management’s consolidated financial statements and notes

PO

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Consolidated Financial Statements and NotesFor the year ended December 31, 2017

Management’s Discussion and AnalysisMarch 23, 2018

Year-E

nd

and

Fo

urth

Qu

arter 2017 R

epo

rt

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C

GR

EA

T-WE

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INC

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AR

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D

IGM

FINA

NC

IAL IN

C.

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PAR

GE

SA H

OLD

ING

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Power Corporation of Canada

P A R T A

Power Financial Corporation

P A R T B

Great-West Lifeco Inc.

P A R T C

IGM Financial Inc.

P A R T D

Pargesa Holding SA

P A R T E


T A B L E O F C O N T E N T S

This document contains management’s discussion and analysis of the fi nancial

condition, fi nancial performance and cash fl ows of Power Corporation of Canada

(the Corporation) for the twelve-month and three-month periods ended

December 31, 2017 and the audited consolidated fi nancial statements of the

Corporation as at and for the year ended December 31, 2017. This document has

been fi led with the securities regulatory authorities in each of the provinces and

territories of Canada and mailed to requesting shareholders of the Corporation

in accordance with applicable securities laws.

P O W E R C O R P O R AT I O N O F C A N A DA 1

PCC_2017Com_Eng01_PCC_2018-03-21_v1.indd 1PCC_2017Com_Eng01_PCC_2018-03-21_v1.indd 1 18-03-22 7:41 PM18-03-22 7:41 PM

The trademarks contained in this report are owned by Power Corporation of Canada or by a Member of the Power Corporation Group of Companies®. Trademarks that are not owned by Power Corporation are used with permission.

2 P O W E R C O R P O R AT I O N O F C A N A DA

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P A R T A

Management’s Discussion and Analysis

P A G E A 2

Financial Statements and Notes

P A G E A 5 9

P O W E R C O R P O R AT I O N O F C A N A DA A 1

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POWER CORPORATION OF CANADAMANAGEMENT’S DISCUSSION AND ANALYSIS

A 2 P O W E R C O R P O R AT I O N O F C A N A DA


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ORGANIZATION OF THE ANNUAL MD&A

OVERVIEW

POWER CORPORATION OF CANADA



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Organization of the MD&A

Power Corporation

Pargesa

GBL [3]

IGM Financial [1]Lifeco

Power Financial



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POWER FINANCIAL

Lifeco

Insurance Companies Act

IGM Financial



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Pargesa and GBL



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Portag3 andWealthsimple

OTHER SUBSIDIARIES

Power Energy

Square Victoria Communications Group

Controlled Portfolio Investments



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SAGARD INVESTMENT FUNDS

Sagard Europe

Sagard Holdings



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Sagard China

CHINA AMC

Fair valueDecember 31,

2017

42616126784



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IFRS BASIS OF PRESENTATION

Control Accounting Method Earnings and OtherComprehensive Income

Impairment Testing Impairment Reversal

A 1 0 P O W E R C O R P O R AT I O N O F C A N A DA


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Power Financial

Power Energy

Square Victoria Communications Group

China AMC [6]

GBL

P O W E R C O R P O R AT I O N O F C A N A DA A 1 1


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Sagard Europe

Sagard Holdings

Sagard China



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NON IFRS FINANCIAL MEASURES AND PRESENTATION

Non IFRS financial measure Definition Purpose



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RECONCILIATION OF IFRS AND NON IFRS FINANCIAL MEASURES

December 31,2017

December 31,2017

1,286 208

223 15451 57

274 211

1,560 419

December 31,2017

December 31,2017

2.77 0.44

0.48 0.340.11 0.12

0.59 0.46

3.36 0.90



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RESULTS OF POWER CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS IN ACCORDANCEWITH IFRS

Consolidated net earnings – Twelve months ended

December 31,2017

Revenues33,9258,0748,356898

51,253

Expenses35,6433,4758,260512

47,890

3,363

2143,577543

Net earnings 3,034

Attributable to1,696

52

1,2863,034



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Consolidated net earnings – Three months ended

December 31,2017

Revenues8,4843,1102,174251

14,019

Expenses

9,987861

2,405129

13,382

637

19656148

Net earnings 508

Attributable to287

13

208508



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NON CONSOLIDATED STATEMENTS OF EARNINGS

December 31,2017

December 31,2017

Adjusted net earnings [1]

1,174 327281 7086 2

(141) (40)1,400 359(89) (24)

1,311 335

445 139(144) (42)(52) (13)

Adjusted net earnings [4] 1,560 419

Other items [5]

(223) (154)(51) (57)

(274) (211)Net earnings [4] 1,286 208

Earnings per share – basic [4]

3.36 0.90(0.59) (0.46)2.77 0.44

Net earnings

Adjusted net earnings

Contribution to adjusted net earnings from Power Financial and other subsidiaries



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CONTRIBUTION TO ADJUSTED NET EARNINGS

POWER FINANCIAL

Contribution to Power Corporation

December 31,2017

December 31,2017

1,400 359(274) (211)

Net earnings 1,126 148

Adjusted and net earnings as reported by Power Financial

December 31,2017

December 31,2017

Adjusted net earnings1,791 499428 106131 3

2,350 608(82) (27)(133) (34)

1 2,135 547Other items

(340) (236)(78) (86)

(418) (322)Net earnings [1] 1,717 225

Net earnings




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LIFECOContribution to Power Corporation

December 31,2017

December 31,2017

1,174 327(223) (154)

Net earnings 951 173

Adjusted and net earnings by segment as reported by Lifeco

December 31,2017

December 31,2017

Canada589 162641 193(11) 2

1,219 357

United States357 80(21) (5)(2)

334 75

Europe947 250190 67(16) (9)

1,121 308

Lifeco Corporate (27) (6)2,647 734(498) (342)

Net earnings [2] 2,149 392




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Individual Customer

Group Customer

Financial Services



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Asset Management

Insurance and Annuities

Reinsurance



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Tax Reconciliation Act

Internal Revenue Code



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IGM FINANCIAL


December 31,2017

December 31,2017

281 70(51) (57)

Net earnings 230 13

Adjusted and net earnings by segment as reported by IGM

December 31,2017

December 31,2017

739 185180 50144 44

1,063 279

(335) (87)728 192(126) (141)

Net earnings [2] 602 51




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December 31,201788.064.63.9

156.5

2017Q4

87.255.85.1

148.1



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PARGESA


December 31,2017

December 31,2017

86 2

Net earnings 86 2

Adjusted and net earnings as reported by Pargesa

December 31,2017

December 31,2017

126 36

604623 1220 51514

13 2

123 (1)440 54

(20) (5)(36) (13)384 36(2) (3)

Net earnings (loss) [3] 382 33




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December 31,2017

December 31,2017

1.1120 1.1623

1.3190 1.2881



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OTHER SUBSIDIARIES

CORPORATE OPERATIONS

Income from Sagard Investment Funds, China AMC and Other Investments

December 31,2017

December 31,2017

5 492 8769 30184 7

100 10(5) 1

445 139



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December 31,2017

December 31,2017

11 29

20 2

Operating and other expenses

December 31,2017

December 31,2017

88 24

44 12

11 3

1 3

144 42

OTHER ITEMS

December 31,2017

December 31,2017

(96) (96)

(71) (2)

(54) (54)

(2) (2)

(223) (154)

(58) (52)

15

(8) (5)

(51) (57)

(274) (211)



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FINANCIAL POSITION

CONSOLIDATED BALANCE SHEETS

December 31,2017

Assets5,903

173,951

3,354

1,8009,8935,04511,8456,28810,085

217,357445,521

Liabilities

161,3657,596

9,35113,036

217,357408,705

Equity965

13,65022,20136,816445,521



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NON CONSOLIDATED BALANCE SHEETS

December 31,2017

Assets646

11,589512

1,554642179444

15,566

Liabilities648303951

Equity965

13,65014,61515,566



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Cash and cash equivalents

Investments

December 31, 2017

Fair value of non controlledportfolio investments [1] 499 397 658 1,554



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EQUITY

Non participating shares

Participating shareholders’ equity

2017

12,898

1,338(706)(10)622

(285)110(41)313299

31

13,650

Outstanding number of participating shares



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CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

2017

6,892(596)

(5,536)

(39)

721

5,182

5,903



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NON CONSOLIDATED STATEMENTS OF CASH FLOWS

2017

Operating activities771(166)605

Financing activities(52)(654)27(1)

250(55)(2)

(487)Investing activities

743(786)

(238)(9)

(290)(9)

(181)827

Cash and cash equivalents, at December 31 646

Cash and cash equivalents:301345646



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CAPITAL MANAGEMENT



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December 31,2017

Debentures and other debt instruments

648

2505,6172,175735(74)

8,7039,351

Non participating shares

965

2,8302,714150

5,6946,659

Equity13,65016,50730,15746,167

Power Corporation

Power Financial



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Lifeco

IGM Financial

RATINGS



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RISK MANAGEMENT

RISK OVERSIGHT APPROACH



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STRATEGIC RISK

LIQUIDITY RISK



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CREDIT RISK ANDMARKET RISK

Credit risk



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Market risk



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OPERATIONAL RISK

Cybersecurity risk

Regulatory compliance risk



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REPUTATION RISK

EMERGING RISKS

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

FAIR VALUEMEASUREMENT



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2017Carrying value Fair value

Assets

89,824 89,82412,807 12,807

340 340

8,194 8,1941,617 1,6174,851 4,8517,938 7,938424 424892 892

126,887 126,887

17,959 19,470

29,748 30,680

331 331106 106

48,144 50,587175,031 177,474

Liabilities

1,841 1,8411,364 1,364

97 973,302 3,302

7,596 7,6589,351 10,303160 221555 555

17,662 18,73720,964 22,039



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DERIVATIVE FINANCIAL INSTRUMENTS

OFF BALANCE SHEET ARRANGEMENTS

GUARANTEES

December 31, 2017

7 1 1

17 2 216,589 384 (952)3,269 36 8

95 1 119,970 423 (941)19,977 424 (940)



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LETTERS OF CREDIT

CONTINGENT LIABILITIES

COMMITMENTS AND CONTRACTUAL OBLIGATIONS



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INCOME TAXES

TRANSACTIONS WITH RELATED PARTIES

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

CONSOLIDATION



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INSURANCE AND INVESTMENT CONTRACT LIABILITIES


a) Bonds at fair value through profit or loss and available for sale



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b) Shares at fair value through profit or loss and available for sale

c) Mortgage loans and bonds classified as loans and receivables

d) Investment properties

IMPAIRMENT OF INVESTMENTS



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GOODWILL AND INDEFINITE LIFE INTANGIBLES IMPAIRMENT TESTING

PENSION PLANS AND OTHER POST EMPLOYMENT BENEFITS



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INCOME TAXES

Current income tax

Deferred income tax

CHANGES IN ACCOUNTING POLICIES



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FUTURE ACCOUNTING CHANGES

IFRS15 –Revenue fromContractswith Customers(IFRS 15)

Revenue from Contracts with Customers

IFRS 16 – Leases(IFRS 16)

Leases

IFRS 17 – InsuranceContracts(IFRS 17)

Insurance Contracts Insurance Contracts



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IFRS 9 – FinancialInstruments(IFRS 9)

Financial InstrumentsFinancial Instruments: Recognition and Measurement

Insurance ContractsFinancial Instruments Insurance Contracts

Deferral Approach:

Overlay Approach:

IFRIC 23 – Uncertaintyover Income TaxTreatments(IFRIC 23)

Uncertainty over Income Tax TreatmentsIncome Taxes



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DISCLOSURE CONTROLS AND PROCEDURES

INTERNAL CONTROL OVER FINANCIAL REPORTING



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SELECTED ANNUAL INFORMATION

2017

51,2531,527

1,2862.772.76

1,5603.36

445,52124,9469,35114,61529.40

48.9415.4

1.4105

0.99941.40001.33751.45001.25001.4000



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SUMMARY OF QUARTERLY RESULTS

2017Q4

14,019

2080.440.44

4190.90(211)(0.46)

2017Q4

(154)(57)

(211)



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December 31 2017

,

Assets 5,903

120,59030,08810,142

4,8518,280

173,9519,8935,0455,1541,734

4248,6641,0236,288

10,085217,357

Total assets 445,521

Liabilities 159,524

1,8417,5969,3511,3649,9031,769

217,357Total liabilities 408,705

Equity

965717

11,4271,506

14,61522,201

Total equity 36,816Total liabilities and equity 445,521



Signed, Signed,

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2017

Revenues

38,284 (4,359)33,925

6,636 1,438 8,074

8,356

898 51,253

Expenses

30,801 (2,214)28,587

1,800 5,256

35,643 3,475 8,260

512 47,890

3,363 214

3,577 543

Net earnings 3,034

Attributable to 1,696

52 1,286 3,034

Earnings per participating share

2.77 2.76



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2017

Net earnings 3,034

Other comprehensive income (loss) Items that may be reclassified subsequently to net earnings

344–

(416)19

(53)

18(5)

405(160)258

(529)–

(90)12

(607)

490 (2)

488

86

Items that will not be reclassified subsequently to net earnings(95)

–

(2)(97)

Other comprehensive loss (11)

Comprehensive income 3,023

Attributable to 1,594

521,3773,023



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Balance, beginning of year

Balance, end of year 965 717 11,427 185 1,321 1,506 22,201 36,816



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2017

Operating activities 3,577 (483)

4,391

857 830

(1,438) (842)

6,892 Financing activities

(1,267)

(52) (654)

(1,973) 27 (1)

159 (63) 450

– 1,100

– (1,284)

925 252

(188) (596)

Investment activities 27,723

2,837 4,248

72 (165) (410)

(31,173) (3,559) (3,878)

– (705) (526)

(5,536) (39) 721

5,182 Cash and cash equivalents, end of year 5,903 Net cash from operating activities includes

5,642 624



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NOTE 1 CORPORATE INFORMATION



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NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION



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USE OF SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS



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REVENUE RECOGNITION

Lifeco



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IGM Financial

Other subsidiaries

CASH AND CASH EQUIVALENTS

INVESTMENTS



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Fair value measurement




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Impairment



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Securities lending

TRANSACTION COSTS

REINSURANCE CONTRACTS

FUNDS HELD BY CEDING INSURERS / FUNDS HELD UNDER REINSURANCE CONTRACTS



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OWNER-OCCUPIED PROPERTIES AND CAPITAL ASSETS

OTHER ASSETS

ASSETS HELD FOR SALE

BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS



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Impairment testing

SEGREGATED FUNDS

INSURANCE AND INVESTMENT CONTRACT LIABILITIES Contract classification

Insurance Contracts

Financial Instruments: Recognition and Measurement



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Measurement

DERECOGNITION OF SECURITIZED MORTGAGES

OTHER FINANCIAL LIABILITIES



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PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS



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OR

ATI

ON

OF

CA

NA

DA


INCOME TAXES

Current income tax

Deferred income tax




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N O

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NA

DA


Fair value hedges

Cash flow hedges



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Net investment hedges

EMBEDDED DERIVATIVES

EQUITY

SHARE-BASED PAYMENTS



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FOREIGN CURRENCY TRANSLATION

Translation of net investment in foreign operations

POLICYHOLDER BENEFITS

LEASES

EARNINGS PER PARTICIPATING SHARE



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New standard Summary of future changes

IFRS 15 – Revenue from Contracts with Customers (IFRS 15)


IFRS 16 – Leases (IFRS 16)

Leases

IFRS 17 – Insurance Contracts (IFRS 17)




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IFRS 9 – Financial Instruments (IFRS 9)

Financial Instruments Financial Instruments: Recognition and Measurement


Deferral Approach:

Overlay Approach:

IFRIC 23 – Uncertainty over Income Tax Treatments (IFRIC 23)




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NOTE 3 BUSINESS ACQUISITIONS AND DISPOSAL

LUMENPULSE

WEALTHSIMPLE

Assets acquired and goodwill

Less: liabilities assumed

Net assets acquired

Consideration



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NOTE 3 BUSINESS ACQUISITIONS AND DISPOSAL

LIFECO Financial Horizons Group

Subsequent event – Retirement Advantage

VEIN CLINICS

SAGARD 3

NOTE 4 CASH AND CASH EQUIVALENTS



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NOTE 5 INVESTMENTS

CARRYING VALUES AND FAIR VALUES

BONDS AND MORTGAGES



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NOTE 5 INVESTMENTS

IMPAIRED INVESTMENTS AND ALLOWANCE FOR CREDIT LOSSES

NET INVESTMENT INCOME



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NOTE 5 INVESTMENTS

INVESTMENT PROPERTIES

TRANSFERRED FINANCIAL ASSETS



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NOTE 6 FUNDS HELD BY CEDING INSURERS

Carrying values and estimated fair values

Asset quality



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NOTE 7 INVESTMENTS IN JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES

PARJOINTCO



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CHINA AMC

ALLIANZ IRELAND



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NOTE 8 OWNER-OCCUPIED PROPERTIES AND CAPITAL ASSETS



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NOTE 9 OTHER ASSETS




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NOTE 10 GOODWILL AND INTANGIBLE ASSETS

GOODWILL

INTANGIBLE ASSETS

Indefinite life intangible assets



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Finite life intangible assets



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ALLOCATION TO CASH GENERATING UNITS

Lifeco

IGM

Other

RECOVERABLE AMOUNT Lifeco



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IGM Financial

NOTE 11 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES



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SEGREGATED FUNDS AND GUARANTEE EXPOSURE



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INVESTMENTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS

INSURANCE AND INVESTMENT CONTRACTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS

INVESTMENT INCOME ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS



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NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES


COMPOSITION OF INSURANCE AND INVESTMENT CONTRACT LIABILITIES AND RELATED SUPPORTING ASSETS



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A 1 0 0 P O W E R C O R P O R AT I O N O F C A N A DA


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CHANGE IN INSURANCE CONTRACT LIABILITIES

2017

P O W E R C O R P O R AT I O N O F C A N A DA A 1 0 1


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2016



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CHANGE IN INVESTMENT CONTRACT LIABILITIES MEASURED AT FAIR VALUE

GROSS PREMIUM INCOME

GROSS POLICYHOLDER BENEFITS



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ACTUARIAL ASSUMPTIONS

Mortality

Morbidity

Property and casualty reinsurance

Investment returns



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Expenses

Policy termination

Utilization of elective policy options

Policyholder dividends and adjustable policy features

RISK MANAGEMENT Insurance risk



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NA

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Reinsurance risk



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NOTE 13 OBLIGATIONS TO SECURITIZATION ENTITIES



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NOTE 14 DEBENTURES AND OTHER DEBT INSTRUMENTS

DEBENTURES Power Corporation

Power Financial

Lifeco

IGM Financial

Total debentures OTHER DEBT INSTRUMENTS Power Corporation

Lifeco

Other subsidiaries

Controlled portfolio investments

Total other debt instruments



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POWER CORPORATION

LIFECO

Subsequent event

IGM FINANCIAL

OTHER SUBSIDIARIES



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NOTE 15 OTHER LIABILITIES

CAPITAL TRUST DEBENTURES

Canada Life Capital Trust (CLCT)

NOTE 16 INCOME TAXES

EFFECTIVE INCOME TAX RATE



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INCOME TAXES



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DEFERRED TAXES



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NOTE 17 STATED CAPITAL

AUTHORIZED

ISSUED AND OUTSTANDING

Non-Participating Shares

Participating Shares

Total Participating Shares



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Non-Participating Shares

Non-cumulative, fixed rate

Participating Shares



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NOTE 18 SHARE-BASED COMPENSATION

STOCK OPTION PLAN

Compensation expense



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DA


PERFORMANCE SHARE UNIT PLAN

DEFERRED SHARE UNIT PLAN

EMPLOYEE SHARE PURCHASE PROGRAM

OTHER SHARE-BASED AWARDS OF SUBSIDIARIES



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NOTE 19 NON-CONTROLLING INTERESTS

Balance sheet

Comprehensive income

Cash flows



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NOTE 20 CAPITAL MANAGEMENT

LIFECO



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IGM FINANCIAL



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NOTE 21 RISK MANAGEMENT



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POWER CORPORATION, POWER FINANCIAL AND OTHER SUBSIDIARIES

Liquidity risk

Credit risk



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Market risk

a) Foreign exchange risk



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b) Interest rate risk

c) Equity risk

LIFECO

Liquidity risk



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DA


Credit risk

a) Maximum exposure to credit risk



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b) Concentration of credit risk



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c) Asset quality

d) Loans past due, but not impaired



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e) Future asset credit losses

Market risk a) Foreign exchange risk




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Change in interest rates

c) Equity risk

Change in equity values

Change in best estimate return assumptions for equities



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IGM FINANCIAL

Liquidity risk



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Credit risk



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DA




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c) Equity risk

Risks related to assets under management



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NOTE 22 OPERATING AND ADMINISTRATIVE EXPENSES

RESTRUCTURING AND OTHER LIFECO – Canadian Business Transformation

IGM

NOTE 23 FINANCING CHARGES



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NOTE 24 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

CHARACTERISTICS, FUNDING AND RISK



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PLAN ASSETS, BENEFIT OBLIGATION AND FUNDED STATUS

Change in fair value of plan assets

Change in defined benefit obligation

Funded status



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The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

PENSION AND OTHER POST-EMPLOYMENT BENEFIT EXPENSE



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ASSET ALLOCATION BY MAJOR CATEGORY WEIGHTED BY PLAN ASSETS

DETAILS OF DEFINED BENEFIT OBLIGATION Portion of defined benefit obligation subject to future salary increases

Allocation of defined benefit obligation by membership

CASH FLOW INFORMATION



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ACTUARIAL ASSUMPTIONS AND SENSITIVITIES Actuarial assumptions

Range of discount rates

Weighted average assumptions used to determine benefit cost

Weighted average assumptions used to determine accrued benefit obligation at year-end

Weighted average healthcare trend rates

Sample life expectancies based on mortality assumptions



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Impact of changes to assumptions on defined benefit obligation

Defined benefit pension plans:

Other post-employment benefits:



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NOTE 25 DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives not designated as accounting hedges

Cash flow hedges




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Cash flow hedges


Fair value hedges



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INTEREST RATE CONTRACTS

FOREIGN EXCHANGE CONTRACTS

OTHER DERIVATIVE CONTRACTS

ENFORCEABLE MASTER NETTING AGREEMENTS OR SIMILAR AGREEMENTS



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Financial instruments (assets)

Financial instruments (liabilities)





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NOTE 26 FAIR VALUE MEASUREMENT

Assets

Liabilities



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Assets

Liabilities



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DA




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Type of asset Valuation approach Significant unobservable input Input value

Inter-relationship between key unobservable inputs and fair value measurement



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NOTE 27 OTHER COMPREHENSIVE INCOME

NOTE 28 EARNINGS PER SHARE

Earnings

Number of participating shares

Net earnings per participating share



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NOTE 29 RELATED PARTIES

PRINCIPAL SUBSIDIARIES, CONTROLLED PORTFOLIO INVESTMENTS AND JOINTLY CONTROLLED CORPORATIONS




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KEY MANAGEMENT COMPENSATION

NOTE 30 CONTINGENT LIABILITIES

LIFECO



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NOTE 31 COMMITMENTS AND GUARANTEES

GUARANTEES

LETTERS OF CREDIT

INVESTMENT COMMITMENTS

PLEDGING OF ASSETS FOR REINSURANCE AGREEMENTS

COMMITMENTS



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NOTE 32 SEGMENTED INFORMATION



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NOTE 32 SEGMENTED INFORMATION CONSOLIDATED NET EARNINGS

Revenues

Expenses

Net earnings

Attributable to

TOTAL ASSETS AND LIABILITIES

TOTAL ASSETS AND TOTAL REVENUES BY GEOGRAPHIC LOCATION



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NOTE 32 SEGMENTED INFORMATION CONSOLIDATED NET EARNINGS

Revenues

Expenses

Net earnings

Attributable to





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Management’s Responsibility for the Consolidated Financial Statements

Auditor’s Responsibility

Opinion



Signed,Deloitte LLP 1

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Consolidated Balance Sheets

Consolidated Statements of Earnings Revenues

Expenses

Net earnings

Attributable to

Per share

Market price



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2017

2016



Page intentionally left blank.



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The attached documents concerning Power Financial Corporation are documents prepared and publicly disclosed by such subsidiary. Certain statements in the attached documents, other than statements of historical fact, are forward-looking statements based on certain assumptions and refl ect the current expectations of the subsidiary as set forth therein. Forward-looking statements are provided for the purposes of assisting the reader in understanding the subsidiary’s fi nancial performance, fi nancial position and cash fl ows as at and for the periods ended on certain dates and to present information about the subsidiary’s management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes.

By its nature, forward-looking 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.

For further information provided by the subsidiary as to the material factors that could cause actual results to diff er materially from the content of forward-looking statements, the material factors and assumptions that were applied in making the forward-looking statements, and the subsidiary’s policy for updating the content of forward-looking statements, please see the attached documents, including the section entitled Forward-Looking Statements. The reader is cautioned to consider these factors and assumptions carefully and not to put undue reliance on forward-looking statements.

Power Financial Corporation

P A R T B


P A G E B 2


P A G E B 5 3

P O W E R C O R P O R AT I O N O F C A N A DA B 1

PCC_2017Com_Eng02_PFC_2018-03-21_v1.indd B1PCC_2017Com_Eng02_PFC_2018-03-21_v1.indd B1 18-03-22 7:29 PM18-03-22 7:29 PM

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NPOWER FINANCIAL CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS

B 2 P O W E R C O R P O R AT I O N O F C A N A DA


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ORGANIZATION OF THE ANNUAL MD&A

OVERVIEW

POWER FINANCIAL CORPORATION



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Value creation

Current portfolio



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Organization of the MD&A

Power Financial

Pargesa

GBL [3]

Lifeco IGM Financial [1]



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LIFECO


IGM FINANCIAL



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PARGESA AND GBL



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PORTAG3 ANDWEALTHSIMPLE

IFRS BASIS OF PRESENTATION



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Control Accounting Method Earnings and OtherComprehensive Income

Impairment Testing Impairment Reversal



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GBL

B 1 0 P O W E R C O R P O R AT I O N O F C A N A DA


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NON IFRS FINANCIAL MEASURES AND PRESENTATION

Non IFRS financial measure Definition Purpose

P O W E R C O R P O R AT I O N O F C A N A DA B 1 1


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RECONCILIATION OF IFRS AND NON IFRS FINANCIAL MEASURES

December 31,2017

December 31,2017

1,717 225

340 23678 86

418 322

2,135 547

December 31,2017

December 31,2017

2.41 0.32

0.47 0.330.11 0.12

0.58 0.45

2.99 0.77



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RESULTS OF POWER FINANCIAL

CONSOLIDATED STATEMENTS OF EARNINGS IN ACCORDANCEWITH IFRS

Consolidated net earnings – Twelve months ended

December 31,2017

Revenues33,9257,6108,34349,878

Expenses35,6433,4757,130432

46,680

3,198

2003,398584

Net earnings 2,814

Attributable to964133

1,7172,814



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Consolidated net earnings – Three months ended

December 31,2017

Revenues8,4842,9772,16113,622

Expenses9,987861

2,081108

13,037

585

12597176

Net earnings 421

Attributable to16234

225421



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NON CONSOLIDATED STATEMENTS OF EARNINGS

December 31,2017

December 31,2017

Adjusted net earnings [1]

1,791 499428 106131 3

2,350 608(82) (27)(133) (34)

Adjusted net earnings [3] 2,135 547

Other items [4]

(340) (236)(78) (86)

(418) (322)Net earnings [3] 1,717 225Earnings per share – basic [3]

2.99 0.77(0.58) (0.45)2.41 0.32

Net earnings


Contribution to adjusted net earnings from Lifeco, IGM and Pargesa



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CONTRIBUTION TO ADJUSTED NET EARNINGS

LIFECO

Contribution to Power Financial

December 31,2017

December 31,2017

1,791 499(340) (236)

Net earnings 1,451 263

Adjusted and net earnings by segment as reported by Lifeco

December 31,2017

December 31,2017

Canada589 162641 193(11) 2

1,219 357

United States357 80(21) (5)(2)

334 75

Europe947 250190 67(16) (9)

1,121 308

Lifeco Corporate (27) (6)2,647 734(498) (342)

Net earnings [2] 2,149 392




PA

RT

B

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NC

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TION

Individual Customer

Group Customer

Financial Services



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

Asset Management

Insurance and Annuities

Reinsurance



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION





PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

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N

IGM FINANCIAL


December 31,2017

December 31,2017

428 106(78) (86)

Net earnings 350 20

Adjusted and net earnings by segment as reported by IGM

December 31,2017

December 31,2017

739 185180 50144 44

1,063 279

(335) (87)728 192(126) (141)

Net earnings [2] 602 51




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION



PA

RT

B

PO

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FIN

AN

CIA

L C

OR

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RA

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N

December 31,201788.064.63.9

156.5

2017Q4

87.255.85.1

148.1



PA

RT

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NC

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OR

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TION

PARGESA


December 31,2017

December 31,2017

131 3

Net earnings 131 3

Adjusted and net earnings as reported by Pargesa

December 31,2017

December 31,2017

126 36

604623 1220 51514

13 2

123 (1)440 54(20) (5)(36) (13)384 36(2) (3)

Net earnings (loss) [3] 382 33




PA

RT

B

PO

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FIN

AN

CIA

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OR

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RA

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N

December 31,2017

December 31,2017

1.1120 1.1623

1.3190 1.2881



PA

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B

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NC

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OR

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TION

CORPORATE OPERATIONS

December 31,2017

December 31,2017

12 (11)

(86) (25)(18) (5)(2) (1)12 15(94) (16)(82) (27)

OTHER ITEMS

December 31,2017

December 31,2017

(146) (146)(107) (3)(83) (83)(4) (4)

(340) (236)

(88) (78)22

(12) (8)(78) (86)

(418) (322)



PA

RT

B

PO

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FIN

AN

CIA

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OR

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N

FINANCIAL POSITION


December 31,2017

Assets5,321

172,345

3,354

6629,8935,04510,9195,7489,580

217,357440,224

Liabilities161,3657,5967,96812,414

217,357406,700

Equity2,83017,68313,01133,524440,224



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

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TION

NON CONSOLIDATED BALANCE SHEETS

December 31,2017

Assets1,05413,7722,8653,354142122

21,309

Liabilities250546796

Equity2,83017,68320,51321,309

Cash and cash equivalents



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

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N

Investments in Lifeco, IGM and Parjointco

EQUITYPreferred shares

Common shareholders’ equity

2017

16,901

1,850(1,310)

(8)532

(387)177(56)4932

229

2117,683



PA

RT

B

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WER

FINA

NC

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OR

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TION

Outstanding number of common shares

CASH FLOWS


2017

7,255(1,156)(5,146)

(28)925

4,3965,321



PA

RT

B

PO

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FIN

AN

CIA

L C

OR

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N

NON CONSOLIDATED STATEMENTS OF CASH FLOWS

2017

Operating activities

98333378

1,394(87)

1,307

Financing activities(130)

(1,163)25018(6)

(1,031)

Investing activities(25)(39)(64)212842

Cash and cash equivalents, at December 31 1,054



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

CAPITAL MANAGEMENT



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

December 31,2017

Debentures and other debt instruments

250

5,6172,175(74)

7,7187,968

Preferred shares

2,830

2,714150

2,8645,694

Equity17,68310,14727,83041,492

Power Financial



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

Lifeco

IGM Financial

RATINGS



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

RISK MANAGEMENT

RISK OVERSIGHT APPROACH



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

STRATEGIC RISK

LIQUIDITY RISK



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

CREDIT RISK ANDMARKET RISK

Credit risk

Market risk



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

OPERATIONAL RISK

Cybersecurity risk

Regulatory compliance risk



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

REPUTATION RISK

EMERGING RISKS

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

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TION

2017Carrying value Fair value

Assets

89,824 89,82412,628 12,628

287 287

8,194 8,194243 243

4,851 4,8517,938 7,938422 422892 892

125,279 125,279

17,959 19,470

29,748 30,680

331 331106 106

48,144 50,587173,423 175,866

Liabilities

1,841 1,8411,364 1,364

71 713,276 3,276

7,596 7,6587,968 8,770160 221555 555

16,279 17,20419,555 20,480



PA

RT

B

PO

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FIN

AN

CIA

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N


OFF BALANCE SHEET ARRANGEMENTS

GUARANTEES

December 31, 2017

17 2 2

16,589 384 (952)3,269 36 819,858 420 (944)19,875 422 (942)



PA

RT

B

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WER

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NC

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OR

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TION

LETTERS OF CREDIT


COMMITMENTS AND CONTRACTUAL OBLIGATIONS



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

INCOME TAXES




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

CONSOLIDATION




PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N








PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

IMPAIRMENT OF INVESTMENTS

GOODWILL AND INDEFINITE LIFE INTANGIBLES IMPAIRMENT TESTING



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

PENSION PLANS AND OTHER POST EMPLOYMENT BENEFITS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

INCOME TAXES

Current income tax

Deferred income tax

CHANGES IN ACCOUNTING POLICIES



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


IFRS15 –Revenue fromContractswith Customers(IFRS 15)


IFRS 16 – Leases(IFRS 16)

Leases

IFRS 17 – InsuranceContracts(IFRS 17)




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

IFRS 9 – FinancialInstruments(IFRS 9)

Financial InstrumentsFinancial Instruments: Recognition and Measurement


Deferral Approach:

Overlay Approach:

IFRIC 23 – Uncertaintyover Income TaxTreatments(IFRIC 23)




PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N





PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


2017

49,8781,521

1,7172.412.40

2,1352.99

440,22423,5227,96820,51324.77713.9

1.6500

0.50671.37501.31251.47501.43751.50001.23751.27501.45000.57650.56731.37501.20001.05000.8792



PA

RT

B

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FIN

AN

CIA

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OR

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N

SUMMARY OF QUARTERLY RESULTS

2017Q4

13,622

2250.320.31

5470.77(322)(0.45)

2017Q4

(146)(3)

(83)(4)

(78)

(8)

(322)



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

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TION


December 31 2017

,

Assets 5,321

120,411

30,035 8,768 4,851 8,280

172,345 9,893 5,045 4,016 1,174

422 8,332

991 5,748 9,580

217,357 Total assets 440,224

Liabilities 159,524

1,841 7,596 7,968 1,364 9,380 1,670

217,357 Total liabilities 406,700

Equity

2,830 826

15,381 1,476

20,513 13,011

Total equity 33,524 Total liabilities and equity 440,224



Signed, Signed,

PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

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RA

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N

2017

Revenues

38,284(4,359)33,925

6,1721,4387,610

8,34349,878

Expenses

30,801(2,214)28,587

1,8005,256

35,6433,4757,130

43246,680

3,198200

3,398584

Net earnings 2,814

Attributable to 964133

1,7172,814

Earnings per common share

2.412.40



PA

RT

B

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WER

FINA

NC

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OR

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TION

2017

Net earnings 2,814 Other comprehensive income (loss)

Items that may be reclassified subsequently to net earnings

(32)10

(29)5

(46)

15(5)

408(160)258

(499)

(90)12

(577)

501 (1)

500

135

Items that will not be reclassified subsequently to net earnings(90)

–

(2)(92)

Other comprehensive income (loss) 43 Comprehensive income 2,857

Attributable to 789133

1,9352,857



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

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RA

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N

Balance, beginning of year

Balance, end of year 2,830 826 15,381 159 1,317 1,476 13,011 33,524



PA

RT

B

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NC

IAL C

OR

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TION

2017

Operating activities 3,398 (482)

4,391

857 830

(1,438) (301)

7,255 Financing activities

(737) (130)

(1,163) (2,030)

18 131 (63) 250 200 850

– (1,284)

925 22

(175) (1,156)

Investment activities 27,217

2,837 3,505

72 (165) (249)

(30,691) (3,506) (3,273)

– (504) (389)

(5,146) (28) 925

4,396 Cash and cash equivalents, end of year 5,321 Net cash from operating activities includes

5,634 549



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


BASIS OF PRESENTATION



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


USE OF SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


REVENUE RECOGNITION

Lifeco



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


IGM Financial


INVESTMENTS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Fair value measurement





PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N




Impairment

Securities lending



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


TRANSACTION COSTS

REINSURANCE CONTRACTS

FUNDS HELD BY CEDING INSURERS / FUNDS HELD UNDER REINSURANCE CONTRACTS



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


OWNER-OCCUPIED PROPERTIES AND CAPITAL ASSETS

OTHER ASSETS


BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Impairment testing

SEGREGATED FUNDS

INSURANCE AND INVESTMENT CONTRACT LIABILITIES Contract classification

Insurance Contracts

Financial Instruments: Recognition and Measurement



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

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RA

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N


Measurement

DERECOGNITION OF SECURITIZED MORTGAGES

OTHER FINANCIAL LIABILITIES



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

INCOME TAXES



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Current income tax

Deferred income tax




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Fair value hedges

Cash flow hedges



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N



EMBEDDED DERIVATIVES

EQUITY




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


FOREIGN CURRENCY TRANSLATION

Translation of net investment in foreign operations

POLICYHOLDER BENEFITS

LEASES

EARNINGS PER COMMON SHARE



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N




IFRS 15 – Revenue from Contracts with Customers (IFRS 15)


IFRS 16 – Leases (IFRS 16)

Leases

IFRS 17 – Insurance Contracts (IFRS 17)




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION



IFRS 9 – Financial Instruments (IFRS 9)

Financial Instruments Financial Instruments: Recognition and Measurement


Deferral Approach:

Overlay Approach:

IFRIC 23 – Uncertainty over Income Tax Treatments (IFRIC 23)




PA

RT

B

PO

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FIN

AN

CIA

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OR

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N

NOTE 3 BUSINESS ACQUISITIONS

WEALTHSIMPLE

Assets acquired and goodwill

Less: liabilities assumed

Net assets acquired

Consideration



PA

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B

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FINA

NC

IAL C

OR

PO

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TION

NOTE 3 BUSINESS ACQUISITIONS

LIFECO Financial Horizons Group

Subsequent event – Retirement Advantage

NOTE 4 CASH AND CASH EQUIVALENTS



PA

RT

B

PO

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FIN

AN

CIA

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OR

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N

NOTE 5 INVESTMENTS

CARRYING VALUES AND FAIR VALUES

BONDS AND MORTGAGES



PA

RT

B

PO

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FINA

NC

IAL C

OR

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RA

TION

NOTE 5 INVESTMENTS

IMPAIRED INVESTMENTS AND ALLOWANCE FOR CREDIT LOSSES




PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 5 INVESTMENTS

INVESTMENT PROPERTIES

TRANSFERRED FINANCIAL ASSETS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 6 FUNDS HELD BY CEDING INSURERS

Carrying values and estimated fair values

Asset quality



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


PARJOINTCO

CHINA AMC



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


ALLIANZ IRELAND

NOTE 8 OWNER-OCCUPIED PROPERTIES AND CAPITAL ASSETS



PA

RT

B

PO

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FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 9 OTHER ASSETS




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


GOODWILL

INTANGIBLE ASSETS

Indefinite life intangible assets



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Finite life intangible assets



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


ALLOCATION TO CASH GENERATING UNITS

Lifeco

IGM

Other

RECOVERABLE AMOUNT Lifeco



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


IGM Financial




PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


SEGREGATED FUNDS AND GUARANTEE EXPOSURE



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N



INSURANCE AND INVESTMENT CONTRACTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS

INVESTMENT INCOME ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION





PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N




COMPOSITION OF INSURANCE AND INVESTMENT CONTRACT LIABILITIES AND RELATED SUPPORTING ASSETS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION




PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


CHANGE IN INSURANCE CONTRACT LIABILITIES

2017



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


2016



PA

RT

B

PO

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FIN

AN

CIA

L C

OR

PO

RA

TIO

N


CHANGE IN INVESTMENT CONTRACT LIABILITIES MEASURED AT FAIR VALUE

GROSS PREMIUM INCOME

GROSS POLICYHOLDER BENEFITS



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


ACTUARIAL ASSUMPTIONS

Mortality

Morbidity


Investment returns



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Expenses

Policy termination



RISK MANAGEMENT Insurance risk



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Reinsurance risk



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 13 OBLIGATIONS TO SECURITIZATION ENTITIES

B 1 0 0 P O W E R C O R P O R AT I O N O F C A N A DA


PA

RT

B

PO

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FINA

NC

IAL C

OR

PO

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TION


DEBENTURES Power Financial

Lifeco

IGM Financial

Total debentures

OTHER DEBT INSTRUMENTS Lifeco

Total other debt instruments

LIFECO

P O W E R C O R P O R AT I O N O F C A N A DA B 1 0 1


PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Subsequent event

IGM FINANCIAL




PA

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B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


CAPITAL TRUST DEBENTURES

Canada Life Capital Trust (CLCT)


EFFECTIVE INCOME TAX RATE





PA

RT

B

PO

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FIN

AN

CIA

L C

OR

PO

RA

TIO

N


INCOME TAXES



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


DEFERRED TAXES



PA

RT

B

PO

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FIN

AN

CIA

L C

OR

PO

RA

TIO

N


AUTHORIZED

ISSUED AND OUTSTANDING

First Preferred Shares (perpetual)

Common Shares

First Preferred Shares



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Non-cumulative, fixed rate

Non-cumulative, 5-year rate reset [1]

Non-cumulative, variable rate

Common Shares



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


STOCK OPTION PLAN



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Compensation expense

PERFORMANCE SHARE UNIT PLAN



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N



EMPLOYEE SHARE PURCHASE PROGRAM

OTHER SHARE-BASED AWARDS OF SUBSIDIARIES



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 19 NON-CONTROLLING INTERESTS

Balance sheet

Comprehensive income

Cash flows



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


LIFECO



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION



IGM FINANCIAL



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


POWER FINANCIAL

Liquidity risk



PA

RT

B

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


Credit risk

Market risk

a) Foreign exchange risk



PA

RT

B

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N



c) Equity risk

LIFECO

Liquidity risk



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a) Maximum exposure to credit risk



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b) Concentration of credit risk



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c) Asset quality

d) Loans past due, but not impaired



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e) Future asset credit losses





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c) Equity risk

Change in equity values

Change in best estimate return assumptions for equities



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IGM FINANCIAL

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c) Equity risk

Risks related to assets under management



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NOTE 22 OPERATING AND ADMINISTRATIVE EXPENSES

RESTRUCTURING AND OTHER LIFECO – Canadian Business Transformation

IGM

NOTE 23 FINANCING CHARGES



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CHARACTERISTICS, FUNDING AND RISK



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PLAN ASSETS, BENEFIT OBLIGATION AND FUNDED STATUS

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Funded status



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The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

PENSION AND OTHER POST-EMPLOYMENT BENEFIT EXPENSE



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ASSET ALLOCATION BY MAJOR CATEGORY WEIGHTED BY PLAN ASSETS

DETAILS OF DEFINED BENEFIT OBLIGATION Portion of defined benefit obligation subject to future salary increases

Allocation of defined benefit obligation by membership

CASH FLOW INFORMATION



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ACTUARIAL ASSUMPTIONS AND SENSITIVITIES Actuarial assumptions

Range of discount rates

Weighted average assumptions used to determine benefit cost

Weighted average assumptions used to determine accrued benefit obligation at year-end

Weighted average healthcare trend rates

Sample life expectancies based on mortality assumptions



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Impact of changes to assumptions on defined benefit obligation

Defined benefit pension plans:

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Cash flow hedges




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INTEREST RATE CONTRACTS

FOREIGN EXCHANGE CONTRACTS

OTHER DERIVATIVE CONTRACTS

ENFORCEABLE MASTER NETTING AGREEMENTS OR SIMILAR AGREEMENTS



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Assets

Liabilities



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Assets

Liabilities



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Type of asset Valuation approach Significant unobservable input Input value

Inter-relationship between key unobservable inputs and fair value measurement



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NOTE 27 OTHER COMPREHENSIVE INCOME

NOTE 28 EARNINGS PER SHARE

Earnings

Number of common shares

Net earnings per common share



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PRINCIPAL SUBSIDIARIES AND JOINTLY CONTROLLED CORPORATIONS




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NOTE 30 CONTINGENT LIABILITIES

LIFECO



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NOTE 31 COMMITMENTS AND GUARANTEES

GUARANTEES

LETTERS OF CREDIT

INVESTMENT COMMITMENTS

PLEDGING OF ASSETS FOR REINSURANCE AGREEMENTS

COMMITMENTS



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CONSOLIDATED NET EARNINGS

Revenues

Expenses

Net earnings

Attributable to





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CONSOLIDATED NET EARNINGS

Revenues

Expenses

Net earnings

Attributable to





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Opinion



Signed,Deloitte LLP 1

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Consolidated Statements of Earnings Revenues

Expenses

Net earnings

Attributable to

Per share

Market price



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2017

2016



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Please note that the bottom of each page in Part C contains two diff erent page numbers. A page number with the prefi x “C” refers to the number of such page in this document and the page number without any prefi x refers to the number of such page in the original document issued by Great-West Lifeco Inc.

The attached documents concerning Great-West Lifeco Inc. are documents prepared and publicly disclosed by such subsidiary. Certain statements in the attached documents, other than statements of historical fact, are forward-looking statements based on certain assumptions and refl ect the current expectations of the subsidiary as set forth therein. Forward-looking statements are provided for the purposes of assisting the reader in understanding the subsidiary’s fi nancial performance, fi nancial position and cash fl ows as at and for the periods ended on certain dates and to present information about the subsidiary’s management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes.


For further information provided by the subsidiary as to the material factors that could cause actual results to differ materially from the content of forward-looking statements, the material factors and assumptions that were applied in making the forward-looking statements, and the subsidiary’s policy for updating the content of forward-looking statements, please see the attached documents, including the section entitled Cautionary Note Regarding Forward-Looking Information. The reader is cautioned to consider these factors and assumptions carefully and not to put undue reliance on forward-looking statements.

Great-West Lifeco Inc.

P A R T C


P A G E C 2


P A G E C 7 3

P O W E R C O R P O R AT I O N O F C A N A DA C 1

PCC_2017Com_Eng03_GWL_2018-03-07_v1.indd C1PCC_2017Com_Eng03_GWL_2018-03-07_v1.indd C1 18-03-13 10:35 AM18-03-13 10:35 AM

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16 Great-West Lifeco Inc. 2017 Annual Report


This Management’s Discussion and Analysis (MD&A) presents management’s view of the financial condition, results of operations and cash flows of Great-West Lifeco Inc. (Lifeco or the Company) for the three and twelve months ended December 31, 2017 and includes a comparison to the corresponding periods in 2016, to the three months ended September 30, 2017, and to the Company’s financial condition as at December 31, 2016. This MD&A provides an overall discussion, followed by analysis of the performance of Lifeco’s three major reportable segments: Canada, United States (U.S.) and Europe.

BUSINESSES OF LIFECO

Lifeco has operations in Canada, the United States and Europe through The Great-West Life Assurance Company (Great-West Life), London Life Insurance Company (London Life), The Canada Life Assurance Company (Canada Life), Great-West Life & Annuity Insurance Company (Great-West Financial), Putnam Investments, LLC (Putnam) and Irish Life Group Limited (Irish Life).

In Canada, Great-West Life and its operating subsidiaries, London Life and Canada Life (owned through holding companies London Insurance Group Inc. (LIG) and Canada Life Financial Corporation (CLFC) respectively), offer a broad portfolio of financial and benefit plan solutions for individuals, families, businesses and organizations through two primary business units: Individual Customer and Group Customer. Through the Individual Customer business unit, the Company provides life, disability and critical illness insurance products as well as wealth accumulation and annuity products to individual customers. Through the Group Customer business unit, the Company provides life, accidental death and dismemberment, critical illness, health and dental protection, creditor and direct marketing insurance as well as accumulation and annuity products and other specialty products to group customers in Canada. The products are distributed through a multi-channel network of brokers, advisors, managing general agencies and financial institutions including Freedom 55 FinancialTM and Wealth and Insurance Solutions Enterprise.

In the U.S., Great-West Financial® is a leading provider of employer-sponsored retirement savings plans in the public/non-profit and corporate sectors. Under the Empower Retirement brand name, Great-West Financial offers employer-sponsored defined contribution plans, individual retirement accounts, enrollment services, communication materials, investment options and education services as well as fund management, investment and advisory services. Its products and services are marketed nationwide through its sales force, brokers, consultants, advisors, third-party administrators and financial institutions. Putnam provides investment management, certain administrative functions and distribution services through a broad range of investment products, including the Putnam Funds, its own family of mutual funds, which are offered to individual and institutional investors.

The Europe segment comprises two distinct business units: Insurance & Annuities, which offers protection and wealth management products, including payout annuity products, through subsidiaries of Canada Life in the United Kingdom (U.K.), the Isle of Man and Germany as well as through Irish Life in Ireland; and Reinsurance, which operates primarily in the U.S., Barbados and Ireland. Reinsurance products are provided through Canada Life, London Life and their subsidiaries.

Lifeco currently has no other material holdings and carries on no business or activities unrelated to its holdings in Great-West Life, London Life, Canada Life, Great-West Financial, Putnam and their subsidiaries. However, Lifeco is not restricted to investing in those companies and may make other investments in the future.

BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

The consolidated financial statements of Lifeco, which are the basis for data presented in this report, have been prepared in accordance with International Financial Reporting Standards (IFRS) unless otherwise noted and are presented in millions of Canadian dollars unless otherwise indicated. This MD&A should be read in conjunction with the Company’s consolidated financial statements for the period ended December 31, 2017.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

This MD&A may contain forward-looking statements. 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”, “intends”, “plans”, “believes”, “estimates” and other similar expressions or negative versions thereof. These statements may include, without limitation, statements about the Company’s operations, business, financial condition, expected financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by the Company, including statements made with respect to the expected benefits of acquisitions and divestitures. Forward-looking statements are based on expectations, forecasts, predictions, projections and conclusions about future events that were current at the time of the statements and are inherently subject to, among other things, risks, uncertainties and assumptions about the Company, economic factors and the financial services industry generally, including the insurance and mutual fund industries. They are not guarantees of future performance, and the reader is cautioned that actual events and results could differ materially from those expressed or implied by forward-looking statements. Material factors and assumptions that were applied in formulating the forward-looking information contained herein include the assumption that the business and economic conditions affecting the Company’s operations will continue substantially in their current state, including, without limitation, with respect to customer behaviour, the Company’s reputation, market prices for products provided, sales levels, premium income, fee income, expense levels, mortality experience, morbidity experience, policy lapse rates, reinsurance arrangements, liquidity requirements, capital requirements, credit ratings, taxes, inflation, interest and foreign exchange rates, investment values, hedging activities, global equity and capital markets, business competition and other general economic, political and market factors in North America and internationally. Many of these assumptions are based on factors and events that are not within the control of the Company and there is no assurance that they will prove to be correct. Other important factors and assumptions that could cause actual results to differ materially from those contained in forward-looking statements include customer responses to new products, impairments of goodwill and other intangible assets, the Company’s ability to execute strategic plans and changes to strategic plans, technological changes, breaches or failure of information systems and security (including cyber-attacks), payments required under investment products, changes in local and international laws and regulations, changes in accounting policies and the effect of applying future accounting policy changes, unexpected judicial or regulatory proceedings, catastrophic events, continuity and availability of personnel and third party service providers, the Company’s ability to complete strategic transactions and integrate acquisitions and unplanned material changes to the Company’s facilities, customer and employee relations or credit arrangements. The reader is cautioned that the foregoing list of assumptions and factors is not exhaustive, and there may be other factors listed in other filings with securities regulators, including factors set out in the Company’s 2017 Annual MD&A under “Risk Management and Control Practices” and “Summary of Critical Accounting Estimates”, which, along with other filings, is available for review at www.sedar.com. The reader is also cautioned to consider these and other factors, uncertainties and potential events carefully and not to place undue reliance on forward-looking statements. Other than as specifically required by applicable law, the Company does not intend to update any forward-looking statements whether as a result of new information, future events or otherwise.

CAUTIONARY NOTE REGARDING NON-IFRS FINANCIAL MEASURES

This MD&A contains some non-IFRS financial measures. Terms by which non-IFRS financial measures are identified include, but are not limited to, “operating earnings”, “adjusted net earnings”, “constant currency basis”, “premiums and deposits”, “sales”, “assets under management”, “assets under administration” and other similar expressions. Non-IFRS financial measures are used to provide management and investors with additional measures of performance to help assess results where no comparable IFRS measure exists. However, non-IFRS financial measures do not have standard meanings prescribed by IFRS and are not directly comparable to similar measures used by other companies. Refer to the appropriate reconciliations of these non-IFRS financial measures to measures prescribed by IFRS.

C 2 P O W E R C O R P O R AT I O N O F C A N A DA


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.Management’s Discussion and Analysis

Great-West Lifeco Inc. 2017 Annual Report 17

CONSOLIDATED OPERATING RESULTS

Selected consolidated financial information As at or for the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 (in Canadian $ millions, except for per share amounts) 2017 2017 2016 2017 2016

Premiums and deposits: Amounts reported in the financial statements Net premium income (Life insurance, guaranteed annuities and insured health products) $ 8,506 $ 8,304 $ 8,905 $ 33,947 $ 31,125 Policyholder deposits (segregated funds): Individual products 5,357 3,641 3,399 17,037 13,512 Group products 2,009 1,634 1,875 7,848 7,846

Premiums and deposits reported in the financial statements 15,872 13,579 14,179 58,832 52,483

Self-funded premium equivalents (Administrative services only contracts) (1) 720 671 691 2,827 2,751 Proprietary mutual funds and institutional deposits (1) 16,065 14,272 15,169 61,490 62,232

Total premiums and deposits (1) 32,657 28,522 30,039 123,149 117,466

Fee and other income 1,403 1,365 1,345 5,454 5,101Net policyholder benefits, dividends and experience refunds 7,618 6,849 7,841 30,387 27,714

EarningsNet earnings – common shareholders $ 392 $ 581 $ 676 $ 2,149 $ 2,641Adjustments (6) 342 1 22 498 44Adjusted net earnings – common shareholders (6) 734 582 698 2,647 2,685 Per common share Net earnings – common shareholders 0.397 0.587 0.686 2.173 2.668 Adjusted net earnings – common shareholders (6) 0.742 0.589 0.709 2.676 2.712 Dividends paid 0.367 0.367 0.346 1.468 1.384 Book value 20.11 19.92 19.76

Return on common shareholders’ equity (2)

Net earnings 10.9% 12.4% 13.8% Adjusted net earnings (6) 13.4% 13.3% 14.1%

Total assets per financial statements (5) $ 419,838 $ 406,768 $ 399,733 Proprietary mutual funds and institutional net assets (3) 278,954 268,994 259,215

Total assets under management (3) 698,792 675,762 658,948 Other assets under administration (4) 651,121 618,532 589,291

Total assets under administration $ 1,349,913 $ 1,294,294 $ 1,248,239

Total equity $ 25,536 $ 25,386 $ 25,008

(1) In addition to premiums and deposits reported in the financial statements, the Company includes premium equivalents on self-funded group insurance administrative services only (ASO) contracts and deposits on proprietary mutual funds and institutional accounts to calculate total premiums and deposits (a non-IFRS financial measure). This measure provides useful information as it is an indicator of top line growth.

(2) Return on common shareholders’ equity is detailed within the “Capital Allocation Methodology” section.

(3) Total assets under management (a non-IFRS financial measure) provides an indicator of the size and volume of the overall business of the Company. Services provided in respect of assets under management include the selection of investments, the provision of investment advice and discretionary portfolio management on behalf of clients. This includes internally and externally managed funds where the Company has oversight of the investment policies.

(4) Other assets under administration (a non-IFRS financial measure) includes assets where the Company only provides administration services for which the Company earns fee and other income. These assets are beneficially owned by clients and the Company does not direct the investing activities. Services provided relating to assets under administration include recordkeeping, safekeeping, collecting investment income, settling of transactions or other administrative services. Administrative services are an important aspect of the overall business of the Company and should be considered when comparing volumes, size and trends.

(5) Comparative figures have been reclassified as described in note 2 and note 34 to the Company’s December 31, 2017 annual consolidated financial statements.



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(6) Adjusted net earnings attributable to common shareholders and adjusted net earnings per common share are non-IFRS measures of earnings performance and reflect the following adjustments in 2017

2017 Adjustments

Annual Financial Segment Statement

Canada United States Europe Total EPS Impact Note Reference

Q1 Restructuring costs $ – $ 11 $ 17 $ 28 $ 0.029 N/A Q2 Restructuring costs 126 – 1 127 0.128 Note 29 Q3 Restructuring costs – – 1 1 0.002 N/A Q4 Restructuring costs – – 4 4 0.004 N/A

Q4 Net charge on sale of equity investment – 122 – 122 0.124 Note 6Q4 U.S. tax reform impact 19 251 (54) 216 0.218 Note 27

Total Q4 Adjustments 19 373 (50) 342 0.345

Total 2017 Adjustments $ 145 $ 384 $ (31) $ 498 $ 0.503

The fourth quarter of 2016 included restructuring costs of $22 million related to the U.S. segment ($44 million year-to-date related to the U.S. and Europe segments).

LIFECO 2017 HIGHLIGHTS

Maintained strong capital position and solid financial performance• The Company maintained its strong capital position as

evidenced by a Minimum Continuing Capital and SurplusRequirements (MCCSR) ratio at December 31, 2017 of 241% forGreat-West Life, Lifeco’s major Canadian operating subsidiary.

• For the twelve months ended December 31, 2017, net earningsattributable to common shareholders were $2,149 million,compared to $2,641 million for the previous year. In 2017, netearnings were impacted by restructuring costs of $160 million,a net charge of $216 million from the impact of U.S. tax reformand the net charge on the disposal of an equity investment inNissay Asset Management Corporation (Nissay), including thenon-cash write-off of an associated intangible asset, in the U.S.segment of $122 million.

• Excluding these items, adjusted net earnings of $2,647 millionwere down $38 million or 1% compared to 2016 adjusted netearnings of $2,685 million. The third quarter of 2017 alsoincluded a $175 million charge related to estimated hurricane-related property catastrophe losses. The 2017 adjusted netearnings, excluding the estimated property catastrophe lossesof $175 million, increased 5% compared to 2016 reflecting solidfundamental business results.

• In 2017, Lifeco’s quarterly common share dividend increased 6% to $0.367 per share.

• In the second quarter of 2017, through its subsidiary, Great-West Lifeco Finance (Delaware) LP, the Company issued 30 yearUS$700 million 4.15% senior unsecured notes, its first issuancein the U.S. debt market in over 10 years. The offering achievedthe Company’s objectives of raising funds at the holdingcompany level and diversifying its sources of capital.

• The Company’s financial leverage ratio at December 31, 2017was 27.1%, providing financial flexibility to invest in organicgrowth and acquisition strategies.

Executed strategic, transformational and regulatory change while focusing on the customer• During 2017, the Canadian operations realigned into two

business units, Individual Customer and Group Customer, andare progressing well on targeted annual expense reductionsof $200 million pre-tax, having achieved $123 million ofannualized reductions by December 31, 2017. Focus on thecustomer continued, as innovative products were launchedincluding a new first-in-Canada student loan retirement andsavings pilot program. In recognition of this customer focus,Great-West Life was named the Life and Health Insurer of theYear at the 2017 Insurance Business awards. The acquisitionof Financial Horizons Group, a Canadian managing generalagency (MGA) was completed, which expanded the Company’sinvestment in distribution in Canada with an ownership stakein the growing independent MGA sector.

• Within the U.S. operations, Great-West Financial completed itsintegration of the Empower Retirement business in early 2017.As of December 31, 2017, Empower Retirement’s participantbase grew to over 8.3 million and assets under administrationreached approximately US$530 billion. Empower Retirementhas maintained the second position in the U.S. definedcontribution (DC) recordkeeping market, measured by numberof participants and received the Top DC Plan Provider award in2017. Additionally, Empower Retirement received top rankingsin several categories from a key retirement industry journal,including Value for Price, where Empower has achieved thenumber one ranking for seven years running. Through itsIndividual Markets line of business, Great-West Financial wasthe second largest distributor of single premium universal lifeinsurance through bank channels in 2017.

• Putnam completed its restructuring and reduced annualexpenses by US$53 million. Putnam received DALBAR’s TotalClient Experience award recognizing overall mutual fund clientservice and continued its strong fund investment performancerelative to its peers with 93% of fund assets performing at levelsabove the Lipper median for the one-year period and 85% forthe five-year period ended December 31, 2017. In addition,Putnam’s ending assets under management increased 13% toUS$171 billion as of December 31, 2017 and year-over-yearmutual fund sales experienced growth of 16%.



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• Europe completed integration of the businesses that were acquired to form Irish Life Health, achieving 17 million of targeted synergies within budget and planned time line. Good progress was also made on the transformation of the Irish Life retail business. Irish Life continued to score well on customer satisfaction with a customer satisfaction index of 87%. The acquisition of Retirement Advantage in the U.K. closed on January 2, 2018 and added over 30,000 customers, more than $3.3 billion of assets under management and brought new products including equity-release mortgages to the Company’s product shelf.

• In 2017, regulatory change in Canada involved significant focus on the changing capital regime. Effective January 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) has replaced the MCCSR guideline with the Life Insurance Capital Adequacy Test (LICAT) guideline, a new regulatory framework for the Canadian life insurance industry. The Company continues implementation preparations and is well-positioned for the new LICAT regulatory capital framework in 2018. The first LICAT reporting period will be the first quarter of 2018.

• On December 22, 2017, the Tax Reconciliation Act, was substantively enacted, following the signing by the President of the U.S. The legislation, which was generally effective for tax years beginning on January 1, 2018, results in significant U.S. tax reform and revises the Internal Revenue Code by, among other things, lowering the corporate federal income tax rate from 35% to 21% and modifying how the U.S. taxes multinational entities. As a result, the Company took a charge of $216 million which primarily reflects the net impact of the revaluation of certain deferred tax balances as well as the impact on insurance contract liabilities and expense provisions. The Company expects the lower U.S. corporate tax rate to benefit future net earnings. Based on Management’s interpretation of the current legislation, 2017 adjusted net earnings would have been approximately $55 million to $60 million higher under the new tax regime.

Outlook for 2018• Lifeco is focused on investing strategically – both organically

and through acquisitions – to drive growth and productivity, while maintaining a strong risk and expense discipline, to deliver long-term value to its customers and shareholders. The Company will continue to review its businesses and products and assess market opportunities for capital deployment, similar to recent transactions like the Financial Horizons Group and Retirement Advantage acquisitions in 2017 and the development of the Irish Life health business. In 2018, there will continue to be a focus on regulatory change across the Company as LICAT is fully implemented and focus turns to preparing for the adoption of accounting changes from IFRS 17, Insurance Contracts which is effective on or after January 1, 2021 and impacts the recognition, measurement, presentation and disclosures of insurance contracts.

• In Canada, the transformation program initiated in the second quarter of 2017 will continue through to 2019. The program focuses on a customer centric approach, transforming the cost base and enhancing the distribution model.

• In the U.S., Empower Retirement is expected to grow, gain efficiencies and improve the overall customer experience. In early 2018, Empower Retirement launched the PlanVisualizer tool which will enhance plan sponsors’ ability to further improve their employees’ retirement readiness. At Putnam, the focus will continue to be on driving growth and market share through strong investment performance and service excellence. The Department of Labor’s (DOL) additional rules regarding fiduciary duties for retirement consultants is not expected to have a material impact on the business in 2018. The DOL has issued an 18-month delay for full compliance with the rule to July 1, 2019.

• In Europe, development of U.K. bulk annuity capabilities as well as the equity-release mortgage and wider product capability acquired with Retirement Advantage will continue to complement the Company’s strong position in the U.K. retirement and payout annuity markets. Investment in digital opportunities and attention given to income protection pricing will be a focus to grow the Company’s market leading U.K. group risk business. In Ireland, deepening and broadening the market leading retail, corporate and investment management businesses, while managing costs, will continue to be the focus. In Germany, investments will continue in technology to drive processing efficiencies and lay the foundation for enhanced future capabilities. Reinsurance will build on its diversified multi-niche base to continue to meet client needs.

NET EARNINGS

Consolidated net earnings of Lifeco include the net earnings of Great-West Life and its operating subsidiaries, London Life, Canada Life and Irish Life; Great-West Financial and Putnam; together with Lifeco’s Corporate operating results.

Lifeco’s net earnings attributable to common shareholders (net earnings) for the three month period ended December 31, 2017 were $392 million compared to $676 million a year ago and $581 million in the previous quarter. On a per share basis, this represents $0.397 per common share ($0.396 diluted) for the fourth quarter of 2017 compared to $0.686 per common share ($0.685 diluted) a year ago and $0.587 per common share ($0.587 diluted) in the previous quarter. Excluding the impact of U.S. tax reform, the net charge on the sale of an equity investment and restructuring costs, which totaled $342 million, adjusted net earnings for the fourth quarter of 2017 were $734 million or $0.742 per common share compared to adjusted net earnings of $698 million or $0.627 per common share a year ago.

For the twelve months ended December 31, 2017, Lifeco’s net earnings were $2,149 million compared to $2,641 million a year ago. On a per share basis, this represents $2.173 per common share ($2.170 diluted) for 2017 compared to $2.668 per common share ($2.663 diluted) a year ago. Excluding the impact of U.S. tax reform, net charge on the sale of an equity investment and restructuring costs, which totaled $498 million, adjusted net earnings for the twelve months ended December 31, 2017 were $2,647 million or $2.676 per common share compared to $2,685 million or $2.712 per common share a year ago. Lifeco’s net earnings for the twelve months ended December 31, 2017 also included a loss estimate of $175 million after-tax relating to estimated claims resulting from the impact of in-year Atlantic hurricane activity which reduced earnings per common share by $0.177.



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Net earnings – common shareholders For the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 2017 2017 2016 (1) 2017 2016 (1)

Canada Individual Customer (1) $ 162 $ 141 $ 179 $ 589 $ 617 Group Customer (1) 193 155 154 641 564 Canada Corporate (2) (17) – (7) (156) 37

338 296 326 1,074 1,218United States Financial Services 80 104 80 357 333 Asset Management (5) 6 (3) (21) (52) U.S. Corporate (2) (373) – (22) (386) (32)

(298) 110 55 (50) 249Europe Insurance & Annuities 250 233 225 947 927 Reinsurance 67 (41) 86 190 277 Europe Corporate (2) 41 (8) (4) 15 (4)

358 184 307 1,152 1,200Lifeco Corporate (6) (9) (12) (27) (26)

Net earnings – common shareholders $ 392 $ 581 $ 676 $ 2,149 $ 2,641

Adjustments (2)

Restructuring costs 4 1 22 160 44 Net charge on sale of equity investment 122 – – 122 – U.S. tax reform impact 216 – – 216 –

Adjusted net earnings – common shareholders $ 734 $ 582 $ 698 $ 2,647 $ 2,685

(1) Comparative figures have been reclassified to reflect presentation adjustments, related to the realignment of the Canada segment operations into two business units.

(2) Adjustments to net earnings are included in the Corporate business units of the Canada, Europe and U.S. segments.

The information in the table above is a summary of results for net earnings of the Company. Additional commentary regarding net earnings is included in the “Segmented Operating Results” section.

MARKET IMPACTS

Interest Rate EnvironmentInterest rates in countries where the Company operates mostly increased during 2017, except in the U.K., where rates mostly decreased. The net change in interest rates did not impact the range of interest rate scenarios tested through the valuation process and had no material impact on net earnings. The net change in interest rates for the quarter and year-to-date did not have a material impact on Great-West Life’s MCCSR ratio.

In order to mitigate the Company’s exposure to interest rate fluctuations, the Company follows disciplined processes for matching asset and liability cash flows. As a result, the impact of changes in fair values of bonds backing insurance contract liabilities recorded through profit or loss is mostly offset by a corresponding change in the insurance contract liabilities.

The Company’s sensitivity to interest rate fluctuations is detailed in the “Accounting Policies – Summary of Critical Accounting Estimates” section.

Equity MarketsIn the regions where the Company operates, average equity market levels in the fourth quarter of 2017 and year-to-date were mostly up compared to the same periods in 2016 and ended the quarter at higher market levels compared to September 30, 2017. Relative to the Company’s expectation, the change in average market levels and market volatility had a positive impact of $4 million on net earnings during the fourth quarter of 2017 and $13 million year-to-date in 2017 (negligible impact in the fourth quarter of 2016 and $10 million negative impact year-to-date in 2016), related to asset-based fee income and the costs related to guarantees of death, maturity or income benefits within certain wealth management products offered by the Company. In addition, the impact on net earnings was positive $7 million in the fourth quarter of 2017 and $26 million year-to-date in 2017 (negligible impact in the fourth quarter of 2016 and $4 million positive impact year-to-date in 2016), related to seed money investments held in the Asset Management and Canada Corporate business units.

Comparing the fourth quarter of 2017 to the fourth quarter of 2016, average equity market levels were up by 7% in Canada (as measured by S&P TSX), 19% in the U.S. (as measured by S&P 500), 8% in the U.K. (as measured by FTSE 100), and 16% in broader Europe (as measured by Eurostoxx 50). The major equity indices finished the fourth quarter up 4% in Canada, 6% in the U.S., 4% in the U.K. and down 3% in broader Europe, compared to September 30, 2017.



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Foreign CurrencyThroughout this document, a number of terms are used to highlight the impact of foreign exchange on results, such as: “constant currency basis”, “impact of currency movement” and “effect of currency translation fluctuations”. These measures have been calculated using the average or period end rates, as appropriate, in effect at the date of the comparative period. This non-IFRS measure provides useful information as it facilitates the comparability of results between periods.

The average currency translation rate for the fourth quarter of 2017 decreased for the U.S. dollar, and increased for the British pound and the euro compared to the fourth quarter of 2016. The overall impact of currency movement on the Company’s net earnings for

the three month period ended December 31, 2017 was an increase of $18 million ($43 million decrease year-to-date) compared to translation rates a year ago.

From September 30, 2017 to December 31, 2017, the market rate at the end of the reporting period used to translate U.S. dollar, British pound and euro assets and liabilities to the Canadian dollar increased. The movements in end-of-period market rates resulted in unrealized foreign exchange gains from the translation of foreign operations, including related hedging activities, of $294 million in-quarter ($495 million net unrealized loss year-to-date) recorded in other comprehensive income.

Translation rates for the reporting period and comparative periods are detailed in the “Translation of Foreign Currency” section.

Credit MarketsCredit markets impact on common shareholders’ net earnings (after-tax) For the three months ended December 31, 2017 For the twelve months ended December 31, 2017

Changes in Changes in provisions provisions for future for future credit losses credit losses Impairment in insurance Impairment in insurance (charges) / contract (charges) / contract recoveries liabilities Total recoveries liabilities Total

Canada $ 1 $ (1) $ – $ 1 $ (2) $ (1)United States (1) 1 – (3) 1 (2)Europe (1) 7 6 (1) 8 7

Total $ (1) $ 7 $ 6 $ (3) $ 7 $ 4

In the fourth quarter of 2017, the Company experienced net charges on impaired investments, including dispositions, which negatively impacted net earnings by $1 million ($4 million net recovery in the fourth quarter of 2016). Changes in credit ratings in the Company’s fixed income portfolio resulted in a net decrease to provisions for future credit losses in insurance contract liabilities, which positively impacted net earnings by $7 million in the quarter ($2 million net positive impact in the fourth quarter of 2016).

For the twelve months ended December 31, 2017, the Company experienced net charges on impaired investments, including dispositions, which negatively impacted net earnings by $3 million ($17 million net charge in 2016). Prior year charges were primarily driven by impairment charges on mortgage loans as a result of the insolvency of British Home Stores (BHS), a U.K. retailer. Changes in credit ratings in the Company’s fixed income portfolio resulted in a net decrease to provisions for future credit losses in insurance contract liabilities, which positively impacted net earnings by $7 million year-to-date ($12 million net positive impact in 2016).

ACTUARIAL ASSUMPTION CHANGES

During the fourth quarter of 2017, the Company updated a number of actuarial assumptions resulting in a positive net earnings impact of $35 million including the impacts noted in the “Actuarial Standards Update” section, compared to $115 million for the same quarter last year and $134 million for the previous quarter.

In Europe, net earnings were positively impacted by $42 million, primarily due to the impact of updated economic, annuitant mortality and morbidity assumptions, partially offset by updated mortality assumptions, updated tax assumptions mainly due to U.S. tax reform, and modeling refinements. In Canada, net earnings were positively impacted by $19 million, primarily due to the impact of updated mortality and morbidity assumptions,

partially offset by updated economic, annuitant mortality, expense and tax assumptions. In the U.S., net earnings were negatively impacted by $26 million, primarily due to the impact of updated tax assumptions due to U.S. tax reform and updated economic assumptions, partially offset by updated mortality assumptions.

For the twelve months ended December 31, 2017, actuarial assumption changes resulted in a positive net earnings impact of $243 million, compared to $446 million for the same period in 2016.

ACTUARIAL STANDARDS UPDATE

In July 2017, the Canadian Actuarial Standards Board published the changes to the standards, effective for 2017 year-end reporting. The changes to the standards relate to prescribed mortality improvement rates and associated margins for adverse deviations, ultimate reinvestment rates, calibration criteria for stochastic risk-free interest rates and calibration criteria for equity investment returns, which are all used in the valuation of insurance contract liabilities.

The prescribed mortality improvement rates and associated margins for adverse deviation reflect recent mortality improvement trends in the Canadian population, revisions to the shape of expected future mortality improvements and the corresponding margins for adverse deviation including recognition of diversification of risk. For business in Canada, the adoption of this standard change in the fourth quarter of 2017 resulted in a positive net earnings impact of $72 million. During 2017, the Company has reviewed the mortality improvement rates used in all regions. While not directly related to the standards change, these resulted in a positive net earnings impact of $3 million in the fourth quarter of 2017, mainly in the U.S., partially offset by impacts within Europe.

Decreases in ultimate reinvestment rates and revised calibration criteria for stochastic risk-free interest rates were prescribed. The



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Company adopted these standard changes in the fourth quarter of 2017, resulting in a charge to net earnings of $27 million.

Criteria for the volatility of returns were added to the calibration criteria for equity investment returns. The Company’s current models already met these criteria; as a result, there was no impact on net earnings.

PREMIUMS AND DEPOSITS AND SALES

Total premiums and deposits (a non-IFRS financial measure) include premiums on risk-based insurance and annuity products net of ceded reinsurance (as defined under IFRS), premium equivalents on self-funded group insurance administrative services only (ASO) contracts, deposits on individual and group segregated fund products as well as deposits on proprietary

mutual funds and institutional accounts. This measure provides an indicator of top-line growth.

Sales (a non-IFRS financial measure) for risk-based insurance and annuity products include 100% of single premium and annualized premiums expected in the first twelve months of the plan. Group insurance and ASO sales reflect annualized premiums and premium equivalents for new policies and new benefits covered or expansion of coverage on existing policies. For individual wealth management products, sales include deposits on segregated fund products, proprietary mutual funds and institutional accounts as well as deposits on non-proprietary mutual funds. For group wealth management products, sales include assets transferred from previous plan providers and the expected annual contributions from the new plan. This measure provides an indicator of new business growth.

Premiums and deposits For the three months ended For the twelve months ended


Canada Individual Customer (1) $ 2,809 $ 2,499 $ 2,769 $ 10,880 $ 10,040 Group Customer (1) 4,038 3,659 3,912 15,665 14,621

6,847 6,158 6,681 26,545 24,661United States Financial Services 3,134 3,140 3,525 12,950 14,156 Asset Management 11,016 10,404 11,119 45,499 45,471

14,150 13,544 14,644 58,449 59,627Europe Insurance & Annuities 8,665 5,983 4,984 25,426 22,276 Reinsurance 2,995 2,837 3,730 12,729 10,902

11,660 8,820 8,714 38,155 33,178

Total premiums and deposits $ 32,657 $ 28,522 $ 30,039 $ 123,149 $ 117,466

Sales For the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 2017 2017 2016 2017 2016

Canada $ 3,772 $ 2,940 $ 3,871 $ 13,608 $ 12,933 United States 19,162 21,173 18,384 81,621 98,218 Europe – Insurance & Annuities 7,325 5,362 4,410 21,938 19,179

Total sales $ 30,259 $ 29,475 $ 26,665 $ 117,167 $ 130,330


The information in the table above is a summary of results for the Company’s total premiums and deposits and sales. Additional commentary regarding premiums and deposits and sales is included in the “Segmented Operating Results” section.



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Net investment income For the three months ended For the twelve months ended


Investment income earned (net of investment properties expenses) $ 1,537 $ 1,545 $ 1,522 $ 6,143 $ 6,229Allowances for credit losses on loans and receivables (6) (3) (13) (7) (35)Net realized gains 66 5 25 127 165

Regular investment income 1,597 1,547 1,534 6,263 6,359Investment expenses (33) (30) (27) (122) (107)

Regular net investment income 1,564 1,517 1,507 6,141 6,252Changes in fair value through profit or loss 1,415 (988) (3,943) 1,466 3,903

Net investment income $ 2,979 $ 529 $ (2,436) $ 7,607 $ 10,155

Net investment income in the fourth quarter of 2017, which includes changes in fair value through profit or loss, increased by $5,415 million compared to the same quarter last year. The changes in fair value in the fourth quarter of 2017 were an increase of $1,415 million compared to a decrease of $3,943 million for the fourth quarter of 2016. In the fourth quarter of 2017, the increase was primarily due to a decline in long duration Canadian bond yields as well as a decline in U.K. bond yields. In the fourth quarter of 2016, the decrease was primarily due to an increase in bond yields across all geographies.

Regular net investment income in the fourth quarter of 2017, which excludes changes in fair value through profit or loss, increased by $57 million compared to the fourth quarter of 2016. The increase was primarily due to higher net realized gains. Net realized gains include gains on available-for-sale securities of $13 million for the fourth quarter of 2017 compared to $14 million for the same quarter last year.

For the twelve months ended December 31, 2017, net investment income decreased by $2,548 million compared to the same period last year. The changes in fair value for the twelve month period in 2017 were an increase of $1,466 million compared to an increase of $3,903 million during the same period in 2016. Fair values increased less in 2017 compared to 2016 primarily due to mixed bond yield movement in the U.K. in the current year, compared to a decline in U.K. bond yields and a larger increase in Canadian equity markets during 2016.

Regular net investment income for the twelve months ended December 31, 2017 decreased by $111 million compared to the same period last year. The decrease was primarily due to the impact of currency movement as the Canadian dollar was stronger against the British pound in 2017 compared to 2016, as well as lower net realized gains. Net realized gains include gains on available-for-sale securities of $30 million for the twelve months ended December 31, 2017, compared to $84 million for the same period last year.

Net investment income in the fourth quarter of 2017 increased by $2,450 million compared to the previous quarter, primarily due to net increases in fair values of $1,415 million in the fourth quarter of 2017 compared to net decreases in fair values of $988 million in the previous quarter. The net increase in fair values during the fourth quarter was primarily due to a decline in long duration Canadian bond yields as well as a decline in U.K. bond yields, while the net decrease in fair values during the previous quarter was primarily due to an increase in bond yields across all geographies.

FEE AND OTHER INCOME

In addition to providing traditional risk-based insurance products, the Company also provides certain products on a fee-for-service basis. The most significant of these products are segregated funds and mutual funds, for which the Company earns investment management fees on assets managed and other fees, as well as ASO contracts, under which the Company provides group benefit plan administration on a cost-plus basis.

Fee and other income For the three For the twelve months ended months ended


Canada Segregated funds, mutual funds and other $ 375 $ 371 $ 345 $ 1,444 $ 1,329 ASO contracts 44 40 41 172 165

419 411 386 1,616 1,494United States Segregated funds, mutual funds and other 616 606 619 2,452 2,311

Europe Segregated funds, mutual funds and other 368 348 340 1,386 1,296

Total fee and other income $ 1,403 $ 1,365 $ 1,345 $ 5,454 $ 5,101

The information in the table above is a summary of gross fee and other income for the Company. Additional commentary regarding fee and other income is included in the “Segmented Operating Results” section.



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NET POLICYHOLDER BENEFITS, DIVIDENDS AND EXPERIENCE REFUNDS

Net policyholder benefits, dividends and experience refunds For the three For the twelve months ended months ended


Canada $ 2,319 $ 2,209 $ 2,280 $ 9,373 $ 9,049United States 1,156 912 1,161 4,228 4,119Europe 4,143 3,728 4,400 16,786 14,546

Total $ 7,618 $ 6,849 $ 7,841 $ 30,387 $ 27,714

Net policyholder benefits, dividends and experience refunds include life and health claims, policy surrenders, maturities, annuity payments, segregated fund guarantee payments, policyholder dividends and experience refund payments. The amounts do not include benefit payments for ASO contracts, segregated funds or mutual funds.

For the three months ended December 31, 2017, net policyholder benefits, dividends and experience refunds were $7.6 billion, a decrease of $0.2 billion from the same period in 2016. The decrease in benefit payments was primarily due to lower volumes relating to existing business and the impact of currency movement.

For the twelve months ended December 31, 2017, net policyholder benefits, dividends and experience refunds were $30.4 billion, an increase of $2.7 billion from the same period in 2016. The increase in benefit payments was primarily due to new and restructured reinsurance treaties.

Compared to the previous quarter, net policyholder benefits, dividends and experience refunds increased by $0.8 billion, primarily due to higher volumes relating to existing business and the impact of currency movement.

OTHER BENEFITS AND EXPENSES

Other benefits and expenses For the three For the twelve months ended months ended


Operating and administrative expenses $ 1,272 $ 1,143 $ 1,250 $ 4,833 $ 4,799Commissions 587 521 853 2,410 2,602Premium taxes 115 118 112 463 411Financing charges 74 71 75 300 302Restructuring and acquisition expenses 5 1 35 259 63Amortization of finite life intangible assets 29 47 44 168 177

Total $ 2,082 $ 1,901 $ 2,369 $ 8,433 $ 8,354

Other benefits and expenses for the fourth quarter of 2017 of $2,082 million decreased by $287 million compared to the fourth quarter of 2016, primarily due to lower commissions, driven by lower sales in Canada.

For the twelve months ended December 31, 2017, other benefits and expenses increased by $79 million to $8,433 million compared to the same period last year, primarily due to higher restructuring and acquisition expenses, partially offset by lower commissions as discussed for the in-quarter results.

Other benefits and expenses for the fourth quarter of 2017 increased by $181 million compared to the previous quarter, primarily due to higher operating and administrative expenses, primarily due to less favourable impacts of changes to certain income tax estimates and a prior quarter non-recurring pension curtailment gain in the U.S. as well as higher commissions, driven by higher sales in Canada.

INCOME TAXES

The Company’s effective income tax rate is generally lower than the statutory income tax rate of 26.75% due to benefits related to non-taxable investment income and lower income tax in foreign jurisdictions.

In the fourth quarter of 2017, the Company had an effective income tax rate of 30%, up from 18% in the fourth quarter of 2016. On December 22, 2017, the Tax Reconciliation Act, was substantively enacted, following the signing by the President of the U.S. The legislation, which was generally effective for tax years beginning on January 1, 2018, results in significant U.S. tax reform and revises the Internal Revenue Code by, among other things, lowering the corporate federal income tax rate from 35% to 21% and modifying how the U.S. taxes multinational entities. As a result of these changes, the Company revalued certain deferred tax balances and insurance contract liabilities and updated certain expense provisions. The impact of these items was a net charge of $216 million to net earnings, which increased the Company’s fourth quarter of 2017 effective income tax rate by 21 points. Excluding the impact of this U.S. tax reform, the Company had an effective income tax rate of 9% for the fourth quarter of 2017, down from 18% in the prior year as a result of the favourable impact of items taxed outside of Canada and tax exempt investment income as well as changes in certain tax estimates, partially offset by the impact of a corporate tax rate increase in British Columbia.

The Company had an effective income tax rate of 15% for the twelve months ended December 31, 2017. Excluding the impact of U.S. tax reform discussed for the in-quarter results, the effective tax rate was 11% for the twelve months ended December 31, 2017 and was comparable to 12% for the same period last year.

Excluding the impact of U.S. tax reform discussed for the in-quarter results, the fourth quarter effective income tax rate of 9% was lower than the third quarter rate of 13%. The decrease in the effective income tax rate was primarily due to the favourable impact of items taxed outside of Canada as well as changes in certain tax estimates, partially offset by the impact of the British Columbia corporate tax rate increase.

C 1 0 P O W E R C O R P O R AT I O N O F C A N A DA


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Effective Income Tax Rate – Impact of U.S. Tax Reform Net For the three For the twelve earnings months ended months ended impact Dec. 31, 2017 Dec. 31, 2017

Effective income tax rate before non-controlling interests 30% 15%Increase (decrease) from revaluation of deferred tax balances: Canada $ (19) (3)% (1)% United States (223) (36) (11) Europe 88 14 4

(154) (25) (8)Increase (decrease) related to insurance contract liabilities and expenses: Canada – – – United States (47) 13 13 Europe (34) (9) (9)

(81) 4 4

Net impact of U.S. tax reform before non-controlling interests $ (235) (21)% (4)%

Effective income tax rate excluding U.S. tax reform impact before non-controlling interests 9% 11%

Attributable to non-controlling interests 19

Net impact of U.S. tax reform $ (216)

CONSOLIDATED FINANCIAL POSITION

The revaluation of deferred tax balances, which are based on management’s best estimates, may require further adjustments as additional guidance from the U.S. Department of the Treasury is provided, the Company’s assumptions change, and as further information and interpretations become available. Changes in these estimates will impact the 2018 fiscal year.

ASSETS Assets under administration December 31, 2017

Canada United States Europe Total

Assets Invested assets $ 73,110 $ 44,263 $ 50,562 $ 167,935 Goodwill and intangible assets 5,447 1,975 2,489 9,911 Other assets 2,804 3,787 18,044 24,635 Segregated funds net assets 80,399 34,038 102,920 217,357

Total assets 161,760 84,063 174,015 419,838Proprietary mutual funds and institutional net assets 6,810 232,623 39,521 278,954

Total assets under management 168,570 316,686 213,536 698,792Other assets under administration 11,580 597,596 41,945 651,121

Total assets under administration $ 180,150 $ 914,282 $ 255,481 $ 1,349,913

December 31, 2016


Assets Invested assets $ 70,311 $ 44,904 $ 47,940 $ 163,155 Goodwill and intangible assets 5,133 2,388 2,428 9,949 Other assets (1) 3,178 4,351 18,697 26,226 Segregated funds net assets 74,909 35,414 90,080 200,403

Total assets 153,531 87,057 159,145 399,733Proprietary mutual funds and institutional net assets 5,852 219,699 33,664 259,215

Total assets under management 159,383 306,756 192,809 658,948Other assets under administration 15,911 534,428 38,952 589,291

Total assets under administration $ 175,294 $ 841,184 $ 231,761 $ 1,248,239


P O W E R C O R P O R AT I O N O F C A N A DA C 1 1


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Total assets under administration at December 31, 2017 increased by $101.7 billion to $1.3 trillion compared to December 31, 2016, primarily due to the impact of positive market movement and new business growth, partially offset by the impact of currency movement. The decrease in Canada other assets under administration of $4.3 billion is primarily due to the transition of $5.5 billion of real estate assets from GWL Realty Advisors to British Columbia Investment Management Corporation (bcIMC) in the third quarter of 2017. The remaining bcIMC real estate assets of approximately $0.8 billion are expected to transition in the first quarter of 2018.

INVESTED ASSETS

The Company manages its general fund assets to support the cash flow, liquidity and profitability requirements of the Company’s insurance and investment products. The Company follows prudent and conservative investment policies, so that assets are not unduly exposed to concentration, credit or market risks. The Company implements strategies within the overall framework of the Company’s policies, reviewing and adjusting them on an ongoing basis in light of liability cash flows and capital market conditions. The majority of investments of the general fund are in medium-term and long-term fixed-income investments, primarily bonds and mortgages, reflecting the characteristics of the Company’s liabilities.

Invested asset distribution December 31, 2017


Bonds Government & related $ 22,600 $ 5,848 $ 21,449 $ 49,897 30% Corporate & other 23,704 26,342 20,261 70,307 42

Sub-total bonds 46,304 32,190 41,710 120,204 72Mortgages 13,142 5,447 3,596 22,185 13Stocks 8,324 112 428 8,864 5Investment properties 1,960 5 2,886 4,851 3

Sub-total portfolio investments 69,730 37,754 48,620 156,104 93Cash and cash equivalents 701 1,017 1,833 3,551 2Loans to policyholders 2,679 5,492 109 8,280 5

Total invested assets $ 73,110 $ 44,263 $ 50,562 $ 167,935 100% December 31, 2016


Bonds Government & related $ 23,580 $ 8,384 $ 18,905 $ 50,869 31% Corporate & other 21,138 24,589 20,177 65,904 41

Sub-total bonds 44,718 32,973 39,082 116,773 72Mortgages 12,892 5,169 3,590 21,651 13Stocks 7,903 160 602 8,665 5Investment properties 1,574 5 2,761 4,340 3

Sub-total portfolio investments 67,087 38,307 46,035 151,429 93Cash and cash equivalents 615 852 1,792 3,259 2Loans to policyholders 2,609 5,745 113 8,467 5

Total invested assets $ 70,311 $ 44,904 $ 47,940 $ 163,155 100%

At December 31, 2017, total invested assets were $167.9 billion, an increase of $4.8 billion from December 31, 2016. The increase in invested assets was primarily due to regular business activity as well as a net increase in the fair value of bonds. The distribution of assets has not changed significantly and remains heavily weighted to bonds and mortgages.

Bond portfolio – It is the Company’s policy to acquire only investment grade bonds subject to prudent and well-defined investment policies. The total bond portfolio, including short-term investments, was $120.2 billion or 72% of invested assets at December 31, 2017 and $116.8 billion or 72% at December 31, 2016. The overall quality of the bond portfolio remained high, with 99% of the portfolio rated investment grade and 81% rated A or higher.

Bond portfolio quality December 31, 2017 December 31, 2016

AAA $ 24,889 21% $ 27,762 24% AA 32,405 27 29,816 26 A 40,328 33 37,787 32 BBB 21,449 18 20,116 17 BB or lower 1,133 1 1,292 1

Total $ 120,204 100% $ 116,773 100%



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At December 31, 2017, non-investment grade bonds were $1.1 billion or 0.9% of the bond portfolio compared to $1.3 billion or 1.1% of the bond portfolio at December 31, 2016.

Mortgage portfolio – It is the Company’s practice to acquire only high quality commercial mortgages meeting strict underwriting standards and diversification criteria. The Company has a well-

defined risk-rating system, which it uses in its underwriting and credit monitoring processes for commercial loans. Residential loans are originated by the Company’s mortgage specialists in accordance with well-established underwriting standards and are well diversified across each geographic region, including specific diversification requirements for non-insured mortgages.

Mortgage portfolio December 31, 2017 December 31, 2016

Mortgage loans by type Insured Non-insured Total Total

Single family residential $ 656 $ 1,483 $ 2,139 10% $ 2,075 9% Multi-family residential 3,549 3,217 6,766 30 5,987 28 Commercial 328 12,952 13,280 60 13,589 63

Total $ 4,533 $ 17,652 $ 22,185 100% $ 21,651 100%

The total mortgage portfolio was $22.2 billion or 13% of invested assets at December 31, 2017, compared to $21.7 billion or 13% of

invested assets at December 31, 2016. Total insured loans were $4.5 billion or 20% of the mortgage portfolio.

Commercial mortgages December 31, 2017 December 31, 2016

Canada U.S. Europe Total Canada U.S. Europe Total

Retail & shopping centres $ 3,185 $ 628 $ 1,337 $ 5,150 $ 3,353 $ 633 $ 1,263 $ 5,249Office buildings 1,862 888 658 3,408 1,845 657 729 3,231Industrial 1,411 1,322 855 3,588 1,570 1,534 842 3,946Other 382 419 333 1,134 340 450 373 1,163

Total $ 6,840 $ 3,257 $ 3,183 $ 13,280 $ 7,108 $ 3,274 $ 3,207 $ 13,589

Single family residential mortgages December 31, 2017 December 31, 2016

Region Ontario $ 1,054 49% $ 1,005 49% Quebec 458 22 436 21 Alberta 135 6 140 7 British Columbia 120 6 127 6 Newfoundland 112 5 113 5 Saskatchewan 94 5 86 4 Nova Scotia 63 3 65 3 New Brunswick 50 2 46 2 Manitoba 49 2 53 3 Other 4 – 4 –

Total $ 2,139 100% $ 2,075 100%

During the twelve months ended December 31, 2017, single family mortgage originations, including renewals, were $618 million, of which 24% were insured. Insured mortgages include mortgages where insurance is provided by a third party and protects the Company in the event that the borrower is unable to fulfill their mortgage obligations. Loans that are insured are subject to the requirements of the mortgage default insurance provider. For

new originations of non-insured residential mortgages, the Company’s investment policies limit the amortization period to a maximum of 25 years and the loan-to-value to a maximum of 80% of the purchase price or current appraised value of the property. The weighted average remaining amortization period for the single family residential mortgage portfolio was 21 years as at December 31, 2017.

Equity portfolio December 31, 2017 December 31, 2016

Equity portfolio by type Publicly traded stocks $ 8,465 62% $ 7,988 62% Privately held stocks 399 3 677 5

Sub-total 8,864 65 8,665 67 Investment properties 4,851 35 4,340 33

Total $ 13,715 100% $ 13,005 100%



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Investment properties December 31, 2017 December 31, 2016

Canada U.S. Europe Total Canada U.S. Europe Total

Office buildings $ 872 $ – $ 635 $ 1,507 $ 702 $ – $ 625 $ 1,327Industrial 340 – 676 1,016 293 – 596 889Retail 222 – 1,167 1,389 207 – 1,114 1,321Other 526 5 408 939 372 5 426 803

Total $ 1,960 $ 5 $ 2,886 $ 4,851 $ 1,574 $ 5 $ 2,761 $ 4,340

Equity portfolio – The total equity portfolio was $13.7 billion or 8% of invested assets at December 31, 2017 compared to $13.0 billion or 8% of invested assets at December 31, 2016. The equity portfolio consists of publicly traded stocks, privately held stocks and investment properties. The increase in public stocks of $0.5 billion was primarily due to an increase in the Canadian equity markets, while the decrease in private stocks of $0.3 billion was primarily due to the sale of an equity investment holding in Allianz Ireland.

The increase in investment properties of $0.5 billion was mainly the result of purchases in the Canadian division as well as net market value increases.

Impaired investments – Impaired investments include bonds in default, mortgages in default or in the process of foreclosure, investment properties acquired by foreclosure and other assets where management no longer has reasonable assurance that all contractual cash flows will be received.

Impaired investments December 31, 2017 December 31, 2016

Gross Impairment Impairment Carrying Gross Impairment Impairment Carrying amount recovery provision amount amount recovery provision amount

Fair value through profit or loss $ 213 $ 20 $ – $ 233 $ 231 $ 53 $ (1) $ 283Available-for-sale 16 2 (1) 17 8 3 (1) 10Loans and receivables 81 – (40) 41 122 – (43) 79

Total $ 310 $ 22 $ (41) $ 291 $ 361 $ 56 $ (45) $ 372

The gross amount of impaired investments totaled $310 million or 0.2% of invested assets at December 31, 2017 compared with $361 million or 0.2% at December 31, 2016, a net decrease of $51 million. The decrease in impaired investments was primarily due to dispositions and repayments.

The impairment recovery at December 31, 2017 was $22 million, which reflects the improvement in market values of certain impaired investments from the date at which they became impaired. The impairment provision at December 31, 2017 was $41 million, compared to $45 million at December 31, 2016. The decrease was primarily due to the restructuring of impaired bonds as well as the disposal of impaired mortgage loans. While the fair values have improved on certain impaired assets, these assets remain impaired based on other impairment factors as described in the “Summary of Critical Accounting Estimates” section of this document and in note 2 of the Company’s December 31, 2017 annual consolidated financial statements.

Provision for future credit losses

As a component of insurance contract liabilities, the total actuarial provision for future credit losses is determined consistent with the Canadian Institute of Actuaries’ Standards of Practice and includes provisions for adverse deviation.

At December 31, 2017, the total actuarial provision for future credit losses in insurance contract liabilities was $2,891 million compared to $2,946 million at December 31, 2016, a decrease of $55 million, primarily due to the impact of basis changes, partially offset by normal business activity.

The aggregate of impairment provisions of $41 million ($45 million at December 31, 2016) and actuarial provisions for future credit losses in insurance contract liabilities of $2,891 million ($2,946 million at December 31, 2016) represents 2.0% of bond and mortgage assets, including funds held by ceding insurers, at December 31, 2017 (2.0% at December 31, 2016).

United Kingdom Property Related Exposures

Holdings of United Kingdom Mortgages and Investment Properties December 31, December 31, 2017 2016

Multi-Family Retail & Office Residential shopping centres buildings Industrial Other Total Total

Mortgages $ 361 $ 1,636 $ 650 $ 941 $ 333 $ 3,921 $ 3,772Investment properties – 1,144 631 676 401 2,852 2,729

Total $ 361 $ 2,780 $ 1,281 $ 1,617 $ 734 $ 6,773 $ 6,501

At December 31, 2017, the Company’s holdings of property related investments in the U.K. were $6.8 billion ($6.5 billion at December 31, 2016) or 4.0% of invested assets. Holdings in Central London were $2.1 billion ($1.9 billion at December 31, 2016) or 1.2% of invested assets, while holdings in other regions of the U.K. were $4.7 billion ($4.6 billion at December 31, 2016) or 2.8% of invested

assets. These holdings were well diversified across property type – Retail (41%), Industrial/Other (35%), Office (19%) and Multi-family (5%). The weighted average loan-to-value ratio of the mortgages was 51% and the weighted average debt-service coverage ratio was 2.4 at December 31, 2017. At December 31, 2017, the weighted average mortgage and property lease term exceeded 12 years.



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There were no major changes to the Company’s policies and procedures with respect to the use of derivative financial instruments in 2017. The Company’s derivative transactions are generally governed by International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements, which provide for legally enforceable set-off and close-out netting of exposure to specific counterparties in the event of an early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from a counterparty against payables to the same counterparty, in the same legal entity, arising out of all included transactions. The Company’s ISDA Master Agreements may include Credit Support Annex provisions, which require both the pledging and accepting of collateral in connection with its derivative transactions.

At December 31, 2017, total financial collateral, including initial margin and overcollateralization, received on derivative assets was $77 million ($159 million at December 31, 2016) and pledged on derivative liabilities was $437 million ($475 million at December 31, 2016). Collateral received on derivative assets declined as a result of a decrease in derivative assets, primarily driven by the impact of the strengthening British pound against the U.S. dollar on cross-currency swaps that pay British pounds and receive U.S. dollars. Collateral pledged on derivative liabilities decreased in 2017 as a result of a decrease in derivative liabilities, primarily driven by the impact of the strengthening Canadian dollar against the U.S. dollar on cross-currency swaps that pay U.S. and receive Canadian dollars.

During the twelve month period ended December 31, 2017, the outstanding notional amount of derivative contracts decreased by $0.6 billion to $16.6 billion. The decrease was primarily due to the expiration and settlement of foreign exchange contracts that were cash flow hedges for the $1.0 billion of the Company’s subordinated debentures redeemed June 21, 2017, partially offset by an increase in regular hedging activities.

The Company’s exposure to derivative counterparty credit risk, which reflects the current fair value of those instruments in a gain position, decreased to $384 million at December 31, 2017 from $528 million at December 31, 2016. The decrease is primarily due to the strengthening of the British pound against the U.S. dollar on cross-currency swaps that pay British pounds and receive U.S. dollars and the expiration and settlement of foreign exchange contracts that paid euro and received British pounds.

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets December 31

2017 2016

Goodwill $ 6,179 $ 5,977Indefinite life intangible assets 2,662 3,030Finite life intangible assets 1,070 942

Total $ 9,911 $ 9,949

The Company’s goodwill and intangible assets relate primarily to its acquisitions of London Life, Canada Life, Putnam and Irish Life. Goodwill and intangible assets of $9,911 million at December 31, 2017 were comparable to December 31, 2016. Goodwill increased by $202 million to $6,179 million, primarily due to the acquisition of Financial Horizons Group and the impact of currency movements. Indefinite life intangible assets decreased by $368 million, primarily due to a reduction in customer contract related intangibles and the impacts of currency movement, partially offset by the reversal of an impairment charge related to Putnam brands and trademarks. Customer contract related indefinite life intangible assets of $290 million were transferred to assets held for sale as a result of the disposal of an associated equity investment. Finite life intangible assets increased by $128 million during 2017, primarily due to additions of customer contracts related to the acquisition of Financial Horizons Group and net additions to computer software, partially offset by currency movement.

IFRS principles require the Company to assess at the end of each reporting period whether there is any indication that an asset may be impaired and to perform an impairment test on goodwill and indefinite life intangible assets at least annually or more frequently if events indicate that impairment may have occurred. Intangible assets that were previously impaired are reviewed at each reporting date for evidence of reversal. Finite life intangible assets are reviewed annually to determine if there are indications of impairment and assess whether the amortization periods and methods are appropriate. In the fourth quarter of 2017, the Company conducted its annual impairment testing of goodwill and intangible assets based on September 30, 2017 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. The recoverable amount is the higher of the asset’s fair value less costs of disposal and value-in-use. In the second quarter of 2017, the Company recognized an impairment loss of $16 million ($12 million after-tax) to finite life intangible assets related to software assets included in the provision for the Canadian business transformation.

Refer to note 10 in the Company’s December 31, 2017 annual consolidated financial statements for further details of the Company’s goodwill and intangible assets. Also, refer to the “Summary of Critical Accounting Estimates” section of this document for details on impairment testing of these assets.



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OTHER GENERAL FUND ASSETS

Other general fund assets December 31

2017 2016 (1)

Funds held by ceding insurers $ 9,893 $ 10,781Reinsurance assets 5,045 5,627Premiums in course of collection, accounts and interest receivable 4,647 4,311Other assets 2,424 2,263Deferred tax assets (1) 930 1,593Owner occupied properties 706 649Derivative financial instruments 384 528Fixed assets 303 304Assets held for sale (2) 169 –Current income taxes (1) 134 170

Total $ 24,635 $ 26,226


(2) For additional details on assets held for sale, refer to note 6 in the Company’s December 31, 2017 annual consolidated financial statements.

Total other general fund assets at December 31, 2017 were $24.6 billion, a decrease of $1.6 billion from December 31, 2016. The decrease was primarily due to a $0.9 billion decrease in funds held by ceding insurers, a $0.7 billion decrease in deferred tax assets and a $0.6 billion decrease in reinsurance assets, partially offset by an increase of $0.3 billion in premiums in course of collection, accounts and interest receivable, an increase of $0.2 million in assets held for sale and an increase of $0.1 billion in other assets. The decrease in deferred tax assets is primarily due to the impact of U.S. tax reform.

Other assets comprise several items including prepaid expenses and accounts receivable. Refer to note 12 in the Company’s December 31, 2017 annual consolidated financial statements for a breakdown of other assets.


Segregated funds December 31

2017 2016 2015

Stock and units in unit trusts $ 93,465 $ 81,033 $ 80,829Mutual funds 54,658 51,726 50,101Bonds 42,270 41,619 42,160Investment properties 11,520 11,019 10,839Cash and other 11,232 10,837 10,279Mortgage loans 2,610 2,622 2,596

Sub-total $ 215,755 $ 198,856 $ 196,804Non-controlling mutual funds interest 1,602 1,547 1,390

Total $ 217,357 $ 200,403 $ 198,194

Year-over-year growth 8% 1% 13%

Investments on account of segregated fund policyholders, which are measured at fair value, increased by $17.0 billion to $217.4 billion at December 31, 2017 compared to December 31, 2016, primarily due to the combined impact of market value gains and investment income of $13.4 billion, the impact of currency movement of $2.5 billion and net deposits of $1.1 billion.

PROPRIETARY MUTUAL FUNDS

Proprietary mutual funds and institutional net assets December 31

2017 2016

Mutual funds Blend equity $ 30,828 $ 31,328 Growth equity 15,045 13,252 Equity value 23,590 23,163 Fixed-income 35,593 33,999 Money market 156 164 Great-West Financial Funds (1) 16,585 15,856

Sub-total $ 121,797 $ 117,762

Institutional accounts Equity $ 103,001 $ 84,257 Fixed-income 46,799 48,700 Other 7,357 8,496

Sub-total $ 157,157 $ 141,453

Total proprietary mutual funds and institutional accounts $ 278,954 $ 259,215

(1) At December 31, 2017, mutual funds exclude $13.4 billion of Putnam managed funds ($10.9 billion at December 31, 2016), which are included in the categories above.

At December 31, 2017, total proprietary mutual funds and institutional accounts include $232.6 billion at Putnam and Great-West Financial, $38.5 billion at Irish Life and $6.8 billion at Quadrus Investment Services Ltd (Quadrus). Proprietary mutual funds and institutional accounts under management increased by $19.7 billion, primarily due to the positive impact of market movements, partially offset by the impact of currency movement.



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LIABILITIES

Total liabilities December 31

2017 2016 (1)

Insurance and investment contract liabilities $ 161,365 $ 157,949Other general fund liabilities (1) 15,580 16,373Investment and insurance contracts on account of segregated fund policyholders 217,357 200,403

Total $ 394,302 $ 374,725


Total liabilities increased by $19.6 billion to $394.3 billion at December 31, 2017 from December 31, 2016.

Insurance and investment contract liabilities increased by $3.4 billion, primarily due to the impact of new business, partially offset by the net impact of currency movement, primarily driven by the strengthening of the Canadian dollar against the U.S. dollar and changes in assumptions. Investment and insurance contracts on account of segregated fund policyholders increased by $17.0 billion, primarily due to the combined impact of market value gains and investment income of $13.4 billion, the impact of currency movement of $2.5 billion and net deposits of $1.1 billion.

Insurance and investment contract liabilities represent the amounts that, together with estimated future premiums and investment income, will be sufficient to pay estimated future benefits, dividends and expenses on policies in-force. Insurance and investment contract liabilities are determined using generally accepted actuarial practices, according to standards established by the Canadian Institute of Actuaries. Also, refer to the “Summary of Critical Accounting Estimates” section of this document for further details.

Assets supporting insurance and investment contract liabilities Non-Participating Participating Account Canada United States Europe Total

December 31, 2017 Bonds $ 23,410 $ 19,486 $ 23,400 $ 33,037 $ 99,333 Mortgage loans 8,959 3,777 4,268 3,569 20,573 Stocks 5,142 2,027 – 262 7,431 Investment properties 1,689 134 – 2,810 4,633 Other assets (1) 9,671 4,607 1,146 13,971 29,395

Total assets $ 48,871 $ 30,031 $ 28,814 $ 53,649 $ 161,365

Total insurance and investment contract liabilities $ 48,871 $ 30,031 $ 28,814 $ 53,649 $ 161,365

December 31, 2016 Bonds $ 22,896 $ 17,464 $ 23,820 $ 31,550 $ 95,730 Mortgage loans 8,810 3,699 4,005 3,557 20,071 Stocks 4,951 1,979 – 236 7,166 Investment properties 1,410 13 – 2,679 4,102 Other assets (1) 9,127 5,970 1,256 14,527 30,880

Total assets $ 47,194 $ 29,125 $ 29,081 $ 52,549 $ 157,949

Total insurance and investment contract liabilities $ 47,194 $ 29,125 $ 29,081 $ 52,549 $ 157,949

(1) Other assets include premiums in the course of collection, interest due and accrued, other investment receivables, current income taxes, prepaid expenses, accounts receivable and deferred acquisition costs.

Asset and liability cash flows are matched within reasonable limits to minimize the financial effects of a shift in interest rates and mitigate the changes in the Company’s financial position due to interest rate volatility.



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OTHER GENERAL FUND LIABILITIES

Other general fund liabilities December 31

2017 2016 (1)

Debentures and other debt instruments $ 5,617 $ 5,980Other liabilities 3,752 3,836Accounts payable 2,684 2,049Derivative financial instruments 1,336 2,012Deferred tax liabilities (1) 1,194 1,521Current income taxes (1) 464 494Funds held under reinsurance contracts 373 320Capital trust securities 160 161

Total $ 15,580 $ 16,373


Total other general fund liabilities at December 31, 2017 were $15.6 billion, a decrease of $0.8 billion from December 31, 2016, primarily due to a decrease of $0.7 billion in derivative financial liabilities, a decrease of $0.4 billion in debentures and other debt instruments and a decrease of $0.3 billion in deferred tax liabilities, partially offset by an increase of $0.6 billion in accounts payable. The decrease in deferred tax liabilities is primarily due to the impact of U.S. tax reform.

Other liabilities of $3.8 billion include pension and other post-employment benefits, deferred income reserve, bank overdraft and other liability balances. Refer to note 18 in the Company’s December 31, 2017 annual consolidated financial statements for a breakdown of the other liabilities balance and note 16 in the Company’s December 31, 2017 annual consolidated financial statements for details of the debentures and other debt instruments.

Segregated Fund and Variable Annuity GuaranteesThe Company offers retail segregated fund products, unitized with profits (UWP) products and variable annuity products that provide for certain guarantees that are tied to the market values of the investment funds.

The Company utilizes internal reinsurance treaties to aggregate the business as a risk-mitigating tool. Aggregation enables the Company to benefit from diversification of segregated fund risks within one legal entity, a more efficient and cost effective hedging process, and better management of the liquidity risk associated with hedging. It also results in the Company holding lower required capital and insurance contract liabilities, as aggregation of different risk profiles allows the Company to reflect offsets at a consolidated level.

In Canada, the Company offers individual segregated fund products through Great-West Life, London Life and Canada Life. These products provide guaranteed minimum death benefits (GMDB) and guaranteed minimum accumulation on maturity benefits (GMAB). In 2009, Great-West Life, London Life and Canada Life launched new individual segregated fund products, which offer three levels of death and maturity guarantees, guarantee reset riders and lifetime guaranteed minimum withdrawal benefits (GMWB).

For a certain generation of products, the guarantees in connection with the Canadian individual segregated fund businesses of Great-West Life, London Life and Canada Life have been reinsured to London Reinsurance Group Inc. (LRG), a subsidiary of London Life. This does not include the guarantees on newer Canadian products, which have been reinsured to London Life. In addition to the

guarantees reinsured from Great-West Life, London Life and Canada Life, LRG also has a closed portfolio of GMDB, GMAB and guaranteed minimum income benefits (GMIB) that it has reinsured from other U.S. and Canadian life insurance and reinsurance companies.

In Europe, the Company offers UWP 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. The Company also offers a GMWB product in Germany through Canada Life.

In the U.S., the Company offers variable annuities with GMDB through Great-West Financial. For the standalone GMDB business, most are a return of premium on death with the guarantee expiring at age 70. Great-West Financial in the U.S. also offers a GMWB product with an optional GMDB feature that does not expire with age.

The GMWB products offered by the Company in Canada, the U.S. and Germany, and previously offered in Ireland, provide the policyholder with a guaranteed minimum level of annual income for life. The minimum level of income may increase depending upon the level of growth in the market value of the policyholder’s funds. Where the market value of the policyholder’s funds is ultimately insufficient to meet the level of guarantee purchased by the policyholder, the Company is obligated to make up the shortfall.

These products involve cash flows of which the magnitude and timing are uncertain and are dependent on the level of equity and fixed-income market returns, interest rates, currency markets, market volatility, policyholder behaviour and policyholder longevity.

The Company has a hedging program in place to manage certain risks associated with options embedded in its GMWB products. The program methodology quantifies both the embedded option value and its sensitivity to movements in equity markets, currency markets and interest rates. Equity derivative instruments, currency derivative instruments and interest rate derivative instruments are used to mitigate changes in the embedded option value attributable to movements in equity markets, currency markets and interest rates respectively. The hedging program, by its nature, requires continuous monitoring and rebalancing to avoid over or under hedged positions. Periods of heightened market volatility will increase the frequency of hedge rebalancing.

By their nature, certain risks associated with the GMWB product either cannot be hedged, or cannot be hedged on a cost effective basis. These risks include policyholder behaviour, policyholder longevity and basis risk and market volatility. Consequently, the hedging program will not mitigate all risks to the Company associated with the GMWB products, and may expose the Company to additional risks including the operational risk associated with the reliance upon sophisticated models, and counterparty credit risk associated with the use of derivative instruments.

Other risk management processes are in place aimed at appropriately limiting the Company’s exposure to the risks it is not hedging or are otherwise inherent in its GMWB hedging program. In particular, the GMWB product has been designed with specific regard to limiting policyholder anti-selection, and the array of investment funds available to policyholders has been determined with a view to minimizing underlying basis risk.

Certain GMWB products offered by the Company offer levels of death and maturity guarantees. At December 31, 2017, the amount of GMWB product in-force in Canada, the U.S., Ireland and Germany was $4,225 million ($3,917 million at December 31, 2016).



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Segregated fund and variable annuity guarantee exposure December 31, 2017 Investment deficiency by benefit type

Market Value Income Maturity Death Total (1)

Canada $ 32,889 $ – $ 15 $ 44 $ 44United States 13,266 4 – 37 41Europe Insurance & Annuities 9,481 4 – 475 475 Reinsurance (2) 1,131 276 – 9 285

Total Europe 10,612 280 – 484 760

Total $ 56,767 $ 284 $ 15 $ 565 $ 845

(1) A policy can only receive a payout from one of the three trigger events (income election, maturity or death). Total deficiency measures the point-in-time exposure assuming the most costly trigger event for each policy occurred on December 31, 2017.

(2) Reinsurance exposure is to markets in Canada and the U.S.

The investment deficiency measures the point-in-time exposure to a trigger event (i.e., income election, maturity or death) assuming it occurred on December 31, 2017. The actual cost to the Company will depend on the trigger event having occurred and the market values at that time. The actual claims before tax associated with these guarantees were $5 million in-quarter ($4 million for the fourth quarter of 2016) and $18 million year-to-date ($21 million year-to-date for 2016), with the majority arising in the Reinsurance business unit in the Europe segment.

LIFECO CAPITAL STRUCTURE

In establishing the appropriate mix of capital required to support the operations of the Company and its subsidiaries, management utilizes a variety of debt, equity and other hybrid instruments giving consideration to both the short and long-term capital needs of the Company.

DEBENTURES AND OTHER DEBT INSTRUMENTS

At December 31, 2017, debentures and other debt instruments decreased by $363 million to $5,617 million compared to December 31, 2016.

During the first quarter of 2017, Irish Life Assurance plc (ILA), a subsidiary of the Company, redeemed its 5.25% 200 million subordinated debenture notes at their principal amount together with accrued interest.

On May 26, 2017, Great-West Lifeco Finance (Delaware) LP, a subsidiary of the Company, issued US$700 million principal amount 4.150% senior unsecured notes that are fully and unconditionally guaranteed by Lifeco, maturing on June 3, 2047.

On June 21, 2017, Great-West Lifeco Finance (Delaware) LP, a subsidiary of the Company, redeemed all $1.0 billion principal amount of its 5.691% subordinated debentures due June 21, 2067 at a redemption price equal to 100% of the principal amount of the debentures, plus any accrued interest up to but excluding the redemption date.

Refer to note 16 in the Company’s December 31, 2017 annual consolidated financial statements for further details of the Company’s debentures and other debt instruments.

CAPITAL TRUST SECURITIES

At December 31, 2017, the Company had $150 million principal outstanding of Canada Life Capital Trust Securities – Series B (CLiCS – Series B). Included in the Company’s invested assets at December 31, 2017 were CLiCS – Series B with a fair value of $52 million and principal value of $37 million (fair value of $50 million at December 31, 2016).

Each holder of the CLiCS – Series B is entitled to receive a semi-annual non-cumulative fixed cash distribution of $37.645 per CLiCS – Series B, representing an annual yield of 7.529% payable out of Canada Life Capital Trust’s (CLCT) distributable funds. Subject to regulatory approval, CLCT may redeem the CLiCS – Series B, in whole or in part, at any time and the CLiCS – Series B are callable at par on June 30, 2032.

EQUITY

Share capital outstanding at December 31, 2017 was $9,974 million, which comprises $7,260 million of common shares, $2,464 million of fixed rate First Preferred Shares, $213 million of 5-year rate reset First Preferred Shares and $37 million of floating rate First Preferred Shares.

Common sharesAt December 31, 2017, the Company had 988,722,659 common shares outstanding with a stated value of $7,260 million compared to 986,398,335 common shares with a stated value of $7,130 million at December 31, 2016.

The Company commenced a normal course issuer bid (NCIB) on January 9, 2017 for one year to purchase and cancel up to 20,000,000 of its common shares at market prices in order to mitigate the dilutive effect of stock options granted under the Company’s Stock Option Plan.

During the twelve months ended December 31, 2017, the Company repurchased and subsequently cancelled 1,800,000 common shares (2016 – 7,967,881) at an average cost per share of $35.18 (2016 – $33.54) under its NCIB, which included shares repurchased under private agreements in 2016.

Subsequent to December 31, 2017, in order to mitigate the dilutive effect of stock options granted under the Company’s Stock Option Plan and for other capital management purposes, the Company announced a normal course issuer bid commencing January 15, 2018 and terminating January 14, 2019 to purchase for cancellation up to but not more than 20,000,000 of its common shares at market prices.



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Preferred sharesAt December 31, 2017, the Company had 11 series of fixed rate First Preferred Shares, one series of 5-year rate reset First Preferred Shares and one series of floating rate First Preferred Shares outstanding with aggregate stated values of $2,464 million, $213 million and $37 million, respectively.

On May 18, 2017 the Company issued 8,000,000 Series T, 5.15% Non-Cumulative First Preferred Shares at $25.00 per share. The shares are redeemable at the option of the Company on or after June 30, 2022 for $25.00 per share plus a premium if redeemed prior to June 30, 2026, in each case together with all declared and unpaid dividends up to but excluding the date of redemption.

The terms and conditions of the outstanding First Preferred Shares are set out in the table below:

Great-West Lifeco Inc. Series F Series G Series H Series I Series L Series M Series N (1)

General Type Fixed Rate Fixed Rate Fixed Rate Fixed Rate Fixed Rate Fixed Rate 5-Year Rate ResetCumulative/Non-Cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulativeDate Issued Jul 10, 2003 Sep 14, 2004 Aug 12, 2005 Apr 12, 2006 Oct 2, 2009 Mar 4, 2010 Nov 23, 2010Shares Outstanding 7,740,032 12,000,000 12,000,000 12,000,000 6,800,000 6,000,000 8,524,422Amount Outstanding (Par) $193,500,800 $300,000,000 $300,000,000 $300,000,000 $170,000,000 $150,000,000 $213,110,550Yield 5.90% 5.20% 4.85% 4.50% 5.65% 5.80% 2.176%Earliest Issuer Redemption Date Sep 30, 2008 Dec 31, 2009 Sep 30, 2010 Jun 30, 2011 Dec 31, 2014 Mar 31, 2015 Dec 31, 2015

Great-West Lifeco Inc. Series O (2) Series P Series Q Series R Series S Series T

General Type Floating Rate Fixed Rate Fixed Rate Fixed Rate Fixed Rate Fixed RateCumulative/Non-Cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulativeDate Issued Dec 31, 2015 Feb 22, 2012 Jul 6, 2012 Oct 11, 2012 May 22, 2014 May 18, 2017Shares Outstanding 1,475,578 10,000,000 8,000,000 8,000,000 8,000,000 8,000,000Amount Outstanding (Par) $36,889,450 $250,000,000 $200,000,000 $200,000,000 $200,000,000 $200,000,000Yield Floating 5.40% 5.15% 4.80% 5.25% 5.15%Earliest Issuer Redemption Date Dec 31, 2015 March 31, 2017 Sep 30, 2017 Dec 31, 2017 Jun 30, 2019 Jun 30, 2022

(1) The Series N, Non-Cumulative 5-Year Rate Reset First Preferred Shares carry an annual fixed non-cumulative dividend rate of 2.176% up to but excluding December 31, 2020 and are redeemable at the option of the Company on December 31, 2020 and on December 31 every five years thereafter for $25.00 per share plus all declared and unpaid dividends up to but excluding the date of redemption. Subject to the Company’s right of redemption and certain other restrictions on conversion described in the Series N share conditions, each Series N share is convertible into one Series O share at the option of the holders on December 31, 2020 and on December 31 every five years thereafter.

(2) The Series O, Non-Cumulative Floating Rate First Preferred Shares carry a floating non-cumulative dividend rate equal to the relevant Government of Canada Treasury Bill rate plus 1.30% and are redeemable at the option of the Company for $25.50 per share, unless the shares are redeemed on December 31, 2020 or on December 31 every five years thereafter in which case the redemption price will be $25.00 per share, plus in each case all declared and unpaid dividends up to but excluding the date of redemption. Subject to the Company’s right of redemption and certain other restrictions on conversion described in the Series O share conditions, each Series O share is convertible into one Series N share at the option of the holders on December 31, 2020 and on December 31 every five years thereafter.

The terms and conditions of the First Preferred Shares do not allow the holder to convert to common shares of the Company or to otherwise cause the Company to redeem the shares. Preferred shares issued by the Company are commonly referred to as perpetual and represent a form of financing that does not have a fixed term.

NON-CONTROLLING INTERESTS

The Company’s non-controlling interests include participating account surplus in subsidiaries and non-controlling interests in subsidiaries. Refer to note 19 in the Company’s December 31, 2017 annual consolidated financial statements for further details of the Company’s non-controlling interests.

Non-controlling interests December 31

2017 2016

Participating account surplus in subsidiaries: Great-West Life $ 622 $ 610 London Life 1,796 1,798 Canada Life 339 357 Great-West Financial 14 17

$ 2,771 $ 2,782

Non-controlling interests in subsidiaries $ 164 $ 224



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LIQUIDITY AND CAPITAL MANAGEMENT AND ADEQUACY

LIQUIDITY

The Company’s liquidity requirements are largely self-funded, with short-term obligations being met by internal funds and maintaining adequate levels of liquid investments. The Company holds cash, cash equivalents and short-term bonds at the Lifeco holding company level and with the Lifeco consolidated subsidiary companies. At December 31, 2017, the Company and its operating subsidiaries held cash, cash equivalents and short-term bonds of $7.3 billion ($7.9 billion at December 31, 2016) and other liquid assets and marketable securities of $93.8 billion ($91.6 billion at December 31, 2016). Included in the cash, cash equivalents and short-term bonds at December 31, 2017 was $0.5 billion ($1.1 billion at December 31, 2016) at the Lifeco holding company level. In addition, the Company maintains sufficient committed lines of credit with Canadian chartered banks for unanticipated liquidity needs, if required.

The Company does not have a formal common shareholder dividend policy. Dividends on outstanding common shares of the Company are declared and paid at the sole discretion of the Board of Directors of the Company. The decision to declare a dividend on the common shares of the Company takes into account a variety of factors including the level of earnings, adequacy of capital and availability of cash resources.

As a holding company, the Company’s ability to pay dividends is dependent upon the Company receiving dividends from its operating subsidiaries. The Company’s operating subsidiaries are subject to regulation in a number of jurisdictions, each of which maintains its own regime for determining the amount of capital that must be held in connection with the different businesses carried on by the operating subsidiaries. The requirements imposed by the regulators in any jurisdiction may change from time to time, and thereby impact the ability of the operating subsidiaries to pay dividends to the Company.

CASH FLOWS

Cash flows For the three months ended For the twelve months ended December 31 December 31

2017 2016 2017 2016

Cash flows relating to the following activities:Operations $ 2,287 $ 1,389 $ 6,757 $ 6,254Financing (256) 510 (1,659) (1,045)Investment (1,627) (1,689) (4,778) (4,565)

404 210 320 644Effects of changes in exchange rates on cash and cash equivalents 41 (11) (28) (198)

Increase (decrease) in cash and cash equivalents in the period 445 199 292 446Cash and cash equivalents, beginning of period 3,106 3,060 3,259 2,813

Cash and cash equivalents, end of period $ 3,551 $ 3,259 $ 3,551 $ 3,259

The principal source of funds for the Company on a consolidated basis is cash provided by operating activities, including premium income, net investment income and fee income. These funds are used primarily to pay policy benefits, policyholder dividends and claims, as well as operating expenses and commissions. Cash flows generated by operations are mainly invested to support future liability cash requirements. Cash flows related to financing activities include the issuance and repayment of capital instruments and associated dividends and interest payments.

In the fourth quarter of 2017, cash and cash equivalents increased by $445 million from September 30, 2017. Cash flows provided by operations during the fourth quarter of 2017 were $2,287 million, an increase of $898 million compared to the fourth quarter of 2016. Cash flows used in financing were $256 million, primarily due to payment of dividends to the preferred and common shareholders of $396 million and the purchase and cancellation of $36 million in common shares, partially offset by an increase to a line of credit of a subsidiary of $171 million. For the three months ended December 31, 2017, cash flows were used by the Company to acquire an additional $1,627 million of investment assets.

For the twelve months ended December 31, 2017, cash and cash equivalents increased by $292 million from December 31, 2016. Cash flows provided by operations were $6,757 million, an increase of $503 million compared to the same period in 2016. Cash flows used in financing were $1,659 million, primarily used for payments of dividends to the preferred and common shareholders of $1,582 million, the net redemption of debt of $359 million and the purchase and cancellation of $63 million in common shares, partially offset by the net issuance of common and preferred shares of $323 million and a $24 million increase in a line of credit of a subsidiary. In the first quarter of 2017, the Company increased the quarterly dividend to common shareholders from $0.346 per common share to $0.367 per common share. For the twelve months ended December 31, 2017, cash flows were used by the Company to acquire an additional $4,778 million of investment assets.



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COMMITMENTS/CONTRACTUAL OBLIGATIONS

Commitments/contractual obligations Payments due by period

Over At December 31, 2017 Total 1 year 2 years 3 years 4 years 5 years 5 years

1) Debentures and other debt instruments $ 5,235 $ 200 $ – $ 500 $ – $ – $ 4,5352) Operating leases – office 763 113 92 79 69 52 358 – equipment 8 6 2 – – – –3) Purchase obligations 253 109 74 48 19 3 –4) Credit-related arrangements (a) Contractual commitments 939 938 1 – – – – (b) Letters of credit see note 4(b) below5) Pension contributions 300 300 – – – – –

Total contractual obligations $ 7,498 $ 1,666 $ 169 $ 627 $ 88 $ 55 $ 4,893

1) Refer to note 16 in the Company’s December 31, 2017 annual consolidated financial statements. Excluded from debentures and other debt instruments are unamortized transaction costs.

2) Operating leases include office space and certain equipment used in the normal course of business. Lease payments are charged to operations over the period of use.

3) Purchase obligations are commitments to acquire goods and services, essentially related to information services.

4) (a) Contractual commitments are essentially commitments of investment transactions made in the normal course of operations in accordance with policies and guidelines that are to be disbursed upon fulfillment of certain contract conditions.

(b) Letters of credit (LOC) are written commitments provided by a bank. The total amount of LOC facilities is US$1.7 billion of which US$1.6 billion were issued as of December 31, 2017.

The Reinsurance operation periodically uses letters of credit as collateral under certain reinsurance contracts for on-balance sheet policy liabilities. The Company may be required to seek collateral alternatives if it is unable to renew existing LOCs on maturity. Various Lifeco subsidiaries have provided LOCs as follows:

To external parties Clients residing in the United States are required pursuant to their insurance laws to obtain LOCs issued on the Company’s behalf from approved banks in order to further secure the Company’s obligations

under certain reinsurance contracts.

Great-West Life has a LOC facility for US$600 million with a bank syndicate, which can be used by Great-West Life and its subsidiaries. As of December 31, 2017, Great-West Life subsidiaries have issued US$97 million to external parties.

Great-West Life also has a LOC facility for US$375 million for use by Great-West Life and its subsidiaries. Under this facility, Canada Life has issued US$49 million to external parties.

As well, certain London Reinsurance Group subsidiaries and London Life have provided LOCs totaling US$5 million to external parties.

To internal parties GWL&A Financial Inc. terminated a US$1.2 billion LOC facility in fourth quarter of 2017 that had been issued to the U.S. branch of Canada Life as beneficiary to allow it to receive statutory capital credit for

reserves ceded to Great-West Life & Annuity Insurance Company of South Carolina (GWSC). In the fourth quarter of 2017, GWSC entered into a reinsurance transaction that allows for the capital credit without the need for the letter of credit.

Great-West Life & Annuity Insurance Company also has a US$70 million LOC facility in place. As of December 31, 2017, US$70 million has been issued to Great-West Life & Annuity Insurance Company of South Carolina as beneficiary, to allow it to receive statutory capital credit.

Canada Life has a £117 million LOC issued to Canada Life Limited (CLL) as beneficiary, to allow CLL to receive statutory capital credit in the United Kingdom for a loan made from Canada Life.

Canada Life has a US$500 million LOC facility. As of December 31, 2017, US$500 million has been issued to Canada Life’s U.S. Branch.

In addition, using capacity from the facilities listed above, Great-West Life subsidiaries have issued US$750 million to other subsidiaries.

5) Pension contributions 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 the significant variability in the assumptions required to project the timing of future contributions.



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CAPITAL MANAGEMENT AND ADEQUACY

At the holding company level, the Company monitors the amount of consolidated capital available and the amounts deployed in its various operating subsidiaries. The amount of capital deployed in any particular company or country is dependent upon local regulatory requirements as well as the Company’s internal assessment of capital requirements in the context of its operational risks and requirements and strategic plans. The Company’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate. The capitalization decisions of the Company and its operating subsidiaries also give consideration to the impact such actions may have on the opinions expressed by various credit rating agencies that provide financial strength and other ratings to the Company.

In Canada, OSFI has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the MCCSR ratio. The internal target range of the MCCSR ratio for Lifeco’s major Canadian operating subsidiaries is 175% to 215% (on a consolidated basis).

Great-West Life’s MCCSR ratio at December 31, 2017 was 241% (240% at December 31, 2016). London Life’s MCCSR ratio at December 31, 2017 was 225% (217% at December 31, 2016). Canada Life’s MCCSR ratio at December 31, 2017 was 284% (275% at December 31, 2016). The MCCSR ratio does not take into account any impact from $0.5 billion of liquidity at the Lifeco holding company level at December 31, 2017 ($1.1 billion at December 31, 2016).

The MCCSR ratio of 241% for Great-West Life includes 6 points for the impact of capital activity in advance of closing for the Retirement Advantage acquisition. The related impact for Canada Life was 10 points, and nil for London Life.

In calculating the MCCSR position, available regulatory capital is reduced by goodwill and intangible assets, subject to a prescribed inclusion for a portion of intangible assets. The OSFI MCCSR Guideline also prescribes that quarterly re-measurements to defined benefit plans, impacting available capital for the Company’s federally regulated subsidiaries, are amortized over twelve quarters.

At December 31, 2017, the Risk Based Capital (RBC) ratio of Great-West Life & Annuity Insurance Company, Lifeco’s regulated U.S. operating company, is estimated to be 487% of the Company Action Level set by the National Association of Insurance Commissioners. Great-West Life & Annuity Insurance Company reports its RBC ratio annually to U.S. Insurance Regulators.

The Board of Directors reviews and approves an annual capital plan as well as capital transactions undertaken by management pursuant to the plan. The capital plan is designed to ensure that the Company maintains adequate capital, taking into account the Company’s strategy, risk profile and business plans. The Company has established policies and procedures designed to identify, measure and report all material risks. Management is responsible for establishing capital management procedures for implementing and monitoring the capital plan. In addition to undertaking capital transactions, the Company uses and provides traditional and structured reinsurance to support capital and risk management.

OSFI Regulatory Capital InitiativesEffective January 1, 2018, OSFI has replaced the current MCCSR guideline with the LICAT guideline, a new regulatory capital framework for the Canadian insurance industry. OSFI published the final 2018 LICAT Guideline during the fourth quarter of 2017. The first reporting period will be the first quarter of 2018. The Company continues implementation preparations and is well-positioned for the new LICAT regulatory capital framework.

In May 2017, the IASB issued IFRS 17, Insurance Contracts, which will replace IFRS 4, Insurance Contracts, effective for annual periods beginning on or after January 1, 2021. IFRS 17 includes, among other things, new requirements for the recognition and measurement of insurance contracts the Company issues and reinsurance contracts it holds. The new standard is expected to have a significant impact to insurers and is expected to lead to further review and possible amendments to the OSFI LICAT Guideline. Additional details on the new IFRS 17 standard are included in the “International Financial Reporting Standards” section.

CAPITAL ALLOCATION METHODOLOGY

The Company has a capital allocation methodology, which allocates financing costs in proportion to allocated capital. For the Canadian and European segments (essentially Great-West Life), this allocation method tracks the regulatory capital requirements, while for U.S. Financial Services and U.S. Asset Management (Putnam), it tracks the financial statement carrying value of the business units. Total leverage capital is consistently allocated across all business units in proportion to total capital resulting in a debt-to-equity ratio in each business unit mirroring the consolidated Company.

The capital allocation methodology allows the Company to calculate comparable return on equity (ROE) for each business unit. These ROEs are therefore based on the capital the business unit has been allocated and the financing charges associated with that capital.



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Return on equity (1)

Dec. 31 Sept. 30 Dec. 31 2017 2017 2016

Canada 17.5% 17.9% 19.9%U.S. Financial Services (2) 17.4% 10.9% 10.6%U.S. Asset Management (Putnam) (3) (24.2)% (1.5)% (2.9)%Europe 15.4% 14.8% 17.1%Lifeco Corporate (4.3)% (5.1)% (5.2)%

Total Lifeco Net Earnings Basis 10.9% 12.4% 13.8%

Total Lifeco Adjusted Net Earnings Basis (4) 13.4% 13.3% 14.1%

(1) ROE is the calculation of net earnings divided by the average common shareholders’ equity over the trailing four quarters.

(2) U.S. Financial Services includes the impact of restructuring costs of $2 million in the fourth quarter of 2016 and $11 million in 2017 and the positive impact of U.S. tax reform of $197 million in the fourth quarter of 2017.

(3) U.S. Asset Management (Putnam) includes the impact of fourth quarter of 2016 restructuring costs of $20 million, a net charge on the sale of an equity investment of $122 million in the fourth quarter of 2017 and the impact of U.S. tax reform of $448 million in the fourth quarter of 2017.

(4) Total Lifeco Adjusted Net Earnings Basis includes adjustments made to arrive at adjusted net earnings, which are detailed in footnote 6 to the Selected Consolidated Financial Information table of this MD&A. The fourth quarter of 2016 included restructuring costs of $20 million related to Putnam and $2 million related to the Financial Services business unit. The third quarter of 2016 included restructuring costs of $13 million related to the Insurance & Annuities business unit and $2 million related to the Financial Services business unit. The second quarter of 2016 included restructuring costs of $3 million related to the Financial Services business unit and $1 million related to the Insurance & Annuities business unit. The first quarter of 2016 included restructuring costs of $2 million related to the Financial Services business unit and $1 million related to the Insurance & Annuities business unit.

The Company reported ROE of 10.9% at December 31, 2017 compared to 13.8% at December 31, 2016. Excluding the impact of U.S. tax reform and a net charge on a sale of equity investment in the U.S. segment in 2017 and restructuring costs in both 2016 and 2017, the Company reported ROE based on adjusted net earnings of 13.4% at December 31, 2017 compared to 14.1% at December 31, 2016. Lifeco’s net earnings for the third quarter of 2017 included a loss estimate of $175 million after-tax relating to estimated claims resulting from the impact of in-year Atlantic hurricane activity which reduced ROE by 0.9%.

RATINGS

The Company’s financial leverage ratio has been maintained at a level consistent with credit rating agencies’ targets for highly rated entities and provides the Company with financial flexibility to invest in organic growth and acquisition strategies.

Lifeco maintains ratings from five independent ratings companies. In 2017, the credit ratings for Lifeco and its major operating subsidiaries were unchanged (set out in table below). The Company continued to receive strong ratings relative to its North American peer group resulting from its conservative risk profile, stable net earnings and consistent dividend track record.

Lifeco’s operating companies are assigned a group rating from each rating agency. This group rating is predominantly supported by the Company’s leading position in the Canadian insurance market and competitive positions in the U.S. and European markets. Great-West Life, London Life and Canada Life have common management, governance and strategy, as well as an integrated business platform. Each operating company benefits from the strong implicit financial support and collective ownership by Lifeco. There were no changes to the Company’s group credit ratings in 2017.

Great-West Life & Annuity Great-West Insurance Rating agency Measurement Lifeco Life London Life Canada Life Irish Life Company

A.M. Best Company Financial Strength A+ A+ A+ A+

DBRS Limited Issuer Rating A (high) AA Financial Strength AA AA AA NR Senior Debt A (high) Subordinated Debt AA (low)

Fitch Ratings Insurer Financial Strength AA AA AA AA AA Senior Debt A Subordinated Debt A+

Moody’s Investors Service Insurance Financial Strength Aa3 Aa3 Aa3 Aa3

Standard & Poor’s Ratings Services Insurer Financial Strength AA AA AA AA Senior Debt A+ Subordinated Debt AA-

In the second quarter of 2017, Standard & Poor’s Ratings Services affirmed and subsequently withdrew its ILA ratings following the redemption of its subordinated debenture during the first quarter of 2017.



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SEGMENTED OPERATING RESULTSThe consolidated operating results of Lifeco, including the comparative figures, are presented on an IFRS basis after capital allocation. Consolidated operating results for Lifeco comprise the net earnings of Great-West Life and its operating subsidiaries,

London Life and Canada Life; Great-West Financial and Putnam; together with Lifeco’s Corporate results.

For reporting purposes, the consolidated operating results are grouped into four reportable segments – Canada, United States, Europe and Lifeco Corporate – reflecting geographic lines as well as the management and corporate structure of the companies.

CANADA

The Canada segment of Lifeco includes the operating results of the Canadian businesses operated by Great-West Life, London Life and Canada Life, together with an allocation of a portion of Lifeco’s corporate results. There are two primary business units included in this segment. Through the Individual Customer business unit, the Company provides life, disability and critical illness insurance products as well as wealth accumulation and annuity products to individual customers. Through the Group Customer business unit, the Company provides life, accidental death and dismemberment, critical illness, health and dental protection, creditor and direct marketing insurance as well as accumulation and annuity products and other specialty products to group customers in Canada.

BUSINESS PROFILE

INDIVIDUAL CUSTOMER

Individual Customer comprises both individual insurance and individual wealth management product lines.

Individual insurance includes individual life insurance and living benefits products and services. Individual wealth management includes individual wealth accumulation and annuity product lines. The Company is a leader in Canada for all insurance and wealth management products and services and utilizes diverse, complementary distribution channels: Freedom 55 FinancialTM, Wealth and Insurance Solutions Enterprise (WISE), MGAs and national accounts, including Investors Group, a member of the Power Financial Corporation group of companies. Through Financial Horizons Group, the Company participates in the MGA channel, distributing products from across the insurance industry.

The individual lines of business access the various distribution channels through distinct product labels offered by Great-West Life, London Life, Canada Life and Quadrus. By offering this broad suite of products and services through multiple distribution channels, the Company is able to provide advice and product solutions to meet the need of Canadians at all phases of their life.

GROUP CUSTOMER

Group Customer includes group life and health benefits, group creditor, and group retirement and investment product lines.

Through its group life and health benefit product lines, the Company offers effective benefit solutions for small, medium and large plan sponsors. The Company offers a wide range of traditional group products and services including life, accidental death and dismemberment, critical illness, disability, health and dental as well as specialty products. In addition, specialty product development has been a focus over the past several years as the Company seeks to provide customized solutions to increasingly unique customer needs. Products to address the needs of mental health in the workplace, high cost medications, optional products purchased by plan members directly and wellness programs are examples of this.

The Company’s creditor and direct marketing business, conducted through its Canada Life subsidiary, offers creditor and affinity group products to large financial institutions, credit card companies, alumni and association groups. Canada Life is a leader in the creditor insurance business in Canada.

Group retirement and investment product lines include group Registered Retirement Savings Plans (RRSP), Tax-Free Savings Accounts (TFSA), group retirement income products, and institutional investment services. The Company is focused on innovation within savings and investment product lines, including student debt savings incentive products, WayfinderTM, a tool to help Canadians achieve a view of all of their savings and investment goals and tailored fund shelf solutions for plan sponsors. Great-West Life has a leading employee education program to help Canadians understand how investment goals can be established, tracked and updated.

Through the Company’s extensive network of Group sales offices located across the country, it distributes its products through brokers, consultants and financial security advisors.



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MARKET OVERVIEW

PRODUCTS AND SERVICES

INDIVIDUAL CUSTOMER

The Company provides an array of individual insurance, wealth accumulation and annuity products that are distributed through multiple sales channels. Products are marketed under the Great-West Life, London Life, Canada Life and Quadrus brands.

MARKET POSITION

• Manages largest portfolio of life insurance in Canada as measured by

premium (1)

• Pre-eminent provider of individual disability and critical illness

insurance with 27% market share of in-force premium (1)

• 27% market share of individual segregated funds (1)


Individual Life Insurance• Term Life

• Universal Life

• Participating Life

Living Benefits• Disability

• Critical Illness

Individual Wealth Management• Savings plans

• RRSPs

• Non-registered savings programs

• TFSAs

Invested in:

• Segregated funds

• Mutual funds

• Guaranteed investment options

• Retirement Income Plans

• Segregated funds with GMWB rider

• Retirement income funds

• Life income funds

• Payout annuities

• Deferred annuities

• Residential mortgages

• Banking products

DISTRIBUTION (2)

Wealth and Insurance Solutions Enterprise• 3,388 financial security advisors

Freedom 55 Financial• 2,627 financial security advisors

Affiliated Partnerships• 7,926 independent brokers associated with 34 MGAs

• 1,868 advisors associated with 14 national accounts

• 2,822 Investors Group consultants who actively sell Canada Life products

• 124 direct brokers and producer groups

Financial Horizons Group• 4,800 independent brokers selling products from across the insurance

industry, including Canada Life

Quadrus Investment Services Ltd. (also included in WISE & Freedom 55 Financial advisor counts):

• 4,951 investment representatives

(1) As at September 30, 2017

(2) WISE and Freedom 55 Financial includes all contracted advisors. Affiliated Partnerships and Financial Horizons Group include advisors who placed new business in 2017

GROUP CUSTOMER

The Company provides an array of life, health and creditor insurance products that are distributed primarily through Group sales offices across the country.

MARKET POSITION

• Employee benefits to over 30,000 plan sponsors (3)

• 21% market share for employee benefit plans (1)

• Leading market share with 39% for creditor products (1) with coverage

provided to over 7.3 million plan members (3)

• 5% market share for direct marketing products (1) with coverage

provided to over 0.6 million plan members (3)

• 20% market share of group capital accumulation plans (1)

• 24% new sales market share of single premium group annuities (2)


Life and Health Benefits• Life

• Disability

• Critical illness

• Accidental death & dismemberment

• Dental

• Expatriate coverage

• Extended health care

Creditor• Life

• Disability

• Job loss


Group Retirement & Investment Services• Group Capital Accumulation Plans including:

• Defined contribution pension plans

• Group RRSPs & TFSAs

• Deferred profit sharing plans

• Non-registered savings programs

Invested in:



• Single company stock

• Retirement Income Plans

• Payout annuities

• Deferred annuities

• Retirement income funds

• Life income funds

• Investment management services only plans

Invested in:



• Securities

DISTRIBUTION

• Group Life and Health and Group Retirement and Investment Services

are distributed through brokers, consultants, and financial security

advisors. Sales and service support are provided by an integrated

team of over 600 employees, located in 28 offices across the country,

including 148 account executives.

• Group Creditor products and services are distributed primarily though

large financial institutions, and serviced through a dedicated sales and

service organization.

(1) As at December 31, 2016





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COMPETITIVE CONDITIONS

INDIVIDUAL CUSTOMER

The individual insurance marketplace is highly competitive. Competition focuses on service, technology, product features, price and financial strength, as indicated by ratings issued by nationally recognized agencies. The Company’s broad spectrum of distribution associates, including exclusive and independent channels, provide important strategic advantages within the Canadian market.

The individual wealth management marketplace is also very competitive. The Company’s main competitors include mutual fund companies, insurance companies, banks and investment advisors as well as other service and professional organizations. New FinTech competitors have entered the marketplace leading to increased competition. Competition focuses on ease of doing business through technology, service, variety of investment options, investment performance, product features, price (fees) and financial strength, as indicated by ratings issued by nationally recognized agencies. Individual wealth management’s broad spectrum of distribution associates, including exclusive and independent channels, provide important strategic advantages within the Canadian market.

GROUP CUSTOMER

The group life and health benefits market in Canada is highly competitive. There are three large group insurance carriers with significant market positions, a number of smaller companies operating nationally and several regional and niche competitors. The Company has a significant market share of 21%, which is supported by an extensive distribution network who have access to a wide range of products and services. This strong market share position is a distinct advantage for competing successfully in the Canadian group insurance market.

The group capital accumulation plan market is also very competitive. Three major insurance companies hold a significant market share while several smaller insurance companies have an important market presence. There has been some market disruption through new FinTech companies, however, the major companies are responding well with technology advancements of their own.

The pension risk transfer business continues to grow in the Canadian marketplace as more companies with defined benefit pension plans (open or closed) look to transfer the investment and longevity risk to insurance companies. Helping the market with the capacity to meet this demand, existing companies have increased their presence in the market place, including major independent and bank-owned insurance companies with strong balance sheets and new entrants.

Selected consolidated financial information – Canada For the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 2017 (1) 2017 (1) 2016 (2) 2017 (1) 2016 (2)

Premiums and deposits $ 6,847 $ 6,158 $ 6,681 $ 26,545 $ 24,661Sales 3,772 2,940 3,871 13,608 12,933Fee and other income 419 411 386 1,616 1,494Net earnings – common shareholders 338 296 326 1,074 1,218Adjusted net earnings – common shareholders (1) 357 296 326 1,219 1,218

Total assets (2) $ 161,760 $ 157,684 $ 153,531Proprietary mutual funds and institutional net assets 6,810 6,513 5,852

Total assets under management 168,570 164,197 159,383Other assets under administration 11,580 11,135 15,911

Total assets under administration $ 180,150 $ 175,332 $ 175,294

(1) Adjusted net earnings attributable to common shareholders is a non-IFRS measure of earnings performance. Adjustments are detailed in footnote 6 to the Selected Consolidated Financial Information table of this MD&A.




Individual Customer $ 162 $ 141 $ 179 $ 589 $ 617Group Customer 193 155 154 641 564Corporate (17) – (7) (156) 37

Net earnings $ 338 $ 296 $ 326 $ 1,074 $ 1,218

Adjustments: Restructuring costs – – – 126 – U.S. tax reform impact 19 – – 19 –

Adjusted net earnings (1) $ 357 $ 296 $ 326 $ 1,219 $ 1,218





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2017 DEVELOPMENTS

• In 2017, Great-West Life, London Life and Canada Life realigned their Canadian operations into two new business units: one focused on individual customers and the other on group customers. In conjunction with these changes, in April, the Company announced it expected to achieve $200 million pre-tax of annual expense reductions expected to be realized by the first quarter of 2019, approximately $160 million relating to the common shareholders’ account and $40 million relating to the participating accounts. The expense reductions address costs across the Canadian operations and corporate functions primarily through a reduction in staff, exiting certain lease agreements and information system impairments.

As of December 31, 2017, $123 million pre-tax of annualized expense reductions have been achieved compared to $95 million as of September 30, 2017. The $123 million of pre-tax annualized expense reductions are approximately $93 million related to the common shareholders’ account and $30 million related to the participating accounts.

As part of this effort, in the second quarter of 2017, the Company incurred a $215 million pre-tax restructuring charge, which included $172 million relating to the common shareholders’ account and $43 million relating to the participating accounts. The restructuring charge has reduced 2017 net earnings attributable to the common shareholders by $126 million and net earnings attributable to the participating accounts by $32 million.

• On January 1, 2017, Individual Customer launched updated participating whole life, term and universal life insurance products that comply with the new tax exempt legislation effective January 2017.

• On May 19, 2017, the Company, through its wholly-owned subsidiary Great-West Life, entered into an agreement to

purchase Financial Horizons Group, a MGA that offers access to life and health insurance, employee benefits, pensions, investments, structured settlements, and risk management products and services to advisors throughout Canada. Effective July 31, 2017, regulatory approval was received and the transaction completed. While the revenue and net earnings from the Financial Horizons Group will not be material, it expands the Company’s investment in distribution in Canada with an ownership stake in the growing independent MGA sector.

• The Group Customer business area rolled out the next phase in the DrugSolutions program. The SMART (Sustainable, Managed And Reasonable Treatment) plan helps guide Great-West Life’s decisions around drug coverage. Through the SMART plan, new or updated drugs are closely assessed before being included in drug plan coverage and an enhanced pre-authorization program strengthens the claims management process to help benefit plans remain sustainable while providing plan members with continued access to comprehensive coverage.

• GWL Realty Advisors ranked first in Canada in the Global Real Estate Sustainability Benchmark (GRESB) for 2017. After participating in the benchmark for only 3 years, GWL Realty Advisors has improved its ranking year over year to take the first spot in Canada and earn a green star ranking for the third consecutive year.

• During the fourth quarter of 2017, Great-West Life was named the Life and Health Insurer of the Year at the 2017 Insurance Business Awards.

• During the fourth quarter of 2017, the Company was the first in Canada to announce a new flexible savings pilot program to help post-secondary graduate plan members focus on savings for the future while paying down their student loan debt.

BUSINESS UNITS – CANADA

INDIVIDUAL CUSTOMER

OPERATING RESULTS

For the three months ended For the twelve months ended


Premiums and deposits $ 2,809 $ 2,499 $ 2,769 $ 10,880 $ 10,040Sales 2,537 2,033 2,648 9,723 9,086Fee and other income 255 236 225 949 870Net earnings 162 141 179 589 617


Premiums and depositsPremiums and deposits for the fourth quarter of 2017 of $2.8 billion were comparable to the same quarter last year. Individual wealth premiums and deposits decreased by $0.1 billion, primarily due to a decrease in segregated fund deposits, while individual insurance premiums increased by $0.1 billion, primarily due to an increase in participating life premiums.

For the twelve months ended December 31, 2017, premiums and deposits increased by $0.8 billion to $10.9 billion compared to the same period last year, due to an increase in individual insurance premiums of $0.4 billion and an increase in individual

wealth premiums and deposits of $0.4 billion. The increase in individual insurance premiums was primarily due to an increase in participating life premiums, while the increase in individual wealth premiums and deposits was primarily due to an increase in segregated funds and proprietary mutual funds.

Premiums and deposits for the fourth quarter of 2017 increased by $0.3 billion compared to the previous quarter, primarily due to a $0.3 billion increase in individual insurance participating life premiums. Individual wealth premiums and deposits were comparable to the previous quarter.



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SalesSales for the fourth quarter of 2017 decreased by $0.1 billion to $2.5 billion compared to the same quarter last year, due to a decrease in individual insurance sales of $0.2 billion, partially offset by an increase in individual wealth sales of $0.1 billion. The decrease in individual insurance sales was primarily due to higher participating life sales in the fourth quarter of 2016 relating to changes to tax exempt legislation effective January 2017, while the increase in individual wealth sales was primarily due to an increase in third party sales.

For the twelve months ended December 31, 2017, sales increased by $0.6 billion to $9.7 billion compared to the same period last year, primarily due to an increase in individual wealth sales of $0.8 billion, partially offset by a decrease in individual insurance sales of $0.2 billion. The increase in individual wealth sales was primarily due to an increase in investment fund sales, while the decrease in individual insurance sales was primarily due to the same reason discussed for the in-quarter results.

Sales for the fourth quarter of 2017 increased by $0.5 billion compared to the previous quarter, due to an increase in individual wealth sales of $0.5 billion, driven by an increase in segregated fund and third party sales. Individual insurance sales were comparable to the previous quarter.

For the individual wealth investment fund business, net cash outflows for the fourth quarter of 2017 were $83 million compared to net cash inflows of $99 million for the same quarter last year and net cash inflows of $141 million for the previous quarter. Net cash inflows for the twelve months ended December 31, 2017 were $299 million compared to $276 million for the same period last year.

Assets under administration – Individual Wealth December 31

2017 2016

Assets under management Risk-based products 5,252 5,527 Segregated funds 33,356 31,931 Quadrus group of funds 6,211 5,530

Total assets under management $ 44,819 $ 42,988

Other assets under administration (1) $ 8,283 $ 7,240

Total assets under administration – Individual Wealth $ 53,102 $ 50,228

(1) Includes third party mutual funds distributed by Quadrus

Fee and other incomeFee and other income for the fourth quarter of 2017 increased by $30 million to $255 million compared to the same quarter last year, primarily due to growth in other income related to distribution arrangements and growth in fee income driven by higher average assets under administration, partially offset by lower margins.

For the twelve months ended December 31, 2017, fee and other income increased by $79 million to $949 million compared to the same period last year. The increase was primarily due to the same reasons discussed for the in-quarter results.

Fee and other income for the fourth quarter of 2017 increased by $19 million compared to the previous quarter, primarily due to the same reasons discussed for the in-quarter results.

Net earningsNet earnings for the fourth quarter of 2017 decreased by $17 million to $162 million compared to the same quarter last year. The decrease was primarily due to lower contributions from investment experience and less favourable mortality experience. These items were partially offset by higher contributions from insurance contract liability basis changes, the favourable impact of new business and favourable morbidity and policyholder behaviour experience.

For the twelve months ended December 31, 2017, net earnings decreased by $28 million to $589 million compared to the same period last year. The decrease was primarily due to lower contributions from investment experience, lower contributions from insurance contract liability basis changes and less favourable morbidity experience. These items were partially offset by lower new business strain, higher net fee income and favourable mortality experience.

Net earnings for the fourth quarter of 2017 increased by $21 million compared to the previous quarter. The increase was primarily due to higher contributions from insurance contract liability basis changes and lower new business strain, partially offset by lower contributions from investment experience.

For the fourth quarter of 2017, net earnings attributable to the participating account decreased by $153 million to $25 million compared to the same quarter last year. The decrease was primarily due to lower contributions from insurance contract liability basis changes, partially offset by lower new business strain.

For the twelve months ended December 31, 2017, net earnings attributable to the participating account were $42 million compared to $191 million for the same period last year. Excluding the impact of restructuring costs of $32 million recorded in the second quarter of 2017, net earnings decreased by $117 million, primarily due to the same reasons discussed for the in-quarter results.

Compared to the previous quarter, net earnings attributable to the participating account increased by $6 million, primarily due to lower new business strain, partially offset by lower contributions from insurance contract liability basis changes.

OUTLOOK – INDIVIDUAL CUSTOMER

Refer to Cautionary Note regarding Forward-looking Information and Cautionary Note regarding non-IFRS Financial Measures at the beginning of this document.

The Individual Customer business unit delivered solid results in 2017. The Company’s reputation for strength and stability, combined with prudent business practices as well as the depth and breadth of its distribution channels positions the Company well for 2018 and beyond.

In 2018, Individual Customer will continue to advance on transformation to position for growth. The Company will further establish the value propositions for advisors in all channels, providing them with strategies and tools for helping customers focus on achieving long-term financial security regardless of life stage and market fluctuations. This Lifetime Advice approach is beneficial to strong customer retention as well as helping advisors attract new customers to the Company. A key distribution strategy will be to maximize the use of common tools, processes and support, while tailoring support to specific segments of advisors where appropriate.



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The Company will continue to competitively develop, price and market its comprehensive range of individual insurance and individual wealth management products while maintaining its focus on sales and service support to customers and advisors in all channels.

Operational expense management continues to be critically important to delivering strong financial results. This will be

achieved through disciplined expense controls and effective development and implementation of strategic investments. Management has identified a number of areas of focus for these investments to facilitate the objective of organic growth, including continuing to invest in digital solutions to support advisors and customers and addressing its legacy of administration systems and processes to unlock the potential for future growth.

GROUP CUSTOMER

OPERATING RESULTS



Premiums and deposits $ 4,038 $ 3,659 $ 3,912 $ 15,665 $ 14,621Sales 1,235 907 1,223 3,885 3,847Fee and other income 157 150 147 610 574Net earnings 193 155 154 641 564


Premiums and depositsPremiums and deposits for the fourth quarter of 2017 increased by $0.1 billion to $4.0 billion compared to the same quarter last year, due to an increase in group insurance premiums and deposits of $0.1 billion. The increase in group insurance was primarily due to an increase in large case market premiums and deposits. Group wealth premiums and deposits were comparable to the same quarter last year.

For the twelve months ended December 31, 2017, premiums and deposits increased by $1.0 billion to $15.7 billion compared to the same period last year, due to an increase in group wealth premiums and deposits of $0.6 billion and an increase in group insurance premiums and deposits of $0.4 billion. The increase in group wealth was primarily due to increases in segregated fund deposits, while the increase in group insurance was primarily due to increases in large case market premiums and deposits.

Premiums and deposits for the fourth quarter of 2017 increased by $0.4 billion compared to the previous quarter, due to an increase in group wealth premiums and deposits of $0.3 billion and an increase in group insurance premiums and deposits of 0.1 billion. The increase in group wealth was primarily due to increases in group segregated fund deposits, while the increase in group insurance was primarily due to increases in ASO market premiums and deposits.

SalesSales for the fourth quarter of 2017 were comparable to the same quarter last year.

For the twelve months ended December 31, 2017, sales were comparable to the same period last year. Group wealth sales increased by $0.1 billion, while group insurance sales decreased by $0.1 billion. The increase in group wealth sales was primarily due to higher sales of segregated fund products, while the decrease in group insurance sales was primarily due to lower sales in the large case market.

Sales for the fourth quarter of 2017 increased by $0.3 billion compared to the previous quarter, due to an increase in group wealth sales of segregated fund products.

For the group wealth segregated fund business, net cash inflows for the fourth quarter of 2017 were $214 million, compared to $133 million for the same quarter last year and $72 million for the previous quarter. For the twelve months ended December 31, 2017, net cash inflows were $780 million compared to $408 million, which excludes a $910 million withdrawal of a lower margin group capital accumulation plan, for the same period last year.

Assets under administration – Group Retirement & Investment Services December 31

2017 2016

Assets under management Risk-based products $ 7,978 $ 7,595 Segregated funds 47,043 42,978 Institutional assets 599 322

Total assets under management $ 55,620 $ 50,895

Other assets under administration (1) $ 506 $ 538

Total assets under administration – Group Retirement & Investment Services $ 56,126 $ 51,433

(1) Includes mutual funds distributed by Quadrus, stock purchase plans administered by London Life and portfolio assets managed by GLC Asset Management Group.



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Fee and other incomeFee and other income for the fourth quarter of 2017 increased by $10 million to $157 million compared to the same quarter last year, primarily due to higher average assets under administration driven by higher average equity markets and net cash inflows, partially offset by lower margins.

For the twelve months ended December 31, 2017, fee and other income increased by $36 million to $610 million compared to the same period last year, primarily due to the same reasons discussed for the in-quarter results.

Fee and other income for the fourth quarter of 2017 increased by $7 million compared to the previous quarter, primarily due to the same reasons discussed for the in-quarter results above.

Net earningsNet earnings for the fourth quarter of 2017 increased by $39 million to $193 million compared to the same quarter last year. The increase was primarily due to more favourable morbidity experience and higher contributions from investment experience, partially offset by lower contributions from insurance contract liability basis changes.

For the twelve months ended December 31, 2017, net earnings increased by $77 million to $641 million compared to the same period last year. The increase was primarily due to more favourable morbidity experience and higher contributions from insurance contract liability basis changes, partially offset by less favourable impacts of changes to certain income tax estimates and less favourable mortality experience.

Net earnings for the fourth quarter of 2017 increased by $38 million compared to the previous quarter, primarily due to more favourable morbidity experience and higher contributions from investment experience, partially offset by lower contributions from insurance contract liability basis changes.

OUTLOOK – GROUP CUSTOMER


During 2017, the Company maintained its strong competitive position in the Canadian group market with leading or strong market share in all case size, regional and benefit market segments. The Company believes that this market share position, together with its distribution capacity, will facilitate continued growth in revenue premium. In particular, through effective investment in digital technologies and innovative benefit solutions, the Company expects to continue to enhance its competitive position in the marketplace.

Recently, the Company has announced a number of new initiatives to grow market share and relevance to Canadian group plans and their covered members including:

• An innovative new student debt project to be piloted in early 2018 which is intended to address the growing issue of rising debt levels of recent post-secondary graduates and will facilitate both the pay-down of student debt concurrent with saving for the future.

• A pilot for a fully bilingual digital health platform, Dialogue™, was launched in November of 2017. Dialogue™ is a service that facilitates an interaction, through web or mobile application, between a plan member and a team of medical professionals who can diagnose a number of conditions and provide medical advice in an efficient and effective manner.

• The Company expects to continue to expand on its leading Health Case Management program through a planned pilot with Best Doctors™ in 2018 to enhance patient diagnosis and treatment. This service is expected to improve health outcomes for plan members, while improving the cost effectiveness of the benefits program for plan sponsors.

• GroupNet for Plan Members will be relaunched on a new digital platform allowing for personalization specific to each plan member. The Company is actively working to leverage the digital channel to be able to deliver customized information efficiently and in a timely manner to plan members.

The Company’s investments in technology and innovation are expected to improve processes and provide faster service, while empowering customers to better achieve financial, physical and mental well-being.

CANADA CORPORATE

Canada Corporate consists of items not associated directly with or allocated to the Canadian business units.

For the fourth quarter of 2017, Canada Corporate had a net loss of $17 million compared to a net loss of $7 million for the same quarter last year. The net loss in the fourth quarter of 2017 includes the impact of U.S. tax reform which was a net charge of $19 million. Excluding this item, net earnings for the fourth quarter of 2017 increased $9 million, primarily due to a more favourable impact from changes to certain income tax estimates, partially offset by lower fee income.

Excluding the impact of U.S. tax reform discussed for the in-quarter results and the impact of restructuring costs of $126 million included in the second quarter of 2017 results, the adjusted net loss for the twelve months ended December 31, 2017 was $11 million compared to net earnings of $37 million for the same period last year. The change in net earnings was primarily due to lower net investment income and a less favourable impact from changes to certain income tax estimates. The year-to-date net earnings in 2016 included a gain on the sale of an investment property which did not recur.

Excluding the items discussed for the in-quarter results, adjusted net earnings for the fourth quarter of 2017 were $2 million compared to nil in the previous quarter. The change in net earnings was primarily due to a more favourable impact from changes to certain income tax estimates, offset by lower fee income.



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UNITED STATES

The United States operating results for Lifeco include the results of Great-West Financial, Putnam and the results of the insurance businesses in the United States branches of Great-West Life and Canada Life, together with an allocation of a portion of Lifeco’s corporate results.

Through its Financial Services business unit, and specifically the Empower Retirement brand, the Company provides an array of financial security products, including employer-sponsored defined contribution plans, administrative and recordkeeping services, individual retirement accounts, fund management as well as investment and advisory services. The Company also provides life insurance, annuity and executive benefits products through its Individual Markets operations.

Through its Asset Management business unit, the Company provides investment management, certain administrative functions, distribution and related services, through a broad range of investment products.

TRANSLATION OF FOREIGN CURRENCY

Foreign currency assets and liabilities are translated into Canadian dollars at the market rate at the end of the financial period. All income and expense items are translated at an average rate for the period.

Currency translation impact is a non-IFRS financial measure that highlights the impact of changes in currency translation rates on IFRS results. This measure provides useful information as it facilitates the comparability of results between periods. Refer to the Cautionary Note regarding non-IFRS Financial Measures at the beginning of this document.

BUSINESS PROFILE

FINANCIAL SERVICES

Great-West Financial provides an array of financial security products, including employer-sponsored defined contribution plans, individual retirement accounts, life insurance, annuity products and executive benefits products. Under the Empower Retirement brand name, Great-West Financial offers employer-sponsored defined contribution plans, individual retirement accounts, enrollment services, communication materials, investment options and education services as well as fund management, investment and advisory services. Through its FASCore subsidiary, the Company offers private label recordkeeping and administrative services for other providers of defined contribution plans. Through relationships with government plan sponsors, the Company is the largest provider of services to state defined contribution plans, with 22 recordkeeping and two investment only state clients.

ASSET MANAGEMENT

Putnam provides investment management, certain administrative functions and distribution services. Putnam offers a broad range of investment products, including equity, fixed-income, absolute return and alternative strategies, through Putnam Funds, Putnam World Trust Funds and institutional portfolios. Revenue is derived from the value and composition of assets under management and performance fees as well as service and distribution fees. Accordingly, fluctuations in the financial markets and changes in the composition of assets or accounts affect revenues and results of operations.

MARKET OVERVIEW


The Company provides a focused product offering that is distributed through a variety of channels.

FINANCIAL SERVICES

MARKET POSITION

• Second largest defined contribution recordkeeper in the country (4) by

participants providing services for 8.3 million participant accounts and

37,515 plans (1)

• 24% market share in state and local government deferred

compensation plans, based on number of participant accounts (2)

• 30% market share of individual life insurance sold through the retail

bank channel (3)

• 13% market share of executive benefits markets life insurance

purchased by financial institutions (3)

• Great-West Lifetime Funds are the 12th largest target date fund offering

in the U.S. (1)


• Employer-sponsored defined contribution plans, enrollment services,

communication materials, investment options and education services

• Administrative and recordkeeping services for financial institutions

and employer-sponsored defined contribution plans and associated

defined benefit plans

• Fund management, investment and advisory services

• Individual retirement accounts (IRAs), individual term and single

premium life insurance and individual annuity products

• Executive benefits markets life insurance products

DISTRIBUTION

• Retirement services products distributed to plan sponsors through

brokers, consultants, advisors, third-party administrators and banks

• FASCore recordkeeping and administrative services distributed through

institutional clients

• Individual life and annuity products distributed through wholesale and

retail sales force, banks, broker dealers and investment advisors

• IRAs available to individuals through the Retirement Solutions Group

• Executive benefits markets life insurance products distributed through

wholesalers and specialized consultants



(3) Market share based on annualized Q1 – Q3 2017 sales data




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ASSET MANAGEMENT

MARKET POSITION

• A global asset manager with assets under management of US$171.5

billion (1)

• Global distribution includes sales teams that are focused on major

institutional markets in the U.S., Europe, the Middle East, Asia and

Australia and through a distribution relationship in Japan


Investment Management Products & Services• Individual retail investors – a family of open-end and closed-end

mutual funds, college savings plans and variable annuity products

• Institutional investors – defined benefit and defined contribution

investment only plans sponsored by corporations, state, municipal

and other governmental authorities, university endowment funds,

charitable foundations, and collective investment vehicles (both U.S.

and non-U.S.)

• Investment services for defined contribution investment only plans

• Alternative investment products across the fixed-income, quantitative

and equity groups

Administrative Services• Transfer agency, underwriting, distribution, shareholder services,

trustee and other fiduciary services

DISTRIBUTION

Individual Retail Investors• A broad network of distribution relationships with unaffiliated broker

dealers, financial planners, registered investment advisors and other

financial institutions that distribute the Putnam Funds and defined

contribution investment only services to their customers, which, in

total, includes approximately 168,000 advisors

• Sub-advisory relationships and Putnam-labeled funds as investment

options for insurance companies and non-U.S. residents

• Retail distribution channels are supported by Putnam’s sales and

relationship management team

• Retirement plan sponsors and participants are supported by Putnam’s

dedicated defined contribution investment only professionals and

through a relationship with Empower Retirement

Institutional Investors• Supported by Putnam’s dedicated account management, product

management and client service professionals

• Strategic relationships with several investment management firms

outside of the U.S.



FINANCIAL SERVICES

The life insurance, savings and investments marketplace is competitive. The Company’s competitors include mutual fund companies, insurance companies, banks, investment advisors and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on name recognition, service, technology, cost, variety of investment options, investment performance, product features, price and financial strength as indicated by ratings issued by nationally recognized agencies.

ASSET MANAGEMENT

The investment management business is highly competitive. Putnam competes with other providers of investment products and services, primarily based on the range of investment products offered, investment performance, distribution, scope and quality of shareholder and other services as well as general reputation in the marketplace. Putnam’s investment management business is also influenced by general securities market conditions, government regulations, global economic conditions as well as advertising and sales promotional efforts. Putnam competes with other mutual fund firms and institutional asset managers that offer investment products similar to Putnam as well as products that Putnam does not offer. Putnam also competes with a number of mutual fund sponsors that offer their funds directly to the public. Conversely, Putnam offers its funds only through intermediaries.



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Selected consolidated financial information – United States For the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 2017 2017 (2) 2016 (2) 2017 2016 (2)

Premiums and deposits $ 14,150 $ 13,544 $ 14,644 $ 58,449 $ 59,627Sales 19,162 21,173 18,384 81,621 98,218Fee and other income 616 606 619 2,452 2,311Net earnings – common shareholders (298) 110 55 (50) 249Net earnings – common shareholders (US$) (234) 88 41 (42) 188Adjusted net earnings – common shareholders (1) 75 110 77 334 278Adjusted net earnings – common shareholders (US$) (1) 60 88 57 260 209



Total assets under administration $ 914,282 $ 876,954 $ 841,184





Financial Services $ 80 $ 104 $ 80 $ 357 $ 333Asset Management (5) 6 (3) (21) (52)Corporate (1) (373) – (22) (386) (32)

Net earnings $ (298) $ 110 $ 55 $ (50) $ 249

Adjustments Restructuring costs – – 22 11 29 Net charge on sale of equity investment 122 – – 122 – U.S. tax reform impact 251 – – 251 –

Adjusted net earnings (1) $ 75 $ 110 $ 77 $ 334 $ 278

Financial Services (US$) $ 64 $ 83 $ 59 $ 277 $ 250Asset Management (US$) (4) 5 (2) (15) (39)Corporate (US$) (1) (294) – (16) (304) (23)

Net earnings (US$) $ (234) $ 88 $ 41 $ (42) $ 188

Adjustments Restructuring costs (US$) – – 16 8 21 Net charge on sale of equity investment (US$) 96 – – 96 – U.S. tax reform impact (US$) 198 – – 198 –

Adjusted net earnings (US$) (1) $ 60 $ 88 $ 57 $ 260 $ 209




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2017 DEVELOPMENTS

• The net loss for the three months ended December 31, 2017 was US$234 million compared to net earnings of US$41 million in the same quarter last year. The net loss for the fourth quarter of 2017 included a net charge related to the impact U.S. tax reform of US$198 million as well as a net charge related to the sale of an equity investment of US$96 million. In the fourth quarter of 2016, net earnings included restructuring costs of US$15 million related to Putnam and US$1 million related to Great-West Financial. Excluding these items, adjusted net earnings for the fourth quarter of 2017 increased by US$3 million to US$60 million compared to the same quarter last year. Adjusted net earnings for the twelve months ended December 31, 2017 were US$260 million, an increase of US$51 million compared to the same period in 2016, primarily due to higher net fee income and lower expenses.

• The Tax Reconciliation Act, took effect on January 1, 2018 and included, among other things, the lowering of the U.S. corporate federal tax rate from 35% to 21%, as discussed in the “Income Tax” section of this MD&A. As a result of this U.S. tax reform, the Company revalued certain deferred tax balances and insurance contract liabilities and updated certain expense provisions. For the U.S. segment, the impact of these items was a net charge of US$198 million included in the U.S. Corporate business unit.

• During the fourth quarter of 2017, the Company agreed in principle to sell an equity investment in Nissay, which has been reclassified to assets held for sale and is expected to be finalized in the first quarter of 2018. The impact of the disposal has been included in net earnings for the fourth quarter of 2017 in U.S. Corporate and is a net charge of US$96 million including the non-cash write-off of an associated indefinite life intangible asset.

• On April 6, 2016, the U.S. Department of Labor (“DOL”) issued a new rule redefining and expanding who is a fiduciary by reason of providing investment advice to a retirement plan or holder of an individual retirement account. The Company has analyzed the rule against current business practices, particularly in its Empower

Retirement and Individual Markets businesses. The rule requires changes to certain aspects of product and service delivery but management does not expect that it will prevent Great-West Financial or Putnam from executing on their overall business strategy and growth objectives. The Company is in compliance with the components of the rule that were effective June 9, 2017. The DOL has issued an 18-month delay for full compliance with the rule to July 1, 2019. There is potential for substantial revisions prior to the full compliance date. The Company continues to monitor any developments or proposed revisions.

BUSINESS UNITS – UNITED STATES

FINANCIAL SERVICES

2017 DEVELOPMENTS

• In the first quarter of 2017, Empower Retirement completed its program activities related to integrating the J.P. Morgan Retirement Plan Services (RPS) business, improving the client-facing experience as well as streamlining back-office processing. Included in net earnings in the first quarter of 2017 were restructuring costs of US$8 million, primarily resulting from Great-West Financial executing a restructuring action to right-size the cost structure and better position the business competitively following the finalization of the Empower Retirement integration activities. The Company expects that these enhancements will increase market share by driving future sales and improving the retention of participants and assets.

• Empower Retirement participant accounts have grown to approximately 8.3 million at December 31, 2017 from 8.0 million at December 31, 2016. In the third quarter of 2017, Empower Retirement was named by the retirement plan advisors as the top defined contribution plan provider in a new survey published by PlanAdvisor.

• Empower Retirement assets under administration grew to approximately US$530 billion, up from US$450 billion at December 31, 2016.

OPERATING RESULTS



Premiums and deposits $ 3,134 $ 3,140 $ 3,525 $ 12,950 $ 14,156Sales 8,146 10,769 7,265 36,122 52,747Fee and other income 380 362 383 1,496 1,362Net earnings 80 104 80 357 333

Premiums and deposits (US$) $ 2,467 $ 2,513 $ 2,650 $ 10,003 $ 10,680Sales (US$) 6,414 8,615 5,462 27,988 39,324Fee and other income (US$) 299 290 288 1,156 1,029Net earnings (US$) 64 83 59 277 250



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Premiums and depositsPremiums and deposits for the fourth quarter of 2017 decreased by US$0.2 billion to US$2.5 billion compared with the same quarter last year. The decrease was primarily due to a decrease in Empower Retirement which was driven by lower deposits from retail and segregated fund investment options and lower deposits from existing participants.

Premium and deposits for the twelve months ended December 31, 2017 decreased by US$0.7 billion to US$10.0 billion compared with the same period last year, due primarily to a decrease in Empower Retirement which was driven by lower deposits from retail and segregated fund investment options and lower sales. The decrease was partially offset by higher sales in the individual annuity line of business of Individual Markets.

Premiums and deposits for the fourth quarter of 2017 of US$2.5 billion were comparable with the previous quarter in 2017.

SalesSales in the fourth quarter of 2017 increased by US$1.0 billion to US$6.4 billion compared with the same quarter last year, primarily due to an increase in Empower Retirement sales driven by higher small and large plan sales. Large plan sales can be highly variable from period to period and tend to be lower margin.

For the twelve months ended December 31, 2017, sales decreased by US$11.3 billion to US$28.0 billion compared with the same period last year, primarily due to a decrease in Empower Retirement sales. The first quarter of 2016 included a very large plan sale which did not recur in 2017.

Sales in the fourth quarter of 2017 decreased by US$2.2 billion compared with the previous quarter, primarily due to a decrease in Empower Retirement sales driven by lower large plan sales.

Empower Retirement – customer account values (US$) Change for the twelve months ended December 31 Total at December 31

2017 2016 2017 2016 % Change

General account – fixed options $ 388 $ 1,226 $ 12,607 $ 12,219 3%Segregated funds – variable options (415) (162) 19,006 19,421 (2)Proprietary mutual funds (1) 3,815 3,665 23,765 19,950 19Unaffiliated retail investment options & administrative services only 75,457 34,243 474,282 398,825 19

$ 79,245 $ 38,972 $ 529,660 $ 450,415 18 %

(1) At December 31, 2017, proprietary mutual funds included US$9.7 billion in Putnam managed funds (US$8.2 billion at December 31, 2016).

Empower Retirement customer account values at December 31, 2017 increased by US$79.2 billion compared with December 31, 2016, primarily due to higher average equity market levels and net cash inflows. Net cash inflows for the general account, proprietary mutual funds and unaffiliated retail investment options and administrative services only account values were partially offset by net asset outflows for segregated funds.

Fee and other incomeFee income is derived primarily from assets under management, assets under administration, shareholder servicing fees, administration and recordkeeping services and investment advisory services. Generally, fees are earned based on assets under management, assets under administration or the number of plans and participants for which services are provided.

Fee and other income for the fourth quarter of 2017 increased by US$11 million to US$299 million compared with the same quarter last year. Included in fee and other income for the fourth quarter of 2016 was a reclassification adjustment of US$33 million relating to variable-asset based fee income. Excluding this adjustment, fee and other income increased US$44 million, primarily due to growth in participants and higher average equity market levels.

For the twelve months ended December 31, 2017, fee and other income increased by US$127 million to US$1,156 million compared with the same period last year. Excluding the adjustment discussed for the in-quarter results, the increase in fee and other income was US$160 million, primarily due to growth in the business and higher average equity market levels.

Fee and other income for the fourth quarter of 2017 increased by US$9 million compared to the previous quarter, primarily due to the same reasons discussed for the year-to-date results.

Net earningsNet earnings for the fourth quarter of 2017 increased by US$5 million to US$64 million compared with the same quarter last year, primarily due to higher net fee income, partially offset by lower contributions from investment experience and insurance contract liability basis changes. Included in the fourth quarter of 2016 were $2 million of strategic and business development expenses related to Empower Retirement.

For the twelve months ended December 31, 2017, net earnings increased by US$27 million to US$277 million compared with the same period last year. Net earnings for the first quarter of 2016 included the positive impact of a management election to claim foreign tax credits of US$19 million. Excluding this item, net earnings increased by US$46 million, primarily due to higher net fee income and lower expenses mostly driven by lower integration costs and an expense recovery related to a change in the future obligations for an employee pension plan, partially offset by lower contributions from investment experience and insurance contract liability basis changes. Included in the year-to-date net earnings were US$3 million of strategic and development expenses related to Empower Retirement, compared with US$16 million for the same period in 2016.

Net earnings for the fourth quarter of 2017 decreased by US$19 million compared with the previous quarter in 2017, primarily due to the pension expense recovery in the third quarter of 2017 discussed for the year-to-date results and unfavourable mortality experience.



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OUTLOOK – FINANCIAL SERVICES


As the second largest recordkeeping provider in the U.S., Empower Retirement is positioned for significant growth opportunities with expertise and diversification across all plan types, company sizes and market segments. Great-West Financial continually examines opportunities to structure products and develop strategies to stimulate growth in assets under management.

In 2018, Empower Retirement’s strategies to drive sales growth will continue to include active marketing of the brand, investing in product differentiation and offering a best-in-class service model. In 2017, service enhancements were made to this model including standardizing and improving client-facing tools, optimizing advisor relationship management and client alignment as well as adopting best practices for participant communications. In 2018, investments will continue to be made to improve the customer web experiences, including adding innovative capabilities and ease of service products. These efforts are expected to increase customer retention and ultimately increase participant retirement savings.

In 2018, Great-West Financial will continue to pursue operational efficiencies. With the completion of the recordkeeping business conversion to single back office platform, Empower Retirement will continue to focus on its unique, interactive web-based experience which was launched to help participants understand their retirement income needs. Great-West Global, which launched in the third quarter of 2015 with over 600 professionals based in India, will continue to expand with a focus on lower unit costs.

Through its Individual Markets line of business, Great-West Financial focuses on providing value and innovative products to the partners, brokers and the clients they serve to help them live well longer. Great-West Financial was the second largest distributor of life insurance through banks in 2017. The Company’s strategy focuses on protecting customers’ wealth and income in retirement with a comprehensive suite of asset growth, income protection and wealth transfer products.

To distribute retail retirement income products, the Company has established strategic partnerships with banks and independent broker dealers. The diversified product offering coupled with new product launches planned in early 2018 are expected to increase sales in 2018. The Company expects the innovative distribution and product strategies for longevity will increase Great-West Financial’s share in the retirement income marketplace.

In the executive benefits market, Great-West Financial provides unique solutions to address the complex needs of organizations for funding employee benefits and retaining key executives. Great-West Financial partners with a network of specialized benefit consultants and brokers to create customized solutions based on clients’ needs. The longstanding broker relationships and new partnerships continued to generate strong regional and community bank sales in 2017.

ASSET MANAGEMENT

2017 DEVELOPMENTS

• Putnam’s ending assets under management (AUM) at December 31, 2017 of US$171.5 billion increased by US$19.3 billion compared to the same period last year, while average AUM for the twelve months ended December 31, 2017 of US$163.6 billion increased by US$15.6 billion compared to the same period last year.

• During the fourth quarter of 2016, Putnam announced that it was undertaking US$65 million pre-tax in expense reductions and was realigning its resources to better position itself for current and future opportunities. As of December 31, 2017, the Company has completed the program and achieved US$53 million pre-tax in annualized expense reductions. This resulted in a pre-tax expense reduction of approximately US$14 million in the fourth quarter of 2017.

• Putnam continues to sustain strong investment performance relative to its peers. As of December 31, 2017, approximately 93% and 85% of Putnam’s fund assets performed at levels above the Lipper median, respectively, on a one-year and five-year basis. Additionally, approximately 46% and 55% of Putnam’s fund assets performed at levels above the Lipper top quartile, respectively, on a one-year and five-year basis.

• For the 28th consecutive year, Putnam has been recognized by DALBAR Inc. for mutual fund service quality, citing industry-leading consistency and reliability. This recognition includes Putnam being named as a DALBAR Mutual Fund Service Award winner for 26 of those years. Additionally, for the seventh consecutive year, Putnam has been named the winner of DALBAR’s Total Client Experience award recognizing overall mutual fund customer service quality.

• In January 2018, Putnam announced plans to offer two funds with dedicated environmental, social and governance strategies that identify opportunities driven by corporate sustainability practices and solutions. Putnam will reposition two existing products with nearly US$5.0 billion in AUM in creating these funds which will focus on identifying companies with demonstrated commitment to sustainable business practices or that provide solutions directly contributing to sustainable social, environmental and economic development.



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OPERATING RESULTS



Sales $ 11,016 $ 10,404 $ 11,119 $ 45,499 $ 45,471Fee income Investment management fees 199 193 194 788 775 Performance fees (10) 5 (6) (23) (30) Service fees 37 36 37 150 157 Underwriting & distribution fees 10 10 11 41 47

Fee income 236 244 236 956 949

Core net earnings (loss) (1) (3) (7) 19 (4) 19 (17) Less: Financing and other expenses (after-tax) (1) 2 (13) 1 (40) (35)

Reported net earnings (loss) (3) (5) 6 (3) (21) (52)

Sales (US$) $ 8,674 $ 8,323 $ 8,360 $ 35,125 $ 34,295Fee income (US$) Investment management fees (US$) 157 155 146 609 585 Performance fees (US$) (8) 4 (4) (18) (23) Service fees (US$) 29 28 28 115 119 Underwriting & distribution fees (US$) 8 8 8 32 35

Fee income (US$) 186 195 178 738 716

Core net earnings (loss) (US$) (1) (3) (6) 15 (3) 15 (12) Less: Financing and other expenses (after-tax) (US$) (1) 2 (10) 1 (30) (27)

Reported net earnings (loss) (US$) (3) (4) 5 (2) (15) (39)

Pre-tax operating margin (2) (3) 1.5% 12.0% (0.1)% 5.2% (1.9)%

Average assets under management (US$) $ 169,837 $ 165,180 $ 151,903 $ 163,591 $ 148,003

(1) Core net earnings (loss) (a non-IFRS financial measure) is a measure of the Asset Management business unit’s performance. Core net earnings (loss) includes the impact of dealer commissions and software amortization, and excludes the impact of corporate financing charges and allocations, fair value adjustments related to stock-based compensation, certain tax adjustments and other non-recurring transactions.

(2) Pre-tax operating margin (a non-IFRS financial measure) is a measure of the Asset Management business unit’s pre-tax core net earnings (loss) divided by the sum of fee income and net investment income.

(3) For the three and twelve months ended December 31, 2017, core and reported net earnings exclude the impact of the net charge related to Assets Held for Sale and the impact of U.S. tax reform, which are included in U.S. Corporate. For the three and twelve months ended December 31, 2016, core and reported net earnings exclude restructuring expenses of $20 million (US$15 million), which are included in U.S. Corporate.

SalesSales for the fourth quarter of 2017 were US$8.7 billion compared to US$8.4 billion for the same quarter last year. The increase was due to an increase in mutual fund sales of US$0.8 billion, partially offset by a decrease in institutional sales of US$0.5 billion.

For the twelve months ended December 31, 2017, sales increased by US$0.8 billion to US$35.1 billion compared to the same period last year. Mutual fund sales increased by US$2.8 billion, partially offset by a decrease in institutional sales of US$2.0 billion.

Sales in the fourth quarter of 2017 increased by US$0.4 billion compared to the previous quarter, due to a US$1.0 billion increase in mutual fund sales, partially offset by a US$0.6 billion decrease in institutional sales.

Fee incomeFee income is derived primarily from investment management fees, performance fees, transfer agency and other service fees, as well as underwriting and distribution fees. Generally, fees are earned based on AUM and may depend on financial markets, the relative performance of Putnam’s investment products, the number of retail accounts and sales.

Fee income for the fourth quarter of 2017 increased by US$8 million to US$186 million compared to the same quarter last year. The increase was primarily due to higher investment management fees, driven by higher average AUM.

For the twelve months ended December 31, 2017, fee income increased by US$22 million to US$738 million compared to the same period last year. The increase was primarily due to the same reasons discussed for the in-quarter results.

Fee income for the fourth quarter of 2017 decreased by US$9 million compared to the previous quarter, primarily due to the proceeds earned from the sale of a previously impaired investment product in the third quarter of 2017. Excluding the impact of proceeds earned on the sale recorded in the third quarter of US$12 million, fee income increased US$4 million, primarily due to the same reasons discussed for the in-quarter results.



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Net earningsThe core net loss (a non-IFRS financial measure) for the fourth quarter of 2017 was US$6 million, compared to core net loss of US$3 million for the same quarter last year. The increase in core net loss was primarily due to higher volume-related expenses, higher incentive compensation from improved investment performance and less favourable impacts of changes to certain income tax estimates. These items were partially offset by increased fee revenue, driven by higher AUM and higher contributions from investment experience. Expenses in the fourth quarter of 2017 were up slightly from the same quarter last year, due to the impact of one-time items, including expense recoveries in 2016, and the timing of certain compensation accruals. Both periods benefited similarly from the expense reductions announced in the fourth quarter of 2016. In the fourth quarter of 2017, the reported net loss, including financing and other expenses, was US$4 million compared to reported net losses of US$2 million for the same quarter last year. Financing and other expenses for the fourth quarter of 2017 were an expense recovery of US$2 million, compared to an expense recovery of US$1 million for the same quarter last year. The impact of the reversal of a previously impaired indefinite life intangible asset of US$10 million, reduced financing costs and lower U.S. state tax expenses shared with an affiliate were mostly offset by less favourable adjustments to certain income tax estimates.

For the twelve months ended December 31, 2017, core net earnings were US$15 million, compared to a core net loss of US$12 million for the same period last year. The increase was primarily due to increased fee revenue, driven by higher AUM and higher contributions from investment experience, partially offset by less favourable impacts of changes to certain income

tax estimates. The current year also benefited from the expense reductions announced in the fourth quarter of 2016, mostly offset by the impact of one-time items, including expense recoveries in 2016, and higher volume related expenses related to improved sales activity and investment performance. For the twelve months ended December 31, 2017, the reported net loss, including financing and other expenses, was US$15 million compared to reported net loss of US$39 million for the same period last year. Financing and other expenses for the twelve month period ended December 31, 2017 increased by US$3 million to US$30 million compared to the same period last year, primarily due to the positive impact of adjustments to certain income tax estimates in the prior year, mostly offset by the indefinite life intangible asset impairment reversal of US$10 million, lower financing costs and U.S. state tax expenses shared with an affiliate.

The core net loss for the fourth quarter of 2017 was US$6 million compared to core net earnings of US$15 million for the previous quarter. Core net earnings for the third quarter of 2017 included proceeds of US$7 million after-tax from the sale of a previously impaired investment product. Excluding this item, the core net loss increased by US$14 million, primarily due to lower contributions from investment experience, higher incentive compensation from improved investment performance and less favourable impacts of changes to certain income tax estimates. The reported net loss, including financing and other expenses, for the fourth quarter of 2017, was US$4 million compared to net earnings of US$5 million for the previous quarter. Financing and other expenses for the fourth quarter of 2017 were an expense recovery of US$2 million compared to expenses of US$10 million for the previous quarter, primarily due to the indefinite life intangible asset impairment reversal of US$10 million and lower U.S. state tax expenses shared with an affiliate.

ASSETS UNDER MANAGEMENT

Assets under management (US$) For the three months ended For the twelve months ended


Beginning assets $ 167,798 $ 162,913 $ 153,798 $ 152,122 $ 148,370

Sales – Mutual funds 5,408 4,404 4,636 19,892 17,115Redemptions – Mutual funds (5,605) (4,625) (5,560) (21,462) (24,654)

Net asset flows – Mutual funds (197) (221) (924) (1,570) (7,539)

Sales – Institutional 3,266 3,919 3,724 15,233 17,180Redemptions – Institutional (3,898) (3,601) (4,251) (13,975) (13,025)

Net asset flows – Institutional (632) 318 (527) 1,258 4,155

Net asset flows – Total (829) 97 (1,451) (312) (3,384)

Impact of market/performance 4,489 4,788 (225) 19,648 7,136

Ending assets $ 171,458 $ 167,798 $ 152,122 $ 171,458 $ 152,122

Average assets under managementMutual funds 78,030 75,900 71,679 75,612 72,326Institutional assets 91,807 89,280 80,224 87,979 75,677

Total average assets under management $ 169,837 $ 165,180 $ 151,903 $ 163,591 $ 148,003



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Average AUM for the three months ended December 31, 2017 was US$169.8 billion, an increase of US$17.9 billion compared to the same quarter last year, primarily due to the cumulative impact of positive markets over the twelve month period. Net asset outflows for the fourth quarter of 2017 were US$0.8 billion compared to US$1.5 billion for the same quarter last year. In-quarter mutual fund net asset outflows were US$0.2 billion and institutional net asset outflows were US$0.6 billion.

Average AUM for the twelve months ended December 31, 2017 increased by US$15.6 billion to US$163.6 billion compared to the same period last year, primarily due to the same reason discussed for the in-quarter results. Net asset outflows for the twelve months ended December 31, 2017 were US$0.3 billion compared to US$3.4 billion for the same period last year. Year-to-date mutual fund net asset outflows of US$1.6 billion were mostly offset by institutional net asset inflows of US$1.3 billion.

Average AUM for the three months ended December 31, 2017 increased by US$4.7 billion compared to the previous quarter, primarily due to the impact of positive markets over the three month period, partially offset by net asset outflows.

OUTLOOK – ASSET MANAGEMENT


Putnam remains committed to providing strong, long-term investment performance across asset classes for its clients and investors in the mutual fund, institutional and retirement marketplaces.

In 2018, Putnam will continue to focus efforts on driving growth and market share through new sales and asset retention in all markets it serves including Global Institutional, PanAgora (Putnam’s quantitative institutional manager), U.S. Retail and Defined Contribution Investment Only, while maintaining its industry recognized reputation for service excellence.

Innovation will remain a key differentiator in 2018, as Putnam further develops its product offerings, service features and operational functions, while bolstering its corporate and business/product brand image with a wide range of key constituents. Putnam continues to increasingly incorporate digital technology throughout its business to drive greater efficiencies and create business opportunities.

Putnam will continue to focus on growth of revenues and assets in 2018, while at the same time managing firm-wide expenses, as the firm seeks to build a scalable, profitable asset management franchise.

UNITED STATES CORPORATE

U.S. Corporate consists of items not associated directly with or allocated to the United States business units, including the impact of certain non-continuing items related to the U.S. segment.

In the fourth quarter of 2017, the net loss was US$294 million compared to US$16 million for the same period in 2016. The net loss in the fourth quarter of 2017 includes the impact of U.S. tax reform which was a net charge of US$198 million, reflecting a US$353 million reduction of deferred tax assets in the Asset Management business unit, partially offset by a US$155 million reduction, primarily related to deferred tax liabilities in the Financial Services business unit. The impact of the sale of an equity investment in Nissay, included in assets held for sale, contributed a further net charge of US$96 million. The fourth quarter of 2016, included restructuring costs of US$16 million, primarily related to Putnam. Excluding these items, net earnings for the fourth quarter of 2017 were comparable to the same period in 2016.

The net loss for the twelve months ended December 31, 2017 was US$304 million compared to US$23 million in the same period in 2016. The 2017 year-to-date results include the items discussed for the in-quarter results as well as US$8 million of restructuring costs primarily relating to Empower Retirement included in the first quarter of 2017 results. The 2016 year-to-date results include restructuring costs of US$15 million related to Putnam and US$6 million related to RPS.

Excluding the items discussed for the in-quarter results, the adjusted net loss for the three months ended December 31, 2017 was comparable to the previous quarter in 2017.



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EUROPE

The Europe segment comprises two distinct business units: Insurance & Annuities and Reinsurance, together with an allocation of a portion of Lifeco’s corporate results. Insurance & Annuities provides protection and wealth management products, including payout annuity products, through subsidiaries of Canada Life in the U.K., the Isle of Man and Germany, as well as through Irish Life in Ireland. Reinsurance operates primarily in the U.S., Barbados and Ireland, and is conducted through Canada Life, London Life and their subsidiaries.


Foreign currency assets and liabilities are translated into Canadian dollars at the market rate at the end of the financial period. All income and expense items are translated at an average rate for the period.

Currency translation impact is a non-IFRS financial measure that highlights the impact of changes in currency translation rates on IFRS results. This measure provides useful information as it facilitates the comparability of results between periods. Refer to the Cautionary Note regarding non-IFRS Financial Measures at the beginning of this document.

BUSINESS PROFILE

INSURANCE & ANNUITIES

The core products offered in the U.K. are guaranteed annuities, investments (including retirement drawdown and pension) and group insurance. These products are distributed through independent financial advisors (IFAs) and employee benefit consultants. The international operations based in the Isle of Man and Ireland offer investment, savings and individual protection products that are sold through IFAs and private banks in the U.K. and in other selected territories. Canada Life Investments is the fund management division in the U.K. and manages over £37 billion of assets. These include equities, fixed-income, property, mortgages and cash for companies in the Lifeco group as well as a wide range of life, pension and collective funds. The funds are distributed mainly through financial advisors as well as wealth managers and discretionary managers in the U.K.

Subsequent to December 31, 2017, on January 2, 2018, The Canada Life Group (U.K.) Limited completed the acquisition of U.K. financial services provider Retirement Advantage. The Retirement Advantage acquisition will add further expertise in the growing U.K. retirement income and broadens our product suite to include equity release mortgages.

The core products offered by Irish Life in Ireland are savings and investments, individual and group life insurance, health insurance and pension products. These products are distributed through independent brokers, a direct sales force and tied agent bank branches. Irish Life Health offers individual and corporate health plans, distributed through independent brokers and direct channels. Irish Life Investment Managers (ILIM) is one of the Company’s fund management operations in Ireland and manages approximately

69 billion of assets. In addition to managing assets on behalf of companies in the Lifeco group, ILIM also manages assets for a wide range of institutional and retail clients, occupational defined benefit and defined contribution pensions, large multinational corporations, charities and domestic companies.

The German operation focuses on pension, lifetime GMWB and individual protection products that are distributed through independent brokers and multi-tied agents.

Insurance & Annuities continues to expand its presence in its defined market segments by focusing on the introduction of innovative products and services, the quality of its service offerings as well as the enhancement of distribution capabilities and intermediary relationships.

REINSURANCE

Reinsurance operates primarily in the U.S., Barbados and Ireland. In the U.S., the reinsurance business operates through branches of Canada Life, London Life, subsidiaries of London Life and an indirect subsidiary of Great-West Financial. In Barbados, the reinsurance business operates primarily through branches of Canada Life, London Life and subsidiaries of London Life. In Ireland, the reinsurance business operates through subsidiaries of Canada Life.

The Company’s business includes both reinsurance and retrocession business transacted directly with clients or through reinsurance brokers. As a retrocessionaire, the Company provides reinsurance to other reinsurers to allow those companies to manage their insurance risk.

The product portfolio offered by the Company includes life, annuity as well as property catastrophe reinsurance, provided on both a proportional and non-proportional basis.

In addition to providing reinsurance products to third parties, the Company also utilizes internal reinsurance transactions between companies in the Lifeco group. These transactions are undertaken to better manage insurance risks relating to retention, volatility and concentration; and to facilitate capital management for the Company, its subsidiaries and branch operations. These internal reinsurance transactions may produce benefits that are reflected in one or more of the Company’s other business units.

MARKET OVERVIEW



MARKET POSITION

U.K.• The market leader of the group life market, with 25% share (1)

• A market leader in group income protection, with 18% share (1)

• Among the top four insurers in payout annuities, with a market share

in excess of 16% (Advisor only) (2)

• A market leading international life company selling into the U.K.

market, with 30% market share (3)

• Among the top five in the onshore unit-linked single premium bond

market, with 11% market share (3)


(2) Market share based on annualized Q1 to Q3 2017 data through IFAs, restricted whole market advisors and Non-Advised Distributor

(3) Market share based on annualized Q1 to Q3 2017 data



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INSURANCE & ANNUITIES (CONT’D)

MARKET POSITION (CONT’D)

Ireland• The market leading life assurance company, with 38% share (4)

• Leading position in the retail life and pensions market, with a 35% share (4)

• Leading positions in the group pensions, group risk and corporate

annuities markets with a 44% share (4)

• ILIM is one of the largest institutional fund managers in Ireland with

69 billion assets under management (5)

• Third largest health insurance business through Irish Life Health (1)

Germany• 5% share of the broker market (5)

• Continued competitive presence in the unit-linked market


U.K.• Individual and bulk payout annuities

• Fixed term annuities

• Pension investment

• Savings

• Life insurance

• Income protection (disability)


• Equity release mortgages (with the Retirement Advantage acquisition

in 2018)

Ireland• Individual and group risk & pensions

• Individual and bulk payout annuities

• Health insurance

• Wealth management services

• Individual savings and investment

• Institutional investment management

Germany• Pensions

• Income protection (disability)


• Variable annuities (GMWB)

• Individual life insurance

DISTRIBUTION

U.K.• IFAs

• Private banks

• Employee benefit consultants

Ireland• Independent brokers

• Pensions and investment consultants

• Direct sales force

• Tied bank branch distribution with various Irish banks

Germany• Independent brokers

• Multi-tied agents


(2) Market share based on annualized Q1 to Q3 2017 data through IFAs, restricted whole market advisors and Non-Advised Distributor

(3) Market share based on annualized Q1 to Q3 2017 data

(4) As at June 30, 2017


REINSURANCE

MARKET POSITION

• Among the top two life reinsurers in the U.S. for assumed structured life reinsurance (1)

• Positioned to participate in the developments of the evolving European structured life reinsurance market

• Ranked 6th for traditional mortality reinsurance in the U.S.

• Long-standing provider of a range of Property and Casualty catastrophe retrocession protection coverages

• Leading provider of U.K. and other European annuity / longevity reinsurance


Life• Yearly renewable term

• Co-insurance

• Modified co-insurance

• Capital relief solutions

Property & Casualty• Catastrophe retrocession

Annuity / Longevity• Payout annuity

• Longevity protection

• Fixed annuity

DISTRIBUTION

• Independent reinsurance brokers

• Direct placements

(1) As at November, 2017


UNITED KINGDOM

In the U.K., the Company has strong market positions for group risk, payout annuities and wealth management products, where, combining sales from onshore and international businesses, Canada Life is one of the top unit-linked single premium bond providers in the U.K. The Company’s market position in the U.K. is further strengthened by the acquisition of Retirement Advantage, which closed on January 2, 2018.

The market for payout annuities increased in 2017. The Company benefited from increased demand from customers for competitive pricing, which increased the proportion of annuities sold through independent financial advisors, the Company’s primary distribution channel. The Company continued to offer both standard and enhanced annuities as well as pension products for individuals who want to take advantage of the greater pension flexibility introduced in recent years. The Company also offers bulk annuities aimed at trustees of defined benefits plans who want to insure pension annuities in payment. There have been a number of new entrants to this market; however, this is a sizeable market and demand from trustees remains strong. The market is expected to grow as pension plan funding improves and trustees consider ways to reduce risk from pension plans. With expertise and experience in longevity and investment products, the Company is well placed to continue to grow new business.



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In international wealth management operations, the market in 2017 remained relatively flat. The penetration of the U.K. retail market increased sales during 2017, an area of continued focus. Future estate planning continues to be an area of focus for U.K. advisors and Canada Life International remains one of the leading companies in this sector of the market.

The impact of Brexit remains uncertain as the U.K. and EU continue exit negotiations in 2018.

IRELAND

The Company maintained its market-leading presence in Ireland through Irish Life and continues to be the largest life assurance company with a market share of 38% (as at June 2017). Irish Life follows a multi-channel distribution strategy with the largest broker distribution network, the largest direct sales force and the largest Bancassurance distribution network where it has tied relationships with five banks.

Irish Life Investment Managers is one of Ireland’s largest institutional fund managers with 69 billion of assets under management, including funds managed for other companies within the Lifeco group, as at December 31, 2017. During 2017, in addition to maintaining its market leading position in Ireland, ILIM continued to expand its business relationships in the U.S., Canada, the U.K. and Europe. In the fourth quarter, ILIM was formally appointed to manage assets for a significant global exchange traded funds (ETF) provider for its EU business.

Setanta Asset Management, a subsidiary of Canada Life, manages assets for a number of institutional clients, both third-party institutions as well as for companies in the Lifeco group and has

9 billion of assets under management as at December 31, 2017.

The Company operates its Irish health insurance business under the Irish Life Health brand, where it has a top three position with 21% market share.

GERMANY

Canada Life has established a leading position among providers of unit-linked products to the German independent intermediary market. This market remains competitive as more companies enter the market due to the projected strong growth over the coming years. Throughout this period of increased competition, the Company has increased market share and maintained a top three position in this segment of the market through continuous product, technology and service improvements. Sales of unit linked products grew by 4% in 2017, and are over 85% higher than 2014 levels. The market for traditional German insurance products has been challenging following the introduction of Solvency II in 2016 and the reductions in the statutory guaranteed interest rate on these products. This new environment continues to create growth opportunities for Canada Life and its unit-linked products.

REINSURANCE

In the U.S. life reinsurance market, the demand for capital relief remains strong because of continuing conservative reserving requirements on term and universal life insurance products. Several competitors are now focusing on growing their share of this market, which increased competition for this business. However, an independent industry survey released in November 2017 confirmed that the Company remains one of the top two providers of capital relief solutions in the U.S. market.

The Company has also had success in traditional life reinsurance as the number of remaining life reinsurers is declining due to consolidation and client value diversification of reinsurers. The Company’s financial strength and ability to offer both capital solutions and traditional mortality reinsurance continues to be a competitive advantage.

In Europe, Solvency II dominates the regulatory landscape and interest in capital relief transactions that produce capital benefits under the new regime continues to grow. Demand for longevity reinsurance remains very strong in the U.K. and some continental European countries. As a result, there are now more reinsurers participating in this market, but even so, demand for longevity coverage continues to exceed supply.

Selected consolidated financial information – Europe For the three months ended For the twelve months ended

Dec. 31 Sept. 30 Dec. 31 Dec. 31 Dec. 31 2017 2017 (2) 2016 2017 2016

Premiums and deposits $ 11,660 $ 8,820 $ 8,714 $ 38,155 $ 33,178Fee and other income 368 348 340 1,386 1,296Net earnings – common shareholders 358 184 307 1,152 1,200Adjusted net earnings – common shareholders (3) 308 185 307 1,121 1,215



Total assets under administration (1) $ 255,481 $ 242,008 $ 231,761

(1) At December 31, 2017, total assets under administration excludes $8.2 billion of assets managed for other business units within the Lifeco group of companies ($7.9 billion at September 30, 2017 and $7.9 billion at December 31, 2016).





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Insurance & Annuities $ 250 $ 233 $ 225 $ 947 $ 927Reinsurance 67 (41) 86 190 277Europe Corporate 41 (8) (4) 15 (4)

Net earnings – common shareholders $ 358 $ 184 $ 307 $ 1,152 $ 1,200

Adjustments Restructuring costs 4 1 – 23 15 U.S. tax reform impact (54) – – (54) –

Adjusted net earnings – common shareholders (1) $ 308 $ 185 $ 307 $ 1,121 $ 1,215


2017 DEVELOPMENTS

• Some market volatility continues following the U.K.’s formal notification in March 2017 of its intention to leave the European Union (EU). The most notable impact following the Brexit vote in June 2016 on the Company’s financial results has been the weakening of the British pound. The average currency translation rate for the Company’s British pound net earnings have declined by 9% from the second quarter of 2016 to the fourth quarter of 2017. The Company will continue to work closely with customers, business partners and regulators over the next few years as the U.K. and the EU negotiate and agree on their new relationship. The Company’s other European businesses may also see some impacts arising from the market uncertainty in Europe continuing from Brexit, but the impacts are not currently expected to be significant.

• On February 8, 2017, Irish Life Assurance plc, a subsidiary of the Company, redeemed its 5.25% 200 million subordinated debenture notes at their principal amount together with accrued interest.

• In March 2017, the Company completed the sale of its 30.43% ownership of Allianz Ireland to a subsidiary of Allianz SE. The sale was approved by the shareholders of Allianz Irish Life Holdings plc and sanctioned by the High Court in Ireland. Consideration received for the sale was 145 million and resulted in a 15 million gain on disposal.

• On August 24, 2017, the Company, through its wholly-owned subsidiary The Canada Life Group (U.K.) Limited, reached an agreement to acquire U.K. financial services provider Retirement Advantage. Retirement Advantage has over 30,000 pension and equity release customers, and more than £2 billion of assets under management including a £1.5 billion block of in-force annuities (as of June 30, 2017). The transaction was completed on January 2, 2018. The transaction is expected to be earnings accretive, although it is not expected to have a material impact on the Company’s financial results.

• The Company, through its subsidiary London Reinsurance Group Inc., offers property catastrophe coverage to reinsurance companies and as a result the Company is exposed to claims arising from major weather events and other catastrophic events. The 2017 Atlantic hurricane season was active and a number of storms made landfall, leading to a high level of insured losses. Included in the Company’s net earnings for the third quarter of 2017 are losses of $175 million after-tax relating to estimated claims net of reinstatement premiums on these coverages. The Company’s loss estimate is based on currently

available information and the exercise of judgment. The Company’s loss estimate may change as additional information becomes available.

• The Tax Reconciliation Act, took effect on January 1, 2018 and included, among other things, the lowering of the U.S. corporate federal tax rate from 35% to 21%, as discussed in the “Income Tax” section of this MD&A. As a result of this U.S. tax reform, the Company revalued certain deferred tax balances and insurance contract liabilities. For the Europe segment, the impact of these items on net earnings was a positive $54 million.

• In the fourth quarter of 2017, the Company achieved an additional 7 million pre-tax of annualized synergies relating to the integration of the Irish Life Health operations for a total of 17 million pre-tax achieved to date slightly exceeding the target of 16 million. The integration of Aviva Health Insurance Ireland Limited (Aviva) and the GloHealth Financial Services Limited (GloHealth) has now completed.

• The Company completed its efforts relating to the Irish Life business strategy to support growth in the retail division and achieved its target of 8 million pre-tax in annualized cost reductions within the Irish Life retail division in 2017.

• During the fourth quarter of 2017, Irish Life entered into its largest ever bulk payout annuity transaction which resulted in over 300 million in additional sales.

• The Irish Life retail division in 2017 achieved its highest ever customer satisfaction score, 87%, and entered the top quartile of companies for customer satisfaction based on a league table of over 700 companies across all business sectors in Ireland and the U.K.

• During the fourth quarter of 2017, the Company received a number of awards:

º Canada Life achieved ‘5 stars’ in the 2017 Financial Adviser Service Awards in both the ‘Life and Pensions’ and ‘Investments Providers and Packagers’ categories for the second successive year.

º Irish Life Investment Managers were winners of the Property Investment Fund Manager award at the KPMG Irish Independent Property Industry Excellence Awards and Investment Manager of the Year and Equities Manager of the Year at the Irish Pensions Awards 2017.

º The Marketing Institute of Ireland awarded Irish Life Health the 2017 Integrated Marketing Award in recognition of their brand launch campaign.



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BUSINESS UNITS – EUROPE


OPERATING RESULTS



Premiums and deposits (1) $ 8,665 $ 5,983 $ 4,984 $ 25,426 $ 22,276Sales (1) 7,325 5,362 4,410 21,938 19,179Fee and other income 361 344 333 1,366 1,276Net earnings 250 233 225 947 927

(1) For the three and twelve months ended December 31, 2017, premiums and deposits and sales exclude $0.1 billion and $0.6 billion, respectively, of assets managed for other business units within the Lifeco group of companies ($0.2 billion for the three months ended September 30, 2017, $0.4 billion for the three months ended December 31, 2016 and $7.5 billion for the twelve months ended December 31, 2016).

Premiums and depositsPremiums and deposits for the fourth quarter of 2017 increased by $3.7 billion to $8.7 billion compared to the same quarter last year, primarily due to higher sales in fund management and pensions and a large bulk payout annuity sale in Ireland, higher wealth management sales in the U.K. and the impact of currency movement.

For the twelve months ended December 31, 2017, premiums and deposits were $25.4 billion compared to $22.3 billion for the same period last year, primarily due to higher bulk payout annuity and wealth management sales in the U.K. and higher pension and bulk payout annuity sales in Ireland, partially offset by the impact of currency movement.

Premiums and deposits for the fourth quarter of 2017 increased by $2.7 billion compared to the previous quarter, primarily due to higher sales in fund management and pensions and a large bulk payout annuity sale in Ireland, higher wealth management sales in the U.K., higher pension sales in Germany as well as the impact of currency movement.

SalesSales for the fourth quarter of 2017 increased by $2.9 billion to $7.3 billion compared to the same quarter last year and by $2.0 billion from the previous quarter, primarily due to the same reasons discussed for premiums and deposits for the respective periods.

For the twelve months ended December 31, 2017, sales increased by $2.8 billion to $21.9 billion compared to the same period last year primarily due to the same reasons discussed for premiums and deposits for the same period.

Fee and other incomeFee and other income for the fourth quarter of 2017 increased by $28 million to $361 million compared to the same quarter last year, primarily due to higher other income in Ireland, which can be highly variable from quarter to quarter, as well as from higher asset management fees in Ireland and Germany.

For the twelve months ended December 31, 2017, fee and other income increased by $90 million to $1,366 million compared to the same period last year. The increase was primarily due to higher asset management fees in Ireland and Germany as well as higher other income in Ireland due to the full year contribution of fee income in 2017 from the Aviva and GloHealth acquisitions in the third quarter of 2016, partially offset by the impact of currency movement and lower surrender fees in the U.K.

Fee and other income for fourth quarter of 2017 increased by $17 million compared to the previous quarter, primarily due to the same reasons discussed for the in-quarter results.

Net earningsNet earnings for the fourth quarter of 2017 increased by $25 million to $250 million compared to the same quarter last year. The increase was primarily due to favourable morbidity experience in Ireland, the impact of changes to certain tax estimates and the impact of currency movements, partially offset by lower contributions from investment experience and insurance contract liability basis changes and unfavourable morbidity experience in the U.K.

Net earnings for the twelve months ended December 31, 2017 increased by $20 million to $947 million compared to the same period last year. The increase was primarily due to the impact of higher new business volumes, contributions from investment experience, a gain on the sale of the Company’s Allianz Ireland holdings and the impact of changes to certain tax estimates, partially offset by lower contributions from insurance contract liability basis changes and the impact of currency movements.

Net earnings for the fourth quarter of 2017 increased by $17 million compared to the previous quarter, primarily due to higher contributions from investment experience, higher new business volumes, the impact of changes to certain tax estimates and the impact of currency movements, partially offset by lower contributions from insurance contract liability basis changes.



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OUTLOOK – INSURANCE & ANNUITIES


United Kingdom – The outlook for the payout annuities market in 2018 is for modest growth. Since April 2015, when changes to the U.K. budget became effective, individuals with defined contribution pensions have had greater flexibility for accessing their savings in retirement. As expected, some individuals have chosen to remain invested in the market while drawing a pension income rather than buying a payout annuity and the Company expects that the attractiveness of this guaranteed income will remain a key part of customers’ retirement planning in the future. In the future, the Company sees the opportunity to grow its payout annuity business in line with the expected growth in the overall retirement market. The Company will look to further develop its presence in the bulk annuity market, where trustees want to insure pension annuities in payment. The Retirement Advantage acquisition in early 2018 creates a strong platform for growth in the U.K.’s growing equity release and retirement income markets. The Company will also continue to develop products for individuals who require additional pension flexibility. The overall size of the retirement market continues to grow as more employers transition from defined benefit to defined contribution pension plans.

Canada Life continues to be a key player in the single premium investment bond marketplace. It will continue to develop a presence in both the international and onshore market segments. The Company’s distribution strategy for onshore will remain focused on IFAs. In the international wealth management segment, the outlook for 2018 is cautiously optimistic with an expectation that the market will continue to grow. The majority of the Company’s business growth is expected to be through discretionary fund management wealth advisors, the retail market and through tax and estate planning products.

The outlook for the group risk operation remains positive and has benefited from additional risk benefits as a result of the U.K. Government’s Pensions Auto Enrolment initiative in the workplace, which commenced October 2012 and will be complete in 2018. Larger Canada Life plans have grown, as the pension legislation increased the membership of the associated group plans. The Company expects the expansion of the existing customer base experienced in recent years will moderate as larger employers have implemented the changes required by the legislation. The Company’s group operations will continue to maintain pricing discipline, reflecting the current low interest rate environment.

The Company has seen market volatility as a result of the Brexit vote, although this benefited the U.K. stock market 2017, which ended the year at higher levels. It is anticipated that the current conditions will continue until further clarity is provided as to the details of the exit process and the respective negotiating positions become clearer. This uncertainty is expected to continue throughout 2018.

Ireland – The Irish economy continues to perform strongly with projected economic growth rates in 2018 of 4.2%. The uncertainty surrounding the impact that Brexit could have on Ireland together with the relatively significant rebound in the domestic market, are key risk in the medium term.

Domestic sources and household spending continue to be the source of growth. The labour market continues to expand with sustained job growth across sectors and regions, with the unemployment rate expected to average 5.4% during 2018 (down from a high of 15% in 2012). Consumer sentiment index remains positive but cautious, and has fallen slightly from a September 2017 high. The favourable forecast in household consumption and declining unemployment is expected to influence retention and new business measures for the Company’s Irish businesses. Irish Life is looking to maintain market share and to improve profitability across its retail, corporate, health and investment management businesses following its multi-channel distribution strategy but continually faces the challenges of operating in a competitive market. The establishment of an Irish innovation centre, to embed collaborative and agile methodologies of high growth into the business, is expected to challenge existing and design new business processes and customer offerings.

Germany – The outlook for the German business continues to be positive and the Company expects continued growth in assets under management in 2018. In 2018, the Company expects to continue to grow its share of the market for unit-linked products, as the market for traditional fixed interest guaranteed products declines, due to lower interest rates and increasing costs of guarantees. The Company is positioning itself to further strengthen its presence in the unit-linked market through continued investments in product development, distribution technology and service improvements. Sales of protection products continued to grow in 2017, with sales up 6% from 2016 levels and over 75% from 2014 levels.

Across all European entities, European Insurance and Occupational Pensions Authority (EIOPA) consultation on Solvency II calibrations could lead to change in capital ratios, if approved.



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REINSURANCE

OPERATING RESULTS



Premiums and deposits $ 2,995 $ 2,837 $ 3,730 $ 12,729 $ 10,902Fee and other income 7 4 7 20 20Net earnings 67 (41) 86 190 277

Premiums and depositsReinsurance premiums can vary significantly from period to period depending on the terms of underlying treaties. For certain life reinsurance transactions, premiums will vary based on the form of the transaction. Treaties where insurance contract liabilities are assumed on a proportionate basis will typically have significantly higher premiums than treaties where claims are not incurred by the reinsurer until a threshold is exceeded. Earnings are not directly correlated to premiums received.

Premiums and deposits for the fourth quarter of 2017 were $3.0 billion compared to $3.7 billion for the same quarter last year. The decrease was primarily due to lower volumes relating to existing business, restructured reinsurance agreements and currency movements.

For the twelve months ended December 31, 2017, premiums and deposits increased by $1.8 billion to $12.7 billion compared to the same period last year. The increase was primarily due to new reinsurance agreements and higher volumes relating to existing business.

Premiums and deposits for the fourth quarter of 2017 were $3.0 billion compared to $2.8 billion for the previous quarter. The increase was primarily due to volume on existing business and currency movements.

Fee and other incomeFee and other income for the fourth quarter of 2017 of $7 million was comparable to the same period last year.

For the twelve months ended December 31, 2017, fee and other income was comparable to the previous period.

Fee and other income for the fourth quarter of 2017 increased by $3 million driven by new business and volumes on existing business.

Net earningsNet earnings for the fourth quarter of 2017 decreased by $19 million to $67 million compared to the same quarter last year. The decrease was primarily due to less favourable morbidity experience, lower impacts from new business gains, partially offset by favourable contributions from insurance contract liability basis changes.

For the twelve months ended December 31, 2017, net earnings decreased by $87 million to $190 million compared to the same period last year. Included in this result is a loss of $175 million for estimated claims resulting from the impact of in-year hurricanes. Excluding this estimated loss, net earnings were $365 million, an increase of $88 million over the same period last year, primarily due to favourable experience in the life and annuity business, higher impacts from new business gains and the favourable impact of changes to certain tax estimates, partially offset by lower contributions of insurance contract liability basis changes and less favourable morbidity experience.

Net earnings for the fourth quarter of 2017 increased by $108 million compared to the previous quarter. Excluding the loss estimate discussed for the year-to-date results, net earnings decreased $67 million over the previous quarter. The decrease was primarily due to lower new business gains, less favourable mortality experience in the traditional life segment and less favourable changes to certain tax estimates, partially offset by higher contributions from insurance contract liability basis changes.



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OUTLOOK – REINSURANCE


The U.S. life reinsurance industry is focused on accessing certain demographics, including the low to middle income families market. If the industry is successful, this could create renewed growth, otherwise expected sales and volume will remain stable. The current Presidential Administration in the U.S. has signaled the desire to repeal and replace the Affordable Care Act. At this point, the Company cannot determine what the impact may be on the health reinsurance market. Effective in 2017, new U.S. regulatory rules (Principle-Based Reserving) affecting the calculation of statutory reserves were issued. These rules are to be implemented by 2020. The U.S. tax reform enacted by the current Administration could cause changes to the industry that are hard to assess at the moment.

In Europe, Solvency II is expected to continue to be the main driver of the business in 2018 and beyond. The Company’s reinsurance operation is prepared to help European clients and other affiliated companies meet the capital challenges and business opportunities arising from these regulatory changes. EIOPA’s current consultation on Solvency II calibrations, if approved, could provide further opportunities.

The 2017 Atlantic hurricane season was extremely active with a number of storms making landfall, leading to a high level of insured losses. As a result, the Company expects the softening of market pricing to reverse and there will be increases in prices in 2018. Hedge fund capacity, collateralized covers and catastrophe bond issuance are expected to continue to grow in 2018. The primary focus for 2018 will be to continue to move further away from exposed risk, continue to utilize the most recent U.S. modeling updates and manage geographic exposures with an expected increase in risk adjusted premiums.

EUROPE CORPORATE

The Europe Corporate account includes financing charges and the impact of certain non-continuing items as well as the results for the legacy international businesses.

Net earnings for the fourth quarter of 2017 increased by $45 million to $41 million compared to the same quarter last year. Net earnings for the fourth quarter of 2017, included the impact of U.S. tax reform which was a net positive of $54 million, primarily related to a reduction of deferred tax liabilities in the Reinsurance business unit. Excluding this item, net earnings decreased by $9 million, primarily due to restructuring costs of $4 million related to Irish Life Health and the Irish Life business strategy to support business growth in the retail division.

For the twelve months ended December 31, 2017, Europe Corporate had net earnings of $15 million compared to a net loss of $4 million for the same period last year. Excluding the impact of U.S. tax reform discussed for the in-quarter results, net earnings decreased by $35 million, primarily due to restructuring costs of $23 million related to Irish Life Health and the Irish Life business strategy to support business growth in the retail division, compared to restructuring costs of $15 million, primarily related to Irish Life Health, for the same period last year. Year-to-date results for Europe Corporate in 2016 also included a fair value gain of $24 million which resulted from the assumption of control of GloHealth.

Excluding the impact of U.S. tax reform discussed for the in-quarter results, the adjusted net earnings for the three months ended December 31, 2017 were $13 million compared to a net loss of $8 million in the previous quarter, primarily due to higher restructuring costs in the fourth quarter of 2017.

LIFECO CORPORATE OPERATING RESULTS

The Lifeco Corporate segment includes operating results for activities of Lifeco that are not associated with the major business units of the Company.

The net loss for the three months ended December 31, 2017 of $6 million decreased from a net loss of $12 million for the same quarter last year, primarily due to higher net investment income and lower operating expenses, partially offset by higher preferred share dividend payments.

For the twelve months ended December 31, 2017, the net loss of $27 million was comparable to the previous period.

The net loss for the three months ended December 31, 2017 of $6 million decreased from a net loss of $9 million for the previous quarter, primarily due to higher net investment income, lower operating expenses and lower preferred share dividend payments, partially offset by higher income taxes.



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RISK MANAGEMENT

OVERVIEW As a diverse financial services company, the effective management of risk is integral to the success of the Company’s business. The Company has a prudent and measured approach to risk management. This approach is built on a strong risk culture and is guided by an integrated Enterprise Risk Management (ERM) Framework.

The Company’s ERM Framework facilitates the alignment of business strategy with risk appetite, informs and improves the deployment of capital; and supports the identification, mitigation and management of exposure to possible operational surprises, losses and risks. The Company’s Risk Function is responsible for the Risk Appetite Framework (RAF), the supporting risk policies and risk limit structure, and provides independent risk oversight across the Company’s operations.

There are three main sections to this Risk Management disclosure: ERM Framework, Risk Management and Control Practices and Exposures and Sensitivities.

ENTERPRISE RISK MANAGEMENT FRAMEWORK The Company’s Board and Management Committees provide oversight of the ERM Framework which is comprised of five components: Risk Culture, Risk Governance, Risk Appetite Framework, Risk Processes and Risk Infrastructure.

RISK CULTURE Risk culture is defined as the system of values and behaviours which reflect the Company’s collective sense of responsibility to fulfill promises to policyholders and safeguard the Company’s financial strength and reputation while growing shareholder value. The risk strategy emphasizes the Company’s strong culture of managing risk, which is strengthened by the role of the Board of Directors and senior management. This reflects the Company’s commitment to placing the interests of its customers and the long-term strength of the Company at the centre of decision-making.

The Company’s culture emphasizes open communication, transparency and ethical behaviour.

RISK GOVERNANCE

Board of Directors The Board of Directors is ultimately responsible for the Company’s risk governance and associated risk policies and annually approves the ERM Policy, RAF and Own Risk and Solvency Assessment (ORSA). The Board considers advice from the Risk Committee of the Board of Directors on risk oversight matters.

The Board of Directors addresses risk management and governance primarily through its Risk Committee, although other Board Committees also have responsibilities in connection with risk management. The Risk Committee’s responsibilities include:

• Review and oversight of the ERM Policy and RAF;

• Review, approval and oversight of the credit, market, insurance, operational and other key risk policies;

• Approval of the risk limit framework, associated risk limits and monitoring adherence to those limits;

• Approval of the organizational structure and resources of the risk management oversight function;

• Evaluation of the Company’s risk culture;

• Discussion of the risks in aggregate and by type of risk;

• Review of the Risk Function reports including stress testing and Dynamic Capital Adequacy Testing (DCAT);

• Review of the Own Risk and Solvency Assessment (ORSA);

• Review of the risk impact of business strategies, capital plans, financial plans and the new business initiatives;

• Review and assessment of the performance and compensation of the Company’s Chief Risk Officer (CRO) and provision of input on succession planning;

• Periodic consideration and input regarding the relationships between risk and compensation; and

• Review and assessment of the effectiveness of risk management across the Company including processes to ensure effective identification, measurement, management, monitoring and reporting on significant current and emerging risks.

The Risk Committee is required to meet, at least annually, with the Audit Committee and with the Company’s Chief Internal Auditor. Members of the Board Risk Committee are independent of management.

The mandate of the Board, which it discharges directly or through one of its Committees, is to supervise the management of the business and affairs of the Company.

Audit Committee – The primary mandate of the Audit Committee is to review the financial statements of the Company and public disclosure documents containing financial information and to report on such review to the Board, to be satisfied that adequate procedures are in place for the review of the Company’s public disclosure documents that contain financial information and to oversee the work and review the independence of the external auditor. The Audit Committee meets with the Risk Committee annually.



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Conduct Review Committee – The primary mandate of the Conduct Review Committee is to require management to establish satisfactory procedures for the consideration and approval of transactions with related parties and to review and, if deemed appropriate, to approve related party transactions, and to recommend to the Board a code of conduct applicable to directors, officers and employees of the Company.

Executive Committee – The primary mandate of the Executive Committee is to approve strategic goals and objectives for the Company, to review and approve, and to monitor the implementation of, the Company’s annual business, financial and capital plans, to review the risks associated with the Company’s diverse businesses, to approve disclosure policies, and to supervise the management of the business and affairs of the Company when the Board is not in session.

Governance and Nominating Committee – The primary mandate of the Governance and Nominating Committee is to oversee the Company’s approach to governance matters, to recommend to the Board effective corporate governance policies and processes, to assess the effectiveness of the Board of Directors, of Committees of the Board and of the Directors, and to recommend to the Board candidates for election as directors and candidates for appointment to Board Committees.

Human Resources Committee – The primary mandate of the Human Resources Committee is to support the Board in its oversight of compensation, talent management and succession planning. This includes the responsibility to approve compensation policies, to review the designs of major compensation programs, to approve compensation arrangements for senior executives of the Company and to recommend to the Board compensation arrangements for the Directors and for the President and Chief Executive Officer. The mandate also includes the responsibility to review succession plans for the President and Chief Executive Officer and other senior executives, to review talent management programs and initiatives and to review the leadership capabilities required to support the advancement of the Company’s strategic objectives. The Human Resources Committee meets with the Risk Committee annually.

Investment Committee – The primary mandate of the Investment Committee is to oversee the Company’s global investment strategy and activities, including reviewing and approving the Company’s investment policy and related investment procedures, guidelines and limits. It also monitors the Company’s compliance with the investment policy and ensures that it aligns with the Company’s ERM Policy and RAF. The mandate also includes reviewing, approving and monitoring progress against the Company’s annual investment plan, reviewing and approving the authority, mandate and effectiveness of the Company’s Chief Investment Officer, and reviewing emerging risks, market trends and performance, investment regulatory issues and any other matters relevant to the oversight of the Company’s global investment function.

Senior Management Risk Committees The Executive Risk Management Committee (ERMC) is the primary senior management committee that oversees all forms of risk and the implementation of the ERM Framework. The members are the CEO, the heads of each major Business Segment and the heads of the key oversight functions. The Board Risk Committee delegates authority for the approval and management of lower level risk limits to the ERMC. The Company’s Chief Risk Officer (CRO) leads the Risk Function and chairs the ERMC. Its responsibilities include reviewing compliance with the RAF, risk policies and risk standards. It also assesses the risk impact of business strategies, capital and financial plans, and material initiatives. The following four enterprise-wide sub-committees, chaired by the Risk Function, report into the ERMC to provide advice and recommendations on each of the key risk categories:

• Market Risk Committee

• Credit Risk Management Committee

• Insurance Risk Committee

• Operational Risk Committee

The oversight responsibilities of the above committees include identification, measurement, management, monitoring and reporting of their respective risks.

Accountabilities The Company has adopted a three lines of defense model in order to clearly segregate risk management and risk oversight responsibilities and applies the ERM Framework rigorously across the enterprise:

• First Line: Business units and support functions, including Investment Management, Human Resources, Information Services and Legal, have primary responsibility for identifying and managing the risks inherent in the products, activities, processes and systems for which they are accountable;

• Second Line: The Risk Function has overall responsibility for independent risk oversight and governance through developing and implementing the ERM framework. In this role, the Risk Function receives support from other control functions including Actuarial, Compliance and Finance; and

• Third Line: Internal Audit is responsible for independently assessing the adequacy of the design and operational effectiveness of the Company’s ERM Framework.

The Company’s CRO reports directly, both to the President and CEO and to the Board Risk Committee. The CRO is responsible for ensuring that the Risk Function is appropriately resourced and effective in executing its responsibilities. The accountabilities of the CRO include reporting on compliance with the ERM Policy and RAF as well as for escalating matters that require attention.

Regional ERMCs monitor all risk categories for businesses and operations within their respective business segments. Risk resources and capabilities are aligned with the Company’s business segments and operating units. Further support is provided by centrally based risk areas of expertise.



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RISK APPETITE FRAMEWORK The Company has an articulated Risk Appetite Framework (RAF) that includes a risk strategy and a qualitative Risk Appetite Statement that reflects the aggregate levels and types of risk that the Company is willing to accept in order to achieve its business objectives. The Company’s Risk Appetite Statement has four key components:

• Strong Capital Position: the Company maintains a strong balance sheet and does not take risks that would jeopardize its financial strength;

• Mitigated Earnings Volatility: the Company seeks to avoid substantial earnings shortfalls by ensuring appropriate diversification and limiting exposure to more volatile lines of business;

• Strong Liquidity: the Company maintains a high quality, diversified investment portfolio with sufficient liquidity to meet the demands of policyholder and financing obligations under normal and stressed conditions; and

• Maintenance of the Company’s Reputation: the Company considers, across all business activities and operations, the potential impact on its reputation.

A comprehensive structure of risk limits and controls is in place across the Company. Enterprise risk limits are further broken down by business unit and risk type. The limit structure is accompanied by comprehensive limit approval and breach management processes to ensure effective governance and oversight of the RAF.

The Company and its subsidiaries are subject to various regulatory regimes. The capital requirements under these regulatory capital regimes are reflected in the development of risk limits.

RISK STRATEGY The Company’s business strategy is aligned with its risk strategy and risk appetite. The risk strategy supports the Company’s main objectives to keep its commitments while growing shareholder value. The risk strategy requires: diversification of products and services, customers, distribution channels and geographies; a prudent and measured approach to risk-taking; conducting business with high standards of integrity; and generating consistent returns.

RISK PROCESSES

Risk processes follow a cycle of: identification, measurement, management, monitoring and reporting and are designed to ensure both current and emerging risks are assessed against the RAF.

Risk Identification, Measurement and Management Risk identification requires the structured analysis of the current and emerging risks facing the Company, so that they are understood and appropriately controlled. Processes are designed to ensure risks are considered, assessed, prioritized and addressed in all business initiatives and changes, including investment strategies, product design, significant transactions, annual planning and budgeting as well as potential business acquisitions and disposals.

Risk measurement provides the means to quantify and assess the Company’s risk profile and monitor the profile against the risk limits. Any material new business development or change in strategy warrants an independent assessment of risk and potential impact on reputation, in addition to measurement of the impact on capital, earnings and liquidity. Stress and scenario testing is used to evaluate risk exposures against the risk appetite. Sensitivity testing of key risks is used to evaluate the impact of risk exposures independent of other risks. Scenario testing is used to evaluate the combined impact of multiple risk exposures.

The Company has processes in place to identify risk exposures on an ongoing basis and, where appropriate, develops mitigation strategies to proactively manage these risks. Effective risk management requires the selection and implementation of approaches to accept, reject, transfer, avoid or control risk, including mitigation plans. It is based on a control framework that includes risk limits, key risk indicators and stress and scenario testing to ensure appropriate escalation and resolution of potential issues in a timely manner.

A key responsibility of the Risk Function is to ensure that the risk appetite is applied consistently across the Company and that limits are established to ensure that risk exposures comply with the risk appetite and Company-wide risk policies.

Risk Monitoring, Reporting and Escalation Risk monitoring relates to ongoing oversight and tracking of the Company’s risk exposures, ensuring that the risk management approaches in place remain effective. Monitoring may also identify risk-taking opportunities.

Risk reporting presents an accurate and timely picture of existing and emerging risk issues and exposures as well as their potential impact on business activities. Reporting highlights the risk profile relative to the risk appetite and associated risk limits.

A clearly defined escalation protocol has been established in respect of breaches of the RAF, risk policies, operating standards and guidelines. Remediation plans are reviewed by the Risk Function and escalated to designated management and Board committees.

RISK INFRASTRUCTURE The Company’s organization and infrastructure is established to ensure resources and risk systems required to support risk policies, operating standards and guidelines and processes are adequate and appropriate.

The Company has codified its procedures and operations related to risk management and oversight requirements in a set of guiding documents composed of risk policies, operating standards and associated guidelines. This comprehensive documentation framework provides detailed and effective guidance across all risk management processes. These documents enable a consistent approach to risk management and oversight across the Company’s businesses and are reviewed and approved regularly, in accordance with an established authority hierarchy, by the Board of Directors, the Board Risk Committee or a senior management committee. Similar policy structures have been developed and are maintained by each region.



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RISK MANAGEMENT AND CONTROL PRACTICES The Company’s risk profile is impacted by a variety of risks and its risk management and independent oversight processes are tailored to the type, volatility and magnitude of each risk. The Company has defined specific risk management and oversight processes for risks, broadly grouped in the following categories:

1. Market and Liquidity Risk

2. Credit Risk

3. Insurance Risk

4. Operational Risk

5. Conduct Risk

6. Strategic Risk

MARKET AND LIQUIDITY RISK

RISK DESCRIPTION Market risk is the risk of loss arising from potential changes in market rates and prices and from changes associated with future cash flows of the Company’s business activities. Market risks include interest rate, equity market, real estate and foreign exchange rate risks. Liquidity risk is the risk that the Company cannot meet cash and collateral commitments as they fall due.

MARKET AND LIQUIDITY RISK MANAGEMENT The Company’s Market Risk Policy sets out the market risk management framework and provides the principles for market risk management. This policy is supported by a number of other policies and guidelines that provide detailed guidance.

An effective governance structure has been implemented for the management of market risk. The business units, including Investment Management, are the ultimate owners of market risk and as such have primary responsibility for the identification, measurement, management, monitoring and reporting of market risk. The Company has established a senior management committee to provide oversight of market risk, which includes completing reviews and making recommendations regarding risk limits, the risk policy and associated compliance, breach management and mitigation pertaining to market risk. Each region has established oversight committees and operating committees to help manage market risk within the region. The Company has developed risk limits, key risk indicators and measures to support the management of market and liquidity risk in compliance with the Company’s RAF.

The Company is willing to accept market risk and liquidity risk in certain circumstances as a consequence of its business model and seeks to mitigate the risk wherever practical, for example through the immunization of the assets and liabilities, either directly or indirectly (e.g. using derivatives). To reduce market risk, the Company uses a dynamic hedging program associated with segregated fund and variable annuity guarantees. This is supplemented by a general macro equity hedging program.

Risks and risk management activities associated with the broad market and liquidity risk categories are detailed below.

Interest Rate RiskInterest rate and spread risk is the risk of loss resulting from the effect of the volatility and uncertainty of future interest rates and credit spreads on asset cash flows relative to liability cash flows and on assets backing surplus. The Company’s principal exposure to interest rate risk arises from certain general fund and segregated fund products. The Company’s Asset Liability Management (ALM) strategy has been designed to mitigate interest rate risks associated with general fund products, with close matching of asset cash flows and insurance and investment contract obligations. Products with similar risk characteristics are grouped together to ensure an effective aggregation and management of the Company’s ALM positions. Asset portfolios backing liabilities are segmented to align with the duration and other characteristics (e.g. liquidity) of contract liabilities.

Crediting rates within general fund products are set prudently and a significant proportion of the Company’s portfolio of crediting rate products includes pass-through features, which allow for the risk and returns to be shared with policyholders. Asset management and related products permit redemptions; however, the Company attempts to mitigate this risk by establishing long-term customer relationships, built on a strategic customer focus and an emphasis on delivering strong fund performance.

The Company has established dynamic hedging programs to hedge interest rate risk sensitivity associated with segregated fund and variable annuity guarantees. The hedging programs are designed to offset changes in the economic value of liabilities through the use of derivative instruments. The Company’s approach to dynamic hedging of interest rate risk principally involves transacting in interest rate swaps. The hedge asset portfolios are dynamically rebalanced within approved thresholds and rebalancing criteria.

Where the Company’s insurance and investment products have benefit or expense payments that are dependent on inflation (e.g. inflation-indexed annuities, pensions and disability claims), the Company generally invests in real return instruments to mitigate changes in the real dollar liability cash flows. Some protection against changes in the inflation index can be 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.

Equity Risk Equity risk is the risk of loss resulting from the sensitivity of the values of assets, liabilities, financial instruments and fee revenue to changes in the level or in the volatility of prices of equity markets. The Company’s principal exposure to equity risk arises from segregated funds and fee income associated with the Company’s assets under management. Approved investment and risk policies also provide for general fund investments in equity markets within defined limits.

The Company has established dynamic hedging programs to hedge equity risk sensitivity associated with segregated fund and variable annuity guarantees. The hedging programs are designed to mitigate exposure to changes in the economic value of these liabilities through the use of derivative instruments. The Company’s approach to dynamic hedging of equity risk principally involves the short selling of equity index futures. The hedge asset portfolios are dynamically rebalanced within approved thresholds and rebalancing criteria. The Company’s product-level hedging programs are supplemented by a general macro hedging strategy.



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For certain very long-dated liabilities it is not practical or efficient to closely match liability cash flows with fixed-income investments. Certain long-dated asset portfolios therefore target an investment return sufficient to meet liability cash flows over the longer term. These segments are partially backed by a diversified portfolio of non-fixed income investments, including equity and real estate investments, in addition to long dated fixed-income instruments that provide duration.

The Company has established a macro equity hedging program. The objective of the program is to reduce the Company’s exposure to equity tail-risk and to maintain overall capital sensitivity to equity market movements within Board approved risk appetite limits. The program is designed to hedge a portion of the Company’s capital sensitivity due to movements in equity markets arising from sources outside of dynamically hedged segregated fund and variable annuity exposures.

Foreign Exchange Risk Foreign exchange risk is the risk of loss due to changes in currency exchange rates. The Company’s foreign exchange investment and risk management policies and practices are to match the currency of the Company’s general fund investments with the currency of the underlying insurance and investment contract liabilities. To enhance portfolio diversification and improve asset liability matching, the Company may use foreign exchange derivatives to mitigate currency exchange risk to the extent this is practical through the use of forward contracts and swaps.

The Company has net investments in foreign operations. As a result, the Company’s revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to fluctuations due to the movement of the Canadian dollar against these currencies. Such fluctuations affect the Company’s financial results. The Company has exposures to the U.S. dollar resulting from the operations of Great-West Financial and Putnam in the United States segment and the Reinsurance business unit within the Europe segment; and to the British pound and the euro resulting from operations of business units within the Europe segment operating in the U.K., the Isle of Man, Ireland and Germany.

In accordance with IFRS, foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in accumulated other comprehensive income (loss). Strengthening or weakening of the Canadian dollar spot rate compared to the U.S. dollar, British pound and euro spot rates impacts the Company’s total share capital and surplus. Correspondingly, the Company’s book value per share and capital ratios monitored by rating agencies are also impacted.

• A 5% appreciation (depreciation) of the average exchange rate of the Canadian dollar to each of the British pound and euro would decrease (increase) net earnings in 2017 by $25 million and $39 million, respectively. A 5% appreciation (depreciation) of the average exchange rate of the Canadian dollar to the U.S. dollar would decrease (increase) net losses by $5 million.

• A 5% appreciation (depreciation) of the Canadian dollar spot rate compared to each of the U.S. dollar, British pound and euro spot rates would decrease (increase) the unrealized foreign currency translation losses, including the impact of instruments designated as hedges of net investments on foreign operations, in accumulated other comprehensive income (loss) of shareholders’ equity by approximately $320 million, $310 million and $110 million, respectively, as at December 31, 2017.

Management may use forward foreign currency contracts and foreign denominated debt to mitigate the volatility arising from the movement of rates as they impact the translation of net investments in foreign operations. The Company uses non-IFRS financial measures such as constant currency calculations to assist in communicating the effect of currency translation fluctuation on financial results.

Liquidity Risk Liquidity risk arises from the Company’s inability to generate the necessary funds to meet its on-and-off balance sheet obligations as they come due.

The Company’s liquidity risk framework and associated limits are designed to ensure that the Company can meet cash and collateral commitments as they fall due, both on an expected basis and under a severe liquidity stress.

In the normal course of certain Reinsurance business, the Company provides Letters of Credit (LOCs) to other parties, or beneficiaries. A beneficiary will typically hold a LOC as collateral in order to secure statutory credit for insurance and investment contract liabilities ceded to or amounts due from the Company.

The Company may be required to seek collateral alternatives if it is unable to renew existing LOCs at maturity. The Company monitors its use of LOCs on a regular basis and assesses the ongoing availability of these and alternative forms of operating credit. The Company has contractual rights to reduce the amount of LOCs issued to the LOC beneficiaries for certain reinsurance treaties. The Company staggers the maturities of LOCs to reduce the renewal risk.

Liquidity December 31

2017 2016

Cash, cash equivalents and short-term bonds $ 7,309 $ 7,874

Other liquid assets and marketable securities Government bonds 36,566 36,873 Corporate bonds 44,573 43,044 Common/Preferred shares (public) 8,465 7,989 Residential mortgages – insured 4,205 3,652

93,809 91,558

Total $ 101,118 $ 99,432

Cashable liability characteristics December 31

2017 2016

Surrenderable insurance and investment contract liabilities At market value $ 19,886 $ 20,369 At book value 51,712 49,751

Total $ 71,598 $ 70,120

The carrying value of the Company’s liquid assets and marketable securities is approximately $101.1 billion or 1.4 times the Company’s surrenderable insurance and investment contract liabilities. The Company believes that it holds adequate and appropriate liquid assets to meet anticipated cash flow requirements as well as to meet cash flow needs under a severe liquidity stress.



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The majority of liquid assets and other marketable securities comprise fixed-income securities whose value is inversely related to interest rates. Consequently, a significant rise in prevailing interest rates would result in a decrease in the value of this pool of liquid assets. Also, a high interest rate environment may encourage holders of certain types of policies to terminate their policies, thereby placing demands on the Company’s liquidity position.

For a further description of the Company’s financial instrument risk management policies, refer to note 7 to the Company’s annual consolidated financial statements for the period ended December 31, 2017.

CREDIT RISK

RISK DESCRIPTION Credit risk is the risk of loss arising from an obligor’s potential inability or unwillingness to fully meet its contractual obligations. Exposure to credit risk occurs any time funds are extended, committed or invested through actual or implied contractual agreements. The Company is exposed to the credit risk of issuers of securities held in the Company’s general fund and pension plans (e.g. bonds, mortgages, structured securities), and to the credit risk of reinsurance and derivative counterparties.

Credit exposure resulting from the purchase of fixed-income securities, which are primarily used to support policyholder liabilities, is considered to be a core business risk that is appropriately factored into the Company’s risk appetite. The Company manages financial contracts with counterparties which may result in counterparty credit risk related to the mitigation of insurance risk, through reinsurance agreements, and market risk, through derivative contracts. Credit risk arising from both sources is included in the Company’s measurement of its credit risk profile.

CREDIT RISK MANAGEMENT The Company’s credit risk management framework focuses on minimizing undue concentration to issuers, connected companies, industries or individual geographies by emphasizing diversification. Diversification is achieved through the establishment of appropriate limits and transaction approval authority protocols. The Company’s approach to credit risk management includes the continuous review of its existing risk profile relative to the RAF as well as to the projection of potential changes in the risk profile under stress scenarios.

Effective governance of credit risk management requires the involvement of dedicated senior management committees, experienced credit risk personnel, and with the guidance of appropriate credit risk policies, standards and processes. For credit risk, the Investment Committee of the Board of Directors (Investment Committee) is responsible for the approval of investment decisions of significant size or level of complexity, and oversight of the Company’s global investment strategy, including compliance with investment limits and policies as well as breach management. Additionally, the Investment Committee reviews the Company’s investment policies, procedures, guidelines, and corresponding limits to ensure that investment decisions are in compliance with the Company’s RAF. The Risk Committee advises the Board of Directors on credit risk oversight matters and approves and monitors compliance with credit risk policies and limits. The Risk Committee also provides oversight of the Credit Risk Management Policy and related processes, and is responsible for ensuring compliance with the Company’s RAF.

The Investment Committee and Risk Committee are supported by senior management committees. The Global Management Investment Review Committee (GMIRC) and the Management Investment Review Committees (MIRCs) for each regional business segment review and approve new investments above the transaction approval authority delegated to management and manage credit risk across invested assets and counterparties. The Credit Risk Management Committee (CRMC), is the ERMC sub-committee responsible for providing global oversight of credit risk management activities, including credit risk limit approval and breach management processes, and credit risk policy compliance.

The Company has established business-segment specific Investment and Lending Policies, including investment limits for each asset class, which are approved by the Investment Committee. These policies and limits are complemented by the Credit Risk Policy which describes credit risk management processes and identifies the role of the Risk Function in the oversight of credit risk, including the setting and monitoring of aggregate risk limits, and the approval and escalation of exceptions.

The Company identifies credit risk through an internal credit risk rating system which includes a detailed assessment of an obligor’s creditworthiness based on a thorough and objective analysis of business risk, financial profile, structural considerations and security characteristics including seniority and covenants. Credit risk ratings are expressed using a 22-point scale that is consistent with those used by external rating agencies. In accordance with the Company’s policies, internal credit risk ratings cannot be higher than the highest rating provided by certain independent ratings companies. The Risk Function reviews and approves the credit risk ratings assigned by Investment Management for all new investments, and reviews the appropriateness of ratings assigned to outstanding exposures.

The Risk Function assigns credit risk parameters (probabilities of default, rating transition rates, loss given defaults, exposures at default) to all credit exposures in order to measure the Company’s aggregate credit risk profile. In addition, the Risk Function establishes limits and processes, performs stress and scenario testing (using stochastically generated and deterministic scenarios) and assesses compliance with the limits established in the RAF. It regularly reports on the Company’s credit risk profile to executive management, the Board of Directors and various committees at enterprise, regional and legal entity levels.

Investment Management and the Risk Function are independently responsible for the monitoring of exposures relative to limits as well as for the management and escalation of risk limit breaches as they occur. The Investment Management Function is also responsible for the continuous monitoring of its portfolios for changes in credit outlook, and performs regular credit reviews of all relevant obligors and counterparties, based on a combination of bottom-up credit analysis and top-down views on the economy and assessment of industry and sub-sector outlooks. Watch Lists are also used at the regional business segment levels to plan and execute the relevant risk mitigation strategies.

The Risk Function oversees monitoring, breach management and escalation activities, and has developed risk limits, key risk indicators (KRIs) and risk budgets to act as early warnings against unacceptable levels of concentration and to support the management of credit risk limits in compliance with the Company’s RAF.



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Counterparty Risk Through reinsurance arrangements, the Company cedes insurance risk in order to mitigate insurance risk. Counterparties providing reinsurance to the Company are reviewed for financial soundness as part of an ongoing monitoring process. The minimum financial strength of reinsurers is outlined in the Reinsurance Risk Management Policy. The Company 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 arrangements where possible.

The Company uses derivatives for risk mitigation purposes. Derivative products are traded through exchanges or with counterparties approved by the Board of Directors or the Investment Committee. The Company seeks to mitigate derivative credit risk by setting rating based counterparty limits in its investment policies and through collateral arrangements where possible. In addition, the Company includes potential future exposure of derivatives in its measure of total exposure against single name limits.

INSURANCE RISK

RISK DESCRIPTION Insurance risk is the risk of loss resulting from adverse changes in experience associated with contractual promises and obligations made under insurance contracts. Insurance risk includes uncertainties around the ultimate amount of net cash flows (premiums, commissions, claims, payouts and related settlement expenses), the timing of the receipt and payment of these cash flows, as well as the impact of policyholder behaviour (e.g. lapses).

The Company identifies six broad categories of insurance risk, which may contribute to financial losses: mortality risk, morbidity risk, longevity risk, lapse risk, expense risk and property catastrophe risk. Mortality risk, morbidity risk and longevity risk are core business risks and the exchange of these risks into value is a core business activity. Lapse risk and expense risk associated with offering the core products are accepted as a consequence of the business model and mitigated where appropriate. Property catastrophe risk is a selectively accepted business risk which is constrained, actively managed and controlled within risk limits.

INSURANCE RISK MANAGEMENT Insurance products involve commitments by the insurer to provide services and financial obligations with coverage for extended periods of time. In order to provide insurance protection effectively, the insurer must design and price products so that the premiums received, and the investment income earned on those premiums, will be sufficient to pay future claims and expenses associated with the product. This requires the insurer, in pricing products and establishing insurance contract liabilities, to make assumptions regarding expected levels of income, claims and expenses and how policyholder behaviours and market risks might impact these assumptions. Insurance contract liability valuation requires regular updating of assumptions to reflect emerging experience. Insurance contract liabilities are established to fund future claims and include a provision for adverse deviation, set in accordance with professional actuarial standards.

An effective governance structure has been implemented for the management of insurance risk. Business units are the ultimate owners of insurance risk and as such have primary responsibility for the identification, measurement, management, monitoring and reporting of insurance risk. The Risk Function, supported by Corporate Actuarial, is primarily responsible for oversight of the insurance risk management framework. The Company has established the Insurance Risk Committee to provide oversight of insurance risk, which includes completing reviews and making recommendations regarding risk limits, the risk policy and associated compliance, breach management and mitigation pertaining to insurance risk. Each region has established oversight committees and operating committees to help manage insurance risk within the region.

The Company’s Insurance Risk Policy sets out the insurance risk management framework and provides the principles for insurance risk management. This policy is supported by a number of other policies and guidelines that provide detailed guidance, including:

• Product Design and Pricing Risk Management Policy and Reinsurance Risk Management Policy, which provide guidelines and standards for the product design and pricing risk management processes and reinsurance ceded risk management practices;

• Corporate Actuarial Valuation Policy, which provides documentation and control standards consistent with the valuation standards of the Canadian Institute of Actuaries; and

• Participating Account Management Policies and Participating Policyholder Dividend Policies, which govern the management of participating accounts and provide for the distribution of a portion of the earnings in the participating account as participating policyholder dividends.

The Risk Function in conjunction with Corporate Actuarial implements a number of processes to carry out its responsibility for oversight of insurance risk. It reviews the Insurance Risk Policy relative to current risk exposures and updates it as required. It reviews insurance risk management processes carried out by the business units, including product design and pricing, underwriting, claims adjudication, and reinsurance ceding, and provides challenge as required. The Risk Function works with the business units and other oversight functions to ensure that current and emerging insurance risks are identified and that appropriate action is taken if required. Insurance risk limits, risk budgets and key risk indicators are set to keep the insurance risk profile within the Company’s appetite for insurance risk and the Risk Function regularly monitors the insurance risk profile relative to these measures. Any breaches would be escalated as required and appropriate remediation would be implemented. The Risk Function performs stress testing and does analysis of insurance risks, including review of experience studies. It provides regular reporting on these activities to the business units, senior management, and risk oversight committees.

Risks and risk management activities associated with the broad insurance risk categories are detailed below.



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Mortality and Morbidity Risk Mortality risk is the risk of loss resulting from adverse changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance contract liabilities.

Morbidity risk is the risk of loss resulting from adverse changes in the level, trend, or volatility of disability, health, dental, critical illness and other sickness rates, where an increase in the incidence rate or a decrease in the disability recovery rate leads to an increase in the value of insurance contract liabilities.

There is a risk that the Company will mis-estimate the level of mortality or morbidity, or accept customers who generate worse mortality and morbidity experience than expected.

The Company employs the following practices to manage its mortality and morbidity risk:

• Research and analysis is done regularly to provide the basis for pricing and valuation assumptions to properly reflect the insurance and reinsurance risks in markets where the Company is active.

• Underwriting limits, practices and policies control the amount of risk exposure, the selection of risks insured for consistency with claims expectations and support the long-term sustainability of the Company.

• The insurance contract liabilities established to fund future claims include a provision for adverse deviation, set in accordance with professional standards. This margin is required to provide for the possibilities of mis-estimation of the best estimate and/or future deterioration in the best estimate assumptions.

• The Company sets and adheres to retention limits for mortality and morbidity risks. Aggregate risk is managed through a combination of reinsurance and capital market solutions to transfer the risk where appropriate.

• For Group life products, exposure to a concentrated mortality event due to concentration of risk in specific locations for example, could have an impact on financial results. To manage the risk, concentrations are monitored for new business and renewals. The Company may impose single-event limits on some group plans and declines to quote in localized areas where the aggregate risk is deemed excessive.

• Effective plan design and claims adjudication practices, for both morbidity and mortality risks are critical to the management of the risk. As an example, for Group healthcare products, inflation and utilization will influence the level of claims costs, which can be difficult to predict. The Company manages the impact of these and similar factors through plan designs that limit new costs and long-term price guarantees and include the ability to regularly re-price for emerging experience.

• The Company manages large blocks of business, which, in aggregate, are expected to result in relatively low statistical fluctuations in any given period. For some policies, these risks are shared with the policyholder through adjustments to future policyholder charges or in the case of participating policies through future changes in policyholder dividends.

Longevity Risk Longevity risk is the risk of loss resulting from adverse changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance contract liabilities. Annuities and some segregated fund products with Guaranteed Minimum Withdrawal Benefits are priced and valued to reflect the life expectancy of the annuitant. There is a risk that annuitants could live longer than was estimated by the Company, which would increase the value of the associated insurance contract liabilities.

Business is priced using mortality assumptions which take into account recent Company and industry experience and the latest research on expected future trends in mortality.

Aggregate risk is managed through a combination of reinsurance and capital market solutions to transfer the risk as appropriate. The Company has processes in place to verify annuitants’ eligibility for continued income benefits. These processes are designed to ensure annuity payments accrue to those contractually entitled to receive them and help ensure mortality data used to develop pricing and valuation assumptions is as complete as possible.

Lapse Risk Lapse risk is the risk of loss resulting from adverse changes in the level or volatility of the rates of policy lapses, terminations, renewals and/or surrenders.

Many products are priced and valued to reflect the expected duration of contracts. There is a risk that the contract may be terminated before expenses can be recovered, to the extent that higher costs are incurred in early contract years. Risk also exists where the contract is terminated later than assumed, on certain long-term level premium products where costs increase by age.

Business is priced using policy termination assumptions which take into account product designs and policyholder options, recent Company and industry experience and the latest research on expected future trends. Assumptions are reviewed regularly and are updated for new policies as necessary.

The Company also incorporates early surrender charges into certain contracts and incorporates commission chargebacks in its distribution agreements to reduce unrecovered expenses.

Policyholder taxation rules in many jurisdictions help encourage the retention of insurance coverage.

Expense Risk Expense risk is the risk of loss resulting from adverse variability of expenses incurred with fee-for-service business or in servicing and maintaining insurance, savings or reinsurance contracts, including direct expenses and allocations of overhead costs.

Expense management programs are regularly monitored to control unit costs while maintaining effective service delivery.



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Property Catastrophe Risk Property catastrophe risk is the risk of loss resulting from adverse changes in property damage experience and is mainly related to extreme or catastrophic events.

The reinsurance business in particular has exposure to natural catastrophic events that result in property damage. As a retrocessionaire for property catastrophe risk, the Company generally participates at more remote event-loss exposures than primary carriers and reinsurers. Generally, an event of significant size must occur prior to the Company incurring a claim. The Company limits the total maximum claim amount under all property catastrophe contracts. The Company monitors cedant companies’ claims experience and research from third party expert risk models on an ongoing basis and incorporates this information in pricing models to ensure that the premium is adequate for the risk undertaken.

OPERATIONAL RISK

RISK DESCRIPTION Operational Risk is the risk of loss arising from potential problems relating to internal processes, people and systems or from external events. Operational risk can result from either normal day-to-day operations or a specific unanticipated event. Operational risks include legal and regulatory, human resources, infrastructure, process, fraud and supplier risks. In addition to operational risks, the Company also manages reputational risk, which can emerge across many businesses and risk types; therefore, reputational considerations are incorporated within each aspect of the Company’s business and risk management practices.

OPERATIONAL RISK MANAGEMENT While operational risks can be mitigated and managed, they remain an inherent feature of the business model, as multiple processes, systems, and stakeholders are required to interact across the enterprise on an ongoing basis. The Company actively manages operational risk across the enterprise in order to maintain a strong reputation and standing, maintain financial strength, protect customers and the Company’s value. On-going engagement of businesses and support functions across the enterprise through robust training and communications is regularly undertaken for identifying, assessing and mitigating operational risk issues.

Operational Risk Management governance and oversight reflects a combined effort between business units and oversight functions. This combined effort is particularly critical for management of operational risk, and it is a key factor for ensuring the Company remains within its Risk Appetite. The Risk Function is responsible for the development of operational risk management policies and operating standards as well as overseeing operational risk management activities performed in the first line of defense. The Operational Risk Committee has the primary mandate to provide risk oversight for Operational Risk across the enterprise. In addition, each regional business segment has established operating committees to oversee operational risk management within their business.

The Company has an Operational Risk Policy, that is supported by standards and guidelines that relate to specialized functions, detailing practices related to stress testing, modeling, fraud, risk data aggregation and risk reporting, regulatory and information technology risk management. The Company implements controls to manage operational risk through integrated policies, procedures, processes and practices, with consideration given to

the cost/benefit trade-off. Processes and controls are monitored and refined by the business areas and periodically reviewed by the Company’s Internal Audit department. Financial reporting processes and controls are further examined by external auditors.

The Company also manages operational risks through the corporate insurance program which mitigates a portion of the operational risk exposure by purchasing insurance coverage that provides protection against unexpected material losses resulting from events such as property loss or damage and liability exposures. As well, the Company purchases insurance to satisfy legal requirements and/or contractual obligations. The nature and amount of insurance protection purchased is assessed with regard to the Company’s risk profile, risk appetite and tolerance for the associated risks.

The Company employs a combination of operational risk management methods including risk and control assessments, internal control factors and risk events analyses. For the identification of operational risks, the Company utilizes Risk and Control Assessments which systematically identify and assess potential operational risks and associated controls. Internal and external operational risk events are analyzed to identify root causes and provide insights into potential new operational risks that could impact the Company. In addition, scenario analysis is employed to identify and quantify potential severe operational risk exposures, while key risk indicators, risk appetite preferences, and other processes are leveraged to measure, manage and monitor operational risks.

The Risk Function monitors the status of actions being undertaken to remediate risks to ensure that risk exposures are mitigated in a timely manner. Processes are in place to escalate significant matters to senior management to inform and enable management to take appropriate action when needed. The Risk Function regularly reports on the Company’s operational risk profile to executive management, the Board of Directors and various committees at enterprise, regional and legal entity levels.

Key operational risks and the Company’s approach to managing them are outlined below.

Legal and Regulatory Risk Legal and regulatory risks arise from non-compliance with specific local or international rules, laws, and regulations, prescribed practices, or ethical standards as well as civil or criminal litigation against the Company. As a multi-national company, the Company and certain of its subsidiaries are subject to extensive legal and regulatory requirements in Canada, the U.S., the U.K., Ireland and other jurisdictions. These requirements cover most aspects of the Company’s operations including capital adequacy, liquidity and solvency, investments, the sale and marketing of insurance and annuity products, the business conduct of insurers, asset managers and investment advisors as well as reinsurance processes. Material changes in the legal or regulatory framework or the failure to comply with legal and regulatory requirements could have a material adverse effect on the Company.

Legal and Regulatory risk is managed through coordination between first and second line of defense functions. The Company records, manages and monitors the regulatory compliance environment closely, leveraging the subject matter expertise of both local and enterprise-wide Compliance and Legal stakeholders and reporting on emerging changes that would have significant impact on the Company’s operations or business.



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Human Resources Risk Human Resources risks can arise from an inability to attract, retain, train and develop the right talent, ineffective governance practices or legal action related to discrimination, and can impact the ability of the Company to meet its business objectives. The Company maintains a highly skilled workforce that is reflective of the diverse cultures and practices of the countries in which the Company operates. Competitive compensation programs, succession planning, talent management and employee engagement processes, are in place to manage these risks and support a high performance culture.

Infrastructure RiskInfrastructure Risk arises from reduced or non-availability of any aspect of a fully functioning business environment. This includes corporate facilities, physical assets, human resources and/or technology (technology assets, systems, applications, cloud computing), security (logical, physical and cyber), failures in license management and insufficient software/application support.

The ability to consistently and reliably obtain securities pricing information, accurately process client transactions and provide reports and other customer services is essential to the Company’s operations. A failure of any of these services could have an adverse effect on the Company’s results of operations and financial condition and could lead to loss of client confidence, breach of regulatory requirements, harm to the Company’s reputation, exposure to disciplinary action and liability to the Company’s customers.

The Company maintains a resilient and secure environment by investing in and managing infrastructure that is sustainable and effective in meeting the Company’s needs for a fully functioning and secure business operation that protects assets and stakeholder value. Infrastructure risk management programs include strong business continuity capabilities across the enterprise to manage incidents or outages and the recovery of critical functions in the event of a disaster. In addition, security measures are designed to deny unauthorized access to facilities, equipment and resources, and to protect personnel and property from damage or harm (such as espionage, theft or terrorist attacks) and events that could cause serious losses or damage.

Technology and Cyber Risk Technology and Cyber Risk arises from a purposeful or accidental event related to the use of technology. It includes the risk of cyber-attack that leads to unplanned outages, unauthorized access, or unplanned disclosure of confidential or restricted information. Technology risk also includes the risk of a deterioration in the reliability and availability of internal, customer-facing, or vendor-supported applications, infrastructure systems and/or services.

Technology remains a critical component of the Company’s business operations and is also central to the Company’s customer-focused and digital strategies. The Company continues to face heightened technology and cyber risks due to the evolving external threat environment, the advancement in techniques used in cyber-attacks and the nature of information entrusted to the Company by clients. Such cyber-attacks include advanced-persistent threats that involve unauthorized parties attempting to gain undetected access to the Information Technology environment and maintain access over an extended period of time, ransomware attacks that attempt to limit or prevent users from accessing their devices by locking or encrypting files and systems while demanding ransom, and distributed denial of service attacks that are intended to disrupt online applications and services.

The Company’s strategy and approach to managing technology and cyber risks includes a comprehensive set of policies that govern the technology environment and set high standards related to information security and the use of technology, including;

• a risk averse approach to the design and ongoing management of the technology environment;

• the use of multiple layers of technologies that are designed to prevent unauthorized access, ransomware attacks, distributed denial of service and other cyber-attacks;

• coordinated global and regional information security offices that gather threat intelligence, detect, monitor and respond to security events and conduct regular threat and vulnerability risk assessments;

• oversight, review and challenge of the approach taken to mitigate technology and cyber risks by the Information Services Risk Management team, an independent group that acts as the second line of defense; and

• regular cyber security awareness sessions and mandatory cyber security training for all employees.

Process Risk Inadequate or failed business processes can adversely impact the Company’s financial results, relationships with customers and reputation. Process risk includes risks arising from significant change initiatives such as business operations changes, major systems implementation, new product introductions and leadership changes, as well as core business operational activities. Process risk also includes risk associated with data aggregation and reporting, and model development and use.

Risk management seeks to ensure strategic alignment and congruency in all business activities, including change initiatives and business-as-usual activities, with the Company’s operational risk appetite and considers the potential impact on the Company’s reputation. The Company monitors change initiatives to ensure that risks are appropriately mitigated and benefits are realized. Core business operational activities have quality control measures in place. Robust processes are in place for the management and oversight of model risk. Further, the Company seeks to control processes across the value chain through automation, standardization and process improvements to prevent or reduce operational losses.



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Fraud RiskThe external fraud environment continues to intensify for financial institutions, as increasingly sophisticated methods of organized fraud and cyber fraud are employed. Fraud can result in a financial loss or reputational impact to the Company and have other impacts that are detrimental to customers and other stakeholders.

The Company manages fraud through a combined focus on prevention, detection and response. The Company promotes a culture of honesty, integrity, transparency and fairness in its internal operations and further manages fiduciary responsibilities through the Company’s Fraud Risk Management Policy and Code of Conduct. The Company maintains a strong set of controls designed to prevent fraud and employs various methods to detect fraud. A fraud response plan is in place to deal with events through a coordinated investigative strategy to ensure stakeholders and the interests of the Company are protected.

Supplier Risk The Company strategically engages suppliers to maintain cost efficiency, to free internal resources and capital and to utilize skills, expertise and resources not otherwise available to the Company. The Company’s profitability or reputation could be negatively impacted if suppliers do not meet Company standards for performance. Suppliers that do not meet the Company’s standards for performance can have a negative impact on the Company’s financial results and reputation. To minimize this risk, the Company applies a supplier risk management program that provides effective oversight and monitoring throughout the entire supplier relationship. This program helps to ensure the arrangement, transactions and other interactions with suppliers meet standards for quality of service and protect the interests of the Company and its stakeholders.

CONDUCT RISK

RISK DESCRIPTION Conduct risk is the risk of unfair outcomes for customers as a result of inadequate or failed processes and/or inappropriate behaviours, offerings or interactions by the Company or its agents. Conduct risk may result in loss due to the cost of customer remediation, damage to reputation and/or regulatory fines.

CONDUCT RISK MANAGEMENT The Company manages conduct risk through a number of means including ensuring appropriate clarity of communications; applying product design, claims management and sales and advice processes that are focused on fair outcomes to customers; seeking customer feedback; maintaining proper controls and adhering to Board-approved policies and processes including its Code of Conduct. Conduct Risk is incorporated in risk management and compliance activities, including Risk and Control Assessments, internal events reporting, emerging risk assessments, and other measurement, monitoring and reporting activities.

STRATEGIC RISK

RISK DESCRIPTION Strategic risk arises as a result of failures of internal planning, ineffective strategic decision-making, major regulatory changes, macroeconomic or country risk events, or changes to the external environment manifesting over the medium to long term. In addition, strategic risk includes risks associated with the Company’s holding company structure, potential future acquisitions and ongoing access to product distribution.

STRATEGIC RISK MANAGEMENT The Company manages strategic risk through proactive engagement, industry representation and a rigorous strategic planning process. The Risk Function is engaged in the business planning cycle to ensure business strategies are in alignment with the Company’s Risk Appetite. The Company’s strategic plan is reviewed with the Board of Directors and Senior Management, with the Risk Function providing objective assessment of enterprise strategic risks and risk mitigation plans. Significant risks and opportunities are identified, and a review of the alignment with risk strategy and qualitative risk preferences is completed. Initiatives, including those related to new markets, distribution channels, product design and investments, are also subject to independent risk review.

Holding Company Structure Risk As a holding company, the Company’s ability to pay interest, dividends and other operating expenses and to meet its obligations generally depends upon receipt of sufficient funds from its principal subsidiaries and its ability to raise additional capital. In the event of the bankruptcy, liquidation or reorganization of any of these subsidiaries, insurance and investment contract liabilities of these subsidiaries will be completely provided for before any assets of such subsidiaries are made available for distribution to the Company; in addition, the other creditors of these subsidiaries will generally be entitled to the payment of their claims before any assets are made available for distribution to the Company except to the extent that the Company is recognized as a creditor of the relevant subsidiaries.

Any payment (including payment of interest and dividends) by the principal subsidiaries is subject to restrictions set forth in relevant insurance, securities, corporate and other laws and regulations which require that solvency and capital standards be maintained by Great-West Life, London Life, Canada Life, Great-West Financial, and their subsidiaries and certain subsidiaries of Putnam. There are considerable risks and benefits related to this structure.

Management closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company level. Additional liquidity is available through established lines of credit and the Company’s demonstrated ability to access capital markets for funds. Management actively monitors the regulatory laws and regulations at both the holding company and operating company levels to ensure ongoing compliance.



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Mergers and Acquisitions Risk From time-to-time, the Company and its subsidiaries evaluate existing companies, businesses, products and services, and such review could result in the Company or its subsidiaries acquiring or disposing of businesses. In the ordinary course of their operations, the Company and its subsidiaries consider and discuss with third parties the purchase or sale of companies, businesses or business segments. If effected, such transactions could be material to the Company in size or scope, and could result in changes in the value of the securities of the Company, including the common shares of the Company.

The Company undergoes extensive due diligence upon any consideration of acquiring or disposing of businesses or companies. In its consideration of strategic acquisitions, the Company may determine it to be prudent to hold additional capital for contingencies that may arise during the integration period following an acquisition.

Product Distribution Risk The Company’s ability to market its products is significantly dependent on its access to a network of distribution channels and intermediaries. These intermediaries generally offer their clients products in addition to, and in competition with, the Company’s products, and are not obligated to continue working with the Company. In addition, certain investors rely on consultants to advise them on the choice of advisor and the consultants may not always consider or recommend the Company. The loss of access to a distribution channel, the failure to maintain effective relationships with intermediaries or the failure to respond to changes in distribution channels could have a significant impact on the Company’s ability to generate sales.

Product distribution risk is managed by maintaining a broad network of distribution relationships, with products distributed through numerous broker-dealers, managing general agencies, financial planners, banks and other financial institutions.

Environmental RiskThe Company may experience direct or indirect financial, operational or reputational impact stemming from environmental risk events, which include environmental issues, regulatory enforcement or costs associated with changes in environmental laws and regulations. The Company endeavors to respect the environment and to take a balanced and environmentally sustainable approach to conducting business. The Company has established environmental policies and guidelines pertaining to the acquisition and ongoing management of investment properties, loans secured by real property and investments in equity and fixed-income securities. These policies are approved by the Board of Directors and are reviewed annually.

EXPOSURES AND SENSITIVITIES

INSURANCE AND INVESTMENT CONTRACT LIABILITIES The following illustrates the approximate impact to the Company’s earnings that would arise as a result of changes to management’s best estimate of certain assumptions used to determine the Company’s insurance contract liabilities.

Increase (decrease) in net earnings 2017 2016

Mortality – 2% increase $ (296) $ (281)Annuitant mortality – 2% decrease $ (446) $ (384)Morbidity – 5% adverse change $ (256) $ (242)Investment returns Parallel shift in yield curve 1% increase $ – $ – 1% decrease $ – $ – Change in interest rates 1% increase $ 150 $ 149 1% decrease $ (523) $ (491) Change in equity values 10% increase $ 48 $ 43 10% decrease $ (85) $ (50) Change in best estimate return assumptions for equities 1% increase $ 439 $ 407 1% decrease $ (470) $ (438)Expenses – 5% increase $ (127) $ (117)Policy termination and renewal – 10% adverse change $ (672) $ (608)

Although the Company takes steps to anticipate and minimize risks in general, unforeseen future events may have a negative impact on the Company’s business, financial condition and results of operations.



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ACCOUNTING POLICIES

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the reporting date, and the reported amounts of revenue and expenses during the reporting period. The results of the Company reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. The estimation of insurance contract liabilities relies upon investment credit ratings. The Company’s practice is to use third-party independent credit ratings where available.

The significant accounting estimates include the following:

Fair Value MeasurementFinancial and other instruments held by the Company include portfolio investments, various derivative financial instruments, debentures and other debt instruments.

Financial instrument carrying values reflect the liquidity of the markets and the liquidity premiums embedded in the market pricing methods the Company relies upon.

The Company’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy:

Level 1 inputs utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs 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.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Refer to note 8 in the Company’s December 31, 2017 annual consolidated financial statements for disclosure of the Company’s financial instruments fair value measurement by hierarchy level as at December 31, 2017.

Fair values for bonds classified as fair value through profit or loss or available-for-sale are determined using quoted market prices. Where prices are not quoted in a normally active market, fair values are determined by valuation models primarily using observable market data inputs. Market values for bonds and mortgages classified as loans and receivables are determined by discounting expected future cash flows using current market rates.

Fair values for public stocks are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for stocks for which there is no active market are determined by discounting expected future cash flows based on expected dividends and where market value cannot be measured reliably, fair value is estimated to be equal to cost. Fair values for investment properties are determined using independent appraisal services and include management adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals.

Investment impairmentInvestments are reviewed regularly on an individual basis to determine impairment status. The Company considers various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults and delinquency in payments of interest or principal. Investments are deemed to be impaired when there is no longer reasonable assurance of timely collection of the full amount of the principal and interest due. The 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 must be taken into consideration when evaluating impairment.

For impaired mortgages and bonds classified as loans and receivables, provisions are established or write-offs made to adjust the carrying value to the net realizable amount. Wherever possible, the fair value of collateral underlying the loans or observable market price is used to establish the estimated realizable value. For impaired available-for-sale bonds, recorded at fair value, the accumulated loss recorded in accumulated other comprehensive income (loss) is reclassified to net investment income. Impairments on available-for-sale debt instruments are reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bonds classified or designated as fair value through profit or loss are already recorded in income; therefore, a reduction due to impairment of these assets will be recorded in net investment income. As well, when determined to be impaired, interest is no longer accrued and previous interest accruals are reversed.



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Goodwill and intangibles impairment testingGoodwill and indefinite life intangible assets are tested for impairment annually or more frequently if events indicate that impairment may have occurred. Intangible assets that were previously impaired are reviewed at each reporting date for evidence of reversal. In the event that certain conditions have been met, the Company would be required to reverse the impairment charge or a portion thereof.

Goodwill and indefinite life intangible assets have been allocated to cash generating unit groupings, representing the lowest level that the assets are monitored for internal reporting purposes. Goodwill and indefinite life intangible assets are tested for impairment by comparing the carrying value of each cash generating unit grouping containing the assets to its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs of disposal and value-in-use, which is calculated using the present value of estimated future cash flows expected to be generated. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.

Insurance and investment contract liabilitiesInsurance and investment contract liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future benefit payments, policyholder dividends, commission and policy administrative expenses for all insurance and annuity policies in-force with the Company. The Appointed Actuaries of the Company’s subsidiaries are responsible for determining the amount of the liabilities to make appropriate provisions for the Company’s obligations to policyholders. The Appointed Actuaries determine the liabilities for insurance contracts using generally accepted actuarial practices, according to the standards established by the Canadian Institute of Actuaries. The valuation uses the Canadian Asset Liability Method (CALM). This method involves the projection of future events in order to determine the amount of assets that must be set aside currently to provide for all future obligations and involves a significant amount of judgment.

In the computation of insurance contract liabilities, valuation assumptions have been made regarding rates of mortality/morbidity, investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of mis-estimation and/or future deterioration in the best-estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness.

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.

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 the Company’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. Improvement scales for life insurance and annuitant mortality are updated periodically based on population and industry studies, product specific considerations, as well as professional guidance. In addition, appropriate provisions have been made for future mortality deterioration on term insurance. A 2% increase in the best estimate assumption would cause a decrease in net earnings of approximately $296 million.

Annuitant mortality is also studied regularly and the results used to modify established industry experience annuitant mortality tables. A 2% decrease in the best estimate assumption would cause a decrease in net earnings of approximately $446 million.

Morbidity – The Company uses industry developed experience tables modified to reflect emerging company experience. Both claim incidence and termination are monitored regularly and emerging experience is factored into the current valuation. For products for which morbidity is a significant assumption, a 5% decrease in best estimate termination assumptions for claim liabilities and a 5% increase in best-estimate incidence assumptions for active life liabilities would cause a decrease in net earnings of approximately $256 million.

Property and casualty reinsurance – Insurance contract liabilities for property and casualty reinsurance written by LRG 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 against expected assumptions for each reinsurance contract separately and at the portfolio level. If necessary, a more in depth analysis is undertaken of the cedant experience.

Investment returns – The assets which correspond to the different liability categories are segmented. For each segment, projected cash flows from the current assets and liabilities are used in CALM to determine insurance contract liabilities. Cash flows from assets are reduced to provide for asset default losses. Testing under several interest rate scenarios (including increasing and decreasing rates) is done to provide for reinvestment risk. The total provision for interest rates is sufficient to cover a broader or more severe set of risks than the minimum arising from the current Canadian Institute of Actuaries’ prescribed scenarios.



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The range of interest rates covered by these provisions is set in consideration of long-term historical results and is monitored quarterly with a full review annually. An immediate 1% parallel shift in the yield curve would not have a material impact on the Company’s view of the range of interest rates to be covered by the provisions. If sustained, however, the parallel shift could impact the Company’s range of scenarios covered.

The total provision for interest rates also considers the impact of the Canadian Institute of Actuaries’ prescribed scenarios.

• The effect of an immediate 1% parallel increase in the yield curve on the prescribed scenarios resulted in interest rate changes to assets and liabilities that will offset each other with no impact to net earnings.

• The effect of an immediate 1% parallel decrease in the yield curve on the prescribed scenarios resulted in interest rate changes to assets and liabilities that will offset each other with no impact to net earnings.

Another way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment contract liabilities impacting the shareholders’ net earnings of the Company of a 1% change in the Company’s view of the range of interest rates to be covered by these provisions.

• The effect of an immediate 1% increase in the low and high end of the range of interest rates recognized in the provisions would be to decrease these insurance and investment contract liabilities by approximately $215 million causing an increase in net earnings of approximately $150 million.

• The effect of an immediate 1% decrease in the low and high end of the range of interest rates recognized in the provisions would be to increase these insurance and investment contract liabilities by approximately $720 million causing a decrease in net earnings of approximately $523 million.

In addition to interest rates, the Company is also exposed to movements in equity markets.

Some insurance and investment contract liabilities are supported by investment properties, common stocks and private equities; for example segregated fund products and products with long-tail cash flows. Generally, these liabilities will fluctuate in line with equity values. There will be additional impacts on these liabilities as equity values fluctuate.

• A 10% increase in equity values would be expected to additionally decrease non-participating insurance and investment contract liabilities by approximately $58 million, causing an increase in net earnings of approximately $48 million.

• A 10% decrease in equity values would be expected to additionally increase non-participating insurance and investment contract liabilities by approximately $109 million, causing a decrease in net earnings of approximately $85 million.

The best-estimate return assumptions for equities are primarily based on long-term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows.

• A 1% increase in the best estimate assumption would be expected to decrease non-participating insurance contract liabilities by approximately $542 million causing an increase in net earnings of approximately $439 million.

• A 1% decrease in the best estimate assumption would be expected to increase non-participating insurance contract liabilities by approximately $591 million causing a decrease in net earnings of approximately $470 million.

Expenses – Contractual policy expenses (e.g., sales commissions) and tax expenses are reflected on a best estimate basis. Expense studies for indirect operating expenses are updated regularly to determine an appropriate estimate of future operating expenses for the liability type being valued. Improvements in unit operating expenses are not projected. An inflation assumption is incorporated in the estimate of future operating expenses consistent with the interest rate scenarios projected under CALM as inflation is assumed to be correlated with new money interest rates. A 5% increase in the best estimate maintenance unit expense assumption would cause a decrease in net earnings of approximately $127 million.

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 the Company has no experience with specific types of policies or its exposure is limited. The Company has significant exposures in respect of the T-100 and Level Cost of Insurance Universal Life products in Canada and policy renewal rates at the end of the term for renewable term policies in Canada and Reinsurance. Industry experience has guided the Company’s assumptions for these products as its own experience is very limited. A 10% adverse change in the best-estimate policy termination and renewal assumptions would cause a decrease in net earnings of approximately $672 million.

Utilization of elective policy options – There are a wide range of elective options embedded in the policies issued by the Company. Examples include term renewals, conversion to whole life insurance (term insurance), settlement annuity purchase at guaranteed rates (deposit annuities) and guarantee re-sets (segregated fund maturity guarantees). The assumed rates of utilization are based on company or industry experience when it exists and when not on judgment considering incentives to utilize the option. Generally, whenever it is clearly in the best interests of an informed policyholder to utilize an option, then it is assumed to be elected.



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Policyholder dividends and adjustable policy features – Future policyholder dividends and other adjustable policy features are included in the determination of insurance contract liabilities with the assumption that policyholder dividends or adjustable benefits will change in the future in response to the relevant experience. The dividend and policy adjustments are determined consistent with policyholders’ reasonable expectations, such expectations being influenced by the participating policyholder dividend policies and/or policyholder communications, marketing material and past practice. It is the Company’s expectation that changes will occur in policyholder dividend scales or adjustable benefits for participating or adjustable business respectively, corresponding to changes in the best estimate assumptions, resulting in an immaterial net change in insurance contract liabilities. Where underlying guarantees may limit the ability to pass all of this experience back to the policyholder, the impact of this non-adjustability impacting shareholders’ net earnings is reflected in the impacts of changes in best estimate assumptions above.

Income taxes The Company is subject to income tax laws in various jurisdictions. The Company’s operations are complex and related income tax interpretations, regulations and legislation that pertain to its activities are subject to continual change. As multinational life insurance companies, the Company’s primary Canadian operating subsidiaries are subject to a regime of specialized rules prescribed under the Income Tax Act (Canada) for purposes of determining the amount of the Companies’ income that will be subject to tax in Canada.

The Company utilizes tax planning strategies involving multiple jurisdictions to obtain tax efficiencies. The Company continually assesses the uncertainty associated with these strategies and holds an appropriate level of provisions for uncertain income tax positions. Accordingly, the provision for income taxes represents management’s interpretation of the relevant income tax laws and its estimate of current and deferred income tax implications of the transactions and events during the period. Deferred income tax assets and liabilities are recorded based on expected future income tax rates and management’s assumptions regarding the expected timing of the reversal of temporary differences. The Company has substantial deferred income tax assets. The recognition of deferred income tax assets depends on management’s assumption that future earnings will be sufficient to realize the deferred benefit. The amount of the asset recorded is based on management’s best estimate of the timing of the reversal of the asset.

The audit and review activities of the Canada Revenue Agency and other jurisdictions’ tax authorities affect the ultimate determination of the amounts of income taxes payable or receivable, deferred income tax assets or liabilities and income tax expense. Therefore, there can be no assurance that income taxes will be payable as anticipated and/or the amount and timing of receipt or use of the income tax related assets will be as currently expected. Management’s experience indicates the taxation authorities are more aggressively pursuing perceived income tax issues and have increased the resources they put to these efforts.

Employee future benefits The Company’s subsidiaries maintain contributory and non-contributory defined benefit and defined contribution pension plans for certain employees and advisors. The defined benefit pension plans provide pensions based on length of service and final average pay. For most plans, active plan participants share in the cost of benefits through employee contributions in respect of current service. Certain pension payments are indexed on either 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. The assets supporting the funded pension plans are held in separate trusteed pension funds. The obligations for the wholly unfunded plans are included in other liabilities and are supported by general assets. The significant defined benefit plans of the Company’s subsidiaries are closed to new entrants with plans in several geographies also closed to future defined benefit accruals. All new hires and employees who previously accrued defined benefits in the closed plans are eligible only for defined contribution benefits. The Company’s defined benefit plan exposure will continue to be reduced in future years. The defined contribution pension plans provide pension benefits based on accumulated employee and subsidiary Company contributions. The Company’s subsidiaries also provide post-employment health, dental and life insurance benefits to eligible employees, advisors and their dependents. These plans are also closed to new entrants. For further information on the Company’s pension plans and other post-employment benefits refer to note 24 in the Company’s December 31, 2017 annual consolidated financial statements.

For the defined benefit plans of the Company’s subsidiaries, service costs and net interest costs are recognized in the Consolidated Statements of Earnings. Service costs include current service cost, administration expenses, past service costs and the impact of curtailments and settlements. The impact of curtailments and special termination benefits resulting from the Canadian transformation were recognized as part of restructuring costs. Re-measurements of the defined benefit liability (asset) due to asset returns less (greater) than interest income, actuarial losses (gains) and changes in the asset ceiling are recognized immediately in the Consolidated Statements of Comprehensive Income.

Accounting for defined benefit pension and other post-employment benefits requires estimates of expected increases in compensation levels, indexation of certain pension payments, trends in health-care costs, the period of time over which benefits will be paid, as well as the appropriate discount rates for past and future service liabilities. These assumptions are determined by management using actuarial methods, and are reviewed and approved annually. Emerging experience that differs from the assumptions will be revealed in future valuations and will affect the future financial position of the plans and net periodic benefit costs.



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Actuarial assumptions – employee future benefits Defined benefit pension plans Other post-employment benefits

At December 31 2017 2016 2017 2016

Actuarial assumptions used to determine benefit cost Discount rate – past service liabilities 3.3% 3.8% 3.8% 4.1% Discount rate – future service liabilities 3.4% 3.8% 4.3% 4.5% Rate of compensation increase 3.2% 3.2% – – Future pension increases (1) 1.1% 1.5% – –

Actuarial assumptions used to determine defined benefit obligation Discount rate – past service liabilities 3.1% 3.3% 3.5% 3.8% Rate of compensation increase 3.1% 3.2% – – Future pension increases (1) 1.3% 1.1% – –

Medical cost trend rates: Initial medical cost trend rate 5.0% 5.1% Ultimate medical cost trend rate 4.5% 4.5% Year ultimate trend rate is reached 2029 2029

(1) Represents the weighted average of plans subject to future pension increases.

Actuarial assumptions – The period of time over which benefits are assumed to be paid is based on best estimates of future mortality, including allowances for mortality improvements. This estimate is subject to considerable uncertainty, and judgment is required in establishing this assumption. As mortality assumptions are significant in measuring the defined benefit obligation, the mortality assumptions applied by the Company take into consideration such factors as age, gender and geographic location, in addition to an estimation of future improvements in longevity.

The mortality tables are reviewed at least annually, and assumptions are in accordance with accepted actuarial practices. Emerging

plan experience is reviewed and considered in establishing the best estimate for future mortality.

As these assumptions relate to factors that are long-term in nature, they are subject to a degree of uncertainty. Differences between actual experience and the assumptions, as well as changes in the assumptions resulting from changes in future expectations, result in increases or decreases in the pension and post-employment benefits expense and defined benefit obligation in future years. There is no assurance that the plans will be able to earn assumed rates of return, and market driven changes to assumptions could impact future contributions and expenses.

The following table indicates the impact of changes to certain key assumptions related to pension and post-employment benefits.

Impact of a change of 1.0% in actuarial assumptions on defined benefit obligation 1% increase 1% decrease

2017 2016 2017 2016

Defined benefit pension plans:Impact of a change to the discount rate $ (1,187) $ (1,138) $ 1,553 $ 1,458Impact of a change to the rate of compensation increase 313 303 (270) (264)Impact of a change to the rate of inflation 582 550 (514) (498)

Other post-employment benefits:Impact of a change to assumed medical cost trend rates 32 33 (27) (28)Impact of a change to the discount rate (43) (46) 52 56

To measure the impact of a change in an assumption, all other assumptions were held constant. It is expected that there would be interaction between at least some of the assumptions.

Funding – The Company’s subsidiaries have both funded and unfunded pension plans as well as other post-employment benefit plans that are unfunded. The Company’s subsidiaries’ funded pension plans are funded to or above the amounts required by relevant legislation. During the year, the Company’s subsidiaries contributed $250 million ($190 million in 2016) to the pension

plans and made benefit payments of $19 million ($19 million in 2016) for post-employment benefits. The Company’s subsidiaries expect to contribute $280 million to the benefit pension plans and make benefit payments of $20 million for post-employment benefits in 2018.



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INTERNATIONAL FINANCIAL REPORTING STANDARDS

Due to the evolving nature of International Financial Reporting Standards (IFRS), there are a number of IFRS changes that impacted the Company in 2017, as well as standards that could impact the Company in future reporting periods. The Company actively monitors future IFRS changes proposed by the International Accounting Standards Board (IASB) to assess if the changes to the standards may have an impact on the Company’s results or operations.

The Company adopted the narrow scope amendments to IFRS for IAS 7 Statement of Cash Flows, IAS 12 Income Taxes and Annual Improvements 2014 – 2016 Cycle for the amendment to IFRS 12 Disclosure of Interest in Other Entities, effective January 1, 2017. The adoption of these narrow scope amendments did not have a significant impact on the Company’s consolidated financial statements.

Effective January 1, 2017, the Company has changed the accounting policy to classify the provision for tax uncertainties as current or deferred based on how a disallowance of the underlying uncertain tax treatment would impact the tax provision accrual as of the balance sheet date. Previously, tax uncertainties were booked as current. In addition, the Company has changed its accounting policy for the netting of U.S. deferred tax balances. The Company continues to net deferred tax balances when the Company has the legally enforceable right to offset current tax assets and liabilities and the deferred tax balances relate to entities within the same consolidated tax group. The Company no longer considers the expected order of usage. The accounting policy changes present more reliable and relevant information to financial statement users.

For a further description of the impact of the accounting policy change, refer to note 2 of the Company’s annual consolidated financial statements for the period ended December 31, 2017.

IFRS that have changed or may change subsequent to 2017 and could impact the Company in future reporting periods, are set out in the following table:

NEW STANDARD SUMMARY OF FUTURE CHANGES

IFRS 15 – Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which replaces IAS 11, Construction Contracts

and IAS 18, Revenue. The standard provides a single revenue recognition standard to align the financial reporting of revenue

from contracts with customers and related costs. The Company will recognize revenue when it transfers goods or services

to a customer in the amount of the consideration the Company expects to receive from the customer. Revenue arising from

insurance contracts, leases, and financial instruments are out of scope of the new standard.

The Company will be adopting the standard on its effective date of January 1, 2018. The Company has concluded that there

will not be a material change in the timing of revenue recognition. The presentation of certain revenues and expenses in

the financial statements will change between being reported on a gross versus net basis and others from net to gross. There

is no significant net earnings impact, however, there will be an approximate $100 million increase in fee income and a

corresponding increase in operating expenses, mostly in the U.S. segment.

IFRS 16 – Leases In January 2016, the IASB issued IFRS 16, Leases, which introduces new guidance for identifying leases as well as a new

right-of-use accounting model for lessees, replacing the operating and finance lease accounting models that currently exist.

The new accounting model will generally require all lessees to recognize lease assets and liabilities on the balance sheet,

initially measured at the present value of unavoidable lease payments for all leases with a maximum possible term of more

than 12 months.

In contrast to the significant changes for lessees, the new standard will retain many key aspects of the current lessor

accounting model.

The standard is effective January 1, 2019. The Company is evaluating the impact of the adoption of this standard, however it

is not yet possible to provide a reliable estimate of the impact on the Company’s consolidated financial statements.

IFRS 17 – Insurance Contracts In May 2017, the IASB issued IFRS 17, Insurance Contracts, which will replace IFRS 4, Insurance Contracts. IFRS 17 sets out

the requirements for the recognition, measurement, presentation and disclosures of insurance contracts a company issues

and reinsurance contracts it holds. IFRS 17 introduces new measurement models depending on the nature of the contracts.

IFRS 17 requires entities to measure insurance contract liabilities on the balance sheet as the total of:

(a) the fulfilment cash flows – the current estimates of amounts that the company expects to collect from premiums and pay

out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts; and

(b) the contractual service margin – the future profit for providing insurance coverage.

The future profit for providing insurance coverage is recognized in profit or loss over time as the insurance coverage is

provided. IFRS 17 also requires the Company to distinguish between groups of contracts expected to be profit making and

groups of contracts expected to be onerous. The Company is required to update the fulfilment cash flows at each reporting

date, using current estimates of the amount, timing and uncertainty of cash flows and discount rates.

The Company is currently in the planning phase of its project which includes assessing the financial statement impact

of adopting IFRS 17, identifying potential business impacts, developing a detailed project plan, assessing resource

requirements, and providing training to staff. The adoption of IFRS 17 is a significant initiative for the Company supported

by a formal governance framework, for which substantial resources are being dedicated to ensure proper implementation.

The new standard is effective for annual periods beginning on or after January 1, 2021. IFRS 17 will affect how the Company

accounts for its insurance contracts and how it reports financial performance in the consolidated statement of earnings. The

Company is currently assessing the impact that IFRS 17 will have on the Consolidated Financial Statements. The Company

expects this standard to have a significant impact on the timing of earnings recognition for its insurance contracts and a

significant impact on how insurance contract results are presented and disclosed in the consolidated financial statements.



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NEW STANDARD SUMMARY OF FUTURE CHANGES

IFRS 9 – Financial Instruments In July 2014, the IASB issued a final version of IFRS 9, Financial Instruments (IFRS 9) to replace IAS 39, Financial Instruments:

Recognition and Measurement. The standard provides changes to financial instruments accounting for the following:

• classification and measurement of financial instruments based on a business model approach for managing financial

assets and the contractual cash flow characteristics of the financial asset;

• impairment based on an expected loss model; and

• hedge accounting that incorporates the risk management practices of an entity.

In September 2016, the IASB issued an amendment to IFRS 4, Insurance Contracts. The amendment “Applying IFRS 9,

Financial Instruments with IFRS 4, Insurance Contracts” provides qualifying insurance companies with two options to

address the potential volatility associated with implementing the IFRS 9 standard before the new proposed insurance

contract standard is effective. The two options are as follows:

• 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.

The Company qualifies for the amendment and will be applying the deferral approach to allow adoption of both IFRS 9 and

IFRS 17, Insurance Contracts simultaneously on January 1, 2021.

In October 2017, the IASB issued an amendment to IFRS 9 that certain prepayable financial assets with negative

compensation can be measured at amortized cost or fair value through other comprehensive income instead of fair value

through profit or loss under a certain condition.

The Company continues to evaluate the impact for the adoption of this standard with the adoption of IFRS 17, Insurance

Contracts.

Annual Improvements 2014 – 2016 Cycle

In December 2016, the IASB issued Annual Improvements 2014 – 2016 Cycle as part of its ongoing process to efficiently deal

with non-urgent narrow scope amendments to IFRS. Three amendments were included in this issue relating to IFRS 12,

Disclosure of Interests in Other Entities, IFRS 1, First-time Adoption of International Financial Reporting Standards, and IAS

28, Investments in Associates and Joint Ventures.

The amendments to IFRS 12 were effective January 1, 2017 and did not have a significant impact on the Company’s

consolidated financial statements. The amendments to IFRS 1 and IAS 28 are effective January 1, 2018. Adoption of these

amendments will not have an impact on the Company’s consolidated financial statements.

IAS 40 – Investment Property In December 2016, the IASB issued an amendment to IAS 40, Investment Property to clarify the requirements on transfers

to, or from, investment property.

The amendment is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of

this standard.

IFRS 2 – Share-based Payment In June 2016, the IASB issued narrow scope amendments to IFRS 2, Share-based Payments clarifying how to account for

certain types of share-based payment transactions.

The amendment is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of

this standard.

IFRIC 22 – Foreign Currency Transactions and Advance Consideration

In December 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration that

provides requirements about which exchange rate to use in reporting foreign currency transactions when payment is made

or received in advance.

The interpretation is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of

this standard.

Annual Improvements 2015 – 2017 cycle

In December 2017, the IASB issued Annual Improvements 2015 – 2017 Cycle as part of its ongoing process to efficiently deal

with non-urgent narrow scope amendments to IFRS. Four amendments were included in this issue relating to IFRS 3, Income

Taxes and IAS 23, Borrowing Costs.

The amendments are effective January 1, 2019. The Company is evaluating the impact of the adoption of these amendments.

IAS 28 – Investments in Associates and Joint Ventures

In October 2017, the IASB issued amendments to IAS 28, Investments in Associates and Joint Ventures. The amendments

clarify that a company is to account for long-term interests in an associate or joint venture using IFRS 9, Financial

Instruments when the equity method is not applied.


IFRIC 23 – Uncertainty over Income Tax Treatments

In June 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments. The interpretation clarifies how to apply the

recognition and measurement requirements in IAS 12, Income Taxes, when there is uncertainty over income tax treatments.

The interpretation is effective for periods beginning on or after January 1, 2019. The Company does not anticipate a

significant impact from the adoption of this standard.



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OTHER INFORMATION


Years ended December 31

(in $ millions, except per share amounts) 2017 2016 (4) 2015

Total revenue $ 47,008 $ 46,381 $ 33,820Net earnings – common shareholders Net earnings 2,149 2,641 2,762Net earnings per common share Basic 2.173 2.668 2.774 Diluted 2.170 2.663 2.768Total assets Total assets (4) $ 419,838 $ 399,733 $ 399,935 Proprietary mutual funds and institutional net assets 278,954 259,215 252,480

Total assets under management 698,792 658,948 652,415 Other assets under administration 651,121 589,291 560,102

Total assets under administration $ 1,349,913 $ 1,248,239 $ 1,212,517

Total liabilities (4) $ 394,302 $ 374,725 $ 374,675

Dividends paid per share Series F First Preferred 1.4750 1.4750 1.4750 Series G First Preferred 1.3000 1.3000 1.3000 Series H First Preferred 1.21252 1.21252 1.21252 Series I First Preferred 1.1250 1.1250 1.1250 Series L First Preferred 1.41250 1.41250 1.41250 Series M First Preferred 1.450 1.450 1.450 Series N First Preferred 0.544000 0.544000 0.912500 Series O First Preferred (1) 0.466386 0.449219 – Series P First Preferred 1.350 1.350 1.350 Series Q First Preferred 1.2875 1.2875 1.2875 Series R First Preferred 1.200 1.200 1.200 Series S First Preferred (2) 1.312500 1.312500 1.312500 Series T First Preferred (3) 0.798 – – Common 1.468 1.384 1.304

(1) The Series O First Preferred Shares were issued on December 31, 2015.

(2) The Series S First Preferred Shares were issued on May 22, 2014. The first dividend payment was made on September 30, 2014 in the amount of $0.47106 per share. Regular quarterly dividends are $0.328125 per share.

(3) The Series T First Preferred Shares were issued on May 18, 2017. The first dividend payment was made on September 29, 2017 in the amount of $0.476200 per share. Regular quarterly dividends are $0.321875 per share.




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QUARTERLY FINANCIAL INFORMATION

(in $ millions, 2017 2016

except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Total revenue (1) $ 12,888 $ 10,198 $ 11,048 $ 12,874 $ 7,814 $ 13,408 $ 12,807 $ 12,352

Common shareholdersNet earnings Total 392 581 585 591 676 674 671 620 Basic – per share 0.397 0.587 0.591 0.598 0.686 0.682 0.675 0.625 Diluted – per share 0.396 0.587 0.590 0.597 0.685 0.681 0.674 0.623 Adjusted net earnings (2)

Total 734 582 712 619 698 689 675 623 Basic – per share 0.742 0.589 0.719 0.627 0.709 0.697 0.679 0.628 Diluted – per share 0.741 0.588 0.718 0.625 0.707 0.696 0.678 0.626

(1) Revenue includes the changes in fair value through profit or loss on investment assets.

(2) Adjusted net earnings attributable to common shareholders is a non-IFRS measures of earnings performance. Adjustments for 2017 are detailed in footnote 6 to the Selected Consolidated Financial Information table of this MD&A. The fourth quarter of 2016 included restructuring costs of $20 million related to Putnam and $2 million related to the Financial Services business unit. The third quarter of 2016 included restructuring costs of $13 million related to the Insurance & Annuities business unit and $2 million related to the Financial Services business unit. The second quarter of 2016 included restructuring costs of $3 million related to the Financial Services business unit and $1 million related to the Insurance & Annuities business unit. The first quarter of 2016 included restructuring costs of $2 million related to the Financial Services business unit and $1 million related to the Insurance & Annuities business unit.

Lifeco’s consolidated net earnings attributable to common shareholders were $392 million for the fourth quarter of 2017 compared to $676 million reported a year ago. On a per share basis, this represents $0.397 per common share ($0.396 million diluted) for the fourth quarter of 2017 compared to $0.686 per common share ($0.685 diluted) a year ago.

Total revenue for the fourth quarter of 2017 was $12,888 million and comprises premium income of $8,506 million, regular net investment income of $1,564 million, a positive change in fair value through profit or loss on investment assets of $1,415 million and fee and other income of $1,403 million.



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The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information relating to the Company which is required to be disclosed in reports filed under provincial and territorial securities legislation is: (a) recorded, processed, summarized and reported within the time periods specified in the provincial and territorial securities legislation, and (b) accumulated and communicated to the Company’s senior management, including the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management evaluated the effectiveness of the Company’s disclosure controls and procedures as at December 31, 2017 and, based on such evaluation, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.


The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. All internal control systems have inherent limitations and may become ineffective because of changes in conditions. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management, under the supervision of the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting based on the 2013 Internal Control – Integrated Framework (COSO Framework) published by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management adopted the revised 2013 COSO Framework in 2015 as the basis to evaluate the effectiveness of the Lifeco’s internal control over financial reporting.

Management evaluated the effectiveness of the Company’s internal control over financial reporting as at December 31, 2017 and, based on such evaluation, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer have concluded that the Company’s internal control over financial reporting is effective and that there are no material weaknesses in the Company’s internal control over financial reporting.


In the normal course of business, Great-West Life and Putnam enter into various transactions with related companies, which include providing insurance benefits and sub-advisory services to other companies within the Power Financial Corporation, Lifeco’s parent, group of companies. In all cases, transactions were at market terms and conditions.

During the year, Great-West Life provided to and received from IGM Financial Inc. and its subsidiaries (IGM), a member of the Power Financial Corporation group of companies, certain administrative services. Great-West Life also provided life insurance, annuity and disability insurance products under a distribution agreement with IGM. London Life provided distribution services to IGM. All transactions were provided at market terms and conditions.

Segregated funds of the Company were invested in funds managed by Investors Group and Mackenzie Investments. The Company also has interests in mutual funds, open-ended investment companies and unit trusts. Some of these funds are managed by related parties of the Company and the Company receives management fees related to these services. All transactions were provided at market terms and conditions.

At December 31, 2017 the Company held $74 million ($42 million in 2016) of debentures issued by IGM.

During the normal course of business in 2017, the Company purchased residential mortgages of $137 million from IGM ($184 million in 2016).

The Company holds investments in Portag3 Ventures and other entities which invests in the FinTech sector. These investments are a corporate partnership with Power Financial Corporation and IGM.

The Company provides asset management and administrative services for employee benefit plans relating to pension and other post-employment benefits for employees of the Company and its subsidiaries. These transactions were provided at market terms and conditions.

As at December 31, 2017 and December 31, 2016, there were no significant outstanding loans or guarantees and no loans or guarantees issued during 2017 or 2016 with related parties. There were no provisions for uncollectible amounts from related parties during 2017 or 2016.



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Through its operating subsidiaries, Lifeco conducts business in multiple currencies. The four primary currencies are the Canadian dollar, the U.S. dollar, the British pound and the euro. Throughout this document, foreign currency assets and liabilities are translated into Canadian dollars at the market rate at the end of the reporting period. All income and expense items are translated at an average rate for the period. The rates employed are:

Translation of foreign currency 2017 2016

Period ended Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31

United States dollarBalance sheet $ 1.26 $ 1.25 $ 1.30 $ 1.33 $ 1.34 $ 1.31 $ 1.30 $ 1.30Income and expenses $ 1.27 $ 1.25 $ 1.34 $ 1.32 $ 1.33 $ 1.31 $ 1.29 $ 1.37

British poundBalance sheet $ 1.70 $ 1.67 $ 1.69 $ 1.67 $ 1.66 $ 1.71 $ 1.72 $ 1.87Income and expenses $ 1.69 $ 1.64 $ 1.72 $ 1.64 $ 1.66 $ 1.71 $ 1.85 $ 1.96

EuroBalance sheet $ 1.51 $ 1.47 $ 1.48 $ 1.42 $ 1.42 $ 1.47 $ 1.44 $ 1.48Income and expenses $ 1.50 $ 1.47 $ 1.48 $ 1.41 $ 1.44 $ 1.46 $ 1.46 $ 1.51

Additional information relating to Lifeco, including Lifeco’s most recent consolidated financial statements, CEO/CFO certification and Annual Information Form are available at www.sedar.com.



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Consolidated Statements of Earnings

(in Canadian $ millions except per share amounts)

For the years ended December 31 2017 2016

Income Premium income Gross premiums written $ 38,306 $ 35,050 Ceded premiums (4,359) (3,925)

Total net premiums 33,947 31,125

Net investment income (note 5) Regular net investment income 6,141 6,252 Changes in fair value through profit or loss 1,466 3,903

Total net investment income 7,607 10,155 Fee and other income 5,454 5,101

47,008 46,381

Benefits and expenses Policyholder benefits Gross 30,801 28,315 Ceded (2,214) (2,103)

Total net policyholder benefits 28,587 26,212 Policyholder dividends and experience refunds 1,800 1,502 Changes in insurance and investment contract liabilities 5,256 6,961

Total paid or credited to policyholders 35,643 34,675 Commissions 2,410 2,602 Operating and administrative expenses (note 28) 4,833 4,799 Premium taxes 463 411 Financing charges (note 15) 300 302 Amortization of finite life intangible assets and impairment reversal (note 10) 168 177 Restructuring expenses (note 29) 259 63 Loss on assets held for sale (note 6) 202 –

Earnings before income taxes 2,730 3,352Income taxes (note 27) 422 396

Net earnings before non-controlling interests 2,308 2,956Attributable to non-controlling interests (note 19) 30 192

Net earnings 2,278 2,764Preferred share dividends (note 21) 129 123

Net earnings – common shareholders $ 2,149 $ 2,641

Earnings per common share (note 21) Basic $ 2.173 $ 2.668

Diluted $ 2.170 $ 2.663



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Consolidated Statements of Comprehensive Income

(in Canadian $ millions)


Net earnings $ 2,278 $ 2,764

Other comprehensive incomeItems that may be reclassified subsequently to Consolidated Statements of Earnings Unrealized foreign exchange gains (losses) on translation of foreign operations (495) (1,485) Unrealized foreign exchange gains (losses) on euro debt designated as hedges of the net investment in foreign operations (90) 42 Income tax (expense) benefit 12 (6) Unrealized gains (losses) on available-for-sale assets (35) 115 Income tax (expense) benefit 9 (10) Realized (gains) losses on available-for-sale assets (30) (80) Income tax expense 5 12 Unrealized gains (losses) on cash flow hedges 10 107 Income tax (expense) benefit (4) (40) Realized (gains) losses on cash flow hedges 407 2 Income tax benefit (160) (1) Non-controlling interests 68 48 Income tax (expense) benefit (14) (10)

Total items that may be reclassified (317) (1,306)

Items that will not be reclassified to Consolidated Statements of Earnings Re-measurements on defined benefit pension and other post-employment benefit plans (note 24) (57) (231) Income tax (expense) benefit (8) 60 Non-controlling interests 12 6 Income tax (expense) benefit (3) (1)

Total items that will not be reclassified (56) (166)

Total other comprehensive income (loss) (373) (1,472)

Comprehensive income $ 1,905 $ 1,292



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December 31 2017 2016

Assets (note 34)

Cash and cash equivalents (note 4) $ 3,551 $ 3,259Bonds (note 5) 120,204 116,773Mortgage loans (note 5) 22,185 21,651Stocks (note 5) 8,864 8,665Investment properties (note 5) 4,851 4,340Loans to policyholders 8,280 8,467

167,935 163,155Assets held for sale (note 6) 169 –Funds held by ceding insurers (note 7) 9,893 10,781Goodwill (note 10) 6,179 5,977Intangible assets (note 10) 3,732 3,972Derivative financial instruments (note 30) 384 528Owner occupied properties (note 11) 706 649Fixed assets (note 11) 303 304Other assets (note 12) 2,424 2,263Premiums in course of collection, accounts and interest receivable 4,647 4,311Reinsurance assets (note 13) 5,045 5,627Current income taxes 134 170Deferred tax assets (note 27) 930 1,593Investments on account of segregated fund policyholders (note 14) 217,357 200,403

Total assets $ 419,838 $ 399,733

LiabilitiesInsurance contract liabilities (note 13) $ 159,524 $ 155,940Investment contract liabilities (note 13) 1,841 2,009Debentures and other debt instruments (note 16) 5,617 5,980Capital trust securities (note 17) 160 161Funds held under reinsurance contracts 373 320Derivative financial instruments (note 30) 1,336 2,012Accounts payable 2,684 2,049Other liabilities (note 18) 3,752 3,836Current income taxes 464 494Deferred tax liabilities (note 27) 1,194 1,521Investment and insurance contracts on account of segregated fund policyholders (note 14) 217,357 200,403

Total liabilities 394,302 374,725

EquityNon-controlling interests (note 19) Participating account surplus in subsidiaries 2,771 2,782 Non-controlling interests in subsidiaries 164 224Shareholders’ equity Share capital (note 20) Preferred shares 2,714 2,514 Common shares 7,260 7,130 Accumulated surplus 12,098 11,465 Accumulated other comprehensive income (note 25) 386 746 Contributed surplus 143 147

Total equity 25,536 25,008

Total liabilities and equity $ 419,838 $ 399,733

Approved by the Board of Directors:

Jeffrey Orr

Chair of the BoardPaul Mahon President and Chief Executive Officer



Signed, Signed,

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Consolidated Statements of Changes in Equity


December 31, 2017

Accumulated other Non- Share Contributed Accumulated comprehensive controlling Total capital surplus surplus income (loss) interests equity

Balance, beginning of year $ 9,644 $ 147 $ 11,465 $ 746 $ 3,006 $ 25,008Net earnings – – 2,278 – 30 2,308Other comprehensive income (loss) – – – (373) (63) (436)

9,644 147 13,743 373 2,973 26,880Dividends to shareholders Preferred shareholders (note 21) – – (129) – – (129) Common shareholders – – (1,453) – – (1,453)Shares exercised and issued under share-based payment plans (note 20) 143 (62) – – 48 129Share-based payment plans expense – 58 – – – 58Equity settlement of Putnam share-based plans – – – – (57) (57)Dividends to Putnam non-controlling interests – – – – (26) (26)Shares purchased and cancelled under Normal Course Issuer Bid (note 20) (63) – – – – (63)Excess of redemption proceeds over stated capital per Normal Course Issuer Bid (note 20) 50 – (50) – – –Issuance of preferred shares (note 20) 200 – – – – 200Preferred share issue costs (note 20) – – (3) – – (3)Dilution gain on non-controlling interests – – 3 – (3) –Disposal of investment in associate (note 5) – – (13) 13 – –

Balance, end of year $ 9,974 $ 143 $ 12,098 $ 386 $ 2,935 $ 25,536

December 31, 2016

Accumulated other Non- Share Contributed Accumulated comprehensive controlling Total capital surplus surplus income (loss) interests equity

Balance, beginning of year $ 9,670 $ 135 $ 10,416 $ 2,218 $ 2,821 $ 25,260Net earnings – – 2,764 – 192 2,956Other comprehensive income (loss) – – – (1,472) (43) (1,515)

9,670 135 13,180 746 2,970 26,701Dividends to shareholders Preferred shareholders (note 21) – – (123) – – (123) Common shareholders – – (1,369) – – (1,369)Shares exercised and issued under share-based payment plans (note 20) 31 (60) – – 62 33Share-based payment plans expense – 72 – – – 72Equity settlement of Putnam share-based plans – – – – (39) (39)Shares purchased and cancelled under Normal Course Issuer Bid (note 20) (267) – – – – (267)Excess of redemption proceeds over stated capital per Normal Course Issuer Bid (note 20) 210 – (210) – – –Dilution loss on non-controlling interests – – (13) – 13 –

Balance, end of year $ 9,644 $ 147 $ 11,465 $ 746 $ 3,006 $ 25,008



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Consolidated Statements of Cash Flows



Operations Earnings before income taxes $ 2,730 $ 3,352 Income taxes paid, net of refunds received (314) (223) Adjustments: Change in insurance and investment contract liabilities 4,391 7,128 Change in funds held by ceding insurers 857 505 Change in funds held under reinsurance contracts 50 18 Change in reinsurance assets 830 (567) Changes in fair value through profit or loss (1,466) (3,903) Other (321) (56)

6,757 6,254

Financing Activities Issue of common shares (note 20) 126 31 Issue of preferred shares (note 20) 200 – Share issue costs (note 20) (3) – Purchased and cancelled common shares (note 20) (63) (267) Issue of senior unsecured notes (note 16) 925 – Repayment of subordinated debentures (note 16) (1,284) – Issue of euro-denominated debt (note 16) – 706 Increase (decrease) in line of credit 24 (31) Increase (decrease) in debentures and other debt instruments (2) 8 Dividends paid on common shares (1,453) (1,369) Dividends paid on preferred shares (129) (123)

(1,659) (1,045)

Investment Activities Bond sales and maturities 26,854 29,949 Mortgage loan repayments 2,837 2,616 Stock sales 3,443 2,717 Investment property sales 72 427 Change in loans to policyholders (165) 48 Business acquisitions, net of cash and cash equivalents acquired (note 3) (291) (33) Investment in bonds (30,419) (34,186) Investment in mortgage loans (3,643) (3,264) Investment in stocks (3,127) (2,737) Investment in investment properties (339) (102)

(4,778) (4,565)

Effect of changes in exchange rates on cash and cash equivalents (28) (198)

Increase in cash and cash equivalents 292 446

Cash and cash equivalents, beginning of year 3,259 2,813

Cash and cash equivalents, end of year $ 3,551 $ 3,259

Supplementary cash flow information Interest income received $ 5,108 $ 5,303 Interest paid 296 294 Dividend income received 238 251



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Notes to Consolidated Financial Statements

(in Canadian $ millions except per share amounts)

1. Corporate Information

Great-West Lifeco Inc. (Lifeco or the Company) is a publicly listed company (Toronto Stock Exchange: GWO), incorporated and domiciled in Canada. The registered address of the Company is 100 Osborne Street North, Winnipeg, Manitoba, Canada, R3C 1V3. Lifeco is a member of the Power Corporation of Canada group of companies and its direct parent is Power Financial Corporation (Power Financial).

Lifeco is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses, primarily in Canada, the United States and Europe through its operating subsidiaries including The Great-West Life Assurance Company (Great-West Life), London Life Insurance Company (London Life), The Canada Life Assurance Company (Canada Life), Great-West Life & Annuity Insurance Company (Great-West Financial) and Putnam Investments, LLC (Putnam).

The consolidated financial statements (financial statements) of the Company as at and for the year ended December 31, 2017 were approved by the Board of Directors on February 8, 2018.

2. Basis of Presentation and Summary of Accounting Policies

The consolidated financial statements of the Company have been prepared in compliance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). Consistent accounting policies were applied in the preparation of the consolidated financial statements of the subsidiaries of the Company.

The Company adopted the narrow scope amendments to IFRS for IAS 7 Statement of Cash Flows, IAS 12 Income Taxes and Annual Improvements 2014 – 2016 Cycle for the amendment to IFRS 12 Disclosure of Interest in Other Entities, effective January 1, 2017. The adoption of these narrow scope amendments did not have a significant impact on the Company’s consolidated financial statements.

Effective January 1, 2017, the Company has changed the accounting policy to classify the provision for tax uncertainties as current or deferred based on how a disallowance of the underlying uncertain tax treatment would impact the tax provision accrual as of the balance sheet date. Previously, tax uncertainties were booked as current. In addition, the Company has changed its accounting policy for the netting of U.S. deferred tax balances. The Company continues to net deferred tax balances when the Company has the legally enforceable right to offset current tax assets and liabilities and the deferred tax balances relate to entities within the same consolidated tax group. The Company no longer considers the expected order of usage. The accounting policy changes present more reliable and relevant information to financial statement users.

The Company retroactively restated the classification of current taxes to deferred taxes on the Consolidated Balance Sheets. The change in accounting policy resulted in decreases to deferred tax assets of $252, deferred tax liabilities of $124, and current income tax liabilities of $55 with an increase in current income tax assets of $73 respectively at December 31, 2016. These adjustments and reclassifications had no impact on the total equity or net earnings of the Company (note 34).

Basis of Consolidation

The consolidated financial statements of the Company were prepared as at and for the year ended December 31, 2017 with comparative information for December 31, 2016. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The Company has control when it has the power to direct the relevant activities, has significant exposure to variable returns from these activities and has the ability to use its power to affect the variable returns. All intercompany balances, transactions, income and expenses and profits or losses, including dividends resulting from intercompany transactions, are eliminated on consolidation.

Use of Significant Judgments, Estimates and Assumptions

In preparation of these consolidated financial statements, management is required to make significant judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net earnings and related disclosures. Although some uncertainty is inherent in these judgments and estimates, management believes that the amounts recorded are reasonable. Key sources of estimation uncertainty and areas where significant judgments have been made are listed below and discussed throughout the notes to these consolidated financial statements including:

• Management uses independent qualified appraisal services to determine the fair value of investment properties, which utilize 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).

• Management uses judgment in determining the assets to be included in a disposal group. The Company uses estimates in the determination of the fair value for disposal groups (note 6).

• In the determination of the fair value of financial instruments, the Company’s management exercises judgment in the determination of fair value inputs, particularly those items categorized within level 3 of the fair value hierarchy (note 9).

• Cash generating unit groupings for goodwill and indefinite life intangible assets have been determined by management as the lowest level that the assets are monitored for internal reporting purposes, which requires management judgment in the determination of the lowest level of monitoring (note 10).

• Management evaluates the future benefit for initial recognition and measurement of goodwill and intangible assets as well as testing the recoverable amounts. The determination of the carrying value and recoverable amounts of the cash generating unit groupings for goodwill and intangible assets relies upon the determination of fair value or value-in-use using valuation methodologies (note 10).



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.Notes to Consolidated Financial Statements


• Judgments are used by management in determining whether deferred acquisition costs and deferred income reserves can be recognized on the Consolidated Balance Sheets. Deferred acquisition costs are recognized if management determines the costs meet the definition of an asset and are incremental and related to the issuance of the investment contract. Deferred income reserves are amortized on a straight-line basis over the term of the policy (notes 12 and 18).

• Management 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.

• The actuarial assumptions, such as interest rates, inflation, policyholder behaviour, mortality and morbidity of policyholders, used in the valuation of insurance and certain investment contract liabilities under the Canadian Asset Liability Method require significant judgment and estimation (note 13).

• The actuarial assumptions used in determining the expense and benefit obligations for the Company’s defined benefit pension plans and other post-employment benefits requires significant judgment and estimation. Management reviews 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).

• The Company operates within various tax jurisdictions where significant management judgments and estimates are required when interpreting the relevant tax laws, regulations and legislation in the determination of the Company’s tax provisions and the carrying amounts of its tax assets and liabilities (note 27).

• Management applies judgment in assessing the recoverability of the deferred income tax asset carrying values based on future years’ taxable income projections (note 27).

• Legal and other provisions are recognized resulting from a past event which, in the judgment of management, has resulted in a probable outflow of economic resources which would be passed to a third-party to settle the obligation. Management uses judgment to evaluate the possible outcomes and risks in determining the best estimate of the provision at the balance sheet date (note 31).

• The operating segments of the Company, which are the segments reviewed by the Company’s Chief Executive Officer to assess performance and allocate resources within the Company, are aligned with the Company’s geographic operations. Management applies judgment in the aggregation of the business units into the Company’s operating segments (note 33).

• The Company consolidates all subsidiaries and entities which management determines that the Company controls. Control is evaluated on the ability of the Company to direct the activities of the subsidiary or entity to derive variable returns and management uses judgment in determining whether control exists. Judgment is exercised in the evaluation of the variable returns and in determining the extent to which the Company has the ability to exercise its power to generate variable returns.

• Management uses judgments, such as the determination of the risks and benefits associated with the transaction that are used in determining whether the Company retains the primary obligation with a client in sub-advisor arrangements. Where the Company retains the risks and benefits, revenue and expenses are recorded on a gross basis.

• Within the Consolidated Statements of Cash Flows, purchases and sales of portfolio investments are recorded within investment activities due to management’s judgment that these investing activities are long-term in nature.

• The results of the Company reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. The provision for future credit losses within the Company’s insurance contract liabilities relies upon investment credit ratings. The Company’s practice is to use third-party independent credit ratings where available. Management judgment is required when setting credit ratings for instruments that do not have a third-party rating.

The significant accounting policies are as follows:

(a) Portfolio Investments

Portfolio investments include bonds, mortgage loans, stocks and investment properties. Portfolio investments are classified as fair value through profit or loss, available-for-sale, held-to-maturity, loans and receivables, equity-method investments or as non-financial instruments based on management’s intention relating to the purpose and nature of the instrument or characteristics of the investment. The Company has not classified any investments as held-to-maturity.

Investments in bonds and stocks 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 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. Changes in the fair value of financial assets designated as fair value through profit or loss are generally offset by changes in insurance contract liabilities, since the measurement of insurance contract liabilities is determined with reference to the assets supporting the liabilities. A financial asset is classified as fair value through profit or loss on initial recognition if it is part of a portfolio that is actively traded for the purpose of earning investment income. Fair value through profit or loss investments are recognized at fair value on the Consolidated Balance Sheets with realized and unrealized gains and losses reported in the Consolidated Statements of Earnings. Available-for-sale investments are recognized at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in other comprehensive income. Realized gains and losses on available-for-sale investments are reclassified from other comprehensive income and recorded in the Consolidated Statements of Earnings when the investment is sold. Interest income earned on both fair value through profit or loss and available-for-sale bonds is recorded as net investment income in the Consolidated Statements of Earnings.



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Investments in stocks where a fair value cannot be measured reliably are classified as available–for–sale and carried at cost. Investments in stocks for which the Company exerts significant influence over but does not control are accounted for using the equity method of accounting. Investments in stocks over which the Company exerts significant influence but does not control include the Company’s investment in an affiliated company, IGM Financial Inc. (IGM), a member of the Power Financial group of companies.

Investments in mortgages and bonds not normally actively traded on a public market are classified as loans and receivables and are carried at amortized cost net of any allowance for credit losses. Interest income earned and realized gains and losses on the sale of investments classified as loans and receivables are recorded in the Consolidated Statements of Earnings and included in net investment income.

Investment properties are real estate held to earn rental income or for capital appreciation. Investment properties are initially measured at cost and subsequently carried at fair value on the Consolidated Balance Sheets. All changes in fair value are recorded as net investment income in the Consolidated Statements of Earnings. Properties held to earn rental income or for capital appreciation that have an insignificant portion that is owner occupied or where there is no intent to occupy on a long-term basis are classified as investment properties. Properties that do not meet these criteria are classified as owner occupied properties. Property that is leased that would otherwise be classified as investment property if owned by the Company is also included within investment properties.

Fair Value Measurement

Financial instrument carrying values necessarily reflect the prevailing market liquidity and the liquidity premiums embedded within the market pricing methods that the Company relies 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 and investment 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 value instruments carried at fair value:

Bonds – Fair Value Through Profit or Loss and Available-for-Sale

Fair values for bonds classified and designated as fair value through profit or loss or available-for-sale are determined with reference to quoted market bid prices primarily provided by third-party independent pricing sources. Where prices are not quoted in a normally active market, fair values are determined by valuation models. The Company maximizes the use of observable inputs when measuring fair value. The Company obtains quoted prices in active markets, when available, for identical assets at the balance sheet date to measure bonds at fair value in its fair value through profit or loss and available-for-sale portfolios.

The Company estimates the fair value of bonds not traded in active markets by referring to actively traded securities with similar attributes, dealer quotations, matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the issuer’s industry, the security’s rating, term, coupon rate and position in the capital structure of the issuer, as well as, yield curves, credit curves, prepayment rates and other relevant factors. For bonds that are not traded in active markets, valuations are adjusted to reflect illiquidity, and such adjustments generally are based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Bonds and Mortgages – Loans and Receivables

For disclosure purposes only, fair values for bonds and mortgages 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.

Stocks – Fair Value Through Profit or Loss and Available-for-Sale

Fair values for stocks traded on an active market are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for stocks for which there is no active market is 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 Company maximizes the use of observable inputs when measuring fair value. The Company obtains quoted prices in active markets, when available, for identical assets at the balance sheet date to measure stocks at fair value in its fair value through profit or loss and available-for-sale portfolios.

Investment Properties

Fair values for investment properties are determined using independent qualified appraisal services and include management adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals. The determination of the fair value of investment property requires the use of estimates including future cash flows (such as future leasing assumptions, rental rates, capital and operating expenditures) and discount, reversionary and overall capitalization rates applicable to the asset based on current market conditions. Investment property under construction is valued at fair value if such values can be reliably determined; otherwise they are recorded at cost.

2. Basis of Presentation and Summary of Accounting Policies (cont’d)



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Impairment

Investments are reviewed regularly on an individual basis to determine impairment status. The Company considers various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults, and delinquency in payments of interest or principal.

Investments are deemed to be impaired when there is objective evidence that timely collection of future cash flows can no longer be reliably estimated. 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 mortgages and bonds classified as loans and receivables, provisions are established or write-offs made to adjust the carrying value to the net realizable amount. Wherever possible the fair value of collateral underlying the loans or observable market price is used to establish net realizable value. For impaired available-for-sale bonds recorded at fair value, the accumulated loss recorded in accumulated other comprehensive income is reclassified to net investment income. Impairments on available-for-sale debt instruments are reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bonds classified or designated as fair value through profit or loss are already recorded in net investment income; therefore a reduction due to impairment of these assets will be recorded in net investment income.

Securities Lending

The Company engages in securities lending through its securities custodians as lending agents. Loaned securities are not derecognized, and continue to be reported within invested assets, as the Company retains substantial risks and rewards and economic benefits related to the loaned securities.

(b) Transaction Costs

Transaction costs are expensed as incurred for financial instruments classified 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 method. Transaction costs for financial liabilities classified as other than fair value through profit or loss are included in the value of the instrument issued and taken into net earnings using the effective interest method.

(c) Cash and Cash Equivalents

Cash and cash equivalents comprise cash, current operating accounts, overnight bank and term deposits with maturities of three months or less held for the purpose of meeting short-term cash requirements. Net payments in transit and overdraft bank balances are included in other liabilities.

(d) Trading Account Assets

Trading account assets consist of investments in sponsored funds, open ended investment companies and sponsored unit-trusts, which are carried at fair value based on the net asset value of these funds. Investments in these assets are included in other assets on the Consolidated Balance Sheets with realized and unrealized gains and losses reported in the Consolidated Statements of Earnings.

(e) Debentures and Other Debt Instruments and Capital Trust Securities

Debentures and other debt instruments and capital trust securities are initially recorded on the Consolidated Balance Sheets at fair value and subsequently carried at amortized cost using the effective interest method with amortization expense recorded in financing charges in the Consolidated Statements of Earnings. These liabilities are derecognized when the obligation is cancelled or redeemed.

(f ) Other Assets and Other Liabilities

Other assets, which include prepaid expenses, deferred acquisition costs, finance leases receivable and miscellaneous other assets, are measured at cost or amortized cost. Other liabilities, which include deferred income reserves, bank overdraft and other miscellaneous liabilities are measured at cost or amortized cost.

Provisions are recognized within other liabilities when the Company has a present obligation, either legal or constructive, as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount to settle the obligation. The amounts recognized for provisions are management’s best estimates of the expenditures required to settle the obligation at the balance sheet date. The Company recognizes a provision for restructuring when a detailed formal plan for the restructuring has been established and that the plan has raised a valid expectation in those affected that the restructuring will occur.

Pension and other post-employment benefits also included within other assets and other liabilities are measured in accordance with note 2(x).

(g) Disposal Group Classified As Held For Sale

Disposal groups are classified as held for sale when the carrying amount will be recovered through a sale transaction rather than continuing use. The fair value of a disposal group is measured at the lower of its carrying amount and fair value less costs to sell. Any impairment loss for the disposal group is recognized as a reduction to the carrying amount of the disposal group.

Disposal group assets classified as held for sale are presented separately on the Company’s Consolidated Balance Sheets. Losses from assets held for sale are presented separately in the Company’s Consolidated Statements of Earnings.



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(h) Derivative Financial Instruments

The Company uses derivative products as risk management instruments to hedge or manage asset, liability and capital positions, including fee and investment income. The Company’s policy guidelines prohibit the use of derivative instruments for speculative trading purposes.

The Company includes disclosure of the maximum credit risk, future credit exposure, credit risk equivalent and risk weighted equivalent in note 30 as prescribed by the Office of the Superintendent of Financial Institutions (OSFI) in Canada.

All derivatives including those that are embedded in financial and non-financial contracts that are not closely related to the host contracts are recorded at fair value on the Consolidated 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 in the Consolidated Statements of Earnings. For derivatives designated as hedging instruments, unrealized and realized gains and losses are recognized according to the nature of the hedged item.

Derivatives are valued using market transactions and other market evidence whenever possible, including market based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model 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 in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs.

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, 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 Company documents 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 Consolidated Balance Sheets or to specific firm commitments or forecasted transactions. The Company also assesses, 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 hedging no longer qualifies for hedge accounting.

Derivatives not designated as hedges for accounting purposes

For derivative investments not designated as accounting hedges, changes in fair value are recorded in net investment income.

Fair value hedges

For fair value hedges, changes in fair value of both the hedging instrument and the hedged risk are recorded in net investment income and consequently any ineffective portion of the hedge is recorded immediately in net investment income.

The Company currently has no instruments designated as fair value hedges.

Cash flow hedges

For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is recorded in the same manner as the hedged item while the ineffective portion is recognized immediately in net investment income. Gains and losses 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.

The Company currently uses interest rate swaps and cross-currency swaps designated as cash flow hedges.


For net investment hedges, the effective portion of changes in the fair value of the hedging instrument are 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 accumulated other comprehensive income and will be reclassified into net earnings when the Company disposes of the foreign operation.

The Company currently has instruments designated as net investment hedges.




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(i) Embedded Derivatives

An embedded derivative is a component of a host contract that modifies the cash flows of the host contract in a manner similar to a derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. Embedded derivatives are treated as separate contracts and are recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself recorded at fair value through the Consolidated Statements of Earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract.

(j) Foreign Currency Translation

The Company operates with multiple functional currencies. The Company’s consolidated financial statements are presented in Canadian dollars as this presentation is most meaningful to financial statement users. For those subsidiaries with different functional currencies, exchange rate differences arising from the translation of monetary items that form part of the net investment in the foreign operation are recorded in unrealized foreign exchange gains (losses) on translation of foreign operations in other comprehensive income.

For the purpose of presenting consolidated financial statements, assets and liabilities are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet dates and all income and expense items are translated at an average of daily rates. Unrealized foreign currency translation gains and losses on translation of the Company’s net investment in its foreign operations are presented separately as a component of other comprehensive income. Unrealized gains and losses will be recognized proportionately in net investment income in the Consolidated Statements of Earnings when there has been a disposal of the investment in the foreign operations.

Foreign currency translation gains and losses on foreign currency transactions of the Company are included in net investment income.

(k) Loans to Policyholders

Loans to policyholders 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. Carrying value of loans to policyholders approximates their fair value.

(l) Reinsurance Contracts

The Company, 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 the Company underwritten by another company. Ceded reinsurance refers to the transfer of insurance risk, along with the respective premiums, to one or more reinsurers who will share the risks. To the extent that assuming reinsurers are unable to meet their obligations, the Company remains liable to its policyholders for the portion reinsured. Consequently, allowances are made for reinsurance contracts which are deemed uncollectible.

Reinsurance contracts are insurance contracts and undergo the classification as described within the Insurance and Investment Contract Liabilities section of this note. Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance assets associated with insurance and investment contracts, are accounted for in accordance with the terms and conditions of the underlying reinsurance contract. Reinsurance assets are reviewed for impairment on a regular basis for any events that may trigger impairment. The Company 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 Consolidated Statements of Earnings.

Any gains or losses on buying reinsurance are recognized in the Consolidated Statements of Earnings immediately at the date of purchase in accordance with the Canadian Asset Liability Method.

Assets and liabilities related to reinsurance are reported on a gross basis on the Consolidated Balance Sheets. The amount of liabilities ceded to reinsurers is estimated in a manner consistent with the claim liability associated with reinsured risks.

(m) 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 the Company but are withheld 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 the Company, the credit risk is retained by the Company. The funds withheld balance where the Company 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 7 for funds held by ceding insurers that are managed by the Company. Other funds held by ceding insurers are general obligations of the cedant and serve as collateral for insurance contract liabilities assumed from cedants. Funds withheld assets on these contacts do not have fixed maturity dates, their release generally being dependent on the run-off of the corresponding insurance contract liabilities.

On the liability side, funds held under reinsurance contracts consist mainly of amounts retained by the Company from ceded business written on a funds withheld basis. The Company withholds assets related to ceded insurance contract liabilities in order to reduce credit risk.



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(n) Business Combinations, Goodwill and Intangible Assets

Business combinations are accounted for using the acquisition method. The Company identifies and classifies, in accordance with the Company’s accounting policies, all assets acquired and liabilities assumed as at the acquisition date. Goodwill represents the excess of purchase consideration over the fair value of net assets of the acquired subsidiaries of the Company. Following initial recognition, goodwill is measured at cost less accumulated impairment losses.

Intangible assets represent finite life and indefinite life intangible assets of acquired subsidiaries of the Company and software acquired or internally developed by the Company. Finite life intangible assets include the value of technology/software, certain customer contracts and distribution channels. These finite life intangible assets are amortized over their estimated useful lives, typically ranging between 3 and 30 years.

Indefinite life intangible assets include brands and trademarks, certain customer contracts and the shareholders’ portion of acquired future participating account profits. Amounts are classified as indefinite life intangible assets when based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Company. The identification of indefinite life intangible assets is made by reference to relevant factors such as product life cycles, potential obsolescence, industry stability and competitive position. Following initial recognition, indefinite life intangible assets are measured at cost less accumulated impairment losses.

Impairment Testing

Goodwill and indefinite life intangible assets are tested for impairment annually or more frequently if events indicate that impairment may have occurred. Intangible assets that were previously impaired are reviewed at each reporting date for evidence of reversal. In the event that certain conditions have been met, the Company would be required to reverse the impairment loss or a portion thereof.

Goodwill and indefinite life intangible assets have been allocated to cash generating unit groupings, representing the lowest level that the assets are monitored for internal reporting purposes. Goodwill and indefinite life intangible assets are tested for impairment by comparing the carrying value of each cash generating unit grouping containing the assets to its recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of the asset’s fair value less costs of disposal and value-in-use.

Finite life intangible assets are reviewed annually to determine if there are indicators of impairment and assess whether the amortization periods and methods are appropriate. If indicators of impairment have been identified, a test for impairment is performed and then the amortization of these assets is adjusted or impairment is recognized as necessary.

(o) Revenue Recognition

Premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized as revenue when due and collection is reasonably assured.

Interest income on bonds and mortgages is recognized and accrued using the effective yield method.

Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed stocks, and usually the notification date or date when the shareholders have approved the dividend for private equity instruments.

Investment property income includes rents earned from tenants under lease agreements and property tax and operating cost recoveries. Rental income leases with contractual rent increases and rent-free periods are recognized on a straight-line basis over the term of the lease.

Fee and other income primarily includes fees earned from management of segregated fund assets, proprietary mutual funds assets, fees earned on administrative services only Group health contracts, commissions and fees earned from management services. Fee and other income is recognized when services are rendered and the amount can be reasonably estimated.

The Company has sub-advisor arrangements where the Company 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.

(p) Owner Occupied Properties and Fixed Assets

Property held for own use and fixed assets are carried at cost less accumulated depreciation and impairments. Depreciation is expensed to write-off the cost of assets, over their estimated useful lives, using the straight-line method, on the following bases:

Owner occupied properties 15 – 20 years Furniture and fixtures 5 – 10 years Other fixed assets 3 – 10 years

Depreciation methods, useful lives and residual values are reviewed at least annually and adjusted if necessary.

(q) Deferred Acquisition Costs

Included in other assets are deferred acquisition costs. These are recognized as assets if the costs are incremental and incurred due to the contract being issued and are primarily amortized on a straight-line basis over the policy term, not to exceed 20 years.




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(r) Segregated Funds

Segregated funds assets and liabilities arise from contracts where all financial risks associated with the related assets are borne by policyholders and are presented separately on the Consolidated Balance Sheets. The assets and liabilities are 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 a corresponding change in the segregated fund liabilities.

(s) Insurance and Investment Contract Liabilities

Contract Classification

When significant insurance risk exists, the Company’s products are classified at contract inception as insurance contracts, in accordance with IFRS 4, Insurance Contracts (IFRS 4). Significant insurance risk exists when the Company agrees to compensate policyholders or beneficiaries of the contract for specified uncertain future events that adversely affect the policyholder and whose amount and timing is unknown. Refer to note 13 for discussion of insurance risk.

In the absence of significant insurance risk, the contract is classified as an investment contract or service contract. Investment contracts with discretionary participating features are accounted for in accordance with IFRS 4 and investment contracts without discretionary participating features are accounted for in accordance with IAS 39, Financial Instruments: Recognition & Measurement. The Company has not classified any contracts as investment contracts with discretionary participating features.

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.

Investment contracts are contracts that carry financial risk, which is the risk of a possible future change in one or more of the following: interest rate, commodity price, foreign exchange rate, or credit rating. Refer to note 8 for discussion of Financial Instruments Risk Management.

Measurement

Insurance contract liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future benefit payments, policyholder dividends, commission and policy administrative expenses for all insurance and annuity policies in force with the Company. The Appointed Actuaries of the Company’s subsidiary companies are responsible for determining the amount of the liabilities to make appropriate provisions for the Company’s obligations to policyholders. The Appointed Actuaries determine the liabilities for insurance contracts using generally accepted actuarial practices, according to the standards established by the Canadian Institute of Actuaries. The valuation uses the Canadian Asset Liability Method. This method involves the projection of future events in order to determine the amount of assets that must be set aside currently to provide for all future obligations and involves a significant amount of judgment.

In the computation of insurance contract liabilities, valuation assumptions have been made regarding rates of mortality/morbidity, investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of mis-estimation 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 similar cash flow characteristics.

(t) Deferred Income Reserves

Included in other liabilities are deferred income reserves relating to investment contracts. These are amortized on a straight-line basis to recognize the initial policy fees over the policy term, not to exceed 20 years.

(u) Income Taxes

The income tax expense for the period represents the sum of current income tax and deferred income tax. Income tax is recognized as an expense or income in profit or loss except to the extent that it relates to items that are recognized outside profit or loss (whether in other comprehensive income or directly in equity), in which case the income tax is also recognized outside profit or loss.

Current Income Tax

Current income tax is based on taxable income for the year. Current income 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 tax rates that have been enacted or substantively enacted at the balance sheet date in each respective jurisdiction. Current income tax assets and current income tax liabilities are offset if a legally enforceable right exists to offset the recognized amounts and the entity intends either to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

A provision for tax uncertainties which meet the probable threshold for recognition is measured based on the probability weighted average approach. The provision for tax uncertainties will be classified as current or deferred based on how a disallowance of the underlying uncertain tax treatment would impact the tax provision accrual as of the balance sheet date.



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Deferred Income Tax

Deferred income tax is the tax expected to be payable or recoverable on differences arising between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable income and is accounted for using the balance sheet liability method. Deferred income tax liabilities are generally recognized for all taxable temporary differences and deferred income tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences, unused tax losses and carryforwards can be utilized.

Recognition is based on the fact that it is probable that the entity will have taxable profits and/or tax planning opportunities available to allow the deferred income tax asset to be utilized. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred income tax assets. The Company’s annual financial planning process provides a significant basis for the measurement of deferred income tax assets.

Deferred income tax assets and liabilities are measured at the tax rates expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to net current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax asset to be recovered.

Deferred income tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, except where the group controls the timing of the reversal of the temporary difference and it is probable that the temporary differences will not reverse in the foreseeable future.

(v) Policyholder Benefits

Policyholder benefits include benefits and claims on life insurance contracts, maturity payments, annuity payments and surrenders. Gross benefits and claims for life insurance contracts include the cost of all claims arising during the year and settlement of claims. Death claims and surrenders are recorded on the basis of notifications received. Maturities and annuity payments are recorded when due.

(w) Repurchase Agreements

The Company accounts for certain forward settling to be announced “TBA” security transactions as derivatives as the Company does not regularly accept delivery of such securities when issued.

(x) Pension Plans and Other Post-Employment Benefits

The Company’s subsidiaries maintain contributory and non-contributory defined benefit pension plans for certain employees and advisors. The Company’s subsidiaries also provide post-employment health, dental and life insurance benefits to eligible employees, advisors and their dependents.

The present value of the defined benefit obligations and the related current service cost is determined using the projected unit credit method (note 24). Pension plan assets are recorded at fair value.

For the defined benefit plans of the Company’s subsidiaries, service costs and net interest costs are recognized in the Consolidated Statements of Earnings. Service costs include current service cost, administration expenses, past service costs and the impact of curtailments and settlements. To determine the net interest costs (income) recognized in the Consolidated Statements of Earnings, the Company’s subsidiaries apply a discount rate to the net benefit liability (asset), where the discount rate is determined by reference to market yields at the beginning of the year on high quality corporate bonds.

For the defined benefit plans of the Company’s subsidiaries, re-measurements of the net defined benefit liability (asset) due to asset returns less (greater) than interest income, actuarial losses (gains) and changes in the asset ceiling are recognized in the Consolidated Statements of Comprehensive Income.

The Company’s subsidiaries also maintain defined contribution pension plans for certain employees and advisors. For the defined contribution plans of the Company’s subsidiaries, the current service costs are recognized in the Consolidated Statements of Earnings.




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(y) Equity

Financial instruments issued by the Company are classified as share capital if they represent a residual interest in the assets of the Company. Preferred share capital is classified as equity if it is non-redeemable, or retractable only at the Company’s option and any dividends are discretionary. Incremental costs that are directly attributable to the issue of share capital are recognized as a deduction from equity, net of income tax.

Contributed surplus represents the vesting expense on unexercised equity instruments under share-based payment plans.

Accumulated other comprehensive income (loss) represents the total of the unrealized foreign exchange gains (losses) on translation of foreign operations, the unrealized foreign exchange gains (losses) on euro debt designated as a hedge of the net investment of foreign operations, the unrealized gains (losses) on available-for-sale assets, the unrealized gains (losses) on cash flow hedges, and the re-measurements on defined benefit pension and other post-employment benefit plans net of tax, where applicable.

Non-controlling interests in subsidiaries represents the proportion of equity that is attributable to minority shareholders.

Participating account surplus in subsidiaries represents the proportion of equity attributable to the participating account of the Company’s subsidiaries.

(z) Share-Based Payments

The Company provides share-based compensation to certain employees and Directors of the Company and its subsidiaries.

The Company follows the fair value based method of accounting for the valuation of compensation expense for shares and share options granted to employees under its stock option plans (note 23). This share-based payment expense is recognized in operating and administrative expenses in the Consolidated Statements of Earnings and as an increase to contributed surplus over the vesting period of the granted options. When options are exercised, the proceeds received, along with the amount in contributed surplus, are transferred to share capital.

The Company and certain of its affiliates have established Deferred Share Unit Plans (DSU Plans) in which Directors of the Company participate. Units issued under the DSU Plans vest when granted. The Company recognizes an increase in operating and administrative expenses for the units granted under the DSU Plans. The Company recognizes a liability for units granted under the DSU Plans which is re-measured at each reporting period based on the market value of the Company’s common shares.

Certain employees of the Company are entitled to participate in the Performance Share Unit Plan (PSU Plan). Units issued under the Performance Share Unit Plan vest over a three year period. The Company uses the fair value method to recognize compensation expense for the units granted under the plan over the vesting period with a corresponding increase in the liability based on the market value of the Company’s common shares.

The Company has an Employee Share Ownership Program (ESOP) where, subject to certain conditions being met, the Company will match contributions up to a maximum amount. The Company’s contributions are expensed within operating and administrative expenses as incurred.

(aa) Earnings Per Common Share

Earnings per common share is calculated using net earnings after preferred share dividends and the weighted average number of common shares outstanding. Diluted earnings per share is calculated by adjusting common shareholders’ net earnings and the weighted average number of common shares outstanding for the effects of all potential dilutive common shares assuming that all convertible instruments are converted and outstanding options are exercised.

(ab) 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 Company is the lessee, are charged to net earnings over the period of use.

Where the Company is the lessor under an operating lease for its investment property, the assets subject to the lease arrangement are presented within the Consolidated Balance Sheets. Income from these leases is recognized in the Consolidated Statements of Earnings on a straight-line basis over the lease term.

Investments in a lease that transfers substantially all the risks and rewards of ownership to the lessee are classified as a finance lease. The Company is the lessor under a finance lease and 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 Consolidated 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 Consolidated Statements of Earnings at a constant periodic rate of return on the Company’s net investment in the finance lease.

(ac) Operating Segments

Operating segments have been identified based on internal reports that are regularly reviewed by the Company’s Chief Executive Officer to allocate resources and assess performance of segments. The Company’s reportable operating segments are categorized by geographic region and include Canada, the United States and Europe. The Canada segment comprises the Individual Customer and Group Customer business units. Great-West Financial and Putnam are reported in the United States segment. The Europe segment comprises Insurance & Annuities and Reinsurance. The Lifeco Corporate segment represents activities and transactions that are not directly attributable to the measurement of the operating segments of the Company.



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(ad) Future Accounting Policies

New Standard Summary of Future Changes

IFRS 15 – Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which replaces IAS 11, Construction Contracts and IAS 18, Revenue. The standard provides a single revenue recognition standard to align the financial reporting of revenue from contracts with customers and related costs. The Company will recognize revenue when it transfers goods or services to a customer in the amount of consideration the Company expects to receive from the customer. Revenue arising from insurance contracts, leases, and financial instruments are out of scope of the new standard.

The Company will be adopting the standard on its effective date of January 1, 2018. The Company has concluded that there will not be a material change in the timing of revenue recognition. The presentation of certain revenues and expenses in the financial statements will change between being reported on a gross versus net basis and others from net to gross. There is no significant net earnings impact but there is an approximate $100 increase in fee income and a corresponding increase in operating expenses, mostly in the U.S. segment.

IFRS 16 – Leases In January 2016, the IASB issued IFRS 16, Leases, which introduces new guidance for identifying leases as well as a new right-of-use accounting model for lessees, replacing the operating and finance lease accounting models that currently exist. The new accounting model will generally require all lessees to recognize lease assets and liabilities on the balance sheet, initially measured at the present value of unavoidable lease payments for all leases with a maximum possible term of more than 12 months.

In contrast to the significant changes for lessees, the new standard will retain many key aspects of the current lessor accounting model.

The standard is effective January 1, 2019. The Company is evaluating the impact of the adoption of this standard, however it is not yet possible to provide a reliable estimate of the impact on the Company's consolidated financial statements.

IFRS 17 – Insurance Contracts

In May 2017, the IASB issued IFRS 17, Insurance Contracts, which will replace IFRS 4, Insurance Contracts. IFRS 17 sets out the requirements for the recognition, measurement, presentation and disclosures of insurance contracts a company issues and reinsurance contracts it holds. IFRS 17 introduces new measurement models depending on the nature of the insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities on the balance sheet as the total of:

(a) the fulfilment cash flows – the current estimates of amounts that the company expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts; and

(b) the contractual service margin – the future profit for providing insurance coverage.

The future profit for providing insurance coverage is recognized in profit or loss over time as the insurance coverage is provided. IFRS 17 also requires the Company to distinguish between groups of contracts expected to be profit making and groups of contracts expected to be onerous. The Company is required to update the fulfilment cash flows at each reporting date, using current estimates of the amount, timing and uncertainty of cash flows and discount rates.

The Company is currently in the planning phase of its project which includes assessing the financial statement impact of adopting IFRS 17, identifying potential business impacts, developing a detailed project plan, assessing resource requirements, and providing training to staff. The adoption of IFRS 17 is a significant initiative for the Company supported by a formal governance framework, for which substantial resources are being dedicated to ensure proper implementation.

The new standard is effective for annual periods beginning on or after January 1, 2021. IFRS 17 will affect how the Company accounts for its insurance contracts and how it reports financial performance in the Consolidated Statements of Earnings. The Company is currently assessing the impact that IFRS 17 will have on its consolidated financial statements. The Company expects this standard to have a significant impact on the timing of earnings recognition for its insurance contracts and a significant impact on how insurance contract results are presented and disclosed in the consolidated financial statements.

IFRS 9 – Financial Instruments

In July 2014, the IASB issued a final version of IFRS 9, Financial Instruments (IFRS 9) to replace IAS 39, Financial Instruments: Recognition and Measurement. The standard provides changes to financial instruments accounting for the following:

• classification and measurement of financial instruments based on a business model approach for managing financial assets and the contractual cash flow characteristics of the financial asset;

• impairment based on an expected loss model; and

• hedge accounting that incorporates the risk management practices of an entity.

In September 2016, the IASB issued an amendment to IFRS 4, Insurance Contracts (IFRS 4). The amendment “Applying IFRS 9, Financial Instruments with IFRS 4, Insurance Contracts” provides qualifying insurance companies with two options to address the potential volatility associated with implementing the IFRS 9 standard before the new proposed insurance contract standard is effective. The two options are as follows:

• 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.

The Company qualifies for the amendment and will be applying the deferral approach to allow adoption of both IFRS 9 and IFRS 17, Insurance Contracts simultaneously on January 1, 2021.

In October 2017, the IASB issued an amendment to IFRS 9 that certain prepayable financial assets with negative compensation can be measured at amortized cost or fair value through other comprehensive income instead of fair value through profit or loss under a certain condition.

The Company continues to evaluate the impact for the adoption of this standard with the adoption of IFRS 17, Insurance Contracts.




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New Standard Summary of Future Changes


In December 2016, the IASB issued Annual Improvements 2014 – 2016 Cycle as part of its ongoing process to efficiently deal with non-urgent narrow scope amendments to IFRS. Three amendments were included in this issue relating to IFRS 12, Disclosure of Interests in Other Entities, IFRS 1, First-time Adoption of International Financial Reporting Standards and IAS 28 Investments in Associates and Joint Ventures.

The amendments to IFRS 12 were effective January 1, 2017 and did not have a significant impact on the Company's consolidated financial statements. The amendments to IFRS 1 and IAS 28 are effective January 1, 2018. Adoption of these amendments will not have an impact on the Company's consolidated financial statements.

IAS 40 – Investment Property

In December 2016, the IASB issued an amendment to IAS 40, Investment Property to clarify the requirements on transfers to, or from, investment property.

The amendment is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of this standard.

IFRS 2 – Share-based Payment

In June 2016, the IASB issued narrow scope amendments to IFRS 2, Share-based Payment clarifying how to account for certain types of share-based payment transactions.

The amendment is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of this standard.

IFRIC 22 – Foreign Currency Transactions and Advance Consideration

In December 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration that provides requirements about which exchange rate to use in reporting foreign currency transactions when payment is made or received in advance.

The interpretation is effective January 1, 2018. The Company does not anticipate a significant impact from the adoption of this standard.


In December 2017, the IASB issued Annual Improvements 2015 – 2017 Cycle as part of its ongoing process to efficiently deal with non-urgent narrow scope amendments to IFRS. Four amendments were included in this issue relating to IFRS 3, Business Combinations, IFRS 11, Joint Arrangements, IAS 12, Income Taxes and IAS 23 Borrowing Costs.


IAS 28 – Investments in Associates and Joint Ventures

In October 2017, the IASB issued amendments to IAS 28, Investments in Associates and Joint Ventures. The amendments clarify that a company is to account for long-term interests in an associate or joint venture using IFRS 9, Financial Instruments when the equity method is not applied.


IFRIC 23 – Uncertainty over Income Tax Treatments

In June 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments. The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes, when there is uncertainty over income tax treatments.

The interpretation is effective for periods beginning on or after January 1, 2019. The Company does not anticipate a significant impact from the adoption of this standard.



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3. Business Acquisitions

(a) Financial Horizons Group

On July 31, 2017, the Company, through its wholly-owned subsidiary Great-West Life, completed the acquisition of all the common shares of Financial Horizons Group Inc. (FHG), a Canadian Managing General Agency that offers access to life and health insurance, employee benefits, pensions, investments, structured settlements and risk management products and services to advisors across Canada.

As at December 31, 2017, the comprehensive valuation of the fair value of the net assets acquired, including intangible assets and completion of the purchase price allocation, was finalized. The revenue and net earnings of FHG were not significant to the results of the Company.

(b) Retirement Advantage

On January 2, 2018, the Company, through its indirect wholly-owned subsidiary The Canada Life Group (UK) Ltd., acquired Retirement Advantage, a financial services provider based in the United Kingdom that offers retirement and equity release services.

Due to the recent closing of the acquisition of Retirement Advantage, the valuation and initial purchase price accounting for the business combination are not complete as at the date of release of these annual consolidated financial statements. As a result, the Company has not provided amounts recognized as at the acquisition date for major classes of assets acquired and liabilities assumed, including goodwill.

The allocation of the purchase price will be finalized after a comprehensive evaluation of the fair value of net assets acquired has been completed.

Net earnings from Retirement Advantage will not be material to the consolidated financial statements.

4. Cash and Cash Equivalents

Cash and cash equivalents include amounts held at the Lifeco holding company level and amounts held in Lifeco’s consolidated subsidiary companies. 2017 2016

Cash $ 2,029 $ 1,559Short-term deposits 1,522 1,700

Total $ 3,551 $ 3,259

At December 31, 2017 cash of $244 was restricted for use by the Company ($185 at December 31, 2016) in respect of cash held in trust for reinsurance agreements or with regulatory authorities, cash held under certain indemnity arrangements, client monies held by brokers and cash held in escrow.



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5. Portfolio Investments

(a) Carrying values and estimated fair values of portfolio investments are as follows: 2017 2016

Carrying Fair Carrying Fair value value value value

Bonds Designated fair value through profit or loss (1) $ 88,062 $ 88,062 $ 85,739 $ 85,739 Classified fair value through profit or loss (1) 1,836 1,836 2,586 2,586 Available-for-sale 12,347 12,347 11,478 11,478 Loans and receivables 17,959 19,470 16,970 18,484

120,204 121,715 116,773 118,287Mortgage loans Residential 8,905 9,083 8,062 8,260 Commercial 13,280 13,922 13,589 14,290

22,185 23,005 21,651 22,550Stocks Designated fair value through profit or loss (1) 8,097 8,097 7,606 7,606 Available-for-sale 55 55 48 48 Available-for-sale, at cost (2) 348 348 391 391 Equity method (3) (4) 364 406 620 610

8,864 8,906 8,665 8,655Investment properties 4,851 4,851 4,340 4,340

Total $ 156,104 $ 158,477 $ 151,429 $ 153,832

(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. 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 cannot be reliably measured, therefore the investments are held at cost.

(3) During 2017, the investment in Allianz Ireland, an investment previously held through the Company’s indirect wholly owned subsidiary Irish Life Group Limited with a carrying value of $192, was disposed of by the Company resulting in a gain of $16 recorded in net investment income. The carrying value of the investment reflected $13 of actuarial losses from the associate’s pension plan (note 24). These actuarial losses were transferred within equity from accumulated other comprehensive income to accumulated surplus.

(4) During 2017, the Company classified an equity method investment within the disposal group of assets held for sale (note 6).

(b) Carrying value of bonds and mortgages by term to maturity are as follows: 2017

Term to maturity

1 year Over or less 1–5 years 5 years Total

Bonds $ 10,187 $ 26,926 $ 82,845 $ 119,958Mortgage loans 1,425 6,611 14,115 22,151

Total $ 11,612 $ 33,537 $ 96,960 $ 142,109

2016

Term to maturity

1 year Over or less 1–5 years 5 years Total

Bonds $ 11,841 $ 26,601 $ 78,016 $ 116,458Mortgage loans 1,259 6,764 13,571 21,594

Total $ 13,100 $ 33,365 $ 91,587 $ 138,052

The above excludes the carrying value of impaired bonds and mortgage loans, as the ultimate timing of collectability is uncertain.



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(c) Certain stocks where equity method earnings are computed are discussed below:

Substantially all of the Company’s equity method investments relate to the Company’s investment, held through Great-West Life, in an affiliated company, IGM, a member of the Power Financial group of companies, over which it exerts significant influence but does not control. The Company’s proportionate share of IGM’s earnings is recorded in net investment income in the Consolidated Statements of Earnings. The Company owns 9,202,049 shares of IGM at December 31, 2017 (9,202,706 at December 31, 2016) representing a 3.82% ownership interest (3.83% at December 31, 2016). The Company uses the equity method to account for its investment in IGM as it exercises significant influence. Significant influence arises from several factors, including, but not limited to the following: common control of the Company and IGM by Power Financial, shared representation on the Boards of Directors of the Company and IGM, interchange of managerial personnel, and certain shared strategic alliances, significant intercompany transactions and service agreements that influence the financial and operating policies of both companies.

2017 2016

Carrying value, beginning of year $ 361 $ 358Equity method share of IGM net earnings 22 23Dividends received (21) (20)

Carrying value, end of year $ 362 $ 361

Share of equity, end of year $ 186 $ 181

Fair value, end of year $ 404 $ 351

The Company and IGM both have a year-end date of December 31. The Company’s year-end results are approved and reported before IGM publicly reports its financial result; therefore, the Company reports IGM’s financial information by estimating the amount of earnings attributable to the Company, based on prior quarter information as well as consensus expectations, to complete equity method accounting. The difference between actual and estimated results is reflected in the subsequent quarter and is not material to the Company’s consolidated financial statements.

IGM’s financial information as at December 31, 2017 can be obtained in its publicly available information.

At December 31, 2017 and 2016 IGM owned 39,737,388 common shares of the Company.

(d) Included in portfolio investments are the following:

(i) Carrying amount of impaired investments 2017 2016

Impaired amounts by classification Fair value through profit or loss $ 233 $ 283 Available-for-sale 17 10 Loans and receivables 41 79

Total $ 291 $ 372

The carrying amount of impaired investments includes $246 bonds, $34 mortgage loans and $11 stocks at December 31, 2017 ($315 bonds and $57 mortgage loans at December 31, 2016). The above carrying values for loans and receivables are net of allowances of $40 at December 31, 2017 and $43 at December 31, 2016.

(ii) The allowance for credit losses and changes in the allowance for credit losses related to investments classified as loans and receivables are as follows:

2017 2016

Mortgage Mortgage Bonds loans Total Bonds loans Total

Balance, beginning of year $ 7 $ 36 $ 43 $ – $ 20 $ 20Net provision for credit losses – in year – 9 9 7 28 35Write-offs, net of recoveries (7) (5) (12) – (6) (6)Other (including foreign exchange rate changes) – – – – (6) (6)

Balance, end of year $ – $ 40 $ 40 $ 7 $ 36 $ 43

The allowance for credit losses is supplemented by the provision for future credit losses included in insurance contract liabilities.

5. Portfolio Investments (cont’d)



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(e) Net investment income comprises the following: 2017

Mortgage Investment Bonds loans Stocks properties Other Total

Regular net investment income: Investment income earned $ 4,294 $ 892 $ 263 $ 318 $ 463 $ 6,230 Net realized gains Available-for-sale 17 – 13 – – 30 Other classifications 23 74 – – – 97 Net allowances for credit losses on loans and receivables 2 (9) – – – (7) Other income (expenses) – – – (87) (122) (209)

4,336 957 276 231 341 6,141Changes in fair value on fair value through profit or loss assets: Classified fair value through profit or loss (16) – 3 – – (13) Designated fair value through profit or loss 881 – 576 – (154) 1,303 Recorded at fair value through profit or loss – – – 176 – 176

865 – 579 176 (154) 1,466

Total $ 5,201 $ 957 $ 855 $ 407 $ 187 $ 7,607

2016


Regular net investment income: Investment income earned $ 4,230 $ 921 $ 266 $ 325 $ 571 $ 6,313 Net realized gains Available-for-sale 80 – 4 – – 84 Other classifications 30 51 – – – 81 Net allowances for credit losses on loans and receivables (7) (28) – – – (35) Other income (expenses) – – – (84) (107) (191)

4,333 944 270 241 464 6,252Changes in fair value on fair value through profit or loss assets: Designated fair value through profit or loss 3,182 – 957 – (297) 3,842 Recorded at fair value through profit or loss – – – 61 – 61

3,182 – 957 61 (297) 3,903

Total $ 7,515 $ 944 $ 1,227 $ 302 $ 167 $ 10,155

Investment income earned comprises income from investments that are classified as available-for-sale, loans and receivables and investments classified or designated as fair value through profit or loss. Investment income from bonds and mortgages includes interest income and premium and discount amortization. Income from stocks includes dividends, distributions from private equity and equity income from the investment in IGM and Allianz Ireland, which was disposed of during 2017. Investment properties income includes rental income earned on investment properties, ground rent income earned on leased and sub-leased land, fee recoveries, lease cancellation income, and interest and other investment income earned on investment properties. Other income includes policyholder loan income, foreign exchange gains and losses, income earned from derivative financial instruments and other miscellaneous income.



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(f ) The carrying value of investment properties and changes in the carrying value of investment properties are as follows: 2017 2016

Balance, beginning of year $ 4,340 $ 5,237Additions 339 102Change in fair value through profit or loss 176 61Disposals (72) (427)Foreign exchange rate changes 68 (633)

Balance, end of year $ 4,851 $ 4,340

(g) Transferred Financial Assets

The Company engages in securities lending to generate additional income. The Company’s securities custodians are used as lending agents. Collateral, which exceeds the fair value of the loaned securities, is deposited by the borrower with the Company’s lending agent and maintained by the lending agent until the underlying security has been returned. The fair value of the loaned securities is monitored on a daily basis by the lending agent who obtains or refunds additional collateral as the fair value of the loaned securities fluctuates. There was no cash collateral included in the collateral deposited with the Company’s lending agent as of December 31, 2017 and December 31, 2016. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default. As at December 31, 2017, the Company had loaned securities (which are included in invested assets) with a fair value of $7,427 ($7,520 at December 31, 2016).

6. Assets Held For Sale

The Company has agreed in principle to dispose of an investment, which is expected to be finalized in the first quarter of 2018. The $169 fair value less cost to sell of the assets held for sale at December 31, 2017 comprise the Company’s investment accounted for under the equity method and a customer contract related indefinite life intangible asset. The disposal group is presented within the Company’s United States operating segment. The Company recognized a loss of $122 ($202 pre-tax) on recognition of the assets held for sale in the Consolidated Statements of Earnings.

Subsequent to year-end, the Company executed the final sale agreement.

5. Portfolio Investments (cont’d)



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7. Funds Held by Ceding Insurers

At December 31, 2017, the Company had amounts on deposit of $9,893 ($10,781 at December 31, 2016) for funds held by ceding insurers on the Consolidated Balance Sheets. Income and expenses arising from the agreements are included in net investment income in the Consolidated Statements of Earnings.

During 2016, the Company completed the transfer of approximately $1,600 of annuity business from The Equitable Life Assurance Company (Equitable Life) acquired during 2015.

During 2016, a subsidiary of the Company completed a portfolio transfer of approximately $1,300 whereby investment contract liabilities and supporting bonds and cash were acquired. The portfolio of investment contract liabilities had been previously reinsured by the Company on a funds withheld basis.

The details of the funds on deposit for certain agreements where the Company has credit risk are as follows:

(a) Carrying values and estimated fair values: 2017 2016

Carrying Fair Carrying Fair value value value value

Cash and cash equivalents $ 132 $ 132 $ 214 $ 214Bonds 7,806 7,806 8,391 8,391Other assets 106 106 118 118

Total $ 8,044 $ 8,044 $ 8,723 $ 8,723

Supporting:Reinsurance liabilities $ 7,777 $ 7,777 $ 8,218 $ 8,218Surplus 267 267 505 505

Total $ 8,044 $ 8,044 $ 8,723 $ 8,723

(b) The following provides details of the carrying value of bonds included in the funds on deposit by issuer and industry sector: 2017 2016

Bonds issued or guaranteed by: Treasuries $ 918 $ 1,143 Government related 1,424 1,506 Agency securitized – 3 Non-agency securitized 891 1,126 Financials 1,834 1,764 Communications 159 132 Consumer products 606 692 Energy 244 276 Industrials 256 252 Technology 74 72 Transportation 196 164 Utilities 1,204 1,228

Total long-term bonds 7,806 8,358 Short-term bonds – 33

Total $ 7,806 $ 8,391

(c) Asset quality

Bond Portfolio By Credit Rating

2017 2016

AAA $ 714 $ 618AA 3,204 3,792A 3,240 3,300BBB 439 476BB and lower 209 205

Total $ 7,806 $ 8,391



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8. Financial Instruments Risk Management

The Company has policies relating to the identification, measurement, management, monitoring and reporting of risks associated with financial instruments. The key risks related to financial instruments are credit risk, liquidity risk and market risk (currency, interest rate and equity). The Risk Committee of the Board of Directors is responsible for the oversight of the Company’s key risks. See the “Risk Management and Control Practices” section in the Company’s December 31, 2017 Management’s Discussion and Analysis.

The following sections describe how the Company manages each of these risks.

(a) Credit Risk

Credit risk is the risk of loss resulting from an obligor’s potential inability or unwillingness to fully meet its contractual obligations to the Company.

The following policies and procedures are in place to manage this risk:

• Investment policies are in place that 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.

• Portfolios are monitored continuously, and reviewed regularly with the Risk Committee and the Investment Committee of the Board of Directors.

• 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. The Company 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 the Company are reviewed for financial soundness as part of an ongoing monitoring process. The minimum financial strength of reinsurers is outlined in the Reinsurance Risk Management Policy. The Company 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 arrangements where possible.

• Investment guidelines also specify collateral requirements.

(i) Maximum Exposure to Credit Risk

The following summarizes the Company’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. 2017 2016

Cash and cash equivalents $ 3,551 $ 3,259Bonds Fair value through profit or loss 89,898 88,325 Available-for-sale 12,347 11,478 Loans and receivables 17,959 16,970Mortgage loans 22,185 21,651Loans to policyholders 8,280 8,467Funds held by ceding insurers (1) 9,893 10,781Reinsurance assets 5,045 5,627Interest due and accrued 1,334 1,310Accounts receivable 2,154 1,835Premiums in course of collection 1,159 1,166Trading account assets 723 516Finance leases receivable 350 273Other assets (2) (3) 554 721Derivative assets 384 528

Total $ 175,816 $ 172,907

(1) Includes $8,044 ($8,723 at December 31, 2016) of funds held by ceding insurers where the Company retains the credit risk of the assets supporting the liabilities ceded (note 7).

(2) Includes items such as current income taxes receivable and miscellaneous other assets of the Company (note 12).

(3) The Company reclassified current taxes to deferred taxes resulting in an increase to current income tax receivable of $73 on the Consolidated Balance Sheets at December 31, 2016 (note 34).



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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 counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Management monitors the value of the collateral, requests additional collateral when needed and performs an impairment valuation when applicable. The Company has $77 of collateral received from counterparties as at December 31, 2017 ($149 at December 31, 2016) relating to derivative assets.

(ii) Concentration of Credit Risk

Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar credit risk characteristics in that they operate in the same geographic region or in similar industries. The characteristics are similar in that changes in economic or political environments may impact their ability to meet obligations as they come due.

The following provides details of the carrying value of bonds by issuer, industry sector and geographic distribution: 2017

United Canada States Europe Total

Bonds issued or guaranteed by: Treasuries $ 899 $ 263 $ 12,452 $ 13,614 Government related 19,322 3,570 7,557 30,449 Agency securitized 65 1,937 21 2,023 Non-agency securitized 2,073 5,232 1,761 9,066 Financials 3,872 4,070 5,493 13,435 Communications 782 1,304 1,015 3,101 Consumer products 3,159 3,714 3,238 10,111 Energy 1,806 2,041 866 4,713 Industrials 1,544 3,727 1,748 7,019 Technology 591 1,094 485 2,170 Transportation 2,407 828 1,144 4,379 Utilities 7,310 4,332 4,277 15,919

Total long-term bonds 43,830 32,112 40,057 115,999 Short-term bonds 2,474 78 1,653 4,205

Total $ 46,304 $ 32,190 $ 41,710 $ 120,204

2016


Bonds issued or guaranteed by: Treasuries $ 1,422 $ 786 $ 10,880 $ 13,088 Government related 18,379 3,903 6,765 29,047 Agency securitized 100 3,685 158 3,943 Non-agency securitized 2,392 4,293 1,875 8,560 Financials 3,167 3,268 5,245 11,680 Communications 634 1,336 970 2,940 Consumer products 2,799 3,305 3,224 9,328 Energy 1,618 2,102 986 4,706 Industrials 1,358 3,951 1,634 6,943 Technology 506 1,054 471 2,031 Transportation 2,246 826 1,095 4,167 Utilities 6,226 4,454 4,259 14,939

Total long-term bonds 40,847 32,963 37,562 111,372 Short-term bonds 3,871 10 1,520 5,401

Total $ 44,718 $ 32,973 $ 39,082 $ 116,773



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The following provides details of the carrying value of mortgage loans by geographic location: 2017

Single family Multi-family residential residential Commercial Total

Canada $ 2,139 $ 4,163 $ 6,840 $ 13,142United States – 2,190 3,257 5,447Europe – 413 3,183 3,596

Total $ 2,139 $ 6,766 $ 13,280 $ 22,185

2016

Single family Multi-family residential residential Commercial Total

Canada $ 2,075 $ 3,709 $ 7,108 $ 12,892United States – 1,895 3,274 5,169Europe – 383 3,207 3,590

Total $ 2,075 $ 5,987 $ 13,589 $ 21,651

(iii) Asset Quality

Bond Portfolio By Credit Rating

2017 2016

AAA $ 24,889 $ 27,762AA 32,405 29,816A 40,328 37,787BBB 21,449 20,116BB and lower 1,133 1,292

Total $ 120,204 $ 116,773

Derivative Portfolio By Credit Rating

2017 2016

Over-the-counter contracts (counterparty ratings):AA $ 135 $ 221A 235 288BBB 13 16Exchange-traded 1 3

Total $ 384 $ 528

(iv) Loans 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 has reasonable assurance of collection of the full amount of principal and interest due. The following provides carrying values of the loans past due, but not impaired: 2017 2016

Less than 30 days $ 1 $ 5430 – 90 days – –Greater than 90 days 1 2

Total $ 2 $ 56

(v) 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: 2017 2016

Participating $ 1,254 $ 1,155Non-participating 1,637 1,791

Total $ 2,891 $ 2,946

8. Financial Instruments Risk Management (cont’d)



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(b) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come due. The following policies and procedures are in place to manage this risk:

• The Company 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 67% in 2016) of insurance and investment contract liabilities are non-cashable prior to maturity or subject to fair value adjustments.

• Management 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. The Company maintains $350 of liquidity at the Lifeco level through committed lines of credit with Canadian chartered banks. As well, the Company maintains a $150 liquidity facility at Great-West Life, a U.S. $500 revolving credit agreement with a syndicate of banks for use by Putnam, and a U.S. $50 line of credit at Great-West Financial.

In the normal course of business the Company enters into contracts that give rise to commitments of future minimum payments that impact short-term and long-term liquidity. The following summarizes the principal repayment schedule of certain of the Company’s financial liabilities.

Payments due by period

Over Total 1 year 2 years 3 years 4 years 5 years 5 years

Debentures and other debt instruments $ 5,235 $ 200 $ – $ 500 $ – $ – $ 4,535Capital trust securities (1) 150 – – – – – 150Purchase obligations 253 109 74 48 19 3 –Pension contributions 300 300 – – – – –

Total $ 5,938 $ 609 $ 74 $ 548 $ 19 $ 3 $ 4,685

(1) Payments due have not been reduced to reflect that the Company held capital trust securities of $37 principal amount ($52 carrying value).

(c) Market Risk

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 which include three types: currency risk, interest rate (including related inflation) risk and equity risk.

Caution Related to Risk Sensitivities

These consolidated financial statements include estimates of sensitivities and risk exposure measures for certain risks, such as the sensitivity due to specific changes in interest rate levels projected and market prices as at the valuation date. Actual results can differ significantly from these estimates for a variety of reasons including:

• Assessment of the circumstances that led to the scenario may lead to changes in (re)investment approaches and interest rate scenarios considered,

• Changes in actuarial, investment return and future investment activity assumptions,

• Actual experience differing from the assumptions,

• Changes in business mix, effective income tax rates and other market factors,

• Interactions among these factors and assumptions when more than one changes, and

• The general limitations of the Company’s 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 Company cannot provide assurance that the actual impact on net earnings attributed to shareholders will be as indicated.



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(i) Currency Risk

Currency risk relates to the Company operating and holding financial instruments in different currencies. For the assets backing insurance and investment contract liabilities that are not matched by currency, changes in foreign exchange rates can expose the Company to the risk of foreign exchange losses not offset by liability decreases. The Company has net investments in foreign operations. The Company’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 accumulated other comprehensive income. Strengthening or weakening of the Canadian dollar spot rate compared to the U.S. dollar, British pound and euro spot rates impacts the Company’s total equity. Correspondingly, the Company’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 the Company’s exposure to currency risk:

• The Company 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 assets backing liabilities not matched by currency, the Company would normally convert the assets back to the currency of the liability using foreign exchange contracts.

• A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non-participating insurance and investment contract liabilities and their supporting assets by approximately the same amount resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non-participating insurance and investment contract liabilities and their supporting assets by approximately the same amount resulting in an immaterial change in net earnings.

(ii) Interest Rate Risk

Interest rate risk exists if asset and liability cash flows are not closely matched and interest rates change causing a difference in value between the asset and liability. The following policies and procedures are in place to mitigate the Company’s exposure to interest rate risk:

• The Company utilizes a formal process for managing the matching of assets and liabilities. This involves grouping general fund assets and liabilities into segments. Assets in each segment are managed in relation to the liabilities in the segment.

• Interest rate risk is managed by investing in assets that are suitable for the products sold.

• Where these products have benefit or expense payments that are dependent on inflation (inflation-indexed annuities, pensions and disability claims) the Company generally invests in real return instruments to hedge its real dollar liability cash flows. Some protection against changes in the inflation index is achieved as any related change in the fair value of the assets will be largely offset by a similar change in the fair value of the liabilities.

• For products with fixed and highly predictable benefit payments, investments are made in fixed income assets or real estate whose cash flows closely match the liability product cash flows. Where assets are not available to match certain 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 risk associated with the mismatch in portfolio duration and cash flow, asset prepayment exposure and the pace of asset acquisition are quantified and reviewed regularly.

Projected cash flows from the current assets and liabilities are used in the Canadian Asset Liability Method to determine insurance contract liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future 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.

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 0.13% (0.14% in 2016). The calculation for future credit losses on assets is based on the credit quality of the underlying asset portfolio.

Testing under a number of interest rate scenarios (including increasing, decreasing and fluctuating rates) is done to assess reinvestment risk. The total provision for interest rates is sufficient to cover a broader or more severe set of risks than the minimum arising from the current Canadian Institute of Actuaries prescribed scenarios.


C 1 0 0 P O W E R C O R P O R AT I O N O F C A N A DA


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The range of interest rates covered by these provisions is set in consideration of long-term historical results and is monitored quarterly with a full review annually. An immediate 1% parallel shift in the yield curve would not have a material impact on the Company’s view of the range of interest rates to be covered by the provisions. If sustained however, the parallel shift could impact the Company’s range of scenarios covered.

The total provision for interest rates also considers the impact of the Canadian Institute of Actuaries prescribed scenarios:

• At December 31, 2017 and December 31, 2016, the effect of an immediate 1% parallel increase in the yield curve on the prescribed scenarios results in interest rate changes to assets and liabilities that will offset each other with no impact to net earnings.

• At December 31, 2017 and December 31, 2016, the effect of an immediate 1% parallel decrease in the yield curve on the prescribed scenarios results in interest rate changes to assets and liabilities that will offset each other with no impact to net earnings.

Another way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment contract liabilities impacting the shareholders’ net earnings of the Company of a 1% change in the Company’s view of the range of interest rates to be covered by these provisions. The following provides information on the effect of an immediate 1% increase or 1% decrease in the interest rates at both the low and high end of the range of interest rates recognized in the provisions:

2017 2016

1% increase 1% decrease 1% increase 1% decrease

Change in interest ratesIncrease (decrease) in non-participating insurance and investment contract liabilities $ (215) $ 720 $ (202) $ 677Increase (decrease) in net earnings $ 150 $ (523) $ 149 $ (491)

(iii) Equity Risk

Equity risk is the uncertainty associated with the valuation of assets and liabilities arising from changes in equity markets and other pricing risk. To mitigate pricing risk, the Company has investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. 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, the Company generally determines insurance contract liabilities at a conditional tail expectation of 75 (CTE75) level.

Some insurance and investment contract liabilities are supported by investment properties, common stocks and private equities, for example segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity 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:

2017 2016


Change in equity valuesIncrease (decrease) in non-participating insurance and investment contract liabilities $ (58) $ 109 $ (51) $ 61Increase (decrease) in net earnings $ 48 $ (85) $ 43 $ (50)

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:

2017 2016


Change in best estimate return assumptions for equitiesIncrease (decrease) in non-participating insurance contract liabilities $ (542) $ 591 $ (504) $ 552Increase (decrease) in net earnings $ 439 $ (470) $ 407 $ (438)

P O W E R C O R P O R AT I O N O F C A N A DA C 1 0 1


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(d) Enforceable Master Netting Arrangements or Similar Agreements

The Company enters into International Swaps and Derivative Association’s (ISDA’s) master agreements for transacting over-the-counter derivatives. The Company receives and pledges collateral according to the related ISDA’s Credit Support Annexes. The ISDA’s master agreements do not meet the criteria for offsetting on the Consolidated Balance Sheets because they create a right of set-off that is enforceable only in the event of default, insolvency, or bankruptcy.

For exchange-traded derivatives subject to derivative clearing agreements with the exchanges and clearinghouses, there is no provision for set-off at default. Initial margin is excluded from the table within this disclosure as it would become part of a pooled settlement process.

The Company’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 the Company and its counterparties in the event of default.

The table sets out the potential effect on the Company’s Consolidated 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 Consolidated Balance Sheets.

2017

Related amounts not set-off in the Balance Sheet

Gross amount of financial instruments Financial presented in Offsetting collateral the Balance counterparty received/ Net Sheet position (1) pledged (2) exposure

Financial instruments – assets Derivative financial instruments $ 384 $ (331) $ (26) $ 27 Reverse repurchase agreements (3) 29 – (29) –

Total financial instruments – assets $ 413 $ (331) $ (55) $ 27

Financial instruments – liabilities Derivative financial instruments $ 1,336 $ (331) $ (359) $ 646

Total financial instruments – liabilities $ 1,336 $ (331) $ (359) $ 646

2016

Related amounts not set-off in the Balance Sheet

Gross amount of financial instruments Financial presented in Offsetting collateral the Balance counterparty received/ Net Sheet position (1) pledged (2) exposure

Financial instruments – assets Derivative financial instruments $ 528 $ (341) $ (131) $ 56

Total financial instruments – assets $ 528 $ (341) $ (131) $ 56

Financial instruments – liabilities Derivative financial instruments $ 2,012 $ (341) $ (403) $ 1,268

Total financial instruments – liabilities $ 2,012 $ (341) $ (403) $ 1,268

(1) Includes counterparty amounts recognized on the Consolidated Balance Sheets where the Company has a potential offsetting position (as described above) but does not meet the criteria for offsetting on the balance sheet, 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 $77 ($159 at December 31, 2016), received on reverse repurchase agreements was $29 (nil at December 31, 2016), and pledged on derivative liabilities was $437 ($475 at December 31, 2016).

(3) Assets related to reverse repurchase agreements are included in bonds, on the Consolidated Balance Sheets.




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9. Fair Value Measurement

The Company’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy:

Level 1: Fair value measurements utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company 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 2: Fair value measurements utilize inputs 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 quotes, issuer spreads, two-sided markets, benchmark securities, offers and reference data. Level 2 assets and liabilities include those priced using a matrix which is based on credit quality and average life, government and 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, and mortgage loans. Investment contracts that are measured at fair value through profit or loss are mostly included in the Level 2 category.

Level 3: Fair value measurements 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. The values of the majority of Level 3 securities were obtained from single broker quotes, internal pricing models, or external appraisers. Assets and liabilities utilizing Level 3 inputs generally include certain bonds, certain asset-backed securities, some private equities, investments in mutual and segregated funds where there are redemption restrictions, certain over-the-counter derivatives, and investment properties.

The following presents the Company’s assets and liabilities measured at fair value on a recurring basis by hierarchy level: 2017

Level 1 Level 2 Level 3 Total

Assets measured at fair value

Cash and cash equivalents $ 3,551 $ – $ – $ 3,551

Financial assets at fair value through profit or loss Bonds – 89,833 65 89,898 Stocks 7,854 – 243 8,097

Total financial assets at fair value through profit or loss 7,854 89,833 308 97,995

Available-for-sale financial assets Bonds – 12,347 – 12,347 Stocks 49 5 1 55

Total available-for-sale financial assets 49 12,352 1 12,402

Investment properties – – 4,851 4,851Funds held by ceding insurers 132 7,806 – 7,938Derivatives (1) 1 383 – 384Assets held for sale – 169 – 169Other assets: Trading account assets 503 220 – 723

Total assets measured at fair value $ 12,090 $ 110,763 $ 5,160 $ 128,013

Liabilities measured at fair value

Derivatives (2) $ 2 $ 1,334 $ – $ 1,336Investment contract liabilities – 1,819 22 1,841

Total liabilities measured at fair value $ 2 $ 3,153 $ 22 $ 3,177

(1) Excludes collateral received from counterparties of $77.

(2) Excludes collateral pledged to counterparties of $374.

There were no transfers of the Company’s assets and liabilities between Level 1 and Level 2 in the year.



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2016


Assets measured at fair value

Cash and cash equivalents $ 3,259 $ – $ – $ 3,259

Financial assets at fair value through profit or loss Bonds – 88,324 1 88,325 Stocks 7,520 6 80 7,606

Total financial assets at fair value through profit or loss 7,520 88,330 81 95,931

Available-for-sale financial assets Bonds – 11,478 – 11,478 Stocks 47 – 1 48

Total available-for-sale financial assets 47 11,478 1 11,526

Investment properties – – 4,340 4,340Funds held by ceding insurers 214 8,391 – 8,605Derivatives (1) 3 525 – 528Other assets: Trading account assets 302 213 1 516

Total assets measured at fair value $ 11,345 $ 108,937 $ 4,423 $ 124,705

Liabilities measured at fair value

Derivatives (2) $ 1 $ 2,011 $ – $ 2,012Investment contract liabilities – 1,989 20 2,009

Total liabilities measured at fair value $ 1 $ 4,000 $ 20 $ 4,021

(1) Excludes collateral received from counterparties of $149.

(2) Excludes collateral pledged to counterparties of $425.

There were no transfers of the Company’s assets and liabilities between Level 1 and Level 2 in the year.

9. Fair Value Measurement (cont’d)



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The following presents additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value: 2017

Fair value Fair value Other through Available- through Available- assets – Total Investment profit or for-sale profit or loss for-sale Investment trading Level 3 contract loss bonds bonds stocks (3) stocks properties account (4) assets liabilities

Balance, beginning of year $ 1 $ – $ 80 $ 1 $ 4,340 $ 1 $ 4,423 $ 20Total gains Included in net earnings 1 – 10 – 176 – 187 – Included in other comprehensive income (loss) (1) 4 – (3) – 68 – 69 –Purchases – – 166 – 339 – 505 –Sales – – (14) – (72) (1) (87) –Other – – – – – – – 2Transfers into Level 3 (2) 60 – 4 – – – 64 –Transfers out of Level 3 (2) (1) – – – – – (1) –

Balance, end of year $ 65 $ – $ 243 $ 1 $ 4,851 $ – $ 5,160 $ 22

Total gains for the year included in net investment income $ 1 $ – $ 10 $ – $ 176 $ – $ 187 $ –

Change in unrealized gains for the year included in earnings for assets held at December 31, 2017 $ 1 $ – $ 10 $ – $ 151 $ – $ 162 $ –

(1) Amount of other comprehensive income for investment properties represents the unrealized gains (losses) on foreign exchange.

(2) Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies. Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors or the lifting of redemption restrictions on investments in mutual and segregated funds.

(3) Includes investments in mutual and segregated funds where there are redemption restrictions. The fair value is based on observable, quoted prices.

(4) Includes illiquid equities where prices are not quoted; however, the Company does not believe changing the inputs to reasonably alternate assumptions would change the values significantly.



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2016

Fair value Fair value Other through Available- through Available- assets – Total Investment profit or for-sale profit or loss for-sale Investment trading Level 3 contract loss bonds bonds stocks (3) stocks properties account (4) assets liabilities

Balance, beginning of year $ 10 $ 1 $ 66 $ 1 $ 5,237 $ 5 $ 5,320 $ 27Total gains Included in net earnings – – 2 – 61 – 63 – Included in other comprehensive income (loss) (1) – – – – (633) – (633) –Purchases – – 50 – 102 – 152 –Sales – – (38) – (427) (5) (470) –Other – – – – – – – (7)Transfers into Level 3 (2) – – – – – 1 1 –Transfers out of Level 3 (2) (9) (1) – – – – (10) –

Balance, end of year $ 1 $ – $ 80 $ 1 $ 4,340 $ 1 $ 4,423 $ 20

Total gains for the year included in net investment income $ – $ – $ 2 $ – $ 61 $ – $ 63 $ –

Change in unrealized gains for the year included in earnings for assets held at December 31, 2016 $ – $ – $ 3 $ – $ 1 $ – $ 4 $ –

(1) Amount of other comprehensive income for investment properties represents the unrealized gains (losses) on foreign exchange.

(2) Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies. Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors or the lifting of redemption restrictions on investments in mutual and segregated funds.

(3) Includes investments in mutual and segregated funds where there are redemption restrictions. The fair value is based on observable, quoted prices.

(4) Includes illiquid equities where prices are not quoted; however, the Company does not believe changing the inputs to reasonably alternate assumptions would change the values significantly.

The following 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:

Type of asset

Valuation approach Significant unobservable input

Input value Inter-relationship between key unobservable inputs and fair value measurement

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 2.6% – 10.3% 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.

Reversionary rate Range of 4.3% – 7.5% 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.

Vacancy rate Weighted average of 2.7% 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.

9. Fair Value Measurement (cont’d)



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The following presents the Company’s assets and liabilities disclosed at fair value on a recurring basis by hierarchy level: 2017

Other assets/ liabilities not held at fair Level 1 Level 2 Level 3 value Total

Assets disclosed at fair valueLoans and receivables financial assets Bonds $ – $ 19,365 $ 105 $ – $ 19,470 Mortgage loans – 23,005 – – 23,005 Loans to policyholders – 8,280 – – 8,280

Total loans and receivables financial assets – 50,650 105 – 50,755Available-for-sale financial assets Stocks (1) – – – 348 348Other stocks (2) (3) 404 – – 2 406Funds held by ceding insurers – – – 106 106

Total assets disclosed at fair value $ 404 $ 50,650 $ 105 $ 456 $ 51,615

Liabilities disclosed at fair valueDebentures and other debt instruments $ 428 $ 5,622 $ – $ – $ 6,050Capital trust securities – 221 – – 221

Total liabilities disclosed at fair value $ 428 $ 5,843 $ – $ – $ 6,271

(1) Fair value of certain stocks available for sale cannot be reliably measured, therefore, these investments are recorded at cost.

(2) Other stocks include the Company’s investments in an affiliated company, IGM, a member of the Power Financial group of companies.

(3) During the fourth quarter of 2017, the Company classified an investment within a disposal group of assets held for sale (note 6).

2016

Other assets/ liabilities not held at fair Level 1 Level 2 Level 3 value Total

Assets disclosed at fair valueLoans and receivables financial assets Bonds $ – $ 18,355 $ 129 $ – $ 18,484 Mortgage loans – 22,550 – – 22,550 Loans to policyholders – 8,467 – – 8,467

Total loans and receivables financial assets – 49,372 129 – 49,501Available-for-sale financial assets Stocks (1) – – – 391 391Other stocks (2) 351 – – 259 610Funds held by ceding insurers – – – 118 118

Total assets disclosed at fair value $ 351 $ 49,372 $ 129 $ 768 $ 50,620

Liabilities disclosed at fair valueDebentures and other debt instruments $ 428 $ 6,001 $ – $ – $ 6,429Capital trust securities – 212 – – 212

Total liabilities disclosed at fair value $ 428 $ 6,213 $ – $ – $ 6,641

(1) Fair value of certain stocks available for sale cannot be reliably measured, therefore, these investments are recorded at cost.

(2) Other stocks include the Company’s investments in an affiliated company, IGM, a member of the Power Financial group of companies and Allianz Ireland, an unlisted general insurance company operating in Ireland, which was disposed of during 2017.



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10. Goodwill and Intangible Assets

(a) Goodwill

(i) The carrying value of goodwill and changes in the carrying value of goodwill are as follows: 2017 2016

Balance, beginning of year $ 5,977 $ 5,913Business acquisitions (note 3) 182 95Changes in foreign exchange rates 20 (31)


Accumulated goodwill impairment losses and changes in accumulated goodwill impairment losses are as follows: 2017 2016

Balance, beginning of year $ 1,205 $ 1,241Changes in foreign exchange rates (72) (36)


(ii) Within each of the three operating segments, goodwill has been assigned to cash generating unit groupings, representing the lowest level in which goodwill is monitored for internal reporting purposes. Lifeco does not allocate insignificant amounts of goodwill and indefinite life intangible assets across multiple cash generating unit groupings. Goodwill is tested for impairment by comparing the carrying value of each cash generating unit grouping to which goodwill has been assigned to its recoverable amount as follows:

2017 2016 (1)

Canada Group Customer $ 1,443 $ 1,443 Individual Customer 2,526 2,344Europe Insurance and Annuities 2,015 1,984 Reinsurance 1 1United States Financial Services 194 205

Total $ 6,179 $ 5,977

(1) Effective January 1, 2017, the Company realigned its Individual Insurance, Wealth Management and Group Insurance business units in the Canada segment into two business units: Individual Customer and Group Customer. The realignment resulted in a change to comparative figures within these cash generating unit groupings.



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(b) Intangible Assets

Intangible assets of $3,732 ($3,972 as at December 31, 2016) include indefinite life and finite life intangible assets. The carrying value and changes in the carrying value of these intangible assets are as follows:

(i) Indefinite life intangible assets: 2017

Shareholders’ portion of acquired future Brands and Customer participating trademarks contract related account profit Total

CostBalance, beginning of year $ 979 $ 2,938 $ 354 $ 4,271Transfer to assets held for sale (note 6) – (290) – (290)Changes in foreign exchange rates (15) (153) – (168)

Balance, end of year $ 964 $ 2,495 $ 354 $ 3,813

Accumulated impairmentBalance, beginning of year $ (157) $ (1,084) $ – $ (1,241)Impairment reversal (1) 20 – – 20Changes in foreign exchange rates 5 65 – 70

Balance, end of year $ (132) $ (1,019) $ – $ (1,151)

Net carrying amount $ 832 $ 1,476 $ 354 $ 2,662

(1) During 2017, the Company reversed an impairment loss of $20 initially recorded in 2008 related to certain Putnam brands and trademarks. The reversal has been recorded in the Consolidated Statements of Earnings within amortization of finite life intangible assets and impairment reversal.

2016

Shareholders’ portion of acquired future Brands and Customer participating trademarks contract related account profit Total

CostBalance, beginning of year $ 1,020 $ 3,019 $ 354 $ 4,393Transfer to finite life – (3) – (3)Changes in foreign exchange rates (41) (78) – (119)

Balance, end of year $ 979 $ 2,938 $ 354 $ 4,271

Accumulated impairmentBalance, beginning of year $ (162) $ (1,116) $ – $ (1,278)Changes in foreign exchange rates 5 32 – 37

Balance, end of year $ (157) $ (1,084) $ – $ (1,241)

Net carrying amount $ 822 $ 1,854 $ 354 $ 3,030

(ii) Indefinite life intangible assets have been assigned to the cash generating unit groupings as follows: 2017 2016 (1)

Canada Group Customer $ 354 $ 354 Individual Customer 619 619Europe Insurance and Annuities 227 216United States Asset Management 1,462 1,841

Total $ 2,662 $ 3,030

(1) Effective January 1, 2017, the Company realigned its Individual Insurance, Wealth Management and Group Insurance business units in the Canada segment into two business units: Individual Customer and Group Customer. The realignment resulted in a change to comparative figures within these cash generating unit groupings.



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(iii) Finite life intangible assets: 2017

Customer contract Distribution Technology/ related channels Software Total

Amortization period range 9 – 30 years 30 years 3 – 10 yearsAmortization method Straight-line Straight-line Straight-line

CostBalance, beginning of year $ 831 $ 106 $ 1,264 $ 2,201Additions 154 – 187 341Changes in foreign exchange rates (10) 2 (36) (44)Disposals – – (25) (25)

Balance, end of year $ 975 $ 108 $ 1,390 $ 2,473

Accumulated amortization and impairmentBalance, beginning of year $ (460) $ (48) $ (751) $ (1,259)Changes in foreign exchange rates 8 – 28 36Disposals – – 8 8Amortization (53) (4) (131) (188)

Balance, end of year $ (505) $ (52) $ (846) $ (1,403)

Net carrying amount $ 470 $ 56 $ 544 $ 1,070

During 2017, the Company recognized an impairment loss of $16 on software assets included in the provision for the Canadian Business Transformation (note 29).

2016

Customer contract Distribution Technology/ related channels Software Total

Amortization period range 9 – 30 years 30 years 3 – 10 yearsAmortization method Straight-line Straight-line Straight-line

CostBalance, beginning of year $ 810 $ 118 $ 1,106 $ 2,034Additions 39 – 183 222Transfer from indefinite life 3 – – 3Changes in foreign exchange rates (21) (12) (25) (58)

Balance, end of year $ 831 $ 106 $ 1,264 $ 2,201

Accumulated amortization and impairmentBalance, beginning of year $ (418) $ (49) $ (646) $ (1,113)Changes in foreign exchange rates 8 5 18 31Amortization (50) (4) (123) (177)

Balance, end of year $ (460) $ (48) $ (751) $ (1,259)

Net carrying amount $ 371 $ 58 $ 513 $ 942

The weighted average remaining amortization period of the customer contract related and distribution channels are 14 and 16 years respectively (10 and 17 years respectively at December 31, 2016).

10. Goodwill and Intangible Assets (cont’d)



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(c) Recoverable Amount

For the purposes of annual impairment testing, the Company allocates goodwill and indefinite life intangible assets to cash generating unit groupings. Any potential impairment of goodwill or indefinite life intangible assets is identified by comparing the recoverable amount of a cash generating unit grouping to its carrying value. Recoverable amount is based on fair value less cost of disposal.

Fair value is initially assessed with reference to valuation multiples of comparable publicly-traded financial institutions and precedent business acquisitions 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 2017, the Company conducted its annual impairment testing of goodwill and indefinite life intangible assets based on September 30, 2017 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. In addition, during the year ended December 31, 2017, management transferred a $290 customer contract-related intangible to assets held for sale (note 6).

Any reasonable changes in assumptions and estimates used in determining recoverable amounts of cash generating unit groupings is unlikely to cause carrying values to exceed recoverable amounts.

11. Owner Occupied Properties and Fixed Assets

The carrying value of owner occupied properties and the changes in the carrying value of owner occupied properties is as follows:

2017 2016

Carrying value, beginning of year $ 721 $ 715Less: accumulated depreciation/impairments (72) (62)

Net carrying value, beginning of year 649 653Additions 73 21Disposals – (2)Depreciation (11) (10)Foreign exchange (5) (13)

Net carrying value, end of year $ 706 $ 649

The net carrying value of fixed assets is $303 at December 31, 2017 ($304 at December 31, 2016).

The following provides details of the net carrying value of owner occupied properties and fixed assets by geographic location:

2017 2016

Canada $ 547 $ 548United States 265 270Europe 197 135

Total $ 1,009 $ 953

There are no restrictions on the title of the owner occupied properties and fixed assets, nor are they pledged as security for debt.



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12. Other Assets

2017 2016

Deferred acquisition costs $ 633 $ 597Trading account assets (1) 723 516Finance leases receivable 350 273Defined benefit pension plan assets (note 24) 193 214Prepaid expenses 105 112Miscellaneous other assets 420 551

Total $ 2,424 $ 2,263

(1) Includes bonds of $114 and stocks of $609 at December 31, 2017 (bonds of $141 and stocks of $375 at December 31, 2016).

Total other assets of $1,275 ($1,203 at December 31, 2016) are expected to be realized within 12 months from the reporting date. This amount excludes deferred acquisition costs, the changes in which are noted below.

Deferred acquisition costs 2017 2016

Balance, beginning of year $ 597 $ 704Additions 139 93Amortization (86) (73)Changes in foreign exchange rates 24 (74)Disposals (41) (53)

Balance, end of year $ 633 $ 597

Finance leases receivable

The Company has a finance lease on one property in Canada which has been leased for a 25-year term. The Company has four finance leases on properties in Europe. These properties have been leased for terms ranging between 27 and 40 years.

The finance lease receivable for the five properties, in aggregate, is as follows: 2017

Present value of minimum Minimum lease lease payments payments

One year $ 27 $ 26Over one to five years 107 85Over five years 656 239

790 350Less: unearned finance lease income 440 –

Total finance leases receivable $ 350 $ 350

The internal rate of return for the leases ranges between 3.7% and 7.5%.



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13. Insurance and Investment Contract Liabilities

(a) Insurance and investment contract liabilities 2017

Gross Reinsurance liability assets Net

Insurance contract liabilities $ 159,524 $ 5,045 $ 154,479Investment contract liabilities 1,841 – 1,841

Total $ 161,365 $ 5,045 $ 156,320

2016


Insurance contract liabilities $ 155,940 $ 5,627 $ 150,313Investment contract liabilities 2,009 – 2,009

Total $ 157,949 $ 5,627 $ 152,322

(b) Composition of insurance and investment contract liabilities and related supporting assets

(i) The composition of insurance and investment contract liabilities is as follows: 2017


Participating Canada $ 36,430 $ (356) $ 36,786 United States 11,155 15 11,140 Europe 1,286 – 1,286Non-Participating Canada 30,031 475 29,556 United States 28,814 272 28,542 Europe 53,649 4,639 49,010

Total $ 161,365 $ 5,045 $ 156,320

2016


Participating Canada $ 34,019 $ (443) $ 34,462 United States 11,790 14 11,776 Europe 1,385 – 1,385Non-Participating Canada 29,125 923 28,202 United States 29,081 309 28,772 Europe 52,549 4,824 47,725

Total $ 157,949 $ 5,627 $ 152,322



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(ii) The composition of the assets supporting liabilities and equity is as follows: 2017


Carrying valueParticipating liabilities Canada $ 17,262 $ 8,485 $ 5,032 $ 1,641 $ 4,010 $ 36,430 United States 5,220 447 – – 5,488 11,155 Europe 928 27 110 48 173 1,286Non-participating liabilities Canada 19,486 3,777 2,027 134 4,607 30,031 United States 23,400 4,268 – – 1,146 28,814 Europe 33,037 3,569 262 2,810 13,971 53,649Other 15,165 943 881 72 215,876 232,937Total equity 5,706 669 552 146 18,463 25,536

Total carrying value $ 120,204 $ 22,185 $ 8,864 $ 4,851 $ 263,734 $ 419,838

Fair value $ 121,715 $ 23,005 $ 8,906 $ 4,851 $ 263,734 $ 422,211

2016 (note 34)


Carrying valueParticipating liabilities Canada $ 16,311 $ 8,327 $ 4,828 $ 1,354 $ 3,199 $ 34,019 United States 5,597 451 – – 5,742 11,790 Europe 988 32 123 56 186 1,385Non-participating liabilities Canada 18,433 3,699 1,979 13 5,001 29,125 United States 23,820 4,005 – – 1,256 29,081 Europe 31,550 3,557 236 2,679 14,527 52,549Other 13,964 952 844 59 200,957 216,776Total equity 6,110 628 655 179 17,436 25,008

Total carrying value $ 116,773 $ 21,651 $ 8,665 $ 4,340 $ 248,304 $ 399,733

Fair value $ 118,287 $ 22,550 $ 8,655 $ 4,340 $ 248,304 $ 402,136

Cash flows of assets supporting insurance and investment contract liabilities are matched within reasonable limits. Changes in the fair values of these assets are essentially offset by changes in the fair value of insurance and investment contract liabilities.

Changes in the fair values of assets backing capital and surplus, less related income taxes, would result in a corresponding change in surplus over time in accordance with investment accounting policies.

13. Insurance and Investment Contract Liabilities (cont’d)



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(c) 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:

2017

Participating


Balance, beginning of year $ 47,176 $ (429) $ 47,605Impact of new business (15) – (15)Normal change in force 2,442 (2) 2,444Management action and changes in assumptions 61 92 (31)With Profits Fund conversion (74) – (74)Impact of foreign exchange rate changes (734) (2) (732)

Balance, end of year $ 48,856 $ (341) $ 49,197

Non-participating

Gross Reinsurance liability assets Net Total Net

Balance, beginning of year $ 108,764 $ 6,056 $ 102,708 $ 150,313Impact of new business 6,550 210 6,340 6,325Normal change in force (2,737) (162) (2,575) (131)Management action and changes in assumptions (1,222) (971) (251) (282)With Profits Fund conversion 74 – 74 –Business movement from/to external parties (344) – (344) (344)Impact of foreign exchange rate changes (417) 253 (670) (1,402)

Balance, end of year $ 110,668 $ 5,386 $ 105,282 $ 154,479

2016

Participating


Balance, beginning of year $ 45,844 $ (403) $ 46,247Impact of new business 35 – 35Normal change in force 2,009 (26) 2,035Management action and changes in assumptions (229) 2 (231)Impact of foreign exchange rate changes (483) (2) (481)

Balance, end of year $ 47,176 $ (429) $ 47,605

Non-participating

Gross Reinsurance liability assets Net Total Net

Balance, beginning of year $ 112,648 $ 5,534 $ 107,114 $ 153,361Impact of new business 5,396 (326) 5,722 5,757Normal change in force 966 824 142 2,177Management action and changes in assumptions (135) 335 (470) (701)Business movement from/to external parties (113) – (113) (113)Impact of foreign exchange rate changes (9,998) (311) (9,687) (10,168)

Balance, end of year $ 108,764 $ 6,056 $ 102,708 $ 150,313

Under fair value accounting, movement in the fair value of the supporting assets is a major factor in the movement of insurance contract liabilities. Changes in the fair value of assets are largely offset by corresponding changes in the fair value of liabilities. The change in the value of the insurance contract liabilities associated with the change in the value of the supporting assets is included in the normal change in force above.

In 2017, the major contributor to the increase in net insurance contract liabilities was the impact of new business of $6,325. This was partially offset by decreases due to the impact of foreign exchange rate changes of $1,402 primarily due to the lower U.S. dollar, business movement from/to external parties of $344 and management action and changes in assumptions of $282.

Net non-participating insurance contract liabilities decreased by $251 in 2017 due to management actions and assumption changes including a $61 decrease in Canada, a $200 decrease in Europe and a $10 increase in the United States.



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The decrease in Canada was primarily due to updated life mortality assumptions of $148, updated morbidity assumptions of $49, updated economic assumptions of $41 and modeling refinements of $5, partially offset by increases due to updated policyholder behaviour assumptions of $113, updated longevity assumptions of $59, updated provision for experience rated funds of $8 and updated provision for claims of $6.

The decrease in Europe was primarily due to updated longevity assumptions of $296 and updated economic assumptions of $180, partially offset by increases due to updated life mortality assumptions of $128, updated expense and tax assumptions of $41, updated policyholder behaviour assumptions of $61, modeling refinements of $32, updated provisions for claims of $7 and updated provisions of $5.

The increase in the United States was primarily due to updated expense and tax assumptions of $62, partially offset by updated life mortality assumptions of $44 and modeling refinements of $5.

Net participating insurance contract liabilities decreased by $31 in 2017 due to management actions and assumption changes. The decrease was primarily due to updated provisions for future policyholder dividends of $4,409 and expense and tax assumptions of $500, partially offset by increases due to lower investment returns of $4,257, updated mortality assumptions of $289, modeling refinements of $243 and updated policyholder behaviour assumptions of $89.

In 2016, the major contributors to the decrease in net insurance contract liabilities were the impact of foreign exchange rate changes of $10,168 primarily due to the lower British pound and management action and changes in assumptions of $701. This was partially offset by increases due to impact of new business of $5,757 and the normal changes in the in force business of $2,177, which was primarily due to the change in fair value.

Net non-participating insurance contract liabilities decreased by $470 in 2016 due to management actions and assumption changes including a $56 decrease in Canada, a $348 decrease in Europe and a $66 decrease in the United States.

The decrease in Canada was primarily due to updated morbidity assumptions of $86, updated provision for claims of $61 largely as a result of a decreased lag in reporting of Group health claims, updated longevity assumptions of $20 and modeling refinements of $8, partially offset by increases due to updated expense and tax assumptions of $91, updated economic assumptions of $20 and updated life mortality assumptions of $8.

The decrease in Europe was primarily due to updated longevity assumptions of $207, updated economic assumptions of $165, modeling refinements of $30, updated morbidity assumptions of $17 and updated policyholder behaviour assumptions of $9, partially offset by increases due to updated life mortality assumptions of $43 and updated expense and tax assumptions of $40.

The discount rate for valuing the reinsurance asset was updated in Ireland. This change in accounting estimate increased gross liabilities and reinsurance assets by $360 and had no impact on net liabilities or net earnings.

The decrease in the United States was primarily due to updated economic assumptions of $27, updated longevity assumptions of $19, updated life mortality assumptions of $17 and modeling refinements of $3.

Net participating insurance contract liabilities decreased by $231 in 2016 due to management actions and assumption changes. The decrease was primarily due to updated expense and tax assumptions of $153, higher investment returns of $102, provisions for future policyholder dividends of $19, updated mortality assumptions of $13 and updated morbidity assumptions of $2, partially offset by increases due updated policyholder behaviour assumptions of $29 and modeling refinements of $29.




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(d) Change in investment contract liabilities measured at fair value 2017 2016

Balance, beginning of year $ 2,009 $ 2,253Normal change in force business (171) (220)Investment experience 93 93Management action and changes in assumptions (22) (46)Impact of foreign exchange rate changes (68) (71)


The carrying value of investment contract liabilities approximates their fair value. No investment contract liabilities have been reinsured.

(e) Gross premiums written and gross policyholder benefits

(i) Premium Income 2017 2016

Direct premiums $ 25,199 $ 23,772Assumed reinsurance premiums 13,107 11,278

Total $ 38,306 $ 35,050

(ii) Policyholder Benefits 2017 2016

Direct $ 16,947 $ 16,721Assumed reinsurance 13,854 11,594

Total $ 30,801 $ 28,315

(f ) Actuarial Assumptions

In the computation of insurance contract liabilities, valuation assumptions have been made regarding rates of mortality/morbidity, investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness.

The methods for arriving at these valuation assumptions are outlined below:

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 the Company’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. Improvement scales for life insurance and annuitant mortality are updated periodically based on population and industry studies, product specific considerations, as well as professional guidance. In addition, appropriate provisions have been made for future mortality deterioration on term insurance.

Annuitant mortality is also studied regularly and the results used to modify established industry experience annuitant mortality tables.

Morbidity

The Company uses industry developed experience tables modified to reflect emerging Company experience. Both claim incidence and termination are monitored regularly and emerging experience is factored into the current valuation.


Insurance contract liabilities for property and casualty reinsurance written by London Reinsurance Group (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 earnings. LRG analyzes the emergence of claims experience against expected assumptions for each reinsurance contract separately and at the portfolio level. If necessary, a more in-depth analysis is undertaken of the cedant experience.

Investment returns

The assets which correspond to the different liability categories are segmented. For each segment, projected cash flows from the current assets and liabilities are used in the Canadian Asset Liability Method to determine insurance contract liabilities. Cash flows from assets are reduced to provide for asset default losses. Testing under several interest rate and equity scenarios (including increasing and decreasing rates) is done to provide for reinvestment risk (note 8(c)).



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Expenses

Contractual policy expenses (e.g. sales commissions) and tax expenses are reflected on a best estimate basis. Expense studies for indirect operating expenses are updated regularly to determine an appropriate estimate of future operating expenses for the liability type being valued. Improvements in unit operating expenses are not projected. An inflation assumption is incorporated in the estimate of future operating expenses consistent with the interest rate scenarios projected under the Canadian Asset Liability Method as inflation is assumed to be correlated with new money interest rates.

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 the Company has no experience with specific types of policies or its exposure is limited. The Company has significant exposures in respect of the T-100 and Level Cost of Insurance Universal Life products in Canada and policy renewal rates at the end of term for renewable term policies in Canada and Reinsurance. Industry experience has guided the Company’s assumptions for these products as the Company’s own experience is very limited.


There are a wide range of elective options embedded in the policies issued by the Company. Examples include term renewals, conversion to whole life insurance (term insurance), settlement annuity purchase at guaranteed rates (deposit annuities) and guarantee re-sets (segregated fund maturity guarantees). The assumed rates of utilization are based on Company or industry experience when it exists and when not on judgment considering incentives to utilize the option. Generally, whenever it is clearly in the best interests of an informed policyholder to utilize an option, then it is assumed to be elected.


Future policyholder dividends and other adjustable policy features are included in the determination of insurance contract liabilities with the assumption that policyholder dividends or adjustable benefits will change in the future in response to the relevant experience. The dividend and policy adjustments are determined consistent with policyholders’ reasonable expectations, such expectations being influenced by the participating policyholder dividend policies and/or policyholder communications, marketing material and past practice. It is the Company’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.

(g) Risk Management

(i) Insurance risk

Insurance risk is the risk that the insured event occurs and that there are large deviations between expected and actual actuarial assumptions including mortality, persistency, longevity, morbidity, expense variations and investment returns.

The Company is in the business of accepting risk associated with insurance contract liabilities. The objective of the Company is to mitigate its exposure to risk arising from these contracts through product design, product and geographical diversification, the implementation of the Company’s underwriting strategy guidelines, and through the use of reinsurance arrangements.




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The following provides information about the Company’s insurance contract liabilities sensitivities to management’s best estimate of the approximate impact as a result of changes in assumptions used to determine the Company’s liability associated with these contracts.

Increase (decrease) in net earnings

2017 2016

Mortality – 2% increase $ (296) $ (281)Annuitant mortality – 2% decrease $ (446) $ (384)Morbidity – 5% adverse change $ (256) $ (242)Investment returns Parallel shift in yield curve 1% increase $ – $ – 1% decrease $ – $ – Change in interest rates 1% increase $ 150 $ 149 1% decrease $ (523) $ (491) Change in equity values 10% increase $ 48 $ 43 10% decrease $ (85) $ (50) Change in best estimate return assumptions for equities 1% increase $ 439 $ 407 1% decrease $ (470) $ (438)Expenses – 5% increase $ (127) $ (117)Policy termination and renewal – 10% adverse change $ (672) $ (608)

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.

2017 2016

Gross Reinsurance Gross Reinsurance liability assets Net liability assets Net

Canada $ 66,461 $ 119 $ 66,342 $ 63,144 $ 480 $ 62,664United States 39,969 287 39,682 40,871 323 40,548Europe 54,935 4,639 50,296 53,934 4,824 49,110

Total $ 161,365 $ 5,045 $ 156,320 $ 157,949 $ 5,627 $ 152,322

(ii) Reinsurance risk

Maximum limits per insured life benefit amount (which vary by line of business) are established for life and health insurance, and reinsurance is purchased for amounts in excess of those limits.

Reinsurance costs and recoveries as defined by the reinsurance agreement are reflected in the valuation with these costs and recoveries being appropriately calibrated to the direct assumptions.

Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honour their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

Certain of the reinsurance contracts are on a funds withheld basis where the Company retains the assets supporting the reinsured insurance contract liabilities, thus minimizing the exposure to significant losses from reinsurer insolvency on those contracts.



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14. Segregated Funds and Other Structured Entities

The Company offers segregated fund products in Canada, the U.S. and Europe that are referred to as segregated funds, separate accounts and unit-linked funds in the respective region. These funds are contracts issued by insurers to segregated fund policyholders where the benefit is directly linked to the performance of the investments, the risks or rewards of the fair value movements and net investment income is realized by the segregated fund policyholders. The segregated fund policyholders are required to select the segregated funds that hold a range of underlying investments. While the Company has legal title to the investments, there is a contractual obligation to pass along the investment results to the segregated fund policyholder and the Company segregates these investments from those of the Company.

In Canada and the U.S., the segregated fund and separate account assets are legally separated from the general assets of the Company under the terms of the policyholder agreement and cannot be used to settle obligations of the Company. In Europe, the assets of the funds are functionally and constructively segregated from those of the Company. As a result of the legal and constructive arrangements of these funds, the assets and liabilities of these funds are presented as line items within the Consolidated Balance Sheets titled investments on account of segregated fund policyholders and with an equal liability titled investment and insurance 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, the Company 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 $1,602 at December 31, 2017 ($1,547 at December 31, 2016).

Within the Consolidated 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 Consolidated Balance Sheets. As these amounts do not directly impact the revenues and expenses of the Company, these amounts are not included separately in the Consolidated Statements of Earnings.

Segregated Funds Guarantee Exposure

The Company offers retail segregated fund products, unitized with profits (UWP) products and variable annuity products that provide for certain guarantees that are tied to the market values of the investment funds. While these products are similar to mutual funds, there is a key difference from mutual funds as the segregated funds have certain guarantee features that protect the segregated fund policyholder from market declines in the underlying investments. These guarantees are the Company’s primary exposure on these funds. The Company accounts for these guarantees within insurance and investment contract liabilities within the consolidated financial statements. In addition to the Company’s exposure on the guarantees, the fees earned by the Company on these products are impacted by the market value of these funds.

In Canada, the Company offers retail segregated fund products through Great-West Life, London Life and Canada Life. These products provide guaranteed minimum death benefits (GMDB) and guaranteed minimum accumulation on maturity benefits.

In the U.S., the Company offers variable annuities with GMDB through Great-West Financial. For the standalone GMDB business, most are a return of premium on death with the guarantee expiring at age 70. Great-West Financial in the U.S. also offers a GMWB product with an optional GMDB feature that does not expire with age.

In Europe, the Company offers UWP 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.

The Company also offers a guaranteed minimum withdrawal benefits (GMWB) product in Canada, the U.S., and Germany, and previously offered GMWB product in Ireland. Certain GMWB products offered by the Company offer levels of death and maturity guarantees. At December 31, 2017, the amount of GMWB product in-force in Canada, the U.S., Ireland and Germany was $4,225 ($3,917 at December 31, 2016).

For further details on the Company’s risk and guarantee exposure and the management of these risks, refer to the Risk Management and Control Practice section of the Company’s December 31, 2017 Management’s Discussion and Analysis.



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The following presents further details of the investments, determined in accordance with the relevant statutory reporting requirements of each region of the Company’s operations, on account of segregated fund policyholders:

(a) Investments on account of segregated fund policyholders

2017 2016

Cash and cash equivalents $ 13,300 $ 12,487Bonds 42,270 41,619Mortgage loans 2,610 2,622Stocks and units in unit trusts 93,465 81,033Mutual funds 54,658 51,726Investment properties 11,520 11,019

217,823 200,506Accrued income 373 359Other liabilities (2,441) (2,009)Non-controlling mutual funds interest 1,602 1,547

Total $ 217,357 $ 200,403

(b) Investment and insurance contracts on account of segregated fund policyholders

2017 2016

Balance, beginning of year $ 200,403 $ 198,194 Additions (deductions): Policyholder deposits 24,885 21,358 Net investment income 2,704 2,379 Net realized capital gains on investments 5,298 4,275 Net unrealized capital gains on investments 5,361 6,311 Unrealized gains (losses) due to changes in foreign exchange rates 2,523 (10,584) Policyholder withdrawals (23,834) (21,895) Business and other acquisitions – 193 Change in Segregated Fund investment in General Fund (42) 8 Change in General Fund investment in Segregated Fund (17) (13) Net transfer from General Fund 21 20 Non-controlling mutual funds interest 55 157

Total 16,954 2,209


(c) Investment income on account of segregated fund policyholders

2017 2016

Net investment income $ 2,704 $ 2,379Net realized capital gains on investments 5,298 4,275Net unrealized capital gains on investments 5,361 6,311Unrealized gains (losses) due to changes in foreign exchange rates 2,523 (10,584)

Total 15,886 2,381

Change in investment and insurance contracts liability on account of segregated fund policyholders 15,886 2,381

Net $ – $ –

(d) Investments on account of segregated fund policyholders by fair value hierarchy level (note 9) 2017


Investments on account of segregated fund policyholders (1) $ 136,469 $ 70,034 $ 12,572 $ 219,075

(1) Excludes other liabilities, net of other assets, of $1,718.

2016


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.



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During 2017, certain foreign stock holdings valued at $629 have been transferred from Level 1 to Level 2 ($18 were transferred from Level 2 to Level 1 at December 31, 2016) primarily based on the Company utilizing inputs in addition to quoted prices in active markets for certain foreign stock holdings at year end. Level 2 assets include those assets where fair value is not available from normal market pricing sources, where inputs are utilized in addition to quoted prices in active markets and where the Company does not have visibility through to the underlying assets.

As at December 31, 2017, $8,521 ($6,726 at December 31, 2016) of the segregated funds were invested in funds managed by related parties Investors Group and Mackenzie Investments, members of the Power Financial group of companies (note 26).

The following presents additional information about the Company’s investments on account of segregated fund policyholders for which the Company has utilized Level 3 inputs to determine fair value:

2017 2016

Balance, beginning of year $ 12,045 $ 11,765Total gains (losses) included in segregated fund investment income 422 (109)Purchases 926 584Sales (943) (370)Transfers into Level 3 137 175Transfers out of Level 3 (15) –


Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies. Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors.

In addition to the segregated funds, the Company 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 strategies for its unit-holders based on the directive of each individual fund.

Some of these funds are managed by related parties of the Company and the Company receives management fees related to these services. Management fees can be variable due to performance of factors – such as markets or industries – in which the fund invests. Fee income derived in connection with the management of investment funds generally increases or decreases in direct relationship with changes of assets under management which is affected by prevailing market conditions, and the inflow and outflow of client assets.

Factors that could cause assets under management and fees to decrease include declines in equity markets, changes in fixed income markets, changes in interest rates and defaults, redemptions and other withdrawals, political and other economic risks, changing investment trends and relative 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.

During 2017, fee and other income earned by the Company resulting from the Company’s interests in these structured entities was $4,557 ($4,323 during 2016).

Included within other assets (note 12) at December 31, 2017 is $632 ($435 at December 31, 2016) of investments by the Company in bonds and stocks of Putnam sponsored funds and $91 ($81 at December 31, 2016) of investments in stocks of sponsored unit trusts in Europe.

15. Financing Charges

Financing charges consist of the following: 2017 2016

Operating charges: Interest on operating lines and short-term debt instruments $ 7 $ 6

Financial charges: Interest on long-term debentures and other debt instruments 253 258 Interest on capital trust securities (note 17) 11 11 Other 29 27

293 296

Total $ 300 $ 302

14. Segregated Funds and Other Structured Entities (cont’d)



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16. Debentures and Other Debt Instruments

2017 2016

Carrying value Fair value Carrying value Fair value

Short-term Commercial paper and other short-term debt instruments with interest rates from 1.455% to 1.726% (0.670% to 0.792% at December 31, 2016), unsecured $ 126 $ 126 $ 133 $ 133 Revolving credit facility with interest equal to LIBOR plus 0.70% (U.S. $240; U.S. $220 at December 31, 2016), unsecured 302 302 295 295

Total short-term 428 428 428 428Capital: Current Lifeco 6.14% Debentures due March 21, 2018, unsecured 200 202 200 211Long-term Lifeco 6.74% Debentures due November 24, 2031, unsecured 193 270 193 261 6.67% Debentures due March 21, 2033, unsecured 393 542 392 523 5.998% Debentures due November 16, 2039, unsecured 342 460 342 441 4.65% Debentures due August 13, 2020, unsecured 499 529 499 549 2.50% Debentures due April 18, 2023, unsecured, (500 euro) 752 830 706 778 1.75% Debentures due December 7, 2026, unsecured, (500 euro) 749 786 704 718

2,928 3,417 2,836 3,270 Canada Life 6.40% subordinated debentures due December 11, 2028, unsecured 100 128 100 128 Irish Life 5.25% 200 euro subordinated debentures callable on February 8, 2017, includes associated fixed to floating swap, unsecured, were redeemed during the year – – 285 277 Great-West Life & Annuity Insurance Capital, LP 6.625% Deferrable debentures due November 15, 2034, unsecured (U.S. $175) 218 269 231 240 Great-West Life & Annuity Insurance Capital, LP II Subordinated debentures due May 16, 2046, bearing an interest rate of 2.538% plus the 3-month LIBOR rate, unsecured (U.S. $300), with an interest rate swap to pay fixed interest of 4.68% 378 376 402 345 Great-West Lifeco Finance (Delaware) LP Senior notes due June 3, 2047, unsecured (U.S. $700), bearing an interest rate of 4.15% 865 720 – – 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, were redeemed during the year – – 999 994 Great-West Lifeco Finance (Delaware) LP II 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 500 510 499 536

Total long-term 5,189 5,622 5,552 6,001

Total $ 5,617 $ 6,050 $ 5,980 $ 6,429

On February 8, 2017, Irish Life Assurance, an indirect wholly owned subsidiary of the Company, redeemed its 5.25% $284 (200 euro) subordinated debenture notes at their principal amount together with accrued interest.

On May 26, 2017, Great-West Lifeco Finance (Delaware) LP issued $925 (U.S. $700) principal amount 4.150% senior unsecured notes that are fully and unconditionally guaranteed by Lifeco, maturing on June 3, 2047.

On June 21, 2017, Great-West Lifeco Finance (Delaware) LP redeemed all $1,000 principal amount of its 5.691% subordinated debentures at a redemption price equal to 100% of the principal amount of the debentures, plus accrued interest up to but excluding the redemption date. The debentures were hedged using a cross-currency swap designated as a cash flow hedge. Upon redemption of the debentures, the gains on the debentures realized and the losses realized on the hedging instrument were recorded in the Consolidated Statements of Earnings with no impact on net earnings. The deferred income taxes related to this cash flow hedge resulted in a reduction to Other Comprehensive Income of $97 that had not previously been recorded (note 25).



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During 2016, Great-West Life & Annuity Insurance Capital, LP II, a subsidiary, elected to not call its U.S. $300 7.153% junior subordinated debentures with a first par call date of May 16, 2016 and a final maturity date 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 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.

On December 7, 2016 the Company issued 500 euro of 10 year senior bonds with an annual coupon rate of 1.75%. The bonds are listed on the Irish Stock Exchange. The euro-denominated debt has been designated as a hedge against the Company’s net investment in euro-denominated foreign operations with changes in foreign exchange on the debt instrument recorded in other comprehensive income.

17. Capital Trust Securities

2017 2016

Carrying value Fair value Carrying value Fair value

Canada Life Capital Trust (CLCT) 7.529% due June 30, 2052, unsecured $ 150 $ 221 $ 150 $ 212Acquisition related fair value adjustment 10 – 11 –

Total $ 160 $ 221 $ 161 $ 212

CLCT, a trust established by Canada Life, had issued $150 of Canada Life Capital Securities – Series B (CLiCS – Series B), the proceeds of which were used by CLCT to purchase Canada Life senior debentures in the amount of $150.

Distributions and interest on the capital trust securities are classified as financing charges in the Consolidated Statements of Earnings (note 15). The fair value for capital trust securities is determined by the bid-ask price. Refer to note 8 for financial instrument risk management disclosures.

Subject to regulatory approval, CLCT may redeem the CLiCS – Series B, in whole or in part, at any time.

18. Other Liabilities

2017 2016

Pension and other post-employment benefits (note 24) $ 1,416 $ 1,436Bank overdraft 435 447Deferred income reserves 303 309Other 1,598 1,644

Total $ 3,752 $ 3,836

Total other liabilities of $2,033 ($2,091 at December 31, 2016) are expected to be realized within 12 months from the reporting date. This amount excludes deferred income reserves, the changes in which are noted below.

Deferred income reserves 2017 2016

Balance, beginning of year $ 309 $ 437Additions 45 29Amortization (35) (39)Changes in foreign exchange 8 (76)Disposals (24) (42)


16. Debentures and Other Debt Instruments (cont’d)



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19. Non-Controlling Interests

The Company had a controlling equity interest in Great-West Life, London Life, Canada Life, Great-West Financial, and Putnam at December 31, 2017 and December 31, 2016.

Non-controlling interests attributable to participating account surplus is the proportion of the equity attributable to the participating account of the Company’s subsidiaries.

Non-controlling interests in subsidiaries includes Nippon Life’s interest in PanAgora, a subsidiary of Putnam, and non-controlling interests for the issued and outstanding shares of Putnam and PanAgora held by employees of the respective companies. Subsequent to year-end, the Company acquired Nippon Life’s interest in PanAgora, this transaction had no impact on net earnings.

(a) The non-controlling interests of Great-West Life, London Life, Canada Life, Great-West Financial and Putnam and their subsidiaries recorded in the Consolidated Statements of Earnings and other comprehensive income are as follows:

2017 2016

Net earnings attributable to participating account before policyholder dividends Great-West Life $ 180 $ 167 London Life 847 843 Canada Life 299 453 Great-West Financial 3 4

1,329 1,467Policyholder dividends Great-West Life (159) (156) London Life (814) (803) Canada Life (312) (314) Great-West Financial (4) (4)

(1,289) (1,277)

Net earnings – participating account 40 190Non-controlling interests in subsidiaries (10) 2

Total $ 30 $ 192

The non-controlling interests of Great-West Life, London Life, Canada Life, Great-West Financial and Putnam and their subsidiaries recorded in other comprehensive income (loss) for the year ended December 31, 2017 was $(63) ($(43) for the year ended December 31, 2016).

(b) The carrying value of non-controlling interests consists of the following: 2017 2016

Participating account surplus in subsidiaries: Great-West Life $ 622 $ 610 London Life 1,796 1,798 Canada Life 339 357 Great-West Financial 14 17

Total $ 2,771 $ 2,782

Non-controlling interests in subsidiaries $ 164 $ 224



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20. Share Capital

Authorized

Unlimited First Preferred Shares, Class A Preferred Shares and Second Preferred Shares

Unlimited Common Shares

Issued and outstanding and fully paid 2017 2016

Carrying Carrying Number value Number value

First Preferred Shares Series F, 5.90% Non-Cumulative 7,740,032 $ 194 7,740,032 $ 194 Series G, 5.20% Non-Cumulative 12,000,000 300 12,000,000 300 Series H, 4.85% Non-Cumulative 12,000,000 300 12,000,000 300 Series I, 4.50% Non-Cumulative 12,000,000 300 12,000,000 300 Series L, 5.65% Non-Cumulative 6,800,000 170 6,800,000 170 Series M, 5.80% Non-Cumulative 6,000,000 150 6,000,000 150 Series N, Non-Cumulative 5-Year Rate Reset 8,524,422 213 8,524,422 213 Series O, Non-Cumulative Floating Rate 1,475,578 37 1,475,578 37 Series P, 5.40% Non-Cumulative 10,000,000 250 10,000,000 250 Series Q, 5.15% Non-Cumulative 8,000,000 200 8,000,000 200 Series R, 4.80% Non-Cumulative 8,000,000 200 8,000,000 200 Series S, 5.25% Non-Cumulative 8,000,000 200 8,000,000 200 Series T, 5.15% Non-Cumulative 8,000,000 200 – –

Total 108,540,032 $ 2,714 100,540,032 $ 2,514

Common shares Balance, beginning of year 986,398,335 $ 7,130 993,350,331 $ 7,156 Purchased and cancelled under Normal Course Issuer Bid (1,800,000) (63) (7,967,881) (267) Excess of redemption proceeds over stated capital per Normal Course Issuer Bid – 50 – 210 Exercised and issued under stock option plan 4,124,324 143 1,015,885 31

Balance, end of year 988,722,659 $ 7,260 986,398,335 $ 7,130

Preferred Shares

On May 18, 2017 the Company issued 8,000,000 Series T, 5.15% Non-Cumulative First Preferred Shares at $25.00 per share for gross proceeds of $200. The shares are redeemable at the option of the Company on or after June 30, 2022 for $25.00 per share plus a premium if redeemed prior to June 30, 2026, in each case together with all declared and unpaid dividends up to but excluding the date of redemption. Transaction costs incurred in connection with the preferred share issue of $5 ($3 after-tax) were charged to accumulated surplus.

The Series F, 5.90% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series G, 5.20% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series H, 4.85% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series I, 4.50% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series L, 5.65% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share plus a premium if the shares are redeemed before December 31, 2018, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series M, 5.80% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share plus a premium if redeemed prior to March 31, 2019, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series N, Non-Cumulative 5-Year Rate Reset First Preferred Shares carry an annual fixed non-cumulative dividend rate of 2.176% up to but excluding December 31, 2020 and are redeemable at the option of the Company on December 31, 2020 and on December 31 every five years thereafter for $25.00 per share plus all declared and unpaid dividends up to but excluding the date of redemption. Subject to the Company’s right of redemption and certain other restrictions on conversion described in the Series N share conditions, each Series N share is convertible into one Series O share at the option of the holders on December 31, 2020 and on December 31 every five years thereafter.



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The Series O, Non-Cumulative Floating Rate First Preferred Shares carry a floating non-cumulative dividend rate equal to the relevant Government of Canada Treasury Bill rate plus 1.30% and are redeemable at the option of the Company for $25.50 per share, unless the shares are redeemed on December 31, 2020 or on December 31 every five years thereafter in which case the redemption price will be $25.00 per share, plus in each case all declared and unpaid dividends up to but excluding the date of redemption. Subject to the Company’s right of redemption and certain other restrictions on conversion described in the Series O share conditions, each Series O share is convertible into one Series N share at the option of the holders on December 31, 2020 and on December 31 every five years thereafter.

The Series P, 5.40% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share plus a premium if redeemed prior to March 31, 2021, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series Q, 5.15% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share plus a premium if redeemed prior to September 30, 2021, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series R, 4.80% Non-Cumulative First Preferred Shares are currently redeemable at the option of the Company for $25.00 per share plus a premium if redeemed prior to December 31, 2021, together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series S, 5.25% Non-Cumulative First Preferred Shares are redeemable at the option of the Company on or after June 30, 2019 for $25.00 per share plus a premium if redeemed prior to June 30, 2023, together with all declared and unpaid dividends up to but excluding the date of redemption.

Common Shares

Normal Course Issuer Bid

On January 5, 2017, the Company announced a normal course issuer bid commencing January 9, 2017 and terminating January 8, 2018 to purchase for cancellation up to but not more than 20,000,000 of its common shares at market prices.

On June 17, 2016, the Company announced its intention to purchase for cancellation, up to 5,809,000 of its common shares pursuant to private agreements between the Company and several arm’s length third-party sellers. These purchases were to be made pursuant to issuer bid exemption orders issued by the Ontario Securities Commission. Any purchases of common shares made by way of private agreements under the orders were to have been at a discount to the prevailing market price of the common shares on the Toronto Stock Exchange at the time of purchase and all purchases must have occurred on or before January 7, 2017. As of December 31, 2017 the Company had not entered into any private agreement for the repurchase of its common shares in 2017.

During 2017, the Company repurchased and subsequently cancelled 1,800,000 common shares pursuant to its normal course issuer bid at a cost of $63 (7,967,881 during 2016 under the previous normal course issuer bid at a cost of $267, which includes shares repurchased under a private agreement). The Company’s share capital was reduced by the average carrying value of the shares repurchased for cancellation. The excess paid over the average carrying value of stated capital was $50 and was recognized as a reduction to equity ($210 during 2016 under the previous normal course issuer bid).

Subsequent event

On January 10, 2018, the Company announced a normal course issuer bid commencing January 15, 2018 and terminating January 14, 2019 to purchase for cancellation up to but not more than 20,000,000 of its common shares at market prices.

21. Earnings Per Common Share

The following provides the reconciliation between basic and diluted earnings per common share: 2017 2016

EarningsNet earnings $ 2,278 $ 2,764Preferred share dividends (129) (123)

Net earnings – common shareholders $ 2,149 $ 2,641

Number of common sharesAverage number of common shares outstanding 989,185,333 989,986,009Add: Potential exercise of outstanding stock options 1,513,422 1,681,577

Average number of common shares outstanding – diluted basis 990,698,755 991,667,586

Basic earnings per common share $ 2.173 $ 2.668

Diluted earnings per common share $ 2.170 $ 2.663

Dividends per common share $ 1.468 $ 1.384



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22. Capital Management

(a) Policies and Objectives

Managing capital is the continual process of establishing and maintaining the quantity and quality of capital appropriate for the Company and ensuring capital is deployed in a manner consistent with the expectations of the Company’s stakeholders. For these purposes, the Board considers the key stakeholders to be the Company’s shareholders, policyholders and holders of subordinated liabilities in addition to the relevant regulators in the various jurisdictions where the Company and its subsidiaries operate.

The Company manages its capital on both a consolidated basis as well as at the individual operating subsidiary level. The primary objectives of the Company’s capital management strategy are:

• to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate;

• to maintain strong credit and financial strength ratings of the Company ensuring stable access to capital markets; and

• to provide an efficient capital structure to maximize shareholders’ value in the context of the Company’s operational risks and strategic plans.

The Company has established policies and procedures designed to identify, measure and report all material risks. Management is responsible for establishing capital management procedures for implementing and monitoring the capital plan.

The capital planning process is the responsibility of the Company’s Chief Financial Officer. The capital plan is reviewed by the Executive Committee of the Board of Directors and approved by the Company’s Board of Directors on an annual basis. The Board of Directors reviews and approves all capital transactions undertaken by management.

The target level of capitalization for the Company 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 the Company, and the desire to hold sufficient capital to be able to honour all policyholder and other obligations of the Company with a high degree of confidence.

(b) Regulatory Capital

In Canada, OSFI has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). For this purpose, various additions or deductions from capital are mandated by the guidelines issued by OSFI. The following provides a summary of the MCCSR information and ratios for Great-West Life:

2017 2016

Adjusted Net Tier 1 Capital $ 14,115 $ 13,071Net Tier 2 Capital 2,858 2,798

Total Capital Available $ 16,973 $ 15,869

Total Capital Required $ 7,042 $ 6,618

Tier 1 Ratio 200% 198%

Total Ratio 241% 240%

The MCCSR ratio of 241% for Great-West Life includes 6 points for the impact of capital activity in advance of closing for the Retirement Advantage business acquisition.

The Company has been preparing for the implementation of the new regulatory capital framework for the Canadian insurance industry. OSFI will replace the current MCCSR guideline with the Life Insurance Capital Adequacy Test (LICAT) guideline, effective January 1, 2018. The first reporting period will be the first quarter of 2018.

At December 31, 2017, the Risk-Based Capital ratio of Great-West Life & Annuity Insurance Company, Lifeco’s regulated U.S. operating company was estimated to be 487% of the Company Action Level set by the National Association of Insurance Commissioners. Great-West Life & Annuity Insurance Company reports its Risk-Based Capital ratio annually to U.S. insurance regulators.

For entities based in Europe, the local solvency capital regime is the Solvency II basis. At December 31, 2017 and December 31, 2016, all European regulated entities met the capital and solvency requirements as prescribed under Solvency II.

Other foreign operations and foreign subsidiaries of the Company are required to comply with local capital or solvency requirements in their respective jurisdictions. At December 31, 2017 and December 31, 2016, the Company maintained capital levels above the minimum local regulatory requirements in each of its other foreign operations.



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23. Share-Based Payments

(a) The Company has a stock option plan (the Plan) pursuant to which options to subscribe for common shares of Lifeco may be granted to certain officers and employees of Lifeco and its affiliates. The Company’s Human Resources Committee (the Committee) administers the Plan and, subject to the specific provisions of the Plan, fixes the terms and conditions upon which options are granted. The exercise price of each option granted under the Plan is fixed by the Committee, but cannot under any circumstances be less than the weighted average trading price per Lifeco common share on the Toronto Stock Exchange for the five trading days preceding the date of the grant. Options generally vest over a period of five years, and have a maximum exercise period of ten years. Termination of employment may, in certain circumstances, result in forfeiture of the options, unless otherwise determined by the Committee. The maximum number of Lifeco common shares that may be issued under the Plan is currently 65,000,000.

During 2017, 1,817,900 common share options were granted (3,146,800 during 2016). The weighted average fair value of common share options granted during 2017 was $2.78 per option ($3.87 in 2016). The fair value of each common share option was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for those options granted in 2017: dividend yield 3.98% (3.99% in 2016), expected volatility 14.06% (19.31% in 2016), risk-free interest rate 1.41% (0.94% in 2016), and expected life of eight years (seven in 2016).

The following summarizes the changes in options outstanding and the weighted average exercise price: 2017 2016

Weighted Weighted average average Options exercise price Options exercise price

Outstanding, beginning of year 16,527,750 $ 31.42 14,623,832 $ 30.50 Granted 1,817,900 36.87 3,146,800 34.68 Exercised (4,124,324) 30.61 (1,015,885) 27.41 Forfeited/expired (821,262) 36.51 (226,997) 35.12

Outstanding, end of year 13,400,064 $ 32.10 16,527,750 $ 31.42

Options exercisable at end of year 7,737,717 $ 29.98 10,259,325 $ 30.13

The weighted average share price at the date of exercise of stock options for the year ended December 31, 2017 was $37.13 ($35.05 in 2016).

Compensation expense due to the Plan transactions accounted for as equity-settled share-based payments of $8 after-tax in 2017 ($11 after-tax in 2016) has been recognized in the Consolidated Statements of Earnings.

The following summarizes information on the ranges of exercise prices including weighted average remaining contractual life at December 31, 2017: Outstanding Exercisable

Weighted average Weighted Weighted remaining average average Exercise price ranges Options contractual life exercise price Options exercise price Expiry

$31.27 – $36.87 1,024,240 0.36 31.40 1,024,240 31.40 2018$23.16 – $35.62 270,900 1.51 28.98 261,460 28.78 2019$23.16 – $35.62 565,186 2.37 28.68 556,466 28.60 2020$23.16 – $35.62 1,014,740 3.24 28.63 1,014,740 28.63 2021$23.16 – $36.87 1,662,115 4.23 26.19 1,662,115 26.19 2022$27.13 – $28.36 1,030,979 5.17 27.15 826,501 27.15 2023$30.33 – $33.02 1,176,663 6.20 31.10 736,351 31.10 2024$35.62 – $36.63 2,262,739 7.17 35.66 1,009,328 35.66 2025$34.68 – $35.52 2,706,502 8.16 34.68 637,116 34.68 2026$36.87 1,686,000 9.16 36.87 9,400 36.87 2027



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(b) In order to promote a greater alignment of interests between Directors and the shareholders of the Company, the Company and certain of its affiliates have established mandatory Deferred Share Unit Plans and/or voluntary Deferred Share Unit Plans (the “Mandatory DSU Plans” and the “Voluntary DSU Plans” respectively) in which the Directors of the Company participate. Under the Mandatory DSU Plans, each Director who is a resident of Canada or the United States is required to receive 50% of his or her annual Board retainer in the form of Deferred Share Units (DSUs). Under the Voluntary DSU Plans, each Director may elect to receive the balance of his or her annual Board retainer (including Board Committee fees) and his or her attendance fees entirely in the form of DSUs, entirely in cash, or equally in cash and DSUs. In both cases the number of DSUs granted is determined by dividing the amount of remuneration payable to the Director by the weighted average trading price per Common Share on the Toronto Stock Exchange for the last five trading days of the preceding fiscal quarter (such weighted average trading price being the “value of a Deferred Share Unit”). Directors receive additional DSUs in respect of dividends payable on the Common Shares based on the value of a Deferred Share Unit at that time. DSUs are generally redeemable at the time that an individual ceases to be a Director by a lump sum cash payment, based on the value of the DSUs on the date of redemption. In 2017, $3 in directors fees were used to acquire DSUs ($3 in 2016).

(c) Certain employees of the Company are entitled to receive Performance Share Units (PSUs). Under these PSU plans, these employees are granted PSUs equivalent to the Company’s common shares vesting over a three-year period. Employees receive additional PSUs in respect of dividends payable on the common shares based on the value of a PSU at that time. At the maturity date, employees receive cash representing the value of the PSU at this date. The Company uses the fair-value based method to account for the PSUs granted to employees under the plan. For the year ended December 31, 2017, the Company recognized compensation expense of $23 ($14 in 2016) for the PSU plans recorded in operating and administrative expenses in the Consolidated Statements of Earnings. At December 31, 2017, the carrying value of the PSU liability is $41 ($27 in 2016) recorded within other liabilities.

(d) The Company’s Employee Share Ownership Plan (ESOP) is a voluntary plan where eligible employees can contribute up to 5% of their previous year’s eligible earnings to purchase common shares of Great-West Lifeco Inc. The Company matches 50% of the total employee contributions. The contributions from the Company vest immediately and are expensed. For the year ended December 31, 2017, the Company recognized compensation expense of $12 ($11 in 2016) for the ESOP recorded in operating and administrative expenses in the Consolidated Statements of Earnings.

(e) Putnam sponsors the Putnam Investments, LLC Equity Incentive Plan. Under the terms of the Equity Incentive Plan, Putnam is authorized to grant or sell Class B Shares of Putnam (the Putnam Class B Shares), subject to certain restrictions, and to grant options to purchase Putnam Class B Shares (collectively, the Awards) to certain senior management and key employees of Putnam at fair value at the time of the award. Fair value is determined under the valuation methodology outlined in the Equity Incentive Plan. Awards vest over a period of up to five years and are specified in the individual’s award letter. Holders of Putnam Class B Shares are not entitled to vote other than in respect of certain matters in regards to the Equity Incentive Plan and have no rights to convert their shares into any other securities. The number of Putnam Class B Shares that may be subject to Awards under the Equity Incentive Plan is limited to 10,555,555.

During 2017, Putnam granted 1,138,580 (990,000 in 2016) restricted Class B common shares and no options in 2017 or 2016 to certain members of senior management and key employees.

Compensation expense recorded for the year ended December 31, 2017 related to restricted Class B common shares and Class B stock options earned was $27 ($37 in 2016) and is recorded in operating and administrative expenses in the Consolidated Statements of Earnings.

(f ) Certain employees of PanAgora, a subsidiary of Putnam, are eligible to participate in the PanAgora Management Equity Plan under which Class C Shares of PanAgora and options and stock appreciation rights on Class C Shares of PanAgora may be issued. Holders of PanAgora Class C Shares are not entitled to vote and have no rights to convert their shares into any other securities. The number of PanAgora Class C Shares may not exceed 20% of the equity of PanAgora on a fully exercised and converted basis.

Compensation expense recorded for the year ended December 31, 2017 related to restricted Class C Shares and stock appreciation rights was $13 in 2017 ($17 in 2016) and is included as a component of operating and administrative expenses in the Consolidated Statements of Earnings.

23. Share-Based Payments (cont’d)



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24. Pension Plans and Other Post-Employment Benefits

Characteristics, Funding and Risk

The Company’s subsidiaries maintain contributory and non-contributory defined benefit pension plans for certain employees and advisors. The Company’s subsidiaries also maintain defined contribution pension plans for certain employees and advisors.

The defined benefit pension plans provide pensions based on length of service and final average pay. For most plans, active plan participants share in the cost by making contributions in respect of current service. Certain 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. The assets supporting the funded pension plans are held in separate trusteed pension funds. The obligations for the wholly unfunded plans are included in other liabilities and are supported by general assets.

The significant defined benefit plans of the Company’s subsidiaries are closed to new entrants with plans in several geographies also closed to future defined benefit accruals. New hires and employees who previously accrued defined benefits in the closed plans are eligible only for defined contribution benefits. The Company’s defined benefit plan exposure will continue to be reduced in future years.

The defined contribution pension plans provide pension benefits based on accumulated employee and subsidiary company contributions. Subsidiary company contributions to these plans are a set percentage of employees’ annual income and may be subject to certain vesting requirements.

The Company’s subsidiaries also provide post-employment health, dental and life insurance benefits to eligible employees, advisors and their dependents. Retirees share in the cost of benefits through deductibles, co-insurance and caps on benefits. These plans are closed to new hires and were previously amended to limit which employees could become eligible to receive benefits. The amount of some of the post-employment benefits other than pensions depends on future cost escalation. These post-employment benefits are not pre-funded and the amount of the obligation for these benefits is included in other liabilities and is supported by general assets.

The Company’s subsidiaries have pension and benefit committees or a trusteed arrangement that provides oversight for the benefit plans of the Company’s subsidiaries. The benefit plans are monitored on an ongoing basis to assess the benefit, funding and investment policies, financial status, and funding requirements of the Company’s subsidiaries. Significant changes to the subsidiary company’s benefit plans require approval from that Company’s Board of Directors.

The Company’s subsidiaries’ funding policy for the funded pension plans is to make 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 pension plan asset, the Company determines if an economic benefit exists in the form of potential reductions in future contributions by the Company, from the payment of expenses from the plan and in the form of surplus refunds, where permitted by applicable regulation and plan provisions.

By their design, the defined benefit plans expose the Company to the typical risks faced by defined benefit plans such as investment performance, changes to the discount rates used to value the obligations, longevity of plan members, and future inflation. Pension and benefit risk is managed by regular monitoring of the plans, applicable regulations and other factors that could impact the expenses and cash flows of the Company.



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The following reflects the financial position of the Company’s subsidiaries contributory and non-contributory defined benefit plans:

(a) Plan Assets, Benefit Obligation and Funded Status Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

Change in fair value of plan assetsFair value of plan assets, beginning of year $ 6,207 $ 6,093 $ – $ –Interest income 205 222 – –Actual return over interest income 298 231 – –Employer contributions 178 125 19 19Employee contributions 17 20 – –Benefits paid (314) (232) (19) (19)Surplus paid out to employer – (8) – –Settlements – (19) – –Administrative expenses (8) (13) – –Net transfer out (7) (3) – –Foreign exchange rate changes 94 (209) – –

Fair value of plan assets, end of year $ 6,670 $ 6,207 $ – $ –

Change in defined benefit obligationDefined benefit obligation, beginning of year $ 6,942 $ 6,627 $ 396 $ 394Current service cost 139 131 2 2Interest cost 227 241 15 16Employee contributions 17 20 – –Benefits paid (314) (232) (19) (19)Plan amendments (1) (1) – 2Curtailments and termination benefits (1) (37) (14) 1 (7)Settlements – (19) – –Actuarial loss (gain) on financial assumption changes 334 495 15 11Actuarial gain (loss) on demographic assumption changes 6 (13) (9) (3)Actuarial loss (gain) arising from member experience 10 (34) 1 1Net transfer out (7) (3) – –Foreign exchange rate changes 85 (256) (2) (1)

Defined benefit obligation, end of year $ 7,401 $ 6,942 $ 400 $ 396

Asset (liability) recognized on the Consolidated Balance SheetsFunded status of plans – surplus (deficit) $ (731) $ (735) $ (400) $ (396)Unrecognized amount due to asset ceiling (92) (91) – –

Asset (liability) recognized on the Consolidated Balance Sheets $ (823) $ (826) $ (400) $ (396)

Recorded in:Other assets (note 12) $ 193 $ 214 $ – $ –Other liabilities (note 18) (1,016) (1,040) (400) (396)

Asset (liability) recognized on the Consolidated Balance Sheets $ (823) $ (826) $ (400) $ (396)

Analysis of defined benefit obligationWholly or partly funded plans $ 7,092 $ 6,636 $ – $ –

Wholly unfunded plans $ 309 $ 306 $ 400 $ 396

(1) The impact of curtailments and termination benefits resulting from the Canadian transformation were recognized as part of restructuring expenses and are not included in Pension and Other Post-Employment Benefits Expense (note 29).

24. Pension Plans and Other Post-Employment Benefits (cont’d)



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Under International Financial Reporting Interpretations Committee (IFRIC) 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, the Company must assess whether each pension plan’s asset has economic benefit to the Company through future contribution reductions, from the payment of expenses from the plan, or surplus refunds; in the event the Company is not entitled to a benefit, a limit or ‘asset ceiling’ is required on the balance. The following provides a breakdown of the changes in the asset ceiling: Defined benefit pension plans

2017 2016

Change in asset ceilingAsset ceiling, beginning of year $ 91 $ 83Interest on beginning of period asset ceiling 4 3Change in asset ceiling (3) 5

Asset ceiling, end of year $ 92 $ 91

(b) Pension and Other Post-Employment Benefits Expense

The total pension and other post-employment benefit expense included in operating expenses and other comprehensive income are as follows: All pension plans Other post-employment benefits

2017 2016 2017 2016

Defined benefit current service cost $ 156 $ 151 $ 2 $ 2Defined contribution current service cost 72 65 – –Employee contributions (17) (20) – –

Employer current service cost 211 196 2 2Administrative expense 8 13 – –Plan amendments (1) (1) – 2Curtailments (22) (14) – (7)Net interest cost 26 22 15 16

Expense – profit or loss 222 216 17 13

Actuarial (gain) loss recognized 350 448 7 9Return on assets greater than assumed (298) (231) – –Change in the asset ceiling (3) 5 – –Actuarial loss – investment in associate (1) 1 – – –

Re-measurements – other comprehensive (income) loss 50 222 7 9

Total expense including re-measurements $ 272 $ 438 $ 24 $ 22

(1) During 2017, the Company transferred actuarial losses of $13 from accumulated other comprehensive income to accumulated surplus. These losses were for accumulated pension plan re-measurements for an investment in an associate that was disposed of (note 5).

(c) Asset Allocation by Major Category Weighted by Plan Assets Defined benefit pension plans

2017 2016

Equity securities 44% 47%Debt securities 43% 41%Real estate 8% 7%Cash and cash equivalents 5% 5%

Total 100% 100%

No plan assets are directly invested in the Company’s or related parties’ securities. Plan assets include investments in segregated funds and other funds managed by subsidiaries of the Company of $5,694 at December 31, 2017 and $5,241 at December 31, 2016, of which $5,616 ($5,176 at December 31, 2016) are included on the Consolidated Balance Sheets. Plan assets do not include any property occupied or other assets used by the Company.



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(d) Details of Defined Benefit Obligation

(i) Portion of Defined Benefit Obligation Subject to Future Salary Increases Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

Benefit obligation without future salary increases $ 6,710 $ 6,306 $ 400 $ 396Effect of assumed future salary increases 691 636 – –

Defined benefit obligation $ 7,401 $ 6,942 $ 400 $ 396

The other post-employment benefits are not subject to future salary increases.

(ii) Portion of Defined Benefit Obligation Without Future Pension Increases Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

Benefit obligation without future pension increases $ 6,834 $ 6,515 $ 400 $ 396Effect of assumed future pension increases 567 427 – –

Defined benefit obligation $ 7,401 $ 6,942 $ 400 $ 396

The other post-employment benefits are not subject to future pension increases.

(iii) Maturity Profile of Plan Membership Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

Actives 37% 43% 21% 21%Deferred vesteds 26% 20% n/a n/aRetirees 37% 37% 79% 79%

Total 100% 100% 100% 100%

Weighted average duration of defined benefit obligation 18.7 years 19.1 years 12.2 years 13.0 years

(e) Cash Flow Information Other post- Pension employment plans benefits Total

Expected employer contributions for 2018:Funded (wholly or partly) defined benefit plans $ 181 $ – $ 181Unfunded plans 15 20 35Defined contribution plans 84 – 84

Total $ 280 $ 20 $ 300

24. Pension Plans and Other Post-Employment Benefits (cont’d)



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(f ) Actuarial Assumptions and Sensitivities

(i) Actuarial Assumptions Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

To determine benefit cost:Discount rate – past service liabilities 3.3% 3.8% 3.8% 4.1%Discount rate – future service liabilities 3.4% 3.8% 4.3% 4.5%Rate of compensation increase 3.2% 3.2% – –Future pension increases (1) 1.1% 1.5% – –

To determine defined benefit obligation:Discount rate – past service liabilities 3.1% 3.3% 3.5% 3.8%Rate of compensation increase 3.1% 3.2% – –Future pension increases (1) 1.3% 1.1% – –

Medical cost trend rates:Initial medical cost trend rate 5.0% 5.1%Ultimate medical cost trend rate 4.5% 4.5%Year ultimate trend rate is reached 2029 2029

(1) Represents the weighted average of plans subject to future pension increases.

(ii) Sample Life Expectancies Based on Mortality Assumptions Defined benefit pension plans Other post-employment benefits

2017 2016 2017 2016

Sample life expectancies based on mortality assumption:Male Age 65 in fiscal year 22.9 22.8 22.3 22.3 Age 65 for those age 35 in the fiscal year 25.1 25.1 23.9 23.9Female Age 65 in fiscal year 24.8 24.7 24.7 24.6 Age 65 for those age 35 in the fiscal year 26.9 26.7 26.2 26.1

The period of time over which benefits are assumed to be paid is based on best estimates of future mortality, including allowances for mortality improvements. This estimate is subject to considerable uncertainty, and judgment is required in establishing this assumption. As mortality assumptions are significant in measuring the defined benefit obligation, the mortality assumptions applied by the Company take into consideration such factors as age, gender and geographic location, in addition to an estimation of future improvements in longevity.

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.

The calculation of the defined benefit obligation is sensitive to the mortality assumptions. The effect of a one-year increase in life expectancy would be an increase in the defined benefit obligation of $211 for the defined benefit pension plans and $16 for other post-employment benefits.

(iii) Impact of Changes to Assumptions on Defined Benefit Obligation 1% increase 1% decrease

2017 2016 2017 2016

Defined benefit pension plans:Impact of a change to the discount rate $ (1,187) $ (1,138) $ 1,553 $ 1,458Impact of a change to the rate of compensation increase 313 303 (270) (264)Impact of a change to the rate of inflation 582 550 (514) (498)

Other post-employment benefits:Impact of a change to assumed medical cost trend rates 32 33 (27) (28)Impact of a change to the discount rate (43) (46) 52 56

To measure the impact of a change in an assumption, all other assumptions were held constant. It is expected that there would be interaction between at least some of the assumptions.



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25. Accumulated Other Comprehensive Income

2017

Unrealized foreign exchange Unrealized gains (losses) foreign on euro debt Re-measurements exchange designated as on defined gains hedge of the Unrealized Unrealized benefit pension on translation net investment gains (losses) gains (losses) and other post- of foreign in foreign on available- on cash flow employment Non-controlling operations operations for-sale assets hedges benefit plans Total interest Shareholders

Balance, beginning of year $ 1,526 $ (22) $ 160 $ (209) $ (647) $ 808 $ (62) $ 746Other comprehensive income (loss) (495) (90) (65) 417 (57) (290) 80 (210)Income tax – 12 14 (164) (8) (146) (17) (163)

(495) (78) (51) 253 (65) (436) 63 (373)Disposal of investment in associate (1) – – – – 13 13 – 13

(495) (78) (51) 253 (52) (423) 63 (360)

Balance, end of year $ 1,031 $ (100) $ 109 $ 44 $ (699) $ 385 $ 1 $ 386

(1) During 2017, the Company transferred actuarial losses of $13 from accumulated other comprehensive income to accumulated surplus. These losses were for accumulated pension plan re-measurements for an investment in an associate that was disposed of (note 5).

2016

Unrealized foreign exchange Unrealized gains (losses) foreign on euro debt Re-measurements exchange designated as on defined gains hedge of the Unrealized Unrealized benefit pension on translation net investment gains (losses) gains (losses) and other post- of foreign in foreign on available- on cash flow employment Non-controlling operations operations for-sale assets hedges benefit plans Total interest Shareholders

Balance, beginning of year $ 3,011 $ (58) $ 123 $ (277) $ (476) $ 2,323 $ (105) $ 2,218Other comprehensive income (loss) (1,485) 42 35 109 (231) (1,530) 54 (1,476)Income tax – (6) 2 (41) 60 15 (11) 4

(1,485) 36 37 68 (171) (1,515) 43 (1,472)

Balance, end of year $ 1,526 $ (22) $ 160 $ (209) $ (647) $ 808 $ (62) $ 746

26. Related Party Transactions

Power Financial, which is incorporated and domiciled in Canada, is the Company’s parent and has voting control of the Company. The Company is related to other members of the Power Financial group including IGM Financial Inc., a company in the financial services sector along with its subsidiaries Investors Group, Mackenzie Financial and Investment Planning Council and Pargesa, a holding company with substantial holdings in a diversified industrial group based in Europe.

(a) Principal subsidiaries

The consolidated financial statements of the Company include the operations of the following subsidiaries and their subsidiaries:

Company Incorporated in Primary business operation % Held

The Great-West Life Assurance Company Canada Insurance and wealth management 100.00%London Life Insurance Company Canada Insurance and wealth management 100.00%The Canada Life Assurance Company Canada Insurance and wealth management 100.00%Great-West Life & Annuity Insurance Company United States Insurance and wealth management 100.00%Putnam Investments, LLC United States Financial services 100.00%(1)

(1) Lifeco holds 100% of the voting shares and 95.9% of the total outstanding shares.



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(b) Transactions with related parties included in the consolidated financial statements

In the normal course of business, Great-West Life and Putnam enter into various transactions with related companies which include providing insurance benefits and sub-advisory services to other companies within the Power Financial group of companies. In all cases, transactions were at market terms and conditions.

During the year, Great-West Life provided to and received from IGM and its subsidiaries, a member of the Power Financial group of companies, certain administrative services. Great-West Life also provided life insurance, annuity and disability insurance products under a distribution agreement with IGM. London Life provided distribution services to IGM. All transactions were provided at market terms and conditions.

Segregated funds of the Company were invested in funds managed by Investors Group and Mackenzie Investments. The Company also has interests in mutual funds, open-ended investment companies and unit trusts. Some of these funds are managed by related parties of the Company and the Company receives management fees related to these services. All transactions were provided at market terms and conditions (note 14).

The Company held debentures issued by IGM; the interest rates and maturity dates are as follows: 2017 2016

3.44%, matures January 26, 2027 $ 10 $ –6.65%, matures December 13, 2027 16 167.45%, matures May 9, 2031 14 137.00%, matures December 31, 2032 13 134.56%, matures January 25, 2047 21 –

Total $ 74 $ 42

During 2017, the Company purchased debentures from IGM with a total market value at December 31, 2017 of $31.

During 2017, the Company purchased residential mortgages of $137 from IGM ($184 in 2016).

The Company holds investments in Portag3 Ventures and other entities which invest in the FinTech sector. These investments are a corporate partnership with Power Financial and IGM.

The Company provides asset management, employee benefits and administrative services for employee benefit plans relating to pension and other post-employment benefits for employees of the Company and its subsidiaries. These transactions were provided at market terms and conditions.

There were no significant outstanding loans or guarantees and no loans or guarantees issued during 2017 or 2016. There were no provisions for uncollectible amounts from related parties during 2017 and 2016.

(c) Key management compensation

Key management personnel constitute those individuals that have the authority and responsibility for planning, directing and controlling the activities of Lifeco, directly or indirectly, including any Director. The individuals that comprise the key management personnel are the Board of Directors as well as certain key management and officers.

The following describes all compensation paid to, awarded to, or earned by each of the key management personnel for services rendered in all capacities to the Company and its subsidiaries: 2017 2016

Salary $ 14 $ 15Share-based awards 9 7Option-based awards 2 3Annual non-equity incentive plan compensation 21 21Pension value 5 8Other 2 –

Total $ 53 $ 54



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27. Income Taxes

(a) Components of the income tax expense

(i) Income tax recognized in Consolidated Statements of Earnings

Current income tax

2017 2016

Current year $ 259 $ 321Previously unrecognized tax loss, tax credit or temporary difference of prior year – (32)

Total current income tax $ 259 $ 289

Deferred income tax 2017 2016

Origination and reversal of temporary differences $ (8) $ 129Effect of changes in tax rates or imposition of new taxes 142 (16)Tax expense (benefit) arising from unrecognized tax losses and tax credits 29 (6)

Total deferred income tax $ 163 $ 107

Total income tax expense $ 422 $ 396

(ii) Income tax recognized in other comprehensive income (note 25) 2017 2016

Current income tax recovery $ (13) $ (9)Deferred income tax recovery 159 (6)

Total $ 146 $ (15)

(iii) Income tax recognized in Consolidated Statements of Changes in Equity 2017 2016

Current income tax expense $ – $ –Deferred income tax recovery (10) (1)

Total $ (10) $ (1)

(b) The effective income tax rate reported in the Consolidated Statements of Earnings varies from the combined Canadian federal and provincial income tax rate of 26.75% for the following items: 2017 2016

Earnings before income taxes $ 2,730 $ 3,352Combined basic Canadian federal and provincial tax rate 730 26.75% 897 26.75%Increase (decrease) in the income tax rate resulting from: Non-taxable investment income (205) (7.51) (198) (5.90) Lower effective income tax rates on income not subject to tax in Canada (207) (7.58) (218) (6.50) U.S. tax reform impact of rate change on deferred income taxes 135 4.94 n/a n/a Impact of other rate changes on deferred income taxes 7 0.25 (16) (0.48) Other (38) (1.39) (69) (2.06)

Total income tax expense and effective income tax rate $ 422 15.46% $ 396 11.81%

On December 22, 2017, H.R. 1, the Tax Reconciliation Act, was substantively enacted. The legislation, which was generally effective for tax years beginning on January 1, 2018, results in significant U.S. tax reform and revises the Internal Revenue Code by, among other things, lowering the corporate federal income tax rate from 35% to 21% and modifying how the U.S. taxes multinational entities.

The net impact of the revaluation of deferred tax balances due to the lowering of the corporate federal income tax rate from 35% to 21% was $135 and the write-down of losses carried forward was $19 for a total income tax expense of $154.

In addition, the Company recorded expenses of $119 associated with U.S. tax reform primarily related to the impact on actuarial liabilities. The income tax recovery associated with these expenses was $38.



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The impact of these U.S. tax reform items was a net decrease of $216 to net earnings and is summarized below:

Expenses $ (119)Income taxes 116

Net earnings before non-controlling interests (235)Attributable to non-controlling interests (19)

Net earnings $ (216)

The revaluation of deferred tax balances, which are based on management’s best estimates and are included in the “U.S. tax reform impact of rate changes on deferred income taxes”, increases the 2017 effective income tax rate by 4.94%. These estimates may require further adjustments as additional guidance from the U.S. Department of the Treasury is provided, the Company’s assumptions change, and as further information and interpretations become available. Changes in these estimates will impact the 2018 consolidated financial statements.

(c) Composition and changes in net deferred income tax assets are as follows: 2017

Insurance and Losses investment Portfolio carried Intangible Tax contract liabilities investments forward assets credits Other Total

Balance, beginning of year $ (1,429) $ (654) $ 1,775 $ (458) $ 375 $ 463 $ 72Recognized in Statements of Earnings 391 28 (596) 88 30 (104) (163)Recognized in Statements of Comprehensive Income – 8 – – – (167) (159)Recognized in Statements of Changes in Equity – – – – – 10 10Acquired in business combinations – – 2 (42) – 1 (39)Foreign exchange rate changes and other 62 16 (49) 11 (14) (11) 15

Balance, end of year $ (976) $ (602) $ 1,132 $ (401) $ 391 $ 192 $ (264)

2016 (1)

Insurance and Losses investment Portfolio carried Intangible Tax contract liabilities investments forward assets credits Other Total

Balance, beginning of year $ (1,279) $ (686) $ 1,785 $ (320) $ 352 $ 453 $ 305Recognized in Statements of Earnings (180) 47 133 (127) 27 (7) (107)Recognized in Statements of Comprehensive Income – (19) – – – 25 6Recognized in Statements of Changes in Equity – – – – – 1 1Acquired in business combinations – – 5 (9) – 2 (2)Foreign exchange rate changes and other 30 4 (148) (2) (4) (11) (131)

Balance, end of year $ (1,429) $ (654) $ 1,775 $ (458) $ 375 $ 463 $ 72

2017 2016 (1)

Recorded on Consolidated Balance Sheets:Deferred tax assets $ 930 $ 1,593Deferred tax liabilities (1,194) (1,521)

Total $ (264) $ 72

(1) As a result of an accounting policy change (note 2), the Company retroactively restated the classification of current taxes to deferred taxes on the Consolidated Balance Sheets. This reclassification resulted in a decrease to deferred tax assets of $252 and a decrease to deferred tax liabilities of $124. These reclassifications had no impact on the total equity or net earnings of the Company.

A deferred income tax asset is recognized for deductible temporary differences and unused losses and carryforwards only to the extent that realization of the related income tax benefit through future taxable profits is probable.

Recognition is based on the fact that it is probable that the entity will have taxable profits and/or tax planning opportunities available to allow the deferred income tax asset to be utilized. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred income tax assets. The Company’s annual financial planning process provides a significant basis for the measurement of deferred income tax assets.



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Management assesses the recoverability of the deferred income tax assets carrying values based on future years’ taxable income projections and believes the carrying values of the deferred income tax assets as of December 31, 2017 are recoverable.

At December 31, 2017, the Company has recognized a deferred tax asset of $1,132 ($1,775 at December 31, 2016) on tax loss carryforwards totaling $7,670 ($7,285 in 2016). Of this amount, $7,572 expire between 2018 and 2037, while $98 have no expiry date. The Company will realize this benefit in future years through a reduction in current income taxes payable.

One of the Company’s subsidiaries has had a history of recent losses. The subsidiary has a net deferred income tax asset balance of $691 (U.S. $549) as at December 31, 2017 comprised principally of net operating losses and future deductions related to goodwill which has been, in prior years, impaired for accounting purposes. Management has concluded that it is probable that the subsidiary and other historically profitable subsidiaries with which it files or intends to file a consolidated U.S. income tax return will generate sufficient taxable income against which the unused U.S. losses and deductions will be utilized.

The Company has not recognized a deferred tax asset of $41 ($24 in 2016) on tax loss carryforwards totaling $186 ($105 in 2016). Of this amount, $117 expire between 2018 and 2037 while $69 have no expiry date.

A deferred income tax liability has not been recognized in respect of the temporary differences associated with investments in subsidiaries, branches and associates as the Company is 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.

28. Operating and Administrative Expenses

2017 2016

Salaries and other employee benefits $ 3,157 $ 3,122General and administrative 1,590 1,594Amortization of fixed assets 86 83

Total $ 4,833 $ 4,799

29. Restructuring

Canadian Business Transformation

In 2017, the Company recorded a restructuring provision for the Canadian operations transformation plan of $215 pre-tax ($172 pre-tax in the shareholder account and $43 pre-tax in the participating accounts) with the charge recorded in restructuring expenses in the Consolidated Statements of Earnings. This restructuring is in respect of activities aimed at achieving planned expense reductions and an organizational realignment to respond to changing customer needs and expectations in Canada. The expense reductions address costs across the Canadian operations and corporate functions primarily through a reduction in staff, exiting of certain lease agreements and information system impairments. The restructuring expense in the participating accounts is comprised of $29 in London Life, $7 in Great-West Life and $7 in Canada Life.

At December 31, 2017, the Company has a restructuring provision of $120 remaining in other liabilities. The change in the restructuring provision for the Canadian Business Transformation is set out below:

Balance, beginning of year $ –Restructuring expense recorded 215Amounts used (95)

Balance, end of year $ 120

Putnam Restructuring

In 2016, Putnam recorded a restructuring expense of $33, which is recorded in restructuring expenses in the Consolidated Statements of Earnings. All amounts have been paid at December 31, 2017. This restructuring is in respect of activities aimed at achieving planned expense reductions and a realignment of its resources to best position itself for current and future opportunities.

The expense reductions addressed costs across the Putnam enterprise through a reduction in staff, elimination of certain non-core business programs and vendor consolidation. As part of this effort, Putnam reduced its staff by nearly eight percent, primarily operations and technology professionals, but also a small number of investment management professionals.

During 2017, the United States operating segment recorded restructuring expenses of $17 ($13 during 2016 in addition to the Putnam restructuring expenses above) and the Europe operating segment recorded restructuring expenses of $27 ($17 during 2016) respectively.

27. Income Taxes (cont’d)



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30. Derivative Financial Instruments

In the normal course of managing exposure to fluctuations in interest and foreign exchange rates, and to market risks, the Company is an end-user of various derivative financial instruments. It is the Company’s policy to transact in derivatives only with the most creditworthy financial intermediaries. Note 8 illustrates the credit quality of the Company’s exposure to counterparties. Credit risk equivalent amounts are presented net of collateral received, including initial margin on exchange-traded derivatives, of $77 as at December 31, 2017 ($159 at December 31, 2016).

(a) The following summarizes the Company’s derivative portfolio and related credit exposure using the following definitions of risk as prescribed by OSFI:

Maximum Credit Risk The total replacement cost of all derivative contracts with positive values.

Future Credit Exposure The potential future credit exposure is calculated based on a formula prescribed by OSFI. The factors prescribed by OSFI for this calculation are based on derivative type and duration.

Credit Risk Equivalent The sum of maximum credit risk and the potential future credit exposure less any collateral held.

Risk Weighted Equivalent Represents the credit risk equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.

2017

Maximum Future Credit Risk Notional credit credit risk weighted amount risk exposure equivalent equivalent

Interest rate contracts Futures – long $ 25 $ – $ – $ – $ – Futures – short 52 – – – – Swaps 2,845 125 35 158 11 Options purchased 307 50 2 52 4

3,229 175 37 210 15Foreign exchange contracts Forward contracts 1,430 10 33 38 3 Cross-currency swaps 11,128 198 728 858 56

12,558 208 761 896 59Other derivative contracts Equity contracts 70 – 4 4 1 Futures – long 13 – – – – Futures – short 626 1 – – – Other forward contracts 93 – – – –

802 1 4 4 1

Total $ 16,589 $ 384 $ 802 $ 1,110 $ 75

2016

Maximum Future Credit Risk Notional credit credit risk weighted amount risk exposure equivalent equivalent

Interest rate contracts Futures – long $ 11 $ – $ – $ – $ – Futures – short 98 – – – – Swaps 3,315 213 35 218 19 Options purchased 318 49 2 50 4

3,742 262 37 268 23Foreign exchange contracts Forward contracts 1,588 35 18 52 4 Cross-currency swaps 11,114 228 677 777 58

12,702 263 695 829 62Other derivative contracts Equity contracts 62 1 4 4 1 Futures – long 11 – – – – Futures – short 609 2 – – – Other forward contracts 103 – – – –

785 3 4 4 1

Total $ 17,229 $ 528 $ 736 $ 1,101 $ 86



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(b) The following provides the notional amount, term to maturity and estimated fair value of the Company’s derivative portfolio by category:

2017

Notional Amount Total 1 year Over Over 5 estimated or less 1–5 years years Total fair value

Derivatives not designated as accounting hedges Interest rate contracts Futures – long $ 17 $ 8 $ – $ 25 $ – Futures – short 43 9 – 52 – Swaps 312 343 1,783 2,438 78 Options purchased 46 202 59 307 50

418 562 1,842 2,822 128 Foreign exchange contracts Forward contracts 955 – – 955 7 Cross-currency swaps 338 2,004 8,286 10,628 (930)

1,293 2,004 8,286 11,583 (923) Other derivative contracts Equity contracts 70 – – 70 (1) Futures – long 13 – – 13 – Futures – short 626 – – 626 (1) Other forward contracts 93 – – 93 –

802 – – 802 (2)Cash flow hedges Interest rate contracts Swaps – – 407 407 10

Foreign exchange contracts Cross-currency swaps 500 – – 500 (123)

Net investment hedges Foreign exchange forward contracts – 475 – 475 (42)

Total $ 3,013 $ 3,041 $ 10,535 $ 16,589 $ (952)

30. Derivative Financial Instruments (cont’d)



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2016

Notional Amount Total 1 year Over Over 5 estimated or less 1–5 years years Total fair value

Derivatives not designated as accounting hedges Interest rate contracts Futures – long $ 2 $ 9 $ – $ 11 $ – Futures – short 70 28 – 98 – Swaps 693 469 1,721 2,883 125 Options purchased 39 194 85 318 49

804 700 1,806 3,310 174 Foreign exchange contracts Forward contracts 1,089 – – 1,089 (7) Cross-currency swaps 428 1,987 7,199 9,614 (1,265)

1,517 1,987 7,199 10,703 (1,272) Other derivative contracts Equity contracts 62 – – 62 1 Futures – long 11 – – 11 – Futures – short 609 – – 609 1 Other forward contracts 103 – – 103 –

785 – – 785 2Cash flow hedges Interest rate contracts Swaps – – 432 432 42

Foreign exchange contracts Cross-currency swaps 1,000 500 – 1,500 (436)

Net investment hedges Foreign exchange forward contracts 450 49 – 499 6

Total $ 4,556 $ 3,236 $ 9,437 $ 17,229 $ (1,484)

Futures contracts included in the above are exchange traded contracts; all other contracts are over-the-counter.

(c) 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. Interest-rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based. Call options grant the Company the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. Call options are used to manage the variability in future interest payments due to a change in credited interest rates and the related potential change in cash flows due to surrenders. Call options are also used to hedge minimum rate guarantees.

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 Company also enters into certain foreign exchange forward contracts to hedge certain product liabilities.

There was no ineffective portion of cash flow hedges during 2017. The maximum time frame for which variable cash flows are hedged is 50 years.

Other Derivative Contracts

Equity index swaps, futures and options are used to hedge certain product liabilities. Equity index swaps are also used as substitutes for cash instruments and are used to periodically hedge the market risk associated with certain fee income. Equity put options are used to manage potential credit risk impact of significant declines in certain equity markets.



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31. Legal Provisions and Contingent Liabilities

The Company 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 Company. 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 Company. Actual results could differ from management’s best estimates.

A subsidiary of the Company in the United States is a defendant in an action in relation to its role as collateral manager of a collateralized debt obligation brought by an institution involved in the collateralized debt obligation. On April 28, 2014, the matter was dismissed. On July 2, 2014, the complainant filed an appeal of the dismissal and on April 15, 2015 the United States Court of Appeals for the Second Circuit issued its decision overturning the dismissal of the action and remanding the matter for further proceedings, which are ongoing. The resolution of this matter will not have a material adverse effect on the consolidated financial position of the Company.

Subsidiaries of the Company 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 believes the claims are without merit and will be aggressively defending these actions. Based on the information presently known these actions will not have a material adverse effect on the consolidated financial position of the Company.

32. Commitments

(a) Letters of Credit

Letters of credit are written commitments provided by a bank. The total amount of letter of credit facilities is U.S. $1,726 of which U.S. $1,629 were issued as of December 31, 2017.

The Reinsurance operation periodically uses letters of credit as collateral under certain reinsurance contracts for on balance sheet policy liabilities.

(b) Investment Commitments

Commitments of investment transactions made in the normal course of operations in accordance with policies and guidelines that are to be disbursed upon fulfillment of certain contract conditions were $939 as at December 31, 2017, with $938 maturing within one year and $1 maturing within two years.

(c) Lease Obligations

The Company enters 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:

2023 and 2018 2019 2020 2021 2022 thereafter Total

Future lease payments $ 119 $ 94 $ 79 $ 69 $ 52 $ 358 $ 771

(d) Pledged Assets

In addition to the assets pledged by the Company disclosed elsewhere in the consolidated financial statements:

(i) The amount of assets included in the Company’s balance sheet which have a security interest by way of pledging is $1,562 ($1,709 at December 31, 2016) in respect of reinsurance agreements.

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) The Company has pledged, in the normal course of business, $66 ($62 at December 31, 2016) of assets of the Company for the purpose of providing collateral for the counterparty.



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33. Segmented Information

The operating segments of the Company are Canada, United States, Europe and Lifeco Corporate. These segments reflect the Company’s management structure and internal financial reporting and are aligned to its geographic operations. Each of these segments operates in the financial services industry and the revenues from these segments are derived principally from interests in life insurance, health insurance, retirement and investment services, asset management and reinsurance businesses. Business activities that are not associated with the specific geographic operations are attributed to the Lifeco Corporate segment.

Transactions between operating segments occur at market terms and conditions and have been eliminated upon consolidation.

The Company has a capital allocation model to measure the performance of the operating segments. The impact of the capital allocation model is included in the segmented information presented below.

(a) Consolidated Net Earnings 2017

United Lifeco Canada States Europe Corporate Total

Income Total net premiums $ 13,191 $ 4,471 $ 16,285 $ – $ 33,947 Net investment income Regular net investment income 2,534 1,816 1,787 4 6,141 Changes in fair value through profit or loss 806 339 321 – 1,466

Total net investment income 3,340 2,155 2,108 4 7,607 Fee and other income 1,616 2,452 1,386 – 5,454

18,147 9,078 19,779 4 47,008

Benefits and expenses Paid or credited to policyholders 12,977 5,814 16,852 – 35,643 Other (1) 3,410 2,651 1,623 22 7,706 Financing charges 123 128 48 1 300 Amortization of finite life intangible assets and impairment reversal 72 65 31 – 168 Restructuring expenses 215 17 27 – 259 Loss on assets held for sale – 202 – – 202

Earnings (loss) before income taxes 1,350 201 1,198 (19) 2,730Income taxes (recovery) 231 243 (47) (5) 422

Net earnings (loss) before non-controlling interests 1,119 (42) 1,245 (14) 2,308Non-controlling interests 42 (10) (2) – 30

Net earnings (loss) 1,077 (32) 1,247 (14) 2,278Preferred share dividends 104 – 19 6 129

Net earnings (loss) before capital allocation 973 (32) 1,228 (20) 2,149Impact of capital allocation 101 (18) (76) (7) –

Net earnings (loss) – common shareholders $ 1,074 $ (50) $ 1,152 $ (27) $ 2,149

(1) Includes commissions, operating and administrative expenses and premium taxes.



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2016

United Lifeco Canada States Europe Corporate Total

Income Total net premiums $ 12,471 $ 5,304 $ 13,350 $ – $ 31,125 Net investment income Regular net investment income 2,668 1,741 1,841 2 6,252 Changes in fair value through profit or loss 692 92 3,119 – 3,903

Total net investment income 3,360 1,833 4,960 2 10,155 Fee and other income 1,494 2,311 1,296 – 5,101

17,325 9,448 19,606 2 46,381

Benefits and expenses Paid or credited to policyholders 11,862 6,271 16,542 – 34,675 Other (1) 3,599 2,678 1,511 24 7,812 Financing charges 115 140 45 2 302 Amortization of finite life intangible assets and impairment reversal 66 82 29 – 177 Restructuring expenses – 46 17 – 63

Earnings (loss) before income taxes 1,683 231 1,462 (24) 3,352Income taxes (recovery) 268 (27) 161 (6) 396

Net earnings (loss) before non-controlling interests 1,415 258 1,301 (18) 2,956Non-controlling interests 191 2 (1) – 192

Net earnings (loss) 1,224 256 1,302 (18) 2,764Preferred share dividends 104 – 19 – 123

Net earnings (loss) before capital allocation 1,120 256 1,283 (18) 2,641Impact of capital allocation 98 (7) (83) (8) –

Net earnings (loss) – common shareholders $ 1,218 $ 249 $ 1,200 $ (26) $ 2,641

(1) Includes commissions, operating and administrative expenses and premium taxes.

33. Segmented Information (cont’d)



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(b) Consolidated Total Assets and Liabilities 2017


Assets Invested assets $ 73,110 $ 44,263 $ 50,562 $ 167,935 Assets held for sale – 169 – 169 Goodwill and intangible assets 5,447 1,975 2,489 9,911 Other assets 2,804 3,618 18,044 24,466 Investments on account of segregated fund policyholders 80,399 34,038 102,920 217,357

Total $ 161,760 $ 84,063 $ 174,015 $ 419,838

2017


Liabilities Insurance and investment contract liabilities $ 66,460 $ 39,970 $ 54,935 $ 161,365 Other liabilities 7,254 4,505 3,821 15,580 Investment and insurance contracts on account of segregated fund policyholders 80,399 34,038 102,920 217,357

Total $ 154,113 $ 78,513 $ 161,676 $ 394,302

2016


Assets Invested assets $ 70,311 $ 44,904 $ 47,940 $ 163,155 Goodwill and intangible assets 5,133 2,388 2,428 9,949 Other assets (1) 3,178 4,351 18,697 26,226 Investments on account of segregated fund policyholders 74,909 35,414 90,080 200,403

Total $ 153,531 $ 87,057 $ 159,145 $ 399,733

2016


Liabilities Insurance and investment contract liabilities $ 63,144 $ 40,871 $ 53,934 $ 157,949 Other liabilities (1) 7,033 4,976 4,364 16,373 Investment and insurance contracts on account of segregated fund policyholders 74,909 35,414 90,080 200,403

Total $ 145,086 $ 81,261 $ 148,378 $ 374,725

(1) The Company reclassified current taxes to deferred taxes resulting in a decrease to other assets of $179 and a decrease to other liabilities of $179 on the Consolidated Balance Sheets at December 31, 2016 (note 34).

34. Comparative Figures

During the year, the Company reclassified certain comparative figures for the change in accounting policy (note 2) for presentation of certain income tax balances (notes 8, 13, 27, and 33).

These reclassifications had no impact on the total equity or net earnings of the Company.



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Independent Auditor’s Report

To the Shareholders of Great-West Lifeco Inc.

We have audited the accompanying consolidated financial statements of Great-West Lifeco Inc., which comprise the consolidated balance sheets as at December 31, 2017 and December 31, 2016, and the consolidated statements of earnings, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.


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.


Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Great-West Lifeco Inc. as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

/s/ Deloitte LLP

Chartered Professional Accountants

Winnipeg, Manitoba February 8, 2018



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Please note that the bottom of each page in Part D contains two diff erent page numbers. A page number with the prefi x “D” refers to the number of such page in this document and the page number without any prefi x refers to the number of such page in the original document issued by IGM Financial Inc.

The attached documents concerning IGM Financial Inc. are documents prepared and publicly disclosed by such subsidiary. Certain statements in the attached documents, other than statements of historical fact, are forward-looking statements based on certain assumptions and refl ect the current expectations of the subsidiary as set forth therein. Forward-looking statements are provided for the purposes of assisting the reader in understanding the subsidiary’s fi nancial performance, fi nancial position and cash fl ows as at and for the periods ended on certain dates and to present information about the subsidiary’s management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes.


For further information provided by the subsidiary as to the material factors that could cause actual results to diff er materially from the content of forward-looking statements, the material factors and assumptions that were applied in making the forward-looking statements, and the subsidiary’s policy for updating the content of forward-looking statements, please see the attached documents, including the section entitled Forward-Looking Statements. The reader is cautioned to consider these factors and assumptions carefully and not to put undue reliance on forward-looking statements.


P A G E D 2


P A G E D 6 1

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P A R T D

P O W E R C O R P O R AT I O N O F C A N A DA D 1

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24 IGM FINANCIAL INC. ANNUAL REPORT 2017 | MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Management’s Discussion and Analysis (MD&A) presents management’s view of the results of operations and the financial condition of IGM Financial Inc. (IGM Financial or the Company) as at and for the years ended December 31, 2017 and 2016 and should be read in conjunction with the audited Consolidated Financial Statements. Commentary in the MD&A as at and for the year ended

December 31, 2017 is as of February 9, 2018.

BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIESThe Consolidated Financial Statements of IGM Financial, which are the basis of the information presented in the Company’s MD&A, have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Canadian dollars (Note

2 of the Consolidated Financial Statements).

PRINCIPAL HOLDERS OF VOTING SHARESAs at December 31, 2017, Power Financial Corporation (PFC) and Great-West Lifeco Inc. (Lifeco), a subsidiary of PFC, held directly or indirectly 61.5% and 3.8%, respectively, of the outstanding common shares of IGM Financial.

Certain statements in this MD&A, other than statements of historical fact, are forward-looking statements based on certain assumptions and reflect IGM Financial’s current expectations. Forward-looking statements are provided to assist the reader in understanding the Company’s financial position and results of operations as at and for the periods ended on certain dates and to present information about management’s current expectations and plans relating to the future. Readers are 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 Company, 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”.

This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements, including the perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. While the Company considers these assumptions to be reasonable based on information currently available to management, they may prove to be incorrect.

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 material factors, many of which are beyond the Company’s and its subsidiaries’ control, affect the operations, performance and results of the Company, 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, changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates), the effect of applying future accounting changes, operational and reputational risks, business competition, technological change, changes in government regulations and legislation, changes in tax laws, unexpected judicial or regulatory proceedings, catastrophic events, the Company’s ability to complete strategic transactions, integrate acquisitions and implement other growth strategies, and the Company’s and its subsidiaries’ success in anticipating and managing the foregoing factors.

The reader is cautioned that the foregoing list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements. The reader is also cautioned to consider these and other factors, uncertainties and potential events carefully and not place undue reliance on forward-looking statements.

Other than as specifically required by applicable Canadian law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are 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 Company’s business and material factors or assumptions on which information contained in forward-looking statements is based is provided in its disclosure materials, including this Management’s Discussion and Analysis and its most recent Annual Information Form, filed with the securities regulatory authorities in Canada, available at www.sedar.com.

FORWARD-LOOKING STATEMENTS

Net earnings available to common shareholders, which is an additional measure in accordance with IFRS, may be subdivided into two components consisting of:

• Adjusted net earnings available to common shareholders; and

• Other items, which include the after-tax impact of any item that management considers to be of a non-recurring nature or that could make the period-over-period comparison of results from operations less meaningful.

“Adjusted net earnings available to common shareholders”, “adjusted diluted earnings per share” (EPS) and “adjusted return on average common equity” (ROE) are non-IFRS financial measures which are used to provide management and investors with additional measures to assess earnings performance. These non-IFRS financial measures do not have standard meanings prescribed by IFRS and may not be directly comparable to similar measures used by other companies.

“Earnings before interest and taxes” (EBIT), “earnings before interest, taxes, depreciation and amortization” (EBITDA) and “adjusted earnings before interest, taxes, depreciation and amortization” (Adjusted EBITDA) are also non-IFRS financial measures. EBIT, EBITDA

and Adjusted EBITDA are alternative measures of performance utilized by management, investors and investment analysts to evaluate and analyze the Company’s results. EBITDA is a common measure used in the asset management industry to assess profitability before the impact of different financing methods, income taxes, depreciation of capital assets and amortization of intangible assets. Other items of a non-recurring nature, or that could make the period-over-period comparison of results from operations less meaningful, are further excluded to arrive at Adjusted EBITDA. These non-IFRS financial measures do not have standard meanings prescribed by IFRS and may not be directly comparable to similar measures used by other companies.

“Earnings before income taxes” and “net earnings available to common shareholders” are additional IFRS measures which are used to provide management and investors with additional measures to assess earnings performance. These measures are considered additional IFRS measures as they are in addition to the minimum line items required by IFRS and are relevant to an understanding of the entity’s financial performance.

Refer to the appropriate reconciliations of non-IFRS financial measures to reported results in accordance with IFRS in Tables 1 and 2.

NON-IFRS FINANCIAL MEASURES AND ADDITIONAL IFRS MEASURES

D 2 P O W E R C O R P O R AT I O N O F C A N A DA


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IGM FINANCIAL INC. ANNUAL REPORT 2017 | MANAGEMENT’S DISCUSSION AND ANALYSIS 25

IGM FINANCIAL INC.SUMMARY OF CONSOLIDATED OPERATING RESULTS

IGM Financial Inc. (TSX:IGM) is one of Canada’s premier financial services companies. The Company’s principal businesses are Investors Group Inc. and Mackenzie Financial Corporation, each operating distinctly, primarily within the advice segment of the financial services market.

Investment fund assets under management, which were at the highest level in the history of the Company, were $149.8 billion at December 31, 2017 compared with $137.6 billion at December 31, 2016. Average investment fund assets under management for the year ended December 31, 2017 were $143.7 billion compared to $130.2 billion in 2016. Average investment fund assets under management for the fourth quarter of 2017 were $148.1 billion compared to $135.2 billion in 2016.

Total assets under management, also at a record high for the Company, were $156.5 billion at December 31, 2017 compared with $142.7 billion at December 31, 2016, as detailed in Tables 4 and 5. Average total assets under management for the year ended December 31, 2017 were $149.3 billion compared to $136.4 billion in 2016. Average total assets under management for the fourth quarter of 2017 were $154.2 billion compared to $141.0 billion in 2016.

Net earnings available to common shareholders for the year ended December 31, 2017 were $601.9 million or $2.50 per share compared to net earnings available to common shareholders of $770.5 million or $3.19 per share in 2016. Adjusted net earnings available to common shareholders, excluding other items outlined below, for the year ended December 31, 2017 were $727.8 million or $3.02 per share compared to adjusted net earnings available to common shareholders of $736.5 million or $3.05 per share in 2016.

Net earnings available to common shareholders for the three months ended December 31, 2017 were $50.6 million or 21 cents per share compared to net earnings available to common shareholders of $233.0 million or 97 cents per share for the comparative period in 2016. Adjusted net earnings available to common shareholders, excluding other items outlined below, for the three months ended December 31, 2017 were $191.4 million or 79 cents per share. Net earnings in the quarter were impacted by a negative fair value adjustment of $19.6 million primarily related to changes in prevailing mortgage valuation rates.

Other items for the year ended December 31, 2017 consisted of :

• Restructuring and other charges of $126.8 million after-tax ($172.3 million pre-tax) recorded in the fourth quarter resulting from efforts in respect of the implementation of a number of initiatives to assist in the Company’s operational effectiveness.

• Restructuring and other charges of $16.8 million after-tax ($23.0 million pre-tax) recorded in the second quarter including severance and termination costs largely associated with the reduction of our region office footprint.

• Favourable revaluation of the Company’s registered pension plan obligation of $36.8 million after-tax ($50.4 million pre-tax) in the second quarter, reflecting a new policy which limits the possibility of certain benefit increases in the future.

• An after-tax charge of $14.0 million in the fourth quarter representing the Company’s proportionate share in Great-West Lifeco Inc.’s charges related to the impact of United States tax reforms and the pending sale of an equity investment.

• An after-tax charge of $5.1 million in the second quarter representing the Company’s proportionate share in Great-West Lifeco Inc.’s restructuring provision.

Other items for the year ended December 31, 2016 consisted of a favourable change in income tax provision estimates of $34.0 million, recorded in the fourth quarter, related to certain tax filings.

Adjusted Net Earnings and Adjusted Net Earnings per ShareFor the financial year ($ millions, except per share amounts)

2013 excluded an after-tax charge related to restructuring and other charges and the proportionate share of the benefit related to the changes in an affiliate’s litigation provisions.

2014 excluded an after-tax charge related to client distributions and other costs, and an after-tax charge related to restructuring and other charges.

2015 excluded an after-tax charge related to restructuring and other charges.

2016 excluded a reduction in income tax estimates related to certain tax filings.

2017 excluded charges related to restructuring and other, a favourable revaluation of the Company’s pension plan obligation, charges representing the proportionate share in Great-West Lifeco Inc.’s one-time charges and restructuring provision.

3.02

728

Adjusted Net Earnings

Adjusted Diluted EPS

826

3.27

796736764

3.213.053.02

2013 2014 2015 2016 2017



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Shareholders’ equity was $4.8 billion at December 31, 2017, compared to $4.7 billion at December 31, 2016. Return on average common equity based on adjusted net earnings for the year ended December 31, 2017 was 15.6%, compared with 16.3% for the comparative period in 2016. The quarterly dividend per common share was 56.25 cents in 2017, unchanged from the end of 2016.

SIGNIFICANT EVENTSOn August 31, 2017, the Company finalized its investment in China Asset Management Co., Ltd. (China AMC), an asset management company, which resulted in a 13.9% ownership interest. This investment was completed in two separate transactions announced on December 29, 2016 and January 5, 2017. Both transactions involved separate non-strategic shareholders that are Chinese state-owned enterprises.

TABLE 1: RECONCILIATION OF NON-IFRS FINANCIAL MEASURES

THREE MONTHS ENDED TWELVE MONTHS ENDED 2017 2017 2016 2017 2016 ($ millions) DEC. 31 SEP. 30 DEC. 31 DEC. 31 DEC. 31

Adjusted net earnings available to common shareholders – Non-IFRS measure $ 191.4 $ 173.4 $ 199.0 $ 727.8 $ 736.5 Restructuring and other, net of tax (126.8) – – (143.6) – Pension plan, net of tax – – – 36.8 – Proportionate share of associate’s one-time charges (14.0) – – (14.0) – Proportionate share of associate’s provision – – – (5.1) – Reduction in income tax estimates related to certain tax filings – – 34.0 – 34.0

Net earnings available to common shareholders – IFRS $ 50.6 $ 173.4 $ 233.0 $ 601.9 $ 770.5

Adjusted net earnings per share(1) available to common shareholders – Non-IFRS measure $ 0.79 $ 0.72 $ 0.83 $ 3.02 $ 3.05 Restructuring and other, net of tax (0.52) – – (0.59) – Pension plan, net of tax – – – 0.15 – Proportionate share of associate’s one-time charges (0.06) – – (0.06) – Proportionate share of associate’s provision – – – (0.02) – Reduction in income tax estimates related to certain tax filings – – 0.14 – 0.14

Net earnings per share(1) available to common shareholders – IFRS $ 0.21 $ 0.72 $ 0.97 $ 2.50 $ 3.19

Adjusted EBITDA – Non-IFRS measure $ 353.8 $ 330.8 $ 352.0 $ 1,354.5 $ 1,320.8 Restructuring and other (172.3) – – (195.3) – Pension plan – – – 50.4 – Proportionate share of associate’s one-time charges (14.0) – – (14.0) – Proportionate share of associate’s provision – – – (5.1) –

EBITDA – Non-IFRS measure 167.5 330.8 352.0 1,190.5 1,320.8 Commission amortization (57.6) (57.0) (58.4) (230.9) (235.8) Amortization of capital assets and intangible assets and other (17.9) (15.3) (11.8) (60.9) (45.9) Interest expense on long-term debt (29.7) (28.9) (23.2) (114.1) (92.2)

Earnings before income taxes 62.3 229.6 258.6 784.6 946.9 Income taxes (9.5) (54.0) (23.4) (173.9) (167.6) Perpetual preferred share dividends (2.2) (2.2) (2.2) (8.8) (8.8)

Net earnings available to common shareholders – IFRS $ 50.6 $ 173.4 $ 233.0 $ 601.9 $ 770.5

(1) Diluted earnings per share



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In the fourth quarter, the Company implemented a number of initiatives to assist in the Company’s operational effectiveness. The initiatives included:

• A decision to discontinue development of a new investment fund accounting system. After a thorough review, the company instead will upgrade its current solution, resulting in meaningful ongoing savings among other benefits. As a result of this, and other associated technology decisions, the company will record a non-cash charge of approximately $74 million after-tax reflecting capitalized system development expenditures.

• Consolidating the Investors Group and Mackenzie investment management functions and expanding the IGM shared services model to areas within marketing, human resources, customer service and other operational teams.

• Optimizing Investors Group’s product and financial specialists to re-invest in the training and development of our advisor network.

• Offering a one-time voluntary retirement program.

• Simplifying the company’s reporting structure to speed decisions and increase the empowerment of our people.

In October 2017, IGM Financial Inc. consolidated the investment management functions of Investors Group and Mackenzie Investments to form a single global investment management

organization to support both companies under Mackenzie Investments. The investment management organization con-tinues to maintain its multi-boutique and asset class structure. It offers diverse and unique products for Investors Group’s Consultants, Mackenzie’s distribution channels and the cli-ents they serve. Investors Group and Mackenzie Investments continue to maintain differentiated fund shelves and brands. In addition, Investors Group continues to offer products using a combination of in-house portfolio management expertise supplemented with leading third party investment talent. The changes will result in some modest efficiencies through lever-aging scale across the combined organization.

REPORTABLE SEGMENTSIGM Financial’s reportable segments are:

• Investors Group

• Mackenzie Investments (Mackenzie Investments or Mackenzie)

• Corporate and Other

These segments, as shown in Tables 2, 3, and 4 reflect the Company’s internal financial reporting and performance measurement. In 2017, the Company announced the combination of investment management functions of Investors Group and Mackenzie resulting in the formation of a single

TABLE 2: CONSOLIDATED OPERATING RESULTS BY SEGMENT – Q4 2017 VS. Q4 2016

INVESTORS GROUP MACKENZIE CORPORATE & OTHER TOTAL THREE MONTHS ENDED 2017 2016 2017 2016 2017 2016 2017 2016 ($ millions) DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31

Revenues Fee income $ 493.1 $ 489.5 $ 204.5 $ 198.2 $ 72.4 $ 64.7 $ 770.0 $ 752.4 Net investment income and other (3.7) 20.1 3.3 0.7 37.1 27.9 36.7 48.7

489.4 509.6 207.8 198.9 109.5 92.6 806.7 801.1

Expenses Commission 165.7 169.9 75.7 73.8 46.7 44.5 288.1 288.2 Non-Commission 138.8 139.1 82.0 76.3 19.5 15.7 240.3 231.1

304.5 309.0 157.7 150.1 66.2 60.2 528.4 519.3

Earnings before interest and taxes $ 184.9 $ 200.6 $ 50.1 $ 48.8 $ 43.3 $ 32.4 278.3 281.8

Interest expense (29.7) (23.2)Restructuring and other (172.3) – Proportionate share of associate’s one-time charges (14.0) –

Earnings before income taxes 62.3 258.6Income taxes 9.5 23.4

Net earnings 52.8 235.2Perpetual preferred share dividends 2.2 2.2

Net earnings available to common shareholders $ 50.6 $ 233.0

Adjusted net earnings available to common shareholders(1) $ 191.4 $ 199.0

(1) Refer to Non-IFRS Financial Measures and Additional IFRS Measures in this MD&A for an explanation of the Company’s use of non-IFRS financial measures.



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TABLE 3: CONSOLIDATED OPERATING RESULTS BY SEGMENT – YTD 2017 VS. YTD 2016

INVESTORS GROUP MACKENZIE CORPORATE & OTHER TOTAL TWELVE MONTHS ENDED 2017 2016 2017 2016 2017 2016 2017 2016 ($ millions) DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31

Revenues Fee income $ 1,927.5 $ 1,833.0 $ 808.5 $ 769.0 $ 269.7 $ 254.9 $ 3,005.7 $ 2,856.9 Net investment income and other 41.7 71.6 1.2 4.0 124.4 112.2 167.3 187.8

1,969.2 1,904.6 809.7 773.0 394.1 367.1 3,173.0 3,044.7

Expenses Commission 654.4 624.9 300.0 291.3 183.4 173.8 1,137.8 1,090.0 Non-Commission 576.3 543.5 329.3 310.3 66.9 61.8 972.5 915.6

1,230.7 1,168.4 629.3 601.6 250.3 235.6 2,110.3 2,005.6

Earnings before interest and taxes $ 738.5 $ 736.2 $ 180.4 $ 171.4 $ 143.8 $ 131.5 1,062.7 1,039.1

Interest expense (114.1) (92.2)Restructuring and other (195.3) –Pension plan 50.4 – Proportionate share of associate’s one-time charges (14.0) – Proportionate share of associate’s provision (5.1) –






TABLE 4: CONSOLIDATED OPERATING RESULTS BY SEGMENT – Q4 2017 VS. Q3 2017

INVESTORS GROUP MACKENZIE CORPORATE & OTHER TOTAL THREE MONTHS ENDED 2017 2017 2017 2017 2017 2017 2017 2017 ($ millions) DEC. 31 SEP. 30 DEC. 31 SEP. 30 DEC. 31 SEP. 30 DEC. 31 SEP. 30

Revenues Fee income $ 493.1 $ 473.9 $ 204.5 $ 201.5 $ 72.4 $ 65.4 $ 770.0 $ 740.8 Net investment income and other (3.7) 5.3 3.3 (0.3) 37.1 27.5 36.7 32.5

489.4 479.2 207.8 201.2 109.5 92.9 806.7 773.3

Expenses Commission 165.7 156.2 75.7 74.2 46.7 45.6 288.1 276.0 Non-Commission 138.8 142.1 82.0 81.6 19.5 15.1 240.3 238.8

304.5 298.3 157.7 155.8 66.2 60.7 528.4 514.8

Earnings before interest and taxes $ 184.9 $ 180.9 $ 50.1 $ 45.4 $ 43.3 $ 32.2 278.3 258.5

Interest expense (29.7) (28.9)Restructuring and other (172.3) – Proportionate share of associate’s one-time charges (14.0) –








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global investment management organization. As a result, the Company has changed the definition of the Mackenzie segment to exclude investment advisory mandates to Investors Group effective October 1, 2017. These mandates are no longer reflected within the Mackenzie segment’s assets under management, net sales and revenues. With these changes, the Investors Group and Mackenzie segments will each reflect their proportionate share of the expenses of the investment management function going forward to better align with internal reporting. Segment operations are discussed in each of their respective Review of Segment Operating Results sections of the MD&A.

Certain items reflected in Tables 2, 3, and 4 are not allocated to segments:

• Interest expense – represents interest expense on long-term debt.

• 2017 Restructuring and other – resulting from efforts in respect of the implementation of a number of initiatives to assist in the Company’s operational effectiveness.

– Charges of $172.3 million ($126.8 million after-tax) recorded in the fourth quarter resulted from efforts in respect of the implementation of a number of initiatives to assist in the Company’s operational effectiveness.

– Charges of $23.0 million ($16.8 million after tax) recorded in the second quarter representing severance and termination costs largely associated with the reduction of our region office footprint.

• 2017 Pension plan – change in policy relating to granting increases to certain pension benefits paid under the

Company’s registered pension plan, resulting in a one-time expense reduction of $50.4 million ($36.8 million after-tax), recorded in the second quarter of 2017. The Company, at its discretion, may from time to time increase the benefits paid to retired members of the plan. The Company has implemented a new policy that limits the possibility of future benefit increases.

• Proportionate share of associate's one-time charges – represents the Company’s proportionate share in Great-West Lifeco Inc.’s charges recorded in the fourth quarter related to the impact of United States tax reforms and the pending sale of an equity investment.

• Proportionate share of associate’s provision – represents the Company’s proportionate share in Great-West Lifeco Inc.’s restructuring provision recorded in the second quarter of 2017.

• Income taxes – changes in the effective tax rates are shown in Table 5.

Tax planning may result in the Company recording lower levels of income taxes. Management monitors the status of its income tax filings and regularly assesses the overall adequacy of its provision for income taxes and, as a result, income taxes recorded in prior years may be adjusted in the current year. The effect of changes in management’s best estimates reported in adjusted net earnings is reflected in Other items, which also includes, but is not limited to, the effect of lower effective income tax rates on foreign operations.

• Perpetual preferred share dividends – represents the dividends declared on the Company’s 5.90% non-cumulative first preferred shares.

TABLE 5: EFFECTIVE INCOME TAX RATE

THREE MONTHS ENDED TWELVE MONTHS ENDED 2017 2017 2016 2017 2016 DEC. 31 SEP. 30 DEC. 31 DEC. 31 DEC. 31

Income taxes at Canadian federal and provincial statutory rates 26.85 % 26.82 % 26.84 % 26.84 % 26.84 % Effect of: Proportionate share of associates’ earnings (14.94) (2.77) (2.76) (3.81) (2.96) Tax loss consolidation(1) (5.11) – (2.36) (1.55) (2.56) Other items 2.38 (0.52) 0.49 0.03 (0.03)

Effective income tax rate – adjusted net earnings 9.18 23.53 22.21 21.51 21.29 Proportionate share of associate’s one-time charges 6.04 – – 0.48 – Proportionate share of associate’s provision – – – 0.17 – Reduction in income tax estimates related to certain tax filings – – (13.15) – (3.59)

Effective income tax rate – net earnings 15.22 % 23.53 % 9.06 % 22.16 % 17.70 %

(1) See the Transactions with Related Parties section of this MD&A for additional information.



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SUMMARY OF CHANGES IN TOTAL ASSETS UNDER MANAGEMENTTotal assets under management were $156.5 billion at December 31, 2017 compared to $142.7 billion at December 31, 2016. Changes in total assets under management are detailed in Tables 6 and 7.

Changes in assets under management for Investors Group and Mackenzie are discussed further in each of their respective Review of the Business sections in the MD&A.

TABLE 6: CHANGE IN TOTAL ASSETS UNDER MANAGEMENT – Q4 2017 VS. Q4 2016(1)

INVESTMENT INVESTORS GROUP MACKENZIE PLANNING COUNSEL CONSOLIDATED(2)

THREE MONTHS ENDED 2017 2016 2017 2016 2017 2016 2017 2016 ($ millions) DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31

Investment funds Mutual funds(3)

Gross sales – long-term $ 1,914 $ 1,847 $ 2,136 $ 1,831 $ 269 $ 222 $ 4,319 $ 3,901 Total mutual fund gross sales 2,314 2,089 2,234 1,953 277 233 4,825 4,275

Net sales – long-term 96 202 111 (78) 45 45 252 170 Total mutual fund net sales 332 261 137 (24) 48 52 516 291

ETFs Net creations 367 43 260 43

Total investment fund net sales(2) 332 261 477 19 48 52 749 334

Sub-advisory, institutional and other accounts Net sales 1,080 (1,615) 1,068 (1,633)

Combined net sales $ 332 $ 261 $ 1,557 $ (1,596) $ 48 $ 52 $ 1,817 $ (1,299)

Change in total assets under management Net sales $ 332 $ 261 $ 1,557 $ (1,596) $ 48 $ 52 $ 1,817 $ (1,299) Investment returns 2,450 2,089 2,117 1,186 152 (1) 4,681 3,268

Net change in assets 2,782 2,350 3,674 (410) 200 51 6,498 1,969 Beginning assets 85,226 78,892 60,948 58,069 5,177 4,857 150,015 140,719

Ending assets $ 88,008 $ 81,242 $ 64,622 $ 57,659 $ 5,377 $ 4,908 $ 156,513 $ 142,688

Total assets under management consists of: Investment funds Mutual funds(3) $ 88,008 $ 81,242 $ 55,728 $ 51,314 $ 5,377 $ 4,908 $ 149,001 $ 137,462 ETFs – – 1,296 113 – – 1,186 113

Total investment funds(2) 88,008 81,242 56,656 51,427 5,377 4,908 149,819 137,575 Sub-advisory, institutional and other accounts 7,966 6,232 6,694 5,113

Ending assets $ 88,008 $ 81,242 $ 64,622 $ 57,659 $ 5,377 $ 4,908 $ 156,513 $ 142,688

(1) Effective October 1, 2017, the Mackenzie segment has been redefined to exclude advisory mandates to Investors Group from its assets under management and revenues. Within Table 6 and Table 7, this change has been applied retroactively to provide comparability of results.

(2) Consolidated results eliminate double counting where business is reflected within multiple segments:

- Included with Mackenzie's results were advisory mandates to other segments with assets of $1.5 billion at December 31, 2017 (2016 - $1.1 billion) and net sales of $120 million for the fourth quarter of 2017 (2016 - $16.0 million).

- Included in ETFs are mutual fund investments in ETFs totalling $368 million at December 31, 2017 and net sales of $27 million for the fourth quarter of 2017.

(3) Investors Group and Investment Planning Counsel total AUM and net sales includes separately managed accounts.



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TABLE 7: CHANGE IN TOTAL ASSETS UNDER MANAGEMENT – 2017 VS. 2016(1)

INVESTMENT INVESTORS GROUP MACKENZIE PLANNING COUNSEL CONSOLIDATED(2)

TWELVE MONTHS ENDED 2017 2016 2017 2016 2017 2016 2017 2016 ($ millions) DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31

Investment funds Mutual funds(3)(4)

Gross sales – long-term $ 8,212 $ 6,683 $ 8,834 $ 6,509 $ 853 $ 909 $ 17,784 $ 14,101 Total mutual fund gross sales 9,693 7,760 9,240 6,939 889 955 19,707 15,654

Net sales – long-term 1,154 54 962 (766) 59 262 2,070 (449) Total mutual fund net sales 1,944 366 1,069 (667) 79 293 2,987 (6)

ETFs Net creations 1,156 112 1,049 112

Total investment fund net sales(2) $ 1,944 $ 366 $ 1,884 $ (555) $ 79 $ 293 $ 3,695 $ 106

Sub-advisory, institutional and other accounts Net sales 1,189 (1,780) 1,107 (1,862)

Combined net sales $ 1,944 $ 366 $ 3,073 $ (2,335) $ 79 $ 293 $ 4,802 $ (1,756)

Change in total assets under management Net sales $ 1,944 $ 366 $ 3,073 $ (2,335) $ 79 $ 293 $ 4,802 $ (1,756) Investment returns 4,822 5,979 3,890 3,949 390 163 9,023 10,046

Net change in assets 6,766 6,345 6,963 1,614 469 456 13,825 8,290 Beginning assets 81,242 74,897 57,659 56,045 4,908 4,452 142,688 134,398

Ending assets $ 88,008 $ 81,242 $ 64,622 $ 57,659 $ 5,377 $ 4,908 $ 156,513 $ 142,688

(1) Effective October 1, 2017, the Mackenzie segment has been redefined to exclude advisory mandates to Investors Group from its assets under management and revenues. Within Table 6 and Table 7, this change has been applied retroactively to provide comparability of results.

(2) Consolidated results eliminate double counting where business is reflected within multiple segments:

- Included with Mackenzie's results were advisory mandates to other segments with assets of $1.5 billion at December 31, 2017 (2016 - $1.1 billion) and net sales of $294 million for the year ending December 31, 2017 (2016 - $80 million).

- Included in ETFs are mutual fund investments in ETFs totalling $368 million at December 31, 2017 and net sales of $341 million for the year ending December 31,2017.

(3) During the twelve months ended December 31 2017, Investors Group and certain third party programs which include Mackenzie mutual funds made fund allocations changes which resulted in Mackenzie mutual fund gross sales of $421 million, redemptions of $621 million and net redemptions of $200 million.

(4) Investors Group and Investment Planning Counsel total AUM and net sales includes separately managed accounts.



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Financial information for the three most recently completed years is included in Table 8.

Net Earnings and Earnings per Share – Except as noted in the reconciliation in Table 8, variations in net earnings and total revenues result primarily from changes in average daily mutual fund assets under management. Investment fund assets under management increased to $127.8 billion in 2015, $137.6 billion in 2016 and $149.8 billion in 2017, driven largely by changes in financial markets during the period. The increase in 2017 also reflected the impact of strong net sales of the Company. Average investment fund assets under man-agement for the year ended December 31, 2017 were $143.7 billion compared to $130.2 billion in 2016. The impact on earnings and revenues of changes in average daily investment fund assets under management and other pertinent items are discussed in the Review of Segment Operating Results sec-tions of the MD&A for both Investors Group and Mackenzie.

Total assets under management at December 31, 2017 were $156.5 billion and included investment fund assets under management totalling $149.8 billion. Net earnings in future

periods will largely be determined by the level of investment fund assets which will continue to be influenced by global market conditions.

Dividends per Common Share – Annual dividends per common share were $2.25 in 2017, unchanged from 2016 and 2015. Annual dividends per common share had increased by 3.4% in 2015.

SUMMARY OF QUARTERLY RESULTSThe Summary of Quarterly Results in Table 9 includes the eight most recent quarters and the reconciliation of non-IFRS financial measures to net earnings in accordance with IFRS.

Changes in average daily investment fund assets under management over the eight most recent quarters, as shown in Table 9, largely reflect the impact of strong net sales of the Company and changes in domestic and foreign markets.

D 1 0 P O W E R C O R P O R AT I O N O F C A N A DA


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TABLE 8: SELECTED ANNUAL INFORMATION

2017 2016 2015

Consolidated statements of earnings ($ millions)

Revenues Fee income $ 3,005.7 $ 2,856.9 $ 2,836.1 Net investment income and other 167.3 187.8 195.2

3,173.0 3,044.7 3,031.3Expenses 2,224.4 2,097.8 2,006.6

948.6 946.9 1,024.7Restructuring and other (195.3) – (33.9)Pension plan 50.4 – –Proportionate share of associate’s one-time charges (14.0) – – Proportionate share of associate’s provision (5.1) – –

Earnings before income taxes 784.6 946.9 990.8Income taxes 173.9 167.6 210.3

Net earnings 610.7 779.3 780.5Perpetual preferred share dividends 8.8 8.8 8.8

Net earnings available to common shareholders $ 601.9 $ 770.5 $ 771.7

Reconciliation of Non-IFRS financial measures(1) ($ millions)

Adjusted net earnings available to common shareholders – non-IFRS measure $ 727.8 $ 736.5 $ 796.0Other items: Restructuring and other, net of tax (143.6) – (24.3) Pension plan, net of tax 36.8 – – Proportionate share of associate’s one-time charges (14.0) – – Proportionate share of associate’s provision (5.1) – – Reduction in income tax estimates related to certain tax filings – 34.0 –

Net earnings available to common shareholders – IFRS $ 601.9 $ 770.5 $ 771.7

Earnings per share ($)

Adjusted net earnings available to common shareholders(1)

– Basic $ 3.03 $ 3.05 $ 3.21 – Diluted 3.02 3.05 3.21 Net earnings available to common shareholders – Basic 2.50 3.19 3.11 – Diluted 2.50 3.19 3.11

Dividends per share ($)

Common $ 2.25 $ 2.25 $ 2.25 Preferred, Series B 1.48 1.48 1.48

Average daily investment fund assets ($ millions) $ 143,735 $ 130,201 $ 129,643

Total investment fund assets under management ($ millions) $ 149,819 $ 137,575 $ 127,791

Total assets under management ($ millions) $ 156,513 $ 142,688 $ 134,398

Total corporate assets ($ millions) $ 16,499 $ 15,625 $ 14,831

Total long-term debt ($ millions) $ 2,175 $ 1,325 $ 1,325

Outstanding common shares (thousands) 240,666 240,516 244,788

(1) Refer to Non-IFRS Financial Measures and Additional IFRS Measures in addition to the Summary of Consolidated Operating Results section included in this MD&A for an explanation of Other items used to calculate the Company’s Non-IFRS financial measures.

P O W E R C O R P O R AT I O N O F C A N A DA D 1 1


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TABLE 9: SUMMARY OF QUARTERLY RESULTS

2017 2017 2017 2017 2016 2016 2016 2016 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Consolidated statements of earnings ($ millions)

Revenues Management fees $ 564.4 $ 541.9 $ 547.0 $ 527.7 $ 525.7 $ 518.3 $ 497.4 $ 483.8 Administration fees 110.4 109.1 111.2 109.0 109.0 107.9 104.4 100.3 Distribution fees 95.2 89.8 94.8 105.2 117.7 101.1 96.3 95.0 Net investment income and other 36.7 32.5 50.3 47.8 48.7 49.1 46.3 43.7

806.7 773.3 803.3 789.7 801.1 776.4 744.4 722.8

Expenses Commission 288.1 276.0 284.4 289.3 288.2 273.1 267.2 261.5 Non-commission 240.3 238.8 246.5 246.9 231.1 224.9 231.7 227.9 Interest 29.7 28.9 28.7 26.8 23.2 23.2 22.9 22.9

558.1 543.7 559.6 563.0 542.5 521.2 521.8 512.3

Earnings before undernoted 248.6 229.6 243.7 226.7 258.6 255.2 222.6 210.5Restructuring and other (172.3) – (23.0) – – – – –Pension plan – – 50.4 – – – – –Proportionate share of associate’s one-time charges (14.0) – – – – – – – Proportionate share of associate’s provision – – (5.1) – – – – –

Earnings before income taxes 62.3 229.6 266.0 226.7 258.6 255.2 222.6 210.5Income taxes 9.5 54.0 63.0 47.4 23.4 55.4 47.5 41.3

Net earnings 52.8 175.6 203.0 179.3 235.2 199.8 175.1 169.2Perpetual preferred share dividends 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

Net earnings available to common shareholders $ 50.6 $ 173.4 $ 200.8 $ 177.1 $ 233.0 $ 197.6 $ 172.9 $ 167.0

Reconciliation of Non-IFRS financial measures (1) ($ millions)

Adjusted net earnings available to common shareholders – non-IFRS measure $ 191.4 $ 173.4 $ 185.9 $ 177.1 $ 199.0 $ 197.6 $ 172.9 $ 167.0Other items: Restructuring and other, net of tax (126.8) – (16.8) – – – – – Pension plan, net of tax – – 36.8 – – – – – Proportionate share of associate’s one-time charges (14.0) – – – – – – – Proportionate share of associate’s provision – – (5.1) – – – – – Reduction in income tax estimates related to certain tax filings – – – – 34.0 – – –

Net earnings available to common shareholders – IFRS $ 50.6 $ 173.4 $ 200.8 $ 177.1 $ 233.0 $ 197.6 $ 172.9 $ 167.0

Earnings per Share (¢)

Adjusted net earnings available to common shareholders(1)

– Basic 80 72 77 74 83 82 72 69 – Diluted 79 72 77 74 83 82 72 69Net earnings available to common shareholders – Basic 21 72 83 74 97 82 72 69 – Diluted 21 72 83 74 97 82 72 69

Average daily investment fund assets ($ billions) $ 148.1 $ 142.4 $ 144.3 $ 140.1 $ 135.2 $ 132.6 $ 128.2 $ 124.7

Total investment fund assets under management ($ billions) $ 149.8 $ 144.6 $ 143.3 $ 142.1 $ 137.6 $ 134.1 $ 129.1 $ 127.4

Total assets under management ($ billions) $ 156.5 $ 150.0 $ 148.6 $ 147.5 $ 142.7 $ 140.7 $ 135.5 $ 133.7

(1) Refer to Non-IFRS Financial Measures and Additional IFRS Measures in addition to the Summary of Consolidated Operating Results section included in this MD&A for an explanation of Other items used to calculate the Company’s Non-IFRS financial measures.



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Investors Group provides a broad range of financial and investment planning services to Canadians through its exclusive network of Consultants across the country.

Fee income is primarily generated from the management, administration and distribution of Investors Group mutual funds.

Fee income is also earned from the distribution of insurance, securities and other financial services.

Additional revenue is derived from net investment income and other income, primarily related to our mortgage business.

Revenues depend largely on the level and composition of mutual fund assets under management. The comprehensive planning approach, provided by our Consultants through the broad range of financial products and services offered by Investors Group, has resulted in a mutual fund redemption rate lower than the industry average.

INVESTORS GROUP STRATEGYIn 2017, Investors Group introduced its new strategic vision and established a number of strategic priorities to drive future business success.

Investors Group’s promise is to inspire financial confidence.

Our strategic mandate is to be Canada’s financial partner of choice.

Our value proposition is to deliver better Gamma, better Beta and better Alpha:

• Gamma – the value of all efforts that sit outside of investment portfolio construction. This includes the value that a financial advisor adds to a client relationship, and comes from the creation and follow through of a well constructed financial plan.

• Beta – the value created by well constructed investment portfolios – achieving expected investment returns for the lowest possible risk.

• Alpha – the value of active management – achieving returns superior to passive benchmarks with a similar composition and risk profile.

We seek to deliver our value proposition through:

• Superior Advice - Acquiring a deep knowledge of Canadian investors and using those insights to shape everything we do.

• Segmented Client Experiences - Creating segmented experiences personalized throughout our clients’ lifetimes.

• Entrepreneurial Advisors - Inspiring our entrepreneurial advisors to constantly deliver an engaging experience and a holistic plan that seeks to deliver superior outcomes.

INVESTORS GROUPREVIEW OF THE BUSINESS

• Powerful Financial Solutions - Providing the most powerful, competitively priced, comprehensive suite of solutions.

• Business processes that are simple, easy and digitized – Redesigning client and advisor interactions to simplify processes, reduce errors, and digitize the experience with an appropriate cost structure.

• Enabled by a high-performing and diverse culture.

CONSULTANT NETWORKInvestors Group distinguishes itself from its competition by offering comprehensive planning to its clients within the context of long-term relationships. This approach is consistent with studies in recent years which indicate that client households receiving advice from a financial advisor have higher assets than non-advised households, and that this advantage increases based on the length of the relationship with the financial advisor. At the centre of these relationships is a national distribution network of Consultants based in region offices across Canada.

The following provides a breakdown of the Investors Group’s Consultant network into its significant components at December 31, 2017:

• 2,124 Consultant practices (2,300 at December 31, 2016), which reflect Consultants with more than four years of Investors Group experience. These practices may include Associates as described below. The level of Consultant practices is a key measurement of our business as they serve clientele representing approximately 95% of AUM.

• 954 New Consultants (1,679 at December 31, 2016), which are those Consultants with less than four years of Investors Group experience.

• 1,068 Associates and Regional Directors (968 at December 31, 2016). Associates are licensed team members of

2013 2014 2015 2016 2017

1,5521,709 1,776 1,833

1,927

Fee Income – Investors GroupFor the financial year ($ millions)



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Consultant practices who provide financial planning services and advice to the clientele served by the team.

• Investors Group had a total Consultant network of 4,146 (4,947 at December 31, 2016).

Starting in the first quarter of 2017, Investors Group has accelerated the departure of Consultants who were not expected to develop a successful practice. We also enhanced recruiting standards to achieve greater likelihood of success while also enhancing our culture and brand. This has resulted in us reducing the overall size of our region office footprint from 115 to 95 offices.

In 2017, Investors Group made it mandatory that all Consultants with more than four years of experience are required to have or be enrolled to achieve the Certified Financial Planner (CFP) or its Quebec equivalent, Financial Planner (F.Pl.) designations. The CFP and F.Pl. designations are nationally recognized financial planning qualifications that require an individual to demonstrate financial planning competence through education, standardized examinations, continuing education requirements, and accountability to ethical standards. The Financial Planning Standards Council published in 2017 that Investors Group has more CFP designation holders than any other organization in Canada.

Over 57% of Consultant practices have professionals who are qualified as Certified Financial Planners (CFP) or its Quebec equivalent, Financial Planners (F.Pl.) and approximately 98% of Consultant practices are qualified or enrolled to be qualified. At December 31, 2017, 1,566 individuals in our Consultant network held the CFP designation or the F.Pl. designation. In addition, there were 2,347 individuals enrolled in these programs to gain these designations. The total of 3,913 of those studying to be or qualified as CFP or F.Pl. is up 42% from 2,746 at December 31, 2016.

CONSULTANT DEVELOPMENT

Investors Group combines a number of interview and testing techniques to identify individuals who demonstrate a blend of experience, education and aptitude that makes them well suited to becoming successful financial planners. This process is continually reviewed in our efforts to select the most appropriate candidates as new Consultants to improve their likelihood of success in the future.

Each year our training curriculum is reviewed and refreshed to offer new Consultants important building blocks to develop client relationships. As Consultants progress, they develop their skills as financial planners and business managers by attending a selection of focused educational programs including: financial planning skills, product knowledge, client service,

business development skills, compliance, technology, practice management and other related topics. This core training is supplemented by annual training conferences, where education is tailored to both new and experienced Consultants, and by other educational programs including National Education Days by way of video.

Investors Group continually reviews and enhances our Consultant technology platform, bringing greater efficiencies to our Consultants’ contact management and portfolio information and financial planning systems to help them serve our clients more effectively. These efforts included upgrades to the financial planning software used by Consultants.

ADMINISTRATIVE SUPPORT AND COMMUNICATION FOR CONSULTANTS AND CLIENTS Administrative support for Consultants and clients includes timely and accurate client account record-keeping and reporting, effective problem resolution support, and continuous improvements to servicing systems.

This administrative support is provided from both Investors Group’s Quebec General Office located in Montreal for Consultants and clients residing in Quebec and from Investors Group’s head office in Winnipeg, Manitoba for Consultants and clients in the rest of Canada. The Quebec General Office has over 200 employees and operating units for most functions supporting approximately 880 Consultants throughout Quebec. Mutual fund assets under management in Quebec were approximately $15 billion as at December 31, 2017.

DEALER PLATFORM

A dealer platform was launched in the fourth quarter of 2016 which delivers an enhanced service experience to Consultants and clients. This dealer platform has allowed us to internalize carrying broker functionality and client statement preparation for Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association of Canada (MFDA) nominee accounts, which were previously performed by a third party service provider, and has provided increased automation of transaction activity. This platform supports the introduction of new IIROC based products designed to support the high net worth segment of our client base. The platform is expected to result in efficiencies over the long term.

CLIENT STATEMENTS

Regular communication with our clients includes quarterly reporting of their Investors Group mutual fund holdings and the change in asset values of these holdings during the quarter. Individual clients experience different returns as a result of



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having different composition of their portfolios in each quarter as illustrated on the accompanying charts. The first chart reflects in-quarter client account median rates of return for the current year, as well as the annual returns for 2017 compared to 2016. The second chart reflects the client account median rates of return based on one, three and five year timeframes as at December 31, 2017. Both charts also illustrate upper and lower ranges of rates of return around the median for 90% of Investors Group client accounts.

For the three months ended December 31, 2017, the client account median rate of return was approximately 2.7% and 98% of client accounts experienced positive returns. For the twelve months ended December 31, 2017, the client account median rate of return was approximately 5.3% and 97% of client accounts experienced positive returns.

Investors Group has long believed that providing our clients with personal account level performance and rate of return information over multiple time periods is a meaningful benefit to our clients and further demonstrates the value provided through advice over the history of our client relationships.

Our clients’ statements include a multiple-period view of their performance, including one year, three year and five year rates of return.

Also for the twelve months ending June 30, 2017, Investors Group introduced its annual cost of compensation disclosure which outlines the fees paid to the Investors Group dealer holding the client’s account.

ASSETS UNDER MANAGEMENTAt December 31, 2017, Investors Group’s mutual fund assets under management were $88.0 billion, an all-time quarter end high. The level of assets under management is influenced by three factors: sales, redemptions and investment returns of our funds. Changes in mutual fund assets under management for the periods under review are reflected in Table 10.

CHANGE IN ASSETS UNDER MANAGEMENT – 2017 VS. 2016

Investors Group’s mutual fund assets under management were $88.0 billion at December 31, 2017, representing an increase of 8.3% from $81.2 billion at December 31, 2016. Average daily mutual fund assets were $87.2 billion in the fourth quarter of 2017, up 9.3% from $79.7 billion in the fourth quarter of 2016.

For the quarter ended December 31, 2017, sales of Investors Group mutual funds through its Consultant network were $2.3 billion, an increase of 10.8% from the comparable period in 2016 and an all-time high fourth quarter result. Mutual fund redemptions totalled $2.0 billion, an increase of 8.4% from 2016. Investors Group mutual fund net sales for the fourth quarter of 2017 were $332 million compared with net sales of $261 million in 2016. During the fourth quarter, investment returns resulted in an increase of $2.5 billion in mutual fund assets compared to an increase of $2.1 billion in the fourth quarter of 2016.

Sales of long-term funds were $1.9 billion for the fourth quarter of 2017, an increase of 3.6% from the previous year. Net sales of long-term funds for the fourth quarter of 2017 were $96 million compared to net sales of $202 million in 2016.

Investors Group’s annualized quarterly redemption rate for long-term funds was 8.3% in the fourth quarter of 2017, unchanged from the fourth quarter of 2016. Investors Group’s twelve month trailing redemption rate for long-term funds was 8.4% at December 31, 2017 compared to 8.8% at December 31, 2016, and remains well below the corresponding average redemption rate for all other members of the Investment Funds Institute of Canada (IFIC) of approximately 16.1% at December 31, 2017.

For the twelve months ended December 31, 2017, sales of Investors Group mutual funds through its Consultant network were $9.7 billion, an increase of 24.9% from 2016. Mutual fund redemptions totalled $7.7 billion, an increase of 4.8% from 2016. Net sales of Investors Group mutual funds were $1.9 billion compared with net sales of $366 million in 2016. Sales of long-

MedianReturns - %

Q1 17 Q2 17 Q3 17 Q4 17 2016 2017

2.1 (0.2) 0.6 2.7 6.8 5.3

90% of clients rate of return range

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8

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16

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-4

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16

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90% of client account rate of range

MedianReturns - %

1 Year 3 Year 5 Year

5.3 4.5 6.5

Client Account Rate of Return (ROR) ExperienceQuarterly and Annual Returns

Client Account Rate of Return (ROR) ExperienceAs at December 31, 2017



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term funds for the twelve month period in 2017 were $8.2 billion compared with $6.7 billion in 2016, an increase of 22.9%. Net sales of long-term funds were $1.2 billion compared to net sales of $54 million in 2016. During 2017, investment returns resulted in an increase of $4.8 billion in mutual fund assets compared to an increase of $6.0 billion in 2016.

CHANGE IN ASSETS UNDER MANAGEMENT – Q4 2017 VS. Q3 2017

Investors Group’s mutual fund assets under management were $88.0 billion at December 31, 2017, an increase of 3.3% from $85.2 billion at September 30, 2017. Average daily mutual fund assets were $87.2 billion in the fourth quarter of 2017 compared to $83.8 billion in the third quarter of 2017, an increase of 4.0%.

For the quarter ended December 31, 2017, sales of Investors Group mutual funds through its Consultant network were $2.3 billion, an increase of 10.7% from the third quarter of 2017. Mutual fund redemptions, which totalled $2.0 billion for the fourth quarter, increased 9.9% from the previous quarter and the annualized quarterly redemption rate was 8.3% in the fourth quarter compared to 7.9% in the third quarter of 2017. Investors Group mutual fund net sales were $332 million for the current quarter compared to net sales of $287 million in the previous

quarter. Sales of long-term funds were $1.9 billion for the current quarter compared to $1.7 billion in the previous quarter. Net sales of long-term funds for the current quarter were $96 million, unchanged from the previous quarter.

PRODUCTS AND SERVICESInvestors Group is regarded as a leader in personal financial services in Canada. Consultants recommend balanced, diversified and professionally managed portfolios that reflect the client’s goals, preferences and risk tolerance. They also look beyond investments to offer clients access to insurance, mortgages and other financial services.

PFP – PERSONAL FINANCIAL PLANNER

Investors Group’s Personal Financial Planner (PFP) software handles a wide range of potential financial planning needs – from projections and illustrations for basic financial planning concepts to the preparation of written financial plans which integrate all disciplines of financial planning, including investment, tax, retirement, education, risk management and estate planning.

TABLE 10: CHANGE IN MUTUAL FUND ASSETS UNDER MANAGEMENT – INVESTORS GROUP

% CHANGE

THREE MONTHS ENDED 2017 2017 2016 2017 2016 ($ millions) DEC. 31 SEP. 30 DEC. 31 SEP. 30 DEC. 31

Sales $ 2,314 $ 2,090 $ 2,089 10.7 % 10.8 %Redemptions 1,982 1,803 1,828 9.9 8.4

Net sales (redemptions) 332 287 261 15.7 27.2Investment returns 2,450 633 2,089 287.0 17.3

Net change in assets 2,782 920 2,350 202.4 18.4Beginning assets 85,226 84,306 78,892 1.1 8.0

Ending assets $ 88,008 $ 85,226 $ 81,242 3.3 % 8.3 %

Average daily assets $ 87,195 $ 83,815 $ 79,744 4.0 % 9.3 %

TWELVE MONTHS ENDED 2017 2016 ($ millions) DEC. 31 DEC. 31 % CHANGE

Sales $ 9,693 $ 7,760 24.9 %Redemptions 7,749 7,394 4.8

Net sales (redemptions) 1,944 366 N/M

Investment returns 4,822 5,979 (19.4)

Net change in assets 6,766 6,345 6.6Beginning assets 81,242 74,897 8.5

Ending assets $ 88,008 $ 81,242 8.3 %

Average daily assets $ 84,705 $ 76,820 10.3 %



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SYMPHONY STRATEGIC INVESTMENT PLANNING™ PROGRAM

Symphony is Investors Group’s approach to strategic investment planning. The Symphony program is designed to provide a scientifically constructed investment portfolio, consistent with the client’s investment objectives and suited to their risk profile.

CHARITABLE GIVING PROGRAM

The Investors Group Charitable Giving Program is a donor-advised giving program which enables Canadians to make donations and build an enduring charitable giving legacy with considerably less expense and complexity than setting up and administering their own private foundation.

MUTUAL FUNDS

Investors Group had $88.0 billion in mutual fund assets under management at December 31, 2017 in 148 mutual funds covering a broad range of investment mandates. This compared with $81.2 billion in 2016, an increase of 8.3%.

Clients can diversify their holdings across investment managers, asset categories, investment styles, geography, capitalization and sectors through portfolios customized to meet their objectives.

Investors Group funds are advised by a newly formed single global investment management organization under Mackenzie Investments that supports both Investors Group and Mackenzie Investments investment management functions. This organization includes a multi-disciplinary team of investment professionals with offices and advisors in North America, Europe, and Asia. The global connections, depth of research and use of information technology provide us with the investment management capabilities to offer our clients investment management expertise suitable for the widest range of investment objectives. Investors Group also offers a range of partner funds through advisory relationships with other external investment management firms. Investors Group oversees all investment advisors to ensure that their activities are consistent with Investors Group’s investment philosophy and with the investment objectives and strategies of the funds that they advise. These advisory relationships include the following investment managers: Putnam Investment Management LLC, PanAgora Asset Management, Inc., Irish Life Investment Managers Limited, AGF Investments Inc., Aristotle Capital Management, LLC, Beutel, Goodman & Company Ltd., Fidelity Investments Canada ULC, Fiera Capital Corporation, CI Investments Inc., LaSalle Investment Management Securities, LLC., and Franklin Templeton Investments Canada.

Fund Performance

At December 31, 2017, 49.9% of Investors Group mutual funds had a rating of three stars or better from the Morningstar† fund ranking service and 15.0% had a rating of four or five stars. This compared to the Morningstar† universe of 62.8% for three stars or better and 25.6% for four and five star funds at December 31, 2017. Morningstar Ratings† are an objective, quantitative measure of a fund’s three, five and ten year risk-adjusted performance relative to comparable funds.

Changes to Mutual Fund Product Offering

Investors Group continues to enhance the performance, scope and diversity of our investment offering with the introduction of new funds and other product changes that are well-suited to the long-term diverse needs of Canadian investors.

Effective January 1, 2017, Investors Group discontinued the deferred sales charge (DSC) purchase option for its mutual funds and, at the same time, fees on no-load series were reduced.

In the third quarter, Investors Group implemented several changes to its mutual fund offering. These changes included the merging of the accumulation focused Alto portfolios into Allegro, providing our Alto and Allegro clients access to a wider range of investment solutions along with dynamic asset allocation capabilities for certain portfolios.

MANAGED ASSET AND MULTI-MANAGER INVESTMENT PROGRAMS

Investors Group offers several managed asset and multi-manager investment programs. Total assets of these programs at December 31, 2017 were $36.5 billion and sales were $6.4 billion for the year ending December 31, 2017. This level of sales represented 66.4% of total gross sales.

Within the managed assets and multi-manager investment programs is a broad selection of asset allocation opportunities which offer:

• Programs with single-step diversification by geography, investment style, asset class and investment advisor, along with tactical asset allocation overlays. At December 31, 2017, assets under management in these programs were $30.7 billion, an increase of 15.4% from $26.6 billion at December 31, 2016.

• iProfile™ managed asset program. At December 31, 2017, the iProfile program assets under management were $5.8 billion, an increase of 149% from $2.3 billion at December 31, 2016.



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HIGH NET WORTH OFFERINGS

High net worth clients represent a growing segment of our client base. Investors Group has several offerings to address the needs of high net worth clients and continues to look at ways to provide further offerings to this segment. Assets under management for clients in this category totalled $40.5 billion at December 31, 2017, an increase of 25.3% from one year ago, and represented 46% of total assets under management. Sales to high net worth clients totalled $1,045 million for the fourth quarter of 2017, an increase of 40% from the fourth quarter of 2016, and represented 46% of total sales.

Pricing for Households with Investment Assets in Excess of $500,000

Investors Group has investment solutions with differentiated pricing for households with investments in Investors Group funds in excess of $500,000. Assets under management for clients in this category totalled $34.7 billion, an increase of 15.8% from $30.0 billion at December 31, 2016.

• Series J had assets of $20.4 billion at December 31, 2017, a decrease of 17.0% from $24.6 billion at December 31, 2016, largely as a result of transfer activity from Series J to Series U.

• Series U provides a pricing structure which separates the advisory fee, which is charged directly to a client’s account, from the fees charged to the underlying investment funds. At December 31, 2017, Series U assets under management had increased to $14.3 billion, compared to $5.4 billion at December 31, 2016, an increase of 164%.

iProfile™

This is a unique portfolio management program, launched in 2001, that is available for households with assets held at Investors Group in excess of $250,000. iProfile investment portfolios have been designed to maximize returns and manage risk by diversifying across asset classes, management styles and geographic regions. The iProfile program has a pricing structure which separates the advisory fee, which is charged directly to a client’s account, from the fees charged to the underlying investment funds.

Along with the IGM Financial global investment management team, the program is advised by a select group of external global money management firms: JPMorgan Asset Management (Canada) Inc., Jarislowsky, Fraser Limited, Cidel Asset Management, Baring International Investment Limited, Laketon Investment Management, Putnam Investment Management LLC, PanAgora Asset Management, Inc., Aristotle Capital Management LLC, and Lazard Asset Management LLC.

At December 31, 2017, the iProfile program assets under management were $5.8 billion, an increase of 149% from $2.3 billion at December 31, 2016.

Unbundled Fee Structures

A growing portion of Investors Group’s client assets are in Series U and iProfile, which are products with unbundled fee structures where a separate advisory fee is charged to the client account by the dealer. At December 31, 2017, $20.1 billion, or 22.8% of Investors Group’s mutual fund assets under management, were in products with unbundled fee structures, up 159% from $7.7 billion at December 31, 2016 which represented 9.5% of assets under management. Sales of these products to high net worth clients totalled $731 million for the fourth quarter of 2017, an increase of $394 million from the fourth quarter of 2016, and represented 70% of total high net worth sales.

In the fourth quarter, the Company indicated it would provide access for all clients to Series U in 2018 with the goal of eliminating all embedded fee purchase options.

Separately Managed Accounts and Fee-Based Brokerage Account

Investors Group’s separately managed account program, Azure Managed InvestmentsTM, as well its Fee-Based Account program, are both offered through Investors Group’s brokerage services firm, Investors Group Securities Inc.

Azure Managed Investments are discretionary managed accounts that allow clients to delegate responsibility for day-to-day investment decisions to a portfolio manager. There are seven different investment mandates available that provide core equity exposure in Canadian, U.S., North American and International equity markets and are managed with supporting expertise from I.G. Investment Management and external investment managers.

Investors Group’s Fee-Based Account program is a non-discretionary, fee-based brokerage account offering clients the benefits of a holistic approach to managing their portfolio.

SEGREGATED FUNDS

Investors Group offers segregated funds which include the Investors Group Series of Guaranteed Investment Funds (GIFs). GIFs are segregated fund policies issued by The Great-West Life Assurance Company and include 14 fund-of-fund segregated portfolios and six individual segregated funds. These segregated funds provide for long-term investment growth potential combined with risk management, full and partial maturity and death benefit guarantee features, potential creditor protection and estate planning efficiencies. Select GIF policies allow for a Lifetime Income Benefit (LIB) option to provide guaranteed retirement income for life. The investment components of these segregated funds are managed by Investors Group. At December 31, 2017, total segregated fund assets were $1.9 billion compared to $1.8 billion at December 31, 2016.



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INSURANCE

Investors Group continues to be a leader in the distribution of life insurance in Canada. Through its arrangements with leading insurance companies, Investors Group offers a broad range of term, universal life, whole life, disability, critical illness, long-term care, personal health care coverage and group insurance. I.G. Insurance Services Inc. currently has distribution agreements with:

• The Canada Life Assurance Company

• The Great-West Life Assurance Company

• Sun Life Assurance Company of Canada

• The Manufacturers Life Insurance Company

The average number of policies sold by each insurance-licensed Consultant was 11.2 in 2017, compared to 10.9 in 2016. Distribution of insurance products is enhanced through Investors Group’s Insurance Planning Specialists, located throughout Canada, who assist Consultants with advanced estate planning solutions for high net worth clients.

SECURITIES OPERATIONS

Investors Group Securities Inc. is an investment dealer registered in all Canadian provinces and territories providing clients with securities services to complement their financial and investment planning. Investors Group Consultants can refer clients to one of our Wealth Planning Specialists available through Investors Group Securities Inc. In addition, there are a growing number of IIROC licensed Consultants using this platform.

MORTGAGE OPERATIONS

Investors Group is a national mortgage lender that offers residential mortgages to Investors Group clients as part of a comprehensive financial plan. Investors Group Mortgage Planning Specialists are located throughout each province in Canada, and work with our clients and their Consultants as permitted by the regulations to develop mortgage strategies that meet the individual needs and goals of each client.

Through its mortgage banking operations, mortgages originated by Investors Group Mortgage Planning Specialists are sold to the Investors Mortgage and Short Term Income Fund, Investors Canadian Corporate Bond Fund, securitization programs, and institutional investors. Certain subsidiaries of Investors Group are Canada Mortgage and Housing Corporation (CMHC)-approved issuers of National Housing Act Mortgage-Backed Securities (NHA MBS) and are approved sellers of NHA MBS into the Canada Mortgage Bond Program (CMB Program). Securitization programs also include certain bank-sponsored asset-backed commercial paper (ABCP) programs. Residential mortgages are also held by Investors Group’s intermediary operations.

Mortgage fundings for the three and twelve months ended December 31, 2017 were $385 million and $1.5 billion, compared to $481 million and $2.2 billion in 2016, a decrease of 20.0% and 28.2%, respectively. At December 31, 2017, mortgages serviced by Investors Group related to its mortgage banking operations totalled $10.8 billion, compared to $11.1 billion at December 31, 2016, a decrease of 2.2%.

SOLUTIONS BANKING†

Investors Group’s Solutions Banking† offering consists of a wide range of products and services provided by the National Bank of Canada under a long-term distribution agreement and includes: investment loans, lines of credit, personal loans, creditor insurance, deposit accounts and credit cards. The offering also includes an All-in-One product which is a comprehensive cash management solution that integrates the features of a mortgage, term loan, revolving line of credit and deposit account to meet the needs of our clients while minimizing overall interest costs. In the fourth quarter of 2017, Investors Group launched a new residential mortgage product suite through our partners at National Bank, which complements our current mortgage offerings. Through Solutions Banking†, clients have access to a network of banking machines, as well as a private labeled client website and client service centre. The Solutions Banking† offering supports Investors Group’s approach to delivering total financial solutions for our clients through a broad financial planning platform. Total lending products of Investors Group clients in the Solutions Banking† offering totalled $3.5 billion at December 31, 2017, compared to $3.1 billion at December 31, 2016.

Available credit associated with Solutions Banking† All-in-One accounts originated for the three and twelve month periods ended December 31, 2017 were $221 million and $1.0 billion, compared to $172 million and $715 million, respectively, in 2016. At December 31, 2017, the balance outstanding of Solutions Banking All-in-One products was 2.2 billion, compared to $1.8 billion one year ago, and represented approximately 49% of total available credit associated with these accounts.

ADDITIONAL PRODUCTS AND SERVICES

Investors Group also provides its clients with guaranteed investment certificates offered by Investors Group Trust Co. Ltd., as well as a number of other financial institutions.



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Investors Group’s earnings before interest and taxes are presented in Table 11.

2017 VS. 2016

FEE INCOME

Fee income is generated from the management, administration and distribution of Investors Group mutual funds. The distribution of insurance and Solutions Banking† products and the provision of securities services provide additional fee income.

Investors Group earns management fees for investment management services provided to its mutual funds, which

depend largely on the level and composition of mutual fund assets under management. Management fees were $366.8 million in the fourth quarter of 2017, an increase of $29.0 million or 8.6% from $337.8 million in 2016. For the twelve months ended December 31, 2017, management fees were $1,415.0 million, an increase of $119.0 million or 9.2% from $1,296.0 million in 2016.

The net increase in management fees in the three and twelve month periods ended December 31, 2017 was primarily due to the increase in average assets under management of 9.3%, and 10.3%, respectively, as shown in Table 10. The average management fee rate in the fourth quarter of 2017 was 166.9

REVIEW OF SEGMENT OPERATING RESULTS

TABLE 11: OPERATING RESULTS – INVESTORS GROUP

% CHANGE


Revenues Management fees $ 366.8 $ 352.5 $ 337.8 4.1 % 8.6 % Administration fees 80.9 79.9 80.6 1.3 0.4 Distribution fees 45.4 41.5 71.1 9.4 (36.1)

493.1 473.9 489.5 4.1 0.7 Net investment income and other (3.7) 5.3 20.1 N/M N/M

489.4 479.2 509.6 2.1 (4.0)

Expenses Commission 76.3 73.2 96.0 4.2 (20.5) Asset retention bonus and premium 89.4 83.0 73.9 7.7 21.0 Non-commission 138.8 142.1 139.1 (2.3) (0.2)

304.5 298.3 309.0 2.1 (1.5)

Earnings before interest and taxes $ 184.9 $ 180.9 $ 200.6 2.2 % (7.8) %


Revenues Management fees $ 1,415.0 $ 1,296.0 9.2 % Administration fees 322.0 309.9 3.9 Distribution fees 190.5 227.1 (16.1)

1,927.5 1,833.0 5.2 Net investment income and other 41.7 71.6 (41.8)

1,969.2 1,904.6 3.4

Expenses Commission 319.3 340.7 (6.3) Asset retention bonus and premium 335.1 284.2 17.9 Non-commission 576.3 543.5 6.0

1,230.7 1,168.4 5.3

Earnings before interest and taxes $ 738.5 $ 736.2 0.3 %



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basis points of average assets under management compared to 167.1 basis points in 2016. The average management fee rate was 166.3 basis points of average assets under management for the twelve month period ended December 31, 2017 compared to 167.4 basis points in 2016. The decrease in the management fee rate in both periods is due, in part, to assets moving into high net worth products.

Investors Group receives administration fees for providing administrative services to its mutual funds and trusteeship services to its unit trust mutual funds, which also depend largely on the level and composition of mutual fund assets under management. Administration fees totalled $80.9 million in the current quarter compared to $80.6 million a year ago, an increase of 0.4%. Administration fees were $322.0 million for the twelve month period ended December 31, 2017 compared to $309.9 million in 2016, an increase of 3.9%. These increases resulted primarily from changes in average assets under management offset, in part, by fee reductions. Effective January 1, 2017, as part of the discontinuation of deferred sales charge (DSC) series options, Investors Group reduced the administration fees on no-load series. The impact on administration fee revenue during the quarter associated with the changes was $2.5 million.

Distribution fees are earned from:

• Redemption fees on mutual funds sold with a deferred sales charge.

• Portfolio fund distribution fees.

• Distribution of insurance products through I.G. Insurance Services Inc.

• Securities trading services provided through Investors Group Securities Inc.

• Banking services provided through Solutions Banking†.

Distribution fee income of $45.4 million for the fourth quarter of 2017 decreased by $25.7 million from $71.1 million in 2016. For the twelve month period, distribution fee income of $190.5 million decreased by $36.6 million from $227.1 million in 2016. The decrease in both periods was primarily due to decreases in distribution fee income from insurance products. Redemption fees were also lower in both the three and twelve month periods. Redemption fee income varies depending on the level of deferred sales charge attributable to fee-based redemptions.

NET INVESTMENT INCOME AND OTHER

Net investment income and other includes income related to mortgage banking operations and net interest income related to intermediary operations.

Net investment income and other was ($3.7) million in the fourth quarter of 2017, a decrease of $23.8 million from $20.1 million in 2016. For the year ended December 31, 2017, net investment income and other totalled $41.7 million, a decrease of $29.9 million from $71.6 million in 2016.

Net investment income related to Investors Group’s mortgage banking operations totalled ($6.3) million for the fourth quarter of 2017 compared to $19.4 million in 2016, a decrease of $25.7 million. For the year ended December 31, 2017, net investment income related to Investors Group’s mortgage banking operations totalled $36.0 million compared to $69.4 million in 2016, a decrease of $33.4 million. A summary of mortgage banking operations for the three and twelve month periods under review is presented in Table 12. The changes in mortgage banking income were due to:

• Net interest income on securitized loans – decreased by $2.1 million and $1.6 million for the three and twelve month periods ended December 31, 2017 to $14.5 million and $62.9 million, respectively, compared to 2016. The decrease resulted primarily from lower margins on securitized loans.

• Gains realized on the sale of residential mortgages – decreased by $3.2 million and $8.6 million for the three and twelve month periods ended December 31, 2017 to nil and $7.5 million, respectively, compared to 2016. The decrease in gains resulted from lower sales activity and margins.

• Fair value adjustments – decreased by $21.7 million and $29.0 million for the three and twelve month periods ended December 31, 2017 to ($19.6) million and ($31.3) million, respectively, compared to 2016. The decrease was primarily due to negative fair value adjustments on loans held temporarily pending sale or securitization to third parties, as a result of interest rate increases in the period. A meaningful component of this fair value adjustment represents a surplus in mortgage rate increases relative to funding rate increases. In these instances, the net fair value adjustment after hedging gains reflects timing as the resulting effective interest rate on the mortgage reflects the increased mortgage rate over the securitization term. Under IFRS 9, effective January 1, 2018, these loans will be classified as hold to collect and recorded at amortized cost with mortgage interest income recognized at the contractual mortgage rate. As a result of this change, issue costs of $24.4 million pre-tax and mortgage fair value adjustments of $25.3 million pre-tax will be credited to retained earnings as at January 1, 2018. The issue costs will be amortized over the life of the related loans.

• Other – increased by $1.3 million and $5.8 million for the three and twelve month periods ended December 31, 2017 to ($1.2) million and ($3.1) million compared to 2016 primarily due to lower mortgage issuance costs.



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TABLE 12: MORTGAGE BANKING OPERATIONS – INVESTORS GROUP

% CHANGE


Total mortgage banking income Net interest income on securitized loans Interest income $ 52.5 $ 49.5 $ 49.4 6.1 % 6.3 % Interest expense 38.0 33.3 32.8 14.1 15.9

Net interest income 14.5 16.2 16.6 (10.5) (12.7) Gains on sales(1) – 0.9 3.2 N/M N/M

Fair value adjustments (19.6) (12.7) 2.1 (54.3) N/M

Other(2) (1.2) (0.2) (2.5) N/M 52.0

$ (6.3) $ 4.2 $ 19.4 N/M % N/M %

Average mortgages serviced Securitizations $ 7,239 $ 7,120 $ 7,419 1.7 % (2.4) % Other 3,596 3,791 3,595 (5.1) –

$ 10,835 $ 10,911 $ 11,014 (0.7) % (1.6) %

Mortgage sales to:(3)

Securitizations $ 1,068 $ 854 $ 717 25.1 % 49.0 % Other(1) 25 240 253 (89.6) (90.1)

$ 1,093 $ 1,094 $ 970 (0.1) % 12.7 %


Total mortgage banking income Net interest income on securitized loans Interest income $ 200.9 $ 193.2 4.0 % Interest expense 138.0 128.7 7.2

Net interest income 62.9 64.5 (2.5) Gains on sales(1) 7.5 16.1 (53.4) Fair value adjustments (31.3) (2.3) N/M

Other(2) (3.1) (8.9) 65.2

$ 36.0 $ 69.4 (48.1) %

Average mortgages serviced Securitizations $ 7,331 $ 7,199 1.8 % Other 3,641 3,566 2.1

$ 10,972 $ 10,765 1.9 %

Mortgage sales to:(3)

Securitizations $ 2,561 $ 2,882 (11.1) % Other(1) 857 1,071 (20.0)

$ 3,418 $ 3,953 (13.5) %

(1) Represents sales to institutional investors through private placements, to Investors Mortgage and Short Term Income Fund, and to Investors Canadian Corporate Bond Fund as well as gains realized on those sales.

(2) Represents mortgage issuance and insurance costs, interest earned on warehoused mortgages, and servicing and other.

(3) Represents principal amounts sold.



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EXPENSES

Investors Group incurs commission expense in connection with the distribution of its mutual funds and other financial services and products. Commissions are paid on the sale of these products and fluctuate with the level of sales. The expense for deferred selling commissions consists of the amortization of the asset over its useful life and the reduction of the unamortized deferred selling commission asset associated with redemptions. Commissions paid on the sale of mutual funds are deferred and amortized over a maximum period of seven years. Commission expense was $76.3 million for the fourth quarter of 2017, a decrease of $19.7 million from $96.0 million in 2016. Commission expense was $319.3 million for the year ended December 31, 2017, a decrease of $21.4 million from $340.7 million in 2016. The changes in both the three and twelve month periods resulted primarily from compensation related to the distribution of other insurance products.

Asset retention bonus and premium expense, which are based on the value of assets under management, increased by $15.5 million and $50.9 million for the three and twelve month periods ended December 31, 2017 to $89.4 million and $335.1 million, respectively, compared to 2016. The increase in both periods was primarily due to the increase in assets under management and to the increasing proportion of no load products within our asset base.

Non-commission expenses incurred by Investors Group primarily relate to the support of the Consultant network, the administration, marketing and management of its mutual funds and other products, as well as sub-advisory fees related to mutual fund assets under management. Non-commission expenses were $138.8 million for the fourth quarter of 2017 compared to $139.1 million in 2016, a decrease of $0.3 million or 0.2%. For the twelve month period, non-commission expenses were $576.3 million compared to $543.5 million in 2016, an increase of $32.8 million or 6.0%. The increase in the twelve month period resulted largely from Consultant network support and other business development efforts, as well as sub-advisory fees related to increased assets under management.

Q4 2017 VS. Q3 2017

FEE INCOME

Management fee income increased by $14.3 million or 4.1% to $366.8 million in the fourth quarter of 2017 compared with the third quarter of 2017. The net increase in management fees in the fourth quarter was primarily due to the increase in average assets under management of 4.0% for the quarter, as shown in Table 10.

Administration fees increased to $80.9 million in the fourth quarter of 2017 from $79.9 million in the third quarter of 2017 largely due to the change in average mutual fund assets under management in the period.

Distribution fee income of $45.4 million in the fourth quarter of 2017 increased by $3.9 million from $41.5 million in the third quarter primarily due to an increase in distribution fee income from insurance product sales.

NET INVESTMENT INCOME AND OTHER

Net investment income and other was ($3.7) million in the fourth quarter of 2017 compared to $5.3 million in the previous quarter, a decrease of $9.0 million primarily related to Investors Group’s mortgage banking operations.

Net investment income related to Investors Group’s mortgage banking operations totalled ($6.3) million in the fourth quarter of 2017, a decrease of $10.5 million from $4.2 million in the previous quarter as shown in Table 12. The changes in mortgage banking income were due to:

• Fair value adjustments – decreased by $6.9 million for the fourth quarter of 2017 to ($19.6) million compared to ($12.7) million in the previous quarter primarily due to negative fair value adjustments on loans held temporarily pending sale or securitization to third parties, as a result of interest rate increases in the period.

EXPENSES

Commission expense in the current quarter was $76.3 million compared with $73.2 million in the previous quarter. The increase primarily related to higher compensation related to the distribution of other financial services and products. The asset retention bonus and premium expense increased by $6.4 million to $89.4 million in the fourth quarter of 2017, due to higher assets under management.

Non-commission expenses were $138.8 million in the current quarter, compared to $142.1 million in the prior quarter.



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Mackenzie’s core business is the provision of investment management and related services offered through diversified investment solutions, distributed through multiple distribution channels. We are committed to delivering strong investment performance for our clients by drawing on the experience and perspective gained through 50 years in the investment management business.

Mackenzie earns revenue primarily from:

• Management fees earned from its mutual funds, sub-advised accounts and institutional clients.

• Fees earned from its mutual funds for administrative services.

• Redemption fees on deferred sales charge and low load units.

The largest component of Mackenzie’s revenues is management fees. The amount of management fees depends on the level and composition of assets under management. Management fee rates vary depending on the investment objective and the account type of the underlying assets under management. Equity based mandates have higher management fee rates than fixed income mandates and retail mutual fund accounts have higher management fee rates than sub-advised and institutional accounts.

MACKENZIE STRATEGYMackenzie strives to ensure that the interests of clients, shareholders, dealers, advisors and employees are closely aligned.

Mackenzie’s vision: We are committed to the financial success of investors, through their eyes. This impacts the strategic priorities we select to fulfil that commitment and drive future business growth. Our strategic mandate is two-fold: win in the Canadian retail space, and build meaningful strategic relationships, both in support of our goal to be the company of choice for individual investors, financial advisors and institutional investors. We aim to achieve this mandate by attracting and fostering the best minds in the investment industry, responding to changing needs of financial advisors and investors with distinctive and innovative solutions, and continuing to deliver institutional quality in everything we do.

Supporting this vision and strategic mandate are six key foundational capabilities that our employees strive to achieve:

• Delivering competitive and consistent risk-adjusted performance

• Offering innovative and high quality investment solutions

• Accelerating distribution

• Advancing brand leadership

• Driving operational excellence and discipline

• Enabling a high-performing and diverse culture

MACKENZIE INVESTMENTSREVIEW OF THE BUSINESS

Mackenzie seeks to maximize returns on business investment by focusing resources in areas that directly impact the success of our strategic mandate: investment management, distribution and client experience.

Founded in 1967, Mackenzie proudly celebrated its 50th anniversary in the Canadian financial services industry during 2017. Mackenzie continues to build an investment advisory business through proprietary investment research and portfolio management while utilizing strategic partners in a selected sub-advisory capacity. Our business focuses on multiple distribution channels: Retail, Strategic Alliances and Institutional.

Mackenzie primarily distributes its retail investment products through third party financial advisors. Mackenzie’s sales teams work with many of the more than 30,000 independent financial advisors and their firms across Canada. In addition to its retail distribution team, Mackenzie also has specialty teams focused on strategic alliances and the institutional marketplace. Within the strategic alliance channel, Mackenzie offers certain series of its mutual funds and provides sub-advisory services to third party and related party investment programs offered by banks, insurance companies and other investment companies. Strategic alliances with related parties include providing advisory services to Investors Group, Investment Planning Counsel and Great-West Lifeco Inc. (Lifeco) subsidiaries, and also include a private label mutual fund arrangement with Lifeco subsidiary Quadrus. Within the strategic alliance channel, Mackenzie’s primary distribution relationship is with the head office of the respective bank, insurance company or investment company. In the institutional channel, Mackenzie provides investment management services to pension plans, foundations and other institutions. Mackenzie attracts new institutional business through its relationships with pension and management consultants.

Gross sales and redemption activity in strategic alliance and institutional accounts can be more pronounced than in the retail channel given the relative size and the nature of the distribution relationships of these accounts. These accounts are also subject

809780823 809

769

2013 2014 2015 2016 2017

Fee Income – MackenzieFor the financial year ($ millions)



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to ongoing reviews and rebalance activities which may result in a significant change in the level of assets under management.

Mackenzie is positioned to continue to build and enhance its distribution relationships given its team of experienced investment professionals, strength of its distribution network, broad product shelf, competitively priced products and its focus on client experience and investment excellence.

ASSETS UNDER MANAGEMENTThe changes in investment fund assets under management are summarized in Table 13 and the changes in total assets under management are summarized in Table 14.

In October 2017, the investment management functions of Investors Group and Mackenzie consolidated to form a single global investment management organization under Mackenzie to support both companies. As previously discussed, effective

TABLE 13: CHANGE IN INVESTMENT FUND ASSETS UNDER MANAGEMENT – MACKENZIE

% CHANGE


Sales $ 2,234 $ 1,840 $ 1,953 21.4 % 14.4 %Redemptions 2,097 1,536 1,977 36.5 6.1

Mutual fund net sales (redemptions) 137 304 (24) (54.9) N/M

ETF net creations 367 286 43 28.3 N/M

Investment fund net sales (redemptions)(2) 477 538 19 (11.3) N/M

Investment returns 1,854 (175) 1,085 N/M 70.9

Net change in assets 2,331 363 1,104 N/M 111.1Beginning assets 54,325 53,962 50,323 0.7 8.0

Ending assets $ 56,656 $ 54,325 $ 51,427 4.3 % 10.2 %

Consists of: Mutual funds $ 55,728 $ 53,752 $ 51,314 3.7 % 8.6 % ETFs 1,296 906 113 43.0 N/M

Investment funds(3) $ 56,656 $ 54,325 $ 51,427 4.3 % 10.2 %

Daily average investment fund assets $ 55,797 $ 53,528 $ 50,596 4.2 % 10.3 %


Sales $ 9,240 $ 6,939 33.2 %Redemptions 8,171 7,606 7.4

Mutual fund net sales (redemptions)(1) 1,069 (667) N/M

ETF net creations 1,156 112 N/M

Investment fund net sales (redemptions)(2) 1,884 (555) N/M


Net change in assets 5,229 2,982 75.4Beginning assets 51,427 48,445 6.2

Ending assets $ 56,656 $ 51,427 10.2 %

Daily average investment fund assets $ 53,962 $ 48,727 10.7 %

(1) During 2017, Investors Group mutual funds and certain third party programs which include Mackenzie mutual funds made fund allocation changes which resulted in Mackenzie mutual fund gross sales of $421 million, redemptions of $621 million and net redemptions of $200 million.

(2) Total investment fund net sales exclude Mackenzie mutual fund investments in ETFs of $27 million for the fourth quarter of 2017, $52 million for the third quarter of 2017 and $341 million for the twelve months ended December 31, 2017.

(3) Excludes Mackenzie mutual fund investments in ETFs of $368 million at December 31, 2017 and $333 million at September 30, 2017.



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TABLE 14: CHANGE IN TOTAL ASSETS UNDER MANAGEMENT – MACKENZIE(1)

% CHANGE


Net sales (redemptions) Mutual funds $ 137 $ 304 $ (24) (54.9) % N/M % ETF net creations 367 286 43 28.3 N/M

Investment funds(3) 477 538 19 (11.3) N/M

Sub-advisory, institutional and other accounts(4) 1,080 74 (1,615) N/M N/M

Total net sales 1,557 612 (1,596) N/M N/M

Investment returns 2,117 (135) 1,186 N/M 78.5

Net change in assets 3,674 477 (410) N/M N/M

Beginning assets 60,948 60,471 58,069 0.8 5.0

Ending assets $ 64,622 $ 60,948 $ 57,659 6.0 % 12.1 %

Consists of: Mutual funds $ 55,728 $ 53,752 $ 51,314 3.7 8.6 % ETFs 1,296 906 113 43.0 N/M

Investment funds(5) 56,656 54,325 51,427 4.3 10.2 Sub-advisory, institutional and other accounts 7,966 6,623 6,232 20.3 27.8

Total assets under management $ 64,622 $ 60,948 $ 57,659 6.0 % 12.1 %

Average total assets(6) $ 63,139 $ 60,117 $ 57,465 5.0 % 9.9 %


Net sales (redemptions) Mutual funds(2) $ 1,069 $ (667) N/M % ETF net creations 1,156 112 N/M

Investment funds(3) 1,884 (555) N/M

Sub-advisory, institutional and other accounts(4) 1,189 (1,780) N/M

Total net sales 3,073 (2,335) N/M


Net change in assets 6,963 1,614 N/M

Beginning assets 57,659 56,045 2.9

Ending assets $ 64,622 $ 57,659 12.1 %

Average total assets(6) $ 60,711 $ 55,935 8.5 %

(1) Effective October 1, 2017, Mackenzie segment has been redefined to exclude advisory mandates to Investors Group funds from its assets under management and net sales. This change has been applied retroactively to provide comparability of results.

(2) During 2017, Investors Group mutual funds and certain third party programs which include Mackenzie mutual funds made fund allocation changes which resulted in Mackenzie mutual fund gross sales of $421 million, redemptions of $621 million and net redemptions of $200 million.

(3) Investment fund net sales and total net sales exclude Mackenzie mutual fund investments in ETFs of $27 million for the fourth quarter of 2017, $52 million for the third quarter of 2017 and $341 million for the twelve months ended December 31, 2017.

(4) During the fourth quarter of 2016, MD Financial Management re-assigned sub-advisory responsibilities on a $1.5 billion fixed income mandate advised by Mackenzie.

(5) Excludes Mackenzie mutual fund investments in ETFs of $368 million at December 31, 2017 and $333 million at September 30, 2017.

(6) Based on daily average investment fund assets and month-end average sub-advisory, institutional and other assets.



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October 1, 2017, Mackenzie’s segment excludes investment advisory mandates to Investors Group funds. These mandates are no longer reflected within Mackenzie’s segment assets under management and net sales. To ensure comparability of results, prior period assets under management and net sales have been adjusted to remove these advisory mandates.

At December 31, 2017, Mackenzie’s investment fund assets under management were $56.7 billion, an all-time quarter end high and total assets under management were $64.6 billion. The change in Mackenzie’s assets under management is determined by the increase or decrease in the market value of the securities held in the portfolios of investments and by the level of net sales.

CHANGE IN ASSETS UNDER MANAGEMENT – 2017 VS. 2016

Mackenzie’s total assets under management at December 31, 2017 were $64.6 billion, an increase of 12.1% from $57.7 billion at December 31, 2016. Mackenzie’s sub-advisory, institutional and other accounts at December 31, 2017 were $8.0 billion, an increase of 27.8% from $6.2 billion last year.

Mackenzie’s investment fund assets under management were $56.7 billion at December 31, 2017, an increase of 10.2% from December 31, 2016. Mackenzie’s mutual fund assets under management were $55.7 billion at December 31, 2017, an increase of 8.6% from $51.3 billion at December 31, 2016. Mackenzie’s ETF assets were $1.3 billion at December 31, 2017, inclusive of $368 million in investments from Mackenzie mutual funds, compared to $113 million at December 31, 2016.

In the three months ended December 31, 2017, Mackenzie’s mutual fund gross sales were $2.2 billion, an increase of 14.4% from $2.0 billion in the comparative period last year. Mutual fund redemptions in the current quarter were $2.1 billion, an increase of 6.1% from last year. Mutual fund net sales for the three months ended December 31, 2017 were $137 million, as compared to net redemptions of $24 million last year. In the three months ended December 31, 2017, ETF net creations were $367 million, inclusive of $27 million in investments from Mackenzie mutual funds compared to ETF net creations of $43 million last year. Investment fund net sales in the current quarter were $477 million compared to net sales of $19 million last year. During the current quarter, investment returns resulted in investment fund assets increasing by $1.9 billion as compared to an increase of $1.1 billion last year.

Total net sales for the three months ended December 31, 2017 were $1.6 billion, as compared to net redemptions of $1.6 billion last year. During the fourth quarter of 2016, MD Financial Management Inc. (MD) re-assigned sub-advisory responsibilities on fixed income mandates totaling $1.5 billion. Excluding this

MD transaction, net redemptions were $106 million in the fourth quarter of 2016. During the current quarter, investment returns resulted in assets increasing by $2.1 billion as compared to an increase of $1.2 billion last year.

In the twelve months ended December 31, 2017, Mackenzie’s mutual fund gross sales were $9.2 billion, an increase of 33.2% from $6.9 billion in the comparative period last year. Mutual fund redemptions in the current period were $8.2 billion, an increase of 7.4% from last year. Mutual fund net sales for the twelve months ended December 31, 2017 were $1.1 billion, as compared to net redemptions of $667 million last year. In the twelve months ended December 31, 2017, ETF net creations were $1.2 billion, inclusive of $341 million in investments from Mackenzie mutual funds, compared to ETF net creations of $112 million last year. Investment fund net sales in the current period were $1.9 billion compared to net redemptions of $555 million last year. During the current period, investment returns resulted in investment fund assets increasing by $3.3 billion as compared to an increase of $3.5 billion last year.

During the twelve months ended December 31, 2017, Investors Group mutual funds and certain third party programs, which include Mackenzie mutual funds, made fund allocation changes resulting in gross sales of $421 million, redemptions of $621 million and net redemptions of $200 million. Excluding these transactions, mutual fund gross sales increased 27.1% and mutual fund redemptions decreased 0.7% in the twelve months ended December 31, 2017 compared to last year and mutual fund net sales were $1.3 billion compared to mutual fund net redemptions of $667 million last year.

Redemptions of long-term mutual funds in the three and twelve months ended December 31, 2017, were $2.0 billion and $7.9 billion, respectively, as compared to $1.9 billion and $7.3 billion last year. Redemptions of long-term mutual funds in the twelve months ended December 31, 2017 excluding the mutual fund allocation changes made by third party programs and Investors Group mutual funds, were $7.3 billion. Mackenzie’s annualized quarterly redemption rate for long-term mutual funds was 14.7% in the fourth quarter of 2017, compared to 15.2% in the fourth quarter of 2016. Mackenzie’s twelve-month trailing redemption rate for long-term mutual funds was 14.8% at December 31, 2017, as compared to 15.0% last year. The corresponding average twelve-month trailing redemption rate for long-term mutual funds for all other members of IFIC was approximately 15.6% at December 31, 2017. Mackenzie’s twelve-month trailing redemption rate is comprised of the weighted average redemption rate for front-end load assets, deferred sales charge and low load assets with redemption fees, and deferred sales charge assets without redemption fees (matured assets). Generally, redemption rates for front-end load



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assets and matured assets are higher than the redemption rates for deferred sales charge and low load assets with redemption fees.

Total net sales for the twelve months ended December 31, 2017 were $3.1 billion, as compared to net redemptions of $2.3 billion last year. During the twelve months ended December 31, 2017, investment returns resulted in assets increasing by $3.9 billion, consistent with the increase last year. Excluding the mutual fund allocation changes resulting in net redemptions of $200 million during 2017 and the MD re-assignment of $1.5 billion during 2016 previously discussed, total net sales were $3.3 billion in the current period compared to net redemptions of $0.8 billion last year.

CHANGE IN ASSETS UNDER MANAGEMENT – Q4 2017 VS. Q3 2017

Mackenzie’s total assets under management at December 31, 2017, were $64.6 billion, an increase of 6.0% from $60.9 billion at September 30, 2017. Mackenzie’s sub-advisory, institutional and other accounts at December 31, 2017 were $8.0 billion, an increase of 20.3% from $6.6 billion at September 30, 2017.

Mackenzie’s investment fund assets under management were $56.7 billion at December 31, 2017, an increase of 4.3% from $54.3 billion at September 30, 2017. Mackenzie’s mutual fund assets under management were $55.7 billion at December 31, 2017, an increase of 3.7% from $53.8 billion at September 30, 2017. Mackenzie’s ETF assets were $1.3 billion at December 31, 2017, an increase of 43.0% from $906 million at September 30, 2017. ETF assets include investments from Mackenzie mutual funds of $368 million at December 31, 2017 and $333 million at September 30, 2017.

For the quarter ended December 31, 2017, Mackenzie mutual fund gross sales were $2.2 billion, an increase of 21.4% from the third quarter of 2017. Mutual fund redemptions, which totalled $2.1 billion for the fourth quarter, increased by 36.5% from the previous quarter. Net sales of Mackenzie mutual funds for the current quarter were $137 million compared with net sales of $304 million in the previous quarter.

Redemptions of long-term mutual fund assets in the current quarter were $2.0 billion, compared to $1.5 billion in the third quarter of 2017. Mackenzie’s annualized quarterly redemption rate for long-term mutual funds for the current quarter was 14.7% compared to 11.0% for the third quarter of 2017. Net sales of long-term funds for the current quarter were $111 million compared to net sales of $268 million in the previous quarter.

For the quarter ended December 31, 2017, Mackenzie ETF net creations were $367 million, an increase of $81 million from the third quarter of 2017. In the current quarter, ETF net creations

were inclusive of $27 million in investments from Mackenzie mutual funds compared to $52 million in the third quarter.

Investment fund net sales in the current quarter were $477 million compared to net sales of $538 million in the third quarter.

INVESTMENT MANAGEMENTIn the fourth quarter of 2017, the investment management functions of Investors Group and Mackenzie were consolidated to form a single global investment management organization to support both companies under Mackenzie. The investment management organization continues to maintain its Canadian presence in Toronto, Montreal and Winnipeg and its international presence in Dublin and Hong Kong. In addition, it has recently expanded to the United States with the opening of its Boston office. Total assets managed by this combined team at December 31, 2017 were $127.1 billion.

The new investment management organization continues to deliver its investment offerings through a boutique structure, with separate in-house investment teams which each have a distinct focus and investment approach. This boutique approach promotes diversification of styles and ideas and provides Mackenzie with a breadth of capabilities. Oversight is conducted through a common process intended to promote superior risk-adjusted returns over time. This process is focused upon i) identifying and encouraging each team’s performance edge, ii) promoting best practices in portfolio construction, and iii) emphasizing risk management.

During 2017, Mackenzie strengthened its investment management capabilities and increased the number of boutiques from ten to fourteen:

• As part of the consolidation of the investment management functions, three new boutiques were created – European & International Equities, Asian Equities and Portfolio Solutions.

• In December 2017, Mackenzie created a new Global Quantitative Equity boutique based in Boston.

In addition to its own investment teams, Mackenzie supplements its investment capabilities through the use of third party sub-advisors in selected areas. These sub-advisors include Putnam Investments Inc., JP Morgan Asset Management Inc., Waddell & Reed Financial, Inc., Irish Life Investment Managers Limited, TOBAM, China AMC, Pax Ellevate Management LLC and Rockefeller & Co.

Mackenzie’s assets under management are diversified by investment objective as set out in Table 15. The development of a broad range of investment capabilities and products has proven to be, and continues to be, a key strength of the organization in satisfying the evolving financial needs of our clients.



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TABLE 15: ASSETS UNDER MANAGEMENT BY INVESTMENT OBJECTIVE – MACKENZIE

($ millions) 2017 2016

Equity Domestic $ 11,970 18.5 % $ 10,818 18.8 % Foreign 21,116 32.7 18,792 32.6

33,086 51.2 29,610 51.4

Balanced Domestic 11,809 18.3 11,189 19.4 Foreign 11,806 18.3 9,500 16.5

23,615 36.6 20,689 35.9

Fixed Income Domestic 4,462 6.9 4,589 7.9 Foreign 2,975 4.6 2,231 3.9

7,437 11.5 6,820 11.8

Money Market Domestic 484 0.7 540 0.9

Total $ 64,622 100.0 % $ 57,659 100.0 %

Consists of: Mutual funds $ 56,656 87.7 % $ 51,427 89.2 % Sub-advisory, institutional and other accounts 7,966 12.3 6,232 10.8

$ 64,622 100.0 % $ 57,659 100.0 %

Long-term investment performance is a key measure of Mackenzie’s ongoing success. At December 31, 2017, 43.9% of Mackenzie mutual fund assets were rated in the top two performance quartiles for the one year time frame, 41.7% for the three year time frame and 41.7% for the five year time frame. Mackenzie also monitors its fund performance relative to the ratings it receives on its mutual funds from the Morningstar† fund ranking service. At December 31, 2017, 70.1% of Mackenzie mutual fund assets measured by Morningstar† had a rating of three stars or better and 32.0% had a rating of four or five stars. This compared to the Morningstar† universe of 74.1% for three stars or better and 32.8% for four and five star funds at December 31, 2017. These ratings exclude the Quadrus Group of Funds†.

PRODUCTSMackenzie’s diversified suite of investment products is designed to meet the needs and goals of investors. Through a number of product launches in 2017, Mackenzie continues to evolve its product shelf by providing enhanced investment solutions for financial advisors to offer their investment clients.

EXCHANGE TRADED FUNDS

During 2017, Mackenzie celebrated its first anniversary of launching its Exchange Traded Funds (ETF) and ended the year with $1.3 billion in assets under management. The addition of ETFs complements Mackenzie’s broad and innovative fund line-up and reflects its investor-focus vision to provide advisors and investors with new solutions to drive investor outcomes and achieve their financial goals. These ETFs offer investors another investment option to utilize in building long-term diversified portfolios.

During 2017 Mackenzie launched five ETFs and ended the year with fifteen ETFs in its lineup:

• Five unique fixed income actively managed ETFs managed by Mackenzie’s Fixed Income Team.

• Six Maximum Diversification Index Smart Beta ETFs in partnership with TOBAM, a global award-winning asset manager and index provider to some of the world’s largest pension funds, to utilize their proprietary investment process.

Included in the 2017 are four ETFs launched during the fourth quarter:

• Mackenzie Ivy Global Equity ETF - managed by Mackenzie’s Ivy Team and provides long term capital growth with international exposure.



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• Mackenzie Canadian Short Term Fixed Income ETF - managed by Mackenzie’s Fixed Team and invests in high quality fixed-income securities with relatively shorter terms to maturity.

• Mackenzie Portfolio Completion ETF – managed by Mackenzie’s Systematic Strategies Team and provides long term capital appreciation and the potential for income by investing primarily in a diversified portfolio of alternative asset class ETFs and currencies.

• Mackenzie Global Leadership Impact ETF – sub-advised by Pax Ellevate Management LLC and invests primarily in companies that promote gender diversity and women’s leadership anywhere in the world.

Early in 2018, Mackenzie launched thirteen new traditional index ETFs that will broaden the choice for investors.

MUTUAL FUNDS

During 2017 and early 2018, Mackenzie launched eleven mutual funds as follows:

• Mackenzie High Diversification Emerging Markets Equity Fund – sub-advised by TOBAM and provides investors with an innovative option to invest in emerging markets with enhanced diversification.

• Mackenzie US Strategic Income Fund – provides investors with a US focused balanced solution that satisfies their needs for income and capital growth.

• Mackenzie Global Credit Opportunities Fund – provides investors with a flexible global credit solution focused on achieving a high level of income and the potential for long-term capital growth.

• Mackenzie All China Equity Fund – capitalizes on Mackenzie’s relationship with China AMC to provide investors with a unique product that captures the entire spectrum of Chinese capital markets.

Included in 2017 are two new products launched during the fourth quarter to meet the growing demand by investors for sustainable, responsible and impact investments:

• Mackenzie Global Sustainability and Impact Balanced Fund – combines the strengths of the Mackenzie Fixed Income Team and equity sub-advisor Rockefeller & Co to provide a combination of income and capital appreciation.

• Mackenzie Global Leadership Impact Fund – sub-advised by Pax Ellevate Management LLC and invests primarily in companies that promote gender diversity and women’s leadership anywhere in the world.

Early in 2018, Mackenzie launched Exchange Traded Fund (ETF) Portfolios, a series of five mutual fund portfolios in a single solution that provides access to a full spectrum of Mackenzie ETFs. Each portfolio has the ability to invest in Mackenzie’s active, strategic beta and traditional ETFs and is managed and monitored by the Mackenzie Asset Allocation Team. This new line-up makes ETFs more accessible to Canadian advisors and investors.

• Mackenzie Conservative Income ETF Portfolio

• Mackenzie Conservative ETF Portfolio

• Mackenzie Balanced ETF Portfolio

• Mackenzie Moderate Growth ETF Portfolio

• Mackenzie Growth ETF Portfolio

During 2017, Mackenzie also implemented an automated service that switches investors with a minimum of $100,000 per fund and households with a minimum of $250,000 into the appropriate Private Wealth Series to ensure they are invested in the lowest fee series for which they qualify.



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REVIEW OF SEGMENT OPERATING RESULTS

In October 2017, the investment management functions of Investors Group and Mackenzie consolidated to form a single global investment management organization under Mackenzie to support both companies. As previously discussed, effective October 1, 2017, Mackenzie’s segment excludes investment advisory mandates to Investors Group funds. Revenue earned on these mandates are no longer reflected within Mackenzie’s segment revenues. With these changes, Mackenzie’s segment

will reflect its proportionate share of the expenses of the investment management function going forward to better align with internal reporting. The impact of these changes in segment earnings is not significant. Prior period earnings have not been restated.

Mackenzie’s earnings before interest and taxes are presented in Table 16.

TABLE 16: OPERATING RESULTS – MACKENZIE

% CHANGE


Revenues Management fees $ 177.4 $ 175.3 $ 172.3 1.2 % 3.0 % Administration fees 25.3 24.5 23.8 3.3 6.3 Distribution fees 1.8 1.7 2.1 5.9 (14.3)

204.5 201.5 198.2 1.5 3.2 Net investment income and other 3.3 (0.3) 0.7 N/M N/M

207.8 201.2 198.9 3.3 4.5

Expenses Commission 11.1 11.3 12.4 (1.8) (10.5) Trailing commission 64.6 62.9 61.4 2.7 5.2 Non-commission 82.0 81.6 76.3 0.5 7.5

157.7 155.8 150.1 1.2 5.1

Earnings before interest and taxes $ 50.1 $ 45.4 $ 48.8 10.4 % 2.7 %


Revenues Management fees $ 701.7 $ 666.7 5.2 % Administration fees 99.1 93.0 6.6 Distribution fees 7.7 9.3 (17.2)

808.5 769.0 5.1 Net investment income and other 1.2 4.0 (70.0)

809.7 773.0 4.7

Expenses Commission 46.7 53.1 (12.1) Trailing commission 253.3 238.2 6.3 Non-commission 329.3 310.3 6.1

629.3 601.6 4.6




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2017 VS. 2016

REVENUES

The largest component of Mackenzie’s revenues is management fees. The amount of management fees depends on the level and composition of assets under management. Management fee rates vary depending on the investment objective and the account type of the underlying assets under management. For example, equity-based mandates have higher management fee rates than fixed income mandates and retail mutual fund accounts have higher management fee rates than sub-advised and institutional accounts. The majority of Mackenzie’s mutual fund assets are purchased on a retail basis.

Within Mackenzie’s retail mutual fund offering, certain series are offered for fee-based programs of participating dealers whereby dealer compensation on such series is charged directly by the dealer to a client (primarily Series F and PWF). As Mackenzie does not pay the dealer compensation, these series have lower management fees. At December 31, 2017, these series had $7.0 billion in assets, an increase of 44.9% from the prior year.

Management fees were $177.4 million for the three months ended December 31, 2017, an increase of $5.1 million or 3.0% from $172.3 million last year. As discussed earlier, advisory mandates to Investors Group funds were excluded from the Mackenzie segment effective October 1, 2017. When adjusted to remove advisory fees from Investors Group, prior period management fees were $167.9 million. Average assets under management were $63.1 billion during the current quarter compared to $57.5 billion last year, an increase of 9.9%. Mackenzie’s average management fee rate was 111.4 basis points during the current quarter compared to 115.9 basis points in 2016 when adjusted to exclude advisory fees from Investors Group funds. The decrease in the average management fee rate in the current quarter was due to a change in the composition of assets under management, including the impact of having a greater share in non-retail priced products and Series F, and the impact of automatic switching of qualified investors into its Private Wealth Series.

Management fees were $701.7 million for the twelve months ended December 31, 2017, an increase of $35.0 million or 5.2% from $666.7 million last year. When adjusted to remove advisory fees from Investors Group funds in prior quarters, management fees were $686.5 million for 2017 and $649.7 last year. Average assets under management were $60.7 billion during the current period, an 8.5% increase from $55.9 billion last year. Mackenzie’s average management fee rate in the twelve months ended December 31, 2017 was 113.1 basis points compared to 115.9 basis points in 2016 when adjusted to exclude advisory fees from Investors Group funds. The decrease in average management fee rate was due to a change in the composition

of assets under management, including the impact of having a greater share in non-retail priced products and Series F.

Mackenzie earns administration fees primarily from providing services to its investment funds. Administration fees were $25.3 million for the three months ended December 31, 2017, an increase of $1.5 million or 6.3% from $23.8 million last year. Administration fees were $99.1 million for the twelve months ended December 31, 2017, an increase of $6.1 million or 6.6% from $93.0 million last year.

Mackenzie earns distribution fee income on redemptions of mutual fund assets sold on a deferred sales charge purchase option and on a low load purchase option. Redemption fees charged for deferred sales charge assets range from 5.5% in the first year and decrease to zero after seven years. Redemption fees for low load assets range from 2.0% to 3.0% in the first year and decrease to zero after two or three years, depending on the purchase option. Distribution fee income in the three months ended December 31, 2017 was $1.8 million, compared to $2.1 million last year. Distribution fee income in the twelve months ended December 31, 2017 was $7.7 million, a decrease of $1.6 million from $9.3 million last year.

Net investment income and other includes investment returns related to Mackenzie’s investments in proprietary funds. These investments are generally made in the process of launching a fund and are sold as third party investors subscribe. Net investment income and other was $3.3 million for the three months ended December 31, 2017 compared to $0.7 million last year. Net investment income and other was $1.2 million for the twelve months ended December 31, 2017, a decrease of $2.8 million from $4.0 million last year.

EXPENSES

Mackenzie’s expenses were $157.7 million for the three months ended December 31, 2017, an increase of $7.6 million or 5.1% from $150.1 million in 2016. Expenses for the twelve months ended December 31, 2017 were $629.3 million, an increase of $27.7 million or 4.6% from $601.6 million last year.

Mackenzie pays selling commissions to the dealers that sell its mutual funds on a deferred sales charge and low load purchase option. The expense for deferred selling commissions consists of the amortization of the asset over its useful life and the reduction of the unamortized deferred selling commission asset associated with redemptions. Mackenzie amortizes selling commissions over a maximum period of three years from the date of original purchase of the applicable low load assets and over a maximum period of seven years from the date of original purchase of the applicable deferred sales charge assets. Commission expense was $11.1 million in the three months ended December 31, 2017, as compared to $12.4 million



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last year. Commission expense in the twelve months ended December 31, 2017 was $46.7 million compared to $53.1 million in 2016. These declines are consistent with the lower amount of deferred sales commissions paid in recent years combined with lower write-offs of the unamortized balance of deferred sales commissions associated with redemptions.

Trailing commissions paid to dealers are paid on certain classes of retail mutual funds and are calculated as a percentage of mutual fund assets under management. These fees vary depending on the fund type and the purchase option upon which the fund was sold: front-end, deferred sales charge or low load. Trailing commissions were $64.6 million in the three months ended December 31, 2017, an increase of $3.2 million or 5.2% from $61.4 million last year. Trailing commissions in the twelve months ended December 31, 2017 were $253.3 million, an increase of $15.1 million or 6.3% from $238.2 million last year. The increase in trailing commissions in the three and twelve months ended December 31, 2017 resulted from the period over period increase in average mutual fund assets offset, in part, by a decline in the effective trailing commission rate. Trailing commissions as a percentage of average mutual fund assets under management was 47.0 basis points and 47.3 basis points in the three and twelve month periods ended December 31, 2017 compared to 48.6 basis points and 48.9 basis points in the three and twelve month periods ended December 31, 2016. The decline in both periods was due to a change in composition of mutual fund assets towards series of mutual funds that do not pay trail commissions.

Non-commission expenses are incurred by Mackenzie in the administration, marketing and management of its assets under management. Non-commission expenses were $82.0 million in the three months ended December 31, 2017, an increase of $5.7 million or 7.5% from $76.3 million in 2016. Non-commission expenses in the twelve months ended December 31, 2017 were $329.3 million, an increase of $19.0 million or 6.1% from $310.3 million in 2016. The increase in non-commission expenses in the fourth quarter of 2017 was primarily timing related. The increase in the twelve month period ended December 31, 2017 was due primarily to additional sales-based incentives as a result of higher mutual fund sales volumes.

Q4 2017 VS. Q3 2017

REVENUES

Mackenzie’s revenues were $207.8 million for the current quarter, an increase of $6.6 million or 3.3% from $201.2 million in the third quarter.

Management fees were $177.4 million for the current quarter, an increase of $2.1 million or 1.2% from $175.3 million in the third quarter. Management fees for the prior quarter were $169.6 million excluding the advisory mandates to Investors Group funds. Factors contributing to the net increase in management fees are as follows:

• Average assets under management were $63.1 billion in the current quarter, a 5.0% increase from $60.1 billion in the prior quarter.

• Mackenzie’s average management fee rate was 111.4 basis points in the current quarter compared to 112.0 basis points in the third quarter, when adjusted to exclude advisory fees from Investors Group.

Administration fees were $25.3 million in the current quarter, an increase of $0.8 million or 3.3% from $24.5 million in the prior quarter.

Net investment income and other includes investment returns related to Mackenzie’s investments in proprietary funds. Net investment income and other was $3.3 million for the current quarter compared to ($0.3) million in the third quarter.

EXPENSES

Mackenzie’s expenses were $157.7 million for the current quarter, an increase of $1.9 million or 1.2% from $155.8 million in the third quarter.

Commission expense related to the amortization of selling commissions was $11.1 million in the quarter ended December 31, 2017, a decrease of 1.8% from the third quarter.

Trailing commissions were $64.6 million in the current quarter, an increase of $1.7 million or 2.7% from $62.9 million in the third quarter. The change in trailing commissions reflects the 3.6% period over period increase in average mutual fund assets under management. The effective trailing commission rate was 47.0 basis points in the current quarter compared to 47.4 basis points in the third quarter.

Non-commission expenses were $82.0 million in the current quarter, compared to $81.6 million in the third quarter.



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CORPORATE AND OTHERREVIEW OF SEGMENT OPERATING RESULTS

The Corporate and Other segment includes net investment income not allocated to the Investors Group or Mackenzie segments, the Company’s proportionate share of earnings of its associates, Great-West Lifeco Inc. (Lifeco) and China Asset Management Co., Ltd. (China AMC), operating results for Investment Planning Counsel Inc., other income, as well as consolidation elimination entries.

The Company’s investment in China AMC closed on August 31, 2017.

The Company also has investments in Personal Capital Corporation, Wealthsimple Financial Corporation and Portag3 Ventures LP.

Corporate and other earnings before interest and taxes are presented in Table 17.

TABLE 17: OPERATING RESULTS – CORPORATE AND OTHER

% CHANGE


Revenues Fee income $ 72.4 $ 65.4 $ 64.7 10.7 % 11.9 % Net investment income and other 0.2 2.6 1.4 (92.3) (85.7) Proportionate share of associates’ earnings 36.9 24.9 26.5 48.2 39.2

109.5 92.9 92.6 17.9 18.3

Expenses Commission 46.7 45.6 44.5 2.4 4.9 Non-commission 19.5 15.1 15.7 29.1 24.2

66.2 60.7 60.2 9.1 10.0

Earnings before interest and taxes $ 43.3 $ 32.2 $ 32.4 34.5 % 33.6 %


Revenues Fee income $ 269.7 $ 254.9 5.8 % Net investment income and other 9.7 8.0 21.3 Proportionate share of associates’ earnings 114.7 104.2 10.1

394.1 367.1 7.4

Expenses Commission 183.4 173.8 5.5 Non-commission 66.9 61.8 8.3

250.3 235.6 6.2




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2017 VS. 2016The proportionate share of associates’ earnings increased by $10.4 million in the fourth quarter of 2017 and by $10.5 million in the year ended December 31, 2017, compared to 2016. These earnings reflect equity earnings from Lifeco for all periods under review and from China AMC in 2017, as discussed in the Consolidated Financial Position section of this MD&A. In the third quarter of 2017, net earnings reflected a reduction in the proportionate share of associates’ earnings of $7.0 million caused by charges incurred by Lifeco in relation to Hurricanes Harvey, Irma and Maria. Net investment income and other decreased to $0.2 million in the fourth quarter of 2017 compared to $1.4 million in 2016. For the twelve month period, net investment income and other increased to $9.7 million compared to $8.0 million in 2016.

Earnings before interest and taxes related to Investment Planning Counsel were $1.8 million higher in the fourth quarter of 2017 compared to the same period in 2016 and $0.1 million higher in the twelve months ended December 31, 2017.

Q4 2017 VS. Q3 2017The proportionate share of associates’ earnings were $36.9 million in the fourth quarter of 2017, an increase of $12.0 million from the third quarter of 2017. Results for the fourth quarter reflect a full quarter of China AMC earnings. Results in the third quarter reflected the charges incurred by Lifeco, as described previously. Net investment income and other decreased to $0.2 million in the fourth quarter of 2017 compared to $2.6 million in the third quarter.

Earnings before interest and taxes related to Investment Planning Counsel were $1.9 million higher in the fourth quarter of 2017 compared to the prior quarter.



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IGM FINANCIAL INC.CONSOLIDATED FINANCIAL POSITION

IGM Financial’s total assets were $16.5 billion at December 31, 2017, compared to $15.6 billion at December 31, 2016.

SECURITIESThe composition of the Company’s securities holdings is detailed in Table 18.

AVAILABLE FOR SALE SECURITIES

Securities classified as available for sale include corporate investments and investments in proprietary investment funds. Unrealized gains and losses on available for sale securities are recorded in Other comprehensive income until they are realized or until management determines that there is objective evidence of impairment, at which time they are reclassified to the Consolidated Statements of Earnings and any subsequent losses are also recorded in net earnings.

Corporate Investments

Corporate investments is primarily comprised of the Company’s investments in Personal Capital Corporation (Personal Capital), Wealthsimple Financial Corporation (Wealthsimple) and Portag3 Ventures LP (Portag3).

In 2017, the Company invested $73.4 million in Corporate investments, with investments of $25.0 million related to Personal Capital and $42.6 million related to Wealthsimple. Subsequent to December 31, 2017, the Company increased its investment in Wealthsimple by a total of $45.0 million including the conversion of a $15.0 million loan to equity.

In 2016, the Company invested $135.9 million, with investments of $97.3 million related to Personal Capital, $20.0 million related to Wealthsimple and $15.0 million related to Portag3.

FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES

Securities classified as fair value through profit or loss include equity securities and proprietary investment funds. Unrealized gains and losses are recorded in Net investment income and other in the Consolidated Statements of Earnings.

Certain proprietary investment funds are consolidated where the Company has made the assessment that it controls the investment fund as discussed in Note 2 of the Consolidated Financial Statements. The underlying securities of these funds are classified as held for trading and recognized at fair value through profit or loss.

LOANS The composition of the Company’s loans is detailed in Table 19.

Loans consisted of residential mortgages and represented 47.6% of total assets at December 31, 2017, compared to 51.1% at December 31, 2016.

Loans classified as loans and receivables are primarily comprised of residential mortgages sold to securitization programs sponsored by third parties that in turn issue securities to investors. An offsetting liability, Obligations to securitization entities, has been recorded and totalled $7.6 billion at December 31, 2017, compared to $7.7 billion at December 31, 2016.

Loans classified as held for trading are residential mortgages held temporarily by the Company pending sale or securitization.

Residential mortgages originated by Investors Group are funded primarily through sales to third parties on a fully serviced basis, including Canada Mortgage and Housing Corporation

TABLE 18: SECURITIES

DECEMBER 31, 2017 DECEMBER 31, 2016 ($ millions) COST FAIR VALUE COST FAIR VALUE

Available for sale Corporate investments $ 215.0 $ 262.8 $ 141.6 $ 152.0 Proprietary investment funds 19.6 19.9 6.1 6.4

234.6 282.7 147.7 158.4

Fair value through profit or loss Equity securities 17.1 17.1 15.5 17.7 Proprietary investment funds 79.6 79.9 49.4 49.1

96.7 97.0 64.9 66.8

$ 331.3 $ 379.7 $ 212.6 $ 225.2



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(CMHC) or Canadian bank sponsored securitization programs. Investors Group services $13.3 billion of residential mortgages, including $2.5 billion originated by subsidiaries of Lifeco.

SECURITIZATION ARRANGEMENTSThrough the Company’s mortgage banking operations, residential mortgages originated by Investors Group mortgage planning specialists are sold to securitization trusts sponsored by third parties that in turn issue securities to investors. The Company securitizes residential mortgages through the CMHC sponsored National Housing Act Mortgage-Backed Securities (NHA MBS) and the Canada Mortgage Bond Program (CMB Program) and through Canadian bank-sponsored asset-backed commercial paper (ABCP) programs. The Company retains servicing responsibilities and certain elements of credit risk and prepayment risk associated with the transferred assets. The Company’s credit risk on its securitized mortgages is mitigated through the use of insurance. Derecognition of financial assets in accordance with IFRS is based on the transfer of risks and rewards of ownership. As the Company has retained

prepayment risk and certain elements of credit risk associated with the Company’s securitization transactions through the CMB and ABCP programs, they are accounted for as secured borrowings. The Company records the transactions under these programs as follows: (i) the mortgages and related obligations are carried at amortized cost, with interest income and interest expense, utilizing the effective interest rate method, recorded over the term of the mortgages, (ii) the component of swaps entered into under the CMB Program whereby the Company pays coupons on Canada Mortgage Bonds and receives investment returns on the reinvestment of repaid mortgage principal, are recorded at fair value, and (iii) cash reserves held under the ABCP program are carried at amortized cost.

In the fourth quarter of 2017, the Company securitized loans through its mortgage banking operations with cash proceeds of $1,031.8 million compared to $698.3 million in 2016. Additional information related to the Company’s securitization activities, including the Company’s hedges of related reinvestment and interest rate risk, can be found in the Financial Risk section of this MD&A and in Note 6 of the Consolidated Financial Statements.

TABLE 19: LOANS

($ millions) DECEMBER 31, 2017 DECEMBER 31, 2016

Loans and receivables $ 7,564.0 $ 7,644.5 Less: Collective allowance 0.8 0.7

7,563.2 7,643.8Held for trading 286.7 339.5

$ 7,849.9 $ 7,983.3



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TABLE 20: INVESTMENT IN ASSOCIATES

TWELVE MONTHS ENDED 2017 2016 ($ millions) DEC. 31 DEC. 31

LIFECO CHINA AMC TOTAL TOTAL

Carrying value, beginning of year $ 888.9 $ – $ 888.9 $ 904.3 Additional investment – 638.3 638.3 – Proportionate share of earnings 105.7 9.0 114.7 104.2 Proportionate share of associate’s one-time charges(1) (14.0) – (14.0) – Proportionate share of associate’s restructuring provision(1) (5.1) – (5.1) – Dividends received (58.3) (10.8) (69.1) (55.0) Proportionate share of other comprehensive income (loss) and other adjustments (14.1) 11.4 (2.7) (64.6)

Carrying value, end of year $ 903.1 $ 647.9 $ 1,551.0 $ 888.9

(1) Refer to the Summary of Consolidated Operating Results in this MD&A.

INVESTMENT IN ASSOCIATES

Great-West Lifeco Inc. (Lifeco)

At December 31, 2017 the Company held a 4% equity interest in Lifeco. IGM Financial and Lifeco are controlled by Power Financial Corporation.

The equity method is used to account for IGM Financial’s investment in Lifeco, as it exercises significant influence. The Company’s proportionate share of Lifeco’s earnings is recorded in Net investment income and other in the Corporate and other reportable segment (Tables 2-4). Changes in the carrying value for the year ended December 31, 2017 compared with 2016 are shown in Table 20.

During 2017, Lifeco established a restructuring provision, and recorded charges related to the impact of the United States tax reform and pending sale of an equity investment. The Company’s after-tax proportionate share of the restructuring provision and the one-time charges are $5.1 million and $14.0 million, respectively.

China Asset Management Co., Ltd. (China AMC)

Founded in 1998 as one of the first fund management companies in China, China AMC has developed and maintained a position among the market leaders in China’s asset management industry.

China AMC’s total assets under management, excluding subsidiary assets under management were RMB¥ 836.4 billion ($159.9 billion) at June 30, 2017, representing a decrease of 16.8% (CAD$ decrease of 17.8%) from RMB¥ 1,005.8 billion ($194.6 billion) at December 31, 2016.

The equity method is used to account for the Company’s 13.9% equity interest in China AMC, as it exercises significant influence. The Company’s proportionate share of China AMC’s earnings is recorded in Net investment income and other in the Corporate and other reportable segment (Tables 2-4). Changes in the carrying value for the quarter ended December 31, 2017 are shown in Table 20.



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LIQUIDITYCash and cash equivalents totalled $966.8 million at December 31, 2017 compared with $611.0 million at December 31, 2016. Cash and cash equivalents related to the Company’s deposit operations were $3.3 million at December 31, 2017, compared to $2.7 million at December 31, 2016, as shown in Table 21.

Working capital totalled $786.1 million at December 31, 2017 compared with $557.8 million at December 31, 2016. Working capital excludes the Company’s deposit operations.

Working capital is utilized to:

• Finance ongoing operations, including the funding of selling commissions.

• Temporarily finance mortgages in its mortgage banking operations.

• Pay interest and dividends related to long-term debt and preferred shares.

• Maintain liquidity requirements for regulated entities.

• Pay quarterly dividends on its outstanding common shares.

• Finance common share repurchases related to the Company’s normal course issuer bid.

IGM Financial generates significant cash flows from its operations. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) totalled $1,354.5 million for the year ended December 31, 2017 compared to $1,320.8 million in 2016. Adjusted EBITDA for each period under review excludes the impact of amortization of deferred selling commissions which totalled $230.9 million in 2017 compared to $235.8 million in 2016. As well as being an important

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

alternative measure of performance, EBITDA is a common measure utilized by investment analysts and credit rating agencies in reviewing asset management companies.

Refer to the Financial Risk section of this MD&A for information related to other sources of liquidity and to the Company’s exposure to and management of liquidity and funding risk.

1,3551,3571,427 1,393

1,321

2013 2014 2015 2016 2017

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)For the financial year ($ millions)

Adjusted EBITDA

2013 excluded a charge related to restructuring and other charges and the proportionate share of the benefit related to the changes in an affiliate’s litigation provisions.

2014 excluded a charge related to client distributions and other costs, and restructuring and other charges.

2015 excluded a charge related to restructuring and other charges.

2017 excluded charges related to restructuring and other, a favourable revaluation of the Company's pension plan obligation, charges representing the proportionate share in Great-West Lifeco Inc.'s one-time charges and restructuring provision.

TABLE 21: DEPOSIT OPERATIONS – FINANCIAL POSITION

AS AT DECEMBER 31 ($ millions) 2017 2016

Assets Cash and cash equivalents $ 3.3 $ 2.7 Client funds on deposit 489.6 455.5 Accounts and other receivables 0.8 0.5 Loans 21.7 25.1

Total assets $ 515.4 $ 483.8

Liabilities and shareholders’ equity Deposit liabilities $ 505.0 $ 471.2 Other liabilities 0.5 2.6 Shareholders’ equity 9.9 10.0

Total liabilities and shareholders’ equity $ 515.4 $ 483.8



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CASH FLOWS

Table 22 - Cash Flows is a summary of the Consolidated Statements of Cash Flows which forms part of the Consolidated Financial Statements for the year ended December 31, 2017. Cash and cash equivalents increased by $355.8 million in 2017 compared to a decrease of $372.0 million in 2016.

Operating activities, before payment of commissions, generated $929.2 million during the year ended December 31, 2017, as compared to $971.5 million in 2016. Cash commissions paid were $271.6 million in 2017 compared to $234.9 million in 2016. Cash flows from operating activities, net of commissions paid, were $657.6 million in 2017 as compared to $736.6 million in 2016.

Financing activities during the year ended December 31, 2017 compared to 2016 related to:

• A net decrease of $131.6 million in 2017 arising from obligations to securitization entities compared to a net increase of $631.1 million in 2016.

• Issuance of debentures of $850.0 million in 2017, comprised of $600.0 million in the first quarter and $250.0 million in the fourth quarter.

• There was no purchase of common shares in 2017 under IGM Financial’s normal course issuer bid compared with the purchase of 4,346,600 common shares at a cost of $155.7 million in 2016.

• The payment of perpetual preferred share dividends which totalled $8.8 million in 2017, unchanged from 2016.

• The payment of regular common share dividends which totalled $541.3 million in 2017 compared to $544.4 million in 2016.

Investing activities during the year ended December 31, 2017 compared to 2016 primarily related to:

• The purchases of securities totalling $181.6 million and sales of securities with proceeds of $62.2 million in 2017 compared to $231.3 million and $80.3 million, respectively, in 2016.

• A net decrease in loans of $136.6 million in 2017 compared to a net increase of $582.9 million in 2016 primarily related to residential mortgages in the Company’s mortgage banking operations.

• Net cash used in additions to intangible assets and acquisitions was $33.6 million in 2017 compared to $64.5 million in 2016.

• The final payment related to investment in China AMC of $439.3 million in the third quarter of 2017, resulting in a total investment of $638.3 million.

CAPITAL RESOURCESThe Company’s capital management objective is to maximize shareholder returns while ensuring that the Company is capitalized in a manner which appropriately supports regulatory requirements, working capital needs and business expansion. The Company’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. Capital of the Company consists of long-term debt, perpetual preferred shares and common shareholders’ equity which totalled $7.0 billion at December 31, 2017, compared to $6.1 billion at December 31, 2016. The Company regularly assesses its capital management practices in response to changing economic conditions.

The Company’s capital is primarily utilized in its ongoing business operations to support working capital requirements, long-term investments made by the Company, business expansion and other strategic objectives. Subsidiaries subject

TABLE 22: CASH FLOWS


Operating activities Before payment of commissions $ 929.2 $ 971.5 (4.4) % Commissions paid (271.6) (234.9) (15.6)

Net of commissions paid 657.6 736.6 (10.7)Financing activities 170.5 (74.9) N/MInvesting activities (472.3) (1,033.7) 54.3

Change in cash and cash equivalents 355.8 (372.0) N/MCash and cash equivalents, beginning of year 611.0 983.0 (37.8)

Cash and cash equivalents, end of year $ 966.8 $ 611.0 58.2 %



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to regulatory capital requirements include investment dealers, mutual fund dealers, exempt market dealers, portfolio managers, investment fund managers and a trust company. These subsidiaries are required to maintain minimum levels of capital based on either working capital, liquidity or shareholders’ equity. The Company’s subsidiaries have complied with all regulatory capital requirements.

The total outstanding long-term debt was $2,175.0 million at December 31, 2017, compared to $1,325.0 million at December 31, 2016. Long-term debt is comprised of debentures which are senior unsecured debt obligations of the Company subject to standard covenants, including negative pledges, but which do not include any specified financial or operational covenants.

In 2017, IGM Financial issued the following debentures:

• January 26 - $400 million of 10 year 3.44% debentures and $200 million of 30 year 4.56% debentures. The net proceeds were used by IGM Financial to finance a substantial portion of the announced acquisitions of its equity interest in China AMC (refer to Note 8 to the Consolidated Financial Statements) and for general corporate purposes.

• December 7 - $250 million of 30 year 4.115% debentures. The net proceeds will be used by IGM Financial to repay upcoming long-term debt maturities and for general corporate purposes.

The debenture offerings were made pursuant to prospectus supplements to IGM Financial’s short form base shelf prospectus dated November 29, 2016.

Perpetual preferred shares of $150 million at December 31, 2017 remain unchanged from December 31, 2016.

The Company commenced a normal course issuer bid on March 20, 2017, which is effective until March 19, 2018, to purchase up to 5% of its common shares in order to mitigate the dilutive effect of stock options issued under the Company’s stock option plan and for other capital management purposes. There were no common shares purchased by the Company in 2017 (refer to Note 16 to the Consolidated Financial Statements). Other activities in 2017 included the declaration of perpetual preferred share dividends of $8.8 million or $1.475 per share and common share dividends of $541.4 million or $2.25 per share. Changes in common share capital are reflected in the Consolidated Statements of Changes in Shareholders’ Equity.

During 2017, Standard & Poor’s (S&P) decreased the rating of the Company’s senior unsecured debentures to “A” from “A+” with a stable outlook as a result of the additional debenture issuance. Dominion Bond Rating Service’s (DBRS) current rating on the Company’s senior unsecured debentures is “A (High)” with a stable rating trend.

Credit ratings are intended to provide investors with an independent measure of the credit quality of the securities of a company and are indicators of the likelihood of payment and the capacity of a company to meet its obligations in accordance with the terms of each obligation. Descriptions of the rating categories for each of the agencies set forth below have been obtained from the respective rating agencies’ websites.

These ratings are not a recommendation to buy, sell or hold the securities of the Company 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.

The A rating assigned to IGM Financial’s senior unsecured debentures by S&P is the sixth highest of the 22 ratings used for long-term debt. This rating indicates S&P’s view that the Company’s capacity to meet its financial commitment on the obligation is strong, but the obligation is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories.

The A (High) rating assigned to IGM Financial’s senior unsecured debentures by DBRS is the fifth highest of the 26 ratings used for long-term debt. Under the DBRS long-term rating scale, debt securities rated A (High) are of good credit quality and the capacity for the payment of financial obligations is substantial. While this is a favourable rating, entities in the A (High) category may be vulnerable to future events, but qualifying negative factors are considered manageable.

Long-term Debt

Perpetual Preferred Shares

Common Shareholders’ Equity

4,436 4,569 4,577

150 150 150

1,325 1,325 1,325

5,911 6,044 6,052

4,675

150

2,175

7,000

2013 2014 2015 2016 2017

4,597

150

1,325

6,072

CapitalAs at December 31 ($ millions)



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FINANCIAL INSTRUMENTS Table 23 presents the carrying amounts and fair values of financial assets and financial liabilities. The table excludes fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. These items include cash and cash equivalents, accounts and other receivables, certain other financial assets, accounts payable and accrued liabilities, and certain other financial liabilities.

Fair value is determined using the following methods and assumptions:

• Securities and other financial assets and liabilities are valued using quoted prices from active markets, when available. When a quoted market price is not readily available, valuation techniques are used that require assumptions related to discount rates and the timing and amount of future cash flows. Wherever possible, observable market inputs are used in the valuation techniques.

• Loans classified as held for trading are valued using market interest rates for loans with similar credit risk and maturity, specifically lending rates offered to retail borrowers by financial institutions.

• Loans classified as loans and receivables are valued by discounting the expected future cash flows at prevailing market yields.

• Obligations to securitization entities are valued by discounting the expected future cash flows at prevailing market yields for securities issued by these securitization entities having similar terms and characteristics.

• Deposits and certificates are valued by discounting the contractual cash flows using market interest rates currently offered for deposits with similar terms and credit risks.

• Long-term debt is valued using quoted prices for each debenture available in the market.

• Derivative financial instruments are valued based on quoted market prices, where available, prevailing market rates for instruments with similar characteristics and maturities, or discounted cash flow analysis.

See Note 22 of the Consolidated Financial Statements which provides additional discussion on the determination of fair value of financial instruments.

Although there were changes to both the carrying values and fair values of financial instruments, these changes did not have a material impact on the financial condition of the Company for the twelve months ended December 31, 2017.

TABLE 23: FINANCIAL INSTRUMENTS

DECEMBER 31, 2017 DECEMBER 31, 2016 ($ millions) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE

Financial assets recorded at fair value Securities – Available for sale $ 282.7 $ 282.7 $ 158.4 $ 158.4 – Held for trading 97.0 97.0 66.8 66.8 Loans – Held for trading 286.7 286.7 339.5 339.5 Derivative financial instruments 35.7 35.7 42.8 42.8Financial assets recorded at amortized cost Loans – Loans and receivables 7,563.2 7,675.5 7,643.8 7,867.7Financial liabilities recorded at fair value Derivative financial instruments 28.4 28.4 38.2 38.2 Other financial liabilities 9.3 9.3 9.8 9.8Financial liabilities recorded at amortized cost Deposits and certificates 505.0 505.5 471.2 472.2 Obligations to securitization entities 7,596.0 7,657.8 7,721.0 7,873.1 Long-term debt 2,175.0 2,470.2 1,325.0 1,610.9



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RISK MANAGEMENT

The Company is exposed to a variety of risks that are inherent in its business activities. Its ability to manage these risks is key to its ongoing success. The Company emphasizes a strong risk management culture and the implementation of an effective risk management approach. The risk management approach coordinates risk management across the organization and its business units and seeks to ensure prudent and measured risk-taking in order to achieve an appropriate balance between risk and return. Fundamental to our enterprise risk management program is protecting and enhancing our reputation.

RISK MANAGEMENT FRAMEWORKThe Company’s risk management approach is undertaken through its Enterprise Risk Management (ERM) Framework which includes five core elements: risk governance, risk appetite, risk principles, a defined risk management process, and risk management culture. The ERM Framework is established under the Company’s ERM Policy, which is approved by the Risk Management Committee.

RISK GOVERNANCE

The Company’s risk governance structure emphasizes a comprehensive and consistent framework throughout the Company and its subsidiaries, with identified ownership of risk management in each business unit and oversight by an executive Risk Management Committee accountable to the Executive Committee of the Board. Additional oversight is provided by the Enterprise Risk Management (ERM) Department, corporate and distribution compliance groups, and the Company’s Internal Audit Department.

The Board of Directors provides oversight and carries out its risk management mandate primarily through the following committees:

• The Executive Committee is responsible for the oversight of enterprise risk management by: i) ensuring that appropriate procedures are in place to identify and manage risks and establish risk tolerances, ii) ensuring that appropriate policies, procedures and controls are implemented to manage risks, and iii) reviewing the risk management process on a regular basis to ensure that it is functioning effectively.

• The Investment Committee oversees management of the Company’s financial risks, being market risk, credit risk, and liquidity and funding risk by: i) ensuring that appropriate procedures are in place to identify and manage financial risks in accordance with tolerances, ii) monitoring the implementation and maintenance of appropriate policies, procedures and controls to manage financial risks, and iii) reviewing the financial risk management process on a regular basis to ensure that it is functioning effectively.

• The Audit Committee has specific risk oversight responsibilities in relation to financial disclosure, internal controls and the control environment as well as the Company’s compliance activities.

• Other committees having specific risk oversight responsibilities include: i) the Compensation Committee which oversees compensation policies and practices, ii) the Governance and Nominating Committee which oversees corporate governance practices, and iii) the Related Party and Conduct Review Committee which oversees conflicts of interest as well as the administration of the Code of Business Conduct and Ethics for Directors, Officers and Employees (Code of Conduct).

Management oversight for risk management resides with the executive Risk Management Committee which is comprised of the President and Chief Executive Officer, IGM Financial and Investors Group, the President and Chief Executive Officer, Mackenzie Investments, the Chief Financial Officer, and the General Counsel and Chief Compliance Officer. The committee is responsible for management providing oversight of the Company’s risk management process by: i) establishing and maintaining the risk framework and policy, ii) defining the Company’s risk appetite, iii) ensuring the Company’s risk profile and processes are aligned with corporate strategy and risk appetite, and iv) establishing “tone at the top” and reinforcing a strong culture of risk management.

The Chief Executive Officers of the operating companies have overall responsibility for overseeing risk management of their respective companies.

The Company has assigned responsibility for risk management using the Three Lines of Defence model, with the First Line reflecting the business units having primary responsibility for risk management, supported by Second Line risk management functions and a Third Line Internal Audit function providing assurance and validation of the design and effectiveness of the ERM Framework.

First Line of Defence

The leaders of the various business units and support functions have primary ownership and accountability for the ongoing risk management associated with their respective activities. Responsibilities of business unit and support function leaders include: i) establishing and maintaining procedures for the identification, assessment, documentation and escalation of risks, ii) implementing control activities to mitigate risks, iii) identifying opportunities for risk reduction or transfer, and iv) aligning business and operational strategies with the risk culture and risk appetite of the organization as established by the Risk Management Committee.



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Second Line of Defence

The Enterprise Risk Management (ERM) Department provides oversight, analysis and reporting to the Risk Management Committee on the level of risks relative to the established risk appetite for all activities of the Company. Other responsibilities include: i) developing and maintaining the enterprise risk management program and framework, ii) managing the enterprise risk management process, and iii) providing guidance and training to business unit and support function leaders.

The Company has a number of committees of senior business leaders which provide oversight of specific business risks, including the Financial Risk Management and Information Services Risk Oversight committees. These committees perform critical reviews of risk assessments, risk management practices and risk response plans developed by business units and support functions.

Other oversight accountabilities reside with the Company’s corporate and sales compliance groups which are responsible for ensuring compliance with policies, laws and regulations.

Third Line of Defence

The Internal Audit Department is the third line of defence and provides independent assurance to senior management and the Board of Directors on the effectiveness of risk management policies, processes and practices.

RISK APPETITE AND RISK PRINCIPLES

The Risk Management Committee establishes the Company’s appetite for different types of risk through the Risk Appetite Framework. Under the Risk Appetite Framework, one of four appetite levels is established for each risk type and business activity of the Company. These appetite levels range from those where the Company has no appetite for risk and seeks to minimize any losses, to those where the Company readily accepts exposure while seeking to ensure that risks are well understood and managed. These appetite levels guide our business units as they engage in business activities, and inform them in establishing policies, limits, controls and risk transfer activities.

A Risk Appetite Statement and Risk Principles provide further guidance to business leaders and employees as they conduct risk management activities. The Risk Appetite Statement’s emphasis is to maintain the Company’s reputation and brand, ensure financial flexibility, and focus on mitigating operational risk.

RISK MANAGEMENT PROCESS

The Company’s risk management process is designed to foster:

• Ongoing assessment of risks and tolerance in a changing operating environment.

• Appropriate identification and understanding of existing and emerging risks and risk response.

• Timely monitoring and escalation of risks based upon changing circumstances.

Significant risks that may adversely affect the Company’s ability to achieve its strategic and business objectives are identified through the Company’s ongoing risk management process.

We use a consistent methodology across our organizations and business units for identification and assessment of risks. Risks are assessed by evaluating the impact and likelihood of the potential risk event after consideration of controls and any risk transfer activities. The results of these assessments are considered relative to risk appetite and tolerances and may result in action plans to adjust the risk profile.

Risk assessments are monitored and reviewed on an ongoing basis by business units and by oversight areas including the ERM Department. The ERM Department promotes and coordinates communication and consultation to support effective risk management and escalation. The ERM Department regularly reports on the results of risk assessments and on the assessment process to the Risk Management Committee and to the Executive Committee of the Board.

RISK MANAGEMENT CULTURE

Risk management is intended to be everyone’s responsibility within the organization. The ERM Department engages all business units in workshops to foster awareness and incorporation of our risk framework into our business activities.

We have an established business planning process which reinforces our risk management culture. Our compensation programs are typically objectives-based, and do not encourage or reward excessive or inappropriate risk taking, and often are aligned specifically with risk management objectives.

Our risk management program emphasizes integrity, ethical practices, responsible management and measured risk-taking with a long-term view. Our standards of integrity and ethics are reflected within our Code of Conduct which applies to directors, officers and employees.



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KEY RISKS OF THE BUSINESSThe Company identifies risks to which its businesses and operations could be exposed considering factors both internal and external to the organization. These risks are broadly grouped into six categories.

1) FINANCIAL RISK

LIQUIDITY AND FUNDING RISK

Liquidity and funding risk is the risk of the inability to generate or obtain sufficient cash in a timely and cost-effective manner to meet contractual or anticipated commitments as they come due or arise.

The Company’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.

• Regular assessment of capital market conditions and the Company’s ability to access bank and capital market funding.

• Ongoing efforts to diversify and expand long-term mortgage funding sources.

• Oversight of liquidity management by the Financial Risk Management Committee, a committee of finance business leaders, and by the Investment Committee of the Board of Directors.

A key funding requirement for the Company is the funding of commissions paid on the sale of mutual funds. Commissions on the sale of mutual funds continue to be paid from operating cash flows.

The Company also maintains sufficient liquidity to fund and temporarily hold mortgages pending sale or securitization to long-term funding sources and to manage any derivative collateral requirements related to the mortgage banking operation. 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) securities including sales to Canada Housing Trust under the CMB Program. The Company maintains committed capacity within certain Canadian bank-sponsored securitization trusts. Capacity for sales under the CMB Program consists of participation in new CMB issues and reinvestment of principal repayments held in the Principal Reinvestment Accounts. The Company’s continued ability to fund residential mortgages through Canadian bank-sponsored securitization trusts and NHA MBS is dependent on securitization market conditions and government regulations that are subject to change. A condition of the NHA MBS and CMB Program is that securitized loans be insured by an insurer that is approved by CMHC. The availability of mortgage insurance is dependent upon market conditions and is subject to change.

As part of ongoing liquidity management during 2017 and 2016, the Company:

• Continued to expand our funding channels by issuing NHA MBS to multiple purchasers.

• Continued to assess and identify additional funding sources for the Company’s mortgage banking operations, including the launch of a new residential mortgage product suite through our partners at National Bank in the fourth quarter of 2017, which complements our current mortgage offerings.

TABLE 24: CONTRACTUAL OBLIGATIONS

LESS THAN 1-5 AFTER AS AT DECEMBER 31, 2017 ($ millions) DEMAND 1 YEAR YEARS 5 YEARS TOTAL

Derivative financial instruments $ – $ 7.0 $ 21.4 $ – $ 28.4Deposits and certificates 489.9 6.5 6.9 1.7 505.0Obligations to securitization entities – 1,193.0 6,357.3 45.7 7,596.0Long-term debt – 150.0 375.0 1,650.0 2,175.0Operating leases(1) – 28.4 70.7 35.1 134.2Pension funding(2) – 47.3 – – 47.3

Total contractual obligations $ 489.9 $ 1,432.2 $ 6,831.3 $ 1,732.5 $ 10,485.9

(1) Includes future minimum lease payments related to office space and equipment used in the normal course of business. Lease payments are charged to earnings in the period of use.

(2) The next required actuarial valuation will be completed based on a measurement date of December 31, 2017. Pension funding requirements beyond 2018 are subject to significant variability and will be determined based on future actuarial valuations. Pension contribution decisions are subject to change, as contributions are affected by many factors including market performance, regulatory requirements, changes in assumptions and management’s ability to change funding policy.



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• Filed a short form base shelf prospectus to give the Company the flexibility to access debt and equity markets.

• Increased the Company’s committed lines of credit by $300 million during the fourth quarter of 2016.

• In January 2017, the Company issued $400 million of 10 year 3.44% debentures and $200 million of 30 year 4.56% debentures. The net proceeds will be used by IGM Financial to finance a substantial portion of its previously announced acquisition of a 13.9% equity interest in China AMC and for general corporate purposes.

• In December 2017, the Company issued $250 million of 30 year 4.115% debentures. The net proceeds will be used by IGM Financial to repay upcoming long-term debt maturities and for general corporate purposes.

The Company’s contractual obligations are reflected in Table 24.

The maturity schedule for long-term debt of $2,175 million is reflected in the accompanying chart (Long-Term Debt Maturity Schedule). Debt repayment of $150 million is due March 7, 2018 and $375 million is due in 2019.

In addition to IGM Financial’s current balance of cash and cash equivalents, liquidity is available through the Company’s lines of credit. The Company’s lines of credit with various Schedule I Canadian chartered banks totalled $825 million at December 31, 2017, unchanged from December 31, 2016. The lines of credit as at December 31, 2017 consisted of committed lines of $650 million (December 31, 2016 – $650 million) and uncommitted lines of $175 million (December 31, 2016 - $175 million). The Company has accessed its uncommitted lines of credit in the past; however, any advances made by a bank under the uncommitted lines of credit are at the bank’s sole

discretion. As at December 31, 2017 and December 31, 2016, the Company was not utilizing its committed lines of credit or its uncommitted lines of credit.

The actuarial valuation for funding purposes related to the Company’s registered defined benefit pension plan, based on a measurement date of December 31, 2016, was completed in September 2017. Based on the actuarial valuation, the registered pension plan had a solvency deficit of $82.7 million compared to $23.4 million in the previous actuarial valuation, which was based on a measurement date of December 31, 2013. The increase in the solvency deficit resulted primarily from lower interest rates, and is required to be funded over five years. The Company has made contributions of $37.8 million in 2017 (2016 - $19.7 million). The Company expects to make contributions of approximately $47.3 million in 2018. Pension contribution decisions are subject to change, as contributions are affected by many factors including market performance, regulatory requirements, changes in assumptions and management’s ability to change funding policy.

Management believes cash flows from operations, available cash balances and other sources of liquidity described above are sufficient to meet the Company’s liquidity needs. The Company continues to have the ability to meet its operational cash flow requirements, its contractual obligations, and its declared dividends. The current practice of the Company is to declare and pay dividends to common shareholders on a quarterly basis at the discretion of the Board of Directors. The declaration of dividends by the Board of Directors is dependent on a variety of factors, including earnings which are significantly influenced by the impact that debt and equity market performance has on the Company’s fee income and commission and certain other

Year

150

375

200

150175

150

450

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047

525

Long-Term Debt Maturity Schedule($ millions)



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expenses. The Company’s liquidity position and its management of liquidity and funding risk have not changed materially since December 31, 2016.

CREDIT RISK

Credit risk is the potential for financial loss to the Company if a counterparty to a transaction fails to meet its obligations.

The Company’s cash and cash equivalents, securities holdings, mortgage portfolios, and derivatives are subject to credit risk. The Company monitors its credit risk management practices on an ongoing basis to evaluate their effectiveness.

Cash and Cash Equivalents

At December 31, 2017, cash and cash equivalents of $966.8 million (2016 - $611.0 million) consisted of cash balances of $88.3 million (2016 - $84.5 million) on deposit with Canadian chartered banks and cash equivalents of $878.5 million (2016 - $526.5 million). Cash equivalents are comprised of Government of Canada treasury bills totalling $239.5 million (2016 - $44.1 million), provincial government treasury bills and promissory notes of $252.6 million (2016 - $197.1 million), bankers’ acceptances and other short-term notes issued by Canadian chartered banks of $351.4 million (2016 - $246.8 million), and highly rated corporate commercial paper of $35.0 million (2016 - $38.5 million).

The Company manages credit risk related to cash and cash equivalents by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. The Company regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value.

The Company’s exposure to and management of credit risk related to cash and cash equivalents and fixed income securities have not changed materially since December 31, 2016.

Mortgage Portfolio

As at December 31, 2017, residential mortgages, recorded on the Company’s balance sheet, of $7.8 billion (2016 - $8.0 billion) consisted of $7.5 billion sold to securitization programs (2016 - $7.6 billion), $286.7 million held pending sale or securitization (2016 - $339.5 million) and $26.0 million related to the Company’s intermediary operations (2016 - $29.2 million).

The Company manages credit risk related to residential mortgages through:

• Adhering to its lending policy and underwriting standards;

• Its loan servicing capabilities;

• Use of client-insured mortgage default insurance and mortgage portfolio default insurance held by the Company; 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.

In certain instances, credit risk is also limited by the terms and nature of securitization transactions as described below:

• Under the NHA MBS program totalling $4.5 billion (2016 - $4.9 billion), the Company 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 $3.1 billion (2016 – $2.7 billion) is limited to amounts held in cash reserve accounts and future net interest income, the fair values of which were $69.7 million (2016 - $54.7 million) and $42.4 million (2016 - $45.0 million), respectively, at December 31, 2017. Cash reserve accounts are reflected on the balance sheet, whereas rights to future net interest income are not reflected on the balance sheet and will be recorded over the life of the mortgages. This risk is further mitigated by insurance with 16.4% of mortgages held in ABCP Trusts insured at December 31, 2017 (2016 – 29.1%).

At December 31, 2017, residential mortgages recorded on balance sheet were 65.5% insured (2016 – 73.9%). As at December 31, 2017, impaired mortgages on these portfolios were $2.8 million, compared to $2.6 million at December 31, 2016. Uninsured non-performing mortgages over 90 days on these portfolios were $0.8 million at December 31, 2017, compared to $0.9 million at December 31, 2016.

The Company 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 the Company’s balance sheet as the Company has transferred substantially all of the risks and rewards of ownership associated with these loans.

The Company regularly reviews the credit quality of the mortgages and the adequacy of the collective allowance for credit losses.



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The Company’s collective allowance for credit losses was $0.8 million at December 31, 2017, compared to $0.7 million at December 31, 2016, and is considered adequate by management to absorb all credit-related losses in the mortgage portfolios based on: i) historical credit performance experience and recent trends, ii) current portfolio credit metrics and other relevant characteristics, and iii) regular stress testing of losses under adverse real estate market conditions.

The Company’s exposure to and management of credit risk related to mortgage portfolios have not changed materially since December 31, 2016.

Derivatives

The Company is exposed to credit risk through derivative contracts it utilizes to hedge interest rate risk, to facilitate securitization transactions and to hedge market risk related to certain stock-based compensation arrangements. These derivatives are discussed more fully under the Market Risk section of this MD&A.

To the extent that the fair value of the derivatives is in a gain position, the Company is exposed to credit risk that its counterparties fail to fulfil their obligations under these arrangements.

The Company’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 $33.8 million (2016 - $41.4 million) 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 $1.2 million at December 31, 2017 (2016 - $3.0 million). Counterparties are all Canadian Schedule I chartered banks and, as a result, management has determined that the Company’s overall credit risk related to derivatives was not significant at December 31, 2017. Management of credit risk related to derivatives has not changed materially since December 31, 2016.

Additional information related to the Company’s securitization activities and utilization of derivative contracts can be found in Notes 2, 6 and 21 to the Consolidated Financial Statements.

MARKET RISK

Market risk is the potential for loss to the Company from changes in the values of its financial instruments due to changes in foreign exchange rates, interest rates or equity prices.

Interest Rate Risk

The Company is exposed to interest rate risk on its mortgage portfolio and on certain of the derivative financial instruments used in the Company’s mortgage banking operations.

The Company manages interest rate risk associated with its mortgage banking operations by entering into interest rate swaps with Canadian Schedule I chartered banks as follows:

• The Company 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, the Company 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 positive fair value of $4.1 million (December 31, 2016 – negative $23.1 million) and an outstanding notional amount of $1.2 billion at December 31, 2017 (December 31, 2016 - $1.0 billion). The Company enters into interest rate swaps with Canadian Schedule I chartered banks to hedge the risk that the interest rates earned on floating rate mortgages and reinvestment returns decline. The negative fair value of these swaps totalled $4.5 million (December 31, 2016 - $30.0 million), on an outstanding notional amount of $1.9 billion at December 31, 2017 (December 31, 2016 - $2.1 billion). The net fair value of these swaps of negative $0.4 million at December 31, 2017 (December 31, 2016 - $6.9 million) are recorded on balance sheet and have an outstanding notional amount of $3.1 billion (December 31, 2016 - $3.1 billion).

• The Company is exposed to the impact that changes in interest rates may have on the value of mortgages committed to or held pending sale or securitization to long-term funding sources. The Company enters into interest rate swaps to hedge the interest rate risk related to funding costs for mortgages held by the Company pending sale or securitization. The fair value of these swaps totalled $0.9 million (December 31, 2016 - negative $0.4 million) on an outstanding notional amount of $137.0 million at December 31, 2017 (December 31, 2016 - $123.0 million).

As at December 31, 2017, the impact to annual net earnings of a 100 basis point increase in interest rates would have been a decrease of approximately $0.9 million (December 31, 2016 - an increase of $0.2 million). The Company’s exposure to and management of interest rate risk have not changed materially since December 31, 2016.



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Equity Price Risk

The Company is exposed to equity price risk on its equity securities which are classified as either available for sale or fair value through profit or loss. The fair value of the equity securities was $379.7 million at December 31, 2017 (December 31, 2016 - $225.2 million), as shown in Table 18.

The Company sponsors a number of deferred compensation arrangements for employees where payments to participants are deferred and linked to the performance of the common shares of IGM Financial Inc. The Company hedges its exposure to this risk through the use of forward agreements and total return swaps.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk on its investments in Personal Capital and China AMC.

RISKS RELATED TO ASSETS UNDER MANAGEMENT

At December 31, 2017, IGM Financial’s total assets under management were $156.5 billion compared to $142.7 billion at December 31, 2016.

The Company’s primary sources of revenues are management, administration and other fees which are applied as an annual percentage of the level of assets under management. As a result, the level of the Company’s revenues and earnings are indirectly exposed to a number of financial risks that affect the value of assets under management on an ongoing basis. These include market risks, such as changes in equity prices, interest rates and foreign exchange rates, as well as credit risk on debt securities, loans and credit exposures from other counterparties within our client portfolios.

Changing financial market conditions may also lead to a change in the composition of the Company’s assets under management between equity and fixed income instruments, which could result in lower revenues depending upon the management fee rates associated with different asset classes and mandates.

The Company’s exposure to the value of assets under management aligns it with the experience of its clients. Assets under management are broadly diversified by asset class, geographic region, industry sector, investment team and style. The Company regularly reviews the sensitivity of its assets under management, revenues, earnings and cash flow to changes in financial markets. The Company believes that over the long term, exposure to investment returns on its client portfolios is beneficial to the Company’s results and consistent with stakeholder expectations, and generally it does not engage in risk transfer activities such as hedging in relation to these exposures.

2) OPERATIONAL RISK

Operational risks relating to people and processes are mitigated through policies and process controls. Oversight of risks and ongoing evaluation of the effectiveness of controls is provided by the Company’s compliance department, ERM Department and Internal Audit Department.

The Company has an insurance review process where it assesses and determines the nature and extent of insurance that is appropriate to provide adequate protection against unexpected losses, and where it is required by law, regulators or contractual agreements.

TABLE 25: IGM FINANCIAL ASSETS UNDER MANAGEMENT – ASSET AND CURRENCY MIX

AS AT DECEMBER 31, 2017 INVESTMENT FUNDS TOTAL

Cash 1.1 % 1.5 %Short-term fixed income and mortgages 6.0 5.9Other fixed income 23.3 22.9Domestic equity 28.0 27.9Foreign equity 38.6 38.6Real Property 3.0 3.2

100.0 % 100.0 %

CAD 61.2 % 61.1 %USD 24.3 24.0Other 14.5 14.9

100.0 % 100.0 %



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OPERATIONAL RISK

Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, human interaction or external events, but excludes business risk.

Operational risk affects all business activities, including the processes in place to manage other risks. As a result, operational risk can be difficult to measure, given that it forms part of other risks of the Company and may not always be separately identified. Our Company is exposed to a broad range of operational risks, including information technology security and system failures, errors relating to transaction processing, financial models and valuations, fraud and misappropriation of assets, and inadequate application of internal control processes. The impact can result in significant financial loss, reputational harm or regulatory actions.

The Company’s risk management framework emphasizes operational risk management and internal control. The Company has a very low appetite for risk in this area.

The business unit leaders are responsible for management of the day to day operational risks of their respective business units. Specific programs, policies, training, standards and governance processes have been developed to support the management of operational risk.

The Company has a business continuity management program to support the sustainment, management and recovery of critical operations and processes in the event of a business disruption.

TECHNOLOGY AND CYBER RISK

Technology and cyber risk driven by systems are managed through controls over technology development and change management. Information security is a significant risk to our industry and our Company’s operations. The Company uses systems and technology to support its business operations and the client and financial advisor experience. As a result, we are exposed to risks relating to technology and cyber security such as data breaches, identity theft and hacking, including the risk of denial of service or malicious software attacks. Such attacks could compromise confidential information of the Company and that of clients or other stakeholders, and could result in negative consequences including lost revenue, litigation, regulatory scrutiny or reputational damage. To remain resilient to such threats, the Company has established enterprise-wide cyber security programs, benchmarked capabilities to sound industry practices, and has implemented threat and vulnerability assessment and response capabilities.

MODEL RISK

The Company uses a variety of models to assist in: the valuation of financial instruments, operational scenario testing, management of cash flows, capital management, and assessment of potential acquisitions. These models incorporate internal assumptions, observable market inputs and available market prices. Effective controls exist over the development, implementation and application of these models. However, changes in the internal assumptions or other factors affecting the models could have an adverse effect on the Company’s consolidated financial position.

LEGAL AND REGULATORY COMPLIANCE

Legal and Regulatory Compliance Risk is the risk of not complying with laws, contractual agreements or regulatory requirements. This includes distribution compliance, investment management compliance, accounting and internal controls, and reporting and communications.

IGM Financial is subject to complex and changing legal, taxation and regulatory requirements, including the requirements of agencies of the federal, provincial and territorial governments in Canada which regulate the Company and its activities. The Company and its subsidiaries are also subject to the requirements of self-regulatory organizations to which they belong. These and other regulatory bodies regularly adopt new laws, rules, regulations and policies that apply to the Company and its subsidiaries. These requirements include those that apply to IGM Financial as a publicly traded company and those that apply to the Company’s subsidiaries based on the nature of their activities. They include regulations related to securities markets, the provision of financial products and services, including fund management, distribution, insurance and mortgages, and other activities carried on by the Company in the markets in which it operates. Regulatory standards affecting the Company and the financial services industry are significant and are being continually changed. The Company and its subsidiaries are subject to reviews as part of the normal ongoing process of oversight by the various regulators.

Failure to comply with laws, rules or regulations could lead to regulatory sanctions and civil liability, and may have an adverse reputational or financial effect on the Company. The Company manages legal and regulatory compliance risk through its efforts to promote a strong culture of compliance. The monitoring of regulatory developments and their impact on the Company is overseen by the Regulatory Initiatives Committee chaired by the Senior Vice-President, Client and Regulatory Affairs. It also continues to develop and maintain compliance policies,



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processes and oversight, including specific communications on compliance and legal matters, training, testing, monitoring and reporting. The Audit Committee of the Company receives regular reporting on compliance initiatives and issues.

IGM Financial promotes a strong culture of ethics and integrity through its Code of Conduct approved by the Board of Directors, which outlines standards of conduct that apply to all IGM Financial directors, officers and employees. The Code of Conduct incorporates many policies relating to the conduct of directors, officers and employees, and covers a variety of relevant topics, such as anti-money laundering and privacy. Individuals subject to the Code of Conduct attest annually that they understand the requirements and have complied with its provisions.

Business units are responsible for management of legal and regulatory compliance risk, and implementing appropriate policies, procedures and controls. The Company has a number of different compliance departments responsible for providing oversight of investment management and distribution-related compliance activities. The Internal Audit Department also provides oversight and investigations concerning regulatory compliance matters.

CONTINGENCIES

The Company is subject to legal actions arising in the normal course of its business. Although it is difficult to predict the outcome of any such legal actions, based on current knowledge and consultation with legal counsel, management does not expect the outcome of any of these matters, individually or in aggregate, to have a material adverse effect on the Company’s consolidated financial position.

3) GOVERNANCE, OVERSIGHT AND STRATEGIC RISK

Governance, oversight and strategic risk is the risk of potential adverse impacts resulting from inadequate or inappropriate governance, oversight, management of incentives and conflicts, and strategic planning.

IGM Financial believes in the importance of good corporate governance and the central role played by directors in the governance process. We believe that sound corporate governance is essential to the well being of the Company and its shareholders.

Oversight of IGM Financial is performed by the Board of Directors directly and through its seven committees. The Company’s President and Chief Executive Officer has overall responsibility for management of the Company. The Company’s activities are carried out principally by three operating companies - Investors Group Inc., Mackenzie Financial Corporation and Investment Planning Counsel Inc. - each of which are managed by a President and Chief Executive Officer.

The Company has a business planning process that supports development of an annual business plan, approved by the Board of Directors, which incorporates objectives and targets for the Company. Components of management compensation are associated with the achievement of earnings targets and other objectives associated with the plan. Strategic plans and direction are part of this planning process and are integrated into the Company’s risk management program.

ACQUISITION RISK

The Company is also exposed to risks related to its acquisitions. The Company undertakes thorough due diligence prior to completing an acquisition, but there is no assurance that the Company will achieve the expected strategic objectives or cost and revenue synergies subsequent to an acquisition. Subsequent changes in the economic environment and other unanticipated factors may affect the Company’s ability to achieve expected earnings growth or expense reductions. The success of an acquisition is dependent on retaining assets under management, clients, and key employees of an acquired company.

4) REGULATORY DEVELOPMENTS

Regulatory development risk is the potential for changes to regulatory, legal, or tax requirements that may have an adverse impact upon the Company’s business activities or financial results.

The Company is exposed to the risk of changes in laws, taxation and regulation that could have an adverse impact on the Company. Particular regulatory initiatives may have the effect of making the products of the Company’s subsidiaries appear to be less competitive than the products of other financial service providers, to third party distribution channels and to clients. Regulatory differences that may impact the competitiveness of the Company’s products include regulatory costs, tax treatment, disclosure requirements, transaction processes or other differences that may be as a result of differing regulation or application of regulation. Regulatory developments may also impact product structures, pricing, and dealer and advisor compensation. While the Company and its subsidiaries actively monitor such initiatives, and where feasible comment upon or discuss them with regulators, the ability of the Company and its subsidiaries to mitigate the imposition of differential regulatory treatment of financial products or services is limited.

BEST INTEREST STANDARD, TARGETED REFORMS AND MUTUAL FUND EMBEDDED COMMISSIONS

In May 2017, the Canadian Securities Administrators (the CSA) published Staff Notice 33-319 (the Staff Notice) Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers and Representatives



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Toward Their Clients (the BIS Consultation Paper), which provided an update on the CSA’s proposal for a set of targeted reforms relating to the client-registrant relationship and a regulatory best interest standard. The Company’s subsidiaries submitted comment letters on the BIS Consultation Paper and also participated in a series of roundtables hosted by certain jurisdictions to further explore the proposals in the BIS Consultation Paper.

The Staff Notice specifies that only the Ontario Securities Commission and the Financial and Consumer Services Commission of New Brunswick will continue to pursue further work to articulate a regulatory best interest standard. The Staff Notice further indicates that over the 2017-2018 fiscal year, the CSA will prioritize the work on many of the targeted reforms. This work will culminate in rule proposals that will be published for comment, providing the Company’s subsidiaries further opportunity for meaningful input.

In January 2017, the CSA published CSA Staff Notice 81-408 Consultation on the Option of Discontinuing Embedded Commissions (the Fees Consultation Paper) which sought input on the option of discontinuing embedded commissions and the potential impacts of such a change on Canadian investors and market participants. The Company’s subsidiaries submitted comment letters on the Fees Consultation Paper. The Company’s subsidiaries also participated in the roundtables hosted by some members of the CSA in the fall to facilitate further stakeholder input on the Fees Consultation Paper.

The Company will continue its active dialogue and engagement with regulators on these subjects.

COOPERATIVE CAPITAL MARKETS REGULATORY SYSTEM

Since 2013, the Government of Canada and participating provincial jurisdictions have been working to establish a common securities regulator for Canada’s capital markets. Of note, there has been opposition from Quebec, Alberta and Manitoba. In response to a reference from the Quebec government, in May 2017 the Quebec Court of Appeal ruled in favour of the Quebec government and held that the governance

framework for the pan-Canadian securities regulation under the proposed Capital Markets Regulatory Authority (CMRA) was unconstitutional.

The decision has been appealed to the Supreme Court of Canada which is expected to hear arguments in March, 2018. The Company is continuing to monitor this initiative and any impact it may have on its activities and those of its subsidiaries, particularly in the area of the regulation of mutual funds.

5) BUSINESS RISK

GENERAL BUSINESS CONDITIONS

General Business Conditions Risk refers to the potential for an unfavourable impact on IGM Financial resulting from competitive or other external factors relating to the marketplace.

Global economic conditions, changes in equity markets, demographics and other factors including political and government instability, can affect investor confidence, income levels and savings decisions. This could result in reduced sales of IGM Financial’s products and services and/or result in investors redeeming their investments. These factors may also affect the level of financial markets and the value of the Company’s assets under management, as described more fully under the Risks Related to Assets Under Management section of this MD&A.

The Company, across its operating subsidiaries, is focused on communicating with clients and emphasizing the importance of financial planning across economic cycles. The Company and the industry continue to take steps to educate Canadian investors on the merits of financial planning, diversification and long-term investing. In periods of volatility Consultants and independent financial advisors play a key role in assisting investors in maintaining perspective and focus on their long-term objectives.

Redemption rates for long-term funds are summarized in Table 26 and are discussed in the Investors Group and Mackenzie Segment Operating Results sections of this MD&A.

TABLE 26: TWELVE MONTH TRAILING REDEMPTION RATE FOR LONG-TERM FUNDS

2017 2016 DEC. 31 DEC. 31

IGM Financial Inc. Investors Group 8.4 % 8.8 % Mackenzie 14.8 % 15.0 % Counsel 16.7 % 15.7 %



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PRODUCT / SERVICE OFFERING

There is potential for unfavourable impacts on IGM Financial resulting from inadequate product or service performance, quality or breadth.

IGM Financial and its subsidiaries operate in a highly competitive environment, competing with other financial service providers, investment managers and product and service types. Client development and retention can be influenced by a number of factors, including products and services offered by competitors, relative service levels, relative pricing, product attributes, reputation and actions taken by competitors. This competition could have an adverse impact upon the Company’s financial position and operating results. Please refer to The Competitive Landscape section of this MD&A for a further discussion.

The Company provides Consultants, independent financial advisors, as well as retail and institutional clients with a high level of service and support and a broad range of investment products, with a focus on building enduring relationships. The Company’s subsidiaries also continually review their respective product and service offering, and pricing, to ensure competitiveness in the marketplace.

The Company strives to deliver strong investment performance on its products relative to benchmarks and peers. Poor investment performance relative to benchmarks or peers could reduce the level of assets under management and sales and asset retention, as well as adversely impact our brands. Meaningful and/or sustained underperformance could affect the Company’s results. The Company’s objective is to cultivate investment processes and disciplines that provide it with a competitive advantage, and does so by diversifying its assets under management and product shelf by investment team, brand, asset class, mandate, style and geographic region.

BUSINESS / CLIENT RELATIONSHIPS

Business/Client relationships risk refers to the risk potential for unfavourable impacts on IGM Financial resulting from changes to other key relationships. These relationships primarily include Investors Group clients and consultants, Mackenzie retail distribution, strategic and significant business partners, clients of Mackenzie funds, and sub-advisors and other product suppliers.

Investors Group Consultant network – Investors Group derives all of its mutual fund sales through its Consultant network. Investors Group Consultants have regular direct contact with clients which can lead to a strong and personal client relationship based on the client’s confidence in that individual Consultant. The market for financial advisors is extremely competitive. The loss of a significant number of key Consultants could lead to the

loss of client accounts which could have an adverse effect on Investors Group’s results of operations and business prospects. Investors Group is focused on strengthening its distribution network of Consultants and on responding to the complex financial needs of its clients by delivering a diverse range of products and services in the context of personalized financial advice, as discussed in the Investors Group Review of the Business section of this MD&A.

Mackenzie – Mackenzie derives the majority of its mutual fund sales through third party financial advisors. Financial advisors generally offer their clients investment products in addition to, and in competition with Mackenzie. Mackenzie also derives sales of its investment products and services from its strategic alliance and institutional clients. Due to the nature of the distribution relationship in these relationships and the relative size of these accounts, gross sale and redemption activity can be more pronounced in these accounts than in a retail relationship. Mackenzie’s ability to market its investment products is highly dependent on continued access to these distribution networks. The inability to have such access could have a material adverse effect on Mackenzie’s operating results and business prospects. Mackenzie is well positioned to manage this risk and to continue to build and enhance its distribution relationships. Mackenzie’s diverse portfolio of financial products and its long-term investment performance record, marketing, educational and service support has made Mackenzie one of Canada’s leading investment management companies. These factors are discussed further in the Mackenzie Review of the Business section of this MD&A.

PEOPLE RISK

People risk refers to the potential inability to attract or retain key employees or Consultants, develop to an appropriate level of proficiency, or manage personnel succession or transition.

Management, investment and distribution personnel play an important role in developing, implementing, managing and distributing products and services offered by IGM Financial. The loss of these individuals or an inability to attract, retain and motivate sufficient numbers of qualified personnel could affect IGM Financial’s business and financial performance.

6) ENVIRONMENTAL RISK Environmental risk is the risk of loss resulting from environmental issues involving our business activities and our operations.

Environmental risk covers a broad spectrum of issues, such as climate change, biodiversity and ecosystem health, pollution, waste and the unsustainable use of water and other resources. Key environmental risks to IGM Financial include:



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• Direct risks associated with the ownership and operation of our businesses, which includes management and operation of company-owned or managed assets and business operations;

• Indirect risks as a result of the products and services we offer and our procurement practices;

• Identification and management of emerging environmental regulatory issues; and

• Failure to understand and appropriately leverage environment related trends to meet client demands for products and services.

IGM Financial has a long-standing commitment to responsible management, as articulated in the Company’s Corporate Responsibility Statement approved by the Board of Directors and also within the Company’s Environmental Policy which commit us to responsibly manage our environmental footprint.

Failure to adequately manage environmental risks could adversely impact our results or our reputation.

IGM Financial manages environmental risks across the Company, with business unit management having responsibility for identifying, assessing, controlling and monitoring

environmental risks pertaining to their operations. IGM Financial’s Executive Management Corporate Responsibility Committee oversees its commitment to environmental responsibility and risk management.

Investors Group and Mackenzie are signatories to the Principles for Responsible Investment (PRI). Under the PRI, investors formally commit to incorporate environmental, social and governance (ESG) issues into their investment processes. In addition, Investors Group, Mackenzie and Investment Planning Counsel have implemented investing policies which provide information on how these ESG issues are implemented at each company.

IGM Financial reports on its environmental management and performance in its Corporate Responsibility Report. In addition, the Company participates in the Carbon Disclosure Project (CDP) survey, which promotes corporate disclosures on greenhouse gas emissions and climate change management.

OUTLOOK

THE FINANCIAL SERVICES ENVIRONMENTCanadians held $4.1 trillion in discretionary financial assets with financial institutions at December 31, 2016 based on the most recent report from Investor Economics. The nature of holdings was diverse, ranging from demand deposits held for short-term cash management purposes to longer-term investments held for retirement purposes. Approximately 66% ($2.7 trillion) of these financial assets are held within the context of a relationship with a financial advisor, and this is the primary channel serving the longer-term savings needs of Canadians. Of the $1.4 trillion held outside of a financial advisory relationship, approximately 60% consisted of bank deposits.

Financial advisors represent the primary distribution channel for the Company’s products and services, and the core emphasis of the Company’s business model is to support these financial advisors as they work with clients to plan for and achieve their financial goals. Multiple sources of emerging research show significantly better financial outcomes for Canadians who use financial advisors compared to those who do not. The Company actively promotes the value of financial advice and the importance of a relationship with an advisor to develop and remain focused on long-term financial plans and goals.

Approximately 41% of Canadian discretionary financial assets or $1.7 trillion resided in investment funds at December 31, 2016, making it the largest financial asset class held by Canadians. Other asset types include deposit products and direct securities such as stocks and bonds. Approximately 78% of investment funds are comprised of mutual fund products, with other product categories including segregated funds, hedge funds, pooled funds, closed end funds and exchange traded funds. With $150 billion in investment fund assets under management, the Company is among the country’s largest investment fund managers. Management believes that investment funds are likely to remain the preferred savings vehicle of Canadians. Investment funds provide investors with the benefits of diversification, professional management, flexibility and convenience, and are available in a broad range of mandates and structures to meet most investor requirements and preferences.

Competition and technology have fostered a trend towards financial service providers offering a comprehensive range of proprietary products and services. Traditional distinctions between bank branches, full service brokerages, financial planning firms and insurance agent sales forces have become obscured as many of these financial service providers strive to offer comprehensive financial advice implemented through



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access to a broad product shelf. Accordingly, the Canadian financial services industry is characterized by a number of large, diversified, vertically-integrated participants, similar to IGM Financial, who offer both financial planning and investment management services.

Canadian banks distribute financial products and services through their traditional bank branches, as well as through their full service and discount brokerage subsidiaries. Bank branches continue to place increased emphasis on both financial planning and mutual funds. In addition, each of the “big six” banks has one or more mutual fund management subsidiaries. Collectively, mutual fund assets of the “big six” bank-owned mutual fund managers and affiliated firms represented 43% of total industry long-term mutual fund assets at December 31, 2017.

The Canadian mutual fund industry continues to be very concentrated, with the ten largest firms and their subsidiaries representing 69% of industry long-term mutual fund assets and 69% of total mutual fund assets under management at December 31, 2017. Management anticipates continuing consolidation in this segment of the industry as smaller participants are acquired by larger organizations.

Management believes that the financial services industry will continue to be influenced by the following trends:

• Shifting demographics as the number of Canadians in their prime savings and retirement years continue to increase.

• Changes in investor attitudes based on economic conditions.

• Continued importance of the role of the financial advisor.

• Public policy related to retirement savings.

• Changes in the regulatory environment.

• An evolving competitive landscape.

• Advancing and changing technology.

THE COMPETITIVE LANDSCAPEIGM Financial and its subsidiaries operate in a highly competitive environment. Investors Group and Investment Planning Counsel compete directly with other retail financial service providers, including other financial planning firms, as well as full service brokerages, banks and insurance companies. Investors Group, Mackenzie and Investment Planning Counsel compete directly with other investment managers for assets under management, and their products compete with stocks, bonds and other asset classes for a share of the investment assets of Canadians.

Competition from other financial service providers, alternative product types or delivery channels, and changes in regulations or public preferences could impact the characteristics of product and service offerings of the Company, including pricing, product structures, dealer and advisor compensation and disclosure. The

Company monitors developments on an ongoing basis, and engages in policy discussions and develops product and service responses as appropriate.

IGM Financial continues to focus on its commitment to provide quality investment advice and financial products, service innovations, effective management of the Company and long-term value for its clients and shareholders. Management believes that the Company is well-positioned to meet competitive challenges and capitalize on future opportunities.

The Company enjoys several competitive strengths, including:

• Broad and diversified distribution with an emphasis on those channels emphasizing comprehensive financial planning through a relationship with a financial advisor.

• Broad product capabilities, leading brands and quality sub-advisory relationships.

• Enduring client relationships and the long-standing heritages and cultures of its subsidiaries.

• Benefits of being part of the Power Financial group of companies.

BROAD AND DIVERSIFIED DISTRIBUTION

IGM Financial’s distribution strength is a competitive advantage. In addition to owning two of Canada’s largest financial planning organizations, Investors Group and Investment Planning Counsel, IGM Financial has, through Mackenzie, access to distribution through over 30,000 independent financial advisors. Mackenzie also, in its growing strategic alliance business, partners with Canadian and U.S. manufacturing and distribution complexes to provide investment management to a number of retail investment fund mandates.

BROAD PRODUCT CAPABILITIES

IGM Financial’s subsidiaries continue to develop and launch innovative products and strategic investment planning tools to assist advisors in building optimized portfolios for clients.

ENDURING RELATIONSHIPS

IGM Financial enjoys significant advantages as a result of the enduring relationships that advisors enjoy with clients. In addition, the Company’s subsidiaries have strong heritages and cultures which are challenging for competitors to replicate.

BENEFITS OF BEING PART OF THE POWER FINANCIAL GROUP OF COMPANIES

As part of the Power Financial group of companies, IGM Financial benefits through expense savings from shared service arrangements, as well as through access to distribution, products and capital.



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SUMMARY OF CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying accounting policies and requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies are common in the financial services industry; others are specific to IGM Financial’s businesses and operations. IGM Financial’s significant accounting policies are described in detail in Note 2 of the Consolidated Financial Statements.

Critical accounting estimates relate to the fair value of financial instruments, goodwill and intangibles, income taxes, deferred selling commissions, provisions and employee benefits.

The major critical accounting estimates are summarized below:

• Fair value of financial instruments – The Company’s financial instruments are carried at fair value, except for loans, deposits and certificates, obligations to securitization entities, and long-term debt which are all carried at amortized cost. The fair value of publicly traded financial instruments is determined using published market prices. The fair value of financial instruments where published market prices are not available, including derivatives related to the Company’s securitized loans, are determined using various valuation models which maximize the use of observable market inputs where available. Valuation methodologies and assumptions used in valuation models are reviewed on an ongoing basis. Changes in these assumptions or valuation methodologies could result in significant changes in net earnings.

Investments in proprietary mutual funds and corporate investments classified as available for sale result in unrealized gains and losses on securities which are recorded in Other comprehensive income until realized or until there is objective evidence of impairment, at which time they are reclassified to the Consolidated Statements of Earnings. Management regularly reviews securities classified as available for sale to assess whether there is objective evidence of impairment. The Company considers such factors as the nature of the investment and the length of time and the extent to which the fair value has been below cost. A significant change in this assessment may result in unrealized losses being recognized in net earnings. During 2017, the Company assessed the measurement of the available for sale securities and determined there was no impairment in the value of these securities.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

• Goodwill and intangible assets – Goodwill, indefinite life intangible assets, and definite life intangible assets are reflected in Note 10 of the Consolidated Financial Statements. The Company tests the fair value of goodwill and indefinite life intangible assets for impairment at least once a year and more frequently if an event or circumstance indicates the asset may be impaired. An impairment loss is recognized if the amount of the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash generating units). Finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

These tests involve the use of estimates and assumptions appropriate in the circumstances. In assessing the recoverable amounts, valuation approaches are used that include discounted cash flow analysis and application of capitalization multiples to financial and operating metrics based upon precedent acquisition transactions and trading comparables. Assumptions and estimates employed include future changes in assets under management resulting from net sales and investment returns, pricing and profit margin changes, discount rates, and capitalization multiples.

The Company completed its annual impairment tests of goodwill and indefinite life intangible assets based on March 31, 2017 financial information and determined there was no impairment in the value of those assets.

• Income taxes – The provision for income taxes is determined on the basis of the anticipated tax treatment of transactions recorded in the Consolidated Statements of Earnings. The determination of the provision for income taxes requires interpretation of tax legislation in a number of jurisdictions. Tax planning may allow the Company to record lower income taxes in the current year and income taxes recorded in prior years may be adjusted in the current year to reflect management’s best estimates of the overall adequacy of its provisions. Any related tax benefits or changes in management’s best estimates are reflected in the provision for income taxes. The recognition of deferred tax assets depends on management’s assumption that future earnings will be sufficient to realize the future benefit. The amount of the deferred tax asset or liability recorded is based on management’s best estimate of the timing of the realization of the assets or liabilities. If our interpretation of tax legislation differs from that of the tax authorities or if timing of reversals is not as anticipated, the provision for income taxes could



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increase or decrease in future periods. Additional information related to income taxes is included in the Summary of Consolidated Operating Results in this MD&A and in Note 14 to the Consolidated Financial Statements.

• Deferred selling commissions – Commissions paid on the sale of certain mutual fund products are deferred and amortized over a maximum period of seven years. The Company regularly reviews the carrying value of deferred selling commissions with respect to any events or circumstances that indicate impairment. Among the tests performed by the Company to assess recoverability is the comparison of the future economic benefits derived from the deferred selling commission asset in relation to its carrying value. At December 31, 2017, there were no indications of impairment to deferred selling commissions.

• Provisions – A provision is recognized when there is a present obligation as a result of a past transaction or event, it is “probable” that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the obligation. In determining the best estimate for a provision, a single estimate, a weighted average of all possible outcomes, or the midpoint where there is a range of equally possible outcomes are all considered. A significant change in assessment of the likelihood or the best estimate may result in additional adjustments to net earnings.

• Employee benefits – The Company maintains a number of employee benefit plans. These plans include a funded registered defined benefit pension plan for all eligible employees, unfunded supplementary executive retirement plans for certain executive officers (SERPs) and an unfunded post-employment health care and life insurance plan for eligible retirees. The funded registered defined benefit pension plan provides pensions based on length of service and final average earnings. The measurement date for the Company’s defined benefit pension plan assets and for the accrued benefit obligations on all defined benefit plans is December 31.

Due to the long-term nature of these plans, the calculation of the accrued benefit liability depends on various assumptions including discount rates, rates of return on assets, the level and types of benefits provided, healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. The discount rate assumption is determined using a yield curve of AA corporate debt securities. All other assumptions are determined by management and reviewed by independent actuaries who calculate the pension and other future benefits expenses and accrued benefit obligations. Actual experience that differs

from the actuarial assumptions will result in actuarial gains or losses as well as changes in benefits expense. The Company records actuarial gains and losses on all of its defined benefit plans in Other comprehensive income.

During 2017, the performance of the defined benefit pension plan assets was positively impacted by market conditions. Corporate bond yields decreased in 2017 thereby impacting the discount rate used to measure the Company’s accrued benefit liability. The discount rate utilized to value the defined benefit pension plan accrued benefit liability at December 31, 2017 was 3.60% compared to 4.05% at December 31, 2016. Pension plan assets increased to $417.7 million at December 31, 2017 from $372.1 million at December 31, 2016. The increase in plan assets was due to market performance of $27.1 million comprised of interest income of $15.5 million calculated based on the discount rate, which was recorded as a reduction to the pension expense, and actuarial gains of $11.6 million, which were recorded in Other comprehensive income. The assets in the Company’s registered defined benefit pension plan also increased due to the Company contributing $37.8 million (2016 - $19.7 million) to the pension plan. The decrease in the discount rate utilized to value the defined benefit pension plan obligation resulted in actuarial losses of $38.6 million which were recorded in Other comprehensive income. Demographic assumptions and experience adjustments were revised which resulted in net actuarial gains of $1.4 million. The total defined benefit pension plan obligation was $493.6 million at December 31, 2017 compared to $481.2 million at December 31, 2016. As a result of these changes, the defined benefit pension plan had an accrued benefit liability of $75.9 million at December 31, 2017 compared to $109.1 million at the end of 2016. The unfunded SERPs and other post-retirement benefits plans had an accrued benefit liability of $63.1 million and $45.4 million, respectively, at December 31, 2017 compared to $62.5 million and $44.8 million in 2016.

A decrease of 0.25% in the discount rate utilized in 2018 would result in a change of $21.9 million in the accrued pension obligation, $20.1 million in other comprehensive income, and $1.8 million in pension expense. Additional information regarding the Company’s accounting and sensitivities related to pensions and other post-retirement benefits is included in Notes 2 and 13 of the Consolidated Financial Statements.



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CHANGES IN ACCOUNTING POLICIESThere were no changes to the Company’s accounting policies from those reported at December 31, 2016.

FUTURE ACCOUNTING CHANGESThe Company continuously monitors the potential changes proposed by the International Accounting Standards Board (IASB) and analyzes the effect that changes in the standards may have on the Company’s operations.

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 flow characteristics of the financial assets.

• Impairment methodology: This phase replaces the current incurred loss model for impairment of financial assets with an expected credit 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.

The transition to IFRS 9 is managed by a committee comprised of senior levels of management. Periodic reporting on the progress against plan is provided to the committee and other affected stakeholders within the Company. To date, the Company’s efforts have been focused on updating accounting policies to address key aspects of the Standard including classification and measurement of financial instruments, reviewing the impact to its impairment models and assessing the use of hedge accounting under IFRS 9.

IFRS 9 is effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively; however restatement of comparative periods is not required. The Company will recognize any measurement difference between the previous carrying amount and the new carrying amount on January 1, 2018, through an adjustment to opening retained earnings.

The application of IFRS 9 as at January 1, 2018 will result in the following changes to the current classification of assets under IAS 39.

• Loans of $263.5 million currently classified as held for trading will be reclassified to amortized cost resulting in the capitalization and amortization of issue costs and the reversal of mortgage premiums and discounts currently recognized under IAS 39.

• Proprietary investment funds of $19.9 million currently classified as available for sale will be reclassified to fair value through profit and loss.

• The company will elect to classify Corporate investments of $262.8 million at Fair value through other comprehensive income. Under this election, unrealized gains and losses on these investments will never be recycled through profit or loss.

The cumulative impact of the above changes will result in an increase to opening retained earnings of approximately $36.3 million after-tax ($49.7 million pre-tax) as at January 1, 2018.

The Company will adopt the hedge accounting requirements of IFRS 9 beginning January 1, 2018.

The Company has also elected to apply the temporary exemption included within IFRS 17 - Insurance Contracts which provides relief from the requirements to apply IFRS 9 accounting to the Company’s investment in Lifeco. Insurance companies in Canada have generally elected to defer adoption of IFRS 9. As a result, this temporary exemption means that the Company will not be required to restate Lifeco’s results to be in accordance with IFRS 9.

The application of the expected credit loss model will not have a material impact to the Company’s loan loss provision.

IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

The IASB issued IFRS 15 which outlines a single comprehensive 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 the customer in an amount that reflects the expected consideration. This standard is effective for annual reporting periods beginning on or after January 1, 2018. Entities have the choice of full retrospective application or prospective application with additional disclosures.

IFRS 15 outlines various criteria for the eligibility of capitalizing contract costs. Determining whether the customer is the fund or the end investor can impact whether costs should be capitalized as a cost of obtaining a contract with a customer or whether they should be assessed as a cost of fulfilling a contract with a customer. Significant judgment is required in determining whether fulfillment costs should be expensed or capitalized. IFRS 15 could therefore result in changes to the timing of recognition of certain commission related expenses.



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Due to recent developments in the interpretation of the guidance on fulfillment costs, the Company continues to assess the impact to certain commission payments and related expenses.

The adoption of IFRS 15 is not expected to have a significant impact to the ongoing recognition of the Company’s revenues.

IFRS 16 LEASES

The IASB issued IFRS 16 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 is effective for annual reporting periods beginning on or after January 1, 2019. The impact of this standard is currently being assessed.

OTHER

The IASB is currently undertaking a number of projects which will result in changes to existing IFRS standards that may affect the Company. Updates will be provided as the projects develop.


The Company’s disclosure controls and procedures are designed to provide reasonable assurance that (a) material information relating to the Company is made known to the President and Chief Executive Officer and the Chief Financial Officer by others, particularly during the period in which the annual filings are being prepared, and (b) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.

The Company’s management, under the supervision of the President and Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluations as of December 31, 2017, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.

All internal control systems have inherent limitations and may become inadequate because of changes in conditions. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management, under the supervision of the President and Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting based on the Internal

Control - Integrated Framework (COSO 2013 Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission. The Company transitioned to the COSO 2013 Framework during 2014. Based on their evaluations as of December 31, 2017, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

During the fourth quarter of 2017, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



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OTHER INFORMATION

TRANSACTIONS WITH RELATED PARTIESIGM Financial enters into transactions with Great-West Life Assurance Company (Great-West), London Life Insurance Company (London Life) and The Canada Life Assurance Company (Canada Life), which are all subsidiaries of its affiliate, Lifeco. These transactions are in the normal course of operations and have been recorded at fair value as described below:

• During 2017 and 2016, the Company provided to and received from Great-West certain administrative services enabling each organization to take advantage of economies of scale and areas of expertise.

• The Company distributes insurance products under a distribution agreement with Great-West and Canada Life and received $77.1 million in distribution fees (2016 - $101.8 million). The Company received $17.8 million (2016 - $16.9 million) and paid $24.2 million (2016 - $21.7 million) to Great-West and related subsidiary companies for the provision of sub-advisory services for certain investment funds. The Company paid $76.0 million (2016 – $70.5 million) to London Life related to the distribution of certain mutual funds of the Company.

• In order to manage its overall liquidity position, the Company’s mortgage banking operation is active in the securitization market and also sells residential mortgage loans to third parties, on a fully serviced basis. During 2017, the Company sold residential mortgage loans to Great-West and London Life for $136.5 million compared to $183.7 million in 2016.

After obtaining advanced tax rulings in October 2017, the Company agreed to tax loss consolidation transactions with the Power Corporation of Canada group whereby shares of a subsidiary that has generated tax losses may be acquired in each year up to and including 2020. The acquisitions are expected to close in the fourth quarter of each year. The Company will recognize the benefit of the tax losses realized throughout the year. On December 29, 2017, the Company acquired shares of such a loss company and recorded the benefit of the tax losses acquired.

For further information on transactions involving related parties, see Notes 8 and 25 to the Company’s Consolidated Financial Statements.

OUTSTANDING SHARE DATAOutstanding common shares of IGM Financial as at December 31, 2017 totalled 240,666,131. Outstanding stock options as at December 31, 2017 totalled 8,912,748, of which 4,063,668 were exercisable. As at February 6, 2018, outstanding common shares totalled $240,801,427 and outstanding stock options totalled $8,777,452 of which $3,928,372 were exercisable.

Perpetual preferred shares of $150 million were outstanding as at December 31, 2017, unchanged at February 6, 2018.

SEDARAdditional information relating to IGM Financial, including the Company’s most recent financial statements and Annual Information Form, is available at www.sedar.com.



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CONSOLIDATED FINANCIAL STATEMENTS

IGM FINANCIAL INC. ANNUAL REPORT 2017 83

Independent Auditor’s Report 85

Consolidated Statements of Earnings 86

Consolidated Statements of Comprehensive Income 87

Consolidated Balance Sheets 88

Consolidated Statements of Changes in Shareholders’ Equity 89

Consolidated Statements of Cash Flows 90

Notes to Consolidated Financial Statements 91

Note 1 Corporate information 91

Note 2 Summary of significant accounting policies 91

Note 3 Non-commission expense 97

Note 4 Securities 97

Note 5 Loans 98

Note 6 Securitizations 99

Note 7 Other assets 100

Note 8 Investment in associates 100

Note 9 Deferred selling commissions 101

Note 10 Goodwill and intangible assets 102

Note 11 Deposits and certificates 103

Note 12 Other liabilities 103

Note 13 Employee benefits 104

Note 14 Income taxes 107

Note 15 Long-term debt 108

Note 16 Share capital 109

Note 17 Capital management 109

Note 18 Share-based payments 110

Note 19 Accumulated other comprehensive income (loss) 112

Note 20 Risk management 112

Note 21 Derivative financial instruments 116

Note 22 Fair value of financial instruments 117

Note 23 Earnings per common share 119

Note 24 Contingent liabilities, Commitments and Guarantees 120

Note 25 Related party transactions 120

Note 26 Segmented information 121



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84 IGM FINANCIAL INC. ANNUAL REPORT 2017 | CONSOLIDATED FINANCIAL STATEMENTS




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IGM FINANCIAL INC. ANNUAL REPORT 2017 | CONSOLIDATED FINANCIAL STATEMENTS 85

To the Shareholders of IGM Financial Inc.

We have audited the accompanying consolidated financial statements of IGM Financial Inc. which comprise the consolidated balance sheets as at December 31, 2017 and December 31, 2016, and the consolidated statements of earnings, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years ended December 31, 2017, and December 31, 2016, and a summary of significant accounting policies and other explanatory information.

MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

AUDITOR'S RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of IGM Financial Inc. as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Chartered Professional AccountantsFebruary 9, 2018

Winnipeg, Manitoba

INDEPENDENT AUDITOR’S REPORT



Signed,Deloitte LLP

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CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE YEARS ENDED DECEMBER 31 (in thousands of Canadian dollars, except shares and per share amounts) 2017 2016

Revenues Management fees $ 2,180,964 $ 2,025,181 Administration fees 439,700 421,618 Distribution fees 385,069 410,135 Net investment income and other 52,603 83,623 Proportionate share of associates’ earnings (Note 8) 95,674 104,226

3,154,010 3,044,783

Expenses Commission 1,142,567 1,090,048 Non-commission (Note 3) 1,112,634 915,602 Interest (Note 15) 114,157 92,196

2,369,358 2,097,846

Earnings before income taxes 784,652 946,937Income taxes (Note 14) 173,887 167,633

Net earnings 610,765 779,304Perpetual preferred share dividends 8,850 8,850

Net earnings available to common shareholders $ 601,915 $ 770,454

Earnings per share (in dollars) (Note 23)

– Basic $ 2.50 $ 3.19 – Diluted $ 2.50 $ 3.19

(See accompanying notes to consolidated financial statements.)



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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31 (in thousands of Canadian dollars) 2017 2016

Net earnings $ 610,765 $ 779,304

Other comprehensive income (loss), net of tax Items that will not be reclassified to Net earnings Employee benefits Net actuarial gains (losses), net of tax of $7,992 and $(356) (21,616) 961 Investment in associates – employee benefits and other Other comprehensive income (loss), net of tax of nil 14,235 (16,247)

Items that may be reclassified subsequently to Net earnings Available for sale securities Net unrealized gains (losses), net of tax of $(4,401) and $(1,297) 31,119 6,899 Reclassification of realized (gains) losses to net earnings, net of tax of $249 and $343 (685) (940)

30,434 5,959 Investment in associates and other Other comprehensive income (loss), net of tax of $(2,459) and $(326) (11,741) (41,121)

11,312 (50,448)

Total comprehensive income $ 622,077 $ 728,856




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DECEMBER 31 DECEMBER 31 (in thousands of Canadian dollars) 2017 2016

Assets Cash and cash equivalents $ 966,843 $ 611,032 Securities (Note 4) 379,696 225,184 Client funds on deposit 489,626 455,474 Accounts and other receivables 305,062 287,071 Income taxes recoverable 33,928 13,627 Loans (Note 5) 7,849,873 7,983,269 Derivative financial instruments (Note 21) 35,692 42,821 Other assets (Note 7) 64,558 240,509 Investment in associates (Note 8) 1,551,013 888,851 Capital assets 150,468 161,337 Deferred selling commissions (Note 9) 767,315 726,608 Deferred income taxes (Note 14) 60,661 61,454 Intangible assets (Note 10) 1,184,451 1,267,789 Goodwill (Note 10) 2,660,267 2,660,267

$ 16,499,453 $ 15,625,293

Liabilities Accounts payable and accrued liabilities $ 406,821 $ 431,049 Income taxes payable 8,018 3,393 Derivative financial instruments (Note 21) 28,444 38,163 Deposits and certificates (Note 11) 504,996 471,202 Other liabilities (Note 12) 491,280 447,943 Obligations to securitization entities (Note 6) 7,596,028 7,721,024 Deferred income taxes (Note 14) 463,862 440,759 Long-term debt (Note 15) 2,175,000 1,325,000

11,674,449 10,878,533

Shareholders’ Equity Share capital Perpetual preferred shares 150,000 150,000 Common shares 1,602,726 1,597,208 Contributed surplus 42,633 39,552 Retained earnings 3,100,775 3,042,442 Accumulated other comprehensive income (loss) (71,130) (82,442)

4,825,004 4,746,760

$ 16,499,453 $ 15,625,293


These financial statements were approved and authorized for issuance by the Board of Directors on February 9, 2018.

Jeffrey R. Carney John McCallumDirector Director




Signed, Signed,

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

SHARE CAPITAL

ACCUMULATED PERPETUAL OTHER PREFERRED COMMON COMPREHENSIVE TOTAL SHARES SHARES CONTRIBUTED RETAINED INCOME (LOSS) SHAREHOLDERS’ (in thousands of Canadian dollars) (Note 16) (Note 16) SURPLUS EARNINGS (Note 19) EQUITY

2017

Balance, beginning of year $ 150,000 $ 1,597,208 $ 39,552 $ 3,042,442 $ (82,442) $ 4,746,760

Net earnings – – – 610,765 – 610,765Other comprehensive income (loss), net of tax – – – – 11,312 11,312

Total comprehensive income – – – 610,765 11,312 622,077

Common shares Issued under stock option plan – 5,518 – – – 5,518Stock options Current period expense – – 3,529 – – 3,529 Exercised – – (448) – – (448)Perpetual preferred share dividends – – – (8,850) – (8,850)Common share dividends – – – (541,367) – (541,367)Common share cancellation excess and other (Note 16) – – – (2,215) – (2,215)

Balance, end of year $ 150,000 $ 1,602,726 $ 42,633 $ 3,100,775 $ (71,130) $ 4,825,004

2016

Balance, beginning of year $ 150,000 $ 1,623,948 $ 35,569 $ 2,949,182 $ (31,994) $ 4,726,705

Net earnings – – – 779,304 – 779,304Other comprehensive income (loss), net of tax – – – – (50,448) (50,448)

Total comprehensive income – – – 779,304 (50,448) 728,856

Common shares Issued under stock option plan – 2,099 – – – 2,099 Purchased for cancellation – (28,839) – – – (28,839)Stock options Current period expense – – 4,097 – – 4,097 Exercised – – (114) – – (114)Perpetual preferred share dividends – – – (8,850) – (8,850)Common share dividends – – – (541,987) – (541,987)Common share cancellation excess and other (Note 16) – – – (135,207) – (135,207)

Balance, end of year $ 150,000 $ 1,597,208 $ 39,552 $ 3,042,442 $ (82,442) $ 4,746,760




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FOR THE YEARS ENDED DECEMBER 31 (in thousands of Canadian dollars) 2017 2016

Operating activities Earnings before income taxes $ 784,652 $ 946,937 Income taxes paid (165,243) (213,004) Adjustments to determine net cash from operating activities Deferred selling commission amortization 230,874 235,787 Amortization of capital and intangible assets 55,767 43,006 Changes in operating assets and liabilities and other 23,104 (41,209)

Cash from operating activities before payment of commissions 929,154 971,517 Deferred selling commissions paid (271,581) (234,868)

657,573 736,649

Financing activities Net decrease in deposits and certificates (2,758) (491) Net (decrease) increase in obligations to securitization entities (131,643) 631,134 Issue of debentures 850,000 – Issue of common shares 5,071 3,376 Common shares purchased for cancellation – (155,673) Perpetual preferred share dividends paid (8,850) (8,850) Common share dividends paid (541,282) (544,450)

170,538 (74,954)

Investing activities Purchase of securities (181,568) (231,322) Proceeds from the sale of securities 62,196 80,338 Net decrease (increase) in loans 136,592 (582,889) Net additions to capital assets (16,549) (42,306) Net cash used in additions to intangible assets and acquisitions (33,627) (64,501) Investment in China Asset Management Co., Ltd. (439,344) (192,988)

(472,300) (1,033,668)

Increase (decrease) in cash and cash equivalents 355,811 (371,973)Cash and cash equivalents, beginning of year 611,032 983,005

Cash and cash equivalents, end of year $ 966,843 $ 611,032

Cash $ 88,354 $ 84,570Cash equivalents 878,489 526,462

$ 966,843 $ 611,032

Supplemental disclosure of cash flow information related to operating activities Interest and dividends received $ 281,159 $ 256,522 Interest paid $ 235,319 $ 209,998




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IGM FINANCIAL INC. ANNUAL REPORT 2017 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017 and 2016 (In thousands of Canadian dollars, except shares and per share amounts)


IGM Financial Inc. (the Company) is a publicly listed company (TSX: IGM), incorporated and domiciled in Canada. The registered address of the Company is 447 Portage Avenue, Winnipeg, Manitoba, Canada. The Company is controlled by Power Financial Corporation.

IGM Financial Inc. is a financial services company which serves the financial needs of Canadians through its principal subsidiaries, each operating distinctly within the advice segment of the financial services market. The Company’s wholly-owned principal subsidiaries are Investors Group Inc. and Mackenzie Financial Corporation.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS). The policies set out below were consistently applied to all the periods presented unless otherwise noted.

USE OF JUDGMENT, ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying accounting policies and requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements. The key areas where judgment has been applied include: the determination of which financial assets should be derecognized; the assessment of the appropriate classification of financial instruments, including those classified as fair value through profit or loss; and the assessment that significant influence exists for its investment in associates. Key components of the financial statements requiring management to make estimates include: the fair value of financial instruments, goodwill, intangible assets, income taxes, deferred selling commissions, provisions and employee benefits. Actual results may differ from such estimates. Further detail of judgments and estimates are found in the remainder of Note 2 and in Notes 6, 8, 10, 12, 13, 14 and 22.

BASIS OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of the Company and all subsidiaries on a consolidated basis after elimination of intercompany transactions and balances. Subsidiaries are entities the Company controls when it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its power to direct the relevant activities of the entity.

The Company’s investments in Great-West Lifeco Inc. (Lifeco) and China Asset Management Co., Ltd. (China AMC) are accounted for using the equity method. The investments were initially recorded at cost and the carrying amounts are increased or decreased to recognize the Company’s share of the investments’ comprehensive income and the dividends received since the date of acquisition.

REVENUE RECOGNITION

Management fees are based on the net asset value of investment fund or other assets under management and are recognized on an accrual basis as the service is performed. Administration fees are also recognized on an accrual basis as the service is performed. Distribution fees derived from investment fund and securities transactions are recognized on a trade date basis. Distribution fees derived from insurance and other financial services transactions are recognized on an accrual basis.

FINANCIAL INSTRUMENTS

All financial assets are classified in one of the following categories: available for sale, fair value through profit or loss, or loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets upon initial recognition. Financial assets at fair value through profit or loss are financial assets classified as held for trading or upon initial recognition are designated by the Company as fair value through profit or loss. Financial assets are classified as held for trading if acquired with the intent to sell in the short-term. Derivatives are also categorized as held for trading unless they are designated as hedging instruments. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Available for sale financial assets are non-derivative financial instruments that are either designated in this category or not classified in any of the other categories.



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92 IGM FINANCIAL INC. ANNUAL REPORT 2017 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FINANCIAL INSTRUMENTS (continued)

All financial assets are recorded at fair value in the Consolidated Balance Sheets, except loans and receivables which are recorded at amortized cost using the effective interest method. Financial liabilities are classified either as financial liabilities measured at amortized cost using the effective interest method or as fair value through profit or loss, which are recorded at fair value.

Unrealized gains and losses on financial assets classified as available for sale as well as other comprehensive income amounts, including unrealized foreign currency translation gains and losses related to the Company’s investment in its associates, are recorded in the Consolidated Statements of Comprehensive Income on a net of tax basis. Accumulated other comprehensive income forms part of Shareholders’ equity.


Cash and cash equivalents comprise cash and temporary investments consisting of highly liquid investments with short-term maturities. Interest income is recorded on an accrual basis in Net investment income and other in the Consolidated Statements of Earnings.

SECURITIES

Securities, which are recorded on a trade date basis, are classified as either available for sale or fair value through profit or loss.

Available for sale securities comprise equity securities held for long-term investment, investments in proprietary investment funds and fixed income securities. Realized gains and losses on disposal of available for sale securities, dividends declared, interest income, as well as the amortization of discounts or premiums using the effective interest method, are recorded in Net investment income and other in the Consolidated Statements of Earnings. Unrealized gains and losses on available for sale securities are recorded in Other comprehensive income until they are realized or until management determines that there is objective evidence of impairment in value, at which time they are reclassified to the Consolidated Statements of Earnings.

Fair value through profit or loss securities are held for trading and are comprised of fixed income and equity securities and investments in proprietary investment funds. Unrealized and realized gains and losses, dividends declared, and interest income on these securities are recorded in Net investment income and other in the Consolidated Statements of Earnings.

LOANS

Loans are classified as either held for trading or loans and receivables, based on the Company’s intent to sell the loans in the near term.

Loans classified as held for trading are recorded at fair value, with changes in fair value recorded in Net investment income and other in the Consolidated Statements of Earnings. Loans classified as loans and receivables are recorded at amortized cost less an allowance for credit losses. Interest income is accounted for on the accrual basis using the effective interest method for all loans and is recorded in Net investment income and other in the Consolidated Statements of Earnings.

A loan is classified as impaired when, in the opinion of management, there no longer is reasonable assurance of the timely collection of the full amount of principal and interest. A loan is also classified as impaired when interest or principal is contractually past due 90 days, except in circumstances where management has determined that the collectability of principal and interest is not in doubt.

The Company maintains an allowance for credit losses which is considered adequate by management to absorb all credit related losses in its portfolio. Specific allowances are established as a result of reviews of individual loans. There is a second category of allowance, the collective allowance, which is allocated against sectors rather than specifically against individual loans. This allowance is established where a prudent assessment by management suggests that losses have occurred but where such losses cannot yet be identified on an individual loan basis.

DERECOGNITION

The Company enters into transactions where it transfers financial assets recognized on its balance sheet. The determination of whether the financial assets are derecognized is based on the extent to which the risks and rewards of ownership are transferred. The gains or losses and the servicing fee revenue for financial assets that are derecognized are reported in Net investment income and other in the Consolidated Statements of Earnings. The transactions for financial assets that are not derecognized are accounted for as secured financing transactions.



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DEFERRED SELLING COMMISSIONS

Commissions paid on the sale of certain investment funds are deferred and amortized over their estimated useful lives, not exceeding a period of seven years. Commissions paid on the sale of deposits are deferred and amortized over their estimated useful lives, not exceeding a period of five years. When a client redeems units 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 the Company. Any unamortized deferred selling commission asset recognized on the initial sale of these investment fund units or shares is recorded as a disposal. The Company regularly reviews the carrying value of deferred selling commissions with respect to any events or circumstances that indicate impairment. Among the tests performed by the Company to assess recoverability is the comparison of the future economic benefits derived from the deferred selling commission asset in relation to its carrying value.

CAPITAL ASSETS

Capital assets are recorded at cost of $368.3 million at December 31, 2017 (2016 – $383.0 million), less accumulated amortization of $217.8 million (2016 – $221.7 million). Buildings, furnishings and equipment are amortized on a straight-line basis over their estimated useful lives, which range from 3 to 17 years for equipment and furnishings and 10 to 50 years for the building and its components. Capital assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

GOODWILL AND INTANGIBLE ASSETS

The Company tests the carrying value of goodwill and indefinite life intangible assets for impairment at least once a year and more frequently if an event or circumstance indicates the asset may be impaired. An impairment loss is recognized if the amount of the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal or its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash generating units).

Investment fund management contracts have been assessed to have an indefinite useful life as the contractual right to manage the assets has no fixed term.

Trade names have been assessed to have an indefinite useful life as they contribute to the revenues of the Company’s integrated asset management business as a whole and the Company intends to utilize them for the foreseeable future.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Software assets are amortized over a period not exceeding 7 years and distribution and other management contracts are amortized over a period not exceeding 20 years. Finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

EMPLOYEE BENEFITS

The Company maintains a number of employee benefit plans including defined benefit plans and defined contribution pension plans for eligible employees. These plans are related parties in accordance with IFRS. The Company’s defined benefit plans include a funded defined benefit pension plan for eligible employees, unfunded supplementary executive retirement plans (SERP) for certain executive officers, and an unfunded post-employment health care, dental and life insurance plan for eligible retirees.

The defined benefit pension plan provides pensions based on length of service and final average earnings.

The cost of the defined benefit plans is actuarially determined using the projected unit credit method prorated on service based upon management’s assumptions about discount rates, compensation increases, retirement ages of employees, mortality and expected health care costs. Any changes in these assumptions will impact the carrying amount of pension obligations. The Company’s 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 Company determines the net interest component of the pension expense for the period by applying the discount rate used to measure the accrued benefit liability at the beginning of the annual period to the net accrued benefit liability. The discount rate used to value liabilities is determined using a yield curve of AA corporate debt securities.



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EMPLOYEE BENEFITS (continued)

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.

Current service costs, past service costs and curtailment gains or losses are included in Non-commission 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. Remeasurements are recognized immediately through Other comprehensive income (OCI) and are not reclassified to net earnings.

The accrued benefit liability represents the deficit related to defined benefit plans and is included in Other liabilities.

Payments to the defined contribution pension plans are expensed as incurred.


The Company uses the fair value based method to account for stock options granted to employees. The fair value of stock options is determined on each grant date. Compensation expense is recognized over the period that the stock options vest, with a corresponding increase in Contributed surplus. When stock options are exercised, the proceeds together with the amount recorded in Contributed surplus are added to Share capital.

The Company recognizes a liability for cash settled awards including those granted under the Performance Share Unit plan and the Deferred Share Unit plan. Compensation expense is recognized over the vesting period, net of related hedges. The liability is remeasured at fair value at each reporting period.

PROVISIONS

A provision is recognized if, as a result of a past event, the Company has a present obligation where a reliable estimate can be made, and it is probable that an outflow of resources will be required to settle the obligation.

INCOME TAXES

The Company uses the liability method in accounting for income taxes whereby deferred income tax assets and liabilities reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases and tax loss carryforwards. Deferred income tax assets and liabilities are measured based on the enacted or substantively enacted tax rates which are anticipated to be in effect when the temporary differences are expected to reverse.

EARNINGS PER SHARE

Basic earnings per 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 share is determined using the same method as basic earnings per share except that the average number of common shares outstanding includes the potential dilutive effect of outstanding stock options granted by the Company as determined by the treasury stock method.


Derivative financial instruments are utilized by the Company in the management of equity price and interest rate risks. The Company does not utilize derivative financial instruments for speculative purposes.

The Company formally documents all hedging relationships, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the Consolidated Balance Sheets or to anticipated future transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivative financial instruments are recorded at fair value in the Consolidated Balance Sheets.



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DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Derivative financial instruments specifically designated as a hedge and meeting the criteria for hedge effectiveness offset the changes in fair values or cash flows of hedged items. A hedge is designated either as a cash flow hedge or a fair value hedge. A cash flow hedge requires the change in fair value of the derivative, to the extent effective, to be recorded in Other comprehensive income, which is reclassified to the Consolidated Statements of Earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of the derivative in a cash flow hedge is recorded in the Consolidated Statements of Earnings. A fair value hedge requires the change in fair value of the hedging derivative and the change in fair value of the hedged item relating to the hedged risk to both be recorded in the Consolidated Statements of Earnings.

The Company enters into interest rate swaps as part of its mortgage banking and intermediary operations. These swap agreements require the periodic exchange of net interest payments without the exchange of the notional principal amount on which the payments are based. These instruments are not designated as hedging instruments. Changes in fair value are recorded in Net investment income and other in the Consolidated Statements of Earnings.

The Company also enters into total return swaps and forward agreements to manage its exposure to fluctuations in the total return of its common shares related to deferred compensation arrangements. Total return swap and forward agreements require the exchange of net contractual payments periodically or at maturity without the exchange of the notional principal amounts on which the payments are based. Certain of these derivatives are not designated as hedging instruments and changes in fair value are recorded in Non-commission expense in the Consolidated Statements of Earnings.

Derivatives continue to be utilized on a basis consistent with the risk management policies of the Company and are monitored by the Company for effectiveness as economic hedges even if specific hedge accounting requirements are not met.

OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

Financial assets and liabilities are offset and the net amount is presented on the Consolidated Balance Sheets when the Company has a legally enforceable right to set off the recognized amounts and intends to settle on a net basis or to realize the assets and settle the liabilities simultaneously.


The Company continuously monitors the potential changes proposed by the International Accounting Standards Board (IASB) and analyzes the effect that changes in the standards may have on the Company’s operations.

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 flow characteristics of the financial assets.

• Impairment methodology: This phase replaces the current incurred loss model for impairment of financial assets with an expected credit 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.

The transition to IFRS 9 is managed by a committee comprised of senior levels of management. Periodic reporting on the progress against plan is provided to this committee and other affected stakeholders within the Company. To date, the Company’s efforts have been focused on updating accounting policies to address key aspects of the Standard including classification and measurement of financial instruments, reviewing the impact to its impairment models and assessing the use of hedge accounting under IFRS 9.




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IFRS 9 Financial Instruments (continued)

IFRS 9 is effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively; however restatement of comparative periods is not required. The Company will recognize any measurement difference between the previous carrying amount and the new carrying amount on January 1, 2018, through an adjustment to opening retained earnings.

The application of IFRS 9 as at January 1, 2018 will result in the following changes to the current classification of assets under IAS 39.

• Loans of $263.5 million currently classified as held for trading will be reclassified to amortized cost resulting in the capitalization and amortization of issue costs and the reversal of mortgage premiums and discounts currently recognized under IAS 39.

• Proprietary investment funds of $19.9 million currently classified as available for sale will be reclassified to fair value through profit and loss.

• The Company will elect to classify Corporate investments of $262.8 million at Fair value through other comprehensive income. Under this election, unrealized gains and losses on these investments will never be recycled through profit or loss.

The cumulative impact of the above changes will result in an increase to opening retained earnings of approximately $36.3 million as at January 1, 2018.

The Company will adopt the hedge accounting requirements of IFRS 9 beginning January 1, 2018.

The Company has also elected to apply the temporary exemption included within IFRS 17 – Insurance Contracts which provides relief from the requirements to apply IFRS 9 accounting to the Company’s investment in Lifeco. Insurance companies in Canada have generally elected to defer adoption of IFRS 9. As a result, this temporary exemption means that the Company will not be required to restate Lifeco’s results to be in accordance with IFRS 9.

The application of the expected credit loss model will not have a material impact to the Company’s loan loss provision.

IFRS 15 Revenue from Contracts with Customers

The IASB issued IFRS 15 which outlines a single comprehensive 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 the customer in an amount that reflects the expected consideration. This standard is effective for annual reporting periods beginning on or after January 1, 2018. Entities have the choice of full retrospective application or prospective application with additional disclosures.

IFRS 15 outlines various criteria for the eligibility of capitalizing contract costs. Determining whether the customer is the fund or the end investor can impact whether costs should be capitalized as a cost of obtaining a contract with a customer or whether they should be assessed as a cost of fulfilling a contract with a customer. Significant judgment is required in determining whether fulfillment costs should be expensed or capitalized. IFRS 15 could therefore result in changes to the timing of recognition of certain commission related expenses.

Due to recent developments in the interpretation of the guidance on fulfillment costs, the Company continues to assess the impact to certain commission payments and related expenses.

The adoption of IFRS 15 is not expected to have a significant impact to the ongoing recognition of the Company’s revenues.

IFRS 16 Leases

The IASB issued IFRS 16 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 is effective for annual reporting periods beginning on or after January 1, 2019. The impact of this standard is currently being assessed.




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NOTE 3 NON-COMMISSION EXPENSE

2017 2016

Salaries and employee benefits $ 414,808 $ 440,199 Restructuring and other 190,550 – Occupancy 56,140 55,440 Amortization of capital and intangible assets 55,767 43,006 Other 395,369 376,957

$ 1,112,634 $ 915,602

In 2017, the Company implemented a number of initiatives to assist in the Company’s operational effectiveness resulting in Restructuring and other charges of $190.6 million.

NOTE 4 SECURITIES

2017 2016 FAIR FAIR COST VALUE COST VALUE

Available for sale: Corporate investments $ 215,050 $ 262,825 $ 141,641 $ 151,949 Proprietary investment funds 19,601 19,931 6,097 6,431

234,651 282,756 147,738 158,380

Fair value through profit or loss: Equity securities 17,115 17,062 15,523 17,695 Proprietary investment funds 79,575 79,878 49,407 49,109

96,690 96,940 64,930 66,804

$ 331,341 $ 379,696 $ 212,668 $ 225,184

AVAILABLE FOR SALE

Corporate Investments

Corporate investments is primarily comprised of the Company’s investments in Personal Capital Corporation (Personal Capital), Wealthsimple Financial Corporation (Wealthsimple) and Portag3 Ventures LP (Portag3).

Personal Capital is a digital wealth advisor that is incorporated in and operates in the U.S. Wealthsimple is an online investment manager that provides financial investment guidance. Portag3 is an early-stage investment fund dedicated to backing innovating financial services companies. Wealthsimple and Portag3 are both controlled by the Company’s parent, Power Financial Corporation.

In 2017, the Company invested $73.4 million in Corporate investments, with investments of $25.0 million related to Personal Capital and $42.6 million related to Wealthsimple. Subsequent to December 31, 2017, the Company increased its investment in Wealthsimple by a total of $45.0 million including the conversion of a $15.0 million loan to equity (Note 7). In 2016, the Company invested $135.9 million, with investments of $97.3 million related to Personal Capital, $20.0 million related to Wealthsimple and $15.0 million related to Portag3.

Proprietary Investment Funds

The Company manages and provides services and earns management and administration fees, in respect of investment funds that are not recognized in the Consolidated Balance Sheets. As at December 31, 2017, there were $149.8 billion in investment fund assets under management (2016 – $137.0 billion). The Company’s investments in proprietary investment funds are classified on the Company’s Consolidated Balance Sheets as available for sale securities. These investments are generally made in the process of launching a new fund and are sold as third party investors subscribe. This balance represents the Company’s maximum exposure to loss associated with these investments.



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FAIR VALUE THROUGH PROFIT OR LOSS

Proprietary Investment Funds

Certain investment funds are consolidated where the Company has made the assessment that it controls the investment fund. As at December 31, 2017, the underlying investments related to these consolidated investment funds primarily consisted of cash and short-term investments of $14.2 million (2016 – $18.1 million), equity securities of $48.6 million (2016 – $31.3 million) and fixed income securities of $17.3 million (2016 – nil). The underlying securities of these funds are classified as held for trading and recognized at fair value.

NOTE 5 LOANS

CONTRACTUAL MATURITY

1 YEAR 1 – 5 OVER 2017 2016 OR LESS YEARS 5 YEARS TOTAL TOTAL

Loans and receivables Residential mortgages $ 1,167,626 $ 6,393,971 $ 2,400 $ 7,563,997 $ 7,644,525

Less: Collective allowance 806 722

7,563,191 7,643,803Held for trading 286,682 339,466

$ 7,849,873 $ 7,983,269

The change in the collective allowance for credit losses is as follows:Balance, beginning of year $ 722 $ 705Write-offs, net of recoveries (612) (502)Provision for credit losses 696 519


Total impaired loans as at December 31, 2017 were $2,842 (2016 – $2,607).

Total interest income on loans classified as loans and receivables was $201.8 million (2016 – $194.2 million). Total interest expense on obligations to securitization entities, related to securitized loans, was $138.0 million (2016 – $128.7 million). Gains realized on the sale of residential mortgages totalled $7.5 million (2016 – $16.1 million). Fair value adjustments related to mortgage banking operations totalled negative $31.3 million (2016 – negative $2.3 million). These amounts were included in Net investment income and other. Net investment income and other also includes other mortgage banking related items including interest income on mortgages held for trading, portfolio insurance, issue costs, and other items.

NOTE 4 SECURITIES (continued)



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NOTE 6 SECURITIZATIONS

The Company securitizes residential mortgages through the Canada Mortgage and Housing Corporation (CMHC) sponsored National Housing Act Mortgage-Backed Securities (NHA MBS) Program and Canada Mortgage Bond (CMB) Program and through Canadian bank-sponsored asset-backed commercial paper (ABCP) programs. These transactions do not meet the requirements for derecognition as the Company retains prepayment risk and certain elements of credit risk. Accordingly, the Company 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 recorded at amortized cost.

The Company earns interest on the mortgages and pays interest on the obligations to securitization entities. As part of the CMB transactions, the Company enters into a swap transaction whereby the Company pays coupons on CMBs and receives 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 coupons and receive investment returns on repaid mortgage principal, is recorded as a derivative and had a positive fair value of $4.1 million at December 31, 2017 (2016 – negative $23.1 million).

Under the NHA MBS and CMB Program, the Company 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 Program are insured by CMHC or another approved insurer under the program. As part of the ABCP transactions, the Company has provided cash reserves for credit enhancement which are recorded at cost. Credit risk is limited to these cash reserves and future net interest income as the ABCP Trusts have no recourse to the Company’s other assets for failure to make payments when due. Credit risk is further limited to the extent these mortgages are insured.

OBLIGATIONS TO SECURITIZED SECURITIZATION 2017 MORTGAGES ENTITIES NET

Carrying value NHA MBS and CMB Program $ 4,461,926 $ 4,470,908 $ (8,982) Bank sponsored ABCP 3,076,083 3,125,120 (49,037)

Total $ 7,538,009 $ 7,596,028 $ (58,019)

Fair value $ 7,649,591 $ 7,657,761 $ (8,170)

2016

Carrying value NHA MBS and CMB Program $ 4,942,474 $ 4,987,298 $ (44,824) Bank sponsored ABCP 2,672,817 2,733,726 (60,909)

Total $ 7,615,291 $ 7,721,024 $ (105,733)

Fair value $ 7,838,295 $ 7,873,118 $ (34,823)

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.



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NOTE 7 OTHER ASSETS

2017 2016

China Asset Management Co., Ltd. $ – $ 193,463Deferred and prepaid expenses 47,962 43,428Other 16,596 3,618

$ 64,558 $ 240,509

As at December 31, 2017, Other assets included a loan of $15.0 million that was provided to Wealthsimple during the quarter. Subsequent to December 31, 2017, the Company converted the $15.0 million loan to equity (Note 4).

As at December 31, 2016, Other assets included a deposit of $193.5 million (RMB¥1.0 billion) related to the Company’s investment in China AMC, which closed August 31, 2017 (Note 8).

Total other assets of $19.8 million as at December 31, 2017 (2016 – $19.8 million) are expected to be realized within one year.

NOTE 8 INVESTMENT IN ASSOCIATES

2017 2016 LIFECO CHINA AMC TOTAL TOTAL

Balance, beginning of year $ 888,851 $ – $ 888,851 $ 904,257Additional investment – 638,349 638,349 –Proportionate share of earnings(1) 105,730 9,042 114,772 104,226 Proportionate share of associate’s one-time charges(1) (14,000) – (14,000) –Proportionate share of associate’s provision(1) (5,098) – (5,098) –Dividends received (58,334) (10,770) (69,104) (54,996)Proportionate share of other comprehensive income (loss) and other adjustments (14,016) 11,259 (2,757) (64,636)

Balance, end of year $ 903,133 $ 647,880 $ 1,551,013 $ 888,851

(1) Recorded in Proportionate share of associates’ earnings in the Consolidated Statements of Earnings.

GREAT-WEST LIFECO INC. (LIFECO)

Lifeco is a publicly listed company that is incorporated and domiciled in Canada and is controlled by Power Financial Corporation. Lifeco is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses, primarily in Canada, the United States, Europe and Asia.

At December 31, 2017, the Company held 39,737,388 (2016 – 39,737,388) shares of Lifeco, which represented an equity interest of 4.0% (2016 – 4.0%). The Company uses the equity method to account for its investment in Lifeco as it exercises significant influence. Significant influence arises from several factors, including but not limited to, the following: common control of Lifeco by Power Financial Corporation, directors common to the boards of the Company and Lifeco, certain shared strategic alliances, significant intercompany transactions and service agreements that influence the financial and operating policies of both companies. The Company’s proportionate share of Lifeco’s earnings is recorded in the Consolidated Statements of Earnings.

During 2017, Lifeco established a restructuring provision, and recorded charges related to the impact of the United States tax reform and pending sale of an equity investment. The Company’s after-tax proportionate share of the restructuring provision and the one-time charges are $5.1 million and $14.0 million, respectively.

The fair value of the Company’s investment in Lifeco totalled $1,393.2 million at December 31, 2017 (December 31, 2016 – $1,397.6 million).

Lifeco directly owned 9,200,000 shares of the Company at December 31, 2017.

Lifeco’s financial information as at December 31, 2017 can be obtained in its publicly available information.



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CHINA ASSET MANAGEMENT CO., LTD. (CHINA AMC)

On August 31, 2017, the Company finalized its investment in China AMC which resulted in a 13.9% ownership interest at a total cost of $638.3 million. The $638.3 million is comprised of a cash payment made during 2017 of $439.3 million, conversion of a deposit made in the fourth quarter of 2016 and transaction costs.

China AMC is an asset management company established in Beijing, China and is controlled by CITIC Securities Company Limited.

As at December 31, 2017, the Company held a 13.9% ownership interest in China AMC. The Company uses the equity method to account for its investment in China AMC as it exercises significant influence. Significant influence arises from board representation, participating in the policy making process, shared strategic initiatives including joint product launches and collaboration between management and investment teams.

The following table sets forth certain summary financial information from China AMC:

AS AT DECEMBER 31, 2017 ($ millions) CANADIAN CHINESE

DOLLARS RENMINBI

Total assets 1,827 9,464 Total liabilities 405 2,097

FOR THE YEAR ENDED DECEMBER 31, 2017(1)

Revenue 752 3,913 Net earnings available to common shareholders 263 1,367 Total comprehensive income 207 1,077

(1) Full year earnings presented; however the Company’s proportionate share of China AMC earnings was effective August 31, 2017.

NOTE 9 DEFERRED SELLING COMMISSIONS

2017 2016

Cost $ 1,429,042 $ 1,374,250Less: accumulated amortization (661,727) (647,642)

$ 767,315 $ 726,608

Changes in deferred selling commissions: Balance, beginning of year $ 726,608 $ 727,527Changes due to: Sales of investment funds 271,578 234,868 Amortization (230,871) (235,787)

40,707 (919)


Amortization of deferred selling commissions includes $24.2 million (2016 – $31.2 million) of disposals related to redemption activity and is recorded in Commission expense in the Consolidated Statements of Earnings.

NOTE 8 INVESTMENT IN ASSOCIATES (continued)



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The components of goodwill and intangible assets are as follows:

FINITE LIFE INDEFINITE LIFE DISTRIBUTION AND OTHER MUTUAL FUND TOTAL MANAGEMENT MANAGEMENT TRADE INTANGIBLE SOFTWARE CONTRACTS CONTRACTS NAMES ASSETS GOODWILL

2017

Cost $ 206,928 $ 112,916 $ 740,559 $ 285,177 $ 1,345,580 $ 2,660,267Less: accumulated amortization (87,909) (73,220) – – (161,129) –

$ 119,019 $ 39,696 $ 740,559 $ 285,177 $ 1,184,451 $ 2,660,267

Changes in goodwill and intangible assets: Balance, beginning of year $ 199,239 $ 42,814 $ 740,559 $ 285,177 $ 1,267,789 $ 2,660,267Additions 31,599 2,618 – – 34,217 –Disposals (3,195) (594) – – (3,789) –Writedowns (92,352) – – – (92,352) –Amortization (16,272) (5,142) – – (21,414) –

Balance, end of year $ 119,019 $ 39,696 $ 740,559 $ 285,177 $ 1,184,451 $ 2,660,267

2016

Cost $ 289,032 $ 111,465 $ 740,559 $ 285,177 $ 1,426,233 $ 2,660,267Less: accumulated amortization (89,793) (68,651) – – (158,444) –

$ 199,239 $ 42,814 $ 740,559 $ 285,177 $ 1,267,789 $ 2,660,267

Changes in goodwill and intangible assets: Balance, beginning of year $ 144,353 $ 49,631 $ 740,559 $ 285,177 $ 1,219,720 $ 2,660,267Additions 63,506 862 – – 64,368 –Disposals (90) (1,675) – – (1,765) –Amortization (8,530) (6,004) – – (14,534) –

Balance, end of year $ 199,239 $ 42,814 $ 740,559 $ 285,177 $ 1,267,789 $ 2,660,267

In 2017, the Company discontinued development of a new investment fund accounting system. As a result of this, and other associated technology decisions, the Company recorded a writedown of $92.4 million of capitalized software development costs which was recorded in Non-commission expense in the Consolidated Statements of Earnings.

The goodwill and indefinite life intangible assets consisting of investment fund management contracts and trade names are allocated to each cash generating unit (CGU) as summarized in the following table:

2017 2016 INDEFINITE INDEFINITE LIFE LIFE INTANGIBLE INTANGIBLE GOODWILL ASSETS GOODWILL ASSETS

Investors Group $ 1,347,781 $ – $ 1,347,781 $ –Mackenzie 1,168,580 1,002,681 1,168,580 1,002,681Other 143,906 23,055 143,906 23,055

Total $ 2,660,267 $ 1,025,736 $ 2,660,267 $ 1,025,736



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The Company tests whether goodwill and indefinite life intangible assets are impaired by assessing the carrying amounts with the recoverable amounts. The recoverable amount of the Company’s CGUs is based on the best available evidence of fair value less costs of disposal. Fair value is initially assessed with reference to valuation multiples of comparable publicly-traded financial institutions and precedent business acquisition transactions. These valuation multiples may include price-to-earnings or other conventionally used measures for investment managers or other financial service providers (multiples of value to assets under management, revenues, or other measures of profitability). 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 costs of disposal of the Company’s CGUs was compared with the carrying amount and it was determined there was no impairment. Changes in assumptions and estimates used in determining the recoverable amounts of CGUs can result in significant adjustments to the valuation of the CGUs.

NOTE 11 DEPOSITS AND CERTIFICATES

Deposits and certificates are classified as other financial liabilities measured at amortized cost.

Included in the assets of the Consolidated Balance Sheets are cash and cash equivalents, client funds on deposit and loans amounting to $505.0 million (2016 – $471.2 million) related to deposits and certificates.

TERM TO MATURITY 1 YEAR 1–5 OVER 2017 2016 DEMAND OR LESS YEARS 5 YEARS TOTAL TOTAL

Deposits $ 489,919 $ 5,895 $ 6,101 $ 573 $ 502,488 $ 468,388Certificates – 584 811 1,113 2,508 2,814

$ 489,919 $ 6,479 $ 6,912 $ 1,686 $ 504,996 $ 471,202


2017 2016

Dividends payable $ 137,587 $ 137,503Interest payable 38,795 27,406Accrued benefit liabilities (Note 13) 184,462 216,387Provisions 92,918 32,052Other 37,518 34,595

$ 491,280 $ 447,943

The Company establishes restructuring provisions related to business acquisitions, divestitures and other items, as well as other provisions in the normal course of its operations. Changes in provisions during 2017 consisted of additional estimates of $95.2 million, provision reversals of $1.6 million and payments of $32.7 million.

Total other liabilities of $279.1 million as at December 31, 2017 (2016 – $207.6 million) are expected to be settled within one year.

NOTE 10 GOODWILL AND INTANGIBLE ASSETS (continued)



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NOTE 13 EMPLOYEE BENEFITS

DEFINED BENEFIT PLANS

The Company maintains a number of employee pension and post-employment benefit plans. These plans include a funded registered defined benefit pension plan for all eligible employees, unfunded supplementary executive retirement plans (SERPs) for certain executive officers, and an unfunded post-employment health care, dental and life insurance plan for eligible retirees.

Effective July 1, 2012, the defined benefit pension plan was closed to new members. For all eligible employees hired after July 1, 2012, the Company has a registered defined contribution pension plan.

The defined benefit pension plan is a separate trust that is legally separated from the Company. The defined benefit pension plan is registered under the Pension Benefits Act of Manitoba (Act) and the Income Tax Act (ITA). As required by the Act, the defined benefit pension plan is governed by a pension committee which includes current and retired employees. The Pension Committee has certain responsibilities as described in the Act but may delegate certain activities to the Company. The ITA governs the employer’s ability to make contributions and also has parameters that the plan must meet with respect to investments in foreign property.

The defined benefit pension plan provides lifetime pension benefits to all eligible employees based on length of service and final average earnings subject to limits established by the ITA. Death benefits are available on the death of an active member or a retired member.

Employees who are not senior officers are required to make annual contributions based on a percentage of salaries which are subject to a maximum amount.

The actuarial valuation for funding purposes related to the Company’s registered defined benefit pension plan, based on a measurement date of December 31, 2016, was completed in September 2017. Based on the actuarial valuation, the registered pension plan had a solvency deficit of $82.7 million compared to $23.4 million in the previous actuarial valuation, which was based on a measurement date of December 31, 2013. The increase in solvency deficit resulted primarily from lower interest rates, and is required to be funded over five years. During 2017, the Company made contributions of $37.8 million (2016 – $19.7 million). The Company expects to make contributions of approximately $47.3 million in 2018. Pension contribution decisions are subject to change, as contributions are affected by many factors including market performance, regulatory requirements, changes in assumptions and management’s ability to change funding policy. The next required actuarial valuation will be based on a measurement date of December 31, 2017.

The SERPs are non-registered, non-contributory defined benefit plans which provide supplementary benefits to certain retired executives.

The other post-employment benefit plan is a non-contributory plan and provides eligible employees a reimbursement of medical costs or a fixed amount per year to cover medical costs during retirement.

The SERPs and other post-employment benefit plans are managed by the Company with oversight from the Board of Directors.

The defined benefit plans expose the Company to actuarial risks such as mortality risk which represents life expectancy and impacts the calculation of the obligations; interest rate risk which impacts the discount rate used to calculate the obligations and the actual return on plan assets; salary risk as estimated salary increases are used in the calculation of the obligations; and investment risk as the nature of the investments impact the actual return on the plan assets. The risks are managed by regular monitoring of the plans, applicable regulations and other factors that could impact the Company’s expenses and cash flows.



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DEFINED BENEFIT PLANS (continued)

Plan assets, benefit obligations and funded status:

2017 2016 DEFINED OTHER POST– DEFINED OTHER POST– BENEFIT EMPLOYMENT BENEFIT EMPLOYMENT PENSION PLAN SERPS BENEFITS PENSION PLAN SERPS BENEFITS

Fair value of plan assets Balance, beginning of year $ 372,087 $ – $ – $ 336,278 $ – $ – Employee contributions 3,005 – – 3,179 – – Employer contributions 37,782 – – 19,674 – – Benefits paid (22,318) – – (18,013) – – Interest income 15,527 – – 14,443 – – Remeasurements: – Return on plan assets 11,604 – – 16,526 – –

Balance, end of year 417,687 – – 372,087 – –

Accrued benefit obligation Balance, beginning of year 481,201 62,461 44,812 439,167 56,481 48,812 Benefits paid (22,313) (2,751) (2,707) (18,013) (2,958) (2,192) Current service cost 23,264 1,453 921 21,173 1,102 1,082 Past service cost – (2,972) (703) – 2,860 – Plan amendment (50,381) – – – – – Curtailment loss 2,514 – – – – – Employee contributions 3,005 – – 3,179 – – Interest expense 19,186 2,335 1,612 18,405 2,240 1,843 Remeasurements: Actuarial losses (gains) – Demographic assumption – – – – – (4,856) – Experience adjustments (1,439) 271 223 (169) 1,854 (822) – Financial assumptions 38,573 2,337 1,247 17,459 882 945

Balance, end of year 493,610 63,134 45,405 481,201 62,461 44,812

Accrued benefit liability $ 75,923 $ 63,134 $ 45,405 $ 109,114 $ 62,461 $ 44,812

The Company, at its discretion, may from time to time increase certain benefits paid to retired members of the plan. Under its previous policy, the Company had granted benefit increases in most years and the obligation included an estimate for future increases. The Company does not expect to grant benefit increases in the foreseeable future. As a result of this change, in 2017, the Company revalued its pension obligation and has recognized a reduction to its obligation of $50.4 million as a decrease to non-commission expense.

Significant actuarial assumptions used to calculate the defined benefit obligation:

2017 2016 DEFINED OTHER POST– DEFINED OTHER POST– BENEFIT EMPLOYMENT BENEFIT EMPLOYMENT PENSION PLAN SERPS BENEFITS PENSION PLAN SERPS BENEFITS

Discount rate 3.60% 3.30% 3.45% 4.05% 3.60%-3.90% 3.70%Rate of compensation increase 3.90% 3.75% N/A 3.90% 3.75% N/AHealth care cost trend rate (1) N/A N/A 5.77% N/A N/A 5.83%Mortality rates at age 65 for current pensioners 23.5 years 23.5 years 23.5 years 23.5 years 23.5 years 23.5 years

(1) Trending to 4.50% in 2034 and remaining at that rate thereafter.

NOTE 13 EMPLOYEE BENEFITS (continued)



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The weighted average duration of the pension plans’ defined benefit obligation at the end of the reporting period is 17.6 years (2016 – 18.4 years).

Benefit expense:

2017 2016 DEFINED OTHER POST- DEFINED OTHER POST- BENEFIT EMPLOYMENT BENEFIT EMPLOYMENT PENSION PLAN SERPS BENEFITS PENSION PLAN SERPS BENEFITS

Current service cost $ 23,269 $ 1,453 $ 921 $ 21,173 $ 1,102 $ 1,082Past service cost – (2,972) (703) – 2,860 –Plan amendment (50,381) – – – – –Curtailment loss 2,514 – – – – –Net interest cost 3,659 2,335 1,612 3,962 2,240 1,843

$ (20,939) $ 816 $ 1,830 $ 25,135 $ 6,202 $ 2,925

Sensitivity analysis:

The calculation of the accrued benefit liability and the related benefit expense are sensitive to the significant actuarial assumptions. The following table presents the sensitivity analysis:

2017 2016 INCREASE INCREASE INCREASE INCREASE (DECREASE) (DECREASE) (DECREASE) (DECREASE) IN LIABILITY IN EXPENSE IN LIABILITY IN EXPENSE

Defined benefit pension plan Discount rate (+ / – 0.25%) Increase $ (20,503) $ (1,771) $ (19,883) $ (1,667) Decrease 21,883 1,809 21,246 1,709 Rate of compensation increase (+ / – 0.25%) Increase 6,538 893 8,106 850 Decrease (6,440) (880) (8,017) (835) Mortality Increase 1 year 9,847 888 10,762 775SERPs Discount rate (+ / – 0.25%) Increase (1,767) 36 (1,822) 32 Decrease 1,850 (40) 1,909 (36) Rate of compensation increase (+ / – 0.25%) Increase 77 27 119 23 Decrease (76) (26) (117) (23) Mortality Increase 1 year 1,467 63 1,419 57Other post-employment benefits Discount rate (+ / – 0.25%) Increase (1,150) 33 (1,183) 25 Decrease 1,201 (34) 1,238 (26) Health care cost trend rates (+ / – 1.00%) Increase 2,016 76 2,060 76 Decrease (1,734) (64) (1,770) (64) Mortality Increase 1 year 1,459 65 1,383 71




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The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur as changes in certain assumptions may be correlated.

Asset allocation of defined benefit pension plan by asset category:

2017 2016

Equity securities 66.6 % 67.5 %Fixed income securities 29.1 31.7Cash and cash equivalents 4.3 0.8

100.0 % 100.0 %

The defined benefit pension plan adheres to its Statement of Investment Policies and Procedures which includes investment objectives, asset allocation guidelines and investment limits by asset class. The defined benefit pension plan assets are invested in proprietary investment funds with the exception of cash on deposit with Schedule I Canadian chartered banks.

DEFINED CONTRIBUTION PENSION PLANS

The Company maintains a number of defined contribution pension plans for eligible employees. The total expense recorded in Non-commission expense was $4.4 million (2016 – $3.4 million).

GROUP RETIREMENT SAVINGS PLAN (RSP)

The Company maintains a group RSP for eligible employees. The Company’s contributions are recorded in Non-commission expense as paid and totalled $6.4 million (2016 – $6.2 million).


Income tax expense:

2017 2016

Income taxes recognized in net earnings Current taxes Tax on current year’s earnings $ 152,502 $ 193,151 Adjustments in respect of prior years (3,892) (37,682)

148,610 155,469 Deferred taxes 25,277 12,164

$ 173,887 $ 167,633

Effective income tax rate:

2017 2016

Income taxes at Canadian federal and provincial statutory rates 26.84 % 26.84 %Effect of: Proportionate share of associates’ earnings (Note 8) (3.81) (2.96) Proportionate share of associate’s one-time charges (Note 8) 0.48 – Proportionate share of associate’s provision (Note 8) 0.17 – Tax loss consolidation (Note 25) (1.55) (2.56) Reduction in income tax estimates related to certain tax filings – (3.59) Other items 0.03 (0.03)

Effective income tax rate 22.16 % 17.70 %




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DEFERRED INCOME TAXES

Sources of deferred income taxes:

2017 2016

Deferred income tax assets Accrued benefit liabilities $ 49,771 $ 58,395 Loss carryforwards 15,002 3,693 Other 43,170 46,331

107,943 108,419

Deferred income tax liabilities Deferred selling commissions 203,976 193,214 Intangible assets 264,487 263,783 Other 42,681 30,727

511,144 487,724

$ 403,201 $ 379,305

Deferred income tax assets and liabilities are presented on the Consolidated Balance Sheets as follows:

2017 2016

Deferred income tax assets $ 60,661 $ 61,454Deferred income tax liabilities 463,862 440,759

$ 403,201 $ 379,305

NOTE 15 LONG-TERM DEBT

MATURITY RATE SERIES 2017 2016

March 7, 2018 6.58% 2003 $ 150,000 $ 150,000April 8, 2019 7.35% 2009 375,000 375,000January 26, 2027 3.44% 2017 400,000 –December 13, 2027 6.65% 1997 125,000 125,000May 9, 2031 7.45% 2001 150,000 150,000December 31, 2032 7.00% 2002 175,000 175,000March 7, 2033 7.11% 2003 150,000 150,000December 10, 2040 6.00% 2010 200,000 200,000January 25, 2047 4.56% 2017 200,000 –December 9, 2047 4.115% 2017 250,000 –

$ 2,175,000 $ 1,325,000

Long-term debt consists of unsecured debentures which are redeemable by the Company, in whole or in part, at any time, at the greater of par and a formula price based upon yields at the time of redemption.

Long-term debt is classified as other financial liabilities and is recorded at amortized cost.

Interest expense relating to long-term debt was $114.2 million (2016 – $92.2 million).

On January 26, 2017, the Company issued $400 million of 10 year, 3.44% debentures and $200 million of 30 year, 4.56% debentures. On December 7, 2017, the Company issued $250 million of 30 year, 4.115% debentures. These offerings were made pursuant to prospectus supplements to the Company’s short form base shelf prospectus dated November 29, 2016.

NOTE 14 INCOME TAXES (continued)



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NOTE 16 SHARE CAPITAL

AUTHORIZED

Unlimited number of: First preferred shares, issuable in series Second preferred shares, issuable in series Class 1 non-voting shares Common shares, no par value

ISSUED AND OUTSTANDING 2017 2016 STATED STATED SHARES VALUE SHARES VALUE

Perpetual preferred shares – classified as equity: First preferred shares, Series B 6,000,000 $ 150,000 6,000,000 $ 150,000

Common shares: Balance, beginning of year 240,515,968 $ 1,597,208 244,788,138 $ 1,623,948 Issued under Stock Option Plan (Note 18) 150,163 5,518 74,430 2,099 Purchased for cancellation – – (4,346,600) (28,839)

Balance, end of year 240,666,131 $ 1,602,726 240,515,968 $ 1,597,208

NORMAL COURSE ISSUER BID

There were no shares purchased in 2017 (2016 – 4,346,600 shares purchased at a cost of $155.7 million). The premium paid to purchase the shares in excess of the stated value was charged to Retained earnings.

The Company commenced a normal course issuer bid on March 20, 2017 which is effective until March 19, 2018. Pursuant to this bid, the Company may purchase up to 12.0 million or 5% of its common shares outstanding as at February 28, 2017. On March 20, 2016, the Company commenced a normal course issuer bid, effective until March 19, 2017, which authorized it to purchase up to 12.1 million or 5% of its common shares outstanding as at March 10, 2016.

In connection with its normal course issuer bid, the Company has established an automatic securities purchase plan for its common shares. The automatic securities purchase plan provides standard instructions regarding how the Company’s common shares are to be purchased under its normal course issuer bid during certain pre-determined trading blackout periods. Outside of these pre-determined trading blackout periods, purchases under the Company’s normal course issuer bid will be completed based upon management’s discretion.


The Company’s capital management objective is to maximize shareholder returns while ensuring that the Company is capitalized in a manner which appropriately supports regulatory capital requirements, working capital needs and business expansion. The Company’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. Capital of the Company consists of long-term debt, perpetual preferred shares and common shareholders’ equity. The Company regularly assesses its capital management practices in response to changing economic conditions.

The Company’s capital is primarily utilized in its ongoing business operations to support working capital requirements, long-term investments made by the Company, business expansion and other strategic objectives. Subsidiaries subject to regulatory capital requirements include investment dealers, mutual fund dealers, exempt market dealers, portfolio managers, investment fund managers and a trust company. These subsidiaries are required to maintain minimum levels of capital based on either working capital, liquidity or shareholders’ equity. The Company’s subsidiaries have complied with all regulatory capital requirements.



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The total outstanding long-term debt was $2,175.0 million at December 31, 2017, compared to $1,325.0 million at December 31, 2016. Long-term debt is comprised of debentures which are senior unsecured debt obligations of the Company subject to standard covenants, including negative pledges, but which do not include any specified financial or operational covenants.

On January 26, 2017, the Company issued $600 million of debentures. The net proceeds were used by IGM Financial to finance a substantial portion of the announced acquisitions of its equity interest in China AMC (Note 8) and for general corporate purposes. On December 7, 2017, the Company issued $250 million of debentures. The net proceeds will be used by IGM Financial to repay upcoming long-term debt maturities and for general corporate purposes.

Perpetual preferred shares of $150 million at December 31, 2017 remain unchanged from December 31, 2016.

The Company commenced a normal course issuer bid on March 20, 2017, which is effective until March 19, 2018, to purchase up to 5% of its common shares in order to mitigate the dilutive effect of stock options issued under the Company’s stock option plan and for other capital management purposes. There were no common shares purchased by the Company in 2017 (Note 16). Other activities in 2017 included the declaration of perpetual preferred share dividends of $8.9 million or $1.475 per share and common share dividends of $541.4 million or $2.25 per share. Changes in common share capital are reflected in the Consolidated Statements of Changes in Shareholders’ Equity.

NOTE 18 SHARE-BASED PAYMENTS

STOCK OPTION PLAN

Under the terms of the Company’s Stock Option Plan (Plan), options to purchase common shares are periodically granted to employees at prices not less than the weighted average trading price per common share on the Toronto Stock Exchange for the five trading days preceding the date of the grant. The options are subject to time vesting conditions set out at the grant date. Options vest over a period of up to 7.5 years from the grant date and are exercisable no later than 10 years after the grant date. At December 31, 2017, 20,806,098 (2016 – 20,956,261) common shares were reserved for issuance under the Plan.

During 2017, the Company granted 1,418,930 options to employees (2016 – 2,226,665). The weighted-average fair value of options granted during the year ended December 31, 2017 has been estimated at $2.52 per option (2016 – $1.68) using the Black-Scholes option pricing model. The weighted-average closing share price at the grant dates was $41.67. The assumptions used in these valuation models include:

2017 2016

Exercise price $ 41.70 $ 35.50Risk-free interest rate 1.53% 0.95%Expected option life 6 years 6 yearsExpected volatility 17.00% 18.00%Expected dividend yield 5.40% 6.34%

Expected volatility has been estimated based on the historic volatility of the Company’s share price over six years which is reflective of the expected option life. Stock options were exercised regularly throughout 2017 and the average share price in 2017 was $41.55.

The Company recorded compensation expense related to its stock option program of $3.5 million (2016 – $4.1 million).

NOTE 17 CAPITAL MANAGEMENT (continued)



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STOCK OPTION PLAN (continued)

2017 2016 WEIGHTED- WEIGHTED- NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE

Balance, beginning of year 8,484,030 $ 43.16 7,441,165 $ 44.80Granted 1,418,930 41.70 2,226,665 35.50Exercised (150,163) 33.77 (74,430) 26.67Forfeited (840,049) 48.42 (1,109,370) 39.86

Balance, end of year 8,912,748 $ 42.59 8,484,030 $ 43.16

Exercisable, end of year 4,063,668 $ 44.09 3,858,518 $ 44.73

EXPIRY EXERCISE OPTIONS OPTIONS OPTIONS OUTSTANDING AT DECEMBER 31, 2017 DATE PRICE $ OUTSTANDING EXERCISABLE

2018 43.19 – 44.60 168,320 168,320 2019 26.67 – 44.00 264,090 264,090 2020 40.45 – 42.82 715,021 715,021 2021 42.49 – 46.72 512,372 488,921 2022 45.56 – 47.23 817,576 700,142 2023 44.73 – 47.26 1,079,942 701,177 2024 53.81 847,191 441,970 2025 43.28 – 43.97 1,126,129 343,481 2026 34.88 – 38.17 2,010,432 240,546 2027 39.71 – 41.74 1,371,675 –

8,912,748 4,063,668

PERFORMANCE SHARE UNIT PLANThe Company has a Performance Share Unit (PSU) plan for eligible employees to assist in retaining and further aligning the interests of senior management with those of the shareholders. Under the terms of the plan, PSUs are awarded annually and are subject to time and performance vesting conditions. The value of each PSU is based on the share price of the Company’s common shares. The PSUs are cash settled and vest over a three year period. Certain employees can elect at the time of grant to receive a portion of their PSUs in the form of deferred share units which vest over a three year period. Deferred share units are redeemable when a participant is no longer an employee of the Company or any of its affiliates by a lump sum payment based on the value of the deferred share unit at that time. Additional PSUs and deferred share units are issued in respect of dividends payable on common shares based on a value of the PSU or deferred share unit at the dividend payment date. The Company recorded compensation expense, excluding the impact of hedging, of $14.0 million in 2017 (2016 – $10.9 million) and a liability of $23.3 million at December 31, 2017 (2016 – $16.4 million).

SHARE PURCHASE PLANS

Under the Company’s share purchase plans, eligible employees and Investors Group consultants can elect each year to have a percentage of their annual earnings withheld, subject to a maximum, to purchase the Company’s common shares. The Company matches 50% of the contribution amounts. All contributions are used by the plan trustee to purchase common shares in the open market. Shares purchased with Company contributions vest after a maximum period of three years following the date of purchase. The Company’s contributions are recorded in Non-commission expense as paid and totalled $12.9 million (2016 – $12.4 million).

NOTE 18 SHARE-BASED PAYMENTS (continued)



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The Company has a Deferred Share Unit (DSU) plan for the directors of the Company to promote a greater alignment of interest between directors and shareholders of the Company. Under the terms of the plan, directors are required to receive 50% of their annual board retainer in the form of DSUs and may elect to receive the balance of their annual board retainer in cash or DSUs. Directors may elect to receive certain fees in a combination of DSUs and cash. The number of DSUs granted is determined by dividing the amount of remuneration payable by the average closing price on the Toronto Stock Exchange of the common shares of the Company on the last five days of the fiscal quarter (value of DSU). A director who has elected to receive DSUs will receive additional DSUs in respect of dividends payable on common shares, based on the value of a DSU at the dividend payment date. DSUs are redeemable when a participant is no longer a director, officer or employee of the Company or any of its affiliates by cash payments, based on the value of the deferred share units at that time. At December 31, 2017, the fair value of the DSUs outstanding was $16.1 million (2016 – $12.9 million). Any difference between the change in fair value of the DSUs and the change in fair value of the total return swap, which is an economic hedge for the DSU plan, is recognized in Non-commission expense in the period in which the change occurs.

NOTE 19 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

AVAILABLE INVESTMENT EMPLOYEE FOR SALE IN ASSOCIATES 2017 BENEFITS SECURITIES AND OTHER TOTAL

Balance, beginning of year $ (110,913) $ 8,617 $ 19,854 $ (82,442)Other comprehensive income (loss) (21,616) 30,434 2,494 11,312

Balance, end of year $ (132,529) $ 39,051 $ 22,348 $ (71,130)

2016

Balance, beginning of year $ (111,874) $ 2,658 $ 77,222 $ (31,994)Other comprehensive income (loss) 961 5,959 (57,368) (50,448)

Balance, end of year $ (110,913) $ 8,617 $ 19,854 $ (82,442)

Amounts are recorded net of tax.


The Company actively manages its liquidity, credit and market risks.

LIQUIDITY AND FUNDING RISK RELATED TO FINANCIAL INSTRUMENTS

Liquidity and funding risk is the risk of the inability to generate or obtain sufficient cash in a timely and cost-effective manner to meet contractual or anticipated commitments as they come due or arise.

The Company’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.

• Regular assessment of capital market conditions and the Company’s ability to access bank and capital market funding.

• Ongoing efforts to diversify and expand long-term mortgage funding sources.

• Oversight of liquidity by management and by Committees of the Board of Directors.

NOTE 18 SHARE-BASED PAYMENTS (continued)



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LIQUIDITY AND FUNDING RISK RELATED TO FINANCIAL INSTRUMENTS (continued)

A key funding requirement for the Company 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.

The Company also maintains sufficient liquidity to fund and temporarily hold mortgages pending sale or securitization to long-term funding sources and to manage any derivative collateral requirements related to the mortgage banking operation. 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) securities including sales to Canada Housing Trust under the Canada Mortgage Bond Program (CMB Program).

Certain subsidiaries of the Company are approved issuers of NHA MBS and are approved sellers into the CMB Program. Capacity for sales under the CMB Program consists of participation in new CMB issues and reinvestment of principal repayments held in the Principal Reinvestment Accounts.

The Company maintains committed capacity within certain Canadian bank-sponsored securitization trusts.

The Company’s contractual maturities of certain financial liabilities were as follows:

LESS THAN AS AT DECEMBER 31, 2017 ($ millions) DEMAND 1 YEAR 1 – 5 YEARS AFTER 5 YEARS TOTAL

Derivative financial instruments $ – $ 7.0 $ 21.4 $ – $ 28.4Deposits and certificates 489.9 6.5 6.9 1.7 505.0Obligations to securitization entities – 1,193.0 6,357.3 45.7 7,596.0Long-term debt – 150.0 375.0 1,650.0 2,175.0Pension funding(1) – 47.3 – – 47.3

Total contractual maturities $ 489.9 $ 1,403.8 $ 6,760.6 $ 1,697.4 $ 10,351.7

(1) The next required actuarial valuation will be completed based on a measurement date of December 31, 2017. Pension funding requirements beyond 2018 are subject to significant variability and will be determined based on future actuarial valuations. Pension contribution decisions are subject to change, as contributions are affected by many factors including market performance, regulatory requirements, changes in assumptions and management’s ability to change funding policy.

In addition to the Company’s current balance of cash and cash equivalents, liquidity is available through the Company’s lines of credit. The Company’s lines of credit with various Schedule I Canadian chartered banks totalled $825 million as at December 31, 2017, unchanged from December 31, 2016. The lines of credit as at December 31, 2017 consisted of committed lines of $650 million (2016 – $650 million) and uncommitted lines of $175 million (2016 – $175 million). The Company has accessed its uncommitted lines of credit in the past; however, any advances made by a bank under the uncommitted lines of credit are at the bank’s sole discretion. As at December 31, 2017 and December 31, 2016, the Company was not utilizing its committed lines of credit or its uncommitted lines of credit.

The Company’s liquidity position and its management of liquidity and funding risk have not changed materially since December 31, 2016.

CREDIT RISK RELATED TO FINANCIAL INSTRUMENTS

Credit risk is the potential for financial loss to the Company if a counterparty to a transaction fails to meet its obligations. The Company’s cash and cash equivalents, securities holdings, mortgage portfolios, and derivatives are subject to credit risk. The Company monitors its credit risk management practices on an ongoing basis to evaluate their effectiveness.

At December 31, 2017, cash and cash equivalents of $966.8 million (2016 – $611.0 million) consisted of cash balances of $88.3 million (2016 – $84.5 million) on deposit with Canadian chartered banks and cash equivalents of $878.5 million (2016 – $526.5 million). Cash equivalents are comprised of Government of Canada treasury bills totalling $239.5 million (2016 – $44.1 million), provincial government treasury bills and promissory notes of $252.6 million (2016 – $197.1 million), bankers’ acceptances and other short-term notes issued by Canadian chartered banks of $351.4 million (2016 – $246.8 million), and highly rated corporate commercial paper of $35.0 million (2016 – $38.5 million). The Company manages credit risk related to cash and cash equivalents by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. The Company regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value.

NOTE 20 RISK MANAGEMENT (continued)



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CREDIT RISK RELATED TO FINANCIAL INSTRUMENTS (continued)

As at December 31, 2017, residential mortgages, recorded on the Company’s balance sheet, of $7.8 billion (2016 – $8.0 billion) consisted of $7.5 billion sold to securitization programs (2016 – $7.6 billion), $286.7 million held pending sale or securitization (2016 – $339.5 million) and $26.0 million related to the Company’s intermediary operations (2016 – $29.2 million).

The Company manages credit risk related to residential mortgages through:

• Adhering to its lending policy and underwriting standards;

• Its loan servicing capabilities;

• Use of client-insured mortgage default insurance and mortgage portfolio default insurance held by the Company; 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.

In certain instances, credit risk is also limited by the terms and nature of securitization transactions as described below:

• Under the NHA MBS program totalling $4.5 billion (2016 – $4.9 billion), the Company 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 $3.1 billion (2016 – $2.7 billion) is limited to amounts held in cash reserve accounts and future net interest income, the fair values of which were $69.7 million (2016 – $54.7 million) and $42.4 million (2016 – $45.0 million), respectively, at December 31, 2017. Cash reserve accounts are reflected on the balance sheet, whereas rights to future net interest income are not reflected on the balance sheet and will be recorded over the life of the mortgages. This risk is further mitigated by insurance with 16.4% of mortgages held in ABCP Trusts insured at December 31, 2017 (2016 – 29.1%).

At December 31, 2017, residential mortgages recorded on balance sheet were 65.5% insured (2016 – 73.9%). As at December 31, 2017, impaired mortgages on these portfolios were $2.8 million, compared to $2.6 million at December 31, 2016. Uninsured non-performing mortgages over 90 days on these portfolios were $0.8 million at December 31, 2017, compared to $0.9 million at December 31, 2016.

The Company 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 the Company’s balance sheet as the Company has transferred substantially all of the risks and rewards of ownership associated with these loans.

The Company regularly reviews the credit quality of the mortgages and the adequacy of the collective allowance for credit losses.

The Company’s collective allowance for credit losses was $0.8 million at December 31, 2017, compared to $0.7 million at December 31, 2016, and is considered adequate by management to absorb all credit-related losses in the mortgage portfolios based on: i) historical credit performance experience and recent trends, ii) current portfolio credit metrics and other relevant characteristics, and iii) regular stress testing of losses under adverse real estate market conditions.

The Company’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and mortgage portfolios have not changed materially since December 31, 2016.

The Company is exposed to credit risk through derivative contracts it utilizes to hedge interest rate risk, to facilitate securitization transactions and to hedge market risk related to certain stock-based compensation arrangements. These derivatives are discussed more fully under the Market Risk section.

To the extent that the fair value of the derivatives is in a gain position, the Company is exposed to credit risk that its counterparties fail to fulfil their obligations under these arrangements.




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CREDIT RISK RELATED TO FINANCIAL INSTRUMENTS (continued)

The Company’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 $33.8 million (2016 – $41.4 million) 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 $1.2 million at December 31, 2017 (2016 – $3.0 million). Counterparties are all Canadian Schedule I chartered banks and, as a result, management has determined that the Company’s overall credit risk related to derivatives was not significant at December 31, 2017. Management of credit risk related to derivatives has not changed materially since December 31, 2016.

MARKET RISK RELATED TO FINANCIAL INSTRUMENTS

Market risk is the potential for loss to the Company from changes in the values of its financial instruments due to changes in foreign exchange rates, interest rates or equity prices.

Interest Rate Risk

The Company is exposed to interest rate risk on its loan portfolio and on certain of the derivative financial instruments used in the Company’s mortgage banking operations.

The Company manages interest rate risk associated with its mortgage banking operations by entering into interest rate swaps with Canadian Schedule I chartered banks as follows:

• The Company 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, the Company 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 positive fair value of $4.1 million (2016 – negative $23.1 million) and an outstanding notional amount of $1.2 billion at December 31, 2017 (2016 – $1.0 billion). The Company enters into interest rate swaps with Canadian Schedule I chartered banks to hedge the risk that the interest rates earned on floating rate mortgages and reinvestment returns decline. The negative fair value of these swaps totalled $4.5 million (2016 – $30.0 million), on an outstanding notional amount of $1.9 billion at December 31, 2017 (2016 – $2.1 billion). The net fair value of these swaps of negative $0.4 million at December 31, 2017 (2016 – $6.9 million) are recorded on balance sheet and have an outstanding notional amount of $3.1 billion (2016 – $3.1 billion).

• The Company is exposed to the impact that changes in interest rates may have on the value of mortgages committed to or held pending sale or securitization to long-term funding sources. The Company enters into interest rate swaps to hedge the interest rate risk related to funding costs for mortgages held by the Company pending sale or securitization. The fair value of these swaps totalled $0.9 million (2016 – negative $0.4 million) on an outstanding notional amount of $137.0 million at December 31, 2017 (2016 – $123.0 million).

As at December 31, 2017, the impact to annual net earnings of a 100 basis point increase in interest rates would have been a decrease of approximately $0.9 million (2016 – increase of $0.2 million). The Company’s exposure to and management of interest rate risk have not changed materially since December 31, 2016.

Equity Price Risk

The Company is exposed to equity price risk on its equity securities (Note 4) which are classified as either available for sale or fair value through profit or loss.

The Company sponsors a number of deferred compensation arrangements for employees where payments to participants are deferred and linked to the performance of the common shares of IGM Financial Inc. The Company hedges its exposure to this risk through the use of forward agreements and total return swaps.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk on its investments in Personal Capital and China AMC.




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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.


The Company enters into derivative contracts which are either exchange-traded or negotiated in the over-the-counter market on a diversified basis with Schedule I chartered banks or Canadian bank-sponsored securitization trusts that are counterparties to the Company’s securitization transactions. In all cases, the derivative contracts are used for non-trading purposes. Interest rate swaps are contractual agreements between two parties to exchange the related interest payments based on a specified notional amount and reference rate for a specified period. Total return swaps are contractual agreements to exchange payments based on a specified notional amount and the underlying security for a specific period. Options are contractual agreements which convey the right, but not the obligation, to buy or sell specific financial instruments at a fixed price at a future date. Forward contracts are contractual agreements to buy or sell a financial instrument on a future date at a specified price.

Certain of the Company’s derivative financial instruments are subject to master netting arrangements and are presented on a gross basis. The amount subject to credit risk is limited to the current fair value of the instruments which are in a gain position and recorded as assets on the Consolidated Balance Sheets. The total estimated fair value represents the total amount that the Company would receive or pay to terminate all agreements at each year end. However, this would not result in a gain or loss to the Company as the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses.

The following table summarizes the Company’s derivative financial instruments:

NOTIONAL AMOUNT FAIR VALUE 1 YEAR 1–5 OVER CREDIT 2017 OR LESS YEARS 5 YEARS TOTAL RISK ASSET LIABILITY

Swaps $ 1,261,555 $ 1,956,242 $ 19,918 $ 3,237,715 $ 28,476 $ 28,476 $ 28,444Forward contracts 8,400 23,080 – 31,480 7,216 7,216 –

$ 1,269,955 $ 1,979,322 $ 19,918 $ 3,269,195 $ 35,692 $ 35,692 $ 28,444

2016

Swaps $ 1,476,604 $ 1,787,241 $ 16,315 $ 3,280,160 $ 40,970 $ 40,970 $ 32,277Options purchased 467,200 – – 467,200 67 67 –Forward contracts 326,499 20,046 – 346,545 1,784 1,784 5,886

$ 2,270,303 $ 1,807,287 $ 16,315 $ 4,093,905 $ 42,821 $ 42,821 $ 38,163

The credit risk related to the Company’s derivative financial instruments after giving effect to any netting agreements was $7.4 million (2016 – $4.7 million).

The credit risk related to the Company’s derivative financial instruments after giving effect to netting agreements and including rights to future net interest income, was $1.2 million (2016 – $3.0 million). Rights to future net interest income are related to the Company’s securitization activities and are not reflected on the Consolidated Balance Sheets.




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NOTE 22 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values are management’s estimates and are calculated using market conditions at a specific point in time and may not reflect future fair values. The calculations are subjective in nature, involve uncertainties and are matters of significant judgment.

All financial instruments measured at fair value and those for which fair value is disclosed are classified into one of three levels that distinguish fair value measurements by the significance of the inputs used for valuation.

Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in the most advantageous market, utilizing a hierarchy of three different valuation techniques, based on the lowest level input that is significant to the fair value measurement in its entirety.

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 – Observable inputs other than Level 1 quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data; and

Level 3 – Unobservable inputs that are supported by little or no market activity. Valuation techniques are primarily model-based.

Markets are considered inactive when transactions are not occurring with sufficient regularity. Inactive markets may be characterized by a significant decline in the volume and level of observed trading activity or through large or erratic bid/offer spreads. In those instances where traded markets are not considered sufficiently active, fair value is measured using valuation models which may utilize predominantly observable market inputs (Level 2) or may utilize predominantly non-observable market inputs (Level 3). Management considers all reasonably available information including indicative broker quotations, any available pricing for similar instruments, recent arm’s length market transactions, any relevant observable market inputs, and internal model-based estimates. Management exercises judgment in determining the most appropriate inputs and the weighting ascribed to each input as well as in the selection of valuation methodologies.

Fair value is determined using the following methods and assumptions:

Securities and other financial assets and financial liabilities are valued using quoted prices from active markets, when available. When a quoted market price is not readily available, valuation techniques are used that require assumptions related to discount rates and the timing and amount of future cash flows. Wherever possible, observable market inputs are used in the valuation techniques.

Loans classified as Level 2 are valued using market interest rates for loans with similar credit risk and maturity.

Loans classified as Level 3 are valued by discounting the expected future cash flows at prevailing market yields.

Obligations to securitization entities are valued by discounting the expected future cash flows at prevailing market yields for securities issued by these securitization entities having similar terms and characteristics.

Deposits and certificates are valued by discounting the contractual cash flows using market interest rates currently offered for deposits with similar terms and credit risks.

Long-term debt is valued using quoted prices for each debenture available in the market.

Derivative financial instruments are valued based on quoted market prices, where available, prevailing market rates for instruments with similar characteristics and maturities, or discounted cash flow analysis.

Level 1 financial instruments include exchange-traded equity securities and open-end investment fund units and other financial liabilities in instances where there are quoted prices available from active markets.

Level 2 assets and liabilities include fixed income securities, loans, derivative financial instruments, deposits and certificates and long-term debt. The fair value of fixed income securities is determined using quoted market prices or independent dealer price quotes. The fair value of derivative financial instruments and deposits and certificates are determined using valuation models, discounted cash flow methodologies, or similar techniques using primarily observable market inputs. The fair value of long-term debt is determined using indicative broker quotes.



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Level 3 assets and liabilities include securities with little or no trading activity valued using broker-dealer quotes, loans, other financial assets, obligations to securitization entities and derivative financial instruments. Derivative financial instruments consist of principal reinvestment account swaps which represent the component of a swap entered into under the CMB Program whereby the Company pays coupons on Canada Mortgage Bonds and receives investment returns on the reinvestment of repaid mortgage principal. Fair value is determined by discounting the projected cashflows of the swaps. The notional amount, which is an input used to determine the fair value of the swap, is determined using an average unobservable prepayment rate of 15% which is based on historical prepayment patterns. An increase (decrease) in the assumed mortgage prepayment rate increases (decreases) the notional amount of the swap.

The following table presents the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. The table distinguishes between those financial instruments recorded at fair value and those recorded at amortized cost. The table also excludes fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. These items include cash and cash equivalents, accounts and other receivables, certain other financial assets, accounts payable and accrued liabilities, and certain other financial liabilities.

FAIR VALUE

2017 CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

Financial assets recorded at fair value Securities – Available for sale $ 282,756 $ 19,931 $ – $ 262,825 $ 282,756 – Held for trading 96,940 95,390 889 661 96,940 Loans – Held for trading 286,682 – 286,682 – 286,682 Derivative financial instruments 35,692 – 22,879 12,813 35,692Financial assets recorded at amortized cost Loans – Loans and receivables 7,563,191 – 25,917 7,649,591 7,675,508Financial liabilities recorded at fair value Derivative financial instruments 28,444 – 19,726 8,718 28,444 Other financial liabilities 9,262 9,146 116 – 9,262Financial liabilities recorded at amortized cost Deposits and certificates 504,996 – 505,486 – 505,486 Obligations to securitization entities 7,596,028 – – 7,657,761 7,657,761 Long-term debt 2,175,000 – 2,470,182 – 2,470,182

2016

Financial assets recorded at fair value Securities – Available for sale $ 158,380 $ 6,431 $ – $ 151,949 $ 158,380 – Held for trading 66,804 63,049 2,317 1,438 66,804 Loans – Held for trading 339,466 – 339,466 – 339,466 Derivative financial instruments 42,821 – 39,976 2,845 42,821Financial assets recorded at amortized cost Loans – Loans and receivables 7,643,803 – 29,452 7,838,295 7,867,747Financial liabilities recorded at fair value Derivative financial instruments 38,163 – 12,263 25,900 38,163 Other financial liabilities 9,781 9,770 11 – 9,781Financial liabilities recorded at amortized cost Deposits and certificates 471,202 – 472,219 – 472,219 Obligations to securitization entities 7,721,024 – – 7,873,118 7,873,118 Long-term debt 1,325,000 – 1,610,942 – 1,610,942

NOTE 22 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)



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There were no significant transfers between Level 1 and Level 2 in 2017 and 2016.

The following table provides a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

GAINS/(LOSSES) GAINS/ INCLUDED IN (LOSSES) OTHER PURCHASES BALANCE INCLUDED IN COMPREHENSIVE AND TRANSFERS BALANCE 2017 JANUARY 1 NET EARNINGS(1) INCOME(2) ISSUANCES SETTLEMENTS IN/OUT DECEMBER 31

Assets Securities – Available for sale $ 151,949 $ 2,611 $ 34,856 $ 73,409 $ – $ – $ 262,825 – Held for trading 1,438 27 – 96 – (900) 661Liabilities Derivative financial instruments, net 23,055 13,189 – 1,810 15,771 – (4,095)

2016

Assets Securities – Available for sale $ 9,273 $ – $ 6,746 $ 135,930 $ – $ – $ 151,949 – Held for trading 1,288 (51) – 183 – 18 1,438Liabilities Derivative financial instruments, net 47,414 11,218 – 4,112 17,253 – 23,055

(1) Included in Net investment income in the Consolidated Statements of Earnings.(2) Included in Available for sale securities – Net unrealized gains (losses) in the Consolidated Statements of Comprehensive Income.

NOTE 23 EARNINGS PER COMMON SHARE

2017 2016

Earnings Net earnings $ 610,765 $ 779,304 Perpetual preferred share dividends 8,850 8,850

Net earnings available to common shareholders $ 601,915 $ 770,454

Number of common shares (in thousands) Weighted average number of common shares outstanding 240,585 241,300 Add: Potential exercise of outstanding stock options(1) 336 102

Average number of common shares outstanding – Diluted basis 240,921 241,402

Earnings per common share (in dollars) Basic $ 2.50 $ 3.19 Diluted $ 2.50 $ 3.19

(1) Excludes 691 thousand shares in 2017 related to outstanding stock options that were anti-dilutive (2016 – 1,809 thousand).

NOTE 22 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)



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NOTE 24 CONTINGENT LIABILITIES, COMMITMENTS AND GUARANTEES


The Company is subject to legal actions arising in the normal course of its business. Although it is difficult to predict the outcome of any such legal actions, based on current knowledge and consultation with legal counsel, management does not expect the outcome of any of these matters, individually or in aggregate, to have a material adverse effect on the Company’s consolidated financial position.

COMMITMENTS

The Company is committed to the following annual future minimum lease payments under its operating leases: 2018 – $28.4 million; 2019 – $23.4 million; 2020 – $20.3 million; 2021 – $15.9 million; and 2022 and thereafter – $46.2 million.

GUARANTEES

In the normal course of operations, the Company executes agreements that provide for indemnifications to third parties in transactions such as business dispositions, business acquisitions, loans and securitization transactions. The Company has also agreed to indemnify its directors and officers. The nature of these agreements precludes the possibility of making a reasonable estimate of the maximum potential amount the Company could be required to pay third parties as the agreements often do not specify a maximum amount and the amounts are dependent on the outcome of future contingent events, the nature and likelihood of which cannot be determined. Historically, the Company has not made any payments under such indemnification agreements. No provisions have been recognized related to these agreements.

NOTE 25 RELATED PARTY TRANSACTIONS

TRANSACTIONS AND BALANCES WITH RELATED ENTITIES

The Company enters into transactions with The Great-West Life Assurance Company (Great-West), London Life Insurance Company (London Life) and The Canada Life Assurance Company (Canada Life), which are all subsidiaries of its affiliate, Lifeco, which is a subsidiary of Power Financial Corporation. These transactions are in the normal course of operations and have been recorded at fair value:

• During 2017 and 2016, the Company provided to and received from Great-West certain administrative services. The Company distributes insurance products under a distribution agreement with Great-West and Canada Life and received $77.1 million in distribution fees (2016 – $101.8 million). The Company received $17.8 million (2016 – $16.9 million) and paid $24.2 million (2016 – $21.7 million) to Great-West and related subsidiary companies for the provision of sub-advisory services for certain investment funds. The Company paid $76.0 million (2016 – $70.5 million) to London Life related to the distribution of certain investment funds of the Company.

• During 2017, the Company sold residential mortgage loans to Great-West and London Life for $136.5 million (2016 – $183.7 million).

After obtaining advanced tax rulings in October 2017, the Company agreed to tax loss consolidation transactions with the Power Corporation of Canada group whereby shares of a subsidiary that has generated tax losses may be acquired in each year up to and including 2020. The acquisitions are expected to close in the fourth quarter of each year. The Company will recognize the benefit of the tax losses realized throughout the year. On December 29, 2017, the Company acquired shares of such a loss company and recorded the benefit of the tax losses acquired.



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The total compensation and other benefits to directors and employees classified as key management, being individuals having authority and responsibility for planning, directing and controlling the activities of the Company, are as follows:

2017 2016

Compensation and employee benefits $ 4,098 $ 5,081Post-employment benefits 2,628 7,326Share-based payments 1,456 3,666

$ 8,182 $ 16,073

Share-based payments exclude the fair value remeasurement of the deferred share units associated with changes in the Company’s share price (Note 18).


The Company’s reportable segments are:

• Investors Group

• Mackenzie

• Corporate and Other

These segments reflect the Company’s internal financial reporting and performance measurement. In 2017, the Company announced the combination of investment management functions of Investors Group and Mackenzie resulting in the formation of a single global investment management organization. As a result, the Company has changed the methodology used to charge its segments the costs associated with the single investment management function to better align it with internal reporting.

Investors Group earns fee-based revenues in the conduct of its core business activities which are primarily related to the distribution, management and administration of its investment funds. It also earns fee revenues from the provision of brokerage services and the distribution of insurance and banking products. In addition, Investors Group earns intermediary revenues primarily from mortgage banking and servicing activities and from the assets funded by deposit and certificate products.

Mackenzie earns fee-based revenues from services it provides as fund manager to its investment funds and as investment advisor to sub-advisory and institutional accounts.

Corporate and Other includes Investment Planning Counsel, equity income from its investment in Lifeco and China AMC (Note 8), net investment income on unallocated investments, other income, and also includes consolidation elimination entries.

NOTE 25 RELATED PARTY TRANSACTIONS (continued)



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INVESTORS CORPORATE GROUP MACKENZIE AND OTHER TOTAL

2017

Revenues Management fees $ 1,415,026 $ 701,669 $ 64,269 $ 2,180,964 Administration fees 322,012 99,147 18,541 439,700 Distribution fees 190,447 7,714 186,908 385,069 Net investment income and other 41,678 1,217 9,708 52,603 Proportionate share of associates’ earnings – – 114,772 114,772

1,969,163 809,747 394,198 3,173,108

Expenses Commission 654,376 300,007 183,500 1,137,883 Non-commission 576,281 329,336 66,848 972,465

1,230,657 629,343 250,348 2,110,348

Earnings before undernoted $ 738,506 $ 180,404 $ 143,850 1,062,760

Interest expense (114,157)Restructuring and other charges (195,234)Pension plan 50,381 Proportionate share of associate’s one-time charges (14,000)Proportionate share of associate’s provision (5,098)

Earnings before income taxes 784,652Income taxes 173,887

Net earnings 610,765Perpetual preferred share dividends 8,850

Net earnings available to common shareholders $ 601,915

Identifiable assets $ 9,445,095 $ 1,322,369 $ 3,071,722 $ 13,839,186Goodwill 1,347,781 1,168,580 143,906 2,660,267

Total assets $ 10,792,876 $ 2,490,949 $ 3,215,628 $ 16,499,453

NOTE 26 SEGMENTED INFORMATION (continued)

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NOTE 26 SEGMENTED INFORMATION (continued)

INVESTORS CORPORATE GROUP MACKENZIE AND OTHER TOTAL

2016

Revenues Management fees $ 1,295,975 $ 666,750 $ 62,456 $ 2,025,181 Administration fees 309,903 93,028 18,687 421,618 Distribution fees 227,105 9,253 173,777 410,135 Net investment income and other 71,668 4,042 7,913 83,623 Proportionate share of associates' earnings – – 104,226 104,226

1,904,651 773,073 367,059 3,044,783

Expenses Commission 624,883 291,346 173,819 1,090,048 Non-commission 543,561 310,282 61,759 915,602

1,168,444 601,628 235,578 2,005,650

Earnings before undernoted $ 736,207 $ 171,445 $ 131,481 1,039,133

Interest expense (92,196)

Earnings before income taxes 946,937Income taxes 167,633

Net earnings 779,304Perpetual preferred share dividends 8,850

Net earnings available to common shareholders $ 770,454

Identifiable assets $ 9,548,190 $ 1,294,982 $ 2,121,854 $ 12,965,026Goodwill 1,347,781 1,168,580 143,906 2,660,267

Total assets $ 10,895,971 $ 2,463,562 $ 2,265,760 $ 15,625,293

P O W E R C O R P O R AT I O N O F C A N A DA D 1 0 1



D 1 0 2 P O W E R C O R P O R AT I O N O F C A N A DA


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Pargesa Holding SA

P A R T E

The attached document discloses information relating to the fi nancial results of Pargesa Holding SA as issued by Pargesa Holding SA.

P O W E R C O R P O R AT I O N O F C A N A DA E 1

PCC_2017Com_Eng05_PAR_2018-03-20_v1.indd E1PCC_2017Com_Eng05_PAR_2018-03-20_v1.indd E1 18-03-21 12:23 PM18-03-21 12:23 PM

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Pargesa

PARGESA HOLDING SA

(3)

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HIGHLIGHTS



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ECONOMIC PRESENTATION OF PARGESA’S FINANCIAL RESULTS

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2017

Contribution from the portfolio to operating income Consolidated:

126.1

Non-consolidated: 59.7 45.9 22.8 19.8 14.9 14.4 5.0 5.1 1.7 1.2 0.1

Contribution of private equity and other funds 123.1 Contribution from the portfolio to operating income 439.8per share [SF] 5.19 4.04

(20.3) (35.3)

Economic operating income 384.2per share [SF] 4.54 3.79

(11.0) 8.8

Net income (loss) 382.0 per share [SF] 4.51 (0.38)

84,661

1.112



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CONSOLIDATED HOLDINGS

Imerys

NON-CONSOLIDATED HOLDINGS

LafargeHolcim

SGS

Pernod Rica rd

Total

adidas

7



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CONTRIBUTIONS FROM PRIVATE EQUITY ACTIVITIES AND OTHER INVESTMENT FUNDS

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NET FINANCIAL INCOME AND EXPENSES

GENERAL EXPENSES AND TAXES

NON-OPERATING INCOME (LOSS)

P O W E R C O R P O R AT I O N O F C A N A DA E 1 1


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PRESENTATION OF RESULTS IN ACCORDANCE WITH IFRS

2017

5,546.7 (4,970.5) 281.3

Operating profit (loss) 857.5 378.8 (141.0) (165.3) 36.4

Consolidated net profit 966.4 (584.4)

Attributable to Pargesa shareholders 382.0

Basic earnings per share attributable to Pargesa shareholders [SF] 4.51 (0.38)

84,661

1.112



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NET ASSET VALUE10

Net asset value of Pargesa

Listed companies:

Other investments:

Total portfolio

Net asset value

per Pargesa share 84.5 SF 128.2

P O W E R C O R P O R AT I O N O F C A N A DA E 1 3



751 Victoria Square Montréal, Québec, Canada H2Y 2J3 514-286-7400 1-800-890-7440

161 Bay Street, Suite 5000 Toronto, Ontario, Canada M5J 2S1 416-607-2250

www.powercorporation.com

This document is also available on the Corporation’s website and on SEDAR at www.sedar.com.

STOCK LISTINGS

Shares of Power Corporation of Canada are listed on the Toronto Stock Exchange:

Subordinate Voting Shares: POW Participating Preferred Shares: POW.PR.E

First Preferred Shares, 1986 Series: POW.PR.F First Preferred Shares, Series A: POW.PR.A First Preferred Shares, Series B: POW.PR.B First Preferred Shares, Series C: POW.PR.C First Preferred Shares, Series D: POW.PR.D First Preferred Shares, Series G: POW.PR.G

TRANSFER AGENT AND REGISTRAR

Computershare Investor Services Inc.

Offices in: Montréal, Québec; Toronto, Ontario; Vancouver, British Columbia www.investorcentre.com

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

Corporate Information

Power Corporation of Canada is recognized as an Imagine Canada Caring Company for leadership and excellence in community investment.

To learn more about the organizations we support, visit

www.PowerCorporationCommunity.com

The Caring Company Program Trustmark is a mark of Imagine Canada used under licence by Power Corporation of Canada.

https://www.powercorporation.com/en/

https://www-us.computershare.com/investor/?gcc=ca&lang=en

https://www.computershare.com/ca/en

http://www.powercorporationcommunity.com/en/

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management’s consolidated financial statements and notes

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