The Empire Life Insurance Company
Annual Report 2013
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Table of Contents
Financial Highlights
4
5
6
9
12
36
37
38
39
44
Message from the Chairman of the Board
Message from the President and Chief Executive Officer
Sources of Earnings
Management Discussion and Analysis
Management's Responsibility for Financial Reporting
Independent Auditor's Report
Appointed Actuary's Report
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
118
Glossary of Terms
120
Participating Account Management Policy
122
Participating Account Dividend Policy
123
Corporate Governance Over Risk Management
124
Corporate Information
Empire Life Annual Report 2013
3
FINANCIAL HIGHLIGHTS
267%
MCCSR ratio
as at December 31, 2013
Product
diversification
Strength of our capital base
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.
Product diversification
by premium and fee income for the
twelve months ended December 31,
2013.
Empire Life is well-diversified across
three product lines:
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.
Wealth Management
31%
Employee Benefits
32%
Individual Insurance
37%
A (Excellent)
A.M. Best Company (as at June 28, 2013)
Subordinated Debt Rating
of A (low)
Issuer Rating of A
Claims Paying Rating of IC-2
(2nd of five categories)
DBRS (as at May 10, 2013)
Shareholders' Net Income
2013 (in millions)
$113.3
Shareholders' Net Income
2012 (in millions) (restated): $80.2
Net Premium and Fee Income
2013 (in millions)
$972
Net Premium and Fee Income
2012 (in millions):
$939
Total Assets under Management
2013 (in millions)
$12,013
Total Assets under Management
2012 (in millions):
$10,839
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 2013 Annual Report.
4
Empire Life Annual Report 2013
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
Looking back at 2013, it’s been a good year. Market returns have been more robust, long-term interest rates are rising
and returning to more normal levels, and we have seen signs that the economy is beginning to stabilize after a number
of years of uncertainty and tumult. I think the results presented within this report show that 2013 has also been a good
year for Empire Life. The Board is pleased with the company’s results.
Even with an improving economy, there is no question that the regulatory landscape in Canada is more complex than
ever before. Not only is our regulatory framework changing, but the marketplace overall is changing as well. We have
seen some dramatic shifts in the Canadian insurance industry over the last number of years. Perhaps the biggest trend
is that many companies have moved away from offering guaranteed long-term products. Empire Life, however, remains
firmly committed to the insurance business and to offering guaranteed products Canadians need.
The Board is keenly aware of the pressures and challenges the current regulatory and economic environments present
and has full confidence in how Empire Life and its management is responding to the demands. The Board believes that
Empire Life is positioned well for the future.
We welcomed two new Shareholder Directors this year: Andrew Birrell and Jonathan Yates. I am pleased with the
wealth of knowledge, depth and expertise of the Board and thank all members for their contributions in 2013.
My appreciation is also extended to each employee at Empire Life, whose contributions can be directly linked to the very
positive results we have seen this past year. Together, the Board, management and employees are working to help
Empire Life fulfill its vision and I am proud of our partnership and dedication.
Duncan N.R. Jackman
Chairman of the Board
February 25, 2014
Empire Life Annual Report 2013
5
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
A key theme over the last five years was our challenging economic environment and how it affected our decisions and
our business results. In 2013, we saw brighter moments within the economic landscape that presented a different story:
we are beginning to see more global economic stability; long-term interest rates are rising; and Canadian and U.S.
equity markets have improved dramatically over the past 12 months. While we still face an uncertain regulatory
environment regarding accounting rules for insurance contracts and capital requirements, an improved economic picture
helped us achieve our goals and strong results for 2013. I am very pleased with our results and progress made on our
key projects.
OUR RESULTS
For the second consecutive year, we achieved a record level of Shareholders’ Net Income reaching $113.3 million in
2013. Individual Insurance and strong segregated fund net income were major contributors to this result. We achieved
strong growth in our total assets under management reaching $12 billion, an increase of 11% over 2012. Our Minimum
Continuing Capital and Surplus Requirements Ratio (MCCSR) is well-above minimum requirements and internal targets
and was 267% at the end of 2013.
Our Employee Benefits business experienced weaker earnings in 2013 with $8.6 million in net income compared to
$17.2 million in 2012. Increased health claims and unfavourable long-term disability results were the primary reasons for
this decrease. However, the line had one of its strongest sales years hitting $52.0 million, an 18% increase over the
previous year. In particular, we achieved greater sales of our 20Plus product focused on the 100-200 employees market
which is very positive.
Within our Wealth line of business, strong earnings from our segregated funds contributed to an overall result of $18.6
million in net income. Our segregated funds line-up is solid with our newest guaranteed minimum withdrawal benefit
product, Class Plus 2, gaining favour with customers and advisors. Improving market performance also contributed to
our earnings and higher segregated fund assets under management reaching $5.9 billion, an increase of 19% over
2012.
While our mutual funds, offered through our subsidiary, Empire Life Investments Inc., achieved lower than expected
sales, we did see steady growth during the second half of the year. This momentum is encouraging and we have higher
expectations for this product line as it gains more awareness in the market.
Our Individual Insurance line of business contributed $72.2 million to our Shareholders’ Net Income, a significant
increase over $20 million earned in 2012 and the net loss we experienced in 2011. Improved investment performance
and rising interest rates helped contribute to this result. Sales were lower than 2012, but improving interest rates allowed
us to re-price our products in Q4 to be more competitive.
6
Empire Life Annual Report 2013
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OUR PRIORITIES IN FOCUS
In 2013, our team completed a review of our strategy and sharpened our focus on three key priorities: our customer,
distribution and operational effectiveness. Ensuring every employee is clear about our goals and where we are headed
is very important. We continue to make progress on our initiatives that will see us become a company known for
simplicity, being easy to do business with and having a personal touch.
Knowing more about customers, the Canadians who trust us with their wealth and financial security, is a cornerstone of
our strategy. In 2013, we implemented a new customer database and spent time developing a customer service
strategy. Using our people and technology, we want to create an improved experience that will help us interact in a more
meaningful way with our customers.
We are putting the fundamentals in place to improve our operations and service, and a major component of that is our
wealth administration system. This past September, we moved the administration of our largest block of wealth business
to Citigroup (Citi). It was a very successful conversion and an important step in this project that has helped us achieve
greater efficiency and scale. We also launched our newest online portal for investment customers and having Citi’s
robust back-end system helped make this possible.
Customer adoption of our group health electronic claims system is increasing, particularly after we added a number of
enhancements early in 2013. This system is steadily gaining a reputation for being extremely simple, easy to use and
cost-efficient. Achieving operational effectiveness is an important goal for our company and in the past year, we
completed a number of process and cost reviews. We will continue to find ways to reduce costs and implement
efficiencies around our business.
Two initiatives within our Individual Insurance line are industry-leading and very exciting for the future of Empire Life. In
the spring, we launched Hybrid Solution 100, an adjustable-priced product that has guaranteed features. It is a
permanent insurance solution that offers competitive prices that fluctuate when interest rates go up or down.
We are also changing the way people buy insurance with our new electronic, fully-underwritten sales process, Fast &
FullTM. Introduced in December, Fast & Full offers an easy way for consumers to access the insurance they need with
the help of their advisor. We know there are large numbers of middle-income Canadians who are not properly insured.
With our fast and easy way to buy insurance, we believe we are taking great strides to help our customers protect their
families and futures.
Empire Life Annual Report 2013
7
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
To close, 2013 was a strong year for Empire Life, in both financial results and progress on our strategy. Our employees,
management and Board are responsible for our success and I thank all of them for their work and dedication. I am
excited about the changes we are making so we can continue to deliver profitable growth, compete and be a leader in
our industry.
Leslie C. Herr
President and Chief Executive Officer
February 25, 2014
8
Empire Life Annual Report 2013
SOURCES 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.
Empire Life Annual Report 2013
9
SOURCES OF EARNINGS
Source of Earnings by Line of Business
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital
& Surplus
Total
For the year ended December 31
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Expected profit on in-force
business
$
47.6 $
35.9 $
18.5 $
17.4 $
39.7 $
38.9
$ 105.8 $
92.2
Impact of new business
(23.8)
(24.7)
(11.9)
(12.5)
Experience gains & losses
1.1
2.2
4.7
12.8
(6.9)
59.8
(19.8)
(3.9)
(42.6)
(57.0)
65.6
11.1
Management actions and
changes
in assumptions
Other
Earnings on operations before
income taxes
Earnings on surplus
Income before income tax
Income taxes
(3.3)
—
21.6
—
21.6
2.9
(6.5)
—
6.9
—
6.9
(0.4)
0.1
—
11.4
—
11.4
2.8
5.0
—
22.7
—
22.7
5.5
3.9
—
96.5
—
96.5
24.3
2.9
3.5
21.6
—
21.6
1.6
0.7
—
129.5
17.4
146.9
33.6
—
17.4
17.4
3.6
—
48.3
48.3
12.6
Shareholders’ Net Income
$
18.7 $
7.3 $
8.6 $
17.2 $
72.2 $
20.0 $
13.8 $
35.7 $ 113.3 $
1.4
3.5
51.2
48.3
99.5
19.3
80.2
Wealth Management
Wealth Management’s 2013 earnings on operations were higher than the level achieved in 2012. In 2013 there was an
increase in expected profit on in-force business due primarily to the segregated fund business. Higher net income on in-
force business in 2013 was due to the growth of the guaranteed minimum withdrawal benefit (GMWB) product which
generates higher fees than other segregated fund products. In addition, in-force business profits improved due to the
positive impact of favourable stock market conditions in 2013 on average assets under management and management
fees earned.
In addition, there was an increase in earnings on operations in 2013 compared to 2012 from the impact of new business
due to weaker GMWB segregated fund gross sales. While GMWB product sales remained strong in 2013 they were
down from the elevated levels experienced in the third and fourth quarters of 2012. The elevated sales in the third and
fourth quarters of 2012 appeared to be attributable primarily to announcements by some GMWB competitors to suspend
the sale of GMWB products, remove benefits, or increase fees.
There was also an increase in earnings resulting from management actions and changes in assumptions primarily
related to annuitant mortality assumptions. While annuitant mortality assumptions were strengthened in both years the
amount of the strengthening was lower in 2013.
These items were partly offset by a decrease in income from experience gains which was due primarily to annuitant
mortality experience losses in 2013 compared to gains in 2012.
10
Empire Life Annual Report 2013
SOURCES OF EARNINGS
Employee Benefits
Employee Benefit’s earnings on operations were lower than the level achieved in 2012. In 2013 there was a decrease
in income from experience gains as the gain from claims experience in 2013 was lower than 2012 due to less favourable
health claims and long-term disability results.
In addition, there was a decrease in earnings on operations in 2013 compared to 2012 due to a less favourable update
of policy liability assumptions in 2013 relative to 2012.
These items were partly offset by an increase in expected profit on in-force business due to strong growth of the in-force
block of business.
Individual Insurance
The increase in Individual Insurance earnings on operations was primarily due to experience gains. The most significant
item was improved investment experience which was due primarily to a significant increase in long-term interest rates in
2013, compared to the small decrease that occurred in 2012. The improvement also resulted from a significant increase
in stock markets in 2013, compared to the modest increase that occurred in 2012. 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.
New business strain also improved in 2013. Lower new business strain resulted from higher prices on long-term
products and lower annualized premium sales.
In addition, there were improved results from management actions and changes in assumptions in 2013. The 2013
update of policy liability assumptions was slightly more favourable than 2012.
These items were partly offset by a decrease in income from other items in 2013 compared to 2012. 2012 had income
resulting from a decrease in policy liabilities, due to a tax law change that lowered future expected premium taxes in the
province of Quebec.
Capital & Surplus
2013 earnings from Capital and Surplus were lower than 2012 due primarily to losses on the sale of available for sale
(AFS) bond investments in 2013, compared to gains from the sale of AFS equity investments in 2012. This 2012 sale of
equity investments was due primarily to a decision to lower equity exposure in Empire Life’s Shareholders’ Capital and
Surplus to allow capacity to purchase common equities to match longer term liabilities in the Individual Insurance
product line.
Empire Life Annual Report 2013
11
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, 2013 and 2012. This MD&A should be read in conjunction with the Company’s December
31, 2013 consolidated financial statements, which form part of The Empire Life Insurance Company 2013 Annual Report
dated February 25, 2014. The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as set out in the Handbook of the Chartered Professional Accountants of
Canada. Unless otherwise noted, both the consolidated financial statements and this MD&A are expressed in Canadian
dollars.
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
(millions of dollars)
Shareholders' net income
*All 2012 comparative amounts have been restated to reflect adoption of IAS 19R.
Fourth quarter
2013
2012*
Year
2013
$
29.9 $
25.1 $
113.3 $
2012*
80.2
Empire Life reported record full year shareholders’ net income of $113.3 million for 2013, compared to $80.2 million for
2012.
For the year, shareholders’ net income was higher relative to 2012 due primarily to improved Individual Insurance
product line net income. This product line’s improvement was due primarily to three items:
1.
In 2013 there was a significant increase in long-term interest rates (for the year, 30 year Canadian
federal government bond yield up 87 basis points from 2.37% to 3.24%), compared to the small
decrease that occurred in 2012.
2.
In 2013 there was a significant increase in stock markets (for the year, S&P TSX up 9.6%, S&P 500
up 29.6%), compared to the modest increase that occurred in 2012.
3.
Higher prices on long-term products and lower annualized premium sales resulted in lower new
business strain in 2013 compared to 2012.
12
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition, the Wealth Management product line reported a strong improvement in net income in 2013 relative to 2012.
The improvement was due primarily to growth in segregated fund management fees and growth in segregated fund
guarantee fees related to guaranteed minimum withdrawal benefit (GMWB) products. This improvement in fee income
was due primarily to strong GMWB sales and the positive impact of favourable stock market conditions on management
fees earned.
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 2013 net income compared to
2012 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 Annual Report 2013
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
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):
(millions of dollars)
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
For the year ended December 31
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Revenue
Net premium income
Fee and other income
Investment income
Realized gain on FVTPL
investments
Realized gain (loss) on
available for sale
investments including
impairment write downs
Fair value change in FVTPL investments
Expenses
Benefits and expenses
Income and other taxes
$
159 $
176 $
307 $
290 $
356 $
348 $ — $ — $
822 $
140
54
115
53
8
4
7
2
—
7
6
2
1
140
1
143
38
50
1
(36)
325
302
4
306
—
1
—
(7)
—
(3)
347
312
302
341
(1)
340
294
9
303
273
12
285
—
(306)
229
132
31
163
—
3
545
526
7
533
2
42
—
(3)
—
41
21
4
25
2
35
—
28
—
65
15
13
28
814
125
237
151
240
45
54
(2)
(349)
28
1
907
1,259
749
48
797
1,155
31
1,186
Net income after tax
$
19 $
7 $
9 $
17 $
66 $
12 $
16 $
37 $
110 $
73
Policyholders' portion
Shareholders' net income
Assets under management
General fund assets
Segregated fund assets
Mutual fund assets
$ 1,105 $ 1,147
$ 5,932 $ 4,993
$
38 $
13
$
22 $
21
Annualized premium sales
$
52 $
44 $
55 $
65
(3)
(7)
$
113 $
80
$ 6,126 $ 5,901
$ 5,954 $ 5,014
$
38 $
13
14
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total Revenue
(millions of dollars)
Revenue
Net premium income
Investment income
Fair value change in FVTPL investments including realized amounts
Realized gain (loss) on AFS investments including
impairment write downs
Fee and other income
Total
Fourth quarter
2013
2012
215 $
64
5
(2)
40
212 $
58
(29)
23
35
322 $
299 $
$
$
Year
2013
822 $
240
(304)
(2)
150
906 $
2012
814
237
56
28
125
1,260
For the year, total revenue at Empire Life decreased by 28% to $906 million compared to $1.26 billion in 2012. Major
revenue items are discussed below.
Net premium income for the year increased in 2013 relative to 2012. The increase related primarily to the Employee
Benefits product line.
Fair value change in FVTPL investments including realized amounts often causes large revenue volatility. These assets
experienced a net loss in 2013 compared to a net gain in 2012. In 2013 the large loss was from primarily a decrease in
bond prices (due to a large increase in market interest rates). This was partly offset by an increase in common share
prices in 2013. 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. 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 (loss) on available for sale investments including impairment write downs was a loss in 2013 relative to
gains in 2012. The decreased revenue was due primarily to losses from the sale of AFS bonds in 2013, compared to
gains from the sale of AFS equities in 2012. 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 were used primarily to back capital and surplus.
Fee and other income increased in 2013 relative to 2012 due primarily to growth in segregated fund management fees
and growth in segregated fund guarantee fees related to guaranteed minimum withdrawal benefit (GMWB) products.
The growth in both of these items was due primarily to strong GMWB product sales in the second half of 2012 and for
the full year in 2013 and GMWB price increases in 2013. In addition, there was a positive impact on average assets
under management and management fees earned, resulting from stock market conditions, as stock markets were higher
on average during 2013 than 2012.
Empire Life Annual Report 2013
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total Benefits and Expenses
(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
2013
2012
$
145 $
148 $
43
—
6
36
47
6
14
—
5
39
55
3
Year
2013
560 $
(160)
1
22
139
168
19
2012
541
265
1
20
140
175
14
$
283 $
264 $
749 $
1,156
Total benefits and expenses at Empire Life for the year decreased by 35% to $749 million compared to $1.156 billion in
2012. 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 the Employee Benefits product
line. 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 2012 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 net change 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.
Commission expenses decreased year over year due primarily to lower Individual Insurance sales.
Interest expense increased in 2013 relative to 2012 due to the issuance of $300 million of subordinated debentures on
May 31, 2013.
16
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Results - Wealth Management
(millions of dollars)
Assets under management
General fund annuities
Segregated funds
Mutual funds
(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 Dec. 31
2013
2012
$
1,105 $
5,932
38
1,147
4,993
13
Fourth quarter
Year
2013
2012
2013
2012
$
44 $
50 $
159 $
302
107
37
10
10
—
(4)
7
(1)
539
313
32
9
9
—
(4)
2
(1)
$
2 $
(3) $
1,009
231
139
22
20
—
—
22
(3)
19 $
176
1,159
404
115
13
13
—
—
10
(3)
7
Assets in Empire Life's general fund annuities decreased by 4%, while segregated fund assets increased by 19% during
the last 12 months. The increase over the last 12 months for segregated funds was attributable to positive investment
returns, due to the stock market increase since December 31, 2012, and strong net sales (gross sales net of
withdrawals) described below.
Premium income for the Wealth Management product line is comprised solely of new deposits on fixed interest annuities
and excludes deposits on the segregated fund products. For the year, fixed interest annuity premiums were down 9%
compared to 2012 due to decreased sales of fixed interest immediate annuities.
For the year, segregated fund gross sales were down 13% compared to 2012. This product line’s gross sales decline for
the year is attributable to GMWB products. While GMWB product sales remain strong they are down from the elevated
levels experienced in the third and fourth quarters of 2012. The elevated sales in the third and fourth quarters of 2012
appeared 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 first quarter of 2013 Empire Life launched a
new version of the GMWB product. The new version reduces the amount of risk Empire Life is taking on and
commands a higher price, while still offering a competitive guaranteed income solution to policyholders.
Empire Life Annual Report 2013
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
Segregated fund net sales for the year were down 43% compared to 2012 due to the above mentioned gross sales
result, and higher withdrawals compared to 2012.
For the year, segregated fund fee income increased by 21% in 2013 relative to 2012. The increase was due primarily to
growth in segregated fund management fees and growth in segregated fund guarantee fees related to GMWB products.
The growth in both of these items was due primarily to strong GMWB product sales in the second half of 2012 and for
the full year in 2013 and GMWB price increases in 2013. In addition, there was a positive impact on average assets
under management and management fees earned, resulting from stock market conditions, as stock markets were higher
on average during 2013 than 2012.
Empire Life launched its new mutual fund business during the first quarter in 2012. Therefore, Empire Life’s mutual fund
business is still in its early stages of development and represents a small portion of the Wealth Management product
line. For the year, mutual fund gross sales were up 65% in 2013 compared to 2012. Mutual fund gross sales also
improved during 2013 as sales for the fourth quarter came in at $10 million compared to $6 million in the third quarter
and $3 million in both the first and second quarters.
During the fourth quarter and for the year earnings from this product line increased relative to 2012. The following table
provides a breakdown of the components of this year over year change in net income.
(millions of dollars)
Wealth Management Net Income Analysis
Net income after tax 2013
Net income (loss) after tax 2012
Increase in net income after tax
Components of increase
2012 loss from update of policy liability assumptions
2013 loss from update of policy liability assumptions
Increase in inforce profit margins
Lower new business strain
Improved (worsened) investment experience
Worsened annuitant mortality experience
Total
Fourth quarter
Year
$
$
$
$
2 $
(3)
5 $
5 $
(2)
2
2
(2)
—
5 $
19
7
12
5
(2)
9
1
1
(2)
12
In 2012, the update of policy liability assumptions was unfavourable by $5 million. The 2012 updates for general fund
annuities related primarily to annuitant mortality assumptions.
In 2013, the update of policy liability assumptions was unfavourable by $2 million. The 2013 updates for general fund
annuities also related primarily to annuitant mortality assumptions.
18
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
Higher net income on inforce business in 2013 was due primarily to the strong growth of the GMWB product which
generates higher fees than other segregated fund products. In addition, inforce business profits improved due to the
positive impact of favourable stock market conditions in 2013 on average assets under management and management
fees earned.
Higher net income from lower new business strain resulted from weaker GMWB segregated fund sales in 2013 relative
to 2012.
Improved investment experience resulted from market interest rate movements and the availability of assets at attractive
yields for matching fixed interest annuity contract liabilities.
Worsened annuitant mortality experience relates to the fixed interest immediate annuity business.
Product Line Results - Employee Benefits
(millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income after tax
Fourth quarter
2013
2012
$
$
12 $
78
1 $
11 $
74
5 $
Year
2013
52 $
307
9 $
2012
44
290
17
For the year, sales in this product line increased by 18% relative to 2012. The 2013 sales reflect continuing strength
compared to the recessionary lows experienced four years ago. This product line’s premium income for the year
increased by 6% relative to 2012 due to continuing growth of the inforce block.
During the fourth quarter and for the year earnings from this product line decreased relative to 2012. The following table
provides a breakdown of the components of this year over year change in net income.
(millions of dollars)
Employee Benefits Net Income Analysis
Net income after tax 2013
Net income after tax 2012
Decrease in net income after tax
Components of decrease
2012 gain from update of policy liability assumptions
Worsened claims experience
Increase in inforce profit margins
Total
Fourth quarter
Year
$
$
$
$
1 $
5
(4) $
(4) $
(2)
2
(4) $
9
17
(8)
(4)
(6)
2
(8)
Empire Life Annual Report 2013
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 2012, the update of policy liability assumptions was favourable. The 2012 update of policy liability assumptions was
due primarily to refinements of valuation models for group long-term disability claims.
In 2013, the update of policy liability assumptions was not significant for this line of business.
In 2013 worsened claims experience relates to unfavourable health claims and long-term disability results.
Higher net income on inforce business in 2013 was due to strong growth of the inforce block of business.
Product Line Results - Individual Insurance
(millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income (loss) after tax
Net income after tax shareholders' portion
Net income (loss) after tax policyholders' portion
Net income after tax
Fourth quarter
2013
2012
18 $
93
25
(4)
21 $
16 $
89
3
(3)
— $
$
$
Year
2013
55 $
356
72
(6)
66 $
2012
65
348
20
(8)
12
For the year, annualized premium sales in this product line decreased by 16% compared to 2012, and premium income
increased by 2% compared to 2012. This product line’s full year sales result is attributable primarily to slower universal
life product sales. During 2011, 2012 and 2013, Empire Life increased prices on long-term products, including universal
life, due to the low long-term interest rate environment. We have observed a similar trend with many of our competitors.
However, during the fourth quarter of 2013 Empire Life has reduced the prices of certain life insurance products to
improve competitiveness and to reflect the recent rise in interest rates and continuing mortality improvements.
20
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
During the fourth quarter and for the year, earnings from this product line increased relative to 2012. The following
table provides a breakdown of the components of this year over year change in net income.
(millions of dollars)
Individual Insurance Net Income Analysis
Net income after tax 2013
Net income after tax 2012
Increase in net income after tax
Components of income increase
2012 gain from update of policy liability assumptions
2013 gain from update of policy liability assumptions
Improved investment experience
Lower new business strain
Improved (worsened) mortality, surrender and other experience
Total
Fourth quarter
Year
$
$
$
$
21 $
—
21 $
(1) $
2
22
2
(4)
21 $
66
12
54
(1)
2
37
8
8
54
In 2012, the update of policy liability assumptions was favourable by $1 million.
In 2013, the update of policy liability assumptions was favourable by $2 million. The following table provides a
breakdown of the components of this amount:
Components of income increase from update of policy liability
assumptions (millions of dollars)
Net re-investment assumptions
Mortality
Model enhancements
Lapse
Other
Total 2013 gain from update of policy liability assumptions
$
$
Year
4
13
9
(32)
8
2
Empire Life uses an ultimate reinvestment rate (“URR”) assumption of 3.0% (3.1% for 2012). Empire Life uses a best
estimate return assumption for equities used to match long-term liabilities of 7.7% (8.1% for 2012). 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.
Empire Life Annual Report 2013
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the year, investment experience improved by $37 million year over year due primarily to the favourable impact from
long-term interest rate movements in 2013. While market interest rates remain unusually low, they increased
significantly during the year, particularly during the second quarter of 2013. Empire Life took advantage of the higher
rates by purchasing long-term bonds during the second quarter at these increased interest rates for the purpose of
matching long-term liabilities. As a result, a reserve release from locking in these higher investment yields occurred in
the second quarter resulting in a $7 million increase in net income for this line of business. For the year, investment
experience also improved in 2013 due to the impact of changes in long-term interest rates on existing insurance contract
liabilities and matching assets. While the impact of bond asset market value changes 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, investment experience improved strongly year over year due to the favourable impact from stock market
movements in 2013. Empire Life makes use of common share assets for the purpose of matching long-term liabilities.
Full year investment experience improved in 2013 due to the impact of changes in common share returns on existing
insurance contract liabilities and matching assets. While the impact of common share asset market value changes 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.
Higher net income from lower new business strain caused a year over year improvement in net income. Lower new
business strain resulted from higher prices on long-term products and lower annualized premium sales.
Results - Capital and Surplus
(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
2013
2012
$
$
2 $
1
3 $
20 $
—
20 $
Year
2013
14 $
2
16 $
2012
36
1
37
22
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 for the
year Capital and Surplus earnings decreased relative to 2012. The following table provides a breakdown of the
components of this year over year change in net income.
(millions of dollars)
Capital and Surplus Net Income Analysis
Net income after tax 2013
Net income after tax 2012
Decrease in net income after tax
Components of decrease
Decreased net income from sale of investments
Lower impairment write downs
Higher interest expense
Higher investment income
Total
Fourth quarter
Year
$
$
$
$
3 $
20
(17) $
(17) $
—
(2)
2
(17) $
16
37
(21)
(22)
1
(4)
4
(21)
Decreased net income from sale of investments was due primarily to losses on the sale of AFS bond investments in
2013, compared to gains from the sale of AFS equity investments in 2012. In 2012 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.
Higher interest expense was due to the issuance of $300 million of subordinated debentures on May 31, 2013.
Higher investment income was due primarily to an increase in invested assets resulting from the investment of the
proceeds from the above mentioned issuance of subordinated debentures.
Empire Life Annual Report 2013
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total Cash Flow
(millions of dollars)
Cash Flow provided from (used for)
Operating Activities
Investing Activities
Financing Activities
Net change in cash and cash equivalents
Year
2013
222 $
(509)
256
(31) $
2012
229
(123)
(13)
93
$
$
The decrease in cash provided by operating activities in 2013 relative to 2012 was due primarily to cash outflows related
to income taxes in 2013 compared to cash inflows related to income taxes in 2012.
The increase in cash used for investing activities during 2013 relative to 2012 was due primarily to the investment of
proceeds from the May 31, 2013 issuance of $300 million of subordinated debentures (described below). In addition,
cash used for investing activities increased due to completion of asset mix changes that began late in 2012. A sale of
common share 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
occurred in the first quarter of 2013.
The increase in cash provided from financing activities was due to the issuance of $300 million of subordinated
debentures on May 31, 2013. The debentures will mature on May 31, 2023 and bear interest at a fixed annual rate of
2.870% for the first five years, payable semi-annually, and a variable annual rate equal to the 3-month Bankers’
Acceptance Rate plus 1.05% for the last five years, payable quarterly. This was partially offset by the payment of $24.1
million of dividends to common shareholders during the third quarter.
Capital Resources
MCCSR Ratio
Dec 31
2013*
267%
Sept 30
June 30
2013*
265%
2013*
262%
Mar 31
2013*
212%
Dec 31
2012
203%
*Reflects adoption of IAS 19R and new MCCSR standards related to lapse required capital on January 1, 2013.
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 267% as at December 31,
2013 continued to be well above requirements, and above minimum internal targets.
24
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
The MCCSR ratio increased by 2 points from the previous quarter and increased by 64 points on a full year basis. This
change was due to increases in available regulatory capital for both the fourth quarter and the year to date, as shown in
the table below. For the fourth quarter this was partly offset by increases in required regulatory capital, as shown in the
table below. However, for the full year required regulatory capital decreases contributed to the MCCSR increase.
(millions of dollars)
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
Dec 31
2013*
Sept 30
2013*
June 30
2013*
Mar 31
2013*
$
$
$
831 $
533
785 $
523
775 $
521
732 $
335
1,364 $
1,308 $
1,296 $
1,067 $
511 $
493 $
494 $
503 $
Dec 31
2012
756
327
1,083
533
*Reflects adoption of IAS 19R and new MCCSR standards related to lapse required capital on January 1, 2013.
Tier 1 and Tier 2 available regulatory capital increased from the previous quarter and on a year to date basis.
The increase in Tier 1 available regulatory capital from the previous quarter was due primarily to fourth quarter net
income.
For the year the increase in Tier 1 available regulatory capital was due primarily to net income, partly offset by the
payment of a common share dividend and the impact of implementation of IAS 19R Employee Benefits standards. The
dividend of $24.1 million, which was paid during the third quarter, decreased Empire Life’s MCCSR ratio by 7 points. The
implementation of IAS 19R (related to employee defined benefit plans), which occurred in the first quarter 2013, lowered
Empire Life’s available regulatory capital by $26 million, and decreased Empire Life’s MCCSR ratio by 5 points.
The increase in Tier 2 available regulatory capital from the previous quarter was not significant. The increase in Tier 2
available regulatory capital for the year to date was due primarily to the issuance of $300 million of subordinated
debentures on May 31, 2013.
Regulatory capital requirements increased from the previous quarter, but decreased on a year to date basis. The
increase from the previous quarter was due primarily to higher investment and lapse exposures. For the year to date the
decrease was due primarily to higher interest rates which lowered required regulatory capital related to lapse risk, and to
changes to the MCCSR standards related to lapse required regulatory capital in the first quarter which improved Empire
Life’s MCCSR ratio by 14 points. The above items were partly offset by the impact of higher investment exposures
which were caused primarily by increased investment in common shares and bonds.
On February 25, 2014 the Board of Directors of Empire Life approved the declaration of a common share dividend of
$34 million payable in the first quarter of 2014. On a pro forma basis, after giving effect to the dividend payment, Empire
Life estimates that, as at December 31, 2013, its MCCSR ratio would have decreased by 10 points.
Empire Life Annual Report 2013
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
In May 2014 Empire Life intends to redeem $200 million 6.73% subordinated debentures at par. The redemption is
subject to approval by the Office of the Superintendent of Financial Institutions Canada (OSFI). On a pro forma basis,
after giving effect to the debenture redemption, Empire Life estimates that, as at December 31, 2013, its MCCSR ratio
would have decreased by 19 points.
Comprehensive Income
(millions of dollars)
Comprehensive income
Shareholders' net income
Unrealized fair value increase (decrease) on AFS
investments
Realized loss (gain) on AFS investments
reclassification to net income
Amortization of loss on derivative investments designated as cash flow
hedges reclassified to net income
Items that will not be reclassified to net income:
Remeasurements of defined benefit plans
Less: Participating Policyholders
Other comprehensive income (loss), attributable to shareholders
Fourth quarter
2013
2012
Year
2013
2012
$
29.9 $
25.1 $
113.3 $
80.2
(1.9)
(18.9)
7.5
1.2
1.6
2.8
0.2
(0.1)
2.9
(1.9)
1.0
(15.1)
(17.0)
0.1
0.9
(16.0)
(0.3)
(16.3)
1.9
(17.0)
0.6
12.9
(3.5)
(3.1)
(6.6)
(19.2)
(11.7)
0.5
(8.7)
(19.9)
(1.2)
(21.1)
59.1
Comprehensive income, attributable to shareholders
$
30.9 $
8.8 $
106.7 $
For the year 2013, Empire Life incurred an other comprehensive loss of $6.6 million due primarily to unrealized fair
value decreases relating to AFS bonds. For the year 2012 Empire Life incurred an other comprehensive loss of $21.1
million due primarily to the reclassification to net income of a large realized gain from the sale of AFS equity investments
during the fourth quarter of 2012.
In the first quarter of 2013 the new accounting standard relating to the remeasurement of defined benefit (DB) plans was
applied retrospectively resulting in the restatement of 2012. For the year 2013 Empire Life experienced a $12.9 million
gain after tax on its DB plans. The gain for the year was due primarily to the impact of higher equity markets on DB plan
assets. DB plan liabilities also experienced a net gain due to higher interest rates partly offset by losses due primarily
to updated mortality assumptions.
For the year 2012 Empire Life experienced an $8.7 million loss after tax on its DB plans. This loss was due primarily to
the impact of lower interest rates on DB plan liabilities.
26
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
Unrealized fair value increases and decreases on AFS bonds in other comprehensive income do not impact MCCSR.
Remeasurement of DB plans do not immediately impact MCCSR as each quarter’s remeasurement gain or loss is
amortized over 12 quarters for MCCSR purposes.
Industry Dynamics and Management’s Strategy
Empire Life’s operations are organized by product line with each line of business having responsibility for product
development, marketing, distribution and customer service within their particular markets. This structure recognizes that
there are distinct marketplace dynamics in each of the three major product lines. Management believes this structure
enables each line of business to develop strategies to achieve the enterprise-wide objectives of business growth and
expense management while recognizing the unique business environment in which each operates. The lines of
business are supported by corporate units that provide product pricing, administrative and technology services to the
lines of business, manage invested assets, and oversee enterprise risk management policies.
Based on general fund and segregated fund assets, Empire Life is among the ten largest life insurance companies in
Canada. Empire Life has less than six per cent market share in all three of its product lines. To be priced competitively in
the marketplace while simultaneously providing acceptable long-term financial contribution to shareholders, Empire Life,
as a mid-sized company, must find a way to 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 is comprised of segregated fund products, guaranteed interest
products and mutual funds. 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 assets under management from its GMWB segregated fund business in 2013.
However, Empire Life has taken several steps to limit GMWB risk exposure. In the first quarter of 2013 Empire Life
launched a new version of the GMWB product. 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.
Empire Life Annual Report 2013
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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. However, while market long-term interest rates remain unusually low in 2013 they increased
significantly during the year, particularly during the second quarter of 2013. During the fourth quarter of 2013 Empire Life
has reduced the prices of certain life insurance products to improve competitiveness and to reflect this recent rise in
interest rates and continuing mortality improvements. 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, develop web based products and processes,
and improve the customer and advisor experience.
28
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2013 Empire Life had $5.95 billion of
segregated fund assets and liabilities. Of this amount, approximately $5.7 billion have guarantees. The following table
provides a percentage breakdown by type of guarantee:
Dec 31
2013
Dec 31
2012
Percentage of segregated fund liabilities with:
75% maturity guarantee and a 100% death benefit guarantee
57.4%
63.8%
100% maturity and death benefit guarantees (with a minimum
of 15 years between deposit and maturity date)
5.2%
5.2%
100% maturity and death benefit guarantees (guaranteed minimum
withdrawal benefit (GMWB))
37.4%
31.0%
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
2013 and 2012, 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:
(millions of dollars)
Sensitivity To Segregated Fund Guarantees:
2013 Shareholders' net income
2012 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, 2013 MCCSR Ratio
December 31, 2012 MCCSR Ratio
10% Increase
10% Decrease
20% Increase
20% Decrease
(1.2)%
(0.5)%
1.2%
—%
(2.3)%
(1.1)%
2.5 %
(12.2)%
Empire Life Annual Report 2013
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
The use of common share assets to match longer term liabilities causes the sensitivity of Empire Life’s MCCSR ratio to
stock market increases to be reduced or slightly negative. Increased stock markets cause a gain on common share
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 share assets
increases. As of December 31, 2013 and 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.
Similarly, the above mentioned increased use of common equities to match longer term liabilities has caused the
sensitivity of Empire Life’s MCCSR ratio to stock market decreases to be slightly positive. As of December 31, 2013,
under a 10% and 20% stock market decrease scenario, the decrease in required capital slightly outweighs the decrease
in available capital resulting in a slightly positive impact on Empire Life’s MCCSR ratio.
Empire Life has not historically hedged its segregated fund guarantee risk. Given the current segregated fund product
mix and level of sensitivity to stock markets, Empire Life has not hedged its segregated fund guarantee risk as of
December 31, 2013 or December 31, 2012 (except for the reinsurance agreement described below).
Effective January 1, 2013 Empire Life has entered into a reinsurance agreement to cede a portion of Empire Life’s
segregated fund death benefit exposure. All Empire Life segregated fund policyholders 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 as at December 31, 2012 in the table
below would be ceded to the reinsurer. Empire Life does not reinsure any other insurer’s segregated fund products.
The amount at risk related to segregated fund maturity guarantees and segregated fund death benefit guarantees and
the resulting actuarial liabilities and MCCSR required capital for Empire Life segregated funds is as follows:
Segregated Funds
(millions of dollars)
December 31, 2013
December 31, 2012
Guarantee >
Fund Value
Death Benefit >
Fund Value
GMWB
Top-up
Fund
Value
Amount At
Risk Fund Value
Amount At
Risk
Amount At
Risk
Actuarial
Liabilities
MCCSR
Required
Capital
$
$
29 $
3 $
264 $
18 $
328
$ nil
$ nil
107 $
11 $
1,250 $
112 $
298
$ nil
$ <1
30
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
The first four columns of the above table 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 policyholders if the net return on each GMWB policyholder’s assets is zero for the
remainder of each GMWB policyholder’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 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 policyholders. The amounts
at risk in December 2013 decreased from the December 2012 levels for maturity guarantee, and death benefit
guarantee exposure due primarily to the increase in many global stock markets. The amount at risk in December 2013
increased from the December 2012 levels for GMWB top-up exposure, due primarily to strong GMWB sales in 2013.
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 initial reinvestment rate (IRR) for nonparticipating insurance
business, would result in a decrease to Empire Life’s MCCSR ratio of 35 points as of December 31, 2013 (32 points as
of December 31, 2012). This assumes no change in the ultimate reinvestment rate (URR). The impact above excludes
the impact of market value changes in available for sale (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 23 points as of December 31, 2013 (28 points as of
December 31, 2012).
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.
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.
Empire Life Annual Report 2013
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 2e, 3a, 3e, and 10c.
Pension and other employee future benefits
Pension and other employee future benefits expense is calculated by independent actuaries using assumptions
determined by management. The assumptions made affect the pension and other employee future benefits expense
included in net income. If actual experience differs from the assumptions used, the resulting experience gain or loss is
recorded in OCI. Additional information regarding pension and other employee future benefits is included in notes 2d,
2k, and 12.
32
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Impaired Investments
Empire Life maintains a prudent policy in setting the provision for impaired investments. When there is no longer
reasonable assurance of full collection of loan principal and loan interest related to a mortgage or policy contract loan,
management establishes a specific provision for loan impairment and charges the corresponding reduction in carrying
value to income in the period the impairment is identified. In determining the estimated realizable value of the
investment, management considers a number of events and conditions. These include the value of the security
underlying the loan, geographic location, industry classification of the borrower, an assessment of the financial stability
of the borrower, repayment history and an assessment of the impact of current economic conditions. Changes in these
circumstances may cause subsequent changes in the estimated realizable amount of the investment and changes in the
specific provision for impairment.
Available for sale securities are subject to a regular review for losses that are significant or prolonged. Objective
evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment
below its cost or if there is a significant adverse change in the technological, market, economic or legal environment in
which the issuer operates or the issuer is experiencing financial difficulties.
Outlook
In 2013 Canada’s economy remained stable, but experienced relatively weak growth. 2013 headlines in Canada were
filled with economic concerns about unemployment, commodity prices, factory closures, housing markets and consumer
debt levels. Global concerns in 2012 about the European sovereign debt crisis and U.S. fiscal issues eased significantly
in 2013, improving consumer confidence. As a result, global stock and credit markets have improved significantly from
the economic turmoil of 2008 and early 2009. Canadian long-term interest rates increased significantly in 2013, after
three years of falling rates. Global stock markets remained volatile, but most significant markets rose strongly in 2013.
This was particularly the case in the U.S., where stock markets provided investors with excellent returns in 2013.
Canada’s main stock market rose in 2013, which was an improvement from the moderate gains of 2012. However,
Canada’s stock market performance in 2013 was meagre compared to the US. Stock market conditions mainly impact
inforce 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 somewhat 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.
While Canada faired well during the financial crisis compared to many other countries, Canada’s economy is growing
slowly and there continues to be uncertainty resulting in mixed economic indicators. As a result businesses remain
cautious and this could cause pressure in the near term on growth prospects for the Employee Benefits product line.
Empire Life Annual Report 2013
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. However, while market long-term interest rates
remained unusually low in 2013 they increased significantly during the year. During the fourth quarter of 2013 Empire
Life has reduced the prices of certain life insurance products to improve competitiveness and to reflect this recent rise in
interest rates and continuing mortality improvements. Long-term interest rates and product pricing are expected to
continue to be issues for Empire Life’s Individual Insurance product line in 2014.
Regulatory change related to segregated fund guarantees continues to evolve. 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’s MCCSR ratio. In the second stage, a
new approach will be implemented for all inforce segregated fund business (including new business issued in 2011 and
later). With respect to the second stage, OSFI states that “we are considering a range of alternatives including a more
market-consistent approach and potentially credit for hedging” and that the target date for this is 2017 or later.
Longer term accounting standard changes are expected by 2018 or later regarding International Financial Reporting
Standards (IFRS) for Insurance Contracts. In a parallel process, capital adequacy standards are also becoming more
aligned with the international framework known as “Solvency II” within a similar timeframe. 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 capital adequacy standards the goal is consistent
treatment of risk within insurance companies from a capital adequacy perspective regardless of the type of business.
These two items could have a material impact on Empire Life’s future net income and capital ratios, however, much
remains unknown.
In 2011 OSFI implemented substantial regulatory changes for Canadian banks related to Basel III capital standards.
These new banking regulations provide a transition plan for banks to move towards more restrictive capital
requirements, including tighter restrictions on bank issued financial instruments. New financial instruments issued by
banks must comply with these new regulations in order to be included in the banks’ capital ratios. It is unclear whether
similar changes will occur for life insurance companies in the future.
OSFI’s Corporate Governance Guideline (compliance required January 31, 2014) includes requirements related to
board responsibilities, the independence of oversight functions, enhancing risk reporting and commissioning third party
reviews of board and oversight function effectiveness. OSFI’s Own Risk and Solvency Assessment Guideline (effective
January 1, 2014) requires insurers to complete a self-assessment process that aims to link an insurer’s risk profile to its
capital needs.
34
Empire Life Annual Report 2013
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Canadian Securities Administrators (CSA) is increasing disclosure requirements for mutual fund companies,
including point of sale requirements (effective mid-2014) and customer relationship model initiatives (staggered
implementation with full effectiveness mid-2016).
Regulatory change is also occurring 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. In 2013 the Canadian Life and Health Insurance Association (CLHIA) has developed a new Insurer-MGA
Relationship Guideline (effective January 1, 2015). The Guideline describes desired outcomes and related practices in
five general areas, stating that insurers should: perform due diligence prior to entering into a contract with an MGA,
clearly set out roles and responsibilities in the contract, commit to a culture of treating customers fairly, monitor the
performance of the MGA and retain ultimate responsibility.
Quarterly Results
The following table summarizes various financial results on a quarterly basis for the most recent eight quarters:
(millions of dollars)
Revenue
Shareholders' Net income
Dec 31 Sept 30
Jun 30 Mar 31 Dec 31 Sept 30
Jun 30 Mar 31
2013
2013
2013
2013
2012
2012
2012
2012
$
$
322 $
235 $
61 $
289 $
299 $
377 $
368 $
215
30 $
32 $
40 $
11 $
25 $
20 $
18 $
17
Revenue for the three months ended December 31, 2013 increased to $322 million (2012 $299 million). The increase
was primarily due to an increase in FVTPL investments in 2013 resulting from an increase in common share prices in
2013 (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 significant increase in stock markets in 2013, compared to the modest
stock market results that occurred in 2012. See Product Line Results sections earlier in this report for further information
on quarterly results.
Empire Life Annual Report 2013
35
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. The consolidated financial statements are
prepared in accordance with International Financial Reporting Standards and the accounting requirements of the Office of the Superintendent of
Financial Institutions, Canada.
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,
2013. Based on that evaluation, management concluded that the Company’s internal control over financial reporting was effective as at
December 31, 2013.
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 25, 2014
Gary J. McCabe
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 25, 2014
36
Empire Life Annual Report 2013
INDEPENDENT AUDITOR'S REPORT
To the Policyholders and Shareholders of The Empire Life Insurance Company
We have audited the accompanying consolidated financial statements of The Empire Life Insurance Company and its subsidiary, which comprise
the consolidated statements of financial position as at December 31, 2013 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 audit. We conducted our audit 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 in our audit 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, 2013 and their financial performance and their cash flows for the year then ended in accordance
with International Financial Reporting Standards.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
February 25, 2014
Empire Life Annual Report 2013
37
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, 2013 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 25, 2014
38
Empire Life Annual Report 2013
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at
Assets
December 31, 2013
December 31, 2012
January 1, 2012
(Restated - Note 2 d))
(Restated - Note 2 d))
Cash and cash equivalents (Note 3)
$
217,350 $
248,382 $
155,559
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
Deferred income taxes (Note 18)
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 (loss)
$
$
25,448
4,333,512
1,009,608
299,353
44,855
90,275
5,803,051
24,058
41,014
—
2,400
11,669
22,043
4,317
16,440
4,227,329
878,085
302,531
43,071
95,461
33,867
4,063,897
808,681
264,238
41,981
113,118
5,562,917
5,325,782
21,452
30,035
—
4,596
9,126
22,827
2,071
20,107
28,455
17,106
—
21,330
21,241
1,090
5,954,508
5,014,392
4,415,318
12,080,410 $
10,915,798 $
10,005,988
55,833 $
78,940
9,306
284,627
4,175,238
12,687
30,937
23,893
—
498,343
5,954,508
69,875 $
63,152
7,473
244,808
4,375,441
14,591
30,634
22,142
—
199,642
5,014,392
11,124,312
10,042,150
985
19,387
945,692
(9,966)
956,098
985
19,387
859,756
(6,480)
873,648
80,266
67,859
—
156,119
4,199,501
15,076
30,263
21,791
432
199,405
4,415,318
9,186,030
985
19,387
786,203
13,383
819,958
Total Liabilities and Equity
$
12,080,410 $
10,915,798 $
10,005,988
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
Empire Life Annual Report 2013
39
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Canadian dollars except 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
(2,000,000 shares authorized; 985,076 shares outstanding)
The accompanying notes are an integral part of these consolidated financial statements.
2013
2012
(Restated - Note 2 d))
918,521 $
(96,977)
821,544
240,159
(349,037)
45,445
(2,488)
150,589
906,212
616,009
(56,472)
(200,203)
39,819
945
22,098
139,450
170,579
(2,322)
18,977
748,880
14,011
3,900
139,421
29,385
110,036 $
(3,243) $
113,279
110,036 $
902,733
(89,201)
813,532
237,354
1,397
54,349
28,405
125,218
1,260,255
590,041
(48,795)
175,940
88,689
754
20,478
140,155
177,175
(2,336)
13,697
1,155,798
13,466
3,900
87,091
13,538
73,553
(6,610)
80,163
73,553
115.00 $
81.38
$
$
$
$
$
40
Empire Life Annual Report 2013
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:
Items that may be reclassified subsequently to net income:
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)
Items that will not be reclassified to net income:
Remeasurements of post-employment benefit liabilities (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.
2013
2012
(Restated - Note 2 d))
$
110,036 $
73,553
(18,881)
1,887
(16,994)
7,504
(19,161)
(11,657)
574
534
12,934
(3,486)
106,550 $
(156) $
106,706
106,550 $
$
$
$
(8,740)
(19,863)
53,690
(5,379)
59,069
53,690
Empire Life Annual Report 2013
41
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31
2013
2012
(Restated - Note 2 d))
Shareholders' Policyholders'
Total
Shareholders'
Policyholders'
Total
985
Capital stock (Note 25)
$
985 $
Contributed surplus
19,387
— $
—
985
$
985 $
— $
19,387
19,387
—
19,387
Retained earnings
Retained earnings -
beginning of year
812,642
47,114
859,756
732,479
53,724
786,203
Net income (loss)
113,279
(3,243)
110,036
80,163
(6,610)
73,553
Dividends to common
shareholders
Retained earnings - end of
year
Accumulated other
comprehensive income
(loss)
Accumulated other
comprehensive income
(loss) - beginning of year
Other comprehensive
income (loss)
Accumulated other
comprehensive income
(loss) - end of year
(24,100)
—
(24,100)
—
—
—
901,821
43,871
945,692
812,642
47,114
859,756
(10,344)
3,864
(6,480)
10,750
2,633
13,383
(6,573)
3,087
(3,486)
(21,094)
1,231
(19,863)
(16,917)
6,951
(9,966)
(10,344)
3,864
(6,480)
Total equity
$
905,276 $
50,822 $
956,098
$
822,670 $
50,978 $
873,648
Composition of accumulated
other comprehensive
income (loss) - end of year
Unrealized gain (loss) on
available for sale financial
assets
Unamortized gain (loss) on
cash flow hedges
Remeasurements of post-
employment benefit
liabilities
Shareholder portion of
policyholders' accumulated
other comprehensive
income
Total accumulated other
comprehensive income
(loss)
$
(5,214) $
8,436 $
3,222
$
14,523 $
5,693 $
20,216
(233)
—
(233)
(807)
—
(807)
(12,313)
(642)
(12,955)
(24,629)
(1,260)
(25,889)
843
(843)
—
569
(569)
—
$
(16,917) $
6,951 $
(9,966)
$
(10,344) $
3,864 $
(6,480)
The accompanying notes are an integral part of these consolidated financial statements.
42
Empire Life Annual Report 2013
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 liability
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 assets
Deferred income taxes
Other items
Cash provided from operating activities
Investing Activities
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
Decrease (increase) in short-term investments
Net purchase of capital assets
2013
2012
(Restated - Note 2 d))
$
110,036 $
73,553
(199,258)
39,819
349,037
(42,957)
(70,842)
4,613
(2,462)
33,760
221,746
176,694
88,689
(1,397)
(82,754)
(73,108)
3,673
(1,892)
45,498
228,956
(2,110,910)
1,612,993
(1,354,055)
1,219,502
(10,333)
14,575
(9,008)
(6,485)
(7,600)
8,293
17,427
(6,240)
Cash provided from (used for) investing activities
(509,168)
(122,673)
Financing Activities
Dividends to common shareholders (Note 19)
Interest paid on subordinated debt
Debt issue (Note 23)
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 related to operating activities:
Income taxes paid, net of (refunds)
Interest income received
Dividend income received
The accompanying notes are an integral part of these consolidated financial statements.
(24,100)
(17,765)
298,255
256,390
(31,032)
248,382
217,350 $
24,074 $
138,902
32,897
—
(13,460)
—
(13,460)
92,823
155,559
248,382
(15,476)
124,863
43,994
$
$
Empire Life Annual Report 2013
43
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 25, 2014.
2.
SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The annual consolidated financial statements of the Company for the year ended December 31, 2013 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, 2013.
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.
(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.
44
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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.
Additional information regarding insurance-related liabilities is included in Notes 2 f), 2 l),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 (OCI).
Additional information regarding financial instrument classification is included in Notes 2 e), 3 a), 3 e), and
10 c).
iii) Pension and other post-employment benefits
Pension and other employee future benefits expense is calculated by independent actuaries using assumptions
determined by management. The assumptions made affect the pension and other employee future benefits
expense included in net income. If actual experience differs from the assumptions used, the resulting
experience gain or loss is recorded in OCI.
Additional information regarding pension and other post-employment benefits is included in Notes 2 d), 2 k)
and 12.
Empire Life Annual Report 2013
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 e), 3 b), 10 c) and 27 a).
(d) Change in Accounting Policies
(i)
IAS 1 Presentation of Financial Statements
The Company has adopted the amendments to IAS 1 effective January 1, 2013. These amendments require
the Company to group OCI items by those that will be subsequently reclassified to net income and those that
will not be reclassified. These changes did not result in any adjustments to OCI or comprehensive income.
(ii) IFRS 10 Consolidated Financial Statements
IFRS 10, Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27,
Consolidated and Separate Financial Statements, and SIC-12, Consolidation - Special Purpose Entities. IFRS
10 requires consolidation of an investee only if the investor possesses power over the investee, has exposure
to variable returns from its involvement with the investee and has the ability to use its power over the investee
to affect its returns. Detailed guidance is provided on applying the definitions of control. The accounting
requirements for consolidation have remained largely consistent with IAS 27.
The Company assessed its consolidation conclusions on January 1, 2013 and December 31, 2013 and
determined that the adoption of IFRS 10 did not result in any change in the consolidation status of its
subsidiary.
(iii) IFRS 12 Disclosure of Interest in Other Entities
The Company assessed its disclosure of its interest in other entities' on January 1, 2013 and December 31,
2013 and determined that the adoption of IFRS 12 did not result in any change in the disclosure of its interests
in its subsidiaries and investees.
46
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(iv) IFRS 13 Fair Value Measurement
IFRS 13 provides a single framework for measuring fair value. The measurement of the fair value of an asset
or liability is based on assumptions that market participants would use when pricing the asset or liability under
current market conditions, including assumptions about risk. The Company adopted IFRS 13 on January 1,
2013 on a prospective basis.
In accordance with IFRS 13, at January 1, 2013, the Company began measuring the fair value of its Level 1
financial assets at closing market prices. The change in fair value from bid price to closing price did not result in
any significant measurement adjustments as at January 1, 2013.
IFRS 13 also requires enhanced disclosures when fair value is used for measurement. Such enhanced
disclosures are included in these consolidated financial statements.
(v) IAS 19R Employee Benefits
IAS 19R requires the net defined benefit liability (asset) to be recognized on the balance sheet without any
deferral of actuarial gains and losses and past service costs as previously allowed. Past service costs are
recognized in net income when incurred. Expected returns on plan assets are no longer included in post-
employment benefits expense. Instead, post-employment benefits expense includes the net interest on the net
defined benefit liability (asset) calculated using a discount rate based on market yields on high quality bonds.
Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net
interest component) and any change in the asset ceiling are recognized in OCI. The Company immediately
recognizes in AOCI all pension adjustments recognized in OCI. AOCI amounts related to IAS 19R will remain in
AOCI and will not be reclassified to Net Income in the future. The Company recognizes interest expense
(income) on net post-employment benefits liabilities (assets) in operating expense in the consolidated
statement of operations.
The Company adopted the amendments of IAS 19R retrospectively and adjusted its opening equity as at
January 1, 2012 to recognize previously unamortized actuarial gains and losses. The operating expense for the
comparable period has been adjusted to reflect the accounting changes for defined benefit plans. The
adjustments for each financial statement line item affected are presented in the tables below. Post-employment
assets are included in Other assets and Post-employment liabilities are included in Accounts payable and other
liabilities on the statement of financial position.
Empire Life Annual Report 2013
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Impact of accounting policy changes on statement of financial position line items
December 31, 2012
January 1, 2012
Before
After
Before
After
Accounting
IAS 19R
Accounting
Accounting
IAS 19R
Accounting
Changes
Adjustment
Changes
Changes
Adjustment
Changes
Assets
Post-employment assets
$
12,338 $
(12,338) $
— $
13,137 $
(13,137) $
Other assets
Deferred income tax assets
All other assets
Total Assets
Liabilities
Post-employment liabilities
Accounts payable and other
liabilities
Deferred income tax liabilities
All other liabilities
Total Liabilities
Equity
Capital Stock
Contributed Surplus
Retained Earnings
Participating Policyholders
Shareholders
Accumulated other comprehensive
income
Participating Policyholders
Shareholders
Total Equity
9,130
—
10,902,076
10,923,544
11,744
34,927
4,792
9,972,275
10,023,738
985
19,387
47,127
812,898
5,124
14,285
899,806
—
21,330
—
9,984,658
(4)
4,596
9,126
4,596
21,327
—
—
10,902,076
9,984,658
3
—
—
(7,746)
10,915,798
10,019,122
(13,134)
10,005,988
23,209
34,953
11,318
10,166
(5)
(4,792)
34,922
—
—
9,972,275
18,412
10,042,150
58,779
6,586
9,105,332
9,182,015
—
—
(13)
(256)
(1,260)
(24,629)
(26,158)
985
19,387
47,114
812,642
3,864
(10,344)
873,648
985
19,387
53,724
732,479
3,487
27,045
837,107
3
(6,154)
—
4,015
—
—
—
—
(854)
(16,295)
(17,149)
21,484
58,782
432
9,105,332
9,186,030
985
19,387
53,724
732,479
2,633
10,750
819,958
Total Liabilities and Equity
$
10,923,544 $
(7,746) $
10,915,798 $
10,019,122 $
(13,134) $
10,005,988
48
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Impact of IAS 19R accounting policy changes on statement of operations line items
Total Revenue
Benefits and Expenses
Operating expenses
All other benefits & expenses
Other taxes
Net Income Before Income
Taxes
Income taxes
Net Income
Attributable to:
Participating Policyholders
Shareholders
Earnings per share
December 31, 2012
Before
After
Accounting
IAS 19R
Accounting
Changes
Adjustment
Changes
$
1,260,255 $
— $
1,260,255
139,788
1,015,643
17,366
87,458
13,636
73,822 $
(6,597) $
80,419
73,822 $
367
—
—
(367)
(98)
(269) $
(13) $
(256)
(269) $
140,155
1,015,643
17,366
87,091
13,538
73,553
(6,610)
80,163
73,553
81.64 $
(0.26) $
81.38
$
$
$
$
Impact of IAS 19R accounting policy changes on statement of comprehensive income line items
Net Income
Other Comprehensive Income
(Loss), Net of Income
Taxes
Remeasurements of post-
employment benefit liabilities
All other comprehensive
income
Total other comprehensive
income (loss)
Comprehensive Income
Attributable to:
Participating Policyholders
Shareholders
December 31, 2012
Before
After
Accounting
IAS 19R
Accounting
Changes
Adjustment
Changes
73,822 $
(269) $
73,553
— $
(8,740) $
(8,740)
(11,123)
—
(11,123)
(11,123)
(8,740)
(19,863)
62,699 $
(9,009) $
53,690
(4,960) $
67,659
62,699 $
(419) $
(8,590)
(9,009) $
(5,379)
59,069
53,690
$
$
$
$
$
Empire Life Annual Report 2013
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(e) 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 or liability quoted in an active market is generally the closing
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.
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.
50
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 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.
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.
Empire Life Annual Report 2013
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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).
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.
52
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
v) Hedge Accounting
From time to time, the Company enters into hedging arrangements. Where the Company has elected to use
hedge accounting, a hedge relationship is designated and documented at inception. The Company evaluates
hedge effectiveness at the inception of the relationship and at least on a quarterly basis using a variety of
techniques including the cumulative dollar offset method. Both at inception and throughout the term of the
hedge, the Company expects that each hedging instrument will be highly effective in offsetting the risk being
hedged. When it is determined that the hedging relationship is no longer effective, or the hedged item has been
sold or terminated, the Company discontinues hedge accounting prospectively. In such cases, if the derivative
hedging instrument is not sold or terminated, any subsequent change in fair value of the derivative is
recognized in investment income.
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging
instrument is recorded in OCI while the ineffective portion is recognized in investment income in the
Consolidated statement of operations. Gains and losses in Accumulated other comprehensive income (AOCI)
are reclassified and recognized in investment income in the Consolidated statement of operations during the
periods when the variability in the cash flows hedged or the hedged forecasted transactions are recognized in
the Consolidated statement of operations. Gains and losses on cash flow hedges accumulated in AOCI are
reclassified immediately to investment income in the Consolidated statement of operations when either the
hedged item is sold or the forecasted transaction is no longer expected to occur. When hedge accounting is
discontinued, and it remains probable that the hedged forecasted transaction will occur, then the amounts
previously recognized in AOCI are reclassified and recognized in investment income in the Consolidated
statement of operations in the periods during which variability in the cash flows hedged or the hedged
forecasted transactions are recognized in the Consolidated statement of operations.
vi) Other
Insurance receivables 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.
Empire Life Annual Report 2013
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(f) 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.
(g) 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.
54
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
(h) 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.
(i) Segregated Funds
Certain insurance contracts allow the policyholder to invest in segregated investment funds managed by the
Company for the benefit of these policyholders. Although the underlying assets are registered in the Company's
name and the policyholder has no direct access to the specific assets, the contractual arrangements are such that
the segregated fund policyholder bears the risk and rewards of the fund's investment performance. The assets of
these funds are carried at their period-end fair values. The Company records a segregated fund policy liability equal
to the fair value of the assets and any guarantees are recorded as an insurance contract 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.
Empire Life Annual Report 2013
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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).
(j) 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.
(k) 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 also provides other post-employment benefits.
i) Pension benefits
The defined benefit plan defines an amount of pension benefit that an employee will receive on retirement,
dependent on factors such as age, years of service and compensation. The liability recognized in the balance
sheet in respect of the defined benefit component is the present value of the defined benefit obligation at the
end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method. The present value of the defined
benefit obligation is determined by discounting the estimated future cash outflows using current interest rates of
high-quality corporate bonds.
Defined benefit expense includes the net interest on the net defined benefit liability (asset) calculated using a
discount rate based on market yields on high quality bonds as of prior-year end. Actuarial gains and losses
arising from experience adjustments and changes in actuarial assumptions are charged or credited to OCI in
the period in which they arise, and remain in AOCI. Past-service costs are recognized immediately in income.
The defined contribution component of the Plan is a component under which the Company pays fixed
contributions into a separate entity. The Company has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay employees the benefits relating to employee
service in the current and prior periods. The contributions are recognized as employee benefit expense when
they are due.
56
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
ii) Other post-employment benefits
The Company also provides other post-employment benefits to their retirees. The entitlement to these benefits
is conditional on the employee remaining in service up to retirement age and the completion of a minimum
service period. The expected costs of these benefits are accrued over the period of employment using the
same accounting methodology as used for defined benefit pension plans. Actuarial gains and losses arising
from experience adjustments and changes in actuarial assumptions are charged or credited to OCI in the
period in which they arise and remain in AOCI. These obligations are valued annually by independent qualified
actuaries and are not funded.
iii) 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.
(l)
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.
Empire Life Annual Report 2013
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(1) Insurance Contracts
The Company’s insurance contract liabilities are determined using accepted actuarial practices according
to standards established by the Canadian Institute of Actuaries (CIA) and the requirements of OSFI. The
Company uses the Canadian Asset Liability Method (CALM) for valuation of insurance contracts, which
satisfies the IFRS 4 Insurance Contracts requirements for eligibility for use under IFRS.
a. Short-term Insurance Contracts
These contracts include both annuity products and group benefits.
The annuity products classified as short-term insurance contracts are guaranteed investment options
that provide for a fixed rate of return over a fixed period. Contracts include certain guarantees that are
initiated upon death of the annuitant. The liabilities are determined using CALM.
The group benefits classified as short-term insurance contracts include short-term disability, health
and dental benefits. Benefits are typically paid within one year of being incurred. Liabilities for unpaid
claims are estimated using statistical analysis and Company experience for claims incurred but not
reported.
b. Long-term Insurance Contracts
These contracts include insurance products, annuity products and group benefits. In all cases,
liabilities represent an estimate of the amount that, together with estimated future premiums and
investment income, will be sufficient to pay future benefits, dividends, expenses and taxes on policies
in force.
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.
58
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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.
Empire Life Annual Report 2013
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
(m) 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.
60
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
(n) 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.
Empire Life Annual Report 2013
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(o) 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.
(p) Income Taxes
Income tax expense for the period is comprised 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.
(q) 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.
62
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
(r) Comprehensive Income
Comprehensive income consists of Net income and OCI. OCI includes items that may be reclassified subsequently
to net income: 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. OCI also includes items that will
not be reclassified to net income: Remeasurements of post-employment benefit liabilities. All OCI amounts are net
of taxes.
(s) 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.
(t) 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.
(u) 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.
(v) Future Accounting Changes
IFRS 9 Financial Instruments
On February 20, 2014, the International Accounting Standards Board announced that IFRS 9 would become
effective January 1, 2018. The quantitative impact of this new standard on the Company’s financial statements has
not yet been determined.
Empire Life Annual Report 2013
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
3.
FINANCIAL INSTRUMENTS
(a) Summary of Cash and Investments
The carrying values and fair values of cash and investments are as follows:
Asset category
or Loss
for Sale
Receivables
Value
As at December 31, 2013
Fair Value
Total
Through Profit
Available
Loans &
Carrying
Total
Fair
Value
Cash and cash equivalents
$
217,350 $
— $
— $
217,350 $
217,350
Short-term investments
Canadian federal government
Corporate
Total short-term investments
Bonds
Bonds issued or guaranteed by:
Canadian federal government
Canadian provincial and
municipal governments
Total government bonds issued
or guaranteed
Canadian corporate bonds by industry sector:
Financial services
Infrastructure
Utilities
Communications
Energy
Consumer staples
Industrials
Health care
Materials
7,325
18,123
25,448
—
—
—
59,870
197,160
2,034,681
252,445
2,094,551
449,605
495,906
219,882
224,452
2,194
49,294
67,223
40,343
54,621
9,712
472,359
24,241
34,962
37,014
35,535
9,903
6,469
5,246
—
Total Canadian corporate bonds
Total bonds
1,163,627
3,258,178
625,729
1,075,334
Preferred shares
Canadian
Total preferred shares
Common shares
Canadian
Common shares
Real estate limited partnership units
U.S.
Other
Total common shares
Mortgages
Loans on policies
Policy contract loans
Total
64
Empire Life Annual Report 2013
224,313
224,313
69,905
69,905
476,742
41,081
116,699
15,090
649,612
—
—
—
65,778
—
—
—
65,778
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
299,353
44,855
90,275
7,325
18,123
25,448
7,325
18,123
25,448
257,030
257,030
2,287,126
2,287,126
2,544,156
2,544,156
968,265
244,123
259,414
39,208
84,829
77,126
46,812
59,867
9,712
968,265
244,123
259,414
39,208
84,829
77,126
46,812
59,867
9,712
1,789,356
4,333,512
1,789,356
4,333,512
294,218
294,218
294,218
294,218
542,520
41,081
116,699
15,090
715,390
299,353
44,855
90,275
542,520
41,081
116,699
15,090
715,390
304,134
44,855
90,275
$
4,374,901 $
1,211,017 $
434,483 $
6,020,401 $
6,025,182
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Asset category
As at December 31, 2012
Fair Value
Through Profit
Available
Loans &
or Loss
for Sale
Receivables
Total
Carrying
Value
Total
Fair
Value
Cash and cash equivalents
$
248,382 $
— $
— $
248,382 $
248,382
Short-term investments
Canadian federal government
Corporate
Total short-term investments
Bonds
Bonds issued or guaranteed by:
Canadian federal government
Canadian provincial and
municipal governments
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
Common shares
Real estate limited partnership units
U.S.
Other
Total common shares
Mortgages
Loans on policies
Policy contract loans
Total
3,991
12,449
16,440
—
—
—
66,391
186,822
2,249,585
188,453
2,315,976
375,275
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
471,080
8,853
13,755
8,676
502,364
—
—
—
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
302,531
43,071
95,461
3,991
12,449
16,440
3,991
12,449
16,440
253,213
253,213
2,438,038
2,438,038
2,691,251
2,691,251
773,712
275,812
211,639
9,986
69,457
62,287
51,339
81,825
21
773,712
275,812
211,639
9,986
69,457
62,287
51,339
81,825
21
1,536,078
4,227,329
1,536,078
4,227,329
321,321
321,321
321,321
321,321
524,957
8,853
14,278
8,676
556,764
302,531
43,071
95,461
524,957
8,853
14,278
8,676
556,764
314,349
43,071
95,461
$
4,498,940 $
871,296 $
441,063 $
5,811,299 $
5,823,117
Empire Life Annual Report 2013
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The fair value of mortgages has been calculated by discounting cash flows of each mortgage at a discount rate
appropriate to its remaining term to maturity. The discount rates are determined based on regular competitive rate
surveys. Mortgages are classified as Level 2 by the fair value hierarchy.
The fair values of Loans on policies and Policy contract loans approximates their carrying values, due to the life
insurance contracts that secure them.
(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, 2013
Recorded
Allowance for
Investment
Impairment
7,076 $
813
7,889 $
2,374 $
556
2,930 $
As at December 31, 2012
Recorded
Allowance for
Investment
Impairment
8,186 $
813
8,999 $
2,878 $
533
3,411 $
$
$
$
$
Carrying
Amount
4,702
257
4,959
Carrying
Amount
5,308
280
5,588
The Company holds collateral of $4,725 (2012 $5,343) in respect of these mortgages and $257 (2012 $280) in
respect of these policy contract loans as at December 31, 2013. 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 loan impairment
Write-off of loans
Allowance - End of Year
$
$
2013
3,411 $
488
(969)
2,930 $
2012
3,120
1,193
(902)
3,411
The Company has recorded interest income of $810 (2012 $864) on these assets.
As at December 31, 2013 loans and receivables past due but not impaired are $nil (2012 $6,248).
66
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
ii) Available for Sale
For the year-ended December 31, 2013, the Company reclassified a pre-tax loss of $409 from OCI to Net
income due to write downs of impaired available for sale common and preferred shares (2012 $2,138).
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 in 2009 (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 $344 (2012 $849) 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
Provision for loan impairment
Investment Income
2013
206,741 $
32,797
1,109
(488)
2012
194,294
43,703
550
(1,193)
240,159 $
237,354
$
$
Included in interest income is $63,220 (2012 $53,130) relating to assets not classified as fair value through profit or
loss.
Empire Life Annual Report 2013
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(e) Fair Value of Financial Instruments
The following table presents the investments 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
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
Total
As at December 31, 2013
Level 1
Level 2
Level 3 Total Fair Value
$
53,394 $
163,956 $
— $
217,350
—
3,258,178
608,531
224,313
—
—
65,778
69,905
41,081
—
25,448
1,075,334
—
—
—
—
—
—
—
—
—
3,258,178
649,612
224,313
25,448
1,075,334
65,778
69,905
$
1,021,921 $
4,563,997 $
— $
5,585,918
As at December 31, 2012
Level 1
Level 2
Level 3
Total Fair Value
$
30,570 $
217,812 $
— $
248,382
—
3,517,875
493,511
213,879
—
—
54,400
107,442
8,853
—
16,440
709,454
—
—
—
—
—
—
—
—
—
3,517,875
502,364
213,879
16,440
709,454
54,400
107,442
$
899,802 $
4,470,434 $
— $
5,370,236
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, 2013 or during the year ended December 31, 2012.
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.
68
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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, 2013
Current
Notional
Replacement
Fair Value
Principal
Cost
Positive
Negative
Credit
Equivalent
Amount
Risk
Weighted
Balance
28,261 $
1,145 $
1,145
—
—
123,469
151,730 $
471
1,616 $
471
1,616 $
130
130 $
1,705
1,705 $
—
20
20
As at December 31, 2012
Current
Notional
Replacement
Fair Value
Principal
Cost
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
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.
Empire Life Annual Report 2013
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
4.
INSURANCE RECEIVABLES
As at December 31
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance Receivables
2013
4,057 $
20,165
13,414
3,378
41,014 $
2012
3,653
11,080
8,923
6,379
30,035
$
$
All amounts are expected to be recovered within one year of the Consolidated statement of financial position date.
These financial instruments are short-term in nature and their fair values approximate carrying value.
5.
OTHER ASSETS
Other assets consist of the following:
As at December 31
Trade accounts receivable
Prepaid expenses
Other Assets
2013
8,397 $
3,272
11,669 $
2012
(Restated)
5,753
3,373
9,126
$
$
All amounts are expected to be recovered within one year of the Consolidated statement of financial position date.
These financial instruments are short-term in nature and their fair values approximate carrying value.
70
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
6.
PROPERTY AND EQUIPMENT
Land
Buildings
Equipment
Improvements
Total
Furniture
and
Leasehold
Cost
As at December 31, 2011
$
2,728 $
12,873 $
15,092 $
5,194 $
Additions
Disposals
As at December 31, 2012
Additions
Disposals
—
—
2,728
—
(410)
—
—
12,873
—
—
3,948
—
19,040
2,822
—
684
—
5,878
751
—
As at December 31, 2013
$
2,318 $
12,873 $
21,862 $
6,629 $
Amortization
As at December 31, 2011
Charge for the year
Disposals
As at December 31, 2012
Charge for the year
Disposals
As at December 31, 2013
Carrying Amount
December 31, 2012
December 31, 2013
— $
(1,255) $
(10,624) $
(2,767) $
—
—
—
—
—
(581)
—
(1,836)
(552)
—
(1,761)
—
(12,385)
(2,550)
—
(704)
—
(3,471)
(845)
—
$
$
$
— $
(2,388) $
(14,935) $
(4,316) $
(21,639)
2,728 $
2,318 $
11,037 $
10,485 $
6,655 $
6,927 $
2,407 $
2,313 $
22,827
22,043
35,887
4,632
—
40,519
3,573
(410)
43,682
(14,646)
(3,046)
—
(17,692)
(3,947)
—
There were no asset impairments in 2013 or 2012.
Empire Life Annual Report 2013
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
7.
INTANGIBLE ASSETS
Cost
As at December 31, 2011
Additions
Disposals
As at December 31, 2012
Additions
Disposals
As at December 31, 2013
Amortization
As at December 31, 2011
Charge for the year
Disposals
As at December 31, 2012
Charge for the year
Disposals
As at December 31, 2013
Carrying Amount
December 31, 2012
December 31, 2013
$
$
$
$
$
$
38,331
1,608
—
39,939
2,912
—
42,851
(37,241)
(627)
—
(37,868)
(666)
—
(38,534)
2,071
4,317
The Company’s total amount of research and development expenditure recognized as an expense during 2013 is
$3,848 (2012 $4,461).
There were no asset impairments during 2013 or 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
Less segregated funds held within
general fund investments
Total
72
Empire Life Annual Report 2013
2013
$
81,079 $
171,903
1,347,287
4,414,766
27,885
2012
192,581
150,376
1,204,163
3,510,274
28,127
6,042,920
5,085,521
(88,412)
(71,129)
$
5,954,508 $
5,014,392
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(b) The following tables present the investments of the segregated funds measured on a recurring basis at fair
value classified by the fair value hierarchy:
Cash and cash equivalents
Common and preferred shares
Bonds
Short-term investments
Total
Cash and cash equivalents
Common and preferred shares
Bonds
Short-term investments
Total
As at December 31, 2013
Level 1
Level 2
Level 3
$
61,504 $
19,575 $
— $
4,414,766
—
—
—
1,347,287
171,903
—
—
—
Total
81,079
4,414,766
1,347,287
171,903
$
4,476,270 $
1,538,765 $
— $
6,015,035
As at December 31, 2012
Level 1
Level 2
Level 3
Total
$
40,329 $
152,252 $
— $
192,581
3,510,274
—
—
—
1,204,163
150,376
—
—
—
3,510,274
1,204,163
150,376
$
3,550,603 $
1,506,791 $
— $
5,057,394
(c) 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
Management fees and other operating costs
Net change in segregated funds held within
general fund investments
Segregated Funds - End of Year
2013
2012
$
5,014,392 $
4,415,318
1,410,240
1,421,084
52,730
111,164
23,971
273,734
45,478
101,066
18,221
—
438,167
2,310,006
180,651
1,766,500
1,184,549
1,016,535
—
168,058
1,352,607
2,819
138,346
1,157,700
(17,283)
(9,726)
$
5,954,508 $
5,014,392
Empire Life Annual Report 2013
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(d) Empire Life's exposure to segregated fund guarantee risk
Segregated fund products issued by Empire Life contain death and maturity guarantees. Market price fluctuations
impact Empire Life's estimated liability for those guarantees. The impact of market price fluctuations in segregated
funds on the shareholders' net income is disclosed in the risk management Note 27 a) (i).
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
2013
39,034 $
9,939
2,579
8,630
18,758
78,940 $
2012
23,876
10,173
2,446
7,674
18,983
63,152
$
$
Of the above total, $1,836 (2012 $1,523) is expected to be settled more than one year after the Consolidated statement
of financial position date. Most of these financial instruments are short-term in nature and their fair value approximates
carrying value. In the absence of an active market for the amount to be settled more than one year after the
Consolidated statement of financial position date, the carrying value provides a reasonable approximation of fair value.
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.
74
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 liability position of
some of the reinsurance is because of the excess of future premiums payable over the expected benefit of
reinsurance. 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.
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.
Empire Life Annual Report 2013
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
Total
Participating Individual
- Life
- Other
Non-participating Individual
- Life
- Annuity
- Health
Non-participating Group
- Life
- Annuity
- Health
Segregated fund deferred acquisition costs
Total
As at December 31, 2013
Gross
Insurance
Contract
Liabilities
Reinsurance
Assets
(Liabilities)
Net
$
456,433 $
(2,552) $
458,985
430
—
430
2,375,625
1,048,353
96,392
28,746
64,300
182,448
(77,489)
(372,024)
15,239
9,099
2,747,649
1,033,114
87,293
927
—
64,684
—
27,819
64,300
117,764
(77,489)
$
4,175,238 $
(284,627) $
4,459,865
As at December 31, 2012
Gross Insurance
Contract
Liabilities
Reinsurance
Assets
(Liabilities)
Net
$
480,011 $
(3,482) $
483,493
425
—
425
2,505,369
1,088,572
97,206
26,297
67,617
181,783
(71,839)
(332,870)
16,727
9,323
2,838,239
1,071,845
87,883
807
—
64,687
—
25,490
67,617
117,096
(71,839)
$
4,375,441 $
(244,808) $
4,620,249
The Company expects to pay $4,018,709 (2012 $4,264,345) of Insurance contract liabilities and $288,153 (2012
$245,543) of Reinsurance liabilities more than one year after the Consolidated statement of financial position date.
76
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
2013
71,839 $
32,012
(26,362)
77,489 $
2012
55,175
39,097
(22,433)
71,839
$
$
Of the above total, $31,535 is expected to be amortized during the next year.
(b) Change in Insurance Contract Liabilities and Reinsurance Assets/Liabilities
Gross
Insurance
Contract
Liabilities
2013
Reinsurance
Assets
(Liabilities)
Net
Insurance contracts
- beginning of year
$
4,375,441 $
(244,808) $
4,620,249
Changes in methods and assumptions - improvements in mortality/morbidity
experience
- lapse assumption updates
- update of investment return assumptions
- model enhancements
- other changes
- new business
- in-force business
(74,377)
42,242
(1,433)
(13,912)
(7,600)
112,569
(257,692)
(59,800)
(1,450)
3,402
2,184
(140)
2,491
13,494
(14,577)
43,692
(4,835)
(16,096)
(7,460)
110,078
(271,186)
Normal changes
Insurance Contracts - End of Year
$
4,175,238 $
(284,627) $
4,459,865
Gross
Insurance
Contract
Liabilities
2012
Reinsurance
Assets
(Liabilities)
Net
Insurance contracts
- beginning of year
$
4,199,501 $
(156,119) $
4,355,620
Changes in methods and assumptions - improvements in mortality/morbidity
experience
- update of investment return assumptions
Normal changes
- model enhancements
- other changes
- new business
- in-force business
(97,053)
28,489
(49,478)
22,799
151,083
120,100
(81,111)
(579)
(10,238)
(2,910)
3,520
2,629
(15,942)
29,068
(39,240)
25,709
147,563
117,471
Insurance Contracts - End of Year
$
4,375,441 $
(244,808) $
4,620,249
Changes in methods and assumptions summarized in the above tables are further explained as follows:
The improvements in mortality/morbidity experience for both 2013 and 2012 are primarily related to favourable
mortality experience for individual life business.
Empire Life Annual Report 2013
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The refinements to lapse rate assumptions for 2013 are primarily related to lapse rate assumptions for renewable
term products, which take into account the Canadian Institute of Actuaries’ Renewal Lapse Experience Study for
10-Year Term Insurance (released January 2014) as well as Empire Life’s emerging lapse rate experience.
The update in investment return assumptions for 2013 was primarily due to the impact of the higher interest rate
environment on the initial reinvestment rate assumption, which was offset by lower ultimate reinvestment rates
related to continuing decreases in the moving average of Government of Canada long-term bond rates over the last
10 years.
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 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 model enhancements for 2013 are related to the refinements of CALM valuation models for universal life
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 participating business.
The model enhancements for 2012 are related to the refinements of CALM valuation models for individual non-
participating insurance business. In addition, refinements were made to the valuation models for group LTD claims.
Other changes for 2013 relate primarily to lower unit costs for individual life insurance business developing in recent
expense studies. There were several other minor changes to assumptions and methodologies.
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.
78
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(c) Mix of Assets Allocated to Insurance, Annuity, Investment Contract Liabilities and Equity
Cash & short-term investments
$
86,443 $
24,074 $
280 $
132,001 $
242,798
As at December 31, 2013
Insurance
Liabilities
Annuity
Liabilities
Investment
Contract
Liabilities
Equity
and Other
Liabilities
Total
Bonds
Mortgages
Preferred shares
Common shares
Loans on policies
Policy contract loans
Other
Total
2,630,849
41,433
45,831
649,612
44,855
1,140
13,567
565,870
254,958
203,144
—
—
38,527
5,616
6,573
2,962
2,360
—
—
448
64
1,130,220
4,333,512
—
42,883
65,778
—
50,160
86,254
299,353
294,218
715,390
44,855
90,275
105,501
$
3,513,730 $
1,092,189 $
12,687 $
1,507,296 $
6,125,902
As at December 31, 2012 (Restated)
Insurance
Liabilities
Annuity
Liabilities
Investment
Contract
Liabilities
Equity
and Other
Liabilities
Total
Cash & short-term investments
$
80,147 $
20,622 $
266 $
163,787 $
264,822
Bonds
Mortgages
Preferred shares
Common shares
Loans on policies
Policy contract loans
Other
Total
2,883,431
36,777
69,425
502,364
43,071
4,513
12,755
607,537
262,374
195,230
—
—
40,927
5,817
7,827
3,380
2,515
—
—
527
76
728,534
4,227,329
—
54,151
54,400
—
49,494
71,459
302,531
321,321
556,764
43,071
95,461
90,107
$
3,632,483 $
1,132,507 $
14,591 $
1,121,825 $
5,901,406
Provisions made for anticipated future losses of principal and interest on investments and included as a component
of policy liabilities are $114,000 (2012 $124,900)
(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.
Empire Life Annual Report 2013
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
Post-employment benefit liability
Accrued interest on subordinated debt
Other
Accounts Payable and Other Liabilities
2013
2012
242,798 $
264,822
2,425,017
2,369,078
2,609,190
2,067,815
5,036,893 $
4,941,827
511,709 $
480,943
1,120,376
1,056,768
1,632,085 $
1,537,711
2013
23,904 $
18,317
2,371
11,241
55,833 $
2012
(Restated)
25,859
34,953
1,604
7,459
69,875
$
$
$
$
$
$
Of the above total, $18,317 (2012 $34,953) is expected to be settled more than one year after the Consolidated
statement of financial position date. All other amounts are short-term in nature and their fair value approximates carrying
value. In the absence of an active market for post-employment benefit liabilities, the actuarially determined value
provides a reasonable approximation of fair value.
80
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
12.
EMPLOYEE BENEFIT PLANS
Empire Life sponsors pension and other post-employment benefit plans for eligible employees. The Empire Life
Insurance Company Staff Pension Plan (the Plan) consists of a defined benefit component and a 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 enrolments in the defined benefit component
effective October 1, 2011. The company has supplemental arrangements that provide defined pension benefits in
excess of statutory limits. 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 defined benefit component of the Plan is a final salary pension plan, which provides benefits to members in the form
of a guaranteed level of pension payable for life. The level of benefits provided depends on members’ age, length of
service and their salary in the final years leading up to retirement. Pensions generally do not receive inflationary
increases once in payment. In the past, however, the Company has provided ad-hoc pension increases on its defined
benefit staff pension plan. Increases take place at the discretion of the Company’s Board of Directors. The pension
benefit payments are from trustee-administered funds.
The Company’s staff pension benefit plan is governed by the Pension Benefits Act of the Province of Ontario, as
amended, which requires that the plan sponsor fund the defined benefits determined under the plan. The Company’s
supplemental employee retirement benefit plan is governed by provisions of the plan, which requires that the plan
sponsor fund the defined benefits determined under the plan. The amount of funds contributed to these defined benefit
pension plans by Empire Life is determined by an actuarial valuation of the plans.
Under the defined contribution component, contributions are made in accordance with the provisions of the Plan
documents.
A pension committee, composed of selected senior members of Empire Life's management and that of its parent,
E-L Financial Corporation, oversees the Pension Plan of the Company. The Pension Committee reports quarterly to the
Human Resources Committee of the Board of Directors. The Audit Committee of the Board of Directors approves the
audited annual financial statements of the Pension Plan.
The other post-employment benefit plan provides for health, dental care, and other future defined benefits to qualifying
employees and retirees. It is unfunded and the Company meets the benefit payment obligation as it falls due.
In the absence of an active market for post-employment benefit obligations, the actuarially determined values provide a
reasonable approximation of their fair value. Plan assets are carried at fair value.
Empire Life Annual Report 2013
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The following tables present financial information for the Company’s defined benefit plans.
As at December 31
Present value of obligations
Fair value of plan assets
Post-employment benefit asset (liability)
Pension Benefits
Other Post Employment Benefits
2013
177,592 $
169,292
(8,300) $
2012
(Restated)
172,925
147,787
(25,138)
$
$
2013
10,017 $
—
(10,017) $
2012
(Restated)
9,815
—
(9,815)
$
$
The post-employment benefit asset (liability), net of the cumulative impact of the asset ceiling, is included in the
Consolidated statement of financial position in Accounts payables and other liabilities.
The movement in the present value of the Plans' defined benefit obligations over the year is as follows:
Present Value of Defined Benefit Obligation
Opening defined benefit obligation
Current service cost
Interest expense
Decrease (increase) in net income before tax
Remeasurements
(Gain)/loss from changes in demographic
assumptions
(Gain)/loss from changes in financial assumptions
Actuarial (gain) loss from member experience
Decrease (increase) in OCI before tax
Employee contributions
Benefits paid
Pension Benefits
Other Post Employment Benefits
2013
2012
(Restated)
2013
2012
(Restated)
$
172,925 $
148,207
$
9,815 $
12,473
6,603
7,117
13,720
5,986
(10,385)
3,052
(1,347)
2,053
(9,759)
5,017
7,462
12,479
—
17,081
—
17,081
2,212
(7,054)
54
397
451
1,135
(905)
(228)
2
—
(251)
103
610
713
(3,404)
1,242
(921)
(3,083)
—
(288)
9,815
Closing defined benefit obligation
$
177,592 $
172,925
$
10,017 $
82
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The movement in the fair value of the Plan’s assets over the year is as follows:
Fair Value of Defined Benefit Assets
Fair value at beginning of year
Interest income
Administrative expense
Increase (decrease) in net income before tax
Remeasurements
Return on plan assets, excluding amounts
included in interest income
Increase (decrease) in OCI before tax
Employer contributions
Employee contributions
Benefits paid
Pension Benefits
2013
2012
(Restated)
$
147,787 $
139,196
6,189
(635)
5,554
16,247
16,247
7,410
2,053
(9,759)
7,098
(636)
6,462
2,122
2,122
4,849
2,212
(7,054)
Fair value of Plan assets at end of year
$
169,292 $
147,787
The actual return on plan assets net of administrative expense, for the year ended December 31, 2013 was a gain of
$21,801 (2012 gain of $8,584).
The following table summarizes income, expense and remeasurement activity for the Company’s defined benefit plans:
For the year ended
Operating expense
Current service cost
Interest expense
Interest income on plan assets
Administrative expense
Decrease (increase) in net income before tax
Remeasurements
Return on plan assets, excluding amounts
included in interest income
(Gain)/loss from changes in demographic
assumptions
(Gain)/loss from changes in financial assumptions
Actuarial (gain) loss from member experience
Pension Benefits
Other Post Employment Benefits
2013
2012
(Restated)
2013
2012
(Restated)
6,603 $
7,117
(6,189)
635
8,166 $
5,017
7,462
(7,098)
636
6,017
$
$
54 $
397
—
—
451 $
103
610
—
—
713
(16,247) $
(2,122)
$
— $
—
$
$
$
5,986
(10,385)
3,052
—
17,081
—
1,135
(905)
(228)
(3,404)
1,242
(921)
(3,083)
Decrease (increase) in OCI before tax
$
(17,594) $
14,959
$
2 $
Empire Life Annual Report 2013
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Defined benefit plan expense is recognized in Operating expenses. Remeasurements in the defined benefit plan are
included in OCI. Operating expenses also include $544 (2012 $333) of pension expense related to the defined
contribution component of the pension plan.
Expected contributions (including both employer and employee amounts) to the Company’s defined benefit pension
plans for the year ending December 31, 2014 are approximately $7,443.
The Plan invests primarily in Empire Life segregated and mutual funds. The fair value of the underlying assets of the
funds and other investments are included in the following table:
As at December 31
Equity
Canadian
Consumer discretionary
Consumer staples
Energy
Financials
Industrials
Information technology
Materials
Telecom services
Utilities
Total Canadian
Foreign
Total Equity
Debt
Government of Canada
Provincial governments
Municipal governments
Canadian corporations
Total Debt
Cash, cash equivalent, accruals
Mutual Funds
Other
Total fair value of assets
$
2013
6,633
3,483
10,839
21,702
4,437
4,072
4,053
1,401
1,975
58,595
43,974
102,569
10,244
12,216
1,140
25,793
49,393
4,046
6,254
7,030
2012
3,881
1,457
14,969
15,511
3,090
1,838
5,564
3,725
1,393
51,428
27,412
78,840
6,979
14,096
1,114
28,837
51,026
5,307
5,407
7,207
$
4%
2%
6%
13%
3%
2%
2%
1%
1%
34%
26%
60%
6%
8%
1%
15%
30%
2%
4%
4%
3%
1%
9%
10%
2%
1%
4%
2%
1%
33%
19%
52%
5%
9%
1%
20%
35%
4%
4%
5%
$
169,292
100%
$
147,787
100%
All equities are classified as level 1 and all debt is classified as level 2 in the fair value hierarchy.
84
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The following weighted average assumptions were used in actuarial calculations:
As at December 31
Defined benefit obligation as at December 31:
Discount rate - defined benefit obligation
Discount rate - net interest
Inflation assumption
Rate of compensation increase
Future pension increases
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
Pension Benefits
Other Post Employment Benefits
2013
2012
(Restated)
2013
2012
(Restated)
4.8%
4.2%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.2%
5.1%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.8%
4.1%
n/a
n/a
n/a
8.1%
4.5%
4.1%
5.0%
n/a
n/a
n/a
8.4%
4.5%
2026
2026
Assumptions relating to future mortality to determine the defined benefit obligation and the net benefit cost for the
defined benefit pension plans are as follows:
(number of years)
Males aged 65 at measurement date
Females aged 65 at measurement date
Males aged 40 at measurement date
Females aged 40 at measurement date
2013
22.49
24.52
23.58
25.37
2012
19.76
22.13
21.63
23.14
The following table provides the sensitivity of the defined benefit pension and other post-employment benefit obligations
to changes in significant actuarial assumptions. For each sensitivity test, the impact of a reasonably possible change in
a single factor is shown with other assumptions left unchanged. In practice, this is unlikely to occur, and changes in
some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to
significant actuarial assumptions the same method has been applied as when calculating the Post-employment benefit
liability recognized within the Statement of financial position.
Empire Life Annual Report 2013
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Discount rate
Rate of compensation increase
Health care cost increase
Claim rate
Life expectancy
Impact on Pension Benefits
Impact on Other Post
Employment Benefits
Change in
Assumption
Increase
Decrease
Increase
Decrease
1%
1%
1%
10%
(21,927)
8,556
n/a
n/a
30,011
(7,414)
n/a
n/a
1 year
4,267
(4,558)
(982)
n/a
1,397
924
495
1,181
n/a
(1,083)
(926)
(514)
The weighted average duration of the defined benefit obligations are:
Staff pension plan
Supplemental employee retirement plan
Other post-employment benefits
Risks
2013
14
11
13
Through its defined benefit pension plan and the other post-employment benefit plan, the Company is exposed to a
number of risks, the most significant of which are detailed below:
Asset volatility
The plan obligations are calculated using a discount rate set with reference to corporate bond yields; if plan assets
underperform this yield, this will create a deficit. The pension plan holds a significant proportion of equities, which are
expected to outperform corporate bonds in the long-term while producing volatility and risk in the short-term.
The following table summarizes the potential impact on OCI of a change in global equity markets regarding assets in
Empire Life's pension plan. 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.
As at December 31, 2013
10% Increase
10% Decrease
20% Increase
20% Decrease
7,760 $
369 $
(7,760) $
(369) $
15,520 $
(15,520)
738 $
(738)
As at December 31, 2012
10% Increase
10% Decrease
20% Increase
20% Decrease
6,022 $
274 $
(6,022) $
(274) $
12,044 $
(12,044)
548 $
(548)
$
$
$
$
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
86
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The following tables summarize the potential impact on OCI as a result of a change in interest rates on assets in Empire
Life's pension plan.
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Changes in bond yields
As at December 31, 2013
100bps
Increase
100bps
Decrease
200bps
Increase
200bps
Decrease
(2,152) $
(104) $
2,607 $
126 $
(3,847) $
(185) $
5,671
273
As at December 31, 2012
100bps
Increase
100bps
Decrease
(2,488) $
(114) $
2,691 $
123 $
200bps
Increase
(4,794) $
(220) $
200bps
Decrease
5,597
257
$
$
$
$
A decrease in corporate bond yields will increase plan obligations, although this will be partially offset by an increase in
the value of the plans’ bond holdings.
Life expectancy
The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy
will result in an increase in the plans’ liabilities.
In case of the funded plans, the Pension Committee ensures that the investment positions are managed within an asset-
liability matching (ALM) framework that has been developed to achieve long-term investments that are in line with the
obligations under the pension plan. Within this framework, the Company's ALM objective is to match assets to the
pension obligations by investing in equities as well as in long-term fixed interest securities with maturities that match the
benefit payments as they fall due. The Company actively monitors how the duration and the expected yield of the
investments are matching the expected cash outflows arising from the pension obligations. The Plan has not changed
the processes used to manage its risks from previous periods. Investments are well diversified, such that the failure of
any single investment would not have a material impact on the overall level of assets. The Plan invests primarily in
Canadian Bonds and Equities through its' ownership of units in Empire Life segregated and mutual funds. The Company
believes that equities offer the best returns over the long term with an acceptable level of risk.
Empire Life Annual Report 2013
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The last triennial valuation was completed in August 2013, as at December 31, 2012.
The next triennial valuation is due to be completed as at December 31, 2015 for both the defined benefit component of
the pension plan and the other post-employment benefits.
13.
INSURANCE PREMIUMS
For the year ended December 31
2013
Reinsurance
2012
Reinsurance
Gross
Ceded
Net
Gross
Ceded
Net
Life premiums
Health premiums
Total life and health premiums
Annuity premiums
319,334
758,799
159,722
$
439,465 $
(73,683) $
365,782 $
427,623 $
(68,094) $
(22,856)
(96,539)
296,478
662,260
299,338
726,961
(21,107)
(89,201)
359,529
278,231
637,760
(438)
159,284
175,772
—
175,772
Total Insurance Premiums
$
918,521 $
(96,977) $
821,544 $
902,733 $
(89,201) $
813,532
14.
FEE INCOME
For the year ended December 31
Investment management, policyholder
administration and guarantee fees
Surrender charges and other miscellaneous fees
Fee Income
15.
BENEFITS AND EXPENSES
(a) Insurance Contract Benefits and Claims Paid
2013
2012
$
$
143,442 $
7,147
150,589 $
117,802
7,416
125,218
For the year ended December 31
2013
Reinsurance
2012
Reinsurance
Life claims
Health claims
Total life and health claims
Gross
Ceded
Net
Gross
Ceded
$
169,046 $
(41,789) $
127,257 $
164,415 $
(34,453) $
221,903
390,949
(11,491)
(53,280)
210,412
337,669
209,078
373,493
(10,626)
(45,079)
Net
129,962
198,452
328,414
Annuity benefits
225,060
(3,192)
221,868
216,548
(3,716)
212,832
Benefits and Claims Paid
$
616,009 $
(56,472) $
559,537 $
590,041 $
(48,795) $
541,246
88
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(b) Change in Insurance Contract Liabilities and Reinsurance Ceded
For the year ended December 31
2013
Reinsurance
2012
Reinsurance
Life
Health
Total life and health
Gross
Ceded
Net
Gross
$
(150,411) $
37,845 $
(112,566) $
175,781 $
(610)
(151,021)
486
38,331
(124)
(112,690)
(2,520)
173,261
Ceded
80,525 $
7,959
88,484
Net
256,306
5,439
261,745
Annuity
(49,182)
1,488
(47,694)
2,679
205
2,884
Change in Insurance
Contract Liabilities
$
(200,203) $
39,819 $
(160,384) $
175,940 $
88,689 $
264,629
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.
Empire Life Annual Report 2013
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Operating results are segmented into three product lines along with the Company’s capital and surplus segment as
follows:
Net premiums from external customers
$
159,284 $
306,585 $
355,675 $
— $
For the year ended December 31, 2013
Wealth
Employee
Management
Benefits
Individual
Insurance
Capital &
Surplus
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
41,489
53,213
5,633
4,256
122,508
140,199
37,111
42,491
(36,256)
(6,561)
(306,220)
7,173
299
37,973
162
140,211
221,868
(47,694)
945
—
1,729
55,249
71,838
—
—
—
2,938
18,651
195
7,605
219,151
2,996
—
1,306
41,926
30,172
—
6,697
—
2,790
8,647
150
1,009
118,518
(115,686)
22,098
1,578
40,798
66,247
—
7,314
3,900
19,182
66,407
—
—
(2,995)
1,764
—
—
—
—
1,477
—
18,977
—
—
4,475
16,331
Total
821,544
206,741
240,159
(349,037)
45,445
(2,488)
150,589
559,537
(160,384)
945
22,098
4,613
139,450
168,257
18,977
14,011
3,900
29,385
110,036
90
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Net premiums from external customers
$
175,772 $
289,510 $
348,250 $
— $
For the year ended December 31, 2012 (Restated)
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
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
42,075
53,037
5,324
6,273
120,491
143,385
26,404
34,659
1,388
(2,963)
2,972
2,944
1,625
49,780
182
115,355
212,831
2,883
754
—
1,316
52,654
72,639
—
—
—
(370)
7,287
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
45,548
74,555
—
7,154
3,900
(4,321)
12,263
—
—
27,967
1,637
—
—
—
—
—
1,083
—
13,697
—
—
12,707
36,776
Total
813,532
194,294
237,354
1,397
54,349
28,405
125,218
541,246
264,629
754
20,478
3,673
140,155
174,839
13,697
13,466
3,900
13,538
73,553
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
As at December 31, 2013
Wealth
Employee
Management
Benefits
Individual
Insurance
Capital &
Surplus
Total
1,104,876 $
154,470 $
3,359,260 $
1,507,296 $
6,125,902
5,932,724
—
21,784
—
5,954,508
7,037,600 $
154,470 $
3,381,044 $
1,507,296 $
12,080,410
As at December 31, 2012 (Restated)
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
1,147,098 $
150,149 $
3,482,334 $
1,121,825 $
5,901,406
4,993,338
—
21,054
—
5,014,392
6,140,436 $
150,149 $
3,503,388 $
1,121,825 $
10,915,798
$
$
$
$
Empire Life Annual Report 2013
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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 depreciation of capital assets
Other
Total
2013
2012
(Restated)
$
83,713 $
14,273
10,826
4,613
26,025
$
139,450 $
85,024
18,488
9,471
3,673
23,499
140,155
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
2013
2012
(Restated)
31,847 $
15,430
(2,462)
—
29,385 $
(2,466)
574
13,538
$
$
During 2013 the Company paid income tax installments totaling $24,074 (2012 $3,920) and recovered income
taxes in respect of prior years totaling $nil (2012 $(19,396)).
The Company has an Ontario minimum tax carry-forward of $7,822. Of this amount, $479 expires in 15 years,
$2,432 expires in 16 years, $2,432 expires in 17 years, and $2,479 expires in 18 years. Management considers it
more likely than not that these tax carry-forwards will be realized before they expire.
92
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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
2013
$
139,421 $
36,919
—
(7,515)
(19)
$
29,385 $
2012
(Restated)
87,091
23,000
74
(11,371)
1,835
13,538
The current enacted corporate tax rates as they impact the Company in 2013 stand at 26.48% (2012 26.41%). This
rate is expected to move to 26.51% for 2014 and remain unchanged through to 2016. The impact of future enacted
corporate tax rates has been taken into consideration in the deferred tax calculation.
(c) Deferred Income Taxes
In certain instances the tax basis of assets and liabilities differs from the carrying amount. These differences will
give rise to deferred income taxes, which are reflected on the Consolidated statement of financial position. These
differences arise in the following items:
As at December 31
Insurance contracts
Portfolio investments
Taxes recoverable in future years
Post-employment benefit plans
Other, net
Deferred Income Tax Asset (Liability)
2013
2012
(Restated)
$
(11,298) $
(7,707)
16,942
4,772
(309)
$
2,400 $
(14,281)
(9,417)
19,342
9,318
(366)
4,596
Of the above total, $6,833 (2012 $9,490) 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
Deferred income tax asset (liability) - beginning of year
Deferred income tax (expense) benefit
Statement of operations
Other comprehensive Income
Deferred income tax asset (liability) - end of year
2013
2012
(Restated)
4,596 $
(432)
2,462
(4,658)
2,400 $
1,892
3,136
4,596
$
$
Empire Life Annual Report 2013
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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
2013
Tax
Before
Tax
Provision
(Recovery)
After
Tax
Before
Tax
2012
(Restated)
Tax
Provision
(Recovery)
After
Tax
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
Remeasurements of post-
employment benefit liabilities
Net Other Comprehensive
Income (Loss)
$
(25,682) $
(6,801) $
(18,881) $
10,192 $
2,688 $
7,504
2,488
601
1,887
(28,405)
(9,244)
(19,161)
849
17,592
275
4,658
574
791
257
534
12,934
(11,876)
(3,136)
(8,740)
$
(4,753) $
(1,267) $
(3,486) $
(29,298) $
(9,435) $
(19,863)
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
2013
Tax
Before
Tax
Provision
(Recovery)
After
Tax
Before
Tax
2012
(Restated)
Tax
Provision
(Recovery)
After
Tax
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
Remeasurements of post-
employment benefit liabilities
Shareholder portion of
policyholder other
comprehensive income (loss)
Net Other Comprehensive
Income (Loss)
$
(31,046) $
(8,222) $
(22,824) $
8,454 $
2,229 $
6,225
4,173
1,086
3,087
(29,256)
(9,555)
(19,701)
849
16,752
275
4,436
574
791
257
534
12,316
(11,324)
(2,990)
(8,334)
368
94
274
259
77
182
$
(8,904) $
(2,331) $
(6,573) $
(31,076) $
(9,982) $
(21,094)
94
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The following income tax amounts are included in each component of policyholders’ OCI:
For the year ended December 31
2013
Tax
Before
Tax
Provision
(Recovery)
After
Tax
Before
Tax
2012
(Restated)
Tax
Provision
(Recovery)
After
Tax
$
5,364 $
1,421 $
3,943 $
1,738 $
459 $
1,279
(1,685)
(485)
(1,200)
851
311
540
840
222
618
(552)
(146)
(406)
(368)
(94)
(274)
(259)
(77)
(182)
$
4,151 $
1,064 $
3,087 $
1,778 $
547 $
1,231
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
Remeasurements of post-
employment benefit liabilities
Shareholder portion of
policyholder other
comprehensive (income) loss
Net Other Comprehensive
Income (Loss)
19.
DIVIDENDS
Shareholder dividends paid in 2013 and 2012 were $24,100 and $nil, respectively. This represents a dividend pay out
rate of $24.4652 per share in 2013 and $nil per share in 2012.
On February 25, 2014 the Board of Directors approved a dividend of $33,984 ($34.4985 per share) payable in the first
quarter of 2014.
Empire Life Annual Report 2013
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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, 2013 and December 31, 2012 the Company was in compliance with
these ratios.
As at December 31
Tier 1 Regulatory Capital
Tier 2 Regulatory Capital
Total Regulatory Capital
2013
830,538 $
532,961
2012
755,641
327,187
1,363,499 $
1,082,828
$
$
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 2013 were $3,250 (2012 $2,987). The future aggregate minimum lease
payments under non-cancellable operating leases are as follows:
2013
2014
2015
2016
2017
2018 (and thereafter for comparative)
2019 (and thereafter)
Investment Commitments
$
2013
— $
3,011
1,859
1,521
1,274
1,016
1,577
2012
2,722
2,568
1,513
1,202
955
1,937
—
$
10,258 $
10,897
In the normal course of business, investment commitments are outstanding which are not reflected in the consolidated
financial statements. At December 31, 2013 there were $11,430 (2012 $41,281) of outstanding commitments to
purchase units in a real estate limited partnership. These commitments are payable on demand and mature within 5
months.
96
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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 2013, the Company earned investment management service fees of $1,631 (2012 $1,634) 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
Total
2013
6,369 $
565
6,934 $
2012
(Restated)
6,367
434
6,801
$
$
Post-employment benefits are comprised of employer current service costs for pension and other post-employment
benefits.
There were no termination benefits expensed during 2013 or 2012.
Empire Life Annual Report 2013
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
23.
SUBORDINATED DEBT
On May 31, 2013, the Company issued $300,000 principal amount of unsecured subordinated debentures with a
maturity date of May 31, 2023. The interest rate from May 31, 2013 until May 31, 2018 is 2.870%, and the rate from May
31, 2018 until May 31, 2023 will be equal to the 3-month Canadian Deposit Offering Rate plus 1.05%. Interest is payable
semi-annually at May 31 and November 30 until May 31, 2018, quarterly thereafter with the first such payment on
August 31, 2018. The Company may call for redemption of the debentures on or after May 31, 2018 subject to the
approval of OSFI. The holders have no right of redemption.
On May 20, 2009, the Company issued $200,000 principal amount of unsecured subordinated debentures with a
maturity date of May 20, 2019. The interest rate from May 20, 2009 until May 20, 2014 is 6.73%, and the rate from May
20, 2014 until May 20, 2019 will be equal to the 3-month Canadian Deposit Offering Rate plus 5.75%. Interest is payable
semi-annually at May 20 and November 20 until May 20, 2014, quarterly thereafter with the first such payment on
August 20, 2014. The Company may call for redemption of the debentures at any time subject to the approval of OSFI.
The holders have no right of redemption.
The debentures are subordinated in right of payment to all policy contract liabilities of the Company and all other senior
indebtedness of the Company.
The fair value of these debentures is $500,609 as of December 31, 2013 (2012 $211,432), and is within level 2 of the
fair value hierarchy. The fair value is provided by a third party bond pricing service.
24.
SHAREHOLDERS’ EQUITY ENTITLEMENT
Shareholders’ entitlement to $5,718 (2012 $5,804) of shareholders’ equity is contingent upon future payment of
dividends to participating policyholders.
98
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
26.
SUPPLEMENTARY PARTICIPATING POLICYHOLDER INFORMATION
Participating Account Assets
As at December 31
Assets backing participating account equity
Assets backing participating account liabilities
$
2013
985 $
2012
985
2013
$
$
50,822 $
510,765 $
2012
(Restated)
50,978
533,215
Transfers to Shareholders’ Account
In 2013, the Company transferred $2,292 (2012 $2,267), equal to 1/9th of the dividends credited to the participating
policyholders, from the participating account to the shareholders’ account.
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.
Empire Life Annual Report 2013
99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
(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.
100
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
(1) Market Price Fluctuations
The Company’s investment portfolio consists primarily of 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, mutual funds 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 and mutual funds are
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 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.
Empire Life Annual Report 2013
101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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.
102
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Segregated fund guarantee policy liabilities
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Segregated fund guarantee policy liabilities
As at December 31, 2013
10% Increase
10% Decrease
20% Increase
20% Decrease
$
20,125 $
(20,125) $
40,272 $
(40,272)
$ nil $ nil $ nil $ nil
$
$
1,800 $
3,036 $
(1,800) $
(3,036) $
3,600 $
6,072 $
(3,600)
(6,072)
$ nil $ nil $ nil $ nil
As at December 31, 2012
10% Increase
10% Decrease
20% Increase
20% Decrease
$
18,083 $
(18,083) $
36,184 $
(36,184)
$ nil $ nil $ nil $ nil
$
$
1,525 $
2,478 $
(1,525) $
(2,478) $
3,050 $
4,956 $
(3,050)
(4,956)
$ nil $ nil $ nil $ nil
The following table identifies the concentration of the Company's common equity holdings in Empire Life's
investment portfolios:
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
2013
2012
$
$
260,775
$
249,655
4.3%
4.3%
41,081
$
39,328
0.7%
0.7%
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.
Empire Life Annual Report 2013
103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 OCI as a result of a
change in interest rates. The impact of a change in future interest rate assumptions on Insurance contract
liabilities 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, 2013
100bps
Increase
100bps
Decrease
200bps
Increase
200bps
Decrease
$ nil $ nil $ nil $ nil
$ nil $ nil $ nil $ nil
$
$
(36,712) $
(2,187) $
45,492 $
2,460 $
(64,681) $
(4,101) $
99,801
5,193
As at December 31, 2012
100bps
Increase
100bps
Decrease
200bps
Increase
200bps
Decrease
$ nil $ nil $ nil $ nil
$ nil $ nil $ nil $ nil
$
$
(20,421) $
(2,435) $
21,525 $
2,575 $
(39,827) $
(4,740) $
43,713
5,295
Interest rate risk in Empire Life's investment portfolio is managed through Investment Committee
established limits and regular reporting by management to the Investment Committee and the Board. The
Company’s investment guidelines establish investment objectives and eligible interest rate sensitive
investments, as well as establish diversification criteria, exposure, concentration and asset quality limits for
these investments. The ALM Committee oversees sensitivity to interest rates. The objective is to maximize
investment yields while managing the default, liquidity and reinvestment risks at acceptable levels and
within risk tolerances. Product development and pricing policies and practices also require consideration of
interest rate risk in the design, development and pricing of the products.
(3) Foreign Currency Risk
Foreign currency risk is the risk that the fair value of cash flows of a financial instrument will fluctuate
because of changes in exchange rates and create an adverse effect on earnings and equity when
measured in the Company’s functional currency.
104
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The Company’s primary foreign currency exposure arises from portfolio investments denominated in US
dollars. A 10% fluctuation in the US dollar would have an impact of approximately $1,430 (2012 $1,278) on
net income, $nil (2012 $nil) on shareholders’ OCI and $nil (2012 $38) 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 debt (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).
Empire Life Annual Report 2013
105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 2013 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.
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
As at December 31, 2013
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
$
155,439 $
231,802 $
441,101 $
14,533,202 $
15,361,544
2,729
214,218
164,239
536,625
3,011
6,294
32,883
—
270,979
5,670
5,085
326,235
18,317
790,738
1,577
3,068
—
—
17,176
573,336
182,556
14,536,270
16,134,612
—
10,258
$
539,636 $
276,649 $
792,315 $
14,536,270 $
16,144,870
As at December 31, 2012 (Restated)
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
$
107,176 $
297,823 $
386,770 $
14,021,133 $
14,812,902
2,919
13,460
141,206
264,761
2,722
7,866
53,482
—
359,171
6,238
5,745
218,927
34,953
646,395
1,937
3,373
—
—
19,903
285,869
176,159
14,024,506
15,294,833
—
10,897
$
267,483 $
365,409 $
648,332 $
14,024,506 $
15,305,730
106
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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, 2013, 4.0% (2012 4.6%) of cash and investments were held in
these shorter duration investments.
iii) Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation. The Company is subject to credit risk which arises from debtors or
counterparties who are unable to meet their obligations under debt or derivative instruments. This credit risk is
derived primarily from investments in bonds, debentures, preferred shares, 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.
Empire Life Annual Report 2013
107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
2013
$
217,350 $
25,448
2012
248,382
16,440
4,333,512
4,227,329
294,218
299,353
44,855
90,275
24,058
41,014
8,397
321,321
302,531
43,071
95,461
21,452
30,035
5,753
$
5,378,480 $
5,311,775
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)).
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
2013
2012
AAA
AA
A
BBB
BB
Total
Fair Value % of Fair Value
Fair Value % of Fair Value
$
290,418
7% $
266,832
1,190,826
2,257,568
594,134
566
27%
52%
14%
—%
1,274,244
2,253,538
432,535
180
$
4,333,512
100% $
4,227,329
6%
30%
54%
10%
—%
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.
108
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Provincial bonds represent the largest concentration in the bond portfolio, as follows:
As at December 31
Provincial bond holdings
Percentage of total bond holdings
2013
2012
$
2,167,988
$
2,355,977
50%
56%
The following table profiles the bond portfolio by contractual maturity, using the earliest contractual
maturity date:
As at December 31
2013
2012
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
Fair Value % of Fair Value
Fair Value % of Fair Value
$
61,367
658,374
492,778
3,120,993
1% $
15%
11%
73%
53,360
434,762
510,229
3,228,978
$
4,333,512
100% $
4,227,329
1%
10%
12%
77%
100%
The following table discloses the Company's 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
2013
2012
$
2,803,115
$
2,935,033
47%
51%
Exposure to the largest single issuer of corporate bonds
$
130,849
$
139,727
Percentage of total cash and investments
2.2%
2.4%
*Fixed income securities includes bonds, debentures, preferred shares and short term investments.
(2) Preferred Shares
The Company’s preferred share investments are all issued by Canadian companies, with 33% (2012 86%)
of these investments rated as P1 and the remaining 67% (2012 14%) rated as P2.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $296,025 or 99% (2012
$298,432 or 99%) of the total mortgage portfolio.
Empire Life Annual Report 2013
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
$
159 $
176 $
307 $
290 $
356 $
348 $ — $ — $
822 $
140
115
8
7
1
1
2
2
151
$
299 $
291 $
315 $
297 $
357 $
349 $
2 $
2 $
973 $
814
125
939
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.
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.
110
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The computation of insurance liabilities and related reinsurance recoverable 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, 2013. 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 $11,100 ($12,400 for 2012). For
annuity business, lower mortality is financially adverse so a 2% decrease in the best estimate mortality
assumption would increase policy liabilities thereby decreasing net income by approximately $3,600
($4,100 for 2012).
Empire Life Annual Report 2013
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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 (described below) over the 20-year rolling period. In order to provide a
margin that recognizes the 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 $34,100 ($47,300 for 2012). This assumes no
change in the ultimate reinvestment rate (URR).
112
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 lesser 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 3.4% for 2012
to 3.2% for 2013. If long-term interest rates remain at current levels for the next year, then the URR is
estimated to decrease to 3.1% for 2014. 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 3.0% (3.1% for 2012) 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 $12,200 ($16,600 for
2012).
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 9.2%
(9.2% for 2012). The Company uses an assumption of 7.7% (8.1% for 2012) 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 $85,800 ($86,300 in 2012).
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.
Empire Life Annual Report 2013
113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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 $100,600
($104,200 in 2012). For products where fewer terminations would be financially adverse to the Company,
the change is applied as a decrease to the lapse assumption. Alternatively, for products where more
terminations would be financially adverse to the Company, the change is applied as an increase to the
lapse assumption.
(4) Expenses
Policy liabilities provide for the future expense of administering policies in force, renewal commissions,
general expenses and taxes. Expenses associated with policy acquisition and issue are specifically
excluded. The future expense assumption is derived from internal cost studies and includes an assumption
for inflation.
An increase in the level of expenses would result in an increase in expenditure thereby reducing profits for
the shareholders.
For non-participating insurance business and annuity business combined, a 5% increase in the
maintenance expense assumption would result in an increase to policy liabilities thereby reducing net
income by approximately $5,700 ($6,300 in 2012).
(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.
114
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 $5,100 ($5,200 in 2012).
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.
Empire Life Annual Report 2013
115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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.
116
Empire Life Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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. Effective January 1, 2013 Empire
Life has entered into a reinsurance agreement to cede a portion of Empire Life’s segregated fund death benefit
exposure. All Empire Life segregated fund policyholders with death benefit guarantees of at least $2 million are
included in this agreement. 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.
Empire Life Annual Report 2013
117
GLOSSARY OF TERMS (unaudited)
Accumulated Other Comprehensive Income (AOCI)
A separate component of shareholders’ and policyholders’ equity which includes net unrealized gains and losses on available for
sale securities, unamortized gains and losses on cash flow hedges, unrealized foreign currency translation gains and losses and
remeasurement of post-employment benefit liabilities. These items have been recognized in comprehensive income, but excluded
from net income.
Available For Sale (AFS) Financial Assets
Non-derivative financial assets that are designated as available for sale or that are not classified as loans and receivables, held to
maturity investments, or held for trading. Most financial assets supporting capital and surplus are classified as Available for sale
(AFS).
Canadian Asset Liability Method (CALM)
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.
Chartered Professional Accountants of Canada (CPA Canada)
Canada's not-for-profit association for Chartered Professional Accountants (CPA) provides information and guidance to its members,
students and capital markets. Working in collaboration with its provincial member organizations, CPA Canada supports the setting of
accounting, auditing and assurance standards for business, not-for-profit organizations and government, and develops and delivers
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 security products to more
than 26 million Canadians and their dependants. The industry develops guidelines, voluntarily and proactively, to respond to
emerging issues and to ensure consumer interests are protected.
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 assets supporting insurance contract liabilities and investment contract liabilities are
classified as Fair value through profit or loss (FVTPL).
International Financial Reporting Standards (IFRS)
Refers to the international accounting standards that were adopted in Canada, effective January 1, 2011; these are now Canadian
Generally Accepted Accounting Principles (CGAAP).
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. Remeasurements of post-employment benefit liabilities are also recorded as OCI or OCL. These
remeasurements will not be reclassified to net income and will remain in AOCI.
118
Empire Life Annual Report 2013
GLOSSARY OF TERMS (unaudited)
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.
Participating Policies
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.
Empire Life Annual Report 2013
119
PARTICIPATING ACCOUNT MANAGEMENT POLICY
The Board of Directors of The Empire Life Insurance Company has approved the following policy:
Participating Account Management Policy
Description of the Participating Account and its Policies
The Empire Life Insurance Company (“Empire Life”) maintains an account in respect of participating policies (“participating account”),
separate from those maintained in respect of other policies, in the form and manner determined by the Office of the Superintendent of
Financial Institutions under section 456 of the Insurance Companies Act (Canada). The participating account includes all policies
issued by Empire Life that entitle its policyholders to participate in the profits of the participating account. Most policies are credited
with dividends annually, while a few older plans receive dividends every five years as per contractual provisions. Empire Life does not
maintain sub-accounts within the participating account for life, disability and annuity plans, other funds, or blocks of business
acquired from other companies. Empire Life does not have any closed blocks of participating business established as part of the
demutualization of a mutual company into a shareholder company.
Investment Policy
The general fund investments in the participating account are subject to limits established by the Insurance Companies Act (Canada)
and to investment guidelines established by the Investment Committee of Empire Life’s Board of Directors (the “Board”). The
investment guidelines are designed to limit overall investment risk by defining investment objectives, eligible investments,
diversification criteria, exposure, concentration and asset quality limits for eligible investments.
Interest rate risk is managed through Investment Committee established limits and regular reporting by management to the
Investment Committee and the Board. The Asset/Liability Management Committee oversees sensitivity to interest rates. The objective
is to maximize investment yields while managing the default, liquidity and reinvestment risks at acceptable and measurable low
levels. Within the participating account, Empire Life has established three asset segments to nominally match the investments to the
specific type of liabilities or surplus as follows: Protection Par, Miscellaneous Insurance Par and Policyholders’ Surplus. Each asset
segment is assigned specific assets in an amount approximately equal to its total liabilities or surplus. Each asset segment is also
subject to asset segmentation guidelines established by the Asset/Liability Management Committee and approved by the Investment
Committee.
The Investment Committee receives monthly reporting on general fund asset mix and performance and investment transactions for
all funds by asset segment. In addition, on at least a quarterly basis, management and the Company’s investment managers report to
the Investment Committee, and through the Investment Committee to the Board of Directors, on portfolio content, asset mix, the
Company’s matched position, the performance of general and segregated funds, and compliance with the investment guidelines. The
investment guidelines are reviewed at least annually by the Board.
Investment Income Allocation
Investment income is recorded directly to each asset segment. A portion of investment income is allocated to or from the
Shareholders’ Capital and Surplus segment from or to the participating account’s asset segments in proportion to the deficiency or
excess of funds over assets of each segment.
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.
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Empire Life Annual Report 2013
PARTICIPATING ACCOUNT MANAGEMENT POLICY
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.
Empire Life Annual Report 2013
121
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 coverage, 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.
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.
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Empire Life Annual Report 2013
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 nine times in 2013 and is scheduled to meet
seven times in 2014.
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.
Empire Life Annual Report 2013
123
CORPORATE INFORMATION
Corporate Head Office
259 King Street East
Kingston, Ontario
Canada K7L 3A8
1 877 548-1881
info@empire.ca
www.empire.ca
RETAIL SALES OFFICES
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.
WESTERN CANADA
ONTARIO
QUEBEC
Burlington Retail Sales Office
601-5500 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
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
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
Saskatoon Retail Sales Office
285-2366 Ave C. North,
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
GROUP SALES OFFICES
WESTERN CANADA
ONTARIO
QUEBEC
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
Burlington Group Sales Office
601-5500 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
Montréal Group Sales Office
1600A-600 de Maisonneuve Boulevard W.
Montréal, Quebec H3A 3J2
514 842-0003
1 800 561-3738
124
Empire Life Annual Report 2013
BOARD OF DIRECTORS
SHAREHOLDERS' DIRECTORS
POLICYHOLDERS' DIRECTORS
HONORARY CHAIRMAN
James F. Billett1, 3, 4
President
J.F. Billett Holdings Ltd.
Mark J. Fuller, LL.B. 2, 3, 4
President and Chief Executive Officer
Ontario Pension Board
Andrew S. Birrell, B.Bus.Sc (Hons) 5
Chief Financial Officer
Guardian Financial Services
Leslie C. Herr 2, 5
President and Chief Executive Officer
The Empire Life Insurance Company
Edward M. Iacobucci 1, 4
Professor of Law
University of Toronto
Duncan N.R. Jackman 1, 2, 3, 4, 5
Chairman of the Board
The Empire Life Insurance Company
Deanna Rosenswig, B.Com., M.B.A. 1, 3
Corporate Director
Harold W. Hillier 2, 5
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, 5
President
Townsend Actuarial Consulting Ltd.
The Honourable Henry N.R. Jackman, O.C.,
O.Ont., LL.D., C.D.
Honorary Chairman
The Empire Life Insurance Company
HONORARY DIRECTOR
The Right Honourable John N. Turner, P.C.,
C.C., Q.C.
Partner
Miller Thomson LLP
1 Member of Audit Committee
2 Member of Investment Committee
3 Member of Human Resources Committee
4 Member of Conduct Review Committee
5 Member of Ad Hoc Capital Committee
Clive P. Rowe 2
Partner
Oskie Capital
Stephen J.R. Smith 2, 3, 5
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
Jonathan J. Yates 5
Chief Executive Officer
Guardian Financial Services
Empire Life Annual Report 2013
125
CORPORATE MANAGEMENT
Leslie C. Herr
President and Chief Executive Officer
Drew Wallace
Executive Vice-President, Retail
Anne E. Butler, 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
Sean E. Kilburn, F.S.A., F.C.I.A.
Senior Vice-President, Life Insurance
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
126
Empire Life Annual Report 2013
EMPIRE LIFE ANNUAL REPORT 2013
The Empire Life Insurance Company (Empire Life) offers competitive
individual and group life and health insurance, investment and retirement
products to help you build wealth and protect your financial security.
Empire Life is among the top 10 life insurance companies in Canada1 and
is rated A (Excellent) by A.M. Best Company2. Our vision is to be known for
simplicity, being easy to do business with and having a personal touch.
1 Source: The Globe and Mail Report on Business Magazine, July 2013, based on revenue
2 As at June 28, 2013
® 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-03/14