The Empire Life Insurance Company
Annual Report 2015
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TABLE OF CONTENTS
Financial Highlights
Message from the Chairman of the Board
Message from the President and Chief Executive Officer
Sources of Earnings
Management Discussion and Analysis
Management's Responsibility for Financial Reporting
Independent Auditor's Report
Appointed Actuary's Report
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Intangible Assets
Insurance Payables
Insurance Receivables
1. Description of Company and Summary of Operations
2. Significant Accounting Policies
3. Financial Instruments
4.
5. Other Assets
6. Property and Equipment
7.
8. Segregated Funds
9.
10. Insurance Contract Liabilities and Reinsurance Assets/Liabilities
11. Accounts Payable and Other Liabilities
12. Employee Benefit Plans
13. Subordinated Debt
14. Insurance Premiums
15. Fee Income
16. Benefits and Expenses
17. Operating Expenses
18. Income Taxes
19. Earnings Per Share
20. Capital Stock
21. Dividends
22. Shareholders' Equity Entitlement
23. Supplementary Participating Policyholder Information
24. Segmented Information
25. Commitments and Contingencies
26. Related Party Transactions
27. Capital Management
28. Risk Management
29. Subsequent Event
Glossary of Terms
Participating Account Management Policy
Participating Policyholder Dividends and Bonus Policy
Corporate Governance Over Risk Management
Corporate Information
Empire Life - Annual Report 2015
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101
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104
MESSAGE FROM THE
2015 FINANCIAL HIGHLIGHTS
CHAIRMAN OF THE BOARD
Empire Life experienced another year of growth and success in 2015. The Board is pleased with the company’s 2015
results and has full confidence in its management and direction.
In December 2015, E-L Financial Corporation Ltd. (E-L Financial) acquired an additional 19% stake in Empire Life’s
holding company E-L Financial Services Ltd. (ELFS) from Guardian Assurance Ltd. This results in E-L Financial owning
100% of ELFS which owns 98.3% of Empire Life.
201%
E-L Financial has always been firmly committed to Empire Life, its employees, distribution partners, shareholders and
customers. This share purchase further strengthens that commitment. As Chairman and Chief Executive Officer of E-L
Financial, I can tell you that we make investment decisions based on long-term investment horizons. We are very positive
about owning an increased share of Empire Life, a significant competitor in the Canadian life insurance market.
MCCSR ratio
as at December 31, 2015
Product
diversification
Through E-L Financial, my family has held an ownership position in Empire Life for close to 60 years. We are proud of
how this company has grown to become one of the leading life insurance companies in Canada and I look forward to
seeing the Empire Life story continue to evolve and develop.
Shareholders’ Net Income
2015 (in millions)
Product diversification
Strength of our capital base
Much of any company’s success comes from its people and Empire Life is no different. Our employees, senior leadership
and Board members work together to provide Canadians with investment and insurance products that help them become
financially secure. I am very proud to lead and serve with our Board members whose impressive talents and
accomplishments provide careful counsel, strategy and leadership to the management team. I wish to thank our Board for
their valued work and commitment this past year. I would also like to thank and acknowledge the leadership and
Empire Life is well-diversified across
contributions of Andrew Birrell, who stepped down from the Board in December 2015.
three product lines:
$108.6
by premium and fee income for the
12 months ended December 31, 2015
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.
Shareholders’ Net Income
2014 (in millions): $98.7
To close, on behalf of the Board of Directors, I thank our shareholders and policyholders for their continued support, as
Wealth Management
well as Empire Life employees, whose work, passion, commitment and innovation fuel this company and its success.
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%.
____________________________ _____ ______
Duncan N. R. Jackman
Chairman of the Board
February 25, 2016
Financial ratings
These financial ratings give you an
independent opinion of our financial
strength as an insurer and our ability
to meet policyholder obligations.
33%
Employee Benefits
32%
Individual Insurance
35%
A (Excellent)
A.M. Best Company (as at May 19, 2015)
Financial Strength Rating: A
Issuer Rating: A
Subordinated Debt Rating: A (low)
DBRS (as at December 17, 2015)
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 2015 Annual Report.
Empire Life - Annual Report 2015
5
4
Net Premium and Fee Income
2015 (in millions)
$1,052
Net Premium and Fee Income
2014 (in millions): $1,055
Total Assets Under Management
2015 (in millions)
$14,535
Total Assets Under Management
2014 (in millions): $13,723
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
Empire Life experienced another year of growth and success in 2015. The Board is pleased with the company’s 2015
results and has full confidence in its management and direction.
In December 2015, E-L Financial Corporation Ltd. (E-L Financial) acquired an additional 19% stake in Empire Life’s
holding company E-L Financial Services Ltd. (ELFS) from Guardian Assurance Ltd. This results in E-L Financial owning
100% of ELFS which owns 98.3% of Empire Life.
E-L Financial has always been firmly committed to Empire Life, its employees, distribution partners, shareholders and
customers. This share purchase further strengthens that commitment. As Chairman and Chief Executive Officer of E-L
Financial, I can tell you that we make investment decisions based on long-term investment horizons. We are very positive
about owning an increased share of Empire Life, a significant competitor in the Canadian life insurance market.
Through E-L Financial, my family has held an ownership position in Empire Life for close to 60 years. We are proud of
how this company has grown to become one of the leading life insurance companies in Canada and I look forward to
seeing the Empire Life story continue to evolve and develop.
Much of any company’s success comes from its people and Empire Life is no different. Our employees, senior leadership
and Board members work together to provide Canadians with investment and insurance products that help them become
financially secure. I am very proud to lead and serve with our Board members whose impressive talents and
accomplishments provide careful counsel, strategy and leadership to the management team. I wish to thank our Board for
their valued work and commitment this past year. I would also like to thank and acknowledge the leadership and
contributions of Andrew Birrell, who stepped down from the Board in December 2015.
To close, on behalf of the Board of Directors, I thank our shareholders and policyholders for their continued support, as
well as Empire Life employees, whose work, passion, commitment and innovation fuel this company and its success.
____________________________ _____ ______
Duncan N. R. Jackman
Chairman of the Board
February 25, 2016
Empire Life - Annual Report 2015
5
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
The economic environment around the world was unsettled in 2015. Equity markets, the Canadian dollar and oil prices
steadily declined in 2015, creating a difficult environment for asset managers and investors. Low long-term interest rates
continue to be a challenge in 2016. We are particularly impacted by this trend as the majority of our assets backing
insurance policy liabilities are fixed income based. Our objective in these turbulent times is simple. Measure and manage
risk. We have refined our ability to quantify the nature of our future obligations to our policy holders and we select our
investments carefully focusing on high quality assets that can sustain through economic uncertainty.
During the past decade we have seen an increasing trend towards more active financial services regulation designed to
provide consumers with more complete disclosure and conflict free advice. This is as it should be. The burden of
monitoring compliance has been placed primarily on the insurers who issue the contracts and to a degree the distribution
networks that interact with consumers. The life insurance industry has worked with the regulators to implement changes
that satisfy consumer needs and help them to obtain the right products, services and advice on a timely basis.
The life insurance industry is highly competitive. Many industry observers forecast that the consolidation in our industry
would reduce the level of competition. The opposite has occurred. We have found that large life insurance companies are
willing and able to actively compete by offering good service, product innovation and keen pricing. We constantly review
our business in order to improve our products and increase our efficiency. In order to succeed we must be able to provide
consumers with an exceptional value proposition.
Despite the unstable economy, and challenging regulatory and competitive environment, we were able to effectively
manage and grow our business in 2015. One of the strengths of our company has always been our investment expertise.
Our value-oriented approach has endured for more than 50 years. Sound business practices and staying true to our
investment philosophy have protected us in this unstable economic climate, while still finding opportunities for growth.
Building the digital highways of the future
The way we communicate is changing. The new generation of consumers want to access information, products and
services online. We are making investments to meet this need. We have been building out our digital capabilities in order
to deliver our products and services to middle income Canadians and small business customers.
We enhanced our Fast and FullTM online insurance platform, arguably one of the best platforms in the industry. With this
platform, advisors can virtually meet with their clients, and apply for insurance online. In June, we launched empirelife.ca,
a new website where Canadians can apply for simple term life insurance online directly or through their advisor. This will
help us reach a large underserved market in Canada. In our Employee Benefits line of business, we continued to see
good adoption of our eClaims system which makes it fast and easy to submit group health claims. We also introduced a
new critical illness product as part of our Employee Benefits offering. These online channels and tools are helping us
improve service, broaden our distribution, and make it simple, fast and easy for Canadians to get the insurance protection
they need.
The delivery of our products and services is achieved by working with our distribution partners. We believe strongly in the
value of advice. As we build the digital highways of the future, we will ensure that the systems work in conjunction with the
services provided by our distribution partners.
System for managing
Technology is key to delivering a superior customer service. But it is only one part of the process. We have undergone a
complete review of our operations to find all possible ways to improve efficiency in order to lower our unit costs. I am
pleased with the progress we are making as an organization to develop systems for managing that will help us measure,
plan and manage our work effectively. We are striving to continuously improve our business to ensure we provide superior
products and services to our customers and distribution partners.
Managing risk
We are in the risk business. We don’t sell insurance, we buy risk. Our customers rely on our ability to provide them with
financial support when the need arises. We take risk off their shoulders and put it on ours. In order to do this we must
effectively monitor and manage risk. In 2015, we continued to strengthen our risk management capability. We have
developed our risk management practices for precisely what we are experiencing now - volatile financial markets.
Empire Life - Annual Report 2015
6
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
The year in numbers
Shareholders’ net income was $108.6 million in 2015, up from $98.7 million in 2014. Strong profits from our inforce
segregated funds and increased earnings on capital and surplus due to a gain on the sale of bonds helped contribute to
this very positive result.
For the third year in a row, sales of our segregated fund products exceeded $1 billion, helping to contribute to earnings of
$59.2 million in this business line, compared to $41.9 million in 2014. Growth in segregated fund management fees and
positive net sales helped contribute to this result. Our funds performed well in 2015, reinforcing for our customers the
value of active management, downside protection and valuable guarantees for their investments. We continue to see
steady growth of our mutual funds, managed through our subsidiary, Empire Life Investments Inc.
Our individual insurance line of business experienced a loss of $1.3 million in 2015, compared to a $27.5 million gain in
2014. Lower sales of universal life policies were offset by strong sales of our participating policyholder product line and
the launch of EstateMaxTM in 2015, which provides affordable lifetime insurance protection combined with long-term cash
values, ideal for estate planning needs.
We have managed to compete effectively against much larger competitors in the Employee Benefits business. But the
impact of aggressive pricing in the market has been seen in our results. Despite our strong claims management practices
we saw our net income decline to $5.8 million in 2015, compared to $9.0 million in 2014.
Total assets under management increased from $13.8 billion in 2014 to $14.5 billion in 2015. We continue to maintain a
healthy Minimum Continuing Capital and Surplus Requirements ratio, which was 201% at the end of December, 2015.
This demonstrates our long-term ability to pay claims and our prudent capital management.
In 2015, we became a reporting issuer, giving us the ability to raise capital to invest in our business and which resulted in
an issue of $130 million in preferred shares in February 2016. This is an exciting development for Empire Life and will
strengthen our ability to compete. In December, DBRS assigned our company a Financial Strength Rating of “A” and
confirmed our Issuer Rating of “A” and Subordinated Debt rating of A (low) for Empire Life, an important third party
confirmation of our strength.
How we achieve success
How do we achieve success? One word. Teamwork. Our business is complex. Our job is to manage the complexity and
make it simple, fast and easy for our customers to do business with us. This is only possible when everyone in our
organization works as a team. So I would like to thank all of our employees for their spirit and willingness to work together
to help our customers to build wealth and obtain the financial protection they need.
I would like to thank the Board of Directors and our shareholders for their support and continued commitment to our
customers, distribution partners and our employees.
____________________________ _____ ______
Mark Sylvia
President and Chief Executive Officer
February 25, 2016
Empire Life - Annual Report 2015
7
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)
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Expected profit on in-force business
$ 91.6 $ 71.3 $ 21.1 $ 20.8 $ 43.8 $ 40.0
$ 156.4 $ 132.1
Impact of new business
Experience gains & losses
Management actions and changes in assumptions
Other
Earnings on operations before income taxes
Earnings on surplus
Income before income tax
Income taxes
Shareholders’ Net Income
(13.7)
(26.8)
6.2
(5.8)
—
12.4
(3.3)
—
78.3
53.6
—
—
(9.9)
(3.4)
(10.2)
(6.9)
(1.9)
(12.4)
0.2
—
8.0
—
3.8
—
12.5
—
(19.3)
—
5.2
—
(4.0)
(0.5)
5.8
(7.3)
34.0
—
—
—
50.2
30.8
(30.5)
(41.0)
(9.6)
10.0
(24.9)
—
91.4
50.2
6.3
(7.3)
100.1
30.8
$ 78.3 $ 53.6 $
8.0 $ 12.5 $
5.2 $ 34.0 $ 50.2 $ 30.8 $ 141.6 $ 130.9
19.0
11.9
2.2
3.5
(1.6)
8.4
13.4
8.4
33.0
32.2
$ 59.3 $ 41.7 $
5.8 $
9.0 $
6.8 $ 25.6 $ 36.8 $ 22.4 $ 108.6 $ 98.7
Wealth Management
Wealth Management’s 2015 earnings on operations were higher than the level achieved in 2014. In 2015 there was an
increase in expected profit on in-force business primarily due to the segregated fund business. This was primarily due to
growth in segregated fund management fees and growth in segregated fund guarantee fees related to guaranteed
minimum withdrawal benefit (GMWB) products. Despite the recent drop in stock markets in 2015, many of Empire Life’s
segregated funds have performed well. The improvement in fee income relative to 2014 was primarily due to product price
Empire Life - Annual Report 2015
8
SOURCES OF EARNINGS
increases and higher assets under management (“AUM”). The increase in AUM was due to positive segregated fund net
sales (gross sales net of withdrawals) in the last 12 months, and the positive impact of the above mentioned segregated
fund performance.
In addition, there were higher earnings from lower new business strain in 2015 due to lower segregated fund product
sales in 2015 relative to 2014 and lower expenses.
These items were partly offset by lower experience gains in 2015 compared to 2014 levels primarily due to worsened
investment experience and worsened annuitant mortality experience. The worsened investment experience resulted from
market interest rate movements and reduced availability of assets at attractive yields for matching fixed interest annuity
contract liabilities.
In addition, 2015 losses resulting from management actions and changes in assumptions were higher than losses
incurred in 2014. In 2015 the losses primarily related to investment return assumptions. In 2014 the losses primarily
related to annuitant mortality assumptions.
Employee Benefits
Employee Benefits earnings on operations were lower than the level achieved in 2014. In 2015 there was a decrease in
earnings from experience gains and losses as the experience loss from claims experience worsened in 2015 compared to
2014 due to unfavourable health claims results.
In addition, the update of policy liability assumptions in 2015 was less favourable relative to 2014 primarily due to waiver
of premium assumptions for group life insurance products in 2014.
These items were partly offset by increased earnings due to lower new business strain in 2015 resulting from efficiency
improvements in 2015 relative to 2014.
There was also an increase in expected profit on in-force business in 2015 due to growth of the in-force block of business.
Individual Insurance
The decrease in Individual Insurance earnings on operations was primarily due to management actions and changes in
assumptions. This was primarily due to a larger net strengthening of reserves in 2015 relative to 2014. This primarily
resulted from a lower reserve release from mortality assumption updates in 2015 relative to 2014. There was also a
favourable settlement on a lawsuit resulting in a gain for Empire Life in 2014.
In addition, there was worsened mortality, surrender and lapse experience in 2015, compared with 2014 levels. This was
partly offset by improved investment experience in 2015 relative to 2014 primarily from the increase in interest rate
spreads on provincial and corporate bonds during 2015 compared to unfavourable interest rate movements during 2014.
While the impact of this on net income is largely reduced due to a corresponding change in insurance contract liabilities,
net income is impacted as it is not possible to perfectly match future liability cash flows with future asset cash flows.
In addition, there were lower earnings due to higher new business strain in 2015 resulting from higher expenses in 2015
relative to 2014.
These items were partly offset by a decrease in losses resulting from other items in 2015 due to the 2014 increased
premium tax rates in the province of Quebec on both in-force policies and new policies sold. Some in-force policies allow
for an adjustment to prices or charges to cover the cost of the additional tax. However, some in-force policies are fully
guaranteed and cannot be adjusted, resulting in a strengthening of insurance contract liabilities of $7.3 million in 2014.
Capital & Surplus
2015 earnings from Capital and Surplus were higher than 2014 primarily due to gains on the sale of available for sale
(AFS) bond investments in 2015, and lower borrowing costs in 2015 due to a reduced debt level.
Empire Life - Annual Report 2015
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A is dated as of February 25, 2016.
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, 2015 and 2014. This MD&A should be read in conjunction with the Company’s December 31,
2015 consolidated financial statements, which form part of The Empire Life Insurance Company 2015 Annual Report
dated February 25, 2016. 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 contains forward-looking information and involves numerous risks and uncertainties, including but not limited to,
those described in the “Risk Factors” section of the Annual Information Form which is available at www.sedar.com. No
assurance can be given that results, performance or achievement expressed in, or implied by, any of the forward-looking
information will occur, or if they do, that any benefits may be derived from them. Actual results may differ materially from
those expressed or implied by such forward-looking information. See Forward-Looking Statements and Information
section in this report.
The financial statements of the Company are prepared in compliance with IFRS, which is generally accepted accounting
principles (“GAAP”) as set out in the Handbook of the Chartered Professional Accountants of Canada. This MD&A makes
reference to certain non-GAAP measures. These measures are not recognized measures under IFRS and do not have a
standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented
by other companies. Rather, these measures are provided as additional information to complement IFRS measures by
providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they
should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported
under IFRS. See Non-GAAP Measures section in this report.
Financial Analysis
Overview
(in millions of dollars except per share amounts)
Shareholders' net income
Earnings per share - basic and diluted
Return on shareholders' equity (quarters annualized) ("ROE")
Fourth quarter
2015
2014
$
$
16.2
16.43
$
$
5.9%
18.2
18.44
$
$
7.4%
Year
2015
108.6
110.22
$
$
10.2%
2014
98.7
100.20
10.5%
Empire Life reported fourth quarter shareholders’ net income of $16.2 million for 2015, compared to $18.2 million for 2014.
Full year shareholders’ net income was $108.6 million compared to $98.7 million in 2014.
The following table provides a breakdown of the sources of earnings1 for the fourth quarter and full year.
Sources of Earnings
(in millions of dollars)
Fourth quarter
2015
Expected profit on in-force business
$
40.3 $
Impact of new business
Experience gains (losses)
Management actions and changes in assumptions
Other
Earnings on operations before income taxes
Earnings on surplus
Income before income tax
Income taxes
Shareholders’ net income
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
(8.9)
8.0
(24.9)
—
14.5
7.1
21.6 $
5.4
16.2 $
$
$
Empire Life - Annual Report 2015
10
2014
33.3 $
(12.7)
6.3
(1.7)
(7.3)
17.9
7.9
25.8 $
7.6
18.2 $
Year
2015
156.4 $
(30.5)
(9.6)
(24.9)
—
91.4
50.2
141.6 $
33.0
108.6 $
2014
132.1
(41.0)
10.0
6.3
(7.3)
100.1
30.8
130.9
32.2
98.7
MANAGEMENT'S DISCUSSION AND ANALYSIS
Fourth quarter shareholders’ net income and ROE were lower relative to 2014 primarily due to lower profit from the
Employee Benefits product line. The decreased profit from this product line primarily resulted from the 2014 favourable
update of group life policy liability assumptions, which did not recur in 2015.
Full year shareholders’ net income was higher relative to 2014 primarily due to growing profit on in-force Wealth
Management business and increased earnings on surplus. Despite the higher net income, full year ROE was slightly
lower in 2015 than 2014 due to a higher level of shareholders’ equity in 2015.
The Wealth Management product line’s improved result was due to the growth in segregated fund management fees and
growth in segregated fund guarantee fees related to guaranteed minimum withdrawal benefit (“GMWB”) products. Despite
the recent drop in stock markets in 2015, many of Empire Life’s segregated funds have performed well. The improvement
in fee income relative to full year 2014 was due to positive segregated fund net sales (gross sales net of withdrawals) in
the last 12 months, product price increases and the positive impact of the above mentioned segregated fund performance.
Earnings on surplus improved primarily due to increased gains on the sale of bonds.
The impact of new business improved, relative to 2014 primarily due to lower fourth quarter and full year segregated fund
sales and lower Wealth Management expenses. Experience losses occurred in the full year 2015 primarily related to
unfavourable surrender, lapse and mortality experience, which adversely affected the Individual Insurance product line. In
2014 full year experience gains were primarily due to the Wealth Management product line’s favourable investment
experience which resulted from market interest rate movements and the availability of assets at attractive yields for
matching fixed interest annuity contract liabilities.
The loss from management actions in 2015 primarily resulted from an unfavourable update of policy liability assumptions
for the Individual Insurance product line. This unfavourable update primarily related to lapse assumptions based on
updated industry and company experience data. The full year gain from management actions in 2014 resulted from a
favourable settlement on a lawsuit.
In addition, 2014 included a decrease in earnings resulting from other items due to increased premium tax rates in the
province of Quebec on both in-force policies and new policies sold. Some in-force policies allow for an adjustment to
prices or charges to cover the cost of the additional tax. However, some in-force policies are fully guaranteed and cannot
be adjusted, which resulted in a strengthening of insurance contract liabilities of $7.3 million in 2014.
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 2015 net income compared to
2014 is shown in the Product Line Results sections later in this report.
On August 5, 2015 Empire Life filed a final long form non-offering prospectus with the securities regulatory authority in the
province of Ontario. The purpose of filing the non-offering prospectus was to qualify Empire Life to raise regulatory capital
in the form of preferred shares and subordinated debt, as well as other debt securities.
On January 28, 2016 the Company announced a $130 million Canadian public offering of Non-Cumulative Rate Reset
Preferred Shares. Empire Life intends to use the net proceeds from the offering for regulatory capital and general
corporate purposes. The offering closed on February 16, 2016 and commenced trading on the Toronto Stock Exchange
under the ticker symbol EML.PR.A. Empire Life has granted the underwriters an option to purchase up to $19.5 million of
additional preferred shares exercisable at any time up to a period of 30 days from the date of closing. Holders of the
preferred shares will be entitled to receive fixed non-cumulative quarterly dividends yielding 5.75% annually, as and when
declared by the Board of Directors of Empire Life, for the initial period ending on and including April 17, 2021. Thereafter,
the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 4.99%.
On a pro forma basis, after giving effect to the preferred share issue (but assuming no exercise of the over-allotment
option), the Company estimates that, as at December 31, 2015, its Minimum Continuing Capital and Surplus
Requirements (“MCCSR”) would have increased by 17 points from 201% to 218%.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Information
Income Statement Financial Information
(in millions of dollars)
Revenue
Net premium income
Fee and other income
Investment income
Realized gain on FVTPL investments
Realized gain on available for sale investments including impairment write downs
Fair value change in FVTPL investments
Total Revenue
Expenses
Benefits and expenses
Income and other taxes
Total Expenses
Net income after tax
Participating policyholders' portion
Shareholders' net income
Return on shareholders' equity
For the years ended December 31
2015
2014
2013
$
$
835
217
259
42
19
(85)
1,287
$
867
188
246
74
13
538
1,926
$
1,139
$
1,770
$
46
1,185
102
(6)
$
108
$
49
1,819
107
9
98
$
822
151
240
45
(2)
(349)
907
749
48
797
110
(3)
113
10.2%
10.5%
13.1%
Revenue volatility was primarily driven by the impact of market interest rate movements on fair value change in fair value
through profit or loss (“FVTPL”) investments. The impact of this on net income is largely reduced due to a corresponding
change in insurance contract liabilities (included in Benefits and expenses in the above table).
Balance Sheet Financial Information
(in millions of dollars)
Assets
Total Cash and Investments
Other assets
Segregated fund assets
Total Assets
Liabilities
Insurance contract liabilities
Reinsurance liabilities
Subordinated debt
Other liabilities
Segregated fund policy liabilities
Total Liabilities
Total Equity
Total Liabilities & Equity
As at December 31
2015
2014
2013
$
$
$
6,859 $
6,669 $
137
7,368
112
6,948
6,020
105
5,955
14,364 $
13,729 $
12,080
4,799 $
4,713 $
4,175
531
299
215
7,368
13,212
1,152
491
299
216
6,948
12,667
1,062
$
14,364 $
13,729 $
285
498
211
5,955
11,124
956
12,080
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Financial Informtion
(in millions of dollars)
Assets under management2
General fund assets
Segregated fund assets
Mutual fund assets
Subordinated debt
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
MCCSR Ratio
As at December 31
2015
2014
2013
$
6,996
$
6,780
$
7,368
171
299
6,948
109
299
$
$
$
918
504
1,422
$
872
452
1,324
708
$
671
$
6,126
5,954
38
498
831
533
1,364
511
201%
197%
267%
Empire Life’s subordinated debt and MCCSR ratio were higher from May 31, 2013 until May 20, 2014 due to the timing of
Empire Life’s issuance of $300 million 2.87% subordinated debentures on May 31, 2013 and the redemption of $200
million 6.73% subordinated debentures at par on May 20, 2014. This pre-funding of maturing debt resulted in Empire Life
temporarily having $200 million of additional debt in its capital structure. The redemption of $200 million 6.73%
subordinated debentures at par on May 20, 2014 resulted in a 19 point decrease in Empire Life’s MCCSR ratio. In
addition, regulatory capital requirements increased significantly in 2014 resulting in a lower MCCSR ratio in 2014. $102
million of the 2014 increase was due to a comprehensive review and update of the methods and assumptions used in
Empire Life’s stochastic model for determining required regulatory capital and policy liabilities for Empire Life’s segregated
fund product guarantees. Empire Life updated the methods and assumptions used in its stochastic model to be more
consistent with the industry. The 2014 $102 million increase in required regulatory capital resulted in a 36 point decrease
in Empire Life’s 2014 MCCSR ratio. This decrease in the MCCSR ratio was entirely related to older segregated fund
products that are closed to new policies.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table provides a summary of Empire Life results by major product line (figures in MD&A may differ due to
rounding):
For the twelve months ended December 31
(in millions of dollars)
Revenue
Net premium income
Fee and other income
Investment income
Realized gain on FVTPL investments
Realized gain on available for sale investments including
impairment write downs
Fair value change in FVTPL investments
Total Revenue
Expenses
Benefits and expenses
Income and other taxes
Total Expenses
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
$ 144 $ 186 $ 325 $ 319 $ 366 $ 362 $ — $ — $ 835 $ 867
207
178
9
4
1
—
(2)
9
4
—
—
4
1
171
38
—
(56)
1
151
65
—
514
49
9
—
20
442
337
336
520
1,093
388
12
400
322
9
331
317
10
327
518
1,049
4
17
522
1,066
43
1
—
(28)
367
289
19
308
—
41
2
19
1
63
10
14
24
—
42
—
13
—
55
16
10
26
217
259
42
19
(85)
188
246
74
13
538
1,287
1,926
1,139
1,770
46
49
1,185
1,819
Net income (loss) after tax
$
59 $
42 $
6 $
9 $
(2) $
27 $
39 $
29 $ 102 $ 107
Participating policyholders' portion
Shareholders' net income
Assets under management3
General fund assets
Segregated fund assets
Mutual fund assets
Annualized premium sales3
Total Revenue
(in millions of dollars)
Revenue
Net premium revenue
Investment income
$ 959 $ 1,063
$ 7,347 $ 6,926
$ 171 $ 109
$
20 $
22
$
44 $
42 $
51 $
59
(6)
$ 108 $
9
98
$ 6,996 $ 6,779
$ 7,367 $ 6,948
$ 171 $ 109
Fourth quarter
2015
2014
Year
2015
206 $
215 $
835 $
67
62
—
56
63
212
1
50
259
(43)
19
217
2014
867
246
612
13
188
391 $
541 $
1,287 $
1,926
$
$
Fair value change in FVTPL investments including realized amounts
Realized gain (loss) on AFS investments including impairment write downs
Fee and other income
Total Revenue
For the quarter, total revenue at Empire Life decreased by 28% to $391 million compared to $541 million in 2014. On a full
year basis, total revenue decreased by 33% to $1.287 billion compared to $1.926 billion in 2014. Revenue volatility was
primarily driven by the impact of market interest rate and stock market movements on Fair value change in fair value
through profit and loss (“FVTPL”) investments. Major revenue items are discussed below.
Net premium revenue for the quarter and year decreased by 4.5% and 3.7% respectively, relative to 2014. The decrease
related primarily to the fixed interest deferred annuities portion of the Wealth Management product line, which
experienced weak demand due to the low interest rate environment.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
Fair value change in FVTPL investments including realized amounts often causes large revenue volatility. These assets
experienced a lower gain for the fourth quarter and a net loss for the year in 2015 compared to large net gains for the
same periods in 2014. In 2015 the loss was from a decrease in stock prices and bond prices (due to an increase in market
interest rates). In 2014 the gain was primarily from an increase in bond prices (due to a decrease in market interest
rates). For the fourth quarter and year, 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 (“AFS”) including impairment write downs was a gain for the year in
both 2015 and 2014. The 2015 gain was primarily due to the sale of AFS bonds, while the gain for the year in 2014 was
due to the sale of both AFS equities and bonds. 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 for the quarter and year increased by 12.3% and 15.6% respectively in 2015 relative to 2014
primarily due to growth in segregated fund management fees and growth in segregated fund guarantee fees related to
GMWB products (see the Product Line Results - Wealth Management section later in this report).
Total Benefits and Expenses
(in millions of dollars)
Benefits and expenses
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contracts provision
Policy dividends
Operating expenses
Net commissions
Interest expense
$
Fourth quarter
2015
2014
162 $
109
(1)
7
39
49
2
168 $
232
1
7
40
51
2
Year
2015
642 $
126
—
26
147
189
9
2014
645
745
2
24
147
193
14
Total benefits and expenses
$
367 $
501 $
1,139 $
1,770
Total benefits and expenses at Empire Life for the quarter decreased by 27% to $367 million compared to $501 million in
2014. On a full year basis, total benefits and expenses decreased by 36% to $1.139 billion compared to $1.770 billion in
2014. Expense volatility was primarily driven by the impact of market interest rate and stock market movements on net
change in insurance contract liabilities. Major benefit and expense items are discussed below.
Net benefits and claims variability is dependent on the claims incurred. Generally, claims rise year over year due to
growth of the insurance blocks, which was the case for the quarter and full year for all lines of business except Wealth
Management, which declined due to lower fixed interest deferred annuity withdrawals. Variability in claims amounts does
not, in isolation, impact net income as insurance contract liabilities are released when claims occur. The insurance
contract liabilities released can be larger or smaller than the claims incurred depending on whether claims experience has
been favourable or unfavourable. Claims experience is the combination of claims incurred compared to claims expected in
product pricing and in insurance contract liabilities. Year over year claims experience is discussed in each of the impacted
product lines (see Product Line Results sections later in this report).
Net change in insurance contract liabilities varies with many factors including new business sold, claims incurred,
surrender and lapse experience, assumptions about the future, and changes in the market value of assets matching
insurance contract liabilities. For the quarter and full year, the main reason for the large change from 2014 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.
For the quarter and full year net commissions decreased year over year primarily due to the decrease in Wealth
Management product sales.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest expense decreased for the full year in 2015 relative to 2014 due to the redemption of $200 million 6.73%
subordinated debentures on May 20, 2014.
Product Line Results - Wealth Management
(in millions of dollars)
Assets under management4
General fund annuities
Segregated funds
Mutual funds
(in millions of dollars)
Selected financial information
Net fixed interest annuity premiums
Segregated fund gross sales4
Segregated fund net sales4
Segregated fund fee income
Mutual fund gross sales4
Mutual fund net sales4
Mutual fund fee income
As at December 31
2015
2014
$
959 $
Fourth quarter
2015
2014
$
32 $
279
65
52
13
7
1
45 $
404
184
46
23
19
—
7,347
171
Year
2015
144 $
1,120
272
202
79
62
2
1,063
6,926
109
2014
186
1,312
479
175
68
62
1
42
Net income after tax
$
10 $
12 $
59 $
Assets in Empire Life general fund annuities decreased by 10%, while segregated fund assets increased by 6% during the
last 12 months. The decrease in the last 12 months for general fund annuities is related primarily to weak demand for
fixed interest deferred annuities due to the low interest rate environment. The increase over the last 12 months for
segregated funds was attributable primarily to strong net sales described below.
Premium revenue 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 fourth quarter and year, fixed interest
annuity premiums were down 28% and 23% respectively compared to 2014 resulting from the low interest rate
environment..
For the fourth quarter and year, segregated fund gross sales were down 31% and 15% respectively compared to 2014.
For the fourth quarter and year, this decrease was primarily due to lower GMWB sales and lower 75% maturity guarantee
product sales which decreased by $83 million and $43 million for the quarter and by $195 million and $38 million for the
year, respectively. These decreases were partly offset by increased sales of 100% maturity guarantee products, which
increased by $2 million and $44 million in the fourth quarter and year respectively compared to 2014. In the fourth quarter
of 2014, Empire Life made significant changes to its segregated funds product line. Empire Life 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 (“GIF”), as well as a stand-alone Guaranteed Interest Contract (“GIC”) and a new version of its GMWB
product. Fees charged to the customer on the new product line are higher than the former product line. The new product
line’s pricing and features are Empire Life’s response to the economic, regulatory and competitive landscape in the
segregated fund product marketplace. On April 20, 2015, Empire Life added to this new family of products by launching a
new series of Empire Life GIFs and a new segregated fund, Empire Life Monthly Income GIF. While 2015 sales were
down from last year (as described above), the launch of these new segregated fund products has gone well, achieving
gross sales of $227 million for the fourth quarter and $844 million for the full year which represented 81% and 75% of
segregated fund gross sales respectively.
Segregated fund net sales for the quarter and full year were down 65% and 43% respectively compared to 2014 primarily
due to the above mentioned gross sales result.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mutual fund gross sales improved on a full year basis, but are still a small component of our Wealth Management assets
under management. Empire Life continues to explore various strategic alternatives with respect to its mutual fund
business.
For the quarter and full year, segregated fund fee income increased by 13% and 15% respectively in 2015 relative to
2014. The increase was due to growth in segregated fund management fees and growth in segregated fund guarantee
fees related to GMWB products. Despite the recent drop in stock markets in 2015, many of Empire Life’s segregated
funds have performed well. The improvement in fee income relative to 2014 was due to positive segregated fund net sales
in the last 12 months, product price increases and the positive impact of the above mentioned segregated fund
performance. The strong net sales and performance had a positive impact on average assets under management and
management fees earned.
During the fourth quarter earnings from this product line decreased, while full year earnings increased relative to 2014.
The following table provides a breakdown of the components of this year over year change in net income.
(in millions of dollars)
Components of increase (decrease)
2014 loss from update of policy liability assumptions
2015 loss from update of policy liability assumptions
Increase in inforce profit margins
Lower new business strain
Worsened annuitant mortality experience
Worsened investment experience
Total
Fourth quarter
Year
$
$
2 $
(4)
5
2
(3)
(4)
(2) $
2
(4)
21
3
(2)
(3)
17
In both 2014 and 2015, the update of policy liability assumptions was unfavourable. In both years there were unfavourable
updates for general fund annuities. In 2014 this primarily related to annuitant mortality assumptions. In 2015 this primarily
related to investment return assumptions.
Higher net income on in-force business in 2015 was primarily due to the growth in segregated fund management fees and
growth in segregated fund guarantee fees related GMWB products (as described above).
Higher net income from lower new business strain was primarily due to the decrease in segregated fund gross sales.
Annuitant mortality experience was close to levels expected in actuarial assumptions but worsened from 2014 levels
related to the fixed interest immediate annuity business.
Investment experience was favourable in both years, but worsened from 2014 levels due to market interest rate
movements and the availability of assets at attractive yields for matching fixed interest annuity contract liabilities.
Product Line Results - Employee Benefits
(in millions of dollars)
Selected financial information
Annualized premium sales5
Net premium revenue
Net (loss) income after tax
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Fourth quarter
2015
2014
$
$
12 $
82
(2) $
9 $
80
2 $
Year
2015
44 $
325
6 $
2014
42
319
9
Empire Life - Annual Report 2015
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the quarter and full year, annualized premium sales in this product line increased by 36% and 5% respectively in 2015
relative to 2014. The 2015 level of sales is a strong achievement particularly given the weak economic conditions in
Canada. The economic weakness contributed to this product line’s slow in-force premium revenue growth.
During the fourth quarter and full year earnings from this product line decreased relative to 2014. The following table
provides a breakdown of the components of this year over year change in net income.
(in millions of dollars)
Components of decrease
2014 gain from update of policy liability assumptions
Worsened claims experience
Increase in inforce profit margins
Total
Fourth quarter
Year
$
$
(3) $
(1)
—
(4) $
(3)
(1)
1
(3)
In 2014, there was a favourable update of group life policy liability assumptions which did not recur in 2015.
In 2015 worsened claims experience primarily related to health claims partly offset by improved long-term disability
results.
Product Line Results - Individual Insurance
(in millions of dollars)
Selected financial information
Annualized premium sales6
Net premium revenue
Net income (loss) after tax
Net income (loss) after tax shareholders' portion
Net income (loss) after tax policyholders' portion
Net income (loss) after tax
Fourth quarter
2015
2014
11 $
92
2 $
(1)
1 $
14 $
91
(1) $
8
7 $
$
$
$
Year
2015
51 $
366
6 $
(8)
(2) $
2014
59
362
25
2
27
For the fourth quarter and full year, annualized premium sales in this product line decreased by 18% and 13% respectively
compared to 2014. This product line’s fourth quarter and full year sales result is attributable primarily to decreased sales
of universal life policies. The decrease in universal life sales primarily related to the investment fund component within
these products as opposed to insurance annualized premium sales. This decline in sales was partly offset by increased
sales of participating products. Empire Life’s recently launched EstateMax participating product contributed to this
increase in participating product sales. EstateMax is distributed through professional financial advisors aimed at
providing simple estate planning solutions to Canadian baby boomers. Empire Life believes that the market response has
been favourable based on sales achieved and applications received in 2015. In recent years (beginning in 2011), 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.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
During the fourth quarter and full year earnings from this product line decreased relative to 2014. The following table
provides a breakdown of the components of this year over year change in net income.
(in millions of dollars)
Components of decrease
2014 gain from update of policy liability assumptions
2015 loss from update of policy liability assumptions
2014 favourable legal settlement
Improved (worsened) mortality, surrender, lapse and other experience
2014 Quebec premium tax increase
Improved investment experience
Total
Fourth quarter
Year
$
$
(5) $
(15)
—
5
5
4
(6) $
(5)
(15)
(6)
(23)
5
15
(29)
Year
(56)
39
8
(6)
(15)
In 2014, the update of policy liability assumptions was favourable by $5 million.
In 2015, the update of policy liability assumptions was unfavourable by $15 million. The following table provides a
breakdown of the components of this amount:
Components of income decrease from update of policy liability assumptions
Lapse
Net re-investment assumptions
Mortality
Other
Total 2015 loss from update of policy liability assumptions
$
$
The refinements to lapse rate assumptions for 2015 are primarily related to an update of Empire Life’s Term-to-100 and
Universal Life level cost of insurance ultimate lapse rate assumptions to reflect the Canadian Institute of Actuaries (“CIA”)
Research Committee’s research papers on Lapse Experience Under Term-to-100 Insurance Policies and Lapse
Experience under Universal Life Level Cost of Insurance Policies released September 2015.
The update in investment return assumptions for 2015 was primarily related to a refinement of the projected amount of
equities backing individual life liabilities. In addition, there were several refinements to the Canadian Asset Liability Method
(“CALM’) model for future reinvestment assumptions.
During the second quarter of 2014 a favourable settlement on a lawsuit resulted in a $6 million gain after tax for Empire
Life.
For the fourth quarter, mortality, surrender and lapse experience was favourable compared to the fourth quarter of 2014.
For the full year, mortality, surrender and lapse experience was unfavourable compared to favourable results in 2014.
During the fourth quarter of 2014, the province of Quebec increased premium tax rates on both in-force policies and new
policies sold. Some in-force policies allow for an adjustment to prices or charges to cover the cost of the additional tax.
However, some in-force policies are fully guaranteed and cannot be adjusted, resulting in a strengthening of reserves of
$5 million after tax in 2014.
There was a gain from investment experience in the fourth quarter of both 2015 and 2014, and the gain improved in 2015
compared to 2014. In the fourth quarter of 2015 the gain was primarily from the increase in interest rate spreads on
provincial and corporate bonds.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
There was a gain from investment experience for the full year for 2015 compared to a loss for the comparable period in
2014. While 30 year Canadian federal bond yields decreased in 2015, there was an increase in interest rate spreads on
provincial and corporate bonds during 2015 which had a favourable impact on 2015 net income more than offsetting the
federal rate decline (as shown in the table below). For full year 2014 the loss was primarily from unfavourable interest rate
movements in 2014 (as demonstrated using 30 year bond yields in the following table).
Interest rate movement
30 year Canadian federal government bond yield
End of period
Beginning of period
Change during period
30 year Province of Ontario spread
End of period
Beginning of period
Change during period
30 year A rated corporate spread
End of period
Beginning of period
Change during period
Fourth quarter
2015
2014
Year
2015
2014
2.16 %
2.20 %
(0.04)%
1.05 %
1.00 %
0.05 %
1.92 %
1.85 %
0.07 %
2.36 %
2.67 %
(0.31)%
0.95 %
0.90 %
0.05 %
1.52 %
1.40 %
0.12 %
2.16 %
2.36 %
(0.20)%
1.05 %
0.95 %
0.10 %
1.92 %
1.52 %
0.40 %
2.36 %
3.24 %
(0.88)%
0.95 %
0.90 %
0.05 %
1.52 %
1.39 %
0.13 %
Interest rate movements impact both bond asset fair value and insurance contract liabilities. In 2015 the increase in
interest rates (including spreads described above) caused lower bond prices which resulted in a bond asset fair value
loss. However these losses were more than offset by decreased insurance contract liabilities resulting from these
increases in market interest rates. 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.
Results - Capital and Surplus
(in millions of dollars)
Net income after tax
Net income after tax shareholders' portion
Net income after tax policyholders' portion
Net income after tax
Fourth quarter
2015
2014
Year
2015
$
$
5 $
—
5 $
6 $
1
7 $
37 $
2
39 $
2014
22
7
29
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.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
During the fourth quarter earnings from this product line decreased, while full year earnings increased relative to 2014.
The following table provides a breakdown of the components of this year over year change in net income.
(in millions of dollars)
Fourth quarter
Year
Components of increase (decrease)
Increased (decreased) net income from sale of investments
Lower interest expense
Lower investment income
Increased (lower) net income on hedging instruments
Total
$
$
(1) $
—
—
(1)
(2) $
5
4
(1)
2
10
Increased net income from sale of investments was primarily due to gains from the sale of AFS bonds in 2015.
Lower interest expense was due to the redemption of $200 million 6.73% subordinated debentures on May 20, 2014.
Lower investment income was primarily due to a decrease in invested assets resulting from the investments sold to fund
the above mentioned redemption of subordinated debentures.
During the full year of 2015 Empire Life experienced a gain of $2 million after tax on its hedging program (discussed in the
Risk Management section later in this report).
Total Cash Flow
(in millions of dollars)
Cash Flow provided from (used for)
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Year
2015
149 $
(179)
(9)
(39) $
2014
152
119
(249)
22
$
$
Cash provided from operating activities in 2015 was close to 2014 levels.
The decrease in cash provided from investing activities during 2015 relative to 2014 was primarily driven by financing
activities and the timing of portfolio investment transactions. 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).
The decrease in cash used for financing activities during 2015 relative to 2014 was primarily due to Empire Life’s 2014
redemption of its $200 million 6.73% subordinated debentures at par on May 20, 2014. In addition there was payment of
$34 million of dividends to common shareholders by Empire Life in 2014 which did not recur in 2015. The Board of
Directors takes a number of factors into consideration in determining the amount of the dividends, if any, including the
financial performance of Empire Life, regulatory solvency requirements, capital ratios and growth opportunities. Based on
the assessment of these factors, Empire Life did not pay a dividend to common shareholders in 2015.
For an analysis of liquidity for Empire Life, see note 10(e) and note 28(b) to the 2015 consolidated financial statements.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Instruments
Empire Life buys investment quality bonds to support, to a very large extent, the liabilities under the insurance and annuity
policies of Empire Life. Empire Life’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 financial instruments are
intended to match the liquidity requirements of Empire Life’s policies, within the limits prescribed by Empire Life. Empire
Life is subject to market risk on these financial instruments.
Empire Life is also subject to credit risk on these financial instruments which could result in a financial loss should the
other party fail to discharge an obligation. This credit risk is derived primarily from investments in bonds, debentures,
preferred shares, short-term investments and mortgages. Empire Life manages market risk exposure mainly through
investment limits and oversight of its in-house investment managers and external investment firms by the Chief
Investment Officer, Asset Management Committee and Investment Committee of the Board. The Investment Committee
actively monitors the portfolio size and asset mix. Empire Life has a semi-static hedging program as part of its approach to
managing this risk. Empire Life manages credit risk by applying its investment guidelines established by the Investment
Committee of the Board of Directors. The investment guidelines establish minimum credit ratings for issuers of bonds,
debentures and preferred share investments, and provide for concentration limits by issuer of such debt instruments.
Management and Board committees review credit quality relative to investment purchases and also monitor the credit
quality of invested assets over time. Management reports regularly to the Investment Committee of Empire Life’s Board
on the credit risk to which the portfolio is exposed.
Empire Life manages credit risk with respect to derivatives 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. Additional information regarding financial
instruments is included in notes 2(d), 3, 10(c), and 28 to the audited consolidated financial statements for the year ended
December 31, 2015.
Capital Resources
Dec 31
2015
Sep 30
2015
Jun 30
2015
Mar 31
2015
Dec 31
2014
MCCSR Ratio
201%
202%
202%
190%
197%
Empire Life continues to maintain a strong balance sheet and capital position. The 2013 Debentures are rated by DBRS
Limited (“DBRS”) and A.M. Best Company, Inc. (“A.M. Best”). On December 17, 2015, DBRS confirmed its ratings of
Empire Life including its issuer rating of “A” (sixth highest of 20 categories), its subordinated debt rating of “A
(low)” (seventh highest of 20 categories) and its financial strength rating of “A” (sixth highest of 22 categories). On
February 16, 2016, DBRS assigned a rating on Empire Life’s $130 million Canadian public offering of Non-Cumulative
Rate Reset Preferred Shares of Pfd-2 (fifth highest of 18 categories). All ratings have a stable trend. According to DBRS,
the assigned ratings reflect Empire Life’s smaller scale, full suite of products, participation in niche markets that reward
company strengths and improving levels of profitability and fixed charge coverage.
On May 19, 2015, A.M. Best confirmed its ratings of Empire Life including its issuer rating of “a” (sixth highest of 21
categories), its subordinated debt rating of “bbb+” (eighth highest of 21 categories) and its financial strength rating of “A
(Excellent)” (third highest of 16 categories). On February 16, 2016, A.M. Best assigned a rating on Empire Life’s $130
million Canadian public offering of Non-Cumulative Rate Reset Preferred Shares of “bbb” (ninth highest of 21 categories).
All ratings have a stable trend. According to A.M. Best, the ratings reflect Empire Life's favourable risk-adjusted capital
position, continued earnings growth and sustainable market presence in Canada with multiple lines of business.
Empire Life’s risk-based regulatory capital ratio, as measured by MCCSR, of 201% as at December 31, 2015 continued to
be above the requirements set by the Office of the Superintendent of Financial Institutions (“OSFI”) as well as Empire
Life’s minimum internal targets.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
The MCCSR ratio was stable, decreasing 1 point from the previous quarter and increasing by 4 points for the full year.
The change was due to increases in available regulatory capital offset by increases in required regulatory capital for the
quarter and for the full year, as shown in the table below.
(millions of dollars)
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
Dec 31
2015
Sep 30
2015
Jun 30
2015
Mar 31
2015
Dec 31
2014
$
$
$
918 $
504
935 $
476
929 $
464
883 $
466
1,422 $
1,411 $
1,393 $
1,349 $
708 $
699 $
691 $
709 $
872
452
1,324
671
The decrease in Tier 1 available regulatory capital from the previous quarter was primarily due to an increase in negative
reserves which decrease Tier 1 (but increase Tier 2 as described below). The increase in Tier 1 available regulatory
capital for the full year was primarily due to net income. This was partly offset by an increase in negative reserves which
decrease Tier 1 (but increase Tier 2 as described below).
Tier 2 available regulatory capital increased from the previous quarter and for the full year primarily due to an increase in
negative reserves which increase Tier 2 (but decrease Tier 1 as described above).
Regulatory capital requirements increased from the previous quarter and for the full year. The increase for the quarter
was primarily due to increased requirements related to asset default, segregated fund guarantees and interest rate risk.
The increase for the full year was primarily due to increased requirements related to segregated fund guarantees.
On January 28, 2016 the Company announced a $130 million Canadian public offering of Non-Cumulative Rate Reset
Preferred Shares. Empire Life intends to use the net proceeds from the offering for regulatory capital and general
corporate purposes. The offering closed on February 16, 2016 and commenced trading on the Toronto Stock Exchange
under the ticker symbol EML.PR.A. Empire Life has granted the underwriters an option to purchase up to $19.5 million of
additional preferred shares exercisable at any time up to a period of 30 days from the date of closing. Holders of the
preferred shares will be entitled to receive fixed non-cumulative quarterly dividends yielding 5.75% annually, as and when
declared by the Board of Directors of Empire Life, for the initial period ending on and including April 17, 2021. Thereafter,
the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 4.99%.
On a pro forma basis, after giving effect to the preferred share issue (but assuming no exercise of the over-allotment
option), the Company estimates that, as at December 31, 2015, its MCCSR would have increased by 17 points from
201% to 218%
Other Comprehensive Income
(in millions of dollars)
Other comprehensive income (loss)
Less: Participating Policyholders
Other comprehensive income (loss), attributable to shareholders
Fourth quarter
2015
2014
$
$
3.2 $
(0.5)
2.7 $
20.6 $
(1.4)
19.2 $
Year
2015
(12.8) $
1.1
(11.7) $
2014
32.7
(0.5)
32.2
Other comprehensive income (OCI) decreased in the fourth quarter and full year of 2015 relative to the comparable
periods of 2014. For the fourth quarter this was primarily due to remeasurement of the liability component of post-
employment defined benefit (“DB”) plans (described below). For the full year this was primarily due to lower unrealized fair
value increases relating to AFS bonds in 2015 compared to 2014 primarily due to interest rate movements.
OCI includes the remeasurement of DB plans which had a loss for the full year in 2015 compared to a gain in 2014. The
2015 result for DB plans was primarily due to losses on DB plan liabilities partly offset by gains on DB plan assets. The full
year 2014 result for DB plans was primarily due to gains on DB plan assets partly offset by losses on DB plan liabilities.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
Unrealized fair value increases and decreases on AFS bonds in OCI do not impact MCCSR. Remeasurement of DB plans
does not immediately impact MCCSR as each quarter’s remeasurement gain or loss is amortized over 12 quarters for
MCCSR purposes.
Industry Dynamics and Management’s Strategy
Empire Life’s operations are organized by product line with each line of business having responsibility for product
development, marketing, distribution and customer service within their particular markets. This structure recognizes that
there are distinct marketplace dynamics in each of the three major product lines. Management believes this structure
enables each line of business to develop strategies to achieve the enterprise-wide objectives of business growth and
expense management while recognizing the unique business environment in which each operates. The lines of business
are supported by corporate units that provide product pricing, administrative and technology services to the lines of
business, manage invested assets, and oversee enterprise risk management policies.
Based on general fund and segregated fund assets, Empire Life is among the ten largest life insurance companies in
Canada. Empire Life has approximately six per cent or less 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 2015. However, Empire Life has taken several steps to limit
GMWB risk exposure. The above mentioned fourth quarter 2014 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.
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 renewable term life insurance. 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-
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 is a financial institution offering Wealth Management, Employee Benefits and Individual Insurance products.
The Company is exposed to a number of risks as a result of its business activities. The goal of the Company’s risk
management process is to ensure that the operations that expose it to risk are consistent with the Company’s strategy,
business objectives and risk philosophy while maintaining an appropriate risk/reward balance and enhancing stakeholder
value. When making decisions about risk taking and risk management, Empire Life considers:
• The need to meet the expectations of its customers, shareholders and creditors and to protect the commitments
that have been made to them;
• The need to be adequately compensated for the capital deployed to support business activities and strategic
objectives;
• The need to protect its brand; and
• The need to maintain its targeted financial strength rating.
Empire Life’s risk management framework is structured based on a number of guiding principles:
• Due to the long term nature of the majority of its commitments, the Company accepts capital market risk provided
it is managed within specific risk tolerances and limits. The Company takes a low risk, value oriented approach to
managing its investments - it accepts credit and alternative asset risk provided it is rewarded through
appropriately enhanced returns;
• The Company manages liquidity across the business to provide a high level of confidence that all obligations (to
customers, creditors and shareholders) will be met when they fall due;
• The Company accepts insurance risks provided they are properly priced and managed in order to deliver value to
its customers and shareholders;
• The Company is forward-looking in its business planning and takes a prudent approach to capital management. It
strives to have a high level of confidence that capital is sufficient to support planned activities into the future;
• Management is active in industry committees and, through a network of oversight functions, monitors the
landscape so that the Company is appropriately positioned to manage regulatory, tax, accounting and actuarial
changes;
• The Company accepts that operational risks are a part of doing business and knows that risk management is a
key part of decision-making. It protects its business and customers by engaging in cost effective risk mitigation;
and
• The Company expects ethical conduct by all of its employees and acts with integrity at all times.
The Board of Directors oversees and monitors the Company’s risk management framework, processes and practices and
reviews and approves the Company’s Enterprise Risk Management Policy and overall risk appetite. Senior 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
an Asset Management Committee with responsibility for overseeing the management of corporate policies established by
both the Investment Committee and Risk and Capital Committee of the Board. More information related to governance
can be found under the Corporate Governance over Risk Management section of Empire Life's 2015 annual report. Risk
management policy development is centralized under the leadership of the Chief Risk Officer and applies to all business
units. The Chief Risk Officer is a member of the Asset Management Committee and has Board reporting responsibility
with respect to risk and capital management. 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 and the risk
management department. There is senior management representation and oversight on various interdisciplinary risk
control committees. The Company formally establishes and documents its values and risk tolerances through several
company-wide policies including a Code of Ethics, Corporate Disclosure principles, enterprise risk management, capital
management and whistleblower policies. The Company’s strategic risk management policies (including those related to
product design and pricing, investment policies and capital management) are also approved by its Board, or a Board
committee.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
Caution Related to Sensitivities
In the sections that follow, the Company provides sensitivities and risk exposure measures for certain risks. These include
sensitivities due to specific changes in market prices and interest rates, based on market prices, interest rates, assets,
liabilities and business mix in place as at the calculation dates. The sensitivities are calculated independently for each risk
factor, assuming that all other risk variables remain constant. Actual results can differ materially from these estimates for a
variety of reasons, including the interaction among these factors when more than one factor changes; changes in actuarial
and investment return and future investment activity assumptions; actual experience differing from the assumptions;
changes in business mix, effective tax rates and other market factors; and the general limitations of the Company’s
internal models used for purposes of these calculations. Changes due to new sales or maturities, asset purchases/sales,
or other management actions could also result in material changes to these reported sensitivities. For these reasons, the
sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based
on the assumptions outlined, and should not be viewed as predictors for the Company’s future net income, OCI, and
capital sensitivities. Changes in risk variables in excess of the ranges illustrated may result in other than proportionate
impacts.
Market Risk
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, 2015 Empire Life had $7.4 billion of segregated
fund assets and liabilities. Of this amount, approximately $7.1 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 75% death benefit guarantee
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
2015
Dec 31
2014
0.4%
51.5%
5.9%
42.2%
—%
53.2%
5.4%
41.4%
All Empire Life segregated fund guarantees are policy based (not deposit-based), thereby generally lowering Empire Life’s
stock market sensitivity relative to products with deposit-based guarantees. Policy-based guarantees consider all of the
deposits in the customer’s policy (whether the fund value is below or above the guaranteed amount) to arrive at an overall
net guarantee payment, whereas deposit-based guarantees consider only the deposits where the fund value is below the
guaranteed amount and ignores all the deposits in the customer’s policy where the fund value is above the guaranteed
amount. Therefore, generally policy based guarantees pay less than 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. The segregated fund regulatory capital and
liability framework includes the use of "zero floors" (i.e. negative amounts are not permitted so zero is used instead as
described below) and other regulatory constraints, and this often makes the sensitivity impacts non-linear. In the first
table below, Empire Life discloses the sensitivity of net income to changes in segregated fund guarantee insurance
contract liabilities. There is a net loss resulting from a 20% decrease at December 31, 2015, but otherwise the amounts
shown in the table are nil. These liabilities (present value of future benefits and expenses minus the present value of
future fee revenue) are calculated using stochastic modeling techniques based on a range of future economic scenarios.
The liabilities are the greater of: (i) the average of the amounts determined in the worst 20% of the scenarios; and (ii)
zero. For the nil amounts shown in this table, the liability for Empire Life was negative. Therefore, the alternative level of
zero is applied in these tests (zero floor) resulting in a net income impact of nil. Based on stock market levels at
December 31 for 2015 and 2014, 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:
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in millions of dollars)
10% Increase
10% Decrease
20% Increase
20% Decrease
Sensitivity To Segregated Fund Guarantees:
December 31, 2015 Shareholders' net income
December 31, 2014 Shareholders' net income
$ nil
$ nil
$ nil
$ (10)
$ nil
$ nil
$ nil
$ nil
The impact of stock market changes is not linear. Based on stock market levels at December 31, 2015 the sensitivity of
shareholders’ net income to changes in segregated fund guarantee insurance contract liabilities resulting from a 20%
decrease in stock markets is a net loss of $10 million as illustrated in the table above. At a 30% decrease in stock markets
the net loss at December 31, 2015 would be $109 million. At December 31, 2015 a 20% and 30% decrease in stock
markets would result in an increase in net income by $35 million to a net gain of $25 million and by $58 million to a net
loss of $51 million respectively from gains on equity hedging instruments. Based on stock market levels at December 31,
2014 the sensitivity of shareholders’ net income to changes in segregated fund guarantee insurance contract liabilities
resulting from a 20% decrease in stock markets is nil as illustrated in the table above. At December 31, 2014, a decrease
in stock markets of 20.2% or more would result in a net loss greater than nil. At December 31, 2014 a 30% decrease in
stock markets would result in a net loss of $76 million. At December 31, 2014 a 20.2% and 30% decrease in stock
markets would result in an increase in net income by $9 million to $9 million and by $17 million to a net loss of $59 million
respectively from gains on equity hedging instruments.
Empire Life has equity market risk related to its segregated fund products and from equity assets backing life insurance
liabilities. Empire Life had been considering implementing a partial economic hedging program for some time. In the
fourth quarter of 2014, Empire Life strengthened its stochastic model, which impacted its base capital position as well as
its capital position under sensitivity tests. This encouraged Empire Life to begin implementation of the hedging program in
November 2014. Therefore, during the fourth quarter of 2014, Empire initiated a semi-static hedging program, and
expanded this program during the first half of 2015. The objective of the hedging program is to partially protect Empire
Life 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 Life aims to protect 10% to 20%
of overall income and MCCSR equity risk through the semi-static hedging program.
There is income statement volatility from this hedging program. Based on current equity market levels, Empire Life 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 full year of 2015 Empire Life experienced a gain of $2
million after tax on its hedging program. During 2016 and subsequent years, Empire Life expects to expand its hedging
program and expects an increase in income statement volatility as a result.
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
(excluding the effect of Empire Life’s equity risk hedging program):
Excluding Equity Risk Hedge
Sensitivity To Stock Markets:
December 31, 2015 MCCSR Ratio
December 31, 2014 MCCSR Ratio
10% Increase
10% Decrease
20% Increase
20% Decrease
0.7%
9.0%
(13.9)%
(11.6)%
1.2%
15.3%
(31.6)%
(25.5)%
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
The December 31, 2015 and 2014 amounts in the following table include the effect of Empire Life’s equity risk hedging
program (described below):
Including Equity Risk Hedge
Sensitivity To Stock Markets:
December 31, 2015 MCCSR Ratio
December 31, 2014 MCCSR Ratio
10% Increase
10% Decrease
20% Increase
20% Decrease
(1.8)%
8.8 %
(10.6)%
(11.2)%
(3.0)%
14.9 %
(24.8)%
(24.4)%
As of December 2014, the equity hedging program was only partially implemented. It provided $4 million of relief in the
10% stock market decrease scenario and $9 million of relief in the 20% stock market decrease scenario. As at December
31, 2015, it provided $15 million of relief in the 10% stock market decrease scenario and $35 million of relief in the 20%
stock market decrease scenario. The full program provides roughly 2.5 times the December 2014 level of protection.
Based on stock market levels as at December 31, 2015 and 2014, the sensitivity of shareholders’ net income (excluding
changes in segregated fund guarantee insurance contract liabilities) resulting from stock market increases and decreases
is as follows (excluding the effect of Empire Life’s equity risk hedging program):
(in millions of dollars)
10% Increase
10% Decrease
20% Increase
20% Decrease
Excluding Equity Risk Hedge
December 31, 2015 Shareholders' net income*
December 31, 2014 Shareholders' net income*
$
$
22 $
17 $
(22) $
(17) $
44 $
33 $
(44)
(33)
*Includes the estimated impact on fee revenue net of trailer commissions after tax for a three month period.
The December 31, 2015 and 2014 amounts in the following table include the effect of Empire Life’s equity risk hedging
program (described above):
(in millions of dollars)
10% Increase
10% Decrease
20% Increase
20% Decrease
Including Equity Risk Hedge
December 31, 2015 Shareholders' net income*
December 31, 2014 Shareholders' net income*
$
$
12 $
14 $
(7) $
(13) $
27 $
29 $
(9)
(24)
*Includes the estimated impact on fee revenue net of trailer commissions after tax for a three month period.
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
Withdrawal Benefit > Fund
Value
Maturity Guarantee > Fund
Value
Death Benefit > Fund
Value
Actuarial
MCCSR
(in millions of dollars)
Fund Value
Amount At
Risk
Fund Value
Amount At
Risk
Fund Value
Amount At
Risk
Liabilities
Required
Capital
December 31, 2015
December 31, 2014
$
$
2,343 $
2,053 $
593 $
384 $
124 $
49 $
4 $
2 $
1,415 $
360 $
17 $ nil $
7 $ nil $
130
102
The first six columns of the above table show all segregated fund policies where the future withdrawal benefit, future
maturity guarantee, or future death benefit guarantee, is greater than the fund value. The amount at risk represents the
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
excess of the future withdrawal benefit, future maturity guarantee or future death benefit guarantee amount over the fund
value for these policies. The withdrawal benefit amounts in the above table relate to GMWB products. The GMWB
withdrawal benefit 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. As at December 31, 2015, the aggregate amount at risk for these three categories of risk (reported in the
above table) was $614 million, an increase from the aggregate amount at risk of $393 million as at December 31, 2014.
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 in the above table 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 on future payments to GMWB policyholders, or upon future maturity of the segregated fund policies, or upon
future death of the segregated fund policyholders. The amounts at risk in December 2015 increased from the December
2014 levels for GMWB withdrawal benefit exposure, fund value guarantee exposure and death benefit guarantee
exposure due primarily to the recent decrease in many global stock markets. The quarterly update of segregated fund
policy data on our stochastic model resulted in an increase in required regulatory capital.
In addition, Empire Life’s MCCSR ratio is sensitive to changes in market interest rates. The impact of an immediate 50
basis point decrease in interest rates, and a 50 basis point 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 50
basis point decrease in interest rates.
Sensitivity To Market Interest Rates:
December 31, 2015 MCCSR Ratio
December 31, 2014 MCCSR Ratio
Before The Sale of
AFS Assets
After The Sale of
AFS Assets
50 bps Decrease
50 bps Decrease
(17)%
(24)%
(13)%
(21)%
Operational Risk
Operational risk relates to the uncertainty arising from larger than expected losses or damages as a result of inadequate
or failed internal processes, people and systems, or from external events. Operational risk is naturally present in all of the
Company’s business activities and encompasses a broad range of risks, including legal disputes, regulatory compliance
failures, technology failures, business interruption, information security and privacy breaches, human resources
management failures, processing errors, modelling errors, theft and fraud, and damage to physical assets. The following
is a further description of key operational risks and their associated risk management strategies.
(1) Legal and Regulatory Risk
The Company is governed by the Insurance Companies Act (“ICA”) and supervised by OSFI and is also subject to
various requirements imposed by legislation and regulation in each of the provinces and territories of Canada
applicable to insurance companies and companies providing other financial services. Material changes in the
regulatory framework could have an adverse effect on the Company. Failure to comply with regulatory requirements
or public expectations could adversely impact the Company’s reputation and ability to conduct business. The
Company is subject to litigation from time to time, in the normal course of business, and currently has a number of
outstanding lawsuits. There can be no assurance that the present or any future litigation will not have a material
adverse effect on the Company.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company’s corporate compliance department, headed by the Chief Compliance Officer, oversees the regulatory
compliance framework. This framework promotes risk-based management of compliance and regulatory risk and
includes Company-wide policies, operating guidelines, programs to promote awareness of laws and regulations
impacting the Company, ongoing monitoring of emerging legal issues and regulatory changes and employee
education programs that include anti-money laundering and anti-terrorist financing, privacy and information security
risk management as well as reporting breaches and the Company’s code of ethics. The framework is supported by a
network of business unit compliance officers as well as the corporate legal services department. The Chief
Compliance Officer reports regularly to the Audit Committee of the Board on the state of compliance, key compliance
risks and emerging regulatory trends. General Counsel reports regularly to the Audit Committee of the Board on
litigation activity.
(2) Model Risk
The Company uses models to support many business functions including investment analysis, product development
and pricing, valuation of policy liabilities, planning, asset/liability management, capital management, project
management and risk management. The risk of inappropriate use or interpretation of the Company’s models or their
output, or the use of deficient models, data or assumptions could result in financial losses or inappropriate decision
making. The Company has developed management and mitigation processes related to model use and oversight of
models to limit financial, operational and strategic impacts from an error or misinterpretation of model results. Senior
management has overall responsibility and accountability for models in use to support activities within their business
area.
(3) Human Resources Risk
Competition for qualified employees, including executives, is intense both in the financial services industry and non-
financial industries. If the Company is unable to retain and attract qualified employees and executives, the results of
its operations and financial condition, including its competitive position, could be adversely affected. To mitigate this
risk, the Company has a number of human resources policies, processes and practices in place. Management reports
regularly to the Human Resources Committee of the Board on succession planning and employee development
programs as well as compensation practices and programs, all of which are designed to attract, motivate and retain
high-performing and high-potential employees.
(4) Third Party Risk
The Company obtains many different types of services from a number of third party services providers and has
outsourced certain business functions or processes to third parties. Should these third parties fail to deliver services in
compliance with contractual or other service arrangements, the Company’s business may be adversely impacted. To
mitigate this risk, the Company has established a Company-wide outsourcing policy that provides guidance when
considering, entering into or managing existing outsourcing arrangements commensurate with the risks associated
with the service provider and the nature of the arrangement. Annually, management reports to the Conduct Review
Committee of the Board on outsourcing activities including details on those arrangements deemed to be most material
to the Company.
(5) Technology, Information Security and Business Continuity Risk
The Company relies on technology in virtually all aspects of its business and operations including the creation and
support of new products and services, and the nature of life insurance business necessitates a substantial investment
in technology. Operational integrity, data integrity and security of information and systems infrastructure are all relied
upon for normal business operations. Disruptions due to system failure, information security breaches, privacy
breaches, cyber-attacks, human errors, natural disasters, criminal activity, fraud or the loss of certain software
licensing agreements could have a material adverse impact on the Company.
The Company has an enterprise wide business continuity and disaster recovery program overseen by the Business
Continuity Planning Team and the Chief Technology Officer. The program includes policies, plans and procedures
designed so that, to the extent practically possible, key business functions can continue and normal operations can
resume effectively and efficiently should a major disruption occur. Each business unit is accountable for preparing and
maintaining detailed business continuity plans and processes. The Company establishes and regularly tests business
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
continuity and disaster recovery plans and maintains off-site backup facilities and failover capability designed to minimize
downtime and accelerate system recovery.
Information security breaches, including various forms of cyber-attack, could occur and may result in inappropriate
disclosure or use of personal or confidential information. To mitigate this risk, the Company has an information security
program overseen by the Chief Technology Officer. This program consists of a number of standards, procedures and
guidelines focused on protecting information and computer systems. An incident management process is in place for
monitoring and managing security events.
Privacy breaches could occur and may result in unauthorized disclosure or use of private and confidential information. To
manage this risk, the Company has a privacy program overseen by the Chief Privacy Officer. The program includes
policies and standards, ongoing monitoring of emerging privacy legislation and a network of business unit privacy officers.
Processes have been established to provide guidance to employees on the handling of personal information and the
reporting of privacy incidents and issues to appropriate management for response and resolution.
Business Risk
Business risk relates to the uncertainty in future earnings and capital related to the potential inability to implement
appropriate business plans and strategies, make decisions, allocate resources, manage distribution or adapt to changes
in business environment, such as the competitive landscape, regulatory and tax changes or changes in accounting and
actuarial standards. The Company regularly reviews and adapts its business strategies and plans in consideration of
changes in the external business environment, economic, political and regulatory environment. The Company’s financial
performance is dependent upon its ability to implement and execute business strategies and plans for growth.
The Company’s business strategies and plans are designed to align with risk appetite, capital position and financial
performance objectives. The Company periodically reassesses risk appetite taking into consideration the economic,
regulatory and competitive environments in which it operates. The current environment requires the Company to adapt
rapidly to new opportunities and challenges and to refine its strategies accordingly. If the Company fails to revise its
strategies on a timely basis or adapt to the changing environment, it may not be able to achieve its growth objectives.
The Company’s business strategies and plans are dependent on the successful execution of organizational and strategic
initiatives designed to support the growth of its business. The ability to effectively manage these changes and prioritize
initiatives directly affects the Company’s ability to execute these strategies. Identifying and implementing the right set of
initiatives is critical to achieving the Company’s business plan targets. Failure to implement these initiatives could also
lead to cost structure challenges.
Successful execution of the Company’s business strategies and plans depends on a number of factors including its ability
to (i) generate sufficient earnings to maintain an adequate level of capital; (ii) generate sustained investment performance;
(iii) meet regulatory requirements; (iv) manage risk exposures effectively; (v) attract and retain customers and distributors;
(vi) have the right set of products; and (vii) reduce operating expenses while maintaining the ability to hire, retain and
motivate key personnel. The Company’s business and strategic plans are reviewed and discussed by its senior
management team and are subject to approval by the Board of Directors, which also receives regular updates on
implementation progress against key business plan objectives. The Board and its subcommittees receive regular updates
on key risks.
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 Empire Life’s Annual Information Form available at www.sedar.com. Additional disclosures of
Empire Life’s sensitivity to risks are included in note 28 to the 2015 consolidated financial statements.
Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed by the Company under Canadian securities laws is recorded, processed, summarized and
reported within the specified time periods, and include controls and procedures that are designed to ensure that
information is accumulated and communicated to management on a timely basis to allow appropriate decisions regarding
public disclosure. Under the supervision of management, an evaluation was carried out on the effectiveness of the
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Company’s disclosure controls and procedures as of December 31, 2015. Based on that evaluation, management
concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2015.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with IFRS. Under the supervision of management, an evaluation of the
Company’s internal control over financial reporting was carried out as at December 31, 2015. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as at December 31,
2015. No changes were made in the Company’s internal control over financial reporting during the year ended December
31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Critical Accounting Estimates
Empire Life’s significant accounting policies are described in note 2 to the consolidated financial statements. Certain of
these policies require management to make estimates and assumptions about matters that are inherently uncertain. The
most critical of these accounting estimates for Empire Life are the valuation of policy liabilities, financial instrument
classification, pension and other employee future benefits and the determination of allowances for impaired investments.
Policy Liabilities
The determination of policy liabilities requires best estimate assumptions that cover the remaining life of the policies for
mortality, morbidity, investment returns, persistency, expenses, inflation and taxes and include consideration of related
reinsurance effects. Due to the long-term risks and measurement uncertainties inherent in the life insurance business, a
margin for adverse deviation from best estimates is included in each assumption. These margins allow for possible
deterioration in future experience and provide for greater confidence that policy liabilities are adequate to pay future
benefits. The resulting provisions for adverse deviations have the effect of increasing policy liabilities and decreasing the
income that otherwise would have been recognized at policy inception. A range of allowable margins is prescribed by the
Canadian Institute of Actuaries. Assumptions are reviewed and updated at least annually and the impact of changes in
those assumptions is reflected in earnings in the year of the change. Empire Life’s sensitivity to risks related to policy
liabilities are included in note 28 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 2(d), 3(a), 3(b), and 10(c).
Pension and Other Employee Future Benefits
Pension and other employee future benefits expense is calculated by independent actuaries using assumptions
determined by management. 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 2(j), 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,
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
repayment history and an assessment of the impact of current economic conditions. Changes in these circumstances may
cause subsequent changes in the estimated realizable amount of the investment and changes in the specific provision for
impairment.
Available for sale securities are subject to a regular review for losses that are significant or prolonged. Objective evidence
of impairment exists if there has been a significant or prolonged decline in the fair value of the investment below its cost or
if there is a significant adverse change in the technological, market, economic or legal environment in which the issuer
operates or the issuer is experiencing financial difficulties.
Outlook
In 2015 Canada’s economy experienced weak growth. 2015 headlines in Canada were filled with economic concerns
about commodity prices, over-valued housing markets, stock market declines, low interest rates, weak Canadian dollar
and high consumer debt levels. Global concerns in 2015 primarily focused on slowing growth in China, low energy prices,
stock market volatility, low interest rates and weak currencies. The U.S. economy was one of the few bright spots with its
improvements in many key areas including job market, consumer confidence, increase in interest rates, and strong
currency. Canadian long-term interest rates increased in 2015 due to an increase in interest rate spreads on provincial
and corporate bonds, bringing some relief after the significant decrease in interest rates that occurred in 2014. Interest
rates have now been lower than typical levels for 5 years. 2015 Global stock markets remained volatile, and most
significant markets declined in 2015. While the Canadian resource heavy stock market saw significant declines in 2015,
the U.S. stock market was down only slightly for the year. The weakening Canadian dollar resulted in strong performance
for assets denominated in U.S. dollars which contributed to the performance of many of Empire Life's segregated funds.
Stock market conditions mainly impact in-force profit margin results and new business growth for the segregated fund and
mutual fund portions of Empire Life’s Wealth Management product line. Looking forward, consumers continue to be
cautious about stock market exposure and Empire Life is well positioned with segregated fund, mutual fund and fixed
interest annuity product offerings to satisfy demand for lower risk investments.
While Canada fared well during the 2008 financial crisis compared to many other countries, Canada’s economy grew
slowly in 2015 and there continues to be uncertainty resulting in mixed economic indicators. Western Canada has major
economic concerns due to the large sustained drop in world oil prices. There are emerging credit concerns with Canadian
oil company bonds. Lower gas prices and a weaker Canadian dollar are expected to improve growth in Ontario and
Quebec. The federal government has plans to stimulate the economy through infrastructure spending across Canada. 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. Until oil prices recover, Western Canada is expected to remain weak which could
result in weak sales in Western Canada for all of Empire Life's product lines.
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
2015, there was significant volatility which has continued so far in 2016. Empire Life has also decreased its emphasis on
long-term products in favour of shorter term products, such as 10 year renewable term life insurance. 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 2016.
Regulatory change related to segregated fund guarantees continues to evolve. OSFI continues to review the overall
approach for determining capital requirements for segregated fund guarantee risks.
Longer term accounting standard changes are expected by 2019 or later 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.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
33
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. Empire Life is not aware of any
plans by OSFI to make similar changes for life insurance companies.
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. Empire Life continues 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”) 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.
Government pension reform including the Federal Pooled Registration Pension Plan program and the proposed Ontario
Registered Pension Plan are expected to reduce future demand for private sector retirement savings products, having an
adverse impact on banks, mutual fund companies, life insurance companies and advisors.
Changes to tax rules that deal with the exemption status of certain life insurance policies will come into effect on January
1, 2017. The exemption test aims to distinguish between (and tax differently) policies that are designed as protection
versus those that are primarily investments. The new rules represent a change to the tax regime that has existed over the
past 30 years. These changes represent a significant change to the policy-holder tax regime, will require all life insurance
companies to review and potentially re-price and redesign their product offerings and will impact policies issued after
December 31, 2016.
Quarterly Results
The following table summarizes various financial results on a quarterly basis for the most recent eight quarters:
(in millions of dollars, except earnings per share)
2015
2015
2015
2015
2014
2014
2014
2014
Dec 31
Sep 30
Jun 30
Mar 31
Dec 31
Sep 30
Jun 30
Mar 31
Revenue
Shareholders' Net income
Earnings per share - basic and diluted
$
$
$
391 $
16 $
212 $
22 $
41 $
44 $
643 $
26 $
541 $
18 $
381 $
24 $
480 $
38 $
524
18
16.43 $
22.49 $
45.34 $
25.97 $
18.44 $
24.49 $
39.22 $
18.05
For the fourth quarter of 2015, total revenue at Empire Life decreased by 28% to $391 million compared to $541 million in
the fourth quarter of 2014. The decrease was primarily due to a lower gain in the fourth quarter on FVTPL investments in
2015 compared to large net gains for the same period in 2014. In the fourth quarter of 2015 the decrease was primarily
due to the decline of major stock markets. In the fourth quarter of 2014 interest rates decreased resulting in an increase
in bond prices (see Total Revenue section earlier in this report). Revenue volatility during the most recent eight quarters
was primarily driven by the impact of market interest rate movements on Fair value change in FVTPL investments. The
impact of this on net income is largely reduced due to a corresponding change in insurance contract liabilities.
For the fourth quarter of 2015, net income was lower relative to the fourth quarter of 2014 primarily due to lower profit from
the Employee Benefits product line. The decreased profit from this product line primarily resulted from the 2014
favourable update of policy liability assumptions for group life, which did not recur in 2015. See Product Line Results
sections earlier in this report for further information on quarterly results.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net income variability during the most recent eight quarters was primarily driven by long-term interest rate movements.
Long-term interest rates decreased resulting in unfavourable net income in the individual insurance product line during the
quarter ending March 31, 2015 and all 2014 quarters. Long-term interest rates increased, resulting in favourable net
income in the individual insurance product line during the second, third and fourth quarters of 2015. During the first three
quarters of 2015 and all 2014 quarters, Empire Life achieved strong year over year growth in the Wealth Management
product line net income. This product line’s strong result was primarily due to the growth in segregated fund management
fees and growth in segregated fund guarantee fees related to GMWB products. Strong fee income was primarily due to
the positive impact of favourable stock market conditions on management fees earned, strong segregated fund sales and
higher GMWB prices.
Forward-looking Statements and Information
Certain statements in this MD&A about the Company’s current and future plans, expectations and intentions, results,
market share growth and profitability, strategic objectives or any other future events or developments constitute forward-
looking statements and information within the meaning of applicable securities laws. The words “may”, “will”, “would”,
“should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”, “anticipates”, “believes”, “estimates”, “predicts”,
“likely” or “potential” or the negative or other variations of these words or other comparable words or phrases, are
intended to identify forward-looking statements and information. Although management believes that the expectations and
assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should
not be placed on the forward-looking statements and information because there can be no assurance that they will prove
to be correct. By their nature, such forward-looking statements and information are subject to various risks and
uncertainties, which could cause the actual results and expectations to differ materially from the anticipated results or
expectations expressed. These risks and uncertainties include, but are not limited to, market risks including equity risks,
hedging risks, interest rate risks, foreign exchange rate risks; liquidity risks; credit risks includingcounterparty risks;
insurance risks including mortality risks, policyholder behaviour risks, expense risks, morbidity risks, product design and
pricing risks, underwriting and claims risks, reinsurance risks; operational risks, including legal and regulatory risks, model
risks, human resources risks, third party risks, technology, information security and business continuity risks; and
business risks, including risks with respect to competition, risks with respect to financial strength, capital adequacy risks,
risks with respect to distribution channels, risks with respect to changes to applicable income tax legislation, risks with
respect to litigation, risks with respect to reputation, risks with respect to risk management policies, risks with respect to
intellectual property, risks with respect to significant ownership of common shares. Please see the section titled “Risk
Factors” in Empire Life’s Annual Information Form available at www.sedar.com for more details on these risks.
Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-
looking statements and information include that the general economy remains stable; assumptions on interest rates,
mortality rates and policy liabilities; and capital markets continue to provide access to capital. These factors are not
intended to represent a complete list of the factors that could affect the Company; however, these factors should be
considered carefully, and readers should not place undue reliance on forward-looking statements made herein or in the
documents reproduced herein.
To the extent any forward-looking information in this MD&A constitutes future-oriented financial information or financial
outlooks within the meaning of securities laws, such information is being provided to demonstrate potential benefits and
readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial
information and financial outlooks are, without limitation, based on the assumptions and subject to the risks set out above.
The forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement. When
relying on the Company’s forward-looking statements and information to make decisions, investors and others should
carefully consider the foregoing factors, assumptions and other uncertainties and potential events. Readers are cautioned
not to place undue reliance on this forward-looking information, which is given as of the date hereof or the date indicated,
and to not use such forward-looking information for anything other than its intended purpose. The Company undertakes
no obligation to update publicly or revise any forward-looking statements and information, whether as a result of new
information, future events or otherwise after the date of this document, except as required by law.
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Non-GAAP Measures
The Company uses non-GAAP measures including source of earnings, annualized premium sales, assets under
management, mutual fund gross and net sales and segregated fund gross and net sales to provide investors with
supplemental measures of its operating performance and to highlight trends in its core business that may not otherwise be
apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors
and other interested parties frequently use non-GAAP measures in the evaluation of issuers. The Company’s
management also uses non-GAAP measures in order to facilitate operating performance comparisons from period to
period, to prepare annual operating budgets and to determine components of management compensation.
Sources of earnings breaks down Empire Life earnings into several categories which are useful to assess the
performance of the business. These categories include expected profit from in-force business, impact of new business,
experience gains and losses, management actions and changes in assumptions, and earnings on surplus. The source of
earnings components are reconciled to net income, see Overview section earlier in this report.
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.
Mutual fund gross and net sales and segregated fund gross and net sales are also used as measures of sales volume.
Empire Life believes that these measures provide information useful to its shareholders and policyholders in evaluating
Empire Life’s underlying financial results.
Assets under management is a non-GAAP measure of the assets managed by Empire Life, which includes general fund
assets, mutual fund assets and segregated fund assets. They represent the total assets of Empire Life and the assets its
customers invest in. Empire Life believes that these measures provide information useful to its shareholders and
policyholders in evaluating Empire Life’s underlying financial results.
The following table provides a reconciliation of assets under management to total assets in Empire Life’s financial
statements.
Reconciliation of Assets Under Management
(in millions of dollars)
Assets under management
General fund assets
Segregated fund assets
Total assets per financial statements
Mutual fund assets
Assets under management
The above table includes the following amounts held by Empire Life’s DB plans.
(in millions of dollars)
DB Plan Assets
Segregated fund assets
Mutual fund assets
As at December 31
2015
2014
6,996 $
7,368
14,364
171
14,535 $
6,780
6,948
13,728
109
13,837
As at December 31
2015
2014
183 $
11
175
10
$
$
$
1, 2, 3, 4, 5, 6 See Non-GAAP Measures
Empire Life - Annual Report 2015
36
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 (IFRS) and the accounting requirements of the Office of the Superintendent of Financial Institutions,
Canada (OSFI).
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 (IFRS). 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, 2015. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as at December 31,
2015.
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
President and Chief Executive Officer
Kingston, Ontario
February 25, 2016
____________________________ _____ ______
Gary J. McCabe
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 25, 2016
Empire Life - Annual Report 2015
37
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, 2015 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, 2015 and their financial performance and their
cash flows for the year then ended in accordance with International Financial Reporting Standards.
____________________________ _____ ______
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
February 25, 2016
Empire Life - Annual Report 2015
38
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, 2015 and their change in the Consolidated statements of operations for
the year then ended in accordance with accepted actuarial practice in Canada including selection of appropriate
assumptions and methods.
In my opinion, the amount of policy liabilities net of reinsurance liabilities, makes appropriate provision for all policy
obligations and the Consolidated financial statements fairly present the results of the valuation.
____________________________ _____ ______
Leonard Pressey, F.S.A., F.C.I.A.
Fellow, Canadian Institute of Actuaries
Kingston, Ontario
February 25, 2016
Empire Life - Annual Report 2015
39
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at December 31
Assets
Cash and cash equivalents (Note 3)
Investments
Short-term investments (Note 3)
Bonds (Note 3)
Preferred shares (Note 3)
Common shares (Note 3)
Derivative assets (Note 3)
Mortgages (Note 3)
Loans on policies (Note 3)
Policy contract loans (Note 3)
2015
2014
$
199,770 $
239,102
33,652
5,193,439
194,680
801,778
14,649
289,221
46,925
84,921
26,892
4,958,086
196,179
789,515
3,375
323,117
46,434
86,698
Total cash and cash equivalents and investments
6,859,035
6,669,398
Accrued investment income
Insurance receivables (Note 4)
Current income taxes
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 13)
Segregated fund policy liabilities
Equity
Capital stock (Note 20)
Contributed surplus
Retained earnings (Note 22)
Accumulated other comprehensive income
$
$
26,023
47,909
3,361
26,257
23,911
9,225
25,048
41,743
—
17,920
21,125
4,832
7,367,823
14,363,544 $
6,948,475
13,728,541
59,145 $
77,337
—
530,826
4,798,683
11,241
32,599
26,951
7,910
299,112
7,367,823
13,211,627
985
19,387
1,121,542
10,003
1,151,917
57,359
73,710
7,804
490,575
4,713,462
11,626
31,332
24,913
8,243
298,763
6,948,475
12,666,262
985
19,387
1,019,084
22,823
1,062,279
Total liabilities and equity
$
14,363,544 $
13,728,541
____________________________ _____ ______
Duncan N. R. Jackman
Chairman of the Board
____________________________ _____ ______
Mark Sylvia
President and Chief Executive Officer
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2015
40
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Canadian dollars except per share amounts and shares authorized and outstanding)
For the year ended December 31
Revenue
Gross premiums (Note 14)
Premiums ceded to reinsurers (Note 14)
Net premiums (Note 14)
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 15)
Total revenue
Benefits and expenses
Gross benefits and claims paid (Note 16)
Claims recovery from reinsurers (Note 16)
Gross change in insurance contract liabilities (Note 16)
Change in insurance contract liabilities ceded (Note 16)
Change in investment 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 (Note 19)
(2,000,000 shares authorized; 985,076 shares outstanding)
2015
2014
$
947,037 $
(111,821)
835,216
259,210
(85,677)
42,233
19,128
216,818
1,286,928
727,319
(84,988)
85,221
40,251
426
25,991
147,165
190,769
(2,361)
8,959
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
1,138,752
1,769,980
14,226
4,000
129,950
27,492
102,458 $
(6,119)
108,577
102,458 $
110.22 $
14,259
4,100
137,677
30,301
107,376
8,670
98,706
107,376
100.20
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2015
41
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
For the year ended December 31
Net income
2015
2014
$
102,458 $
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 (decrease)
Amortization of loss on derivative investments designated as cash flow hedges reclassified to net
income (Note 18)
Items that will not be reclassified to net income:
Remeasurements of post-employment benefit liabilities (Note 18)
Total other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income (loss) attributable to:
Participating policyholders
Shareholders
Total
4,118
(13,922)
(9,804)
—
(3,016)
(12,820)
38,349
(8,975)
29,374
233
3,182
32,789
$
$
$
89,638 $
140,165
(7,203) $
96,841
89,638 $
9,218
130,947
140,165
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2015
42
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31
2015
2014
Shareholders' Policyholders'
Total
Shareholders'
Policyholders'
Total
985
19,387
945,692
107,376
(33,984)
— $
—
985 $
985 $
19,387
19,387
— $
—
Capital stock
$
985 $
Contributed surplus
Retained earnings
Retained earnings - beginning of year
Net income (loss)
Dividends to common shareholders
19,387
966,543
108,577
—
52,541
(6,119)
—
1,019,084
102,458
—
901,821
98,706
(33,984)
966,543
43,871
8,670
—
52,541
1,019,084
Retained earnings - end of period
1,075,120
46,422
1,121,542
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
15,324
(11,736)
7,499
(1,084)
22,823
(12,820)
(16,917)
32,241
3,588
6,415
10,003
15,324
6,951
548
7,499
(9,966)
32,789
22,823
Total equity
$
1,099,080 $
52,837 $
1,151,917 $
1,002,239 $
60,040 $
1,062,279
Composition of accumulated other comprehensive income (loss) - end of period
Unrealized gain (loss) on available for
sale financial assets
Remeasurements of post-employment
benefit liabilities
Shareholder portion of policyholders'
accumulated other comprehensive
income
Total accumulated other
comprehensive income (loss)
$
15,148 $
7,644 $
22,792 $
23,889 $
8,707 $
32,596
(12,163)
(626)
(12,789)
(9,287)
(486)
(9,773)
603
(603)
—
722
(722)
—
$
3,588 $
6,415 $
10,003 $
15,324 $
7,499 $
22,823
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2015
43
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 discount on debt instruments
Amortization related to property and equipment and intangible assets (Notes 6 & 7)
Deferred income taxes (Note 18)
Other items
Cash provided from (used for) operating activities
Investing activities
Portfolio investments
Purchases and advances
Sales and maturities
Loans on policies
Advances
Repayments
(Increase) decrease in short-term investments
Purchase of property and equipment and intangible assets (Notes 6 & 7)
Cash provided from (used for) investing activities
Financing activities
Dividends to common shareholders (Note 21)
Interest paid on subordinated debt
Debt repayment (Note 13)
Cash provided from (used for) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents - beginning of period (Note 3)
Cash and cash equivalents - end of period (Note 3)
Supplementary cash flow information related to operating activities:
Income taxes paid, net of (refunds)
Interest income received
Dividend income received
2015
2014
$
102,458 $
107,376
85,647
40,251
85,677
(61,361)
(73,515)
4,369
761
(35,723)
148,564
540,506
205,948
(538,036)
(87,090)
(71,714)
4,720
9,496
(19,359)
151,847
(2,081,180)
1,918,878
(1,543,975)
1,659,452
(7,333)
8,657
(6,760)
(11,548)
(179,286)
—
(8,610)
—
(8,610)
(39,332)
239,102
199,770 $
34,185 $
149,988
37,764
(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
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2015
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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). Empire
Life became a public company on August 5, 2015 and registered as a public issuer with the Ontario Securities
Commission. 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 (the Board) on
February 25, 2016.
2. Significant Accounting Policies
(a) Basis of preparation
The annual Consolidated Financial Statements of the Company for the year ended December 31, 2015 have
been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).
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, none of which are an exception to IFRS.
(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, ELII. The Company owns 100% of
the voting shares and maintains control of its subsidiary. The Company controls an entity when the Company
is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which
control is transferred to the Company. They are deconsolidated from the date that control ceases. 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 the Consolidated Financial Statements, in accordance with IFRS, requires management to
make judgements and estimates and form assumptions that affect the reported amounts of assets and
liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of revenue and
expenses during the year. On an ongoing basis, management evaluates its judgements, estimates and critical
assumptions in relation to assets, liabilities, revenues and expenses. Actual results could differ from these
estimates and changes in estimates are recorded in the accounting period in which they are determined.
Empire Life - Annual Report 2015
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 (CALM),
which incorporates best-estimate assumptions for mortality, morbidity, policy lapses, surrenders, future
investment yields, policy dividends, administration costs and margins for adverse deviation. These
assumptions are reviewed at least annually and are updated to reflect actual experience and market
conditions. Changes in the assumptions and margins for adverse deviation can have a significant impact
on the valuation of insurance related liabilities.
Additional information regarding insurance-related liabilities is included in Notes 2(e), 2(k),10 and 28.
(ii) Financial instruments classification
Management judgement is used to classify financial instruments as fair value through profit or loss
(FVTPL), available for sale (AFS) or loans and receivables. Most financial assets supporting insurance
contract liabilities and investment contract liabilities are designated as FVTPL. Most financial assets
supporting capital and surplus and participating accounts are classified as AFS. Loans and receivables
support both contract liabilities and capital and surplus. The designation of a financial instrument as
FVTPL or AFS dictates whether unrealized fair value changes are reported in Net income or Other
comprehensive income (OCI).
Additional information regarding financial instrument classification is included in Notes 2(d), 3(a), 3(b) and
10(c).
(iii) Pension and other post-employment benefits
Pension and other employee future benefits expense is calculated by independent actuaries using
assumptions determined by management. The assumptions made affect the pension and other employee
future benefits expense included in Net income. If actual experience differs from the assumptions used,
the resulting experience gain or loss is recorded in OCI.
Additional information regarding pension and other post-employment benefits is included in Notes 2(j) and
12.
(iv) Impairment
AFS 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 AFS securities and loans and
receivables, impairment losses are recognized if there is objective evidence of impairment as a result of
an event that reduces the estimated future cash flows of the instrument and the impact can be reliably
estimated. Objective evidence of impairment includes, but is not limited to, bankruptcy or default,
delinquency by a debtor, and specific adverse conditions affecting an industry or a region. In addition, for
equity securities, a significant or prolonged decline in the fair value of a security below its cost is objective
evidence of impairment. For these purposes management considers a significant decline to be 20% or
greater and a prolonged period to be 12 months or greater. The decision to record a write-down, its
amount and the period in which it is recorded could change if management’s assessment of those factors
were different. Impairment write-downs on debt securities are not recorded when impairment is due to
changes in market interest rates, if future contractual cash flows associated with the debt security are still
expected to be recovered.
Additional information regarding impairment is included in Notes 2(d), 3(b), 10(c) and 28(c).
Empire Life - Annual Report 2015
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(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
exchange traded common and preferred shares and derivatives.
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 cash equivalents, government
bonds, certain corporate and private bonds, short-term investments, certain common shares
(real estate limited partnership units) and over the counter derivatives.
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 cash equivalents and investments
Cash and cash equivalents 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.
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 and cash equivalents, 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 Statements 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 Statements 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 Statements of Operations.
Empire Life - Annual Report 2015
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 rate method, net of provisions for
impairment losses, if any. Mortgage loans are secured by real estate. Loans on policies and policy
contract loans are secured by policy values. Loans and receivables are defined as non-derivative financial
assets with fixed or determinable payments that are not quoted in active markets.
All transactions are recorded on the trade date. Transaction costs are expensed for FVTPL instruments
and capitalized for all others.
(iii) 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 and liabilities are
classified as FVTPL. Therefore, they are initially recorded at fair value on the acquisition date and
subsequently revalued at their fair value as at each reporting date. Derivative financial instruments with a
positive fair value are disclosed as derivative assets while derivative financial instruments with a negative fair
value are disclosed as other liabilities. Changes in fair value are recorded, in Fair value change in FVTPL
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 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 through Net income (loss). Any subsequent increase
in value is recorded in OCI.
(3) Loans and receivables
Mortgages and loans are individually evaluated for impairment in establishing the allowance for
impairment.
Objective evidence of impairment exists if there is no longer reasonable assurance of full collection of
loan principal or loan interest related to a mortgage, policy contract loan or a loan on a policy. Events
and conditions considered in determining if there is objective evidence of impairment include the value
of the security underlying the loan, geographic location, industry classification of the borrower, an
assessment of the financial stability and credit worthiness of the borrower, repayment history and an
assessment of the impact of current economic conditions. If objective evidence of impairment is found,
allowances for credit losses are established to adjust the carrying value of these assets to their net
recoverable amount and the impairment loss is recorded in Net income (loss). If, in a subsequent
Empire Life - Annual Report 2015
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 accounts 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 (excluding derivative 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.
(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 Statements of
Operations. Reinsurance recoveries on claims incurred are recorded as Claims recovery from reinsurers in
the Consolidated Statements 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 Statements 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, buildings, 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 an 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)
Empire Life - Annual Report 2015
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Amortization is included in Operating expenses in the Consolidated Statements 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.
(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
Statements 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 Statements 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. Segregated fund assets are not available to pay liabilities of the general fund.
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 Statements 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, maturity benefit and withdrawal 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 28(a)(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 Statements of Operations.
Empire Life - Annual Report 2015
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(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 accumulated other comprehensive income
(AOCI). Past-service costs are recognized immediately in net 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.
(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
Empire Life - Annual Report 2015
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 CALM for valuation of insurance contracts, which satisfies the IFRS 4
Insurance Contracts requirements for eligibility for use under IFRS.
(a) Short-term insurance contracts
These contracts include both annuity products and group benefits.
The annuity products classified as short-term insurance contracts are guaranteed investment
options that provide for a fixed rate of return over a fixed period. Contracts include certain
guarantees that are initiated upon death of the annuitant. The liabilities are determined using
CALM.
The group benefits classified as short-term insurance contracts include short-term disability,
health and dental benefits. Benefits are typically paid within one year of being incurred. Liabilities
for unpaid claims are estimated using statistical analysis and Company experience for claims
incurred but not reported.
(b) Long-term insurance contracts
These contracts include insurance products, annuity products and group benefits. In all cases,
liabilities represent an estimate of the amount that, together with estimated future premiums and
investment income, will be sufficient to pay future benefits, dividends, expenses and taxes on
policies in force.
The insurance products so classified are life insurance and critical illness that provide for benefit
payments related to death, survival or the occurrence of a critical illness. Terms extend over a
long duration. The annuity products classified as long-term insurance contracts include both
annuities that provide for income payments for the life of the annuitant and guarantees associated
with the Company’s segregated fund products. The group benefits classified as long-term
insurance contracts are life benefits which are payable upon death of the insured and disability
benefits that provide for income replacement in case of disability.
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 Statements
Empire Life - Annual Report 2015
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 as at the date of the Consolidated Statements of Financial
Position. 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 Gross
change in insurance contract liabilities and/or Change in insurance contract liabilities ceded in the
Consolidated Statements 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 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
Statements of Operations. Deposits and withdrawals are recorded in Investment contract liabilities on
the Consolidated Statements 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 Statements of Financial Position. The
costs deferred in the period and amortization of deferred costs form part of the Gross change in insurance
contract liabilities on the Consolidated Statements 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 recognized as Policy
dividends expense in the Consolidated Statements of Operations.
Empire Life - Annual Report 2015
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 Accumulated other comprehensive income
(AOCI) is reported separately in the Policyholders’ equity section of the Consolidated Statements of Changes
in Equity. Supplementary participating policyholder information is reported in Note 23.
(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 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.
(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 account, 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 account, income taxes are allocated to the
participating account in proportion to total taxable income for the Company.
(m) Fee income
Fee income includes investment management, policy administration and guarantee fees that are recognized
on an accrual basis, and surrender charges that are recognized as incurred. Fee income earned for
investment management, administration and guarantees of the investment funds is based on the funds’
closing net asset values.
(n) Investment income
Interest income is recognized using the effective interest rate method. Fees that are an integral part of the
effective yield of the financial asset are recognized as an adjustment to the effective interest rate of the
instrument.
Dividend income is recognized when the right to receive payment is established, which is usually the ex-
dividend date.
Empire Life - Annual Report 2015
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Interest income and dividend income are included in Investment income in the Consolidated Statements 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 Statements 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
Statements of Operations.
For monetary financial assets designated as AFS, translation differences are recognized in the Consolidated
Statements 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 AOCI
is recognized in the Consolidated Statements 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 investments, 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
as 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.
Empire Life - Annual Report 2015
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(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 (EPS)
Basic EPS is calculated by dividing the Net income (loss) for the period attributable to common shareholders
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 EPS are the same as basic
EPS.
(u) Accounting changes
(i) New accounting pronouncements adopted in 2015
(1) Amendment to IAS 19 Employee Benefits
The IASB amended IAS 19 to permit employee contributions that are independent of the number of years
of service to be recognized as a reduction of service cost in the period in which the service is rendered,
instead of allocating the contributions to periods of service. Retrospective adoption of the amendment on
January 1, 2015 did not have a significant impact on the Consolidated Financial Statements.
(2) IFRS Annual Improvements
The IASB periodically issues improvements to clarify the requirements of IFRS and eliminate
inconsistencies within and between standards. Adoption of the 2010-2012 and 2011-2013 improvements
on January 1, 2015 in accordance with their respective transition provisions did not have a significant
impact on the Consolidated Financial Statements.
(ii) New accounting pronouncements issued but not yet effective
(1) IFRS Annual Improvements 2012-2014
In September 2014 the IASB issued a limited number of amendments to clarify the requirements of four
IFRS standards. The amendments are effective for annual periods beginning on or after January 1, 2016,
with retrospective application. The Company is currently evaluating the impact of IFRS Annual
Improvements 2012-2014 on its Consolidated Financial Statements.
(2) 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, 2018, with retrospective application. The Company is currently
evaluating the impact of IFRS 15 on its Consolidated Financial Statements.
(3) 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 as well as the implementation options for insurers proposed in the December 2015 Exposure
Draft Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed amendments to
IFRS 4)
(4) IFRS 16 Leases
In January 2016, the IASB published IFRS 16 which is effective January 1, 2019. The new standard
requires the capitalization of all leases by recognizing the present value of the lease payments and
showing them as lease assets, and recognizing a financial liability representing an obligation to make
future lease payments. The Company is currently evaluating the impact of IFRS 16 on its Consolidated
Financial Statements.
Empire Life - Annual Report 2015
56
Canadian government bonds issued or guaranteed by:
Federal government
Provincial & municipal governments
Total Canadian government bonds
76,053
2,575,792
2,651,845
Canadian corporate bonds by industry sector:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
3. Financial Instruments
(a) Summary of Cash and cash equivalents and investments
The carrying values of cash and cash equivalents and investments are as follows:
As at December 31
2015
Fair value
through profit
or loss
Available for
sale
Total carrying
value
Fair value
through profit
or loss
$
21,390 $
— $
21,390 $
42,594 $
Asset category
Cash and cash equivalents
Cash
Cash equivalents
Total cash and cash equivalents
Short-term investments
Canadian federal government
Canadian provincial governments
Corporate
Total short-term investments
Bonds
Financial services
Infrastructure
Utilities
Communications
Energy
Consumer staples
Industrials
Health care
Materials
Total Canadian corporate bonds
Total bonds
Preferred shares
Canadian
Total preferred shares
Common shares
Canadian
Common shares
Real estate limited partnership units
U.S.
Other
Total common shares
Derivative assets
Loans and receivables
Mortgages
Loans on policies
Policy contract loans
Total
178,380
199,770
4,781
5,994
17,881
28,656
475,027
279,858
274,431
1,484
40,999
95,887
61,790
70,821
10,789
—
—
4,996
—
—
4,996
214,285
392,143
606,428
386,044
22,193
33,070
24,444
53,352
76,326
15,650
13,001
—
178,380
199,770
9,777
5,994
17,881
33,652
196,508
239,102
3,310
1,782
16,839
21,931
290,338
2,967,935
3,258,273
72,626
2,479,365
2,551,991
861,071
302,051
307,501
25,928
94,351
172,213
77,440
83,822
10,789
545,554
241,371
246,080
1,608
52,759
78,546
47,240
70,683
10,615
2014
Available for
sale
Total carrying
value
— $
—
—
4,961
—
—
4,961
165,921
284,502
450,423
437,673
20,079
30,881
28,007
60,643
68,319
1,564
14,050
—
42,594
196,508
239,102
8,271
1,782
16,839
26,892
238,547
2,763,867
3,002,414
983,227
261,450
276,961
29,615
113,402
146,865
48,804
84,733
10,615
1,311,086
3,962,931
624,080
1,230,508
1,935,166
5,193,439
1,294,456
3,846,447
661,216
1,111,639
1,955,672
4,958,086
189,645
189,645
5,035
5,035
194,680
194,680
186,856
186,856
9,323
9,323
196,179
196,179
505,534
60,396
154,482
19,535
739,947
14,649
—
—
—
61,831
—
—
—
61,831
—
—
—
—
567,365
60,396
154,482
19,535
801,778
14,649
289,221
46,925
84,921
526,613
47,512
139,988
13,921
728,034
3,375
—
—
—
61,481
—
—
—
61,481
—
—
—
—
588,094
47,512
139,988
13,921
789,515
3,375
323,117
46,434
86,698
$
5,135,598 $
1,302,370 $
6,859,035 $
5,025,745 $
1,187,404 $
6,669,398
Empire Life - Annual Report 2015
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
The following table presents the fair value of cash and cash equivalents and investments classified by the fair
value hierarchy:
As at December 31
2015
2014
Level 1
Level 2 Total fair value
Level 1
Level 2
Total fair value
Fair value through profit or loss:
Cash and cash equivalents
$
21,390 $
178,380 $
199,770 $
42,594 $
196,508 $
Short-term investments
Bonds
Preferred shares
Common shares
Derivative assets
Available for sale:
Short-term investments
Bonds
Preferred shares
Common shares
Loans and Receivables
Mortgages
Loans on policies
Policy contract loans
Total
—
—
189,645
679,551
14,482
—
—
5,035
61,831
—
—
—
28,656
28,656
3,962,931
3,962,931
—
60,396
167
189,645
739,947
14,649
4,996
4,996
1,230,508
1,230,508
—
—
300,186
46,925
84,921
5,035
61,831
300,186
46,925
84,921
—
—
186,856
680,522
2,791
—
—
9,323
61,481
—
—
—
21,931
239,102
21,931
3,846,447
3,846,447
—
47,512
584
186,856
728,034
3,375
4,961
4,961
1,111,639
1,111,639
—
—
338,160
46,434
86,698
9,323
61,481
338,160
46,434
86,698
$
971,934 $
5,898,066 $
6,870,000 $
983,567 $
5,700,874 $
6,684,441
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, 2015 or during the year ended December 31, 2014.
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 28 Risk Management.
(b) Impairments
(i) Loans and receivables
Investments in individual assets have been reduced by the following specific allowances for impairment:
As at December 31
Impaired Loans
Mortgages
Policy contract loans
Total
2015
2014
Recorded
investment
Allowance for
impairment
Carrying value
Recorded
investment
Allowance for
impairment
Carrying value
$
$
5,963 $
2,600 $
3,363 $
6,303 $
2,295 $
813
525
288
813
541
6,776 $
3,125 $
3,651 $
7,116 $
2,836 $
4,008
272
4,280
The Company holds collateral with a fair value of $3,370 (2014 $4,045) in respect of these mortgages and
$288 (2014 $272) in respect of these policy contract loans as at December 31, 2015. Mortgage loans are
secured by real estate, and policy contract loans are secured by life insurance.
Empire Life - Annual Report 2015
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Continuity of allowance for loan impairment:
Allowance - beginning of year
Provision for loan impairment
Write-off of loans
Allowance - end of year
$
$
2015
2,836 $
545
(256)
3,125 $
2014
2,930
536
(630)
2,836
The Company has recorded interest income of $858 (2014 $727) on these assets.
As at December 31, 2015 loans and receivables past due but not impaired are $ nil (2014 $ nil).
(ii) Available for sale
For the year-ended December 31, 2015, the Company reclassified a pre-tax loss of $2,379 from OCI to
Net income due to write downs of impaired AFS common and preferred shares (2014 $221).
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 28.
(c) 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
2015
220,681 $
38,225
849
(545)
2014
215,036
30,583
798
(536)
259,210 $
245,881
$
$
Included in interest income is $63,449 (2014 $65,336) relating to assets not classified as FVTPL.
(d) 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
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Total
$
$
Notional
principal
2015
Fair value
assets
Fair value
liabilities
Notional
principal
2014
Fair value
assets
Fair value
liabilities
94,312 $
299,876
977 $
340 $
51,773 $
13,505
119,990
869 $
1,922
175,368
167
151,731
584
569,556 $
14,649 $
376 $
323,494 $
3,375 $
—
36
1,201
—
137
1,338
All contracts mature in less than one year. Fair value asset amounts are reported on the Consolidated
Statements of Financial Position as Derivative assets. Fair value liability amounts are reported on the
Consolidated Statements of Financial Position as part of Accounts payable and other liabilities. Fair value
of exchange traded derivatives is determined based on Level 1 inputs. Foreign currency forward contracts
are valued based primarily on the contract notional amount, the difference between the contract rate and
the forward market rate for the same currency, interest rates and credit spreads. Contracts for which
Empire Life - Annual Report 2015
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
counterparty credit spreads are observable and reliable, or for which the credit-related inputs are
determined not to be significant to fair value, are classified as Level 2.
For analysis of the Company’s risks arising from financial instruments, refer to Note 28.
4. Insurance Receivables
As at December 31
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance receivables
2015
3,229 $
22,810
18,506
3,364
47,909 $
2014
3,501
16,530
18,501
3,211
41,743
$
$
All amounts are expected to be recovered within one year of the Consolidated Statements of Financial Position
date. These financial instruments are short-term in nature and their fair values approximate carrying value.
5. Other Assets
Other assets consist of the following:
As at December 31
Trade accounts receivable
Prepaid expenses
Other assets
2015
20,803 $
5,454
26,257 $
2014
13,294
4,626
17,920
$
$
All amounts are expected to be recovered within one year of the Consolidated Statements of Financial Position
date. These financial instruments are short-term in nature and their fair values approximate carrying value.
Empire Life - Annual Report 2015
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
6. Property and Equipment
Land
Buildings
Furniture and
equipment
Leasehold
improvements
Cost
As at January 1, 2014
$
2,318 $
12,873 $
21,862 $
Additions
Disposals
As at December 31, 2014
Additions
Disposals
—
—
2,318
—
—
74
—
12,947
91
—
3,045
—
24,907
5,899
—
6,629 $
(288)
—
6,341
56
—
As at December 31, 2015
$
2,318 $
13,038 $
30,806 $
6,397 $
Amortization
As at January 1, 2014
Charge for the year
Disposals
As at December 31, 2014
Charge for the year
Disposals
As at December 31, 2015
Carrying amount
December 31, 2014
December 31, 2015
$
$
$
— $
(2,388) $
(14,935) $
(4,316) $
—
—
—
—
—
(524)
—
(2,912)
(498)
—
(2,385)
—
(17,320)
(2,205)
—
(840)
—
(5,156)
(557)
—
— $
(3,410) $
(19,525) $
(5,713) $
2,318 $
2,318 $
10,035 $
9,628 $
7,587 $
11,281 $
1,185 $
684 $
There were no asset impairments in 2015 or 2014.
Total
43,682
2,831
—
46,513
6,046
—
52,559
(21,639)
(3,749)
—
(25,388)
(3,260)
—
(28,648)
21,125
23,911
Empire Life - Annual Report 2015
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
7. Intangible Assets
Cost
As at January 1, 2014
Additions
Disposals
As at December 31, 2014
Additions
Disposals
As at December 31, 2015
Amortization
As at January 1, 2014
Charge for the year
Disposals
As at December 31, 2014
Charge for the year
Disposals
As at December 31, 2015
Carrying amount
December 31, 2014
December 31, 2015
Intangible assets
42,851
1,486
—
44,337
5,502
—
49,839
(38,534)
(971)
—
(39,505)
(1,109)
—
(40,614)
4,832
9,225
$
$
$
$
$
$
The Company’s total amount of research and development expenditure recognized as an expense during 2015 is
$2,218 (2014 $3,658).
There were no asset impairments during 2015 or 2014.
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
Other assets
Less segregated funds held within general fund investments
Total
2015
$
301,764 $
151,203
1,528,873
5,362,003
59,085
7,402,928
(35,105)
$
7,367,823 $
2014
162,646
152,395
1,567,578
5,067,181
24,977
6,974,777
(26,302)
6,948,475
Empire Life - Annual Report 2015
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(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
2015
2014
Level 1
Level 2
Total
Level 1
Level 2
Total
Cash and cash equivalents
$
42,827 $
258,937 $
301,764 $
26,829 $
135,817 $
Short-term investments
Bonds
—
—
Common and preferred shares
5,362,003
151,203
1,528,873
—
151,203
1,528,873
5,362,003
—
—
5,067,181
152,395
1,567,578
—
162,646
152,395
1,567,578
5,067,181
Total
$
5,404,830 $
1,939,013 $
7,343,843 $
5,094,010 $
1,855,790 $
6,949,800
There were no transfers between Level 1 and Level 2, and there were no Level 3 investments during the year
ended December 31, 2015 or during the year ended December 31, 2014.
(c) The following table presents the change in segregated fund assets:
For the year ended December 31
Segregated fund assets - beginning of year
Additions to segregated funds:
Amount received from policyholders
Interest
Dividends
Other income
Net realized gains on sale of investments
Net unrealized increase in fair value of investments
Deductions from segregated funds:
Amounts withdrawn or transferred by policyholders
Net unrealized decrease in fair value of investments
Management fees and other operating costs
Net change in segregated funds held within general fund investments
2015
2014
$
6,948,475 $
5,954,508
1,521,736
1,650,775
63,259
130,732
32,306
412,110
—
57,360
123,868
29,743
481,448
34,206
2,160,143
2,377,400
1,245,387
262,012
224,593
1,731,992
(8,803)
1,242,284
—
203,259
1,445,543
62,110
Segregated fund assets - end of year
$
7,367,823 $
6,948,475
(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 shareholders' net income is disclosed in the Risk Management Note
28(a)(1).
Empire Life - Annual Report 2015
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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
2015
38,159 $
11,297
2,267
11,707
13,907
77,337 $
2014
27,771
11,936
2,456
10,804
20,743
73,710
$
$
Of the above total, $1,305 (2014 $1,280) is expected to be settled more than one year after the Consolidated
Statements of Financial Position date. Most of these financial instruments are short-term in nature and their fair
value approximates carrying 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
assets (liabilities) are 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:
Empire Life - Annual Report 2015
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Concentration of insurance contract liabilities and reinsurance assets/liabilities
As at December 31
Participating Individual
Life
Annuity
Non-participating Individual
Life
Annuity
Health
Non-participating Group
Life
Annuity
Health
2015
Reinsurance
(assets)
liabilities
Gross
insurance
contract
liabilities
Net
Gross
insurance
contract
liabilities
2014
Reinsurance
(assets)
liabilities
Net
$
547,978 $
(2,111) $
545,867 $
523,424 $
2,667 $
526,091
192
—
192
292
—
292
3,011,228
908,073
154,455
21,564
56,398
194,029
623,305
(12,439)
(9,274)
(626)
—
(68,029)
3,634,533
895,634
145,181
20,938
56,398
126,000
2,842,061
1,009,782
141,503
22,194
61,490
202,641
584,900
(14,617)
(9,715)
(568)
—
(72,092)
3,426,961
995,165
131,788
21,626
61,490
130,549
Segregated fund deferred acquisition
costs
(95,234)
—
(95,234)
(89,925)
—
(89,925)
Total
$
4,798,683 $
530,826 $
5,329,509 $
4,713,462 $
490,575 $
5,204,037
The Company expects to pay $4,710,118 (2014 $4,563,763) of Insurance contract liabilities and $529,604
(2014 $492,065) of Reinsurance liabilities more than one year after the Consolidated Statements 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
2015
2014
89,925 $
38,551
(33,242)
95,234 $
77,489
40,992
(28,556)
89,925
$
$
Of the above total, $37,876 (2014 $36,364) is expected to be amortized during the next year.
(b) Change in insurance contract liabilities and reinsurance assets/liabilities
For the year ended December 31
2015
2014
Gross insurance
contract
liabilities
Reinsurance
(assets)
liabilities
Net Gross insurance
contract
liabilities
Reinsurance
(assets)
liabilities
Net
Balance - beginning of year
$
4,713,462 $
490,575 $
5,204,037 $
4,175,238 $
284,627 $
4,459,865
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
Balance - end of year
(45,126)
67,282
(37,843)
—
8,599
77,241
15,068
36,149
8,364
(10,160)
—
(1,250)
(10,535)
17,683
(8,977)
75,646
(48,003)
—
7,349
66,706
32,751
(141,617)
113,471
77,408
(88,465)
(5,882)
(16,331)
125,003
588,108
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
$
4,798,683 $
530,826 $
5,329,509 $
4,713,462 $
490,575 $
5,204,037
Empire Life - Annual Report 2015
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Changes in methods and assumptions summarized in the above table are further explained as follows:
The updates for mortality/morbidity experience for 2015 are primarily related to favourable mortality
experience for individual life business.
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 refinements to lapse rate assumptions for 2015 are primarily related to an update of Empire Life’s Term-
to-100 (T100) and Universal Life Level Cost of Insurance (UL LCOI) ultimate lapse rate assumptions to reflect
the CIA Research Committee’s research papers on Lapse Experience Under T100 Insurance Policies and
Lapse Experience under UL LCOI Policies released September 2015 which was partially offset by an update
to lapse rate margins to reflect more credible company and industry experience.
The refinements to lapse rate assumptions for 2014 are primarily related to emerging lapse rate experience
for Empire Life’s universal life ART 85 and VitaLink products as well as regular updates for Empire Life’s other
individual life insurance products.
The update in investment return assumptions for 2015 was primarily related to a refinement of the projected
amount of equities backing individual life liabilities. In addition, there were several refinements to the CALM
model for future reinvestment assumptions.
The update in investment return assumptions for 2014 was primarily due to revised Canadian actuarial
standards of practice effective October 15, 2014. In addition, there were several refinements to the CALM
model for future reinvestment assumptions.
There were no model enhancements for 2015.
The model enhancements for 2014 are related to refinements to the valuation models for group waiver of
premium business.
Other changes for 2015 relate to lower expense unit costs that were offset by refinements to target fund value
mix for universal life policies and other minor changes to assumptions and methodologies.
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.
The normal change for new business liabilities is primarily related to new deposits for annuity business, which are
offset by negative reserves calculated for new sales of individual life
The increase in the normal change in in-force policy liabilities in 2015 primarily results from the maturing of in-
force liabilities. Smaller changes in the in-force policy liabilities resulted from decreases in interest rates and
experience gains and losses related to mortality and lapses.
The change for in-force business in 2014 is primarily attributable to the fair value change in liabilities due to a
decrease in interest rates.
Empire Life - Annual Report 2015
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(c) Mix of assets allocated to insurance, annuity, investment contract liabilities and equity
Cash and cash equivalents & Short-term investments
$
62,748 $
20,676 $
245 $
149,753 $
233,422
As at December 31, 2015
Insurance
liabilities
Annuity
liabilities
Investment
contract
liabilities
Equity and
other
liabilities
Total
Bonds
Mortgages
Preferred shares
Common shares
Derivative assets
Loans on policies
Policy contract loans
Other
Total
3,518,901
46,811
23,853
739,948
1,144
46,925
318
23,754
480,695
239,569
168,825
—
—
—
33,444
4,731
5,700
2,841
2,002
—
—
—
397
56
1,188,143
5,193,439
—
—
61,830
13,505
—
50,762
108,145
289,221
194,680
801,778
14,649
46,925
84,921
136,686
$
4,464,402 $
947,940 $
11,241 $
1,572,138 $
6,995,721
As at December 31, 2014
Insurance
liabilities
Annuity
liabilities
Investment
contract
liabilities
Equity and
other
liabilities
Total
Cash and cash equivalents & Short-term investments
$
122,349 $
3,919 $
43 $
139,683 $
265,994
Bonds
Mortgages
Preferred shares
Common shares
Derivative assets
Loans on policies
Policy contract loans
Other
Total
3,318,781
56,852
29,963
728,034
1,453
46,434
296
13,970
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
1,922
—
50,080
91,057
323,117
196,179
789,515
3,375
46,434
86,698
110,668
$
4,318,132 $
1,051,192 $
11,626 $
1,399,116 $
6,780,066
Provisions made for anticipated future losses of principal and interest on investments and included as a
component of policy liabilities are $163,500 (2014 $169,800)
(d) Fair value of insurance and investment contract liabilities and reinsurance assets/liabilities
In the absence of an active market for the sale of insurance and investment contract liabilities and
reinsurance assets/liabilities, the actuarially determined values provide a reasonable approximation of their
fair value. Investment contract liabilities are term certain annuities with a relatively short duration.
(e) Liquidity
The Company defines liquid assets as high quality marketable investments that may be easily sold, meaning
there exists an active market and observable prices for the investments. Liquid asset values are based on
fair value as at December 31.
The Company defines cash demands or demand liabilities as those policyholder obligations that may be
called on immediately at the discretion of the policyholder. More specifically, demand liabilities include cash
surrender values under whole life insurance products as well as current accumulated values of annuity
products. Amounts would be gross of any surrender charge or market value adjustment allowed under the
terms of the contract. Demand liabilities are determined as though all such policyholders made their call at
the same time and as such cannot be readily compared to insurance contract liabilities that are determined
based on actuarial assumptions associated with lapse as well as other decrements.
Empire Life - Annual Report 2015
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 cash equivalents & 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 (Note 12)
Accrued interest on subordinated debt
Derivative liabilities (Note 3d)
Other
Accounts payable and other liabilities
2015
2014
$
$
$
$
233,422 $
265,994
3,136,487
2,459,446
2,869,167
2,514,664
5,829,355 $
5,649,825
586,695 $
548,289
1,099,332
1,125,761
1,686,027 $
1,674,050
2015
$
21,905 $
23,685
767
376
12,412
$
59,145 $
2014
23,574
17,560
767
1,338
14,120
57,359
Of the above total, $23,685 (2014 $17,560) is expected to be settled more than one year after the Consolidated
Statements of Financial Position date. In the absence of an active market for post-employment benefit liabilities,
the actuarially determined value provides a reasonable approximation of fair value. Derivative liabilities are carried
at fair value, as disclosed in Note 3(d). All other amounts are short-term in nature and their fair value
approximates carrying value.
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 Board.
The pension benefit payments are from trustee-administered funds.
Empire Life - Annual Report 2015
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
The Company’s staff pension 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 three times each year. The Audit Committee of the Board 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.
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
2015
2014
2015
2014
$
$
209,311 $
192,948 $
9,684 $
10,531
195,310
185,919
—
—
(14,001) $
(7,029) $
(9,684) $
(10,531)
The post-employment benefit asset (liability), net of the cumulative impact of the asset ceiling, is included in the
Consolidated Statements of Financial Position in Accounts payables and other liabilities (Note 11).
The movement in the present value of the defined benefit obligations over the year is as follows:
As at December 31
Pension benefits
Other post-employment
benefits
2015
2014
2015
2014
Present value of defined benefit obligation - beginning of year
$
192,948 $
177,592 $
10,531 $
10,017
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
6,817
—
8,038
14,855
—
(5,873)
12,992
7,119
1,823
(7,434)
5,965
236
8,317
14,518
(2,354)
20,545
(10,638)
7,553
1,929
(8,644)
29
—
400
429
(2,133)
(177)
1,384
(926)
—
(350)
47
—
468
515
(500)
1,000
(181)
319
—
(320)
Present value of defined benefit obligation - end of year
$
209,311 $
192,948 $
9,684 $
10,531
Empire Life - Annual Report 2015
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
The movement in the fair value of the Plan’s defined benefit assets over the year is as follows:
As at December 31
Pension benefits
2015
2014
Fair value of defined benefit assets - at beginning of year
$
185,919 $
169,292
Interest income
Administrative expense
Increase (decrease) in net income before tax
Remeasurements
7,355
(682)
6,673
8,082
(635)
7,447
Return on plan assets, excluding amounts included in interest income
2,083
12,201
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
Employer contributions
Employee contributions
Benefits paid
—
—
—
—
2,083
6,246
1,823
(7,434)
—
—
—
—
12,201
3,694
1,929
(8,644)
Fair value of defined benefit assets - end of year
$
195,310 $
185,919
The actual return on defined benefit assets net of administrative expense, for the year ended December 31, 2015
was a gain of $8,756 (2014 gain of $19,648).
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 (Note 18(d))
Pension benefits
Other post-employment
benefits
2015
2014
2015
2014
$
$
$
$
6,817 $
5,965 $
29 $
—
8,038
(7,355)
682
236
8,317
(8,082)
635
—
400
—
—
8,182 $
7,071 $
429 $
(2,083) $
(12,201) $
— $
—
(5,873)
12,992
—
(2,354)
20,545
(10,638)
—
(2,133)
(177)
1,384
—
5,036 $
(4,648) $
(926) $
47
—
468
—
—
515
—
(500)
1,000
(181)
—
319
Defined benefit plan expense is recognized in Operating expenses. Remeasurements in the defined benefit plan
are included in OCI. Operating expenses also include $823 (2014 $670) of employer contributions related to the
defined contribution component of the Plan.
Expected contributions (including both employer and employee amounts) to the Company’s defined benefit
pension plans for the year ending December 31, 2016 are approximately $5,112.
Empire Life - Annual Report 2015
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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
2015
2014
$
3,535
6,301
6,988
18,863
7,677
5,876
1,057
5,088
1,399
56,784
56,411
113,195
10,336
15,459
1,167
32,778
59,740
5,512
8,177
8,686
2% $
3%
3%
9%
4%
3%
1%
3%
1%
29%
29%
58%
5%
8%
1%
17%
31%
3%
4%
4%
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%
—%
2%
1%
38%
21%
59%
3%
8%
1%
18%
30%
3%
4%
4%
$
195,310
100% $
185,919
100%
Fair value is determined based on Level 1 inputs for equities and Level 2 inputs for debt.
Empire Life - Annual Report 2015
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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
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
2015
2014
2015
2014
4.2%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.0%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.0%
n/a
n/a
n/a
7.5%
4.5%
2026
3.9%
n/a
n/a
n/a
7.8%
4.5%
2026
2014
21.49
23.96
22.88
25.18
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
2015
21.57
24.02
22.93
25.22
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 Consolidated Statements of Financial Position.
As at December 31, 2015
Discount rate
Rate of compensation increase
Health care cost increase
Claim rate
Life expectancy
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
Increase
Decrease
Increase
Decrease
(24,832)
10,444
n/a
n/a
4,565
33,832
(9,080)
n/a
n/a
(4,690)
(969)
n/a
1,110
894
414
1,171
n/a
(955)
(895)
(407)
Impact on pension benefits
Impact on other post employment
benefits
Increase
Decrease
Increase
Decrease
Change in
assumption
1%
1%
1%
10%
1 year
Change in
assumption
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 2015
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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
2015
2014
14
11
15
14
11
15
Risks
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.
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
As at December 31, 2015
10% Increase
10% Decrease
20% Increase
20% Decrease
8,641 $
410 $
(8,641) $
(410) $
17,281 $
(17,281)
820 $
(820)
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)
$
$
$
$
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
As at December 31, 2015
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
(1,576) $
(75) $
1,731 $
82 $
(2,993) $
(142) $
3,620
172
As at December 31, 2014
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
(1,346) $
(64) $
1,500 $
72 $
(2,538) $
(121) $
3,154
151
$
$
$
$
Changes in bond yields
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.
Empire Life - Annual Report 2015
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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.
13. 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 is 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 is 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 $305,244 as of December 31, 2015 (2014 $305,199), and is within level 2 of
the fair value hierarchy. The fair value is provided by a third party bond pricing service.
14. Insurance Premiums
For the year ended December 31
2015
Gross
Reinsurance
ceded
Net
Gross
2014
Reinsurance
ceded
Life premiums
Health premiums
Total life and health premiums
Annuity premiums
Total insurance premiums
$
$
460,324 $
(85,418) $
374,906 $
450,133 $
(78,702) $
342,489
802,813
144,224
(26,170)
(111,588)
(233)
316,319
691,225
143,991
335,044
785,177
186,375
(25,093)
(103,795)
(264)
947,037 $
(111,821) $
835,216 $
971,552 $
(104,059) $
Net
371,431
309,951
681,382
186,111
867,493
Empire Life - Annual Report 2015
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
15. Fee Income
For the year ended December 31
Investment management, policyholder administration and guarantee fees
Surrender charges and other miscellaneous fees
Fee income
16. Benefits and Expenses
(a) Insurance contract benefits and claims paid
For the year ended December 31
2015
Gross
Reinsurance
ceded
Net
Gross
2014
Reinsurance
ceded
2015
2014
$
$
208,085 $
179,537
8,733
7,979
216,818 $
187,516
Life claims
Health claims
Total life and health claims
Annuity benefits
Benefits and claims paid
$
$
207,352 $
(67,549) $
139,803 $
192,165 $
(63,289) $
257,559
464,911
262,408
(14,528)
(82,077)
(2,911)
243,031
382,834
259,497
244,151
436,316
289,903
(14,399)
(77,688)
(3,193)
727,319 $
(84,988) $
642,331 $
726,219 $
(80,881) $
(b) Change in insurance contract liabilities and reinsurance ceded
For the year ended December 31
2015
Gross
Reinsurance
ceded
Net
Gross
2014
Reinsurance
ceded
Life
Health
Total life and health
Annuity
$
193,091 $
33,569 $
226,660 $
526,875 $
213,350 $
4,340
197,431
(112,210)
4,504
38,073
2,178
8,844
235,504
(110,032)
65,304
592,179
(53,955)
(8,024)
205,326
622
Change in insurance contract liabilities
$
85,221 $
40,251 $
125,472 $
538,224 $
205,948 $
Net
128,876
229,752
358,628
286,710
645,338
Net
740,225
57,280
797,505
(53,333)
744,172
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 of property and equipment and intangibles
Other
Total
2015
$
83,301 $
19,658
11,290
4,369
28,547
2014
85,309
14,914
10,473
4,720
31,553
$
147,165 $
146,969
Significant components of other expenses include travel, advertising, and office supplies and services.
Empire Life - Annual Report 2015
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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
2015
2014
26,731 $
20,805
761
27,492 $
9,496
30,301
$
$
During 2015 the Company paid income tax installments totaling $34,185 (2014 $32,566).
(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
2015
2014
$
129,950 $
34,580
(7,503)
415
$
27,492 $
137,677
36,511
(6,494)
284
30,301
The current enacted corporate tax rates as they impact the Company in 2015 stand at 26.61% (2014
26.52%). Expected future tax rates are as follows:
2016
2017
2018
2019
2020
26.68%
26.65%
26.63%
26.60%
26.57%
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 Statements 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)
2015
2014
(8,485) $
(5,896)
2,847
6,300
(2,676)
(7,910) $
(10,479)
(6,839)
6,011
4,655
(1,591)
(8,243)
$
$
Of the above total, $403 (2014 $4,304) is expected to be received (paid) more than one year after the
Consolidated Statements of Financial Position date.
Empire Life - Annual Report 2015
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 benefit (expense)
Statement of operations
Other comprehensive Income
Deferred income tax asset (liability) - end of year
2015
(8,243) $
(761)
1,094
(7,910) $
2014
2,400
(9,496)
(1,147)
(8,243)
$
$
(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
2015
Tax provision
(recovery)
After tax
Before tax
2014
Tax provision
(recovery)
After tax
$
5,612 $
1,494 $
4,118 $
52,187 $
13,838 $
38,349
(19,128)
(5,206)
(13,922)
(12,621)
(3,646)
(8,975)
Total other comprehensive income (loss)
$
(17,626) $
(4,806) $
(12,820) $
44,239 $
11,450 $
—
—
—
(4,110)
(1,094)
(3,016)
344
4,329
111
1,147
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
Before tax
2015
Tax provision
(recovery)
After tax
Before tax
2014
Tax provision
(recovery)
After tax
$
5,775 $
1,537 $
4,238 $
45,445 $
12,050 $
33,395
(17,762)
(4,783)
(12,979)
(6,047)
(1,755)
(4,292)
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 (Note 12)
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 (Note 12)
Shareholder portion of policyholder other
comprehensive income (loss)
—
—
—
(3,919)
(1,043)
(2,876)
344
4,117
(171)
(52)
(119)
(75)
111
1,091
46
Total other comprehensive income (loss)
$
(16,077) $
(4,341) $
(11,736) $
43,784 $
11,543 $
Empire Life - Annual Report 2015
77
233
3,182
32,789
233
3,026
(121)
32,241
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
The following income tax amounts are included in each component of policyholders’ OCI:
For the year ended December 31
Before tax
2015
Tax provision
(recovery)
After tax
Before tax
2014
Tax provision
(recovery)
After tax
$
(163) $
(43) $
(120) $
6,742 $
1,788 $
4,954
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 (Note 12)
Shareholder portion of policyholder other
comprehensive income (loss) (Note 23)
Total other comprehensive income (loss)
$
(1,549) $
(465) $
(1,084) $
455 $
(1,366)
(423)
(191)
171
(51)
52
(943)
(140)
119
(6,574)
(1,891)
(4,683)
212
75
56
(46)
(93) $
156
121
548
19. Earnings Per Share
Earnings per share (EPS) is calculated by dividing common shareholders' net income by the weighted average
number of common shares outstanding. The preferred share offering announced on January 25, 2016 will not dilute
EPS as the shares are not convertible into common shares.
Details of the calculation of the net income and the weighted average number of shares used in the EPS
computations are as follows:
For the year ended December 31
Basic and diluted EPS
Common shareholders' net income
Weighted average number of common shares outstanding
Basic and diluted EPS
2015
2014
$
$
108,577 $
985,076
110.22 $
98,706
985,076
100.20
20. 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
21. Dividends
2015
$
985 $
2014
985
Common shareholder dividends
Common shareholder dividends paid in 2015 and 2014 were $ nil and $33,984, respectively. This represents a
dividend pay out rate of $ nil per share in 2015 and $34.4985 per share in 2014.
Preferred shareholder dividends
On February 25, 2016 the Board approved a cash dividend of $0.2402 per share on the issued and outstanding Non-
Cumulative Rate Reset Preferred Shares, Series 1 of the Company, such dividend to be payable on the 17th day of April,
2016, to shareholders of record on the 14th day of March, 2016. (see Note 29).
Empire Life - Annual Report 2015
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
22. Shareholders' Equity Entitlement
Shareholders’ entitlement to $4,586 (2014 $5,478) of shareholders’ equity is contingent upon future payment of
dividends to participating policyholders.
23. Supplementary Participating Policyholder Information
As at December 31
Assets backing participating account equity
Assets backing participating account liabilities
2015
2014
$
$
52,837 $
609,423 $
60,040
579,832
Transfers to shareholders’ account
In 2015, the Company transferred $2,057 (2014 $2,016), equal to 7.9% (2014 8.3%) of the distributable
participating profits, from the participating account to the shareholders' account.
24. 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.
Capital and Surplus is made up of assets held in the shareholders’ and participating policyholders’ equity
accounts and other corporate items not allocated to other segments.
Empire Life - Annual Report 2015
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Operating results are segmented into three product lines along with the Company’s capital and surplus as
follows:
Net premiums from external customers
$
143,991 $
325,223 $
366,002 $
— $
For the year ended December 31, 2015
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Interest income
Total investment income
Fair value change in fair value through profit or loss assets
Realized gain (loss) on fair value through profit or loss
assets
Realized gain (loss) on available for sale assets including
impairment write downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of property and equipment and intangibles
Total operating expenses
Net commission expense
Interest expense
Premium tax
Investment and capital tax
Income tax expense (recovery)
Net income (loss) after tax
35,854
43,673
(28,153)
1,276
(30)
205,957
259,497
(110,032)
426
—
1,748
52,604
86,019
—
—
—
18,980
59,220
6,036
3,558
(2,137)
1,223
72
9,265
252,654
(5,238)
—
—
1,039
41,976
32,592
—
7,216
—
2,219
5,785
140,376
171,119
(56,408)
38,415
40,860
1,021
444
1,338
130,180
240,742
—
25,991
1,582
51,586
69,797
—
7,010
4,000
(7,440)
(1,257)
18,642
258
—
—
—
—
—
999
—
8,959
—
—
13,733
38,710
38,114
1,620
42,233
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 property and equipment and intangibles
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
Empire Life - Annual Report 2015
80
Total
835,216
220,681
259,210
(85,677)
19,128
216,818
642,331
125,472
426
25,991
4,369
147,165
188,408
8,959
14,226
4,000
27,492
102,458
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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, 2015
959,181 $
162,597 $
4,301,805 $
1,572,138 $
6,995,721
7,347,426
—
20,397
—
7,367,823
8,306,607 $
162,597 $
4,322,202 $
1,572,138 $
14,363,544
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
As at December 31, 2014
1,062,818 $
160,465 $
4,157,667 $
1,399,116 $
6,780,066
6,926,322
—
22,153
—
6,948,475
7,989,140 $
160,465 $
4,179,820 $
1,399,116 $
13,728,541
$
$
$
$
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.
25. 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 2015 were $3,079 (2014 $3,026). The future aggregate minimum
lease payments under non-cancellable operating leases are as follows:
2015
2016
2017
2018
2019
2020 (and thereafter)
2015
—
2,662
2,098
1,840
1,777
761
2014
2,466
2,159
1,914
1,656
1,593
679
$
9,138 $
10,467
Investment commitments
In the normal course of business, investment commitments are outstanding which are not reflected in the
Consolidated Financial Statements. At December 31, 2015 there were $ nil (2014 $8,942) of outstanding cash
calls to purchase units in a real estate limited partnership. On July 9, 2015, the 2014 commitment was settled with
the purchase of additional units for $8,942.
In January 2016 the Company made a further $20 million commitment to purchase units in a real estate limited
partnership. Draws on this commitment are payable on demand up to and including July 31, 2018.
Empire Life - Annual Report 2015
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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.
26. Related Party Transactions
The Company is a 98.3% owned subsidiary of E-L Financial Services Limited (ELFS) which in turn is a 100.0%
owned subsidiary of E-L Financial Corporation Limited (E-L). E-L owns, directly and indirectly through ELFS,
99.2% of the common shares of Empire Life. 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 E-L and other companies under common control or common
influence involving the leasing of office property, investment management services and miscellaneous office
services. The amounts earned and expensed were not significant. Some directors and officers have insurance and
investment policies underwritten by the Company.
Compensation of key management personnel
Key management personnel are comprised of directors and executive officers of the Company. The remuneration
of key management personnel is as follows:
For the year ended December 31
Salaries and other short-term employee benefits
Post-employment benefits
Total
2015
6,314 $
616
6,930 $
2014
6,829
530
7,359
$
$
Post-employment benefits are comprised of employer current service costs for pension and other post-
employment benefits.
Empire Life - Annual Report 2015
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
27. 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, 2015 and
December 31, 2014 the Company was in compliance with these ratios.
As at December 31
Tier 1 Regulatory Capital
Tier 2 Regulatory Capital
Total Regulatory Capital
28. Risk Management
2015
2014
$
$
917,617 $
504,430
872,275
452,203
1,422,047 $
1,324,478
The Company is exposed to 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 following sections
describe the principal risks and associated risk management strategies for the risks that management considers to
be most significant in terms of likelihood and the potential adverse impact on the Company: market, liquidity,
credit and insurance.
Caution related to sensitivities
In the sections that follow, the Company provides sensitivities and risk exposure measures for certain risks. These
include sensitivities due to specific changes in market prices and interest rates, based on the market prices,
interest rates, assets, liabilities and business mix in place as at the calculation dates. The sensitivities are
calculated independently for each risk factor, assuming that all other risk variables remain constant. Actual results
can differ materially from these estimates for a variety of reasons, including the interaction among these factors
when more than one factor changes; changes in actuarial and investment return and future investment activity
assumptions; actual experience differing from the assumptions; changes in business mix, effective tax rates and
other market factors; and the general limitations of the Company’s internal models used for purposes of these
calculations. Changes due to new sales or maturities, asset purchases/sales, or other management actions could
also result in material changes to these reported sensitivities. For these reasons, the sensitivities should only be
viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions
outlined, and should not be viewed as predictors for the Company’s future Net income, OCI, and capital
sensitivities. Changes in risk variables in excess of the ranges illustrated may result in other than proportionate
impacts.
(a) 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 equities, real estate and other securities, credit spreads and foreign 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. Under the Canadian insurance accounting and regulatory regime the
Company’s results for any period reflect equity market values and interest rates at the end of the period
through mark-to-market accounting. Consequently, a decline in public equity market values or changes in
interest rates or spreads could result in material changes to net income attributed to shareholders, increases
to regulatory capital requirements and reduction in the Company’s capital ratios.
Empire Life - Annual Report 2015
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 Chief Investment Officer, the Asset Management Committee, and the Investment Committee
of the Board. The Investment Committee actively monitors the portfolio size and asset mix.
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, 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 Management Committee, which meets regularly and reports at least quarterly to the
Investment Committee of the Board. The mandate of the Asset Management Committee includes monitoring of
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
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 established a Capital Management Policy, capital management levels that exceed
regulatory minimums and Dynamic Capital Adequacy Testing (DCAT) 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 on the Company’s MCCSR.
For the Company, the most significant market risks are equity risk, interest rate risk and foreign exchange rate
risk.
(1) Equity risk
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, and the management fees collected on segregated fund contracts, mutual funds
Empire Life - Annual Report 2015
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
and on index funds within universal life contracts and insurance policy liabilities and capital
requirements, particularly in respect of segregated fund guarantees.
The risk of fluctuation of the market value of the Company’s segregated funds and mutual funds is
generally assumed by the policyholders and unit holders, respectively. 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, economic hedging program.
The objective of the economic hedging program is to partially protect the Company from possible
future MCCSR ratio declines that might result from adverse stock market price changes. The program
presently employs put options and futures on key equity indices. 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 to all counterparties limited to $100 million.
The Company has an Equity Risk Hedging Policy to support general fund economic hedging programs.
The policy outlines objectives, risk limits and authorities associated with its economic hedging activities.
Management monitors its economic hedging activities on a regular basis and reports, at least quarterly, to
the Risk and Capital Committee of the Board on the status of the economic 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 Asset Management
Committee reports quarterly to the Risk and Capital 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 following table summarizes the estimated 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. The amounts in the following table include the effect of
Empire Life’s general fund equity risk economic hedging program (described above). For segregated
fund guarantees the level of sensitivity is highly dependent on the level of the stock market at the time
of performing the estimate. If period end equity markets are high relative to market levels at the time
that segregated fund policies were issued, the sensitivity is reduced. If period end equity markets are
low relative to market levels at the time that segregated fund policies were issued, the sensitivity is
increased. The amounts shown below for segregated fund guarantees represent the impact on
shareholders’ net income.
Empire Life - Annual Report 2015
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
As at December 31, 2015
10% Increase
10% Decrease
20% Increase
20% Decrease
Shareholders' net income (excludes segregated fund guarantees)*
$
11,804 $
(6,789) $
27,044 $
(8,958)
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$ nil $ nil $ nil $ nil
$
$
2,141 $
2,392 $
(2,141) $
(2,392) $
4,282 $
4,784 $
(4,282)
(4,784)
Shareholders' net income (due to segregated fund guarantees)
$ nil $ nil $ nil $
(10,031)
As at December 31, 2014
10% Increase
10% Decrease
20% Increase
20% Decrease
Shareholders' net income (excludes segregated fund guarantees)*
$
14,387 $
(13,149) $
29,310 $
(24,198)
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$ nil $ nil $ nil $ nil
$
$
2,088 $
2,425 $
(2,088) $
(2,425) $
4,176 $
4,850 $
(4,176)
(4,850)
Shareholders' net income (due to segregated fund guarantees)
$ nil $ nil $ nil $ nil
*Includes the estimated impact on fee income net of trailer commissions after tax for a three month
period
For the life insurance business, the Company’s policy is to 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 8.9% (2014 9.2%). The Company uses an assumption of 7.8%
(2014 7.5%) 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 is described above. 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
$116,500 (2014 $91,900).
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
2015
2014
$
$
286,544
$
279,662
4.2%
4.2%
60,396
$
47,512
0.9%
0.7%
(2) Interest rate risk
Interest rate risk arises when economic losses are incurred 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
Empire Life - Annual Report 2015
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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.
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 estimated immediate financial impact on Net income and OCI as
a result of an immediate change in interest rates.
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 2015
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
8,640 $
516 $
(29,672) $
(1,368) $
(9,700) $
(565) $
34,385 $
1,452 $
16,349 $
987 $
(54,631) $
(2,652) $
(20,608)
(1,186)
73,483
2,987
As at December 31 2014
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
7,977 $
520 $
(20,706) $
(1,176) $
(8,958) $
(572) $
23,510 $
1,245 $
15,090 $
993 $
(38,603) $
(2,280) $
(19,035)
(1,202)
49,818
2,559
$
$
$
$
$
$
$
$
The computation of policy liabilities takes into account projected investment income net of investment
expenses from the assets supporting policy liabilities, and investment income expected to be earned
on reinvestments. The assets supporting the policy liabilities are segmented from the assets backing
shareholders’ and policyholders’ equity. For life and health insurance, the projected cash flows from
the 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
Empire Life - Annual Report 2015
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
extend the duration of its assets. Under 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.
The estimated impact of an immediate change in interest rates is described above. If interest rates
increase or decrease during the next year, then a change to the IRR assumption would be required to
take into account the then-current economic outlook. For non-participating insurance business, a 1%
decrease in interest rates would cause a decrease in reinvestment assumption for the next 40-years,
resulting in an increase to policy liabilities thereby reducing net income by approximately $56,200
(2014 $57,000) . 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 Canadian actuarial standards of practice, 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%. The prescribed level of the URR
assumption may be periodically changed by the actuarial standards setting body. As interest rates are
currently lower than they were when the current URR assumptions were set, there may be a downward
bias if the rates were to be updated.
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% (2014 4.0%) to adjust for credible adverse scenarios.
For annuity business, where the timing and amount of the benefit obligations can be more readily
determined, the matching of the asset and liability cash flows is tightly controlled. A sudden increase
or decrease in interest rates would have a negligible effect on future profits from annuity business
currently in force. 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.
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 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 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 exchange rate risk
Foreign exchange rate risk arises when the fair value of cash flows of a financial instrument fluctuate
due to changes in exchange rates. This can create an adverse effect on earnings and equity when
measured in the Company’s functional currency.
The Company’s primary foreign currency exposure arises from portfolio investments denominated in
US dollars. A 10% fluctuation in the US dollar would have an impact of approximately $ nil (2014 $ nil)
on Net income, $ nil (2014 $ nil) on shareholders’ OCI and $ nil (2014 $ 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
Empire Life - Annual Report 2015
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 to all counterparties 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 rate exposure. Oversight and management of this
policy falls under the responsibility of the Asset Management Committee, which reports exposures
and any breaches to the Investment Committee of the Board.
(b) Liquidity risk
Liquidity risk is the risk that an entity will not be able to fund all cash outflow commitments or obligations
as they fall due or that, in order to fund commitments, an entity may have to sell assets at depressed
prices resulting in losses at time of sale. Cash outflows could be in the form of benefit payments to
policyholders, expenses, asset purchases and interest on debt. 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 13 - 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. 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 Asset
Management 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).
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 2015 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.
Empire Life - Annual Report 2015
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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, 2015
$
90,776 $
191,264 $
473,493 $
17,495,346 $
18,250,879
2,263
8,610
168,734
270,383
2,662
6,061
24,210
6,050
227,585
6,476
3,468
311,238
23,174
811,373
—
3,373
—
—
15,165
344,058
197,958
17,498,719
18,808,060
—
9,138
$
273,045 $
234,061 $
811,373 $
17,498,719 $
18,817,198
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
The Asset Management 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, 2015, 3.4% (2014 4.0%) of cash and investments were held in these shorter duration
investments.
(c) Credit risk
Credit risk is the possibility of loss from amounts either owed by financial counterparties, such as debtors,
reinsurers and other financial institutions, or in connection with issuers of securities held in an asset
portfolio. 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 and Risk and Capital Committee of 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
Empire Life - Annual Report 2015
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 in the interest rate
assumption.
The Company has the following assets that are exposed to credit risk:
As at December 31
Cash and cash equivalents
Short-term investments
Bonds
Preferred shares
Derivative assets
Mortgages
Reinsurance
Loans on policies
Policy contract loans
Accrued investment income
Insurance receivables
Trade accounts receivable
Total
2015
2014
$
199,770 $
33,652
239,102
26,892
5,193,439
4,958,086
194,680
14,649
289,221
94,922
46,925
84,921
26,023
47,909
20,803
196,179
3,375
323,117
99,707
46,434
86,698
25,048
41,743
13,294
$
6,246,914 $
6,059,675
Mortgages, Loans on policies and Policy contract loans are fully or partially secured.
The Company has made provision in its Consolidated Statements 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 (and lower ratings)
Total
2015
2014
Fair value % of Fair value
Fair value % of Fair value
$
308,435
524,546
3,628,158
731,738
562
6% $
269,223
10%
70%
14%
—%
1,395,341
2,578,045
714,717
760
5%
28%
53%
14%
—%
$
5,193,439
100% $
4,958,086
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 comparable
investments rated by recognized rating agencies and/or methodologies used by recognized rating
agencies.
Empire Life - Annual Report 2015
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
Provincial bonds represent the largest concentration in the bond portfolio, as follows:
As at December 31
Provincial bond holdings
Percentage of total bond holdings
2015
2014
$
2,845,599
$
2,630,620
55.0%
53.0%
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
2015
2014
Fair value % of Fair value
Fair value % of Fair value
$
66,769
560,124
571,599
3,994,947
1% $
11%
11%
77%
106,297
671,657
489,124
3,691,008
$
5,193,439
100% $
4,958,086
2%
14%
10%
74%
100%
The following table discloses the Company's holdings of fixed income securities in the 10 issuers
(excluding the federal government) to which the Company had the greatest exposure, as well as
exposure to the largest single issuer of corporate bonds.
As at December 31
2015
2014
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.
$
$
3,480,719
$
3,242,685
50.8%
48.6%
151,859
$
131,066
2.2%
2.0%
(2) Preferred shares
The Company’s preferred share investments are all issued by Canadian companies, with 4%
(2014 10%) of these investments rated as P1 and the remaining 96% (2014 90%) rated as P2.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $288,622 or 99%
(2014 $320,262 or 99%) of the total mortgage portfolio.
Empire Life - Annual Report 2015
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(d) 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)
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
For the year ended December 31
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Net premium income
Fee and other income
Total
$
$
144 $
186 $
325 $
319 $
366 $
362 $
206
178
9
9
2
1
350 $
364 $
334 $
328 $
368 $
363 $
— $
—
— $
— $
835 $
—
217
867
188
— $
1,052 $
1,055
Insurance risk is the risk that actual experience related to claims, benefit payments, expenses, cost of
embedded product options and cost of guarantees associated with insurance risks, does not emerge as
expected. The Company is exposed to various insurance risks as a result of the business it writes,
including: mortality, policyholder behaviour (termination or lapse), expenses, morbidity, longevity, product
design and pricing risk, underwriting and claims risk and reinsurance risk.
The Company regularly evaluates its exposure to foreseeable risks through stress testing techniques
including DCAT analysis.
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, longevity,
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
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.
Policy liability assumptions are reviewed and updated at least annually by the Company’s Appointed
Actuary. The impact of changes in those assumptions is reflected in earnings in the year of the change.
Details related to the changes in assumptions are also discussed with the Audit Committee of the Board.
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,
2015. 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.
Empire Life - Annual Report 2015
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
(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 $11,900 (2014
$11,800).
For annuity business, lower mortality (or longevity) is financially adverse so a 2% decrease in the best
estimate mortality assumption would increase policy liabilities thereby decreasing Net income by
approximately $4,500 (2014 $4,100).
(2) Policyholder behaviour (termination or 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
$113,500 (2014 $113,100). 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.
(3) 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 $5,500 (2014 $5,800).
(4) 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 2015
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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 $6,300 (2014 $6,500).
(5) 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 DCAT and reports annually to the
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 Risk and Capital Committee of the Board, 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.
(6) Underwriting and claims risk
The Company is subject to the risk of financial loss resulting from the selection and underwriting of
risks to be insured and from the adjudication and settlement of claims. Many of the Company’s
individual insurance and group disability products provide benefits over the policyholder’s lifetime.
Actual claims experience may differ from the mortality and morbidity assumptions used to calculate
the related premiums. Catastrophic events such as earthquakes, acts of terrorism or an influenza
pandemic in Canada could result in adverse claims experience.
In addition to the risk management controls described above under Product Design and Pricing Risk,
the Company also manages underwriting and claims risk through its Underwriting and Liability Risk
Management Policy for each of its major product lines. This policy is established by management and
approved by the Risk and Capital Committee of the Board. 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
Empire Life - Annual Report 2015
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts and where otherwise stated and shares authorized and outstanding)
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.
(7) 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.
Management reports annually to the Risk and Capital Committee of the Board on reinsurance
activities. 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.
29. Subsequent Event - Preferred Share Offering
On January 28, 2016 the Company announced a $130 million Canadian public offering of Non-Cumulative Rate Reset
Preferred Shares. The offering closed on February 16, 2016. Empire Life has granted the underwriters an option to
purchase up to $19.5 million of additional preferred shares exercisable at any time up to a period of 30 days from the
date of closing.
Holders of the preferred shares will be entitled to receive fixed non-cumulative quarterly dividends yielding 5.75%
annually, as and when declared by the Board of Directors of Empire Life, for the initial period ending on and
including April 17, 2021. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year
Government of Canada bond yield plus 4.99%.
Empire Life - Annual Report 2015
96
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) Finance 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.
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.
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.
Earnings on Surplus
This source of earnings represents the pre-tax earnings on the shareholders’ capital and surplus funds.
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.
Expected Profit from In-Force Business
This source of earnings represents the profit Empire Life expects to generate on in-force business if experience is in line
with the Empire Life’s best estimate assumptions for mortality, morbidity, persistency, investment returns, expenses and
taxes.
Empire Life - Annual Report 2015
97
GLOSSARY OF TERMS (unaudited)
Experience Gains and Losses
This source of earnings represents gains or losses due to the difference between actual experience and the best estimate
assumptions.
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.
Impact on New Business
Writing new business typically adds economic value to a life insurance company. At 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.
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) for publicly accountable enterprises.
Management Actions and Changes in Assumptions
This source of earnings 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.
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.
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.
Return on Shareholders' Equity (ROE)
A profitability measure that presents the net income available to common shareholders as a percentage of the average
capital deployed to earn the income.
Empire Life - Annual Report 2015
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PARTICIPATING ACCOUNT MANAGEMENT POLICY
Purpose
The Participating Account Management Policy sets out the management objectives for oversight of the 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
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.
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PARTICIPATING ACCOUNT MANAGEMENT POLICY
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.
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100
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.
Policy 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 the
participating account is financing new business, changes in legislation, regulation of the participating account, taxation,
accounting rules or fundamental changes in the circumstances of the Company.
Principal Sources of Income
The principal sources of income considered for determining the aggregate amount of dividends are investment income,
asset defaults, mortality, lapses, expenses and taxes. The actual experience of the participating account will be reviewed
annually by Company management. The sources of income may be adjusted to smooth fluctuations in experience and
provide for transitions during periods of major change over a period not to exceed five years.
The Company uses a temporary contribution to policyholder surplus philosophy, so that contributions to policyholder
surplus from participating account income are expected to be returned to policyholders over the lifetime of the policy.
Since actual experience cannot be known in advance, the aggregate amount of dividends and allocation of the dividends
cannot be guaranteed. As a result, dividends will increase or decrease depending on actual experience.
Dividend Allocation
Policyholders participate in this distribution through the setting of dividend scales, which allocate the aggregate amount of
dividends among different dividend classes. The Company establishes dividend classes for participating policyholders
based on the original pricing assumptions used when setting the guaranteed values provided by the policies. The
Company uses a combination of factor-based and pricing methods when setting the dividend scale to allocate the
aggregate amount of dividends among different dividend classes. The basic concept of this method is to allocate the
aggregate amounts of dividends among dividend classes in the same proportion as the policies are considered to have
contributed to the aggregate amount of dividends over the long term. The fundamental objective in the allocation of
dividends is the maintenance of reasonable equity between dividend classes and between generations of policyholders,
taking into account practical considerations and limits.
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.
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PARTICIPATING POLICYHOLDER DIVIDENDS AND BONUS POLICY
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 2015
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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 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, led by
the Chief Risk Officer, that supports enterprise risk management activities across the Company. An internal audit function
is responsible for assessing the adequacy and adherence to the systems of internal control. The results of internal audit’s
reviews are reported to management and to the Audit Committee of the Board of Directors regularly throughout the year.
Management is supervised in the completion of these responsibilities by the Board of Directors and its Committees.
Senior management of the Company reports regularly to the Board on its risk management policies and procedures.
The Board of Directors has plenary power. The Board’s responsibility is to oversee the conduct of the business and affairs
of the Company including oversight and monitoring of the Company’s risk management. The Board discharges these
responsibilities directly and through delegation to Board Committees and management. The Board met nine times in 2015
and is scheduled to meet at least six times in 2016.
The risk management functions overseen by the Board include those relating to market risk (including interest rate risk,
equity risk, real estate risk and foreign exchange rate risk), liquidity risk, credit risk, insurance risk (including mortality risk,
policyholder behavior (termination or lapse) risk, expense risk, morbidity risk as well as product design and pricing risk,
underwriting and claims risk and reinsurance risk), operational risk (including legal and regulatory risk, model risk, human
resources risk, third party risk and technology, information security and business continuity risk) and business 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.
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 the Company’s asset/liability management activities.
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 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 the approved risk appetite framework.
Empire Life - Annual Report 2015
103
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
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
Empire Life - Annual Report 2015
104
BOARD OF DIRECTORS
SHAREHOLDERS' DIRECTORS
POLICYHOLDERS' DIRECTORS
HONORARY CHAIRMAN
John F. Brierley 1, 5
Corporate Director
Edward M. Iacobucci 1, 4
Dean, Faculty of Law
University of Toronto
Duncan N.R. Jackman 2, 3, 5
Chairman of the Board
Mark J. Fuller 2, 3, 4
The Honourable Henry N.R. Jackman
President and Chief Executive Officer
Honorary Chairman
Ontario Pension Board
The Empire Life Insurance Company
Harold W. Hillier 2, 4
Corporate Director
Richard E. Rooney 2, 3
President
HONORARY DIRECTOR
The Right Honourable John N. Turner
The Empire Life Insurance Company
Burgundy Asset Management Ltd.
Clive P. Rowe 2, 5
Partner
Oskie Capital
Stephen J.R. Smith 2, 3
Chairman and President
First National Financial LP
Mark M. Taylor 1, 2
Corporate Director
Jacques Tremblay 3, 5
Partner
Oliver Wyman Actuarial Consulting
Jonathan J. Yates 5
Corporate Director
Mark Sylvia 5
President and Chief Executive Officer
The Empire Life Insurance Company
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
Empire Life - Annual Report 2015
105
CORPORATE MANAGEMENT
Mark Sylvia
President and Chief Executive Officer
Richard Cleaver
Senior Vice-President and Chief Technology Officer
J. Edward Gibson
Senior Vice-President and Chief Actuary
Sean E. Kilburn
Senior Vice-President, Retail
Gary J. McCabe
Senior Vice-President and Chief Financial Officer
Gaelen Morphet
Senior Vice-President and Chief Investment Officer
Natalie A. Ochrym
General Counsel and Senior Vice-President, Human Resources and Communications
Steve S. Pong
Senior Vice-President, Group Solutions
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EMPIRE LIFE ANNUAL REPORT 2015
The Empire Life Insurance Company (Empire Life) is a proud Canadian company
that has been in business since 1923. We offer individual and group life and
health insurance, investment and retirement products, including mutual funds
through our wholly-owned subsidiary Empire Life Investments Inc.
Empire Life is among the top 10 life insurance companies in Canada1 and is rated
A (Excellent) by A.M. Best Company2. Our mission is to make it simple, fast and
easy for Canadians to build wealth, generate income, and get the insurance and
group benefits coverage they need.
Follow Empire Life on Twitter @EmpireLife or visit our website,
www.empire.ca for more information.
1 The Globe and Mail Report on Business, June 2015, based on revenue
2 As at May 19, 2015
Reporting Procedure for Accounting and Auditing Matters
If you have a complaint regarding accounting, internal controls or auditing matters
or a concern regarding questionable accounting or auditing matters, you should
submit your written complaint or concern to:
Mr. John Brierley
The Empire Life Insurance Company
259 King Street East
Kingston, ON, K7L 3A8
Email: jfbrierley@sympatico.ca
Phone: 905-338-7290
You may submit your complaint or concern anonymously. Your submission will be kept
confidential and will be treated in accordance with the company’s policy for reporting
accounting and auditing matters.
® Registered trademark of The Empire Life Insurance Company.
™ Trademark of The Empire Life Insurance Company.
Policies are issued by The Empire Life Insurance Company.
Insurance & Investments – Simple. Fast. Easy.™
www.empire.ca info@empire.ca
A-0004-EN-03/16