QUARTERLY REPORT 69 MONTHS RESULTS. Canada Life Financial Corporation E1251(6/09)-6/09 E1251(9/08)-9/08

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1 QUARTERLY REPORT January January 1 to September 1 to June 30, MONTHS RESULTS Canada Life Financial Corporation E1251(9/08)-9/08 E1251(6/09)-6/09

2 Quarterly Report to Shareholders 1 Letter to Shareholders 2 Management s Discussion & Analysis 3 Consolidated Operating Results 12 Consolidated Financial Position 15 Segmented Operating Results 26 Consolidated Financial Statements For cautionary notes regarding forward-looking information and non-gaap financial measures, see page 2. Copies of this report are available at or by contacting the Corporate Secretary s Office at Canada Life and design are trademarks of The Canada Life Assurance Company. Great-West Life and key design are trademarks of The Great-West Life Assurance Company.

3 Quarterly Report January 1 to June 30, 2009 TO THE SHAREHOLDERS OF CANADA LIFE FINANCIAL CORPORATION The interim unaudited consolidated financial statements including notes at June 30, 2009 were approved by the Board of Directors at a meeting held today in Winnipeg. Canada Life Financial Corporation (CLFC) has reported net income of $253 million for the three months ended June 30, 2009 compared to $251 million reported a year ago. Net income attributable to the common shareholder was $211 million compared to $252 million for the second quarter of Net income attributable to the Participating Account before policyholder dividends was $57 million compared to $53 million for the second quarter of For the six months ended June 30, 2009, net income was $373 million, compared to $548 million reported a year ago. Net income attributable to the common shareholder was $323 million compared to $548 million for the six months ended June 30, Net income to the Participating Account before policyholder dividends was $127 million compared to $119 million for the six months ended June 30, Total sales for the six months ended June 30, 2009 decreased to $2,886 million from $3,197 million at June 30, Fee and other income for the six months ended June 30, 2009 was $353 million, a decrease of $12 million compared to the same period in Total assets under administration at June 30, 2009 were $95.8 billion, compared to $88.8 billion at December 31, Dividends At its meeting today, the Board of Directors approved quarterly dividends of $1.72 per share on the common shares of the Company, payable September 30, 2009 to shareholders of record at the close of business September 2, In addition, the Directors approved a quarterly dividend of $ per share on the Series B Preferred Shares of the Company, payable September 30, 2009 to shareholders of record at the close of business September 2, For purposes of the Income Tax Act (Canada), and any similar provincial legislation, the dividends referred to above are eligible dividends. D. Allen Loney President and Chief Executive Officer August 6,

4 Management s Discussion and Analysis MANAGEMENT S DISCUSSION AND ANALYSIS For the period ended June 30, 2009 Dated: August 6, 2009 The Management s Discussion and Analysis (MD&A) presents management s view of the financial condition, results of operations and cash flows of Canada Life Financial Corporation (CLFC or the Company) for the three months and six months ended June 30, 2009 compared with the same periods in 2008 and three months ended March 31, The MD&A provides an overall discussion, followed by analysis of the performance of the Company s business units. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES The consolidated financial statements of CLFC, which are the basis for data presented in this report, have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and presented in millions of Canadian dollars unless otherwise indicated. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION This report contains some forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. 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 or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future action by the Company including statements made by the Company with respect to the expected benefits of acquisitions or divestitures are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events 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 actual events and results could differ materially from those expressed or implied by forward-looking statements made by the Company due to, but not limited to, important factors such as sales levels, premium income, fee income, expense levels, mortality experience, morbidity experience, policy lapse rates and taxes, as well as general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, catastrophic events, and the Company's ability to complete strategic transactions and integrate acquisitions. The reader is cautioned that the foregoing list of important factors is not exhaustive, and there may be other factors, including factors set out under Risk Management and Control Practices in the Company s 2008 Annual MD&A, and any listed in other filings with securities regulators, which are available for review at The reader is also cautioned to consider these and other factors carefully and to not place undue reliance on forward-looking statements. Other than as specifically required by applicable law, the Company has no intention to update any forward-looking statements whether as a result of new information, future events or otherwise. CAUTIONARY NOTE REGARDING NON-GAAP FINANCIAL MEASURES This report contains some non-gaap financial measures. Terms by which non-gaap financial measures are identified include but are not limited to earnings before restructuring charges, adjusted net income, earnings before adjustments, premiums and deposits, sales, and other similar expressions. Non-GAAP financial measures are used to provide management and investors with additional measures of performance. However, non-gaap financial measures do not have standard meanings prescribed by GAAP and are not directly comparable to similar measures used by other companies. Refer to the appropriate reconciliations of these non- GAAP financial measures to measures prescribed by GAAP. 2

5 Management s Discussion and Analysis C ONSOLIDATED O PERATING R ESULTS Selected Consolidated Financial Information (in $ millions except per common share amounts) As at or for the three months ended For the six months ended June 30 March 31 June 30 June 30 June Total premiums and deposits $ 2,628 $ 1,886 $ 2,474 $ 4,514 $ 17,450 Fee and other income Paid or credited to policyholders 2, ,054 14,039 Summary of net income attributable to: Participating account 1 1 (4) 2 (5) Perpetual preferred shareholders Common shareholder Per Common Share Basic earnings $ 1.31 $ 0.70 $ 1.56 $ 2.01 $ 3.41 Dividends paid Book value Total assets $ 67,052 $ 60,025 $ 65,305 Segregated funds net assets 27,276 24,537 30,572 Total assets under management 94,328 84,562 95,877 Other assets under administration (1) 1,430 1,434 2,516 Total assets under administration $ 95,758 $ 85,996 $ 98,393 Participating account surplus $ 22 $ 27 $ 26 Shareholder equity 8,747 4,834 4,701 Total participating account surplus and shareholder equity $ 8,769 $ 4,861 $ 4,727 (1) Other assets under administration includes both retail and institutional assets in which the Company only performs administrative or recordkeeping type services for the end client. In general, fee income is based on the type of services performed per client and does not fluctuate in direct proportion with asset levels. REINSURANCE TRANSACTION Standard Life Transaction On February 14, 2008, the Company s indirect wholly-owned Irish reinsurance subsidiary, Canada Life International Re Limited signed an agreement with Standard Life Assurance Limited (Standard Life), a U.K. based provider of life, pension and investment products, to assume by way of indemnity reinsurance, a large block of U.K. payout annuities (the Standard Life transaction). The reinsurance transaction increased premium income, paid or credited to policyholders, funds held by ceding issuers and policyholders liabilities in 2008 by approximately $12.5 billion. FINANCIAL MARKETS VOLATILITY Since mid-2007 global credit, equity and foreign exchange markets have experienced significant volatility as a result of credit and liquidity concerns relating ultimately to the deterioration in the United States mortgage and housing market and the ensuing global recession. These concerns have led to the disruption in the normal functioning of credit markets around the world, unprecedented volatility and have resulted in many financial institutions experiencing financial difficulty. Governments across the globe have introduced measures intended to instill confidence in financial markets for financial institutions and their clients. 3

6 Management s Discussion and Analysis Impact on Operating Results Equity Markets Impact In the second quarter of 2009, equity markets in general recovered some of the ground lost to the end of The S&P TSX index increased 19% in the second quarter which has resulted in an increase of 15% since the beginning of the year. Also, in the quarter the S&P 500 index increased 15% which has resulted in an increase of 2% since the beginning of the year. Despite an 8% increase for the quarter, the FTSE 100 Index has declined 4% since the beginning of the year. The equity market gains achieved in 2009 followed a tumultuous second half of 2008 in which the S&P TSX Index fell 38%, the S&P 500 fell 30% and the FTSE 100 Index fell 21%. Consequently, the average S&P TSX index level for the second quarter of 2009 was 31% lower than the same period in Similarly the average index levels for the S&P 500 and the FTSE 100 were down 35% and 29% respectively from 2008 levels. The declines in average index levels were very similar when comparing the year-to-date periods for 2009 and The average index level for the S&P TSX for the first half of the year was down 33% compared to 2008 and the S&P 500 and the FTSE 100 were down 37% and 30% respectively. Guarantees Associated with Investment Products The Company offers individual segregated fund products and unitized with profits products that provide for certain guarantees that are tied to the market values of the investment funds to which policyholders have directed deposits made under their policies. In Canada, the Company offers individual segregated fund products that provide guaranteed minimum death benefits (GMDB) and guaranteed minimum accumulation or maturity benefits (GMAB). These products are required to have minimum guarantees of 75% on death and 75% on maturity. The policyholder can choose to increase the level of guarantee up to 100%. The increased guarantee requires the policyholder to pay an additional premium for the enhanced guarantee. In Europe, the Company offers unitized with profits (UWP) products, which are similar to segregated fund products. The investment guarantees are reinsured on a stop-loss basis to Canada Life Reinsurance Ltd., a subsidiary of Canada Life. A guaranteed minimum withdrawal benefit (GMWB) product was introduced in Germany in the first quarter. Sales to date have been minimal. The majority of the guarantees in connection with the Canadian individual segregated fund businesses of Canada Life have been reinsured to London Reinsurance Group Inc. (LRG). During the quarter, LRG reinsured on a stoploss basis the guarantees it assumed from Great-West Life and Canada Life to the London Life Barbados branch. For policies with these guarantees the Company generally determines policy liabilities at a CTE 75 (conditional tail expectation of 75) level. This determines the amount held as the amount required in excess of the policyholder funds in the average of the 25% worst scenarios tested, using scenario generating processes consistent with the Canadian Institute of Actuaries Standards of Practice. Guarantees are valued using factors prescribed by the Office of the Superintendent of Financial Institutions (OSFI). Policyholder funds include equities (common shares and real estate), and fixed income (bond, mortgage, and money market) investment funds. If this amount is less than zero, then no policy liability is held for the guarantees. For purposes of determining the required capital for these guarantees a Total Gross Calculated Requirement (TGCR) is determined and the required capital is equal to the TGCR less the policy liabilities held. The OSFI rules for the TGCR provide for a CTE98 level for cash flows within one year, CTE95 level for cash flows between one and five years, and between CTE90 level and CTE95 level for cash flows greater than 5 years. 4

7 Management s Discussion and Analysis Segregated funds guarantee exposure June 30, 2009 Deficiency by benefit type Market value Death Maturity Income Canada $ 89 $ 7 $ 1 $ - Europe 1, Total $ 1,792 $ 387 $ 1 $ - At June 30, 2009, the excess of policyholder guaranteed minimum death benefits (GMDB) over the market value of the policyholder funds was $387 million. This should be interpreted to mean that, if all of the policyholders with inthe-money guaranteed minimum death benefits had died on June 30, 2009, the Company would have been obligated to pay death benefits of approximately $2.2 billion, or $387 million ($516 million at March 31, 2009) in excess of the market value of the policyholder s funds on that date. If markets were to remain at June 30, 2009 levels, the GMDB related payments over the next twelve months are estimated to be $1 million ($2 million at March 31, 2009). The TGCR at June 30, 2009 was $99 million ($103 million at March 31, 2009). The Company does not currently hedge its exposure to these guarantees. Credit Markets Impact Investment impairment charges For the three months ended June 30, 2009, the Company recorded investment impairment charges of $3 million pre-tax, which has negatively impacted net income attributable to the common shareholder reported by the Company by $2 million after-tax. The charges include additional market value fluctuations on investment exposures previously identified as impaired at March 31, 2009, as well as investment exposures identified as impaired in the quarter. For the six months ended June 30, 2009, investment impairment charges negatively impacted net income attributable to common shareholders by $15 million after-tax ($20 million pre-tax). Impaired investments June 30, 2009 December 31, 2008 Gross Amount Impairment Provisions Carrying Amount Gross Amount Impairment Provisions Carrying Amount Impaired investments by type Held for trading (1) $ 103 $ (90) $ 13 $ 97 $ (78) $ 19 Loans and receivables 119 (39) (26) 24 Total $ 222 $ (129) $ 93 $ 147 $ (104) $ 43 (1) Includes impaired amounts on certain funds held by ceding insurers. Impaired investments include bonds in default, mortgages in the process of foreclosure or in arrears 90 days or more, and real estate acquired by foreclosure, or other assets where management no longer has reasonable assurance that all contractual cash flows will be received. Impairment provisions at June 30, 2009 were $129 million, compared to $104 million at December 31, The $25 million increase includes $20 million of investment impairment charges recorded in the first six months of 2009, and $5 million relating to changes in foreign currency translation rates between December 31, 2008 and June 30, 2009, partly offset by the realization of provisions on assets disposed of in Impaired investments on a gross basis totaled $222 million or 0.37% of portfolio investments (including certain assets reported as funds held by ceding insurers) at June 30, 2009 compared with $147 million or 0.27% at December 31,

8 Management s Discussion and Analysis Provision for future credit losses At June 30, 2009, the total provision for future credit losses in actuarial liabilities was $1,617 million, compared to $1,237 million at March 31, 2009, an increase of $380 million. The $380 million increase includes $113 million of provisions relating to credit rating downgrade activity in the quarter on fixed income securities held by the Company. It also includes $147 million in connection with basis changes made by the Company regarding its methodology for calculating the provisions. The basis changes were generally conforming in nature to work toward the harmonization of practices across the Company s operating segments. The remaining $120 million increase is due mainly to growth in the block of actuarial liabilities and currency movement. The $380 million increase in provision for future credit losses negatively impacted net income attributable to the common shareholder, after adjusting for minority interests by $203 after-tax in the quarter. The aggregate of impairment provisions of $129 million ($124 million at March 31, 2009; $104 million at December 31, 2008) and $1,617 million ($1,237 million at March 31, 2009; $1,042 million at December 31, 2008) provision for future credit losses in actuarial liabilities represents 3.3% of bond and mortgage assets at June 30, 2009 (2.7% at March 31, 2009; 2.2% at December 31, 2008). Unrealized mark-to-market losses The deterioration in financial markets has produced a general widening of credit spreads and lower market prices for fixed income investments. This has resulted in a decline in the fair value of CLFC s bond investments. While credit conditions have improved in 2009, the Company s bond portfolio at June 30, 2009 continued to reflect significant unrealized losses. Gross unrealized bond losses (1) June 30, 2009 December 31, 2008 Classification Held for trading $3, % $3, % Available for sale 67 2 % % Total $3, % $3, % (1) Includes unrealized bond losses on certain funds held by ceding insurers. At June 30, 2009, gross unrealized bond losses totaled $3,741 million ($3,729 at December 31, 2008). The held for trading bonds are held primarily in support of actuarial liabilities. The changes in the fair value of these held for trading bonds, excluding investment impairment charges, have been offset by a corresponding change in the value of the actuarial liabilities on the basis that management s assessment is that the Company will ultimately receive all contractual cash flows on these bonds. Impact on Liquidity and Capital The Company s liquidity requirements are self-funded, with short term obligations being met by generating internal funds and maintaining adequate levels of liquid investments. At June 30, 2009, Canada Life held cash and liquid short term investments of $3.0 billion. In addition, the Company and its operating subsidiaries held Canada, United States and other foreign government bonds of $10.5 billion. The Company s financial condition and regulatory capital position remained strong at June 30, In this regard, Canada Life s consolidated Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio was 205%, which is above the Company s target operating range. 6

9 Management s Discussion and Analysis C ONSOLIDATED O PERATING R ESULTS NET INCOME For the three months ended June 30, 2009, net income was $253 million compared to $251 million for the same period in Net income attributable to the common shareholder was $211 million or $1.31 per common share compared to $252 million or $1.56 per common share in Net income for the participating account before policyholder dividends was $57 million compared to $53 million for For the six months ended June 30, 2009, net income was $373 million compared to $548 million for the same period in Net income attributable to the common shareholder was $323 million or $2.01 per common share compared to $548 million or $3.41 per common share in Net income for the participating account before policyholder dividends was $127 million compared to $119 million for For the second quarter of 2009, net income was $253 million compared to $120 million in the first quarter. Net income attributable to the common shareholder was $211 million or $1.31 per common share compared to $112 million or $0.70 per common share in the first quarter. Net income for the participating account before policyholder dividends was $57 million compared to $70 million in the first quarter. Net income by segment For three months ended For six months ended June 30 March 31 June 30 June 30 June Attributable to participating account Net income before policyholder dividends $ 57 $ 70 $ 53 $ 127 $ 119 Policyholder dividends Total $ 1 $ 1 $ (4) $ 2 $ (5) Attributable to shareholders Preferred shareholder dividend $ 41 $ 7 $ 3 $ 48 $ 5 Common shareholder Individual Insurance & Investment Products $ 86 $ 59 $ 42 $ 145 $ 125 Group Insurance Europe/Reinsurance United States Corporate (18) (1) 25 Total common shareholder $ 211 $ 112 $ 252 $ 323 $ 548 Total net income $ 253 $ 120 $ 251 $ 373 $ 548 Net income attributable to the participating account Net income attributable to the participating account for the second quarter of 2009 was $1 million, an increase of $5 million from For the six months ended June 30, 2009, net income attributable to the participating account was $2 million, an increase of $7 million from Net income attributable to the participating account for the second quarter of 2009 was $1 million, level with the first quarter. 7

10 Management s Discussion and Analysis Net income attributable to the common shareholder Individual Insurance & Investment Products (IIIP) For the second quarter of 2009, net income was $86 million compared to $42 million in 2008, primarily due to higher investment income from new business and trading activities and higher actuarial basis change. For the six months ended June 30, 2009, net income was $145 million, compared to $125 million in 2008, due to the same reasons as the in quarter period compared to Compared to the first quarter of 2009, net income increased by $27 million in the second quarter of 2009 due primarily to higher investment income from trading activities. Group Insurance For the second quarter of 2009, net income was $20 million compared to $17 million in 2008 attributable to improved morbidity experience and higher actuarial reserve basis changes. For the six months ended June 30, 2009, net income was $44 million in 2009 compared to $26 million in 2008, primarily attributable to mortality experience and higher actuarial reserve basis changes. Compared to the first quarter of 2009, net income was down $4 million in the second quarter of 2009 due to group health experience. Europe/Reinsurance For the second quarter of 2009, net income was $117 million compared to $164 million in Insurance & Annuities decreased $48 million and Corporate (Europe/Reinsurance) increased $1 million, while Reinsurance remained unchanged. For the six months ended June 30, 2009, net income was $123 million compared to $346 million in Insurance & Annuities decreased $160 million, Reinsurance decreased $63 million and Corporate (Europe/Reinsurance) remained unchanged. Compared to the first quarter of 2009, net income increased by $111 million in the second quarter of Insurance & Annuities increase $69 million, Reinsurance increased $41 million and Corporate (Europe/Reinsurance) increased $1 million. United States For the second quarter of 2009, net income was $6 million compared to $18 million in 2008 mainly due to a gain on sale of the health care business of $4 million in April 2008, and higher investment income in For the six months ended June 30, 2009, net income was $12 million compared to $26 million in 2008 for the same reasons as in quarter period compared to Net income in the second quarter of 2009 was similar to the first quarter. Corporate For the second quarter of 2009, net income attributable to the common shareholder was a charge of $18 million compared to income of $11 million in 2008 due to primarily due to income taxes and increased preferred share dividend payments in connection with the issuance of preferred shares and fixed term loans to Great-West Life in For the six months ended June 30, 2009, net income attributable to the common shareholder was a charge of $1 million compared to income of $25 million in 2008 primarily due to for the same reasons as the in quarter period compared to Net income attributable to the common shareholder in the second quarter of 2009 was significantly less than in the first quarter of 2009 for the same reasons as the in quarter compared to Refer to each segment section for further detail. 8

11 Management s Discussion and Analysis PREMIUMS AND DEPOSITS AND SALES For the three months ended For the six months ended Premiums and deposits June 30 March 31 June 30 June 30 June 30 Business/Product Individual Insurance & Investment Products $ 508 $ 429 $ 572 $ 937 $ 1,083 Group Insurance Europe/Reinsurance 1,925 1,249 1,708 3,174 15,962 United States Total premiums and deposits $ 2,628 $ 1,886 $ 2,474 $ 4,514 $ 17,450 Summary by Type Risk-based products $ 1,329 $ 1,077 $ 1,372 $ 2,406 $ 15,213 Segregated funds deposits Individual products 1, ,066 2,059 2,159 Group products Total premiums and deposits 2,628 $ 1,886 $ 2,474 $ 4,514 $ 17,450 For the three months ended For the six months ended Sales June 30 March 31 June 30 June 30 June 30 Business/Product Individual Insurance & Investment Products $ 394 $ 306 $ 492 $ 700 $ 915 Group Insurance Europe - Insurance & Annuities 1, ,065 2,171 2,269 Total sales $ 1,777 $ 1,109 $ 1,565 $ 2,886 $ 3,197 Premiums and deposits include premiums on risk based insurance and annuity products and deposits on individual and group segregated fund products. Q vs Q Premiums and deposits for the quarter were $2.6 billion, up $0.1 billion similar to the same period in 2008 primarily due to sales growth in the U.K. savings and payout annuity products. Q vs Q2 2008(six months) Premiums and deposits in 2009 were $4.5 billion, a decrease of $13.0 billion compared to The decrease is due mainly to the Standard Life transaction which increased premiums by $12.5 billion in Q vs Q Compared to the first quarter of 2009, premiums and deposits increased by $0.7 billion due to increased payout annuity sales in Group Retirement Services in Canada and the U.K. Refer to each segment section for further detail. 9

12 Management s Discussion and Analysis NET INVESTMENT INCOME Net investment income For the three months ended For the six months ended June 30 March 31 June 30 June 30 June Investment income earned $ 899 $ 748 $ 922 $ 1,647 $ 1,579 Amortization of net realized and unrealized gains/(losses) on real estate investments (12) (11) 2 (23) 7 (Provision) recovery of credit losses on loans and receivables (8) (7) 1 (15) 1 Other net realized gains/(losses) Regular investment income ,647 1,620 Investment expenses (8) (8) (7) (16) (14) Regular net investment income ,631 1,606 Changes in fair value of held for trading assets 1,235 (1,545) (1,238) (310) (1,943) Net investment income $ 2,126 $ (805) $ (295) $ 1,321 $ (337) Q vs Q Net investment income in 2009 increased by $2,421 million compared to the same period last year. The year over year increase is primarily due to the increase in fair value of held for trading assets of $2,473 million. Regular net investment income decreased mainly due to lower amortization of net realized and unrealized gains/(losses) on real estate investments as a result of market value declines on real estate and an increase in provision for credit losses on loans and receivables, partly offset by currency movement. The increase in fair value on held for trading assets was due to an improvement in bond and stock values attributable to decreased credit spreads and equity market appreciation. Net investment income in the quarter includes $3 million of investment impairment charges. Of this amount, $8 million is related to investment classified as loans and receivables, less $5 million related to recoveries of market value on investments classified as held for trading. Q vs Q (six months) Net investment income in 2009 increased by $1,658 million compared to the same period last year. The year over year increase in fair value of held for trading assets of $1,633 million and an increase in regular net investment income of $25 million account for the change. Regular net investment income increased mainly due to investment income earned partially offset by amortization of net realized and unrealized gains/(losses) on real estate investments as a result of market value declines on real estate and an increase in provision for credit losses on loans and receivables. The increase in fair value on held for trading assets was due to an improvement in bond and stock values attributable to decreased credit spreads and equity market appreciation. Net investment income in the quarter includes $20 million of investment impairment charges. Of this amount, $15 million is related to investment classified as loans and receivables, and $5 million related to investments classified as held for trading. Q vs Q The increase in net investment income in the second quarter of 2009 compared to the first quarter is primarily due to the increase in fair value of held for trading assets of $2,780 million. 10

13 Management s Discussion and Analysis 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, for which the Company earns investment management and other premium-based fees. Fee and other income For the three months ended For the six months ended June 30 March 31 June 30 June 30 June Segregated funds and other $ 167 $ 186 $ 181 $ 353 $ 365 Q vs Q Fee income derived from the management of segregated funds assets and other asset management services decreased by $14 million compared to 2008 in the second quarter of 2009, mainly due to lower average segregated assets under management (AUM) and equity market declines. Q vs Q (six months) Fee income decreased $12 million compared to 2008 primarily due to lower average segregated assets under management partly offset by growth in Germany. Q vs Q Fee income in the second quarter decreased by $19 million from the first quarter of 2009 primarily due to Europe, partly offset by higher fees from higher AUM in the second quarter. PAID OR CREDITED TO POLICYHOLDERS This amount includes increases in policy liabilities, claims, surrenders, annuity and maturity payments, dividend and experience refund payments for risk-based products, but does not include payment amounts for fee-based products (segregated funds). It also includes adjustments to actuarial liabilities for changes to fair value of certain invested assets backing those actuarial liabilities, and charges for future credit losses in actuarial liabilities. Q vs Q In aggregate, $3.0 billion was paid or credited to policyholders in 2009 compared to $0.7 billion in 2008 primarily due to an increase in fair value of invested assets backing actuarial liabilities. Q vs Q (six months) In aggregate, $3.1 billion was paid or credited to policyholders in 2009 compared to $14.0 billion in The decrease is primarily the Standard Life transaction which increased policy liabilities by $12.5 billion in 2008, partly offset by an increase in the fair value of invested assets backing actuarial liabilities. Q vs Q Compared to the first quarter of 2009, the increase of $2.9 billion was primarily due to an increase in fair value of invested assets backing actuarial liabilities. 11

14 Management s Discussion and Analysis C ONSOLIDATED F INANCIAL P OSITION Consolidated total assets June 30 December Assets Invested assets $ 52,987 $ 47,984 Goodwill and intangible assets Other general fund assets 13,686 13,091 Total general fund assets 67,052 61,439 Segregated funds net assets 27,276 25,896 Total assets under management 94,328 87,335 Other assets under administration(1) 1,430 1,451 Total assets under administration $ 95,758 $ 88,786 (1) Other assets under administration includes both retail and institutional assets in which the Company only performs administrative or recordkeeping type services for the end client. In general, fee income is based on the type of services performed per client and does not fluctuate in direct proportion with asset levels. ASSETS Total assets under administration at June 30, 2009 were $95.8 billion, an increase of $7.0 billion from December 31, General fund assets increased by $5.6 billion and segregated funds assets increased by $1.4 billion compared with December 31, Invested assets which include bonds and stocks are recorded at fair value were $53.0 billion at June 30, 2009, an increase of $5.0 billion from December 31, On May 12, 2009, the Company issued fixed term loans of $3,500 million and $300 million respectively to its parent The Great-West Life Assurance Company (Great-West Life). The loans bear interest of 6.82% and are due on May 12, 2012 and May 12, 2011 respectively. Invested assets also changed due to an increase in fair value. Goodwill and intangible assets increased marginally since December 31, 2008, due mainly to the currency movement. LIABILITIES Total liabilities have increased from $56.1 billion at December 31, 2008 to $57.8 billion at June 30, Policy liabilities increased from $52.5 billion at December 31, 2008 to $54.4 billion at June 30, 2009 due to an increase in the fair value of invested assets backing actuarial liabilities. Actuarial liabilities represent 97% of total policy liabilities. PARTICIPATING ACCOUNT SURPLUS AND SHAREHOLDER EQUITY During the six months ended June 30, 2009, the Company paid preferred share dividends of $48 million. In connection with the fixed term loans to Great-West Life on May 12, 2009, the Company issued 140,000,000 Series D, 7.0% cumulative preferred shares and 12,000,000 Series E, 7.0% cumulative preferred shares to its parent, Great-West Life, for a value of $3,500 million and $300 million respectively. An increase in unrealized foreign exchange gains on translation of foreign operations of $129 million and reductions in other comprehensive income net of income taxes of $94 million increased shareholder surplus by $35 million from December 31, These activities, coupled with earnings from operations, resulted in total participating account surplus and shareholder equity of $8.8 billion at June 30,

15 Management s Discussion and Analysis L IQUIDITY AND C APITAL MANAGEMENT AND A DEQUACY LIQUIDITY The Company s liquidity requirements are self-funded, with short term obligations being met by generating internal funds and maintaining adequate levels of liquid investments. At June 30, 2009, the Company held cash and liquid short term investments of $3.0 billion ($2.7 billion at December 31, 2008). In addition, the Company and its operating subsidiaries held Canada and United States and other foreign government bonds of $10.5 billion ($11.3 billion at December 31, 2008) and $20.7 billion ($19.4 billion at December 31, 2008) of other marketable securities. For further information, refer to the Company s 2008 Annual MD&A. CASH FLOWS Cash flows For the three months For the six months ended June 30 ended June Cash flows relating to the following activities: Operations $ 632 $ 626 $ 616 $ 949 Financing 3,573 (151) 3,418 (72) Investment (3,753) (659) (3,623) (1,382) 452 (184) 411 (505) Effect of changes in exchange rates on cash and cash equivalents 75 (24) Increase (decrease) in cash and cash equivalents in the period 527 (208) 491 (381) Cash and cash equivalents, beginning of period 2,063 2,696 2,099 2,869 Cash and cash equivalents, end of period $ 2,590 $ 2,488 $ 2,590 $ 2,488 The principal source of funds for the Company is cash provided by operating activities, including premium income, net investment income and fee income. In general 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. Financing activities include the issuance and repayment of capital instruments, and associated dividends and interest payments. In the quarter, cash and cash equivalents increased by $527 million from March 31, Cash flows provided by operations increased by $6 million compared to In May of 2009, the company issued preferred shares to Great-West Life in the amount of $3.8 billion. This was offset by the use of cash for investment activities in the quarter related to the promissory notes receivable of $3.8 billion from Great-West Life. In addition, the Company paid $227 million of dividends to the preferred and common shareholders during the quarter. For the six months ended June 30, 2009, cash and cash equivalents increased by $491 million from December 31, Cash flows from operations decreased $333 million. The Financing and Investment activities have changed primarily for the same reasons outlined in the in quarter period. 13

16 Management s Discussion and Analysis COMMITMENTS/CONTRACTUAL OBLIGATIONS Commitments/contractual obligations have not changed materially from December 31, For further information refer to the Company s 2008 Annual MD&A. CAPITAL MANAGEMENT AND ADEQUACY 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 (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). The Company s MCCSR ratio at June 30, 2009 was 204% (213% at December 31, 2008). The Canada Life Assurance Company s MCCSR ratio at June 30, 2009 was 205% (214% at December 31, 2008). RATINGS The Company and its major operating subsidiary continue to hold strong ratings. Since December 31, 2008, the ratings have been affirmed with a stable outlook by four rating agencies as follows: A.M. Best on January 22, 2009, Moody's Investors Service and Standard and Poor's Ratings Services on February 12, 2009 and Fitch Ratings on April 20, The ratings affirmations are significant in light of the economic environment over the past year. Rating Agency Measurement Rating A.M. Best Company Financial Strength A+ Dominion Bond Rating Service Claims Paying Ability IC-1 Subordinated Debt AA(low) Fitch Ratings Insurer Financial Strength AA+ Moody's Investors Service Insurance Financial Strength Aa3 Standard & Poor's Ratings Services Insurer Financial Strength AA Subordinated Debt AA- F INANCIAL INSTRUMENTS AND OTHER INSTRUMENTS There were no major changes to the Company s and its subsidiaries policies and procedures with respect to the use of derivative financial instruments in During the six month period ended June 30, 2009, the outstanding notional amount of derivative contracts increased by $204 million. The exposure to credit risk, which is limited to the current fair value of those instruments which are in a gain position, decreased to $275 million at June 30, 2009 from $293 million at December 31, For an overview of the use of derivative financial instruments, refer to the 2008 Annual MD&A and to note 21 to the 2008 Annual Consolidated Financial Statements. R ISK MANAGEMENT AND C ONTROL P RACTICES Insurance companies are in the business of assessing, structuring, pricing, assuming and managing risk. The types of risks are many and varied, and will be influenced by factors both internal and external to the businesses operated by the insurer. These risks, and the control practices used to manage the risks, are discussed in detail in the Company s 2008 Annual MD&A. A CCOUNTING P OLICIES Goodwill and Intangible Assets - Effective January 1, 2009, the Company adopted the CICA Handbook Section 3064, Goodwill and Intangible Assets. This section replaces existing section 3062, Goodwill and Other intangible assets, and Section 3450, Research and Development Costs. This section establishes new standards for the recognition and measurement of intangible assets, but does not affect the accounting for goodwill. Certain software costs previously included in other assets have been reclassified to intangible assets. 14

17 Management s Discussion and Analysis FUTURE ACCOUNTING POLICIES International Financial Reporting Standards - In February 2008, the CICA announced that Canadian GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards ( IFRS ) for fiscal years beginning on or after January 1, The Company will be required to begin reporting under IFRS for the quarter ending March 31, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented. The Company has developed an IFRS changeover plan which will address key areas such as accounting policies, financial reporting, disclosure controls and procedures, information systems, education and training and other business activities. The Company s changeover plan is on schedule to meet the requirements of IFRS. Although the Company is not in a position to determine the impact on our financial results we continue to monitor and assess the impact of adopting IFRS. Refer to the Company s 2008 Annual MD&A. SEGMENTED OPERATING RESULTS INDIVIDUAL INSURANCE & INVESTMENT PRODUCTS 2009 DEVELOPMENTS Sales of retail guaranteed interest rate products increased by 31% for the six months ended June 30, 2009 compared to last year. For the six months ended June 30, 2009, the impact of weaker equity markets on fee income and actuarial liabilities negatively impacted net income by $8 million after-tax compared to the same period in Individual Life sales growth of participating whole life insurance and non-participating term insurance policies remained strong through the second quarter with participating policy sales growth of 31% year to date and nonparticipating term policy sales growth of 15% year to date. Mid-way through the second quarter, lower premium rates were introduced for non-participating term life insurance to enhance competitiveness and stimulate sales growth. REAL ESTATE FUND The temporary suspension on withdrawals and transfers-out from the Real Estate Segregated Fund (the Fund), effective the close of business December 15, 2008, remained in effect through the second quarter of To enable the suspension to be lifted, the Company continues work to build liquidity through a disciplined asset sales process that supports the long-term viability of the Fund. Notwithstanding the suspension, the Fund remains open to contributions. OPERATING RESULTS For the three months ended For the six months ended June 30 March 31 June 30 June 30 June Premiums and deposits $ 508 $ 429 $ 572 $ 937 $ 1,083 Sales Fee and other income Net income

18 Management s Discussion and Analysis Premiums and deposits Q vs Q Individual Life premiums in 2009 increased 7% to $191 million, reflecting the continued growth in sales and strong persistency. Living Benefits premiums of $21 million increased 11% from $19 million in Economic uncertainty contributed to a 30% decrease in total deposits made to individual segregated funds. Instead, retail clients turned to guaranteed interest rate products leading to a considerable increase in guaranteed interest premiums due to an enhancement to the credited rates for new deposits in mid March to make them more competitive. Individual payout annuity premiums increased 40% as a result of more competitive pricing. GRS premiums decreased by 41% mainly due to a decrease in sales of group payout annuities. Q vs Q (six months) Individual Life premiums increased 5% to $ 370 million. Living Benefits premiums of $42 million increased from $39 million in Individual segregated fund premiums decrease by 30% and guaranteed interest rate product premiums increased by 233% for the same reasons as the in quarter period compared to GRS premiums decreased by 41% in quarter for the same reasons as the in quarter period compared to Q vs Q Individual Life premiums increased 7%, reflecting the continued strong growth in sales of participating life insurance and overall strong persistency. Living Benefits premiums of $21 were constant. Although premiums deposited into proprietary investment funds were down 14%, premiums in the second quarter have historically been 15% to 25% lower than the first quarter primarily because of RRSP season, which significantly increases deposits in the first quarter. Guaranteed interest rate product premiums were up 133% over the first quarter due to clients' continuing to move to guaranteed deposits. Individual payout annuity premiums were up 70% due to enhanced pricing. GRS premiums increased by 113% due to increased payout annuity sales. Sales Q vs Q Individual Life sales in 2009 of $29 million were 7% higher mainly due to continued growth in participating whole life insurance and non-participating term insurance sales. Sales of Living Benefits of $3 million were $1 million lower. Sales results for individual segregated funds and individual payout annuities are very similar to the premiums and deposits results. Guaranteed interest rate product sales include reinvested maturities as well as new premiums and were 95% higher than Reinvested maturities partially offset the significant growth in new premium as there was a much smaller amount of maturing investments this year. GRS sales decreased due to lower sales of group payout annuities. Q vs Q (six months) Individual Life sales in 2009 of $52 million were 4% higher mainly due to growth in participating whole life insurance sales of 31% and non-participating term insurance sales of 15%. Sales of Living Benefits in 2009 of $6 million were $1 million lower. Sales results for proprietary investment funds and individual payout annuities are very similar to the premiums and deposits results. Guaranteed interest rate product sales increased by 31% for the same reasons as the in quarter period compared to GRS sales decreased due to lower sales of group payout annuities. 16

19 Management s Discussion and Analysis Q vs Q Individual Life sales were 26% higher due mainly to continued growth in participating whole life insurance and universal life sales. Sales of Living Benefits of $3 million were level with the first quarter of Sales results for proprietary investment funds and individual payout annuities are very similar to the premiums and deposits results. Guaranteed rate product sales were up 24% due to clients continuing to move to guaranteed products. GRS sales increased due to higher group payout annuity sales. Fee and other income Q vs Q IRIS and GRS fee income in 2009 totaled $25 million, reflecting decreases from last year of 19% for IRIS and 40% for GRS primarily due to decreases in average segregated fund AUM of 15% and 34% respectively. Fee income declined by more than the change in average assets for IRIS because of a shift from equities to fixed income funds, due to declines in equity markets. For GRS, the decline was due to the closure of the securities business in mid Q vs Q (six months) IRIS and GRS fee income in 2009 totaled $47 million, reflecting decreases from last year of 21% for IRIS and 43% for GRS primarily due to decreases in average segregated fund AUM of 19% and 35% respectively, similar to the in quarter period compared to Q vs Q IRIS and GRS fee income totaled $25 million, an increase of 13% for IRIS and 2% for GRS primarily due to increases in average segregated fund AUM of 11% and 3% respectively. Net income Q vs Q Net income in 2009 was $86 million compared to $42 million in The increase is the result of a significant increase in Cash Flow Valuation Method (CFVM) new business and trading gains and higher actuarial reserve basis change slightly offset by lower mortality gains. Details of the credit related and investment spread related impacts on 2009 earnings are as follows: Net income includes an additional charge for future credit losses in actuarial liabilities of $2 million after-tax as a result of basis changes to work toward the harmonization of practices across the Company s operating segments. In addition, a reduction in excess interest rate mismatch reserves improved results by $1 million after-tax. Q vs Q (six months) Net income in 2009 was $145 million compared to $125 million in 2008 for the same reason as the in quarter period compared to Q vs Q The increase of $27 million is primarily the result of a significant increase in CFVM gains primarily from trading activities and higher Life expense gains partially offset by lower actuarial reserve basis change. 17

20 Management s Discussion and Analysis GROUP INSURANCE 2009 DEVELOPMENTS For the six months ended June 30, 2009 creditor/direct marketing net premiums remained steady at the same level as last year. Direct premiums received from clients increased 3% over Sales of $15 million for the six months ended June 30, 2009 increased by $2 million compared to OPERATING RESULTS For the three months ended For the six months ended June 30 March 31 June 30 June 30 June Premiums and deposits $ 155 $ 154 $ 157 $ 309 $ 312 Sales Net income Premiums and deposits Q vs Q Premiums and deposits in 2009 decreased $2 million primarily due to the decrease in insured net premiums. This is a closed block of business and should decrease over time as policies terminate. The creditor/direct marketing net premiums decreased slightly from Q vs Q (six months) Premiums and deposits in 2009 decreased $3 million primarily due to the decrease in insured net premiums. This is a closed block of business and should decrease over time as policies terminate. The creditor/direct marketing net premiums remained steady at the same level as last year. Q vs Q Premiums and deposits in the second quarter increased $1 million, insured net premiums are at the same level, and the creditor/direct marketing net premiums increased 3%. Sales Q vs Q Creditor/direct marketing sales in 2009 were slightly lower than Q vs Q (six months) Creditor/direct marketing sales in 2009 were $2 million higher mainly due to one large sale for $5 million in 2009 partly offset by decreased enrollments through the auto dealer sales channels. Q vs Q Creditor/direct marketing sales in the second quarter decreased slightly. Net income Q vs Q Net income in 2009 was $20 million, an increase of $3 million. The results reflect improved group health morbidity experience mainly from improved claims experience, higher gains from actuarial reserve basis changes and an increase in interest rate mismatch reserves of $2 million after-tax. 18