The Empire Life Insurance Company
Annual Report 2014
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Table of Contents
4 Financial Highlights
5 Message from the Chairman of the Board
6 Message from the President and Chief Executive Officer
9 Sources of Earnings
12 Management Discussion and Analysis
31 Management's Responsibility for Financial Reporting
32 Independent Auditor's Report
33 Appointed Actuary's Report
34 Consolidated Statements of Financial Position
35 Consolidated Statements of Operations
36 Consolidated Statements of Comprehensive Income
37 Consolidated Statements of Changes in Equity
38 Consolidated Statements of Cash Flows
39 Notes to the Consolidated Financial Statements
100 Glossary of Terms
102 Participating Account Management Policy
104 Participating Policyholder Dividends and Bonus Policy
106 Corporate Governance Over Risk Management
108 Corporate Information
Empire Life Annual Report 2014 3
2014 FINANCIAL HIGHLIGHTS
197%
MCCSR ratio
as at December 31, 2014
Product
diversification
Strength of our capital base
Product diversification
Our Minimum Continuing Capital and
Surplus Requirements (MCCSR) ratio is well
above the minimum requirements set by
the industry regulator. A high MCCSR ratio
demonstrates our long-term ability to pay
claims and our prudent capital management.
What is an MCCSR ratio?
An MCCSR ratio of 100% means that a
company has adequate capital to meet
obligations to its policyholders. The Office
of the Superintendent of Financial Institutions
of Canada (OSFI) requires life insurance
companies to maintain an MCCSR ratio
of at least 120% and expects them to have
a target ratio of at least 150%.
Financial ratings
These financial ratings give you an
independent opinion of our financial
strength as an insurer and our ability
to meet policyholder obligations.
by premium and fee income for the
12 months ended December 31, 2014
Empire Life is well-diversified across
three product lines:
Wealth Management
34%
Employee Benefits
31%
Individual Insurance
35%
A (Excellent)
A.M. Best Company (as at May 21, 2014)
Subordinated Debt Rating
of A (low)
Issuer Rating of A
Claims Paying Rating of IC-2
(2nd of five categories)
DBRS (as at May 23, 2014)
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 2014 Annual Report.
4
Empire Life Annual Report 2014
Shareholders’ Net Income
2014 (in millions)
$98.7
Shareholders’ Net Income
2013 (in millions): $113.3
Net Premium and Fee Income
2014 (in millions)
$1,055
Net Premium and Fee Income
2013 (in millions): $972
Total Assets Under Management
2014 (in millions)
$13,723
Total Assets Under Management
2013 (in millions): $12,013
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
Empire Life experienced another year of profitable growth in 2014. We continue to be successful in helping Canadians build
wealth and protect their financial security in a challenging and competitive business environment.
In June 2014, we appointed Mark Sylvia as President and CEO of Empire Life. Mark has an impressive track record of
leading and growing Canadian insurance companies by focusing on service, simplicity and strategic partnerships. His vision
and focus on measuring to improve and achieving greater profitable growth is already becoming a key focus within the
company. The Board has full confidence in Mark’s leadership and the management of the company and in its direction.
I wish to recognize and thank Les Herr for his vision and leadership during his tenure as President and CEO and for
establishing a strategic direction and foundation for growth that we continue to build upon today.
I would also like to acknowledge the contributions of three Board members who left this past year. Jim Billett has retired, and
Paul Weiss and Deanna Rosenswig did not seek re-election. I thank Jim, Paul, Deanna for their leadership and many
contributions to our Board.
We are very fortunate to welcome two new Board members in 2014, John Brierley and Jacques Tremblay. I am proud to
serve with our Board members who apply their strategic thinking and insights to understand the company’s strategy,
challenges and successes, while providing thoughtful guidance and deliberation. The depth of talent on our board is
considerable and I am very pleased with the work we have accomplished this past year.
Finally, on behalf of the Board of Directors, I wish to thank our shareholders and policyholders for their support and Empire
Life employees who continue to demonstrate why this company is one of the best life insurance companies in Canada. Your
dedication, commitment and focus on growing Empire Life can never be underestimated and is always deeply appreciated.
Duncan N. R. Jackman
Chairman of the Board
February 27, 2015
Empire Life Annual Report 2014 5
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
The state of the world economy was a major issue in 2014. The impact this has on Canadian equity markets and interest
rates is larger than we often anticipate. Against a background of relatively slow economic growth, the TSX index ended the
year 7.4% above the previous year’s close after hitting a peak of 14.9% above the prior year in early September. This
significant decrease in the index over the past four months of 2014 was a signal that investors were concerned about future
economic growth.
The Government of Canada 10-year bond yield finished the year at exactly 1.0%, a number which was down from the yield
of 1.09% at the beginning of the year. This was also a sign of anticipated weak economic growth ahead.
Do these events impact life insurance companies? The answer to that question is yes, significantly. We rely on investment
income from bonds to fund the reserves backing our policy liabilities; to a lesser but important degree we also rely on growth
of equity markets. The lower interest rate environment impacts our reinvestment rates, which results in the need to increase
our reserves to fund future liabilities.
From a sales perspective, 2014 was a solid year. Our new group insurance sales were $42 million in 2014 compared to $52
million in 2013, which is a year-over-year decrease. The group insurance market is in a phase of hyper-competitiveness.
Our traditional small employer market niche has become the focus of group insurers who previously concentrated on the
larger employer market. This additional competition has lowered prices and we have not been willing to underprice new
customers to get new sales.
Our Individual Insurance sales in 2014 were $59 million compared to $55 million in 2013. This was a solid result. The
demographics that drive new life insurance sales are relatively flat. Our increased sales in 2014 reflect the dedication of our
sales and customer service teams who support our advisor partners. This superior service has generated the additional
sales achieved in 2014.
Our segregated fund sales achieved a solid increase in 2014. New deposit premiums were $1.3 billion compared to
$1.0 billion in 2013. This is a growing business. Our products are aimed at the retirement and pre-retirement members of the
baby boom generation. This large segment of the Canadian population will be saving at a high rate over the next decade as
they move from asset accumulation during their working years, to asset utilization during their retirement years. Our
segregated fund and annuity products are able to offer retirement income guarantees not available in other products. Our
annuity product sales were $186 million in 2014, compared to $159 million in 2013, a solid increase. Our mutual fund sales
in 2014 increased to $68 million compared to $22 million in 2013. The combined total investment product sales of $1.566
billion was a 31.5% increase over the 2013 total of $1.190 billion.
Total assets under management for segregated fund and mutual fund portfolios reached a total of $7.1 billion in 2014, an
increase of $1.1 billion over the prior year total of $6.0 billion.
Total general fund assets (including par fund assets) increased to $6.8 billion in 2014, an increase of $0.7 billion over the
2013 assets of $6.1 billion.
6
Empire Life Annual Report 2014
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Total assets under management increased by $1.7 billion to $13.7 billion in 2014 compared to $12.0 billion in 2013. From a
shareholders’ net income perspective, 2014 was a better than average year with a net income of 98.7 million. In 2013, we
achieved a record net income of $113.2 million.
We recognize however that the economic trends and strong competition in our industry make it imperative that we improve
efficiency not only in our operations but in our capital management and product pricing. We do not see economic conditions
improving in the immediate future and we expect continued effective competition from our respected competitors.
Maintaining profitability and growing our business are often competing objectives. We intend to look for growth opportunities
that do not sacrifice the fundamental need for an adequate return on investment.
Meeting the needs of our customers in the digital age
In 2014, we continued to focus on providing superior products and services and making it easy for our distribution partners
and customers to do business with us. While the need to protect the financial security of Canadians has not changed, how
consumers choose to interact with financial service companies has changed in the digital age. We need to be faster, more
responsive and find ways to make it easier for Canadians to buy insurance and other financial products they need, while still
benefitting from valuable advice.
In 2014, we launched new social media channels to raise brand awareness and engage with our customers, advisors and
communities. We also launched a consumer-advertising campaign, “The Dumbest Way to Die is Without Life Insurance,”
based on the popular “Dumb Ways to Die” public safety campaign. This helped create awareness of our life insurance
products and directed them to empirelife.ca where they could find an advisor and get a quote online. We have seen
increasing adoption of our online Fast and Full™ insurance application which provides customers an easy way to access the
insurance they need with the help of an advisor. We will continue to build on this platform to target the large numbers of
middle-income Canadians who are under-insured.
We added a new income fund early last year to meet the growing demand for income funds, and significantly enhanced our
Wealth Management product offering in the fall with new Guaranteed Investment Funds. We believe Canadians want
investment products that are simple, easy to understand and that change with their needs as they transition from savings to
retirement. We will continue to ensure our products meet the needs of Canadians while balancing this with the risk we
accept as a company and our ability to meet the promises to our customers in the future.
In September 2014, we announced that we would partner with Express Scripts Canada to provide pharmacy benefit
management services to our group customers, effective February 1, 2015. As medical science continues to evolve and
costly new specialty drugs grow in importance, we need to find new ways to help customers protect their employees with
comprehensive and cost-effective drug benefits. We believe this partnership with Express Scripts Canada will benefit our
customers and their plan members, while managing and reducing drug benefit costs for plan sponsors. We also saw
increases in the use of our popular e-Claims system for health claims which makes submitting claims simple, easy to use
and cost-efficient.
Empire Life Annual Report 2014 7
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
We continued to see consolidation in our industry in 2014. We believe we are well-positioned to find growth opportunities as
a Canadian-owned insurance company that offers personalized service to our customers and advisor partners.
I would like to close by saying that since joining Empire Life in June of 2014, I have come to appreciate the unique culture of
this great company and the passion and commitment of the people who work here. I have said many times in the past, that I
have seen companies with good products and processes fail because they did not have engaged people, but I have yet to
see a company with superior people fail to succeed. I would also like to acknowledge our distribution partners-the advisors
who work faithfully with our customers to build wealth, protect their financial security and provide the service they need.
Finally, I would like to thank my senior leadership team for their support and guidance and our Board of Directors for their
continued confidence in our management and commitment to profitably growing our business.
Mark Sylvia
President and Chief Executive Officer
February 27, 2015
8
Empire Life Annual Report 2014
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.
Source of Earnings by Line of Business
For the year ended December 31
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
(millions of dollars)
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Expected profit on in-force business
$ 71.3 $ 47.6 $ 20.8 $ 18.5 $ 40.0 $ 39.7
Impact of new business
Experience gains & losses
Management actions and changes in assumptions
Other
(26.8)
(23.8)
(10.2)
(11.9)
12.4
1.1
(1.9)
(3.3)
(3.3)
—
—
3.8
—
4.7
0.1
—
(4.0)
(0.5)
5.8
(7.3)
(6.9)
59.8
3.9
—
$ 132.1 $ 105.8
(41.0)
(42.6)
10.0
6.3
(7.3)
65.6
0.7
—
Earnings on operations before income taxes
53.6
21.6
12.5
11.4
34.0
96.5
—
— 100.1
129.5
Earnings on surplus
Income before income tax
Income taxes
Shareholders’ Net Income
—
—
—
—
—
—
30.8
17.4
30.8
17.4
$ 53.6 $ 21.6 $ 12.5 $ 11.4 $ 34.0 $ 96.5 $ 30.8 $ 17.4 $ 130.9 $ 146.9
11.9
2.9
3.5
2.8
8.4
24.3
8.4
3.6
32.2
33.6
$ 41.7 $ 18.7 $
9.0 $
8.6 $ 25.6 $ 72.2 $ 22.4 $ 13.8 $ 98.7 $ 113.3
Empire Life Annual Report 2014 9
SOURCES OF EARNINGS
Wealth Management
Wealth Management’s 2014 earnings on operations were higher than the level achieved in 2013. In 2014 there was an
increase in expected profit on in-force business primarily due to the segregated fund business. Higher net income on in-
force business in 2014 was primarily due to growth in segregated fund management fees and growth in segregated fund
guarantee fees related to GMWB products. The growth in these fees was primarily due to favourable stock market
conditions, strong segregated fund product sales in 2014 and GMWB price increases. The favourable stock market
conditions had a positive impact on average assets under management and management fees earned, as stock markets
were higher on average during 2014 than they were during 2013.
Experience gains in 2014 were higher than 2013 levels primarily due to improved investment experience resulting from
market interest rate movements and the availability of assets at attractive yields for matching fixed interest annuity contract
liabilities.
These items were partly offset by lower earnings from higher new business strain in 2014 due to the strong segregated fund
product sales in 2014 relative to 2013.
Earnings resulting from management actions and changes in assumptions in 2014 were unchanged from 2013 levels and
continued to be primarily related to annuitant mortality assumptions.
Employee Benefits
Employee Benefit’s earnings on operations were higher than the level achieved in 2013. In 2014 there was an increase in
expected profit on in-force business due to growth of the in-force block of business.
There were also increased earnings due to lower new business strain in 2014 resulting from lower sales in 2014 relative to
2013.
In addition, there was a favourable update of policy liability assumptions in 2014 relative to 2013 primarily due to waiver of
premium assumptions for group life products in 2014.
These items were partly offset by a decrease in earnings from experience gains and losses as a loss from claims
experience occurred in 2014 versus a gain in 2013 due to unfavourable health claims and long-term disability results in
2014.
Individual Insurance
The decrease in Individual Insurance earnings on operations was primarily due to lower experience gains. The most
significant item was worsened investment experience which was primarily due to a significant decrease in long-term interest
rates in 2014, compared to the significant increase that occurred in 2013. 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.
10
Empire Life Annual Report 2014
SOURCES OF EARNINGS
In addition, there was a decrease in earnings resulting from other items in 2014 due to increased premium tax rates in the
province of Quebec on both inforce policies and new policies sold. Some inforce policies allow for an adjustment to prices
or charges to cover the cost of the additional tax. However, some inforce policies are fully guaranteed and cannot be
adjusted, resulting in a strengthening of insurance contract liabilities of $7.3 million.
These items were partly offset by improved new business strain in 2014. Lower new business strain resulted from higher
prices on long-term products and a product mix shift toward lower strain products such as term life.
In addition, there were improved results from management actions and changes in assumptions in 2014. This was primarily
due a favourable settlement on a lawsuit resulting in a gain for Empire Life in 2014. This was partly offset by a strengthening
of reserves in 2014 versus a release in the 2013 update of policy liability assumptions.
Capital & Surplus
2014 earnings from Capital and Surplus were higher than 2013 primarily due to gains on the sale of available for sale (AFS)
bond investments in 2014, compared to losses from the sale of AFS bond investments in 2013.
Empire Life Annual Report 2014 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, 2014 and 2013. This MD&A should be read in conjunction with the Company’s December 31, 2014 consolidated
financial statements, which form part of The Empire Life Insurance Company 2014 Annual Report dated February 27, 2015.
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
Fourth quarter
2014
2013
Year
2014
$
18.2 $
29.9 $
98.7 $
2013
113.3
Empire Life reported full year shareholders’ net income of $98.7 million for 2014, compared to $113.3 million for 2013.
For the year shareholders’ net income was lower relative to 2013 primarily due to lower Individual Insurance product line net
income. This product line’s lower result was primarily due to the unfavourable impact of long-term interest rate movements
experienced in 2014, compared to favourable movements in 2013. This was partly offset by a strong improvement in Wealth
Management product line net income. This product line’s improved result was primarily due to the 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 primarily due to the positive impact of favourable stock market conditions, strong
segregated fund product sales in 2014 and GMWB price increases.
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 2014 net income compared to 2013 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.
12
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
On March 5, 2014 the Chairman of the Board of Directors of Empire Life announced that Leslie C. Herr would be leaving his
position as President and Chief Executive Officer of Empire Life effective May 30, 2014, would continue to provide advice to
the Board and the new President and CEO following his departure in May, and would step down from his role as Chairman of
the Board for Empire Life Investments Inc., a subsidiary of Empire Life, effective May 30, 2014. On May 13, 2014 the Chairman
of the Board of Directors of Empire Life announced the appointment of Mark Sylvia as President and Chief Executive Officer
of Empire Life and Chairman of the Board for Empire Life Investments Inc. effective June 2, 2014.
The following table provides a summary of Empire Life results by major product line (figures in Management’s Discussion and
Analysis may differ due to rounding):
For the twelve months ended December 31
(millions of dollars)
Revenue
Net premium income
Fee and other income
Investment income
Realized gain on FVTPL investments
Realized gain (loss) on available for sale investments
including impairment write downs
Fair value change in FVTPL investments
Expenses
Benefits and expenses
Income and other taxes
Net income after tax
Policyholders' portion
Shareholders' net income
Assets under management
General fund assets
Segregated fund assets
Mutual fund assets
Annualized premium sales
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
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
$ 186 $ 159 $ 319 $ 307 $ 362 $ 356 $ — $ — $ 867 $ 822
178
49
9
—
20
442
388
12
400
140
54
7
1
(36)
325
302
4
306
9
4
—
—
4
8
4
—
—
(7)
1
151
65
—
514
336
312
1,093
317
10
327
294
1,049
9
17
303
1,066
1
140
38
—
(306)
229
132
31
163
—
42
—
13
—
55
16
10
26
2
42
—
(3)
—
41
21
4
25
188
246
74
13
538
1,926
1,770
49
1,819
151
240
45
(2)
(349)
907
749
48
797
$
42 $
19 $
9 $
9 $
27 $
66 $
29 $
16 $ 107 $ 110
$ 1,063 $ 1,105
$ 6,926 $ 5,932
$ 109 $
38
$
22 $
22
$
42 $
52 $
59 $
55
9
(3)
$
98 $ 113
$ 6,779 $ 6,126
$ 6,948 $ 5,954
$ 109 $
38
Fourth quarter
2014
2013
Year
2014
$
$
215 $
215 $
867 $
63
212
1
50
64
5
(2)
40
246
612
13
188
541 $
322 $
1,926 $
2013
822
240
(304)
(2)
150
906
Empire Life Annual Report 2014 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the year, total revenue at Empire Life increased by 113% to $1.93 billion compared to $906 million in 2013. Revenue volatility
was primarily driven by the impact of market interest rate movements on Fair value change in FVTPL investments. Major
revenue items are discussed below.
Net premium income for the year increased in 2014 relative to 2013. The increase related primarily to the Wealth Management
product line.
Fair value change in FVTPL investments including realized amounts often causes large revenue volatility. These assets
experienced a net gain in 2014 compared to a net loss in 2013. In 2014 the large gain was primarily from an increase in bond
prices (due to a decrease in market interest rates). In 2013 the loss was primarily from a decrease in bond prices (due to an
increase in market interest rates). 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 gain in 2014 versus losses in
2013. The increased revenue was due to gains from the sale of AFS equities and bonds in 2014, compared to losses primarily
from the sale of AFS bonds in 2013. 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 primarily backed capital and surplus.
Fee and other income increased in 2014 relative to 2013 primarily due to growth in segregated fund management fees and
growth in segregated fund guarantee fees related to GMWB products. The growth in these fees was primarily due to favourable
stock market conditions, strong segregated fund product sales in 2014 and GMWB price increases. The favourable stock market
conditions had a positive impact on average assets under management and management fees earned, as stock markets were
higher on average during 2014 than they were during 2013.
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
2014
2013
Year
2014
$
168 $
232
1
7
40
51
2
145 $
645 $
43
—
6
36
47
6
745
2
24
147
193
14
$
501 $
283 $
1,770 $
2013
560
(160)
1
22
139
168
19
749
Total benefits and expenses at Empire Life for the year increased by 136% to $1.77 billion compared to $749 million in 2013.
Expense volatility was primarily driven by the impact of market interest rate movements on Net change in insurance contract
liabilities. Major benefit and expense items are discussed below.
14
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net benefits and claims variability is dependent on the claims incurred. Generally, claims rise year over year due to growth of
the insurance blocks, which was the case for the quarter and year to date for all lines of business except Individual Insurance,
which declined slightly year to date. 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. The main reason for the large change from 2013 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.
Net commissions increased year over year due to the increase in Wealth Management product sales.
Interest expense decreased in 2014 relative to 2013 due to the redemption of $200 million 6.73% subordinated debentures on
May 20, 2014.
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 December 31,
2014
2013
$
1,063 $
6,926
109
Year
2014
186 $
1,312
479
175
68
62
1
8
37
(3)
42 $
1,105
5,932
38
2013
159
1,009
231
139
22
20
—
—
22
(3)
19
Fourth quarter
2014
2013
$
45 $
44 $
404
184
46
23
19
—
4 $
9
(1)
12 $
302
107
37
10
10
—
(4) $
7
(1)
2 $
Empire Life Annual Report 2014 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Assets in Empire Life general fund annuities decreased by 4%, while segregated fund assets increased by 17% 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, 2013, 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 and mutual fund products. For the year, fixed interest annuity premiums were up
17% compared to 2013. The increase was primarily due to increased sales of fixed interest deferred annuities.
For the year, segregated fund gross sales were up $303 million, a 30% increase from 2013. $205 million of this increase was
from 75% maturity guarantee products, which increased 49%. GMWB and 100% maturity guarantee product sales also
increased, growing by $69 million and $29 million respectively.
Segregated fund net sales for the year were up 108% compared to 2013 due to the above mentioned gross sales result.
For the year, segregated fund fee income increased by 26% in 2014 relative to 2013. The increase was due to growth in
segregated fund management fees and growth in segregated fund guarantee fees related to GMWB products. The growth in
these fees was primarily due to favourable stock market conditions, strong segregated fund product sales in 2014 and GMWB
price increases. The favourable stock market conditions had a positive impact on average assets under management and
management fees earned, as stock markets were higher on average during 2014 than they were during 2013.
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 209% in 2014 compared to 2013. Mutual fund gross sales continued to steadily improve during
2014 as sales for the fourth quarter came in at $23 million compared to $19 million, $13 million, $14 million and $10 million for
the previous four quarters respectively. In January 2014 a new mutual fund was added, the Empire Life Emblem Diversified
Income Portfolio. With a target asset mix of 80% fixed income and 20% equities, it is designed for conservative investors
seeking predictable and diversified income. This new fund is aimed at providing income solutions for the growing number of
Canadians in retirement.
16
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
During the fourth quarter and for the year earnings from this product line increased relative to 2013. 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 2014
Net income after tax 2013
Increase net income after tax
Components of increase
2013 loss from update of policy liability assumptions
2014 loss from update of policy liability assumptions
Increase in inforce profit margins
Improved annuitant mortality experience
Improved investment experience
Higher new business strain
Total
Fourth quarter
Year
$
$
$
$
12 $
2
10 $
2 $
(2)
3
3
5
(1)
10 $
42
19
23
2
(2)
17
4
5
(3)
23
In both 2013 and 2014, the update of policy liability assumptions was unfavourable by $2 million. In both years the updates for
general fund annuities related primarily to annuitant mortality assumptions.
Higher net income on inforce business in 2014 was primarily due to growth in segregated fund management fees and growth
in segregated fund guarantee fees related to GMWB products. The growth in these fees was primarily due to favourable stock
market conditions, strong segregated fund product sales in 2014 and GMWB price increases. The favourable stock market
conditions had a positive impact on average assets under management and management fees earned, as stock markets were
higher on average during 2014 than they were during 2013.
Improved annuitant mortality experience relates to the fixed interest immediate annuity business.
Improved investment experience resulted from market interest rate movements and the availability of assets at attractive yields
for matching fixed interest annuity contract liabilities.
Lower net income from higher new business strain caused a year over year decrease in net income. Higher new business
strain primarily resulted from higher segregated fund sales.
In the fourth quarter, Empire Life made significant changes to its segregated funds product line. Empire Life has closed its
existing segregated funds products to new policies effective October 31, 2014. In addition, on November 3, 2014 Empire Life
launched a new suite of investment products including a new segregated funds family called Empire Life Guaranteed Investment
Funds, as well as a stand-alone Guaranteed Interest Contract (GIC) and new version of its GMWB product. Fees charged to
the customer on the new product line are higher than the existing product line. The new product line’s pricing and features are
Empire Life’s response to the economic, regulatory and competitive landscape in the life insurance industry.
Empire Life Annual Report 2014 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Results - Employee Benefits
(millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income after tax
Fourth quarter
2014
2013
9 $
80
12 $
78
Year
2014
42 $
319
2 $
1 $
9 $
$
$
2013
52
307
9
For the year, sales in this product line decreased by 19% in 2014 relative to 2013. However, the 2014 level of sales while below
last year were relatively strong due to relatively stable economic conditions. This product line’s premium income increased by
4% relative to 2013 due to continuing growth of the inforce block.
During the fourth quarter and for the year earnings from this product line increased relative to 2013. 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 2014
Net income after tax 2013
Increase in net income after tax
Components of increase
2014 gain from update of policy liability assumptions
Increase in inforce profit margins
Worsened claims experience
Total
Fourth quarter
Year
$
$
$
$
2 $
1
1
3 $
—
(2)
1
9
9
—
3
2
(5)
—
In 2014, the favourable update of policy liability assumptions was primarily due to updated waiver of premium methods and
assumptions for group life products.
Higher net income on inforce business in 2014 was due to growth of the inforce block of business.
In 2014 worsened claims experience relates to unfavourable health claims and long-term disability results.
Product Line Results - Individual Insurance
(millions of dollars)
Selected financial information
Annualized premium sales
Premium income
Net income (loss) after tax
Net income (loss) after tax shareholders' portion
Net income (loss) after tax policyholders' portion
Net income after tax
18
Empire Life Annual Report 2014
Fourth quarter
2014
2013
14 $
91
(1) $
8
7 $
18 $
93
25 $
(4)
21 $
$
$
$
Year
2014
59 $
362
25 $
2
27 $
2013
55
356
72
(6)
66
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the year, annualized premium sales in this product line increased by 7% compared to 2013, and premium income increased
by 2% compared to 2013. This product line’s full year sales result is attributable primarily to increased sales of term life products.
Empire Life has been shifting its product mix toward shorter term products such as term life, while increasing prices on long-
term products, due to the low long-term interest rate environment.
During the fourth quarter and for the year, earnings from this product line decreased relative to 2013. 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 2014
Net income after tax 2013
Decrease in net income after tax
Components of income decrease
2013 gain from update of policy liability assumptions
2014 gain from update of policy liability assumptions
Worsened investment experience
Quebec premium tax increase
Worsened mortality, surrender and other experience
Lower new business strain
Favourable legal settlement
Total
Fourth quarter
Year
$
$
$
7 $
21
(14) $
(2) $
5
—
(5)
(12)
—
—
$
(14) $
27
66
(39)
(2)
5
(43)
(5)
(2)
2
6
(39)
In 2013, the update of policy liability assumptions was favourable by $2 million.
In 2014, the update of policy liability assumptions was favourable by $5 million. The following table provides a breakdown of
the components of this amount:
Components of income increase from update of policy liability assumptions
Net re-investment assumptions (primarily related to changes in methods)
Mortality
Lapse (primarily related to changes in methods)
Other
Total 2014 gain from update of policy liability assumptions
Year
70
27
(87)
(5)
5
$
$
In May 2014, final revisions to the Canadian actuarial standards of practice with respect to economic reinvestment assumptions
used in the valuation of insurance contract liabilities were released. The changes relate to assumed future interest rates, credit
spreads and the use of non-fixed income assets to match insurance contract liabilities. This revised standard, which took effect
on October 15, 2014 was used to calculate the above mentioned $70 million after tax reserve release resulting from investment
return assumption updates. Management estimates that the impact of implementing this revised standard at the beginning of
2014 would have been a reserve release of approximately $60 million after tax. Accordingly management estimates that a
reserve release of approximately $10 million after tax ($70 million minus $60 million) relates to all other investment return
assumption updates and changes in methods for 2014.
Empire Life Annual Report 2014 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
Empire Life uses an ultimate reinvestment rate (“URR”) assumption of 4.0% (3.0% for 2013). Empire Life uses a best estimate
return assumption for equities used to match long-term liabilities of 7.5% (7.7% for 2013). 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.
The refinements of lapse rate assumptions for 2014 was primarily related to emerging lapse rate experience for certain cost
of insurance structures offered within universal life products and for critical illness products as well as regular updates for other
individual life products.
For the year, investment experience weakened significantly year over year primarily due to the unfavourable impact from long-
term interest rate movements in 2014, compared to favourable movements in 2013. These interest rates decreased significantly
in 2014 compared to significant increases in 2013 (as shown in the following table).
Interest rate movement
30 year Canadian federal government bond yield
End of period
Beginning of period
Change during period
Fourth quarter
2014
2013
Year
2014
2.36 %
2.67 %
(0.31)%
3.24%
3.07%
0.17%
2.36 %
3.24 %
(0.88)%
2013
3.24%
2.37%
0.87%
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.
During the fourth quarter, the province of Quebec increased premium tax rates on both inforce policies and new policies sold.
Some inforce policies allow for an adjustment to prices or charges to cover the cost of the additional tax. However, some
inforce policies are fully guaranteed and cannot be adjusted, resulting in a strengthening of reserves of $5 million after tax.
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 a product mix shift toward lower strain products such as term life.
During the second quarter a favourable settlement on a lawsuit resulted in a $5.5 million gain after tax for Empire Life.
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
2014
2013
Year
2014
$
$
6 $
1
7 $
2 $
1
3 $
22 $
7
29 $
2013
14
2
16
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 increased relative to 2013.
20
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 2014
Net income after tax 2013
Increase in net income after tax
Components of increase
Increased net income from sale of investments
Lower interest expense
Lower investment and other income
Total
Fourth quarter
Year
$
$
$
$
7 $
3
4 $
3 $
3
(2)
4 $
29
16
13
11
4
(2)
13
Increased net income from sale of investments was due to gains from the sale of AFS equities and bonds in 2014, compared
to losses primarily from the sale of AFS bonds in 2013.
Lower interest expense was due to the redemption of $200 million 6.73% subordinated debentures on May 20, 2014.
Lower investment and other income was primarily due to a decrease in investment management service fee income from a
former related company.
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
2014
152 $
119
(249)
22 $
2013
222
(509)
256
(31)
$
$
The decrease in cash provided from operating activities in 2014 relative to 2013 was primarily due to increased cash
outflows related to annuity business in 2014 and higher cash outflows related to income taxes in 2014.
The decrease in cash used for investing activities during 2014 relative to 2013 was primarily driven by financing activities. In
2013 cash used for investing activities included the investment of proceeds from the May 31, 2013 issuance of $300 million
of subordinated debentures (described below). In addition, 2013 cash used for investing activities included the completion of
asset mix changes that began late in 2012. A sale of equity assets backing Capital and Surplus was completed in 2012, and
proceeds were partially re-invested in fixed income assets backing Capital and Surplus in 2012. The remainder of the re-
investment into fixed income assets occurred in the first quarter of 2013. In 2014 cash provided from investing activities
included the sale of investments to fund Empire Life’s May 20, 2014 redemption of $200 million of subordinated debentures
(described below).
Empire Life Annual Report 2014 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
The decrease in cash provided from financing activities during 2014 relative to 2013 was primarily driven by debt issuance
and redemption activities. In 2013 Empire Life issued $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. In 2014 Empire Life redeemed its $200 million 6.73% subordinated debentures at par on May 20, 2014.
In addition Empire Life paid $34 million of dividends to common shareholders during 2014 compared to $24 million during
2013.
Capital Resources
MCCSR Ratio
197%
231%
231%
250%
267%
Dec 31
2014
Sep 30
2014
Jun 30
2014
Mar 31
2014
Dec 31
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 197% as at December 31, 2014 continued
to be above requirements, and above minimum internal targets.
The MCCSR ratio decreased by 34 points from the previous quarter and by 70 points on a full year basis. The change was
primarily due to increases in required regulatory capital, as shown in the table below.
(millions of dollars)
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
Dec 31
2014
Sep 30
2014
Jun 30
2014
Mar 31
2014
Dec 31
2013
$
$
$
872 $
452
856 $
436
839 $
430
808 $
529
1,324 $
1,292 $
1,269 $
1,337 $
671 $
560 $
549 $
535 $
831
533
1,364
511
The increase in Tier 1 available regulatory capital from the previous quarter and on a full year basis was primarily due to net
income. For the quarter, this was partly offset by an increase in negative reserves which decrease Tier 1 (but increase Tier 2
as described below). On a full year basis, the Tier 1 increase was partly offset by the payment of a common share dividend
of $34 million during the first quarter (the dividend decreased Empire Life’s MCCSR ratio by 10 points).
Tier 2 available regulatory capital increased from the previous quarter primarily due to an increase in negative reserves which
increase Tier 2 (but decrease Tier 1 as described above). The decrease in Tier 2 available regulatory capital on a full year basis
was primarily due to Empire Life’s redemption of $200 million 6.73% subordinated debentures at par on May 20, 2014 (the
redemption decreased Empire Life’s MCCSR ratio by 19 points).
22
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
Regulatory capital requirements increased significantly from the previous quarter and on a full year basis. $102 million of the
increase for both periods was due to a comprehensive review and update of the methods and assumptions used in Empire’s
stochastic model for determining required regulatory capital and policy liabilities for Empire’s segregated fund product
guarantees. In addition, for the quarter and the year required regulatory capital increased from the impact of higher investment
exposures which were caused by increased investment in bonds and stocks. For the year required regulatory capital also
increased from the impact of lower interest rates which increased required regulatory capital related to lapse risk.
Comprehensive Income
(millions of dollars)
Comprehensive income
Shareholders' net income
Other comprehensive income (loss)
Fourth quarter
2014
2013
Year
2014
2013
$
18.2 $
29.9 $
98.7 $
113.3
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
10.6
(0.7)
9.9
—
10.7
20.6
(1.4)
19.2
1.2
1.6
2.8
0.2
(0.1)
2.9
(1.9)
1.0
38.3
(9)
29.3
0.2
3.2
32.7
(0.5)
32.2
(18.9)
1.9
(17)
0.6
12.9
(3.5)
(3.1)
(6.6)
Comprehensive income, attributable to shareholders
$
37.4 $
30.9 $
130.9 $
106.7
For the year 2014, Empire Life earned other comprehensive income of $32.7 million primarily due to unrealized fair value
increases relating to AFS bonds and stocks. For the year 2013, Empire Life incurred an other comprehensive loss of $3.5
million primarily due to unrealized investment losses relating to AFS bonds.
For the year 2014, Empire Life experienced a $3.2 million gain after tax on the remeasurement of post-employment defined
benefit (“DB”) plans. This gain was primarily due to the impact of higher stock markets on DB plan assets, partly offset by a
loss on DB plan liabilities. The loss on DB plan liabilities resulted from lower market interest rates partly offset by gains related
to updated plan membership experience data and mortality assumption updates.
For the year 2013, Empire Life experienced a $12.9 million gain after tax on its DB plans. The gain for the year was primarily
due 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.
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.
Empire Life Annual Report 2014 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 new segregated funds family called Empire Life Guaranteed Investment Funds
launched in the fourth quarter of 2014. Empire Life achieved strong growth in assets under management from its segregated
fund business in 2014. However, Empire Life has taken several steps to limit GMWB risk exposure. The above mentioned
fourth quarter product launch by Empire included a new version of its GMWB product. The new version commands a higher
price and reduces the amount of risk Empire Life is taking on, while still offering a competitive guaranteed income solution to
customers. Empire Life will continue to monitor the competitive landscape for this product.
Within the broader employee benefits marketplace in Canada, Empire Life continues to focus on the small group market
comprised of employers with fewer than 200 employees. This niche strategy coupled with an ongoing focus on balancing growth
and profit has enabled Empire Life to be cost competitive within this market segment and is expected to enable this product
line to grow its market share while generating acceptable returns.
24
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
Individual Insurance products are very long-term in nature and consequently can be subject to 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. Low long-term interest rates continue
to have an unfavourable impact on this product line. In the past few years industry prices for longer term life insurance products
have increased. Empire Life has also increased prices for these products and has focused its growth efforts on shorter term
products, such as 10 year term life. Mortality trends continue to be favourable for life insurance products. 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 has been 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.
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, 2014 Empire Life had $6.9 billion of segregated
fund assets and liabilities. Of this amount, approximately $6.7 billion have guarantees. The following table provides a percentage
breakdown by type of guarantee:
Percentage of segregated fund liabilities with:
75% maturity guarantee and a 100% death benefit guarantee
100% maturity and death benefit guarantees (with a minimum of 15 years between deposit and maturity date)
100% maturity and death benefit guarantees (guaranteed minimum withdrawal benefit (GMWB))
Dec 31
2014
Dec 31
2013
53.2%
5.4%
41.4%
57.4%
5.2%
37.4%
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 2014 and 2013, 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
Sensitivity To Segregated Fund Guarantees:
2014 Shareholders' net income
2013 Shareholders' net income
10% Increase
10% Decrease
20% Increase
20% Decrease
$ nil
$ nil
$ nil
$ nil
$ nil
$ nil
$ nil
$ nil
Empire Life Annual Report 2014 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2014 MCCSR Ratio
December 31, 2013 MCCSR Ratio
10% Increase
10% Decrease
20% Increase
20% Decrease
8.8 %
(1.2)%
(11.2)%
1.2 %
14.9 %
(2.3)%
(24.4)%
2.5 %
The 2014 amounts in the above tables include the effect of Empire’s equity risk hedging program (described below). Sensitivity
to equities is larger in 2014 than 2013 primarily due to the comprehensive review and update of the methods and assumptions
used in Empire’s stochastic model for determining required regulatory capital and policy liabilities for Empire’s segregated fund
product guarantees.
Prior to the fourth quarter of 2014, Empire Life has not hedged its segregated fund guarantee risk (except for the reinsurance
agreement described below). Empire has equity market risk related to its segregated fund products and from equity assets
backing life insurance liabilities. During the fourth quarter of 2014, Empire initiated a semi-static hedging program. The objective
of the hedging program is to partially protect Empire from possible future MCCSR ratio declines that might result from adverse
stock market price changes. The hedging program presently employs put options and short positions on key equity indices.
Empire intends to protect 10% to 20% of overall income and MCCSR equity risk exposure by expanding the hedging program
during 2015 and subsequent years.
There is income statement volatility from this hedging program. Based on current equity market levels, Empire has required
capital for MCCSR purposes related to segregated fund guarantees, but does not have policy liabilities related to these
guarantees on its balance sheet. Therefore a by-product of hedging MCCSR exposure is income statement volatility, as the
gains or losses from hedging instruments are not offset by changes in policy liabilities related to segregated fund guarantees
on the income statement. During the fourth quarter of 2014 Empire Life experienced a small loss of $0.4 million after tax on
its hedging program. During 2015 and subsequent years, Empire Life expects to expand its hedging program and expects an
increase in income statement volatility as a result.
Empire Life also has 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.
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
Guarantee > Fund Value
Death Benefit > Fund Value
GMWB Top-up
Actuarial
(millions of dollars)
Fund Value
Amount At
Risk
Fund Value
Amount At
Risk
Amount At
Risk
Liabilities
MCCSR
Required
Capital
December 31, 2014
December 31, 2013
$
$
49 $
29 $
2 $
3 $
360 $
264 $
10 $
18 $
380 $ nil $
102
328 $ nil $ nil
26
Empire Life Annual Report 2014
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 2014 decreased from the December 2013 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 2014 increased from the December 2013 levels for GMWB top-up exposure, due primarily to strong
GMWB sales in 2014. The MCCSR required capital increased due to the comprehensive review and update of the methods
and assumptions used in Empire’s stochastic model for determining required regulatory capital and policy liabilities for Empire’s
segregated fund product guarantees.
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 and
segregated fund guarantees, is shown in the table below. This assumes no change in the ultimate reinvestment rate (URR).
The first column below 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. The second column below shows the
impact if the AFS bonds were sold to realize the gains from a 1% decrease in interest rates.
Sensitivity To Market Interest Rates:
December 31, 2014 MCCSR Ratio
December 31, 2013 MCCSR Ratio
Before The
Sale of AFS
Assets
After The Sale
of AFS Assets
1% Decrease
1% Decrease
(32)%
(35)%
(25)%
(23)%
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 2014 27
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 2d, 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 2j, and 12.
Provision for Impaired Investments
Empire Life maintains a prudent policy in setting the provision for impaired investments. When there is no longer reasonable
assurance of full collection of loan principal and loan interest related to a mortgage or policy contract loan, management
establishes a specific provision for loan impairment and charges the corresponding reduction in carrying value to income in
the period the impairment is identified. In determining the estimated realizable value of the investment, management considers
a number of events and conditions. These include the value of the security underlying the loan, geographic location, industry
classification of the borrower, an assessment of the financial stability of the borrower, repayment history and an assessment
of the impact of current economic conditions. Changes in these circumstances may cause subsequent changes in the estimated
realizable amount of the investment and changes in the specific provision for impairment.
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.
28
Empire Life Annual Report 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS
Outlook
In 2014 Canada’s economy remained stable, but experienced relatively weak growth. 2014 headlines in Canada were filled
with economic concerns about commodity prices, over-valued housing markets and high consumer debt levels. Global concerns
in 2014 about European sovereign debt eased in 2014, and the US economy improved significantly, improving consumer
confidence. As a result, global credit and stock markets have improved significantly from the economic turmoil of 2008 and
early 2009. Canadian long-term interest rates decreased significantly in 2014 after increasing significantly in 2013, and have
now been lower than typical levels for 4 years. Global stock markets remained volatile, but most significant markets rose in
2014. This was particularly the case in the U.S., where stock markets provided investors with strong returns in 2014. Canada’s
main stock market rose in 2014, but was much weaker than the US due to the steep drop in world oil prices and other commodities.
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 fared 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. Growth rates in western Canada are expected
to slow down due to the large drop in world oil prices. Lower gas prices and a weaker Canadian dollar are expected to improve
growth in Ontario and Quebec. However, the auto sector in Ontario is very uncertain given GM’s unclear future intentions
regarding manufacturing in Ontario. As a result businesses across Canada remain cautious and this could cause pressure in
the near term on growth prospects for the Employee Benefits product line.
A key issue for the Individual Insurance product line since 2011 has been 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. While market long-term interest rates recovered somewhat in 2013 they decreased
significantly during 2014. Empire Life has also decreased its emphasis on long-term products in favour of shorter term products,
such as 10 year term life. Long-term interest rates, product mix and product pricing are expected to continue to be issues for
Empire Life’s Individual Insurance product line in 2015.
Regulatory change related to segregated fund guarantees continues to evolve. OSFI continues to review the overall approach
for determining capital requirements for segregated fund risks.
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
international frameworks. 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.
Empire Life Annual Report 2014 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. We are not aware of any plans by OSFI to make similar
changes for life insurance companies.
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 Regulatory Compliance Management Guideline (compliance required by
May 1, 2015) establishes requirements for managing regulatory compliance risk inherent in an insurers business activities.
OSFI’s Own Risk 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.
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). Mutual fund fees continue to be an area of interest for Canadian securities regulators. The CSA has
commissioned independent third party research that will assess the impact of commissions and embedded (trailer) fees on
mutual fund flows. This research will support CSA policy decisions concerning Canada's current mutual fund fee structure. We
continue to watch these developments as they may also impact the insurance industry at some future date.
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
Sep 30
2014
2014
Jun 30
2014
Mar 31
Dec 31
Sep 30
2014
2013
2013
Jun 30
2013
Mar 31
2013
$
$
541 $
18 $
381 $
24 $
480 $
38 $
524 $
18 $
322 $
30 $
235 $
32 $
61 $
40 $
289
11
For the fourth quarter of 2014, total revenue at Empire Life increased by 68% to $541 million compared to $322 million in the
fourth quarter of 2013. The increase was due primarily to an increase in FVTPL investments in 2014 resulting from an increase
in bond prices in 2014 compared to losses on FVTPL investments in 2013 resulting from a decrease in bond prices in 2013
(see Total Revenue section earlier in this report).
For the fourth quarter net income was lower relative to last year due primarily to worsened lapse and mortality experience
relating to the Individual Insurance product line in 2014. See Product Line Results sections earlier in this report for further
information on quarterly results.
30
Empire Life Annual Report 2014
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, 2014. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as at December 31, 2014.
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.
Mark Sylvia
Gary J. McCabe
President and Chief Executive Officer
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 27, 2015
Kingston, Ontario
February 27, 2015
Empire Life Annual Report 2014 31
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, 2014 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 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, 2014 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 27, 2015
32
Empire Life Annual Report 2014
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, 2014 and their change in the Consolidated statements of operations for the
year then ended in accordance with accepted actuarial practice in Canada including selection of appropriate assumptions
and methods.
In my opinion, the amount of policy liabilities net of reinsurance liabilities, makes appropriate provision for all policy
obligations and the Consolidated financial statements fairly present the results of the valuation.
Leonard Pressey, F.S.A., F.C.I.A.
Fellow, Canadian Institute of Actuaries
Kingston, Ontario
February 27, 2015
Empire Life Annual Report 2014 33
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at December 31
Assets
2014
2013
Cash and cash equivalents (Note 3)
$
239,102 $
217,350
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)
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)
$
$
26,892
4,958,086
985,694
323,117
46,434
86,698
6,426,921
25,048
41,743
—
19,957
21,125
4,832
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
6,948,475
13,727,203 $
5,954,508
12,080,410
56,021 $
73,710
7,804
490,575
4,713,462
11,626
31,332
24,913
8,243
298,763
6,948,475
12,664,924
985
19,387
1,019,084
22,823
1,062,279
55,833
78,940
9,306
284,627
4,175,238
12,687
30,937
23,893
—
498,343
5,954,508
11,124,312
985
19,387
945,692
(9,966)
956,098
Total Liabilities and Equity
$
13,727,203 $
12,080,410
The accompanying notes are an integral part of these consolidated financial statements.
Duncan N. R. Jackman
Chairman of the Board
Mark Sylvia
President and Chief Executive Officer
34
Empire Life Annual Report 2014
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Canadian dollars except per share amounts)
For the year ended December 31
Revenue
Gross premiums (Note 13)
Premiums ceded to reinsurers ( Note 13)
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.
2014
2013
$
$
$
$
971,552 $
(104,059)
867,493
245,881
538,036
74,469
12,621
187,516
1,926,016
726,219
(80,881)
538,224
205,948
2,282
23,898
146,969
195,588
(2,447)
14,180
1,769,980
14,259
4,100
137,677
30,301
107,376 $
8,670
98,706
107,376 $
100.20 $
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
115.00
Empire Life Annual Report 2014
35
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
For the year ended December 31
Net Income
2014
$
107,376 $
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
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
Comprehensive Income
Comprehensive income (loss) attributable to:
Participating Policyholders
Shareholders
Total
The accompanying notes are an integral part of these consolidated financial statements.
38,349
(8,975)
29,374
233
3,182
32,789
140,165 $
9,218 $
130,947
140,165 $
$
$
$
2013
110,036
(18,881)
1,887
(16,994)
574
12,934
(3,486)
106,550
(156)
106,706
106,550
36
Empire Life Annual Report 2014
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31
2014
2013
Shareholders' Policyholders'
Total
Shareholders'
Policyholders'
Total
Capital stock
$
985 $
Contributed surplus
19,387
— $
—
985 $
985 $
19,387
19,387
— $
—
985
19,387
Retained earnings
Retained earnings - beginning of
year
Net income (loss)
Dividends to common shareholders
Retained earnings - end of period
901,821
98,706
(33,984)
966,543
43,871
8,670
—
945,692
107,376
(33,984)
52,541
1,019,084
812,642
113,279
(24,100)
901,821
Accumulated other comprehensive income (loss)
Accumulated other comprehensive
income (loss) - beginning of year
Other comprehensive income (loss)
Accumulated other comprehensive
income (loss) - end of period
(16,917)
32,241
15,324
6,951
548
7,499
(9,966)
32,789
(10,344)
(6,573)
22,823
(16,917)
47,114
(3,243)
—
43,871
3,864
3,087
6,951
859,756
110,036
(24,100)
945,692
(6,480)
(3,486)
(9,966)
Total equity
$
1,002,239 $
60,040 $
1,062,279 $
905,276 $
50,822 $
956,098
Composition of accumulated other comprehensive income (loss) - end of period
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)
$
23,889 $
8,707 $
32,596 $
(5,214) $
8,436 $
3,222
—
—
—
(233)
—
(233)
(9,287)
(486)
(9,773)
(12,313)
(642)
(12,955)
722
(722)
—
843
(843)
—
$
15,324 $
7,499 $
22,823 $
(16,917) $
6,951 $
(9,966)
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life Annual Report 2014
37
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 (used for) 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
Cash provided from (used for) investing activities
Financing Activities
Dividends to common shareholders (Note 19)
Interest paid on subordinated debt
Debt issue (Note 23)
Debt repayment (Note 23)
Cash provided from (used for) financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning of Period
Cash and Cash Equivalents - End of Period
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.
2014
2013
$
107,376 $
110,036
540,506
205,948
(538,036)
(87,090)
(71,714)
4,720
9,496
(19,359)
151,847
(199,258)
39,819
349,037
(42,957)
(70,842)
4,613
(2,462)
33,760
221,746
(1,543,975)
1,659,452
(2,110,910)
1,612,993
(12,017)
21,530
(1,444)
(4,317)
119,229
(33,984)
(15,340)
—
(200,000)
(249,324)
21,752
217,350
239,102 $
32,566 $
147,293
30,353
(10,333)
14,575
(9,008)
(6,485)
(509,168)
(24,100)
(17,765)
298,255
—
256,390
(31,032)
248,382
217,350
24,074
138,902
32,897
$
$
38
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
1.
DESCRIPTION OF COMPANY AND SUMMARY OF OPERATIONS
The Empire Life Insurance Company (the “Company” or “Empire Life”) was founded in 1923 when it was organized
under a provincial charter in Toronto. Authorization to continue as a federal corporation was obtained in 1987. The
Company underwrites life and health insurance policies and provides segregated funds, mutual funds and annuity
products for individuals and groups across Canada. The Company is a subsidiary of E-L Financial Corporation Limited
(the ”Parent” or “E-L”). The head office, principal address and registered office of the Company are located at 259 King
Street East, Kingston, Ontario, K7L 3A8. Empire Life is a Federally Regulated Financial Institution, regulated by the
Office of the Superintendent of Financial Institutions, Canada (OSFI). The Company established a mutual fund
subsidiary in 2011, Empire Life Investments Inc. (ELII). ELII became a registered Investment Funds Manager on
January 5, 2012. The head office for ELII is located at 165 University Avenue, 9th Floor, Toronto, Ontario, M5H 3B8.
These consolidated financial statements were approved by the Company’s Board of Directors on February 27, 2015.
2.
SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The annual consolidated financial statements of the Company for the year ended December 31, 2014 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, 2014.
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.
(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
Empire Life Annual Report 2014 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 2e), 2k),10 and 27b).
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 2d), 3a), 3e), and 10c).
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 2k) and 12.
40
Empire Life Annual Report 2014
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 2e), 3b), 10c) and 27a).
(d) Financial Instruments
i)
Fair Value
Fair value is the amount of consideration that would be agreed upon in an arm’s length transaction between
knowledgeable, willing parties who are under no compulsion to act. When a financial instrument is initially
recognized, its fair value is generally the value of the consideration paid or received. Subsequent to initial
recognition, the fair value of a financial asset 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.
Empire Life Annual Report 2014 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Level 3 - Fair value is based on valuation techniques that require one or more significant inputs that are not
based on observable market inputs. These unobservable inputs reflect the Company’s expectations
about the assumptions market participants would use in pricing the asset or liability.
All of the Company’s financial instruments requiring fair value measurement meet the requirements of Level 1
or Level 2 of the fair value hierarchy.
ii) Cash and Investments
Cash and cash equivalents and short-term investments are short-term, highly liquid investments that are
subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash
equivalents comprise financial assets with maturities of three months or less from the date of acquisition and
short-term investments comprise financial assets with maturities of greater than three months and less than
one year when acquired.
Most financial assets supporting insurance contract liabilities and investment contract liabilities are designated
as FVTPL. These assets may be comprised of cash, short-term investments, bonds and debentures, common
and preferred shares, futures, forwards and options. Changes in the fair value of these financial assets are
recorded in fair value change in FVTPL assets in the Consolidated statement of operations in the period in
which they occur.
Most financial assets supporting capital and surplus and participating accounts are classified as AFS. These
assets may be comprised of short-term investments, bonds and debentures or common and preferred shares.
AFS assets are carried at fair value in the Consolidated statement of financial position. Except for foreign
currency gains/losses on monetary AFS assets and impairment losses, any changes in the fair value are
recorded, net of income taxes, in 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.
42
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
iii) Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to foreign currency, equity and other
market risks associated with certain assets and liabilities. Derivative financial assets are designated as fair value
through profit or loss. Therefore, they are initially recorded at fair value on the acquisition date and subsequently
revalued at their fair value. Derivative financial instruments with a positive fair value are recorded as assets while
derivative financial instruments with a negative fair value are recorded as liabilities. Changes in fair value are
recorded in Fair value change in fair value through profit or loss assets, in the Consolidated statements of
operations.
iv)
Impairment
All investments other than FVTPL instruments are assessed for impairment at each reporting date. Impairment
is recognized in net income (loss), when there is objective evidence that a loss event has occurred which has
impaired the estimated future cash flows of an asset.
(1) AFS Debt Instruments
An AFS debt instrument would be identified as impaired when there is objective observable evidence
suggesting that timely collection of the contractual principal or interest is no longer reasonably assured.
This may result from a breach of contract by the issuer, such as a default or delinquency in interest or
principal payments, or evidence that the issuer is in significant financial difficulty. Impairment is recognized
through net income (loss). Impairment losses previously recorded through net income (loss) are reversed if
the fair value subsequently increases and the increases can be objectively related to an event occurring
after the impairment loss was recognized.
(2) AFS Equity Instruments
Objective evidence of impairment exists if there has been a significant or prolonged decline in the fair
value of the investment below its cost or if there is a significant adverse change in the technological,
market, economic or legal environment in which the issuer operates or the issuer is experiencing financial
difficulties.
The accounting for an impairment that is recognized in net income (loss) is the same as described for AFS
debt instruments above with the exception that impairment losses previously recognized in net income
(loss) cannot be subsequently reversed. Any subsequent increase in value is recorded in OCI.
(3) Loans and Receivables
Mortgages and loans are individually evaluated for impairment in establishing the allowance for
impairment.
Objective evidence of impairment exists if there is no longer reasonable assurance of full collection of loan
principal or loan interest related to a mortgage, policy contract loan or a loan on a policy. Events and
conditions considered in determining if there is objective evidence of impairment include the value of the
security underlying the loan, geographic location, industry classification of the borrower, an assessment of
the financial stability and credit worthiness of the borrower, repayment history and an assessment of the
impact of current economic conditions. If objective evidence of impairment is found, allowances for credit
Empire Life Annual Report 2014 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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).
v) 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.
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 due to their short term nature.
44
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(e) Reinsurance
The Company enters into reinsurance agreements with reinsurers in order to limit its exposure to significant losses.
The Company has a Reinsurance Risk Management policy which requires that such arrangements be placed with
well-established, highly rated reinsurers. Reinsurance is measured consistently with the amounts associated with
the underlying insurance contracts and in accordance with the terms of each reinsurance treaty. Amounts due to or
from reinsurers with respect to premiums received or claims paid are included in Insurance receivables and
Insurance liabilities in the Consolidated statement of financial position. Premiums for reinsurance ceded are
presented as Premiums ceded to reinsurers in the Consolidated statement of operations. Reinsurance recoveries
on claims incurred are recorded as Claims recovery from reinsurers in the Consolidated statement of operations.
The reinsurers’ share of Insurance contract liabilities is recorded as Reinsurance assets or Reinsurance liabilities in
the Consolidated statement of financial position at the same time as the underlying insurance contract liability to
which it relates.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of
impairment arises during the reporting year. Impairment occurs when objective evidence exists that not all amounts
due under the terms of the contract will be received. If a reinsurance asset is determined to be impaired, it would be
written down to its recoverable amount and the impairment loss would be recorded in the Consolidated statement of
operations.
Gains or losses on buying reinsurance are recognized in the Consolidated statement of operations immediately at
the date of purchase and are not amortized.
(f) Property and Equipment
Property and equipment comprises own use land, building, leasehold improvements and furniture and equipment.
All classes of assets are carried at cost less accumulated amortization including any impairment losses, except for
land, which is not subject to amortization. Cost includes all expenditures that are directly attributable to the
acquisition of the asset. Subsequent costs are included in the asset’s carrying amount only when it is probable that
future economic benefits associated with the item will flow to the Company and the cost can be measured reliably.
Amortization is calculated to write down the cost of property and equipment to their residual values over their
estimated useful lives as follows:
Land
Building
Furniture and equipment
Leasehold improvements
No amortization
Five percent (declining balance)
Three to five years (straight-line)
Remaining lease term (straight-line)
Amortization is included in Operating expenses in the Consolidated statement of operations.
The estimated useful lives, residual values and amortization methods are reviewed at each year-end, with the effect
of any changes in estimate accounted for on a prospective basis. Impairment reviews are performed when there are
indicators that the carrying value may not be recoverable. An impairment loss is recognized for the amount by
which the carrying value of the asset exceeds its expected recoverable amount. The recoverable amount is the
higher of fair value less costs to sell and value in use. Impairment losses are recognized in the Consolidated
statement of operations.
Empire Life Annual Report 2014 45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(g) Intangible Assets
Intangible assets include computer software, related licenses and software development costs, which are carried at
cost less accumulated amortization and any impairment losses. Amortization of intangible assets is calculated
using the straight-line method to allocate the costs over their estimated useful lives, which are generally between
three and seven years. Amortization is included in Operating expenses in the Consolidated statement of
operations. For intangible assets under development, amortization begins when the asset is available for use. The
Company does not have intangible assets with indefinite useful lives.
Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in
the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as
changes in accounting estimates.
Impairment reviews are performed when there are indicators that the carrying value may not be recoverable. An
impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected
recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows. Impairment losses are recognized in the Consolidated statement of operations.
(h) Segregated Funds
Certain insurance contracts allow the policyholder to invest in segregated investment funds managed by the
Company for the benefit of these policyholders. 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.
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).
(i) Subordinated Debt
Subordinated debt is recorded at amortized cost using the effective interest rate method. Interest on subordinated
debt is reported as Interest expense in the Consolidated statement of operations.
46
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(j) Employee Benefits
The Company provides employee pension benefits through either a defined benefit or a defined contribution
component of its pension plan. The Company discontinued new enrolments in the defined benefit component
effective October 1, 2011 and introduced a defined contribution component effective January 1, 2012 for new
enrolments and for any existing employees who chose to transfer from the defined benefit component. The
Company 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 qualified 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.
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.
Empire Life Annual Report 2014 47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(k) Insurance and Investment Contracts
i) Product Classification
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract.
Insurance risk is transferred when the Company agrees to compensate a policyholder if a specified uncertain
future event (other than a change in a financial variable) adversely affects the policyholder and the insurance
contract has commercial substance. Any contracts not meeting the definition of an insurance contract under
IFRS are classified as investment contracts or service contracts, as appropriate. Products issued by the
Company that transfer significant insurance risk have been classified as insurance contracts in accordance
with IFRS 4 Insurance Contracts. Otherwise, products issued by the Company are classified as either
investment contracts in accordance with IAS 39 Financial Instruments: Recognition and Measurement or
service contracts in accordance with IAS 18 Revenue. The Company defines significant insurance risk as the
possibility of paying at least 2% more than the benefits payable if the insured event did not occur. When
referring to multiple contract types, the Company uses the terminology policy liabilities.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the
remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and
obligations are extinguished or expire. Investment contracts, however, can be reclassified as insurance
contracts after inception if insurance risk becomes significant.
The Company classifies its insurance and investment contracts into three main categories: short-term
insurance contracts, long-term insurance contracts and investment contracts.
(1) Insurance Contracts
The Company’s insurance contract liabilities are determined using accepted actuarial practices according
to standards established by the Canadian Institute of Actuaries (CIA) and the requirements of OSFI. The
Company uses the Canadian Asset Liability Method (CALM) for valuation of insurance contracts, which
satisfies the IFRS 4 Insurance Contracts requirements for eligibility for use under IFRS.
a) Short-term Insurance Contracts
These contracts include both annuity products and group benefits.
The annuity products classified as short-term insurance contracts are guaranteed investment options
that provide for a fixed rate of return over a fixed period. Contracts include certain guarantees that are
initiated upon death of the annuitant. The liabilities are determined using CALM.
The group benefits classified as short-term insurance contracts include short-term disability, health
and dental benefits. Benefits are typically paid within one year of being incurred. Liabilities for unpaid
claims are estimated using statistical analysis and Company experience for claims incurred but not
reported.
48
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
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 insurance 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
Empire Life Annual Report 2014 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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.
iii) Benefits and Claims Paid
Benefits are recorded as an expense when they are incurred. Annuity payments are expensed when due for
payment. Health insurance claims are accounted for when there is sufficient evidence of their existence and a
reasonable assessment can be made of the monetary amount involved. Benefits and claims paid include the
direct costs of settlement. Reinsurance recoveries are accounted for in the same period as the related claim.
iv) Deferred Acquisition Costs
Distribution costs of segregated funds having a deferred sales charge are deferred and amortized over the
term of the related deposits or the applicable period of such sales charge, as appropriate. These deferred
costs form part of insurance contract liabilities on the Consolidated statement of financial position. The costs
deferred in the period and amortization of deferred costs form part of the change in insurance contract liabilities
on the Consolidated statement of operations.
(l) Participating Policies
The Company maintains an account in respect of participating policies (“participating account”), separate from
those maintained in respect of other policies, in the form and manner determined by OSFI under sections 456-464
of the Insurance Companies Act. The participating account includes all policies issued by the Company that entitle
its policyholders to participate in the profits of the participating account. The Company has discretion as to the
amount and timing of dividend payments which take into consideration the continuing solvency of the participating
account. Dividends are paid annually, with a few older plans paying dividends every five years as per contractual
provisions. Participating policyholder dividends are expensed through the Consolidated statement of operations.
At the end of the reporting period all participating insurance contract liabilities, both guaranteed and discretionary,
are held within Insurance contract liabilities, Policyholders’ funds on deposit and Provision for profits to
policyholders. All participating policy reinsurance ceded at the end of the reporting period is held within
Reinsurance assets or Reinsurance liabilities. Net income (loss) attributable to participating policyholders is shown
on the Consolidated statements of operations. Comprehensive income (loss) attributable to participating
policyholders is shown on the Consolidated statements of comprehensive income. The participating policyholders’
portion of Retained earnings and AOCI is reported separately in the Policyholders’ equity section of the
Consolidated statements of changes in equity.
50
Empire Life Annual Report 2014
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.
(m) Fee Income
Fee income includes fund Management fees, Policy administration fees and surrender charges, and is recognized
on an accrual basis. Fee income earned for investment management and administration of the segregated and
mutual funds is generally calculated and recorded as revenue daily based on the funds’ closing net asset values.
Empire Life Annual Report 2014 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(n) Investment Income
Interest income is recognized using the effective interest rate method. Fees that are an integral part of the effective
yield of the financial asset are recognized as an adjustment to the effective interest rate of the instrument.
Dividend income is recognized when the right to receive payment is established, which is usually the ex-dividend
date.
Interest income and Dividend income are included in Investment income in the Consolidated statement of
operations for all financial assets.
(o) Income Taxes
Income tax expense for the period 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.
(p) Foreign Currency Translation
The Company uses the Canadian dollar as both its functional and presentational currency.
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions.
Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets
and liabilities denominated in foreign currencies, are recognized in the Consolidated statement of operations.
52
Empire Life Annual Report 2014
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.
(q) 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.
(r) Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past
events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be
reliably estimated. If the outflow of economic benefits is not probable, a contingent liability is disclosed unless the
possibility of an outflow of economic benefits is remote. Any change in estimate of a provision is recorded in Net
income. Provisions are not recognized for future operating losses. Provisions are measured at the present value of
the expected expenditures to settle the obligation using a discount rate that reflects current market assessments of
the time value of money and the risks specific to the obligation.
(s) Leases
The Company leases certain property and equipment. The Company does not have substantially all of the risks and
rewards of ownership and these leases are therefore classified as operating leases. Payments made under
operating leases are charged to Net income on a straight-line basis over the term of the lease.
(t) Earnings per Share
Basic earnings per share (EPS) is calculated by dividing the net income (loss) for the period attributable to common
share owners of the Company by the weighted average number of common shares outstanding during the period.
The Company does not have any potentially dilutive instruments. As a result, diluted earnings per share are the
same as basic earnings per share.
(u) Future Accounting Changes
IFRS 15 Revenue from Contracts with Customers
In May 2014 the IASB published IFRS 15 which introduces a single model for recognizing revenue from contracts
with customers. IFRS 15 excludes insurance contracts from its scope and is primarily applicable to the Company’s
non-insurance revenue. The standard is effective for annual periods beginning on or after January 1, 2017, with
retrospective application. The Company is currently evaluating the impact of IFRS 15 on its consolidated financial
statements.
Empire Life Annual Report 2014 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
IFRS 9 Financial Instruments
In July 2014 the IASB published the complete version of IFRS 9 which is effective for annual periods beginning on or
after January 1, 2018, with retrospective application. The new standard includes requirements on the classification and
measurement of financial assets and liabilities, an expected credit loss model that replaces the existing incurred loss
impairment model and new hedge accounting guidance. The Company is currently evaluating the impact of IFRS 9 on
its consolidated financial statements.
54
Empire Life Annual Report 2014
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 of cash and investments are as follows:
Asset category
As at December 31, 2014
As at December 31, 2013
Designated
Fair Value
Through
Profit or
Loss
Available for
Sale
Total Carrying
Value
Designated Fair
Value
Through
Profit or Loss
Available for
Sale
Total Carrying
Value
Cash and cash equivalents
$
239,102 $
— $
239,102 $
217,350 $
— $
217,350
Short-term investments
Canadian federal government
Canadian provincial governments
Corporate
Total short-term investments
Bonds
Bonds issued or guaranteed by:
3,310
1,782
16,839
21,931
4,961
—
—
4,961
8,271
1,782
16,839
26,892
7,325
—
18,123
25,448
—
—
—
—
7,325
—
18,123
25,448
Canadian federal government
72,626
165,921
238,547
59,870
197,160
257,030
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
2,479,365
284,502
2,763,867
2,034,681
252,445
2,287,126
2,551,991
450,423
3,002,414
2,094,551
449,605
2,544,156
545,554
241,371
246,080
1,608
52,759
78,546
47,240
70,683
10,615
437,673
20,079
30,881
28,007
60,643
68,319
1,564
14,050
—
983,227
261,450
276,961
29,615
113,402
146,865
48,804
84,733
10,615
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
—
968,265
244,123
259,414
39,208
84,829
77,126
46,812
59,867
9,712
Total Canadian corporate bonds
1,294,456
661,216
1,955,672
1,163,627
625,729
1,789,356
Total bonds
Preferred shares
Canadian
Total preferred shares
Common shares
Canadian
3,846,447
1,111,639
4,958,086
3,258,178
1,075,334
4,333,512
186,856
186,856
9,323
9,323
196,179
196,179
224,313
224,313
69,905
69,905
294,218
294,218
Common shares
526,613
61,481
588,094
476,742
65,778
542,520
Real estate limited partnership
units
U.S.
Other
Total common shares
Loans and Receivables
Mortgages
Loans on policies
Policy contract loans
Total
47,512
139,988
13,921
728,034
—
—
—
—
—
—
61,481
—
—
—
47,512
139,988
13,921
789,515
323,117
46,434
86,698
41,081
116,699
15,090
649,612
—
—
—
—
—
—
65,778
—
—
—
41,081
116,699
15,090
715,390
299,353
44,855
90,275
$
5,022,370 $
1,187,404 $
6,666,023 $
4,374,901 $
1,211,017 $
6,020,401
Empire Life Annual Report 2014 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
The following table presents the fair value of cash and investments classified by the fair value hierarchy:
As at December 31
2014
2013
Level 1
Level 2
Total Fair
Value
Level 1
Level 2 Total Fair Value
Cash and cash equivalents
$
42,594 $
196,508 $
239,102 $
53,394 $
163,956 $
217,350
Fair value through profit or loss:
Bonds
Common shares
Preferred shares
Short-term investments
Available for sale:
Bonds
Common shares
Preferred shares
Short-term investments
Loans and Receivables
Mortgages
Loans on policies
Policy contract loans
—
3,846,447
3,846,447
—
3,258,178
3,258,178
680,522
186,856
—
—
61,481
9,323
—
—
—
—
47,512
—
21,931
728,034
186,856
21,931
1,111,639
1,111,639
—
—
4,961
338,160
46,434
86,698
61,481
9,323
4,961
338,160
46,434
86,698
608,531
224,313
—
—
65,778
69,905
—
—
—
—
41,081
—
25,448
649,612
224,313
25,448
1,075,334
1,075,334
—
—
—
304,134
44,855
90,275
65,778
69,905
—
304,134
44,855
90,275
Total
$
980,776 $
5,700,290 $
6,681,066 $
1,021,921 $
5,003,261 $
6,025,182
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. The fair values of Loans on policies and Policy contract loans approximates their carrying values, due to
the life insurance contracts that secure them.
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 and Level 2 and there were no Level 3
investments during the year ended December 31, 2014 or during the year ended December 31, 2013.
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 Note 27 Risk Management.
(b) Impairments
i)
Loans and Receivables
Investments in individual assets have been reduced by the following specific allowances for impairment:
56
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Impaired Loans
Mortgages
Policy contract loans
Total
As at December 31, 2014
As at December 31, 2013
Recorded
Investment
Allowance for
Impairment
Carrying
Amount
Recorded
Investment
Allowance for
Impairment
Carrying
Amount
$
$
6,303 $
2,295 $
4,008 $
7,076 $
2,374 $
813
541
272
813
556
7,116 $
2,836 $
4,280 $
7,889 $
2,930 $
4,702
257
4,959
The Company holds collateral of $4,045 (2013 $4,725) in respect of these mortgages and $272 (2013 $257) in
respect of these policy contract loans as at December 31, 2014. 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
2014
2,930 $
536
(630)
2,836 $
2013
3,411
488
(969)
2,930
$
$
The Company has recorded interest income of $727 (2013 $810) on these assets.
As at December 31, 2014 loans and receivables past due but not impaired are $ nil (2013 $ nil).
ii) Available for Sale
For the year-ended December 31, 2014, the Company reclassified a pre-tax loss of $221 from OCI to Net
income due to write downs of impaired AFS common and preferred shares (2013 $409). 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 a). 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 until May 20, 2014, when the
Company redeemed the debenture at par.
Empire Life Annual Report 2014 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(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
2014
2013
215,036 $
206,741
30,583
798
(536)
32,797
1,109
(488)
245,881 $
240,159
$
$
Included in interest income is $65,336 (2013 $63,220) relating to assets not classified as FVTPL.
(e) 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.
As At December 31, 2014
As At December 31, 2013
Notional
Principal
Fair Value
Assets
Fair Value
Liabilities
Notional
Principal
Fair Value
Assets
Fair Value
Liabilities
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Total
$
$
51,773 $
119,990
869 $
1,201 $
28,261 $
1,145 $
1,922
—
—
151,731
584
137
123,469
323,494 $
3,375 $
1,338 $
151,730 $
1,616 $
—
471
—
—
130
130
All contracts mature in less than one year. Fair value asset amounts and fair value liability amounts are reported on
the Consolidated statement of financial position as Other assets and Accounts payable and other liabilities
respectively.
For analysis of the Company’s risks arising from financial instruments, refer to Note 27 Risk Management.
4.
INSURANCE RECEIVABLES
As at December 31
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance Receivables
2014
3,501 $
16,530
18,501
3,211
41,743 $
2013
4,057
20,165
13,414
3,378
41,014
$
$
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.
58
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
5.
OTHER ASSETS
Other assets consist of the following:
As at December 31
Trade accounts receivable
Prepaid expenses
Other Assets
2014
15,331 $
4,626
2013
8,397
3,272
19,957 $
11,669
$
$
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.
6.
PROPERTY AND EQUIPMENT
Cost
As at January 1, 2013
Additions
Disposals
As at December 31, 2013
Additions
Disposals
As at December 31, 2014
Amortization
As at January 1, 2013
Charge for the year
Disposals
As at December 31, 2013
Charge for the year
Disposals
As at December 31, 2014
Carrying Amount
December 31, 2013
December 31, 2014
Land
Buildings
Furniture and
Equipment
Leasehold
Improvements
2,728 $
12,873 $
19,040 $
5,878 $
—
(410)
2,318
—
—
—
—
12,873
74
—
2,822
—
21,862
3,045
—
751
—
6,629
(288)
—
2,318 $
12,947 $
24,907 $
6,341 $
— $
(1,836) $
(12,385) $
(3,471) $
—
—
—
—
—
(552)
—
(2,388)
(524)
—
(2,550)
—
(14,935)
(2,385)
—
(845)
—
(4,316)
(840)
—
Total
40,519
3,573
(410)
43,682
2,831
—
46,513
(17,692)
(3,947)
—
(21,639)
(3,749)
—
— $
(2,912) $
(17,320) $
(5,156) $
(25,388)
2,318 $
2,318 $
10,485 $
10,035 $
6,927 $
7,587 $
2,313 $
1,185 $
22,043
21,125
$
$
$
$
$
There were no asset impairments in 2014 or 2013.
Empire Life Annual Report 2014 59
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 January 1, 2013
Additions
Disposals
As at December 31, 2013
Additions
Disposals
As at December 31, 2014
Amortization
As at January 1, 2013
Charge for the year
Disposals
As at December 31, 2013
Charge for the year
Disposals
As at December 31, 2014
Carrying Amount
December 31, 2013
December 31, 2014
Intangible Assets
$
$
$
$
$
$
39,939
2,912
—
42,851
1,486
—
44,337
(37,868)
(666)
—
(38,534)
(971)
—
(39,505)
4,317
4,832
The Company’s total amount of research and development expenditure recognized as an expense during 2014 is
$3,658 (2013 $3,848).
There were no asset impairments during 2014 or 2013.
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
2014
2013
$
162,646 $
152,395
1,567,578
5,067,181
24,977
81,079
171,903
1,347,287
4,414,766
27,885
6,974,777
6,042,920
(26,302)
(88,412)
$
6,948,475 $
5,954,508
60
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
(b) The following table presents the investments of the segregated funds measured on a recurring basis at fair
value classified by the fair value hierarchy:
As at December 31, 2014
As at December 31, 2013
Level 1
Level 2
Total
Level 1
Level 2
Total
Cash and cash equivalents
$
26,829 $
135,817 $
162,646 $
61,504 $
19,575 $
81,079
Common and preferred shares
5,067,181
Bonds
Short-term investments
Total
—
1,567,578
152,395
5,067,181
1,567,578
152,395
4,414,766
—
—
—
1,347,287
171,903
4,414,766
1,347,287
171,903
—
—
$
5,094,010 $
1,855,790 $
6,949,800 $
4,476,270 $
1,538,765 $
6,015,035
There were no transfers between Level 1 and Level 2, and there were no Level 3 investments during the year ended
December 31, 2014 or during the year ended December 31, 2013.
(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
Management fees and other operating costs
Net change in segregated funds held within general fund investments
2014
2013
$
5,954,508 $
5,014,392
1,650,775
1,410,240
57,360
123,868
29,743
481,448
34,206
52,730
111,164
23,971
273,734
438,167
2,377,400
2,310,006
1,242,284
1,184,549
203,259
168,058
1,445,543
1,352,607
62,110
(17,283)
Segregated Funds - End of Year
$
6,948,475 $
5,954,508
(d) Empire Life's exposure to segregated fund guarantee risk
Segregated fund products issued by Empire Life contain death, maturity, and withdrawal benefit 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).
Empire Life Annual Report 2014 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
2014
2013
$
27,771 $
39,034
11,936
2,456
10,804
20,743
$
73,710 $
9,939
2,579
8,630
18,758
78,940
Of the above total, $1,280 (2013 $1,836) 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.
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 table below shows the concentration of insurance contract liabilities and related reinsurance
assets (liabilities) by type of contract.
62
Empire Life Annual Report 2014
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
As at December 31
Participating Individual
Life
Other
Non-participating Individual
Life
Annuity
Health
Non-participating Group
Life
Annuity
Health
Gross
Insurance
Contract
Liabilities
2014
Reinsurance
Assets
(Liabilities)
Net
Gross
Insurance
Contract
Liabilities
2013
Reinsurance
Assets
(Liabilities)
Net
$
523,424 $
(2,667) $
526,091 $
456,433 $
(2,552) $
458,985
292
—
292
430
—
430
2,842,061
1,009,782
141,503
22,194
61,490
202,641
(584,900)
3,426,961
14,617
9,715
568
—
72,092
995,165
131,788
21,626
61,490
130,549
2,375,625
1,048,353
96,392
28,746
64,300
182,448
(372,024)
15,239
9,099
927
—
64,684
2,747,649
1,033,114
87,293
27,819
64,300
117,764
Segregated fund deferred acquisition
costs
Total
(89,925)
—
(89,925)
(77,489)
—
(77,489)
$
4,713,462 $
(490,575) $
5,204,037 $
4,175,238 $
(284,627) $
4,459,865
The Company expects to pay $4,563,763 (2013 $4,004,629) of Insurance contract liabilities and $492,065 (2013
$288,153) of Reinsurance liabilities more than one year after the Consolidated statement of financial position date.
The balance is expected to be settled within one year.
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
2014
2013
$
$
77,489 $
40,992
(28,556)
89,925 $
71,839
32,012
(26,362)
77,489
Of the above total, $36,364 (2013 $31,535) is expected to be amortized during the next year.
Empire Life Annual Report 2014 63
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 Assets/Liabilities
For the year ended December 31,
Gross
Insurance
Contract
Liabilities
2014
Reinsurance
Assets
(Liabilities)
Net
Gross
Insurance
Contract
Liabilities
2013
Reinsurance
Assets
(Liabilities)
Net
Insurance contracts - beginning of year $
4,175,238 $
(284,627) $
4,459,865 $
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
Normal changes
new business
in-force business
(141,617)
77,408
(88,465)
(5,882)
(16,331)
125,003
588,108
(113,471)
(40,400)
4,607
(257)
(18,442)
(1,731)
(36,254)
(28,146)
117,808
(93,072)
(5,625)
2,111
126,734
624,362
(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)
Insurance Contracts - End of Year
$
4,713,462 $
(490,575) $
5,204,037 $
4,175,238 $
(284,627) $
4,459,865
Changes in methods and assumptions summarized in the above tables are further explained as follows:
The updates for mortality/morbidity experience for 2014 are primarily related to favourable mortality experience for
individual life business. In addition, there were refinements to the mortality study to reflect mortality experience for
higher face amount policies and renewable term business. The updates for mortality/morbidity experience for 2013
are primarily related to favourable mortality experience for individual life business.
The refinements to lapse rate assumptions for 2014 are primarily related to emerging lapse rate experience for
certain cost of insurance structures offered within Empire Life’s universal life product and for the Company's critical
illness products as well as regular updates for Empire Life’s other individual life insurance products. 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 2014 was primarily due to revised Canadian actuarial standards of
practice effective October 15, 2014, which prescribed higher long-term ultimate risk-free reinvestments for non-fixed
income assets and lower limits for the projected amount of equities backing individual life insurance liabilities. In
addition, there were several refinements to the CALM model for future reinvestment assumptions. 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 model enhancements for 2014 are related to refinements to the valuation models for group life waiver of
premium business. 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.
64
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Other changes for 2014 relate to lower expense unit costs resulting from refinements to expense studies that were
offset by refinements for modelling unearned reinsurance premiums and other minor changes to assumptions and
methodologies. Other changes for 2013 relate primarily to lower unit costs for individual life insurance business.
There were several other minor changes to assumptions and methodologies.
Normal changes in the policy liabilities are further explained as follow:
The change in new business reflects changes in the volume and mix of business from year to year.
The change for in-force business is primarily attributable to the fair value change in liabilities due to a decrease in
interest rates in 2014, and an increase in interest rates in 2013.
(c) Mix of Assets Allocated to Insurance, Annuity, Investment Contract Liabilities and Equity
Cash & short-term investments
$
122,349 $
3,919 $
43 $
139,683 $
265,994
As at December 31, 2014
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
3,318,781
56,852
29,963
728,034
46,434
296
14,085
578,019
263,352
164,398
—
—
35,925
5,579
6,393
2,913
1,818
—
—
397
62
1,054,893
4,958,086
—
—
61,481
—
50,080
92,979
323,117
196,179
789,515
46,434
86,698
112,705
$
4,316,794 $
1,051,192 $
11,626 $
1,399,116 $
6,778,728
As at December 31, 2013
Insurance
Liabilities
Annuity
Liabilities
Investment
Contract
Liabilities
Equity and
Other
Liabilities
Total
Cash & short-term investments
$
86,443 $
24,074 $
280 $
132,001 $
242,798
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
Provisions made for anticipated future losses of principal and interest on investments and included as a component
of policy liabilities are $169,800 (2013 $114,000)
(d) Fair Value of Insurance and Investment Contract Liabilities and Reinsurance Assets/Liabilities
In the absence of an active market for the sale of insurance and investment contract liabilities and reinsurance
assets/liabilities, the actuarially determined values provide a reasonable approximation of their fair value.
Empire Life Annual Report 2014 65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
Investment contract liabilities are term certain annuities with a relatively short duration.
(e) Liquidity
The Company defines liquid assets as high quality marketable investments that may be easily sold, meaning there
exists an active market and observable prices for the investments. Liquid asset values are based on fair value as
at December 31.
The Company defines cash demands or demand liabilities as those policyholder obligations that may be called on
immediately at the discretion of the policyholder. More specifically, demand liabilities include cash surrender values
under whole life insurance products as well as current accumulated values of annuity products. Amounts would be
gross of any surrender charge or market value adjustment allowed under the terms of the contract. Demand
liabilities are determined as though all such policyholders made their call at the same time and as such cannot be
readily compared to insurance contract liabilities that are determined based on actuarial assumptions associated
with lapse as well as other decrements.
The Company maintains a high level of liquid assets so that cash demands can be readily met. The Company’s
liquidity position is as follows:
As at December 31
Assets:
Cash and short-term investments
Canada and provincial bonds
Other readily-marketable bonds and stocks
Total Liquid Assets
Liabilities:
Demand liabilities with fixed values
Demand liabilities with market value adjustments
Total Liquidity Needs
11.
ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of:
As at December 31
Accounts payable
Post-employment benefit liability
Accrued interest on subordinated debt
Other
Accounts Payable and Other Liabilities
2014
2013
265,994 $
242,798
2,869,167
2,514,664
2,425,017
2,369,078
5,649,825 $
5,036,893
548,289 $
511,709
1,125,761
1,120,376
1,674,050 $
1,632,085
2014
23,574 $
17,560
767
14,120
56,021 $
2013
23,904
18,317
2,371
11,241
55,833
$
$
$
$
$
$
Of the above total, $17,560 (2013 $18,317) 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.
66
Empire Life Annual Report 2014
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 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 average 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 to the Human
Resources Committee of the Board of Directors three times each year. 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 2014 67
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
2014
2013
2014
2013
$
$
192,948 $
177,592 $
10,531 $
10,017
185,919
169,292
—
—
(7,029) $
(8,300) $
(10,531) $
(10,017)
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:
As at December 31
Present Value of Defined Benefit Obligation
Opening defined benefit obligation
Current service cost
Past 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
2014
2013
2014
2013
$
177,592 $
172,925 $
10,017 $
9,815
5,965
236
8,317
14,518
(2,354)
20,545
(10,638)
7,553
1,929
(8,644)
6,603
—
7,117
13,720
5,986
(10,385)
3,052
(1,347)
2,053
(9,759)
47
—
468
515
(500)
1,000
(181)
319
—
(320)
54
—
397
451
1,135
(905)
(228)
2
—
(251)
10,017
Closing defined benefit obligation
$
192,948 $
177,592 $
10,531 $
68
Empire Life Annual Report 2014
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:
As at December 31
Fair Value of Defined Benefit Assets
Fair value at beginning of year
Interest income
Administrative expense
Increase (decrease) in net income before tax
Remeasurements
Pension Benefits
2014
2013
$
169,292 $
147,787
8,082
(635)
7,447
6,189
(635)
5,554
Return on plan assets, excluding amounts included in interest income
12,201
16,247
(Gain)/loss from changes in demographic assumptions
(Gain)/loss from changes in financial assumptions
Actuarial (gain) loss from member experience
Change in effect of asset limit
Increase (decrease) in OCI before tax
Plan transfers / curtailments
Employer contributions
Employee contributions
Benefits paid
—
—
—
—
—
—
—
—
12,201
16,247
—
3,694
1,929
(8,644)
—
7,410
2,053
(9,759)
Fair value of Plan assets at end of year
$
185,919 $
169,292
The actual return on plan assets net of administrative expense, for the year ended December 31, 2014 was a gain of
$19,648 (2013 gain of $21,801).
The following table summarizes income, expense and remeasurement activity for the Company’s defined benefit plans:
For the year ended December 31
Operating expense
Current service cost
Past 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
Change in effect of asset limit
Decrease (increase) in OCI before tax
Pension Benefits
Other Post Employment
Benefits
2014
2013
2014
2013
$
$
$
5,965 $
6,603 $
47 $
236
8,317
(8,082)
635
—
7,117
(6,189)
635
—
468
—
—
7,071 $
8,166 $
515 $
(12,201) $
(16,247) $
— $
(2,354)
20,545
(10,638)
—
5,986
(10,385)
3,052
—
(500)
1,000
(181)
—
$
(4,648) $
(17,594) $
319 $
54
—
397
—
—
451
—
1,135
(905)
(228)
—
2
Defined benefit plan expense is recognized in Operating expenses. Remeasurements in the defined benefit plan are
included in OCI. Operating expenses also include $670 (2013 $544) 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, 2015 are approximately $5,239.
Empire Life Annual Report 2014 69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
2014
2013
$
4,006
8,504
13,169
23,096
9,202
7,251
682
3,188
2,218
71,316
39,064
110,380
6,469
14,520
1,920
33,213
56,122
5,261
7,296
6,860
2% $
5%
7%
12%
5%
4%
0%
2%
1%
38%
21%
59%
3%
8%
1%
18%
30%
3%
4%
4%
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
4%
2%
6%
13%
3%
2%
2%
1%
1%
34%
26%
60%
6%
8%
1%
15%
30%
2%
4%
4%
$
185,919
100% $
169,292
100%
All equities are classified as level 1 and all debt is classified as level 2 in the fair value hierarchy.
70
Empire Life Annual Report 2014
4.8%
4.1%
n/a
n/a
n/a
8.1%
4.5%
2026
2013
22.49
24.52
23.58
25.37
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 ultimate health care cost trend rate is reached
Pension Benefits
Other Post Employment
Benefits
2014
2013
2014
2013
4.0%
4.8%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.8%
4.2%
2.0%
3.5%
3.0%
n/a
n/a
n/a
3.9%
4.8%
n/a
n/a
n/a
7.8%
4.5%
2026
Assumptions (in number of years) relating to future mortality, to determine the defined benefit obligation and the net
benefit cost for the defined benefit pension plans are as follows:
As at December 31
Males aged 65 at measurement date
Females aged 65 at measurement date
Males aged 40 at measurement date
Females aged 40 at measurement date
2014
21.49
23.96
22.88
25.18
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.
As at December 31, 2014
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%
(22,545)
9,593
n/a
n/a
31,159
(8,327)
n/a
n/a
1 year
4,216
(4,330)
(1,337)
n/a
1,505
998
503
1,640
n/a
(1,255)
(998)
(491)
Empire Life Annual Report 2014 71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
As at December 31, 2013
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, in number of years, of the defined benefit obligations are:
As at December 31
Staff pension plan
Supplemental employee retirement plan
Other post-employment benefits
Risks
2014
2013
14
11
15
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, 2014
10% Increase
10% Decrease
20% Increase
20% Decrease
8,460 $
404 $
(8,460) $
(404) $
16,919 $
(16,919)
808 $
(808)
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)
$
$
$
$
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
72
Empire Life Annual Report 2014
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, 2014
100bps
Increase
100bps
Decrease
200bps
Increase
200bps
Decrease
(2,538) $
(121) $
3,154 $
151 $
(4,464) $
(213) $
6,929
331
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
$
$
$
$
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 in accordance
with the investment philosophy outlined in the investment policy approved by the Human Resources Committee of the
Board. The fundamental philosophy is to achieve acceptably high investment return over the long term without
jeopardizing the level of security of the members’ benefits and without introducing too much volatility into the Company’s
future expense. The Company's objective is to match assets to the pension obligations by investing in equities as well
as fixed interest securities. The Company 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.
The last triennial valuation on the Staff Pension Plan was completed in August 2014, as at December 31, 2013. The
next triennial valuation is due to be completed as at December 31, 2016.
Empire Life Annual Report 2014 73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
13.
INSURANCE PREMIUMS
For the year ended December 31
2014
Gross
Reinsurance
Ceded
Net
Gross
2013
Reinsurance
Ceded
Life premiums
Health premiums
Total life and health premiums
Annuity premiums
Total Insurance Premiums
$
$
450,133 $
(78,702) $
371,431 $
439,465 $
(73,683) $
335,044
785,177
186,375
(25,093)
(103,795)
(264)
309,951
681,382
186,111
319,334
758,799
159,722
(22,856)
(96,539)
(438)
971,552 $
(104,059) $
867,493 $
918,521 $
(96,977) $
Net
365,782
296,478
662,260
159,284
821,544
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
For the year ended December 31
2014
Gross
Reinsurance
Ceded
Net
Gross
Life claims
Health claims
Total life and health claims
Annuity benefits
Benefits and Claims Paid
$
$
192,165 $
(63,289) $
128,876 $
169,046 $
(41,789) $
244,151
436,316
289,903
(14,399)
(77,688)
(3,193)
229,752
358,628
286,710
221,903
390,949
225,060
(11,491)
(53,280)
(3,192)
726,219 $
(80,881) $
645,338 $
616,009 $
(56,472) $
2014
2013
$
$
179,537 $
143,442
7,979
7,147
187,516 $
150,589
2013
Reinsurance
Ceded
Net
127,257
210,412
337,669
221,868
559,537
(b) Change in Insurance Contract Liabilities and Reinsurance Ceded
For the year ended December 31
2014
Gross
Reinsurance
Ceded
Net
Gross
2013
Reinsurance
Ceded
Net
Life
Health
Total life and health
Annuity
$
526,875 $
213,350 $
740,225 $
(150,411) $
37,845 $
(112,566)
65,304
592,179
(53,955)
(8,024)
205,326
622
57,280
797,505
(53,333)
(610)
(151,021)
(49,182)
486
38,331
1,488
(124)
(112,690)
(47,694)
Change in Insurance Contract Liabilities $
538,224 $
205,948 $
744,172 $
(200,203) $
39,819 $
(160,384)
74
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
16.
SEGMENTED INFORMATION
The Company operates in the Canadian life insurance industry and follows a product line management approach for
internal reporting and decision making. A description of the product lines is as follows:
The Wealth Management product line includes segregated funds, mutual funds, guaranteed interest rate annuities and
annuities providing income for life.
The Employee Benefits product line offers group benefit plans to employers for medical, dental, disability, and life
insurance coverage of their employees.
The Individual Insurance product line includes both non-participating and participating individual life and health
insurance products.
The Capital and Surplus segment is made up of assets held in the shareholders’ and participating policyholders’ equity
accounts.
Operating results are segmented into three product lines along with the Company’s capital and surplus segment as
follows:
For the year ended December 31, 2014
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Net premiums from external customers
$
186,106 $
318,942 $
362,445 $
— $
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
39,712
48,998
19,981
9,174
39
177,368
286,714
(53,330)
2,282
—
1,939
61,087
91,307
—
—
—
11,733
41,872
6,149
4,104
4,270
489
48
8,571
237,540
6,596
—
—
1,183
41,826
31,025
—
6,943
—
3,475
9,019
130,332
150,543
513,949
65,220
10
1,327
121,084
790,906
—
23,898
1,598
42,637
70,809
—
7,316
4,100
5,219
27,526
38,843
42,236
(164)
(414)
12,524
250
—
—
—
—
—
1,419
—
14,180
—
—
9,874
28,959
Total
867,493
215,036
245,881
538,036
74,469
12,621
187,516
645,338
744,172
2,282
23,898
4,720
146,969
193,141
14,180
14,259
4,100
30,301
107,376
Empire Life Annual Report 2014 75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
For the year ended December 31, 2013
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Net premiums from external customers
$
159,284 $
306,585 $
355,675 $
— $
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
(36,256)
(6,561)
(306,220)
7,173
162
140,211
221,868
(47,694)
945
—
1,729
55,249
71,838
—
—
—
2,938
18,651
299
195
7,605
219,151
2,996
—
—
1,306
41,926
30,172
—
6,697
—
2,790
8,647
37,973
150
1,009
118,518
(115,686)
—
22,098
1,578
40,798
66,247
—
7,314
3,900
19,182
66,407
37,111
42,491
—
—
(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
Assets are segmented into three product lines along with the Company’s capital and surplus as follows:
Assets excluding segregated funds
Segregated funds
Total assets
Assets excluding segregated funds
Segregated funds
Total assets
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
As at December 31, 2014
1,062,818 $
160,465 $
4,156,329 $
1,399,116 $
6,778,728
6,926,322
—
22,153
—
6,948,475
7,989,140 $
160,465 $
4,178,482 $
1,399,116 $
13,727,203
As at December 31, 2013
Wealth
Management
Employee
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
$
$
$
$
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.
76
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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
2014
$
85,309 $
14,914
10,473
4,720
31,553
2013
83,713
14,273
10,826
4,613
26,025
$
146,969 $
139,450
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
Income Tax Expense
2014
2013
20,805 $
31,847
9,496
30,301 $
(2,462)
29,385
$
$
During 2014 the Company paid income tax installments totaling $32,566 (2013 $24,074).
The Company has an Ontario minimum tax carry-forward of $1,549 expiring in 17 years. Management considers it
more likely than not that these tax carry-forwards will be realized before they expire.
Empire Life Annual Report 2014 77
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:
Tax paid dividends on stocks
Miscellaneous
Income Tax Expense
2014
2013
$
137,677 $
36,511
(6,494)
284
$
30,301 $
139,421
36,919
(7,515)
(19)
29,385
The current enacted corporate tax rates as they impact the Company in 2014 stand at 26.52% (2013 26.48%). This
rate is expected to remain unchanged through to 2018. 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)
2014
2013
$
(10,479) $
(6,839)
6,011
4,655
(1,591)
(8,243) $
$
(11,298)
(7,707)
16,942
4,772
(309)
2,400
Of the above total, $4,304 (2013 $6,833) 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
2014
2,400 $
(9,496)
(1,147)
(8,243) $
2013
4,596
2,462
(4,658)
2,400
$
$
78
Empire Life Annual Report 2014
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
Before Tax
2014
Tax Provision
(Recovery)
After Tax
Before Tax
2013
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
Total other comprehensive income
(loss)
$
52,187 $
13,838 $
38,349 $
(25,682) $
(6,801) $
(18,881)
(12,621)
(3,646)
(8,975)
2,488
344
4,329
111
1,147
233
3,182
849
17,592
4,658
12,934
$
44,239 $
11,450 $
32,789 $
(4,753) $
(1,267) $
(3,486)
601
275
1,887
574
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
Before Tax
2014
Tax Provision
(Recovery)
After Tax
Before Tax
2013
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)
Total other comprehensive income
(loss)
$
45,445 $
12,050 $
33,395 $
(31,046) $
(8,222) $
(22,824)
(6,047)
(1,755)
(4,292)
4,173
1,086
3,087
344
4,117
(75)
111
1,091
46
233
3,026
849
16,752
(121)
368
275
4,436
94
574
12,316
274
$
43,784 $
11,543 $
32,241 $
(8,904) $
(2,331) $
(6,573)
Empire Life Annual Report 2014 79
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
2014
Tax Provision
(Recovery)
Before Tax
After Tax
Before Tax
2013
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
Remeasurements of post-employment
benefit liabilities
Shareholder portion of policyholder
other comprehensive income (loss)
Total other comprehensive income
(loss)
19.
DIVIDENDS
$
6,742 $
1,788 $
4,954 $
5,364 $
1,421 $
3,943
(6,574)
(1,891)
(4,683)
(1,685)
(485)
(1,200)
212
75
56
(46)
156
121
840
(368)
222
(94)
618
(274)
$
455 $
(93) $
548 $
4,151 $
1,064 $
3,087
Shareholder dividends paid in 2014 and 2013 were $33,984 and $24,100, respectively. This represents a dividend pay
out rate of $34.4985 per share in 2014 and $24.4652 per share in 2013.
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, 2014 and December 31, 2013 the Company was in compliance with
these ratios.
As at December 31
Tier 1 Regulatory Capital
Tier 2 Regulatory Capital
Total Regulatory Capital
2014
2013
$
$
872,275 $
452,203
830,538
532,961
1,324,478 $
1,363,499
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 2014 were $3,026 (2013 $3,250). The future aggregate minimum lease
payments under non-cancellable operating leases are as follows:
80
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
2014
2015
2016
2017
2018
2019 (and thereafter for comparative)
2020 (and thereafter)
Investment Commitments
2014
$
— $
2,466
2,159
1,914
1,656
1,593
679
2013
3,011
1,859
1,521
1,274
1,016
1,577
—
$
10,467 $
10,258
In the normal course of business, investment commitments are outstanding which are not reflected in the consolidated
financial statements. At December 31, 2014 there were $8,942 (2013 $11,430) of outstanding commitments to purchase
units in a real estate limited partnership. These commitments are payable on demand and mature within 6 months.
Other Contingencies
The Company operates in the insurance industry and is subject to legal proceedings in the normal course of business.
While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings,
management does not believe that such proceedings (including litigation) will have a material effect on its results and
financial position.
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 2014, the Company earned investment management service fees of $101 (2013 $1,631) 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:
Empire Life Annual Report 2014 81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
For the year ended December 31
Salaries and other short-term employee benefits
Post-employment benefits
Total
2014
6,829 $
530
7,359 $
2013
6,369
565
6,934
$
$
Post-employment benefits are comprised of employer current service costs for pension and other post-employment
benefits.
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 redeemed these debentures on May 20, 2014 at par.
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 $305,199 as of December 31, 2014 (2013 $500,609), 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 $5,478 (2013 $5,718) of shareholders’ equity is contingent upon future payment of
dividends to participating policyholders.
25.
CAPITAL STOCK
(a) Authorized
Common shares:
2,000,000 shares with no par value
(b) Issued and fully paid
As at December 31
Number of common shares: 985,076
82
Empire Life Annual Report 2014
2014
$
985 $
2013
985
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
26.
SUPPLEMENTARY PARTICIPATING POLICYHOLDER INFORMATION
Participating Account Assets
As at December 31
Assets backing participating account equity
Assets backing participating account liabilities
2014
2013
$
$
60,040 $
579,832 $
50,822
510,765
Transfers to Shareholders’ Account
In 2014, the Company transferred $2,016 (2013 $2,292), equal to 8.3% of the distributable participating profits, from the
participating account to the shareholders' account.
27.
RISK MANAGEMENT
The Company is subject to a number of risks relating to its business, including investment risks and insurance risks.
The goal 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 and enhancing stakeholder value. Management shares responsibility and accountability for risk management
across the organization. This enables a cross-functional perspective on risk management, enhanced by the frequency
of contact across the management team. The Company has a Management Risk Committee with Board reporting
responsibility. The Company’s risk management framework is based on the former Office of the Superintendent of
Financial Institutions (OSFI) Standards of Sound Business Practices and is tailored to the Company’s circumstances
and business risks, capturing its risk philosophy and risk appetite. Risk management policy development is centralized
under the leadership of the Vice-President Risk Management and applies to all business units. On February 27, 2015
the Board approved the establishment of a Risk and Capital Committee and a Chief Risk Officer position. All risk
management policies and procedures are regularly reviewed for relevance and changes in the risk environment.
Accountability, application, day-to-day management and procedural elements are the responsibility of area
management, supported by business unit compliance officers. There is executive representation and oversight on
various interdisciplinary risk control committees, and the Company follows the same reporting and disclosure discipline
as its public company parent, E-L Financial. The Company formally establishes and documents its values and risk
tolerances through several company-wide policies including a Code of Ethics, Corporate Disclosure principles, risk
management, capital management and whistleblower policies. The Company’s strategic risk management policies
(such as product design and pricing, investment policies and capital management) are also approved by its Board, or
one of its subcommittees.
Empire Life Annual Report 2014 83
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 investment and insurance risks arising from its investing activities and its insurance
operations and to general reputation risk associated with these activities and its 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:
(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
The disclosures in Note 3 provide the breakdown of investments by type and by geographic region. The fair values of
these investments are inherently volatile and frequently change in value as a result of factors beyond the Company’s
control, including general economic and capital market conditions.
i) Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates,
trading prices of equity and other securities, credit spreads and foreign currency exchange rates. Market risk is
directly influenced by the volatility and liquidity in the markets in which the related financial instruments are traded,
expectations of future price and yield movements and the composition of the Company’s investment portfolio. For
the Company, the most significant market risks are market price fluctuations, interest rate risk and foreign currency
risk.
(1) Market Price Fluctuations
The Company’s investment portfolio 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
84
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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, MCCSR position and results of operations. The Company has reinsured a portion of its
segregated fund death benefit guarantee. During the fourth quarter of 2014, the Company initiated a semi-
static hedging program. The objective of the hedging program is to partially protect the Company from
possible future MCCSR ratio declines that might result from adverse stock market price changes. The
hedging program presently employs put options and short positions on key equity indices. The Company
intends to protect 10% to 20% of overall income and MCCSR equity risk exposure by expanding the
hedging program during 2015 and subsequent years. 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 $100 million. 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 policies, 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 Minimum Continuing Capital and
Surplus Requirements (MCCSR) position. Regulatory pressure to increase capital escalates as the
MCCSR position 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.
The Company manages this risk exposure mainly through investment limits and oversight of its investment
managers by the Investment Committee of the Board.
Empire Life Annual Report 2014 85
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 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 by segment. The Investment Committee receives monthly reporting on general fund asset
mix and performance by segment, derivatives matching, segregated fund asset mix and performance, and
investment transactions for all funds. In addition, on at least a quarterly basis, management and the
Company’s investment managers report to the Investment Committee, and through the Investment
Committee to the Board of Directors, on portfolio content, asset mix, the Company’s matched position, the
performance of general and segregated funds and compliance with the investment guidelines.
The Company has an Asset/Liability Management Committee, which meets regularly and reports at least
quarterly to the Investment Committee of the Board. The mandate of the Asset/Liability Management
Committee is to monitor the matched position of Empire’s investments in relation to its liabilities within the
various segments of the Company’s operations. The matching process is designed to require that assets
supporting policy liabilities closely match 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. Asset
segmentation guidelines, which are reviewed regularly with the Investment Committee, have been
established to govern these activities. The Asset/Liability Management Committee reports regularly to the
Investment Committee on the Company’s matched positions, asset mixes, and investment allocation
decisions relative to the Company’s asset segments.
The Company has a Hedging Policy to support general fund hedging programs. The policy outlines objectives,
risk limits and authority associated with its hedging activities. Management monitors its hedging activities on a
regular basis and reports, at least quarterly, to the Board on the status of the hedging program.
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 and liquidity. 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
86
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 Returns section.
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Segregated fund guarantee policy liabilities
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Segregated fund guarantee policy liabilities
As at December 31, 2014
10% Increase
10% Decrease
20% Increase
20% Decrease
$
20,635 $
(19,397) $
41,805 $
(36,694)
$ nil $ nil $ nil $ nil
$
$
2,133 $
2,380 $
(2,133) $
(2,380) $
4,266 $
4,760 $
(4,266)
(4,760)
$ nil $ nil $ nil $ nil
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
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
2014
2013
$
$
279,662
$
260,775
4.2%
4.3%
47,487
$
41,081
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 to
customers, thereby adversely affecting the Company’s operating results.
Empire Life Annual Report 2014 87
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 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, 2014
100bps
Increase
100bps
Decrease
200bps
Increase
200bps
Decrease
$ nil $ nil $ nil $ nil
$ nil $ nil $ nil $ nil
$
$
(38,645) $
(2,238) $
49,866 $
2,511 $
(66,070) $
110,952
(4,207) $
5,300
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
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.
88
Empire Life Annual Report 2014
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 $nil (2013 $1,430) on
net income, $nil (2013 $nil) on shareholders’ OCI and $nil (2013 $nil) on policyholders’ OCI. The
Company’s exposure to foreign currency risk in its financial liabilities is not material.
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 $100 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 2014 89
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 2014 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
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
As at December 31, 2014
$
150,297 $
186,989 $
418,045 $
15,967,863 $
16,723,194
1,983
8,610
164,583
325,473
2,466
6,739
30,094
6,461
230,283
7,322
3,964
320,039
17,560
759,608
679
3,189
—
—
15,875
358,743
188,604
15,971,052
17,286,416
—
10,467
$
327,939 $
237,605 $
760,287 $
15,971,052 $
17,296,883
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
As at December 31, 2013
$
169,841 $
267,826 $
468,223 $
14,564,254 $
15,470,144
2,729
214,218
164,239
551,027
3,011
6,294
32,883
—
307,003
5,670
5,085
326,235
18,317
817,860
1,577
3,068
—
—
17,176
573,336
182,556
14,567,322
16,243,212
—
10,258
$
554,038 $
312,673 $
819,437 $
14,567,322 $
16,253,470
90
Empire Life Annual Report 2014
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, 2014, 4.0% (2013 4.0%) 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,
mortgages and from reinsurers under reinsurance agreements.
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 and by the Board
respectively. 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 2014 91
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
Reinsurance
Loans on policies
Policy contract loans
Accrued investment income
Insurance receivables
Trade accounts receivable
Total
2014
2013
$
239,102 $
26,892
217,350
25,448
4,958,086
4,333,512
196,179
323,117
99,707
46,434
86,698
25,048
41,743
15,331
294,218
299,353
91,967
44,855
90,275
24,058
41,014
8,397
$
6,058,337 $
5,470,447
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
AAA
AA
A
BBB
BB
Total
2014
2013
Fair Value % of Fair Value
Fair Value % of Fair Value
$
269,223
5% $
290,418
1,395,341
2,578,045
714,717
760
28%
53%
14%
—%
1,190,826
2,257,568
594,134
566
$
4,958,086
100% $
4,333,512
7%
27%
52%
14%
—%
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.
92
Empire Life Annual Report 2014
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
2014
2013
$
2,630,620
$
2,167,988
53.0%
50.0%
The following table profiles the bond portfolio by contractual maturity, using the earliest contractual
maturity date:
As at December 31
1 year or less
1 - 5 years
5 - 10 years
Over 10 years
Total
As at December 31
2014
2013
Fair Value % of Fair Value
Fair Value % of Fair Value
$
106,297
671,657
489,124
3,691,008
2% $
14%
10%
74%
61,367
658,374
492,778
3,120,993
$
4,958,086
100% $
4,333,512
1%
15%
11%
73%
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.
Holdings of fixed income securities* in the 10 issuers (excluding federal governments) to which the Company
had the greatest exposure
Percentage of total cash and investments
Exposure to the largest single issuer of corporate bonds
Percentage of total cash and investments
*Fixed income securities includes bonds, debentures, preferred shares and short term investments.
2014
2013
$
$
3,242,685
$
2,803,115
48.6%
46.6%
123,415
$
130,849
1.9%
2.2%
(2) Preferred Shares
The Company’s preferred share investments are all issued by Canadian companies, with 10% (2013 33%)
of these investments rated as P1 and the remaining 90% (2013 67%) rated as P2.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $320,262 or 99% (2013
$296,025 or 99%) of the total mortgage portfolio.
(b)
Insurance Risk
The Company provides a broad range of life insurance, health insurance and wealth management products,
employee benefit plans, and financial services that are concentrated by product line as follows:
(millions of dollars)
Net premium income
Fee and other income
Total
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
$ 186 $ 159 $ 319 $ 307 $ 362 $ 356 $ — $ — $ 867 $ 822
178
140
9
8
1
1
—
2
188
151
$ 364 $ 299 $ 328 $ 315 $ 363 $ 357 $ — $
2 $ 1,055 $ 973
Empire Life Annual Report 2014 93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 stress testing techniques including
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.
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 (CIA). 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.
94
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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, 2014. 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 $11,800 ($11,100 - for 2013).
For annuity business, lower mortality is financially adverse so a 2% decrease in the best estimate mortality
assumption would increase policy liabilities thereby decreasing net income by approximately $4,100
($3,600 for 2013).
(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. In order to provide a margin
that recognizes the mismatch of assets and liabilities, 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 needs to reinvest net cash flows arising in the future to
extend the duration of its assets. Under the revised Canadian actuarial standards of practice, the yields
assumed for these future reinvestments are related to current interest rates, the current economic outlook
and the Company’s expected future asset mix. The reinvestment assumption grades from the initial
reinvestment rate (IRR) assumption to the ultimate reinvestment rate (URR) assumption over the rolling
40-year period following the balance sheet date.
Empire Life Annual Report 2014 95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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% change in interest rates would cause a change in reinvestment
assumption for the next 40-years, resulting in an increase to policy liabilities thereby reducing net income
by approximately $57,000 (not available for 2013) . This assumes no change in the URR assumption.
For investment income expected to be earned on reinvestments beyond the rolling 40-year period, the
Company uses an URR assumption. Under the revised Canadian actuarial standards of practice effective
October 15, 2014, the URR assumption is prescribed as a long-term ultimate risk-free reinvestment rate of
3.3% plus a maximum amount for credit spreads minus asset default rates of 0.8%.
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 4.0% (3.0%
for 2013) to adjust for credible adverse scenarios.
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 20 years following
the balance sheet date. 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 2013). The Company uses an assumption of 7.5% (7.7% for 2013) 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 $91,900 ($85,800 in 2013).
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 a 1% decrease in assumed IRR has on policy liabilities and
subsequently on net income is negligible as a result of the matching process described above. The
Company does not use equity investments to match annuity liability cash flows.
96
Empire Life Annual Report 2014
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 $113,100
($100,600 in 2013). 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 $5,800 ($5,700 in 2013).
(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.
Empire Life Annual Report 2014 97
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 $6,500 ($5,100 in 2013).
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 as follows. 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 Risk Management Policy for each of
its major product lines. This policy, which is established by management and approved by the Company’s
Board of Directors, defines the Company’s product design and pricing risk management philosophy. The
policy sets out product design and pricing approval authorities, product concentration limits, and required
product development monitoring processes and controls.
iii) Underwriting and Claims Risk
The Company is subject to the risk of financial loss resulting from the selection and underwriting of risks to be
insured and from the adjudication and settlement of claims. Many of the Company’s individual insurance and
group disability products provide benefits over the policyholder’s lifetime. Actual claims experience may differ
98
Empire Life Annual Report 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated)
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 Risk 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 claims
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 inadequate 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 reinsurance
market conditions, both in terms of price and availability, which can also affect earnings.
The Reinsurance Risk Management Policy establishes reinsurance objectives and limits, and requires ongoing
evaluation of reinsurers for financial soundness. As reinsurance does not release a company from its primary
commitments to its policyholders, an ongoing oversight process is critical. Most of the Company’s individual life
reinsurance (with the exception of its renewable term 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
renewable term 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. A portion of Empire Life’s
segregated fund death benefit exposure is reinsured. 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 2014 99
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.
Active Market
An active market is a market in which the items traded are homogeneous, willing buyers and sellers can normally be found
at anytime and prices are available to the public.
Available For Sale (AFS) Financial Assets
Non-derivative financial assets that are designated as AFS 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 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 dependents. The industry develops guidelines, voluntarily and
proactively, to respond to emerging issues and to ensure consumer interests are protected.
Effective Interest Method
The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of
allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly
discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset or financial liability
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 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.
100
Empire Life Annual Report 2014
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 2014 101
PARTICIPATING ACCOUNT MANAGEMENT POLICY
Purpose
The Participating Account Management Policy sets out the management objectives for oversight of participating account of
The Empire Life Insurance Company (“Empire Life” or the “Company”).
Scope
This policy applies to all policies issued in the participating account of Empire Life that entitle its policyholder 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.
Policy
Description of the Participating Account and its Policies
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. The participating account includes all policies issued by
Empire Life that entitle its policyholders to participate in the profits of the participating accounting.
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
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 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 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
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Empire Life Annual Report 2014
PARTICIPATING ACCOUNT MANAGEMENT POLICY
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 centers are charged to the participating account in proportion to expenses directly charged.
Investment expenses are allocated monthly to the participating account in proportion to the Company’s total funds at the
beginning of each month.
Premium taxes are allocated in proportion to taxable premiums. Other taxes, licenses, and fees are allocated to lines of
business using cost centre methods.
Income Tax Allocation
Income taxes are allocated to the participating account in proportion to total taxable income for the Company. Deferred tax
assets and liabilities are treated consistently between participating and non-participating accounts.
Surplus Management
The level of surplus in the participating account will be managed by company management taking into consideration the
continuing solvency of the participating account, the participating account’s ability to fulfill all of its contractual obligations
and the extent to which existing participating business is financing new participating business.
Transfers to Shareholder Accounts
It is Empire Life’s intention to transfer the full permitted percentage of distributable participating profits to the shareholder
accounts as allowed by section 461 of the Insurance Companies Act.
Appointed Actuary
Annually, the Board will consider the Appointed Actuary’s opinion on the continuing fairness of this policy to participating
policyholders.
Process to Approve (and Frequency)
This policy is reviewed annually by the Vice President & Product Actuary. All non-material amendments must be approved
by the Chief Actuary. Material amendments must be approved by 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.
This policy will also be reviewed if the Company decides to stop accepting new business in the participating account.
Empire Life Annual Report 2014 103
PARTICIPATING POLICYHOLDER DIVIDENDS AND BONUS POLICY
Purpose
The Participating Policyholder Dividends and Bonus Policy (the “dividend policy”) sets out the process for determining,
recommending and declaring dividends for policies issued in the participating account of The Empire Life Insurance
Company (“Empire Life” or the “Company”).
Scope
This dividend policy applies to all policies issued in the participating account of Empire Life that entitle its policyholder 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.
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 policyholder 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. Before declaring the aggregate amount of dividend, the Board will consider Company management’s
recommendations for policyholder dividends and the Appointed Actuary’s opinion on the conformity of the proposed dividend
to this policy and its fairness to participating policyholders. Company management’s recommendations and the Appointed
Actuary’s opinions shall be prepared in compliance with applicable legislative and regulatory requirements, and generally
accepted actuarial practice with such changes as determined by the Office of the Superintendent of Financial Institutions.
Principal Factors that Affect the Aggregate Amount of Dividends
The aggregate amount of dividends will reflect operating income on all participating life, annuity and disability coverages,
dividends on deposit, participating paid-up additions and participating term additions, as well as income attributable to
surplus in the participating account. The aggregate amount of dividends will also be influenced by considerations such as,
solvency of the participating account, its ability to fulfill all contractual obligations, the extent to which surplus in 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.
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Empire Life Annual Report 2014
PARTICIPATING POLICYHOLDER DIVIDENDS AND BONUS POLICY
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.
Company management will review the underlying experience, assumptions and procedures for participating dividend scales
annually. Material changes in actual experience will be passed through to participating policyholders within two years of the
experience change to the extent that they are not anticipated in the current dividend scale. Company management will
prepare a written report which describes the underlying experience, assumptions and procedures for the proposed dividend
scale recommendations.
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.
Appointed Actuary
Annually, the Board will consider the Appointed Actuary’s opinion on the continuing fairness of this policy to participating
policyholders.
Process to Approve (and Frequency)
This policy is reviewed annually by the Vice President & Product Actuary. All non-material amendments must be approved
by the Chief Actuary. Material amendments must be approved by 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.
This policy will also be reviewed if the Company decides to stop accepting new business in the participating account.
Empire Life Annual Report 2014 105
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, internal risk management, corporate compliance, external audit by an
independent chartered professional 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 and an internal risk management department that
supports enterprise risk management activities. On February 27, 2015 the Board approved the establishment of a Risk and
Capital Committee and a Chief Risk Officer position. 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 eleven times in 2014
and is scheduled to meet seven times in 2015.
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 five 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 five Committees.
106
Empire Life Annual Report 2014
CORPORATE GOVERNANCE OVER RISK MANAGEMENT
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.
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.
The Risk and Capital Committee (established February 27, 2015) is responsible for oversight of the Company’s risk and
capital management activities. The Committee also monitors capital utilization as well as risk identification and assessment
in accordance with approved risk management policies and approved risk appetite framework.
Empire Life Annual Report 2014 107
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
WESTERN CANADA
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
Winnipeg Retail Sales Office
200-5 Donald Street
Winnipeg, Manitoba R3L 2T4
204 452-9138
1 866 204-1001
GROUP SALES OFFICES
WESTERN CANADA
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
108
Empire Life Annual Report 2014
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.
ONTARIO
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
QUEBEC
Montréal Retail Sales Office
1600-600 de Maisonneuve Boulevard W.
Montréal, Quebec H3A 3J2
514 842-9151
1 800 371-9151
Québec Retail Sales Office
100-1220 Lebourgneuf Boulevard
Québec, Quebec G2K 2G4
418 628-1220
1 888 816-1220
QUEBEC
Montréal Group Sales Office
1600A-600 de Maisonneuve Boulevard W.
Montréal, Quebec H3A 3J2
514 842-0003
1 800 561-3738
ONTARIO
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
Ottawa Group Sales Office
Northwood Executive Centre
43 Auriga Street, Suite 129
Nepean, Ontario K2E 7Y8
613 548-1881 ext. 8636
1 877 548-1881 ext. 8636
London Group Sales Office
380 Wellington Street, Suite 658
London, Ontario N6A 5B5
519 438-1751
BOARD OF DIRECTORS
SHAREHOLDERS' DIRECTORS
POLICYHOLDERS' DIRECTORS
HONORARY CHAIRMAN
Andrew S. Birrell 5
Chief Financial Officer
Mark J. Fuller 2, 3, 4
The Honourable Henry N.R. Jackman
President and Chief Executive Officer
Honorary Chairman
Guardian Financial Services
Ontario Pension Board
The Empire Life Insurance Company
John F. Brierley 1, 5
Corporate Director
Edward M. Iacobucci 1, 4
Dean, Faculty of Law
University of Toronto
Harold W. Hillier 2, 4
Corporate Director
HONORARY DIRECTOR
The Right Honourable John N. Turner
Richard E. Rooney 2, 3
President
Burgundy Asset Management Ltd.
Duncan N.R. Jackman 1, 2, 3, 4, 5
Mark Sylvia 5
Chairman of the Board
President and Chief Executive Officer
The Empire Life Insurance Company
The Empire Life Insurance Company
Clive P. Rowe 2, 5
Partner
Oskie Capital
Stephen J.R. Smith 2, 3,
Chairman and President
First National Financial LP
Mark M. Taylor 2
Executive Vice-President and Chief Financial
Officer
E-L Financial Corporation Limited
Jacques Tremblay 1, 3, 5
Partner
Oliver Wyman Actuarial Consulting
Jonathan J. Yates 5
Chief Executive Officer
Guardian Financial Services
Douglas C. Townsend 1, 3, 5
President
Townsend Actuarial Consulting Ltd.
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 Risk and Capital Committee (effective Feb 27, 2015)
Empire Life Annual Report 2014 109
CORPORATE MANAGEMENT
Mark Sylvia
President and Chief Executive Officer
Anne E. Butler
Senior Vice-President, Human Resources, Communication and Legal Services
Richard Cleaver
Senior Vice-President and Chief Technology Officer
J. Edward Gibson
Senior Vice-President and Chief Actuary
Sean E. Kilburn
Senior Vice-President, Life Insurance
Gary J. McCabe
Senior Vice-President and Chief Financial Officer
Gaelen Morphet
Senior Vice-President and Chief Investment Officer
Steve S. Pong
Senior Vice-President, Group Solutions
110
Empire Life Annual Report 2014
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EMPIRE LIFE ANNUAL REPORT 2014
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 The Globe and Mail Report on Business, June 2014, based on revenue
2 As at May 21, 2014
® 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-02/15