Financialfacts. London Life participating life insurance. Accountability Strength Performance

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1 2014 Financialfacts London Life participating life insurance Accountability Strength Performance

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3 This guide provides key financial facts about the management, strength and performance of the London Life participating account. Table of contents Financial highlights Participating life insurance overview... 6 How participating policies perform... 6 How policyowner* dividends are allocated... 7 Accountability... 8 Strength...10 Participating account performance...12 Dividend scale interest rate...12 Historical average returns...13 Stability...14 Returns...14 Asset mix...15 Investment guidelines...16 Prudent management...17 Need more information?...19 Appendix...20 London Life participating account management policy...20 London Life participating policyholder* dividend policy...22 * The term policyowner is used throughout except in the appendix. Throughout this document numbers may have been rounded. Performance data is provided for illustrative purposes only and represents past performance, which is not necessarily indicative of future performance.

4 Financial highlights 2014 for the London Life participating account Accountability The participating policyowner portion of distributed surplus continued to be 97.5 per cent unchanged since London Life is governed under the federal Insurance Companies Act (ICA) of Canada, which includes provisions for how participating accounts must be managed within a company that has shareholders. It also includes the requirements that a participating account management policy and a policyowner dividend policy be established and maintained. Participating policyowner dividends are determined in accordance with the policyowner dividend policy approved by the board of directors. This policy is intended to ensure reasonable equity among groupings of participating policyowners. In 2014, London Life participating policyowner death claims totalled $396.2 million. Detailed information on the investments held in London Life s participating account can be found at londonlife.com. This information is updated quarterly. notes The dividend scale interest rate is used to calculate the investment component of participating policyowner dividends and is based on the return on the assets backing participating account liabilities. It does not include the return on assets backing the participating account surplus. The dividend scale interest rate is only one of many factors that contribute to an individual policy s performance. The actual cash value growth in any policy varies based on a number of factors, such as type of product, product features, premium-paying period, issue age, rating, dividend option, the dividend scale and others. Strength London Life continues to have the largest participating account in Canada, as measured by assets. 1 The total participating account assets, including surplus, were $23.8 billion at Dec. 31, London Life has 1.5 million participating life insurance policies in force at Dec. 31, London Life s credit ratings were maintained in The company continues to enjoy strong ratings relative to its North American peer group due to its conservative risk profile and stable earnings track record. Vesting Vesting is a significant benefit available with participating life insurance. Starting at a policy s first anniversary, policyowners can begin receiving dividends. Dividends credited to a policy have a cash value associated with them. This cash value, once credited to the policy, can grow year after year. It cannot be reduced or used for any purpose other than as authorized by the policyowner, to pay premiums or to preserve the policy s tax-exempt status. Vesting is a key and attractive advantage of participating life insurance because policyowner dividends, once distributed, are not negatively affected by future market performance. 1. This information is based on competitive data available at time of printing; not all companies report this information. 2. Ratings are the latest ratings given by A.M. Best Company, DBRS Limited, Fitch Ratings, Moody s Investors Service and Standard & Poor s Ratings Services at time of publication. For current information on London Life s ratings and financial strength, see the corporate information section at londonlife.com. 4

5 Performance London Life has distributed dividends to its participating policyowners every year since In 2014, dividends distributed to participating policyowners were $783 million. London Life s long-term investment strategy together with its strategy of smoothing the returns for the purpose of determining the dividend scale interest rate helps reduce the impact of shortterm investment volatility on participating life insurance policyowner dividends. On average, based on the 2014 dividend scale, approximately 60 per cent of policyowner dividends were derived from investment experience. Approximately 30 per cent were derived from positive mortality experience and approximately 10 per cent were derived from other factors, such as lapse, expense and tax experience. The 2014 dividend scale interest rate was 5.9 per cent. 3 The 10-year average annual dividend scale interest rate was 6.8 per cent, and the 20-year average was 7.7 per cent to the end of The 30-year average annual dividend scale interest rate was 8.7 per cent for the period from 1985 to The 60-year average annual dividend scale interest rate was 7.4 per cent for the period from 1955 to The one-year return on total participating account assets for 2014, after investment expenses, was 5.5 per cent. 5 In 2014, participating account investment expenses were 7.4 basis points. In 2014, the participating account holdings of equity investments, including real estate, decreased to 19.1 per cent of the total invested participating account assets, from 22.9 per cent in In 2014, mortgage holdings decreased to 26.0 per cent of the total invested participating account assets, from 26.7 per cent in In 2014, public bond holdings increased to 46.0 per cent of the total invested participating account assets, from 43.8 per cent in In 2014, private placement holdings decreased to 3.9 per cent of total invested participating account assets, from four per cent in For 2015 In November 2014 the board of directors approved the recommendation of the company s actuary, and the 2014 dividend scale will continue to apply for all London Life participating life insurance policies through Factors such as mortality and taxes have improved, and equity markets performed well, which helped offset the impact of the continuing low interest rate environment, allowing the dividend scale to be maintained. London Life s participating life insurance products continue to be competitive and reflect a history of strong, stable performance. On average, based on the 2015 dividend scale, approximately 60 per cent of policyowner dividends will come from investment experience. Approximately 30 per cent will come from positive mortality experience, and approximately 10 per cent will come from other factors, such as lapse, expense and tax experience. The 2015 dividend scale interest rate is 5.9 percent. 3 In 2015, dividends distributed to participating policyowners are estimated to be $830 million. notes 3. The rate shown applies to policies issued on or after Sept.16, These policies have a variable policy loan rate provision, whereas policies issued before this date have a fixed policy loan rate provision and a different dividend scale interest rate. 4. The 60-year average annual dividend scale interest rate is a blended average of the dividend scale interest rate that applies to policies with a variable policy loan rate provision (1969 to 2014) and the dividend scale interest rate that applies to policies with a fixed policy loan rate provision (1955 to 1968). 5. The participating account return is the return on the participating account assets that back both liabilities and surplus after investment expenses are deducted. Investment expenses may vary yearly due to changes in the asset mix of the total participating account, economies of scale and other factors. The participating account return is reported for the calendar year Jan. 1, 2014, to Dec. 31, The participating account return is a short-term indicator of investment performance. This return is based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), effective Jan. 1, 2011, with the exception of unrealized gains and losses on bonds, which are excluded because bonds in the participating account are generally held until maturity. Common stock and real estate returns are valued on a marked-to-market basis (i.e., not smoothed) and realized gains and losses on bonds are recognized as incurred. 5

6 Participating life insurance overview How participating life insurance policies perform Participating life insurance is built on a foundation of guaranteed values, tax-advantaged growth, plus the opportunity to receive policyowner dividends. Participating policyowners premiums go into a separate account called the participating account. London Life manages this account, investing its assets in a diversified portfolio of bonds, mortgages and equities including real estate. This frees policyowners from the details of hands-on management. Earnings come from favourable investment returns, mortality experience, policy lapse experience and expense management relative to the assumptions used when pricing the products. Each year, London Life may distribute some of these earnings in the form of policyowner dividends, as approved by the board of directors. Policyowner dividends are not guaranteed. The amount to be distributed is influenced by considerations such as the need to retain earnings as surplus and to reduce short-term volatility in dividends. Surplus is held in the participating account to maintain the strength and stability of the company. London Life reviews the dividend scale and the participating account insurance contract liabilities at least annually. This review involves analyzing factors such as investment returns, mortality experience, expenses, lapses and taxes. The process is intended to ensure the participating account insurance contract liabilities are at an appropriate level and to determine whether a change needs to be made to the policyowner dividend scale. How is a policyowner dividend different from a shareholder dividend? Shareholder dividends are paid based on the overall results of the company from all lines of business, including non-participating life insurance and investment products. Participating policyowner dividends are based solely on the experience of London Life s participating life insurance line of business. 6

7 How policyowner dividends are allocated Each year, the board of directors declares what portion of the participating account earnings for that financial year will be distributed from the participating account. Currently, 97.5 per cent of the amount is distributed to participating policyowners, and 2.5 per cent is distributed to the shareholder account under section 461 of the federal Insurance Companies Act (ICA). The 97.5/2.5 per cent split for London Life has remained unchanged since See the accountability section for more details. Participating policyowner dividends are allocated based on groupings of participating policyowners, including: The year a policy was issued Eras in which premiums or guarantees are similar Plan types Basic risk classifications (e.g., male/female; smoker/non-smoker) Issue ages Dividends are distributed fairly in relation to the amount a policy has contributed to earnings. This is referred to as the contribution principle. In following this principle, several elements are taken into account, such as: Dividend groupings Generations of policies Legal and regulatory requirements Professional guidelines Industry practices Dividends are distributed to policies according to the amount of basic and paid-up additional coverage and the terms of each policy. The premium due on the first policy anniversary must be paid before the first dividend is credited. Paid-up additions is a dividend option that uses policyowner dividends to buy more participating life insurance that is fully paid up and has additional cash value. This dividend option helps maximize the growth in a policy s cash value and death benefit. 7

8 Accountability London Life is a shareholderowned company and as such is required to maintain the participating account and its earnings separately from the shareholder account. London Life is governed by regulatory agencies and acts, including the Office of the Superintendent of Financial Institutions (OSFI), relevant provincial insurance regulatory authorities and the federal Insurance Companies Act (ICA). These agencies and acts regulate how London Life manages its participating account. Insurance Companies Act (ICA) provisions and references Subject to the ICA, the directors of a company must manage or supervise the management of business affairs of the company. This management includes establishing and maintaining a policy for dividends to be distributed to participating policyowners, as well as a policy for the management of the participating accounts. The ICA contains a number of provisions that outline certain duties required of directors and the reporting requirements regarding the use of fair and equitable actuarial practices. 1. Investment income and expenses are to be allocated to the participating account in accordance with a method that in the opinion of the company s actuary is fair and equitable to participating policyowners. Once this allocation method is approved by the board of directors, it is sent to OSFI (sections 457 to 460). 2. The board of directors is required to establish and maintain a policy for determining the dividends to be distributed to participating policyowners and to send a copy of the policy to OSFI (section 165 (2)(e)). 3. The board of directors is required to establish and maintain a policy respecting the management of the participating account and to send a copy of the policy to OSFI (section 165 (2)(e.1)). 4. At least annually, the company s actuary must review the participating policyowner dividend policy and provide a written report to the board of directors on its continuing fairness to participating policyowners (section 165 (3.1) Report of the Actuary). 5. Prior to the declaration of policyowner dividends by the board of directors, the company s actuary must provide his or her opinion to the board on the fairness to participating policyowners of the proposed policyowner dividends and on the company s compliance with its policyowner dividend policy (section 464 (2)). 8

9 6. The ICA limits the amount that may be distributed to the shareholder account from any annual distribution of the profits of the participating account for a financial year (section 461). This annual limit is set as a maximum percentage of the amount determined by the board of directors to be distributed from the profits of the participating account for that financial year. This total amount to be distributed is divided between the shareholders and participating policyowners. The maximum percentage of the total distribution that can be distributed to the shareholder account depends on the size of the participating account. The maximum percentage decreases from 10 per cent for a small participating account to just over 2.5 per cent as the size of the participating account increases. London Life has the largest participating account in Canada as measured by assets and currently distributes 2.5 per cent of the total distribution to the shareholder account. In 2014, this distribution to the shareholder account was $21 million, representing approximately 0.1 per cent of the participating account assets at Dec. 31, Each participating policyowner and shareholder is entitled to receive notice to attend the annual meeting of policyowners and shareholders and to receive copies of documents (for example, the annual statement). Each also has certain voting rights (sections 331 and 334). For more information on London Life s participating account management policy and the policyowner dividend policy, see the appendix. 9

10 Strength A London Life participating life insurance policy provides a foundation of guaranteed values. It also offers the opportunity for growth based on participation in a pool with 1.5 million other participating policies (at Dec. 31, 2014). London Life offers both stability and flexibility in a permanent life insurance solution. London Life has the largest participating account in Canada as measured by assets. London Life s participating account has $23.8 billion in assets, including $1.7 billion in surplus (at Dec. 31, 2014). London Life has distributed dividends to its participating policyowners every year since The London Life participating account s strong surplus position can help manage fluctuations in dividends. London Life s credit ratings were maintained in 2014.* It continues to enjoy strong ratings relative to its North American peer group due to its conservative risk profile and stable earnings track record. * Ratings are the latest ratings given by A.M. Best Company, DBRS Limited, Fitch Ratings, Moody s Investors Service and Standard & Poor s Ratings Services at time of publication. For current information on London Life s ratings and financial strength see the corporate information section at londonlife.com. Participating account ($ millions) Summary of participating account operations Participating account balance sheet 10 Note 1 1. For 2013, the participating account expenses reflected an in-year increase in expenses of $196 million arising from an adjustment to the litigation provision for legal proceedings in regard to the involvement of the participating account in the financing of the acquisition of London Insurance Group Inc. in The adjustment was made following a February 3, 2014, decision of the Court of Appeal for Ontario. Additional notes Participating policyowner premiums $1,900 $2,033 + Investment income 1,190 1,457 Benefits paid Changes in actuarial liabilities 1,094 1,312 Expenses and taxes Distribution to policyowners and shareholders Policyowner dividends Change in dividend liability 5 23 Shareholder portion Cash payment Accrual 4 (4) = Participating account operating income 1 $41 $31 Other expenses = Total participating account net income (loss) $(155) $31 Investment income is based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) effective Jan. 1, Certain assets, such as public bonds, common stocks and real estate, are marked to market (not smoothed). Investment income is reported for the calendar year Jan. 1 to Dec. 31 and includes assets backing both the participating account liabilities and surplus. Changes in actuarial liabilities are based on IFRS as issued by the IASB, effective Jan. 1, A change in actuarial liabilities is made to ensure the total amount of actuarial liabilities is sufficient to meet all policyowner obligations. The dividend liability represents dividends earned but not paid at the calendar year-end. To be consistent with the company s financial statements, accumulated other comprehensive income is now included in the participating account surplus. Other comprehensive income includes specific unrealized investment gains and losses, which may be temporary. Dec. 31, Dec. 31, Assets $22,171 $23,844 Liabilities 20,510 22,124 = Closing balance for participating account surplus $1,661 $1,720 Participating account surplus Opening balance Dec. 31 (previous year) $1,822 $1,661 + Participating account net income (loss) (155) 31 + Other comprehensive income (loss) (6) 24 + Reallocation of assets - 4 = Closing balance for participating account surplus $1,661 $1,720 Asset values are based on IFRS as issued by the IASB, effective Jan. 1, During 2014, London Life re-allocated $4 million from the shareholder account to the London Life participating account. This adjustment was for the commutation of certain reinsurance transactions completed during the year. Under the terms of the 2012 re-allocation of the investment in London Reinsurance Group (LRG) from the participating account to its shareholder account, this adjustment was required upon finalization of these transactions. The $4 million was recorded as a charge to shareholder accumulated surplus and an increase to the London Life participating account surplus. The accrual account represents a portion of shareholder surplus that is held within the participating account and has been recognized but not paid. It is dependent on future payment of dividends to participating policyowners. The accrual account balance increased by $4.2 million in 2013 and decreased by $4.2 million in 2014.

11 London Life serving our clients since 1874 Founded in London, Ontario, in 1874, London Life Insurance Company has been helping Canadians meet their financial security needs for 141 years and has almost two million clients. London Life offers financial security advice and planning through its more than 3,500-member Freedom 55 Financial division. Freedom 55 Financial offers London Life s own brand of investments, savings and retirement income, annuities, life insurance and mortgage products. In addition to its domestic operations, London Life participates in international reinsurance markets through its branch in Barbados and its subsidiary London Reinsurance Group Inc. London Life is a subsidiary of The Great-West Life Assurance Company. Together, Great-West Life and its subsidiaries, London Life and Canada Life, serve the financial security needs of more than 12 million people across Canada and have $371 billion in consolidated assets under administration (at Dec. 31, 2014). London Life reported a minimum continuing capital and surplus requirements ratio of 247 per cent at Dec. 31, 2014.* Together, Great-West Life, London Life and Canada Life have almost three million individual life insurance policies in force (at Dec. 31, 2014) and are a leading provider of individual life insurance in Canada. The companies are subsidiaries of Great-West Lifeco Inc., and members of the Power Financial Corporation group of companies. * In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act and their subsidiaries, known as the minimum continuing capital and surplus requirements (MCCSR) ratio. For Canadian regulatory purposes, capital is defined by OSFI in its MCCSR guideline. 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. 11

12 Participating account performance The investment performance of the London Life participating account is an important component in determining the long-term value of participating life insurance policies. The participating account assets are managed by London Life s investment division. The company s asset/liability management group monitors the overall asset mix and guides investment activity within the parameters of the investment policy, approved by the board of directors. Managers of the specific asset classes, such as bonds, mortgages and equities (including real estate), manage the buying and selling of the actual assets in the portfolio within the parameters specified. Dividend scale interest rate The dividend scale interest rate is an element used to determine the amount of dividends that come from the participating account s investments. This rate: Incorporates the smoothed investment experience of assets backing participating account liabilities for the most recent 12-month period, from July 1 to June 30 Does not include the return on assets backing the participating account surplus Includes factors such as the smoothed gains and losses from prior periods May change depending on investment experience Smoothing is the process by which gains and losses are brought into the dividend scale interest rate over a period of time. London Life s long-term investment strategy together with its strategy of smoothing helps reduce the impact of short-term volatility on the investment component of dividends received by participating life insurance policyowners. The dividend scale interest rate is only one factor that contributes to an individual policy s performance. It cannot be directly tied to the cash value growth in a particular policy. The actual cash value growth in any policy varies based on a number of factors, including: Type of product Product features Premium-paying period Issue age Rating Dividend option Dividend scale Policy duration Past results are not indicative of the participating account s future performance. Surplus, and income generated by it, is used to help ensure the financial strength and stability of the company. It can also be used for other purposes, such as: Financing new business growth and acquisitions which may benefit the participating account Providing for transitions during periods of major change Managing fluctuations in dividends 12

13 Historical average returns (at Dec. 31, 2014) Number of years year standard deviation (2014) ( ) ( ) ( ) ( ) ( ) (since 1985) London Life dividend scale interest rate (%) S&P/TSX composite total return index (%) Five-year GICs (%) n/a 3.1 Government of Canada 5- to 10 year bonds (%) Consumer price index (%) All historical average annual returns are geometric means. A low standard deviation means the range of performance has been narrow and indicates there has been less volatility. Notes The historical average annual dividend scale interest rate for 30 years or less applies to policies issued on or after Sept. 16, 1968, which have a variable policy loan rate provision. Policies issued before this date have a fixed policy loan rate provision and a different dividend scale interest rate. The 60-year average annual rate is a blended average of the dividend scale interest rate that applies to policies with a variable policy loan rate provision (1969 to 2014) and the dividend scale interest rate that applies to policies that have a fixed policy loan rate provision (1955 to 1968). The dividend scale interest rate is used to calculate the investment component of participating policyowner dividends and is based on assets backing participating account liabilities. It does not include the returns on assets backing participating account surplus. The dividend scale interest rate for policies issued on or after Sept. 16, 1968, is 5.9 per cent for S&P/TSX composite total return index includes the reinvestment of dividends. TSX Copyright 2015 TSX Inc. All rights reserved. Five-year guaranteed investment certificate (GIC) returns are based on the nominal yields to maturity taken from Statistics Canada, CANSIM table , series V (Statistics Canada website), Jan. 2, For each calendar year, the average of the monthly GIC rates was used. Government of Canada five- to 10-year bond returns are taken from Statistics Canada, CANSIM table , series V (Statistics Canada website), Jan. 2, For each calendar year, the average of the monthly values was used. Consumer price index inflation rates are based on the change from December to December, taken from Statistics Canada, CANSIM table , series V (Statistics Canada website), Jan. 23, As with any financial product, over the long term a change in investment returns can have a significant impact on dividend values and related features in a policy. To better understand this sensitivity for a specific policy, clients and policyowners should refer to the reduced dividend examples in their policy illustrations. It may be useful to periodically request an updated copy of the illustration. 13

14 Stability The London Life participating account s strong surplus position helps provide stability and strength to the participating account and can help manage fluctuations in dividends. During times of economic change, the London Life dividend scale interest rate has been relatively stable compared to returns on many financial investments. The graph below shows how the participating account asset mix and the smoothing of returns have had stabilizing effects on the London Life dividend scale interest rate. Returns (at Dec. 31, 2014) 40% 30% 20% 10% 0% -10% -20% Lo sc S& to 5- inv (G Go 5-30% -40% Notes Performance data is provided for illustrative purposes only and represents past performance, which is not necessarily indicative of fut London Life dividend scale interest rate S&P/TSX composite total return index 5-year guaranteed investment certificates (GICs) Government of Canada 5- to 10-year bonds The dividend scale interest rate is used to calculate the investment component of participating policyowner dividends and is based on assets backing participating account liabilities. It does not include the returns on assets backing participating account surplus. The rate shown applies to policies issued on or after Sept. 16, These policies have a variable policy loan rate provision whereas policies issued before this date have a fixed policy loan rate provision and a different dividend scale interest rate. The S&P/TSX composite total return index includes the reinvestment of dividends. TSX Copyright 2015 TSX Inc. All rights reserved. Five-year guaranteed investment certificate (GIC) returns are the nominal yields to maturity taken from Statistics Canada, CANSIM table , series V (Statistics Canada website), Jan. 2, For each calendar year, the average of the monthly GIC rates was used. Government of Canada five- to 10-year bond returns are taken from Statistics Canada, CANSIM table , series V (Statistics Canada website), Jan. 2, For each calendar year, the average of the monthly values was used L 14

15 Asset mix The London Life participating account is broadly diversified and is generally managed as a fixed-income account with the goal of having approximately 80 per cent of invested assets in fixed-income investments and 20 per cent of invested assets in equities. Participating account assets for London Life at 2013 and 2014 year-ends ($ millions) Total Total Total Dec. 31, invested Dec. 31, invested Investment participating 2013 assets 2014 assets guidelines account assets $ % $ % % % Short term Cash and equivalents $ % $1, % 0% to 5% 4.5% Fixed income Bonds and private placements Public bonds Government 3, , Corporate 5, , Private placements Subtotal of bonds and private placements 9, , % to 75% 45.4 Mortgages Residential Commercial 4, , Subtotal of mortgages 5, , % to 40% 23.7 Total fixed income 14, , Equity Real estate and common stock Real estate 1, , % to 15% 4.7 Common stock 3, , % to 20% 12.5 Subtotal of real estate and common stock 4, , Preferred stock Total equities 4, , Total invested assets 20, , Policy loans 1, , Other assets* Total participating account assets $22,171.1 $23, % * Includes assets such as investment income due and accrued, outstanding premiums (receivables), future income tax and reinsurance assets. Notes London Life has guidelines in place to manage the level of invested assets by asset class. These ranges do not include policy loans or other assets. Any change to the investment guidelines must be approved by the board of directors. Asset values are based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), effective Jan. 1,

16 Investment guidelines 16 The investment guidelines for each asset category recognize the business objectives, liability characteristics, liquidity requirements, tax considerations and interest rate risk tolerance unique to that category. Any change to the investment guidelines must be approved by London Life s board of directors. A large portion of the total participating account assets is invested in bonds and mortgages to support long-term stable growth and core guarantees within participating life insurance policies. London Life s investment strategy helps stabilize the variation in the investment returns used to determine the investment portion of policyowner dividends. Years to maturity by fixed-income asset type Based on book values at Dec. 31, 2014 Years to maturity 0 to 5 years Over 5 years Public bonds 42.2% 57.8% Private placements 23.3% 76.7% Residential mortgages 99.5% 0.5% Commercial mortgages 45.0% 55.0% Total fixed income 44.0% 56.0% About 10 per cent of the total fixed-income portfolio of bonds and mortgages will be invested each year at then-current market rates. The majority of this is due to the maturity of bonds and mortgages. A portion of new premiums and investment income is also invested at the current market rates each year. The asset returns available in the marketplace in January and February 2015 for new participating account investments in bonds and mortgages were about 3.3 per cent. This is approximately 110 basis points below the average return for similar participating account assets maturing throughout Asset quality is very important At Dec. 31, 2014 Asset quality Public bonds Private placements AAA % % AA % % A % % BBB % % BB or less % % Total % % 99.5 per cent of total bonds held are investment grade or higher, i.e., BBB or higher which is an investment industry measure of bond quality. Private placements are internally rated. Private placements Private placements are bond investments made through private agreements with various borrowers. They are grouped into three main categories: Lease finance Mid-market and other corporate credit Infrastructure These investments have the potential to provide higher returns to the participating account than other types of fixed-income investments generally can. All private placements go through a disciplined credit process. Each arrangement undergoes due diligence and is thoroughly researched, underwritten and actively managed by the specialized private placement investment management team. In today s market, private placements can provide 1.5 to three per cent higher yields than federal government bonds.* * Performance data is provided for illustrative purposes only and represents past performance, which is not necessarily indicative of future performance. Mortgages (commercial and residential) Percentage Insured % Uninsured % Total % Principal and interest to the date of default are guaranteed for insured mortgages. Residential and commercial mortgage arrears (90+ days) are 0.02 per cent compared to the 0.01 per cent industry average at Dec. 31, 2014.

17 Prudent management The historical performance of London Life s participating account is due not only to strong investment results but also to prudent selection of underwriting risks and favourable mortality and expense management results. On average, under the 2014 dividend scale, approximately 60 per cent of policyowner dividends were derived from investment experience. Approximately 30 per cent were derived from positive mortality experience and approximately 10 per cent were derived from other factors, such as lapse, expense and tax experience. Mortality People are living longer and participating policyowners have benefited Every decade of the last century has shown mortality improvement. When people live longer, policy claims are paid later than anticipated, which creates gains in mortality experience. This benefits policyowners because gains in mortality experience can have a positive impact on the participating account and can increase the amount available for distribution as policyowner dividends. This is a unique feature of participating life insurance. Statistics Statistics Canada Canada life expectancy life expectancy for males and for females and at birth females at birth YEARS YEARS Sources FEMALE MALE Source of information to tables: Statistics Canada Longevity and Historical Life Tables: (Abridged) Canada and the Provinces. Catalogue no table: Statistics Canada Life Tables, Canada, Provinces and Territories, Catalogue no to tables: Statistics Canada, CANSIM table Source of information to tables: Statistics Canada Longevity and Historical Life Tables: (Abridged) table: Statistics Canada Life and Tables, the Canada, Provinces. and Catalogue Territories, Catalogue no no to tables: Statistics Canada Longevity and Historical Life Tables: (Abridged) Canada and the Provinces. Catalogue no to tables: Statistics Canada, CANSIM table table: Statistics Canada Life Tables, Canada, Provinces and Territories. Catalogue no Statistics Statistics Canada Canada remaining remaining life expectancy life expectancy for males and for females at and age females 65 at age 65 FEMALE MALE L L to tables: Statistics Canada, CANSIM table

18 The protective value of underwriting These mortality statistics reflect life expectancies for the entire population. On average, individuals who have been underwritten and approved for life insurance have even longer life expectancies. People considered a higher risk because of health, lifestyle or occupational concerns may pay more for life insurance coverage or may be declined coverage. Mortality results for London Life Mortality experience is reviewed annually and changes are taken into account in the review of policyowner dividends. Positive mortality experience was a contributing factor in London Life s ability to maintain the dividend scale for Even if mortality improvements slow over time, current mortality levels are still better than those used in pricing participating life insurance products. This is due to the level of conservatism built into the long-term pricing assumptions London Life used when developing the guarantees associated with its participating life insurance products and to London Life s process for selection of risk. Expenses London Life has the largest participating account in Canada as measured by assets, with $23.8 billion including surplus (at Dec. 31, 2014). This provides considerable opportunities when it comes to achieving expense efficiencies. Expenses and taxes incurred by London Life are allocated to the participating account in accordance with a method that in the opinion of the company s actuary is fair and equitable to participating policyowners and that has been approved by the board of directors after considering the actuary s opinion. Each year the actuary reviews the method used by the company for allocating expenses and taxes to the participating account and reports to the board of directors on its continuing fairness and equitableness. Expense-management policies focus on controlling expenses for the benefit of participating policyowners and shareholders. Historically, expense experience has been a relatively small component of the dividend scale compared with the investment and mortality components. 18

19 Need more information? For more information about how participating life insurance policies work, ask your financial security advisor for: Your guide to London Life participating life insurance Understanding how London Life participating life insurance works The value of London Life participating life insurance London Life participating life insurance: looking back at historical returns Smoothed returns help reduce volatility How London Life participating life insurance uses smoothing to reduce volatility of policyowner dividends Balancing to reduce risk Insights into private placements and the participating account You can find out more about participating life insurance and London Life s other products and services by calling your financial security advisor or local office. Each year on a policy s anniversary, a participating policyowner receives an annual statement that provides an update on the current status of the policy. It is often useful to ask your financial security advisor for an updated policy illustration. Visit London Life online at londonlife.com or call if you have a question about a specific policy. Your policy contains important definitions of certain terms used in this guide. This guide should be kept with your London Life illustration and participating life insurance policy contract. The information provided is based on current laws, regulations and other rules applicable to the company and to Canadian residents. Every reasonable effort has been made to ensure its accuracy as of the date of publication. Rules and their interpretations may change, which could affect the accuracy of the information. The information provided is general in nature and should not be relied on as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate professional advisors. London Life is a member of Assuris, which administers the Consumer Protection Plan for policyowners of member companies. 19

20 Appendix London Life Insurance Company (the Company) Participating Account Management Policy 20 This Participating Account Management Policy, in conjunction with the Participating Policyholder Dividend Policy, has been established by the Board of Directors and may be amended by the Board from time to time at its discretion. The factors most likely to be considered in deciding whether to amend this policy include changes in applicable legal or regulatory requirements, professional guidelines, industry practices or significant business changes. The Appointed Actuary has overall accountability for the administration of this policy. As required by the Insurance Companies Act, the Company maintains accounts for its participating insurance policies separately from those maintained in respect of other policies. This facilitates the measurement of the earnings attributable to the participating account. The participating account is maintained in respect of participating life insurance policies and a small block of participating annuities that have been issued or assumed by the Company. The participating account remains open to new participating policies issued or assumed by the Company. Assets of the Company held within its general funds are allocated to the participating account and non-participating account segments for the purpose of determining investment income for each account. Assets are allocated to each segment according to the investment guidelines established for the segments. These guidelines outline criteria for asset mix, liquidity, currency risk and interest rate risk. These guidelines are intended to recognize considerations such as the business objectives, liability characteristics, liquidity requirements, tax considerations and interest rate risk tolerance of each segment. Assets allocated to a segment may from time to time be reallocated to another segment within the same account or another account provided the assets exchanged comply with the investment policy of the respective segments. Any such exchanges are effected at fair value. On an annual basis the Board of Directors reviews and approves investment policies and guidelines which govern investment activities. The investment policies outline a number of principles for investing in assets, including risk tolerance and the approach to managing investment risk. Investment risk is managed through underwriting standards, exposure limits and specific guidelines governing asset classes and investment operations. The investment policies establish limits for the concentration of assets in single geographic areas, industries, companies and types of businesses as part of the risk management process. The Company may use derivative products for risk management purposes to hedge asset and liability positions or as substitutes for cash within specified limits. The assets supporting the participating account liabilities are notionally divided into two segments for defining investment needs and objectives and managing the portfolio: (1) investments that are used to satisfy near term policy benefits (next 10 years) and (2) investments that are used to achieve longer term objectives of the participating account. The investments used for the near term are primarily fixed-income assets. The cash flows of these assets, together with the participating policy premiums, are expected to provide for the policyholder benefits for the next 10 years. These benefits include dividends, death benefits, cash surrender values and other policy benefits, such as waiver of premium. To achieve the longer term objectives of the participating account, the balance of the accounts are invested in a combination of 1 to 10 year fixed income assets and a diversified pool of common stocks and real estate. As a result, the fixed income assets in this segment are expected to mature and be reinvested several times before satisfying the policy benefits. The focus in managing this segment is to create value by reinvesting in a disciplined manner as investment spreads, interest rate levels and equity market conditions evolve and cycle. The performance of this part of the strategy is a key driver of changes in the dividend scale interest rate and this rate is an important contributor to changes in the dividend scale. Investment income is allocated to the participating account in accordance with the Company s

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