Financialfacts2012London Life participating life insuranceAccountability Strength Performance
This guide provides key financial facts aboutthe management, strength and performanceof the London Life participating account.Table of contentsFinancial highlights..................................................................... 4Participating life insurance overview.............................................. 6How participating policies perform.......................................... 6How policyowner* dividends are allocated................................ 7Accountability............................................................................ 8Strength...................................................................................10Performance for the long term....................................................12Historical average returns.......................................................13Stability....................................................................................14Returns................................................................................14Asset mix..................................................................................15Investment guidelines.................................................................16Prudent management.................................................................17Need more information?.............................................................19AppendixLondon Life participating account management policy...................20London Life participating policyholder* dividend policy..................22*The term “policyowner” is used throughout except in the appendix.Throughout this document numbers may be rounded.Performance data is provided for illustrative purposes only and represents past performance,which is not necessarily indicative of future performance.
4Accountability|Strength|PerformanceAccountability■■ The participating policyowner portion ofdistributed surplus continued to be97.5 per cent – unchanged since 1966.■■ London Life is governed under the federalInsurance Companies Act (ICA) of Canada,which includes provisions for how participatingaccounts must be managed within a companywith shareholders, and includes the requirementfor a participating account managementpolicy and a policyowner dividend policy tobe established and maintained.■■ Participating policyowner dividends aredetermined in accordance with the policyownerdividend policy approved by the board ofdirectors. This policy is intended to ensurereasonable equity among groupings ofparticipating policyowners.■■ In 2012, London Life participating policyownerdeath claims totaled $337.8 million.■■ Detailed information on the investments heldin the London Life participating account isupdated quarterly and can be found atwww.londonlife.com.Financial highlights 2012for the London Life participating accountnotesVestingOnce a dividend has been paid orcredited to a policy, it is fully vestedand cannot be reduced or used forany purpose other than as authorizedby the policyowner or to pay premiums,as per the automatic premium loannon-forfeiture provisions of the policy.• The dividend scale interest rate is used to calculate the investmentcomponent of participating policyowner dividends and is based on thereturn on the assets backing participating account liabilities. It does notinclude the return on assets backing participating account surplus.• The dividend scale interest rate is only one of many factors thatcontribute to an individual policy’s performance. The actual cash valuegrowth in any policy varies based on a number of factors such as typeof product, product features, premium-paying period, issue age, rating,dividend option, the policyowner dividend scale and others.1. Based on competitive data currently available as not all companiesreport this information.2. As last rated by A.M. Best Company, DBRS Limited, Fitch Ratings,Moody’s Investors Service and Standard & Poor’s Ratings Services attime of publication. For current information on London Life’s ratingsand financial strength see the corporate information section atwww.londonlife.com.3. The rate shown applies to policies issued on or after Sept.16, 1968.These policies have a variable policy loan rate provision, whereaspolicies issued before this date have a fixed policy loan rate provisionand a different dividend scale interest rate.4. The 60-year average annual dividend scale interest rate is a blendedaverage of the dividend scale interest rate that applies to policies witha variable policy loan rate provision (1969 to 2012) and the dividendscale interest rate that applies to policies with a fixed policy loan rateprovision (1953 to 1968).5. The participating account return is the return on the participatingaccount assets backing liabilities and surplus after investmentexpenses are deducted. Investment expenses may vary from yearto year due to changes in the asset mix of the total participatingaccount, economies of scale and other factors. The participatingaccount return is reported for the calendar year Jan. 1, 2012 toDec. 31, 2012. The participating account return is a short-termindicator of investment performance. This return is based oninternational financial reporting standards (IFRS) as issued by theInternational Accounting Standards Board (IASB), effective Jan. 1,2011, with the exception of unrealized gains and losses on bonds,which are excluded because bonds in the participating account aregenerally held until maturity. Common stock and real estate returnsare valued on a marked-to-market basis, i.e., not smoothed, andrealized gains and losses on bonds are recognized as incurred.Strength■■ London Life continues to have the largestparticipating account in Canada, as measuredby assets.1■■ The total participating account assets, includingsurplus, was $20.9 billion at Dec. 31, 2012.■■ London Life has 1.6 million participating lifeinsurance policies in force at Dec. 31, 2012.■■ London Life’s credit ratings were maintained in2012. It continues to enjoy strong ratings relativeto its North American peer group due to itsconservative risk profile and stable earningstrack record.2
Accountability|Strength|Performance5Performance■■ London Life has distributed dividends to itsparticipating policyowners every year since 1886.■■ In 2012, dividends distributed to participatingpolicyowners were $757 million.■■ London Life’s long-term investment strategy –together with its strategy of smoothing the returnsfor the purpose of determining the dividendscale interest rate – helps reduce the impact ofshort-term volatility on participating life insurancepolicyowner dividends.■■ On average, based on the 2012 dividend scale,approximately 65 per cent of policyownerdividends was derived from investment experience.Approximately 30 per cent was derived frompositive mortality experience and five per cent wasderived from other factors such as lapse, expenseand tax experience.■■ The 2012 dividend scale interest rate was6.42 per cent, a decrease of 45 basis pointsfrom 2011.3■■ The 10 and 20-year average annual dividend scaleinterest rates to the end of 2012 were 7.2 and8.0 per cent respectively.3■■ The 30-year average annual dividend scaleinterest rate was 9.0 per cent for the period from1983 to 2012.3■■ The 60-year average annual dividend scaleinterest rate was 7.3 per cent for the period from1953 to 2012.4■■ The one-year return on total participating accountassets for 2012, after investment expenses,was 5.9 per cent.5■■ In 2012, participating account investment expenseswere 5.4 basis points.■■ In 2012, the participating account holdings ofequity investments, including real estate, increasedto 20.6 per cent of the total invested participatingaccount assets, from 19.1 per cent in 2011.■■ In 2012, mortgage holdings decreased to25.9 per cent of the total invested participatingaccount assets, from 27.5 per cent in 2011.■■ In 2012, public bond holdings increased to47.6 per cent of the total invested participatingaccount assets, from 46.3 per cent in 2011.■■ In 2012, private placement holdings increasedto 4.3 per cent of total invested participatingaccount assets, from 3.8 per cent in 2011.For 2013■■ In November 2012, the board of directorsapproved a reduction to the dividend scale for allLondon Life individual participating life insurancepolicies effective Jan. 1, 2013. Although factorslike mortality and taxes have improved, thesehave not been enough to offset the declines ininvestment experience on the assets backingliabilities in the participating account.■■ On average, based on the 2013 dividend scale,approximately 60 per cent of policyownerdividends is derived from investment experience.Approximately 30 per cent is derived frompositive mortality experience and ten per centfrom other factors such as lapse, expense andtax experience.■■ The 2013 dividend scale interest rate is5.90 per cent, a decrease of 52 basis pointsfrom 2012.3■■ In 2013, dividends distributed to participatingpolicyowners are estimated to be $722 million.
6Accountability|Strength|PerformanceHow participating policies performParticipating life insuranceoverviewParticipating life insurancepolicies are built on afoundation of guaranteedvalues such as basicpremium, basic lifeinsurance coverage,guaranteed portion of cashvalues and guaranteedportion of reduced paid-upvalues. These guaranteedvalues are determined usinglong-term assumptions forfactors such as investmentreturns, mortality, expenses,lapses and taxes.If the actual results in the participating account are collectivelymore favourable than the long-term assumptions supporting theguaranteed values, earnings are generated and become part ofthe participating account surplus (retained earnings). Each year,London Life may distribute a portion of the earnings as approved bythe board of directors. Any amount distributed for a given year willvary up and down depending on the actual and expected experience.The amount to be distributed is influenced by considerations suchas the need to retain earnings as surplus and to reduce short-termvolatility in dividends. Surplus is held in the participating account tomaintain strength and stability of the participating account.London Life reviews the policyowner dividend scale and theparticipating account actuarial liabilities at least annually. This reviewinvolves analyzing factors such as investment returns, mortalityexperience, expenses, lapses and taxes. The process is intendedto ensure the participating account actuarial liabilities are at anappropriate level and to determine whether a change needs to bemade to the policyowner dividend scale.How is a policyowner dividend different froma shareholder dividend?Dividends paid to shareholders are based on the overall results ofthe company from all lines of business, such as non-participatinglife insurance and investment products.Participating policyowner dividends are based solely onthe experience from London Life’s participating life insuranceline of business.
Accountability|Strength|Performance7How policyowner dividends are allocatedEach year, the board ofdirectors declares whatportion of the participatingaccount earnings forthat financial year willbe distributed from theparticipating account.Currently, 97.5 per centof the distribution iscredited to participatingpolicyowners and 2.5 percent is distributed to theshareholder account undersection 461 of the federalInsurance Companies Act(ICA). The 97.5 and 2.5 percent split for London Lifehas remained unchangedsince 1966. See theaccountability section formore details.Participating policyowner dividends are allocated to achievereasonable equity among groupings of participating policyowners.London Life participating policies are grouped for the purpose ofallocating policyowner dividends according to factors such as:■■ Year the policy was issued and by eras where premiumsor guarantees are similar■■ Plan type■■ Basic risk classification – male/female/smoker/non-smoker■■ Issue ageDividends are allocated to each grouping following the contributionprinciple: earnings to be distributed are divided among policyownersover the long term in proportion to their policy contribution to thoseearnings. When applying the contribution principle, attention is paidto achieving reasonable equity between dividend classes and betweengenerations of policies taking into account practical considerationsand limits, legal and regulatory requirements, professional guidelinesand industry practices.Dividends are credited to policies based on the amount ofbasic coverage and the terms of each policy. Dividend optionsinvolving paid-up additional coverage also generate dividendsbased on this coverage and these dividends are allocated usingthe contribution principle.Dividends credited to a policy have a cash value associated with them.This cash value, once credited to the policy, is vested and cannot bereduced or used in any way without the policyowner’s authorization,other than to pay premiums, as per the automatic premium loan non-forfeiture provisions of the policy.The premium due on the first policy anniversary must be paid beforethe first dividend will be credited.A policy loan on a specific policy, including any premium loan, doesnot reduce the policy’s dividend. The policy continues to receivedividends as though the policy loan did not exist. Any outstandingloan, including interest, is repaid from either the cash value in theevent of a cash surrender of the policy, or the death benefit in theevent of the death of the life insured.
8Accountability|Strength|PerformanceAccountabilityICA provisions and referencesSubject to the ICA, the directors of a company shall manage or supervisethe management of business affairs of the company, which includesestablishing and maintaining a policy for dividends to be distributed toparticipating policyowners, as well as a policy for the management ofparticipating accounts. The ICA contains a number of provisions thatinclude certain duties required of directors, and reporting requirementsregarding the use of fair and equitable actuarial practices.1. Investment income and expenses are to be allocated to theparticipating account in accordance with a method that inthe opinion of the company’s actuary, is fair and equitable toparticipating policyowners. Once this allocation method is approvedby the board of directors, it is sent to OSFI (sections 457-460).2. The board of directors is required to establish and maintaina policy for determining the dividends to be distributed toparticipating policyowners and to send a copy of the policyto OSFI (section 165 (2) (e)).3. The board of directors is required to establish and maintain a policyrespecting the management of the participating account and to senda copy of the policy to OSFI (section 165 (2) (e.1)).4. At least annually, the company’s actuary shall review the participatingpolicyowner dividend policy and provide a written report tothe board of directors on its continuing fairness to participatingpolicyowners (section 165 (3.1) – Report of the Actuary).5. Prior to the declaration of policyowner dividends by the board ofdirectors, the company’s actuary must provide his or her opinionto the board on the fairness to participating policyowners of theproposed policyowner dividends and on the company’s compliancewith the policyowner dividend policy (section 464).Participating life insurancepolicies are managed inthe participating account.In Canada, in the caseof shareholder-ownedcompanies, the participatingaccount must be maintainedseparately from theshareholder account. Thisfacilitates the measurementof earnings attributable tothe participating account.The philosophy behindparticipating policies isto provide participatingpolicyowners with lifeinsurance at a cost thattakes into account the long-term performance of theparticipating account.London Life’s activities areregulated federally by theOffice of the Superintendentof Financial Institutions (OSFI)and within each provinceby the relevant provincialinsurance regulatoryauthorities.In addition, the federalInsurance Companies Act(ICA) contains a numberof provisions that governhow a participating accountmust be managed within acompany with shareholders.
Accountability|Strength|Performance9For more information on London Life’sparticipating account management policyand the policyowner dividend policy,see the appendix.6. The ICA limits the amount that may be distributed to the shareholderaccount from any annual distribution of the profits of theparticipating account for a financial year (section 461). This annuallimit is set as a maximum percentage of the amount determinedby the board of directors to be distributed from the profits of theparticipating account for that financial year. This total amountis distributed between the shareholders and participatingpolicyowners. The maximum percentage of the total distributionthat can be distributed to the shareholder account depends onthe size of the participating account. The maximum percentagedecreases from 10 per cent, for a small participating account, to justover 2.5 per cent as the size of the participating account increases.London Life has the largest participating account in Canada, asmeasured by assets and currently 2.5 per cent of the distributed totalgoes to the shareholder account. In 2012, this distribution to theshareholder account was $19 million, representing approximately 0.1per cent of total assets in the participating account.7. Each participating policyowner and shareholder is entitled toreceive notice to attend the annual meeting of policyowners andshareholders, receive copies of documents (for example, the annualstatement) and has certain voting rights (sections 331 and 334).
10Accountability|Strength|PerformanceA London Life participating life insurance policyprovides a foundation of guaranteed values.It also offers the opportunity for growth basedon participation in a pool with 1.6 millionother participating policies (at Dec. 31, 2012).A London Life participating policy offers both stabilityand flexibility in a permanent life insurance solution.London Life’s participating account has$20.9 billion in assets, including $1.8 billion insurplus (at Dec. 31, 2012). London Life hasthe largest participating account in Canada,as measured by assets.Strength• Investment income is based on international financial reportingstandards (IFRS) as issued by the International Accounting StandardsBoard (IASB) effective Jan. 1, 2011. Certain assets such as publicbonds, common stocks and real estate are marked to market(not smoothed). Investment income is reported for the calendaryear Jan. 1, 2012 to Dec. 31, 2012 and includes assets backingparticipating account liabilities and surplus.• Changes in actuarial liabilities are based on IFRS as issued by theIASB effective Jan. 1, 2011. A change in actuarial liabilities is made toensure the total amount of actuarial liabilities is sufficient to meet allpolicyowner obligations.• The amount of expenses and taxes reflects a reduction in expensesof $120 million arising from an adjustment to the litigationprovision for legal proceedings in regard to the involvement of theparticipating account in the financing of the acquisition of LondonInsurance Group Inc. in 1997. The adjustment was made followinga Jan. 24, 2013 decision of the Ontario Superior Court of Justice.This decision is under appeal.• The dividend liability represents dividends earned but not paid atthe calendar year-end.• The participating account surplus excludes other comprehensiveincome. Other comprehensive income includes specific unrealizedinvestment gains and losses, which may be temporary. If andwhen these unrealized gains and losses are realized, they arerecognized in participating account net income and become partof participating account surplus.• Asset values are based on IFRS as issued by the IASB effectiveJan. 1, 2011.• The accrual account represents a portion of shareholder surplus,held within the participating account, that has been recognizedbut not paid and is dependent on future payment of dividends toparticipating policyowners. In 2012, the accrual account balanceincreased by $2.2 million.• During 2012, the Company re-allocated its investment inLondon Reinsurance Group with a carrying value of $89 millionfrom its participating account to its shareholder account.The difference of $6 million between the carrying value of theinvestment and the fair value of the investment of $95 millionwas recorded as a charge to shareholder accumulated surplus andan increase in the Company’s participating account surplus.Summary of participating accountoperations in 2012Participating policyowner premiums $1,838+ Investment income 1,156– Benefits paid 757– Changes in actuarial liabilities 1,001– Expenses and taxes 263– Distribution to policyowners and shareholders 766 Policyowner dividends 757 Change in dividend liability -12 Shareholder portion Cash payment 19 Accrual 2= Participating account net income $207Participating accountbalance sheetAssets $20,926– Liabilities 19,060– Other comprehensive income (loss) 55= Closing balance for participating account surplus at Dec. 31, 2012 $1,811Participating account surplusOpening balance Dec. 31, 2011 $1,598+ Reallocation of assets 6+ Participating account net income 207= Closing balance for participating account surplus $1,811Participating account ($ millions)London Life has distributed dividends to itsparticipating policyowners every year since 1886.London Life’s participating account’s strong surplusposition helps provide stability and strength to theparticipating account and can help smooth theimpact of fluctuations in experience on dividends.London Life’s credit ratings were maintained in 2012.It continues to enjoy strong ratings relative to itsNorth American peer group due to its conservativerisk profile and stable earnings track record.**As last rated by A.M. Best Company, DBRS Limited, Fitch Ratings,Moody’s Investors Service and Standard & Poor’s Ratings Services attime of publication. For current information on London Life’s ratingsand financial strength see the corporate information section atwww.londonlife.com.Notes
11Founded in London, Ontario in 1874, London Life Insurance Companyhas been helping Canadians meet their financial security needs for139 years and has almost two million clients. London Life offersfinancial security advice and planning through its more than3,150-member Freedom 55 Financial™ division. Freedom 55 Financialoffers London Life’s own brand of investments, savings and retirementincome, annuities, life insurance and mortgage products.In addition to its domestic operations, London Life participates ininternational reinsurance markets through London Reinsurance GroupInc., a supplier of reinsurance in the United States and Europe.London Life is a subsidiary of The Great-West Life Assurance Company.Together, Great-West Life and its subsidiaries, London Life andCanada Life, serve the financial security needs of more than 12 millionpeople across Canada and have $218 billion in consolidated assetsunder administration (at Dec. 31, 2012). Great-West Life and itssubsidiaries reported a minimum continuing capital and surplusrequirements ratio of 207 per cent at Dec. 31, 2012.*Together, Great-West Life, London Life and Canada Life have three millionindividual life insurance policies in force (at Dec. 31, 2012) and are aleading provider of individual life insurance in Canada.Great-West Life, London Life and Canada Life are members of thePower Financial Corporation group of companies.*In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has establisheda capital adequacy measurement for life insurance companies incorporated under the InsuranceCompanies Act and their subsidiaries, known as the minimum continuing capital and surplusrequirements (MCCSR) ratio. For Canadian regulatory purposes, capital is defined by OSFI in itsMCCSR guideline. The company’s practice is to maintain the capitalization of its regulated operatingsubsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in thejurisdictions in which they operate.London Life – servingour clients since 1874Accountability|Strength|Performance
12Accountability|Strength|PerformancePerformance for the long termThe investment performanceof the London Lifeparticipating account isan important componentin determining the long-term value of participatingpolicies.The participating accountassets are managed byLondon Life’s investmentdivision. The company’sasset/liability managementgroup monitors the overallasset mix and guidesinvestment activity withinthe parameters of theinvestment policy, which isapproved by the board ofdirectors. The managers ofthe specific asset classes,such as bonds, mortgagesand equities (including realestate), manage the buyingand selling of the actualassets in the portfolio withinthe parameters specified.Dividend scale interest rateThe dividend scale interest rate is the interest rate used in determiningthe investment component of the dividend scale. This rate incorporatesthe smoothed investment experience of assets backing participatingaccount liabilities for the most recent 12-month period from July 1to June 30, and also includes the smoothed gains and losses fromprior periods and other factors. It does not include the return onassets backing surplus. London Life’s long-term investment strategy –together with its strategy of smoothing – helps reduce the impact ofshort-term volatility on the investment component of dividendsreceived by participating life insurance policyowners. Smoothing worksby bringing gains and losses into the dividend scale interest rate overa period of time.The dividend scale interest rate is only one factor that contributes to anindividual policy’s performance. It cannot be directly tied to the cashvalue growth in a particular policy. The actual cash value growth in anypolicy varies based on a number of factors such as type of product,product features, premium-paying period, issue age, rating, dividendoption, the policyowner dividend scale and others.As with any financial product, over the long term, a change ininvestment returns can have a significant impact on dividend valuesand related features in a policy. To better understand this sensitivityfor a specific policy, clients and policyowners should refer to thereduced dividend example in the policy illustration. It may be useful toperiodically request an updated copy of the illustration.Past results should not be considered indicative of the participatingaccount’s future performance.Surplus, and income generated by it, is used to helpensure financial strength and stability. It can alsobe used for other purposes such as financing newbusiness growth within the participating account,providing for transitions during periods of majorchange, or smoothing the impact of fluctuationsin experience on dividends related to investmentvolatility, mortality and expenses.
Accountability|Strength|Performance15The London Life participating account assets are invested for the long term. The account isbroadly diversified and is generally managed as a fixed-income account with a goal to haveapproximately 80 per cent of invested assets in fixed-income investments and 20 per cent ofinvested assets in common stock and real estate investments.London Life participating account assets at 2011 and 2012 year-ends($ millions)Notes• London Life has guidelines in place to manage the level of invested assets by asset class. These ranges do not include policy loans or other assets.Any change to the investment guidelines must be approved by the board of directors.• Asset values are based on international financial reporting standards (IFRS) as issued by the International Accounting Standards Board (IASB)effective Jan. 1, 2011.• At Dec. 31, 2012, the classification of real estate investment trusts changed to better reflect the underlying risk category of the asset.This resulted in certain assets previously categorized as common stock being re-classified as real estate. 2011 numbers have not been restatedto reflect this change.*Other assets are composed primarily of investment income due and accrued, outstanding premiums (receivables), future income tax assets andreinsurance assets.Asset mix Total Total Total Dec. 31, invested Dec. 31, invested Investment participating 2011 assets 2012 assets guidelines account assets $ % $ % % %Short term Cash and equivalents $589.4 3.3% $324.9 1.7% 0% to 5% 1.6%Fixed income Bonds and private placements Public bonds Government bonds 3,409.9 19.2 3,601.4 19.1 17.2Corporate bonds 4,816.9 27.1 5,351.8 28.4 25.6Private placements 679.8 3.8 803.3 4.3 3.8Sub-total of bonds and private placements 8,906.6 50.1 9,756.5 51.8 40% to 75% 46.6Mortgages Residential 502.9 2.8 469.4 2.5 2.2Commercial 4,384.3 24.7 4,396.4 23.4 21.0Sub-total of mortgages 4,887.2 27.5 4,865.8 25.9 10% to 40% 23.2Total fixed income 13,793.7 77.6 14,622.4 77.7 69.9Equity Real estate and common stock Real estate 352.3 2.0 932.1 5.0 4.5Common stock 2,910.6 16.4 2,922.9 15.5 14.0Sub-total of real estate and common stock 3,262.9 18.4 3,855.0 20.5 0% to 20% 18.5Preferred stock 128.8 0.7 20.6 0.1 0% to 5% 0.1Total equities 3,391.7 19.1 3,875.6 20.6 18.5Total invested assets 17,774.9 100.0 18,822.9 100.0 90.0Policy loans 1,740.0 1,758.8 8.4Other assets* 303.0 344.1 1.6Total participating assets $19,817.9 $20,925.7 100.0%
16Accountability|Strength|PerformanceInvestment guidelinesThe investment guidelines for each asset categoryrecognize the business objectives, liabilitycharacteristics, liquidity requirements, taxconsiderations and interest rate risk toleranceunique to that category. Any change to theinvestment guidelines must be approved byLondon Life’s board of directors.A large portion of the total participating accountassets is invested in bonds and mortgages to supportlong-term stable growth and core guarantees withinthe participating policies.London Life’s investment strategy helps stabilizethe variation in the investment returns used todetermine dividends.Years to maturity by fixed-incomeasset typeBased on book values at Dec. 31, 2012Years to maturity 0 to 5 years Over 5 yearsPublic bonds 44.2% 55.8%Private placements 31.1% 68.9%Residential mortgages 99.5% 0.5%Commercial mortgages 43.8% 56.2%Total fixed income 45.2% 54.8%About 10 per cent of the total fixed-income portfolioof bonds and mortgages will be invested each year atthen-current market rates. The majority of this is dueto the maturity of bonds and mortgages. A portionof the new premiums and investment income is alsoinvested at the current market rates each year.The asset returns available in the marketplace inJanuary and February 2013 for new participatingaccount investments in bonds and mortgageswere about 3.2 per cent. This is approximately140 basis points below the average return forsimilar participating account assets maturingthroughout 2013.Asset quality is very importantAt Dec. 31, 2012Asset quality Public bonds Private placementsAAA........................ 48.9%.............................. 0.3%AA ......................... 13.3%............................. 17.5%A ........................... 22.7%............................. 41.4%BBB........................ 14.6%............................. 40.8%BB or less.................. 0.4%.............................. 0.0%Total..................... 100.0%........................... 100.0%99.6 per cent of total bonds held are investment gradeor higher, i.e., BBB or higher – an investment industrymeasure of bond quality.Private placements are internally rated.Private placementsPrivate placements are bond investments made throughprivate agreements with various borrowers. They aregrouped into three main categories:■■ Lease finance■■ Mid-market and other corporate credit■■ InfrastructureThese investments have the potential to providehigher returns in the participating account than canbe found in other types of fixed-income investments.All private placements go through a disciplined creditprocess. Each arrangement undergoes due diligenceand is thoroughly researched, underwritten andactively managed by the specialized private placementinvestment management team.In today’s market, private placements can provide1.5 to three per cent higher yields than federalgovernment bonds.**Performance data is provided for illustrative purposes only andrepresents past performance, which is not necessarily indicativeof future performance.Mortgages(commercial and residential) PercentageInsured...........................................................32.3%Uninsured.......................................................67.7%Total.............................................................100.0%■■ Principal and interest to the date of default areguaranteed for insured mortgages.■■ At 0.03 per cent, residential and commercialmortgage arrears (90+ days) are below the 0.11per cent average for the industry at Dec. 31, 2012.
Accountability|Strength|Performance17YEARS1920–19221930–19321940–19421950–19521960–19621970–19721980–19821990–19922000–20022007–2009506070809088-1746LSource of information1920 – 1922 to 1980 – 1982 tables: Statistics Canada Longevity and Historical Life Tables: 1921-1981 (Abridged) Canada and the Provinces. Catalogue no. 89-506.1990 – 1992 table: Statistics Canada Life Tables, Canada, Provinces and Territories, Catalogue no. 84-5372000 – 2002 to 2007 – 2009 tables: Statistics Canada, CANSIM table 102-0512.Statistics Canada life expectancy for males and females at birthThe historical performance of London Life’s participating account is due not only to strong investment results,but also to prudent selection of underwriting risks and favourable mortality and expense management results.On average, under the 2012 dividend scale, approximately 65 per cent of policyowner dividends were derivedfrom investment experience. Approximately 30 per cent was derived from positive mortality experience andfive per cent from other factors such as lapse, expense and tax experience.Prudent managementMortalityPeople are living longer and participating policyowners have benefited.Every decade of the last century has shown continuous mortality improvement. As people live longer,this positive mortality experience is passed to policyowners through dividends. This is a unique featureof participating life insurance.Source of information• 1920 – 1922 to 1980 – 1982 tables: Statistics Canada Longevity and Historical Life Tables: 1921-1981(Abridged) Canada and the Provinces. Catalogue no. 89-506• 1990 – 1992 table: Statistics Canada Life Tables, Canada, Provinces and Territories, Catalogue no. 84-537• 2000 – 2002 to 2007 – 2009 tables: Statistics Canada, CANSIM table 102-0512.Statistics Canada life expectancy for males and females at birth 1920-1922 1930-1932 1940-1942 1950-1952 1960-1962 1970-1972 1980-1982 1990-1992 2000-2002 2007-20099080706050YEARSFEMALEYEARS1920–19221930–19321940–19421950–19521960–19621970–19721980–19821990–19922000–20022007–2009812162024 88-1747LSource of information1920 – 1922 to 1980 – 1982 tables: Statistics Canada Longevity and Historical Life Tables: 1921-1981 (Abridged) Canada and the Provinces. Catalogue no. 89-506.1990 – 1992 table: Statistics Canada Life Tables, Canada, Provinces and Territories, Catalogue no. 84-5372000 – 2002 to 2007 – 2009 tables: Statistics Canada, CANSIM table 102-0512.Statistics Canada remaining life expectancy for males and females at age 65Statistics Canada remaining life expectancy for males and females at age 65 1920-1922 1930-1932 1940-1942 1950-1952 1960-1962 1970-1972 1980-1982 1990-1992 2000-2002 2007-2009242016128YEARSFEMALEMALEMALE
18Accountability|Strength|PerformanceThe protective value of underwritingThese mortality statistics reflect life expectancy for the entirepopulation. Individuals who have been underwritten and approvedfor life insurance, on average, have even longer life expectancies.People considered a higher risk because of health, lifestyle oroccupational concerns may pay more for life insurance coverageor may be declined coverage.Mortality results for London LifeMortality experience is reviewed annually and changes are taken intoaccount in the review of dividends. Mortality improvements can helpto partially offset the impact of declining interest rates. The 2013dividend scale change reflects the benefit of additional mortalityimprovement experienced by London Life participating policyownerssince the last dividend scale change in 2012. The reduction in the2013 dividend scale would have been on average 0.7 per cent morehad there been no mortality improvement.Even if mortality improvements slow over time, current mortalitylevels are still better than those used in pricing participating lifeinsurance products. This is due to the level of conservatism built intoLondon Life’s long-term pricing assumptions used when developingthe guarantees associated with its participating life insuranceproducts, and London Life’s process for selection of risk.ExpensesLondon Life has the largestparticipating account inCanada, as measured by assets,with $20.9 billion includingsurplus (at Dec. 31, 2012),which provides considerableopportunities when it comes toachieving expense efficiencies.Expenses and taxes incurredby London Life are allocatedto the participating account inaccordance with a method thatin the opinion of the company’sactuary is fair and equitable toparticipating policyowners, andhas been approved by the boardof directors after consideringthe actuary’s opinion. Eachyear the actuary reviews themethod used by the companyfor allocating expenses and taxesto the participating accountand reports to the board ofdirectors on its continuingfairness and equitableness.Expense-management policiesfocus on controlling expensesfor the benefit of participatingpolicyowners and shareholders.Historically, expense experiencehas been a relatively smallcomponent of the total dividendcompared to the investment andmortality components.
Accountability|Strength|Performance19For more informationabout how participating lifeinsurance policies work,ask your financial securityadvisor for:■■ Your guide to London Lifeparticipating life insurancebooklet■■ Understanding howLondon Life participating lifeinsurance works■■ The value of London Lifeparticipating life insurance■■ London Life participating lifeinsurance – Looking back athistorical returns■■ Smoothed returns help reducevolatility – How London Lifeparticipating life insurance usessmoothing to reduce volatilityof policyowner dividends■■ Balancing to reduce risk■■ Insights into private placementsand the participating accountNeed more information?You can find out more about participating life insurance andLondon Life’s other products and services by calling your financialsecurity advisor or local office. Each year on the policy’s anniversary,policyowners receive an annual statement updating them on thecurrent status of their policy. It is often useful to ask your financialsecurity advisor for an updated policy illustration.Look for London Life at www.londonlife.com or call 1-877-566-5433if you have a question about a specific policy.Your policy contains important definitions of certain terms usedin this guide.This guide should be kept with your London Life illustration andpolicy contract.The information provided is based on current laws, regulations andother rules applicable to the company and to Canadian residents.Every reasonable effort has been made to ensure its accuracy as ofthe date of publication. Rules and their interpretation may change,affecting the accuracy of the information. The information providedis general in nature, and should not be relied on as a substitute foradvice in any specific situation. For specific situations, advice shouldbe obtained from the appropriate professional advisors.London Life is a member of Assuris, formerly known as the CanadianLife and Health Insurance Compensation Corporation (CompCorp),which administers the Consumer Protection Plan for policyowners ofmember companies.
20Accountability|Strength|PerformanceLondon Life Insurance Company (the Company)Participating account management policyAppendixThis participating account management policyhas been established by the Board of Directorsand may be amended by the Board from time totime at its discretion. The factors most likely to beconsidered in deciding whether to amend this policyinclude changes in applicable legal or regulatoryrequirements, professional guidelines, industrypractices or significant business changes.As required by the Insurance Companies Act, theCompany maintains accounts for its participatinginsurance policies separately from those maintainedin respect of other policies. This facilitates themeasurement of the earnings attributable to theparticipating account.The participating account is maintained in respect ofparticipating life insurance policies and a small blockof participating annuities that have been issued orassumed by the Company. The participating accountremains open to new participating policies issued orassumed by the Company.Assets of the Company held within its generalfunds are allocated to the participating accountand non-participating account segments for thepurpose of determining investment income foreach account. Assets are allocated to each segmentaccording to the investment guidelines establishedfor the segments. These guidelines outline criteriafor asset mix, liquidity, currency risk and interestrate risk. These guidelines are intended to recognizeconsiderations such as the business objectives,liability characteristics, liquidity requirements, taxconsiderations and interest rate risk tolerance ofeach segment. Assets allocated to a segment mayfrom time to time be reallocated to another segmentwithin the same account or another accountprovided the assets exchanged comply with theinvestment policy of the respective segments. Anysuch exchanges are effected at fair value.On an annual basis the Board of Directors reviewsand approves investment policies and guidelineswhich govern investment activities. The investmentpolicies outline a number of principles for investingin assets, including risk tolerance and the approachto managing investment risk. Investment risk ismanaged through underwriting standards, exposurelimits and specific guidelines governing asset classesand investment operations. The investment policiesestablish limits for the concentration of assets insingle geographic areas, industries, companiesand types of businesses as part of the riskmanagement process.A large portion of the participating accountassets are invested in fixed-income assets to supportlong-term stable growth and the core guaranteeswithin participating policies. The Company employscash-flow-matching techniques so that asset cashflows are sufficient to meet obligations and tohelp control exposure to interest rate fluctuations.In addition, a portion of the portfolio is reinvestedeach year so returns reflect the trend in interest rates.The Company may use derivative products as riskmanagement instruments to hedge asset and liabilitypositions, or as substitutes for cash instrumentswithin specified guideline limits.Investment income is allocated to the participatingaccount in accordance with the Company’sinvestment income allocation policy. Generally,investment income results are allocated directlyto a segment based on the assets allocated to thesegment. Each year the Appointed Actuary reviewsthe method used for allocating investment income tothe participating account and reports to the Board ofDirectors on its fairness and equitableness.Expenses and taxes incurred by the Company areallocated to the participating account in accordancewith the Company’s expense allocation and taxallocation policies.
Accountability|Strength|Performance21Expenses are allocated by the area incurring theexpense to the appropriate company and lineof business. As a general principle, expenses areallocated to a line of business in accordance withits business activities. In addition, from time totime Great-West Life and/or its subsidiaries makesignificant expenditures/investments outside ofregular business activities which may include butare not limited to transactions such as acquisitions,restructurings, and capital expenditures (e.g. majorIT systems), the intent and effect of which is toreduce future expenses. The governing principle forfair and equitable treatment of such expenditures/investments is that expenses will be allocated to thelines of business recognizing both the benefit derivedby the line of business from that expenditure/investment and the contribution made by the lineof business to that expenditure/investment.In general, expenses that are exclusively related toparticipating business are allocated directly to theparticipating account. Expenses related to bothparticipating and non-participating business areallocated based on business statistics when theexpenses vary based on those statistics, based onmanagers’ estimates supported by time studiesor other assessments, or in proportion to thetotal expenses allocated using all of the methodspreviously mentioned.For unusual items, management will determineand report to the Appointed Actuary the resultingallocation of expenses to each line of business,including the basis and justification for it.Taxes are allocated to the participating account usingthe characteristics of the participating and non-participating accounts that are determinative of therelevant tax costs.Each year the Appointed Actuary reviews the methodused for allocating expenses and taxes to theparticipating account and reports to the Board ofDirectors on its fairness and equitableness.The participating account surplus is managed inaccordance with the Company’s capital managementpolicy and participating account surplus policy andwith regard to regulatory requirements. The surplusposition is reviewed annually to assess its continuingappropriateness, having regard for the specificcircumstances of the participating account. Surplusmay be used for a number of purposes including tohelp ensure the Company can meet its obligationsto participating policyholders, help ensure financialstrength and stability, finance new business growthand acquisitions which may benefit the participatingaccount, provide for transitions during periodsof major change, and smooth the reflection ofexperience fluctuations in dividends; subject to itemssuch as practical considerations and limits, legal andregulatory requirements, and industry practices.As permitted by the Insurance Companies Act,the Company may distribute to the shareholdersa percentage of the amount distributed topolicyholders in respect of a financial year. Prior toany such distribution, the Appointed Actuary willconfirm to the Board of Directors that the proposeddistribution is permitted under the terms of theInsurance Companies Act. The proportion distributedto the shareholders will not exceed the prescribedamount as determined under section 461 of theInsurance Companies Act. Any distribution made tothe shareholders will be published in the Company’sannual report.Approved by London Life Insurance CompanyBoard of Directors on Nov. 8, 2012 andeffective that day.
22Accountability|Strength|PerformanceLondon Life Insurance CompanyParticipating policyholder dividend policyThis policyholder dividend policy has beenestablished by the Board of Directors and applies toall participating insurance policies issued or assumedby London Life. The Board of Directors may amendthis policy from time to time at its discretion. Thefactors most likely to be considered in decidingwhether to amend this policy include changesin applicable legal or regulatory requirements,professional guidelines, industry practices orsignificant business changes.Earnings are generated in the participating accountwhen the experience in the participating account forfactors such as investment income, asset defaults,mortality, lapses, expenses and taxes is collectivelymore favourable than the assumptions for thesefactors used when establishing the guaranteed valuesassociated with participating insurance policies.London Life may distribute a portion of the earningsas declared at the discretion of the Board of Directorsin accordance with this policy.Participating insurance policies are eligible forperiodic policyholder dividends. The amount tobe distributed from the participating account aspolicyholder dividends is determined at least annuallyfollowing a review of the actual and expectedexperience of the participating account, takinginto account significant changes in factors such asinvestment income, asset defaults, mortality, lapses,expenses and taxes. The amount distributed in anyyear will vary up or down depending on the actualand expected experience. The amount distributed isalso influenced by considerations such as the needto retain earnings as surplus and reducing short-termvolatility in dividends.The amount distributed as policyholder dividendsis divided among classes of policies by setting thepolicyholder dividend scale. These dividend classesare groupings of participating policies with certainproduct and policy attributes in common.London Life follows the contribution principlewhen setting the policyholder dividend scale. Thismeans the amount distributed as policyholderdividends is divided among dividend classes overthe long term in proportion to their contributionto earnings. A contribution to earnings will bemade from a particular dividend class to the extentthe experience for that particular class is differentfrom the assumptions used when establishing theguaranteed values for that class. When applying thecontribution principle, attention is paid to achievingreasonable equity between dividend classes andbetween generations of policies, taking into accountpractical considerations and limits, legal andregulatory requirements, professional guidelines andindustry practices. For certain blocks of policies, thepolicyholder dividend scale may be determined usingmethods designed to approximate the contributionto earnings of those blocks.The policyholder dividends are credited accordingto the terms of each policy. A change made by apolicyholder to a policy after it is issued may, in somecases, result in a change to the policy’s dividend classand thus a change to the amount of policyholderdividends credited thereafter.In addition to periodic policyholder dividends,dividends may be payable on some policies whenterminated through death, surrender or maturity.The amount of any such dividends may take intoconsideration such factors as the type of policy, thelength of time the policy has been in force and whenthe policy was issued.Prior to the declaration of policyholder dividendsby the Board, the Appointed Actuary reports to theBoard of Directors with his opinion on the fairnessto participating policyholders of the proposedpolicyholder dividends and on their compliancewith this policy, applicable legislative and regulatoryrequirements and applicable professional practicestandards. Policy illustrations will reflect changes tothe policyholder dividend scale as soon as practical.Approved by London Life Insurance Company Boardof Directors on May 5, 2011 and effective that day.
FSC–FPOLondon Life and design and Freedom 55 Financial are trademarks of London Life Insurance Company. 41-4031-4/13Accountability Strength Performance