RENEWAL IN A
CHANGING LANDSCAPE
Annual Report 2011
CONTENTS
6 Message from the Chairman of the Board
8 Message from the President and Chief Executive Officer
11 Source of Earnings
12
Source of Earnings by Line of Business
13 Management’s Discussion and Analysis
29 Management’s Responsibility for Financial Reporting
30
Independent Auditor’s Report
31 Appointed Actuary’s Report
32 Consolidated Financial Statements
37 Notes to the Consolidated Financial Statements
112 Participating Account Management Policy
114
Participating Account Dividend Policy
116 Corporate Governance Over Risk Management
117 Corporate Information
119 Board of Directors
120 Corporate Management
2
Empire Life Annual Report 2011
THE BUSINESS
LANDSCAPE
HAS CHANGED
DRAMATICALLY IN
A VERY SHORT TIME.
Despite a challenging economic and regulatory environment, Empire Life has set out to renew
the way we do business so we can provide smart, simple solutions to our customers.
Empire Life Annual Report 2011
3
Our vision is to be the leading,
independently-owned, Canadian
financial services company known
for simplicity, being easy to do business
with and having a personal touch.
4
Empire Life Annual Report 2011
OUR MISSION
Our mission is to help Canadians build wealth
and protect their financial security.
OUR CORE VALUES
INTEGRITY
We are honest, fair and respectful, honour our
commitments, and take pride in being a good
corporate citizen.
KNOW OUR CUSTOMER
We listen to our customers to provide products
and services that meet their needs.
CAN-DO ATTITUDE
We are positive, creative and always search for
better ways to do things.
HIGH-PERFORMANCE
We are focused on our priorities, have high
expectations and standards, and celebrate effort
and achievement.
Empire Life Annual Report 2011
5
FOCUS
THRIVE
EVOLVE
Duncan N.R. Jackman
Chairman of the Board
6
Empire Life Annual Report 2011
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
It has been an extraordinary period in the history of financial
I would like to pay tribute to Mr. James W. McCutcheon, QC,
services in Canada. In the past decade, we have seen
a former longtime Director and Chairman of our Board,
increased market volatility, global economic uncertainty
whose contributions and service to The Empire Life
and increasing regulation. Perhaps the most extraordinary
Insurance Company were many. Mr. McCutcheon passed
development has been the trend of low long-term interest
away in October 2011. He will be missed.
rates and its impact on the profitability and viability of
long-term insurance products.
I feel privileged to lead this Board and this company during
these extraordinary times and I thank everyone at
It has caused a re-evaluation of pricing and product mix
Empire Life for their contributions and commitment
across the industry. We are confident that changes made
to our ongoing success.
Duncan N.R. Jackman
Chairman of the Board
Toronto, Ontario
February 24, 2012
at Empire Life will ensure continued service to our
valued customers.
I think extraordinary could also be used to describe the
focus and commitment of Empire Life in managing through
these challenges to renew itself in this changing landscape.
The company has made significant progress on its strategic
agenda this past year.
I am confident the management team of Empire Life is
doing the right things to manage through the challenges
presented by the current economic landscape to continue to
grow and prosper. I am also impressed by the transparency
of management with the Board and with the level of
engagement and dialogue to ensure we are all doing the
right things for our stakeholders.
The launch of our subsidiary, Empire Life Investments Inc.,
is an important milestone for our company and especially
exciting given our history. My father, Henry (Hal) N.R.
Jackman, was instrumental in introducing some of the first
segregated funds in Canada through Empire Life. We have
more than 45 years of expertise and experience in managing
money for Canadians. It has been a great success story and
we are excited to be able to expand our reach to offer mutual
funds to Canadian investors.
7
Empire Life Annual Report 2011 EXPERTISE
CHANGE
GROWTH
Leslie C. Herr
President and Chief
Executive Officer
88
Empire Life Annual Report 2011
Empire Life Annual Report 2011 MESSAGE FROM THE
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Empire Life has been on a journey of renewal which started
We saw a similar trend in our Wealth business, with strong
in late 2009 when we established a new strategic direction
net income of $16.2 million, but lower sales than last
and began work on several key initiatives. In 2011, we
year. The highly volatile markets and uncertain economic
completed many of these initiatives. We have accomplished
conditions continued to make consumers nervous about
much and I am very pleased with the progress we have
investing in the markets. While gross and net segregated
made as a company to move us forward and position us
fund sales were disappointing, we believe we are well-
for future growth.
positioned for future growth in this line of business.
Our achievements are especially notable given the economic
It was a challenging year for our non-participating
conditions this past year. When we first established our
Individual Insurance product line with an overall net loss
business plans for 2011, we were anticipating a stable
of $33.8 million. The impact of continued low long-term
economy, less volatile markets and somewhat improved
interest rates on the profitability of this business line
interest rates. As the year unfolded, we saw the opposite
continues to be felt. We made three price increases in 2011
occur. Economic growth slowed, interest rates dropped
to improve our profitability and better reflect the current
significantly, and markets were extremely volatile. The
accounting, regulatory and economic environments.
European sovereign debt crisis and U.S. fiscal issues took a
Even with these price increases, sales continued strong
toll on long-term interest rates and on consumer confidence.
throughout the year. Clearly there is a market demand for
Despite these challenges, our company has made
significant progress to renew itself in this changing
business environment. We have a strong, diversified, solid
long-term insurance solutions in Canada. We will continue
to make prudent changes to our life insurance solutions so
that we are able to achieve our Return on Equity targets.
company with good people and sound governance, led
Shareholders’ Capital and Surplus earnings of $34.8 million
by a management team with a clear vision and focus. I
were up from $20.3 million in 2010. We sold and re-invested
am confident that our team is doing all the right things to
assets during the year as part of managing our portfolio
be well-positioned to take advantage of opportunities as
and managing our asset mix profile. This resulted in strong
conditions improve.
Our results
Shareholders’ net income of $32.3 million was higher than in
2010. Our Employee Benefits product line had a very strong
year with $15.1 million in net income, significantly higher
than 2010 results of $12.8 million. While new sales were
realized gains reflecting the expertise of our investment
management team to achieve results even under turbulent
market conditions.
Our Minimum Continuing Capital and Surplus Requirements
Ratio was 207% as at December 31, 2011, well above
minimum requirements.
slightly lower than last year, we saw strong premium growth
I believe our income results are not indicative of our
and good retention of our inforce business which resulted in
achievements this past year. I am pleased with our progress
a positive contribution to our overall results.
and our ability to remain focused on our goals and plans
despite the distractions and uncertainty around us.
9
Empire Life Annual Report 2011 Strategic initiatives
In 2011, we introduced a new brand framework with a new
Our industry and our community
Given these changes, it is important we work with
visual identity and a renewed commitment to simplifying
governments and regulators as they make decisions that
the world of financial services for our customers. We also
impact our company and industry. We have strengthened our
refreshed our corporate website using technology that
focus on regulatory affairs with a number of our senior leaders
enables online transactional capabilities for our customers
participating in industry committees and advisory groups.
and advisors.
We restructured our sales teams in both the Retail and Group
lines of business to capitalize on our strengths, build our
expertise, and expand our distribution. The transition to
these new sales teams has gone well and enables us to build
We are working closely with the Canadian Life and Health
Insurance Association (CLHIA) and other member companies
on an industry advocacy campaign to raise awareness among
members of parliament and government officials on the
importance of our industry to Canadians and our economy.
new relationships and strengthen existing relationships with
Helping to build strong, sustainable communities has been
distribution partners across the country.
important to Empire Life since its founding in 1923. Over the
We reached a significant milestone in November, when we
partnered with Citigroup (Citi) to administer our investment
business and converted the first block of investment policies
onto Citi’s platform. This partnership will help us achieve
operational efficiencies and enable us to offer a better overall
experience to our customers and distribution partners. Two
more conversions are planned that will bring the majority of
past year, we have continued our community investment in
the areas of health and medical research, education, social
services and the arts. This investment is not only in the form
of charitable donations and sponsorships, but also through
the thousands of volunteer hours our employees generously
provided to make a difference in communities across Canada.
We are very proud of them.
our investment business onto the Citigroup platform.
Renewal implies change, growth, and energy with a strong
We also made advancements last year towards the creation
of a single customer data registry so we can better know and
understand our customers, and what they are looking for
from their financial services company. This knowledge will
allow us to proactively offer key solutions to our customers
to meet their evolving needs across all product lines.
In 2011, we successfully formed a new wholly-owned
subsidiary, Empire Life Investments Inc., to offer mutual funds
to Canadians for the first time. We launched our fund family
at the beginning of 2012 with five stand-alone mutual funds
and five portfolio mutual funds. Being able to bring a wider
selection of investment products to Canadians is very exciting
and we look forward to growing our distribution and assets
through this new line of business.
anchor to the past. In this changing landscape, we are
continuing to renew our company by building on our past
successes and striving to be the leading, independently-
owned, Canadian financial services company known for
simplicity, being easy to do business with and having a
personal touch. Canadians want a financial services company
they can trust to help them build and protect their wealth.
We will always be a company that delivers on its promises
and does the right thing for its customers and all
its stakeholders.
I wish to thank all of the members of our Board of Directors
for their support and commitment to Empire Life and its
management. I also want to recognize and thank all of our
employees for their dedication and focus over this extremely
busy past year. Together I know we can achieve great things
Regulatory and accounting changes
In 2011, we successfully implemented International Financial
in the year ahead.
Reporting Standards (IFRS) Phase I. Moving to IFRS was a
major undertaking and this annual report reflects the new
reporting approach. Further accounting and regulatory
changes are on the horizon. We are concerned about the
impact of these changes and increasing regulation on
companies that have to adhere to international standards
which are not based on the Canadian model. These changes
are causing uncertainty and make it difficult to price products
and plan for future liabilities, particularly in our life insurance
business line.
10
Leslie C. Herr
President and Chief Executive Officer
Kingston, Ontario
February 24, 2012
Empire Life Annual Report 2011 SOURCE OF EARNINGS
Source of earnings is a methodology for identifying and quantifying the various sources of Canadian Generally Accepted
Accounting Principles (“GAAP”) income of a life insurance company. It presents shareholders’ net income in a different format
from the traditional income statement form and provides a better understanding of the Company’s sources of profit for each
major product line.
Expected Profit from In-Force Business
This source of earnings represents the profit the Company expects to generate on in-force business if experience is in line with
the Company’s best estimate assumptions for mortality, morbidity, persistency, investment returns, expenses and taxes.
Impact of New Business
Writing new business typically adds economic value to a life insurance company. However, as of the point of sale, new business
may have a positive or negative impact on earnings. A negative impact (new business strain) will result when the provision
for adverse deviation included in the actuarial liabilities at the point of sale exceeds the expected profit margin in the product
pricing. The impact of new business also includes any excess acquisition expenses not covered by product pricing at the
point of issue.
Experience Gains and Losses
This item represents gains or losses due to the difference between actual experience and the best estimate assumptions.
Management Actions and Changes in Assumptions
This component includes earnings generated by management actions during the year (e.g. acquisition or sale of a block of
business, changes to product price, fees or asset mix, etc.) or the impact of changes in assumptions or methodology used for
the calculation of actuarial liabilities for in-force business.
Other
This item includes any source of earnings from operations not included above.
Earnings on Surplus
This component represents the pre-tax earnings on the shareholders’ capital and surplus funds.
11
Empire Life Annual Report 2011 SOURCE OF EARNINGS BY LINE OF BUSINESS
For the year ended December 31
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
$ 28.3
(17.1)
2.0
$ 22.9
(15.3)
(3.7)
$ 15.9
(11.1)
14.0
$ 13.5
(9.4)
14.4
$ 39.0
(33.8)
(36.9)
$ 38.0
(41.3)
(2.1)
4.5
-
2.8
-
2.2
-
(0.4)
-
(19.4)
-
(26.5)
(0.8)
$ 83.2
(62.0)
(20.9)
$ 74.4
(66.0)
8.6
(12.7)
-
(24.1)
(0.8)
17.7
-
$ 17.7
1.5
$ 16.2
6.7
-
$ 6.7
(2.9)
$ 9.6
21.0
-
$ 21.0
5.9
$ 15.1
18.1
-
$ 18.1
5.3
$ 12.8
(51.1)
-
$ (51.1)
(17.3)
$ (33.8)
(32.7)
-
$ (32.7)
(9.8)
$ (22.9)
-
47.1
$ 47.1
12.3
$ 34.8
-
27.1
$ 27.1
6.8
$ 20.3
(12.4)
47.1
$ 34.7
2.4
$ 32.3
(7.9)
27.1
$ 19.2
(0.6)
$ 19.8
(in millions of dollars)
Expected profit on in-force
business
Impact of new business
Experience gains & losses
Management actions and
changes in assumptions
Other
Earnings on operations before
income taxes
Earnings on surplus
Income before income tax
Income taxes
Shareholders’ Net Income
Wealth Management
Wealth Management’s 2011 earnings on operations were higher than the level achieved in 2010. Most of the improvement related to an
increase in income from experience results primarily related to lower segregated fund guarantee payouts.
In addition, there was an increase in expected profit on in-force business due primarily to the segregated fund business. Higher net
income on in-force business in 2011 was due to the increase in average segregated funds under management relative to 2010 and growth
of the guaranteed minimum withdrawal benefit (“GMWB”) product which generates higher fees than other segregated fund products.
Management actions and changes in assumptions was also favourable in 2011 relative to 2010. The 2011 assumption updates related to
general fund annuities and were due primarily to favourable updates to investment assumptions and favourable annuitant mortality
experience. This was partly offset by a 2011 loss in this product line related to updating insurance liabilities to reflect new industry
guidance from the Canadian Institute of Actuaries (“CIA”) for annuitant mortality assumptions. This new guidance revised methods for
reflecting mortality improvements up to and beyond the valuation date, generally resulting in higher levels of mortality improvement
in the valuation assumption.
Employee Benefits
Employee Benefits’ earnings on operations were higher than the level achieved in 2010. Most of the increase was due to a more favourable
update of policy liability assumptions in 2011 relative to 2010. Net income was strong in both years in this product line as claims experience
was favourable in both years.
Individual Insurance
The decrease in Individual Insurance earnings on operations was primarily due to unfavourable investment experience which was caused
by a significant drop in long-term interest rates and a significant stock market drop in 2011. While the impact of this on net income is
largely reduced due to a corresponding change in insurance contract liabilities, net income is impacted as it is not possible to perfectly
match future liability cash flows with future asset cash flows.
This was partly offset by a lower loss from management actions and changes in assumptions in 2011 relative to 2010. Both years had
significant losses from changes in assumptions due to a significant strengthening of policy liabilities from the annual assumption update
during both 2011 and 2010. This strengthening was primarily related to reinvestment assumptions, driven by the persisting low interest
rate environment. The strengthening was partly offset by releases related to ongoing mortality improvement in this product line. In
addition, in 2011 a gain occurred in this product line related to updating insurance liabilities to reflect new industry guidance from the
CIA, related to individual life insurance mortality assumptions. This new guidance revised methods for reflecting mortality improvements
up to and beyond the valuation date, generally resulting in higher levels of mortality improvement in the valuation assumption.
Both years had significant losses from new business strain due to high strain rates arising from the low interest rate environment.
However, new business strain improved in 2011 relative to 2010 due to price increases implemented in 2011.
12
Empire Life Annual Report 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS
This document has been prepared for the purpose of providing Management’s Discussion and Analysis (“MD&A”) of the
operating results and financial condition of The Empire Life Insurance Company (“Empire Life” or the “Company”) for the
years ended December 31, 2011 and 2010. This MD&A should be read in conjunction with the Company’s December 31, 2011
consolidated financial statements, which form part of The Empire Life Insurance Company 2011 Annual Report dated February
24, 2012. The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting
Principles (“Canadian GAAP”) as set out in Part I of the Handbook of the Canadian Institute of Chartered Accountants (“CICA
Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”),
and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011.
Accordingly, the Company has reported on this basis in these consolidated financial statements. In the MD&A, the term
“Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS. Unless otherwise noted, both the consolidated financial
statements and this MD&A are expressed in Canadian dollars.
The MD&A may contain certain forward-looking statements that are subject to risks and uncertainties that may cause the results
or events mentioned in this discussion to differ materially from actual results or events. No assurance can be given that results,
performance or achievement expressed in, or implied by, any forward-looking statements within this discussion will occur,
or if they do, that any benefits may be derived from them.
Use of Non-GAAP Measures
The report contains references to annualized premium sales. This term does not have any standardized meaning according to
GAAP and therefore may not be comparable to similar measures presented by other companies. Annualized premium sales is
used as a method of measuring sales volume. It is equal to the premium expected to be received in the first twelve months for
all new Individual Insurance and Employee Benefit policies sold during the period. The Company believes that this measure
provides information useful to its shareholders and policyholders in evaluating the Company’s underlying financial results.
International Financial Reporting Standards (“IFRS”)
Empire Life’s results are now being reported in accordance with IFRS as issued by the International Accounting Standards
Board (“IASB”) and as incorporated into Part 1 of the Handbook of The Canadian Institute of Chartered Accountants. All
comparative information has been restated to reflect the application of IFRS. Note 3 – First time adoption of International
Financial Reporting Standards of the financial statements provides a detailed description of the impact of Empire Life’s
transition to IFRS. This note includes a line-by-line reconciliation of the financial statements reported under previous
Canadian GAAP to those under IFRS as at December 31, 2010 and January 1, 2010 and for the year ended December 31, 2010
as well as explanations of the individual adjustments that resulted from the transition. The impact of the transition from
previous Canadian GAAP to IFRS on Empire Life’s financial results is described in the Overview section and the Other
Comprehensive Income section of this report.
13
Empire Life Annual Report 2011 Financial Analysis
Overview
(in millions of dollars)
Shareholders’ net income
Quarterly results
Year
Q4 2011
$ 8.2
Q4 2010
2011
2010
$ 4.0
$ 32.3
$ 19.8
Empire Life reported full year shareholders’ net income of $32.3 million for 2011, compared to $19.8 million in 2010.
For the year, shareholders’ net income was higher relative to 2010 due primarily to gains from the sale of portfolio assets
backing Capital and Surplus. In addition both the Wealth Management and Employee Benefits product lines reported improved
net income in 2011. These favourable items were partly offset by a shareholders’ net loss from the Individual Insurance product
line due primarily to the impact of low interest rates.
Shareholders’ net income includes a $17 million after tax gain in 2011 related to new CIA guidance for reflecting mortality
improvements. This gain increased 2011 Individual Insurance net income by $27 million and decreased 2011 Wealth
Management net income by $10 million.
For Individual Insurance, net income includes a $6 million after tax loss in the first quarter of 2010 related to a change in
actuarial methods. The change in actuarial methods was related to the January 1, 2010 transition to International Financial
Reporting Standards (“IFRS”) and is described further in the next paragraph.
Prior year shareholders’ net income for the year was $10.4 million lower under IFRS than Canadian GAAP (IFRS $19.8 million
versus Canadian GAAP $30.2 million). The decrease impacted primarily Individual Insurance and occurred primarily in the
first quarter of 2010. $3.5 million of the decrease was due primarily to the re-designation of equity assets supporting insurance
contract liabilities from Available For Sale (“AFS”) to Fair Value Through Profit and Loss (“FVTPL”). Upon transition on
January 1, 2010, cumulative unrealized gains and losses were reclassified from Accumulated Other Comprehensive Income
(“AOCI”) to Retained earnings. As a result, realized gains related to these former AFS assets were lower under IFRS in 2010
than was previously reported under Canadian GAAP. In addition, during the first quarter of 2010 the method for setting the
investment return on insurance contract liabilities was updated by utilizing a modified mean reversion approach. This method
change was made due to the IFRS transition decision to re-designate equity assets supporting insurance liabilities. $6 million
of the above mentioned 2010 shareholders’ net income decrease resulted from this method change.
Prior year fourth quarter shareholders’ net income was $1.8 million lower under IFRS than Canadian GAAP (IFRS $4.0 million
versus Canadian GAAP $5.8 million).
Policyholders’ net income (which is not included in the above table) includes a $9 million after tax gain in 2011 related to
reflecting the impact of moving to an adjusted book value method for participating insurance business. The method change
results in greater consistency with industry peers.
Empire Life has three major product lines (Wealth Management, Employee Benefits and Individual Insurance) and maintains
distinct accounts for Capital and Surplus. A discussion of each product line’s 2011 net income compared to 2010 is shown in the
Product Line Results sections later in this report.
14
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 This report contains references to annualized premium sales. This term does not have any standardized meaning according to
GAAP and therefore may not be comparable to similar measures presented by other companies. Annualized premium sales
is used as a method of measuring sales volume. It is equal to the premium expected to be received in the first twelve months
for all new Individual Insurance and Employee Benefit policies sold during the period. Empire Life believes that this measure
provides information useful to its shareholders and policyholders in evaluating Empire Life’s underlying financial results.
The Company established a mutual fund subsidiary during the second quarter of 2011, Empire Life Investments Inc. (“ELII”).
During the third quarter of 2011, the Company provided working capital to ELII. ELII became operational in January 2012.
Empire Life’s consolidated financial statements include ELII.
In August 2011, the Company announced changes to The Empire Life Insurance Company Staff Pension Plan that became
effective on January 1, 2012. The Empire Life Insurance Company Staff Pension Plan consists of a defined benefit component
and a newly created defined contribution component. The defined contribution component became effective January 1, 2012.
Plan participants as of September 30, 2011 were offered the choice of continuing membership in the defined benefit component
or switching to the newly created defined contribution component on January 1, 2012. The Company discontinued new
enrolments in the defined benefit component effective October 1, 2011. Plan participants advised the Company of their decisions
on November 30, 2011. Approximately 5.8% of employees opted to switch from the defined benefit component to the defined
contribution component of the pension plan.
The analysis and discussion which follows is focused on the full year 2011 and comparative 2010 line of business net income
after tax.
The following tables provide a summary of Empire Life results by major product line:
For the year ended
December 31
(in millions of dollars)
Revenue
Net premium income
Fee and other income
Investment income
Realized gain on FVTPL
investments
Realized gain (loss) on
available for sale investments
including impairment write-downs
Fair value change in FVTPL
investments
Expenses
Benefits and expenses
Income and other taxes
Net Income (Loss) After Tax
Policyholders’ portion
Shareholders’ Net Income
Assets under management
General fund assets
Segregated fund assets
Annualized premium sales
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
$ 141 $ 239
104
58
110
56
$ 278
7
6
$ 262
6
6
$ 339
1
118
$ 316
1
104
$ -
2
37
$ - $ 758
120
217
2
36
$ 817
113
204
6
-
4
-
2
-
25
338
10
415
14
307
-
8
282
-
33
4
-
-
(1)
26
-
8
41
26
8
7
356
847
196
620
-
65
-
46
395
214
1,557
1,363
320
2
322
408
(3)
405
$ 16 $ 10
280
12
292
$ 15
258
11
269
$ 13
892
(10)
882
15
13
28
$ (35) $ (31) $ 37
657
(6)
651
$ 1,137 $ 1,141
$ 4,392 $ 4,592
$ 23
$ 28
$ 41
$ 43
$ 73
$ 68
15
8
23
$ 23
1,507
17
1,524
$ 33
1,338
10
1,348
$ 15
1
(5)
$ 32
$ 20
$ 5,600
$ 4,910
$ 4,415
$ 4,620
15
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011
Total Revenue
(in millions of dollars)
Revenue
Net premium income
Investment income
Fair value change in FVTPL investments including realized amounts
Realized gain on available for sale investments including impairment write-downs
Fee and other income
Total
Quarterly results
Year
Q4 2011
Q4 2010
2011
2010
$ 184
56
188
19
29
$ 476
$ 200
54
(32)
1
30
$ 253
$ 758
217
436
26
120
$ 1,557
$ 817
204
222
7
113
$ 1,363
For the year, total revenue at Empire Life increased by 14% to $1.6 billion compared to $1.4 billion in 2010. Major revenue
items are discussed below.
Net premium income for the year decreased in 2011 relative to 2010. The decrease related to fixed interest annuity premiums
which declined to more typical levels from 2010’s strong levels.
Fair value change in FVTPL investments including realized amounts often cause large revenue volatility. These assets
experienced a net gain for the year in both 2011 and 2010 from primarily an increase in bond prices (due to a decrease in
market interest rates). This was partly offset by a decrease in common share prices for the year in 2011. The impact of this on
net income is largely reduced due to a corresponding change in insurance contract liabilities (discussed in the Total Benefits
and Expenses section below).
Realized gain on available for sale investments including impairment write-downs was a larger gain for the year in 2011
relative to 2010 due primarily to the sale of certain AFS equity investments. These gains and losses impact net income and
are considered in the net income investment experience comments for each of the impacted product lines (see Product Line
Results sections later in this report). The assets sold and the impaired assets written down back primarily capital and surplus.
Total Benefits and Expenses
(in millions of dollars)
Benefits and expenses
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contracts provision
Policy dividends
Operating expenses
Net commissions
Interest expense
Total
Quarterly results
Year
Q4 2011
Q4 2010
2011
2010
$ 128
248
-
6
34
39
3
$ 458
$ 140
26
-
5
32
42
3
$ 248
$ 513
664
1
21
130
164
14
$ 1,507
$ 534
497
1
19
116
157
14
$ 1,338
Total benefits and expenses at Empire Life for the year increased by 13% to $1.5 billion compared to $1.3 billion in 2010.
Major benefit and expense items are discussed below.
16
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Net benefits and claims variability is dependent on the claims incurred. Generally, claims rise year over year due to growth of
the insurance blocks. However, for the year, a decrease in claims occurred related primarily to Individual Insurance. Variability
in claims amounts does not, in isolation, impact net income as insurance contract liabilities are released when claims occur. The
insurance contract liabilities released can be larger or smaller than the claims incurred depending on whether claims experience
has been favourable or unfavourable. Claims experience is the combination of claims incurred compared to claims expected in
product pricing and in insurance contract liabilities. Year-over-year claims experience is discussed in each of the impacted product
lines (see Product Line Results sections later in this report).
Net change in insurance contract liabilities varies with many factors including new business sold, claims incurred, surrender and
lapse experience, assumptions about the future, and changes in the market value of assets matching insurance contract liabilities.
For the year, the main reason for the large change from 2010 for this item was the change in insurance contract liabilities resulting
from the fair value change in matching assets (described above in the Total Revenue section). Variability in the increase in insurance
contract liabilities amounts does not, in isolation, impact net income as it must be looked at in concert with other lines of the
statement of operations.
Policy dividends increased year over year due to growth of business in-force.
Operating expenses and commission expenses increased year over year due to growth in annualized premium sales and business
in-force. Operating expenses also increased due to higher expenditure on strategic initiatives, related primarily to branding, web
site enhancement and investment in the wealth management line of business.
Product Line Results – Wealth Management
(in millions of dollars)
Assets under management
General fund annuities
Segregated funds
(in millions of dollars)
Selected financial information
Fixed interest annuity premiums
Segregated fund gross sales
Segregated fund net sales
Segregated fund fee income
Net income after tax fixed income annuity portion
Net income after tax segregated fund portion
Net Income After Tax
As at Dec. 31
2011
2010
$ 1,137
4,392
$ 1,141
4,592
Quarterly results
Year
Q4 2011
Q4 2010
2011
2010
$ 30
185
(1)
27
$ 4
1
$ 5
$ 50
226
14
28
$ 141
725
(24)
110
$ 239
778
79
104
$ 3
3
$ 6
$ 7
9
$ 16
$ 4
6
$ 10
Assets in Empire Life general fund annuities decreased by less than 1%, while segregated fund assets decreased by 4% during
the last twelve months. The decrease over the last twelve months for segregated funds was attributable to negative investment
returns, due to the stock market decline, and negative net sales (gross sales net of withdrawals) described below.
17
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Premium income for the Wealth Management product line is comprised solely of new deposits on fixed interest annuities and
excludes deposits on the segregated fund products. For the year, fixed interest annuity premiums were down 41% compared
to 2010 due primarily to decreased sales of fixed interest deferred annuities. However, 2010 was a strong year for fixed interest
annuity sales. The 2011 fixed interest annuity premiums represent a return to more typical levels.
For the year, segregated fund gross sales were down 7% compared to 2010. Net sales were a small negative for the year and
were lower than 2010 due to decreased gross sales and increased withdrawals.
For the year, segregated fund fee income increased by 7% in 2011 relative to 2010 as management and insurance fees earned
on segregated funds grew. This increase was due to higher average assets under management in 2011 compared to 2010 as
stock markets were higher on average in 2011 than they were in 2010, combined with growth of the guaranteed minimum
withdrawal benefit (“GMWB”) product.
During the fourth quarter, earnings from this product line decreased relative to 2010. However, for the year 2011, earnings
from this product line increased compared to 2010. The following table provides a breakdown of the components of this
year-over-year change in net income.
(in millions of dollars)
Wealth Management Net Income Analysis
Net income after tax 2011
Net income after tax 2010
Increase (Decrease) Net Income After Tax
Components of increase (decrease)
2011 loss re: update of insurance liability to reflect new
actuarial guidance related to mortality assumptions
Update of policy liability assumptions
Increase (decrease) in inforce profit margins
Improved (worsened) investment experience
Improved (worsened) segregated fund death benefit guarantee and mortality results
Total
Q4
Year
$ 5
6
$ (1)
$ 16
10
$ 6
$ (10)
13
(1)
(2)
(1)
$ (10)
13
2
-
1
$ (1)
$ 6
In 2011, a loss occurred in this product line related to updating insurance liabilities to reflect new industry guidance from the
CIA for annuitant mortality assumptions. This new guidance revised methods for reflecting mortality improvements up to
and beyond the valuation date, generally resulting in higher levels of mortality improvement in the valuation assumption.
The update of policy liability assumptions was favourable in 2011 relative to 2010. The 2011 updates for general fund annuities
related primarily to favourable updates to investment assumptions and favourable annuitant mortality experience.
Higher net income on in-force business in 2011 was due to the increase in average segregated funds under management
relative to 2010 and growth of the GMWB product which generates higher fees than other segregated fund products.
18
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Product Line Results – Employee Benefits
(in millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income after tax
Quarterly results
Year
Q4 2011 Q4 2010
2011
2010
$ 9
70
3
$ 10
66
$ 41
278
1 15
$ 43
262
13
For the year, sales in this product line decreased by 5% relative to 2010. The 2011 sales reflect a slow down, but remain strong
compared to the recessionary lows experienced two years ago. This product line’s premium income for the year increased by 6%
relative to 2010 due to continuing growth of the in-force block.
During the fourth quarter and for the year, earnings from this product line increased relative to 2010. The following table
provides a breakdown of the components of this year-over-year change in net income.
(in millions of dollars)
Employee Benefits Net Income Analysis
Net income after tax 2011
Net income after tax 2010
Increase in Net Income After Tax
Components of increase
Update of policy liability assumptions
Total
Q4
Year
$ 3
1
$ 2
$ 15
13
$ 2
$ 2
$ 2
$ 2
$ 2
Net income was strong in both years in this product line as claims experience was favourable in both years. The update of
policy liability assumptions was more favourable in 2011 than 2010.
19
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Product Line Results – Individual Insurance
(in millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income (loss) after tax
Net loss after tax shareholders' portion
Net income (loss) after tax policyholders’ portion
Net Loss After Tax
Quarterly results
Year
Q4 2011 Q4 2010
2011
2010
$ 14
85
$ 19
83
$ 73
339
$ 68
316
$ (19)
6
$ (13)
$ (8)
(2)
$ (10)
$ (34)
(1)
$ (35)
$ (23)
(8)
$ (31)
For the year, annualized premium sales in this product line increased by 8% compared to 2010, and premium income
increased by 7% compared to 2010. This product line’s sales result is attributable primarily to increased volume resulting from
distributor concerns that further price increases may occur for several long-term products. Empire Life has been increasing
prices on long-term products due to the low long-term interest rate environment, a trend we have observed with many of
our competitors.
During the fourth quarter and for the year, earnings from this product line decreased relative to 2010. The following table
provides a breakdown of the components of this year-over-year change in net income.
(in millions of dollars)
Individual Insurance Net Loss Analysis
Net loss after tax 2011
Net loss after tax 2010
Increase in Net Loss After Tax
Components of loss increase
2010 loss re: update of insurance liability method for setting investment return
2011 gain re: update of insurance liability to reflect new actuarial guidance related to mortality assumptions
2011 gain re: update of insurance liability to reflect change in method related to participating insurance
Update of policy liability assumptions
Worsened investment experience
Improved mortality, surrender and other experience
Lower new business strain
Total
Q4
Year
$ (13)
(10)
$ (3)
$ (35)
(31)
$ (4)
$ -
27
9
(36)
(6)
-
3
$ (3)
$ 6
27
9
(36)
(18)
5
3
$ (4)
During the first quarter of 2010, the method for setting the investment return on insurance contract liabilities was updated by
utilizing a modified mean reversion approach. This method change was made due to the IFRS transition decision to re-designate
$151 million of financial assets supporting insurance liabilities. These assets, which were previously designated as AFS under
Canadian GAAP, are now designated as FVTPL under IFRS.
In 2011, a gain occurred in this product line related to updating insurance liabilities to reflect new industry guidance from the
CIA, related to individual life insurance mortality assumptions. This new guidance revised methods for reflecting mortality
improvements up to and beyond the valuation date, generally resulting in higher levels of mortality improvement in the
valuation assumption.
20
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 In 2011, a gain occurred in this product line related to updating insurance liabilities to reflect the impact of moving to an adjusted
book value method for participating insurance business. The method change results in greater consistency with industry peers.
The update of policy liability assumptions was very unfavourable in 2011 relative to 2010. The 2011 updates related primarily
to unfavourable updates to investment assumptions caused by a significant drop in long-term interest rates (decreased 2011
shareholders’ net income by $66 million). This unfavourable assumption update was partly offset by a favourable assumption
update in 2011 resulting from favourable mortality experience in the individual life insurance business (increased 2011
shareholders’ net income by $26 million). These two 2011 items were the primary reason for the negative $36 million
year-over-year change related to update of policy liability assumptions.
Worsened investment experience was caused by a significant drop in long-term interest rates and a significant stock market drop
in 2011. While the impact of this on net income is largely reduced due to a corresponding change in insurance contract liabilities,
net income is impacted as it is not possible to perfectly match future liability cash flows with future asset cash flows.
Results – Capital and Surplus
(in millions of dollars)
Net income (loss) after tax
Net income after tax shareholders' portion
Net income after tax policyholders’ portion
Net Income After Tax
Quarterly results
Year
Q4 2011 Q4 2010
2011
2010
$ 18
1
$ 19
$ 5
1
$ 6
$ 35
2
$ 37
$ 20
3
$ 23
In addition to the three major lines of business, Empire Life maintains distinct accounts for the investment income
attributable to Shareholders’ Capital and Surplus and to Policyholders’ Surplus. During the fourth quarter and the full year,
Capital and Surplus earnings increased relative to 2010. The following table provides a breakdown of the components of this
year-over-year change in net income.
(in millions of dollars)
Capital and Surplus Net Income Analysis
Net income after tax 2011
Net income after tax 2010
Increase in Net Income After Tax
Components of increase
Increased net income from sale of investments
Higher impairment write-downs
Increased investment income
Total
Q4
Year
$ 19
6
$ 13
$ 37
23
$ 14
$ 14
(1)
-
$ 13
$ 16
(4)
2
$ 14
Increased net income from sale of investments resulted primarily from higher gains from the sale of certain AFS equity
investments compared to 2010. Approximately $7 million of this increase in net income resulted from gains on the sale of
$100 million of equities in the fourth quarter of 2011 aimed at lowering equity exposure in Empire Life’s asset mix.
Higher impairment write-downs resulted primarily from the sharp decline in stock markets during the third quarter of 2011.
21
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Total Cash Flow
(in millions of dollars)
Cash Flow provided from (used for)
Operating Activities
Investing Activities
Financing Activities
Net Change in Cash and Cash Equivalents
Year
2011
2010
$ 180
(160)
(16)
$ 4
$ 170
(153)
(15)
$ 2
The increase in cash provided by operating activities in 2011 relative to 2010 was due primarily to lower cash outflows related
to income taxes and higher cash inflows related to all major business lines except annuities. These items were partially offset by
decreased cash inflows related to annuity business.
The increase in cash used for investing activities during 2011 relative to 2010 was due primarily to the increase in cash provided
by operating activities.
The cash used for financing activities during both 2011 and 2010 was due to the payment of dividends to common shareholders.
Capital Resources
MCCSR Ratio
Dec 31
Sept 30
June 30
Mar 31
Dec 31
2011
207%
2011
215%
2011
232%
2011
237%
2010
239%
Empire Life continues to maintain a strong balance sheet and capital position. The A (Excellent) rating given to Empire Life
by A.M. Best Company provides third party confirmation of this strength. Empire Life’s risk-based capital ratio, as measured
by Minimum Continuing Capital and Surplus Requirements (“MCCSR”), of 207% as at December 31, 2011 continued to be well
above requirements and above minimum internal targets.
The MCCSR ratio decreased by 8 points from the previous quarter due to increases in capital requirements partly offset by
increases in total available capital. Capital requirements increased due primarily to higher lapse rate exposures related to
lower interest rates. However, this increase was partially offset by lower required capital due to the sale of $100 million
of equities in the fourth quarter of 2011 aimed at lowering equity exposure in Empire Life’s asset mix. Total available
capital increased due to the impact of the net income on Tier 1 available capital partly offset by the impact of the Other
Comprehensive Loss (“OCL”) related to the sale of equity assets on Tier 2 capital. In addition, an increase in negative insurance
contract liabilities resulted in an $18 million decrease in Tier 1 capital and an $18 million increase in Tier 2 capital.
The MCCSR ratio decreased by 32 points for the year for the same reasons as described above related to Tier 2 available capital
and required capital. In addition, Tier 2 available capital was unfavourably impacted for the year by lower stock markets in
2011. Total available capital was reduced for the year due to net income being more than offset by the OCL and by the payment
of shareholder dividends.
22
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011
Other Comprehensive Income
(in millions of dollars)
Other comprehensive income (OCI) (loss) (OCL)
Shareholders’ OCI (OCL)
Policyholders’ OCI (OCL)
Quarterly results
Year
Q4 2011 Q4 2010
2011
2010
$ (6)
$ 1
$ 10
$ 2
$ (18)
$ (1)
$ 20
$ 2
Unrealized gains and losses, primarily on financial assets backing Capital and Surplus, are recorded as Other Comprehensive
Income (“OCI”) or Other Comprehensive Loss (“OCL”). When these assets are sold or written down the resulting gain or loss is
reclassified from OCI to net income. A gain reclassified to net income causes a loss in OCI. A loss reclassified to net income causes
a gain in OCI.
For the year, a loss resulted in 2011 due primarily to the reclassification to net income of a large realized gain in 2011 versus a
small realized gain in 2010. In addition, this 2011 loss was due to a stock market decline in 2011 versus a stock market rise in 2010.
Prior year fourth quarter shareholders’ OCI was $8 million lower under IFRS than Canadian GAAP (IFRS OCI $10 million versus
Canadian GAAP OCI $18 million). The decrease was due primarily to the re-designation of equity assets supporting insurance
contract liabilities from AFS to FVTPL.
Prior year shareholders’ OCI for the year was $5 million lower under IFRS than Canadian GAAP (IFRS OCI $20 million versus
Canadian GAAP OCI $25 million). The decrease was due primarily to the re-designation of equity assets supporting insurance
contract liabilities from AFS to FVTPL.
Industry Dynamics and Management’s Strategy
Empire Life’s operations are organized by product line with each line of business having responsibility for product development,
marketing, distribution and customer service within their particular markets. This structure recognizes that there are distinct
marketplace dynamics in each of the three major product lines. Management believes this structure enables each line of business
to develop strategies to achieve the enterprise-wide objectives of business growth and expense management while recognizing
the unique business environment in which each operates. The lines of business are supported by corporate units that provide
product pricing, administrative and technology services to the lines of business, manage invested assets, and oversee enterprise
risk management policies.
Based on general fund and segregated fund assets, Empire Life is among the ten largest life insurance companies in Canada.
Empire Life has less than six per cent market share in all three of its product lines. To be priced competitively in the marketplace
while simultaneously providing acceptable long-term financial contribution to shareholders, Empire Life, as a mid-sized
company, must find a way to be cost competitive with the larger companies that have some natural economy of scale advantages.
In order to improve its unit expenses, management’s enterprise-wide strategic focus has been on achieving profitable growth in
its selected markets and on expense management. Empire Life has focused exclusively on the Canadian marketplace and within
it, on particular market segments where management feels there are opportunities to build solid, long-term relationships with
independent distribution partners by offering competitive products and more personal service. By focusing on particular market
segments and by being seen by these independent advisors as a viable alternative to broadly focused competitors, management
believes these solid relationships will enable profitable growth.
23
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 The Wealth Management product line at Empire Life is comprised of segregated fund products and guaranteed interest products.
In January 2012, mutual funds were added to this product line. These products compete against products offered by a variety of
financial institutions. A key element of any competitive strategy in this market is providing a competitive rate of return to
clients. The value oriented equity investment strategy used by Empire Life has focused on developing long-term performance
in the fund marketplace. Management is expecting to grow market share through this long-term performance along with
broadened distribution reach and the addition of new funds and fund products such as the recently launched mutual
fund products.
Within the broader employee benefits marketplace in Canada, Empire Life continues to focus on the small group market
comprised of employers with fewer than 200 employees. This niche strategy coupled with an ongoing focus on balancing growth
and profit has enabled Empire Life to be cost competitive within this market segment and is expected to enable this product line
to continue to grow its market share while generating acceptable returns.
Individual Insurance products are very long-term in nature and consequently can be subject to significant levels of new business
strain. New business strain occurs when the provision for adverse deviation included in the actuarial policy liabilities exceeds
the profit margin in the product pricing. Unless a company opts for increased levels of reinsurance, current price levels in the
Canadian marketplace create significant new business strain that has a negative impact on short-term earnings. Sales strain
has been particularly high in 2010 and 2011 due to the low long-term interest rate environment that followed the financial
crisis. This has impacted the entire industry resulting in significant price increases in 2011 for individual insurance products by
Empire Life and many of our competitors. Rather than give up the future earnings that would emerge if the trend in mortality
improvement witnessed in recent decades continues, Empire Life continues to utilize lower than average levels of reinsurance
with the resultant negative impact on short-term earnings. Because of the reasonable long-term returns of this product line,
management continues to focus on steady growth, technology development and process improvement in order to continue to
improve this product line’s unit expenses and maintain a competitive market position while generating an acceptable long-term
financial contribution.
Risk Management
Empire Life’s MCCSR ratio, among other things, is sensitive to stock market volatility, due primarily to liability and capital
requirements related to segregated fund guarantees. As of December 31, 2011 Empire had $4.4 billion of segregated fund assets
and liabilities. Of this amount, approximately $4.2 billion have guarantees. The following table provides a percentage breakdown
by type of guarantee:
Percentage of segregated fund liabilities with:
75% maturity guarantee and a 100% death benefit guarantee
100% maturity and death benefit guarantees (with a minimum
of 15 years between deposit and maturity date)
100% maturity and death benefit guarantees (guaranteed minimum withdrawal benefit (GMWB))
Dec 31 2011
Dec 31 2010
77.7%
5.6%
16.7%
83.2%
5.5%
11.3%
24
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 All Empire Life segregated fund guarantees are policy-based (not deposit-based), thereby lowering Empire Life’s stock market
sensitivity relative to products with deposit-based guarantees. For segregated fund guarantee insurance contract liabilities,
the level of sensitivity is highly dependent on the level of the stock market at the time of performing the estimate. If period end
stock markets are high relative to market levels at the time that segregated fund policies were issued, the sensitivity is reduced.
If period end stock markets are low relative to market levels at the time that segregated fund policies were issued, the sensitivity
is increased. Based on stock market levels at December 31 for 2011 and 2010, the sensitivity of shareholders’ net income to
changes in segregated fund guarantee insurance contract liabilities resulting from stock market increases and decreases
is as follows:
(in millions of dollars)
Sensitivity to Segregated Fund Guarantees:
2011 Shareholders' net income
2010 Shareholders' net income
10% Increase
10% Decrease
20% Increase
20% Decrease
$
$
nil
nil
$
$
nil
nil
$
$
nil
nil
$
$
nil
nil
Based on stock market levels on the dates indicated below, the sensitivity of Empire Life’s MCCSR ratio to stock market increases
and decreases for all Empire Life stock market exposures, including segregated fund guarantees, is as follows:
(in millions of dollars)
Sensitivity to Stock Markets:
December 31, 2011 MCCSR Ratio
December 31, 2010 MCCSR Ratio
10% Increase
10% Decrease
20% Increase
20% Decrease
0.9%
0.7%
-2.4%
-0.7%
1.7%
1.3%
-19.1%
-2.2%
Empire Life has not historically hedged or reinsured its segregated fund guarantee risk. Given the current segregated fund
product mix and level of sensitivity to stock markets, Empire Life has not hedged or reinsured its segregated fund guarantee
risk as of December 31, 2010 or December 31, 2011. In addition, Empire Life does not reinsure any other insurer’s segregated
fund products.
The amount at risk related to segregated fund maturity guarantees and segregated fund death benefit guarantees and the
resulting actuarial liabilities and MCCSR required capital for Empire Life segregated funds is as follows:
Segregated Funds
(in millions of dollars)
December 31, 2011
December 31, 2010
Guarantee > Fund Value
Death Benefit > Fund Value
Fund Value Amount At Risk
$ 19
$ 12
$ 176
$ 113
Fund Value Amount At Risk
$ 212
$ 137
$ 2,089
$ 1,422
Actuarial
Liabilities
$ nil
$ nil
MCCSR
Required Capital
$ nil
$ nil
The above table shows all segregated fund policies where the future maturity guarantee or future death benefit guarantee is
greater than the fund value. The amount at risk represents the excess of the future maturity guarantee or future death benefit
guarantee amount over the fund value for these policies. The amount at risk is not currently payable. Payment is contingent
on future outcomes including fund performance, deaths, deposits, withdrawals and maturity dates. The level of actuarial
liabilities and required capital is calculated based on the probability that Empire Life will ultimately have to make payment to the
segregated fund policyholders for any fund value deficiency that may exist upon either future maturity of the segregated fund
policies, or upon future death of the segregated fund policyholders. The amounts at risk in December 2011 increased from the
December 2010 levels, due primarily to the decline in many global stock markets including Canada’s.
In addition to the discussion of risks included in this MD&A, a comprehensive discussion of the material risks that impact
Empire Life is included in the Annual Information Form of Empire Life’s parent company, E-L Financial Corporation Limited,
which is available at www.sedar.com. Additional disclosures of Empire Life’s sensitivity to risks are included in Note 29 to the
consolidated financial statements.
25
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011
Critical Accounting Estimates
Empire Life’s significant accounting policies are described in Note 2 to the consolidated financial statements. Certain of these
policies require management to make estimates and assumptions about matters that are inherently uncertain. The most critical
of these accounting estimates for Empire Life are the valuation of policy liabilities and the determination of allowances for
impaired investments.
Policy Liabilities
The determination of policy liabilities requires best estimate assumptions that cover the remaining life of the policies for
mortality, morbidity, investment returns, persistency, expenses, inflation and taxes and include consideration of related
reinsurance effects. Due to the long-term risks and measurement uncertainties inherent in the life insurance business, a margin
for adverse deviation from best estimates is included in each assumption. These margins allow for possible deterioration in
future experience and provide for greater confidence that policy liabilities are adequate to pay future benefits. The resulting
provisions for adverse deviations have the effect of increasing policy liabilities and decreasing the income that otherwise would
have been recognized at policy inception. A range of allowable margins is prescribed by the CIA. Assumptions are reviewed
and updated at least annually and the impact of changes in those assumptions is reflected in earnings in the year of the change.
Empire Life’s sensitivity to risks related to policy liabilities are included in Note 29 to the consolidated financial statements.
Provision for Impaired Investments
Empire Life maintains a prudent policy in setting the provision for impaired investments. When there is no longer reasonable
assurance of full collection of loan principal and loan interest related to a mortgage or policy contract loan, management
establishes a specific provision for loan impairment and charges the corresponding reduction in carrying value to income in the
period the impairment is identified. In determining the estimated realizable value of the investment, management considers
a number of events and conditions. These include the value of the security underlying the loan, geographic location, industry
classification of the borrower, an assessment of the financial stability of the borrower, repayment history, and an assessment
of the impact of current economic conditions. Changes in these circumstances may cause subsequent changes in the estimated
realizable amount of the investment and changes in the specific provision for impairment.
Available for sale securities are subject to a regular review for losses that are significant or prolonged. Objective evidence of
impairment exists if there has been a significant or prolonged decline in the fair value of the investment below its cost or if there
is a significant adverse change in the technological, market, economic or legal environment in which the issuer operates or the
issuer is experiencing financial difficulties.
Outlook
In 2011 economic growth remained weak, interest rates dropped significantly, and stock markets were extremely volatile.
Canada’s main stock market declined significantly. The European sovereign debt crisis and U.S. fiscal issues contributed strongly
to these unfavourable trends and impacted consumer confidence. However, stock and credit markets continue to be improved
from the economic turmoil of 2008 and early 2009. Stock market conditions mainly impact inforce profit margin results and
new business growth for the segregated fund portion of Empire Life’s Wealth Management product line. Looking forward,
consumers continue to be cautious about stock market exposure and Empire Life is well positioned with segregated fund,
mutual fund and fixed interest annuity product offerings to satisfy demand for lower risk investments.
26
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 The strength of the economic recovery is relatively robust in Canada compared to other countries, but continues to be
uncertain with mixed economic indicators. As a result, businesses remain cautious and this could cause continued pressure
in the near term on growth prospects for the Employee Benefits product line.
A key issue for the Individual Insurance product line in 2011 was the low long-term interest rate environment that followed
the financial crisis. This has impacted the entire industry resulting in price increases for individual insurance products by
Empire Life and many of our competitors. Long-term interest rates and product pricing are expected to continue to be issues
for Empire’s Individual Insurance product line in 2012.
Regulatory change related to segregated fund guarantees continues to evolve. The Office of the Superintendent of Financial
Institutions Canada (“OSFI”) is currently reviewing the overall approach for determining capital requirements for segregated
fund risks, and is implementing this change in two stages. In the first stage, the parameters within life company stochastic
models were strengthened with respect to new business issued after January 1st, 2011. This did not have a significant impact
on Empire’s MCCSR ratio. In the second stage, a new approach will be implemented for all inforce segregated fund business
(including new business issued in 2011 and later). With respect to the second stage, OSFI states that “we are considering a
range of alternatives including a more market-consistent approach and potentially credit for hedging” and that the target
date for this is 2016 or later.
Longer term accounting standard and regulatory changes are expected by 2015 or later regarding IFRS for Insurance Contracts
and Solvency II. Both of these changes aim at consistent measurement. For Insurance Contracts accounting, the goal is global
consistency under IFRS as opposed to the differing approaches in each country that exist today. For Solvency II, the goal
is consistent treatment of risk within insurance companies from a capital adequacy perspective regardless of the type of
business. These two items could have a material impact on Empire Life’s future net income and capital ratios, however, much
remains unknown.
In 2011, OSFI implemented substantial regulatory changes for Canadian banks related to Basel III capital standards. These new
banking regulations provide a transition plan for banks to move towards more restrictive capital requirements, including
tighter restrictions on bank issued financial instruments. New financial instruments issued by banks must comply with these
new regulations in order to be included in the bank’s capital ratios. It is unclear whether similar changes will occur for life
insurance companies in the future.
The potential for regulatory change also exists for Managing General Agents (“MGA”). Life insurance companies, including
Empire Life, commonly contract with MGAs as a key component of the distribution chain for insurance and wealth
management products. The nature and impact of potential regulation is unclear.
27
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 Quarterly Results
The following table summarizes various financial results on a quarterly basis for the most recent eight quarters:
(in millions of dollars)
Revenue
Shareholders’ net income (loss)
Dec 31
2011
Sept 30
2011
June 30
2011
Mar 31
2011
Dec 31
2010
Sept 30
2010
June 30
2010
Mar 31
2010
$
$
476 $
499 $
345 $
237 $
253
8 $
(7) $
17 $
14
$
4
$
$
422 $
331
$
357
11
$
3 $
2
Revenue for the three months ended December 31, 2011 increased to $476 million (2010 $253 million). The increase was primarily
due to net gains on FVTPL investments in 2011 resulting from an increase in bond prices. The increase in bond prices was due to a
decrease in market interest rates in 2011 (see Total Revenue section earlier in this report).
For the fourth quarter, net income was higher relative to last year due primarily to higher Capital and Surplus net income.
This improvement resulted from higher gains from primarily the sale of certain AFS equity investments compared to 2010.
See Product Line Results sections earlier in this report for further information on quarterly results.
28
MANAGEMENT’S DISCUSSION AND ANALYSISEmpire Life Annual Report 2011 MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING
The consolidated financial statements in this annual report have been prepared by management, who is responsible for their
integrity, objectivity and reliability. This responsibility includes selecting and applying appropriate accounting policies,
making judgements and estimates, and ensuring information contained throughout the annual report is consistent with these
statements. These consolidated financial statements are prepared in accordance with the Insurance Companies Act (Canada)
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (“OSFI”),
the consolidated financial statements are to be prepared in accordance with Canadian Generally Accepted Accounting Principles
(“Canadian GAAP”) as set out in Part I of the Handbook of The Canadian Institute of Chartered Accountants which represent
International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
The Company maintains a system of internal control over financial reporting which is designed to provide reasonable
assurance that assets are safeguarded, expenditures are made in accordance with authorizations of management and directors,
transactions are properly recorded, and the financial records are reliable for preparing the consolidated financial statements in
accordance with Canadian GAAP. Under the supervision of management, an evaluation of the effectiveness of the Company’s
internal control over financial reporting was carried out as at December 31, 2011. Based on that evaluation, management
concluded that the Company’s internal control over financial reporting was effective as at December 31, 2011.
The Board of Directors, acting through the Audit Committee which is comprised of directors who are not officers or employees
of the Company, oversees management’s responsibility for financial reporting and for internal control systems. The Audit
Committee is responsible for reviewing the consolidated financial statements and annual report and recommending them to
the Board of Directors for approval. The Audit Committee meets with management, internal audit and the external auditors
to discuss audit plans, internal controls over accounting and financial reporting processes, auditing matters, and financial
reporting issues.
The Appointed Actuary is appointed by the Board of Directors and is responsible for ensuring that the assumptions and methods
used in the valuation of the policy liabilities are in accordance with accepted actuarial practice and regulatory requirements. The
Appointed Actuary is required to provide an opinion regarding the appropriateness of the policy liabilities at the consolidated
statement of financial position date to meet all policyholder obligations of the Company. Examination of supporting data
for accuracy and completeness and analysis of Company assets for their ability to support the amount of policy liabilities are
important elements of the work required to form this opinion. The Appointed Actuary is also required each year to analyze the
financial condition of the Company and prepare a report for the Board of Directors. The analysis tests the capital adequacy of the
Company under adverse economic and business conditions for the current year and the next four years.
PricewaterhouseCoopers’ responsibility as external auditors is to report to the policyholders, shareholders and OSFI regarding
the fairness of presentation of the Company’s annual consolidated financial statements. The external auditors have full and free
access to, and meet periodically with, the Audit Committee to discuss their audit. The Independent Auditor’s Report outlines the
scope of their examination and their opinion.
Leslie C. Herr
President and Chief Executive Officer
Kingston, Ontario
February 24, 2012
Gary J. McCabe
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 24, 2012
29
Empire Life Annual Report 2011 INDEPENDENT AUDITOR’S REPORT
To the Policyholders and Shareholders of The Empire Life Insurance Company
We have audited the accompanying consolidated financial statements of The Empire Life Insurance Company and its
subsidiary, which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010
and January 1, 2010 and the consolidated statements of operations, comprehensive income, changes in equity, and cash
flows for the years ended December 31, 2011 and December 31, 2010 and the related notes, which comprise a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, which is one of the financial reporting frameworks included in Canadian
generally accepted accounting principles, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
The Empire Life Insurance Company and its subsidiary as at December 31, 2011, December 31, 2010 and January 1, 2010
and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance
with International Financial Reporting Standards, which is one of the financial reporting frameworks included in Canadian
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
February 24, 2012
30
Empire Life Annual Report 2011
APPOINTED ACTUARY’S REPORT
To the Policyholders and Shareholders of The Empire Life Insurance Company
I have valued the policy liabilities and reinsurance liabilities of The Empire Life Insurance Company for its Consolidated
statements of financial position at December 31, 2011 and their change in the Consolidated statements of operations for the
year then ended in accordance with accepted actuarial practice in Canada including selection of appropriate assumptions
and methods.
In my opinion, the amount of policy liabilities net of reinsurance liabilities, makes appropriate provision for all policy
obligations and the Consolidated financial statements fairly present the results of the valuation.
Leonard Pressey, F.S.A., F.C.I.A.
Fellow, Canadian Institute of Actuaries
Kingston, Ontario
February 24, 2012
31
Empire Life Annual Report 2011 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at
Assets
Cash and cash equivalents
Investments
Short-term investments (Note 4)
Bonds (Note 4)
Common and preferred shares (Note 4)
Mortgages (Note 4)
Loans on policies (Note 4)
Policy contract loans (Note 4)
Total investments
Accrued investment income
Insurance receivables (Note 5)
Current income taxes receivable
Reinsurance assets (Note 11)
Other assets (Note 6)
Property and equipment (Note 7)
Intangible assets (Note 8)
Segregated fund assets (Note 9)
Total Assets
Liabilities
Accounts payable and other liabilities (Note 12)
Insurance payables (Note 10)
Current income taxes payable
Reinsurance liabilities (Note 11)
Insurance contract liabilities (Note 11)
Investment contract liabilities
Policyholders' funds on deposit
Provision for profits to policyholders
Deferred income taxes (Note 19)
Subordinated debt (Note 24)
Segregated fund policy liabilities
Equity
Capital stock (Note 26)
Contributed surplus
Retained earnings (Note 25)
Accumulated other comprehensive income
Dec. 31, 2011 Dec. 31, 2010
Jan. 1, 2010
$ 155,559
$ 151,332
$ 149,141
33,867
4,063,897
808,681
264,238
41,981
113,118
50,914
3,221,908
1,002,393
226,887
40,242
119,896
37,080
2,795,896
949,778
223,642
38,728
137,764
5,325,782
4,662,240
4,182,888
20,107
24,155
17,106
-
34,464
21,241
1,090
4,415,318
18,411
24,621
11,007
-
18,915
21,257
2,244
4,620,899
17,827
17,660
-
32,693
19,548
19,973
3,688
4,186,585
$ 10,014,822
$ 9,530,926
$ 8,630,003
$ 70,097
63,559
-
156,119
4,199,501
15,076
30,263
21,791
6,586
199,405
4,415,318
$ 37,708
73,055
-
17,680
3,673,318
16,978
30,037
20,104
3,481
199,185
4,620,899
$ 45,143
57,908
30,065
-
3,226,145
17,566
29,702
18,558
2,811
198,980
4,186,585
9,177,715
8,692,445
7,813,463
985
19,387
786,203
30,532
837,107
985
19,387
768,858
49,251
838,481
985
19,387
768,911
27,257
816,540
Total Liabilities and Equity
$ 10,014,822
$ 9,530,926
$ 8,630,003
The accompanying notes are an integral part of these consolidated financial statements.
Duncan N.R. Jackman
Chairman of the Board
Leslie C. Herr
President and Chief Executive Officer
32
Empire Life Annual Report 2011 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Canadian dollars except for per share amounts)
Revenue
Gross premiums
Premiums ceded to reinsurers
Net premiums (Note 14)
Investment income (Note 4)
Fair value change in fair value through profit or loss assets
Realized gain (loss) on fair value through profit or loss assets sold
Realized gain (loss) on available for sale assets
including impairment write-downs (Note 4)
Fee income (Note 15)
Total revenue
Benefits and Expenses
Gross benefits and claims paid (Note 16)
Claims recovery from reinsurers (Note 16)
Gross change in insurance contract liabilities (Note 16)
Change in insurance contract liabilities ceded (Note 16)
Change in investment contract provision
Policy dividends
Operating expenses (Note 18)
Commissions
Commission recovery from reinsurers
Interest expense
Total benefits and expenses
Premium tax
Investment and capital tax
Net Income Before Income Taxes
Income taxes (Note 19)
Net Income
Net Income (Loss) Attributable to:
Participating Policyholders
Shareholders
Total
Earnings per share - basic and diluted
(2,000,000 shares authorized; 985,076 shares outstanding)
The accompanying notes are an integral part of these consolidated financial statements.
For the year ended December 31
2011
2010
$ 838,422 $ 890,514
(73,988)
816,526
(79,968)
758,454
216,782
394,512
41,324
204,348
213,646
8,047
25,846
120,243
1,557,161
7,496
113,094
1,363,157
567,744
(54,332)
526,183
138,439
745
20,962
129,865
166,392
(2,186)
13,680
596,607
(62,845)
447,173
50,373
910
19,079
116,411
159,085
(2,004)
13,665
1,507,492
1,338,454
12,985
3,400
33,284
12,198
3,300
9,205
139
(5,742)
33,145
14,947
838
32,307
(4,890)
19,837
$ 33,145 $ 14,947
$ 32.80 $ 20.14
33
Empire Life Annual Report 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Net income
Other comprehensive income (loss), net of income taxes:
Unrealized fair value change on available for sale investments (Note 19)
Less realized fair value change on available for sale
investments including impairment write-downs
reclassified to net income (Note 19)
Net unrealized fair value increase (decrease)
Gain (loss) on derivative investments
designated as cash flow hedges (Note 19)
Less gain (loss) on derivative investments
designated as cash flow hedges reclassified
to net income (Note 19)
Net gain (loss) on derivatives designated as cash flow hedges
Total other comprehensive income (loss)
Comprehensive Income
Comprehensive income (loss) attributable to:
Participating Policyholders
Shareholders
Total
The accompanying notes are an integral part of these consolidated financial statements.
For the year ended December 31
2011
2010
$ 33,145
$ 14,947
(3,014)
25,442
16,201
(19,215)
3,910
21,532
-
-
(496)
496
(462)
462
(18,719)
21,994
$ 14,426
$ 36,941
$ (394)
14,820
$ 14,426
$ (3,207)
40,148
$ 36,941
34
Empire Life Annual Report 2011
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31, 2011
For the year ended December 31, 2010
Shareholders’ Policyholders’
Total Shareholders’ Policyholders’
Total
$ 985
$ -
$ 985
$ 985
$ -
$ 985
$ 19,387
$ -
$ 19,387
$ 19,387
$ -
$ 19,387
Capital stock (Note 26)
Contributed surplus
Retained earnings
Retained earnings - beginning of year
$ 715,972
$ 52,886
$ 768,858
$ 711,135
$ 57,776
$ 768,911
Net income
32,307
838
33,145
19,837
(4,890)
14,947
Dividends to common shareholders
(15,800)
-
(15,800)
(15,000)
-
(15,000)
Retained earnings - end of year
$ 732,479
$ 53,724
$ 786,203
$ 715,972
$ 52,886
$ 768,858
Accumulated other comprehensive
income (AOCI)
Accumulated other comprehensive
income - beginning of year
$ 44,532
$ 4,719
$ 49,251
$ 24,221
$ 3,036
$ 27,257
Other comprehensive income (loss)
(17,487)
(1,232)
(18,719)
20,311
1,683
21,994
Accumulated other comprehensive
income - end of year
$ 27,045
$ 3,487
$ 30,532
$ 44,532
$ 4,719
$ 49,251
Total Equity (Note 25)
$ 779,896
$ 57,211
$ 837,107
$ 780,876
$ 57,605
$ 838,481
Composition of AOCI – end of year
Unrealized gain on available for sale
financial assets
Unamortized gain (loss) on cash
flow hedges
Shareholder portion of
policyholders' AOCI
Total accumulated other
comprehensive income
$ 27,999
$ 3,874
$ 31,873
$ 45,845
$ 5,243
$ 51,088
(1,341)
-
(1,341)
(1,837)
-
(1,837)
387
(387)
-
524
(524)
-
$ 27,045
$ 3,487
$ 30,532
$ 44,532
$ 4,719
$ 49,251
The accompanying notes are an integral part of these consolidated financial statements.
35
Empire Life Annual Report 2011 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Operating Activities
Net income
Non-cash items affecting net income
Change in contract liabilities
Change in reinsurance liabilities
Fair value change in fair value through profit or loss assets
Realized (gain) loss on assets including impairment write-downs
Amortization related to invested assets
Amortization related to capital asssets
Deferred income taxes
Other items
For the year ended December 31
2011
2010
$ 33,145
$ 14,947
526,928
138,439
(394,512)
(67,170)
(73,094)
4,228
3,105
8,946
448,083
50,373
(213,646)
(15,543)
(68,419)
4,109
670
(50,734)
Cash provided from operating activities
180,015
169,840
Investing Activities
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
Decrease (increase) in short-term investments
Purchase of intangible assets and property and equipment
Other
Cash provided from (used for) investing activities
Financing Activities
Dividends to common shareholders
Cash provided from (used for) financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning of Year
Cash and Cash Equivalents – End of Year
The accompanying notes are an integral part of these consolidated financial statements.
(1,569,477)
1,389,722
(1,375,230)
1,223,373
(7,646)
13,424
17,047
(324)
(2,734)
(7,800)
24,791
(13,834)
(133)
(3,816)
(159,988)
(152,649)
(15,800)
(15,000)
(15,800)
(15,000)
4,227
2,191
151,332
149,141
$ 155,559
$ 151,332
36
Empire Life Annual Report 2011
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
1. DESCRIPTION OF COMPANY AND SUMMARY OF OPERATIONS
The Empire Life Insurance Company (the Company) was founded in 1923 when it was organized under a provincial
charter in Toronto. Authorization to continue as a federal corporation was obtained in 1987. The Company underwrites
life and health insurance policies and provides segregated funds and annuity products for individuals and groups
across Canada. The Company is a subsidiary of E-L Financial Corporation Limited (the parent or E-L). The head office,
principal address and registered office of the Company are located at 259 King Street East, Kingston, Ontario, K7L 3A8.
The Company is a Federally Regulated Financial Institution, regulated by the Office of the Superintendent of Financial
Institutions Canada (OSFI). The Company established a mutual fund subsidiary during the second quarter of 2011,
Empire Life Investments Inc. (ELII). During the third quarter of 2011, the Company provided working capital to ELII.
The Company expects ELII to become operational early in 2012. The head office of ELII is located at 165 University Avenue,
9th Floor, Toronto, Ontario, M5H 3B8.
These consolidated financial statements were approved by the Company’s Board of Directors on February 24, 2012.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The consolidated financial statements for the year ended December 31, 2011 represent the first annual consolidated
financial statements of the Company prepared in accordance with Canadian Generally Accepted Accounting
Principles (“Canadian GAAP”) as set out in Part I of the Handbook of The Canadian Institute of Chartered
Accountants which represent International Financial Reporting Standards (IFRS), as issued by the International
Accounting Standards Board (IASB). The preparation of these consolidated financial statements resulted in changes
to the accounting policies as compared with the December 31, 2010 annual financial statements prepared in
accordance with previous Canadian GAAP. Subject to certain transition elections and exceptions disclosed in
Note 3, the accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements. They have also been applied in preparing an opening IFRS Statement of financial
position as at January 1, 2010, as if these policies had always been in effect, as required by IFRS 1 First-time Adoption
of International Financial Reporting Standards. The impact of the transition from previous Canadian GAAP to
IFRS is explained in Note 3 First-time Adoption of International Financial Reporting Standards. In Note 3, the terms
“Canadian GAAP” and “previous Canadian GAAP” refer to Canadian GAAP before the adoption of IFRS. IFRS refers
to Canadian GAAP after the adoption of IFRS.
These consolidated financial statements have been prepared on a fair value measurement basis, with the exception
of certain assets and liabilities. Insurance contract liabilities and Reinsurance assets/liabilities are measured on a
discounted basis in accordance with accepted actuarial practice. Investment contract liabilities, Mortgages, Policy
contract loans and Loans on policies are carried at amortized cost. Certain other assets and liabilities are measured
on a historical cost basis, as explained throughout this note. All amounts included in the consolidated financial
statements are presented in thousands of Canadian dollars, rounded to the nearest thousand. These consolidated
financial statements also comply with the accounting requirements of OSFI.
37
Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Basis of Consolidation
The Company’s consolidated financial statements include the assets, liabilities, results of operations and cash flows
of the Company and its wholly-owned and controlled subsidiary, Empire Life Investments Inc. The Company owns
100% of the voting shares of its subsidiary. The financial statements of the subsidiary are prepared for the same
reporting period as the Company, using consistent accounting policies. All significant inter-company transactions,
balances, income and expenses are eliminated in full on consolidation.
(c) Critical Accounting Estimates and Judgements
The preparation of consolidated financial statements requires management to make judgements and estimates and
form assumptions that affect the reported amounts of assets and liabilities as at the date of the consolidated financial
statements, and the reported amounts of revenue and expenses during the year. On an ongoing basis, management
evaluates its judgements and estimates and critical assumptions in relation to assets, liabilities, revenues and
expenses. Management uses historical experience and various other factors it believes to be reasonable under the
given circumstances as the basis for its judgements, estimates and assumptions. Actual results could differ from
these estimates and changes in estimates are recorded in the accounting period in which they are determined.
The table below sets out those items the Company considers particularly susceptible to changes in estimates and
assumptions, the relevant accounting policy and note references.
Item
Accounting Policy
Impairment of financial instruments
Insurance contract liabilities
Reinsurance
Employee benefits
(d) Financial Instruments
i) Fair Value
d
k
e
j
Notes
4 (b)
11, 29
11, 29
13
Fair value is the amount of consideration that would be agreed upon in an arm’s length transaction between
knowledgeable, willing parties who are under no compulsion to act. When a financial instrument is initially
recognized, its fair value is generally the value of the consideration paid or received. Subsequent to initial
recognition, the fair value of a financial asset quoted in an active market is generally the bid price and, for a
financial liability quoted in an active market, the fair value is generally the ask price. For financial instruments
such as cash equivalents and short-term investments that have a short duration, the carrying value of these
instruments approximates fair value.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value measurements used in these consolidated financial statements have been classified by using a fair value
hierarchy based upon the transparency of the inputs used in making the measurements. The three levels of the
hierarchy are:
Level 1 – Fair value is based on unadjusted quoted prices for identical assets or liabilities in an active market.
The types of financial instruments classified as level 1 generally include cash and cash equivalents,
and exchange traded common and preferred shares.
Level 2 – Fair value is based on quoted prices for similar assets or liabilities in active markets, valuation that
is based on significant observable inputs, or inputs that are derived principally from or corroborated
with observable market data through correlation or other means. The types of financial instruments
classified as level 2 generally include government bonds, certain corporate and private bonds,
and short-term investments.
Level 3 – Fair value is based on valuation techniques that require one or more significant inputs that are not based
on observable market inputs. These unobservable inputs reflect the Company’s expectations about the
assumptions market participants would use in pricing the asset or liability.
All of the Company’s financial instruments requiring fair value measurement meet the requirements of Level 1 or
Level 2 of the fair value hierarchy.
ii) Cash and Investments
Cash and cash equivalents and short-term investments are short-term, highly liquid investments that are subject
to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents
comprise financial assets with maturities of three months or less from the date of acquisition and short-term
investments comprise financial assets with maturities of greater than three months and less than one year
when acquired.
Most financial assets supporting insurance contract liabilities and investment contract liabilities are classified as
Fair value through profit or loss (FVTPL). These assets may be comprised of cash, short-term investments, bonds
and debentures, common and preferred shares, futures, forwards and options. Changes in the fair value of these
financial assets are recorded in fair value change in FVTPL assets in the Consolidated statement of operations in
the period in which they occur.
Most financial assets supporting capital and surplus are classified as Available for sale (AFS). These assets may be
comprised of short-term investments, bonds and debentures, or common and preferred shares. AFS assets are
carried at fair value in the Consolidated statement of financial position. Except for foreign currency gains/losses
on monetary AFS assets and impairment losses, any changes in the fair value are recorded, net of income taxes,
in Other comprehensive income (OCI). Gains and losses realized on sale or maturity of AFS assets are reclassified
from OCI to realized gain (loss) on AFS assets in the Consolidated statement of operations.
Loans and receivables may include mortgage loans, loans on policies, and policy contract loans. These assets
are recorded at amortized cost, using the effective interest method, net of provisions for impairment losses, if
any. Mortgage loans are secured by real estate. Loans on policies and policy contract loans are secured by policy
values. Loans and receivables are defined as non-derivative financial assets with fixed or determinable payments
that are not quoted in active markets.
All transactions are recorded on the trade date. Transaction costs are expensed for FVTPL instruments and
capitalized for all others.
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
iii) Impairment
All investments other than FVTPL instruments are assessed for impairment at each reporting date. Impairment
is recognized in net income (loss), when there is objective evidence that a loss event has occurred which has
impaired the estimated future cash flows of an asset.
(1) AFS Debt Instruments
An AFS debt instrument would be identified as impaired when there is objective observable evidence
suggesting that timely collection of the contractual principal or interest is no longer reasonably assured. This
may result from a breach of contract by the issuer, such as a default or delinquency in interest or principal
payments, or evidence that the issuer is in significant financial difficulty. Impairment is recognized through
net income (loss). Impairment losses previously recorded through net income (loss) are reversed if the fair
value subsequently increases and the increases can be objectively related to an event occurring after the
impairment loss was recognized.
(2) AFS Equity Instruments
Objective evidence of impairment exists if there has been a significant or prolonged decline in the fair
value of the investment below its cost or if there is a significant adverse change in the technological,
market, economic or legal environment in which the issuer operates or the issuer is experiencing
financial difficulties.
The accounting for an impairment that is recognized in net income (loss) is the same as described for AFS
debt instruments above with the exception that impairment losses previously recognized in net income (loss)
cannot be subsequently reversed. Any subsequent increase in value is recorded in OCI.
(3) Loans and Receivables
Mortgages and loans are individually evaluated for impairment in establishing the allowance for impairment.
Objective evidence of impairment exists if there is no longer reasonable assurance of full collection of
loan principal or loan interest related to a mortgage, policy contract loan or a loan on a policy. Events and
conditions considered in determining if there is objective evidence of impairment include the value of the
security underlying the loan, geographic location, industry classification of the borrower, an assessment of
the financial stability and credit worthiness of the borrower, repayment history and an assessment of the
impact of current economic conditions. If objective evidence of impairment is found, allowances for credit
losses are established to adjust the carrying value of these assets to their net recoverable amount and the
impairment loss is recorded in net income (loss). If, in a subsequent period, the amount of the impairment
loss decreases and the decrease can be objectively related to an event occurring after the impairment
was recognized, the impairment loss is reversed by adjusting the allowance account and the reversal is
recognized in net income (loss).
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
iv) Derecognition
A financial asset is derecognized when the contractual rights to its cash flows expire, or the Company has
transferred its economic rights to the asset and substantially all risks and rewards. In instances where
substantially all risks and rewards have not been transferred or retained, the assets are derecognized if the
asset is not controlled through rights to sell or pledge the asset.
v) Hedge Accounting
From time to time, the Company enters into hedging arrangements. Where the Company has elected to use
hedge accounting, a hedge relationship is designated and documented at inception. The Company evaluates
hedge effectiveness at the inception of the relationship and at least on a quarterly basis using a variety of
techniques including the cumulative dollar offset method. Both at inception and throughout the term of
the hedge, the Company expects that each hedging instrument will be highly effective in offsetting the risk
being hedged. When it is determined that the hedging relationship is no longer effective, or the hedged item
has been sold or terminated, the Company discontinues hedge accounting prospectively. In such cases, if the
derivative hedging instrument is not sold or terminated, any subsequent change in fair value of the derivative
is recognized in investment income.
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging
instrument is recorded in OCI while the ineffective portion is recognized in investment income in the
Consolidated statement of operations. Gains and losses in Accumulated other comprehensive income (AOCI)
are reclassified and recognized in investment income in the Consolidated statement of operations during the
periods when the variability in the cash flows hedged or the hedged forecasted transactions are recognized
in the Consolidated statement of operations. Gains and losses on cash flow hedges accumulated in AOCI are
reclassified immediately to investment income in the Consolidated statement of operations when either the
hedged item is sold or the forecasted transaction is no longer expected to occur. When hedge accounting is
discontinued, and it remains probable that the hedged forecasted transaction will occur, then the amounts
previously recognized in AOCI are reclassified and recognized in investment income in the Consolidated
statement of operations in the periods during which variability in the cash flows hedged or the hedged
forecasted transactions are recognized in the Consolidated statement of operations.
vi) Other
Insurance receivables have been classified as loans or receivables and are carried at amortized cost. Accounts
payable and other liabilities and Insurance payables have been classified as other financial liabilities and are
carried at amortized cost. For these financial instruments, carrying value approximates fair value.
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Reinsurance
The Company enters into reinsurance agreements with reinsurers in order to limit its exposure to significant losses.
The Company has a Reinsurance Risk Management policy which requires that such arrangements be placed with
well-established, highly rated reinsurers. Reinsurance is measured consistently with the amounts associated
with the underlying insurance contracts and in accordance with the terms of each reinsurance treaty. Amounts
due to or from reinsurers with respect to premiums received or claims paid are included in Insurance receivables
and Insurance liabilities in the Consolidated statement of financial position. Premiums for reinsurance ceded are
presented as Premiums ceded to reinsurers in the Consolidated statement of operations. Reinsurance recoveries
on claims incurred are recorded as Claims recovery from reinsurers in the Consolidated statement of operations.
The reinsurers’ share of Insurance contract liabilities is recorded as Reinsurance assets or Reinsurance liabilities,
as appropriate, in the Consolidated statement of financial position.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication
of impairment arises during the reporting year. Impairment occurs when objective evidence exists that not all
amounts due under the terms of the contract will be received. If a reinsurance asset is determined to be impaired,
it would be written down to its recoverable amount and the impairment loss would be recorded in the Consolidated
statement of operations.
Gains or losses on buying reinsurance are recognized in the Consolidated statement of operations immediately at the
date of purchase and are not amortized.
(f) Property and Equipment
Property and equipment comprises own use land, building, leasehold improvements and furniture and equipment.
All classes of assets are carried at cost less accumulated amortization and any impairment losses, except for land,
which is not subject to amortization. Cost includes all expenditures that are directly attributable to the acquisition
of the asset. Subsequent costs are included in the asset’s carrying amount only when it is probable that future
economic benefits associated with the item will flow to the Company and the cost can be measured reliably.
Amortization is calculated to write down the cost of property and equipment to their residual values over their
estimated useful lives as follows:
Land
Building
Furniture and equipment
Leasehold improvements
No amortization
Five percent (declining balance)
Three to five years (straight-line)
Remaining lease term (straight-line)
Amortization is included in Operating expenses in the Consolidated statement of operations.
The estimated useful lives, residual values and amortization methods are reviewed at each year-end, with the effect
of any changes in estimate accounted for on a prospective basis.
Impairment reviews are performed when there are indicators that the carrying value may not be recoverable.
An impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected
recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. Impairment
losses are recognized in the Consolidated statement of operations.
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Intangible Assets
Intangible assets include computer software, related licenses and software development costs, which are carried at
cost less accumulated amortization and any impairment losses. Amortization of intangible assets is calculated using
the straight-line method to allocate the costs over their estimated useful lives, which are generally between three
and seven years. Amortization is included in Operating expenses in the Consolidated statement of operations. For
intangible assets under development, amortization begins when the asset is available for use. The Company does not
have intangible assets with indefinite useful lives.
Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied
in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as
changes in accounting estimates.
Impairment reviews are performed when there are indicators that the carrying value may not be recoverable.
An impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected
recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable
cash flows. Impairment losses are recognized in the Consolidated statement of operations.
(h) Segregated Funds
Certain policy contracts allow the policyholder to invest in segregated investment funds managed by the Company
for the benefit of these policyholders. The policyholder bears the risks and rewards associated with these assets
except to the extent there are guarantees, and as a result, the assets and liabilities associated with segregated funds
are not included with other assets and liabilities, but are presented as separate items on the Consolidated statement
of financial position. The assets of these funds are carried at their period-end fair values, which also represents the
segregated fund policy liability. The Company’s Consolidated statement of operations includes fee income earned
for management of the segregated funds, as well as expenses related to the acquisition, investment management,
administration and death benefit and maturity benefit guarantees of these funds. A continuity schedule of segregated
funds is disclosed in Note 9.
The Company provides minimum guarantees on certain segregated fund contracts. These include minimum death,
maturity and withdrawal benefit guarantees which are accounted for as insurance contracts. The actuarial liabilities
associated with these minimum guarantees are recorded within Insurance contract liabilities. Sensitivity of the
Company’s liability for segregated fund guarantees to market fluctuations is disclosed in Note 29.
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) Subordinated Debt
Subordinated debt is recorded at amortized cost using the effective interest rate method. Interest on subordinated
debt is reported as Interest expense in the Consolidated statement of operations.
(j) Employee Benefits
The Company provides employee pension benefits through either a defined benefit or a defined contribution
component of its pension plan. The Company discontinued new enrolments in the defined benefit component
effective October 1, 2011 and introduced a defined contribution component effective January 1, 2012 for new
enrolments and for any existing employees who chose to transfer from the defined benefit component.
The Company provides post-employment health and dental insurance benefits to eligible employees and
their dependents.
The Company accrues its obligations for its employee defined benefit plans, net of plan assets. The cost of defined
benefit pensions and other post-employment benefits earned by employees is actuarially determined using the
projected unit credit method pro-rated on services and using management’s best estimate of expected plan
investment performance, salary escalation, retirement ages of employees, expected mortality and expected health
care costs. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.
The asset or liability recognized in the Consolidated statement of financial position is the present value of the defined
benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for
unrecognized actuarial gains and losses and unrecognized past service costs. The present value of the defined benefit
obligation is determined by discounting the estimated future cash outflows using a discount rate based on market
yields for high-quality corporate bonds that are denominated in Canadian dollars and that have terms to maturity
approximating the terms of the related pension liability. Actuarial gains (losses) arise from the difference between
actual long-term rates of return on plan assets for a period and the expected long-term rates of return on plan assets
for that period or from changes in actuarial assumptions used to determine the defined benefit obligation. The excess
of the net actuarial gain (loss) over 10% of the greater of the defined benefit obligation and the fair value of plan assets
is amortized over the expected average remaining service period of active employees. The vested portion of past
service cost arising from plan amendments is recognized immediately in the Consolidated statement of operations.
The unvested portion is amortized on a straight-line basis over the average remaining service period until the
benefits become vested.
For funded plans, surpluses are recognized only to the extent that the surplus is considered recoverable.
Recoverability is primarily based on the extent to which the Company can reduce future contributions to the plan.
Payments to defined contribution plans are expensed as incurred, which is as the related employee service is
rendered. Once the contributions have been paid, the Company has no further payment obligations.
Termination Benefits
Termination benefits are payable when employment is terminated before the normal retirement date or whenever
an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination
benefits when it is demonstrably committed to either terminating the employment of current employees according
to a detailed formal plan without realistic possibility of withdrawal or providing termination benefits as a result of
an offer made to encourage voluntary redundancy.
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(k) Insurance and Investment Contracts
i) Product Classification
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract.
Insurance risk is transferred when the Company agrees to compensate a policyholder if a specified uncertain
future event (other than a change in a financial variable) adversely affects the policyholder and the insurance
contract has commercial substance. Any contracts not meeting the definition of an insurance contract under
IFRS are classified as investment contracts or service contracts, as appropriate. Products issued by the Company
that transfer significant insurance risk have been classified as insurance contracts in accordance with
IFRS 4 Insurance Contracts. Otherwise, products issued by the Company are classified as either investment
contracts in accordance with IAS 39 Financial Instruments: Recognition and Measurement or service contracts
in accordance with IAS 18 Revenue. The Company defines significant insurance risk as the possibility of paying
at least 2% more than the benefits payable if the insured event did not occur. When referring to multiple contract
types, the Company uses the terminology policy contracts.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder
of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations
are extinguished or expire. Investment contracts, however, can be reclassified as insurance contracts after
inception if insurance risk becomes significant.
The Company classifies its insurance and investment contracts into three main categories: short-term insurance
contracts, long-term insurance contracts and investment contracts.
(1) Insurance Contracts
The Company’s insurance contract liabilities are determined using accepted actuarial practices according
to standards established by the Canadian Institute of Actuaries (CIA) and the requirements of OSFI. The
Company uses the Canadian Asset Liability Method (CALM) for valuation of insurance contracts, which
satisfies the IFRS 4 Insurance Contracts requirements for eligibility for use under IFRS.
a. Short-term Insurance Contracts
These contracts include both annuity products and group benefits.
The annuity products classified as short-term insurance contracts are guaranteed investment options
that provide for a fixed rate of return over a fixed period. Contracts include certain guarantees that are
initiated upon death of the annuitant. The liabilities are determined using CALM.
The group benefits classified as short-term insurance contracts include short-term disability, health and
dental benefits. Benefits are typically paid within one year of being incurred. Liabilities for unpaid claims
are estimated using statistical analysis and Company experience for claims incurred but not reported.
b. Long-term Insurance Contracts
These contracts include insurance products, annuity products and group benefits. In all cases, liabilities
represent an estimate of the amount that, together with estimated future premiums and investment
income, will be sufficient to pay future benefits, dividends, expenses and taxes on policies in force.
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
The insurance products so classified are life insurance and critical illness that provide for benefit
payments related to death, survival or the occurrence of a critical illness. Terms extend over a long
duration. The annuity products classified as long-term insurance contracts include both annuities that
provide for income payments for the life of the annuitant and guarantees associated with the Company’s
segregated fund products. The group benefits classified as long-term insurance contracts are life benefits
which are payable upon death of the insured and disability benefits that provide for income replacement
for the duration of the disability.
The determination of long-term insurance contract liabilities requires best estimate assumptions
that cover the remaining life of the policies for mortality, morbidity, investment returns, persistency,
expenses, inflation and taxes. Due to the long-term risks and measurement uncertainties inherent
in the life insurance business, a margin for adverse deviation from best estimates is included in each
assumption. These margins allow for possible deterioration in future experience and provide for greater
confidence that insurance contract liabilities are adequate to pay future benefits. The resulting provisions
for adverse deviation have the effect of increasing insurance contract liabilities and decreasing the income
that otherwise would have been recognized at policy inception. Assumptions are reviewed and updated at
least annually and the impact of changes in those assumptions is reflected in Change in insurance contract
liabilities in the Consolidated statement of operations in the year of the change.
Annually, the Appointed Actuary determines whether insurance contract liabilities (for both short-term
and long-term categories) are sufficient to cover the obligations and deferred acquisition costs that relate
to policies in force at the Consolidated statement of financial position date. A number of valuation methods
are applied, including CALM, discounted cash flows and stochastic modeling. Aggregation levels and the
level of prudence applied in assessing liability adequacy are consistent with requirements of the CIA.
Any adjustment is recorded as a Change in insurance contract liabilities in the Consolidated statement
of operations.
(2) Investment Contracts
These contracts include annuity products that do not involve the transfer of significant risk, either at
inception or during the life of the contract. For the Company, products so classified are limited to term
certain annuities that provide for income payments for a specified period of time.
Investment contract liabilities are recognized when contracts are entered into and deposits are received.
These liabilities are initially recognized at fair value, and subsequently they are carried at amortized cost
based on expected future cash flows using the effective interest rate method. The expected future cash flows
are re-estimated at each reporting date and the carrying amount of the financial liability is recalculated
as the present value of estimated future cash flows using the financial liability’s original effective interest
rate. Any adjustment is immediately recognized in the Consolidated statement of operations. Deposits and
withdrawals are recorded in Investment contract liabilities on the Consolidated statement of
financial position.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
ii) Premiums
Gross premiums for all types of insurance contracts are recognized as revenue when due and collection is
reasonably assured. When premiums are recognized, actuarial liabilities are computed, with the result that
benefits and expenses are matched with such revenue. Annuity premiums are comprised solely of new deposits
on general fund products with a guaranteed rate of return and exclude deposits on segregated fund and
investment contract products.
iii) Benefits and Claims Paid
Benefits are recorded as an expense when they are incurred. Annuity payments are expensed when due for
payment. Health insurance claims are accounted for when there is sufficient evidence of their existence and
a reasonable assessment can be made of the monetary amount involved. Benefits and claims paid include the
direct costs of settlement. Reinsurance recoveries are accounted for in the same period as the related claim.
iv) Deferred Acquisition Costs
Distribution costs of segregated funds having a deferred sales charge are deferred and amortized over the term of
the related deposits or the applicable period of such sales charge, as appropriate. These deferred costs form part of
insurance contract liabilities on the Consolidated statement of financial position. The costs deferred in the period
and amortization of deferred costs form part of the change in insurance contract liabilities on the Consolidated
statement of operations.
(l) Participating Policies
The Company maintains an account in respect of participating policies (“participating account”), separate from
those maintained in respect of other policies, in the form and manner determined by OSFI under sections 457-60
of the Insurance Companies Act (Canada). The participating account includes all policies issued by the Company
that entitle its policyholders to participate in the profits of the participating account. The Company has discretion
as to the amount and timing of dividend payments which take into consideration the continuing solvency of the
participating account. Dividends are paid annually, with a few older plans paying dividends every five years as per
contractual provisions. Participating policyholder dividends are expensed through the Consolidated statement
of operations.
At the end of the reporting period all participating insurance contract liabilities, both guaranteed and discretionary,
are held within Insurance contract liabilities, Policyholders’ funds on deposit, and Provision for profits to
policyholders. All participating policy reinsurance ceded at the end of the reporting period is held within
Reinsurance assets or Reinsurance liabilities. The participating policyholders’ portion of retained earnings and AOCI
is reported separately in the Policyholders’ equity section of the Consolidated statement of changes in equity.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
i) Investment Policy
The investments in the participating account are subject to limits established by the Insurance Companies
Act (Canada) and to investment guidelines established by the Investment Committee of the Company’s Board
of Directors (the “Board”). The investment guidelines are designed to limit overall investment risk by defining
investment objectives, eligible investments, diversification criteria, exposure, concentration and asset quality
limits for eligible investments. Interest rate risk is managed through Investment Committee established
limits and regular reporting by management to the Investment Committee and the Board. The Asset/Liability
Management Committee oversees sensitivity to interest rates. The objective is to maximize investment yields
while managing the default, liquidity and reinvestment risks at acceptable and measurable low levels.
ii) Investment Income Allocation
Investment income is attributed to each asset segment. A portion of investment income is allocated to or from the
Shareholders’ Capital and Surplus segment from or to the participating account’s asset segments in proportion to
the deficiency or excess of funds over assets of each segment.
iii) Expense Allocation
For purposes of allocation of profits to the participating accounts, expenses associated directly with the
participating account will be attributed to the participating account. Expenses arising from or varying directly
with various functional activities are charged to the participating account in proportion to statistics appropriate
to each cost centre. Expenses incurred by overhead cost centres are charged to the participating account in
proportion to expenses directly charged. Investment expenses are allocated monthly to the participating account
in proportion to the Company’s total funds at the beginning of each month. Premium taxes are allocated in
proportion to taxable premiums. Other taxes, licenses, and fees are allocated to lines of business using
cost centre methods.
iv) Income Tax Allocation
For the purpose of allocation of profits to the participating accounts, income taxes are allocated to the
participating account in proportion to total taxable income for the Company.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) Fee Income
Fee income includes fund management fees, policy administration fees and surrender charges, and is recognized
on an accrual basis. Fee income earned for investment management and administration of the segregated funds is
generally calculated and recorded as revenue daily based on closing segregated fund net asset market values.
(n) Investment Income
Interest income is recognized using the effective interest rate method. Fees that are an integral part of the effective
yield of the financial asset are recognized as an adjustment to the effective interest rate of the instrument.
Dividend income is recognized when the right to receive payment is established, which is usually the
ex-dividend date.
Interest income and dividend income are included in Investment income in the Consolidated statement of operations
for all financial assets, regardless of classification.
(o) Income Taxes
Income tax expense for the period comprises current and deferred tax. Tax is recognized in the Consolidated
statement of operations except to the extent that it relates to items recognized in OCI or directly in equity. In these
cases, the tax is recognized in OCI or directly in equity, respectively.
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted at the end of each reporting period.
Deferred income tax assets and liabilities are recorded for the expected future income tax consequences of events
that have been reflected in the consolidated financial statements. Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes are recognized for all significant temporary
differences between tax and financial statement bases for assets and liabilities and for certain carry-forward items.
Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is probable that
the deferred income tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of their substantive enactment.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and
assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.
(p) Foreign Currency Translation
The Company uses the Canadian dollar as both its functional and presentational currency.
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions.
Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets
and liabilities denominated in foreign currencies, are recognized in the Consolidated statement of operations.
For monetary financial assets designated as AFS, translation differences are recognized in the Consolidated
statement of operations. Translation differences on non-monetary items, such as foreign denominated AFS common
equities, are recognized in OCI and included in the AFS component within AOCI. On derecognition of an AFS
non-monetary financial asset, the cumulative exchange gain or loss previously recognized in equity is recognized
in the Consolidated statement of operations.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(q) Comprehensive Income
Comprehensive income consists of Net income and Other comprehensive income. OCI includes unrealized fair value
change on AFS financial assets, net of amounts reclassified to the Consolidated statement of operations, and the
effective portion of the change in the fair value of cash flow hedging instruments, net of amounts reclassified to the
Consolidated statement of operations, all net of taxes.
(r) Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past
events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be
reliably estimated. If the outflow of economic benefits is not probable, a contingent liability is disclosed unless the
possibility of an outflow of economic benefits is remote. Any change in estimate of a provision is recorded in Net
income. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the
expected expenditures to settle the obligation using a discount rate that reflects current market assessments of the
time value of money and the risks specific to the obligation.
(s) Leases
The Company leases certain property and equipment. The Company does not have substantially all of the risks and
rewards of ownership and these leases are therefore classified as operating leases.
Payments made under operating leases are charged to Net income on a straight-line basis over the term of the lease.
(t) Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income (loss) for the period attributable to common
share owners of the Company by the weighted average number of common shares outstanding during the period.
The Company does not have any potentially dilutive instruments. As a result, diluted earnings per share are the same
as basic earnings per share.
(u) Future Accounting Changes
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning
on or after January 1, 2013. The Company has not yet determined the impact of these standards and amendments on
its consolidated financial statements.
IFRS 9 Financial Instruments – Classification and Measurement
This is part of a new standard on classification and measurement of financial assets, financial liabilities and
derecognition of financial instruments that will replace IAS 39 Financial Instruments: Recognition and
Measurement. IFRS 9 has two measurement categories: amortized cost and fair value. Under fair value, any
unrealized gains or losses on financial instruments would be recognized in net income. Under almost all
circumstances, equity instruments are measured at fair value. Debt instruments are permitted to use amortized cost
only if the entity is holding the instruments to collect contractual cash flows and the cash flows represent principal
and interest. Otherwise, debt instruments would be recorded at fair value. This standard is effective for the Company
beginning on or after January 1, 2015.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
IFRS 10 Consolidated Financial Statements
The IASB issued IFRS 10 which establishes principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities and replaces IAS 27 Consolidated and Separate
Financial Statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 defines the principle of control
and establishes control as the basis for determining which entities are included in the consolidated financial
statements of the entity that is the parent.
IFRS 12 Disclosure of Interests in Other Entities
This is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities,
including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard requires
an entity to disclose information that enables users of financial statements to evaluate the nature and risks associated
with its interests in other entities, and the effects of those interests on its financial position, financial performance
and cash flows.
IFRS 13 Fair Value Measurement
The IASB issued IFRS 13 Fair Value Measurement to provide a single source of guidance for measuring fair value.
IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. IFRS 13 applies when other IFRSs require or
permit fair value measurements or disclosures about fair value measurements.
IAS 1 Presentation of Financial Statements
An amendment was issued which requires the grouping of items presented in other comprehensive income on the
basis of whether or not they will be reclassified to profit or loss in the future. This amendment is effective for annual
periods beginning on or after July 1, 2012.
IAS 19 Employee Benefits
An amended version of IAS 19 Employee Benefits was issued which eliminates the option that allows an entity
to defer the recognition of actuarial gains and losses arising from defined benefit plans. The amendments require
service cost and net interest to be recognized in profit or loss, whereas remeasurements, which include actuarial
gains and losses arising from defined benefit plans, are recognized in OCI. Net interest is comprised of interest
expense of the defined benefit obligation and interest income on plan assets. Interest income on plan assets is
determined using the same discount rate selected to discount the defined benefit obligation, rather than an expected
rate of return under IAS 19. The amended IAS 19 also includes enhanced disclosure requirements relating to the
characteristics and risks associated with defined benefit plans.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The Company has adopted IFRS effective January 1, 2011. Prior to the adoption of IFRS the Company prepared its
financial statements in accordance with previous Canadian GAAP. The Company’s consolidated financial statements
for the year ended December 31, 2011 are the Company’s first annual consolidated financial statements prepared in
accordance with IFRS.
The Company has applied IFRS 1 First-time Adoption of International Financial Reporting Standards in preparing these
consolidated financial statements, with a transition date of January 1, 2010. In accordance with IFRS, the Company has:
• provided comparative financial information restated from previous Canadian GAAP;
• applied the same accounting policies throughout all periods presented;
• retrospectively applied all IFRS standards effective as of December 31, 2011 except for the optional exemptions and
mandatory exceptions applicable for first-time adopters of IFRS that the Company has applied, as discussed below.
(a) First-time Adoption Exemptions Applied
IFRS 1 provides for some exemptions from full retrospective application of certain standards. In preparing these
consolidated financial statements in accordance with IFRS 1, the Company has applied the following optional
exemptions and applicable mandatory exceptions.
i) IFRS Optional Exemptions
(1) Business Combinations
IFRS 1 provides the option to apply IFRS 3 Business Combinations, retrospectively or prospectively from
the transition date. The retrospective basis would require restatement of all business combinations that
occurred prior to the transition date. The Company elected not to retrospectively apply IFRS 3 to business
combinations that occurred prior to its transition date and therefore such business combinations have not
been restated.
(2) Employee Benefits
IFRS 1 provides the option to retrospectively apply the corridor approach under IAS 19 Employee Benefits
for the recognition of actuarial gains and losses or recognize all cumulative gains and losses deferred under
previous Canadian GAAP in opening Retained earnings at the date of transition. The Company has elected to
recognize all cumulative unamortized actuarial gains and losses that existed at the transition date in opening
Retained earnings for all defined benefit plans. The Company has also elected under IFRS 1 to disclose the
present value of its defined benefit obligations, fair value of plan assets, surplus or deficit positions and
experience adjustments prospectively from the date of transition.
(3) Fair Value or Revaluation as Deemed Cost
IFRS 1 allows an entity to use a previous GAAP revaluation of an item of property and equipment at, or before, the
date of transition to IFRS as deemed cost if, at the date of the revaluation, the revaluation was broadly comparable
to fair value, or the cost or depreciated cost in accordance with IFRS. The Company has elected to use a previous
GAAP revaluation as the asset’s deemed cost at the transition date since this value was broadly comparable to fair
value at the date of the revaluation. The Company’s head office land and buildings, which were presented as real
estate investment under previous Canadian GAAP, were last valued as of September 22, 2009.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
(4) Designation of Previously Recognized Financial Instruments
IFRS 1 permits the redesignation of previously recognized financial assets at the date of transition as AFS
or, provided the asset meets the criteria specified in IAS 39 Financial Instruments: Recognition and
Measurement, FVTPL. The Company has elected to re-designate $151,047 of financial assets, previously
classified as AFS and held in support of insurance operations, as FVTPL and maintain financial assets held
in support of Shareholders’ equity as AFS. The re-designated assets are valued at fair value under
both designations.
ii) IFRS Mandatory Exceptions
(1) Estimates
IFRS 1 requires that an entity’s estimates under IFRS at the date of transition be consistent with estimates
made for the same date under previous GAAP, unless there is objective evidence that those estimates were in
error. The Company’s estimates under IFRS at January 1, 2010 are consistent with the estimates made under
previous Canadian GAAP for the same date.
(2) Hedge Accounting
Hedge accounting can only be applied prospectively from the transition date to transactions that satisfy the
hedge accounting criteria in IAS 39 at that date. Hedging relationships cannot be designated retrospectively
and the supporting documentation cannot be created retrospectively. The Company discontinued hedge
accounting on foreign exchange effective January 1, 2010. The impact was not material.
(b) Reconciliations of Previous Canadian GAAP to IFRS
IFRS 1 requires an entity to reconcile equity, comprehensive income and cash flows for prior periods. The adoption of
IFRS has not changed the Company’s actual cash flows, however it has resulted in certain changes to the Company’s
reported financial position and results of operations. IFRS has also resulted in a number of presentation changes on
the face of the Company’s consolidated financial statements. In order to allow the users of the consolidated financial
statements to better understand these changes, the Company has reconciled its previous Canadian GAAP Statement
of financial position, Statement of operations, Statement of comprehensive income and Statement of cash flows for
the year ended December 31, 2010 as well as the opening Statement of financial position as at January 1, 2010 to an
IFRS basis. Explanations for the transitional adjustments and presentation reclassifications are provided below.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
i) Reconciliations
Reconciliation of shareholders’ equity as at the transition date – January 1, 2010
As reported under Canadian GAAP - December 31, 2009
Differences increasing (decreasing) reported amount:
1. Financial instruments
2. Employee benefits
3. Impairment of financial assets
4. Contract classification
5. Real estate
6. Income taxes
IFRS changes at January 1, 2010
Reference
Share
capital
Contributed
surplus
Retained
earnings
AOCI
Shareholders’
equity
$ 985
$ 19,387
$ 697,212
$ 33,470
$ 751,054
a
b
f
c
d
e
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,393
3,430
(647)
1,190
18
(461)
(10,357)
-
647
-
-
461
13,923
(9,249)
36
3,430
-
1,190
18
-
4,674
Total Shareholders’ Equity Under IFRS – as at January 1, 2010
$ 985
$ 19,387
$ 711,135
$ 24,221
$ 755,728
Reconciliation of policyholders’ equity as at the transition date – January 1, 2010
As reported under Canadian GAAP - December 31, 2009
Differences increasing (decreasing) reported amount:
1. Impairment of financial assets
2. Income taxes
IFRS changes at January 1, 2010
Reference
e
Retained
earnings
AOCI
Policyholders’
equity
$ 57,839
$ 2,973
$ 60,812
-
(63)
(63)
-
63
63
-
-
-
Total Policyholders’ Equity Under IFRS – as at January 1, 2010
$ 57,776
$ 3,036
$ 60,812
Reconciliation of total equity as at the transition date – January 1, 2010
As reported under Canadian GAAP - December 31, 2009
Differences increasing (decreasing) reported amount:
1. Financial instruments
2. Employee benefits
3. Impairment of financial assets
4. Contract classification
5. Real estate
6. Income taxes
IFRS changes at January 1, 2010
Reference
Share
capital
Contributed
surplus
Retained
earnings
AOCI
Total equity
$ 985
$ 19,387
$ 755,051
$ 36,443
$ 811,866
a
b
f
c
d
e
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,393
3,430
(647)
1,190
18
(524)
(10,357)
-
647
-
-
524
13,860
(9,186)
36
3,430
-
1,190
18
-
4,674
Total Equity Under IFRS – as at January 1, 2010
$ 985
$ 19,387
$ 768,911
$ 27,257
$ 816,540
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of shareholders’ equity as at December 31, 2010
As reported under Canadian GAAP - December 31, 2010
IFRS changes at January 1, 2010
Differences increasing (decreasing) reported amount:
1. Financial instruments
2. Employee benefits
3. Impairment of financial assets
4. Contract classification
5. Real estate
6. Income taxes
IFRS changes for the year ended December 31, 2010
Reference
Share
capital
Contributed
surplus
Retained
earnings
AOCI
$ 985
-
$ 19,387
-
$ 712,402 $ 58,744
(9,249)
13,923
Shareholders’
equity
$ 791,518
4,674
a
b
f
c
d
e
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,487)
(187)
(699)
(136)
(527)
683
(4,979)
-
699
-
-
(683)
(14,466)
(187)
-
(136)
(527)
-
(10,353)
(4,963)
(15,316)
Total Shareholders’ Equity Under IFRS – as at December 31, 2010
$ 985
$ 19,387
$ 715,972 $ 44,532
$ 780,876
Reconciliation of policyholders’ equity as at December 31, 2010
As reported under Canadian GAAP - December 31, 2010
IFRS changes at January 1, 2010
Differences increasing (decreasing) reported amount:
1. Impairment of financial assets
2. Income taxes
IFRS changes for the year ended December 31, 2010
Reference
f
e
Retained
earnings
AOCI
$ 52,968 $ 4,637
63
(63)
Policyholders’
equity
$ 57,605
-
(92)
73
(19)
92
(73)
19
-
-
-
Total Policyholders’ Equity Under IFRS – as at December 31, 2010
$ 52,886 $ 4,719
$ 57,605
Reconciliation of total equity as at December 31, 2010
As reported under Canadian GAAP - December 31, 2010
IFRS changes at January 1, 2010
Differences increasing (decreasing) reported amount:
1. Financial instruments
2. Employee benefits
3. Impairment of financial assets
4. Contract classification
5. Real estate
6. Income taxes
IFRS changes for the year ended December 31, 2010
Reference
Share
capital
Contributed
surplus
Retained
earnings
AOCI
Total equity
$ 985
-
$ 19,387
-
$ 765,370 $ 63,381
(9,186)
13,860
$ 849,123
4,674
a
b
f
c
d
e
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,487)
(187)
(791)
(136)
(527)
756
(4,979)
-
791
-
-
(756)
(10,372)
(4,944)
(14,466)
(187)
-
(136)
(527)
-
(15,316)
Total Equity Under IFRS – as at December 31, 2010
$ 985
$ 19,387
$ 768,858 $ 49,251
$ 838,481
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of net income (loss) for the year ended December 31, 2010
Net income (loss) under Canadian GAAP, December 31, 2010
IFRS changes increasing (decreasing) reported net income:
1. Redesignation of financial instruments
2. Employee benefits
3. Impairment of financial assets
4. Contract classification
5. Real estate
6. Income taxes
Total IFRS changes for the year ended December 31, 2010
Reference
Shareholders’
Policyholders’
Total
$ 30,190
$ (4,871)
$ 25,319
a
b
f
c
d
e
(9,487)
(187)
(699)
(136)
(527)
683
(10,353)
-
-
(92)
-
-
73
(19)
(9,487)
(187)
(791)
(136)
(527)
756
(10,372)
Net Income (Loss) Under IFRS
$ 19,837
$ (4,890)
$ 14,947
Reconciliation of other comprehensive income (loss) for the year ended December 31, 2010
Other comprehensive income (loss) under Canadian GAAP
IFRS changes increasing (decreasing) reported other
comprehensive income:
1. Redesignation of financial instruments
2. Impairment of financial assets
3. Income taxes
Total IFRS changes for the year ended December 31, 2010
Reference
Shareholders’
Policyholders’
Total
$ 25,274
$ 1,664
$ 26,938
a
f
e
(4,979)
699
(683)
(4,963)
-
92
(73)
19
(4,979)
791
(756)
(4,944)
Other Comprehensive Income (Loss) Under IFRS
$ 20,311
$ 1,683
$ 21,994
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of Statement of financial position as of January 1, 2010
Canadian GAAP Accounts
Reference
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS IFRS Accounts
ASSETS
ASSETS
GENERAL FUNDS
Cash and cash equivalents
Short-term investments
Bonds
Common and preferred shares
Mortgages
Real estate
Loans on policies
Policy contract loans
Accrued investment income
Premiums receivable
Current income taxes receivable
Other assets
TOTAL GENERAL FUND ASSETS
TOTAL SEGREGATED FUND ASSETS
LIABILITIES
GENERAL FUNDS
Accounts payable and other liabilities
Current income taxes payable
Policy liabilities
Policyholders’ funds on deposit
Provision for unpaid and unreported claims
Provision for profits to policyholders
Future income taxes
Subordinated debt
a
d
i
h
b,i
d,i
i
g
g
b,d,j
h,j
c,h
c
h
b,c
g
SHAREHOLDERS’ & POLICYHOLDERS’
EQUITY
Shareholders’ equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
a,b,c,d,e,f
a,e,f
Policyholders’ equity
Retained earnings
Accumulated other comprehensive income
TOTAL GENERAL FUND LIABILITIES
AND EQUITY
TOTAL SEGREGATED FUND LIABILITIES
e
e
g
$ 149,141 $ - $ 149,141 Cash and cash equivalents
37,080
2,795,896
949,742
223,642
15,601
38,728
137,764
4,198,453
17,827
3,914
-
-
32,718
-
-
-
-
-
36
-
(15,601)
-
-
(15,565)
-
13,746
-
32,693
(13,170)
19,973
3,688
4,186,585
37,080
2,795,896
949,778
223,642
-
38,728
137,764
Investments
Short-term investments
Bonds
Common and preferred shares
Mortgages
Loans on policies
Policy contract loans
4,182,888 Total investments
17,827 Accrued investment income
Insurance receivables
17,660
- Current income taxes receivable
32,693 Reinsurance assets
19,548 Other assets
19,973 Property and equipment
Intangible assets
3,688
4,186,585 Segregated fund assets
$ 4,402,053 $ 4,227,950 $ 8,630,003 TOTAL ASSETS
$ 4,310,401 $ (4,310,401)
-
LIABILITIES
$ 86,172
-
30,065
3,192,988
-
29,702
32,606
18,558
1,116
198,980
-
3,590,187
(41,029)
57,908
-
33,157
17,566
-
(32,606)
-
1,695
-
4,186,585
4,223,276
45,143 Accounts payable and other liabilities
57,908
Insurance payables
30,065 Current income taxes payable
3,226,145
17,566
29,702 Policyholders’ funds on deposit
Insurance contract liabilities
Investment contract liabilities
-
18,558 Provision for profits to policyholders
2,811 Deferred income taxes
198,980 Subordinated debt
4,186,585 Segregated fund policy liabilities
7,813,463
SHAREHOLDERS’ & POLICYHOLDERS’
EQUITY
Shareholders’ equity
985 Capital stock
19,387 Contributed surplus
711,135 Retained earnings
24,221 Accumulated other comprehensive income
755,728
-
-
13,923
(9,249)
4,674
Policyholders’ equity
(63)
63
-
57,776 Retained earnings
3,036 Accumulated other comprehensive income
60,812
985
19,387
697,212
33,470
751,054
57,839
2,973
60,812
811,866
4,674
816,540
$ 4,402,053 $ 4,227,950 $ 8,630,003 TOTAL LIABILITIES AND EQUITY
$ 4,310,401 $ (4,310,401) $ -
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of Statement of financial position as of December 31, 2010
Canadian GAAP Accounts
ASSETS
GENERAL FUNDS
Cash and cash equivalents
Short-term investments
Bonds
Common and preferred shares
Mortgages
Real estate
Loans on policies
Policy contract loans
Accrued investment income
Premiums receivable
Current income taxes receivable
Other assets
TOTAL GENERAL FUND ASSETS
TOTAL SEGREGATED FUND ASSETS
LIABILITIES
GENERAL FUNDS
Accounts payable and other liabilities
Policy liabilities
Policyholders’ funds on deposit
Provision for unpaid and unreported claims
Provision for profits to policyholders
Future income taxes
Subordinated debt
Reference
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
IFRS Accounts
ASSETS
$ 151,332 $ - $ 151,332 Cash and cash equivalents
50,914
3,221,908
1,002,238
226,887
15,656
40,242
119,896
4,677,741
-
-
155
-
(15,656)
-
-
(15,501)
50,914
3,221,908
1,002,393
226,887
-
40,242
119,896
Investments
Short-term investments
Bonds
Common and preferred shares
Mortgages
Loans on policies
Policy contract loans
4,662,240 Total investments
18,411
3,108
11,054
38,281
-
-
-
-
21,513
(47)
(19,366)
21,257
2,244
4,620,899
18,411 Accrued investment income
24,621
Insurance receivables
11,007 Current income taxes receivable
18,915 Other assets
21,257 Property and equipment
Intangible assets
2,244
4,620,899 Segregated fund assets
$ 4,899,927 $ 4,630,999 $ 9,530,926 TOTAL ASSETS
$ 4,706,658 $ (4,706,658) $ -
LIABILITIES
$ 81,654 $ (43,946) $ 37,708 Accounts payable and other liabilities
-
-
3,669,504
-
30,037
42,977
20,104
7,343
199,185
-
4,050,804
73,055
17,680
3,814
16,978
-
(42,977)
-
(3,862)
-
4,620,899
4,641,641
73,055
17,680 Reinsurance liabilities
Insurance payables
3,673,318
16,978
30,037 Policyholders’ funds on deposit
Insurance contract liabilities
Investment contract liabilities
-
20,104 Provision for profits to policyholders
3,481 Deferred income taxes
199,185 Subordinated debt
4,620,899 Segregated fund policy liabilities
8,692,445
a
d
i
a
b,i
d,i
i
g
g
b,d, j
h, j
a,h
a,c,h
c
h
a,b,c
g
SHAREHOLDERS’ & POLICYHOLDERS’ EQUITY
Shareholders’ equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
a,b,c,d,e,f
a,e,f
Policyholders’ equity
Retained earnings
Accumulated other comprehensive income
e,f
e,f
985
19,387
712,402
58,744
791,518
52,968
4,637
57,605
-
-
3,570
(14,212)
(10,642)
(82)
82
-
SHAREHOLDERS’ & POLICYHOLDERS’ EQUITY
Shareholders’ equity
985 Capital stock
19,387 Contributed surplus
715,972 Retained earnings
44,532 Accumulated other comprehensive income (loss)
780,876
Policyholders’ equity
52,886 Retained earnings
4,719 Accumulated other comprehensive income (loss)
57,605
849,123
(10,642)
838,481
TOTAL GENERAL FUND LIABILITIES
AND EQUITY
$ 4,899,927 $ 4,630,999 $ 9,530,926 TOTAL LIABILITIES AND EQUITY
TOTAL SEGREGATED FUNDS
g
$ 4,706,658 $ (4,706,658) $ -
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of Statement of operations for year ended December 31, 2010
Canadian GAAP Accounts
REVENUE
Insurance premiums
Annuity premiums
Investment income
Fair value change in held for trading assets
Realized gain (loss) on held for trading assets
Realized gain (loss) on available for sale assets
including impairment write-downs
Fee income
BENEFITS AND EXPENSES
Insurance benefits
Annuity benefits
Policy dividends
Increase (decrease) in policy liabilities
Operating expenses
Commissions
Interest expense
Reference
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
IFRS Accounts
REVENUE
$ 577,847 $ (577,847) $ -
-
239,864
c
c,h
h
h
d
a
a
a,f
d
c,h
h
a,c,h
a,h
c
c
b,d
h
h
(239,864)
890,514
(73,988)
(1,185)
(1,012)
15,535
(201)
817,711
205,360
198,111
8,248
15,463
113,151
(7,967)
(57)
890,514 Gross premiums
(73,988) Premiums ceded to reinsurers
816,526 Net premiums
204,348
Investment income
213,646 Fair value change in FVTPL assets
8,047 Realized gain (loss) on FVTPL assets
Realized gain (loss) on available for sale assets
including impairment write-downs
7,496
113,094 Fee income
1,358,044
5,113
1,363,157
-
-
-
-
-
306,847
230,048
19,079
476,516
116,527
157,081
-
13,665
1,319,763
1,319,763
BENEFITS AND EXPENSES
596,607
(62,845)
533,762
596,607 Gross benefits and claims paid
(62,845) Claims recovery from reinsurers
533,762 Net benefits and claims
447,173
50,373
497,546
910
(306,847)
(230,048)
-
(476,516)
(116)
2,004
(2,004)
-
(1,013,527)
18,691
447,173 Gross change in insurance contract liabilities
50,373 Change in insurance contract liabilities ceded
497,546 Net change in insurance contract liabilities
910 Change in investment contract provision
-
-
19,079 Policy dividends
-
116,411 Operating expenses
159,085 Commissions
(2,004) Commissions recovery from reinsurers
13,665
306,236
1,338,454 Total benefits and expenses
Interest expense
NET INCOME BEFORE TAXES
Taxes - premium
- investment and capital
- income
38,281
(13,578)
24,703 NET INCOME BEFORE TAXES
12,198
3,300
(2,536)
-
-
(3,206)
12,198 Taxes - premium
3,300
(5,742)
- investment and capital
- income
a,b,c,d,e,f
12,962
(3,206)
9,756
NET INCOME
25,319
(10,372)
14,947 NET INCOME
Participating policyholders’ net income (loss)
e,f
(4,871)
(19)
(4,890)
Participating policyholders’ portion of net
income (loss)
SHAREHOLDERS’ NET INCOME
$ 30,190 $ (10,353) $ 19,837 SHAREHOLDERS’ NET INCOME
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of Statement of comprehensive income for year ended December 31, 2010
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
IFRS Accounts
SHAREHOLDERS’
$ 30,190 $ (10,353) $ 19,837 Net income
Canadian GAAP Accounts
Reference
SHAREHOLDERS’
Net income
Other comprehensive income, net of income taxes:
Unrealized fair value change on available for sale
investments
Less realized fair value change on available for sale
investments including impairment write-downs
reclassified to net income
Net unrealized fair value increase (decrease)
Gain/loss on derivative investments
designated as cash flow hedges
Less gain/loss on derivative investments
designated as cash flow hedges reclassified
to net income
Net gain/loss on derivatives designated as
cash flow hedges
Shareholder portion of policyholder other
comprehensive income (loss)
Total other comprehensive income (loss)
a
33,690
(10,636)
23,054
Other comprehensive income (loss), net of income taxes:
Unrealized fair value change on available for sale
investments
Less realized fair value change on available for sale
investments including impairment write-downs
reclassified to net income
a,e,f
9,063
24,627
(5,671)
(4,965)
3,392
19,662 Net unrealized fair value increase (decrease)
-
(462)
462
Gain (loss) on derivative investments
designated as cash flow hedges
Less gain (loss) on derivative investments
designated as cash flow hedges reclassified
to net income
Net gain (loss) on derivatives designated as
cash flow hedges
-
(462)
462
-
-
-
185
25,274
2
(4,963)
Shareholder portion of policyholder other
comprehensive income (loss)
20,311 Total other comprehensive income (loss)
187
Comprehensive income (loss)
$ 55,464 $ (15,316) $ 40,148 Comprehensive income (loss)
POLICYHOLDERS’
Net income (loss)
$ (4,871) $ (19) $ (4,890) Net income (loss)
POLICYHOLDERS’
Other comprehensive income (loss), net of
income taxes:
Unrealized fair value change on available for sale
investments
Less realized fair value change on available for sale
investments including impairment write-downs
reclassified to net income
Net unrealized fair value increase (decrease)
Shareholder portion of policyholder other
comprehensive (income) loss
Total other comprehensive income (loss)
2,388
-
2,388
e,f
539
1,849
(185)
1,664
(21)
21
(2)
19
Other comprehensive income (loss), net of
income taxes:
Unrealized fair value change on available for sale
investments
Less realized fair value change on available for sale
investments including impairment write-downs
reclassified to net income
518
1,870 Net unrealized fair value increase (decrease)
Shareholder portion of policyholder other
(187)
comprehensive income (loss)
1,683 Total other comprehensive income (loss)
Comprehensive income (loss)
$ (3,207) $ - $ (3,207) Comprehensive income (loss)
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of Statement of cash flows for year ended December 31, 2010
Canadian GAAP Accounts
OPERATING ACTIVITIES
Net income
Non-cash items affecting net income
Increase (decrease) in policy liabilities
Fair value change in held for trading assets
Realized (gain) loss on assets including
impairment write downs
Amortization related to invested assets
Future income taxes
Other items
Cash provided from operating activities
INVESTING ACTIVITIES
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
Decrease (increase) in short-term investments
Other
Reference
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
IFRS Accounts
OPERATING ACTIVITIES
a,b,c,d,e,f
$ 25,319
$ (10,372)
$ 14,947 Net income
a,c,h
h
a
a,f
d
a,b,c,d
476,516
(198,111)
(23,711)
(68,419)
6,227
(47,981)
169,840
(1,375,230)
1,223,373
(7,800)
24,791
(13,834)
8,168
-
4,109
(5,557)
(2,753)
-
-
-
-
-
-
(28,433)
50,373
(15,535)
448,083
50,373
(213,646)
Non-cash items affecting net income:
Change in contract liabilities
Change in reinsurance liabilities
Fair value change in FVTPL assets
Realized (gain) loss on assets including
impairment write downs
Amortization related to invested assets
Amortization related to capital assets
Deferred income taxes
(15,543)
(68,419)
4,109
670
(50,734) Other items
169,840 Cash provided from operating activities
(1,375,230)
1,223,373
INVESTING ACTIVITIES
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
(7,800)
24,791
(13,834) Decrease (increase) in short-term investments
i
i
(3,949)
(133)
133
Purchase of intangible assets and property
and equipment
(133)
(3,816) Other
Cash provided from (used for) investing activities
(152,649)
-
(152,649) Cash provided from (used for) investing activities
FINANCING ACTIVITIES
Dividends to common shareholders
Debt issue
Debt repayment
Cash provided from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents – beginning of period
(15,000)
-
-
(15,000)
2,191
149,141
-
-
-
-
-
-
FINANCING ACTIVITIES
(15,000) Dividends to common shareholders
- Debt issue
- Debt repayment
(15,000) Cash provided from financing activities
2,191 Net change in cash and cash equivalents
149,141 Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
$ 151,332
$ -
$ 151,332 Cash and cash equivalents – end of year
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
ii) Notes to the IFRS Reconciliations
The following narratives explain the significant differences between previous Canadian GAAP and IFRS impacting
the Company’s financial statements.
(1) Transitional Adjustments
a. Financial Instruments
As noted in the “IFRS Optional Exemptions” section, $151,047 of financial assets supporting insurance
contract liabilities designated as AFS under previous Canadian GAAP have been re-designated as FVTPL
under IFRS. In addition, common and preferred shares previously carried as AFS at cost are now carried
as AFS at fair value. The effects of these adjustments as of January 1, 2010, were an increase in Retained
earnings of $10,393, a decrease in AOCI of $10,357 and an increase in Common and preferred shares of $36.
During 2010, the Company updated its method for setting the investment return on its insurance contract
liabilities by utilizing a modified mean reversion approach. The effects of this adjustment and the above
noted adjustment on 2010 operating results were an increase in Common and preferred shares of $119, a
decrease in Current income taxes receivable of $47, an increase in Insurance contract liabilities of $19,326,
an increase in Reinsurance liabilities of $392, a reduction of Deferred income taxes of $5,180, a reduction
in Net income of $9,487, and a reduction in OCI of $4,979.
b. Employee Benefits
As noted in the “IFRS Optional Exemptions” section, the Company elected under IFRS 1 to recognize all
cumulative unamortized actuarial gains and losses related to its defined benefit plans in opening Retained
earnings at the date of transition. The Company also recognized unamortized transitional amounts that
existed at the date of transition. The recognition of these unamortized amounts resulted in the following
adjustments to the Statement of financial position at January 1, 2010: a decrease in Other liabilities of
$348, an increase in Other assets of $4,263, an increase in Deferred income taxes of $1,181, and an increase
in Retained earnings of $3,430.
The effects of these adjustments on the Statement of financial position as at December 31, 2010 were: a
decrease in Other liabilities of $33, a decrease in Other assets of $285, a decrease in Deferred income taxes
of $65, and a decrease in Retained earnings of $187.
The Company also adjusted its pension expense to remove the amortization of both actuarial gains and
losses and transitional assets and obligations. These items are combined in the adjustment to Operating
expenses in the Company’s Statement of operations reconciliation. The impact on net income for the year
ended December 31, 2010 was a reduction of $187.
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
c. Contract Classification
Under previous Canadian GAAP all policy contracts were presented as a single item on the face of the
financial statements. Under IFRS investment contracts without a significant insurance element are
presented as investment contract liabilities. Certain of the Company’s policy contracts do not meet the
significant insurance element requirement under IFRS and as a result have been reclassified to investment
contracts. Deposits and withdrawals on these policies are recorded in a liability account rather than
revenue and expense accounts. Contract liabilities of $19,270 were removed from Insurance contract
liabilities on transition. These contracts were then measured as Investment contracts under IAS 39 using
the effective interest rate method and valued at $17,566. Deferred income taxes of $514 arose on the
difference in measurement. Retained earnings increased by $1,190.
For the year ended December 31, 2010, deposits of $1,185, and withdrawals of $2,683 were removed from
previously reported Premiums, and Benefits and claims respectively. The change in policy contract
liabilities increased by $1,772. These adjustments, together with the related reduction in income taxes of
$138, resulted in a reduction to 2010 Net income of $136.
d. Property and Equipment
The Company’s office properties (head office land and buildings) that were classified as real estate
investments under previous Canadian GAAP ($15,601) do not meet the definition of investment property
under IFRS. As a result, they are accounted for as Property and equipment under IFRS ($15,601) and
have been reclassified accordingly on the Company’s Statement of financial position. The effects on the
Statement of financial position were a decrease in Investments of $15,601 and an increase of the same
amount to Property and equipment, a decrease in Accounts payable and other liabilities of $18 and an
increase in Shareholders’ retained earnings of $18 as of January 1, 2010.
During 2010, the Company reversed rental income and rental expense (reported in Investment income
and Operating expenses, respectively) related to own use property on the 2010 Statement of operations.
The Company also recognized amortization expense of $644 on the 2010 Statement of operations related to
Property and equipment that was previously reported as investment real estate. The resulting impact on
Net income for the year ended December 31, 2010 was a reduction of $527.
e. Income Taxes
Under previous Canadian GAAP the full impact of the March 4, 2009 amendments to the Income Tax Act
(Canada) was recorded in Net income. Under IAS 12 Income Taxes, the impact of any substantively enacted
amendments relating to items recorded in OCI would have been reported in OCI. The unrealized tax
recovery at January 1, 2010 associated with this tax law change was reclassified from Retained earnings
to AOCI on transition (Shareholders’ $461, Policyholders’ $63).
During the year ended December 31, 2010, as tax recoveries were realized they were transferred from
OCI to Net income (Shareholders’ $683, Policyholders’ $73).
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
f.
Impairment of AFS Assets
IAS 39 Financial Instruments: Recognition and Measurement requires the recognition of an impairment
loss on a financial asset or group of financial assets when there is objective evidence that the financial
assets are impaired. Under previous Canadian GAAP, an impairment loss was recognized when there was
objective evidence of impairment and the decline in fair value was other than temporary. On transition to
IFRS, the Company recognized additional impairment on certain preferred share investments at
January 1, 2010 as a result of the impairment review conducted in accordance with IAS 39. The impact
of this adjustment on the Statement of financial position at January 1, 2010 was a decrease to Retained
earnings of $647 and an increase to AOCI of $647.
The Company also recognized additional impairment on its equity investments for the year ended
December 31, 2010, resulting in a $699 decrease to Shareholders’ Net income and a $92 decrease to
Policyholders’ Net income with equivalent increases to OCI in the Statement of comprehensive income.
(2) Presentation Reclassifications
Certain amounts on the Statement of financial position, Statement of operations and Statement of cash flows
have been reclassified to conform to the presentation adopted under IFRS. These presentation differences have
no impact on reported net income or total equity.
g. Segregated Funds
Under previous Canadian GAAP, segregated fund assets and liabilities were presented separately from
general funds on the face of the Statement of financial position and a continuity schedule was presented
in a Statement of changes in segregated funds. Under IFRS total segregated fund assets are presented as
a separate line item and included in total assets. Segregated fund policy liabilities are also presented as a
separate line item and included in total liabilities. A breakdown by asset type and a change in segregated
funds schedule is presented in Note 9. The Statement of operations presentation of segregated funds was not
impacted by the change to IFRS. Segregated fund assets and Segregated fund liabilities were decreased by
$123,816 to eliminate the Company’s investment in Segregated funds on transition
(December 31, 2010 $85,759).
h. Presentation of Insurance and Reinsurance
Under previous Canadian GAAP reinsurance ceded to third parties was deducted from insurance
contract liabilities, insurance premiums, annuity premiums, insurance benefits, annuity benefits and
commissions. IFRS requires these items to be presented on a gross basis. The grossing up of insurance
contract liability balances has no effect on comprehensive income or equity. In addition, the Provision
for unpaid and unreported claims has been disaggregated and reclassified to Insurance receivables,
Reinsurance assets, Reinsurance liabilities, Insurance payables, or Insurance contract liabilities
as appropriate.
i. Disaggregation of Other Assets
IFRS requires that insurance related assets, intangible assets and property and equipment be presented
separately in the Statement of financial position. These line items have been reclassified from Other assets
and Real estate investments, where they were presented under previous Canadian GAAP.
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 3. FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
j. Disaggregation of Other Liabilities
IFRS requires that insurance related liabilities be presented separately in the Statement of financial
position. These line items have been reclassified from Accounts payable and other liabilities, where they
were presented under previous Canadian GAAP.
4. FINANCIAL INSTRUMENTS
(a) Summary of Invested Assets
The carrying values and fair values of portfolio investments are as follows:
Asset category
Short-term investments
Canadian federal government
Canadian provincial governments
Total Short-term Investments
Bonds
Bonds issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
Total Government Bonds Issued or Guaranteed
Canadian corporate bonds by industry sector:
Financial services
Infrastructure
Utilities
Energy
Consumer staples
Industrials
Health care
Total Canadian Corporate Bonds
Total Bonds
Preferred shares
Canadian
Total Preferred Shares
Common shares
Canadian
U.S.
Other
Total Common Shares
Mortgages
Loans on policies
Policy contract loans
Total
As at December 31, 2011
Designated
as Fair Value
Through Profit
or Loss
Available
for Sale
Loans &
Receivables
Total
Carrying
Value
Total
Fair
Value
$ 5,979
3,994
9,973
$ 14,908
8,986
23,894
$ -
-
-
$ 20,887
12,980
33,867
$ 20,887
12,980
33,867
62,729
2,301,634
2,364,363
462,997
196,681
176,436
36,783
36,754
37,012
69,011
1,015,674
3,380,037
229,091
161,880
390,971
206,259
34,838
15,360
17,135
9,001
4,732
5,564
292,889
683,860
215,582
215,582
108,648
108,648
276,934
13,766
3,169
293,869
183,625
6,957
-
190,582
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
291,820
2,463,514
291,820
2,463,514
2,755,334
2,755,334
669,256
231,519
191,796
53,918
45,755
41,744
74,575
1,308,563
4,063,897
669,256
231,519
191,796
53,918
45,755
41,744
74,575
1,308,563
4,063,897
324,230
324,230
324,230
324,230
460,559
20,723
3,169
484,451
460,559
20,723
3,169
484,451
-
-
-
$ 3,899,461
-
-
-
$ 1,006,984
264,238
41,981
113,118
$ 419,337
264,238
41,981
113,118
$ 5,325,782
279,855
41,981
113,118
$ 5,341,399
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 As at December 31, 2010
Designated
as Fair Value
Through Profit
or Loss
Available
for Sale
Loans &
Receivables
Total
Carrying
Value
Total
Fair
Value
$ 3,987
-
3,987
$ 34,954
11,973
46,927
$ -
-
-
$ 38,941
11,973
50,914
$ 38,941
11,973
50,914
53,684
1,851,697
1,905,381
488,225
145,435
120,888
20,262
38,187
25,058
6,932
844,987
2,750,368
107,870
150,735
258,605
158,274
26,656
17,221
4,937
3,152
2,695
-
212,935
471,540
250,187
250,187
121,143
121,143
312,828
-
-
312,828
299,648
16,934
1,653
318,235
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
161,554
2,002,432
2,163,986
161,554
2,002,432
2,163,986
646,499
172,091
138,109
25,199
41,339
27,753
6,932
1,057,922
3,221,908
646,499
172,091
138,109
25,199
41,339
27,753
6,932
1,057,922
3,221,908
371,330
371,330
371,330
371,330
612,476
16,934
1,653
631,063
226,887
40,242
119,896
612,476
16,934
1,653
631,063
236,824
40,242
119,896
-
-
-
226,887
40,242
119,896
$ 3,322,777
$ 952,438
$ 387,025
$ 4,662,240
$ 4,672,177
4. FINANCIAL INSTRUMENTS (continued)
Asset category
Short-term investments
Canadian federal government
Canadian provincial governments
Total Short-term Investments
Bonds
Bonds issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
Total Government Bonds Issued or Guaranteed
Canadian corporate bonds by industry sector:
Financial services
Infrastructure
Utilities
Energy
Consumer staples
Industrials
Health care
Total Canadian Corporate Bonds
Total Bonds
Preferred shares
Canadian
Total Preferred Shares
Common shares
Canadian
U.S.
Other
Total Common Shares
Mortgages
Loans on policies
Policy contract loans
Total
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 4. FINANCIAL INSTRUMENTS (continued)
Asset category
Short-term investments
Canadian federal government
Corporate
Total Short-term Investments
Bonds
Bonds issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
Other foreign government
Total Government Bonds Issued or Guaranteed
Canadian corporate bonds by industry sector:
Financial services
Infrastructure
Utilities
Energy
Consumer staples
Industrials
Total Canadian Corporate Bonds
Total Bonds
Preferred shares
Canadian
Total Preferred Shares
Common shares
Canadian
U.S.
Other
Total Common Shares
Mortgages
Loans on policies
Policy contract loans
Total
As at January 1, 2010
Designated
as Fair Value
Through Profit
or Loss
Available
for Sale
Loans &
Receivables
Total
Carrying
Value
Total
Fair
Value
$ 4,099
-
4,099
$ 12,986
19,995
32,981
$ -
-
-
$ 17,085
19,995
37,080
$ 17,085
19,995
37,080
126,759
1,426,409
153
1,553,321
465,020
87,472
118,297
9,488
38,444
8,829
727,550
2,280,871
191,664
149,427
1,418
342,509
122,544
19,109
20,108
5,252
4,176
1,327
172,516
515,025
275,640
275,640
124,985
124,985
227,816
19,290
19,398
266,504
245,901
26,308
10,440
282,649
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
318,423
1,575,836
1,571
1,895,830
587,564
106,581
138,405
14,740
42,620
10,156
900,066
2,795,896
318,423
1,575,836
1,571
1,895,830
587,564
106,581
138,405
14,740
42,620
10,156
900,066
2,795,896
400,625
400,625
400,625
400,625
473,717
45,598
29,838
549,153
223,642
38,728
137,764
473,717
45,598
29,838
549,153
225,160
38,728
137,764
-
-
-
223,642
38,728
137,764
$ 2,843,259
$ 939,495
$ 400,134
$ 4,182,888
$ 4,184,406
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
4. FINANCIAL INSTRUMENTS (continued)
(b) Impairments
i) Loans and Receivables
Investments in individual assets have been reduced by the following specific allowances for impairment:
Impaired Loans
Mortgages
Policy contract loans
Total
Impaired Loans
Mortgages
Policy contract loans
Total
Impaired Loans
Mortgages
Policy contract loans
Total
As at December 31, 2011
Recorded
Investment
$ 8,010
813
$ 8,823
Allowance for
Impairment
$ 2,571
549
$ 3,120
As at December 31, 2010
Recorded
Investment
$ 10,649
813
$ 11,462
Allowance for
Impairment
$ 2,421
565
$ 2,986
As at January 1, 2010
Recorded
Investment
$ 10,214
813
$ 11,027
Allowance for
Impairment
$ 2,061
578
$ 2,639
Carrying
Amount
$ 5,439
264
$ 5,703
Carrying
Amount
$ 8,228
248
$ 8,476
Carrying
Amount
$ 8,153
235
$ 8,388
The Company holds collateral of $5,462 in respect of these mortgages and $264 in respect of these policy contract
loans as at December 31, 2011. Mortgage loans are secured by real estate, and policy contract loans are secured by
life insurance.
Continuity of Allowance for Loan Impairment
Allowance - beginning of year
Provision for (recovery of) loan impairment
Write off of loans
Allowance - End of Year
2011
$ 2,986
505
(371)
$ 3,120
2010
$ 2,639
925
(578)
$ 2,986
The Company has recorded interest income of $854 (2010 $764) on these assets.
As at December 31, 2011 loans and receivables past due but not impaired are $nil
(December 31, 2010 $nil, January 1, 2010 $9,270).
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 4. FINANCIAL INSTRUMENTS (continued)
ii) Available for Sale
For the year ended December 31, 2011, the Company reclassified a pre-tax loss of $10,199 from OCI to Net income
due to write-downs of impaired available for sale common and preferred shares (2010 $5,380). Management
considers these assets to be impaired due to the length of time that the fair value was less than the cost and/or the
extent and nature of the loss.
For additional information on the fair values of the Company’s AFS investments, refer to Note 4(e) Fair Value of
Financial Instruments. For analysis of the Company’s risks arising from financial instruments, refer to Note 29
Risk Management.
(c) Hedge Accounting
In conjunction with the issuance of unsecured subordinated debentures (Note 24), the Company entered into a bond
forward derivative with a notional amount of $75,000 which matured on May 13, 2009. This derivative has been
accounted for as a hedging item in a cash flow hedging relationship.
The Company expects to reclassify a loss of $791 from AOCI to investment income on the Consolidated statement
of operations in the next twelve months.
(d) Investment Income
Investment income is comprised of the following:
For the year ended December 31
Interest income
Dividend income
Other
Impaired asset recovery (write-down)
Investment Income
2011
2010
$ 183,244
34,398
(355)
(505)
$ 169,423
35,713
137
(925)
$ 216,782
$ 204,348
Included in interest income is $50,228 (2010 $49,212) relating to assets not classified as fair value through
profit or loss.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 4. FINANCIAL INSTRUMENTS (continued)
(e) Fair Value of Financial Instruments
The following table presents the financial instruments measured at fair value classified by the fair value hierarchy:
As of December 31, 2011
Level 1
Level 2
Level 3
Total Fair Value
$ 155,559
$ -
$ -
$ 155,559
-
293,869
215,582
-
-
190,582
108,648
-
$ 964,240
3,380,037
-
-
9,973
683,860
-
-
23,894
$ 4,097,764
-
-
-
-
-
-
-
-
$ -
3,380,037
293,869
215,582
9,973
683,860
190,582
108,648
23,894
$ 5,062,004
As of December 31, 2010
Level 1
Level 2
Level 3
Total Fair Value
$ 151,332
$ -
$ -
$ 151,332
-
318,235
250,187
-
-
312,828
121,143
-
$ 1,153,725
2,750,368
-
-
3,987
471,540
-
-
46,927
$ 3,272,822
-
-
-
-
-
-
-
-
$ -
2,750,368
318,235
250,187
3,987
471,540
312,828
121,143
46,927
$ 4,426,547
As of January 1, 2010
Level 1
Level 2
Level 3
Total Fair Value
$ 149,141
$ -
$ -
$ 149,141
-
282,649
275,640
-
-
266,504
124,985
-
$ 1,098,919
2,280,871
-
-
4,099
515,025
-
-
32,981
$ 2,832,976
-
-
-
-
-
-
-
-
$ -
2,280,871
282,649
275,640
4,099
515,025
266,504
124,985
32,981
$ 3,931,895
Cash and cash equivalents
Fair value through profit or loss:
Bonds
Common shares
Preferred shares
Short-term investments
Available for sale:
Bonds
Common shares
Preferred shares
Short-term investments
Total
Cash and cash equivalents
Fair value through profit or loss:
Bonds
Common shares
Preferred shares
Short-term investments
Available for sale:
Bonds
Common shares
Preferred shares
Short-term investments
Total
Cash and cash equivalents
Fair value through profit or loss:
Bonds
Common shares
Preferred shares
Short-term investments
Available for sale:
Bonds
Common shares
Preferred shares
Short-term investments
Total
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 4. FINANCIAL INSTRUMENTS (continued)
The classification of a financial instrument into a level is based on the lowest level of input that is significant to the
determination of the fair value. There were no transfers between Level 1, Level 2 and Level 3 during the year ended
December 31, 2011 or during the year ended December 31, 2010.
For additional information on the composition of the Company’s invested assets and analysis of the Company’s risks
arising from financial instruments refer to Notes 4(a) and 29.
(f) Derivative Financial Instruments
As at December 31, 2011
Notional
Principal
Current
Replacement
Cost
Fair Value
Positive
Negative
Credit
Equivalent
Amount
Risk
Weighted
Balance
$ 22,681
-
$ 30
-
$ 30
-
$ 161
-
$ -
-
$ -
-
16,200
-
16
-
16
-
289
-
178
-
3
-
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Other equity contracts
Total
$ 38,881
$ 46
$ 46
$ 450
$ 178
$ 3
As at December 31, 2010
Notional
Principal
Current
Replacement
Cost
Fair Value
Positive
Negative
Credit
Equivalent
Amount
Risk
Weighted
Balance
$ 9,424
-
$ 25
-
$ 25
-
$ 154
-
$ -
-
$ -
-
6,571
11,545
12
730
12
730
40
526
78
1,422
1
23
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Other equity contracts
Total
$ 27,540
$ 767
$ 767
$ 720
$ 1,500
$ 24
As at January 1, 2010
Notional
Principal
Current
Replacement
Cost
Fair Value
Positive
Negative
Credit
Equivalent
Amount
Risk
Weighted
Balance
$ 10,128
7
$ 66
3
$ 66
3
$ -
-
$ -
3
$ -
-
22,425
15,515
124
2,300
124
2,300
247
-
349
3,407
5
55
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Other equity contracts
Total
$ 48,075
$ 2,493
$ 2,493
$ 247
$ 3,759
$ 60
All contracts mature in less than one year. Fair value positive amounts and fair value negative amounts are reported on
the Consolidated statement of financial position as Other assets and Accounts payable and other liabilities respectively.
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 5. INSURANCE RECEIVABLES
As at
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance Receivables
December 31, 2011
$ 3,400
18,593
2
2,160
$ 24,155
December 31, 2010
$ 3,108
16,235
2,781
2,497
$ 24,621
January 1, 2010
$ 3,914
9,437
1,355
2,954
$ 17,660
All amounts are expected to be recovered within one year of the Consolidated statement of financial position date.
6. OTHER ASSETS
Other assets consist of the following:
As at
Trade accounts receivable
Pension asset
Prepaid expenses
Other Assets
December 31, 2011
$ 18,696
13,137
2,631
$ 34,464
December 31, 2010
$ 4,590
12,016
2,309
$ 18,915
January 1, 2010
$ 6,431
10,506
2,611
$ 19,548
Of the above total, $13,137 (December 31, 2010 $12,016, January 1, 2010 $10,506) is expected to be recovered more than one
year after the Consolidated statement of financial position date.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
7. PROPERTY AND EQUIPMENT
Cost
As at January 1, 2010
Additions
Disposals
As at December 31, 2010
Additions
Disposals
As at December 31, 2011
Amortization
As at January 1, 2010
Charge for the year
Disposals
As at December 31, 2010
Charge for the year
Disposals
As at December 31, 2011
Carrying Amount
January 1, 2010
December 31, 2010
December 31, 2011
Land
Buildings
$ 2,728
-
-
2,728
-
-
$ 2,728
$ -
-
-
-
-
-
$ -
$ 2,728
$ 2,728
$ 2,728
$ 12,873
-
-
12,873
-
-
$ 12,873
$ -
(644)
-
(644)
(611)
-
$ (1,255)
$ 12,873
$ 12,229
$ 11,618
Furniture
and
Equipment
$ 13,074
2,413
(2,609)
12,878
2,214
-
$ 15,092
$ (10,422)
(1,296)
2,609
(9,109)
(1,515)
-
$ (10,624)
$ 2,652
$ 3,769
$ 4,468
Leasehold
Improvements
$ 3,271
1,403
-
4,674
520
-
$ 5,194
$ (1,551)
(592)
-
(2,143)
(624)
-
$ (2,767)
$ 1,720
$ 2,531
$ 2,427
Total
$ 31,946
3,816
(2,609)
33,153
2,734
-
$ 35,887
$ (11,973)
(2,532)
2,609
(11,896)
(2,750)
-
$ (14,646)
-
$ 19,973
$ 21,257
$ 21,241
There were no asset impairments in 2011 or 2010.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 8. INTANGIBLE ASSETS
Cost
As at January 1, 2010
Additions
Disposals
As at December 31, 2010
Additions
Disposals
As at December 31, 2011
Amortization
As at January 1, 2010
Charge for the year
Disposals
As at December 31, 2010
Charge for the year
Disposals
As at December 31, 2011
Carrying Amount
January 1, 2010
December 31, 2010
December 31, 2011
$ 38,767
133
-
38,900
324
(893)
$ 38,331
$ (35,079)
(1,577)
-
(36,656)
(1,164)
579
$ (37,241)
$ 3,688
$ 2,244
$ 1,090
The Company’s total amount of research and development expenditure recognized as an expense during 2011 is
$2,023 (2010 $889).
There were no asset impairments during 2011 or 2010.
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 9. SEGREGATED FUNDS
(a) The following table identifies segregated fund assets by category of asset:
As at
Cash and cash equivalents
Short-term investments
Bonds
Common and preferred shares
Net other assets (liabilities)
Less general fund investments
Total
December 31, 2011
$ 139,781
163,846
909,071
3,270,227
(6,204)
4,476,721
(61,403)
December 31, 2010
$ 233,078
109,150
768,350
3,576,969
19,111
4,706,658
(85,759)
$ 4,415,318
$ 4,620,899
January 1, 2010
$ 142,279
230,409
627,045
3,294,346
16,322
4,310,401
(123,816)
$ 4,186,585
(b) The following table presents the change in segregated fund assets:
Segregated funds - beginning of year
Additions to segregated funds:
Amount received from policyholders
Interest
Dividends
Net realized gains on sale of investments
Net unrealized increase in market value of investments
Deductions from segregated funds:
Amounts withdrawn or transferred
by policyholders
Net realized losses on sale of investments
Net unrealized decrease in market value of investments
Management fees and other operating costs
Net change in general fund investments
Segregated Funds - End of Year
2011
$ 4,620,899
2010
$ 4,186,585
1,081,150
41,258
114,256
-
-
1,236,664
1,130,268
106,327
107,544
122,462
1,466,601
24,356
1,081,289
36,230
95,929
-
354,406
1,567,854
1,049,679
16,109
-
105,809
1,171,597
38,057
$ 4,415,318
$ 4,620,899
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 10. INSURANCE PAYABLES
As at
Claims due and accrued
Payable to agents
Premiums paid in advance
Due to reinsurance companies
Other
Insurance Payables
December 31, 2011
$ 31,610
7,734
2,753
6,976
14,486
$ 63,559
December 31, 2010
$ 38,344
7,270
2,314
7,799
17,328
$ 73,055
January 1, 2010
$ 21,910
6,306
2,608
5,260
21,824
$ 57,908
Of the above total, $3,002 (December 31, 2010 $7,031, January 1, 2010 $7,281) is expected to be settled more than one year
after the Consolidated statement of financial position date.
11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES
(a) Nature and Composition of Insurance Contract Liabilities and Related Reinsurance
Insurance contract liabilities include life, health and annuity contracts on a participating and non-participating basis.
Changes in actuarial assumptions are made based on emerging and evolving experience with respect to major factors
affecting estimates of future cash flows and consideration of economic forecasts of investment returns, industry
studies and requirements of the CIA and OSFI.
Insurance contract liabilities represent the amounts that together with estimated future premiums and investment
income, will be sufficient to pay estimated future benefits, dividends, expenses, and taxes on policies in force.
Insurance contract liabilities are determined using accepted actuarial practice according to standards established
by the CIA and the requirements of OSFI.
The Company reinsures excess risks with Canadian regulated reinsurance companies. The reinsurance asset (liability)
is determined based on both the premiums expected to be paid by the Company under reinsurance agreements
over the duration of the insurance contracts that they support, and the insurance claims expected to be received
by the Company when an insured event occurs under those insurance contracts. The Company’s gross exposure to
insurance risk is decreased (increased) by reinsurance assets (liabilities) of $(156,119) (December 31, 2010 $(17,680),
January 1, 2010 $32,693). The change in reinsurance liability is primarily related to the Company’s revised mortality
assumptions, which reduce the present value of insurance claims expected to be recovered from the reinsurance
companies. The Company enters into reinsurance agreements only with reinsurance companies that have an
independent credit rating of “A-” or better from A.M. Best.
Reinsurance transactions do not relieve the original insurer of its primary obligation to policyholders.
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES (continued)
The Company is active in most life insurance and annuity product lines across Canada and does not operate in foreign
markets. The tables below show the concentration of insurance contract liabilities and related reinsurance assets
(liabilities) by type of contract.
Concentration of Insurance Contract Liabilities
Participating Individual
- Life
- Other
Non-participating Individual
- Life
- Annuity
- Health
Non-participating Group
- Life
- Annuity
- Health
Segregated fund deferred acquisition costs
Segregated fund guarantee liability
Total
Participating Individual
- Life
- Other
Non-participating Individual
- Life
- Annuity
- Health
Non-participating Group
- Life
- Annuity
- Health
Segregated fund deferred acquisition costs
Segregated fund guarantee liability
As at December 31, 2011
Gross Insurance
Contract Liabilities
Reinsurance Assets
(Liabilities)
Net
$ 449,045
446
$ (2,579)
-
$ 451,624
446
2,365,799
1,066,630
85,937
23,782
70,196
192,841
(55,175)
-
(253,239)
16,932
10,502
774
-
71,491
-
-
2,619,038
1,049,698
75,435
23,008
70,196
121,350
(55,175)
-
$ 4,199,501
$ (156,119)
$ 4,355,620
As at December 31, 2010
Gross Insurance
Contract Liabilities
Reinsurance Assets
(Liabilities)
Net
$ 387,804
463
$ (4,230)
-
$ 392,034
463
1,951,227
1,067,767
61,427
20,963
74,691
167,496
(58,520)
-
(103,475)
18,439
9,555
810
-
61,221
-
-
2,054,702
1,049,328
51,872
20,153
74,691
106,275
(58,520)
-
Total
$ 3,673,318
$ (17,680)
$ 3,690,998
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES (continued)
Participating Individual
- Life
- Other
Non-participating Individual
- Life
- Annuity
- Health
Non-participating Group
- Life
- Annuity
- Health
Segregated fund deferred acquisition costs
Segregated fund guarantee liability
As at January 1, 2010
Gross Insurance
Contract Liabilities
Reinsurance Assets
(Liabilities)
Net
$ 341,582
483
$ (3,282)
-
$ 344,864
483
1,660,305
990,191
43,914
19,279
75,581
153,745
(58,935)
-
(50,598)
21,376
8,727
736
-
55,734
-
-
1,710,903
968,815
35,187
18,543
75,581
98,011
(58,935)
-
Total
$ 3,226,145
$ 32,693
$ 3,193,452
The Company expects to pay $4,082,809 (December 31, 2010 $3,539,517) of Insurance contract liabilities and $161,885
(December 31, 2010 $24,911) of Reinsurance liabilities more than one year after the Consolidated statement of financial
position date.
The following segregated fund deferred acquisition costs are included in Insurance contract liabilities:
Segregated funds deferred acquisition costs - beginning of year
Deferred during year
Amortized during year
Segregated Funds Deferred Acquisition Costs - End of Year
2011
$ 58,520
21,250
(24,595)
$ 55,175
2010
$ 58,935
23,093
(23,508)
$ 58,520
Of the above total, $52,128 (December 31, 2010 $55,580, January 1, 2010 $56,228) is expected to be recovered more than
one year after the Consolidated statement of financial position date.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES (continued)
(b) Change in Insurance Contract Liabilities and Reinsurance Assets/Liabilities
Insurance contracts
Changes in methods and assumptions - improvements in mortality/morbidity experience
- beginning of year
$ 3,673,318
(181,964)
$ (17,680)
(142,405)
$ 3,690,998
(39,559)
2011
Reinsurance
Assets
(Liabilities)
Gross
Liabilities
Net
- updated approach for establishing mortality
assumption
- decrease in investment return assumption
- model enhancements
- other changes
- new business
- in-force business
Normal changes
Insurance Contracts - End of Year
Insurance contracts
Changes in methods and assumptions - updated approach for establishing investment
- beginning of year
return assumption
- improvements in mortality/morbidity experience
- decrease in investment return assumption
- revision to lapse assumptions
- other changes
- new business
- in-force business
Normal changes
Insurance Contracts - End of Year
(46,744)
81,296
(8,628)
2,350
154,250
525,623
$ 4,199,501
(23,782)
(32)
3,807
8,091
6,729
9,153
$ (156,119)
(22,962)
81,328
(12,435)
(5,741)
147,521
516,470
$ 4,355,620
2010
Reinsurance
Assets
(Liabilities)
Gross
Liabilities
Net
$ 3,226,145
$ 32,693
$ 3,193,452
8,391
(79,878)
40,167
(9,673)
(5,405)
250,875
242,696
$ 3,673,318
(63)
(50,163)
1,387
(14,357)
(1,115)
808
13,130
$ (17,680)
8,454
(29,715)
38,780
4,684
(4,290)
250,067
229,566
$ 3,690,998
Changes in methods and assumptions summarized in the above tables are further explained as follows:
The improvements in mortality/morbidity experience for both 2011 and 2010 are primarily related to favourable mortality
experience for individual life business.
The updated approach for establishing mortality assumption for 2011 is primarily related to new guidelines from the CIA
that allow for mortality improvements after the valuation date for individual life and immediate annuity business.
The decrease in investment return assumptions for both 2011 and 2010 is primarily due to the impact of the lower interest
rate environment, partially offset by changes to asset default, investment expense and preferred share asset assumptions.
The model enhancements for 2011 is related to participating insurance business. The Company is now using an adjusted book
value basis for valuation which essentially assumes that dividends are adjusted to reflect changes in experience as it emerges.
The updated approach for establishing investment return assumption for 2010 is related to the introduction of a mean
reversion approach for setting investment return on individual life business. This change was made due to the IFRS
decision to re-designate from AFS to FVTPL $151 million of financial assets supporting insurance liabilities.
The revision to lapse assumptions for 2010 is primarily related to persistency experience for individual life business.
Other changes for 2011 relate primarily to assumption updates associated with policy termination (lapse) and
administrative expense experience. For 2010, the changes relate primarily to assumption updates associated with
administrative expense experience.
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES (continued)
(c) Mix of Assets Allocated to Insurance, Annuity and Investment Contract Liabilities and Equity
Cash and short-term investments
Bonds
Mortgages
Preferred shares
Common shares
Loans on policies
Policy contract loans
Other
Total
Cash and short-term investments
Bonds
Mortgages
Preferred shares
Common shares
Loans on policies
Policy contract loans
Other
Total
Cash and short-term investments
Bonds
Mortgages
Preferred shares
Common shares
Loans on policies
Policy contract loans
Reinsurance assets
Other
Total
Insurance
Contract
Liabilities
$ 135,886
2,781,320
7,082
74,824
293,869
41,981
20,403
20,832
$ 3,376,197
Insurance
Contract
Liabilities
$ 122,637
2,082,779
-
84,928
318,235
40,242
19,680
16,713
$ 2,685,214
Insurance
Contract
Liabilities
$ 97,645
1,740,732
-
90,016
282,649
38,728
18,921
11,317
13,499
$ 2,293,507
As at December 31, 2011
Annuity
Contract
Liabilities
$ 20,425
602,396
253,748
192,022
-
-
43,605
10,176
$ 1,122,372
Investment
Contract
Liabilities
$ 274
8,092
3,408
2,579
-
-
586
137
$ 15,076
As at December 31, 2010
Annuity
Contract
Liabilities
$ 21,994
597,735
223,511
227,545
-
-
48,531
4,862
$ 1,124,178
Investment
Contract
Liabilities
$ 332
9,027
3,376
3,437
-
-
733
73
$ 16,978
As at January 1, 2010
Annuity
Contract
Liabilities
$ 12,684
496,948
219,943
250,412
-
-
57,091
21,376
7,366
$ 1,065,820
Investment
Contract
Liabilities
$ 213
8,358
3,699
4,212
-
-
960
-
124
$ 17,566
Equity
Total
$ 32,841
672,089
-
54,805
190,582
-
48,524
87,018
$ 1,085,859
$ 189,426
4,063,897
264,238
324,230
484,451
41,981
113,118
118,163
$ 5,599,504
Equity
Total
$ 57,283
532,367
-
55,420
312,828
-
50,952
74,807
$ 1,083,657
$ 202,246
3,221,908
226,887
371,330
631,063
40,242
119,896
96,455
$ 4,910,027
Equity
Total
$ 75,679
549,858
-
55,985
266,504
-
60,792
-
57,707
$ 1,066,525
$ 186,221
2,795,896
223,642
400,625
549,153
38,728
137,764
32,693
78,696
$ 4,443,418
Provisions made for anticipated future losses of principal and interest on investments and included as a component of
insurance contract liabilities are $93,000 (2010 $86,900).
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 11. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS/LIABILITIES (continued)
(d) Fair Value of Insurance and Investment Contract Liabilities and Reinsurance Assets/Liabilities
In the absence of an active market for the sale of insurance and investment contract liabilities and reinsurance
assets/liabilities, the actuarially determined values provide a reasonable approximation of their fair value.
Investment contract liabilities are term certain annuities with a relatively short duration.
(e) Liquidity
The Company defines liquid assets as high quality marketable investments that may be easily sold, meaning there
exists an active market and observable prices for the investments. Liquid asset values are based on fair value as at
December 31.
The Company defines cash demands or demand liabilities as those policyholder obligations that may be called on
immediately at the discretion of the policyholder. More specifically, demand liabilities include cash surrender values
under whole life insurance products as well as current accumulated values of annuity products. Amounts would
be gross of any surrender charge or market value adjustment allowed under the terms of the contract. Demand
liabilities are determined as though all such policyholders made their call at the same time and as such cannot be
readily compared to insurance contract liabilities that are determined based on actuarial assumptions associated
with lapse as well as other decrements.
The Company maintains a high level of liquid assets so that cash demands can be readily met. The Company’s
liquidity position is as follows:
As at
Assets:
Cash and short-term paper
Canada and provincial bonds
Other readily-marketable bonds and stocks
Total Liquid Assets
Liabilities:
Demand liabilities with fixed values
Demand liabilities with market value adjustments
Total Liquidity Needs
December 31, 2011 December 31, 2010
January 1, 2010
$ 189,426
2,725,635
1,865,898
$ 4,780,959
$ 202,246
2,140,324
1,924,529
$ 4,267,099
$ 186,221
1,880,942
1,822,638
$ 3,889,801
$ 460,881
994,877
$ 1,455,758
$ 438,738
978,820
$ 1,417,558
$ 420,280
873,268
$ 1,293,548
12. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of:
As at
Accounts payable
Employee future benefit accrued obligation
Accrued interest on subordinated debt
Other
Accounts Payable and Other Liabilities
December 31, 2011 December 31, 2010
$ 16,864
10,920
1,604
8,320
$ 37,708
$ 48,225
11,318
1,604
8,950
$ 70,097
January 1, 2010
$ 29,230
10,509
1,604
3,800
$ 45,143
Of the above total, $11,318 (December 31, 2010 $10,920, January 1, 2010 $10,509) is expected to be settled more than one
year after the Consolidated statement of financial position date.
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 13. EMPLOYEE BENEFIT PLANS
Pension benefit plans include defined benefit plans available to employees. The Company also provides for
post-employment health and dental care coverage and other future benefits to qualifying employees and retirees.
In the past, the Company has provided ad hoc pension increases on its defined benefit staff pension plan.
Increases take place at the discretion of the Company’s Board of Directors.
The following tables present financial information for the Company’s defined benefit plans.
The amounts recognized in the Consolidated statement of financial position are as follows:
Present value of funded obligations
Fair value of plan assets
Funded status - surplus (deficit)
Unrecognized actuarial loss (gains)
Defined Benefit Asset (Liability) (Note 6)
Present value of unfunded obligations
Unrecognized actuarial loss (gains)
Defined Benefit Asset (Liability) (Note 12)
Pension Benefit Plans
December 31, 2011
December 31, 2010
January 1, 2010
$ (148,207)
139,196
(9,011)
22,148
$ (132,807)
136,737
3,930
8,086
$ 13,137
$ 12,016
$ (118,455)
128,961
10,506
-
$ 10,506
Other Post-Employment Benefit Plans
December 31, 2011
(12,473)
1,155
December 31, 2010
(11,663)
743
January 1, 2010
(10,509)
-
$ (11,318)
$ (10,920)
$ (10,509)
The defined benefit asset (liability), net of the cumulative impact of the asset ceiling, is included in the Consolidated
statement of financial position as Other assets or Accounts payables and other liabilities.
The movement in the present value of the Company’s defined benefit obligation over the year is as follows:
Present value of defined benefit obligation
Opening defined benefit obligation
Current service cost
Employee contributions
Interest cost
Benefits paid
Actuarial loss (gain) obligations
Closing Defined Benefit Obligation
Changes in the fair value of pension plan assets are as follows:
Pension Benefit Plans
Other Post-Employment
Benefit Plans
2011
2010
2011
2010
$ 132,807
4,192
2,172
7,395
(5,957)
7,598
$ 118,455
3,142
2,015
7,465
(7,170)
8,900
$ 11,663
108
-
631
(343)
414
$ 10,509
106
-
645
(340)
743
$ 148,207
$ 132,807
$ 12,473
$ 11,663
Plan assets
Fair value at beginning of year
Expected return on plan assets
Actuarial (loss) gain assets
Employer contributions
Employee contributions
Benefits paid
Fair Value at End of Year
82
Pension Benefit Plans
2011
2010
$ 136,737
7,784
(6,476)
4,936
2,172
(5,957)
$ 128,961
7,982
814
4,135
2,015
(7,170)
$ 139,196
$ 136,737
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
13. EMPLOYEE BENEFIT PLANS (continued)
The actual return on plan assets for the year ended December 31, 2011 was a gain of $1,308 (2010 gain of $8,796).
The movements in actuarial gains and losses due to differences between actual and expected experience on the plan
assets and defined benefit obligations, together with the impact of changes in actuarial assumptions to reflect economic
conditions at the year end are summarized below:
Pension Benefit Plans Other Post-Employment
Benefit Plans
2011
2010
2011
2010
Unrecognized actuarial loss (gain) as of January 1
$ 8,086
$ -
$ 743
$ -
Experience adjustments on plan obligations
Experience adjustments on plan assets
Changes due to discount rate assumptions
Changes due to other actuarial assumptions
Unrecognized actuarial loss (gain) in the year
Less net actuarial loss (gain) recognized in the year
397
6,476
7,200
-
14,073
11
(1,861)
(814)
10,761
-
8,086
-
(255)
-
669
-
414
2
(229)
-
972
-
743
-
Total Unrecognized Actuarial Loss (Gain) as of December 31
$ 22,148
$ 8,086
$ 1,155
$ 743
The following summarizes income and expense activity for the Company’s defined benefit plans:
Defined benefit plan expense
Current service cost
Interest cost
Expected return on plan assets
Net actuarial loss (gain) recognized in the year
Defined benefit plan expense is recognized in Operating expenses.
Defined benefit plan assets consist of:
Equity securities
Debt securities
Short-term securities
Other
Pension Benefit Plans Other Post-Employment
Benefit Plans
2011
2010
2011
2010
$ 4,192
7,395
(7,784)
11
$ 3,142
7,465
(7,982)
-
$ 108
631
-
2
$ 106
645
-
-
$ 3,814
$ 2,625
$ 741
$ 751
Pension Benefit Plans
2011
54%
36%
5%
5%
100%
2010
55%
36%
5%
4%
100%
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 13. EMPLOYEE BENEFIT PLANS (continued)
The average remaining service period of the active employees covered by the pension plan and other benefit plans as at
December 31 is as follows:
Remaining Service in years
Staff pension plan
Supplemental employee retirement benefit plan
Retiree health benefits
The following weighted average assumptions were used in actuarial calculations:
Defined Benefit Plans
2011
10
10
9
2010
12
10
9
Pension Benefit Plans
2011
2010
5.1%
2.0%
3.5%
3.0%
5.5%
5.7%
7.5%
3.7%
5.5%
2.0%
3.5%
3.0%
6.3%
6.2%
8.0%
4.2%
Other Post-Employment Benefit Plans
2011
2010
5.0%
2.0%
5.5%
7.2%
4.5%
5.5%
2.0%
6.3%
7.2%
4.5%
2026
2026
Defined benefit obligation as at December 31:
Discount rate
Inflation assumption
Rate of compensation increase
Future pension increases
Benefit expense for year ended December 31:
Discount rate
Expected long-term rate of return on plan assets
Expected long-term rate of return on:
Equity securities
Debt securities
Defined benefit obligation as at December 31:
Discount rate
Inflation assumption
Benefit expense for year ended December 31:
Discount rate
Assumed health care cost trend rates at December 31:
Initial health care cost trend rate
Cost trend rate declines to
Year that the rate reaches the rate it is
assumed to remain at
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 13. EMPLOYEE BENEFIT PLANS (continued)
The discount rate was selected based on a review of current market interest rates of high quality corporate bonds adjusted
to reflect the duration of expected future cash outflows for pension benefit payments. A 1% increase in this rate would
reduce the defined benefit obligation by approximately $17,756 as of December 31, 2011 (December 31, 2010 $15,231) and
the service cost by approximately $946 in 2011 (2010 $723).
The expected return on plan assets is determined for each asset class by considering both market conditions at the
opening financial position date and any expectations for longer-term changes in current returns. A 1% increase in the
expected rate of return on assets would decrease pension expense by approximately $1,295 in 2011 (2010 $1,280).
A 1% change in assumed health care cost trend rates would have the following effects on non-pension benefit plans:
Defined benefit obligation
Total service and interest cost
2011
2010
Increase
Decrease
Increase
Decrease
$ 1,787
$ 108
$ (1,486)
$ (90)
$ 1,541
$ 100
$ (1,291)
$ ( 84)
The mortality assumptions used to assess the Company’s defined benefit obligations for the pension and other
post-employment benefit plans are based on the actuarial standards as established by the CIA.
The table below provides additional information on the defined benefit plans for the current and previous annual periods:
As at December 31
Present value of defined benefit obligation
Fair value of plan assets
Funded Status - Surplus (Deficit)
Pension Benefit Plans
Other Post-Employment
Benefit Plans
2011
2010
2011
2010
$ (148,207)
139,196
$ (9,011)
$ (132,807)
136,737
$ 3,930
$ (12,473)
-
$ (12,473)
$ (11,663)
-
$ (11,663)
Experience adjustments on plan liabilities
Percentage of the present value of plan liabilities
Experience adjustments on plan assets
Percentage of plan assets
$ 397
(0.27%)
$ (6,476)
(4.65%)
$ (1,861)
1.40%
$ 814
0.60%
$ (255)
2.04%
-
-
$ (229)
1.96%
-
-
Expected contributions (including both employer and employee amounts) to the Company’s defined benefit pension
plans for the year ending December 31, 2012 are approximately $5,917.
In August 2011, the Company announced changes to The Empire Life Insurance Company Staff Pension Plan that
became effective on January 1, 2012. The Empire Life Insurance Company Staff Pension Plan consists of a defined benefit
component and a newly created defined contribution component. The defined contribution component became effective
January 1, 2012. Plan participants as of September 30, 2011 were offered the choice of continuing membership in the
defined benefit component or switching to the newly created defined contribution component on January 1, 2012. The
Company discontinued new enrolments in the defined benefit component effective October 1, 2011. Plan participants
advised the Company of their decisions on November 30, 2011. Approximately 5.8% of employees opted to switch from
the defined benefit component to the defined contribution component of the pension plan.
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 14. INSURANCE PREMIUMS
For the year ended December 31
2011
Life premiums
Health premiums
Total life and health premiums
Gross
$ 407,163
289,813
696,976
Reinsurance
Ceded
$ (60,157)
(19,811)
(79,968)
Net
Gross
$ 347,006
270,002
617,008
$ 378,612
273,223
651,835
2010
Reinsurance
Ceded
$ (55,597)
(18,391)
(73,988)
Net
$ 323,015
254,832
577,847
Annuity premiums
141,446
-
141,446
238,679
-
238,679
Insurance Premiums
$ 838,422
$ (79,968)
$ 758,454
$ 890,514
$ (73,988)
$ 816,526
15. FEE INCOME
For the year ended December 31
Investment management, policyholder administration and guarantee fees
Surrender charges and other miscellaneous fees
Fee Income
16. BENEFITS AND EXPENSES
(a) Insurance Contract Benefits and Claims Paid
For the year ended December 31
2011
Life claims
Health claims
Total life and health claims
Gross
$ 143,033
200,884
343,917
Reinsurance
Ceded
$ (39,991)
(11,802)
(51,793)
Net
Gross
$ 103,042
189,082
292,124
$ 175,988
194,436
370,424
2011
$ 109,096
11,147
2010
$ 103,179
9,915
$ 120,243
$ 113,094
2010
Reinsurance
Ceded
$ (52,610)
(11,423)
(64,033)
Net
$ 123,378
183,013
306,391
Annuity benefits
223,827
(2,539)
221,288
226,183
1,188
227,371
Benefits and Claims Paid
$ 567,744
$ (54,332)
$ 513,412
$ 596,607
$ (62,845)
$ 533,762
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 16. BENEFITS AND EXPENSES (continued)
(b) Change in Insurance Contract Liabilities and Reinsurance Ceded
For the year ended December 31
2011
Life
Health
Total life and health
Gross
$ 483,456
45,015
528,471
Reinsurance
Ceded
$ 148,080
(11,148)
136,932
Net
Gross
$ 631,536
33,867
665,403
$ 342,603
27,461
370,064
2010
Reinsurance
Ceded
$ 53,395
(5,959)
47,436
Net
$ 395,998
21,502
417,500
Annuity
(2,288)
1,507
(781)
77,109
2,937
80,046
Change in Insurance
Contract Liabilities
$ 526,183
$ 138,439
$ 664,622
$ 447,173
$ 50,373
$ 497,546
17. SEGMENTED INFORMATION
The Company operates in the Canadian life insurance industry and follows a product line management approach for
internal reporting and decision making. Operating results are segmented into three product lines along with the
Company’s capital and surplus segment as follows:
Net premiums from external customers
Interest income
Total investment income
Fair value change in fair value through
profit or loss assets
Realized gain (loss) on fair value through
profit or loss assets
Realized gain (loss) on available for
sale assets including impairment
write-downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of capital assets
Total operating expenses
Net commission expense
Interest expense
Premium tax
Investment and capital tax
Income tax expense (recovery)
Net income (loss) after tax
For the year ended December 31, 2011
Wealth
Management
$ 141,446
43,491
55,366
Employee
Benefits
$ 278,306
5,115
5,947
Individual
Insurance
$ 338,702
109,301
118,247
Capital &
Surplus
$ -
25,337
37,222
Total
$ 758,454
183,244
216,782
24,371
14,029
356,112
6,805
1,737
32,782
(75)
110,693
221,288
(780)
745
-
1,201
45,089
54,612
-
-
-
1,432
16,220
(65)
6,744
196,678
17,913
-
-
971
38,399
26,625
-
6,075
-
5,899
15,109
(327)
1,241
95,446
647,489
-
20,962
1,742
45,372
82,969
-
6,910
3,400
(20,407)
(35,384)
-
-
26,313
1,565
-
-
-
-
-
1,005
-
13,680
-
-
13,215
37,200
394,512
41,324
25,846
120,243
513,412
664,622
745
20,962
3,914
129,865
164,206
13,680
12,985
3,400
139
33,145
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 17. SEGMENTED INFORMATION (continued)
Net premiums from external customers
Interest income
Total investment income
Fair value change in fair value through
profit or loss assets
Realized gain (loss) on fair value through
profit or loss assets
Realized gain (loss) on available for
sale assets including impairment
write downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of capital assets
Total operating expenses
Net commission expense
Interest expense
Premium tax
Investment and capital tax
Income tax expense (recovery)
Net income (loss) after tax
Wealth
Management
$ 238,679
44,325
58,280
For the year ended December 31, 2010
Employee
Benefits
$ 261,659
4,531
5,823
Individual
Insurance
$ 316,188
96,415
104,408
Capital &
Surplus
$ -
24,152
35,837
Total
$ 816,526
169,423
204,348
10,188
7,785
195,673
4,475
142
3,430
(187)
103,829
227,365
80,046
910
-
1,610
43,671
56,619
-
-
-
(2,978)
9,630
(188)
6,462
189,442
9,633
-
-
875
34,637
23,941
-
5,708
-
5,332
12,778
(1,234)
1,341
116,955
407,867
-
19,079
1,624
37,136
76,521
-
6,490
3,300
(16,226)
(31,103)
-
-
9,105
1,462
-
-
-
-
-
967
-
13,665
-
-
8,130
23,642
213,646
8,047
7,496
113,094
533,762
497,546
910
19,079
4,109
116,411
157,081
13,665
12,198
3,300
(5,742)
14,947
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 17. SEGMENTED INFORMATION (continued)
Assets are segmented into three product lines along with the Company’s capital and surplus.
Assets excluding segregated funds
Segregated funds
As at December 31, 2011
Wealth
Management
$ 1,137,448
4,391,908
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
$ 151,964
-
$ 3,224,233
23,410
$ 1,085,859
-
$ 5,599,504
4,415,318
Total Assets
$ 5,529,356
$ 151,964
$ 3,247,643
$ 1,085,859
$ 10,014,822
Assets excluding segregated funds
Segregated funds
As at December 31, 2010
Wealth
Management
$ 1,141,156
4,592,482
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
$ 132,477
-
$ 2,552,737
28,417
$ 1,083,657
-
$ 4,910,027
4,620,899
Total Assets
$ 5,733,638
$ 132,477
$ 2,581,154
$ 1,083,657
$ 9,530,926
Assets excluding segregated funds
Segregated funds
As at January 1, 2010
Wealth
Management
$ 1,083,386
4,157,826
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
$ 121,806
-
$ 2,171,701
28,759
$ 1,066,525
-
$ 4,443,418
4,186,585
Total Assets
$ 5,241,212
$ 121,806
$ 2,200,460
$ 1,066,525
$ 8,630,003
A description of the product lines is as follows:
The Wealth Management product line includes segregated funds, guaranteed interest rate annuities and annuities
providing income for life.
The Employee Benefits product line offers group benefit plans to employers for medical, dental, disability, and life
insurance coverage of their employees.
The Individual Insurance product line includes both non-participating and participating individual life and health
insurance products.
The Capital and Surplus segment is made up of assets held in the shareholders’ and participating policyholders’
equity accounts.
While specific general fund assets are nominally matched against specific types of general fund liabilities or held in the
shareholders’ and policyholders’ equity accounts, all general fund assets are available to pay all general fund liabilities if
required. Segregated fund assets are not available to pay liabilities of the general fund.
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 18. OPERATING EXPENSES
Operating expenses include the following:
For the year ended December 31
Salary and benefits expense
Professional services
Rent, leasing and maintenance
Amortization of capital assets
Other
Total
19. INCOME TAXES
(a) Income Tax Expense
2011
$ 73,463
18,138
8,666
4,227
25,371
$ 129,865
2010
$ 66,840
14,966
8,742
4,109
21,754
$ 116,411
The Company’s income tax expense includes provisions for current and deferred taxes as follows:
For the year ended December 31
Current income tax expense
Deferred income tax expense (benefit)
- relating to the origination and reversal of temporary differences
- resulting from substantively enacted changes in tax rates
Income Tax Expense
2011
$ (2,966)
2010
$ (6,412)
3,681
(576)
1,671
(1,001)
$ 139
$ (5,742)
During 2011 the Company paid income tax installments totaling $4,010 (2010 $13,004) and paid (recovered) income
taxes in respect of prior years totaling $(11,525) (2010 $29,125).
The Company has unused tax losses of $69,527 (2010 $69,823) in the province of Ontario related to the harmonization
of Ontario and Federal income tax administration that result in income tax credits which will expire in 2013. The
amount of income tax recoverable of $4,001 (2010 $4,099) related to these tax losses is included in deferred income
taxes. The Company also has an Ontario minimum tax carry-forward of $4,863. $2,463 of this amount expires in
20 years and $2,400 expires in 19 years. Management considers it more likely than not that these tax losses will be
realized before they expire.
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011
19. INCOME TAXES (continued)
(b) Variance from Statutory Provision
Income taxes provided varies from the expected statutory provision as follows:
For the year ended December 31
Net income before income taxes
Income tax provision at statutory rates
Increase (decrease) resulting from:
Substantively enacted changes in income tax rates
Tax paid dividends on stocks
Impact of recognizing tax rule changes
Miscellaneous
Income Tax Expense
2011
$ 33,284
9,326
(2,586)
(9,498)
-
2,897
$ 139
2010
$ 9,205
2,778
(1,001)
(10,026)
890
1,617
$ (5,742)
In 2007 the Federal government passed a tax reduction plan to lower the corporate income tax rate in Canada.
The Federal government also encouraged the Provinces and Territories to do the same. The overall goal of the Federal
Government is to achieve a combined Federal/Provincial tax rate of 25%. The current enacted corporate tax rates
as they impact the Company in 2011 stand at 28.02% (2010 30.17%). This rate is expected to drop to approximately
26.27% in 2012 and 25.90% in 2013. The impact of the future enacted drop in corporate tax rates has been taken into
consideration in the deferred tax calculation.
(c) Deferred Income Taxes
In certain instances the tax basis of assets and liabilities differs from the carrying amount. These differences will
give rise to deferred income taxes, which are reflected on the Consolidated statement of financial position as follows:
As at
Insurance contracts
Portfolio investments
Losses recoverable in future years
Other, net
Deferred Income Tax Liability
December 31, 2011
$ (12,632)
(11,479)
17,747
(222)
$ (6,586)
December 31, 2010
$ 20,826
(38,219)
13,405
507
$ (3,481)
January 1, 2010
$ 53,820
(67,480)
10,052
797
$ (2,811)
Of the above total, $(2,436) (December 31, 2010 $(3,338), January 1, 2010 $(1,313)) is expected to be received (paid)
more than one year after the Consolidated statement of financial position date.
The net movement on the deferred income tax account is as follows:
For the year ended December 31
Beginning of year
Statement of operations charge (credit)
End of Year
2011
$ (3,481)
3,105
$ (6,586)
2010
$ (2,811)
670
$ (3,481)
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 19. INCOME TAXES (continued)
(d) Income Taxes Included in Other Comprehensive Income
Other comprehensive income (loss) is presented net of income taxes.
The following Income tax amounts are included in each component of total OCI.
For the year ended December 31
Unrealized fair value change on available for sale investments
Fair value change on available for sale investments reclassified
to net income, including impairment write downs
Gain (loss) on derivative investments designated as
cash flow hedges
Gain (loss) on derivative investments designated as
cash flow hedges reclassified to net income
Net Other Comprehensive Income (Loss)
2011
Tax
Provision
(Recovery)
Before
Tax
2010
Tax
Provision
(Recovery)
After
Tax
After
Tax
Before
Tax
$ (4,148) $ (1,134) $ (3,014) $ 36,328
$ 10,886 $ 25,442
(25,845)
(9,644)
(16,201)
(7,495)
(3,585)
(3,910)
-
-
-
-
-
-
735
684
$ (29,258) $ ( 10,539) $ (18,719) $ 29,517
496
239
222
462
$ 7,523 $ 21,994
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
Unrealized fair value change on available for sale investments
Fair value change on available for sale investments reclassified
to net income, including impairment write downs
Gain (loss) on derivative investments designated as
cash flow hedges
Gain (loss) on derivative investments designated as
cash flow hedges reclassified to net income
Shareholder portion of policyholder other comprehensive
income (loss)
Net Other Comprehensive Income (Loss)
2011
Tax
Provision
(Recovery)
Before
Tax
2010
Tax
Provision
(Recovery)
After
Tax
After
Tax
Before
Tax
$ (2,859) $ (773) $ (2,086) $ 32,921
$ 9,867 $ 23,054
(24,933)
(9,173)
(15,760)
(6,661)
(3,269)
(3,392)
-
-
-
-
-
-
735
239
496
684
222
462
(220)
(83)
$ (27,277) $ (9,790)
(137)
286
$ (17,487) $ 27,230
99
187
$ 6,919 $ 20,311
The following income tax amounts are included in each component of policyholders’ OCI:
2011
Tax
Provision
(Recovery)
Before
Tax
2010
Tax
Provision
(Recovery)
After
Tax
After
Tax
Before
Tax
$ (1,289) $ (361) $ (928) $ 3,407
$ 1,019 $ 2,388
(912)
(471)
(441)
(834)
(316)
(518)
220
(286)
$ (1,981) $ (749) $ (1,232) $ 2,287
137
83
(99)
(187)
$ 604 $ 1,683
For the year ended December 31
Unrealized fair value change on available for sale investments
Fair value change on available for sale investments reclassified
to net income, including impairment write downs
Shareholder portion of policyholder other comprehensive
(income) loss
Net Other Comprehensive Income (Loss)
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 20. DIVIDENDS
The dividends paid in 2011 and 2010 were $15,800 and $15,000, respectively. This represents a dividend payout rate of
$16.0394 per share in 2011 and $15.2273 per share in 2010.
No dividends have been declared between the date of the Statement of financial position to February 24, 2012, being the
date on which these financial statements have been authorized for issue.
21. CAPITAL MANAGEMENT
The Company aims to manage its capital in order to meet the capital adequacy requirements of the Insurance Companies
Act (Canada) as established and monitored by OSFI. Under the guidelines established by OSFI, the Company’s capital
consists of two tiers. The Company’s Tier 1 capital includes common shares, contributed surplus, retained earnings and
participating policyholders’ equity. Tier 2 capital includes the accumulated unrealized gains on AFS equity securities,
net of tax, negative reserves on insurance contract liabilities and subordinated debt. OSFI’s target Tier 1 and total capital
ratios for Canadian life insurance companies are 105% and 150% respectively. As at December 31, 2011, December 31, 2010
and January 1, 2010 the Company was in compliance with these ratios.
As at
Tier 1 capital
Tier 2 capital
Total Regulatory Capital
December 31, 2011
$ 705,288
314,129
$ 1,019,417
December 31, 2010
$ 714,802
314,598
$ 1,029,400
January 1, 2010
$ 721,338
291,341
$ 1,012,679
22. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases as lessee for office space and certain computer and other
equipment. Operating lease payments in 2011 were $2,786 (2010 $2,605). The future aggregate minimum lease payments
under non-cancellable operating leases are as follows:
2011
2012
2013
2014
2015
2016 (and thereafter for comparative)
2017 (and thereafter)
Other Contingencies
2011
$ -
2,559
2,234
2,086
1,184
810
2,406
$ 11,279
2010
$ 2,355
2,069
1,819
1,678
985
3,065
-
$ 11,971
The Company operates in the insurance industry and is subject to legal proceedings in the normal course of business.
While it is not practical to forecast or determine the final results of all pending or threatened legal proceedings,
management does not believe that such proceedings (including litigation) will have a material effect on its results
and financial position.
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 22. COMMITMENTS AND CONTINGENCIES (continued)
In connection with its operations, the Company is from time to time named as defendant in actions for damages and costs
allegedly sustained by plaintiffs. While it is not possible to estimate the outcome of the various proceedings at this time,
the Company does not believe that it will incur any material loss or expense in connection with such actions.
The Company by-laws provide indemnification to its current and former directors, officers and employees to the extent
permitted by law, against contractual indemnities and liabilities arising from their service to the Company. The broad
general nature of these indemnification by-laws does not permit a reasonable estimate of the maximum potential amount
of any liability.
In certain cases, the Company would have recourse against third parties with respect to the foregoing items and the
Company also maintains insurance policies that may provide coverage against certain of these items.
23. RELATED PARTY TRANSACTIONS
The Company is a 98.3% owned subsidiary of E-L Financial Services Limited which in turn is an 81.0% owned subsidiary
of E-L Financial Corporation Limited. The Company’s ultimate controlling party is The Honourable Henry N. R. Jackman
together with a trust created in 1969 by his father, Henry R. Jackman. In the normal course of business, the Company
enters into transactions with its Shareholder and other companies under common control or common influence
involving the leasing of office property, investment management services, and miscellaneous office services. During
2011, the Company received investment management service fees of $1,565 (2010 $1,462) from related companies under
common shareholder control. For all other services, the amounts paid and received were not significant. Some directors
and officers have insurance policies underwritten by the Company.
Compensation of Key Management Personnel
Key management personnel are comprised of directors and executive officers of the Company. The remuneration of key
management personnel is as follows:
For the year ended December 31
Salaries and other short-term employee benefits
Post-employment benefits
Other long-term benefits
Total
2011
$ 5,591
346
-
$ 5,937
2010
$ 5,444
238
-
$ 5,682
Post-employment benefits are comprised of employer current service costs for pension and other
post-employment benefits.
There were no termination benefits expensed during 2011 or 2010.
Management has established procedures to review and approve transactions with related parties and reports annually to
the Conduct Review Committee of the Board of Directors on the procedures followed and the results of the review.
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 24. SUBORDINATED DEBT
On May 20, 2009, the Company issued $200,000 principal amount of unsecured subordinated debentures with a maturity
date of May 20, 2019. The interest rate from May 20, 2009 until May 20, 2014 is 6.73%, and the rate from May 20, 2014 until
May 20, 2019 will be equal to the 3-month Canadian Deposit Offering Rate plus 5.75%. Interest is payable semi-annually
at May 20 and November 20 until May 20, 2014, quarterly thereafter with the first such payment on August 20, 2014. The
debenture is recorded at amortized cost using the effective interest rate method.
The debt is subordinated in right of payment to all policy contract liabilities of the Company and all other senior
indebtedness of the Company. The Company may call for redemption of the issue at any time subject to the approval
of OSFI. The holder has no right of redemption.
The fair value of these debentures was $218,032 as of December 31, 2011 (December 31, 2010 $218,858,
January 1, 2010 $213,420).
25. SHAREHOLDERS’ EQUITY ENTITLEMENT
Shareholders’ entitlement to $6,357 (December 31, 2010 $6,401, January 1, 2010 $6,757) of shareholders’ equity is
contingent upon future payment of dividends to participating policyholders.
26. CAPITAL STOCK
a) Authorized Common shares: 2,000,000 shares with no par value
b)
Issued and fully paid
As at
Number of common shares: 985,076
December 31, 2011
$ 985
December 31, 2010
$ 985
January 1, 2010
$ 985
27. SUPPLEMENTARY CASH FLOW INFORMATION
Supplementary cash flow information:
For the year ended December 31
Interest paid on subordinated debt
Income taxes paid, net of (refunds)
Interest income received
Dividend income received
2011
$ 13,460
(7,515)
111,564
34,424
2010
$ 13,460
42,129
103,662
35,158
All amounts were reflected as operating cash flows in the Consolidated statement of cash flows.
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 28. SUPPLEMENTARY PARTICIPATING POLICYHOLDER INFORMATION
Participating Account Assets
As at
Assets backing participating account equity
Assets backing participating account liabilities
December 31, 2011
$ 57,211
500,635
December 31, 2010
$ 57,605
439,141
January 1, 2010
$ 60,812
383,508
Transfers to Shareholders’ Account
The Company transferred in 2011 $2,172 (2010 $1,978), equal to 1/9th of the dividends credited to the participating
policyholders, from the participating account to the shareholders’ account.
29. RISK MANAGEMENT
The objective of the Company’s risk management process is to ensure that the operations of the Company that expose it
to risk are consistent with the Company’s objectives and risk philosophy, while maintaining an appropriate risk/reward
balance. In support of this, the Company has created a Risk Management Policy. Oversight and management of this
policy falls under the responsibility of the Management Risk Committee, a multi-disciplinary management committee
with representation from all functional areas of the Company, chaired by the Chief Actuary and reporting directly to
the Board. All risk management policies and procedures are regularly reviewed for relevance and changes in the risk
environment and are presented to the Board on an annual basis.
The Company is exposed to financial risks arising from its investing activities and its insurance operations and to general
reputation risk associated with its activities and ability to manage specific risks. The specific risks that management
considers to be most significant in terms of likelihood and the potential adverse impact on the Company, are outlined
below in order of importance:
(a) Investment Risk:
i) Market Risk, including:
(1) Market Price Fluctuations
(2) Interest Rate Risk
(3) Foreign Currency Risk
ii) Liquidity Risk
iii) Credit Risk
(b) Insurance Risk:
i) Experience Risk
(1) Mortality
(2) Investment Returns
(3) Policy Termination (Lapse)
(4) Expenses
(5) Morbidity
ii) Product Design and Pricing Risk
iii) Underwriting and Claims Risk
iv) Reinsurance Risk
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
(a) Investment Risk
i) Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates,
trading prices of equity and other securities, credit spreads and foreign currency exchange rates. Market risk
is directly influenced by the volatility and liquidity in the markets in which the related financial instruments
are traded, expectations of future price and yield movements and the composition of the Company’s
investment portfolio. For the Company, the most significant market risks are market price fluctuations,
interest rate risk, and foreign currency risk.
(1) Market Price Fluctuations
The Company’s investment portfolio includes primarily bonds and equity securities, and the fair value
of its investments varies according to changes in general economic and securities market conditions,
including volatility and declines in equity markets. Equity market volatility could occur as a result
of general market volatility or as a result of specific social, political or economic events. A decline in
securities markets could have an adverse impact on the return on assets backing capital, capital adequacy,
the management fees collected on segregated fund contracts and on index funds within universal life
contracts, and insurance policy liabilities and capital requirements, particularly in respect of segregated
fund guarantees.
The risk of fluctuation of the market value of the Company’s segregated funds is generally assumed by
the policyholders. Market value variations of such assets will result in variations in the income of the
Company to the extent fees are determined in relation to the value of such funds. A significant and steady
decline of the securities markets may result in net losses on such products which could adversely affect
the Company. Additionally, certain of the Company’s segregated fund products contain guarantees upon
death, maturity, or withdrawal, where the guarantee may be triggered by the market performance of the
underlying funds. If a significant market decline is experienced, the resulting increased cost of providing
these guarantees could have an adverse effect on the Company’s financial position, Minimum Continuing
Capital and Surplus Requirements (MCCSR) position, and results of operations.
The Company buys investment quality bonds to support, to a very large extent, the liabilities under the
insurance and annuity policies of the Company. Cash flows arising from these investments are intended
to match the liquidity requirements of the Company’s policy liabilities, within the limits prescribed by
the Company. However, if the Company does not achieve the expected returns underlying the pricing of
its products, its operating results may be adversely affected.
A core aspect of the Company’s investment strategy is to maintain a higher than industry average level
of publicly-listed “large cap” common stocks in its capital and surplus investment portfolio, in pursuit of
superior long-term returns. Therefore, the Company has a relatively large common stock portfolio and
is exposed to significant loss from declines in its fair value. A decrease in the fair value of the Company’s
common stock portfolio results in reduced shareholders’ equity, reduced policyholders’ surplus, and a
reduced MCCSR position. Regulatory pressure to increase capital escalates as the MCCSR ratio approaches
OSFI’s supervisory minimum. Net income would also be reduced if the declines in value are realized
through dispositions or recognized in provisions for impairment.
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
The Company manages this risk exposure mainly through investment limits and Investment Committee
oversight of its investment managers. The Investment Committee actively monitors the portfolio size and
asset mix. The Company is fully exposed to the portfolio’s fair value changes and does not hedge
this exposure.
The Company’s general fund investments are subject to limits established by the Insurance Companies
Act (Canada) and to investment guidelines established by the Investment Committee of its Board. The
investment guidelines are designed to limit overall investment risk by defining investment objectives,
eligible investments, diversification criteria, exposure, concentration and asset quality limits for eligible
investments by segment. The Investment Committee receives monthly reporting on general fund asset
mix and performance by segment, derivatives matching, segregated fund asset mix and performance,
and investment transactions for all funds. In addition, on at least a quarterly basis, management and
the Company’s investment managers report to the Investment Committee, and through the Investment
Committee to the Board of Directors, on portfolio content, asset mix, the Company’s matched position,
the performance of general and segregated funds, and compliance with the investment guidelines.
The Company uses stochastic models to monitor and manage risk associated with segregated fund
guarantees, and establishes policyholder liability provisions in accordance with standards set forth by
the CIA. Product development and pricing policies also require consideration of portfolio risk and capital
requirements in the design, development and pricing of the products. The Asset Liability Management
Committee (ALM), a management committee, reports quarterly to the Investment Committee of the Board
on the nature and value of the Company’s segregated fund guarantee liabilities, including potential top-
up exposure and capital requirements.
The Company has established a Capital Management Policy, capital management levels that exceed
regulatory minimums, and Dynamic Capital Adequacy Testing that takes into account the potential effect
of adverse investment risk scenarios (including adverse market conditions and adverse interest rates) on
the Company’s capital position. Management monitors its MCCSR position on a regular basis and reports
at least quarterly to the Board of Directors on the Company’s MCCSR.
The following table summarizes the potential impact on the Company of a change in global equity
markets. The Company uses a 10% increase or decrease in equity markets as a reasonably possible
change in equity markets. The Company has also disclosed the impact of a 20% increase or decrease in
its equity market sensitivity. For segregated fund guarantee policy liabilities the level of sensitivity is
highly dependent on the level of the stock market at the time of performing the estimate. If period end
equity markets are high relative to market levels at the time that segregated fund policies were issued,
the sensitivity is reduced. If period end equity markets are low relative to market levels at the time
that segregated fund policies were issued, the sensitivity is increased. The amounts shown below for
segregated fund guarantee policy liabilities represent the impact on shareholders’ net income.
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Segregated fund guarantee policy liabilities
Shareholders’ net income
Policyholders’ net income
Shareholders’ other comprehensive income
Policyholders’ other comprehensive income
Segregated fund guarantee policy liabilities
As at December 31, 2011
10% Increase
10% Decrease
20% Increase
20% Decrease
$ 11,056
$ nil
$ 11,477
$ 2,241
$ nil
$ (11,056)
$ nil
$ (11,477)
$ (2,241)
$ nil
$ 22,124
$ nil
$ 22,954
$ 4,482
$ nil
$ (28,943)
$ nil
$ (22,954)
$ (4,482)
$ nil
As at December 31, 2010
10% Increase
10% Decrease
20% Increase
20% Decrease
$ 10,582
$ nil
$ 19,498
$ 2,254
$ nil
$ (10,582)
$ nil
$ (19,498)
$ (2,254)
$ nil
$ 21,276
$ nil
$ 38,996
$ 4,508
$ nil
$ (21,276)
$ nil
$ (38,996)
$ (4,508)
$ nil
The following table identifies the concentration of common equity holdings.
As at
Holdings of common equities in the 10 issuers to which
the Company had the greatest exposure
December 31, 2011
December 31, 2010
January 1, 2010
$ 214,097
$ 245,668
$ 200,399
Percentage of total cash and investments
3.9%
5.1%
4.6%
Exposure to the largest single issuer of common equities
$ 41,687
$ 46,192
$ 42,430
Percentage of total cash and investments
0.8%
1.0%
1.0%
(2) Interest Rate Risk
Interest rate risk is the risk of economic loss due to the need to reinvest or divest during periods of
changing interest rates. Changes in interest rates, as a result of the general market volatility or as a result
of specific social, political or economic events, could have an adverse effect on the Company’s business
and profitability in several ways. Certain of the Company’s product offerings contain guarantees and,
if long-term interest rates fall below those guaranteed rates, the Company may be required to increase
policy liabilities against losses, thereby adversely affecting its operating results. Interest rate changes
can also cause compression of net spread between interest earned on investments and interest credited,
thereby adversely affecting the Company’s operating results.
Rapid declines in interest rates may result in, among other things, increased asset calls, and mortgage
prepayments and require reinvestment at significantly lower yields, which could adversely affect
earnings. Additionally, during periods of declining interest rates, bond redemptions generally increase,
resulting in the reinvestment of such funds at lower current rates. Rapid increases in interest rates may
result in, among other things, increased policy surrenders. Fluctuations in interest rates may cause losses
to the Company due to the need to reinvest or divest during periods of changing interest rates, which may
force the Company to sell investment assets at a loss. In addition, an interest rate sensitivity mismatch
between assets and the liabilities that they are designated to support could have an adverse effect on the
Company’s financial position and operating results.
99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
The following tables summarize the impact on Net income and Other comprehensive income of a
reasonably possible change in interest rates.
As at December 31, 2011
1% Increase
1% Decrease
2% Increase
2% Decrease
Shareholders’ net income
Policyholders’ net income
Shareholders’ other comprehensive income
Policyholders’ other comprehensive income
$ nil
$ nil
$ (20,609)
$ (1,945)
$ nil
$ nil
$ 21,848
$ 2,045
Shareholders’ net income
Policyholders’ net income
Shareholders’ other comprehensive income
Policyholders’ other comprehensive income
As at December 31, 2010
1% Increase
$ nil
$ nil
$ (12,961)
$ (760)
1% Decrease
$ nil
$ nil
$ 13,794
$ 801
$ nil
$ nil
$ (40,097)
$ (3,791)
2% Increase
$ nil
$ nil
$ (25,125)
$ (1,485)
$ nil
$ nil
$ 44,963
$ 4,201
2% Decrease
$ nil
$ nil
$ 27,602
$ 1,643
Interest rate risk is managed through Investment Committee established limits and regular reporting by
management to the Investment Committee and the Board. The Company’s investment guidelines establish
investment objectives and eligible interest rate sensitive investments, as well as establish diversification
criteria, exposure, concentration and asset quality limits for these investments. The ALM Committee
oversees sensitivity to interest rates. The objective is to maximize investment yields while managing
the default, liquidity and reinvestment risks at acceptable levels and within risk tolerances. Product
development and pricing policies and practices also require consideration of interest rate risk in the
design, development and pricing of the products.
(3) Foreign Currency Risk
Foreign currency risk is the risk that the fair value of cash flows of a financial instrument will fluctuate
because of changes in exchange rates and create an adverse effect on earnings and equity when measured
on the Company’s functional currency.
The Company’s primary foreign currency exposure arises from portfolio investments denominated in US
dollars. A 10% fluctuation in the US dollar would have an impact of approximately $1,174 (2010 $487) on
Net income, $410 (2010 $319) on shareholders’ OCI and $91 (2010 $nil) on policyholders’ OCI. The Company
has no significant foreign currency exposure in its financial liabilities.
The Company uses derivative instruments, including futures contracts and foreign currency forward
contracts, to manage foreign exchange risks. Improper use of these instruments could have an adverse
impact on earnings. The Company manages this risk by applying limits established by the Investment
Committee in its investment guidelines, which set out permitted derivatives and permitted uses for
derivatives, as well as limits to the use of these instruments. In particular, no leverage is permitted in
the use of derivatives and strict counterparty credit restrictions are imposed, with total credit exposure
limited to $25 million.
The Company has a foreign exchange risk management policy which outlines objectives, risk limits and
authority associated with any foreign exchange exposure. Oversight and management of this policy falls
under the responsibility of the ALM Committee, which reports exposures and breaches to the Investment
Committee of the Board.
100
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
ii) Liquidity Risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or another financial asset. The majority of the
Company’s obligations relate to its policy liabilities, the duration of which varies by line of business and
expectations relating to key policyholder actions or events (i.e. cash withdrawal, mortality, and morbidity).
The remaining obligations of the Company relate to the subordinated debenture which matures in 2019
(refer to Note 24 Subordinated Debt) and to ongoing operating expenses as they fall due, which are expected
to settle in a very short period of time.
The Company’s liquidity risk management strategy is to ensure that there will be sufficient cash to meet all
financial commitments and obligations as they become due.
The Company’s liquidity risk management program is monitored by management and by the Board of the
Company through regular reporting to the Investment Committee and the Board. The Company monitors its
cash flow obligations and meets its liquidity needs by holding high quality marketable investments that may
be easily sold, if necessary, and by maintaining a portion of investments in cash and short term investments.
The Company maintains a liquidity policy requiring an assessment of the Company’s liquidity risk and
specific procedures so that liquidity needs are met. Compliance with the policy is monitored by the ALM
Committee and exposures and breaches are reported to the Investment Committee of the Board. The
Company’s current liquidity position as at December 31 is provided in a table in Note 11(e).
Based on the Company’s historical cash flows and current financial performance, management believes that
the cash flows from the Company’s operating activities will continue to provide sufficient liquidity for the
Company to satisfy debt service obligations and to pay other expenses.
The following table shows details of the expected maturity profile of the Company’s undiscounted obligations
with respect to its financial liabilities and estimated cash flows of policy liabilities. Policy liability cash
flows include estimates related to the timing and payment of death and disability claims, policy maturities,
annuity payments, policyholder dividends, amounts on deposit, commission and premium taxes offset by
contractual future premiums and fees on in-force business. Recoveries from reinsurance agreements are also
reflected. Segregated fund liabilities are excluded from this analysis. These estimated cash flows are based
on the best estimate assumptions, with margins for adverse deviations, used in the determination of policy
liabilities. The actuarial and other policy liability amounts included in the Company’s 2011 consolidated
financial statements are based on the present value of the estimated cash flows. Due to the use
of assumptions, actual cash flows will differ from these estimates.
101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
Insurance contract liabilities
Investment contract liabilities
Subordinated debt
Other liabilities
Total liabilities
Operating lease commitments
Total
Insurance contract liabilities
Investment contract liabilities
Subordinated debt
Other liabilities
Total liabilities
Operating lease commitments
Total
2011
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$ 112,149
2,082
13,460
175,709
303,400
2,559
$ 333,093
9,328
56,010
5,269
403,700
6,314
$ 390,290
6,217
234,558
11,318
642,383
2,406
$ 10,407,478
3,588
-
-
10,411,066
-
$ 11,243,010
21,215
304,028
192,296
11,760,549
11,279
$ 305,959
$ 410,014
$ 644,789
$ 10,411,066
$ 11,771,828
2010
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$ 128,290
2,728
13,460
150,680
295,158
2,355
$ 406,191
9,623
55,487
2,785
474,086
6,551
$ 433,494
6,673
249,542
10,920
700,629
3,065
$ 9,558,711
4,065
-
-
9,562,776
-
$ 10,526,686
23,089
318,489
164,385
11,032,649
11,971
$ 297,513
$ 480,637
$ 703,694
$ 9,562,776
$ 11,044,620
The Company is able to fund its short-term cash outflows by generating positive cash inflows from operations
and from investment income earned on its investment portfolio. The ALM Committee, which meets
regularly, monitors the matched position of the Company’s investments in relation to its liabilities within the
various segments of its operations. The matching process is designed to require that assets supporting policy
liabilities closely match, to the extent possible, the timing and amount of policy obligations, and to plan for
the appropriate amount of liquidity in order to meet its financial obligations as they fall due. The Company
maintains a portion of its investments in short-term investments and cash equivalents to meet its short-term
funding requirements. As at December 31, 2011, 3.5% (2010 4.2%) of cash and investments were held in these
shorter duration investments.
iii) Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party
by failing to discharge an obligation. The Company is subject to credit risk which arises from debtors or
counterparties who are unable to meet their obligations under debt or derivative instruments. This credit
risk is derived primarily from: investments in bonds, debentures, preferred shares, short-term investments
and mortgages; and amounts recoverable from reinsurers under reinsurance agreements.
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
The Company manages this risk by applying its investment guidelines and product design and pricing risk
management policy established by the Investment Committee of the Board of Directors. The investment
guidelines establish minimum credit ratings for issuers of bonds, debentures and preferred share
investments, and provide for concentration limits by issuer of such debt instruments. Management and
Board committees review credit quality relative to investment purchases and also monitor the credit quality
of invested assets over time. Management reports regularly to the Investment Committee of the Company’s
Board on the credit risk to which the portfolio is exposed. The Reinsurance Risk Management Policy
(along with supporting material in the product design and pricing risk management policy) establishes
reinsurance objectives and limits, and requires ongoing evaluation of reinsurers for financial soundness.
The Company enters into reinsurance agreements only with reinsurance companies that have a credit rating
of “A-” or better.
Credit risk analysis includes the consideration of credit spreads. From an investment perspective, when
buying credit the Company is guided by two principles; first that there is a high likelihood of return of
principal and second that there is an acceptable return on investment. The Company looks to obtain a
risk/reward balance that aligns with its objectives and risk philosophy. When determining insurance
contract liabilities, credit spreads and changes in credit spreads are reflected implicitly in the interest
rate assumption.
The Company has the following assets that are exposed to credit risk:
As at
Cash and cash equivalents
Short-term investments
Bonds
Preferred shares
Mortgages
Loans on policies
Policy contract loans
Accrued investment income
Premiums receivable
Reinsurance assets
Total
December 31, 2011 December 31, 2010
$ 151,332
50,914
3,221,908
371,330
226,887
40,242
119,896
18,411
3,108
-
$ 4,204,028
$ 155,559
33,867
4,063,897
324,230
264,238
41,981
113,118
20,107
3,400
-
$ 5,020,397
January 1, 2010
$ 149,141
37,080
2,795,896
400,625
223,642
38,728
137,764
17,827
3,914
32,693
$ 3,837,310
Mortgages, Loans on policies and Policy contract loans are fully or partially secured.
The Company has made provision in its Statement of financial position for credit losses. Provisions have been
made partly through reduction in the value of the assets and partly through a provision in policy liabilities
(see Notes 4(b) and 11(c)).
103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
Concentration of Credit Risk
(1) Bonds and Debentures
The concentration of the Company’s bond portfolio by investment grade is as follows:
December 31, 2011
December 31, 2010
January 1, 2010
Fair Value
% of Fair Value
Fair Value
% of Fair Value
Fair Value
% of Fair Value
$ 304,142
1,295,345
2,255,901
208,509
-
$ 4,063,897
7%
32%
56%
5%
0%
100%
$ 172,028
1,025,075
1,858,650
166,155
-
$ 3,221,908
5%
32%
58%
5%
0%
100%
$ 323,732
811,887
1,523,876
130,882
5,519
$ 2,795,896
12%
29%
54%
5%
0%
100%
Provincial bonds represent the largest concentration in the bond portfolio, as follows:
As at
AAA
AA
A
BBB
BB
Total
As at
Provincial bond holdings
Percentage of total bond holdings
December 31, 2011
$ 2,433,815
60%
December 31, 2010
$ 1,978,770
61%
January 1, 2010
$ 1,559,947
56%
The following table provides bonds by contractual maturity, using the earliest contractual maturity date:
As at
December 31, 2011
December 31, 2010
January 1, 2010
Fair Value
% of Fair Value
Fair Value
% of Fair Value
Fair Value
% of Fair Value
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
$ 81,509
469,470
379,338
3,133,580
$ 4,063,897
2%
12%
9%
77%
$ 82,431
359,701
297,073
2,482,703
3%
11%
9%
77%
$ 146,214
344,287
270,540
2,034,855
100%
$ 3,221,908
100%
$ 2,795,896
5%
12%
10%
73%
100%
The following table discloses the holdings of fixed income securities in the 10 issuers (excluding federal
governments) to which the Company had the greatest exposure, as well as exposure to the largest single
issuer of corporate bonds.
As at
Holdings of fixed income securities* in the 10 issuers
(excluding federal governments) to which the
Company had the greatest exposure
December 31, 2011
December 31, 2010
January 1, 2010
$ 3,000,342
$ 2,539,709
$ 2,174,181
Percentage of total cash and investments
54.8%
52.6%
50.0%
Exposure of the largest single issuer of
corporate bonds
$ 140,581
$ 102,940
$ 88,790
Percentage of total cash and investments
2.6%
2.1%
2.0%
* Fixed income securities includes bonds, debentures, preferred shares and short-term investments.
104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
(2) Preferred Shares
The Company’s preferred share investments are all issued by Canadian companies, with 86%
(December 31, 2010 81%, January 1, 2010 82%) of these investments rated as P1 as at December 31, 2011
and the remaining 14% (December 31, 2010 19%, January 1, 2010 18%) rated as P2.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $258,277 or 98%
(December 31, 2010 $218,903 or 96%, January 1, 2010 $213,885 or 96%) of the total portfolio.
(b) Insurance Risk
The Company provides a broad range of life insurance, health insurance and wealth management products, employee
benefit plans, and financial services that are concentrated by segment as follows:
(millions of dollars)
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
Net premium income
Fee and other income
Total
2011
$ 141
110
$ 251
2010
2011
2010
2011
2010
$ 239
104
$ 343
$ 278
7
$ 285
$ 262
6
$ 268
$ 339
1
$ 340
$ 316
1
$ 317
2011
$ -
2
$ 2
2010
$ -
2
$ 2
2011
2010
$ 758
120
$ 878
$ 817
113
$ 930
The Company is in the business of measuring and managing risk, as reflected in the valuation of insurance contract
liabilities. The Company is exposed to various insurance risks, and the most important insurance risks
of the Company, include:
i) Experience Risk, including:
(1) Mortality
(2) Investment Returns
(3) Policy Termination (Lapse)
(4) Expenses
(5) Morbidity
ii) Product Design and Pricing Risk
iii) Underwriting and Claims Risk
iv) Reinsurance Risk
The Company regularly evaluates its exposure to foreseeable risks through Dynamic Capital Adequacy
Testing analysis.
105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
i) Experience Risk
The principal risk the Company faces under insurance contracts is the risk that experience on claims, policy
lapses and operating expenses will not emerge as expected. To the extent that emerging experience is more
favourable than assumed in the valuation, income will emerge. If emerging experience is less favourable,
losses will result. Therefore, the objective of the Company is to establish sufficient insurance liabilities to
cover these obligations with reasonable certainty.
The computation of insurance liabilities and related reinsurance recoverables requires “best estimate”
assumptions covering the remaining life of the policies. Assumptions in use are based on past experience,
current internal data, external market indices and benchmarks which reflect current observable market
trends and other published information. These assumptions are made for mortality, morbidity, investment
returns, laspe, expenses, inflation and taxes. Due to the long-term risks and measurement uncertainties
inherent in the life insurance business, a margin for adverse deviations from best estimates is calculated
separately for each variable and included in policy liabilities. These margins are intended to allow for possible
deterioration in experience and to provide greater confidence that policy liabilities are adequate to pay future
benefits. A range of allowable margins is prescribed by the CIA.
The Company maintains margins near the middle of the allowable range for those assumptions where the
best estimate has been calculated rigorously and with a relatively high degree of credibility, and near the
high end of the allowable range for assumptions where the measurement uncertainty is greater.
Policy liability assumptions are reviewed and updated at least annually, and the impact of changes in
those assumptions is reflected in earnings in the year of the change. The methods for arriving at the
most important of these assumptions are outlined below. Also included are measures of the Company’s
estimated net income sensitivity to changes in best estimate assumptions in the non-participating insurance
liabilities, based on a starting point and business mix as of December 31, 2011. For participating business it is
assumed that changes will occur in policyholder dividend scales corresponding to changes in best estimate
assumptions such that the net change in participating insurance contract liabilities is immaterial.
(1) Mortality
The Company carries out annual internal studies of its own mortality experience. The valuation mortality
assumptions are based on a combination of this experience and recent CIA industry experience. An
increase in the rate of mortality will lead to a larger number of claims (and claims could occur sooner than
anticipated), which for life insurance, will increase expenditures and reduce profits for the shareholders.
For non-participating insurance business, a 2% increase in the best estimate mortality assumption would
increase policy liabilities thereby decreasing Net income by approximately $10,900 ($12,800 for 2010). For
annuity business, lower mortality is financially adverse so a 2% decrease in the best estimate mortality
assumption would increase policy liabilities thereby decreasing Net income by approximately $3,900
($3,300 for 2010).
106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
(2) Investment Returns
The computation of policy liabilities takes into account projected investment income net of investment
expenses from the assets supporting policy liabilities, and investment income expected to be earned
on reinvestments. The assets supporting the policy liabilities are segmented from the assets backing
shareholders’ and policyholders’ equity.
For life and health insurance, the projected cash flows from the matched assets are combined with
estimated future reinvestment rates based on both the current economic outlook and the Company’s
expected future asset mix. The cash flows are subjected to tests under a wide spectrum of possible
reinvestment scenarios, and the policy liabilities are then adjusted to provide for credible adverse
future scenarios.
In order to match the savings component of policy liabilities that vary with a variety of indices and
currencies, the Company maintains certain equity, fixed income and currency financial instruments
as part of its general fund assets. Asset-liability mismatch risk for these liabilities is monitored on a
daily basis.
For the life insurance business, where the insurance contract liabilities have a longer term than most
available bonds and mortgages, the Company’s policy is to cover estimated insurance liability cash flows
rigorously only for a rolling 20-year period. In order to provide a margin that recognizes the longer term
mismatch, the cash flows are subjected to tests under a wide spectrum of possible reinvestment scenarios,
and the insurance contract liabilities are then adjusted to provide for credible adverse future scenarios.
For annuity business, where the timing and amount of the benefit obligations can be more readily
determined, the matching of the asset and liability cash flows is tightly controlled. A sudden increase or
decrease in interest rates would have a negligible effect on future profits from annuity business currently
in force.
The impact of an immediate change in interest rates can be found in Note 29 under the Investment Risk
section. If the change in interest rates persisted for one year, then a change to the actuarial reinvestment
assumption would be required. For non-participating insurance business, a 1% decrease in assumed
reinvestment rates would result in an increase to policy liabilities thereby reducing net income by
approximately $47,400 ($34,800 in 2010). This assumes no change in the ultimate reinvestment rate. For
annuity business, the impact is negligible as a result of the matching process described above.
The impact of an immediate change in equity markets can be found in Note 29 under the Investment Risk
section. If the change in equity markets persisted for one year, then a change to the actuarial future equity
market return assumption would be made. For non-participating insurance business, a 1% decrease in
future equity market returns would result in an increase to policy liabilities thereby reducing net income
by approximately $40,200 ($31,000 in 2010).
107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
(3) Policy Termination (Lapse)
Policy termination (lapse) and surrender assumptions are based on a combination of the Company’s own
internal termination studies (conducted annually) and recent CIA industry experience. Separate policy
termination assumptions are used for permanent cash-value business, renewable term insurance, term
insurance to age 100, and universal life insurance. In setting policy termination rates for renewable term
insurance, it is assumed that extra lapses will occur at each renewal point, and that healthy policyholders
are more likely to lapse at that time than those who have become uninsurable.
Acquisition costs may not be recovered fully if lapses in the early policy years exceed those in the actuarial
assumptions. An increase in policy termination rates early in the life of the policy would tend to reduce
profits for shareholders. An increase in policy termination rates later in the life of the policy would tend to
increase profits for shareholders if the product is lapse supported (such as term insurance to age 100),
but decrease shareholder profits for other types of policies.
For non-participating insurance and annuity business a 10% adverse change in the lapse assumption
would result in a reduction to net income by approximately $99,900 ($75,400 in 2010). For products where
fewer terminations would be financially adverse to the Company, the change is applied as a decrease to the
lapse assumption. Alternatively, for products where more terminations would be financially adverse to
the Company, the change is applied as an increase to the lapse assumption.
(4) Expenses
Policy liabilities provide for the future expense of administering policies in force, renewal commissions,
general expenses, and taxes. Expenses associated with policy acquisition and issue are specifically
excluded. The future expense assumption is derived from internal cost studies and includes an
assumption for inflation.
An increase in the level of expenses would result in an increase in expenditure thereby reducing profits for
the shareholders.
For non-participating insurance business and annuity business combined, a 5% increase in the
maintenance expense assumption would result in an increase to policy liabilities thereby reducing net
income by approximately $5,700 ($5,000 in 2010).
(5) Morbidity
The Company carries out annual internal studies of its own morbidity experience where morbidity refers to
both the rates of accident or sickness and the rates of recovery from the accident or sickness. The valuation
assumptions are based on a combination of internal experience and recent CIA industry experience.
108
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
For individual critical illness business, the incidence rates (or rates of accident or sickness) are the
key assumption related to morbidity. An increase in incidence rates would result in an increase in
the number of claims which increases expenditures and reduces shareholders’ profits. For group
long-term disability business the termination rates (or rates of recovery) are the key assumption related
to morbidity. A decrease in termination rates would result in disability claims persisting longer which
increases expenditures.
For non-participating insurance business where morbidity is a significant assumption, a 5% adverse
change in the assumption would result in an increase to policy liabilities thereby reducing net income
by approximately $5,000 ($4,400 in 2010).
ii) Product Design and Pricing Risk
The Company is subject to the risk of financial loss resulting from transacting insurance business where the
costs and liabilities assumed in respect of a product exceed the expectations reflected in the pricing of the
product. This risk may be due to an inadequate assessment of market needs, a poor estimate of the future
experience of several factors, such as mortality, morbidity, lapse experience, future returns on investments,
expenses and taxes, as well as the introduction of new products that could adversely impact the future
behaviour of policyholders.
For certain types of contracts, all or part of this risk may be shared with or transferred to the policyholder
through dividends and experience rating refunds, or through the fact that the Company can adjust
the premiums or future benefits if experience turns out to be different than expected. For other types
of contracts, the Company assumes the entire risk, and thus must carry out a full valuation of the
commitments in this regard.
The Company manages product design and pricing risk through a variety of enterprise-wide programs and
controls. The key programs and controls are described below. The Company has established policy liabilities
in accordance with standards set forth by the CIA. Experience studies (both Company-specific and industry
level) are factored into ongoing valuation, renewal and new business processes so that policy liabilities, as
well as product design and pricing, take into account emerging experience. The Company has established
an active capital management process that includes a Capital Management policy and capital management
levels that exceed regulatory minimums. As prescribed by regulatory authorities, the Appointed Actuary
conducts Dynamic Capital Adequacy Testing and reports annually to the Company’s Audit Committee on the
Company’s financial condition, outlining the impact on capital levels should future experience be adverse.
The Company has also developed a product design and pricing policy for each of its major product lines. This
policy, which is established by management and approved by the Company’s Board of Directors, defines the
Company’s product design and pricing risk management philosophy. The policy sets out product design and
pricing approval authorities, product concentration limits, and required product development monitoring
processes and controls.
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 29. RISK MANAGEMENT (continued)
iii) Underwriting and Claims Risk
The Company is subject to the risk of financial loss resulting from the selection and underwriting of risks to
be insured and from the adjudication and settlement of claims. Many of the Company’s individual insurance
and group disability products provide benefits over the policyholder’s lifetime. Actual claims experience may
differ from the mortality and morbidity assumptions used to calculate the related premiums. Catastrophic
events such as earthquakes, acts of terrorism or an influenza pandemic in Canada could result in adverse
claims experience.
In addition to the risk management controls described above under Product Design and Pricing Risk, the
Company also manages underwriting and claims risk through its underwriting and liability management
policy for each of its major product lines. This policy is established by management and approved by
the Company’s Board of Directors. Together, these policies define the Company’s underwriting and risk
management philosophy. These policies also set out by product line insurance risk tolerances, underwriting
criteria, underwriting and liability concentration limits, claims approval requirements, underwriting and
claims processes and controls, approval authorities and limits, and ongoing risk monitoring requirements.
The Company uses reinsurance to mitigate excessive exposure to adverse mortality and morbidity
experience. Management reviews and establishes retention limits for its various product lines and the Board
approves changes to these retention limits.
iv) Reinsurance Risk
The Company is subject to the risk of financial loss due to improper reinsurance coverage or a default of
a reinsurer. Amounts reinsured per life vary according to the type of protection and the product. The
Company also maintains a catastrophe reinsurance program, which provides protection in the event that
multiple insured lives perish in a common accident or catastrophic event. Although the Company relies on
reinsurance to mitigate excessive exposure to adverse mortality and morbidity experience, reinsurance does
not release it from its primary commitments to its policyholders and it is exposed to the credit risk associated
with the amounts ceded to reinsurers. The availability and cost of reinsurance are subject to prevailing
market conditions, both in terms of price and availability, which can also affect earnings.
The Reinsurance Risk Management Policy establishes reinsurance objectives and limits, and requires ongoing
evaluation of reinsurers for financial soundness. As reinsurance does not release a company from its primary
commitments to its policyholders, an ongoing oversight process is critical. Most of the Company’s individual
life reinsurance (with the exception of its Term 10 and Term 20 products) is on an excess basis (with a
$500 retention limit), meaning the Company retains 100% of the risk up to $500 in face amount. With the
Company’s Term 10 and 20 products, however, all amounts over $100 are reinsured at an 80% level, meaning
that the Company retains only 20% of the risk on coverage over $100, to a maximum retention of $500. In
addition the Company also retains a maximum of $100 on individual accidental death policies. Retention
amounts are lower for group business but are in addition to those noted for individual business. As a result
of this reinsurance strategy, the Company utilizes lower than average levels of reinsurance and absorbs the
resultant negative impact on short-term earnings due to additional sales strain. The Company does not have
any material assumed reinsurance annual premium revenue and it does not reinsure its own segregated fund
guaranteed products or those issued by other insurance companies.
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 30. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with new financial statement presentation standards
adopted in 2011.
31. SUBSEQUENT EVENTS
(a) Empire Life Investments Inc. (ELII)
Effective January 1, 2012, the investment management operations of The Empire Life Insurance Company were
transferred to its wholly owned subsidy, Empire Life Investments Inc.
On January 4, 2012, ELII filed a simplified prospectus with the Ontario Securities Commission with respect to the
following mutual funds:
Series A units, Series T6 units, Series T8 units and Series I units (unless otherwise indicated) of:
Empire Life Emblem Conservative Portfolio (not available in Series T8 units)
Empire Life Emblem Balanced Portfolio
Empire Life Emblem Moderate Growth Portfolio
Empire Life Emblem Growth Portfolio
Empire Life Emblem Aggressive Growth Portfolio
Empire Life Small Cap Equity Mutual Fund
Empire Life Canadian Equity Mutual Fund
Empire Life Dividend Growth Mutual Fund
Empire Life Monthly Income Mutual Fund
Empire Life Money Market Mutual Fund (not available in Series T6 units or Series T8 units)
Simultaneously, The Empire Life Insurance Company provided $6,500 of seed funding to the funds.
On January 5, 2012, ELII obtained the final receipt from the Ontario Securities Commission on the Empire Life
Mutual Funds Simplified Prospectus dated January 4, 2012. ELII is now a registered Investment Funds Manager.
The prospectus was filed under Multilateral Instrument 11-102 Passport System in British Columbia, Alberta,
Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and
Labrador, Yukon, Nunavut and Northwest Territories. The receipt for the prospectus is deemed to be issued
by the regulator in each of those jurisdictions.
The funds are managed by Empire Life Investments Inc., which also serves as the trustee of the funds.
(b) Employee Benefits Plans
In August 2011, the Company announced changes to The Empire Life Insurance Company Staff Pension Plan that
took effect January 1, 2012. The Empire Life Insurance Company Staff Pension Plan now consists of a defined
benefit component and a newly-created defined contribution component. The defined contribution component
became effective January 1, 2012. Plan participants as of September 30, 2011 were offered the choice of continuing
membership in the defined benefit component or switching to the newly created defined contribution component
on January 1, 2012. The Company discontinued new enrolments in the defined benefit component effective
October 1, 2011. Plan participants advised the Company of their decisions on November 30, 2011. Approximately
5.8% of employees enrolled in the defined benefit component of the plan opted to switch to the defined contribution
component. Given the relatively few number of employees that transferred to the defined contribution component
of the pension plan, the Company will report a plan settlement (not a plan curtailment). The Company has not
provided for settlement costs in the December 31, 2011 financial statements. All costs related to plan settlement will
be recorded once the Company receives regulatory approval for the plan amendments.
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life Annual Report 2011 PARTICIPATING ACCOUNT MANAGEMENT POLICY
The Board of Directors of The Empire Life Insurance Company has approved the following policy:
Participating Account Management Policy
Description of the Participating Account and its Policies
The Empire Life Insurance Company (“Empire Life”) maintains an account in respect of participating policies
(“participating account”), separate from those maintained in respect of other policies, in the form and manner determined
by the Office of the Superintendent of Financial Institutions under section 456 of the Insurance Companies Act (Canada).
The participating account includes all policies issued by Empire Life that entitle its policyholders to participate in the profits
of the participating account. Most policies are credited with dividends annually, while a few older plans receive dividends
every five years as per contractual provisions. Empire Life does not maintain sub-accounts within the participating account
for life, disability and annuity plans, other funds, or blocks of business acquired from other companies. Empire Life does not
have any closed blocks of participating business established as part of the demutualization of a mutual company into a
shareholder company.
Investment Policy
The general fund investments in the participating account are subject to limits established by the Insurance Companies Act
(Canada) and to investment guidelines established by the Investment Committee of Empire Life’s Board of Directors
(the “Board”). The investment guidelines are designed to limit overall investment risk by defining investment objectives,
eligible investments, diversification criteria, exposure, concentration and asset quality limits for eligible investments.
Interest rate risk is managed through Investment Committee established limits and regular reporting by management to
the Investment Committee and the Board. The Asset/Liability Management Committee oversees sensitivity to interest rates.
The objective is to maximize investment yields while managing the default, liquidity and reinvestment risks at acceptable
and measurable low levels. Within the participating account, Empire Life has established three asset segments to nominally
match the investments to the specific type of liabilities or surplus as follows: Protection Par, Miscellaneous Insurance Par and
Policyholders’ Surplus. Each asset segment is assigned specific assets in an amount approximately equal to its total liabilities
or surplus. Each asset segment is also subject to asset segmentation guidelines established by the Asset/Liability Management
Committee and approved by the Investment Committee.
The Investment Committee receives monthly reporting on general fund asset mix and performance and investment transactions
for all funds by asset segment. In addition, on at least a quarterly basis, management and the Company’s investment managers
report to the Investment Committee, and through the Investment Committee to the Board of Directors, on portfolio content,
asset mix, the Company’s matched position, the performance of general and segregated funds, and compliance with the
investment guidelines. The investment guidelines are reviewed at least annually by the Board.
Investment Income Allocation
Investment income is recorded directly to each asset segment. A portion of investment income is allocated to or from the
Shareholders’ Capital and Surplus segment from or to the participating account’s asset segments in proportion to the deficiency
or excess of funds over assets of each segment.
112
Empire Life Annual Report 2011 Expense Allocation
General expenses are allocated to the participating account using cost centre methods. Expenses associated directly with the
participating account are so charged. Expenses arising from or varying directly with various functional activities are charged to
the participating account in proportion to statistics appropriate to each cost centre. Expenses incurred by overhead cost centres
are charged to the participating account in proportion to expenses directly charged. Investment expenses are allocated monthly
to the participating account in proportion to the Company’s total funds at the beginning of each month. Premium taxes are
allocated in proportion to taxable premiums. Other taxes, licenses, and fees are allocated to lines of business using cost centre
methods.
Income Tax Allocation
Income taxes are allocated to the participating account in proportion to total taxable income for the Company. Deferred tax
assets and liabilities are treated consistently between participating and non-participating accounts.
Surplus Management
The level of surplus in the participating account will be managed by Company management taking into consideration the
continuing solvency of the participating account, the participating account’s ability to fulfill all of its contractual obligations and
the extent to which existing participating business is financing new participating business.
Transfers to Shareholders’ Account
It is Empire Life’s intention to transfer the full permitted percentage of distributable participating profits to the shareholders’
account as allowed by section 461 of the Insurance Companies Act (Canada). The Company’s current practice, so long as the
participating account in aggregate remains below $250 million, is to transfer an amount equal to 1/9th of the dividends credited
to participating policyholders from the participating account to the shareholders’ account.
Amendments
The Company’s participating account management policy may be amended from time to time at the discretion of its Board.
The principal factors that would be expected to change the policy include changes in legislation, regulation of participating
account, accepted actuarial practice, capital requirements, taxation and accounting rules or fundamental changes to the
circumstances of the Company. The policy will also be reviewed if the Company decides to stop accepting new business in the
participating account. Annually, the Board will consider the Appointed Actuary’s opinion on the continuing fairness of this
policy to participating policyholders.
113
Empire Life Annual Report 2011 PARTICIPATING ACCOUNT DIVIDEND POLICY
The Board of Directors of The Empire Life Insurance Company has approved the following policy:
Participating Policy Dividends and Bonus Policy
This dividend policy applies to all policies issued in the participating account of The Empire Life Insurance Company
(“Empire Life” or the “Company”) that entitle its policyholders to participate in the profits of the participating account.
Most policies are credited with dividends annually, while a few older plans receive the dividends every five years as per
contractual provisions.
Dividends are declared at the discretion of the Board. The aggregate amount of dividend and allocation of the dividend to the
different classes of participating policies is declared annually at the discretion of the Board of Directors (the “Board”) of
Empire Life under section 464(1) of the Insurance Companies Act (Canada). Before declaring the aggregate amount of dividend,
the Board will consider Company management’s recommendations for policyholder dividends and the Appointed Actuary’s
opinion on the conformity of the proposed dividend to this policy and its fairness to participating policyholders. Company
management’s recommendations and the Appointed Actuary’s opinions shall be prepared in compliance with applicable
legislative and regulatory requirements, and generally accepted actuarial practice with such changes as determined by the Office
of the Superintendent of Financial Institutions.
Principal Factors that Affect the Aggregate Amount of Dividends
The aggregate amount of dividends will reflect operating income on all participating life, annuity and disability coverages,
dividends on deposit, participating paid-up additions and participating term additions, as well as income attributable to surplus
in the participating account. The aggregate amount of dividends will also be influenced by considerations such as, solvency
of the participating account, its ability to fulfill all contractual obligations, the extent to which surplus in the participating
account is financing new business, changes in legislation, regulation of the participating account, taxation, accounting rules
or fundamental changes in the circumstances of the Company.
Principal Sources of Income
The principal sources of income considered for determining the aggregate amount of dividends are investment income, asset
defaults, mortality, lapses, expenses and taxes. The actual experience of the participating account will be reviewed annually
by Company management. The sources of income may be adjusted to smooth fluctuations in experience and provide for
transitions during periods of major change over a period not to exceed five years. The Company uses a temporary contribution to
policyholder surplus philosophy, so that contributions to policyholder surplus from participating account income are expected
to be returned to policyholders over the lifetime of the policy.
Since actual experience cannot be known in advance, the aggregate amount of dividends and allocation of the dividends cannot
be guaranteed. As a result, dividends will increase or decrease depending on actual experience.
114
Empire Life Annual Report 2011 Dividend Allocation
Policyholders participate in this distribution through the setting of dividend scales, which allocate the aggregate amount of
dividends among different dividend classes. The Company establishes dividend classes for participating policyholders based
on the original pricing assumptions used when setting the guaranteed values provided by the policies. The Company uses a
combination of factor-based and pricing methods when setting the dividend scale to allocate the aggregate amount of dividends
among different dividend classes. The basic concept of this method is to allocate the aggregate amounts of dividends among
dividend classes in the same proportion as the policies are considered to have contributed to the aggregate amount of dividends
over the long term. The fundamental objective in the allocation of dividends is the maintenance of reasonable equity between
dividend classes and between generations of policyholders, taking into account practical considerations and limits. The dividend
scales may also be adjusted to reflect specific policyholder behaviour, such as experience for lapses or for policy loans taken
at guaranteed rates. For certain blocks of policies, the policyholder dividend scale may be determined using methods which
are designed to approximate the contribution to income of those blocks. Termination dividends are not payable under any
participating policies issued by Empire Life.
Amendments
The Company’s dividend policy may be amended from time to time at the discretion of the Board. The principal factors that
would be expected to change the policy include changes in legislation, regulation of participating account, accepted actuarial
practice, capital requirements, taxation and accounting rules or fundamental changes to the circumstances of the Company.
The policy will also be reviewed if the Company decides to stop accepting new business in the participating account. Annually,
the Board will consider the Appointed Actuary’s opinion on the continuing fairness of this policy to participating policyholders.
115
Empire Life Annual Report 2011 CORPORATE GOVERNANCE OVER RISK MANAGEMENT
The Empire Life Insurance Company (the “Company”) is a stock company that has both shareholders and
participating policyholders. The Company established a mutual fund subsidiary during the second quarter of 2011,
Empire Life Investments Inc. (“ELII”). During the third quarter of 2011, the Company provided working
capital to ELII. The Company expects ELII to become operational early in 2012.
Pursuant to the Insurance Companies Act (Canada) (the “Act”) each holder of one or more participating policies is entitled to
one vote in the election of policyholders’ directors, and each shareholder is entitled to one vote per share held in the election
of shareholders’ directors. At least one-third of directors are elected as policyholder directors and the balance are elected as
shareholder directors. The Company is governed by the Act, which contains provisions concerning corporate governance.
The Company’s governance system is supported by internal audit, corporate compliance, external audit by an independent
chartered accountants firm, and examination by the Office of the Superintendent of Financial Institutions Canada (“OSFI”).
Management is responsible for identifying risks and determining their impact upon the Company. Management is also
responsible for establishing appropriate policies, procedures, and controls to mitigate risks. The Company has established an
internal risk management committee, which reports to the Board of Directors. An internal audit function is responsible for
assessing the adequacy and adherence to the systems of internal control. The results of internal audit’s reviews are reported
to management and to the Audit Committee of the Board of Directors regularly throughout the year.
Management is supervised in the completion of these responsibilities by the Board of Directors and its Committees. Senior
management of the Company reports regularly to the Board on its risk management policies and procedures.
The Board of Directors has plenary power. The Board’s responsibility is to oversee the conduct of the business and affairs
of the Company including oversight and monitoring of the Company’s risk management. The Board discharges these
responsibilities directly and through delegation to Board Committees and management. The Board met eight times in 2011
and is scheduled to meet seven times in 2012.
The risk management functions overseen by the Board include those relating to market price fluctuations, interest rate risk,
credit risk, foreign currency risk, reinsurance risk, liquidity risk, other risks associated with policy liabilities (including
mortality risk, investment return risk, policy termination (lapse) risk, expense risk, morbidity risk and risks associated
with segregated fund policy guarantees), regulatory risk, and operational risk (including product design and pricing risk,
underwriting and claims risk). Primary responsibility for oversight of some of these risks is delegated to four standing
Committees of the Board, whose roles and responsibilities are specifically defined. The following is a brief summary of some
of the key responsibilities of the four Committees.
The Audit Committee is a committee charged with statutory responsibility under the Act to oversee, on behalf of the Board,
the Company’s financial reporting, accounting and financial reporting systems and internal controls. The Committee also
oversees work related to stress testing and capital management.
The Investment Committee assists the Board in monitoring the Company’s investment and lending policies, standards and
procedures and in monitoring the Company’s investment activities and portfolios. Some of the activities of the Investment
Committee are prescribed by the Company’s Investment Guidelines, which reflect the requirements of the Act. The
Committee also monitors activities mandated to the Company’s Asset/Liability Management Committee.
The Human Resources Committee is responsible for reviewing and monitoring the Company’s human resources practices,
including employee and executive compensation, manpower and pension and benefit plans.
The Conduct Review Committee is responsible for oversight of procedures established to identify material related party
transactions pursuant to the Act. The Committee also monitors certain corporate policies, including procedures with respect
to conflicts of interest, confidentiality of information and outsourcing.
116
Empire Life Annual Report 2011 CORPORATE INFORMATION
Corporate Head Office
The Empire Life Insurance Company is a member of Assuris, the organization that
protects Canadian insurance policyholders from loss of benefits due to the financial
failure or insolvency of a member company.
Policyholders and prospective policyholders can learn more about Assuris and the
protection it provides by visiting www.assuris.ca or calling the Assuris Information
Centre at 1 866 878-1225.
259 King Street East
Kingston, Ontario
Canada K7L 3A8
Telephone: 1 877 548-1881
info@empire.ca
www.empire.ca
Retail Sales Offices
Western Canada
Ontario
Quebec
Vancouver Retail Sales Office
N302-5811 Cooney Road, North Tower
Richmond, British Columbia V6X 3M1
604 232-5557
1 888 627-3591
Calgary Retail Sales Office
408-1550 8th Street S.W.
Calgary, Alberta T2R 1K1
403 269-1000
1 800 656-2878
Saskatoon Retail Sales Office
1000-201 21st Street E.
Saskatoon, Saskatchewan S7K 0B8
306 934-3899
1 800 667-7775
Winnipeg Retail Sales Office
200-5 Donald Street
Winnipeg, Manitoba R3L 2T4
204 452-9138
1 866 204-1001
London Retail Sales Office
One London Place
1030-255 Queens Avenue
London, Ontario N6A 5R8
519 438-2922
1 888 548-4729
Waterloo Retail Sales Office
250-180 King Street S.
Waterloo, Ontario N2J 1P8
519 569-7002
1 888 548-4729
Burlington Retail Sales Office
402-5500 North Service Road
Burlington, Ontario L7L 6W6
905 335-6558
1 888 548-4729
Toronto Retail Sales Office
500-2550 Victoria Park Avenue
Toronto, Ontario M2J 5A9
416 494-0900
1 888 548-4729
Kingston Retail Sales Office
259 King Street E.
Kingston, Ontario K7L 3A8
613 540-7506
1 888 548-4729
Ottawa Retail Sales Office
102-9 Gurdwara Road
Nepean, Ontario K2E 7X6
613 225-7530
1 888 548-4729
Montréal Retail Sales Office
1600-600 de Maisonneuve Boulevard W.
Montréal, Quebec H3A 3J2
514 842-9151
1 800 371-9151
Québec Retail Sales Office
100-1220 Lebourgneuf Boulevard
Québec, Quebec G2K 2G4
418 628-1220
1 888 816-1220
Atlantic Canada
Halifax Retail Sales Office
101-647 Bedford Highway
Bedford, Nova Scotia B3M 0A5
902 832-1403
1 888 548-4729
117
Empire Life Annual Report 2011 Group Sales Offices
Western Canada
Ontario
Quebec
Montréal Group Sales Office
1600A-600 de Maisonneuve Boulevard W.
Montréal, Quebec H3A 3J2
514 842-0003
1 800 561-3738
Atlantic Canada
Halifax Group Sales Office
101-647 Bedford Highway
Bedford, Nova Scotia B3M 0A5
902 832-1403
1 888 548-4729
Vancouver Group Sales Office
N302-5811 Cooney Road, North Tower
Richmond, British Columbia V6X 3M1
604 232-5558
1 800 547-0628
Calgary Group Sales Office
408-1550 8th Street S.W.
Calgary, Alberta T2R 1K1
403 262-6386
1 888 263-6386
Edmonton Group Sales Office
1980-10020 101 A Avenue
Edmonton, Alberta T5J 3G2
780 482-4241
1 866 990-9925
London Group Sales Office
One London Place
1030-255 Queens Avenue
London, Ontario N6A 5R8
519 438-1751
1 800 268-3403
Waterloo Group Sales Office
250-180 King Street S.
Waterloo, Ontario N2J 1P8
519 569-7002
1 866 569-7002
Burlington Group Sales Office
402-5500 North Service Road
Burlington, Ontario L7L 6W6
905 335-6558
1 800 663-9984
Toronto Group Sales Office
500-2550 Victoria Park Avenue
Toronto, Ontario M2J 5A9
416 494-6834
1 800 361-7980
Ottawa Group Sales Office
102-9 Gurdwara Road
Nepean, Ontario K2E 7X6
613 225-1173
1 800 387-4123
118
Empire Life Annual Report 2011 BOARD OF DIRECTORS
Back row, left to right: Leslie Herr, Edward Iacobucci, James Billett,
Duncan Jackman, Harold Hillier, Richard Rooney.
Front row, left to right: Mark Taylor, Clive Rowe, Deanna Rosenswig,
Mark Fuller, Stephen Smith. Missing from photo: Hon. Henry Jackman,
Rt. Hon. John Turner, Douglas Townsend and Paul Weiss.
Shareholders’ Directors
Edward M. Iacobucci 1, 4
Professor of Law
University of Toronto
Duncan N.R. Jackman 1, 2, 3, 4
Chairman of the Board
The Empire Life Insurance Company
Deanna Rosenswig, B.Com., M.B.A. 1, 3
Corporate Director
Clive P. Rowe 2
Partner
Oskie Capital
Stephen J.R. Smith 2, 3
Chairman and President
First National Financial LP
Mark M. Taylor 2
Executive Vice-President and Chief Financial Officer
E-L Financial Corporation Limited
Paul R. Weiss, F.C.A. 1, 4
Corporate Director
James F. Billett 1, 4
President
J.F. Billett Holdings Ltd.
1 Member of Audit Committee
2 Member of Investment Committee
3 Member of Human Resources Committee
4 Member of Conduct Review Committee
Policyholders’ Directors
Mark J. Fuller, LL.B. 2, 3, 4
President and Chief Executive Officer
Ontario Pension Board
Leslie C. Herr 2
President and Chief Executive Officer
The Empire Life Insurance Company
Richard E. Rooney, F.C.A., C.F.A. 2, 3
President
Burgundy Asset Management
Douglas C. Townsend, F.S.A. 1, 3
President
Townsend Actuarial Consulting Ltd.
Honorary Chairman
The Honourable Henry N.R. Jackman
Honorary Chairman
The Empire Life Insurance Company
Honorary Directors
The Right Honourable John N. Turner, P.C., C.C., Q.C.
Partner
Miller Thomson LLP
Harold W. Hillier
Corporate Director
119
Empire Life Annual Report 2011
CORPORATE MANAGEMENT
From left to right: Gaelen Morphet, Gary McCabe, Richard Cleaver,
Drew Wallace, Leslie Herr, Anne Butler, Timo Hytonen, Steve Pong
and Edward Gibson
Leslie C. Herr
President and Chief Executive Officer
Drew E. Wallace
Executive Vice-President, Retail
Anne E. Butler, B.A., LL.B.
Senior Vice-President, General Counsel and Corporate Secretary
Richard Cleaver
Senior Vice-President and Chief Technology Officer
J. Edward Gibson, F.S.A., F.C.I.A.
Senior Vice-President, Strategy, and Chief Actuary
Timo J. Hytonen, M.B.A., C.H.R.P., F.C.I.P., C.R.M., C.Dir.
Senior Vice-President, Human Resources and Corporate Initiatives
Gary J. McCabe, C.A.
Senior Vice-President and Chief Financial Officer
Gaelen Morphet, C.F.A.
Senior Vice-President and Chief Investment Officer
Steve S. Pong, B.A.Sc.
Senior Vice-President, Group Solutions
120
Empire Life Annual Report 2011 EMPIRE LIFE ANNUAL REPORT 2011
The Empire Life Insurance Company (Empire Life) offers competitive individual and
group life and health insurance, investment and retirement products to help you build
wealth and protect your financial security.
Empire Life is among the top 10 life insurance companies in Canada1 and is rated
A (Excellent) by A.M. Best Company2. Our vision is to be the leading, independently-
owned, Canadian financial services company committed to simplicity, being easy
to do business with and having a personal touch.
1 Source: Office of the Superintendent of Financial Institutions (OSFI), based on general and
segregated fund assets
2 As at June 22, 2011
® Registered trademark of The Empire Life Insurance Company.
™ Trademark of The Empire Life Insurance Company.
Policies are issued by The Empire Life Insurance Company.
Investments • Insurance • Group solutions
www.empire.ca info@empire.ca
A-0004-ENG-12/11