90 years of making our mark
Annual Report 2012
FinAnciAl HiGHliGHTS
203%
MccSR ratio
as at December 31, 2012
Product
diversification
Strength of our capital base
Product diversification
Our Minimum Continuing Capital and
Surplus Requirements (MCCSR) ratio is well
above the minimum requirements set by
the industry regulator. A high MCCSR ratio
demonstrates our long-term ability to pay
claims and our prudent capital management.
What is an MCCSR ratio?
An MCCSR ratio of 100% means that a
company has adequate capital to meet
obligations to its policyholders. The Office
of the Superintendent of Financial Institutions
of Canada (OSFI) requires life insurance
companies to maintain an MCCSR ratio
of at least 120% and expects them to have
a target ratio of at least 150%.
financial ratings
These financial ratings give you an
independent opinion of our financial
strength as an insurer and our ability
to meet policyholder obligations.
by premium and fee income for the
12 months ended December 31, 2012
Empire Life is well-diversified across
three product lines:
Wealth Management
31%
Employee Benefits
32%
Individual Insurance
37%
A (Excellent)
A.M. Best Company (as at June 29, 2012)
Subordinated Debt Rating
of A (low)
Issuer Rating of A
Claims Paying Rating of IC-2
(2nd of five categories)
DBRS (as at May 29, 2012)
Shareholders’ Net Income
2012 (in millions)
$80.4
Shareholders’ Net Income
2011 (in millions): $32.3
Net Premium and Fee Income
2012 (in millions)
$939
Net Premium and Fee Income
2011 (in millions): $879
Total Assets Under Management
2012 (in millions)
$10,839
Total Assets Under Management
2011 (in millions): $9,897
Note: The selected financial information presented above is derived from the audited financial statements of The Empire Life Insurance Company and Management’s
Discussion and Analysis included in the Empire Life 2012 Annual Report.
2
Empire Life Annual Report 2012Annual report pie graph 90 years
of making our mark
Since 1923, The Empire Life insurance Company
(Empire Life) has made its mark by helping
Canadians build wealth and protect their
financial security.
With an unwavering focus on our customer, we have grown to be
a leader in the industry, recognized for our personal touch, our
expertise, and the smart, simple solutions we provide to Canadians.
conTenTS
9 Message from the Chairman of the Board
40 Notes to the Consolidated Financial Statements
10 Message from the President and Chief
100 Glossary
Executive Officer
12 Source of Earnings
13 Source of Earnings by Line of Business
15 Management’s Discussion and Analysis
32 Management’s Responsibility for
Financial Reporting
33 Independent Auditor’s Report
34 Appointed Actuary’s Report
35 Consolidated Financial Statements
101 Participating Account Management Policy
103 Participating Account Dividend Policy
105 Corporate Governance Over Risk Management
106 Corporate Information
108 Board of Directors
109 Corporate Management
Empire Life Annual Report 2012
3
CuSTOMER FOCuS
Working with a nationwide network of professional financial advisors,
we help our customers navigate through the complex world of financial
services. We offer smart, simple solutions for individuals, families and
small businesses. Helping our customers prepare for and achieve their
goals is at the heart of everything we do.
ExPERTISE
We are known for our experience and expertise. Empire Life has been
managing investments for Canadians for more than 45 years. Our in-house
investment management team follows a conservative, value-oriented,
disciplined investment style, with a strong emphasis on providing downside
protection to build wealth.
InnOvATIOn
How might we…? These three words are the starting point for many
big ideas at Empire Life. How might we do things better? How might
we deliver superior products and service to our customers? How might
we provide peace of mind during a difficult time?
Whether it’s a new electronic claims system to make it easier for plan
members to submit claims or smart apps that allow advisors to provide
instant insurance quotes for customers, we always ask ourselves how
we can make things simple and straightforward.
SMART, SIMPLE
SOLuTIOnS
We try to bring smart thinking and simplicity into everything we do. In 2012,
we launched our mutual fund company, Empire Life Investments Inc. Our
mutual funds are simple, easy-to-understand and managed by experienced
investment professionals.
4
Empire Life Annual Report 2012 ThE NExT 90 yEARS
Every day, we make and deliver on promises to Canadians. These promises guide
each decision we make. This was true 90 years ago, it’s true today, and it will stay
true for our next 90 years.
Empire Life Annual Report 2012
5
5
Empire Life Annual Report 2012 oUR HiSToRY
On January 11, 1923, our founder, Milton Palmer Langstaff and four other directors signed the incorporation
papers to bring The Empire Life Insurance Company to life. Their vision was simple—to help protect Canadians
from the impact of sickness and death.
While our products and services have changed with the times and the needs of our customers, our mission
of helping Canadians protect what is important to them remains true to this day.
1923
1934
1956
1968
1987
The Empire Life
Insurance Company
is founded by Milton
Palmer Langstaff in
Toronto, Ontario
Acquisition of The
Canadian Order
of Odd Fellows
insurance portfolio
1936
Jackman Family
become shareholders
E-L Financial
Corporation Limited
is formed as holding
company of Empire Life
Merger with Mutual Relief
Life Insurance Company;
head Office moves from
Toronto to Kingston, Ontario
E-L Financial Corporation
Limited brings together
through merger and
acquisition activities The
Empire Life Insurance
Company, The Montreal
Life Insurance Company
and the life insurance
section of The Dominion
of Canada General
Insurance Company
1957
Empire Life
begins selling
Group products
1970
Life insurance
business in-force
grows to $1 billion
1929
Merger with The
Commonwealth
Life and Accident
Insurance Company
1926
The Company
expands outside
Ontario by opening
a Branch Office in
British Columbia
6
Empire Life Annual Report 2012 90 years of helping Canadians
build wealth and protect their
financial security
1993
Acquisition of
non-participating
individual insurance
policies of
The Citadel Life
Assurance
Company
2002
Amalgamation with
Concordia Life
Insurance Company
2009
2012
The Empire Life
Insurance Company
issues $200 million
Subordinated Debt
ELII launches mutual
funds broadening
Empire’s wealth
offering
2004
Surpasses $5 billion
in assets under
administration
2011
The Company
surpasses $10
billion in assets
1992
Acquisition of a
block of group
business of The
Metropolitan Life
Insurance Company
1997
Acquisition of Colonia Life
Insurance Company (name
changed to Concordia Life
Insurance Company)
Entry into MGA channel
2007
In October, surpasses
$1 billion in gross
segregated fund sales
(year-to-date)
1995
Agreement to administer
and assume deferred
annuity and RRIF block of
policies of Confederation
Life Insurance Company
2005
Enters into
National Account
Channel
2011
The Company
sets up a new
subsidiary Empire Life
Investments Inc. (ELII)
7
Empire Life Annual Report 2012 OUR VISION
OuR CORE vALuES
our vision is to be the leading,
IntegrIty
independently-owned,
Canadian financial services
company known for simplicity,
We are honest, fair and respectful, honour our
commitments, and take pride in being a good
corporate citizen.
being easy to do business with
Know our customer
and having a personal touch.
OUR MISSION
our mission is to help
Canadians build wealth and
protect their financial security.
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.
8
8
Empire Life Annual Report 2012
Empire Life Annual Report 2012 MESSAgE FROM THE
cHAiRMAn oF THe BoARd
When thinking of the accomplishments of The Empire Life
Insurance Company (Empire Life) this past year and
reflecting on the company’s 90-year history, I am reminded
of the saying, history repeats itself.
Sixty years ago, the life insurance industry in Canada
was going through tremendous change. Life insurance
ownership was on the rise, resulting in dramatic sales
growth, excessive new business strain, and decreased
earnings for most insurance companies.
Regulators were urged to consider changing reporting
and reserve requirements to more accurately reflect the
true value of life insurance companies. The rules didn’t
change and soon, many shareholders began to doubt
the value of their investments. Many Canadian insurance
companies were bought by foreign entities. To stem this
trend, the government allowed life insurance companies to
mutualize and buy their own stock. In a seven-year period,
the ownership of more than two-thirds of the Canadian life
insurance industry changed, either through foreign control
or mutualization.
I think it is worth noting that during this turbulent period
in the history of our industry, Empire Life was the only
Canadian life insurance company that was not bought
by foreign companies or mutualized. The company’s
management stayed true to its roots and looked for
Canadian investors, a group led by my grandfather, Henry
Jackman. He became the first Chairman of the Board
for this company and believed strongly in the people
and mission of Empire Life. Two generations later, that
conviction remains.
I find it interesting that even today, a number of years
after demutualization and the more recent financial crisis,
industry change and regulatory matters continue to play
a significant role in how we do business. In the past year,
we have seen almost all life insurers make fundamental
decisions about their products and strategy in response to
economic and regulatory conditions. The Board of Directors
believes Empire Life is responding to these pressures in
ways that will make it a stronger company, just as it has
responded to past challenges in its history.
As a Board, we are responsible for making sure Empire Life
does what it needs to do to honour its commitments,
keep growing and remain financially strong, for today and
the future. I have been impressed with how the Board
and management have worked together to increase
understanding of the issues and the level of transparency
needed to make the right decisions. We are confident that
the company continues to be managed well, with integrity,
which is reflected in its results.
Harold Hillier joined our Board this year as Policyholder
Director. Mr. Hillier brings extensive investment
management and leadership expertise, adding to the
Board’s overall strength and diversity.
I am proud of the leadership my grandfather and father
gave to Empire Life, helping build a strong foundation
for the company we see today. As the next chapter of
history unfolds for this great company, the Board supports
and thanks all Empire Life employees for their work and
dedication to its success.
duncan n.R. Jackman
Chairman of the Board
Toronto, Ontario
February 27, 2013
9
Empire Life Annual Report 2012 MESSAgE FROM THE
PReSidenT And cHieF
execUTive oFFiceR
For 90 years, The Empire Life Insurance Company
(Empire Life) has made its mark by helping Canadians
build wealth and protect their financial security. This past
year we continued on our journey to become a financial
services company known for simplicity, being easy to do
business with and having a personal touch. We remain
focused on that goal.
The business environment is challenging, no question.
However, our customers, distribution partners, shareholders
and employees expect us to deliver on our promises
regardless of what’s happening in the world. We cannot get
distracted. I believe that 2012 allowed us to demonstrate
that we can compete well and respond appropriately to the
many challenges we face and still deliver exceptional results.
our results
We achieved overall shareholders’ net income of
$80.4 million, a record level of earnings for Empire Life.
Results across all three business lines were positive, with
strong Capital and Surplus earnings.
Our Employee Benefits line of business had another strong
year, achieving $17.2 million in net income, an increase of
$2.1 million over 2011. Sales were slow at the beginning of
the year, but strong results and momentum in the last half
of the year helped push sales above 2011 levels. Favourable
long-term disability claims experience also contributed to
our Employee Benefits income result.
The net income result of $7.3 million for our Wealth
business was lower than last year due to a strengthening
of annuity reserves in 2012, versus reserve releases last
year. We experienced very strong sales, particularly in
segregated funds which saw 60% higher gross sales than
2011. While sales of mutual funds through our subsidiary,
Empire Life Investments Inc., did not meet our first year
objectives, I am pleased with how we have positioned this
new product line in a very competitive market.
Individual Insurance results were strong at $12.6 million,
much higher than the $35.4 million net loss this line
experienced in 2011. Careful and thoughtful decisions
regarding price increases and product changes to this line
helped us achieve solid sales levels in 2012. Price increases
and sales results prevented excessive sales strain, and a
release of reserves and a less severe interest rate drop in
2012 also contributed favourably to this result.
Our Shareholders’ Capital and Surplus earnings was
$35.7 million, up from $34.8 million in 2011. Our
Minimum Continuing Capital and Surplus Requirements
Ratio (MCCSR) was 203% as at December 31, 2012, well
above minimum requirements.
moving the company forward
We have made good progress on a number of key
initiatives this past year that are moving us towards our
vision of becoming a company known for simplicity and
being easy to do business with.
Our Single view of the Customer initiative will enable
us to access and analyze customer information housed
on multiple administration systems. This system will
be in place in early 2013 and will give us tremendous
knowledge and understanding of our customers’ needs
so we can better serve them.
We have made significant progress on the second phase of
the conversion of our wealth administration systems onto
one platform through our service provider, Citigroup (Citi).
The next phase of the conversion will take place in
10
Empire Life Annual Report 2012 Our industry has gone through a tremendous period of
change. I believe this is the new norm. Making sure we
can offer the right product solutions to Canadians and
maintain profitability remains a priority. I also believe
we have been successful in managing the company
well through these changes and that our ability to adapt
appropriately is one of our key strengths.
On January 11, 2013, Empire Life celebrated its 90th
anniversary. Our long and successful history comes from
the efforts and dedication of our employees, past and
present, our committed ownership and the guidance and
confidence of our Board of Directors. Empire Life may not
be as large as some of our competitors, but our stature
within the industry and importance to our customers and
distribution partners are by no means small.
I know that with our clear vision, strong leadership and
the commitment and resourcefulness of our people,
we will continue to be highly profitable, and become
a company that can offer smarter, simpler financial
solutions to Canadians.
leslie c. Herr
President and Chief Executive Officer
Kingston, Ontario
February 27, 2013
August 2013 and will help us achieve greater efficiency
in serving our customers and distribution partners. We
are very encouraged at how the relationship between
Empire Life and Citi has grown and work has already
begun on future conversions.
Early in 2012, we entered the mutual fund market with our
new family of Empire Life Mutual Funds offered through
Empire Life Investments Inc. A brand and marketing
campaign helped us position our funds to appeal to value-
oriented investors looking for uncomplicated funds to
add to their portfolio. We are encouraged by the interest
from advisors we have seen so far for this product line and
believe it is important to the future success of Empire Life.
We completed two key initiatives in our group Solutions
area this past year including designing and implementing a
new online health benefits claims system, and introducing
a drug-pooling product. Drug-pooling is an industry-wide
initiative that helps insulate employee health benefit plans
from the full impact of high-cost prescription drug claims.
By doing this, we help protect business owners from
dramatic increases in their premium renewals if one of
their employees requires an expensive drug treatment. It
is an important development for our industry and will help
many Canadians.
Over the past two years, we made a number of changes
to our insurance products and pricing, in response to
sustained low interest rates. Almost all of our competitors
took similar steps to continue to profitably offer long-
term products to Canadians, while reducing company
risk. We carefully considered the impact to our customers
and distribution partners in making these changes and
tried to stay focused on our own business plans and not
overreact to what was happening outside Empire Life. We
continue to conduct a critical review of what products we
can offer and expect to continue to change our product
design, mix and pricing.
11
Empire Life Annual Report 2012 SoURce oF eARninGS
Source of earnings is a methodology for identifying and quantifying the various sources of International Financial Reporting
Standards (IFRS) 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.
12
Empire Life Annual Report 2012 SoURce oF eARninGS BY line oF BUSineSS
(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
2012
2011
For the year ended december 31
individual
insurance
2012
2011
2011
Capital
& Surplus
2012
Employee
Benefits
2012
$ 35.9
(24.7)
2.2
$ 28.3
(17.1)
2.0
$ 17.4
(12.5)
12.8
$ 15.9
(11.1)
14.0
$ 38.9
(19.5)
(3.9)
$ 39.0
(33.8)
(36.9)
(6.5)
-
4.5
-
5.0
-
2.2
-
2.9
3.5
(19.4)
-
Total
2011
2012
2011
$ 92.2
(56.7)
11.1
$ 83.2
(62.0)
(20.9)
1.4
3.5
(12.7)
-
6.9
-
$ 6.9
(0.4)
7.3
$
17.7
-
$ 17.7
1.5
$ 16.2
22.7
-
$ 22.7
5.5
$ 17.2
21.0
-
$ 21.0
5.9
$ 15.1
21.9
-
$ 21.9
1.7
$ 20.2
(51.1)
-
$ (51.1)
(17.3)
$ (33.8)
-
48.3
$ 48.3
12.6
$ 35.7
-
47.1
$ 47.1
12.3
$ 34.8
51.5
48.3
$ 99.8
19.4
$ 80.4
(12.4)
47.1
$ 34.7
2.4
$ 32.3
Wealth management
Wealth Management’s 2012 earnings on operations were lower than the level achieved in 2011. In 2012 there was a decrease in
income resulting from management actions and changes in assumptions primarily related to annuitant mortality assumptions.
In contrast, the 2011 assumption updates were due primarily to favourable updates to investment assumptions and favourable
annuitant mortality experience resulting in an increase in 2011 income. 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.
In addition, there was a decrease in earnings on operations in 2012 compared to 2011 from the impact of new business due to
strong growth in segregated fund gross sales. This sales growth is attributable primarily to guaranteed minimum withdrawal
benefit (GMWB) products.
These items were partly offset by an increase in expected profit on in-force business due primarily to the segregated fund
business. Higher net income on inforce business in 2012 was due to the growth of the GMWB product which generates higher
fees than other segregated fund products.
Employee Benefits
Employee Benefit’s 2012 earnings on operations were higher than the level achieved in 2011. Most of the increase was due to
a more favourable update of policy liability assumptions in 2012 relative to 2011. Net income was strong in both years in this
product line as claims experience was favourable in both years.
13
Empire Life Annual Report 2012 SoURce oF eARninGS BY line oF BUSineSS
individual insurance
The increase in Individual Insurance earnings on operations was primarily due to several large items. The most significant
item was improved investment experience which was due primarily to a less severe drop in long-term interest rates in 2012.
The improvement also resulted from a rise in stock markets in 2012, compared to 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.
In addition, there were improved results from management actions and changes in assumptions in 2012. The 2012 update
of policy liability assumptions included favourable asset mix changes, mortality assumption updates and actuarial method
changes partly offset by the unfavourable impact of fixed income future reinvestment rate assumptions. In contrast, the
update of policy liability assumptions was very unfavourable in 2011. This 2011 policy liability strengthening was primarily
related to reinvestment assumptions, driven by the persisting low interest rate environment. The 2011 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.
New business strain also improved in 2012. Lower new business strain resulted from higher prices on long-term products and
lower annualized premium sales.
The gain from other items in 2012 relates to a decrease in policy liabilities due to a tax law change that lowered future expected
premium taxes in the province of Quebec.
14
Empire Life Annual Report 2012 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, 2012 and 2011. This MD&A should be read in conjunction with the Company’s December 31, 2012 consolidated
financial statements, which form part of The Empire Life Insurance Company 2012 Annual Report dated February 27, 2013. The
consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS)
as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). Unless otherwise noted,
both the consolidated financial statements and this MD&A are expressed in Canadian dollars.
This 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.
financial analysis
Overview
(in millions of dollars)
Shareholders’ net income
Fourth quarter
Year
2012
$ 25.2
2011
8.2
$
2012
$ 80.4
2011
$ 32.3
Empire Life reported full year shareholders’ net income of $80.4 million for 2012, compared to $32.3 million in 2011.
For the year, shareholders’ net income was higher relative to 2011 due primarily to improved Individual Insurance product
line net income. This product line’s improvement was due primarily to three items:
1.
In 2012, there was a relatively small decrease in long-term interest rates, compared to the significant drop that
occurred in 2011.
2.
Higher prices on long-term products and lower annualized premium sales resulted in lower new business strain
in 2012 compared to 2011.
3.
The update of policy liability assumptions was favourable in 2012 compared to a very unfavourable impact in 2011.
This favourable 2012 update of assumptions included favourable mortality and model enhancements partly offset
by unfavourable lapse, reinvestment assumption and other assumptions. The 2012 reinvestment assumption update
is made up of two large components. The first component is a shareholders’ net loss of $116 million primarily
related to the unfavourable impact of the low interest rate environment on fixed income future reinvestment rate
assumptions. The second component is a shareholders’ net gain of $95 million due primarily to the increased use
of equities to match long-term liabilities of non-participating life and universal life products.
15
Empire Life Annual Report 2012
In addition, both the Wealth Management and Employee Benefits product lines reported improved sales results in 2012. Lower
Wealth Management and higher Employee Benefits net income was reported in 2012 compared to 2011, due primarily to the
update of policy liability assumptions.
Shareholders’ Capital and Surplus net income of $36 million in 2012 was similar to the $35 million achieved in 2011. 2012 and
2011 included gains from the sale of equity assets of $15 million and $7 million respectively. These gains resulted from asset
liability management and capital management decisions to change asset mix.
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 2012 net income compared to 2011 is shown in
the Product Line Results sections later in this report.
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.
Empire Life established a mutual fund subsidiary, Empire Life Investments Inc. (ELII), in 2011. ELII became a registered
Investment Funds Manager on January 5, 2012. Empire Life’s consolidated financial statements include ELII.
Empire Life 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 analysis and discussion which follows is focused on the full year 2012 and comparative 2011 line of business net
income after tax.
16
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012
The following table provides a summary of Empire Life results by major product line (figures in Management’s Discussion
and Analysis may differ due to rounding):
For the year ended december 31
Wealth
management
Employee
Benefits
individual
insurance
Capital
& Surplus
Total
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
278 $ 348 $
1
143
339 $
1
118
- $
2
35
- $ 814 $
2
37
125
237
758
120
217
$
176 $
115
53
141 $ 290 $
110
56
7
6
2
-
1
347
341
(1)
340
6
-
25
338
320
2
322
2
-
(3)
302
273
12
285
7
6
2
-
14
307
280
12
292
$
7 $
16 $
17 $
15 $
12 $
$ 1,147 $ 1,137
$ 4,993 $ 4,392
-
13 $
$
$
21 $
23
$
44 $
41 $
65 $
73
-
28
-
65
50
33
-
-
356
847
3
545
526
7
533
892
(10)
882
(35) $
15
13
28
37 $
-
26
-
65
15
13
28
37 $
$
54
28
1
1,259
1,155
31
1,186
73 $
(7)
80 $
41
26
395
1,557
1,507
17
1,524
33
1
32
$ 5,909 $ 5,600
$ 5,014 $ 4,415
-
13 $
$
(in millions of dollars)
revenue
net premium income
Fee and other income
Investment income
Realized gain on fair value
through profit or loss
investments
Realized gain (loss) on
available for sale investments
including impairment write-downs
Fair value change in fair
value through profit or loss
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
Mutual fund assets
annualized premium sales
Total revenue
(in millions of dollars)
revenue
net premium income
Investment income
Fair value change in fair value through profit or loss investments including realized amounts
Realized gain on available for sale investments including impairment write-downs
Fee and other income
Total
Fourth quarter
2011
2012
Year
2012
2011
$
212 $
58
(29)
23
35
758
217
436
26
120
$ 299 $ 476 $ 1,260 $ 1,557
184 $ 814 $
56
188
19
29
237
56
28
125
For the year, total revenue at Empire Life decreased by 19% to $1.26 billion compared to $1.56 billion in 2011. Major revenue
items are discussed below.
Net premium income for the year increased in 2012 relative to 2011. The increase related primarily to the Wealth Management
product line.
Investment income for the year increased in 2012 relative to 2011. The increase related primarily to higher interest and
dividend income in the Individual Insurance product line.
17
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 Fair value change in fair value through profit or loss (FVTPL) investments including realized amounts often cause large
revenue volatility. These assets experienced a net gain for the year in both 2012 and 2011. In 2012, the gain was from primarily
an increase in bond prices (due to a decrease in market interest rates) and an increase in common share prices. In 2011 the
gain was from primarily a large increase in bond prices (due to a large decrease in market interest rates) partly offset by
a decrease in common share prices. 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 (AFS) investments including impairment write-downs was a larger gain for the year in
2012 relative to 2011 due primarily to common share impairment write-downs in 2011. 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.
Fee and other income for the year increased in 2012 relative to 2011 due primarily to growth in segregated fund guarantee
fees related to guaranteed minimum withdrawal benefit (GMWB) products. The growth in GMWB guarantee fees was due
to strong GMWB product sales.
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
Fourth quarter
Year
2012
2011
2012
2011
$
$
148
14
-
5
39
55
3
264
$
$
128
248
-
6
34
39
3
458
$
541
265
1
20
140
175
14
$ 1,156
$
$
513
664
1
21
130
164
14
1,507
Total benefits and expenses at Empire Life for the year decreased by 23% to $1.16 billion compared to $1.5 billion in 2011.
Major benefit and expense items are discussed below.
Net benefits and claims variability is dependent on the claims incurred. Generally, claims rise year over year due to growth
of the insurance blocks. For the year, the increase in claims 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 2011 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.
18
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 Operating expenses and commission expenses increased year over year due primarily to growth in segregated fund deposits.
Operating expenses also increased due to the startup of a new mutual fund business.
Product Line results – Wealth management
(in millions of dollars)
assets under management
general fund annuities
Segregated funds
Mutual funds
(in millions of dollars)
Selected financial information
Fixed interest annuity premiums
Segregated fund gross sales
Segregated fund net sales
Segregated fund fee income
Mutual fund gross sales
Mutual fund net sales
Mutual fund fee income
net income (loss) after tax fixed income annuity portion
net income after tax segregated fund portion
net loss after tax mutual fund portion
net Income (Loss) After Tax
As at december 31
2012
2011
$
1,147
4,993
13
$
1,137
4,392
-
Fourth quarter
2012
2011
Year
2012
2011
$
$
$
50
539
313
32
9
9
-
(4)
2
(1)
(3)
$
$
$
30
185
(1)
27
-
-
-
4
1
-
5
$
$
$
176
1,159
404
115
13
13
-
-
10
(3)
7
$
$
$
141
725
(24)
110
-
-
-
7
9
-
16
Assets in Empire Life general fund annuities increased by less than 1%, while segregated fund assets increased by 14% during
the last twelve months. The increase over the last twelve months for segregated funds was attributable to strong net sales
(gross sales net of withdrawals) described below, and positive investment returns, due to the stock market increase.
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 up 24% compared to
2011 due primarily to increased sales of fixed interest deferred annuities.
For the year, segregated fund gross sales were up 60% compared to 2011. Net sales were positive for the year and were higher
than 2011 due to increased gross sales and decreased withdrawals. This product line’s gross sales growth is attributable
primarily to guaranteed minimum withdrawal benefit (GMWB) products. The growth appears to be attributable primarily
to announcements by some GMWB competitors to suspend the sale of GMWB products, remove benefits, or increase fees.
Empire Life has taken several steps to limit GMWB risk exposure. In the fourth quarter of 2012 Empire Life announced a new
version of the GMWB product for launch in early 2013. The new version reduces the amount of risk Empire Life is taking on,
while still offering a competitive guaranteed income solution to customers.
For the year, segregated fund fee income increased by 4% in 2012 relative to 2011. The increase was due to growth in GMWB
guarantee fees. The growth in GMWB guarantee fees was due to strong GMWB product sales. For the year, management fees
earned on segregated funds were lower than 2011 by less than 1%. The small decrease in management fees earned was due to
lower average assets under management in 2012 compared to 2011, as stock markets were lower on average during 2012 than
they were during 2011. This was partially offset by the positive impact on average assets under management and management
fees earned, resulting from strong net sales in 2012.
19
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 Empire Life launched its new mutual fund business during the first quarter in 2012 with gross sales of $13 million for the year,
including $7 million from one of Empire Life’s pension plans.
During the fourth quarter and for the year earnings from this product line decreased relative to 2011. 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 (Loss) analysis
net income (loss) after tax 2012
net income (loss) after tax 2011
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
2011 gain from update of policy liability assumptions
2012 loss from update of policy liability assumptions
Higher new business strain
Mutual fund startup expenses
Increase in inforce profit margins
Improved mortality results
Total
Fourth quarter
Year
$
$
$
$
(3)
5
(8)
10
(13)
(5)
(5)
-
4
1
(8)
$
$
$
$
7
16
(9)
10
(13)
(5)
(4)
(2)
5
-
(9)
In 2011, a $10 million loss occurred 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.
The update of policy liability assumptions was favourable by $13 million in 2011. The 2011 updates for general fund
annuities related primarily to favourable updates to investment assumptions and favourable updates to annuitant
mortality assumptions.
In contrast, the update of policy liability assumptions was unfavourable by $5 million in 2012. The 2012 updates for general
fund annuities related primarily to annuitant mortality assumptions.
Higher new business strain resulted from strong GMWB sales in 2012.
Higher net income on in-force business in 2012 was due to the strong growth of the GMWB product which generates higher
fees than other segregated fund products.
Product Line results – Employee Benefits
(in millions of dollars)
Selected financial information
Annualized premium sales
Premium income
net income after tax
Fourth quarter
Year
2012
2011
2012
2011
$
$
11
74
5
$
$
9
70
3
$ 44
290
17
$
$ 41
278
15
$
For the year, sales in this product line decreased by 9% relative to 2011. The 2012 sales reflect continuing strengh compared to
the recessionary lows experienced three years ago. This product line’s premium income for the year increased by 4% relative
to 2011 due to continuing growth of the in-force block.
20
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 Fourth quarter and annual earnings from this product line increased relative to 2011. 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 2012
net income after tax 2011
Increase in net Income After Tax
Components of increase
2011 gain (loss) from update of policy liability assumptions
2012 gain from update of policy liability assumptions
Total
Fourth quarter
Year
$
$
5
3
2
$ 17
15
2
$
$
(2)
$
(2)
4
2
$
4
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 2012 than 2011. The 2012 update of policy liability assumptions was due
primarily to refinements of valuation models for group long-term disability claims.
Product Line results – individual insurance
(in millions of dollars)
Selected financial information
Annualized premium sales
Premium income
net income (loss) after tax
net income (loss) after tax shareholders' portion
net income (loss) after tax policyholders’ portion
net Income (Loss) After Tax
Fourth quarter
Year
2012
2011
2012
2011
$ 16
89
$ 14
85
$ 65
348
$ 73
339
$
$
3
(3)
-
$
$
(19)
6
(13)
$ 20
(8)
$ 12
$ (34)
(1)
$ (35)
For the year, annualized premium sales in this product line decreased by 11% compared to 2011, and premium income
increased by 3% compared to 2011. This product line’s full year sales result is attributable primarily to higher than normal
volume in 2011 resulting from distributor concerns in 2011 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.
We have observed a similar trend with many of our competitors.
Fourth quarter and annual earnings from this product line increased relative to 2011. 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 income (Loss) analysis
net income after tax 2012
net loss after tax 2011
Increase in net Income After Tax
Components of increase
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
2011 loss from update of policy liability assumptions
2012 gain from update of policy liability assumptions
Improved (worsened) investment experience
Improved (worsened) mortality, surrender and other experience
Lower new business strain
Total
Fourth quarter
Year
$
$
$
$
-
(13)
13
(27)
(9)
41
1
(3)
7
3
13
$
$
$
$
12
(35)
47
(27)
(9)
41
1
29
(5)
17
47
21
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012
In 2011, a $27 million 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.
In 2011, a $9 million 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. 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 $41 million loss related to update of policy
liability assumptions.
In contrast, the update of policy liability assumptions was favourable by $1 million in 2012. The following table provides
a breakdown of the components of this amount:
components of income increase from update of policy liability assumptions
(in millions of dollars)
Fixed income asset assumptions
non-fixed income asset assumptions
net re-investment assumptions
Mortality
Model enhancements
Lapse
Other
Total 2012 gain From update of Policy Liability Assumptions
Year
(116)
95
(21)
16
24
(11)
(7)
1
$
$
$
As shown in the above table, the update in investment return assumptions in 2012 is primarily made up of two components:
1.
For fixed income asset assumptions, a shareholders’ net loss of $116 million primarily related to the
unfavourable impact of the low interest rate environment on fixed income future reinvestment rate
assumptions; and
2.
For non-fixed income asset assumptions, a shareholders’ net gain of $95 million was due primarily to the
increased use of equities to match long-term liabilities of non-participating life and universal life products.
This resulted primarily from an asset liability management and capital management decision in the fourth
quarter of 2012 to purchase $174 million of common equities to match longer-term liabilities.
Empire Life uses an ultimate reinvestment rate (URR) assumption of 3.1% (3.7% for 2011). Empire Life uses a best estimate
return assumption for equities used to match long-term liabilities of 8.11% (8.43% for 2011). This equity return
assumption is then reduced by margins to determine the net return used in the valuation. Additional information
regarding investment return assumptions can be found in note 27(b)i)(2) to the consolidated financial statements.
Investment experience had a year-over-year improvement of $29 million. This was due primarily to a relatively small
decrease in long-term interest rates in 2012, compared to the significant drop that occurred in 2011. The improvement
also resulted from a rise in stock markets in 2012, compared to 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.
22
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 In addition, $8 million of the full-year improved investment experience resulted from the favourable impact on insurance
contract liabilities of changes made to the asset mix during the second quarter of 2012, and a commitment in the second quarter
of 2012 to make further asset mix changes. The asset mix changes and the commitment relate to the purchase of units in a real
estate limited partnership. The investment improves the matching of long-term liabilities at favourable investment yields.
New business strain had a year-over-year improvement of $17 million. Lower new business strain resulted from higher prices
on long-term products and lower annualized premium sales.
results – Capital and Surplus
(in millions of dollars)
net income after tax
net income after tax shareholders' portion
net income after tax policyholders’ portion
net Income After Tax
Fourth quarter
Year
2012
2011
2012
2011
$
$
19
-
19
$
$
18
1
19
$ 36
1
$ 37
$ 35
2
$ 37
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 were similar to 2011 levels. 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 2012
net income after tax 2011
Increase in net Income After Tax
Components of increase
Decreased net income from sale of investments
Lower impairment write-downs
Decreased investment income
Total
Fourth quarter
Year
$
$
$
$
19
19
-
-
-
-
-
$
$
$
$
37
37
-
(3)
5
(2)
-
Decreased net income from sale of investments was due primarily to lower gains from the sale of certain AFS equity
investments compared to 2011. In both years, a portion of these gains relate to asset mix changes in Shareholders’ Capital and
Surplus. Approximately $7 million in shareholders’ 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. Approximately
$15 million in shareholders’ net income resulted from gains on the sale of $174 million of equities in the fourth quarter of
2012. This 2012 sale of equity assets was aimed at lowering equity exposure in Empire Life’s Shareholders’ Capital and
Surplus to allow capacity to purchase $174 million of common equities to match longer-term liabilities in the Individual
Insurance product line.
Lower impairment write-downs were due primarily to the sharp decline in stock markets during the third quarter of 2011.
Decreased investment income was due primarily to lower dividend income in 2012, from the above-mentioned sale of
$174 million of common equities.
23
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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
2012
2011
$ 229
(123)
(13)
93
$
$
$
193
(160)
(29)
4
The increase in cash provided by operating activities in 2012 relative to 2011 was due primarily to increased cash inflows
related to annuity business and increased cash inflows related to income taxes.
The decrease in cash used for investing activities during 2012 relative to 2011 was due primarily to asset mix changes in process
at the end of 2012. The sale of equity assets backing Capital and Surplus was completed in 2012, and proceeds were partially
re-invested in fixed income assets backing Capital and Surplus in 2012. The remainder of the re-investment into fixed income
assets will occur in the first quarter of 2013.
The decrease in cash used for financing activities in 2012 relative to 2011 was due to Empire Life’s decision to retain cash to
finance operations growth rather than pay a dividend to common shareholders.
Capital resources
mCCSr ratio
2012
Dec 31
203%
2012
Sept 30
203%
2012
June 30
205%
2012
mar 31
210%
2011
Dec 31
207%
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 regulatory capital ratio, as
measured by Minimum Continuing Capital and Surplus Requirements (MCCSR), of 203% as at December 31, 2012 continued
to be well above requirements, and above minimum internal targets.
The MCCSR ratio decreased by less than 1 point from the previous quarter, and decreased by 4 points on a full-year basis.
These small changes were due to increases in required regulatory capital, offset by increases in available regulatory capital, as
shown in the table below.
(in millions of dollars)
available regulatory capital
Tier 1
Tier 2
Total
required regulatory capital
2012
Dec 31
2012
Sept 30
2012
June 30
2012
mar 31
2011
Dec 31
$
756
327
$ 1,083
$
746
331
$ 1,077
$
730
321
$ 1,051
$
718
321
$ 1,039
$
705
314
$ 1,019
$ 533
$ 529
$
512
$ 494
$ 492
Regulatory capital requirements increased from the previous quarter, and on a full-year basis, due primarily to higher
lapse rate exposures related to lower interest rates, and higher investment exposures related to lower interest rates and
higher stock markets.
Tier 1 available regulatory capital increased from the previous quarter while Tier 2 decreased slightly. Tier 1 and Tier 2
available regulatory capital increased on a full-year basis.
The increase in Tier 1 available regulatory capital from the previous quarter, and on a full-year basis, was due primarily to the
impact of fourth quarter and full-year 2012 net income. Tier 1 available regulatory capital was also maintained due to Empire Life’s
decision to retain cash to finance operations growth rather than paying a dividend to common shareholders in 2012.
24
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 The small decrease in Tier 2 available regulatory capital from the previous quarter was due primarily to the impact of the
Other Comprehensive Loss (OCL) related to the sale of equity assets on Tier 2 capital. This was partly offset by an increase in
negative insurance contract liabilities. The increase in Tier 2 available regulatory capital on a full-year basis was due primarily
to an increase in negative insurance contract liabilities, partly offset by the impact of the OCL related to the sale of equity
assets on Tier 2 capital. The increase in negative insurance contract liabilities in the fourth quarter resulted in a $12 million
decrease in Tier 1 regulatory capital and a $12 million increase in Tier 2 regulatory capital. The increase in negative insurance
contract liabilities for the full year resulted in a $23 million decrease in Tier 1 regulatory capital and a $23 million increase in
Tier 2 regulatory capital.
Empire Life’s MCCSR ratio will be impacted by two items in the first quarter of 2013. The estimated impact of these items
is as follows:
1.
There will be changes to the MCCSR standards related to lapse-required regulatory capital which is expected
to improve Empire Life’s MCCSR ratio by 14 points.
2.
Implementation of IAS 19R Employee Benefits standards (related to employee defined benefit plans) in the
first quarter 2013 is expected to lower Empire Life’s available regulatory capital by $26 million, which would
decrease Empire Life’s MCCSR ratio by 5 points.
other Comprehensive income
(in millions of dollars)
other comprehensive income (oCi) (loss) (oCL)
Shareholders’ OCI (OCL)
Policyholders’ OCI (OCL)
Fourth quarter
Year
2012
2011
2012
2011
$ (17)
-
$
$
$
(6)
1
$ (13)
2
$
$
$
(18)
(1)
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.
In 2012, the full year Shareholders’ loss was due primarily to the reclassification to net income of a large realized gain during
the fourth quarter of 2012.
In 2011, the full year Shareholders’ loss was due primarily to the reclassification to net income of a large realized gain during
the fourth quarter of 2011. In addition, this 2011 loss was due to a stock market decline in 2011.
For the year, a Policyholders’ gain occurred in 2012 versus a loss in 2011, due primarily to a stock market rise in 2012 versus
a stock market decline in 2011.
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.
25
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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 continue 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.
The Wealth Management product line at Empire Life has historically been 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. Empire Life achieved strong growth in its GMWB segregated fund business in
2012. However, Empire Life has taken several steps to limit GMWB risk exposure. In the fourth quarter of 2012, Empire Life
announced a new version of the GMWB product for launch in early 2013. The new version reduces the amount of risk
Empire Life is taking on, while still offering a competitive guaranteed income solution to customers. Empire Life will
continue to monitor the competitive landscape for this product.
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 was particularly high in 2010 and 2011 due to the low long-term interest rate environment that
followed the financial crisis. The low interest rate environment continued in 2012. This has impacted the entire industry
resulting in significant price increases in both 2011 and 2012 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 have a cost
structure that allows us to compete while generating an acceptable long-term financial contribution. Empire Life is reviewing
its Individual Insurance products to improve profitability, reduce interest rate risk, reduce required regulatory capital, and
improve the customer experience.
26
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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, 2012 Empire Life had $5.0 billion of segregated fund
assets and liabilities. Of this amount, approximately $4.8 billion have guarantees. The following table provides a percentage
breakdown by type of guarantee:
As at december 31
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))
2012
63.8%
5.2%
31.0%
2011
77.7%
5.6%
16.7%
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 2012 and December 31 for 2011, 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:
2012 Shareholders' net income
2011 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:
Sensitivity to Stock markets:
December 31, 2012 mCCSr ratio
December 31, 2011 MCCSR Ratio
10% increase
10% decrease
20% increase
20% decrease
-0.5%
0.9%
0.0%
-2.4%
-1.1%
1.7%
-12.2%
-19.1%
The increased use of common equities to match longer-term liabilities in the fourth quarter of 2012 has caused the sensitivity
of Empire Life’s MCCSR ratio to stock market increases to be slightly negative. Increased stock markets cause a gain on
common equity assets partly offset by a loss due to higher policy liabilities for a net increase in available capital. However,
increased stock markets also cause an increase in required capital, as the required capital related to common equity assets
increases. As of December 31, 2012, under a 10% and 20% stock market increase scenario, the increase in required capital
slightly outweighs the increase in available capital resulting in a slightly negative impact on Empire Life’s MCCSR ratio.
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, 2011 or December 31, 2012. In addition, Empire Life does not reinsure any other insurer’s segregated
fund products.
27
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 However, effective January 1, 2013 Empire Life has entered a reinsurance agreement to cede a portion of Empire Life’s
segregated fund death benefit exposure. All Empire Life segregated fund customers with death benefit guarantees of at least
$2 million are included in this agreement. If this agreement was in place as at December 31, 2012 approximately $8 million of
the $112 million death benefit “amount at risk” reported in the table below would be ceded to the reinsurer.
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
guarantee > fund Value
Death Benefit > fund Value
(in millions of dollars)
December 31, 2012
December 31, 2011
fund Value
107
$
176
$
amount at risk
11
19
$
$
fund Value
1,250
$
2,089
$
amount at risk
112
212
$
$
gmWB Top-up
amount at risk
298
147
$
$
actuarial
Liabilities
$ nil
$ nil
mCCSr
required
Capital
$ <1
$ nil
The first four columns of the table above show 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 fifth column of the above table
shows GMWB top-up exposure. The GMWB top-up amount at risk represents the amount that could be paid by Empire Life to
GMWB customers if the net return on each GMWB customer’s assets is zero for the remainder of each GMWB customer’s life,
based on life expectancy. For these three categories of risk, 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 regulatory 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, or upon the occurrence of future top-up
payments to GMWB customers. The amounts at risk in December 2012 decreased from the December 2011 levels for maturity
guarantee, and death benefit guarantee, due primarily to the increase in many global stock markets including Canada’s. The
amount at risk in December 2012 increased from the December 2011 levels for GMWB top-up exposure, due primarily to
strong GMWB sales in 2012.
In addition, Empire Life’s MCCSR ratio is sensitive to changes in market interest rates. The impact of an immediate 1%
decrease in interest rates, and a 1% decrease in assumed IRR for nonparticipating insurance business, would result in
a decrease to Empire Life’s MCCSR ratio of 32 points as of December 31, 2012 (34 points as of December 31, 2011). This
assumes no change in the URR. The impact above excludes the impact of market value changes in AFS bonds. The AFS
bonds provide a natural economic offset to the interest rate risk arising from our product liabilities. If the AFS bonds
were sold to realize the gains from a 1% decrease in interest rates, the above impact would be reduced to 28 points as of
December 31, 2012 (30 points as of December 31, 2011).
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 27 to the
consolidated financial statements.
28
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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, financial instrument
classification, pension and other employee future benefits 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
Canadian Institute of Actuaries. 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 27 to the consolidated financial statements.
Financial instrument classification
Management judgement is used to classify financial instruments as FVTPL, AFS or loans and receivables. Most financial
assets supporting insurance contract liabilities and investment contract liabilities are designated as FVTPL. Most financial
assets supporting capital and surplus and participating accounts are classified as AFS. Loans and receivables support both
contract liabilities and capital and surplus. The designation of a financial instrument as FVTPL or AFS dictates whether
unrealized fair value changes are reported in net income or other comprehensive income. Additional information regarding
financial instrument classification is included in Notes 2(d), 3(a), 3(e), and 10(c).
Pension and other employee future benefits
Pension and other employee future benefits expense is calculated by independent actuaries using assumptions determined
by management. If actual experience differs from the assumptions used, pension and other employee future benefits
expense could increase or decrease in future years. The expected rate of return on plan assets is a management estimate that
significantly affects the calculation of pension expense. The expected rate of return on plan assets is determined using the
plan’s target asset allocation and estimated rates of return for each asset class. Additional information regarding pension
and other employee future benefits is included in Notes 2(j), 2(u), and 12.
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.
29
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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 2012 economic growth remained weak, interest rates continued to drop, but the drop was far less than the large drop
that occurred in 2011. Stock markets remained volatile, but most significant markets rose in 2012. Canada’s main stock
market rose in 2012, an improvement from the significant decline in 2011. The European sovereign debt crisis and U.S.
fiscal issues contributed strongly to the volatility 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 in-
force profit margin results and new business growth for the segregated fund and mutual fund portions 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.
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 and 2012 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 Life’s Individual Insurance product line in 2013.
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 1, 2011. This did not have a significant impact on
Empire Life’s MCCSR ratio. In the second stage, a new approach will be implemented for all in-force 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.
In the first quarter of 2013, Empire Life’s MCCSR ratio is expected to increase by 14 points due to a change to the MCCSR
standards related to lapse risk, and decrease by 5 points due to the implementation of IAS 19R Employee Benefits standards
(see Capital Resources section earlier in this report for further information).
Longer-term accounting standard and regulatory changes are expected by 2016 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.
30
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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 banks’ 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 (MGAs). 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.
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)
2012
Dec 31
$ 299
25
$
2012
Sept 30
$ 377
20
$
2012
June 30
$ 368
18
$
2012
mar 31
$ 215
17
$
2011
Dec 31
$ 476
8
$
2011
Sept 30
$ 499
(7)
$
2011
June 30
$ 345
17
$
2011
Mar 31
$ 237
14
$
Revenue for the three months ended December 31, 2012 decreased to $299 million (2011 $476 million). The decrease was
primarily due to net gains on FVTPL investments in 2011 resulting from an increase in bond prices in 2011. 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 from primarily improved Individual Insurance product line
net income. This was due primarily to a favourable impact from the update of policy liability assumptions in 2012 compared to
unfavourable in 2011. See Product Line Results sections earlier in this report for further information on quarterly results.
31
ManageMent’s Discussion anD analysisEmpire Life annual Report 2012 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, 2012. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as at December 31, 2012.
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 27, 2013
Gary J. Mc Cabe
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 27, 2013
32
Empire Life Annual Report 2012 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 statement of financial position as at December 31, 2012 and the consolidated
statements of operations, comprehensive income, changes in equity, and cash flows for the year then ended, 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, 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 audit 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 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, 2012 and financial performance and their
cash flows for the year then ended in accordance with International Financial Reporting Standards.
PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
February 27, 2013
33
Empire Life Annual Report 2012 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, 2012 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 27, 2013
34
Empire Life Annual Report 2012 conSolidATed STATeMenTS oF FinAnciAl PoSiTion
(in thousands of Canadian dollars)
As at december 31
assets
Cash and cash equivalents (Note 3)
Investments
Short-term investments (Note 3)
Bonds (Note 3)
Common and preferred shares (Note 3)
Mortgages (Note 3)
Loans on policies (Note 3)
Policy contract loans (Note 3)
Total investments
Accrued investment income
Insurance receivables (Note 4)
Current income taxes receivable
Other assets (Note 5)
Property and equipment (Note 6)
Intangible assets (Note 7)
Segregated fund assets (Note 8)
Total assets
Liabilities
Accounts payable and other liabilities (Note 11)
Insurance payables (Note 9)
Current income taxes payable
Reinsurance liabilities (Note 10)
Insurance contract liabilities (Note 10)
Investment contract liabilities
Policyholders' funds on deposit
Provision for profits to policyholders
Deferred income taxes (Note 18)
Subordinated debt (Note 23)
Segregated fund policy liabilities
Equity
Capital stock (Note 25)
Contributed surplus
Retained earnings (Note 24)
Accumulated other comprehensive income
2012
2011
$
248,382
$
155,559
16,440
4,227,329
878,085
302,531
43,071
95,461
5,562,917
21,452
30,035
-
21,468
22,827
2,071
5,014,392
33,867
4,063,897
808,681
264,238
41,981
113,118
5,325,782
20,107
28,455
17,106
34,464
21,241
1,090
4,415,318
$ 10,923,544
$ 10,019,122
$
46,671
63,152
7,473
244,808
4,375,441
14,591
30,634
22,142
4,792
199,642
5,014,392
10,023,738
985
19,387
860,025
19,409
899,806
$
70,097
67,859
-
156,119
4,199,501
15,076
30,263
21,791
6,586
199,405
4,415,318
9,182,015
985
19,387
786,203
30,532
837,107
Total Liabilities and Equity
$ 10,923,544
$ 10,019,122
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
35
Empire Life Annual Report 2012 conSolidATed STATeMenTS oF oPeRATionS
(in thousands of Canadian dollars except for per share amounts)
For the year ended december 31
revenue
gross premiums
Premiums ceded to reinsurers
net premiums (Note 13)
Investment income (Note 3)
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 3)
Fee income (Note 14)
Total revenue
Benefits and Expenses
gross benefits and claims paid (Note 15)
Claims recovery from reinsurers (Note 15)
gross change in insurance contract liabilities (Note 15)
Change in insurance contract liabilities ceded (Note 15)
Change in investment contracts provision
Policy dividends
Operating expenses (Note 17)
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 18)
net income
net income (Loss) attributable to:
Participating Policyholders
Shareholders
Total
Earnings per share - basic and diluted
2012
2011
$ 902,733
(89,201)
813,532
$ 838,422
(79,968)
758,454
237,354
1,397
54,349
28,405
125,218
216,782
394,512
41,324
25,846
120,243
1,260,255
1,557,161
590,041
(48,795)
175,940
88,689
754
20,478
139,788
177,175
(2,336)
567,744
(54,332)
526,183
138,439
745
20,962
129,865
166,392
(2,186)
13,697
1,155,431
13,680
1,507,492
13,466
3,900
87,458
13,636
12,985
3,400
33,284
139
$
73,822
$
33,145
(6,597)
80,419
838
32,307
$
73,822
$
33,145
(2,000,000 shares authorized; 985,076 shares outstanding)
$
81.64
$
32.80
The accompanying notes are an integral part of these consolidated financial statements.
36
Empire Life Annual Report 2012 conSolidATed STATeMenTS oF coMPReHenSive incoMe
(in thousands of Canadian dollars)
For the year ended december 31
net income
other comprehensive income (loss), net of income taxes:
unrealized fair value change on available for sale investments (Note 18)
Fair value change on available for sale investments reclassified
to net income including impairment write-downs (Note 18)
net unrealized fair value increase (decrease)
Amortization of loss on derivative investments designated
as cash flow hedges reclassified to net income (Note 18)
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.
2012
2011
$
73,822
$
33,145
7,504
(3,014)
(19,161)
(11,657)
(16,201)
(19,215)
534
496
(11,123)
(18,719)
$ 62,699
$
14,426
$
(4,960)
67,659
$
(394)
14,820
$ 62,699
$
14,426
37
Empire Life Annual Report 2012 conSolidATed STATeMenTS oF cHAnGeS in eqUiTY
(in thousands of Canadian dollars)
For the year ended december 31
2012
2011
Capital stock (Note 25)
Contributed surplus
retained earnings
Shareholders’ Policyholders’
Total
Shareholders’ Policyholders’
$
$
985
19,387
$
$
-
-
$
985
$
19,387
$
$
985
19,387
$
$
-
-
$
$
Total
985
19,387
Retained earnings - beginning of year
$ 732,479
$
53,724
$ 786,203
$
715,972
$
52,886
$ 768,858
net income (loss)
80,419
(6,597)
73,822
32,307
838
33,145
Dividends to common shareholders
-
-
-
(15,800)
-
(15,800)
Retained earnings - end of year
$ 812,898
$
47,127
$ 860,025
$
732,479
$
53,724
$ 786,203
accumulated other comprehensive
income (aoCi)
Accumulated other comprehensive
income - beginning of year
Other comprehensive income (loss)
Accumulated other comprehensive
income - end of year
Total Equity (Note 24)
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
$
27,045
(12,760)
$
14,285
$ 847,555
$
$
$
3,487
1,637
$ 30,532
(11,123)
$
44,532
(17,487)
5,124
$
19,409
$
27,045
52,251
$ 899,806
$ 779,896
$
$
$
4,719
(1,232)
$
49,251
(18,719)
3,487
$
30,532
57,211
$ 837,107
$
14,523
$
5,693
$
20,216
$
27,999
$
3,874
$
31,873
(807)
569
-
(807)
(1,341)
-
(1,341)
(569)
-
387
(387)
-
$
14,285
$
5,124
$
19,409
$
27,045
$
3,487
$
30,532
The accompanying notes are an integral part of these consolidated financial statements.
38
Empire Life Annual Report 2012 conSolidATed STATeMenTS oF cASH FloWS
(in thousands of Canadian dollars))
For the year ended december 31
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 on available for sale assets
Amortization related to invested assets
Amortization related to capital asssets
Deferred income taxes
Other items
2012
2011
$
73,822
$
33,145
176,694
88,689
(1,397)
(82,754)
(73,108)
3,673
(1,794)
45,131
526,928
138,439
(394,512)
(67,170)
(73,094)
3,914
3,105
22,406
Cash provided from operating activities
228,956
193,161
investing activities
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
Decrease (increase) in short-term investments
net purchase of capital assets
Cash provided from (used for) investing activities
financing activities
Dividends to common shareholders
Interest paid on subordinated debt
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
Supplementary cash flow information:
Income taxes paid, net of (refunds)
Interest income received
Dividend income received
The accompanying notes are an integral part of these consolidated financial statements.
(1,354,055)
1,219,502
(1,569,477)
1,389,722
(7,600)
8,293
17,427
(6,240)
(7,646)
13,424
17,047
(2,744)
(122,673)
(159,674)
-
(13,460)
(15,800)
(13,460)
(13,460)
(29,260)
92,823
4,227
155,559
151,332
$
248,382
$
155,559
$
$
(15,476)
124,863
43,994
(7,515)
111,564
34,424
39
Empire Life Annual Report 2012 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” or “Empire Life”) 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, mutual 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. Empire Life 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 in 2011,
Empire Life Investments Inc. (ELII). ELII became a registered Investment Funds Manager on January 5, 2012. The head
office for 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 27, 2013.
2. SignifiCanT aCCounTing PoLiCiES
(a) Basis of Preparation
The annual consolidated financial statements of the Company for the year ended December 31, 2012 have been
prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB) and applicable at December 31, 2012.
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 except for per share amounts and where otherwise stated.
These consolidated financial statements also comply with the accounting requirements of OSFI.
40
Empire Life Annual Report 2012 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 and maintains control of its subsidiary. Control is defined as the power to govern the
financial and operating activities of an entity so as to obtain the benefits from its activities. The financial statements
of its subsidiary are included in the Company’s results from the day control was established, the commencement of
operations, and will be deconsolidated should control cease. 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, estimates and critical assumptions in relation to assets, liabilities, revenues and expenses.
Actual results could differ from these estimates and changes in estimates are recorded in the accounting period in
which they are determined.
The Company considers the following items to be particularly susceptible to changes in estimates and judgements:
i) Insurance-related liabilities
Liabilities for insurance contracts are determined using the Canadian Asset Liability Method, which incorporates
best-estimate assumptions for mortality, morbidity, policy lapses, surrenders, future investment yields, policy
dividends, administration costs and margins for adverse deviation. These assumptions are reviewed at least
annually and are updated to reflect actual experience and market conditions. Changes in the assumptions and
margins for adverse deviation can have a significant impact on the valuation of insurance related liabilities. See
Note 27(b) for information on the Company’s sensitivity to changes in best estimate assumptions.
Additional information regarding insurance-related liabilities is included in Notes 2(e), 2(k), 10 and 27(b).
ii) Financial instrument classification
Management judgement is used to classify financial instruments as fair value through profit or loss (FVTPL),
available for sale (AFS) or loans and receivables. Most financial assets supporting insurance contract liabilities and
investment contract liabilities are designated as FVTPL. Most financial assets supporting capital and surplus and
participating accounts are classified as AFS. Loans and receivables support both contract liabilities and capital
and surplus. The designation of a financial instrument as FVTPL or AFS dictates whether unrealized fair value
changes are reported in net income or other comprehensive income.
Additional information regarding financial instrument classification is included in Notes 2(d), 3(a), 3(e), and 10(c).
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 2012 2. SignifiCanT aCCounTing PoLiCiES (continued)
iii) Pension and other employee future benefits
Pension and other employee future benefits expense is calculated by independent actuaries using assumptions
determined by management. If actual experience differs from the assumptions used, pension and other employee
future benefits expense could increase or decrease in future years. The expected rate of return on plan assets is a
management estimate that significantly affects the calculation of pension expense. The expected rate of return on
plan assets is determined using the plan’s target asset allocation and estimated rates of return for each asset class.
Additional information regarding pension and other employee future benefits is included in Notes 2(j), 2(u), and 12.
iv) Impairment
Available for sale securities and loans and receivables are reviewed at each quarter-end reporting period to
identify and evaluate investments that show indications of possible impairment. For available for sale securities
and loans and receivables, impairment losses are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows of the instrument and the impact can be reliably
estimated. Objective evidence of impairment includes, but is not limited to, bankruptcy or default, delinquency
by a debtor, and specific adverse conditions affecting an industry or a region. In addition, for equity securities, a
significant or prolonged decline in the fair value of a security below its cost is objective evidence of impairment.
For these purposes management considers a significant decline to be 20% or greater and a prolonged period to
be 12 months or greater. The decision to record a write-down, its amount and the period in which it is recorded
could change if management’s assessment of those factors were different. Impairment write-downs on debt
securities are not recorded when impairment is due to changes in market interest rates, if future contractual
cash flows associated with the debt security are still expected to be recovered.
Additional information regarding impairment is included in Notes 2(d), 3(b), 10(c) and 27(a).
(d) Financial Instruments
i) Fair Value
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.
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 2012 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 designated
as 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 and participating accounts are classified as 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.
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 2012 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).
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 2012 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 forcasted transactions are recognized in the
Consolidated statement of operations.
vi) Other
Insurance receivables and Trade receivables have been classified as loans or receivables and are carried at
amortized cost. Trade accounts receivables are presented as Other assets. 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.
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 2012 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
in the Consolidated statement of financial position at the same time as the underlying insurance contract liability
to which it relates.
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 including 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.
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 2012 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 insurance 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
segregated fund assets except to the extent there are guarantees, and as a result, the assets associated with
segregated funds are not reported as Investments of Empire Life, but are reported as a separate item 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. See
Note 8 for details on segregated fund assets and changes in segregated fund assets.
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 27 (a) i) (1).
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 2012 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.
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 2012 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 liabilities.
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 inforce.
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 2012 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 in case of 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.
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 2012 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 456-464 of the Insurance Companies Act. 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. Net income (loss) attributable to participating policyholders
is shown on the Consolidated statements of operations. Comprehensive income (loss) attributable to participating
policyholders is shown on the Consolidated statements of comprehensive income. The participating policyholders’
portion of Retained earnings and AOCI is reported separately in the Policyholders’ equity section of the Consolidated
statements of changes in equity.
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 2012 2. SignifiCanT aCCounTing PoLiCiES (continued)
i) Investment Policy
The investments in the participating account are subject to limits established by the Insurance Companies Act
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 recorded directly to each asset segment. When there is a deficiency of funds over
assets, a portion of investment income is allocated to the Shareholders’ Capital and Surplus segment from the
participating account’s asset segments in proportion to the deficiency of funds over assets of each segment.
When there is an excess of funds over assets, a portion of investment income is allocated from the Shareholders’
Capital and Surplus segment to the participating account’s asset segments in proportion to the 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.
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 2012 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 and
mutual funds is generally calculated and recorded as revenue daily based on the funds’ closing net asset 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.
(o) Income Taxes
Income tax expense for the period comprises of 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.
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 2012 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 net income, and the amortization of loss on derivative
investments designated as cash flow hedges reclassified to net income, 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. Except for IAS 19R, the Company has not yet determined the impact of these standards
and amendments on its consolidated financial statements.
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.
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 2012 2. SignifiCanT aCCounTing PoLiCiES (continued)
IAS 19R 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 net income, 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. IAS 19R also includes enhanced disclosure requirements relating to the characteristics and
risks associated with defined benefit plans.
IAS 19R requirements are effective for the Company beginning January 1, 2013 and will be applied retrospectively
with restatement of the 2012 figures. The Company has determined that the retrospective impact on its financial
statements, as at January 1, 2012, will be a $13,137 decrease in Other assets, a $10,166 increase in Accounts payable
and Other liabilities, a $6,154 decrease in Deferred tax liabilities and a $17,149 decrease in AOCI (participating
policyholders $854, and shareholders $16,295).
The retrospective impact on Comprehensive income for 2012 will be a $269 decrease in Net income (participating
policyholders $13, and shareholders $256) and a $8,741 decrease in OCI (participating policyholders $406, and
shareholders $8,335) resulting in a $9,010 decrease in Comprehensive income (participating policyholders $419,
and shareholders $8,591).
The January 1, 2012 adjustment to AOCI and the retrospective 2012 and future charges/credits to OCI, related to
IAS 19R, will remain in AOCI and will not be reclassified to Net income in the future.
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. The fair value measurement basis
of financial assets in an active market will change prospectively from bid price to closing price.
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 2012 2. SignifiCanT aCCounTing PoLiCiES (continued)
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 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 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. Equity instruments
are measured at fair value under almost all circumstances. 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 annual periods beginning on or after January 1, 2015.
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 2012 3. finanCiaL inSTrumEnTS
(a) Summary of Cash and Investments
The carrying values and fair values of cash and investments are as follows:
As at december 31, 2012
As at december 31, 2012
Asset category
fair Value
Through Profit
or Loss
available
for Sale
Loans &
receivables
$
-
-
-
-
-
Cash and cash equivalents
$
248,382
$
Short-term investments
Canadian federal government
Canadian provincial governments
Corporate
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
Communications
Energy
Consumer staples
Industrials
Health care
Materials
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
3,991
-
12,449
16,440
66,391
2,249,585
2,315,976
544,631
239,394
204,291
-
37,559
55,124
44,935
75,944
21
1,201,899
3,517,875
213,879
213,879
479,933
13,755
8,676
502,364
-
-
-
$ 4,498,940
$
186,822
188,453
375,275
229,081
36,418
7,348
9,986
31,898
7,163
6,404
5,881
-
334,179
709,454
107,442
107,442
53,877
523
-
54,400
-
-
-
871,296
Total
Carrying
Value
Total
fair
Value
$
248,382
$
248,382
3,991
-
12,449
16,440
3,991
-
12,449
16,440
253,213
2,438,038
2,691,251
253,213
2,438,038
2,691,251
773,712
275,812
211,639
9,986
69,457
62,287
51,339
81,825
21
1,536,078
4,227,329
773,712
275,812
211,639
9,986
69,457
62,287
51,339
81,825
21
1,536,078
4,227,329
321,321
321,321
321,321
321,321
533,810
14,278
8,676
556,764
533,810
14,278
8,676
556,764
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
302,531
43,071
95,461
441,063
302,531
43,071
95,461
$ 5,811,299
314,349
43,071
95,461
$ 5,823,117
$
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 2012 3. finanCiaL inSTrumEnTS (continued)
As at December 31, 2011
Asset category
Fair Value
Through Profit
or Loss
Available
for Sale
Loans &
Receivables
Cash and cash equivalents
$
155,559
$
-
$
Total
Carrying
Value
Total
Fair
Value
$
155,559
$
155,559
20,887
12,980
33,867
20,887
12,980
33,867
291,820
2,463,514
2,755,334
669,256
231,519
191,796
53,918
45,755
41,744
74,575
1,308,563
4,063,897
291,820
2,463,514
2,755,334
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,979
3,994
9,973
14,908
8,986
23,894
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
-
-
-
$ 4,055,020
-
-
-
$ 1,006,984
264,238
41,981
113,118
419,337
264,238
41,981
113,118
$ 5,481,341
279,855
41,981
113,118
$ 5,496,958
$
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
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 2012 3. 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
As at december 31, 2012
recorded
investment
8,186
813
8,999
$
$
allowance for
impairment
2,878
$
533
3,411
$
As at December 31, 2011
Recorded
Investment
8,010
813
8,823
$
$
Allowance for
Impairment
2,571
$
549
3,120
$
Carrying
amount
5,308
280
5,588
Carrying
Amount
5,439
264
5,703
$
$
$
$
The Company holds collateral of $5,343 (2011 $5,462) in respect of these mortgages and $280 (2011 $264) in respect
of these policy contract loans as at December 31, 2012. 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
2012
3,120
1,193
(902)
3,411
$
$
2011
2,986
505
(371)
3,120
$
$
The Company has recorded interest income of $864 (2011 $854) on these assets.
As at December 31, 2012 loans and receivables past due but not impaired are $6,248 (2011 $nil).
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 2012 3. finanCiaL inSTrumEnTS (continued)
ii) Available for Sale
For the year ended December 31, 2012, the Company reclassified a pre-tax loss of $2,138 from OCI to Net income
due to write-downs of impaired available for sale common and preferred shares (2011 $10,199). 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 3(e) Fair Value of
Financial Instruments. For analysis of the Company’s risks arising from financial instruments, refer to Note 27
Risk Management.
(c) hedge Accounting
In conjunction with the issuance of unsecured subordinated debentures (Note 23), the Company entered into a bond
forward derivative with a notional amount of $75,000 which matured on May 13, 2009. This derivative had been
accounted for as a hedging item in a cash flow hedging relationship.
The Company expects to reclassify a pre-tax loss of $849 (2011 $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
2012
194,294
43,703
550
(1,193)
237,354
$
$
2011
183,244
34,398
(355)
(505)
216,782
$
$
Included in interest income is $53,130 (2011 $50,228) relating to assets not classified as fair value through profit or 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 2012 3. 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:
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
As at december 31, 2012
Level 1
248,382
$
Level 2
-
$
Level 3
-
$
Total fair Value
248,382
$
-
493,511
213,879
-
-
54,400
107,442
-
1,117,614
Level 1
155,559
-
293,869
215,582
-
-
190,582
108,648
-
964,240
$
$
$
3,517,875
8,853
-
16,440
709,454
-
-
-
4,252,622
$
-
-
-
-
-
-
-
-
-
3,517,875
502,364
213,879
16,440
709,454
54,400
107,442
-
5,370,236
$
As at December 31, 2011
Level 2
-
Level 3
-
$
Total Fair Value
155,559
$
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
$
$
$
$
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 2012 3. 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, 2012 or during the year ended December 31, 2011.
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 3(a) and 27.
(f) Derivative Financial Instruments
The values of derivative instruments are set out in the following table. The use of derivatives is measured in terms
of notional principal amounts, which serve as the basis for calculating payments and are generally not actual
amounts that are exchanged.
Exchange-traded
Equity index futures
Over-the-counter
Foreign currency forwards
Total
Exchange-traded
Equity index futures
Over-the-counter
Foreign currency forwards
Total
As at december 31, 2012
notional
Principal
Current
replacement
Cost
fair Value
Positive
negative
Credit
Equivalent
amount
risk
Weighted
Balance
$
22,203
$
182
$
182
$
-
$
-
$
15,802
$ 38,005
$
61
243
$
61
243
$
44
44
$
219
219
$
-
4
4
As at December 31, 2011
Notional
Principal
Current
Replacement
Cost
Fair Value
Positive
Negative
Credit
Equivalent
Amount
Risk
Weighted
Balance
$
22,681
$
16,200
38,881
$
$
30
16
46
$
$
30
16
46
$
$
161
$
-
$
289
450
$
178
178
$
-
3
3
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.
Current replacement cost represents the current cost of replacing all contracts having a positive fair value,
should the counterparty default.
As the regulator of the Canadian insurance industry, OSFI provides guidelines to quantify the use of derivatives.
The credit equivalent amount, a measure used to approximate the potential credit exposure, is determined as the
replacement cost of the derivative contracts having a positive fair value plus an amount representing the potential
future credit exposure. Equity index futures have negligible credit risk as they are settled daily.
The risk-weighted credit equivalent balance is a measure used to determine the amount of capital necessary
to support derivative transactions for Canadian regulatory purposes. It is determined by weighting the credit
equivalent amount according to the nature of the derivative and the creditworthiness of the counterparties.
For analysis of the Company’s risks arising from financial instruments, refer to Note 27 Risk Management.
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 2012 4. inSuranCE rECEiVaBLES
As at december 31
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance Receivables
2012
3,653
11,080
8,923
6,379
30,035
$
$
2011
3,400
18,593
4,302
2,160
28,455
$
$
All amounts are expected to be recovered within one year of the Consolidated statement of financial position date.
5. oTHEr aSSETS
Other assets consist of the following:
As at december 31
Trade accounts receivable
Pension asset
Prepaid expenses
Other Assets
2012
5,757
12,338
3,373
21,468
$
$
2011
18,696
13,137
2,631
34,464
$
$
Of the above total, $12,338 (2011 $13,137) is expected to be recovered more than one year after the Consolidated
statement of financial position date.
6. ProPErTY anD EQuiPmEnT
Cost
As at January 1, 2011
Additions
Disposals
As at December 31, 2011
Additions
Disposals
as at December 31, 2012
Amortization
As at January 1, 2011
Charge for the year
Disposals
As at December 31, 2011
Charge for the year
Disposals
as at December 31, 2012
Carrying Amount
December 31, 2011
December 31, 2012
Land
Buildings
Furniture and
Equipment
Leasehold
Improvements
$
$
$
$
$
$
2,728
-
-
2,728
-
-
2,728
-
-
-
-
-
-
-
2,728
2,728
$
$
$
$
$
$
12,873
-
-
12,873
-
-
12,873
(644)
(611)
-
(1,255)
(581)
-
(1,836)
11,618
11,037
$
$
$
$
$
$
12,878
2,214
-
15,092
3,948
-
19,040
(9,109)
(1,515)
-
(10,624)
(1,761)
-
(12,385)
4,468
6,655
$
$
$
$
$
$
4,674
520
-
5,194
684
-
5,878
(2,143)
(624)
-
(2,767)
(704)
-
(3,471)
2,427
2,407
Total
33,153
2,734
-
35,887
4,632
-
40,519
(11,896)
(2,750)
-
(14,646)
(3,046)
-
(17,692)
-
21,241
22,827
$
$
$
$
$
$
There were no asset impairments in 2012 or 2011.
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 2012 7.
inTangiBLE aSSETS
Cost
As at January 1, 2011
Additions
Disposals
As at December 31, 2011
Additions
Disposals
as at December 31, 2012
Amortization
As at January 1, 2011
Charge for the year
Disposals
As at December 31, 2011
Charge for the year
Disposals
as at December 31, 2012
Carrying Amount
December 31, 2011
December 31, 2012
$ 38,900
324
(893)
38,331
1,608
-
$ 39,939
$
$
$
$
(36,656)
(1,164)
579
(37,241)
(627)
-
(37,868)
1,090
2,071
The Company’s total amount of research and development expenditure recognized as an expense during 2012 is
$4,461 (2011 $2,023).
There were no asset impairments during 2012 or 2011.
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 2012 8. SEgrEgaTED funDS
(a) The following table identifies segregated fund assets by category of asset:
As at december 31
Cash and cash equivalents
Short-term investments
Bonds
Common and preferred shares
net other assets (liabilities)
Less segregated funds held within general fund investments
Total
2012
192,581
150,376
1,204,163
3,510,274
28,127
5,085,521
(71,129)
5,014,392
$
$
(b) The following table presents the change in segregated fund assets:
For the year ended december 31
Segregated funds - beginning of year
Additions to segregated funds:
Amount received from policyholders
Interest
Dividends
Other income
net realized gains on sale of investments
net unrealized increase in fair value of investments
Deductions from segregated funds:
Amounts withdrawn or transferred by policyholders
net realized losses on sale of investments
net unrealized decrease in fair value of investments
Management fees and other operating costs
net change in segregated funds held within general fund investments
Segregated Funds - End of Year
$
2012
4,415,318
$
1,421,084
45,478
101,066
18,221
-
180,651
1,766,500
1,016,535
2,819
-
138,346
1,157,700
(9,726)
5,014,392
2011
139,781
163,846
909,071
3,270,227
(6,204)
4,476,721
(61,403)
4,415,318
2011
4,620,899
1,081,150
41,258
114,256
17,679
162,546
-
1,416,889
1,130,268
-
376,417
140,141
1,646,826
24,356
4,415,318
$
$
$
$
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 2012 9. inSuranCE PaYaBLES
As at december 31
Claims due and accrued
Payable to agents
Premiums paid in advance
Due to reinsurance companies
Other
Insurance Payables
2012
23,876
10,173
2,446
7,674
18,983
63,152
$
$
2011
31,610
7,734
2,753
6,976
18,786
67,859
$
$
Of the above total, $1,523 (2011 $3,002) is expected to be settled more than one year after the Consolidated statement
of financial position date.
10. 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 $(244,808) (2011 $(156,119)). 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.
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 2012 10. 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
Total
gross insurance
Contract Liabilities
As at december 31, 2012
reinsurance assets
(Liabilities)
net
$
480,011
425
$
(3,482)
-
$
483,493
425
2,505,369
1,088,572
97,206
26,297
67,617
181,783
(71,839)
-
4,375,441
$
(332,870)
16,727
9,323
807
-
64,687
-
-
(244,808)
$
Gross Insurance
Contract Liabilities
As at December 31, 2011
Reinsurance Assets
(Liabilities)
$
449,045
446
$
(2,579)
-
2,365,799
1,066,630
85,937
23,782
70,196
192,841
(55,175)
-
4,199,501
$
(253,239)
16,932
10,502
774
-
71,491
-
-
(156,119)
$
2,838,239
1,071,845
87,883
25,490
67,617
117,096
(71,839)
-
4,620,249
Net
451,624
446
2,619,038
1,049,698
75,435
23,008
70,196
121,350
(55,175)
-
4,355,620
$
$
$
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 2012 10. inSuranCE ConTraCT LiaBiLiTiES anD rEinSuranCE
aSSETS/LiaBiLiTiES (continued)
The Company expects to pay $4,264,345 (2011 $4,082,809) of Insurance contract liabilities and $245,543 (2011 $161,885)
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
2012
55,175
39,097
(22,433)
71,839
$
$
2011
58,520
21,250
(24,595)
55,175
$
$
Of the above total, $28,740 (2011 $23,832) is expected to be amortized during the next year.
(b) Change in Insurance Contract Liabilities and Reinsurance Assets/Liabilities
Insurance contracts
Changes in methods and
assumptions
- beginning of year
- improvements in mortality/morbidity experience
2012
reinsurance
assets
(Liabilities)
gross
Liabilities
$ 4,199,501 $
(97,053)
net
(156,119) $ 4,355,620
(15,942)
(81,111)
- updated approach for establishing mortality
assumption
- update of investment return assumptions
- model enhancements
- other changes
- new business
- in-force business
-
28,489
(49,478)
22,799
151,083
120,100
$ 4,375,441 $
-
(579)
(10,238)
(2,911)
3,520
2,629
-
29,068
(39,240)
25,710
147,563
117,471
(244,808) $ 4,620,249
normal changes
Insurance Contracts - End of Year
Insurance contracts
Changes in methods and
assumptions
- beginning of year
- improvements in mortality/morbidity experience
2011
Reinsurance
Assets
(Liabilities)
Gross
Liabilities
$ 3,673,318 $
(181,964)
Net
(17,680) $ 3,690,998
(39,559)
(142,405)
- updated approach for establishing mortality
assumption
- update of investment return assumptions
- model enhancements
- other changes
- new business
- in-force business
(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
(22,962)
81,328
(12,435)
(5,741)
147,521
516,470
(156,119) $ 4,355,620
normal changes
Insurance Contracts - End of Year
Changes in methods and assumptions summarized in the above tables are further explained as follows:
The improvements in mortality/morbidity experience for both 2012 and 2011 are primarily related to favourable
mortality experience for individual life business.
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 2012 10. inSuranCE ConTraCT LiaBiLiTiES anD rEinSuranCE
aSSETS/LiaBiLiTiES (continued)
The update in investment return assumptions in 2012 is primarily made up of two components:
1.
For fixed income asset assumptions, a $158,100 policy liability increase primarily related to the unfavourable
impact of the low interest rate environment on fixed income future reinvestment rate assumptions; and
2. For non-fixed income asset assumptions, a $129,800 policy liability decrease is due primarily to the increased
use of equities to match long-term liabilities of non-participating life and universal life products. This resulted
primarily from an asset liability management and capital management decision in the fourth quarter to
purchase $174 million of common equities to match longer-term liabilities.
The update in investment return assumptions for 2011 was primarily due to the impact of the lower interest
rate environment.
The model enhancements for 2012 are related to the refinements of CALM valuation models for individual non-
participating insurance business to more accurately reflect the timing of asset default rates and investment expense
on reinvestment cash flows and revise the calculation of projected valuation interest rates. In addition, refinements
were made to the valuation models for group LTD claims. The model enhancements for 2011 were related to
participating insurance business. Starting in 2011, the Company adopted an adjusted book value basis for valuation
which essentially assumes that dividends are adjusted to reflect changes in experience as it emerges.
Other changes for 2012 relate primarily to unfavorable experience associated with policy termination (lapse) for
T100 and Universal Life level cost of insurance products and higher unit costs for individual life insurance business
developing in recent expense studies. Other changes for 2011 relate primarily to assumption updates associated with
policy termination (lapse) and administrative expense experience.
(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
$
insurance
Liabilities
80,147
2,883,431
36,777
69,425
502,364
43,071
4,513
12,755
$ 3,632,483
$
Insurance
Liabilities
135,886
2,781,320
7,082
74,824
293,869
41,981
20,403
20,832
$ 3,376,197
As at december 31, 2012
$
annuity
Liabilities
20,622
607,537
262,374
195,230
-
-
40,927
5,817
$ 1,132,507
investment
Contract
Liabilities
266
7,827
3,380
2,515
-
-
527
76
14,591
$
$
As at December 31, 2011
Annuity
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
$
$
Equity
and other
Liabilities
163,787
728,534
-
54,151
54,400
-
49,494
79,205
1,129,571
Equity
and Other
Liabilities
32,841
672,089
-
54,805
190,582
-
48,524
91,318
1,090,159
$
$
$
$
$
Total
264,822
4,227,329
302,531
321,321
556,764
43,071
95,461
97,853
$ 5,909,152
$
Total
189,426
4,063,897
264,238
324,230
484,451
41,981
113,118
122,463
$ 5,603,804
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 2012 10. inSuranCE ConTraCT LiaBiLiTiES anD rEinSuranCE
aSSETS/LiaBiLiTiES (continued)
Provisions made for anticipated future losses of principal and interest on investments and included as a component
of policy liabilities are $124,900 (2011 $93,000).
(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 december 31
Assets:
Cash and short-term investments
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
11. aCCounTS PaYaBLE anD oTHEr LiaBiLiTiES
Accounts payable and other liabilities consist of:
As at december 31
Accounts payable
Employee future benefit accrued obligation
Accrued interest on subordinated debt
Other
Accounts Payable and Other Liabilities
2012
2011
$
264,822
2,609,190
2,067,815
$ 4,941,827
$ 480,943
1,056,768
$ 1,537,711
$
189,426
2,725,635
1,865,898
$ 4,780,959
$
460,881
994,877
$ 1,455,758
2012
25,859
11,744
1,604
7,464
46,671
$
$
2011
48,225
11,318
1,604
8,950
70,097
$
$
Of the above total, $11,744 (2011 $11,318) is expected to be settled more than one year after the Consolidated statement
of financial position date.
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 2012 12. EmPLoYEE BEnEfiT PLanS
The Empire Life Insurance Company Staff Pension Plan consists of a defined benefit component and a recently
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 defined contribution component on January 1, 2012. The Company discontinued new
enrolments in the defined benefit component effective October 1, 2011. 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.
In addition to pension benefits, the Company also provides for post-employment health and dental care coverage and
other future benefits to qualifying employees and retirees.
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:
Pension Benefit Plans
other Post-employment Benefit Plans
Present value of funded obligations
Fair value of plan assets
Funded status - surplus (deficit)
Present value of unfunded obligations
unamortized actuarial loss (gains)
$
2012
(172,925)
147,787
(25,138)
-
37,476
$
2011
(148,207)
139,196
(9,011)
-
22,148
Defined Benefit Asset (Liability)
$
12,338
$
13,137
2012
-
-
-
(9,820)
(1,924)
(11,744)
$
$
$
2011
-
-
-
(12,473)
1,155
(11,318)
$
$
$
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) on obligations
Closing Defined Benefit Obligation
Pension Benefit Plans
other Post-employment Benefit Plans
2012
2011
$
$
148,207
4,773
2,212
7,707
(7,054)
17,080
172,925
$
$
132,807
4,192
2,172
7,395
(5,957)
7,598
148,207
$
$
2012
12,473
98
-
613
(288)
(3,076)
9,820
2011
11,663
108
-
631
(343)
414
12,473
$
$
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 2012
12. EmPLoYEE BEnEfiT PLanS (continued)
Changes in the fair value of pension plan assets are as follows:
Plan assets
Fair value at beginning of year
Expected return on plan assets
Actuarial (loss) gain on plan assets
Employer contributions
Employee contributions
Benefits paid
Fair value at End of Year
Pension Benefit Plans
2012
2011
$ 139,196
7,546
1,038
4,849
2,212
(7,054)
$ 147,787
$ 136,737
7,784
(6,476)
4,936
2,172
(5,957)
$ 139,196
The actual return on plan assets for the year ended December 31, 2012 was a gain of $8,584 (2011 gain of $1,308).
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:
unamortized actuarial loss (gain) as of January 1
Experience adjustments on plan obligations
Experience adjustments on plan assets
Changes due to discount rate assumptions
Changes due to other actuarial assumptions
unamortized actuarial loss (gain) in the year
Less amortization of actuarial loss (gain)
Total unamortized Actuarial Loss (gain) as of December 31
Pension Benefit Plans
other Post-employment
Benefit Plans
2012
$ 22,148
226
(1,038)
20,204
(3,350)
16,042
714
$ 37,476
2011
$ 8,086
397
6,476
7,200
-
14,073
11
$ 22,148
2012
1,155
$
(3,956)
-
880
-
(3,076)
3
(1,924)
$
2011
743
(255)
-
669
-
414
2
1,155
$
$
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
Amortization of actuarial loss (gain)
Pension Benefit Plans
other Post-employment
Benefit Plans
2012
2011
2012
2011
$
$
4,773
7,707
(7,546)
714
5,648
$
$
4,192
7,395
(7,784)
11
3,814
$
$
98
613
-
3
714
$
$
108
631
-
2
741
Defined benefit plan expense is recognized in Operating expenses.
Defined benefit plan assets consist of:
Equity securities
Debt securities
Short-term securities
Other
72
Pension Benefit Plans
2012
58%
36%
1%
5%
100%
2011
54%
36%
5%
5%
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 2012 12. 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:
Average Remaining Service Period (in years)
defined Benefit Plans
Staff pension plan
Supplemental employee retirement benefit plan
Retiree health benefits
2012
10
9
9
2011
10
10
9
The following weighted average assumptions were used in actuarial calculations:
Pension Benefit Plans
other Post-employment
Benefit Plans
Defined benefit obligation as at December 31:
Discount rate
Inflation assumption
Rate of compensation increase
Future pension increases
Benefit expense for years 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
Refundable tax deposits and cash
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
2012
4.2%
2.0%
3.5%
3.0%
5.1%
5.4%
7.5%
3.0%
0.0%
n/a
n/a
n/a
2011
5.1%
2.0%
3.5%
3.0%
5.5%
5.7%
7.5%
3.7%
0.0%
n/A
n/A
n/A
2012
4.1%
2.0%
n/a
n/a
5.0%
n/a
n/a
n/a
n/a
8.4%
4.5%
2026
2011
5.0%
2.0%
n/A
n/A
5.5%
n/A
n/A
n/A
n/A
7.2%
4.5%
2026
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 $23,414 (2011 $17,756) and the service cost by
approximately $1,239 (2011 $946).
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 $1,384 (2011 $1,295).
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
2012
2011
increase
$ 1,194
111
$
Decrease
(976)
$
(92)
$
Increase
$ 1,787
108
$
Decrease
$ (1,486)
(90)
$
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 2012 12. EmPLoYEE BEnEfiT PLanS (continued)
The mortality assumptions used to assess the Company’s defined benefit obligations for the pension and other post-
employment benefit plans are based on 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
Pension Benefit Plans
other Post-employment
Benefit Plans
2012
2011
2010
2012
2011
2010
Present value of defined benefit obligation
Fair value of plan assets
Funded Status - Surplus (Deficit)
Experience adjustments on plan liabilities
Percentage of the present value of plan liabilities
Experience adjustments on plan assets
Percentage of plan assets
$
$
$
$ (172,925) $ (148,207) $ (132,807) $
139,196
136,737
147,787
(25,138) $
(9,011) $
3,930 $
(9,820) $
-
(9,820) $
(12,473) $
-
(12,473) $
(11,663)
-
(11,663)
$
226
(0.13%)
1,038 $
(0.70%)
$
397
(0.27%)
(6,476) $
(4.65%)
(1,861) $
1.40%
814
0.60%
$
(3,956) $
40.29%
$
-
-
(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, 2013 are approximately $6,037.
13. inSuranCE PrEmiumS
For the year ended december 31
2012
reinsurance
Ceded
gross
net
Gross
2011
Reinsurance
Ceded
Life premiums
Health premiums
Total life and health premiums
$ 427,623 $ (68,094) $ 359,529 $ 407,163 $
299,338
726,961
(21,107)
(89,201)
278,231
637,760
289,813
696,976
Net
(60,157) $ 347,006
270,002
(19,811)
617,008
(79,968)
Annuity premiums
175,772
-
175,772
141,446
-
141,446
Insurance Premiums
$ 902,733 $
(89,201) $ 813,532 $ 838,422 $
(79,968) $ 758,454
14. fEE inComE
For the year ended december 31
Investment management, policyholder administration and guarantee fees
Surrender charges and other miscellaneous fees
Fee Income
2012
$ 117,802 $
7,416
2011
113,503
6,740
$ 125,218 $ 120,243
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 2012
15. BEnEfiTS anD EXPEnSES
(a) Insurance Contract Benefits and Claims Paid
For the year ended december 31
Life claims
Health claims
Total life and health claims
2012
reinsurance
Ceded
(34,453)
(10,626)
(45,079)
$
gross
$ 164,415
209,078
373,493
net
$ 129,962
198,452
328,414
Gross
$ 143,033
200,884
343,917
2011
Reinsurance
Ceded
(39,991)
(11,802)
(51,793)
$
Net
$ 103,042
189,082
292,124
Annuity benefits
216,548
(3,716)
212,832
223,827
(2,539)
221,288
Benefits and Claims Paid
$ 590,041
$
(48,795)
$ 541,246
$ 567,744
$
(54,332)
$ 513,412
(b) Change in Insurance Contract Liabilities and Reinsurance Ceded
For the year ended december 31
Life
Health
Total life and health
2012
reinsurance
Ceded
$ 80,525
7,959
88,484
gross
$ 175,781
(2,520)
173,261
net
$ 256,306
5,439
261,745
Gross
$ 483,456
45,015
528,471
2011
Reinsurance
Ceded
$ 148,080
(11,148)
136,932
Net
$ 631,536
33,867
665,403
Annuity
2,679
205
2,884
(2,288)
1,507
(781)
Change in Insurance
Contract Liabilities
$ 175,940
$ 88,689
$ 264,629
$ 526,183
$ 138,439
$ 664,622
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 2012 16. SEgmEnTED informaTion
The Company operates in the Canadian life insurance industry and follows a product line management approach for
internal reporting and decision making. A description of the product lines is as follows:
The Wealth Management product line includes segregated funds, mutual 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.
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, 2012
Wealth
management
$ 175,772
42,075
53,037
Employee
Benefits
$ 289,510
5,324
6,273
individual
insurance
$ 348,250
120,491
143,385
$
Capital &
Surplus
-
26,404
34,659
Total
$ 813,532
194,294
237,354
1,388
2,944
182
115,355
212,831
2,883
754
-
1,316
52,654
72,639
-
-
-
(370)
7,287
(2,963)
2,972
1,625
49,780
199
7,217
206,059
(1,774)
-
-
1,007
40,870
27,645
-
6,312
-
5,522
17,227
57
1,009
122,356
263,520
-
20,478
1,350
45,181
74,555
-
7,154
3,900
(4,223)
12,532
-
-
27,967
1,637
-
-
-
-
-
1,083
-
13,697
-
-
12,707
36,776
1,397
54,349
28,405
125,218
541,246
264,629
754
20,478
3,673
139,788
174,839
13,697
13,466
3,900
13,636
73,822
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 2012 16. 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
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
$
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
Total
758,454
183,244
216,782
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
Assets are segmented into three product lines along with the Company’s capital and surplus as follows:
Assets excluding segregated funds
Segregated funds
Total Assets
Assets excluding segregated funds
Segregated funds
Total Assets
Wealth
management
1,147,098
$
4,993,338
$ 6,140,436
Wealth
Management
1,137,448
$
4,391,908
$ 5,529,356
$
$
$
$
As at december 31, 2012
Employee
Benefits
150,149
-
150,149
individual
insurance
$ 3,482,334
21,054
$ 3,503,388
Capital &
Surplus
1,129,571
-
1,129,571
$
$
Total
$ 5,909,152
5,014,392
$ 10,923,544
As at December 31, 2011
Employee
Benefits
151,964
-
151,964
Individual
Insurance
$ 3,224,233
23,410
3,247,643
$
Capital &
Surplus
1,090,159
-
1,090,159
$
$
Total
$ 5,603,804
4,415,318
$ 10,019,122
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.
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 2012 17. oPEraTing EXPEnSES
Operating expenses include the following:
For the year ended december 31
Salary and benefits expense
Professional services
Rent, leasing and maintenance
Amortization and disposal of capital assets
Other
Total
2012
84,657
18,488
9,471
3,673
23,499
139,788
$
$
Significant components of other expenses include travel, advertising, and office supplies and services.
18. inComE TaXES
(a) Income Tax Expense
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
2012
15,430
(2,368)
574
13,636
$
$
2011
73,463
18,138
8,666
4,227
25,371
129,865
2011
(2,966)
3,681
(576)
139
$
$
$
$
During 2012 the Company paid income tax installments totaling $3,920 (2011 $4,010) and recovered income taxes in
respect of prior years totaling $19,396 (2011 $11,525).
The Company has an Ontario minimum tax carry-forward of $6,400. Of this amount, $1,536 expires in 17 years,
$2,432 expires in 18 years, and $2,432 expires in 19 years. Management considers it more likely than not that these
tax carry-forwards will be realized before they expire.
(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
Miscellaneous
Income Tax Expense
$
$
2012
87,458
23,098
74
(11,371)
1,835
$
13,636
$
2011
33,284
9,326
(2,586)
(9,498)
2,897
139
The current enacted corporate tax rates as they impact the Company in 2012 stand at 26.41% (2011 28.02%). This rate
is expected to remain at 26.41% through to 2016. The impact of future enacted corporate tax rates has been taken into
consideration in the deferred tax calculation.
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 2012 18. inComE TaXES (continued)
(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 december 31
Insurance contracts
Portfolio investments
Recoverable in future years
Other, net
Deferred Income Tax Liability
$
$
2012
(14,281)
(9,417)
19,342
(436)
$
(4,792)
$
2011
(12,632)
(11,479)
17,747
(222)
(6,586)
Of the above total, $109 (2011 $(2,436)) 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
Deferred income tax expense (benefit)
End of Year
2012
(6,586)
(1,794)
(4,792)
$
$
2011
(3,481)
3,105
(6,586)
$
$
(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
Amortization of loss on derivative investments designated as
cash flow hedges reclassified to net income
net Other Comprehensive Income (Loss)
2012
Tax
Provision
(recovery)
Before
Tax
after
Tax
$ 10,192 $ 2,688 $ 7,504 $
2011
Tax
Provision
(Recovery)
Before
Tax
(4,148) $
(1,134) $
After
Tax
(3,014)
(28,405)
(9,244)
(19,161)
(25,845)
(9,644)
(16,201)
791
496
$ (17,422) $ (6,299) $ (11,123) $ (29,258) $ (10,539) $ (18,719)
534
239
257
735
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 2012 18. inComE TaXES (continued)
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended december 31
2012
Tax
Provision
(recovery)
Before
Tax
after
Tax
Before
Tax
2011
Tax
Provision
(Recovery)
After
Tax
(773) $ (2,086)
unrealized fair value change on available for sale investments $ 8,454 $ 2,229 $ 6,225 $ (2,859) $
Fair value change on available for sale investments reclassified
to net income, including impairment write-downs
Amortization of 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)
182
(6,992) $ (12,760) $ (27,277) $
259
$ (19,752) $
(29,256)
(24,933)
(19,701)
(9,555)
(220)
534
257
735
791
77
(9,173)
(15,760)
239
496
(83)
(137)
(9,790) $ (17,487)
The following income tax amounts are included in each component of policyholders’ OCI:
For the year ended december 31
2012
2011
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)
19. DiViDEnDS
Tax
Provision
(recovery)
Before
Tax
$ 1,738 $
after
Tax
Tax
Provision
(Recovery)
Before
Tax
(1,289) $
(361) $
After
Tax
(928)
459 $ 1,279 $
851
311
540
(912)
(471)
(441)
(259)
$ 2,330 $
(77)
693 $ 1,637 $
(182)
220
83
(1,981) $
(749) $
137
(1,232)
Shareholder dividends paid in 2012 and 2011 were $nil and $15,800, respectively. This represents a dividend pay out rate
of $nil per share in 2012 and $16.0394 per share in 2011.
No dividends have been declared between the date of the Statement of financial position to February 27, 2013, being the
date on which these financial statements have been authorized for issue.
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 2012 20. CaPiTaL managEmEnT
The Company aims to manage its regulatory capital in order to meet the regulatory capital adequacy requirements of
the Insurance Companies Act (Canada) as established and monitored by OSFI. Under the guidelines established by
OSFI, the Company’s regulatory capital consists of two tiers. The Company’s Tier 1 regulatory capital includes common
shares, contributed surplus, retained earnings and participating policyholders’ equity. Tier 2 regulatory 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 regulatory capital ratios for Canadian life insurance companies
are 105% and 150% respectively. As at December 31, 2012 and December 31, 2011 the Company was in compliance
with these ratios.
As at december 31
Tier 1 Regulatory capital
Tier 2 Regulatory capital
Total Regulatory Capital
$
2012
755,641
327,187
$ 1,082,828
2011
705,288
314,129
1,019,417
$
$
21. CommiTmEnTS anD ConTingEnCiES
Lease Commitments
The Company has entered into various operating leases as lessee for office space and certain computer and other
equipment. Operating lease payments in 2012 were $2,987 (2011 $2,786). The future aggregate minimum lease
payments under non-cancellable operating leases are as follows:
2012
2013
2014
2015
2016
2017 (and thereafter for comparative)
2018 (and thereafter)
Investment Commitments
2012
-
2,722
2,568
1,513
1,202
955
1,937
10,897
$
$
2011
2,559
2,234
2,086
1,184
810
2,406
-
11,279
$
$
In the normal course of business, investment commitments are outstanding which are not reflected in the consolidated
financial statements. At December 31, 2012 there were $41,281 (2011 $nil) of outstanding commitments to purchase units
in a real estate limited partnership. These commitments are payable on demand and mature within 17 months.
Other Contingencies
The Company operates in the insurance industry and is subject to legal proceedings in the normal course of business.
While it is not practicable 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.
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 2012 21. CommiTmEnTS anD ConTingEnCiES (continued)
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.
22. 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 2012, the Company earned investment management service fees of $1,634 (2011 $1,565) from related companies
under common shareholder control. For all other services, the amounts earned and expensed 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
2012
6,367
413
-
6,780
$
$
2011
5,591
346
-
5,937
$
$
Post-employment benefits are comprised of employer current service costs for pension and other post-employment benefits.
There were no termination benefits expensed during 2012 or 2011.
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.
82
Notes to the CoNsolidated FiNaNCial statemeNts(in thousands of Canadian dollars except for per share amounts and where otherwise stated)Empire Life annual Report 2012
23. 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 three-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 $211,432 as of December 31, 2012 (2011 $218,032).
24. SHarEHoLDErS’ EQuiTY EnTiTLEmEnT
Shareholders’ entitlement to $5,806 (2011 $6,357) of shareholders’ equity is contingent upon future payment of
dividends to participating policyholders.
25. CaPiTaL SToCk
(a) Authorized
Common shares: 2,000,000 shares with no par value
b) Issued and fully paid
As at december 31
number of common shares: 985,076
2012
985
$
2011
985
$
26. SuPPLEmEnTarY ParTiCiPaTing PoLiCYHoLDEr informaTion
Participating Account Assets
As at december 31
Assets backing participating account equity
Assets backing participating account liabilities
Transfers to Shareholders’ Account
$
2012
52,251
533,215
$
2011
57,211
500,635
In 2012, the Company transferred $2,267 (2011 $2,172), equal to 1/9th of the dividends credited to the participating
policyholders, from the participating account to the shareholders’ account.
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 2012 27. 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
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 2012 27. riSk managEmEnT (continued)
(a) Investment Risk
i) Market Risk
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. The Company’s investment strategy also includes the use
of publicly-listed “large cap” common stocks to support the liabilities under its insurance policies. 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.
Furthermore, 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.
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 2012 27. riSk managEmEnT (continued)
The Company manages equity 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 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 through the
Asset Liability Management (ALM) Committee, 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, capital and surplus
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 ALM 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.
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 2012 27. riSk managEmEnT (continued)
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. The impact of a change in future equity return
assumptions can be found in Note 27 (b)i)(2) under the Insurance Risk Investment Return section.
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
10% increase
18,083
nil
1,525
2,478
nil
$
$
$
$
$
10% Increase
11,056
nil
11,477
2,241
nil
$
$
$
$
$
As at december 31, 2012
10% Decrease
(18,083)
nil
(1,525)
(2,478)
nil
20% increase
36,184
nil
3,050
4,956
nil
$
$
$
$
$
$
$
$
$
$
As at December 31, 2011
10% Decrease
(11,056)
nil
(11,477)
(2,241)
nil
20% Increase
22,124
nil
22,954
4,482
nil
$
$
$
$
$
$
$
$
$
$
20% Decrease
(36,184)
nil
(3,050)
(4,956)
nil
$
$
$
$
$
20% Decrease
(28,943)
nil
(22,954)
(4,482)
nil
$
$
$
$
$
The following table identifies the concentration of common equity holdings.
As at december 31
Holdings of common equities in the 10 issuers to which
the Company had the greatest exposure
Percentage of total cash and investments
Exposure to the largest single issuer of common equities
Percentage of total cash and investments
(2) interest rate risk
2012
2011
$ 249,655
$ 214,097
4.3%
3.9%
$ 39,328
$ 41,687
0.7%
0.8%
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.
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 2012 27. riSk managEmEnT (continued)
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.
The following tables summarize the immediate financial impact on Net income and Other comprehensive
income as a result of a change in interest rates. The impact of a change in future interest rate assumptions
can be found in Note 27(b)i)(2) under the Insurance Risk Investment Return section.
Shareholders’ net income
Policyholders’ net income
Shareholders’ other comprehensive income
Policyholders’ other comprehensive income
Shareholders’ net income
Policyholders’ net income
Shareholders’ other comprehensive income
Policyholders’ other comprehensive income
As at december 31, 2012
100 bps increase
nil
nil
(20,421)
(2,435)
$
$
$
$
100 bps Decrease
nil
nil
21,525
2,575
$
$
$
$
200 bps increase
nil
nil
(39,827)
(4,740)
$
$
$
$
200 bps Decrease
nil
nil
43,713
5,295
$
$
$
$
As at December 31, 2011
100 bps Increase
nil
nil
(20,609)
(1,945)
$
$
$
$
100 bps Decrease
nil
nil
21,848
2,045
$
$
$
$
200 bps Increase
nil
nil
(40,097)
(3,791)
$
$
$
$
200 bps Decrease
nil
$
$
nil
$ 44,963
4,201
$
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.
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 2012 27. riSk managEmEnT (continued)
(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
in the Company’s functional currency.
The Company’s primary foreign currency exposure arises from portfolio investments denominated in U.S.
dollars. A 10% fluctuation in the U.S. dollar would have an impact of approximately $1,278 (2011 $1,174) on
net income, $nil (2011 $410) on shareholders’ OCI and $38 (2011 $91) 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.
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 23 – 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 10(e).
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 2012 27. riSk managEmEnT (continued)
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 2012
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.
As at december 31, 2012
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
1 year or less
111,573
$
2,919
13,460
165,372
293,324
2,722
$
1 - 5 years
297,823
7,866
53,482
3,827
362,998
6,238
$
5 - 10 years over 10 years
Total
386,770 $ 11,069,490 $ 11,865,656
19,904
285,868
180,943
12,352,371
10,897
3,373
-
-
11,072,863
-
5,745
218,927
11,744
623,186
1,937
$ 296,046
$
396,236
$
625,123
$ 11,072,863
$ 12,363,268
As at December 31, 2011
1 year or less
112,149
$
2,082
13,460
175,709
303,400
2,559
305,959
$
1 - 5 years
333,093
9,328
56,010
5,269
403,700
6,314
410,014
$
$
5 - 10 years Over 10 years
390,290 $ 10,407,478
3,588
-
-
10,411,066
-
$ 10,411,066
6,217
234,558
11,318
642,383
2,406
644,789
$
$
Total
$ 11,243,010
21,215
304,028
192,296
11,760,549
11,279
$ 11,771,828
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 cash, cash equivalents and short-term investments to meet its
short-term funding requirements. As at December 31, 2012, 4.6% (2011 3.5%) of cash and investments were
held in these shorter duration investments.
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 2012 27. riSk managEmEnT (continued)
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, cash and cash
equivalents and mortgages.
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 december 31
Cash and cash equivalents
Short-term investments
Bonds
Preferred shares
Mortgages
Loans on policies
Policy contract loans
Accrued investment income
Insurance receivables
Trade accounts receivable
Total
$
2012
248,382
16,440
4,227,329
321,321
302,531
43,071
95,461
21,452
30,035
5,757
$ 5,311,779
$
2011
155,559
33,867
4,063,897
324,230
264,238
41,981
113,118
20,107
28,455
18,696
$ 5,064,148
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 (see Note 3(b)) and partly through a provision in
policy liabilities (see Note 10(c)).
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 2012 27. 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:
As at december 31
AAA
AA
A
BBB
BB
Total
2012
2011
$
fair Value
266,832
1,274,244
2,253,538
432,535
180
$ 4,227,329
% of fair Value
6%
30%
54%
10%
0%
100%
$
Fair Value
304,142
1,295,345
2,255,901
208,509
-
$ 4,063,897
% of Fair Value
7%
32%
56%
5%
0%
100%
Credit ratings are normally obtained from Standard & Poor’s (S&P) and Dominion Bond Rating Service
(DBRS). In the event of a split rating, the lower rating is used. Issues not rated by a recognized rating
agency (i.e. S&P, DBRS, or Moody’s) are rated internally by the Investment Department. The internal rating
assessment is documented referencing suitable comparables rated by recognized rating agencies and/or
methodologies used by recognized rating agencies.
Provincial bonds represent the largest concentration in the bond portfolio, as follows:
As at december 31
Provincial bond holdings
Percentage of total bond holdings
2012
2011
$ 2,355,977
$ 2,433,815
56%
60%
The following table profiles the bond portfolio by contractual maturity, using the earliest contractual
maturity date:
As at december 31
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
2012
2011
$
fair Value
53,360
434,762
510,229
3,228,978
$ 4,227,329
% of fair Value
1%
10%
12%
77%
100%
$
Fair Value
81,509
469,470
379,338
3,133,580
$ 4,063,897
% of Fair Value
2%
12%
9%
77%
100%
The following table discloses the holdings of fixed income securities in the 10 issuers (excluding the federal
government) to which the Company had the greatest exposure, as well as exposure to the largest single issuer
of corporate bonds.
As at december 31
Holdings of fixed income securities* in the 10 issuers (excluding federal governments) to
which the Company had the greatest exposure
Percentage of total cash and investments
Exposure of the largest single issuer of corporate bonds
Percentage of total cash and investments
2012
2011
$ 2,935,033
$ 3,000,342
50.4%
54.8%
$
139,727
$
140,581
2.4%
2.6%
* Fixed income securities includes bonds, debentures, preferred shares and short-term investments.
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 2012 27. riSk managEmEnT (continued)
(2) Preferred Shares
The Company’s preferred share investments are all issued by Canadian companies, with
86% (2011 86%) of these investments rated as P1 and the remaining 14 % (2011 14%) rated as P2.
(3) mortgages
Mortgages in the province of Ontario represent the largest concentration with $298,432 or
99% (2011 $258,277 or 98%) of the total mortgage 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 product line as follows:
(millions of dollars)
net premium
income
Fee and other
income
Total
Wealth
Management
2012
2011
employee
Benefits
2012
2011
individual
insurance
2012
2011
capital
& Surplus
2012
Total
2011
2012
2011
$ 176
$ 141
$ 290
$ 278
$ 348
$ 339
$
115
$ 291
110
$ 251
7
$ 297
7
$ 285
1
$ 349
1
$ 340
$
-
2
2
$
$
-
2
2
$ 814
$ 758
125
$ 939
120
$ 878
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.
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 2012 27. 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, lapse,
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. The effect of these margins
is to increase policy liabilities over the best estimate assumptions.
The margins for adverse deviation used by the Company are within the target range established by the Canadian
Institute of Actuaries. A correspondingly larger margin is included in the insurance contract liabilities if an
assumption is susceptible to change or if there is more uncertainty about the best estimate assumption. Each
margin is reviewed annually for continued appropriateness.
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, 2012. 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 $12,400 ($10,900 for 2011). 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
$4,100 ($3,900 for 2011).
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 2012 27. 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 for the
assets supporting policy liabilities 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, bond 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. For investment income expected to be earned on reinvestments
during the rolling 20-year period, the Company uses an initial reinvestment rate (IRR) assumption. Under
Canadian actuarial standards of practice, the IRR is determined as 90% of the interest rates based on the
current economic outlook and the Company’s expected future asset mix, which grades to the ultimate
reinvestment rate assumption (URR) (described below) over the 20-year rolling period. In order to provide
a margin that recognizes the longer-term mismatch for the 20-year rolling-period, 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.
The impact of an immediate change in interest rates can be found in Note 27(a)i)(2) under the Investment
Risk section. If interest rates increase or decrease during the next year, then a change to the IRR assumption
would be required to take into account the then-current economic outlook. For non-participating insurance
business, a 1% decrease in assumed IRR would result in an increase to policy liabilities thereby reducing net
income by approximately $47,300 ($47,400 for 2011). This assumes no change in the URR.
For investment income expected to be earned on reinvestments beyond the rolling 20-year period, the
Company uses an URR assumption. Under Canadian actuarial standards of practice, the URR must not
exceed the lessor of 5% or 90% of an interest rate based on a moving average of Government of Canada long-
term bond rates over the last 10 years. The maximum prescribed URR decreased from 3.8% for 2011 to 3.4%
for 2012. If long-term interest rates remain at current levels for the next year, then the URR is estimated to
decrease to 3.1% for 2013. 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. The Company uses an
URR of 3.1% (3.7% for 2011) to reflect the downward trend in long-term interest rates. For non-participating
insurance business, a 0.10% decrease in assumed URR would result in an increase to policy liabilities thereby
reducing net income by approximately $16,600 ($16,400 for 2011).
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 2012 27. riSk managEmEnT (continued)
The above estimates do not take into account any compensatory measures that the Company may
take to mitigate the impact of lasting decreases in interest rates. The Company reviews the continuing
appropriateness of the URR assumption annually.
For the life insurance business, the Company’s policy is to also use equity investments to cover estimated
insurance liability cash flows of non-participating life and universal life products beyond the 20-year
rolling period. The value of the liabilities supported by these equities depends on assumptions about the
future level of equity markets. The best estimate return assumptions for equities are primarily based on
long-term historical averages of total returns (including dividends) for the Canadian equity market, which
is 9.16% (9.20% for 2011). The Company uses an assumption of 8.11% (8.43% for 2011) to include provisions
for moderate changes in equity rates of return determined in accordance with Canadian actuarial standards
of practice. The returns are then reduced by margins to determine the net returns used in the valuation.
Changes in the current market would result in changes to these assumptions.
The impact of an immediate change in equity markets can be found in Note 27 (a)i)(1) 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 $86,300 ($40,200 in 2011).
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. For annuity business, the impact of a 1% decrease in assumed IRR or a 0.10% decrease in assumed
URR is negligible as a result of the matching process described above. The Company does not use equity
investments to match annuity liability cash flows.
(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, for renewable term insurance, term
insurance to age 100 and for 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 an increase to policy liabilities thereby decreasing net income by approximately $104,200
($99,900 in 2011). 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.
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 2012 27. riSk managEmEnT (continued)
(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 $6,300 ($5,700 in 2011).
(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.
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 $5,200 ($5,000 in 2011).
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 2012
27. riSk managEmEnT (continued)
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.
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 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.
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 2012 27. riSk managEmEnT (continued)
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, compared to Canadian competitors, and absorbs the
resultant negative impact on short-term earnings due to additional sales strain. The Company does not have any
assumed reinsurance business and it does not reinsure its own segregated fund guaranteed products or those
issued by other insurance companies.
28. ComParaTiVE figurES
Certain comparative figures have been reclassified to conform with financial statement presentation adopted in 2012.
99
Empire Life Annual Report 2012 GloSSARY oF TeRMS (unaudited)
Accumulated Other Comprehensive Income (AOCI)
security products to more than 26 million Canadians
A separate component of shareholders’ and policyholders’
and their dependants. The industry develops guidelines,
equity which includes net unrealized gains and losses on
voluntarily and proactively, to respond to emerging issues
available for sale securities, unamortized gains and losses
and to ensure consumer interests are protected.
on cash flow hedges, and unrealized foreign currency
translation gains and losses. These items have been
recognized in comprehensive income, but excluded from
net income.
Fair Value Through Profit or Loss (FVTPL)
Invested assets are classified as financial instruments at
FVTPL if they are held for trading, or if they are designated
by management under the fair value option. Most financial
Available For Sale (AFS) Financial Assets
assets supporting insurance contract liabilities and
Non-derivative financial assets that are designated as
investment contract liabilities are classified as Fair value
available for sale or that are not classified as loans and
through profit or loss (FVTPL).
receivables, held to maturity investments, or held for
trading. Most financial assets supporting capital and
surplus are classified as Available for sale (AFS).
International Financial Reporting Standards (IFRS)
Refers to the international accounting standards that were
adopted in Canada, effective January 1, 2011; these are now
Canadian Asset Liability Method (CALM)
Canadian Generally Accepted Accounting Principles (CGAAP).
The prescribed method for valuation of policy liabilities in
Canada. CALM is a prospective basis of valuation which uses
the full gross premium for the policy, the estimated expenses
and obligations under the policy, current expected experience
assumptions plus a margin for adverse deviations, and
scenario testing to assess interest rate risk and market risks.
Canadian Institute of Actuaries (CIA)
As the national organization of the Canadian actuarial
profession, the CIA means to serve the public through the
provision by the profession of actuarial services and advice
of the highest quality. The CIA ensures that the actuarial
services provided by its members meet accepted professional
standards; and assists actuaries in Canada in the discharge of
their professional responsibilities.
Canadian Institute of Chartered Accountants (CICA)
Canada’s not-for-profit association for Chartered
Accountants (CA) provides information and guidance to
its members, students and capital markets. Working in
collaboration with its provincial member organizations,
Minimum Continuing Capital and Surplus
Requirements (MCCSR)
The ratio of the available regulatory capital of a life insurance
company to its required regulatory capital, each as calculated
under the Office of the Superintendent of Financial
Institutions’ (OSFI) published guidelines.
Other Comprehensive Income (OCI)
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.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered financial
institutions and federally administered pension plans
in Canada. OSFI’s mission is to safeguard policyholders,
depositors and pension plan members from undue loss.
the CICA supports the setting of accounting, auditing
Participating Policies
and assurance standards for business, not-for-profit
The participating account includes all policies issued by
organizations and government, and develops and delivers
the Company that entitle its policyholders to participate in
education programs.
Canadian Life and Health Insurance Association (CLHIA)
The Canadian Life and Health Insurance Association (CLHIA)
is an organization representing life insurance and health
insurance providers in Canada. The Canadian life and health
insurance industry provides a wide range of financial
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.
100
Empire Life Annual Report 2012 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” or 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 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.
101
Empire Life Annual Report 2012 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.
102
Empire Life Annual Report 2012 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.
103
Empire Life Annual Report 2012 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.
104
Empire Life Annual Report 2012 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 also has a mutual fund subsidiary, Empire Life Investments Inc. (ELII).
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 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 2012
and is scheduled to meet seven times in 2013.
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. Those not delegated to
a standing Committee remain with the Board. The following is a brief summary of some of the key responsibilities of the
four Committees.
The Audit Committee has 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.
105
Empire Life Annual Report 2012 coRPoRATe inFoRMATion
Corporate Head office
259 King Street East
Kingston, Ontario
Canada K7L 3A8
1 877 548-1881
info@empire.ca
www.empire.ca
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.
retail Sales offices
Western Canada
Ontario
Quebec
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
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
100-1401 1st Street S.E.
Calgary, Alberta T2g 2J3
403 269-1000
1 800 656-2878
regina retail Sales office
300-1914 Hamilton Street
Regina, Saskatchewan S4P 3n6
306 949-1445
1 877 949-1445
Saskatoon retail Sales office
285-2366 Avenue C n.
Saskatoon, Saskatchewan S7L 5x5
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
204-43 Auriga Drive
nepean, Ontario K2E 7Y8
613 225-7530
1 888 548-4729
106
Empire Life Annual Report 2012 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
100-1401 1st Street S.E.
Calgary, Alberta T2g 2J3
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
204-43 Auriga Drive
nepean, Ontario K2E 7Y8
613 225-1173
1 800 387-4123
107
Empire Life Annual Report 2012 BoARd oF diRecToRS
Shareholders’ Directors
Policyholders’ Directors
honorary Directors
mark J. fuller, LL.B. 2, 3, 4
President and Chief Executive Officer
Ontario Pension Board
andrew S. Birrell
Chief Financial Officer
guardian Financial Services
Leslie C. Herr 2
President and Chief Executive Officer
The Empire Life Insurance Company
Harold W. Hillier 2
Corporate Director
richard E. rooney, f.C.a., C.f.a. 2, 3
President
Burgundy Asset Management
Douglas C. Townsend, f.C.i.a. 1, 3
President
Townsend Actuarial Consulting Ltd.
honorary Chairman
The Honourable Henry n.r. Jackman,
o.C., o. ont., LL.D, C.D.
Honorary Chairman
The Empire Life Insurance Company
The right Honourable
John n. Turner, P.C., C.C., Q.C.
Partner
Miller Thomson LLP
Jonathan J. Yates
Chief Executive Officer
guardian Financial Services
Photo above:
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,
Paul Weiss, Andrew S. Birrell and Jonathan J. Yates.
1 Member of Audit Committee
2 Member of Investment Committee
3 Member of Human Resources Committee
4 Member of Conduct Review Committee
James f. Billett 1, 3, 4
President
J.F. Billett Holdings Ltd.
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.P.a., f.C.a. 1, 4
Corporate Director
108
Empire Life Annual Report 2012 Photo above:
From left to right: Gaelen Morphet, Gary McCabe, Richard Cleaver,
Drew Wallace, Leslie Herr, Anne Butler, Timo Hytonen, Steve Pong
and Edward Gibson
coRPoRATe MAnAGeMenT
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.P.a., 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
109
Empire Life Annual Report 2012 EMPIRE LIFE ANNUAL REPORT 2012
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 Canada 1 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) and company annual reports,
based on general and segregated fund assets
2 As at June 29, 2012
® 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-03/13