Canada Life Financial 6-K Canada Life Reports First Quarter Results

Consolidated Statements of Net Income –Unaudited

For the three months ended March 31
(in millions of Canadian dollars, except per share amounts)		2003			2002
Revenues
Premiums
	Annuities	$	596		$	463
	Individual life and health insurance		410			398
	Group life and health insurance		584			456
			1,590			1,317
Net investment income			563			580
Fee and other income			123			141
			2,276			2,038
Expenditures
Payments to policyholders and beneficiaries
	Annuity payments		372			331
	Life and health benefits		593			486
	Maturities, surrender payments and other		415			351
	Participating policyholder dividends		67			75
			1,447			1,243
Increase in actuarial liabilities			248			283
General operating expenses			220			183
Commissions			156			117
Premium and other taxes			21			17
Interest expense			10			11
Non-controlling interest in subsidiary			8			—
			2,110			1,854
Net income before income tax provision			166			184
Income tax provision			37			59
Net income including participating policyholders’ net income (loss)			129			125
Participating policyholders’ net income (loss)			(1	)		3
Shareholders’ net income			130			122
Preferred share dividends			2			2
Common shareholders’ net income		$	128		$	120
Average number of common shares outstanding(millions)
	Basic		160.4			160.4
	Diluted		160.5			160.6
Earnings per common share
Basic and diluted		$	0.80		$	0.75

(see accompanying notes)

Canada Life Financial Corporation — First Quarter Report 2003     10

Consolidated Balance Sheets –Unaudited

		March 31		December 31		March 31
(in millions of Canadian dollars)		2003		2002		2002
Assets
Invested assets
	Bonds	$	21,701	$	22,317	$	19,516
	Mortgages		7,281		7,622		7,900
	Common and preferred stocks		1,867		2,073		1,935
	Real estate		1,048		1,066		922
	Policy loans		1,107		1,113		1,076
	Cash, cash equivalents and short-term investments		1,334		1,159		1,082
	Other		437		1,124		760
Total invested assets			34,775		36,474		33,191
Other assets			1,976		1,717		1,658
Total general fund assets		$	36,751	$	38,191	$	34,849
Segregated funds net assets		$	20,476	$	21,899	$	23,005
Liabilities and equity
Policy liabilities
	Actuarial liabilities	$	28,012	$	29,050	$	26,650
	Other policy liabilities		1,058		1,059		1,040
	Policyholders’ amounts left on deposit		447		453		430
Total policy liabilities			29,517		30,562		28,120
Net deferred gains			1,423		1,472		1,453
Other liabilities			1,006		1,190		786
			31,946		33,224		30,359
Subordinated debentures			550		550		550
Non-controlling interest in subsidiary			450		450		450
Total equity			3,805		3,967		3,490
Total general fund liabilities and equity		$	36,751	$	38,191	$	34,849
Segregated funds net liabilities		$	20,476	$	21,899	$	23,005

(see accompanying notes)

Canada Life Financial Corporation — First Quarter Report 2003     11

Consolidated Statements of Equity– Unaudited

For the three months ended March 31
(in millions of Canadian dollars)		2003			2002
Participating policyholders’ equity
	Balance, beginning of period	$	44		$	41
	Participating policyholders’ net income (loss)		(1	)		3
	Balance, end of period		43			44
Currency translation
	Balance, beginning of period		4			(1	)
	Net unrealized loss on translation of net investments in foreign operations		(1	)		(1	)
	Balance, end of period		3			(2	)
Total participating policyholders’ equity		$	46		$	42
Shareholders’ equity
Share capital
Preferred shares
	Balance, beginning and end of period	$	145		$	145
Common shares
	Balance, beginning and end of period	$	317		$	317
Retained earnings
	Balance, beginning of period	$	3,299		$	2,910
	Shareholders’ net income		130			122
	Dividends paid to common shareholders		(32	)		(24	)
	Dividends paid to preferred shareholders		(2	)		(2	)
	Canada Life Capital Securities (“CLiCS”) issuance costs		—			(5	)
	Balance, end of period		3,395			3,001
Currency translation account
	Balance, beginning of period		158			11
	Net unrealized loss on translation of net investments in foreign operations		(256	)		(26	)
	Balance, end of period		(98	)		(15	)
Total retained earnings		$	3,297		$	2,986
Total shareholders’ equity		$	3,759		$	3,448
Total equity		$	3,805		$	3,490

(see accompanying notes)

Canada Life Financial Corporation — First Quarter Report 2003     12

Consolidated Statements of Cash Flows– Unaudited

For the three months ended March 31
(in millions of Canadian dollars)		2003			2002
Cash flows from operating activities
Net income including participating policyholders’ net income (loss)		$	129		$	125
Items not affecting cash and cash equivalents:
	Increase in actuarial liabilities and other policy liabilities		265			295
	Amortization of net deferred gains and amortization of net discounts on bonds and mortgages		(49	)		(64	)
	Other, including future income taxes		24			12
	Net change in other operating assets and liabilities		(168	)		(256	)
Increase due to operating activities			201			112
Cash flows from investing activities
Sales, maturities and scheduled redemptions of:
	Bonds		4,319			2,789
	Mortgages		1,335			583
	Common and preferred stocks		553			126
	Real estate		65			12
	Other investments		630			23
Purchases of:
	Bonds		(4,748	)		(3,486	)
	Mortgages		(1,316	)		(497	)
	Common and preferred stocks		(452	)		(105	)
	Real estate		(119	)		(4	)
	Other investments		(17	)		(18	)
Net short-term investments			(643	)		30
Net policy loans			(46	)		(7	)
Acquisition, net of cash received (note 2)			(122	)		—
Decrease due to investing activities			(561	)		(554	)
Cash flows from financing activities
Issue of CLiCS			—			445
Dividends paid to common shareholders			(32	)		(24	)
Dividends paid to preferred shareholders			(2	)		(2	)
Increase (decrease) due to financing activities			(34	)		419
Effect of changes in exchange rates on cash and cash equivalents			(63	)		(6	)
Net decrease in cash and cash equivalents for the period			(457	)		(29	)
Cash and cash equivalents, beginning of period			1,066			993
Cash and cash equivalents, end of period			609			964
Short-term investments, end of period			725			118
Cash, cash equivalents and short-term investments, end of period		$	1,334		$	1,082
Supplementary disclosure of cash flow information:
	Interest paid on subordinated debentures, other liabilities and Canada Life Capital Securities	$	10		$	11
	Income taxes paid, net of refunds	$	48		$	3

(see accompanying notes)

Canada Life Financial Corporation — First Quarter Report 2003     13

Consolidated Statements of Changes in Segregated Funds —Unaudited

For the three months ended March 31
(in millions of Canadian dollars)	2003			2002
Additions to segregated funds
Deposits and transfers from the general fund	$	888		$	905
Assets added by business acquisition(note 2)		130			—
Reclassifications from the general fund and transfer of seed money		—			656
Net investment income		102			93
Tax recovery		—			5
		1,120			1,659
Deductions from segregated funds
Withdrawals, benefit payments and transfers to the general fund		602			538
Operating expenses		116			106
Currency translation adjustment		1,033			304
Net decrease (increase) in fair value of investments		792			(204	)
		2,543			744
Net additions to (deductions from) segregated funds for the period		(1,423	)		915
Segregated funds net assets, beginning of period		21,899			22,090
Segregated funds net assets, end of period	$	20,476		$	23,005

(see accompanying notes)

Consolidated Statements of Segregated Funds Net Assets —Unaudited

	As at
	March 31			December 31			March 31
(in millions of Canadian dollars)	2003			2002			2002
Common and preferred stocks	$	15,192		$	16,214		$	18,794
Bonds		2,403			2,455			2,305
Cash, cash equivalents and short-term investments		1,866			2,291			1,397
Real estate		855			944			756
Mortgages		10			9			8
Investment income due and accrued		280			242			50
Tax liability		(56	)		(49	)		(56	)
Due to brokers and others		(74	)		(207	)		(249	)
	$	20,476		$	21,899		$	23,005

(see accompanying notes)

Canada Life Financial Corporation — First Quarter Report 2003     14

Notes to the Interim Consolidated Financial Statements —Unaudited
For the three months ended March 31, 2003

1.	SIGNIFICANT ACCOUNTING POLICIES
	The interim Consolidated Financial Statements for Canada Life Financial Corporation (the “Company”) are prepared according to Canadian generally accepted accounting principles, including the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada. These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2002. The significant accounting policies followed in the preparation of these interim Consolidated Financial Statements are consistent with those found in the 2002 Consolidated Financial Statements except as described below.
(a)	Accounting Policy Changes
(i)	Stock-based Compensation and Other Stock-based Payments
	Effective January 1, 2003, the Company changed its accounting policy for stock options granted to employees on or after that date from the intrinsic value method to the fair value method on a prospective basis. Under the fair value method, the fair value of the stock options is estimated at the grant date using the Black-Scholes option pricing model. The total fair value of the options is amortized over the vesting period as compensation expense with an offset to share capital. For options that are forfeited prior to vesting, the compensation expense previously recognized in general operating expenses and share capital is reversed. When the options are exercised, the proceeds received by the Company are credited to share capital.
(ii)	Disclosure of Guarantees
	Effective January 1, 2003, the Company adopted the new guideline for Disclosure of Guarantees issued by the Canadian Institute of Chartered Accountants (CICA). Under the guideline, a guarantor must disclose significant information about guarantees it has provided, regardless of whether it will have to make any payments under the guarantee. The guideline does not address the recognition and measurement of guarantees. Guarantees issued by insurance companies and subject to specialized insurance accounting, including guarantees embedded in insurance or investment contracts, are excluded from the scope of this new guideline.
	The Company issues letters of credit in the normal course of business. Letters of credit in the amount of $3 million were issued but not drawn against at March 31, 2003.
(iii)	Impaired Loans – Foreclosed Assets
	Effective January 1, 2003, the Company adopted the amendments made to CICA Handbook Section 3025, Impaired Loans. Under the amendments, a long-lived foreclosed asset classified as held for sale is carried at fair value less cost to sell, whereas foreclosed assets other than long-lived foreclosed assets classified as held for sale are initially carried at fair value. Any gains or losses on foreclosure and subsequent adjustments to the carrying value of the foreclosed asset are recognized in income immediately. The impact of this change on these interim Consolidated Financial Statements was not material.
2.	ACQUISITION
	On January 1, 2003, the Company completed the acquisition of the Irish-based German life operations of a significant international insurer. The transaction involved the transfer of a block of business to the Company for $147 million, primarily consisting of liabilities for unit-linked and critical illness products. This transfer requires High Court approval in Ireland, which is expected to be received in July 2003. In the interim, the business is being reinsured by the Company. Additionally, as part of the acquisition, the Company acquired a Germany-based sales and marketing company for $35 million, and an Irish-based life insurance company for $6 million. Results are included in the Consolidated Statement of Income from the date of acquisition. The aggregate acquisition had a purchase price of approximately $188 million.

Canada Life Financial Corporation — First Quarter Report 2003     15

Details of the aggregate consideration given and the fair value of net assets acquired are as follows:

Fair value of net assets acquired:

(in million of Canadian dollars)
	Cash	$	6
	Intangible assets		33
	Goodwill		46
	Other assets		9
			94
	Actuarial liabilities		(135	)
	Other liabilities		41
			(94	)
	Net assets acquired	$	188
Aggregate consideration:
	Cash consideration	$	124
	Satisfaction of vendor liabilities		80
	Consideration adjustments receivable		(20	)
	Transaction costs		4
		$	188
Segregated funds assets and liabilities acquired		$	130

	The purchase price allocation is subject to change pending the finalization of certain consideration adjustments and the determination of fair values of assets and liabilities acquired.
	Intangible assets consist of broker contracts which are not subject to amortization.
	Immediately following the acquisition, the Company entered into assumed reinsurance arrangements on the transferred block of business, for which it received $107 million.
3.	STOCK-BASED COMPENSATION
	The Company has a directors share purchase plan, a deferred stock unit plan, and an employee stock purchase plan. Information concerning these plans, in addition to the stock option plan, is included in note 17 to the Consolidated Financial Statements for the year ended December 31, 2002.
	The Company adopted the fair value method of accounting for stock options effective January 1, 2003 on a prospective basis. As at March 31, 2003, no compensation expense was recorded as no stock options were granted in the quarter.
	No compensation expense is recognized for stock options granted prior to January 1, 2003. When these stock options are exercised, the amount of proceeds is included in shareholders’ equity. Had the Company used the fair value method to measure compensation for all outstanding stock options granted before January 1, 2003 but after January 1, 2002, the common shareholders’ net income, earnings per common share and diluted earnings per common share for the three months ended March 31, 2003 would have been reduced by $1 million, $0.01 and $0.01, respectively (March 31, 2002 — $1 million, $0.01 and $0.01, respectively).
	The Company recognizes compensation expense for those stock options that have been awarded stock appreciation rights in tandem based on the excess of the market value over the exercise price. The Company expects stock appreciation rights to be settled in cash and, therefore, accrues compensation expense on them over the vesting period equal to the excess of quoted market price at the balance sheet date over the exercise price. Total compensation expense, included in general operating expenses on the Consolidated Statements of Net Income, for the three months ended March 31, 2003 and March 31, 2002 was not material.

Canada Life Financial Corporation — First Quarter Report 2003     16

4.

SEGMENTED INFORMATION

The Company is a diversified international life insurance enterprise offering a wide range of protection and wealth management products to individuals and groups, through operating divisions in Canada, the United Kingdom, the United States, the Republic of Ireland, and an International and Reinsurance Division. In addition, there is a corporate group that manages invested assets, provides certain administrative services for the operating divisions and is responsible for capital management.

													International
				United			United						and
For the three months ended March 31	Canadian			Kingdom			States			Irish			Reinsurance		Corporate
(in millions of Canadian dollars)	Division			Division			Division			Division			Division		Division			Total
2003
GENERAL FUND
Revenues
Premiums	$	640		$	391		$	430		$	31		$	98	$	—		$	1,590
Net investment income		218			135			164			20			17		9			563
Fee and other income		44			49			3			26			1		—			123
		902			575			597			77			116		9			2,276
Expenditures
Payments to policyholders and beneficiaries		549			399			420			19			60		—			1,447
Increase (decrease) in actuarial liabilities		129			67			69			(26	)		9		—			248
General operating expenses, commissions, premium and other taxes and interest expense		147			70			76			65			38		19			415
		825			536			565			58			107		19			2,110
Net income (loss) before income tax provision		77			39			32			19			9		(10	)		166
Income tax provision (recovery)		25			(1	)		13			3			1		(4	)		37
Net income (loss) including participating policyholders’ net income (loss)		52			40			19			16			8		(6	)		129
Participating policyholders’ net income (loss)		(1	)		—			(1	)		1			—		—			(1	)
Shareholders’ net income (loss)	$	53		$	40		$	20		$	15		$	8	$	(6	)	$	130
Preferred share dividends		—			—			—			—			—		2			2
Common shareholders’ net income (loss)	$	53		$	40		$	20		$	15		$	8	$	(8	)	$	128
General fund assets	$	14,149		$	9,576		$	10,314		$	1,369		$	1,343	$	—		$	36,751
Segregated funds
Deposits	$	335		$	316		$	23		$	214		$	—	$	—		$	888
Total assets	$	7,067		$	9,653		$	594		$	3,157		$	5	$	—		$	20,476
2002
GENERAL FUND
Revenues
Premiums	$	456		$	287		$	457		$	34		$	83	$	—		$	1,317
Net investment income		238			123			180			12			15		12			580
Fee and other income		48			58			4			30			1		—			141
		742			468			641			76			99		12			2,038
Expenditures
Payments to policyholders and beneficiaries		505			209			449			17			63		—			1,243
Increase in actuarial liabilities		34			159			73			15			2		—			283
General operating expenses, commissions, premium and other taxes and interest expense		131			57			72			31			26		11			328
		670			425			594			63			91		11			1,854
Net income before income tax provision		72			43			47			13			8		1			184
Income tax provision (recovery)		27			11			17			3			2		(1	)		59
Net income including participating policyholders’ net income		45			32			30			10			6		2			125
Participating policyholders’ net income		—			—			3			—			—		—			3
Shareholders’ net income	$	45		$	32		$	27		$	10		$	6	$	2		$	122
Preferred share dividends		—			—			—			—			—		2			2
Common shareholders’ net income	$	45		$	32		$	27		$	10		$	6	$	—		$	120
General fund assets	$	13,996		$	7,427		$	11,082		$	910		$	984	$	450		$	34,849
Segregated funds
Deposits	$	427		$	275		$	38		$	165		$	—	$	—		$	905
Total assets	$	8,288		$	11,108		$	823		$	2,782		$	4	$	—		$	23,005

Canada Life Financial Corporation — First Quarter Report 2003     17

5.	GREAT-WEST LIFECO INC. PROPOSED TRANSACTION
	On February 17, 2003, Great-West Lifeco Inc. (“Great-West”) and the Company announced that Great-West had agreed to acquire all of the outstanding common shares of the Company for a combination of cash and Great-West securities then valued at $44.50 per common share of the Company. In a management proxy circular dated March 22, 2003 (the “Circular”) mailed to shareholders, the Board of Directors unanimously recommended that shareholders vote to approve the transaction at a special meeting to be held on May 5, 2003. The acquisition is subject to shareholder and regulatory approvals and is expected to close in the third quarter.
	As part of the transaction, the Company agreed to conduct its business in the ordinary course consistent with past practice until the transaction closes or the transaction agreement is terminated, unless Great-West provides written consent. The Company has incurred costs in respect of the proposed transaction and these costs have been capitalized. Under certain circumstances described in the Circular the transaction agreement may be terminated and, depending on the circumstances, the Company will be required to pay to Great-West a termination fee or an amount in respect of expense reimbursement or Great-West will be required to pay to the Company an amount in respect of expense reimbursement.
	The unsolicited offer made by Manulife Financial Corporation on December 27, 2002 to acquire all of the outstanding common shares of the Company expired on February 28, 2003.

Canada Life Financial Corporation — First Quarter Report 2003     18