Wawanesa Insurance 2011 Annual Report

Wawanesa Insurance 2011 Annual Report

Wawanesa is a Canadian mutual company owned by its policyholders. With assets of over $7 billion and nearly 2 million policies inforce, Wawanesa is one of the 10 largest property and casualty insurers in Canada. Wawanesa has a rich history dating back to September 25, 1896, when it was founded in the Village of Wawanesa, Manitoba. Today, our head office continues to be located in the Village of Wawanesa with the executive offices located in Winnipeg, Manitoba. Wawanesa has 100% ownership of three subsidiary companies. The Wawanesa Life Insurance Company 400 200 Main Street Winnipeg, Manitoba R3C 1A8 Book value of shares $93,165,000 Wawanesa General Insurance Company 9050 Friars Road San Diego, California 92108 Book value of shares $260,067,000 Wawanesa Holdings U.S. Inc. 9050 Friars Road San Diego, California 92108 Book value of shares $13,627,000

1 Mission and Values Mission Earning your trust since 1896 As a policyholder-owned mutual insurance company, we will continue to earn trust by providing quality products and services at the lowest price which supports long-term growth and financial stability. Values We treat others in a respectful and truthful manner. We conduct business with integrity, honesty, consistency and fairness. We act ethically and lawfully. We take pride in making service a priority. We encourage collaboration, innovation and excellence. We support the communities in which we work and live.

2 President s report The year just ended proved to be a challenging one for our Company. While we made significant progress on many chosen initiatives and grew our business at a reasonable pace, we are reporting disappointing underwriting results. Renewal of our major insurance systems has been a high priority in recent years and I am pleased to report that we made major strides forward in 2011. During the year, we successfully implemented a new claims system (Guidewire s ClaimCentre) across the entire organization. Final conversions and decommissioning of the old system will be complete by mid-2012. The project team did a tremendous job on this two-year project that was completed on time and on budget. The team consisted of a combination of Wawanesa staff from information services, executive office claims and each regional claims department augmented by external consultants. This is the first step in our renewal of all insurance systems and the success has certainly provided confidence in our ability to complete the renewal of all systems in the coming years. Also in 2011, we completed the introduction of our broker transaction portal which provides brokers with the ability to send insurance transactions to us electronically. This is our first transaction portal offering and will provide an improved service offering to our brokers. We are actively transferring brokers to this environment. Work continues on a number of other initiatives. Progress was made on the development of an enterprise data warehouse. Late in the year, a project was initiated to replace our financial reporting systems with a new state-of-the-art system. This work will be conducted during 2012 and 2013. Furthering our renewal of core insurance systems, during 2012 we will initiate the project to replace our policy administration system. Development of a formal Enterprise Risk Management program began in earnest during the year. We recognize the value of an increased focus on managing individual risks but also the need to consider combinations of risks through modeling and stress testing. We implemented a completely new rating system in Quebec late in the year. It was clear to us that a more sophisticated rating approach was required to reinforce our competitive position in the market. This was a major undertaking that has significantly changed our business approach. We will be monitoring the impact quite carefully throughout 2012. Since 1995, we have operated in the United States both as a branch of Wawanesa Mutual and through our wholly owned subsidiary, Wawanesa General. We completed a corporate reorganization during 2011 and now operate solely as Wawanesa General. This simplifies our corporate structure and will reduce future administrative costs. During the year, we successfully implemented a new claims system (Guidewire s ClaimCentre) across the entire organization. Our plans for 2012 include continuing with enterprise system renewal and taking the actions required to improve our underwriting results whether by rate increases, product changes or other means. As well, we are considering two emerging issues. Regulatory

3 capital requirements are increasing. While we have always reported very strong capital ratios and would continue to do so under these new requirements, the new requirements related to certain investment types could reduce the reported ratio. Accordingly, we will be reviewing our investment policies during 2012. We are also studying our earthquake exposure. Prudent management of earthquake risk requires that we maintain an extensive reinsurance program with highly rated reinsurers. But earthquake exposures have grown dramatically in recent years and reinsurance rates have increased due to recent global earthquake activity. This has resulted in increased reinsurance costs and as a result, higher premiums for our policyholders purchasing earthquake coverage. We intend to continue carefully monitoring our earthquake exposures and coverages as part of our management of this risk. On a consolidated basis, premium revenues increased by 5.6% while investment income increased 6.2%. Profit for the year was $108 million, down from $129 million in 2010. Profits declined in both property and casualty and life operations with severe weather negatively impacting property and casualty results and the low interest rate environment requiring reserve increases in life operations. Total assets increased to $7 billion and total capital increased to $2.3 billion. Our capital ratio remains very strong at 302%, much in excess of regulatory requirements while our A.M. Best rating was stable at A+ (Superior). Property and Casualty Operations Financial Results Consolidated Financial Results For the first time, our financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The preparation for the transition to IFRS was a major undertaking conducted over a number of years by our accounting and finance staff. The preparation was well done and provided for a very successful transition to IFRS. As a result of the transition to IFRS, Wawanesa Life has been consolidated into the Wawanesa Mutual financial statements for the first time. This required a change in the presentation of the Statements of Operations and the new format does not provide traditional property and casualty disclosures. Accordingly, there is expanded note disclosure which provides appropriate presentation of the results of both our property and casualty and life operations. Separate financial statements will continue to be prepared for Wawanesa Life. For the first time, our financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Overall business growth was good but somewhat reduced from 2010 s growth rate. While inforce policies increased by 2% and written premiums increased by 5.4%, regional results varied considerably. Many regions grew quite well, some reported moderate growth and a couple of regions declined slightly. Our underwriting results were disappointing and the story is severe weather, mainly in Western Canada. We are reporting an underwriting loss in our property and casualty operations of $90 million compared to a $50 million loss in 2010. Property results, both personal and commercial, were very poor in 2011. Our underwriting loss was $120 million with a combined ratio of 115%. While a number of areas reported poor results, the increased severe weather activity in Western Canada was the primary driver of the results. Total weather catastrophe costs were $259 million in 2011, up almost $100 million from 2010 and more than double the 2009 levels. 3

4 The severe weather was most extreme in Alberta where catastrophe costs increased by $100 million to total $200 million in 2011. The catastrophic events started early with the Slave Lake wildfire in May, continued through the summer with many wind and hail storms and ended with a major Calgary windstorm in November. It is very difficult to address these fast ramp-ups in claims costs but we are responding in an appropriate but aggressive manner. Our reinsurance arrangements certainly helped cushion the financial blow of this increased catastrophe activity. However, catastrophe reinsurance is designed to assist companies with unexpected extreme events and if the level of catastrophe activity experienced in the last couple of years becomes the norm in the future, reinsurance costs and availability may be impacted. Our automobile results improved significantly in 2011. The main contributor to the improvement was the Ontario automobile line of business, but while improving significantly, we are still reporting an underwriting loss in the line. It appears the Ontario market has stabilized to a significant extent as result of the September, 2010 reforms but there are still elements of the reforms that have not been completed. It is hoped that the government and regulator maintain their resolve to take the necessary actions to further stabilize the market. All other regions reported good results except for disappointing results in the United States. Further declines in the interest rate environment required an increase in policy reserves which reduced underwriting income in the amount of $13 million. Net investment income increased from $232 million to $245 million. Overall, profit before taxes in our property and casualty operations declined to $155 million from $183 million. Regional Results The Maritime Region operated very effectively in 2011 with continued growth and overall underwriting profitability. Policy counts increased by over 3% and premiums increased by 8%. Auto results were good but offset somewhat by losses in the property line. While the auto insurance environment in the region has been quite stable for many years, governments in both New Brunswick and Nova Scotia are introducing modifications to the auto insurance systems. It is hoped that these changes do not threaten the premium stability that has existed for the last number of years. Our business in the Quebec Region has been declining in recent years. We are reporting modest business reductions in 2011. In response, we introduced a completely updated pricing and rating approach late in 2011 that is designed to re-establish our competitive position and reverse recent business declines. The impact of this major change will be monitored carefully in 2012. The Ontario Region grew significantly in 2011. Policy counts increased by 5% while premium income increased by 14%. A significant portion of the growth occurred in the property line. After a number of difficult years in the automobile line, underwriting results improved significantly in 2011, although an underwriting loss was still reported for 2011. There is still uncertainty in the automobile environment as the 2010 reforms are not fully in effect thus there is still doubt that the desired results will be realized. Accordingly, we continue to carefully monitor the environment. The Winnipeg Region had another stable operating year in 2011. Policy growth of nearly 2%, premium growth of 11% and a break-even underwriting position are being reported. Much of the growth occurred in NW Ontario where an underwriting loss was reported, while Manitoba results were profitable. The Prairie Region grew nicely in 2011 with a 2% increase in policies and a 10% increase in premiums. Severe weather events impacted the region again in 2011 although not to the same extent as in 2010. While this resulted in a reduced underwriting loss, the loss is still substantial in spite of significant rate increase in recent years. We will continue to address this shortfall. Southern Alberta and Northern Alberta Regions are reporting very similar results for 2011. Policy counts increased by 2 3% while written premiums increased

5 5 6%. Both reported overall underwriting losses with very good auto profitability but disastrous underwriting results in the property line. The underwriting loss for property in all of Alberta was $86 million. The poor property results were the result of the severe weather mentioned above. Seventeen events occurred in Alberta with a gross loss cost of $200 million. Of this total, $183 million was property losses and $17 million was auto losses. As mentioned, it is very difficult to address rapid claims increases. We are responding in an appropriate but aggressive manner via a variety of product and pricing changes. Heavy catastrophic claims activity also creates a very challenging environment for our claims department staff. The British Columbia Region reported another year of substantial growth. Policies increased by over 5% with written premium growth of 12%. This growth came in spite of substantial premium rate increases for earthquake coverage made necessary by the increasing costs of securing reinsurance protection for earthquake exposures. While a modest underwriting loss was reported, we believe actions taken during 2011 and early 2012 will improve the region s 2012 results. Our United States operation was challenged in 2011 by poor economic conditions in California and a very competitive environment. A small decline in policies was experienced along with a small increase in premiums. Underwriting results were disappointing with a significant loss being reported. Our focus for 2012 is on improving underwriting results while maintaining business levels. Life Operations Financial Results Wawanesa Life achieved good results in new business activity and strong policy persistency which are both contributing to record premium revenues. Premium Wawanesa Life achieved good results in new business activity and strong policy persistency which are both contributing to record premium revenues. income net of reinsurance grew to $106 million in 2011, surpassing $100 million for the first time. All lines of business contributed to this achievement. However, like others in the life insurance industry, we continued to encounter challenges with low interest rates, stock market volatility and actuarial standards updates. The stock market decline and record low interest rates required reserve increases. Significant mortality assumption changes related to the valuation of individual insurance contract liabilities also served to increase reserves. These changes generally had a negative impact on permanent products and a favourable impact on term products which created a significant loss from participating business, offsetting positive results reported for non participating business. Wawanesa Life is reporting a net loss of $1.7 million for the year. Operational Comments New business sales of individual insurance totaled $5.3 million, 11% ahead of 2010 and consistent with the results achieved over the last few years. Production was strong across Wawanesa Life with eight of nine regions surpassing 2010 numbers. Policy persistency was very good with inforce net premium growing by 4% to $40.7 million. Management action was taken this year to address the prolonged period of low interest rates being experienced. These actions included changes to investment mix and increases in asset duration. Premium increases were required to lessen the new business strain of current permanent business. During 2011, plans were put in motion to replace the Individual Operation s various legacy systems. Much of the year was spent detailing the current system strengths and weaknesses, scoping areas of desirable business process improvement and evaluating possible vendor solutions. Vendor selection was completed by year end and work is now beginning on the

6 implementation. This is a significant investment for Wawanesa Life. The objective is to modernize the technology environment and gain efficiencies in the back office environment which will enhance policyholder and broker servicing. When complete, Wawanesa Life will be in a good position to continue its history of steady growth. New business sales of group insurance reached $4.7 million. While this is off the record numbers of 2010, it is well ahead of historical production levels. Net premium revenue was $34.3 million, an increase of 29% from 2010. Action was taken early in the year to mitigate the unfavourable claim trends that were emerging from the newly launched 3-9 life group plan. Premium and plan design changes were made to the product, returning it to a solid financial footing. New business activity continues to meet targeted expectations. While we have experienced recent success in growing the group insurance base, we want to ensure that our approach will continue to produce steady, profitable growth in the long term. Accordingly, an operational review of our group product pricing and underwriting approach was undertaken in 2011. As a result of this review, we will be updating some of our current underwriting and pricing practices during 2012. Wawanesa Life continued to demonstrate its financial strength despite the economic and financial market challenges in 2011. The MCCSR (Minimum Continuing Capital and Surplus Requirements) ratio is well in excess of 200%, significantly above the requirement set by the Office of the Superintendent of Financial Institutions. In addition, Wawanesa Life continues to be rated as A (Excellent) by A.M. Best. Acknowledgements We are clear in our direction and we are preparing for the future by developing operational depth and flexibility. While there were no senior management changes in 2011, there were some changes in the composition of our Board of Directors. At the annual meeting in May, 2011, two long-serving members retired from the Board of Directors. Both were dedicated to Wawanesa and committed to the long-term success of the Company. Barry W. Harrison retired after 17 years of service including serving as Board Chair from 2006 until his retirement. Susan M. Van De Velde served Wawanesa for 18 years and chaired various Board committees. Both Susan and Barry were instrumental in the development of enhanced governance processes over a number of years. We thank them both for their significant contribution to Wawanesa. As a result of Barry s retirement, the Board selected Richard R. Bracken as the new Board Chair. Richard has been a member of the Board since 2004. He is an experienced business person and very involved in the Winnipeg community. Also at the annual meeting, Robert O. Landry was elected as a director of all Wawanesa companies. Mr. Landry is a resident of Toronto and a former property and casualty insurance industry executive, having served as President and CEO of a leading commercial property and casualty company. He is a former Board member of the Insurance Bureau of Canada and a Past Chair of The Insurance Institute of Canada. Our Company continues to grow and prosper in a challenging environment. We are clear in our direction and we are preparing for the future by developing operational depth and flexibility. I would like to offer sincere thanks to our employees and brokers who continued to demonstrate their commitment to Wawanesa in 2011. Ken McCrea, CA, FLMI President and Chief Executive Officer

7 the wawanesa mutual insurance company Report of the Independent Auditor on the summary consolidated financial statements February 21, 2012 To the Directors of The Wawanesa Mutual Insurance Company The accompanying summary consolidated financial statements, which comprise the summary consolidated balance sheets as at December 31, 2011 and 2010 and the summary consolidated statements of operations for the years ended December 31, 2011 and 2010, are derived from the audited consolidated financial statements of The Wawanesa Mutual Insurance Company for the years ended December 31, 2011 and 2010. We expressed an unmodified audit opinion on those consolidated financial statements in our report dated February 21, 2012. The summary consolidated financial statements do not contain all the disclosures required by International Financial Reporting Standards. Reading the summary consolidated financial statements, therefore, is not a substitute for reading the audited consolidated financial statements of The Wawanesa Mutual Insurance Company. Management s Responsibility for the Summary Consolidated Financial Statements Management is responsible for the preparation of a summary of the audited consolidated financial statements in accordance with International Financial Reporting Standards. Auditor s Responsibility Our responsibility is to express an opinion on the summary consolidated financial statements based on our procedures, which were conducted in accordance with Canadian Auditing Standards ( CAS ) 810, Engagements to Report on Summary Financial Statements. Opinion In our opinion, the summary consolidated financial statements derived from the audited consolidated financial statements of The Wawanesa Mutual Insurance Company for the years ended December 31, 2011 and 2010 are a fair summary of those consolidated financial statements, in accordance with International Financial Reporting Standards. Chartered Accountants Winnipeg, Manitoba Founded in 1896 Incorporated May 1, 1929 Head Office Wawanesa, Manitoba Executive Office 900 191 Broadway Winnipeg, Manitoba Officers and Corporate Management K. E. McCrea, CA, FLMI President and Chief Executive Officer G. N. Bass, Q.C. Vice President, General Counsel and Secretary B. A. MacKinnon, FCAS, FCIA, MAAA Vice President and Chief Actuary G. J. Timlick, CA Vice President and Chief Financial Officer S. J. Goy, ACAS, CIP Vice President, Insurance Products R. G. LaPage, FCIP, CRM Vice President, Regional Insurance Operations C. R. Loeppky, BScCS Vice President, Information Services C. B. Luby, FCIP, CRM Vice President, Marketing and Business Development B. K. MacIntyre, BBA, FCIP Vice President, Claims T. L. Nelson, FLMI/M, CHRP, CIP Vice President, Human Resources K. P. Boyd, CA Controller P. R. Mulaire, CMA, FCIP, CIA Manager, Internal Audit

8 regional Offices Maritime 1010 St. George Boulevard Moncton, New Brunswick B. E. MacKenzie, CIP Vice President, Maritime Region Québec 8585 Décarie Boulevard Montréal, Québec C. Auclair, PAA Vice President, Québec Region Ontario 100 4110 Yonge Street Toronto, Ontario T. R. Greer Vice President, Ontario Region Winnipeg 700 200 Main Street Winnipeg, Manitoba E. Rossong, FCIP Vice President, Winnipeg Region Prairie Wawanesa, Manitoba W. G. McGregor, FCIP Vice President, Prairie Region the wawanesa mutual insurance company Appointed Actuary s Report February 21, 2012 To the Directors of The Wawanesa Mutual Insurance Company I have valued the insurance contract liabilities of the Company for its consolidated balance sheets as at December 31, 2011 and their change in the consolidated statements of operations for the year then ended in accordance with accepted actuarial practice including selection of appropriate assumptions and methods. In my opinion, the amount of insurance contract liabilities makes appropriate provision for all policyholder obligations, and the consolidated financial statements fairly present the result of the valuation. Brett A. MacKinnon, FCAS, FCIA, MAAA Winnipeg, Manitoba Northern Alberta 100, 8657 51st Avenue Edmonton, Alberta K. E. Hartry, FCIP, MBA Vice President, Northern Alberta Region Southern Alberta 600, 708 11th Avenue S.W. Calgary, Alberta M. M. Cote-Johnson, CIP Vice President, Southern Alberta Region British Columbia 400 1985 West Broadway Vancouver, British Columbia G. R. Haigh, FCIP, CAIB Vice President, British Columbia Region United States 9050 Friars Road San Diego, California D. G. Fitzgibbons, CPCU Vice President, United States Operations

9 the wawanesa mutual insurance company summary consolidated balance Sheets As at December 31 2011 2010 Assets Cash and cash equivalents $ 90,211 $ 59,262 Accrued investment income 30,774 29,873 Investments 5,622,206 5,310,015 Other assets 1,312,578 1,189,937 Total assets $ 7,055,769 $ 6,589,087 Liabilities Insurance contract liabilities $ 4,209,645 $ 3,835,944 Other liabilities 513,638 514,953 Total liabilities 4,723,283 4,350,897 Equity 2,332,486 2,238,190 Total liabilities and equity $ 7,055,769 $ 6,589,087 A complete set of audited consolidated financial statements are available at www.wawanesa.com

10 the wawanesa mutual insurance company summary consolidated statements of operations For the year ended December 31 2011 2010 Revenue Net premiums written $ 2,416,305 $ 2,298,202 Change in unearned premiums (71,298) (94,768) Net premiums earned 2,345,007 2,203,434 Net investment income 294,994 277,672 Instalment service charges earned 35,660 33,886 2,675,661 2,514,992 Expenses Net claims and insurance benefits incurred $ 1,905,568 $ 1,757,365 Other expenses incurred 616,878 2,522,446 573,644 2,331,009 Profit before income taxes 153,215 183,983 Provision for income taxes 45,365 54,563 Profit for the year $ 107,850 $ 129,420 Profit (loss) for the year attributed to: Policyholders of the Company $ 114,543 $ 130,013 Participating policyholders interest (6,693) (593) $ 107,850 $ 129,420 A complete set of audited consolidated financial statements are available at www.wawanesa.com

11 the wawanesa mutual insurance company consolidated supplementary information gross premiums written 2011 1% 5% 36% Automobile Property 58% Life Other profit total assets $129,420 $7,055,769 $100,468 $107,850 $6,589,087 $6,076,300 2009 2010 2011 2009 2010 2011 2009 is prepared under Canadian GAAP 2010 and 2011 are prepared under IFRS All years prepared under IFRS

12 the wawanesa mutual insurance company consolidated supplementary information equity $2,019,957 $2,238,190 $2,332,486 2009 2010 2011 All years prepared under IFRS carrying value of investments 2011 1% 11% 10% 13% Canadian Bonds $3,638,052 Foreign Bonds $696,979 Canadian Stocks $623,291 65% Foreign Stocks $582,574 Other $81,310

13 Property and Casualty (P&C) operations Profile P&C Operations consist of The Wawanesa Mutual Insurance Company in Canada and Wawanesa General Insurance Company in the U.S. Our P&C Operations have conducted business in Canada and the U.S. for over 100 years and 35 years, respectively. P&C Operations provide automobile, personal and commercial property, and liability insurance products in all major areas of Canada as well as in California and Oregon. Wawanesa s P&C insurance products are distributed by over 1,300 independent insurance brokers except in Quebec and the U.S. where products are distributed through company agents. Key Facts Total assets of $6.3 billion Strong financial position with equity of $2.3 billion Over $2.3 billion in annual policy premiums Over 2,300 employees across Canada and in the U.S. KEY FINANCIAL MEASURES The following information and charts may not be IFRS measurements, but are derived from elements of the financial statements (2011 and 2010 are prepared under IFRS, 2009 is prepared under Canadian GAAP), and are consistent with financial measures used in the P&C insurance industry. gross premiums written Gross premiums written is the premiums for all insurance policies placed inforce during the period including new policies and renewals. It is a measure of how much insurance P&C Operations sold to our customers during the period. $1,338,426 $1,409,048 $1,448,140 Automobile Personal Property Commercial Property Other $543,540 $176,768 $32,923 $619,817 $195,136 $35,542 $683,402 $211,261 $38,080 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS

14 P&C operations Underwriting loss Underwriting loss is the loss from insurance operations. It includes net premiums earned and instalment service charges less net claims and other expenses incurred. $(49,745) $(78,740) $(90,334) 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS net investment income Net investment income is comprised of interest income, dividends and distributions, the realized gain on sale of available-for-sale financial assets, and other investment income and expenses. $232,436 $244,920 $182,248 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS

15 P&C operations Combined ratio The combined ratio measures the overall underwriting performance and profitability of insurance operations. It is the relationship between claims and other expenses incurred and premiums earned for the year expressed as a percentage. When there is an underwriting profit, the combined ratio will be less than 100%. When there is an underwriting loss, the combined ratio will be greater than 100%. 115% 105% 103% 107% 103% 101% 106% 104% 99% Total Automobile Property 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS Capital ratio MCT The Minimum Capital Test (MCT) is a measure used by the regulator to ensure insurance companies remain solvent. The MCT ratio is determined by dividing capital available by capital required, as a percentage. Capital required is determined using a risk based formula, including balance sheet assets, insurance contract liabilities and catastrophes. 299% 302% 302% MCT 150% 150% 150% Regulatory Minimum Target 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS

16 life operations profile Our life insurance operations are conducted by The Wawanesa Life Insurance Company. It is a Canadian life and health insurance company that has been in operation for over 50 years. Wawanesa Life provides term, permanent and critical illness insurance plus investment product options including segregated funds to individuals through its independent broker channel. Group life and health insurance products are designed to service the needs of employers, associations and unions by working with group benefit brokers. Wawanesa Life maintains regional sales offices across the country to support its many broker and client relationships. Key Facts Total assets of $830 million Individual life insurance volumes of $14 billion insured through 65,000 polices Insures more than 24,000 employees through group benefit plans Key Financial Measures The following information and charts may not be IFRS measurements, but are derived from elements of Wawanesa Life s financial statements (2011 and 2010 are prepared under IFRS, 2009 is prepared under Canadian GAAP), and are consistent with financial measures used in the life insurance industry. Net PremiumS and Equivalents Net premiums and equivalents are the sum of billed insurance premiums, contributions received for investment in annuities or segregated funds, management fees earned on segregated fund balances and fee income earned from the administration of group business where the policyholder retains the insurance risk. $37,668 $39,080 $32,482 $40,731 $34,738 $33,907 $23,486 $27,402 $26,967 Individual Group Annuity 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS

17 life operations Net Income (Loss) Net income (loss) attributed to the participating policyholders (PAR Account) and the shareholder is shown in the following chart. $3,732 $4,974 $1,347 $(593) $1,711 PAR Account Shareholder Account 2009 2010 $(6,693) 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS Equity Equity includes amounts related to the shareholder account and the participating account. Shareholder equity supports the non-participating business and participating equity supports participating business. A summary of Wawanesa Life s Participating Account Management Policy and Participating Policyholder Dividend Policy can be found on page 26. $82,698 $87,638 $93,165 PAR Account Shareholder Account $29,289 $29,203 $22,272 2009 2010 2011 All years prepared under IFRS

18 life operations Total Assets Represents total assets managed by Wawanesa Life which include its general fund assets and policyholder contributions to the segregated funds that are held separate and apart from the general fund assets. $591,519 $636,847 $666,278 General Fund Assets Segregated Funds Net Assets $139,896 $167,842 $163,636 2009 All years prepared under IFRS 2010 2011 Investments Investments are managed in a conservative manner to provide steady, consistent investment income to support the cash flow and liquidity needs of Wawanesa Life. The Board of Directors has approved the Investment Policy Statement that sets out the guidelines followed by management to prudently manage these assets. $436,489 $476,877 $519,348 Bonds Stocks Other $59,413 $38,912 $70,506 $34,259 $73,605 $30,021 2009 2010 2011 All years prepared under IFRS

19 life operations Bonds Credit Quality Breakdown $214,226 $247,854 $269,039 AAA AA A BBB $94,002 $111,463 $12,116 $4,682 $110,009 $100,480 $12,160 $6,374 $93,840 $135,853 $18,565 $2,051 Below BBB All years prepared under IFRS 2009 2010 2011 Capital Ratio The MCCSR defines capital available and capital required. The MCCSR Ratio equals capital available divided by capital required. The regulatory minimum target ratio is 150%. Capital available is the life insurance company s equity with certain prescribed adjustments. Capital required is determined using a risk based formula. Capital requirements include amounts related to asset default risk, insurance risk (mortality, morbidity and lapse), changes in interest rate risk and segregated fund risk. 280% 259% 226% MCCSR Regulatory Minimum Target 150% 150% 150% 2009 2010 2011 2009 is prepared under Canadian GAAP, 2010 and 2011 are prepared under IFRS

20 Incorporated July 7, 1960 Head Office Wawanesa, Manitoba Executive Office 400 200 Main Street Winnipeg, Manitoba Officers and Management Corporate K. E. McCrea, CA, FLMI President and Chief Executive Officer M. K. Nemeth, CA, FLMI, GBA Vice President and Chief Operating Officer G. N. Bass, Q.C. Vice President, General Counsel and Secretary I. R. MacDonald, FSA, FCIA Vice President and Actuary C. R. Loeppky, BScCS Vice President, Information Services T. L. Nelson, FLMI/M, CHRP, CIP Vice President, Human Resources E. Elvebo, CA Manager, Corporate Reporting P. M. Horncastle, CGA Controller P. R. Mulaire, CMA, FCIP, CIA Manager, Internal Audit K. J. Richtik, FSA, FCIA Manager, Actuarial Financial Reporting Insurance Operations G. G. Sadler, CLU, ChFC, CHS Director, Individual Sales and Marketing M. M. Nolin, DDM, ALHC, ACS, AIAA Manager, Group Benefit Services D. M. Smook Manager, National Group Sales and Marketing D. I. Verwey Manager, Group Underwriting and Policy Administration A. E. Waller, MBA, CFP, ChFC, CLU, FALU Manager, Individual Life Administration Medical Director Dr. R. B. Boyd, MD the wawanesa LIFE insurance company Report of the Independent Auditor on the summary financial statements February 21, 2012 To the Shareholder and Policyholders of The Wawanesa Life Insurance Company The accompanying summary financial statements, which comprise the summary balance sheets as at December 31, 2011 and 2010 and the summary statements of operations for the years ended December 31, 2011 and 2010, are derived from the audited financial statements of The Wawanesa Life Insurance Company for the years ended December 31, 2011 and 2010. We expressed an unmodified audit opinion on those financial statements in our report dated February 21, 2012. The summary financial statements do not contain all the disclosures required by International Financial Reporting Standards. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements of The Wawanesa Life Insurance Company. Management s Responsibility for the Summary Financial Statements Management is responsible for the preparation of a summary of the audited financial statements in accordance with International Financial Reporting Standards. Auditor s Responsibility Our responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with Canadian Auditing Standards ( CAS ) 810, Engagements to Report on Summary Financial Statements. Opinion In our opinion, the summary financial statements derived from the audited financial statements of The Wawanesa Life Insurance Company for the years ended December 31, 2011 and 2010 are a fair summary of those financial statements, in accordance with International Financial Reporting Standards. Chartered Accountants Winnipeg, Manitoba

21 the wawanesa LIFE insurance company Appointed Actuary s Report February 21, 2012 To the Shareholder and Policyholders of The Wawanesa Life Insurance Company I have valued the insurance contract liabilities of The Wawanesa Life Insurance Company for its balance sheet at December 31, 2011 and their change in the statement of operations for the year then ended in accordance with accepted actuarial practice, including selection of appropriate assumptions and methods. In my opinion, the amount of insurance contract liabilities makes appropriate provision for all policyholder obligations and the financial statements fairly present the result of the valuation. Ian R. MacDonald Fellow, Canadian Institute of Actuaries Winnipeg, Manitoba regional Offices Atlantic 1010 St. George Boulevard Moncton, New Brunswick S. B. Brydges, CFP, CHS Regional Life Manager Ontario 100 4110 Yonge Street Toronto, Ontario B. I. Lang, RHU Regional Life Manager R. J. Rowe, GBA Regional Group Manager Western Manitoba 208 740 Rosser Avenue Brandon, Manitoba G. L. C. Goymer, CFP, ChFC, CLU, CHS Regional Life Manager Eastern Manitoba and NW Ontario 700 200 Main Street Winnipeg, Manitoba J. A. Kien Regional Life Manager T. A. McDowell Regional Group Manager Saskatchewan 201 3501 8th Street East Saskatoon, Saskatchewan 205, 2631 28th Avenue Regina, Saskatchewan G. F. M. Kurmey, FLMI Regional Life Marketing Representative Northern Alberta 100, 8657 51st Avenue Edmonton, Alberta L. P. J. Addison Regional Life Manager S. Lambert Regional Group Manager Southern Alberta 600, 708 11th Avenue S.W. Calgary, Alberta B. A. Reid Galarnyk Regional Life Manager British Columbia 310 1985 West Broadway Vancouver, British Columbia S. F. Engmann Regional Life Manager B. R. Wyne, MBA Regional Group Manager

22 the wawanesa LIFE insurance company summary balance Sheets As at December 31 2011 2010 Assets Cash and cash equivalents $ 30,281 $ 12,448 Investments 622,974 581,642 Other assets 13,023 42,757 General fund assets 666,278 636,847 Segregated funds net assets 163,636 167,842 Total assets $ 829,914 $ 804,689 Liabilities Other liabilities $ 7,006 $ 6,188 Insurance contract liabilities 543,835 513,818 General fund liabilities 550,841 520,006 Segregated funds contract liabilities 163,636 167,842 Total liabilities 714,477 687,848 Equity 115,437 116,841 Total liabilities and equity $ 829,914 $ 804,689 A complete set of audited financial statements are available at www.wawanesa.com

23 the wawanesa LIFE insurance company summary statements of operations For the year ended December 31 2011 2010 Net premiums and equivalents $ 109,376 $ 98,529 Net investment income 50,074 45,236 Total income 159,450 143,765 Net claims and benefits incurred 73,775 65,815 Net change in insurance contract liabilities 58,370 49,976 Expenses incurred 28,676 26,682 Total benefits and expenses 160,821 142,473 Income (loss) before income taxes (1,371) 1,292 Provision for income taxes 348 174 Net income (loss) for the year $ (1,719) $ 1,118 Net income (loss) for the year attributed to: Shareholder $ 4,974 $ 1,711 Participating policyholders (6,693) (593) $ (1,719) $ 1,118 A complete set of audited financial statements are available at www.wawanesa.com

24 the wawanesa LIFE insurance company source of earnings statement The Source of Earnings are attributable to one of the following categories: Expected profit on inforce business This includes the release of the Provision for Adverse Deviations (PFADs) plus the expected profits on Segregated Funds. The release of the PFADs is the profit arising on the inforce business if the expected assumptions used in calculating the actuarial liabilities are realized. Impact of new business This represents the overall loss during the first year on new business. The PFADs in the actuarial liabilities contribute to an overall initial loss on issuing new business. These PFADs are anticipated to be released into income in future years to the extent they are not required to cover future adverse experience. Management action and changes in assumptions This section includes specific management actions and the impact of changes in assumptions used to calculate actuarial liabilities. Earnings on surplus This reflects the earnings on the surplus and capital of the Company. Other This represents all other sources of earnings not included above. Experience gains and losses The experience gains result from items such as investment returns, claims and expenses where the actual experience during the year differs from the expected experience assumed in the actuarial liabilities. It also includes the amount the fee income generated on Segregated Funds differs from expected.

25 the wawanesa LIFE insurance company source of earnings statement Source of Earnings 2011 Total company Individual life Individual annuity Group life and health Expected profit on inforce business $ 6,978 $ 4,331 $ 2,031 $ 616 Impact of new business (17,449) (13,435) (827) (3,187) Experience gains and losses 3,941 668 67 3,206 Management action and change in assumptions (720) (533) (170) (17) Other Earnings (loss) on operations (7,250) $ (8,969) $ 1,101 $ 618 Earnings on surplus 5,879 Income (loss) before income taxes (1,371) Income taxes 348 Net income (loss) $ (1,719) Source of Earnings 2010 Total company Individual life Individual annuity Group life and health Expected profit on inforce business $ 4,481 $ 4,239 $ 1,867 $ (1,625) Impact of new business (14,787) (9,454) (510) (4,823) Experience gains and losses 1,654 2,410 573 (1,329) Management action and change in assumptions 3,811 3,247 564 Other 341 148 22 171 Earnings (loss) on operations (4,500) $ 590 $ 1,952 $ (7,042) Earnings on surplus 5,792 Income before income taxes 1,292 Income taxes 174 Net income $ 1,118

26 the wawanesa LIFE insurance company Summary of the Participating Account Management Policy* A Participating Account is maintained in respect of the Company s participating business which is separate from the Shareholder Account. Revenue and expenses that are directly related to participating business are recorded to the Participating Account. Allocation methods are also used to record certain expense and revenue items to the Participating Account. The Expense Allocation Method is designed to allocate expenses and taxes fairly and equitably between the Participating Account and the Shareholder Account. The Investment Income Allocation Method is designed to allocate investment income fairly and equitably between the Participating Account and the Shareholder Account. The Investment Policy Statement (IPS) governs the investment activities of the Company. Assets have been segmented into funds to facilitate managing assets with liabilities. The IPS specifies the investment objectives, investment risks, and management of these risks for each of the funds. Surplus exists in the Participating Account for the needs of the current inforce business and future new business. Surplus is managed to meet the continuing financial stability of the Participating Account and to exceed any minimum regulatory requirements. Participating policyholders are eligible to receive distributions from the Participating Account when experience justifies their payment. The Board of Directors determines the amount of dividends to be paid in accordance with the Company s Dividend Policy. The Company is allowed to transfer an amount from the Participating Account to the Shareholder Account each year as described in the Insurance Companies Act. The Company intends to transfer an amount equal to the lesser of 10% of the amount of the dividends paid to the participating policyholders during the year and the maximum permitted by the Insurance Companies Act. Summary of the Participating Policyholder Dividend Policy* Participating Individual Life Insurance Participating Earnings are generated when collective experience related to investment, mortality, lapse, expenses and taxes is more favourable than assumed in developing the premiums. The Company may distribute a portion of the participating account earnings to the participating policyholders. The distribution is in the form of dividends payable to the policyholders. The amount available to be paid as dividends is determined based on various factors including the Company s earnings, any regulatory requirements and the amount of surplus required to ensure the continuing financial stability of the Participating Account. The dividend scale sets out a formula for the allocation of distributable earnings to the participating policies. The principle factors used to distribute earnings are investment earnings, mortality, and expense experience. The dividend scale allocates distributable earnings among policies in the same proportion as the policies are considered to have contributed to distributable earnings. Dividends are credited to the policies on their policy anniversary date. The distribution of dividends is designed to maintain reasonable equity between classes of participating business. Dividends are declared at the discretion of the Board of Directors. * Complete policies are available upon request

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Standing (L to R): E. J. Beale, D. G. Unruh, M. E. Northey, J. S. McCallum, G. J. Hanson, R. O. Landry, K. L. Matchett, D. C. Crewson Seated (L to R): R. R. Bracken, K. E. McCrea Board of directors The Wawanesa Mutual Insurance Company, Wawanesa General Insurance Company and The Wawanesa Life Insurance Company R. R. Bracken 1,2,3,4 Chairman of the Board E. J. Beale 2,3 D. C. Crewson 1,2 G. J. Hanson 3,4 R. O. Landry 2,3 K. L. Matchett 1,4 J. S. McCallum 3,4 K. E. McCrea M. E. Northey 1,2 D. G. Unruh 1,4 1. Member of the Audit Committee 2. Member of the Conduct Review and Corporate Governance Committee 3. Member of the Investment Committee 4. Member of the Human Resources Committee