Co-operators Life Insurance Company. Annual Report

Transcription

1 Co-operators Life Insurance Company Annual Report

2 MISSION, VISION, VALUES Our Mission The Co-operators: financial security for Canadians and their communities. Our Vision The Co-operators aspires to be valued by Canadians as... a champion of their prosperity and peace of mind, a leader in the financial services industry, distinct in its co-operative character, and a catalyst for a sustainable society. Statement of Values At The Co-operators we... strive for the highest level of integrity foster open and transparent communication give life to co-operative principles and values carefully temper our economic goals with consideration for the environment and the well-being of society at large anticipate and surpass client expectations through innovative solutions supported by mutually beneficial partnerships. Visit to view the full suite of 2010 reports for The Co-operators group of companies.

3 CONTENTS With an engagement score of 75%, Co-operators Life Insurance Company moved up four places to 28 th on the 50 Best Employers in Canada list. It was also named one of Canada s Top 100 Employers. Company Profile 4 Consolidated Highlights 5 Letter to Shareholder and Policyholders 6 Management s Discussion & Analysis 7 Responsibility for Financial Reporting 30 Independent Auditor s Report 31 Report of the Appointed Actuary 32 Consolidated Financial Statements 33 Notes to the Consolidated Financial Statements 39 Board of Directors: Committees 79 Board of Directors 80 Corporate Directory Annual Report Co-operators Life Insurance Company

4 COMPANY PROFILE Organizational chart The Co-operators group of companies (The Co-operators) is 100% Canadian owned and operated. Co-operators Life Insurance Company (Co-operators Life) provides life insurance, travel insurance and wealth management products to individuals. It also provides group insurance and pensions to a variety of employees and association groups. Through The CUMIS Group Limited (CUMIS), it provides life and property and casualty (P&C) insurance and financial products to credit unions and their members. The Co-operators Group Limited Business profile Co-operators Life Insurance Company is among the largest life insurance organizations in Canada. Successfully completed the foundational integration-related activities with The CUMIS Group Limited; these efforts complete a major step towards fully maximizing the relationships with our credit union partners. Continued building towards our growth objectives by introducing the new Infinity Term product and expanding our presence into Quebec with the Group Life and Health product suite. Named one of Canada s Top 100 Employers. Assets Under Management (AUM) of $5.271 billion. 1,139 employees (Co-operators Life and CUMIS). Protects more than 640,000 lives. Insures more than 250,000 employees through group Co-operators Financial Services Limited benefit plans. Provides travel insurance to more than one million Canadians and visitors to Canada. Provides credit insurance to more than one million Canadians. Offers a wide range of wealth management products. Addenda Capital Inc. (71.28%) Annual Report Co-operators Life Insurance Company Co-operators General Insurance Company The Sovereign General Insurance Company - Harlock Murray Underwriting Ltd. (50%) L UNION CANADIENNE, Compagnie d Assurances The Equitable General Insurance Company COSECO Insurance Company Co-operators Life Insurance Company TIC Travel Insurance Coordinators Ltd. - SELECTCARE WORLDWIDE CORP. The CUMIS Group Limited (72.99%) - CUMIS Life Insurance Company - CUMIS General Insurance Company - Credential Financial Inc. (50%) Federated Agencies Limited HB Group Insurance Management Ltd. UNIFED Insurance Brokers Limited 75% Engagement score among Co-operators Life employees in 2010

5 CONSOLIDATED HIGHLIGHTS Capital Assets Under Management 350% 6,000 5,273 Minimum continuing capital and surplus requirements 300% 250% 200% 150% 244% $ millions 5,000 4,000 3,000 2,000 1, Insurance Premiums and Equivalents Net Income $ millions $ millions Annual Report Co-operators Life Insurance Company

6 010 Letter to Shareholder and Policyholders 2010 was an extraordinary year for Co-operators Life Insurance Company Annual Report Co-operators Life Insurance Company We welcomed The CUMIS Group Limited (CUMIS) as the newest member of The Co-operators group of companies, an acquisition made in partnership between Co-operators Life Insurance Company and Central 1 Credit Union. It is a winning combination that results in CUMIS becoming 100 per cent Canadian-owned and allows The Co-operators to become even more directly connected with credit unions and caisses populaires across multiple product lines for the first time in more than two decades. As a newly united organization, much of our work during 2010 was focused on integration of the two companies. Using the strengths of each company, we positioned our people and systems to effectively manage the complexity of our new organization and to grow our business. We achieved solid financial performance in spite of a tough investment climate. The addition of CUMIS provides diversity to our earnings with less interest-sensitive products in our mix of business and also diversifies our distribution channel. Our profitability will be further enhanced moving forward as 2010 contained significant integration costs that will not reoccur. We enhanced our foundational structure through three cornerstone initiatives. An incredible effort went into the Creditor Infrastructure Program, a game-changer that will deliver a more dynamic product and service offering to credit unions and caisses populaires. We made great strides with our Group Revitalization Program that will deliver new functionality and a paperless billing and remittance process for our group benefits clients and a leading edge suite of online services for plan sponsors and administrators. And we put the wheels in motion for a new Wealth Management Strategy that offers unique and attractive offerings for small and medium enterprises. Through all of this work and transformation, we received accolades from our employees who helped us achieve recognition from Mediacorp as one of Canada s Top 100 Employers for the fourth time and from Hewitt as one of the 50 Best Employers in Canada for the third year in a row. We thank our employees for their commitment and perseverance through extensive integration efforts and change. Our investment in CUMIS, our cornerstone initiatives, and other areas are showing early signs of financial returns. We expect to see even higher returns as we begin our journey on a new four-year strategy and finish what we started, effectively manage the complexity of our united organization, and begin to leverage the significant opportunities in our multiple distribution touch points. (Signed) Kevin Daniel Executive Vice-President and Chief Operating Officer (Signed) Richard Lemoing Chairperson, Board of Directors

7 MANAGEMENT S DISCUSSION & ANALYSIS For the year ended December 31, 2010 February 16, 2011 This Management s Discussion and Analysis (MD&A) comments on the Consolidated Co-operators Life Insurance Company s operations and financial condition for the year ended December 31, Unless otherwise stated or the context otherwise indicates, in this report Co-operators Life, we, us and our refers to the Consolidated Co-operators Life Insurance Company including its majority owned subsidiaries, The CUMIS Group Limited (CUMIS or CUMIS Group), CUMIS General Insurance Company (CUMIS General), CUMIS Life Insurance Company (CUMIS Life) and TIC Travel Insurance Coordinators Ltd. (TIC). The information in this discussion should be read in conjunction with our consolidated financial statements and notes. The use of Note refers to the Notes to the Consolidated Financial Statements. All amounts are expressed in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Certain prior year data has been reclassified to conform to the current year s presentation. We use certain non-gaap financial performance measures which do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. They should not be viewed as an alternative to measures of financial performance determined in accordance with GAAP. Such measures are defined in this document. The information in this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from these forward-looking statements as a result of various factors, including those discussed below. Please read the cautionary note which follows. CAUTION REGARDING FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking statements and forward-looking information, including statements regarding the operations, objectives, strategies, financial situation and performance of Co-operators Life. These statements, which appear in this MD&A (including the documents incorporated by reference herein), generally can be identified by the use of forwardlooking words such as may, will, expect, intend, estimate, anticipate, believe or continue or the negative thereof and similar variations. These statements are not guarantees of future performance and involve known and unknown risk, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in the forwardlooking statements or information. In addition, this MD&A may contain forward-looking statements and information attributed to third party industry sources. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Such forward-looking statements and information in this MD&A speak only as of the date of this MD&A. Forward-looking statements and information in this MD&A include, but are not limited to, statements with respect to: our growth expectations; the impact of changes in governmental regulation on our company; possible changes in our expense levels; changes in tax laws; and anticipated benefits of acquisitions and dispositions. With respect to forward-looking statements and information contained in this MD&A, we have made assumptions regarding, among other things: growth rates and inflation rates in the Canadian and global economies; the Canadian and U.S. housing markets; the Canadian and global capital markets; the strength of the Canadian dollar relative to the U.S. dollar; employment levels and consumer spending in the Canadian economy; and impacts of regulation and tax laws by the Canadian and provincial governments or their agencies. Some of the assumptions we have made are described in Outlook. Although we believe that the expectations reflected in the forward-looking statements and information are reasonable, there can be no assurance that such expectations will prove to be correct. We cannot guarantee future results, levels of activity, performance or achievements. Consequently, we make no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements and information. Some of the risks and other factors, some of which are beyond our control, which could cause results to differ materially from those expressed in the forward-looking statements and information contained in this MD&A and the documents incorporated by reference herein include, but are not limited to: our ability to implement our strategy or operate our business as we currently expect; our ability to accurately assess the risks associated with the insurance policies that we write; unfavourable capital market developments or other factors which may affect our investments; the cyclical nature of the property and casualty (P&C) insurance industry; our ability to accurately predict future claims frequency; government regulations; litigation and regulatory actions; periodic negative publicity regarding Annual Report Co-operators Life Insurance Company

8 Management s Discussion & Analysis the insurance industry; intense competition; our reliance on agents, brokers, credit unions, caisses populaires, and other third parties to sell our products; our ability to successfully pursue our acquisition strategy; terrorist attacks and ensuing events; the occurrence of catastrophic events; our ability to maintain our financial strength ratings; our ability to alleviate risk through reinsurance; our ability to successfully manage credit risk (including credit risk related to the financial health of reinsurers); our reliance on information technology and telecommunications systems; our dependence on key employees; and general economic, financial and political conditions. Readers are cautioned that the foregoing list of factors is not exhaustive. The forward-looking statements and information contained in this MD&A are expressly qualified by this cautionary statement. We are not under any duty to update any of the forward-looking statements after the date of this MD&A to conform such statements to actual results or to changes in our expectations except as otherwise required by applicable legislation. CORPORATE OVERVIEW ABOUT US Our principal business is to provide life, health, property and casualty, credit and travel insurance, as well as wealth management products, to individuals and groups in Canada. We achieve diversification of insurance risk by insuring a large number of relatively small risks spread across all regions of Canada and in various lines of business to millions of Canadians and travellers to Canada. Co-operators Life s parent is Co-operators Financial Services Limited and its ultimate parent is The Co-operators Group Limited (CGL or The Co-operators). Significant associated companies include Co-operators General Insurance Company (CGIC), L Union Canadienne Compagnie d Assurances, The Sovereign General Insurance Company, COSECO Insurance Company (COSECO), Addenda Capital Inc. (Addenda), Federated Agencies Limited, and HB Group Insurance Management Ltd. The Co-operators refers to CGL and all its direct and indirect subsidiaries. On December 31, 2009, Co-operators Life, in partnership with Central 1 Credit Union (Central 1), completed the acquisition of CUMIS Group and its primary subsidiaries CUMIS Life and CUMIS General. As a result of additional transactions in 2010, Co-operators Life now owns 72.99% of CUMIS with the remainder owned by Central 1. Details of the 2010 transactions can be found in Note 22 Related Party Transactions. With the acquisition of CUMIS, we are strengthening our ties to the credit union and caisse populaire sector (collectively referred to as credit unions in this document), bringing increased value to the credit union distribution channel in Canada, and diversifying our product portfolio. Co-operators Life is among the largest life insurance organizations in Canada. The majority of the individual products are distributed through the exclusive agency sales force of CGIC, while group products are marketed primarily through independent group benefits advisors. Our travel insurance products are distributed by our wholly-owned subsidiary TIC through travel agents, independent brokers and direct-to-consumer methods. With the addition of CUMIS we have expanded our distribution network whereby through credit unions we provide credit, individual, wealth, home and auto, and travel products to the credit union members. We also market our insurance and wealth management products to credit unions as key corporate clients. We benefit from synergies and create strength from interdependencies that exist within the group of companies of CGL. We provide a variety of products to CGIC s agents to broaden their offering; we utilize Addenda as our investment management provider; and we share many other corporate services with associated companies Annual Report Co-operators Life Insurance Company 8 Like many life insurance companies we have a shareholder account and a participating ( par ) account. The par account holds products that are structured so that some of the profitability of the product accrues to the policyholder. The par account also includes equity from accumulated profits from par account products (also referred to as Surplus) and earns investment income on its equity. The shareholder account holds all other products and businesses % of net income from CUMIS accrues to Central 1 which is referred to as non-controlling interest. The remainder of the shareholder account accrues to the shareholders. Our dividend policy for participating policies is available on our website at CORPORATE STRATEGY Our mission is simple: to provide financial security for Canadians and their communities. Our vision is to be: valued by Canadians as a champion of their prosperity and peace of mind; a leader in the financial services industry that is distinct in its co-operative character; and a catalyst for a sustainable society. The Co-operators Mission Statement, Vision and Statement of Values reflect the commitment to becoming a leader in sustainable business practices. Building on the strong foundation of the past, we have furthered our commitment to being a client-centric organization. We continue to strengthen our client base by building multi-product client relationships and investing in developing long-lasting relationships with organizations with similar values to ours, such as credit unions, caisses populaires and co-operatives. Our strategy for 2010 was rooted in the following key strategic areas:

9 Financial Strength Financial strength is fundamental to sustain our ability to exceed our clients expectations over the longterm. A strong capital position allows us to invest in new products and services to better serve our clients current and future needs. We continually enhance our financial strength through setting and meeting target ranges of our key success indicators for each of our operating segments over a four-year timeframe. The key success indicators we use to measure financial performance are: revenue growth, assets under management (AUM) growth, return on equity (ROE) and minimum continuing capital and surplus requirements (MCCSR). Our long-term targets include: insurance premium written growth of 8%, ROE of 12% and consolidated MCCSR of not less than 180%. Underwriting objectives guide the development of the business on a profitable, prudent and diversified basis. Our pricing approach reflects the factors described in Risk Management Product Design and Pricing Risk as well as our financial performance targets, competitive environment, capital required to support product lines and investment earnings on that capital. We believe that our personal service approach to claims handling is a key competitive advantage in providing better service to clients and claimants. Our actuarial liability calculations are designed to be conservative in nature to ensure we are able to provide benefits to our policyholders in their time of need. Additional details of how we ensure our obligations to policyholders will be met can be found in Risk Management Insurance Risks. We manage our investment assets in a conservative manner that provides steady income to support our cash flow and liquidity needs. We have an established investment policy and strategy that are based upon prudence and regulatory guidelines. The investment policy is approved by Co-operators Life s Board of Directors and reviewed on a regular basis. Key policies and procedures to safeguard our investment assets are described in more detail in Risk Management Financial Risks. We write business that is broadly diversified in terms of lines of business and geography. We also utilize reinsurance to manage our exposure to individual losses and multiple claims from a single occurrence. Details of our reinsurance practices are described in Catastrophic loss risk and Underwriting risk in the Risk Management discussion. Growth Growth is crucial to increase our relevance in the industry and is a key facilitator in our ability to engage in our communities. Our business strategy is to continue to grow through diversification of our products and expansion of our sales force, and to offer small- and medium-sized businesses the customer service and flexibility they desire. Our four-year strategy includes an average annual insurance premium written growth rate of 8%. With our acquisition of CUMIS we have increased our total revenue to over $1.1 billion, and have expanded our distribution network, enhanced credit union sector relationships, and leveraged products and services across the organizations. We will continue to seek out acquisition opportunities that offer attractive growth and profitability prospects and are a good fit for our organization. Clients We are committed to attracting and retaining clients by building and fostering solid lifetime relationships. This past year we made it even easier to do business with Co-operators Life for the duration of our relationship with our clients. We launched a webquote system via our website which provides a life insurance needs analysis, term insurance quotes and a choice of agents to follow up with. We also streamlined the claims process for smaller life insurance policies to pay benefits to claimants within three days of their claim. Our disability rehabilitation case managers are now located in more locations across the country to strengthen client relationships and provide more person-to-person contact throughout the often difficult rehabilitation process. And we ll be doing more of the same in Our goal is to be the preferred insurance provider of financial security products to the co-operative sector and to build a closer bond with member-owner organizations of our ultimate parent, CGL, as well as with their individual members. Our focus is on understanding and providing solutions that meet the unique needs of co-operatives. Our recent acquisition of CUMIS expanded our presence and relationships with credit unions and their members. We will continue to leverage these corporate relationships as well as develop and expand relationships with their individual clients to ensure they are well served by our insurance products and services. Trust & Reputation Our core company values hold us to the highest level of integrity as our standard of conduct and the belief that we must balance economic, social and environmental priorities as a responsible corporate citizen Annual Report Co-operators Life Insurance Company We have made a commitment to be a sustainable organization and to reduce our carbon footprint on the world. Whenever possible we utilize video conferencing, imaging technology and online tools to reduce travel and paper usage. Through volunteer programs, including our active involvement in the community and with charitable organizations, and our commitment to be a catalyst for a sustainable society, we demonstrate our dedication to being a socially responsible

10 Management s Discussion & Analysis organization. In 2010, the YES initiative (Youth Engagement for Sustainability), which facilitates the completion of sustainability projects, was expanded and now supports seven Regina area high schools. Human Resources We credit the strength of our people for our organization s success. Their understanding of our strategy and goals, as well as their satisfaction with the work they do and how it contributes, are of critical importance throughout our companies. Our corporate goal is to sustain high levels of staff engagement as measured by: how positively staff view and speak of the organization; how likely they are to stay with the organization; and their willingness to exert extra effort to achieve business success was a demanding year for our staff as we took on the task of integrating CUMIS and transforming the combined organization. And as is the case for most acquisitions and integrations, to achieve maximum efficiencies some staff were displaced. Despite these challenges, our staff spoke loud and clear about working at Co-operators Life: Hewitt named us one of the "50 Best Employers in Canada" for the third year in a row based on employee feedback. In addition, Mediacorp recognized us as one of "Canada's Top 100 Employers" for the fourth time based on our Human Resources policies and practices. We thank our employees for their commitment and perseverance through extensive integration efforts and change. Strategic Renewal In 2010 our Corporate Strategy was reviewed and refreshed for 2011 to It is described in more detail in Outlook Our Business. COMPETITIVE ENVIRONMENT Co-operators Life ranks among the largest Canadian life insurance organizations after the three largest life companies who control two thirds of the market. The market is highly competitive and there are numerous industry participants, although industry consolidation over the years has seen the overall number of life insurers decline. Competitors include large national and international insurers, banks, credit unions, caisses populaires, mutual fund companies and smaller insurance companies. Main components of competition include price, distribution channels, availability and quality of products, quality and speed of service, financial strength and technical expertise. Our corporate objective is to achieve significant growth and to continue to be a leading Canadian member-owned life insurer which provides financial security to Canadians and their communities. KEY FINANCIAL MEASURES (NON-GAAP) We measure and evaluate the performance of the consolidated operations and each business segment using a number of financial measurements. These measurements help the reader understand business volumes, the quality of risk underwriting, management reserving practices, the financial strength and the financial leverage of Co-operators Life. These measures are not GAAP measurements, but are derived from elements of our GAAP financial statements, and are consistent with financial measures used in the life insurance industry Annual Report Co-operators Life Insurance Company 10 Insurance premiums and equivalents is the sum of insurance premiums received and estimated insurance premiums for administrative business where we earn a fee but do not receive a premium because the group policyholder retains the insurance risk. Wealth management premiums and contributions are not included. It is an indicator of insurance business volume. Wealth management premiums and contributions is the sum of amounts received for investment in annuities, segregated funds and other investment vehicles. Assets under management (AUM) is the total assets that we manage to earn profits. It includes both assets on our balance sheet and segregated funds. It is an indicator of business volume. Minimum continuing capital and surplus requirements (MCCSR) is a regulatory defined, formula-driven, risk-based ratio of capital available divided by capital required for life insurance companies. Required capital is calculated based on the company s assets and liabilities multiplied by prescribed risk factors. Capital available is the total of GAAP equity and long-term debt, plus or minus certain prescribed adjustments. The regulatory minimum is an MCCSR ratio of 150%. Shareholder net income is the portion of net income which accrues to the shareholder account and will provide capital to support products or fund dividends to shareholders. Par account net income is the portion of net income which accrues to the par account and will provide capital to support products or fund dividends to par policyholders. Return on equity (ROE) is the ratio of net income to the average of opening and closing equity excluding accumulated other comprehensive income, expressed as a percentage.

11 FINANCIAL PERFORMANCE AND CONDITION AT A GLANCE SUMMARY OF KEY FINANCIAL DATA (in millions of dollars except MCCSR ratio and ROE ) Insurance premiums and equivalents Wealth management premiums and contributions Assets under management 5,273 4,897 3,695 4,075 3,824 MCCSR ratio 244% 255% 256% 301% 303% Net income Shareholder net income Participating account net income Non-controlling interest net income Return on equity 5.3% 5.2% 7.7% 9.7% 11.3% Shareholder return on equity 4.8% 7.0% 15.4% 12.7% 19.6% Participating account return on equity 5.8% 4.1% 3.5% 8.2% 7.3% Non-controlling interest return on equity 3.9% KEY SUCCESS INDICATORS (NON-GAAP) We monitor several success indicators of our financial performance. Our strategy is to build on our financial strength by meeting or exceeding targets for each of these key success indicators. Insurance Premiums and Equivalents Growth Insurance premiums and equivalents are a measure of insurance business volume, and growth is important to our overall success. 40% 30% 32% Insurance premiums written for 2010 increased $218.4 million or 32% compared to a targeted growth rate of 8% for The increase was primarily attributable to the acquisition of CUMIS. Wealth Management Premiums and Contributions Wealth management contributions represent new funds under our management, a key driver of fee revenue. Wealth management premiums and contributions increased by $95.2 million over Individual wealth management, which tends to be more client discretionary, had a turnaround year as investor sentiment turned more positive in Contributions from individuals increased $35.2 million over In addition to ongoing group wealth management contributions, which tend to be regular deductions from client payroll, employers purchased annuity contracts, increasing total group contributions by $60.0 million over $ millions 20% 10% 0% -10% % Target Annual Report Co-operators Life Insurance Company 11

12 Management s Discussion & Analysis Return on Equity In 2010, we earned a 5.3% ROE. This was ahead of our 2010 target of 5%. Our capital position is very strong but the excess capital above 180% earns only investment returns which will be well below 12% after tax. We will continue to seek out opportunities to grow our business through organic growth and acquisitions to fully utilize our excess capital to support more products and clients. MCCSR Ratio Our MCCSR ratio declined by 11% to 244% in This decline was primarily due to our acquisition of an increased interest in CUMIS during 2010, growing our ownership of CUMIS from 50.1% to 72.99%. New business generated during the year also added to our capital requirements, but this was offset by additional capital available from our net income for the year. Our MCCSR ratio is still well above the regulatory minimum ratio of 150% and our Boardapproved internal minimum ratio of 180%. 12% 10% 8% 6% 4% 2% 0% 275% 250% 225% 200% 175% 150% 5.3% % 180% FINANCIAL PERFORMANCE REVIEW NET INCOME 2010 Annual Report Co-operators Life Insurance Company net income increased over 2009 by $8.0 million to $ million. Non-controlling 41.7 interest net income Increases in net income in Credit Insurance ($6.6 million), Property & Casualty Insurance ($5.3 million), Travel Insurance ($4.9 million), and Life Surplus ($1.6 million), were partially offset by decreases in Individual Insurance ($8.3 million), Group Insurance ($1.9 million), and Wealth Management ($0.2 million) net income was impacted by non-recurring integration expenses of $18.7 million net income included $6.0 million of acquisition related expenses. OTHER COMPREHENSIVE INCOME Participating account net income Shareholder account net income Return on Equity $ millions ($ millions) Unrealized gain (loss) on available for sale assets (101.2) Reclassification adjustment for (gain) loss included in income (3.6) Net unrealized gain (loss) Income taxes (recovery) (104.8) (33.7) Other comprehensive income (loss) (71.1) Market returns were more modest but more balanced in 2010 as both stocks and bonds advanced versus 2009 when unrealized gains were primarily due to a significant recovery of stock markets. More stable markets also resulted in lower reclassification adjustments in % 10% 8% 6% 4% 2% 0%

13 INDIVIDUAL INSURANCE We offer a complete portfolio of individual insurance products including permanent, term, universal life (UL), critical illness and mortgage disability income. Most of our life products can be tailored to reflect individual health and lifestyle choices. Premium Written In 2010 we increased premiums written through both sales growth and acquisition. Net sales resulted in premium written growth of $11.1 million, while premiums added through the acquisition of CUMIS added $38.6 million of premium written. The combination of these two sources of growth resulted in a total increase of 19.2% We earned sales growth in all product lines with the largest gains in Health (14.8%) and Term (8.5%). We introduced a new product in 2010 Infinity Term which is a hybrid with the best features of term and permanent insurance. It has been well received by our CGIC agents and our clients, with 2010 sales exceeding our expectations. Premiums written - $ millions Permanent Term UL Health Successes, challenges and initiatives With the acquisition of CUMIS Group at the end of 2009, we utilized significant resources to integrate CUMIS individual insurance clients and products into our systems and made significant strides to complete the integration. But throughout the year we kept our focus on our clients and maintained high service standards while still achieving a number of strategic objectives and initiatives. We improved our front-end technology to give CGIC agents the tools to make them more efficient and effective in meeting their clients life insurance needs, while reducing paper use and contributing to The Co-operators sustainability goals. We also improved our back-office technology to manage our insurance risks more precisely. In the last quarter of 2010 we introduced a webquote facility that provides our website visitors with a life insurance needs analysis, a term insurance quote and an agent to connect with to discuss their needs. Our life insurance claims processing has been changed to streamline the payment of benefits and we now pay the benefits on many smaller life insurance policies within three days of being notified of the claim Annual Report Co-operators Life Insurance Company 13

14 Management s Discussion & Analysis GROUP INSURANCE Our complete range of group benefit products provide insurance coverage for life, accidental death and dismemberment, disability, critical illness, extended health benefits, and dental care. Group insurance products and services are provided under fully insured, administrative services only (ASO) or a combination of insured and ASO contracts. These products are distributed through our six regional group sales offices and are placed through independent brokers, third-party administrators and CGIC agents. Premiums and Equivalents Written Total premiums and equivalents written fell 4.5% compared to The group insurance market continues to be extremely price competitive with insurers implementing aggressive strategies for acquisition of new business. In 2010 our new sales were offset by the loss of two third party administered accounts, resulting in a net decline in our total premiums and equivalents. Overall our renewal strategy has been successful, resulting in our ability to maintain the most profitable business and where there is a good longer term strategic fit. Premiums & equivalents written - $ millions Life Disability Medical Dental AD&D Successes, challenges and initiatives 2010 Annual Report Co-operators Life Insurance Company 14 We completed the implementation of our new distribution strategy which involved a significant change in focus and approach to the market. We are increasing our emphasis on growth from brokers, our agency force, and credit unions. This has resulted in increased quoting activity and sales through the agency channel. We are confident that we will achieve similar results in the broker market in 2011 as our new preferred broker incentive program stimulates growth from this channel. In September we made a major commitment to the Quebec market by opening a new group benefits office in Montreal. Sales and service for our existing and new Quebec clients will be delivered from this office. Implementation of a new administration system will be completed in the first half of 2011 and the conversion of existing business completed prior to 2011 year-end. This system will give us a strong technological platform to provide not only competitive core functionality but also a longer term competitive advantage based on the integration of our systems, the degree of flexibility, and multi-product capabilities.

15 WEALTH MANAGEMENT We offer individuals and groups a wide range of long-term savings and wealth management products designed to accommodate pension, retirement and tax planning. The products available include annuities, segregated funds and other wealth management vehicles. Individual wealth management products are distributed through CGIC s Canada-wide agent network. Group wealth management products are distributed primarily through independent brokers. Assets under Management (AUM) The CUMIS acquisition added $424.0 million to our AUM on December 31, 2009 but our 2009 results do not include any income earned on those assets. Our AUM increased $220.9 million in The majority of the increase resulted from an increase in the market value of investments and income on investments. Continuing a trend of more than five years, new funds invested in our products outpaced withdrawals, evidence that our clients are committed to investing and confident in our asset management capabilities. Successes, challenges and initiatives The consolidation of Co-operators Life and CUMIS Life wealth management operations was a major focus in 2010, but was completed successfully with all services now offered under a single management team. Despite the efforts required for integration, we excelled at securing new business, attracting both new investment assets and new clients, especially in the small and medium enterprise market. AUM - $ millions 2,000 1,750 1,500 1,250 1, , General Segregated In 2011 we will continue to develop new products and services including web access for individual clients to their wealth management products Annual Report Co-operators Life Insurance Company 15

16 Management s Discussion & Analysis TRAVEL INSURANCE We offer out-of-province and out-of-country emergency health and travel-related insurance to Canadians and visitors to Canada. Our claims and travel assistance representatives respond to and assist with emergencies or consumer needs. These products and services are provided by our wholly-owned subsidiary and managing general underwriter TIC, which is one of the top travel insurance providers in Canada. These products are distributed through multiple channels, including licensed insurance agents, travel agents, credit unions, and an in-house call centre. Premium Written 2010 premiums grew to $87.2 million, up $2.1 million over After strong growth in sales in 2008 and 2009, we selectively controlled the expansion of our products to manage the balance of the risks we insure. Strong sales of our traditional travel insurance products through all other distribution channels resulted in an increase in premiums overall. To produce continued premium growth on all products we contracted new distributors in the latter half of 2010 and will continue to do so in Premiums written - $ millions Successes, challenges and initiatives Sales of our travel insurance products are largely dependent on the volume of Canadians travelling. The strength of the Canadian dollar and the Canadian economic recovery is expected to result in Canadians travelling at or above past levels. With our new products we are well positioned to travel with more and more clients Annual Report Co-operators Life Insurance Company 16 Following the lead of our parent company, TIC was named to AON Hewitt Research s list of "50 Best Small & Medium Employers in Canada."

17 CREDIT INSURANCE Our credit insurance products are marketed primarily to members of Canadian credit unions. We offer life, disability, critical illness, and loss of employment insurance which provide benefits to protect and assist the insured members in meeting their credit obligations. These products are underwritten by CUMIS Life. From 1986 to 2009 we participated in a joint venture with CUMIS Life in which we received 50% of their credit insurance results. Following our acquisition of CUMIS Group, our 2010 results represent 100% of the credit insurance results and 2009 figures are our results from our half of the joint venture. Premiums Written Premiums written are dependent on the level of lending through our partner credit unions, as well as the participation rate at which borrowers choose to purchase credit insurance on their loans, mortgages, and lines of credit premiums written were $213.0 million, $92.7 million ahead of our 2009 joint venture results, but $6.8 million behind comparable 2009 premiums written reported by CUMIS Life. Lending levels and loans eligible for credit insurance were down in 2010 but we maintained our participation rates on the loans that were placed. Premiums written - $ millions Successes, challenges and initiatives Our premium growth is largely governed by lending volumes and our credit union partners are forecasting modest lending growth in We will continue to refresh our products and strategies to increase our penetration rates and generate growth rates in excess of lending volume trends. In the coming year we will implement a new sales and administration system that will integrate front-end data collection and back-office administration of credit insurance. It will enable the delivery of enhanced products and product features while streamlining administration processes by transferring data directly from credit union input through to our administration systems Annual Report Co-operators Life Insurance Company 17

18 Management s Discussion & Analysis PROPERTY AND CASUALTY INSURANCE Our subsidiary CUMIS General markets a portfolio of (P&C) insurance products through credit unions, offering auto, home, and travel insurance to their members as well as commercial, and bonding insurance to the credit unions themselves. CUMIS General was acquired on December 31, 2009 so their prior year income and premiums are not included in our consolidated results, but are discussed for comparative purposes. Combined Ratio Our combined ratio, which measures our claims and expenses as a percentage of earned premiums, was 95.1% in Excluding 2010 integration expenses, our combine ratio for the year was 89.0% % 90.5% 86.8% Premiums Written 2010 Annual Report Co-operators Life Insurance Company 18 CUMIS General s premiums increased 11.7% over 2009 to $88.1 million. The key gains were in Auto and Bonding insurance. Auto premiums increased by 18.4% as effective sales programs, solid retention, increased rates and the addition of new credit union accounts all contributed to the enhanced sales performance. Bonding premiums were up 14.5% primarily due to rate adjustments. Successes, challenges and initiatives In 2010 our primary focus was integration and generating value by leveraging synergies with CGL s other P&C operations. We outsourced our home and auto underwriting and pricing to HB Group Insurance Management Ltd., a subsidiary of CGL which provides similar services for COSECO. Premiums written - $ millions In 2011, we will continue to expand our distribution network of home and auto products to even more credit unions to achieve profitable growth across Canada. We have very good market share of credit unions, providing most with insurance coverage for commercial and bonding risks. In 2010 we made process improvements for these product lines which will support our 2011 goals of retaining business and solidifying our relationships Home Auto Commercial Bonding

19 LIFE SURPLUS The capital of our life insurance companies is invested in a diversified portfolio of stocks, bonds, mortgages, real estate and short-term investments. Income from these investments is a significant part of our expected total net income. Investments are managed with a long-term outlook so we accept some short-term volatility in the value of our investments and income in order to achieve higher returns over the long term. Returns of bonds and shares are measured against market benchmarks. This portfolio also provides additional liquidity to the operating segments and for funding acquisitions from excess capital. Interest, dividends and real estate income are included in net income each year. As described in Note 4, bonds and stocks in this portfolio are recorded as available-for-sale so changes in unrealized gains are not included in net income in the year they are earned but are included in other comprehensive income. Gains on the sale of investments are included in income in the year that they are realized. An other than temporary decline in value of an investment is recorded as an impairment loss in the current year similar to a realized loss. Life Surplus net income for 2010 was $1.1 million, an increase of $1.6 million from In 2010 we realized gains on the sale of stocks of $8.4 million which was $19.2 million more than the losses we realized in These gains were largely offset by an increase in integration expenses of $9.0 million, goodwill amortization of $3.6 million, and a decline in investment income of $3.4 million. Net income - $ millions Invested Asset Mix % based on carrying value Cash and short term investments 5.6% 6.0% 6.5% Bonds 42.8% 41.8% 44.9% Stocks 43.5% 44.4% 45.1% Mortgages 3.5% 4.6% 3.5% Private Debt 1.2% 1.3% 0.0% Real estate 3.4% 1.9% 0.0% As a result of mortgage foreclosures in 2010, our real estate holdings increased and our mortgage holdings decreased modestly. Credit Quality of Bonds Ratings are by DBRS or other independent rating services. % based on fair value AAA 43.3% 46.3% 54.2% AA 18.3% 18.2% 14.5% A 30.7% 30.8% 28.4% BBB 7.7% 4.3% 2.6% Below BBB 0.0% 0.4% 0.3% After a flight to quality during the financial crisis in 2008, we have returned our bond portfolio to a more normal balance of credit risk and return. Overall our bond portfolio remains very high quality Annual Report Co-operators Life Insurance Company 19

20 Management s Discussion & Analysis FINANCIAL CONDITION EQUITY Our equity includes a shareholder account, a par account and non-controlling interest. Generally, the shareholder account and par account are separate and support the products related to each account. Transactions between the shareholder and par accounts are regulated and limited. Our assets, liabilities and income consolidate the full value of CUMIS results although we don t own 100% of CUMIS. Non-controlling interest represents Central 1 s ownership interest in CUMIS and is their portion of CUMIS net assets. Capital is a critical strategic resource. It reflects the financial well-being of the organization and enables us to pursue strategic business opportunities. A strong capital position also acts as a safety net for possible losses or catastrophic events and provides a basis for confidence in our financial strength by regulators, shareholders, policyholders and others. For more information on capital management refer to Note 18. DIVIDENDS AND TRANSFERS $ millions 1, Non-controlling interest Participating account Shareholder account The par account pays dividends to par policyholders based on a Board-approved policy. The par account also transfers an amount to the shareholder account which is based on actual dividends paid to par policyholders. The transfer amount is limited by legislation. Additional details on par account dividends and transfers can be found in Note 16. The shareholder account pays dividends on its preferred shares but has otherwise retained its net income to maintain financial strength and for future investment. ($ millions) Par dividends to policyholders Net transfer from the par account to the shareholder account Preferred share dividends MINIMUM CONTINUING CAPITAL AND SURPLUS REQUIREMENTS We use the MCCSR ratio as our primary method of measuring our overall capital adequacy. We forecast our MCCSR ratio as part of our annual and long-term plans to ensure that our MCCSR ratio will remain above our Board approved internal minimum of 180%. Our actual capital levels are measured and monitored quarterly or more frequently if there are significant changes to our capital or capital requirements as a result of major events such as an acquisition, divestiture or changes in investment markets. Our MCCSR ratio at the end of 2010 was 244%. Our capital is $260.8 million ( $269.3 million) in excess of the 150% regulatory minimum and $177.7 million ( $192.2 million) in excess of the 180% internal minimum Annual Report Co-operators Life Insurance Company 20 Each year we measure our overall exposure to a wide variety of risks using Dynamic Capital Adequacy Testing (DCAT). DCAT was developed by the Canadian Institute of Actuaries and is required by OSFI to measure an insurance company s ability to withstand a number of plausible adverse scenarios. Our results, which were well above the minimum regulatory target of 150% MCCSR ratio in all cases, are presented to management, the Board and OSFI. Additional details on capital management can be found in Note 18. THIRD PARTY RATINGS Rating agencies issue several types of ratings. A Financial Strength Rating (FSR) provides guidance to policyholders of an insurance company. A Counterparty Credit Rating (CCR) provides guidance on overall creditworthiness of a company to interested parties. Company Co-operators Life Co-operators Life Rating Agency Rating Type Most Recent Report Current Rating Current Outlook A.M. Best FSR Mar 16, 2010 A Stable A A Standard & Poor s FSR Nov 30, 2010 BBB+ Stable BBB+ BBB+ Co-operators Life Standard & Poor s CCR Nov 30, 2010 BBB+ Stable BBB+ BBB+

21 OUTLOOK GENERAL ECONOMIC AND BUSINESS CONDITIONS The economic recovery in Canada is expected to be gradual as the effects of the fiscal stimulus used to promote recovery tapers off and monetary stimulus is reduced. The key risks to Canada s economic recovery are the ongoing volatility of the global financial markets as they continue to react to concerns over the European debt crisis, continuing high U.S. unemployment and slowing growth in China. Canada s gross domestic product growth forecast for 2011 and 2012 is 2.9% and 3.2% respectively. We have used an inflation forecast of 2% for The Bank of Canada is expected to gradually raise its overnight interest rate in 2011 to 2.25% in response to strong domestic growth. The U.S. Federal Reserve is expected to do likewise in the first half of Canadian stock markets are forecast to appreciate 13% overall in 2011, but not without some volatility and small corrections given the uneven nature of the recovery. U.S. stock markets are expected to do better with overall growth of 13% in 2011 as US corporate balance sheets are now strong and cash has risen to near record levels, providing the ability to participate in the recovery as business and consumer confidence returns. Corporate bond values are expected to appreciate 2% in The prospects of a global economic double-dip is overvalued, and as this is recognized, the market s focus will return to rising short-term rates, leading to a flatter yield curve and the recovery gaining momentum. We expect that the Canadian dollar will be at or above par to the US dollar during BUSINESS ENVIRONMENT Demographics Baby boomers are starting to retire and retirements will accelerate in the coming years. Strong international immigration and the changing profile of adult immigrants (who tend to be highly skilled and educated) will contribute to the evolving ethnic make-up of our potential client base. Regulatory Increasing oversight with respect to capital strength and higher capital requirements will increase the cost of doing business for Canada s financial institutions. Reforms which are being introduced at both the federal and provincial levels will continue leading to more restrictions and/or involvement in the day-to-day operations of financial institutions. Technology The volume of consumers using the Internet to obtain quotes and purchase insurance, predominantly home and auto insurance, will continue to increase. Insurers will explore the use of social networking tools for marketing and gaining additional insight into current and potential clients. Technology will play an increasing role in driving operational efficiency. OUR BUSINESS Strategic Renewal During 2010 The Co-operators undertook a renewal of its corporate strategy and identified six strategic focus areas for for all of its companies. Over the next four years, we ll focus our resources within these areas to support the achievement of our long-term goals: Client Experience - We will work every day to earn our clients trust and their business. Through our client experience we will strive to set the bar for which others in our industry are measured. Co-operative Experience - We will be the insurance provider of choice for co-operatives, credit unions and their members. We extend the features and benefits of our co-operative difference through a retail sales experience which will engage consumers and build long-term relationships. Competitiveness - We will profitably grow combined operations to create financial security for all stakeholders (owners, client groups). We will support our Agency network by providing a market relevant and competitive product portfolio. We will consistently achieve ROE targets while optimizing our strong capital position. Distribution - We will establish an integrated distribution capability for all lines of business. Trust and Reputation - We will demonstrate that we are principled, trustworthy, reliable and corporately responsible. Through our combined efforts we will build and enhance our stakeholder trust and reputation. People - We will be an employer of choice, with a highly engaged and accountable workforce, aligned to our values, that builds on the strengths of our combined cultures. For , our emphasis will be on maintaining financial strength and growing by strengthening our sustainable competitive advantages and providing a superior client experience, while remaining aligned with the strategic focus areas to fulfill our mission and achieve our vision Annual Report Co-operators Life Insurance Company 21

22 Management s Discussion & Analysis Integration of CUMIS On December 31, 2009 we acquired 50.01% of CUMIS with the remainder owned by Central 1. As a result of additional transactions in 2010, Co-operators Life now owns 72.99% of CUMIS with the remainder owned by Central 1. Details of the 2010 transactions can be found in Note 22 Related Party Transactions. Our integration objectives are to realize synergies in insurance operations and back-office functions (manufacturing), and to fully develop the credit union distribution opportunity in strategic partnership with Central 1. Our focus in 2010 was primarily on the integration of manufacturing-related functions, which includes products, pricing, client service, as well as shared services, such as Information Technology (IT), Finance, Actuarial, Legal and Human Resources. We established a single executive management team early in 2010 and completed the integration of organizational structures by the end of the year. We also undertook an extensive migration of IT infrastructure from CUNA Mutual Group, CUMIS former parent company. This work began in January 2010 with a planned timeline of 18 months. The majority of the IT integration was completed ahead of schedule, before the end of 2010 with only minor activities remaining in The distribution opportunity, focused on credit unions, will involve leveraging products and expertise across The Co-operators, Central 1, Credential Financial Inc. and CUMIS. New distribution leadership and organizational structure were established in the second half of 2010 and will be focused on their objectives and deliverables throughout While synergies earned in 2010 were ahead of plan, our work to achieve all of our acquisition-related financial objectives will carry on in 2011 as we continue to streamline operations. At the close of 2010 with the large majority of integration work completed, our overall integration costs were well under budget and are expected to remain under budget through to the completion of our integration work in Forecast The forecast improvement of economic and business conditions offers a positive outlook for our industry and our company. At a consumer level, the general economic recovery is expected to increase both spending and investment which bodes well for our Wealth Management, Travel Insurance, and Credit Insurance businesses. For businesses, stabilization or even increases in staffing level will benefit our Group Insurance business. The ongoing strength of the Canadian dollar is expected to boost the number of Canadians travelling outside their province, increasing the market for travel insurance. Our Travel Insurance business will also generate additional business growth through new products such as the home rider and expanding distribution penetration in key areas. Rising investment values and interest rates will benefit our businesses to varying degrees, but greatest impacts will be in Individual Insurance, Wealth Management and Life Surplus. Certain Individual Insurance products have very long terms in excess of 30 years. Valuation and therefore net income from inforce products are susceptible to changes in the interest rate environment. Recovering equity and bond markets will provide higher investment returns. This will reduce our actuarial liabilities on the longer term products and have a corresponding increase in income. It will also alleviate some of the pricing pressures that have existed during the last few years. This along with improving consumer confidence will help support increasing sales of individual insurance products Annual Report Co-operators Life Insurance Company 22 Revenues from Wealth Management products relate to the total number of dollars invested, which is driven by both consumer contributions to products as well as market levels. Improving consumer confidence and recovering equity markets are both expected to have a positive effect on wealth management products. Our Property and Casualty Insurance operations will continue to be exposed to claims volatility from severe weather events. The overall auto market is expected to remain stable with the exception of Ontario auto where the accident benefit claims costs are expected to remain well above premium intake in spite of the Ontario auto reforms that came into effect in September Within commercial lines, price competition below normal profitability levels is expected to continue. RELATED PARTY TRANSACTIONS In the normal course of business, we obtain services from related companies that are under the common ownership of our ultimate parent CGL. CGL incurs the direct costs for the Board of Directors, annual meeting, senior executives, general counsel, taxation department, internal audit, financial accounting services, corporate communications and planning. These charges are primarily set on a costrecovery basis and shared among the various subsidiaries of the parent. We utilize the product distribution services of CGIC. Their exclusive agency force is licensed to sell our life insurance products. CGIC compensates its agents directly and we pay CGIC based on the production level. We also pay CGIC for the portion of the marketing program that benefits the life insurance business. This contract is periodically renegotiated. Investment management services are provided by Addenda for our entire portfolio of invested assets, other than real estate.

23 We provide a number of services to CGL and companies in the group including staff employee benefit insurance, staff pension plans, services for enterprise risk management, hosting, web hosting and support for common finance systems. On January 1, 2010, CUMIS acquired the interests of Co-operators Life and CGIC in their common joint venture in exchange for shares in CUMIS. We subsequently acquired CGIC s shares in CUMIS. Details of the transactions are described in Note 22 Related Party Transactions. RISK MANAGEMENT Effective risk management is vital to making sound business decisions, both strategically and operationally. It involves identifying and understanding the risks that the organization is exposed to and taking measures to manage the risks within the risk appetite. We recognize the importance of a strong risk management culture where the efficient and effective assessment of risk forms the basis of all decision-making and strategic planning. The Co-operators has an enterprise-wide approach to the identification, measurement, monitoring and management of risks faced across the organization. The Board of Directors, directly or through the Executive Committee, ensures that company management has put appropriate risk management policies in place and that risk management processes are effective. Periodic reports on risk exposures are provided to the Board and senior management by the Chief Risk Officer. We have identified and considered a large number of risks when engaging in our organizational activities. Those risks are continuously assessed relative to their potential impact on our corporate strategy, competitive position, operational results and financial condition. The risks identified are not presumed to be exhaustive and previously unidentified risks or material changes in the exposure to a known risk may occur resulting in a reassessment of their relative effect on The Co-operators. The risks described below are those currently viewed as material to our company. FINANCIAL RISKS Interest Rate Risk The exposure of asset and liability values to movements in interest rates. Investment portfolios supporting products are managed with an objective of managing the interest rate sensitivity of its assets versus that of its liabilities based on the nature of the product characteristics to within approved limits. Investment managers seek to match the cash flows of investments with those of the products to the extent possible, often over very long terms. This minimizes the risk of gain or loss from interest rate changes and also provides liquidity for payments to policyholders. For each product type we establish investment objectives that include specific interest rate risk limits. The limits are expressed by product as the difference between the interest rate sensitivity of the assets and the interest rate sensitivity of the liabilities. These investment objectives are included in our asset liability management policy which is approved by management and the Board. Interest rate risk is regularly monitored and managed using multiple duration measurements and scenario testing. The investment portfolio supporting surplus is managed with a total return objective. Gains (or losses) on bonds from interest rate changes are not recognized into income unless a bond is sold and the gain (or loss) is realized. However, any change in the fair value of bonds in the surplus portfolio is reflected in our available MCCSR capital and will affect our MCCSR ratio. Additional information on our interest rate risk as well as our policies and practices for managing interest rate risk are in Note 7. Credit Risk The risk of financial loss resulting from the failure of a counterparty/debtor to honour its obligations to us. A description of our credit risk exposure as well as our policies and practices for managing credit risk are described in Note 7. Equity Risk The risk that the fair value of stocks will fluctuate as a result of market forces. Our investment portfolios supporting products hold $75.2 million ( $55.8 million) of stocks. Our investment portfolio supporting surplus holds $295.3 million ( $283.8 million) of stocks. As described in Surplus, gains (or losses) on stocks are not recognized into income unless a stock is sold and the gain (or loss) is realized. However, any change in the fair value of stocks in the surplus portfolio is reflected in our available MCCSR capital and will affect our MCCSR ratio. A description of our market risk exposure as well as our policies and practices for managing market risk are described in Note 7. Foreign Exchange Risk The risk that the value of our foreign currency denominated financial instrument portfolio that is not offset by corresponding liabilities, will fluctuate as a result of changes in foreign exchange rates. A description of our foreign exchange risk exposure as well as our policies and practices for managing foreign exchange risk are described in Note Annual Report Co-operators Life Insurance Company 23

24 Management s Discussion & Analysis Liquidity Risk The risk of insufficient cash available to meet our policy obligations (claims-paying ability) as they fall due. Liquidity risk varies by line of business based on contractual rights to make cash withdrawals and other distinct product features. Overall, our liquidity far exceeds our possible cash requirements. At year-end our policies with no surrender charges that could be liquidated at any time represented only 33% ( %) of our marketable investments. A description of our liquidity risk exposure, and our policies and practices for managing liquidity risk, are described in Note 7. INSURANCE RISKS Catastrophic loss risk The exposure to loss resulting from multiple claims arising out of a single catastrophic event. Insurers are subject to catastrophes: a series of claims arising out of one event. Catastrophes are caused by various perils such as terrorist attack, natural disasters, pandemic or group travel accidents. Catastrophes can have a significant effect on our operating results and financial condition. To limit the impact of catastrophic losses we utilize catastrophe reinsurance which will reimburse us for aggregate life claims over $7 million to a maximum of $88 million, and travel claims over $500 thousand ( $1 million) to a maximum of $24.5 million ( $25 million), from a series of claims arising out of one event. Our catastrophe coverage includes reinsurance of our risks for acts of terrorism but does not cover pandemic risks. Additional details on our use of reinsurance are described in Note 9. Product Design and Pricing Risk The exposure to financial loss from transacting insurance business where costs and liabilities experienced in respect of a product line exceeds the expectation in pricing the product line. We price our products taking into account numerous factors including mortality, morbidity, administrative expenses, capital required to support a product, investment income and the potential volatility and variability of each of the factors. Our pricing process is designed to earn an appropriate return on capital over the long term. These factors are reviewed and adjusted periodically to ensure they reflect the current environment. Additional descriptions of these factors are in Note 8. Many of our products remain in place for the lifetime of the client. Because these products are a long-term commitment to the client, significant research and development is completed prior to offering a product for sale. This includes analysis of product economics, risks, sensitivities, capital requirements, investment returns, competition and administrative requirements. All analysis is documented and retained. Senior management approves initial product pricing and design, as well as significant changes to existing products. Underwriting Risk The exposure to financial loss resulting from the selection and approval of risks to be insured or the inappropriate application of underwriting rules to risks being insured Annual Report Co-operators Life Insurance Company 24 Our underwriting objective is to develop business within our target market on a prudent and diversified basis and to achieve profitable underwriting results. We use comprehensive underwriting manuals which detail the policies, practices and procedures used in the determination of the insurance risk for each individual or group to be insured and the decision of whether or not to insure the client. The manuals are continually revised for new products and risks undertaken. All employees in the underwriting area are well trained and their work is audited on a regular basis. We also manage our exposure to underwriting risks by limiting our coverage amount to individual risks either directly or through the use of reinsurance. Our policy is to purchase reinsurance contracts to limit our life insurance loss exposure to no more than $500,000 per person, and disability losses to $2,500 per month per person. Additional details on our use of reinsurance are described in Note 9. Reinsurance risk Reinsurance risk is the risk of financial loss due to inadequacies in reinsurance coverage or the default of a reinsurer. The Company reviews its reinsurance requirements annually to assess the level of coverage required. Reinsurance is purchased to limit our exposure to a particular risk, category of risk or geographic risk area. When appropriate coverages are determined, we carefully negotiate coverages with selected companies. Our practice requires that all reinsurance contracts contain significant insurance risk transfer. No reinsurance contracts are permitted if the intent is to offset the impact of another reinsurance contract. All of our reinsurance contracts are prospective in nature.

25 Reinsurance acquired does not relieve Co-operators Life of its ultimate liability to its policyholders. Therefore we retain credit risk associated with reinsurers to whom we have transferred insurance risk. We assess the financial strength of our reinsurers on a regular basis and manage our use of reinsurers based on their ratings and capital resources. To manage reinsurance risk, we assess and monitor the financial strength of our reinsurers on a regular basis. There have been no material defaults with reinsurers in the past eight years. The availability and cost of this reinsurance is subject to prevailing market conditions. Additional details on our use of reinsurance are described in Note 9. Reserve valuation risk The risk that policy liabilities are insufficient to cover incurred claims. We maintain reserves in the form of policy liabilities to cover our estimated ultimate liability for claims. There is the potential for significant variability in the amount of ultimate settlement from the current amounts recorded. Our practice is to maintain an adequate margin to ensure future years earnings are not negatively affected by prior years claims development and other variable factors, such as inflation. We also monitor fluctuations in reserve adequacy on an ongoing basis, and periodically seek an external peer review of reserve levels. We are subject to some exposure in the fluctuation of long-term investment portfolio yield rates in the valuation of our discounted unpaid claims. OPERATIONAL RISKS Regulatory and political risk The risk of loss arising from non-compliance with laws, rules, regulations, prescribed practices or ethical standards within jurisdiction of operation, and the risk that changes in government or the political climate will threaten our competitive position and capacity to conduct business efficiently. Insurance companies are subject to significant regulation by governments. We monitor our compliance with all relevant regulations. As in any regulated industry, it is possible that future regulatory changes or developments may prevent us from raising rates or taking other action to enhance our operating results. As well, future regulatory changes, novel or unexpected judicial interpretations or political developments could fundamentally change the business environment in which we operate. We actively participate in discussions with regulators, governments, and industry groups to ensure we are well-informed of contemplated changes and that our concerns are understood. We consider the implications of potential changes to our regulatory and political environment in our strategic planning processes to understand the impacts and adjust our plans if necessary. Common business risks Risks that exist for any large business and are not unique to our company or industry. Although this is not an exhaustive list, examples are competition, human resource adequacy, client preferences and behaviours, technological changes, environmental changes, and tax law changes. These risks are managed through the development and documentation of policies and procedures, ongoing training and education, environmental scanning and other processes that contribute to a culture of sound business management practices. ACCOUNTING MATTERS ACCOUNTING POLICIES & CRITICAL ESTIMATES These accompanying financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Co-operators Life is an insurance company and we must also comply with the accounting requirements of our regulators. The significant accounting policies used in the preparation of our financial statements are described in Note 4. We made certain changes to our accounting policies during the year which are described, along with their impacts, in Note 2. Future changes in our accounting policies are described in Note 3. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Significant estimates include actuarial liabilities (Note 8), employee future benefits (Note 14), and contingencies (Note 25). Actual results could differ from these estimates and changes in estimates are recorded in the accounting period in which they are determined. Ultimately, differences between estimates and actual results will affect the timing of when income is recognized but not the amount. Actuarial liabilities and Increase (decrease) in actuarial liabilities Actuarial liabilities are our estimate of the present value of the future net costs of our policies. It is our most significant accounting estimate. Actuarial liabilities are determined based on a very complex set of calculations that are guided by actuarial standards set by the Canadian Institute of Actuaries. For these calculations we make best estimate assumptions covering the lifetime of the policies for many factors including mortality, morbidity, reinvestment rates, policy termination rates, operating expenses, inflation, policyholder dividends and taxes. We review these assumptions annually based on studies of these factors Annual Report Co-operators Life Insurance Company 25

26 Management s Discussion & Analysis The impact of any changes in our assumptions is reflected immediately in our actuarial liabilities and in income through Increase (decrease) in actuarial liabilities. A 1% decrease in our mortality assumptions would reduce actuarial liabilities by $3.3 million ( $3.9 million). Because there is uncertainty in making these assumptions and risk that our actual experience will be different than our assumptions over the life of the policies, we add a margin to each assumption. These margins are designed to allow for the possibility that our actual experience will be worse than assumed and to provide greater comfort that our actuarial liabilities are adequate to pay future benefits. The Canadian Institute of Actuaries prescribes a range for these margins and in most cases we maintain margins at the conservative end of that range. Management estimates the amount of unreported claims based on past patterns, experience and recent events that may affect claims volumes. Note 8 provides more detailed explanations of the actuarial liabilities and a complete description of the nature of the liabilities, the most recent assumption changes and their impact on earnings. Employee future benefits Measurement uncertainty exists in valuing the components of employee future benefits. Each assumption is determined by management, based on current market conditions and experiential information available at the time. Due to the long-term nature of the plans, the calculation of benefit expenses and obligations depends on various assumptions such as discount rates, medical and dental care cost trend rates, retirement age and mortality and termination rates. Actual experience that differs from the actuarial assumptions will affect the amounts recorded for the accrued benefit obligation and benefit expense. Assumed medical and dental care cost trend rates have a significant effect on the amount reported for the medical and dental benefit plans. A 1% increase in assumed medical and dental benefit cost trend rates would increase the accrued benefit obligation for 2010 by $3.6 million ( $4.4 million). Significant assumptions used in the calculation of employee future benefits are presented in Note 14. Contingent liabilities In common with the insurance industry in general, Co-operators Life is subject to litigation arising in the normal course of conducting its insurance business and must estimate the costs and expected losses from such litigation. We are of the opinion that this litigation will not have a significant effect on our financial position, results of operations or cash flows. Additional discussion of contingent liabilities can be found in Note 25. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Beginning in 2011 we will be required to report our financial statements in accordance with International Financial Reporting Standards (IFRS). Our financial statements for 2011 will also include comparative data on an IFRS basis, including an opening balance sheet as at January 1, We have completed our analysis of IFRS accounting policy decisions and the following is a summary of impacts on accounting policy decisions: 2010 Annual Report Co-operators Life Insurance Company 26 Segregated fund assets and liabilities will be included on our balance sheet. These balances are currently presented separately in our Consolidated Statement of Segregated Funds Net Assets and our Consolidated Statement of Changes in Segregated Funds Net Assets. Selected actuarial liabilities balances will be reclassified as investment contract liabilities where significant insurance risk is not present in the related insurance contract. The reclassified amounts will be re-measured as financial instruments under IAS 39 using deposit accounting principles. Deferred net realized gains on sale-leaseback transactions will be recognized into our opening retained earnings balance upon transition to IFRS. These gains are currently being deferred and amortized over the life of the related leases in accordance with Canadian GAAP, currently presented as deferred net realized gains. Reinsurance assets that are currently netted against actuarial liabilities under Canadian GAAP will be presented separately as reinsurance assets. Interests in Joint Ventures will be accounted for using the equity method. Under Canadian GAAP the basis of accounting used is proportionate consolidation. IFRS 1 elections are described in the table below. All insurance and reinsurance contracts have been assessed to have significant insurance risk transfer. As per IFRS 4, we will continue to account for insurance contracts using the same accounting policies we use under Canadian GAAP.

27 IFRS accounting policy decisions for invested assets, income taxes, goodwill and intangible assets have been assessed to have no material impact on changeover. This is due to the fact that Canadian GAAP, as it pertains to us, has been significantly converged with IFRS as at January 1, We expect the effect of adoption of IFRS will have a minimal effect on our business operations, our capital requirements and our key success indicators. We are not in a position to comment on the effect to our business arising from proposed future changes to IFRS, specifically IFRS 9 - Financial Instruments and IFRS 4 - Phase II for Insurance Contracts. The effective date for these proposed changes is not expected prior to Impacts arising from IFRS 1 First-time adoption of IFRS During 2010 we finalized the way we plan to apply IFRS 1 in our first reporting period under IFRS in IFRS 1 applies to entities adopting IFRS for the first time and in general, it requires an entity to comply with each IFRS that will be effective at the end of its first IFRS reporting period. However, IFRS 1 does grant limited optional exemptions from these requirements where the costs of complying with them would likely exceed the benefits to users of the financial statements. IFRS 1 also prohibits retrospective application (i.e. restatement of past results) in some areas, particularly when retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known. The following table summarizes our planned exemption elections under IFRS 1: Exemption elections available under IFRS 1 Business combinations exemption First-time adopters may elect not to apply IFRS 3 Business Combinations to past business combinations prior to the transition date. Alternatively, a first-time adopter may elect to apply IFRS 3 to all business combinations after a selected date that is prior to the transition date. Employee benefits exemption A first-time adopter may elect to recognize all cumulative actuarial gains and losses as of the transition date as an adjustment to opening retained earnings. Alternatively, a first-time adopter may elect to use a corridor approach that leaves some actuarial gains and losses unrecognized in accordance with IAS 19 Employee Benefits. Insurance contracts - A first time adopter may apply the transitional provisions in IFRS 4 Insurance Contracts which restricts changes in accounting policies for insurance contracts, including changes made by a first-time adopter. Decisions made We will apply the business combinations exemption in IFRS 1 to all business combinations taking place prior to the transition date. Accordingly, we do not plan to restate our accounting for business combinations that took place prior to January 1, We will elect to recognize all cumulative actuarial gains and losses at January 1, The corridor approach for recognizing gains and losses will be applied to gains and losses occurring after transition. We will apply the transitional provisions in IFRS 4 Insurance Contracts which in effect, will leave our existing accounting policies for insurance contracts unchanged. Designation of financial assets and financial liabilities exemption First time adopters are permitted to re-designate financial assets and financial liabilities as at the date of transition to IFRS. Other aspects of our IFRS transition plans We will apply this exemption. We will reclassify certain assets that are classified as held-for-trading to availablefor-sale for instances where the related insurance products must now be accounted for as investment contracts under IFRS. The reclassification will transfer $3.4m into AOCI. We are on track with all other aspects of our IFRS transition plans. We have captured IFRS comparative results for Because parallel reporting will be effected through our existing financial reporting platforms, the internal controls over financial reporting associated with the processing of transactions will not be significantly impacted. The impact on the remaining control environment was addressed by the Company for changes in process and information flows as a result of the identified differences in IFRS versus Canadian GAAP. We have completed the preparation of IFRS model financial statements. This included the identification and assessment for notes disclosure data. We have adopted certain IFRS note disclosures in our 2010 annual financial statements, where it is compliant with Canadian GAAP. Internal education will continue in 2011 for all levels of finance staff responsible for financial reporting. Along with the education of our staff, we continue to educate the Board of Directors and Audit Committee Annual Report Co-operators Life Insurance Company 27

28 Management s Discussion & Analysis SOURCES OF EARNINGS This is an alternative presentation of life insurance net income, in a different format from the traditional GAAP income statement presentation. It is an analysis of the difference between actual income and the income that would have been reported had all the actuarial assumptions at the start of the year been realized during the year. The terminologies used in the sources of earnings analysis are described below. Expected Profit on In-force Business - The expected income based on business in force at the beginning of the year and on the achievement of the best estimate assumptions. Impact of New Business - The impact on income at the time of sale from new business written during the year. Experience Gains and Losses - The impact on income from differences between our actual experience during the year compared to the assumptions made for our actuarial liabilities at the start of the year. It includes the impact of foreign currency rate changes. Management Actions and Changes in Assumptions - The impact on income from management s actions, changes in actuarial assumptions, changes to margin levels in actuarial liabilities, changes to actuarial methodologies and error corrections made during the year. Other - Any other variance from expected profit on in-force business not included in the above categories. Sources of Earnings analysis is not designed for P&C insurance so it is reported in this category in its entirety. Earnings on Surplus - The investment income earned on our capital less investment expenses, certain corporate expenses, and interest on subordinated debt. SOURCES OF EARNINGS ANALYSIS Annual Report Co-operators Life Insurance Company 28 $ millions Individual Insurance Group Insurance Wealth Management Travel Insurance Credit Insurance P&C Insurance Life Surplus Total Expected profit on in-force business Impact of new business (6.9) - (2.8) Experience gains and losses (11.1) (3.7) 2.9 (5.2) (9.4) - - (26.5) Management actions and changes in assumptions (1.1) Other (0.2) Earnings on Surplus (1.7) (1.7) Operating income before income taxes (1.7) 56.0 Income taxes (1.9) 14.3 Net operating income Net transfer to shareholders (0.9) Net income Net income by account Participating account net income Non-controlling interest net income (4.8) 3.7 Shareholder account net income (6.7) (7.1) 12.6 Experience losses of $26.5 million were primarily the result of decreasing long-term interest rates, higher than expected term insurance lapses, unfavourable group expenses, unfavourable claims experience for travel insurance, and unfavourable expense and experience rating refund payments in credit insurance. These were partially offset by favourable wealth management mortality experience, favourable group morbidity experience and higher equity values. Individual Insurance made assumption changes related to mortality, lapses, expenses and inflation rates which resulted in a gain of $5.0 million. Changes to assumptions regarding the timing and duration of disability claims were the primary component Group Insurance's gain of $6.3 million for Additional information on the impacts of changes in assumptions are described in Note 8.

29 2009 $ millions Individual Insurance Group Insurance Wealth Management Travel Insurance Credit Insurance P&C Insurance Life Surplus Expected profit on in-force business Impact of new business (6.5) - (2.0) (4.6) Experience gains and losses (9.4) (9.4) Management actions and - changes in assumptions 1.8 (1.5) Other - - (0.1) (0.1) Earnings on Surplus (5.5) (5.5) Operating income before income taxes (3.5) (5.5) 45.5 Income taxes (1.0) (3.8) 11.8 Net operating income (2.5) (1.7) 33.7 Net transfer to shareholders (1.1) - (0.1) Net income (2.5) (0.5) 33.7 Net income by account Participating account net income Shareholder account net income (1.3) (2.5) (0.5) 16.8 Experience gains of $8.5 million were primarily the result of reduced long-term disability claims, stock market improvements, changes in interest rates, and favourable mortality and morbidity experience for Individual Insurance, Group Insurance and Wealth Management. These were partially offset by higher than expected group insurance expenses, and travel and credit insurance losses. Management actions included revisions to the investment strategy for wealth management guaranteed products and adjustments to both term conversions and retention limits on reinsurance. The impacts of changes in assumptions are described in Note 8. GLOSSARY OF TERMS Certain terms used in this Management s Discussion & Analysis have the meanings set forth below that tend to be specific to the Canadian insurance industry or to this company. Agent an insurance agent who sells insurance products exclusively for one insurance company. Broker an intermediary who negotiates policies of insurance or reinsurance with insurers on behalf of the insured or reinsured, receiving a commission from the insurer or the reinsurer for placement and other services rendered. Claim the amount owed by an insurer or reinsurer pursuant to a policy of insurance or reinsurance arising from the loss relating to an insured event. Line of business the major product groupings offered to the public. Our major lines of business are: individual insurance, group insurance, wealth management, travel insurance, credit insurance, life surplus, and property and casualty insurance. Total New business strain New policies often require that reserves be established which exceed first year premiums less expenses. As a result, these new policies have a negative impact on income in their first year. OSFI Office of the Superintendent of Financial Institutions (Canada). Pandemic - an epidemic of infectious disease that is spreading through human populations across a large region. Property and casualty (P&C) insurance all types of insurance excluding life insurance and governmental insurance. Also known as general insurance. Reinsurance insurance that is purchased by an insurance company (primary insurer) from another insurance company (reinsurer) as a means of risk management, to transfer or cede risk from the insurer to the reinsurer who assumes the risk. Retention has two meanings: (1) in respect of reinsurance, the amount of risk not ceded to reinsurers; (2) in respect to policies in force, the number of policyholders who renew for a subsequent term. Third-party administrators Companies that provide administration services for group benefit plans, but do not insure the plans. They are an intermediary or representative of the insured company. Underwriting the selection and assumption of risk for designated loss or damage arising from specified events by issuing a policy of insurance in respect thereof Annual Report Co-operators Life Insurance Company 29

30 RESPONSIBILITY FOR FINANCIAL REPORTING Management and the appointed actuary Management is responsible for the preparation of the accompanying consolidated financial statements and the accuracy, integrity and objectivity of the information they contain. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and the requirements of Canadian insurance regulators. The financial information presented elsewhere in the annual report is consistent with the consolidated financial statements. These consolidated financial statements, which necessarily include some amounts that are based on management s best estimates and the opinion of the appointed actuary, have been made using careful judgment. To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide reasonable assurance that its assets are safeguarded; that only valid and authorized transactions are executed; and that accurate, timely and comprehensive financial information is prepared. These controls are supported by policies and procedures and the careful selection and training of qualified staff. The appointed actuary is appointed by the Board of Directors pursuant to the Insurance Companies Act. Among the appointed actuary s responsibilities is the requirement to carry out an annual valuation of the Company s policy liabilities in accordance with accepted actuarial practice and regulatory requirements for the purpose of reporting to shareholders, policyholders and the Office of the Superintendent of Financial Institutions, Canada. Management is responsible for providing the appointed actuary the information necessary for completion of the annual valuation. The appointed actuary s report follows. Audit Committee of the Board of Directors al Report Co-operators Life Insurance Company Annu The Audit Committee of the Board of Directors, consisting entirely of non-executive, independent directors, is responsible for reviewing the accounting principles and practices employed by the Company and reviewing the Company s annual consolidated financial statements prior to their submission to the Board of Directors for final approval. The Audit Committee meets no less than quarterly with the internal and external auditors, the appointed actuary and management to review their work and to ensure that respective responsibilities are properly discharged. The Audit Committee also reviews and monitors weaknesses in the Company s system of internal controls as reported by the auditors. Both the internal and external auditors have full and unrestricted access to the Audit Committee, with and without the presence of management. The Audit Committee is responsible for recommending to the Board of Directors the appointment of the Company s external auditors, the approval of their remuneration and the terms of their engagement. The consolidated financial statements have been examined independently by PricewaterhouseCoopers LLP, on behalf of our shareholders and policyholders. The auditors report is presented below and outlines the scope of their examination and expresses their opinion on the consolidated financial statements of the Company. (Signed) Kathy Bardswick President and Chief Executive Officer February 16, 2011 (Signed) P. Bruce West Executive Vice-President, Finance and Chief Financial Officer

31 February 16, 2011 PricewaterhouseCoopers LLP Chartered Accountants PO Box 82 Royal Trust Tower, Suite 3000 Toronto Dominion Centre Toronto, Ontario Canada M5K 1G8 Telephone Facsimile Independent Auditor s Report To the Shareholders and Policyholders of Co-operators Life Insurance Company We have audited the accompanying consolidated financial statements of Co-operators Life Insurance Company and its subsidiaries, which comprise the consolidated general fund balance sheet and the separate consolidated statement of segregated fund net assets as at December 31, 2010 and the consolidated statements of changes in equity, income, comprehensive income and cash flows for the year then ended, and the related notes including a summary of significant accounting policies. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Co-operators Life Insurance Company and its subsidiaries as at December 31, 2010 and the results of their operations and their cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. (Signed) PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity. al Report Co-operators Life Insurance Company Annu

32 REPORT OF THE APPOINTED ACTUARY To the Shareholder and Policyholders of Co-operators Life Insurance Company: I have valued the policy liabilities of the Company for its consolidated general fund balance sheet at December 31, 2010 and their change in the consolidated statement of income for the year then ended in accordance with accepted actuarial practice, including selection of appropriate assumptions and methods. In my opinion, the amount of policy liabilities makes appropriate provision for all policyholder obligations and the consolidated financial statements fairly present the results of the valuation. (Signed) Michael Ah-Fat Fellow, Canadian Institute of Actuaries 2010 Annual Report Co-operators Life Insurance Company 32 Regina, Saskatchewan February 16, 2011

33 CONSOLIDATED FINANCIAL STATEMENTS CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED GENERAL FUND BALANCE SHEET As at December (restated - note 5) (in thousands of dollars) $ $ Assets Cash and cash equivalents 28, ,336 Cash held in trust 72,233 59,119 Invested assets (note 6) 3,093,633 2,906,005 Premiums due 55,935 43,643 Reinsurance ceded assets, property and casualty operation (note 9) 14,213 69,917 Goodwill and intangible assets (note 11) 157, ,890 Other assets (note 12) 129, ,581 3,551,866 3,471,491 Liabilities Policy liabilities, life operations (note 8) 2,273,243 2,183,616 Policy liabilities, property and casualty operation (note 8) 141, ,663 Deferred net realized gains (note 6) 16,538 17,704 Payables and other liabilities (note 13) 280, ,873 2,712,136 2,687,856 Equity Share capital 7,998 7,998 Contributed surplus 20,351 4,110 Retained earnings 247, ,116 Accumulated other comprehensive income 6,721 2,119 Shareholder's equity 282, ,343 Participating policyholder account 473, ,854 Non-controlling interest (note 5) 83, , , ,635 3,551,866 3,471,491 Contingencies, commitments and guarantees (note 25) Approved by the Board of Directors: (Signed) (Signed) Richard Lemoing Kathy Bardswick Chairperson, Board of Directors President and Chief Executive Officer 2010 Annual Report Co-operators Life Insurance Company 33 See accompanying notes to the consolidated financial statements.

34 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Years ended December 31 Accumulated other Total Participating Non- Share Retained Contributed comprehensive shareholder's policyholder controlling 2010 capital earnings surplus income (loss) equity account interest Total (in thousands of dollars) $ $ $ $ $ $ $ $ Balance, beginning of year 7, ,116 4,110 2, , , , ,635 Net income - 12, ,651 25,374 3,696 41,721 Other comprehensive income ,602 4,602 21,455 1,098 27,155 Comprehensive income - 12,651-4,602 17,253 46,829 4,794 68,876 Appropriation (note 16) - (1,190) - - (1,190) 1, Contributed capital - - 1,593-1, ,380 Dividends declared - (232) - - (232) - - (232) Non-controlling interest adjustment on termination of co-insurance agreement ,363-21,363 - (26,158) (4,795) Shares issued by a subsidiary ,642 15,642 Reduction in equity of a subsidiary (2,144) (1,611) Changes in non-controlling interests in existing subsidiaries (note 22) - - (7,248) - (7,248) - (16,917) (24,165) Balance, end of year 7, ,345 20,351 6, , ,873 83, ,730 Accumulated other Total Participating Non- Share Retained Contributed comprehensive shareholder's policyholder controlling 2009 capital earnings surplus income (loss) equity account interest Total (in thousands of dollars) $ $ $ $ $ $ $ $ Balance, beginning of year 8, ,336 4,110 (19,895) 212, , ,406 al Report Co-operators Life Insurance Company Annu Net income - 16, ,801 16,895-33,696 Other comprehensive income ,014 22,014 38,305-60,319 Comprehensive income - 16,801-22,014 38,815 55,200-94,015 Appropriation (note 16) - (800) - - (800) Shares redeemed (3) (3) - - (3) Dividends declared - (221) - - (221) - - (221) Non-controlling interest acquired on business acquisition (restated - note 5) , ,438 Balance, end of year 7, ,116 4,110 2, , , , ,635 See accompanying notes to the consolidated financial statements.

35 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME Years ended December (in thousands of dollars) $ $ Revenue Premium written 960, ,440 Reinsurance ceded (note 9) (71,915) (62,832) Net investment gains and income (note 6) 210, ,644 Fees and other income 77,771 17,462 1,176, ,714 Expenses Claims and benefits expenses (note 20) 644, ,047 Premium and other taxes 24,015 12,791 Commissions 218, ,764 General expenses 233, ,370 Reinsurance allowances - 61,171 1,120, ,143 Income before income taxes 56,067 45,571 Income taxes (note 10) 14,346 11,875 Net income 41,721 33,696 Net income attributable to: Shareholders 12,651 16,801 Participating policyholders 25,374 16,895 Non-controlling interest 3,696 - Net Income 41,721 33,696 al Report Co-operators Life Insurance Company 35 See accompanying notes to the consolidated financial statements Annu

36 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Years ended December (in thousands of dollars) $ $ Net income 41,721 33,696 Unrealized gain on available-for-sale financial assets Bonds 11,125 1,828 Stocks 26,295 66,172 37,420 68,000 Reclassification adjustment for (gain) loss included in income Bonds (1,102) (2,237) Stocks 2,453 22,941 1,351 20,704 Net unrealized gain 38,771 88,704 Income taxes (note 10) 11,616 28,385 Other comprehensive income 27,155 60,319 Other comprehensive income attributable to: Shareholders 4,602 22,014 Participating policyholders 21,455 38,305 Non-controlling interest 1,098-27,155 60,319 Comprehensive income 68,876 94,015 Comprehensive income attributable to: Shareholders 17,253 38,815 Participating policyholders 46,829 55,200 Non-controlling interest 4,794 - Comprehensive income 68,876 94,015 al Report Co-operators Life Insurance Company Annu See accompanying notes to the consolidated financial statements.

37 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December (restated - note 5) (in thousands of dollars) $ $ Operating activities Net income 41,721 33,696 Items not requiring the use of cash (note 21) (73,175) (36,710) Changes in non-cash operating components (note 21) 37,298 11,850 Cash provided by operating activities 5,844 8,836 Investing activities Business acquisition (note 5) - (214,917) Cash acquired through business acquisition (note 5) - 120,486 Acquisition of additional interest in existing subsidiary from related party (note 22) (24,165) - Reduction in equity of a subsidiary (1,611) - Purchases and advances of: Invested assets - financial instruments (986,891) (896,348) Invested assets - real estate Property and equipment Intangible assets Other Sale and redemption of: (246) (6) (895) (1,769) (9,436) - (1,250) - Invested assets - financial instruments 916, ,068 Invested assets - real estate Property and equipment Intangible assets 15 - Other 5,280 - Cash used in investing activities (102,354) (4,263) Financing activities Share capital redemptions (note 15) - (1) Issuance of share capital of a subsidiary (note 5) - 107,438 Repayment of subordinated debt (957) - Dividends paid to shareholders (232) (225) Cash provided by (used in) financing activities (1,189) 107,212 Net increase (decrease) in cash and cash equivalents (97,699) 111,785 Cash and cash equivalents, beginning of year 126,336 14,551 Cash and cash equivalents, end of year 28, ,336 Supplemental information (note 21) See accompanying notes to the consolidated financial statements. al Report Co-operators Life Insurance Company Annu

38 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF SEGREGATED FUNDS NET ASSETS As at December (in thousands of dollars) $ $ Assets Cash 26,728 39,224 Receivable from investments sold 1,465 1 Bonds 437, ,451 Stocks 845, ,905 Investment income due and accrued 3,336 3,209 Mutual fund units 409, ,264 1,723,978 1,510,054 Liabilities Taxes, licenses and fees due and accrued 1, Payables for investments purchased 1, ,721,495 1,509,160 CO-OPERATORS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SEGREGATED FUNDS NET ASSETS Years ended December (in thousands of dollars) $ $ Additions to segregated funds Amounts received from unitholders 204, ,972 Administrator contribution Interest 18,222 20,660 Dividends 21,570 13,202 Other investment income 17,687 25,778 al Report Co-operators Life Insurance Company Annu Net realized gains (losses) 16,724 (10,417) Market value appreciation 99, ,976 Segregated funds acquired through business combinations (note 5) - 193, , ,787 Deductions from segregated funds Amounts withdrawn by unitholders 147, ,851 Operating expenses 18,867 13, , ,815 Net additions to segregated funds for the year 212, ,972 Segregated funds net assets, beginning of year 1,509,160 1,239,188 Segregated funds net assets, end of year 1,721,495 1,509,160 See accompanying notes to the consolidated financial statements.

39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (Amounts in thousands of dollars except where otherwise noted) 1. Nature of operations Unless otherwise noted or the context otherwise indicates, in these notes, Company refers to Co-operators Life Insurance Company (CLIC) including its wholly owned subsidiary, TIC Travel Insurance Coordinators Ltd. and its 73% controlling interest in The CUMIS Group Ltd. and its wholly owned subsidiaries (CUMIS). CUMIS includes its wholly owned subsidiaries CUMIS Life Insurance Company (CUMIS Life) and CUMIS General Insurance Company (CUMIS General) and its jointly controlled company Credential Financial Inc. (CFI). The Company is licensed to write life insurance, health insurance and wealth management products in all provinces and territories in Canada. Wealth management products are offered on both segregated fund and general fund basis. As a result of the acquisition of CUMIS, the Company, through a subsidiary of CUMIS, is also licensed to write property and casualty insurance in Canada. The Company is subject to the Insurance Companies Act and is regulated by the Office of the Superintendent of Financial Institutions, Canada (OSFI). The Company s common shares are 100% owned by Co-operators Financial Services Limited (CFSL), which in turn is owned 100% by the Co-operators Group Limited (CGL). 2. Changes in accounting policies In January 2009, the Canadian Institute of Chartered Accountants (CICA) issued three new accounting standards: section 1582 Business combinations, section 1601 Consolidated financial statements, and section 1602 Non-controlling interests. Section 1582 replaced section 1581 Business combinations to improve the information reported by an entity about a business combination and its effects. This section establishes guidance for how the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. As permitted by the transitional provisions of the standard, the Company adopted this section for business combinations with an acquisition date on or after January 1, Section 1601 together with section 1602 replaced section 1600 Consolidated financial statements. These sections establish standards for the preparation of consolidated financial statements and the accounting for a non-controlling interest subsequent to a business combination. The Company adopted these sections for its consolidated financial statements beginning January 1, This is in accordance with the transitional provisions of these sections which require their adoption when an entity adopts section The Company evaluated the impact of the adoption of these sections on its consolidated financial statements as at January 1, 2010, and determined that there was no material impact with the exception of a reclassification of non-controlling interest to an item included in equity on the consolidated balance sheet. 3. Future changes in accounting policies In 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS) by 2011 to replace Canadian generally accepted accounting principles (Canadian GAAP). As the Company meets the definition of a publicly accountable enterprise, all future financial statements will be presented under IFRS. In accordance with IFRS transition guidelines, the Company will provide comparative data in accordance with IFRS for 2010 with reconciliations of shareholders equity and comprehensive income for previously reported Canadian GAAP amounts Annual Report Co-operators Life Insurance Company 39

40 Notes to the Consolidated Financial Statements 4. Summary of significant accounting policies These consolidated financial statements have been prepared in accordance with Canadian GAAP. CLIC and its subsidiaries must also comply with the accounting and reporting requirements of their respective regulators. The significant accounting policies used in the preparation of these consolidated financial statements, including the accounting requirements of the regulators, are in all material respects, in accordance with Canadian GAAP and are summarized below. Basis of presentation These consolidated financial statements of the Company include the accounts of CLIC and its subsidiary companies (note 1). All significant inter-company balances and transactions are eliminated upon consolidation. These consolidated financial statements include the accounts of all co-ownerships to the extent of the Company's proportionate interest in their respective assets, liabilities, revenue, expenses and cash flows. When the Company has significant influence the investment is accounted for using the equity method with the Company s pro-rata share of net income from these investments included in net investment gains and income. Equity method investments are included in other assets in the consolidated balance sheets. Insurance contracts Revenue recognition Premiums written for all types of life insurance and annuity contracts are recognized as revenue in the consolidated statement of income when due. For property and casualty operations, premiums written are deferred as unearned premiums and recognized in the consolidated statement of income over the terms of the underlying policies. Premiums written are gross of any premium taxes and commissions. Fees and other income include fees earned on administrative services only (ASO) group health contracts and fees earned from the management of the Company s segregated fund contracts. Policy liabilities Life actuarial liabilities - Actuarial liabilities have been determined using the Canadian Asset Liability Method (CALM). Actuarial liabilities represent the amounts which, together with future premiums and investment income, will be sufficient to pay future benefits, dividends and expenses on all policies in force. The liabilities are calculated using estimates of future reinvestment rates, asset default, mortality, morbidity, policy termination and expense, and include reasonable provisions for adverse deviations from those estimates. As the probability of deviation from estimates declines, these provisions for adverse deviations will be included in future income to the extent not required. al Report Co-operators Life Insurance Company 40 Property and casualty unpaid claims and adjustment expenses The unpaid claims and adjustment expenses represent the estimated amount required to settle all reported and unreported claims incurred to the end of the year. These estimates are determined using the best information available from claims settlement patterns, inflation, expenses, changes in the legal and regulatory environment and other matters. The provision reflects the time value of money and is discounted based on the projected market yield of the assets backing the claims liability. Anticipated recoveries of amounts relating to reported and unreported claims and expected reinsurance recoveries on unpaid claims and adjustment expenses, net of any required provision for doubtful amounts, are recognized as assets. Estimation of the amount of these recoveries is based on principles consistent with the Company s method for establishing the related liability. Differences between the estimated cost and subsequent settlement of claims are recognized in the consolidated statement of income in the year in which they are settled or in which the provisions for claims outstanding are re-estimated. Property and casualty unearned premiums Unearned premiums represent the portion of the premiums written relating to periods of insurance coverage subsequent to the balance sheet date Annu

41 Premiums due Premiums due represents receivables that are recognized when owed pursuant to the terms of the related insurance contract. Premiums due are measured on initial recognition at the fair value of the consideration receivable and are recorded on the balance sheet net of any impairment provisions. Premiums due are classified as loans and receivables. Acquisition expenses Property and casualty acquisition expenses comprise commissions and premium taxes, which relate directly to the acquisition of premiums. These expenses are deferred and amortized over the terms of the related policies to the extent that they are considered to be recoverable from unearned premiums, after considering the anticipated claims, expenses and investment income related to the unearned premiums. If a premium deficiency arises, any deferred acquisition expenses would be written off first, and a liability would be recorded on the consolidated balance sheet for any remainder. Deferred acquisition costs arising on segregated funds are calculated and included in actuarial liabilities. Actuarial liabilities implicitly include deferred acquisition costs on life insurance and annuity product sales. Reinsurance The Company cedes reinsurance in the normal course of business, with retention limits varying by line of business. The cost of reinsurance related to insurance contracts of the life operations is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. For the property and casualty operations, premiums payable in respect of reinsurance ceded are recognized in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the balance sheet date. These premiums are expensed on a pro-rata basis over the period of the reinsurance contract. Reinsurance assets primarily consist of balances due from reinsurance companies for ceded insurance liabilities and relate entirely to the property and casualty operations. Reinsurance ceded assets related to the life operations are shown on a net basis against the related policy liability. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Structured settlements In the normal course of claims adjudication, the Company s property and casualty operation settles certain long-term claims losses through the purchase of annuities under structured settlement arrangements with life insurance companies. As the property and casualty subsidiary does not retain any interest in the related insurance contract and obtains a legal release from the claimant, any gain or loss arising on the purchase of an annuity is recognized in the consolidated income statement at the date of purchase and the related claims liabilities are derecognized. Segregated funds Segregated funds are insurance products offered under life insurance policies which provide policyholders with opportunities to grow their investment capital. The holdings of the segregated funds are kept separate from the Company s assets. Certain contracts allow policyholders to invest in segregated funds managed by the Company. Income earned on these funds and any related capital gains or losses accrue to the benefit of the segregated fund and are included in income of the funds. Investments held in segregated funds are carried at fair value. Financial instruments Classification and designation Financial assets are classified as held-for-trading (HFT), available-for-sale (AFS), held-to-maturity (HTM), or loans and receivables based on their characteristics and purpose of their acquisition. Certain financial assets may be designated as HFT at the Company s option. Financial liabilities are required to be classified as HFT or other liabilities. al Report Co-operators Life Insurance Company Annu

42 Notes to the Consolidated Financial Statements The Company has classified bonds and stocks as either AFS or HFT. Bonds and stocks backing equity have been designated as AFS while bonds and stocks backing policyholder liabilities have generally been designated as HFT. OSFI has imposed certain restrictions in OSFI guideline D-10 on the designation of assets and liabilities as HFT on initial recognition (the fair value option). The fair value option may be used when such a designation eliminates or significantly reduces an accounting mismatch caused by measuring assets and liabilities on different bases or when instruments are measured and managed on a fair value basis. In both cases a documented risk management strategy must exist to support the use of the fair value option. Mortgages, policy loans, amounts on deposit with reinsurers and accounts receivable are classified as loans and receivables. Short-term investments, which include money market instruments with a maturity of greater than three months from the date of acquisition, and cash and cash equivalents are classified as HFT. Currency derivatives are classified as HFT. Reinsurers funds on deposit, payables and other liabilities which includes subordinated debt are classified as other financial liabilities with interest expense, if any, recorded in general expenses. Presentation Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognised amounts and there is the ability and intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Recognition and measurement Purchases and sales of invested assets classified as HFT, AFS, HTM or loans and receivables are recorded on a trade-date basis. Financial assets are measured at fair value with the exception of loans and receivables. Assets classified as loans and receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method, less provision for impairment losses if any. Any premium or discount on bond acquisitions is included in the calculation of the effective interest rate. Financial liabilities are measured at fair value when they are classified as HFT. Other financial liabilities are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. A specific exemption is provided for contracts issued to policyholders by insurance enterprises. The actuarial liabilities are determined according to standard actuarial practices. Real estate is comprised of land and buildings both for own use and held for resale. Land and buildings are accounted for using a moving to market basis. External appraisals are completed a minimum every three years and differences between carrying value and market value are amortized to income at 3% per quarter on a declining balance basis. The most recent external appraisal at December 31, 2009 indicated that the market value was $17,900. Policy loans are carried at their amortized cost, which is not in excess of the cash surrender value of the policies on which the respective loans were made. Due to the short-term nature of the loans, fair value is considered to approximate amortized cost. al Report Co-operators Life Insurance Company Annu Changes in the fair value of HFT financial assets and financial liabilities are recognized in net investment gains and income in the consolidated statement of income for the year, while changes in the fair value of AFS financial assets are recognized in other comprehensive income (OCI) until the related instrument is disposed of or has become other than temporarily impaired. Accumulated other comprehensive income (AOCI) is included in the consolidated balance sheets as a separate component of shareholders equity (net of income taxes) and is comprised entirely of net unrealized gains and losses on AFS financial assets. The cumulative gains or losses in the fair values of investments previously recognized in AOCI are reclassified to net income when they are realized or when a decline is considered to be other than temporary. Fair value Fair value is the amount of consideration that would be agreed on in an arm s length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair value measurements for invested assets are categorized into levels within a fair value hierarchy based on the nature of valuation inputs (Level 1, 2 or 3). These are defined in note 6. The fair value of other financial assets and financial liabilities is considered to be the carrying value when they are of short duration or when the instrument s interest rate approximates current observable market rates. Where other financial assets and financial liabilities are of longer duration, then fair value is determined using the discounted cash flow method using discount rates based on adjusted observable market rates.

43 Impairment of financial assets The Company reviews its investment portfolio on a quarterly basis, at a minimum, for any declines in value. The Company assesses whether an AFS financial asset is other than temporarily impaired by assessing whether there is a significant or prolonged decline in fair value below cost and whether there is objective evidence that the impairment is other than temporary. Factors that are considered when assessing whether an other than temporary impairment exists include but are not limited to: a decline in current financial position; defaults on debt obligations; failure to meet debt covenants; significant downgrades of credit status, and severity and/or duration of the decline in value. If the decline is considered to be other than temporary, an impairment loss is recorded through the consolidated statement of income. Other than temporary impairments of AFS stock instruments are reversed through net income when realized on sale. Other than temporary impairments of AFS debt instruments are only reversed prior to realization when the increase can objectively be related to an event occurring after the impairment loss was recognized in net income. Financial assets include mortgages and other investments classified as loans and receivables that are also evaluated for impairment. These invested assets are considered impaired when there is objective evidence of deterioration in credit quality that indicates the Company no longer has reasonable assurance that the full amount of principal and interest will be collected. The Company then establishes specific provisions for losses and balances are subsequently measured at their net realizable amount based on discounting the cash flows at the original effective interest rate inherent in the loan or the fair value of the underlying security. Changes in the net realizable value of impaired loans are recognized in net investment gains and income as a credit or charge to impairment losses. Policy loans are not subject to impairment losses because they are fully secured by the policy values on which the loans are made. Derivative financial instruments Derivatives are classified as HFT and transactions are recorded on a trade date basis. Derivatives are recognized at fair value in the consolidated balance sheet. The gains and losses arising from remeasuring the derivatives at fair value are recognized in the consolidated statement of income. Embedded derivatives An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract. Some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified financial variable. Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for as derivatives when: a) their economic characteristics and risks are not closely related to those of the host contract; b) the terms of the embedded derivative are the same as those of a free standing derivative; c) the combined instrument or contract is not measured at fair value with the changes in fair value being recognized in other income and d) the fair value of the embedded derivative can be reliably measured on a separate basis. These embedded derivatives are classified as HFT financial assets and liabilities with changes in fair value recognized in the consolidated statement of income as a component of net investment gains (losses). Hedge accounting CFI uses derivative instruments to manage its exposure to interest rate risk. Where hedge accounting can be applied, a hedge relationship is designated and documented at its inception to detail the particular risk management objective and the strategy for undertaking the hedge transaction. The documentation identifies the specific risk that is being hedged, the asset, or liability giving rise to such risk, the type of hedging instrument used and how effectiveness will be assessed. The hedging instrument must be highly effective in accomplishing the objective of offsetting changes in the anticipated cash flows attributable to the risk being hedged both at inception and throughout the life of the hedge. Hedge accounting is discontinued when it is determined that the hedging of the instrument is no longer effective as a hedge, the hedging instrument is terminated or sold, upon the sale or early termination of the hedged item or when the Company terminates its designation of the hedging relationship. The accounting consequence of discontinuing hedge accounting depends on the circumstances giving rise to its discontinuance. Generally, hedge accounting is discontinued prospectively, however, if hedge accounting is discontinued because the hedged item no longer exists any gains and losses recognized in AOCI will be reclassified to net income immediately. al Report Co-operators Life Insurance Company Annu

44 Notes to the Consolidated Financial Statements CFI applies hedge accounting to minimize volatility in earnings caused by changes in interest rates. Interest rate fluctuations will either cause assets and liabilities to appreciate or depreciate in market value or cause variability in anticipated cash flows. When a hedging instrument functions effectively, gains, losses, revenue and expenses of the hedging instrument will largely offset the gains, losses, revenue and expenses of the hedged item. In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in OCI while any ineffective portion is recognized in income. When hedge accounting is discontinued, the amounts previously recognized in AOCI are reclassified to income during the periods when the variability in the cash flows of the hedged item affects income. Gains and losses on derivatives are reclassified immediately to net income when the hedged item is sold or terminated early. CFI predominantly uses interest rate swaps to hedge the variability in cash flows related to variable rate assets. Revenue and expense recognition Included within net investment gains and income is dividend and interest income. Dividend income is recorded on the exdividend date and interest income, which includes amortization of premiums or discounts, is recognized using the effective interest method. Realized gains and losses on the sale of investments are computed using the average cost of investments and are recognized in net income on the date of sale. Gains and losses on the sale of real estate are recognized when title passes. When there are leaseback agreements in place, the Company may be required to defer all or a portion of any gains on sale and amortize proportionately to the lease payments over the life of the lease. Transaction costs for AFS financial assets and loans and receivables are recorded as part of the purchase cost of the asset. Transaction costs for financial liabilities classified as other than HFT are included in the value of the instrument at issue. Transaction costs for HFT financial instruments are recognized in the consolidated statement of income. Other significant accounting policies Cash and cash equivalents Cash and cash equivalents include short-term investments with a maturity of three months or less from the date of acquisition. Property and equipment Computer equipment, furniture and equipment, leasehold improvements, and art collections are carried at cost less accumulated amortization and accumulated impairment losses. Subsequent costs are included in the asset s carrying value when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All repairs and maintenance are charged to income during the period in which they occur. Property and equipment balances are amortized on a straight-line basis over their estimated useful lives as follows: al Report Co-operators Life Insurance Company Annu Computer equipment Furniture and equipment Leasehold improvements Art collection Term 3 years 10 years Lesser of 5 years and terms of related lease Not amortized Property and equipment are derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Gains and losses on disposal are determined by comparing the proceeds with the net carrying value. Fully depreciated property and equipment are retained in assets and accumulated amortization accounts until such assets are removed from service. Leases Leases of property and equipment where the Company is not exposed to substantially all of the risks and rewards of ownership are classified as operating leases. Incentives received from the lessor are deferred and amortized to the consolidated statement of income on a straight-line basis over the term of the lease. Where substantially all of the risks and rewards have been transferred to the Company the lease is classified as a capital lease. In these cases an obligation and an asset are recognized based on the present value of the future minimum lease payments and balances are amortized over the lease term or useful life as applicable.

45 Business acquisitions Business acquisitions are accounted for using the purchase method whereby the identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. The results of operations and cash flows of an acquired business are included in the Company's consolidated financial statements from the date of acquisition, which is the date on which it obtains control of the acquiree. Goodwill and intangible assets Goodwill represents the excess of purchase price over fair value of the net identifiable assets acquired at the date of acquisition. Goodwill is not amortized but is evaluated for impairment annually or more frequently when an event or circumstance occurs that indicates goodwill might be impaired. Testing for impairment is accomplished by determining if the carrying value of a reporting unit exceeds its fair value at the assessment date. A reporting unit is a component of a segment in which discrete financial information is available and the segment s management regularly reviews the operating results of the component. If the carrying value of a reporting unit, including the allocated goodwill, exceeds its fair value, the amount of the goodwill impairment is measured as the excess of the carrying amount of the reporting unit s allocated goodwill over the implied fair value of the goodwill, based on the fair value of the assets and liabilities of the reporting unit. Should the carrying value exceed fair value, an impairment loss is recognized in the consolidated statement of income at that time. The estimate of fair value required for the impairment test is sensitive to the cash flow projections and the assumptions used in the valuation model. Finite life intangible assets are carried at cost less accumulated amortization. Finite life intangible assets are tested for impairment when events or circumstances indicate that the carrying value may not be recoverable. When the recoverable amount is less than the net carrying value, an impairment loss is recognized. Amortization and impairments are recorded as general expenses in the consolidated statement of income. Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows: Asset administration contracts Customer relationships Computer software development CUMIS brand Term 7 years years 2-5 years Not amortized Employee future benefits Employee future benefits include pensions, post-employment and medical and dental benefits to qualifying individuals. The primary pension plan of Co-operators Life Insurance Company and its wholly owned subsidiary TIC Travel Insurance Coordinators Ltd. is a defined contribution plan where the Company s obligation is fulfilled as contributions are made by the employer and employee based on a set percentage of the employee s annual income. The primary pension plan of CUMIS is a defined benefit plan which is accounted for using projected benefit method prorated on service and management s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. For the purpose of calculating the expected returns on plan assets, those assets are valued at fair value. The other-than-pension benefits are defined benefit contracts and are accounted for using the accumulated benefit method. The expected costs of employee future benefits are expensed during the years that the employees render services and an accrued post-employment benefit obligation is recognized. The obligation is determined by application of the terms of the plans together with relevant actuarial assumptions. There are no employee contributions to the other-than-pension benefits plans. The plans are not funded. Actuarial gains and losses, past service costs and transition costs have been deferred and amortized. For the pension benefits, the excess of the net actuarial gain (loss) in excess of 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service period of active employees. For all benefits, past service costs and transition costs are amortized over the average future service to expected retirement age on a straight-line basis. Past service costs from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. al Report Co-operators Life Insurance Company Annu

46 Notes to the Consolidated Financial Statements Subordinated debt Subordinated debt is carried at amortized cost and debt issuance costs are amortized over the term of the related debt using the effective interest rate method. Foreign currency translation The Company translates all foreign currency monetary assets and liabilities into Canadian dollars at year-end foreign exchange rates. Revenue and expenses are translated at the prevailing foreign exchange rate on the date of the transaction. Exchange gains and losses are recognized in the consolidated statement of income with the exception of unrealized gains and losses associated with financial assets classified as AFS, which are recorded in OCI. Income taxes The Company accounts for income taxes using the asset and liability method. Under this method, the provision for income taxes is calculated based on income tax laws and rates enacted and substantively enacted as at the balance sheet date. The income tax provision comprises current and future income taxes. Current income taxes are amounts expected to be payable or recoverable as a result of current year operations. Future income tax assets and liabilities arise from temporary differences between the accounting and tax basis of assets and liabilities. A future income tax asset is recognized to the extent that the benefit of losses and deductions available to be carried forward to future years for income tax purposes are more likely than not to be realized. Current and future income taxes that are associated with components of OCI are recorded in OCI. In determining the impact of taxes, the Company is required to comply with the standards of both the Canadian Institute of Actuaries and the CICA. Actuarial standards require that the projected timing of all cash flows associated with the policy liabilities, including income taxes, be included in the determination of life actuarial liabilities under the CALM. The actuarial liabilities are first computed including all related income tax effects on a discounted basis, including the effects of temporary differences that have already occurred. Future income tax assets and/or liabilities arising from temporary differences that have already occurred are computed without discounting. The undiscounted future income tax assets and/or liabilities are reclassified from the actuarial liabilities to future income taxes on the consolidated balance sheet. The net result of this reclassification is to leave the discounting effect of the future income taxes in the actuarial liabilities. Use of estimates al Report Co-operators Life Insurance Company 46 The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Significant estimates include the allocation of fair value on the purchase price to the assets acquired and liabilities assumed by the Company at the date of acquisition (note 5), the valuation of investments and embedded derivatives (note 6), policy liabilities (note 8), income taxes (note 10), goodwill and intangibles (note 11) employee future benefits (note 14) and contingencies (note 25). Actual results could differ from these estimates. Changes in estimates are recorded in the accounting period in which they are determined. 5. Business acquisition On December 31, 2009, Canada Inc, 50.01% owned by the Company, acquired 100% of the common shares of CUMIS, a leading provider of life insurance and property and casualty insurance to credit unions and their members, for cash consideration of $214,917, adjusted subsequent to December 31, 2009 for the purchase price finalization. The balance sheet of CUMIS had been included in the Company s consolidated financial statements as at that date. Subsequent to December 31, 2009, the Company increased its share ownership of CUMIS (note 22). The acquisition of CUMIS contributes to the Company s growth objective as well as its strategy to enhance its presence within credit unions. The business combination was accounted for using the purchase method of accounting. The cost of the acquisition was allocated to identifiable net assets on the basis of the estimated fair values at the date of the purchase. The excess of acquisition costs over the net fair value of assets acquired was allocated to goodwill. Goodwill is made up of the workforce of CUMIS General and CUMIS Life as well as future profits from The CUMIS group of companies. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed by the Company at the date of acquisition Annu

47 Adjustments Net assets acquired applied retrospectively Net assets acquired (restated) $ $ $ Cash and cash equivalents 120, ,486 Invested assets 592, ,154 Cash held in trust 59,119-59,119 Premiums due 19,631-19,631 Reinsurance ceded assets, property and casualty operation 69,917-69,917 Goodwill and intangible assets 144,566 1, ,283 Other assets 110, ,980 Total assets acquired 1,116,240 2,330 1,118,570 Policy liabilities, life operations 370, ,800 Policy liabilities, property and casualty operation 130, ,664 Payables and other liabilities 401, ,189 Assets acquired 213,418 1, ,917 Non-controlling interest 106, ,438 Net assets acquired 106, ,479 Segregated fund net assets of $193,362 have also been acquired with a corresponding segregated fund contract liability of $193,362. Goodwill and intangible assets related to this acquisition are not deductible for tax purposes. During 2010, the purchase price allocation was finalized and was applied retrospectively to the December 31, 2009 amounts. The additional payment on purchase price finalization was $1,499 and other miscellaneous allocation changes were applied retroactively, with the impact on net assets acquired representing the portion of the Company s additional payment. 6. Invested assets and net investment gains and income a) Invested assets Fair value Amortized cost Carrying value Classified Designated Loans and AFS HFT HFT receivables Other Total 2010 $ $ $ $ $ $ Bonds Federal 117, , ,863 Provincial 95, , ,181 Municipal 16, , ,896 Corporate 180, ,043-24, ,604 Co-operative - - 2, , ,997-1,405,359-24,681 1,840,037 Stocks Canadian common 147,742-61, ,900 Canadian preferred 114,472 (9,148) ,324 U.S. equities 30,853-11, ,894 Foreign equities 11,569-2, , ,636 (9,148) 74, ,468 Short-term investments 2,544 68, , ,499 Derivative contracts - (54) (54) Mortgages , ,259 Other investments 1, ,100 3,712 Real estate ,590 23,590 Policy loans ,332-55,332 Investment income due and accrued ,790-19,790 Total invested assets 718,712 58,888 1,480, ,381 92,246 3,093, Annual Report Co-operators Life Insurance Company 47

48 Notes to the Consolidated Financial Statements Fair value Amortized cost Carrying value Classified Designated Loans and AFS HFT HFT receivables Other Total 2009 $ $ $ $ $ $ Bonds Federal 100, , ,930 Provincial 83, , ,062 Municipal 22, , ,039 Corporate 156, ,204-24, ,780 Co-operative - - 2, , ,911-1,352,066-24,337 1,739,314 Stocks Canadian common 138,137-45, ,010 Canadian preferred 108,095 (5,919) ,176 U.S. equities 30,087-8, ,055 Foreign equities 12,231-2, , ,550 (5,919) 56, ,629 Short-term investments 2,500 76, ,452 84,354 Derivative contracts - (97) (97) Mortgages , ,786 Other investments 2, ,200 4,086 Real estate ,091 18,091 Policy loans ,600-53,600 Investment income due and accrued ,242-20,242 Total invested assets 655,966 70,386 1,409, ,628 49,080 2,906,005 Other investments includes HTM financial assets. The notional amounts of the foreign currency forward contracts total $5,481 ( $2,625). The negative replacement cost of the foreign currency forward contracts was $174 ( $97) included in derivative contracts. CFI was party to interest rate swap instruments designated as cash flow hedges, with a notional balance of $17,500 ( $nil). The fair value of the interest rate swaps included in derivative contracts was $111 ( $nil), excluding interest income of $9 ( $nil). The unrealized gain on the effective portion of the interest rate swap instruments designated as a cash flow hedge, and recorded in OCI, during 2010 was $91 ( $nil). b) Investments - measured at fair value al Report Co-operators Life Insurance Company Annu The Company is responsible for determining the fair value of its investment portfolio by utilizing market-driven measurements obtained from active markets where available, by considering other observable and unobservable inputs and by employing valuation techniques that make use of current market data. Assets and liabilities recorded at fair value in the balance sheet are measured and classified in a hierarchy consisting of three levels for disclosure purposes. The three levels are based on the significance and reliability of the inputs to the respective valuation techniques. The input levels are defined as follows: Level 1 - Quoted prices Represents unadjusted quoted prices for identical instruments exchanged in active markets. The fair value is determined based on quoted prices in active markets obtained from external pricing sources. Assets measured at fair value and classified as Level 1 include Canadian common and preferred stocks. Level 2 - Significant other observable inputs Includes directly or indirectly observable inputs other than quoted prices for identical instruments exchanged in active markets. These inputs include quoted prices for similar instruments exchanged in active markets; quoted prices for identical or similar instruments exchanged in inactive markets; inputs other than quoted prices that are observable for the instruments, such as interest rates and yield curves, volatilities, prepayment spreads, credit risks and default rates where available; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Assets measured at fair value and classified as Level 2 include short-term investments, bonds, foreign equities, and other investments.

49 Level 3 - Significant unobservable inputs Includes inputs that are not based on observable market data. Management is required to use its own assumptions regarding unobservable inputs as there is little, if any, market activity in these assets or liabilities or related observable inputs that can be corroborated at the measurement date. Unobservable inputs require significant management judgement or estimation to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities. To verify pricing, the Company assesses the reasonability of the fair values by comparing to industry accepted valuation models, to movements in credit spreads and to recent transaction prices for similar assets where available. Assets measured at fair value and classified as Level 3 include tracking notes and derivative contracts. The following summarizes how fair values are determined as at December 31: Level 1 Level 2 Level 3 Significant other Significant Quoted observable unobservable Total fair prices inputs inputs value 2010 $ $ $ $ AFS Short-term investments - 2,544-2,544 Bonds - 409, ,997 Stocks 241,826 48, ,505 Other investments - 1,535-1, , , ,581 HFT Short-term investments - 68,090-68,090 Bonds - 1,405,359-1,405,359 Stocks 61,148 13,822-74,970 Derivative contracts - (174) 120 (54) Other investments ,148 1,487, ,548,442 Total invested assets at fair value 302,974 1,949, ,253,023 Level 1 Level 2 Level 3 Significant other Significant Quoted observable unobservable Total fair prices inputs inputs value 2009 $ $ $ $ AFS HFT Short-term investments - 2,500-2,500 Bonds - 362, ,911 Stocks 232,453 48, ,499 Other investments - 2,005-2, , , ,915 Short-term investments - 76,402-76,402 Bonds - 1,352,066-1,352,066 Stocks 45,876 11,122-56,998 Derivative contracts - (97) - (97) Other investments ,876 1,439, ,486,250 Total invested assets at fair value 278,329 1,854, ,134,165 Included in the AFS stocks in the above table are embedded derivatives of $9,148 ( $5,919), which are classified HFT. The embedded derivative represents the redemption options in the preferred share portfolio, the value of which has been determined using unobserved inputs in an accepted model. The embedded derivative has been offset against its host instrument as the net amount's fair value represents an unadjusted quoted price for identical instruments exchanged in active markets. al Report Co-operators Life Insurance Company Annu

50 Notes to the Consolidated Financial Statements Excluded from these totals are AFS investments of $4,983 ( $2,132) in common shares of other co-operative entities which are carried at cost as they do not have quoted market values in active markets. No investments were transferred between levels during the year. The following tables are reconciliations of the Level 3 fair value measurements. Other investments 2010 $ Balance as at December 31, Sales (1,306) Gains Realized in net income 453 Unrealized included in net income 27 Unrealized included in OCI 93 Balance as at December 31, Other investments 2009 $ Balance as at December 31, Acquired through business combinations 871 Balance as at December 31, The other investments classified as Level 3 consist of master asset vehicle II (MAV II) ineligible asset tracking notes that were received as a result of restructuring of the asset backed commercial paper held by CFI. c) Net investment gains and income Classified Designated Loans and AFS HFT HFT receivables Other Total 2010 $ $ $ $ $ $ Interest income 16, ,884 37,442 2, ,819 Dividend, rental and other income, net 9,378-1, ,458 Investment fees (948) (65) (1,489) (1,410) (1,740) (5,652) Net investment income 25, ,367 36, ,625 Net realized gains 3,177-5,993 3,546 1,107 13,823 al Report Co-operators Life Insurance Company 50 Foreign exchange losses - (637) - - (6) (643) Change in unrealized gain - (556) 71, ,810 Impairment losses (3,264) - - (97) (26) (3,387) Net investment gains (losses) (87) (1,193) 77,359 3,449 1,075 80,603 Net investment gains and income 25,161 (667) 144,726 39,481 1, , Annu

51 Classified Designated Loans and AFS HFT HFT receivables Other Total 2009 $ $ $ $ $ $ Interest income 11,152 1,906 53,319 37, ,111 Dividend, rental and other income, net 10,644-1,229-4,413 16,286 Investment fees (766) - (1,167) (1,470) - (3,403) Net investment income 21,030 1,906 53,381 36,069 4, ,994 Net realized gains (losses) (9,536) - 8,676 1,164 1,166 1,470 Foreign exchange losses - (2,398) (2,398) Change in unrealized gain ,501 1,245-22,746 Impairment losses (11,168) (11,168) Net investment gains (losses) (20,704) (2,398) 30,177 2,409 1,166 10,650 Net investment gains and income 326 (492) 83,558 38,478 5, ,644 During 2008, the Company disposed of real estate property resulting in total realized investment gains of $27,477. A portion of these realized gains related to own use property and was leased back by the Company. Hence, $19,206 of these realized gains were deferred and are being amortized in proportion to the lease payments over the 15 year term of the related lease. As at December 31, 2010, the unrealized deferred gain is $16,538 ( $17,704). During 2010, the Company recognized $1,166 of deferred net realized gains in the consolidated statements of income which is included in net investment gains (losses) ( $1,166). d) Impaired assets and provisions for losses For the year ended December 31, 2010, the Company has recognized other than temporary impairment losses of $3,387 ( $11,168). The impairment losses were determined to be other than temporary based on management s best estimate using available market data. The impairment losses are included in net investment gains and income in the consolidated statement of income. The AFS financial assets disclosed in the following table exhibit evidence of impairment, however, the impairment loss has not been recognized in net income either because management does not believe there is objective evidence of impairment or because the loss is considered temporary Unrealized Unrealized Fair value losses Fair value losses $ $ $ $ Bonds 62, ,375 4,715 Stocks 60,527 3, ,048 13,519 Total temporarily impaired financial assets 122,718 4, ,423 18,234 HFT financial assets have been excluded from the above table since changes in fair value of these financial assets are recorded in the consolidated statement of income. The Company has mortgages which have been assessed individually and provisions have been established when there is no longer reasonable assurance of timely collection of the full amount of the principal and interest due. The value of the estimated future cash flows discounted at the effective interest rate inherent in the loan is used to determine the amount the Company expects to recover from an impaired loan. The following table discloses the distribution of mortgages by credit quality as at December 31, al Report Co-operators Life Insurance Company Annu

52 Notes to the Consolidated Financial Statements $ $ Current 650, ,491 Past due less than 90 days - 1,946 Past due 180 days or more Impaired 17,696 25,135 Allowance for impaired loans (883) (786) Balance December , ,786 Impaired loans total $17,696 ( $25,135) with specific provisions of $883 ( $786). The remaining impaired mortgage balance of $16,813 ( $24,349) does not require additional provisions because, at a minimum, either the fair value of the collateral or the expected future cash flows exceed the carrying value of the mortgage. Net investment gains and income includes $328 ( $254) in respect of a recovery of loan impairments, and includes mortgage write-offs of $425 ( $nil). During the year the Company foreclosed on a mortgage with at a net book value of $5,456 ( $nil). In conjunction with the foreclosure, the Company acquired residential and commercial real estate interests with an estimated net realizable value equal to the value of the mortgage. The estimated net realizable value was primarily determined by reviewing recent selling prices for the units already sold and by assessing current market conditions. The Company continues to actively market the properties for sale and no impairment loss has been recorded. As of the year-end date, the property had a carrying amount of $5,456 and was included within the Company s real estate invested assets $ $ Specific provision - beginning of year 786 1,040 Change in provision 97 (254) Specific provision - end of year In addition to the specific provisions, possible future impairments are provided for through the reduction of future asset cash flows assumed in the calculation of the actuarial liabilities. The provision for credit losses is $99,047 ( $80,598). e) Maturity profile of invested assets < > 5 Year Years Years Years No fixed Total 2010 $ $ $ $ $ $ Bonds 81, , ,635 1,269,772-1,840,037 Stocks 1,521 8,272 4,775 5, , ,468 Short-term investments 112, , Annual Report Co-operators Life Insurance Company 52 Derivative contracts (174) (54) Mortgages 89, , , ,718 14, ,259 Policy loans ,332 55,332 Other investments 77 1,404 2, ,712 Real estate ,590 23,590 Investment income due and accrued 19, , , , ,360 1,577, ,164 3,093,633 10% 11% 14% 51% 14% 100%

53 < > 5 Year Years Years Years No fixed Total 2009 $ $ $ $ $ $ Bonds 85, , ,223 1,148,786-1,739,314 Stocks 9,406 12,272 31,057 30, , ,629 Short-term investments 84, ,354 Derivative contracts (97) (97) Mortgages 105, ,459 99, ,255 17, ,786 Policy loans ,600 53,600 Other investments 9 1,002 2, ,086 Real estate ,091 18,091 Investment income due and accrued 20, , , , ,814 1,503, ,486 2,906,005 10% 12% 14% 52% 12% 100% f) Mortgage diversification Creditor concentration $ $ Insured 248, ,695 Residential 77,218 65,138 Commercial 342, , , ,786 Geographic concentration Atlantic 113, ,686 Ontario 223, ,267 West 304, ,910 Other 26,985 31, , ,786 Fair value 707, ,114 g) Real estate diversification $ $ Usage concentration Land and project developments 12,473 5,055 Office 11,117 12,845 Project development ,590 18,091 Geographic concentration Ontario 18,134 17,900 Atlantic 5,456 - British Columbia ,590 18,091 Fair value 23,590 18,181 al Report Co-operators Life Insurance Company Annu

54 Notes to the Consolidated Financial Statements 7. Financial risk management The Company has established risk management policies and practices covering key aspects of the operations. The Board of Directors approves these policies and management is responsible for ensuring the policies are properly maintained and implemented. The Board of Directors receives confirmation that the risks are being appropriately managed through regular reporting, as well as annual compliance reporting and by reviews conducted by the internal audit department. Credit risk Credit risk refers to the risk of financial loss from the failure of a debtor/counterparty to honour its obligation to the Company. Credit risk is increased when there is a concentration of investments made in similar industry sectors, in the same geographical area or within a single entity. The Company s investment policy puts limits on the bond portfolio including portfolio composition limits, issuer type limits, bond quality limits, single issuer limits, corporate sector limits and general guidelines for geographic exposure. Throughout 2010 and 2009, the Company maintained all positions within these concentration limits. At December 31, 2010, the bond portfolio includes 92.1% ( %) of bonds rated A or better. The Company limits its investment concentration in any one corporate investee or control group to 5% of total assets and a maximum of 15% of the bond portfolio can be invested in bonds rated below A. At December 31, 2010, the largest corporate credit exposure was 1.5% of invested assets ( %) or 5.4% of total equity ( %). The Company s mortgage portfolio represents 21.6% ( %) of invested assets carrying value. The Company has a separate, comprehensive mortgage policy which includes, among other factors, single loan limits, diversification by type of property limits, and geographic diversification limits. Each mortgage is secured by real estate and related contracts. At December 31, 2010, the largest single mortgage balance was $14,370 ( $13,640). The Company s detailed underwriting process for mortgages is in compliance with the requirements of the Insurance Companies Act and OSFI. Concentrations of credit risk for insurance contracts can arise from reinsurance ceded contracts as insurance ceded does not relieve the ceding enterprise of its primary obligation to the policyholder. The Company has established a Reinsurance and Insurance Counterparty Standards Committee that evaluates the financial condition of its reinsurers to minimize its exposure to significant loss from any one reinsurer s insolvencies. Reinsurers are typically all required to have a minimum financial strength rating of A - at the inception of the treaty; rating agencies used are A.M. Best and Standard & Poor s. Concentration guidelines are also in place to establish the maximum amount of business that can be placed with a single reinsurer. There were no material defaults on transactions with reinsurers during the year. Based on management s review of creditworthiness of its reinsurers, no allowance, other than as required by actuarial standards is included in the accounts. Another potential source of credit risk for insurance contracts is premiums due from policyholders. The Company s credit exposure to any one individual policyholder is not material. The Company s policies, however, are distributed by agents, program managers, or brokers who manage cash collection Annual Report Co-operators Life Insurance Company 54 The table below provides information regarding the overall credit risk of the Company by classifying assets according to the credit ratings of the counterparties. AAA is the highest possible rating and those assets that fall outside the range of AAA to BBB are classified as speculative grade. Bonds, short-term investments and selected cash equivalent amounts are based on external ratings provided by Dominion Bond Rating Services (DBRS); reinsurance ceded assets are classified based on financial strength ratings provided by A.M. Best and Standard & Poor s; mortgages are classified using the Company s internal rating system.

55 AAA AA A BBB Below BBB Not rated Net 2010 $ $ $ $ $ $ $ Cash and cash equivalents 2,154 7,457 3,307 1,577-14,142 28,637 Bonds - AFS 166,872 92, ,533 27, ,997 Bonds - designated HFT 264, , ,046 92, ,405,359 Bonds - other ,681 24,681 Short-term investments 105,655-1,281 1,263-4, ,499 Policy loans ,332 55,332 Derivative contracts Mortgages and other investments - 248, , ,849 9,567 16, ,971 Investment income due and accrued ,790 19,790 Cash held in trust ,233 72,233 Reinsurance ceded assets, property and casualty operation ,213 14,213 Premiums due ,935 55,935 Other receivables ,987 81, , ,501 1,019, ,280 10, ,089 2,952,754 AAA AA A BBB Below BBB Not rated Net 2009 $ $ $ $ $ $ $ Cash and cash equivalents 29,207-3, , ,336 Bonds - AFS 151,002 87, ,908 19, ,911 Bonds - designated HFT 280, , ,179 83, ,352,066 Bonds - other ,337 24,337 Short-term investments 68,802 7,733-2,499-5,320 84,354 Policy loans ,600 53,600 Mortgages and other investments - 242, , ,323 5,637 19, ,872 Investment income due and accrued ,242 20,242 Cash held in trust ,119 59,119 Reinsurance ceded assets, property and casualty operation ,917 69,917 Premiums due ,643 43,643 Other receivables ,273 57, , , , ,265 7, ,987 2,904,670 Management has interpolated short-term investments ratings as follows: AAA = R-1 (high); AA = R-1 (middle); A = R-1 (low); BBB = R-2 (high, middle, low); below BBB = R-3 (high, middle, low). The total amounts outlined in the tables above represent the Company s maximum credit exposure based on a worst case scenario and do not take into account any collateral held or other credit enhancements attached to the assets. The Company participates in a securities lending program managed by a federally regulated financial institution whereby the Company lends securities it owns to other financial institutions to allow them to meet delivery commitments. The Company receives securities of superior credit quality and value as collateral for securities loaned. At December 31, 2010, securities, which are included in invested assets, with an estimated fair value of $106,404 ( $117,052) have been loaned. Securities with an estimated fair value of $111,828 ( $123,351) were received as collateral. The collateral received has not been recorded on the Company s consolidated balance sheet. al Report Co-operators Life Insurance Company Annu

56 Notes to the Consolidated Financial Statements Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of three types of risks: equity risk, foreign exchange risk, and interest rate risk. a) Equity risk Equity risk arises whenever financial results are adversely affected by changes in capital markets. One of the Company s exposures to market risk occurs when investment guarantees are offered, as is the case with segregated funds. Other segments currently facing equity risk exposure are Individual Life Par, Universal Life, Group Benefit, and Surplus. Stocks have a fair value of $370,468 ( $339,629) and comprise 12.0% ( %) of the carrying value of the Company s total invested assets. An investment policy is in place and its application is monitored by the Board of Directors on a quarterly basis. Diversification techniques are employed to minimize risk. Policies limit investments in any entity or group of related entities to a maximum of 5% of the Company s assets. The Company also ensures that there are adequate actuarial reserves to cover the segregated fund guarantees, Individual Life Par liabilities, Universal Life liabilities, and Group Benefit liabilities. The Surplus segment is monitored by the Surplus Committee, which is comprised of senior management. The Surplus segment is made up of assets that are not supporting policy liabilities. The Company s stock portfolio is benchmarked to and is considered closely correlated with the following indices. A 1% movement in the indices with all other variables held constant would have the following estimated effect on the fair values of the Company s stock holdings AFS HFT AFS HFT Stock portfolio Benchmarked index $ $ $ $ Canadian common S&P/TSX Composite Index 1, , Canadian preferred BMO CM 50 Preferred Index 1,053-1,026 - US equities S&P 500 Index (CDN $) Foreign equities MSCI EAFE Index & MSCI EM Index (CDN $) The cumulative change in fair value of a stock is recognized in net investment gains (losses) when the Company sells the stock, or when it is other than temporarily impaired. For AFS stocks that the Company holds at year-end, except for those that are other than temporarily impaired, the change in fair value during the year is recognized in OCI. For HFT stocks that the Company holds at year-end, the changes in fair value during the year is recognized in net investment gains and income. b) Foreign exchange risk al Report Co-operators Life Insurance Company 56 Foreign exchange risk is the risk that the value of the foreign denominated financial instrument portfolio that is not offset by corresponding liabilities, will fluctuate as a result of changes in foreign exchange rates. The Company s foreign exchange risk is related to its stock holdings. A 1% change in the value of the United States dollar would affect the fair value of the stocks by $309 ( $224). The Company mitigates a portion of its foreign exchange risk by buying or selling foreign exchange forward contracts. Foreign exchange forward contracts are commitments to buy or sell foreign currencies for delivery at a specified date in the future at a fixed rate. Foreign exchange forward contracts are transacted in over-the-counter markets. These foreign exchange forward contracts are included in invested assets (note 6). The counterparty risk of default for these derivative financial instruments is limited to their positive replacement cost, which is substantially lower than their notional amount. The replacement cost of over-the-counter derivative financial instruments is an estimate and is determined using valuation models that incorporate prevailing foreign exchange rates and prices on underlying instruments with similar maturities and characteristics. The replacement cost reflects the estimated amount that the Company would receive or might have to pay to terminate the contracts as at December 31, The counterparties are federally regulated financial institutions. As at December 31, 2010, the negative replacement cost of these derivative instruments was $174 (2009 $97). The maturity date for the Company s contracts range from January 26 to April 13, The contract rates range from $1.005 to $ Annu

57 c) Interest rate risk Interest rate risk is the potential for financial loss arising from changes in interest rates. One source of this risk arises when a company s asset cash flows do not coincide with the cash flows arising from the liabilities, as this may result in the need to either sell assets to meet policy payments and expenses or reinvest excess asset cash flows under unfavourable interest environments. Asset and liability cash flows are subject to uncertainty for a number of reasons, including the presence of embedded features as well as the inherent variability of both assets and liabilities. The assets and liabilities of the Company are segmented based on the nature of the products and the relative level of exposure to interest rate risk. The investment objective and interest rate risk limits for each portfolio of assets are intended to match the liability structure and specific needs of the products in that segment. Managing interest rate risk involves prudent management of both assets and liabilities in order to control the impact of changes in interest rates on the Company s financial results. Interest rate risk for life insurance liabilities is managed through the Company s Asset Liability Management (ALM) function. The ALM policy is established by the ALM Committee and reviewed by the Board of Directors. The assets supporting surplus are managed on a total return basis. For certain product types, including participating individual insurance and some forms of universal life and pension products, the effect of changes in the interest rate environment is at least partially passed through to the policyholders through changes in the dividend scale or the rate of interest credited. However, the very long duration of the insurance liabilities still results in a mismatch in interest rate sensitivity with the assets. Asset strategies are selected to mitigate some of the exposure to interest rate risk. Annuities, individual non-participating life, group life, and group accident and sickness liabilities involve either contractual or otherwise guaranteed payments to policyholders. Therefore, these liabilities are also sensitive to changes in interest rates. One measure of sensitivity to interest rate changes is the change in net present value of ALM assets and liabilities due to interest rate changes. Net present value equals the present value of asset cash flows less the present value of liability cash flows, determined using the interest rate in effect at the reporting date. The market yield based on the Government of Canada yield curve is used for reporting purposes. For the life operations, a 1% increase in interest rates, with all other variables held constant, could positively impact the net present value by $25,073 ( $24,520). Conversely, a 1% decrease in interest rates, with all other variables held constant, could negatively impact the net present value by $113,836 ( $80,264). For the P&C operation, at December 31, 2010, a 1% move in interest rates, a commonly accepted rate change in line with the most likely movement, with all other variables held constant, could impact the fair value of bonds by $5,085 ( $4,172). A fair value change in AFS bonds would be included in OCI for the year. From time to time, the Company enters into interest rate swap contracts to manage exposure to interest rate risks. Interest rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based. As at December 31, 2010, CFI entered into interest rate swap contracts. The maturity date for the Company s contracts range from August 13, 2012 to June 13, The fair values of the contracts, with a total notional amount of $17,500 have been included in note 6. During 2010, the Company did not recognize any gain or loss on the ineffective portion of the cash flow hedges. Liquidity risk Liquidity risk refers to the ability of the Company to access sufficient funds to meet financial commitments as they fall due. Liquidity risk varies by line of business based on contractual rights to make cash withdrawals and other distinct product features. The Company s ALM process ensures it has adequate liquid assets to cover potential commitments. It is unlikely that all demand liabilities will be withdrawn at the same time and approximately 67% ( %) of life policy liabilities are not cashable prior to maturity or are subject to market value adjustments. The Company has no material commitments for capital expenditures and there is normally no need for such expenditures in the normal course of business. Claims payments are funded by current revenue cash flow which normally exceeds cash requirements. At December 31, 2010 the Company had $28,637 ( $126,336) of cash and cash equivalents, and $112,499 ( $84,354) of short-term investments. In addition, the Company had a combination of lines of credit and a liquid investment portfolio. Canadian fixedincome securities issued or guaranteed by governments, investment grade corporate bonds and publicly traded Canadian and United States equities had a December 31, 2010 fair value of $2,117,857 ( $2,055,153). al Report Co-operators Life Insurance Company Annu

58 Notes to the Consolidated Financial Statements Along with internally generated funds, the Company has credit facilities of $12,000 ( $12,000) that provide it with additional financial flexibility to fulfill cash requirements on an ongoing basis. Bonds with a carrying value of $18,020 ( $15,595) have been pledged as collateral security and interest terms are bank prime less 0.25%. The Company had utilized $nil ( $nil) at the balance sheet date. The Company s estimated maturities of its financial instruments, insurance contracts and other commitments are shown in the following table on an undiscounted basis. Financial liabilities and contractual commitments are presented based on their estimated contractual maturities. Policy liabilities are presented based on expectations of the timing of future cash flows and/or the duration of the contract. Contractual commitments are not reported on the consolidated balance sheet. < > 5 Year Years Years Years Total 2010 $ $ $ $ $ Policy liabilities - life 237, , ,306 5,197,409 5,745,632 Policy liabilities - property & casualty 75,139 29,915 15,280 8, ,792 Financial liabilities Premium, income and other taxes payable 7, ,657 Long-term debt ,620 10,620 Payables and other liabilities 203, ,600 Total financial liabilities 524, , ,586 5,216,487 6,096,301 Contractual commitments (note 25) Operating lease commitments 6,253 10,877 8,413 22,188 47,731 Mortgage funding 29, ,015 Total contractual commitments 35,308 11,837 8,413 22,188 77,746 < > 5 Year Years Years Years Total 2009 $ $ $ $ $ Policy liabilities - life 261, , ,057 5,959,585 6,584,678 Policy liabilities - property & casualty 14,412 12,861 5,411 2,847 35,531 Financial liabilities Premium, income and other taxes payable 34, ,098 Long-term debt ,774 9,731 Payables and other liabilities 191, , ,653 Total financial liabilities 501, , ,962 6,027,308 6,911,691 Contractual commitments (note 25) 2010 Annual Report Co-operators Life Insurance Company 58 Operating lease commitments 7,403 11,973 9,523 27,462 56,361 Mortgage funding 18, ,864 Total contractual commitments 25,617 12,623 9,523 27,462 75,225

59 8. Policy liabilities Life Operations Actuarial liabilities $ $ Individual insurance 671, ,955 Group insurance 427, ,572 Wealth management 817, ,138 Travel insurance 13,685 15,440 Credit insurance 121, ,609 Total life actuarial liabilities 2,050,810 1,957,714 Policyholders' funds on deposit 133, ,900 Claims in course of settlement 23,673 22,835 Provision for unreported claims 24,766 28,382 Provision for policyholder dividends and experience rating refunds 40,310 47,509 Reinsurers' funds on deposit Total life other policy liabilities 222, ,902 Policy liabilities, life operations 2,273,243 2,183,616 Nature of actuarial liabilities Actuarial liabilities represent the amounts which, together with estimated future premiums and investment income, will be sufficient to pay estimated future benefits, dividends and expenses on all policies in force. Actuarial liabilities are determined in accordance with Canadian generally accepted actuarial practices, based on standards established by the Canadian Institute of Actuaries. These standards prescribe the use of the CALM to determine actuarial liabilities. Actuarial liabilities have been adjusted to incorporate the effect on future cash flows attributable to differences between statement and tax actuarial liabilities and asset valuations. Assumptions used to calculate actuarial liabilities consist of two components - an expected or best estimate assumption and a margin for adverse deviation. Assumptions In the computation of actuarial liabilities, expected assumptions covering the lifetime of the policies have been made for many variables including mortality, morbidity, reinvestment rates, rates of policy termination, operating expenses, inflation, policyholder dividends and taxes. Assumptions are reviewed annually based on studies of the major experience factors. The change in actuarial liabilities resulting from assumption revisions is recognized in income immediately. The methods for arriving at the most significant assumptions are outlined below. Mortality The mortality assumption for life insurance is mainly based on Company experience. A decrease of one percentage point in the individual life insurance mortality assumption would reduce the actuarial liabilities by $3,322 ( $3,860). For annuities, the mortality assumption is derived from industry experience tables. Mortality improvement has been projected in future years for annuitants. Morbidity Morbidity assumptions are made with respect to the rates of claim incidence and termination for accident and sickness business. The key morbidity assumption for the life operations is the termination rate for group long-term disability claims. This assumption is mainly based on Company experience studies. al Report Co-operators Life Insurance Company Annu

60 Notes to the Consolidated Financial Statements Investment returns The life operations maintain asset segments backing specific lines of business. Under CALM, projections of future asset and liability cash flows under multiple interest rate scenarios are used to determine the actuarial liability for each segment, along with a reinvestment strategy consistent with the life operations policy for that segment. A reduction is made to the asset cash flows to provide for future credit losses. A decrease of one percentage point in the current interest rates would increase individual life insurance actuarial liabilities by $26,342 ( $26,480). Expenses Policy maintenance expense assumptions are derived from the Company s internal cost studies without any adjustment for productivity gains. An inflation assumption consistent with the investment return is incorporated in the estimate of future expenses. Policy termination Policyholders may allow their policies to terminate by choosing not to continue to pay premiums. Policy termination rates are mainly based on the Company s own experience. The assumptions reflect differences in termination patterns for different types of contracts. A block of policies is considered to be lapse-supported if an increase in ultimate lapse rates increases profitability. The Company has reflected the latest industry experience for lapse-supported products. Provision for adverse deviation To recognize the uncertainty in establishing the expected assumptions, to allow for possible deterioration in experience and to provide greater comfort that actuarial liabilities are adequate to pay future benefits, a margin for adverse deviation is included in each assumption. With the passage of time, and resulting reduction in estimation risk, these margins are released into income. A standard range of margins is prescribed by the Canadian Institute of Actuaries and the Company is within these ranges. Changes in actuarial liabilities Changes in actuarial liabilities during the year were caused by the following business activities and changes in actuarial assumptions: Individual Group Wealth Travel Creditor Insurance Insurance Management Insurance Insurance Total 2010 $ $ $ $ $ $ Actuarial liabilities - beginning of year 586, , ,138 15, ,609 1,957,714 Normal changes 2010 Annual Report Co-operators Life Insurance Company 60 a) new business (46,977) 89,177 38,310 13,563 36, ,404 b) in-force 135,814 (92,292) (26,252) (15,318) (28,845) (26,893) Changes in assumptions Mortality/morbidity (10,692) (12,139) (3,903) - (712) (27,446) Investment returns 9, ,356 Expenses (16,188) 5,181 3, (7,087) Policy lapsation 13,624-1,122 - (3) 14,743 Other (272) (239) (305) - (165) (981) Actuarial liabilities - end of year 671, , ,297 13, ,389 2,050,810

61 Individual Group Wealth Travel Creditor Insurance Insurance Management Insurance Insurance Total 2009 $ $ $ $ $ $ Actuarial liabilities - beginning of year 538, , ,659 10,254 53,071 1,587,134 Normal changes Changes in assumptions a) new business (37,394) 82,575 10,248 15,302 17,764 88,495 b) in-force 79,200 (96,898) (14,842) (10,116) (17,988) (60,644) Mortality/morbidity (7,841) (233) (8,074) Investment returns 7, ,172 Expenses (3,360) 1, (350) (1,427) Policy lapsation ,922 Other (99) - (945) - (487) (1,531) Increase due to acquisition of CUMIS 9,765 28, ,916-62, ,667 Actuarial liabilities - end of year 586, , ,138 15, ,609 1,957, The major assumption and other changes in 2010 are described below. The changes had a material impact on the Company s net income in the current reporting period. Mortality Changes made to expected mortality assumptions as well as margins for adverse deviation for individual insurance and payout annuities resulted in a net decrease of $14,113 in actuarial liabilities. Morbidity Revisions were made to expected termination assumptions for group life disability waiver claims, expected Canada Pension Plan approvals for group long-term disability, and incidence and termination rates for creditor disability. These changes resulted in a net decrease in actuarial liabilities of $13,333. Investment Returns Actuarial liabilities increased by $10,356 as a result of lower ultimate interest rates used in CALM interest rate scenarios as well as refinements in the CALM valuation models. Expenses Maintenance expense assumptions were increased for some lines of business but this was offset by a change in the expense inflation assumption as well as lower maintenance expenses for individual insurance. The net impact on actuarial liabilities was a decrease of $7,087. Policy Termination The regular updating of the lapse assumptions, based on the latest Company experience studies, and changes to margins for adverse deviation produced a net increase in actuarial liabilities of $14,743. This relates primarily to the individual insurance renewable term business. Other Miscellaneous changes to the valuation models, tax rate changes and error corrections resulted in a decrease in actuarial liabilities of $981. Assets supporting actuarial liabilities The Company manages assets, liabilities, capital and surplus within nine major segments depending on the investment objectives that are appropriate for each segment. Included as a segment is CUMIS insurance, comprised of CUMIS individual and credit insurance, which are managed together from an asset, liability and capital perspective. The group benefits and retirement security fund segments of CUMIS are included in the group benefits segment and group pension segment, respectively. Prior year amounts have been updated to reflect the changes in segment disclosures. The distribution of net assets within each segment was as follows: al Report Co-operators Life Insurance Company Annu

62 Notes to the Consolidated Financial Statements Immediate Individual Universal Deferred Annuities Group Group CUMIS Surplus CUMIS Life Par Life Non-Par Annuities Par Pension Benefits Insurance Life P&C Total 2010 $ $ $ $ $ $ $ $ $ $ $ Bonds 272, ,397 76,249 34,898 41, , , , , ,013 1,840,037 Stocks 9,240 54, , , ,468 Mortgages 150,620 80,373 8,585 64,810 17,245 60, ,249 10,615 23,907 6, ,259 Real estate , ,590 Other 56,699 11,228 (7,473) 3,123 1,905 23,011 66,061 35, ,676 76, ,512 Total assets 489, ,774 77, ,831 60, , , ,999 1,027, ,104 3,551,866 Deferred gains ,538-16,538 Miscellaneous liabilities 118,948 3,013 5,711 1,349 (1,041) 2,758 62,733 62,898 58, ,005 CUMIS P&C/ CUMIS Other , , ,783 Net assets 370, ,761 71, ,482 61, , , , ,581 53,479 2,890,540 Immediate Individual Universal Deferred Annuities Group Group CUMIS Surplus CUMIS Life Par Life Non-Par Annuities Par Pension Benefits Insurance Life P&C Total 2009 $ $ $ $ $ $ $ $ $ $ $ Bonds 280, ,515 72,245 32,661 40, , , , , ,684 1,739,314 Stocks 6,399 44, , , ,629 Mortgages 133,439 70,279 8,950 61,253 19,878 57, ,722 9,815 29,531 3, ,786 Real estate ,091-18,091 Other 52,525 3,282 (11,316) 6, , ,243 32, , , ,671 Total assets 472, ,142 69, ,590 60, , , , , ,266 3,471,491 Deferred gains ,704-17,704 Miscellaneous liabilities 118,107 1, (1,158) 2,795 51, , , ,975 CUMIS P&C/ CUMIS Other , , ,463 Net assets 354, ,387 69,300 99,949 61, , ,231 79, ,633 31,999 2,741,349 Additional surplus related to CUMIS property and casualty operations is included in the CUMIS P&C segment. Additional surplus related to other non-life insurance business is included in the Surplus Life segment as a corporate investment. al Report Co-operators Life Insurance Company Annu A cash transfer between surplus and each liability segment was performed for certain asset segments only; therefore the net asset value of certain segments does not match the net liability value. Property and casualty operations Management estimates the amount of unpaid claims and the timing of future claims payments based on assumptions that reflect the expected set of economic conditions and planned courses of action. Uncertainty exists on reported claims in that all information may not be available at the reporting date. In addition, claims may not be reported to the Company immediately, therefore estimates are made as to the value of claims incurred but not yet reported, a value which may take years to finally determine. The initial actuarial estimate of unpaid claims and adjustment expenses is an undiscounted amount. In order to determine the undiscounted liability, assumptions are developed considering the characteristics of the class of business, historical trends, the amount of data available on individual claims and any other pertinent factors. This estimate is then discounted to recognize the time value of money. The interest rate used to discount the liabilities for each of the operating company was 3.6% ( %) based on each company s projected rate of return on its investment portfolio. The discounted unpaid claims and adjustment expenses incorporates assumptions concerning future investment income, projected cash flows, and appropriate provisions for adverse deviation (PFADs). As the estimates for unpaid claims are subject to measurement uncertainty and the variability could be material in the near term, the Company includes PFADs in its assumptions for claims development, reinsurance recoveries and future investment income. The incorporation of PFADs is in accordance with

63 accepted actuarial practice in order to ensure that the actuarial liabilities are adequate to pay future benefits. The selected PFADs are within the ranges recommended by the Canadian Institute of Actuaries. Total policy liabilities for the property and casualty operation are comprised of the following: $ $ Unearned premiums 42,060 37,873 Unpaid claims and adjustment expenses 88,328 85,084 Provision for experience rated refunds 8,776 4,725 Reinsurance ceded liabilities (note 9) 2,408 2,981 Net unpaid claims and adjustment expenses 141, ,663 a) Profile of unpaid claims and adjustment expenses and amounts recoverable from reinsurers share of unpaid claims and adjustment expenses Unpaid claims Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ Automobile - liability 18,671 1,891 16,780 20,379 11,083 9,296 Automobile - personal accident 23,341 4,303 19,038 21,033 11,771 9,262 Automobile - other Property 10, ,257 7,220 4,451 2,769 Liability 7,907-7,907 9,675 5,040 4,635 Risk-sharing pools 3,037-3,037 3,609 1,805 1,804 Other 21,356 6,538 14,818 19,253 11,639 7,614 85,013 13,511 71,502 81,780 46,095 35, $ $ Gross unpaid claims and adjustment expenses 88,328 85,084 Salvage and subrogation recoverable (3,315) (3,304) Gross unpaid claims and adjustment expenses and salvage and subrogation recoverable 85,013 81,780 Reinsurers' share of unpaid claims and adjustment expenses (13,511) (46,095) Net unpaid claims and adjustment expenses 71,502 35,685 b) Interest rate sensitivity A 1% decrease in the discount rate would have an approximate impact of $1,431 ( $1,453) on the value of unpaid claims and adjustment expenses and impact of $1,073 ( $1,003) on net income. c) Reconciliation of unpaid claims and adjustment expenses, net of reinsurers share of unpaid claims and adjustment expenses and salvage and subrogation recoverable Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ Balance, beginning of year 81,780 46,095 35,685 73,713 40,426 33,287 Paid on prior years (25,016) (3,938) (21,078) (20,307) (10,502) (9,805) Change in estimate on prior years 1,440 (28,650) 30,090 (3,422) (357) (3,065) Incurred on current year 48, ,428 53,183 29,210 23,973 Paid on current year (21,623) - (21,623) (21,387) (12,682) (8,705) Balance, end of year 85,013 13,511 71,502 81,780 46,095 35,685 al Report Co-operators Life Insurance Company Annu

64 Notes to the Consolidated Financial Statements Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ Current 30,880 4,908 25,972 33,838 19,073 14,765 Non-current 54,133 8,603 45,530 47,942 27,022 20,920 Balance, end of year 85,013 13,511 71,502 81,780 46,095 35,685 Included in the change in estimate on prior years is the impact of the termination of the co-insurance agreement, as disclosed in note 22. d) Reconciliation of unearned premiums Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ Unearned premiums - beginning of Year 37,873 21,355 16,518 34,667 19,380 15,287 Premiums written 94,727 (9,283) 104,010 83,291 49,204 34,087 Less: premiums earned 90,540 11,400 79,140 80,085 47,229 32,856 Unearned premiums - end of year 42, ,388 37,873 21,355 16,518 e) Analysis of unearned premiums Unearned premium Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ Automobile - liability 8,437-8,437 7,437 3,719 3,718 Automobile - personal accident 5,762-5,762 4,640 2,320 2,320 Automobile - other 4,976-4,976 4,336 2,168 2,168 Property 16, ,275 15,696 10,269 5,427 Liability 2, ,440 2,424 1,227 1,197 Risk-sharing pools 2,915-2,915 2,812 1,406 1,406 Other , ,388 37,873 21,355 16, Reinsurance programs Reinsurance has been used to reduce risk by limiting the Company's exposure to costs from individual claims and from events involving multiple insureds. al Report Co-operators Life Insurance Company 64 The Co-operators Life Insurance Company reinsures most individual insurance amounts in excess of $500 per life ( $500), group insurance amounts in excess of $325 per life ( $325) and all monthly income amounts in excess of two thousand five hundred dollars per month for non-experience rated group long-term disability business. For certain individual life products, the Company retains less than $500 per life ( $500). Travel insurance claim amounts in excess of $200 per individual ( $200) are reinsured. In addition, net death claims in excess of $7,000 ( $7,000), or travel insurance claims in excess of $500 ( $500), resulting from a loss occurrence involving multiple lives are reinsured. Although claims in excess of these limits are recoverable from the companies that have assumed the reinsurance coverage, the Company remains primarily liable to the beneficiaries on these policies. CUMIS s life operation reinsures most individual insurance amounts in excess of $200 per life ( $200), group insurance amounts in excess of $100 per life ( $100). For certain individual life products, the Company retains less than $200 per life ( $200). Although claims in excess of these limits are recoverable from the companies that have assumed the reinsurance coverage, the Company remains primarily liable to the beneficiaries on these policies Annu

65 The property and casualty operation follows the policy of underwriting and reinsuring contracts of insurance which limits the liability of the Company to a maximum amount on any one loss. In addition, the Company has obtained reinsurance which limits the Company s liability in the event of a series of claims arising out of a single occurrence. Prior to 2010 the Company participated in a quota share reinsurance program which was ended December 31, The Company s net retentions are as follows: Individual loss $ $ Property 1, General liability Automobile Fidelity and Director's Liability 3,000 1,500 Catastrophe Maximum limit 800,000 85,000 Company retention 1,500 2,000 The following summarizes the impact of reinsurance on certain financial statement line items: Life Operations Property and Casualty Operations Premiums $ $ $ $ Premium assumed Credit Union coinsurance - 124, Related parties (note 22) Other 1, , , Premium ceded Credit Union coinsurance - 17, Other 60,512 45,376 11,403-60,512 62,832 11,403 - Life Operations Property and Casualty Operations Claims $ $ $ $ Claims assumed Credit Union coinsurance - 37, Related parties (note 22) Other , Claims ceded Credit Union coinsurance - 13, Other 32,273 27, ,273 40, al Report Co-operators Life Insurance Company Annu

66 Notes to the Consolidated Financial Statements Life Operations Property and Casualty Operations Assets and liabilities $ $ $ $ Reinsurance assumed liabilities Other 2,456 1, ,456 1, Reinsurance ceded liabilities Other 304, ,131 2,408 2, , ,131 2,408 2,981 Reinsurance ceded assets Credit Union coinsurance ,224 Other 44 1,064 14,213 15, ,064 14,213 69, Income taxes a) Reconciliation to statutory income tax rate Differences in the effective income tax rate reflected in the consolidated statement of income and the corporate income tax rate are as follows: $ $ Income before income taxes 56,067 45,571 Combined basic Canadian federal and provincial income tax rate 30% 32% Income taxes at statutory rates 16,820 14,583 Decrease resulting from permanent differences (2,200) (2,866) Change in future tax rates Other (823) (33) Income taxes 14,346 11,875 Current income taxes 22,104 19,568 Future income taxes (7,758) (7,693) Income taxes 14,346 11,875 al Report Co-operators Life Insurance Company 66 Effective rate of tax 26% 26% b) Components of future income tax balances $ $ Bonds and mortgages (13,760) (21,965) Real estate 2,748 2,201 Loss carry forwards 4,140 2,044 Other assets (10,529) (10,697) Actuarial liabilities 4,980 5,629 Other liabilities (89) 1,601 Employee future benefits 8,880 9,799 (3,630) (11,388) 2010 Annu

67 c) Income taxes included in OCI OCI included on the consolidated statement of comprehensive income (loss) is presented net of income taxes. The following income tax amounts are included in each component of OCI: Unrealized gains on AFS financial assets $ $ Bonds 3, Stocks 7,880 21,175 11,546 21,760 Reclassifications to net income for AFS financial assets Bonds (674) (716) Stocks 744 7, ,625 Income taxes 11,616 28,385 d) Non-capital loss carryforwards The Company has non-capital loss carryforwards of $15,120 ( $9,098) of which a future tax asset of $4,140 ( $2,044) has been recognized. The non-capital loss carryforwards expire as follows: Fiscal Year $ , , , , Goodwill and intangible assets Cost Computer Asset CUMIS Customer software administration Goodwill Brand relationships development contracts Total $ $ $ $ $ $ January 1, , ,607 Acquisitions of subsidiaries 86,364 4,800 48, , ,283 December 31, ,971 4,800 48, , ,890 Additions ,436-9,436 Disposals (2,090) - - (15) - (2,105) December 31, ,881 4,800 48,700 10,240 5, ,221 Accumulated amortization and impairment January 1, December 31, Amortization - - 4, ,264 December 31, , ,264 Net carrying value January 1, , ,607 December 31, ,971 4,800 48, , ,890 December 31, ,881 4,800 44,547 9,929 4, ,957 No impairments were recognized during the year ( $nil) Annual Report Co-operators Life Insurance Company 67

68 Notes to the Consolidated Financial Statements 12. Other assets $ $ Accounts receivable and other 72,963 74,481 Deferred acquisition expenses 6,768 3,204 Salvage and subrogation 3,315 3,304 Property and equipment 8,419 10,519 Future income taxes (note 10) 20,482 10,829 Investment in partially owned company Accrued benefit asset (note 14) Premium, income and other taxes receivable 16,087 6, , ,581 Details of property and equipment are as noted below. Losses on disposal of $378 ( gains on disposal of $6) were recorded in the consolidated statement of income. Cost Computer Furniture and Leasehold Art equipment equipment improvements Collection Total $ $ $ $ $ January 1, ,751 13,310 2, ,419 Additions ,330-1,769 Acquisitions of subsidiaries 1,448 1, ,497 December 31, ,267 15,066 4, ,685 Additions ,114 Disposals (329) (685) - - (1,014) Transfers (14) December 31, ,323 14,498 4, ,785 Accumulated amortization January 1, ,256 7, ,825 Amortization 261 1, ,942 Acquisitions of subsidiaries ,399 December 31, ,047 8,755 1,364-14,166 Amortization 635 1, ,619 al Report Co-operators Life Insurance Company Annu Disposals (312) (107) - - (419) December 31, ,370 9,811 2,185-16,366 Net carrying value January 1, ,177 1, ,594 December 31, ,220 6,311 2, ,519 December 31, ,687 2, ,419 Details of deferred acquisition expenses are as noted below $ $ Deferred acquisition expenses - beginning of year 3,204 - Acquisition costs deferred 6,768 - Amortization expense (3,204) - Acquired through business combinations (note 5) - 3,204 Deferred acquisition expenses - end of year 6,768 3,204

69 13. Payables and other liabilities $ $ Accounts payable and other 203, ,786 Employee future benefits (note 14) 34,794 36,103 Future income taxes (note 10) 24,112 22,217 Premium, income and other taxes payable 7,657 41,036 Long term debt 10,620 9, , ,873 The long-term debt is comprised of subordinated debt as well as other long term debt amounts. The carrying amounts of the long term debt are considered to be a reasonable approximation of fair value. Subordinated debt totals $10,620 ( $8,774) and qualifies as capital under rules of OSFI. CGL holds $5,000 of the subordinated debt and interest is payable in semi-annual installments at the one-year Treasury bill rate plus 110 basis points, set every November. The principal is due December 21, Interest expense on this loan for the year was $85 ( $140). The remaining subordinated debt is held by 31 savings and credit unions, which is non-interest bearing. The majority of this debt is repayable subject to approval of the Investment Industry Regulatory Organization of Canada. These loans have maturities ranging from September 2020 to March The debt is subordinated in right of payment to all policy liabilities of the Company and all other senior indebtedness of the Company. The Company may call for redemption at any time subject to the approval of OSFI. The holder has no right of early retraction. 14. Employee future benefits Medical and Dental Benefits - Co-operators Life Insurance Company Medical and Dental Benefits - The CUMIS Group Ltd. Pension Plan Benefits - The CUMIS Group Ltd $ $ 7,116 6,514 17,933 17,163 9,045 11,644 Balance at end of year 34,094 35,321 Employee future benefits (note 13) Accrued benefit asset (note 12) 34,794 36, ,094 35,321 The Company and its subsidiary offers pension, medical and dental benefits for qualifying retirees and certain other qualifying individuals. The pension plan has no direct investment in the Company or any of its affiliates. For the other-than-pension benefits maintained by Co-operators Life Insurance Company and CUMIS, future salary levels do not affect the amount of employee future benefits. The accumulated benefit method has been used to determine the accrued benefit obligation. The accrued benefit obligation has been determined as at December 31, The most recent actuarial valuation was at January 1, al Report Co-operators Life Insurance Company Annu

70 Notes to the Consolidated Financial Statements Information regarding the pension benefit plans and other benefit plans costs, liabilities and actuarial assumptions follow: Change in fair value of plan assets Pension benefit plans Other benefit plans $ $ $ $ Fair value of plan assets, beginning of year 63, Actual return on plan assets 5, Company contributions 5, Benefits paid (3,901) Acquired through business combinations (note 5) - 63, Fair value of plan assets, end of year 69,955 63, Accrued benefit obligation Balance at beginning of year 74,829-25,499 7,092 Recognition of past service cost Current service cost 2, Interest on accrued benefits 4,111-1, Benefits paid (3,901) - (545) (458) Actuarial loss 2, ,025 Acquired through business combinations (note 5) - 74,829-17,163 Balance at end of year 79,856 74,829 27,398 25,499 Funded status Funded status of plan - deficit all plans (9,901) (11,644) (27,398) (25,499) Unamortized net actuarial loss 856-2,044 1,952 Unamortized past service cost (275) Unamortized transitional obligation Accrued benefit liability (9,045) (11,644) (25,049) (23,677) Elements of defined benefit costs recognized in the year Current service cost 2, Interest on accrued benefits 4,111-1, Past service costs (amortized vs actual in year) Actual return on plan assets (5,561) Actuarial loss 2, ,025 Elements of defined benefit costs before adjustment recognized 4,172-2,444 1,702 Experience loss during the year (2,949) - (92) (743) 2010 Annual Report Co-operators Life Insurance Company 70 Difference between expected and actual return on plan assets 1, Past service costs amortization - - (491) (91) Transitional obligation amortization Other adjustments (45) - - (9) Defined benefit costs recognized 2,466-1,

71 a) Medical and dental benefits plan Pension benefit plans Other benefit plans Significant assumptions Accrued benefit obligation as of December 31 Discount rate 5.25% 5.50% 5.25% % 5.50% % Assumed rate of salary escalation 4.00% 4.00% 4.00%* 4.00%* Benefit costs as of December 31 Discount rate 5.50% N/A 5.50% % 7.50% Assumed rate of salary escalation 4.00% N/A 4.00%* 4.00%* Fair value of plan assets Expected long-term rate of return on plan assets 3.50%-7.00% 3.50%-7.00% N/A N/A Assumed medical care cost trend rates at December 31 Initial medical care cost trend rate N/A N/A 9.00% % 5.50% % Commencing in year N/A N/A Cost trend rate declines to N/A N/A 4.50% % 4.50% % Year that the rate reaches the rate it is assumed to remain at N/A N/A * Certain plans do not include an assumed rate of salary escalation assumption Experience gains and losses for the other-than-pension benefit plans maintained by Co-operators Life Insurance Company and CUMIS are amortized over 13 years and 10 years, respectively. Measurement uncertainty exists in valuing the components of employee future benefits. Each assumption is determined by management based on current market conditions and experiential information available at the time, however, the long term nature of the exposure and future fluctuations in the actual results makes the valuation uncertain. Assumed medical and dental benefits cost trend rates have a significant effect on the amounts reported for the medical and dental benefit plan. A 1% change in assumed medical and dental benefits cost trend rates would have the following effects for 2010: Medical and Dental Benefits Increase Decrease $ % $ % Total of service and interest cost (255) (14.1) Accrued benefit obligation 3, (3,331) (12.2) b) Pension plans Co-operators Life Insurance Company and its wholly owned subsidiary TIC Travel Insurance Coordinators Ltd. have a defined contribution pension plan for all of its operations. The total cost recognized for the Company s defined contribution plan is $3,756 ( $3,334). al Report Co-operators Life Insurance Company Annu

72 Notes to the Consolidated Financial Statements 15. Share capital The number of shares are not in thousands. 20,000 First preference shares, non-cumulative dividend to be determined annually by the Board of Directors, redeemable at $100, with a stated value of $100 50,010 First preference shares, non-cumulative dividend to be determined annually by the Board of Directors, redeemable at $100, with a stated value of $100 4,987 Common shares The redemption of any share must be approved in advance by the Office of the Superintendent of Financial Institutions, Canada. The number of shares issued and outstanding are as follows: Number of Amount Number of Amount shares $ shares $ First preference shares 20,000 2,000 20,000 2,000 Second preference shares 50,010 5,001 50,010 5,001 Common shares 4, , ,998 7, Participating policyholder account Certain policyholders are eligible to participate in the distribution of the surplus by means of annual dividends based on the contribution of the class of policy to the distributable surplus. Equity is maintained between classes of policyholders and generations of policyholders. The dividends paid during the year were $6,714 ( $6,769). The accrual method is used to determine the shareholder portion of participating income. Reflected in shareholder income for the year is its share of participating income of $1,567 ( $1,181). Section 461 of the Insurance Companies Act (The Act) allows a transfer from the participating account to the shareholders account based on actual dividends paid during the year. The amount allowed under The Act is $377 ( $381). The additional amount of $1,190 ( $800) was appropriated to the participating account for distribution as allowed by The Act. The total amount appropriated at the end of the year is $25,221 ( $22,657). The participating policyholder account at December 31, 2010 includes accumulated other comprehensive income of $26,098 ( $4,643). 17. Comprehensive income available to shareholders al Report Co-operators Life Insurance Company Annu The comprehensive income (loss) available to shareholders includes the comprehensive income of the non-participating policies, investment earnings credited to the shareholders' account and the shareholder portion of participating policyholder income before dividends. 18. Capital management The Company views capital as a scarce and strategic resource. This resource reflects the financial well being of the organization, but is also critical in enabling the Company to pursue strategic business opportunities. Adequate capital also acts as a safeguard against possible unexpected losses, and as a basis for confidence in the Company by shareholders, policyholders, creditors and others. For the purpose of capital management, the Company has defined capital as the participating policyholders account and shareholders equity, excluding AOCI. The Company has a Capital Management Policy that is administered by its Executive Management Team which monitors, evaluates and recommends capital allocation decisions on behalf of the Company. On an annual basis, the appointed actuary prepares the Dynamic Capital Adequacy Testing report which projects and analyzes trends of capital adequacy under a variety of plausible adverse scenarios. Strategies for the assets backing surplus and retained earnings are managed and monitored by the Surplus Management Committee. Capital is also monitored by the Management Capital Committee at the Company s parent level. Reinsurance and ALM programs are examples of practices the Company uses to reduce its capital management risk (note 8 and 9).

73 Life operations OSFI measures the financial strength of life insurance companies using the minimum continuing capital and surplus requirement (MCCSR). The MCCSR guideline describes the capital required, using a risk-based formula, and defines the capital that is available to meet the minimum standard. A life insurer s minimum capital requirement is determined as the sum of the capital requirements for each of five risk components (asset default, mortality/morbidity/lapse, changes in interest rate environment, segregated funds and foreign exchange). Capital available is comprised of two tiers, tier 1 (core capital) and tier 2 (supplementary capital), consisting mainly of statement capital, including AOCI and qualifying non-controlling interests in subsidiaries. Capital available involves certain deductions including goodwill, intangible assets, negative reserves and investments in non-life financial corporations, and is subject to limits and restrictions. OSFI s target MCCSR ratio is 150%. The Company s internal target, established by the board of directors, is 180%. As at December 31, 2010, the Company and its subsidiary were in compliance with OSFI minimum requirements as well as internal targets. Property and casualty operations OSFI measures the financial strength of property and casualty insurers using a Minimum Capital Test (MCT). This test compares a company s capital, including AOCI, against the risk profile of the organization. The risk-based capital adequacy framework assesses the risk of assets, policy liabilities, structured settlements, letters of credit, derivatives, unlicensed reinsurance and other exposures, by applying varying factors. As at December 31, 2010, the Company s P&C subsidiary was in compliance with OSFI s requirements of 150% MCT as well as the subsidiary s internal target of 200% MCT. 19. Supplemental expense information Included within general expenses are the following: $ $ Compensation costs 131,665 69,256 Employee future benefits (note 14) 4, Amortization expense 7,575 1,939 Interest expense Claims and benefits expenses Claims and benefits expenses consist of the following: $ $ Increase in life actuarial liabilities (note 8) 93,096 26,912 Claims and adjustment expenses 355, ,778 Cash value of surrendered policies 65,880 54,630 Policyholder dividends & experienced rating refunds 47,987 32,195 Annuity payments 78,240 34,359 Policyholder interest 4,059 4, , ,047 al Report Co-operators Life Insurance Company Annu

74 Notes to the Consolidated Financial Statements 21. Statement of cash flows a) Other non-cash items i) Items not requiring the use of cash $ $ Investing activities (gains) losses (9,190) 1,178 Realized deferred gains (1,166) (1,166) Loss on disposal of property and equipment Amortization and depreciation of: Bond discount (14,909) (14,231) Bond premium 9,964 3,559 Discount on subordinated debt 97 - Mortgage accretion Real estate 4 1 Intangible assets 5,264 - Property and equipment 2,435 1,939 Change in fair value of held-for trading invested assets (70,541) (21,501) Impairment loss 3,387 11,168 Mortgage investment provisions - (254) Future income taxes 1,894 (7,692) Employee future benefits (1,301) (10,300) (73,175) (36,710) ii) Changes in non-cash operating components Net policy liabilities 100,534 6,716 Premiums due (12,292) 407 Accounts receivable and other assets 23, ,526 Payables and other liabilities (74,205) (123,799) 37,298 11,850 b) Supplemental information $ $ Interest and dividends received 137, , Annual Report Co-operators Life Insurance Company 74 Interest paid 4,486 4,463 Income taxes paid (net of recoveries) 84,

75 22. Related party transactions Related party transactions: $ $ Revenue Premium direct 6,764 5,598 Premium assumed (note 9) Net investment income (2,546) (2,567) Fees and other income Expenses Net claims (note 9) 37 - Commissions 46,621 36,838 General expenses 11,757 4,120 Balances outstanding at year end Subordinated debt (note 13) 5,000 6,394 Amounts due from related parties 54 22,327 Amounts due to related parties 9,864 69,464 All related parties are controlled by the same ultimate parent, CGL. Transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Included within premiums and fees and other income are revenues from providing group insurance programs, acting as a service provider for data processing applications and leasing space to related parties. Charges to net investment gains and income are comprised of investment counselling services from Addenda Capital Inc. Product distribution is provided by Co-operators General Insurance Company (CGIC) and management services are provided by CGL. The fees are recorded under commissions and general expenses, respectively. With the exception of the management services, which are based on an internal contract, all other services are in the normal course of business and are established at terms and conditions using available market information. The amounts due to/from related parties represent current accounts with related parties and are generally settled in 30 days. Amounts due from related parties are recorded in the balance sheet as other assets. Amounts due to related parties are recorded in the balance sheet as payables and other liabilities. Effective December 31, 2009, the Company acquired a controlling interest in CUMIS. The Company participated in a coinsurance agreement with subsidiaries of CUMIS up to that date. Transactions and balances with CUMIS as at the effective date are included in table above. On January 1, 2010 subsidiaries of CUMIS acquired the Company s interest in the CUIS joint venture, together with the interest held by CGIC, a company under common control, in exchange for share capital of the subsidiaries. The transaction was recorded at its nominal carrying value as an equity transaction. The Company and CGIC injected additional capital of $59,121, and $15,642 in exchange for additional share capital issued by the subsidiaries. The share capital issued by the subsidiaries was exchanged for shares of CUMIS Group Limited. Subsequently, the subsidiaries terminated the co-insurance agreements between the Company and CGIC and the subsidiaries, and recaptured the in-force business for a recapture fee. The recapture fee was recorded at nominal value as an equity transaction, and the related tax amount is also recorded through equity. The recapture of in-force business resulted in the Company derecognizing the following balances: $ Assumed policy liabilities and other liabilities 86,033 Assumed premiums 7,154 Reinsurer's funds on deposit 79,007 The Company subsequently entered into separate agreements with CUMIS Life and CUMIS General under which CUMIS Life and CUMIS General agreed to reinsure 100% of the in-force group and travel business, respectively, written by the Company. Transactions and balances with CUMIS Life and CUMIS General as at December 31, 2010 are included in the related party transactions table above. al Report Co-operators Life Insurance Company Annu

76 Notes to the Consolidated Financial Statements On November 30, 2010 CGIC sold its 6.06% interest in CUMIS to Canada Inc., a subsidiary controlled by the Company for $24,165, and Canada Inc. was subsequently wound up into the Company. The difference between the carrying amount and exchange amount was recorded in contributed surplus. During the year, CUIS Brokerage Services Limited (CBSL) sold its 50% ownership interest in Interior Savings Insurance Services (ISIS) to Federated Agencies Limited (FAL), a Company under common control. This investment was recorded by CBSL at a carrying amount of $5,240. ISIS was sold for cash consideration of $10,000, resulting in an increase in contributed surplus of $4,760, 50% of which was recorded by the Company. CBSL was subsequently dissolved. 23. Segmented information The principal business of the Company is to provide life insurance, health insurance, travel insurance and wealth management products to individuals and employee and association groups. The Company primarily manages its business on a marketing basis between group and individual products. The Company s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different specializations and marketing strategies. Individual Group Wealth Travel Credit CUMIS Life Insurance Insurance Management Insurance Insurance P&C Surplus Eliminations Total 2010 $ $ $ $ $ $ $ $ $ Premium written 215, , ,830 87, ,007 88,063 - (2,477) 960,516 Reinsurance ceded (51,637) (7,047) - (692) (1,136) (11,403) - - (71,915) Net investment income 89,128 31,675 52,805 (779) 8,648 4,889 23, ,228 Fees and other income 1,325 3,216 15, ,028-77, , , ,604 86, ,519 81,839 79,890 (2,477) 1,176,600 Expenses 245, , ,654 83, ,034 73,626 81,594 (2,477) 1,120,533 Income taxes 2,265 5,264 1,419 1,130 3,234 2,927 (1,893) - 14, , , ,073 84, ,268 76,553 79,701 (2,477) 1,134,879 Net operating income 6,894 10,190 3,531 2,380 13,251 5, ,721 Transfer to shareholders (note 16) (906) - (37) (624) - (1,567) Transfer from participating account (note 16) ,567-1,567 Net income 5,988 10,190 3,494 2,380 13,251 5,286 1,132-41,721 Total comprehensive income 5,988 10,190 3,494 2,380 13,251 6,901 26,672-68, Annual Report Co-operators Life Insurance Company 76 Individual Group Wealth Travel Credit CUMIS Life Insurance Insurance Management Insurance Insurance P&C Surplus Eliminations Total 2009 $ $ $ $ $ $ $ $ $ Premium written 180, ,713 44,610 85, , ,440 Reinsurance ceded (37,504) (22,803) - (2,403) (122) (62,832) Net investment income 54,916 26,144 37,441 (1,828) 6,584-4, ,644 Fees and other income 1,161 2,893 11,741 1, , , ,947 93,792 82, ,832-4, ,714 Expenses 177, ,458 88,385 85, ,235-10, ,143 Income taxes 6,550 5,421 1,676 (973) 2,975 - (3,774) - 11, , ,879 90,061 84, ,210-6, ,018 Net operating income (loss) 15,408 12,068 3,731 (2,457) 6,622 - (1,676) - 33,696 Transfer to shareholders (note 16) (1,109) (4) (62) (6) - (1,181) Transfer from participating account (note 16) ,181-1,181 Net income (loss) 14,299 12,064 3,669 (2,457) 6,622 - (501) - 33,696 Total comprehensive income (loss) 14,299 12,064 3,669 (2,457) 6,622-59,818-94,015 The life surplus segment includes surplus of both life operations. Additional surplus related to other non-life insurance business is included in the surplus life segment as a corporate investment.

77 24. Co-ownerships Through the acquisition of CUMIS, the Company acquired interests in two joint ventures that CUMIS held for the purpose of developing breadth of financial products and services to the credit union market. Through its jointly controlled companies, CFI and CBSL prior to its dissolution, CUMIS provides wealth management and insurance brokerage services to credit unions and their members. CFI has a year-end of September 30, No events have occurred in the intervening period that would significantly affect the financial position or results of operation of the Company. In 2010, CBSL sold the remainder of its brokerage investments to FAL as described in note 22. CBSL was subsequently dissolved May 25, The major components of the Company s interests in co-ownerships are as follows: $ $ Assets 143, ,893 Liabilities 139, ,435 Revenues 57,949 3 Expenses 58, Net loss (62) (11) Cash flow - operating activities 1,606 (564) Cash flow - investing activities 1,592 6 Cash flow - financing activities (2,763) (330) 25. Contingencies, commitments and guarantees The Company is subject to litigation arising in the normal course of conducting its insurance business. In addition, the Company is from time to time subject to litigation other than the litigation relating to claims under its policies. Legal proceedings are often subject to numerous uncertainties and it is not possible to predict the outcome of individual cases. In management s opinion, the Company has made adequate provision for, or has adequate insurance to cover all claims and legal proceedings. Consequently, any settlements reached should not have a material adverse effect on the consolidated financial position of the Company. The Company provides indemnification agreements for directors and certain officers acting as directors on behalf of the Company, to the extent permitted by law, against certain claims made against them as a result of their services to the Company. The Company purchases directors and officers insurance to mitigate the potential financial impact associated with these commitments. The limits of insurance purchased are compared to Canadian benchmarks obtained from the financial institutions practice of the Company s broker and other industry sources. They are consistent with limits purchased by organizations of similar size and are in amounts management feels to be adequate and reasonable. The Company leases all of its office space and certain equipment used in the normal course of business, under operating leases. The Company s commitments to the minimum annual lease payments are included in note 7. The Company has committed to provide mortgage funding of $30,015 subsequent to year end ( $18,864) with interest rates ranging from 3.79% to 7.00%. The maturities of these commitments are included in note 7. The Company issues letters of credit in the normal course of business. Letters of credit in the amount of $179 were outstanding at December 31, 2010 ( $167), none of which have been drawn upon at that date. al Report Co-operators Life Insurance Company Annu

78 Notes to the Consolidated Financial Statements 26. Responsibilities of the appointed actuary and external auditors The appointed actuary is appointed by the Board of Directors pursuant to the Insurance Companies Act. Among the appointed actuary s responsibilities is the requirement to carry out an annual valuation of the Company s policy liabilities in accordance with accepted actuarial practice and regulatory requirements for the purpose of reporting to shareholders, policyholders and OSFI. In performing this valuation, the appointed actuary makes assumptions as to future rates of interest, asset default, mortality, policy termination, expenses and other contingencies, taking into account the circumstances of the Company and the policies in force. The appointed actuary makes use of information provided by management and considers the work of the external auditors in testing the underlying policy and investment data used in the valuation. Examination of the supporting data for accuracy and completeness is an important element of the valuation process. The Report of the appointed actuary outlines the scope of the valuation and contains the actuary s opinion regarding the appropriateness of the policy liabilities. The appointed actuary is also required each year to analyze the financial condition of the Company and prepare a report for the Board of Directors. The most recent analysis tests the capital adequacy of the Company until December 31, 2012 under adverse economic and business conditions. The external auditors have been appointed by the Board of directors on behalf of the shareholders and policyholders pursuant to the Insurance Companies Act. Their responsibility is to conduct an examination of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and report to the shareholders and policyholders regarding the fairness of the presentation of the Company s consolidated financial statements in accordance with Canadian GAAP. 27. Comparative figures Certain prior year figures have been reclassified to conform to the current year consolidated financial statement presentation Annual Report Co-operators Life Insurance Company 78

79 BOARD OF DIRECTORS: COMMITTEES The following is a brief summary of the key responsibilities of the standing committees of the Board: The Executive Committee functions as the Board of Directors in-between Board meetings. It considers Board policy issues and acts as the compensation committee of the Board. The Audit Committee oversees the system of internal controls and financial reporting of the company. It has a liaison role between the auditors, Board and management. The committee ensures the independence of the auditors, reviewing their findings with respect to internal controls and accounting treatment and disclosure of company affairs. The committee also has a responsibility to review, evaluate and approve the procedures that management puts in place to ensure appropriate internal controls. The Conduct Review Committee has two principal responsibilities. The first is to review transactions with related parties of the company in accordance with the requirements of the Insurance Companies Act (Canada). The second is to act more broadly as a committee to review the conduct of officers and directors with respect to the company, particularly regarding compliance with the code of ethics, the directors conduct policy, the corporate opportunities policy and conflicts of interest. To ensure independence and objectivity, the Chairperson of the Conduct Review Committee is not permitted to hold any other position on Board committees. The Corporate Governance Committee is the Board contact and monitoring committee for corporate governance issues. This committee reviews related programs and processes to enhance the company s corporate governance policies and practices. The Investment Policy Committee is responsible for reviewing the investment policies, assets and ongoing activities of the investment management of the company. COMMITTEE MEMBERS Executive Committee Richard Lemoing (Chairperson) John Lamb (1 st Vice-Chairperson) Alexandra Wilson (2 nd Vice-Chairperson) Daniel Burns Wayne McLeod Jack Wilkinson Audit Committee Paul Godin (Chairperson) Janet Grantham Rowland Kelly Terry Otto André Perras Conduct Review Committee Dave Sitaram (Chairperson) Paul Godin Richard Lemoing Corporate Governance Committee Connie Doucette (Chairperson) Karl Baumgardner Don Fluney Réjean Laflamme Sheena Lucas Investment Policy Committee Albert De Boer (Chairperson) Denis Bourdeau Alan Fisher Denis Laverdière Jim MacConnell 2010 Annual Report Co-operators Life Insurance Company 79

80 BOARD OF DIRECTORS Richard Lemoing Chairperson Manitoba John Lamb 1 st Vice-Chairperson Alberta Alexandra Wilson 2 nd Vice-Chairperson Ontario Albert De Boer Alberta Don Fluney Alberta Connie Doucette Atlantic Denis Laverdière Atlantic Jim MacConnell Atlantic 2010 Annual Report Co-operators Life Insurance Company 80 Daniel Burns British Columbia Rowland Kelly British Columbia Wayne McLeod Manitoba Denis Bourdeau Ontario

81 Alan Fisher Ontario Janet Grantham Ontario Sheena Lucas Ontario Terry Otto Ontario Dave Sitaram Ontario Jack Wilkinson Ontario Paul Godin Quebec Réjean Laflamme Quebec André Perras Saskatchewan Karl Baumgardner Saskatchewan Kathy Bardswick President and Chief Executive Officer 2010 Annual Report Co-operators Life Insurance Company 81

82 CORPORATE DIRECTORY The Co-operators Group Limited Priory Square Guelph, ON N1H 6P8 Phone: (519) Fax: (519) Co-operators Life Insurance Company 1920 College Avenue Regina, SK S4P 1C4 Phone: (306) Fax: (306) Executive Management Team Kathy Bardswick President and Chief Executive Officer Kevin Daniel Chief Operating Officer Hugh Cumming Executive Vice-President and Chief Information Officer Bob Hague President, Credit Union Distribution Kevin Daniel Executive Vice-President and Chief Operating Officer Co-operators Life Insurance Company Dennis Deters Executive Vice-President, Member Relations and Corporate Services Bob Hague President, Credit Union Distribution The CUMIS Group Limited Garry Herback Senior Vice-President, Insurance Operations John Asher Vice-President, Finance David Hartman Vice-President, Travel Ken Kolstad Vice-President, Strategy and Integration 2010 Annual Report Co-operators Life Insurance Company 82 Rick McCombie Executive Vice-President, Direct Distribution and Insurance Operations Martin-Eric Tremblay Executive Vice-President, National P&C Product and President, Quebec Operations Rob Wesseling Executive Vice-President and Chief Operating Officer The Sovereign General Insurance Company P. Bruce West Executive Vice-President, Finance and Chief Financial Officer Michael White President and Chief Executive Officer Addenda Capital Inc. Craig Marshall Vice-President, General Counsel Life Operations Paul Mlodzik Vice-President, Marketing and Communications Bryan Sigurdson Vice-President and Chief Actuary Mavis Whiting Vice-President, Human Resources Linda Yeo Vice-President, Information Technology

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84 2010 Annual Report Co-operators Life Insurance Company X Co-operators Life Insurance Company, 1920 College Avenue, Regina SK S4P 1C4 Phone: (306) / Fax: (306) / / [email protected]