Legal

December 31, 2015

Overview - Investors Group Trust Co. Ltd. Regulatory Disclosures

Investors Group Trust Co. Ltd. (IGTC or the Company) is a trust company continued under the Trust and Loan Companies Act (Canada) incorporated and domiciled in Canada. The Company is a wholly owned subsidiary of Investors Group Inc., which in turn is a wholly owned subsidiary of IGM Financial Inc. The Company is ultimately controlled by Power Financial Corporation.

The Company provides trustee services and is an issuer of Guaranteed Investment Certificates and Term Certain Annuities. The Company’s assets are primarily invested in insured residential mortgage loans and in highly rated short-term securities.

The operations of IGTC are supported through outsourcing agreements with the Company’s parent, Investors Group Inc., and with other affiliated companies under common control. The officers of the Company are employed by affiliated companies and receive no remuneration from IGTC.

The Company does not manage a trading book and therefore is not subject to capital requirements related to this type of market based activity.

Regulatory capital

The Company’s capital management policy and practices are focused on maintaining a solid capital base and a strong balance sheet. The objective is to maintain a capital position which supports the Company’s business objectives and working capital requirements, and ensures all of its regulatory capital requirements are satisfied.

On an annual basis, a Capital Plan with a three year horizon is prepared by management and is reviewed and approved by the Board of Directors. The Capital Plan encompasses all the forecasted uses, sources and adequacy of capital. The Company manages its capital on an ongoing basis in accordance with the Capital Management & Dividend Policy which is reviewed and approved by the Board of Directors.

Regulatory capital requirements and risk-weighted assets are determined using the Basel III framework, the Capital Adequacy Requirements (CAR) Guideline, and the Leverage Requirements Guideline issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).

Under Basel III, regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 Capital. CET1 Capital is the most permanent form of capital and is comprised of common shareholder’s equity less certain deductions if applicable. Tier 1 Capital is comprised of CET1 Capital with additional items that consist of capital instruments such as certain preferred shares, net of certain deductions. Tier 2 Capital is primarily comprised of subordinated debentures and the eligible portion of the collective allowance for credit losses, net of certain Tier 2 Capital deductions. Total Capital includes Tier 1 and Tier 2 Capital.

The Company’s CET1 Capital, Tier 1 Capital and Total Capital are comprised solely of common shareholder’s equity.

As at December 31, 2015 the CET1 Capital Ratio, Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio are the primary regulatory capital measures.

OSFI establishes minimum risk-based capital targets for deposit-taking institutions in Canada. These minimum targets are a CET1 Capital Ratio of 7%, Tier 1 Capital Ratio of 8.5%, and a Total Capital Ratio of 10.5%. Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by risk weighted assets. The Company uses the Standardized Approach to determine risk weighted assets for credit risk, and uses the Basic Indicator Approach to determine risk weighted assets for operational risk.

The Basel III Leverage Ratio replaced the Assets to Capital Multiple (ACM) effective January 1, 2015. Similar to the ACM, the Leverage Ratio is a non-risk adjusted view of the company's leverage. The Leverage Ratio is calculated by dividing Tier 1 Capital by total assets. OSFI has established confidential minimum Leverage Ratio targets unique to each institution.

The Company’s Capital Ratios were well above OSFI’s stated minimum Capital Ratio requirements as at December 31, 2015. The Company’s Leverage Ratio at December 31, 2015, remains well above the minimum Leverage Ratio authorized by OSFI.

The Company’s Regulatory Capital, Capital Ratios, and Leverage Ratio at December 31, 2015, are detailed below.

Regulatory Capital and Capital Ratios as at December 31, 2015

Leverage Ratio as at December 31, 2015

In addition to meeting capital requirements specified in the CAR Guideline issued by OSFI, the Company also conducts its own assessment of the adequacy of its capital through an Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP, which is completed on a periodic basis, addresses all material risks faced by the Company as they relate to the adequacy of capital. This includes risks explicitly captured in the minimum regulatory capital requirements as well as material risks not fully captured under the CAR Guideline. The Company utilizes the ICAAP in concert with the Capital Plan and the minimum requirements set out in the CAR Guideline to assess the adequacy of its capital to support current and future activities. The ICAAP is reviewed and approved by the Board of Directors.

Management measures its capital position and its compliance with regulatory and internal capital requirements and reports to the Investment and Conduct Review Committee of the Board of Directors on a quarterly basis.

The Company’s capital management activities for the year ended December 31, 2015 included the declaration and payment of common share dividends of $1.5 million.

Risk management overview

The Company’s strategy and its business activities are supported by a risk management framework which defines appetite for risk, and through which policies and guidelines are established for each major category of risk. Supporting this risk management framework is a governance structure which includes oversight by the Board of Directors, the Audit Committee and the Investment Conduct and Review Committee of the Board of Directors. The Board of Directors reviews and approves all of the Company’s risk management policies. Management reports on a regular basis to the Investment and Conduct Review Committee, the Audit Committee, and the Board of Directors on compliance with the Company’s risk management policies. The Company also benefits from the enterprise-wide risk management framework of its parent company.

The Company actively manages its liquidity and funding, credit, market, and operational risks.

Liquidity and funding risk

Liquidity and funding risk is the risk of the inability to generate or obtain sufficient cash in a timely and cost-effective manner to meet contractual or anticipated commitments as they become due or arise.

Liquidity management for the Company is based on the Liquidity Management Policy approved by the Board of Directors. As at December 31, 2015, the Company’s liquidity position was in compliance with the Liquidity Management Policy.

The Company’s liquidity management practices include: controls over liquidity management processes; stress testing of various operating scenarios; and oversight of liquidity management by the Investment and Conduct Review Committee of the Board of Directors.

The Company also monitors its liquidity position on a monthly basis as required by OSFI’s Liquidity Adequacy Requirements Guideline, which became effective January 1, 2015. The Company reports its Liquidity Coverage Ratio (LCR) to OSFI, which is a minimum regulatory liquidity standard adopted by OSFI. The LCR requires regulated financial institutions to maintain a sufficient stock of high-quality liquid assets to cover a minimum of 30 days of net cumulative cash flow requirements in a stressed environment. As well, the Company reports the OSFI-designed Net Cumulative Cash Flow (NCCF), which measures detailed cash flows to capture the risk posed by funding mismatches over and up to a 12 month time horizon. The Company complies with these requirements.

In addition to the Company’s current balance of cash and cash equivalents, other potential sources of liquidity include access to a line of credit with a Schedule I Canadian bank through its parent company. The Company has not utilized this facility as of December 31, 2015.

Credit risk

Credit risk is the potential for financial loss to the Company if a counterparty to a transaction fails to meet its obligations. The Company’s cash and cash equivalents and mortgage loans are subject to credit risk.

The Company manages credit risk related to cash and cash equivalents and mortgage loans by adhering to its Investment Policy which outlines credit risk parameters and concentration limits. The Company does not utilize derivative financial instruments.

At December 31, 2015, the Company’s cash and cash equivalents consisted of cash balances on deposit with Canadian chartered banks, bankers acceptances issued by Canadian chartered banks as well as provincial treasury bills. The Company regularly reviews the credit ratings of its counterparties.

The Company regularly reviews the credit quality of its mortgage loan portfolio and the adequacy of the collective allowance for credit losses. For further information on mortgages please see the Mortgage portfolio details section of this report below.

The Company monitors its credit risk management practices on an ongoing basis to evaluate their effectiveness.

Market risk

Market risk is the potential for loss to the Company from changes in the values of its financial instruments due to changes in foreign exchange rates, interest rates, or equity prices. The Company’s financial instruments are denominated in Canadian dollars and, therefore, are not subject to risks related to foreign exchange rates. The Company has no equity security holdings and does not utilize derivative financial instruments and is therefore not exposed to equity price risk.

Interest rate risk

The Company is exposed to interest rate risk to the extent that deposit assets and deposit liabilities mature or re-price at different points in time.

The objective of the Company’s asset and liability management is to control interest rate risk by actively managing its interest rate exposure in adherence with its Investment Policy which sets mismatch limits between deposit liabilities and the assets backing those liabilities. As at December 31, 2015, the Company was in compliance with the mismatch limits set out in the Investment Policy.

The table below reflects the impact on net earnings from an immediate parallel increase or decrease of 100 basis points in the yield curve:

As at December 31
(in thousands of dollars)
2015 2014
100 basis point increase 25 28
100 basis point decrease(1) (15) (20)

(1)Net earnings exposure is calculated by measuring the impact of a decline in interest rates where the resultant interest rate does not become negative.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Company manages operational risk through outsourcing arrangements with the Company’s parent and affiliated companies in accordance with the Company’s Outsourcing Policy. Operational risk is managed through the detailed control processes, and the risk avoidance and risk mitigation strategies employed by the Company and the affiliates which are party to the outsourcing agreements.

Mortgage portfolio details

As at December 31, 2015, mortgages totaled $21.7 million. The mortgage portfolio was 100% insured, 100% residential and geographically diverse.

There were no impaired loans. The collective allowance for credit losses was $170 thousand at December 31, 2015

Of the loans in the portfolio, 99% had remaining amortization periods of 25 years or less as of December 31, 2015.

The geographic distribution of the loans in the Company’s mortgage portfolio was within Investment Policy limits as at December 31, 2015, and was as follows:

Atlantic Canada

11.0%

Quebec

27.4%

Ontario

25.9%

Manitoba/Saskatchewan

12.5%

Alberta

12.8%

British Columbia

10.4%

Territories

0.0%

Designated office for support orders and support provisions

In compliance with the Support Orders and Support Provisions (Trust and Loan Companies) Regulations established under the Trust and Loan Companies Act, the following location has been designated for the service of all enforcement notices on Investors Group Trust Co. Ltd. across Canada.

Attention: Legal Department
Investors Group Trust Co. Ltd.
447 Portage Avenue
Winnipeg, Manitoba
R3B 3H5