The Empire Life Insurance Company
Annual Report 2016
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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
Glossary of Terms
Participating Account Management Policy
Participating Policyholder Dividends and Bonus Policy
Corporate Governance Over Risk Management
Corporate Information
Empire Life - Annual Report 2016
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82
82
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86
100
102
104
106
107
2016 FINANCIAL HIGHLIGHTS
248%
MCCSR ratio
as at December 31, 2016
Product
diversification
Strength of our capital base
Product diversification
Our Minimum Continuing Capital and
Surplus Requirements (MCCSR) ratio is well
above the minimum requirements set by
the industry regulator. A high MCCSR ratio
demonstrates our long-term ability to pay
claims and our prudent capital management.
What is an MCCSR ratio?
An MCCSR ratio of 100% means that a
company has adequate capital to meet
obligations to its policyholders. The Office
of the Superintendent of Financial Institutions
of Canada (OSFI) requires life insurance
companies to maintain an MCCSR ratio
of at least 120% and expects them to have
a target ratio of at least 150%.
Financial ratings
These financial ratings give you an
independent opinion of our financial
strength as an insurer and our ability
to meet policyholder obligations.
by premium and fee income for the
12 months ended December 31, 2016
Empire Life is well-diversified across
three product lines:
Wealth Management
36%
Employee Benefits
31%
Individual Insurance
33%
A (Excellent)
A.M. Best Company (as at May 27, 2016)
Financial Strength Rating: A
Issuer Rating: A
Subordinated Debt Rating: A (low)
DBRS (as at May 27, 2016)
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 2016 Annual Report.
Empire Life - Annual Report 2016
4
Common Shareholders’
Net Income
2016 (in millions)
$152.7
Common Shareholders’
Net Income
2015 (in millions): $108.6
Net Premium and Fee Income
2016 (in millions)
$1,110
Net Premium and Fee Income
2015 (in millions): $1,052
Total Assets Under Management
2016 (in millions)
$16,051
Total Assets Under Management
2015 (in millions): $14,535
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
The Board of Directors is very pleased with the Company’s 2016 results and particularly with how its management
team is successfully developing the Company’s capacity to finance its growth. In 2016, the Company raised $350
million through a preferred share offering in the first quarter, and a subordinated debt issue in late December. This is a
sign of maturity and agility that further strengthens the ability of Empire Life to compete and succeed in the Canadian
marketplace.
On March 29, 2016, I had the pleasure of opening the Toronto Stock Exchange with Empire Life President and Chief
Executive Officer, Mark Sylvia and colleagues from both E-L Financial and Empire Life. This event recognized the
listing of Empire Life preferred shares on the Exchange. That morning, before we rang the opening siren, I remarked
that my father, Henry (Hal), had also opened the TSX when E-L Financial was listed in 1968 and how proud I was that
our family has been invested in Empire Life for such a long history.
That history continues and over the past year Empire Life has achieved important milestones and growth. Throughout
this report, you will find evidence of its strong performance over the past year and how it is successfully preparing for
the future.
I am grateful for the contributions of our Board members over the past year and thank them for their dedication and
commitment to the Company. This past year, Richard Rooney and Jonathan Yates did not stand for re-election and I
wish to thank them both for their work on the Board. Douglas Townsend retired earlier this year and did not stand for
re-election in 2016. I commend Mr. Townsend on a long, accomplished career and thank him for his many years of
dedicated service to both Empire Life and its Board of Directors.
Once again, it is the people of Empire Life, including our shareholders and policyholders, who make this Company
successful. On behalf of the Board of Directors, I sincerely thank all of them for their support, commitment, hard work
and dedication.
Duncan N. R. Jackman
Chairman of the Board
February 24, 2017
Empire Life - Annual Report 2016
5
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each year when I write this message, I reflect on the economic environment and how it has impacted our customers
and our business. In our 2014 annual report, I noted that despite an uncertain world economy, the Toronto Stock
Exchange (TSX) index had increased by 7.4%. Last year at this time, I characterized 2015 as a down year, since
equity markets and oil prices had declined and long-term interest rates remained low.
I think most people will agree that 2014 and 2015 were both relatively uneventful compared to 2016. We saw the TSX
decline dramatically early in the year, only to finish strong after a series of unexpected international political events
that were expected to negatively impact stock markets. We also saw long-term interest rates rise and return to 2015
levels.
Very few people could have predicted the events of the past year. It will be interesting to look back on 2017 at this
time next year and see how much of what we experience was expected. I suspect we will continue to be surprised by
political and economic events. Uncertainty has become our new normal. We do not believe we can plan for every
possible scenario, so rather than speculate on what the future holds, Empire Life stays focused on offering solid
products, running an efficient business and investing in high quality assets that have value and persevere through
turbulent times.
Empire Life was founded almost 100 years ago in Toronto, but soon after moved its head office to Kingston, Ontario,
the base from which we have grown into the sixth largest life insurance company in Canada, based on assets. We
only do business in Canada, and that gives us a unique perspective and understanding of our customers - middle
income families and small business owners and their employees.
We believe our country’s future is bright. We have a strong resource base that has allowed us to build a national
infrastructure that includes a strong education system. This focus on education is helping Canada to make the
transition to a technology-based economy. We are beginning to see innovation centres develop across the country.
This emerging trend will provide opportunities to the next generation of Canadians.
Last year, I mentioned how important technology has become to our business. It provides a service platform that
supports the advice our customers receive from the more than 20,000 qualified financial advisors who recommend
Empire Life to their clients. All the life insurance, employee benefits and investment products and services we are
developing use technology to enhance the customer experience and power our delivery system. Our customers
expect product purchases and claims payments to be simple, fast, and easy and we are committed to delivering on
this mantra.
Our approach to managing our business has been to concentrate on doing the fundamental things to provide great
value in our products and good service to our customers. I can say with certainty that our focus on value in our
investment portfolio and careful management style will serve us and our customers well as we continue to embrace
the emerging technology age.
Our 2016 financial results
We achieved overall shareholders’ net income of $152.7 million in 2016, up from $108.6 million in 2015. Improved
stock market conditions, good operating results and our capital and asset and liability management strategies helped
us achieve this record result.
Insurance sales were buoyed by the introduction of new income tax rules affecting life insurance policies that came
into effect January 1, 2017. Many customers purchased insurance protection to take advantage of their last chance to
buy a policy under the old rules. Net income for Individual Insurance in 2016 was $83 million, an increase from a loss
of $2 million the previous year. We have been reducing the risk in our insurance portfolio by focusing on developing
simple products that are easy to purchase and understand. These products are also less capital intensive and provide
good value to our customers.
Empire Life - Annual Report 2016
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MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Despite the headwinds that faced equity markets at the beginning of the year, the TSX Composite Index finished the
year strong, delivering an impressive 17.5% return. Strong equity markets and growth in segregated fund guarantee
fees, management fees, and lower expenses contributed to a net income of $62 million in our Wealth Management
line of business for 2016 compared to $59 million in 2015. We continue to manage our investment portfolio carefully to
mitigate the impact of the continued low interest rate environment on our long-term returns.
The Employee Benefits market remains very competitive. Despite this challenge, our net income was $10.0 million for
2016, an increase from $6 million the previous year. Profit margins increased as the result of a series of profit
recovery measures that improved our health insurance product results. In 2016 we entered into a small number of
new partnerships with specialty providers and third party administrators in order to expand our distributor opportunities
in the small business market.
Risk and capital management
The cornerstone of our capital management strategy is maintaining a strong capital base. Empire Life went to market
to raise capital twice in 2016, issuing $149.5 million of preferred shares in January and completing a $200 million
subordinated debt issue in December. Increasing our access to capital markets was one of our priorities. We were
very pleased to sound the opening bell for the Toronto Stock Exchange (TSX) on March 31, 2016 to signal that we
had become a reporting issuer.
Empire Life’s Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio was 248% as at December 31,
2016, up from 201% the previous year-end. This strong capital base will ensure we can weather changes in our
economic environment.
Capital management is just one element of managing risk. We are continuing to evolve our enterprise risk
management framework to ensure we identify, measure and manage risks that could impact our business.
Timeless value
In our fast changing world one thing has not changed-the importance of value. Our customers want competitive prices
and expect us to prudently manage their investments and the investments that back our insurance products.
As value investors, we have been following the same disciplined investment philosophy for more than 50 years. It has
served us and our customers well. Our investment management team pays attention to detail and focuses on
investing in the debt and equity of companies that will increase in value over time.
As at December 31, 2016, Empire Life had $16.1 billion dollars in assets under management in segregated funds,
mutual funds, participating insurance policies and general assets. We are aware of the immense responsibility and
trust Canadians have placed in us. We understand that we aren’t just managing money or providing insurance. We
are helping families to buy their first home, look after medical expenses, ensure their loved ones are cared for, and
help them plan for their retirement years. That is the purpose behind what we do and we take that responsibility and
trust very seriously.
We believe we have a clear advantage over our competitors, and that is the personal touch and caring of our
employees. I’d like to thank all members of the Empire Life team for another successful year, our management group
for their vision and leadership, and our Board of Directors for their continued support and guidance.
Mark Sylvia
President and Chief Executive Officer
February 24, 2017
Empire Life - Annual Report 2016
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)
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Expected profit on in-force business
$ 99.9 $ 94.9 $ 20.0 $ 21.1 $ 39.6 $ 43.8
(6.5)
(17.0)
8.5
6.2
(7.7)
(5.2)
(9.9)
(3.4)
(1.0)
29.3
(6.9)
(12.4)
$ 159.5 $ 159.7
(15.2)
(33.8)
32.6
(9.6)
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
(19.9)
(5.8)
—
82.1
—
—
78.3
—
7.0
—
14.1
—
0.2
—
8.0
—
53.2
(19.3)
40.3
(24.9)
—
121.1
—
—
5.2
—
—
—
— 217.2
(2.7)
50.2
(2.7)
—
91.4
50.2
$ 82.1 $ 78.3 $ 14.1 $
8.0 $ 121.1 $
5.2 $
(2.7) $ 50.2 $ 214.5 $ 141.6
20.0
19.0
4.1
2.2
30.9
(1.6)
(1.1)
13.4
54.0
33.0
Shareholders’ net income
$ 62.1 $ 59.3 $ 10.0 $
5.8 $ 90.2 $
6.8 $
(1.6) $ 36.8 $ 160.6 $ 108.6
Empire Life - Annual Report 2016
8
SOURCES OF EARNINGS
Wealth Management
Wealth Management’s 2016 earnings on operations were higher than the level achieved in 2015. In 2016 there were
higher earnings from lower new business strain primarily due to lower segregated fund product sales in 2016 relative
to 2015 and lower expenses.
In 2016 there was an increase in expected profit on in-force business primarily due to the segregated fund business.
This was due to growth in segregated fund guarantee fees and management fees and lower expenses.
In addition, there were higher experience gains in 2016 compared to 2015 levels primarily due to improved investment
experience resulting from market interest rate movements and improved availability of assets at attractive yields for
matching fixed interest annuity contract liabilities.
These items were partly offset by higher 2016 losses resulting from management actions and changes in assumptions
compared to 2015 levels. In 2016 the losses primarily related to investment return assumptions and refinements to
the modelling of preferred share investment cash flows for deferred and immediate annuity business. In 2015 the
losses primarily related to investment return assumptions.
Employee Benefits
Employee Benefit’s earnings on operations were higher than the level achieved in 2015. In 2016 there was an
increase in earnings from the update of policy liability assumptions which primarily related to group long-term disability
products.
Individual Insurance
The increase in Individual Insurance earnings on operations was primarily due to management actions and changes
in assumptions. Management actions to improve asset/liability matching resulted in increased profit for 2016. The
improved matching position resulted in a gain from updating insurance contract liabilities. Empire Life increased its
investment in real estate limited partnership units during 2016. This investment is used to match long term insurance
contract liabilities. In addition Empire Life made changes to its bond investments throughout 2016 to tighten matching
of investments with insurance contract liabilities.
Assumption updates in 2016 resulted in gains for Individual Insurance compared to losses in 2015. In 2016 gains from
assumption updates primarily related to refinements to the modelling of reinsurance treaties and improved mortality
assumptions. These were partly offset by losses from the assumption updates related to lapse and reinvestment
assumptions. The refinements to lapse rate assumptions for 2016 were primarily related to emerging lapse rate
experience for increasing renewal lapse rates on renewable Term 10 business. The update in investment return
assumptions for 2016 was primarily due to regular updates to reinvestment rates and credit spreads for the Canadian
Asset Liability Method (“CALM”) valuation model for future reinvestment assumptions.
This compared to a loss from the net strengthening of reserves in 2015 primarily related to lapse assumption updates
to reflect new industry data released in 2015. This was partly offset by gains from updating 2015 reinvestment
assumptions primarily related to a refinement of the projected amount of equities backing individual life liabilities.
Individual Insurance earnings on operations also improved due to experience gains, which primarily related to
investment experience in 2016 compared to a smaller gain in 2015. In 2016 this experience gain primarily resulted
from favourable stock market movements during 2016. In 2015 this experience gain primarily resulted from an
increase in interest rate spreads on provincial and corporate bonds.
Capital & Surplus
Earnings from Capital and Surplus in 2016 were lower than 2015 primarily due to a $28 million after tax loss on
Empire Life’s hedging program, compared to a $2 million after tax gain in 2015. The 2016 hedging program loss was
primarily due to rising Canadian stock prices.
In addition, there were lower gains from the sale of AFS bonds in 2016 relative to 2015.
Empire Life - Annual Report 2016
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A is dated as of February 24, 2017.
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, 2016 and 2015. This MD&A should be read in conjunction with the Company’s
December 31, 2016 consolidated financial statements, which form part of The Empire Life Insurance Company 2016
Annual Report dated February 24, 2017. 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)
Common shareholders' net income
Earnings per share - basic and diluted
Return on common shareholders' equity (quarters annualized) ("ROE")
Fourth quarter
2016
2015
$
$
52.5
53.34
$
$
17.1%
16.2
16.43
$
$
5.9%
Year
2016
152.7
155.03
$
$
2015
108.6
110.22
13.1%
10.2%
Empire Life reported fourth quarter common shareholders’ net income of $52.5 million for 2016, compared to $16.2
million for 2015. Full year common shareholders’ net income was $152.7 million compared to $108.6 million in 2015.
Empire Life - Annual Report 2016
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
2016
2015
Year
2016
Expected profit on in-force business
$
39.9 $
40.9 $
159.5 $
Impact of new business
Experience gains (losses)
Management actions and changes in assumptions
Earnings on operations before income taxes
Earnings on surplus
Income before income tax
Income taxes
Shareholders’ net income
Dividends on preferred shares
Common shareholders’ net income
(5.5)
34.5
5.5
74.4
(1.1)
73.3
18.6
54.7
2.2
(9.5)
8.0
(24.9)
14.5
7.1
21.7
5.4
16.2
—
(15.2)
32.6
40.3
217.2
(2.7)
214.5
54.0
160.6
7.9
$
52.5 $
16.2 $
152.7 $
2015
159.7
(33.8)
(9.6)
(24.9)
91.4
50.2
141.6
33.0
108.6
—
108.6
Fourth quarter and full year common shareholders’ net income and ROE were higher relative to 2015 due to higher
profit from the Individual Insurance product line primarily from improved stock market conditions in 2016, a favourable
update of policy liability assumptions for the Individual Insurance product line in 2016 (compared to an unfavourable
update in 2015) and management actions to improve asset/liability matching in 2016. Empire Life improved its
matching position throughout 2016 by increasing its investment in real estate limited partnership units and by making
changes to its bond investments. The improved matching position resulted in a gain in all four quarters of 2016.
The expected profit on in-force business was slightly lower relative to 2015 primarily due to increased premium taxes
on in-force policies. This was partly offset by strong profit on the in-force Wealth Management product line due to
growth in segregated fund guarantee fees and management fees and lower expenses. The impact of new business
improved relative to 2015 in all quarters of 2016 primarily due to lower new business strain (resulting from lower
segregated fund sales) and lower Wealth Management expenses. Earnings on surplus decreased primarily due to
hedging costs which resulted from the increase in stock markets in 2016.
During the first quarter of 2016, Empire Life issued $149.5 million of preferred shares resulting in the payment of
preferred share dividends in 2016 which lowered common shareholders’ net income relative to 2015. On December
16, 2016, the Company issued $200 million principal amount of unsecured subordinated debentures with a maturity
date of December 16, 2026. The interest rate from December 16, 2016 until December 16, 2021 is 3.383%, and the
rate from December 16, 2021 until December 16, 2026 is equal to the 3-month Canadian Bankers’ Acceptance Rate
plus 1.95%. The issuance of these debentures increased Empire Life’s Minimum Continuing Capital and Surplus
Requirements (“MCCSR”) ratio by 26 percentage points during the fourth quarter of 2016.
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 2016 net income compared to
2015 is shown in the Product Line Results sections later in this report.
Empire Life - Annual Report 2016
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Information
Income Statement Financial Information
(in millions of dollars)
Revenue
Net premium income
Fees 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
Dividends on preferred shares
Common shareholders’ net income
Return on shareholders' equity
For the years ended December 31
2016
2015
2014
$
$
882
228
255
20
12
12
1,409
$
835
217
259
42
19
(85)
1,287
$
1,178
$
1,139
$
74
1,252
157
(4)
46
1,185
102
(6)
$
161
$
108
$
8.0
153
—
108
867
188
246
74
13
538
1,926
1,770
49
1,819
107
9
98
—
98
13.1%
10.2%
10.5%
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 significantly 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
2016
2015
2014
$
$
$
7,605 $
6,859 $
175
8,082
137
7,368
6,669
112
6,948
15,862 $
14,364 $
13,729
5,003 $
4,799 $
4,713
533
499
295
8,082
14,412
1,450
531
299
215
7,368
13,212
1,152
$
15,862 $
14,364 $
491
299
216
6,948
12,667
1,062
13,729
Empire Life - Annual Report 2016
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Financial Information
(in millions of dollars)
Assets under management2
General fund assets2
Segregated fund assets2
Mutual fund assets2
Subordinated debt
Preferred shares
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
MCCSR Ratio
Cash dividends per share
Preferred shares series 1
Common shares
As at December 31
2016
2015
2014
$
7,780
$
6,996
$
8,082
7,368
189
499
150
171
299
—
1,206
$
707
1,913
$
918
504
1,422
771
$
708
$
6,780
6,948
109
299
—
872
452
1,324
671
248%
201%
197%
2016
2015
2014
1.3183
$
— $
— $
— $
—
34.4985
$
$
$
$
During 2016, Empire Life’s MCCSR ratio increased by 26 percentage points from the issuance of $200 million of
subordinated debentures and 20 percentage points from the issuance of $149.5 million of preferred shares.
Empire Life - Annual Report 2016
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
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Net income (loss) after tax
$
62 $
59 $
10 $
6 $
83 $
(2) $
2 $
39 $
157 $
102
$
176 $
144 $
339 $
325 $
367 $
366 $ — $ — $
882 $
217
207
41
(1)
—
(4)
429
348
19
367
43
1
—
(28)
367
289
19
308
9
4
1
—
—
9
4
1
—
(2)
353
337
329
14
343
322
9
331
2
176
48
—
22
615
491
40
531
1
171
38
—
(56)
520
518
4
522
—
34
(28)
12
(6)
12
10
—
10
—
41
2
19
1
63
10
14
24
835
217
259
42
19
(85)
228
255
20
12
12
1,409
1,287
1,178
1,139
73
46
1,251
1,185
$
970 $
959
$ 8,061 $ 7,347
$
189 $
171
$
21 $
20
$
44 $
44 $
42 $
51
(4)
8
(6)
—
$
153 $
108
$ 7,780 $ 6,996
$ 8,082 $ 7,367
$
189 $
171
(in millions of dollars)
Revenue
Net premium income
Fee income
Investment income
Realized gain (loss) 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
Participating policyholders' portion
Dividends on preferred shares
Common shareholders' net income
Assets under management3
General fund assets3
Segregated fund assets3
Mutual fund assets3
Annualized premium sales3
Total Revenue
(in millions of dollars)
Revenue
Net premium revenue
Investment income
Fair value change in FVTPL investments including realized amounts
Realized gain (loss) on AFS investments including impairment write downs
Fee and other income
Total Revenue
Fourth quarter
2016
2015
Year
2016
222 $
206 $
882 $
69
(371)
(3)
58
67
62
—
56
255
32
12
228
2015
835
259
(43)
19
217
(25) $
391 $
1,409 $
1,287
$
$
For the quarter, total revenue at Empire Life decreased by $416 million to negative $25 million in 2016. On a full year
basis, total revenue increased by 9% to $1,409 million compared to $1,287 million in 2015. 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.
Empire Life - Annual Report 2016
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net premium revenue for the quarter and year increased by 7.9% and 5.5% respectively, relative to 2015. The
increase related primarily to the fixed interest immediate annuities portion of the Wealth Management product line,
which experienced stronger demand due to improved interest rates offered by Empire Life and customer caution
resulting from stock market volatility.
Fair value change in FVTPL investments including realized amounts often causes large revenue volatility. These
assets experienced a loss for the fourth quarter and a net gain for the year in 2016 compared to an opposite pattern
for the same periods in 2015. In 2016, the fourth quarter loss was from a decrease in bond prices (due to an increase
in market interest rates). In 2015, the fourth quarter gain was primarily from an increase in bond prices (due to a
decrease in market interest rates) and an increase in US stock prices. In 2016, the full year gain was primarily from an
increase in stock prices and for 2015, the full year loss was from a decrease in stock prices and bond prices (due to
an increase in market interest rates). For the fourth quarter and year, the impact of this on net income is significantly
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 2016 and 2015. The gain for both years was primarily due to the sale of AFS 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 income for the quarter and year increased by 3.9% and 5.3% respectively in 2016 relative to 2015 primarily due
to growth in segregated fund guarantee fees and management fees (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
2016
2015
151 $
(357)
(1)
8
40
56
3
162 $
109
(1)
7
39
49
2
Year
2016
593 $
207
—
29
145
195
9
2015
642
126
—
26
147
189
9
Total benefits and expenses
$
(100) $
367 $
1,178 $
1,139
Total benefits and expenses at Empire Life for the quarter decreased by $467 million to negative $100 million in 2016.
On a full year basis, total benefits and expenses decreased by 3.5% to $1,178 million compared to $1,139 million in
2015. 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.
Empire Life - Annual Report 2016
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net benefits and claims variability is dependent on the claims incurred. Generally, claims rise year over year due to
growth of the insurance blocks, which was the case for the quarter and full year for the Employee Benefits line of
business. Otherwise net benefits and claims for the quarter and full year were lower than last year primarily due to
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 may 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 2015 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 increased year over year primarily due to the increase in Individual
Insurance participating product sales.
Product Line Results - Wealth Management
(in millions of dollars)
Assets under management4
General fund annuities4
Segregated fund assets4
Mutual funds4
(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
2016
2015
$
970 $
8,061
189
Year
2016
Fourth quarter
2016
2015
$
39 $
326
32 $
279
176 $
1,027
92
54
6
(1)
1
65
52
13
7
1
157
213
33
8
3
959
7,347
171
2015
144
1,120
272
202
79
62
2
59
Net income after tax
$
8 $
10 $
62 $
Assets in Empire Life general fund annuities increased by less than 1%, while segregated fund assets increased by
10% during the last 12 months. The increase in the last 12 months for general fund annuities is related primarily to
improving demand for fixed interest immediate annuities. The increase over the last 12 months for segregated funds
was attributable to increased stock markets and positive net sales.
Premium revenue for the Wealth Management product line is composed solely of new deposits on fixed interest
annuities and excludes deposits on the segregated fund and mutual fund products. For the fourth quarter and full
year, net fixed interest annuity premiums were up 21% and 22% respectively compared to 2015 due to improved
interest rates offered by Empire Life. Management also believes that customers have chosen more conservative fixed
interest products due to concerns with stock market volatility.
Empire Life - Annual Report 2016
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the fourth quarter and full year, segregated fund gross sales were up 17% and down 8% respectively compared to
2015, primarily due to 75% maturity guarantee product sales which increased by $34 million in the fourth quarter but
decreased by $56 million for the year. In the fourth quarter of 2014, Empire Life closed its existing segregated funds
products to new policies effective October 31, 2014 and on November 3, 2014 launched a new suite of investment
products including a new segregated funds family and a new version of its Guaranteed Minimum Withdrawal Benefit
(“GMWB”) product. Fees charged to the customer on the new product line are higher than those for 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. While 2016 sales were down from last year, the
launch of these new segregated fund products has gone well, achieving gross sales of $281 million (2015 $227
million) and $840 million (2015 $844 million) for the fourth quarter and full year respectively, which represented 86%
(2015 81%) and 82% (2015 75%) respectively of total segregated fund gross sales.
Segregated fund net sales for the quarter and full year were up 41% and down 42% respectively compared to 2015
primarily due to the above mentioned gross sales result.
Mutual fund gross sales were very weak and are still a small component of our Wealth Management assets under
management. Management believes that customers have chosen more conservative fixed interest products given
stock market volatility, which hurt mutual fund sales as these products offer no guarantees to customers. 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 4% and 5% respectively in 2016 relative to
2015. The increase was primarily due to growth in segregated fund guarantee fees and management fees. Improved
stock markets in the second half of 2016 resulted in higher average assets under management and management fees
earned relative to 2015.
During the fourth quarter earnings from this product line decreased, while full year earnings increased relative to
2015. 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)
2015 loss from update of policy liability assumptions
2016 loss from update of policy liability assumptions
Lower new business strain
Increase in inforce profit margins
Improved annuitant mortality experience
Improved investment experience
Total
$
$
4 $
(14)
2
—
1
5
(2) $
4
(14)
7
4
—
2
3
In both 2015 and 2016, the update of policy liability assumptions was unfavourable. In both years there were
unfavourable updates for general fund annuities. In 2015, this primarily related to investment return assumptions. In
2016, this primarily related to investment return assumptions and refinements to the modelling of preferred share
investment cash flows for deferred and immediate annuity business.
Higher net income from lower new business strain for the year was primarily due to the decrease in segregated fund
gross sales (and the resulting sales strain) and lower expenses.
Higher net income on in-force business in 2016 was primarily due to lower expenses and improved stock markets.
Empire Life - Annual Report 2016
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Results - Employee Benefits
(in millions of dollars)
Selected financial information
Annualized premium sales5
Net premium revenue
Net (loss) income after tax
Fourth quarter
2016
2015
$
$
9 $
85
9 $
12 $
82
(2) $
Year
2016
44 $
339
10 $
2015
44
325
6
For the quarter, annualized premium sales in this product line decreased by 25% and for the full year annualized
premium sales were flat relative to 2015. In-force premium revenue grew 4% for the quarter and for the full year
relative to the same periods in 2015. While down slightly, the 2016 level of sales is a strong achievement particularly
given the weak economic conditions in Canada.
During the fourth quarter and full year, earnings from this product line increased relative to 2015. 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
2016 gain from update of policy liability assumptions
Improved (worsened) claims experience
Total
Fourth quarter
Year
$
$
5 $
6
11 $
5
(1)
4
In 2016, there was a favourable assumption update for the group long-term disability policy liability in the fourth
quarter.
For the full year, claims experience was unfavourable in both years primarily due to health claims partly offset by
group life insurance and long-term disability claims 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 after tax shareholders' portion
Net loss after tax policyholders' portion
Net income (loss) after tax
Fourth quarter
2016
2015
Year
2016
$
$
$
14 $
98
38 $
(3)
35 $
11 $
92
2 $
(1)
1 $
42 $
367
90 $
(7)
83 $
2015
51
366
6
(8)
(2)
Empire Life - Annual Report 2016
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the fourth quarter and full year, annualized premium sales in this product line increased by 18% and decreased by
19% respectively compared to 2015. This product line’s fourth quarter sales result was attributable primarily to
increased sales of participating products. Management believes this is due in part to the January 1, 2017 effective
date of less favourable tax rules that deal with the exemption status of certain life insurance policies. The full year
decrease in sales was due to lower universal life insurance product sales partly offset by increased sales of
participating products and term 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. In recent years Empire Life
has been shifting its product mix toward shorter-term products such as term life, while increasing prices on long-term
products, due to the low long-term interest rate environment. During the fourth quarter of 2016 Empire Life decided to
stop selling universal life insurance products but will continue to administer its in-force block of universal life insurance
products.
During the fourth quarter and full year earnings from this product line increased relative to 2015. 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
2015 loss from update of policy liability assumptions
2016 gain from update of policy liability assumptions
Management actions to improve asset/liability matching
Improved investment experience
Improved mortality, surrender and other experience
Decrease in inforce profit margins
Total
Fourth quarter
Year
$
$
15 $
4
1
7
8
(1)
34 $
15
4
27
31
11
(3)
85
Year
(19)
(12)
7
28
4
In 2015, the update of policy liability assumptions was unfavourable by $15 million.
In 2016, the update of policy liability assumptions was favourable by $4 million. The following table provides a
breakdown of the components of this amount:
(in millions of dollars)
Components of income increase from update of policy liability assumptions
Lapse
Net re-investment assumptions
Mortality
Other
Total 2016 gain from update of policy liability assumptions
$
$
The refinements to lapse rate assumptions for 2016 were primarily related to emerging lapse rate experience for
increasing renewal lapse rates on renewable Term 10 business.
The update in investment return assumptions for 2016 was primarily due to regular updates to reinvestment rates and
credit spreads for the Canadian Asset Liability Method (“CALM”) valuation model for future reinvestment assumptions.
Other policy liability assumption updates for 2016 were primarily related to refinements to the modelling of reinsurance
treaties.
Management actions to improve asset/liability matching resulted in increased profit for the fourth quarter and the full
year in 2016. The improved matching position resulted in a gain from updating insurance contract liabilities. Empire
Life increased its investment in real estate limited partnership units during the first nine months of 2016. This
investment is used to match long-term insurance contract liabilities. In addition Empire Life made changes to its bond
investments throughout 2016 to tighten matching of investments with insurance contract liabilities.
Empire Life - Annual Report 2016
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
There was a gain from investment experience for the fourth quarter and full year of 2016 compared to a smaller gain
for the comparable period in 2015. In 2016, the experience gain primarily resulted from favourable stock market
movements during the fourth quarter and full year in 2016. In 2015, the experience gain primarily resulted from an
increase in interest rate spreads on provincial and corporate bonds.
Long-term interest rate movements are demonstrated 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 (including financials)
End of period
Beginning of period
Change during period
30 year A rated financials spread
End of period
Beginning of period
Change during period
Fourth quarter
2016
2015
Year
2016
2015
2.31 %
1.67 %
0.64 %
0.90 %
1.00 %
(0.10)%
1.60 %
1.73 %
(0.13)%
2.01 %
2.26 %
(0.25)%
2.16 %
2.20 %
(0.04)%
1.05 %
1.00 %
0.05 %
1.92 %
1.85 %
0.07 %
2.19 %
2.05 %
0.14 %
2.31 %
2.16 %
0.15 %
0.90 %
1.05 %
(0.15)%
1.60 %
1.92 %
(0.32)%
2.01 %
2.19 %
(0.18)%
2.16 %
2.36 %
(0.20)%
1.05 %
0.95 %
0.10 %
1.92 %
1.52 %
0.40 %
2.19 %
1.87 %
0.32 %
Interest rate movements impact both bond asset fair values and insurance contract liabilities. In the fourth quarter
and full year of 2016, the increase in interest rates (including spreads described above) caused lower bond prices,
which resulted in mark to market fair value bond adjustments. These fair value adjustments are offset by changes in
insurance contract liabilities.
Stock market movements are demonstrated in the following table.
Stock market movement
S&P/TSX Composite Index
End of period
Beginning of period
Percentage change during period
S&P 500 Index
End of period
Beginning of period
Percentage change during period
Fourth quarter
2016
2015
Year
2016
2015
15,288
14,726
13,010
13,307
15,288
13,010
13,010
14,632
3.80%
(2.20)%
17.50%
(11.10)%
2,239
2,168
2,044
1,920
2,239
2,044
2,044
2,059
3.30%
6.50 %
9.50%
(0.70)%
In the fourth quarter and full year of 2016 the strong increase in stock markets caused common share asset fair value
gains. These gains are partially offset by increases in insurance contract liabilities.
Empire Life - Annual Report 2016
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results - Capital and Surplus
(in millions of dollars)
Net income (loss) after tax
Fourth quarter
2016
2015
Year
2016
Net income (loss) after tax shareholders' portion
Net income after tax policyholders' portion
Net income (loss) after tax
$
$
(1) $
—
(1) $
5 $
—
5 $
(2) $
4
2 $
2015
37
2
39
In addition to the three major lines of business, Empire Life maintains distinct accounts for the investment income
attributable to Shareholders’ Capital and Surplus and to Policyholders’ Surplus.
During the fourth quarter and year, earnings from Capital and Surplus decreased relative to 2015. 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
Increased net loss on hedging instruments
Decreased net income from investments
Total
Fourth quarter
Year
$
$
(4) $
(2)
(6) $
(30)
(7)
(37)
During the fourth quarter and full year of 2016, Empire Life experienced a loss of $5 million and $28 million after tax
respectively on its hedging program primarily due to rising Canadian stock prices compared to a loss of $1 million and
a gain of $2 million respectively for the comparable period in 2015 (discussed in the Risk Management section later in
this report).
Decreased net income from investments was primarily due to lower gains from the sale of AFS bonds in 2016 relative
to 2015.
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
2016
292 $
(454)
331
169 $
2015
149
(179)
(9)
(39)
$
$
Cash provided from operating activities in 2015 was close to 2014 levels.
Cash provided from operating activities in 2016 increased from 2015 levels primarily due to increased net cash flows
from increases in working capital levels.
The increase in cash used for investing activities during 2016 relative to 2015 was primarily due to the investment of
the proceeds from its first quarter 2016 issuance of $149.5 million of preferred shares, the investment of the increased
cash flows from fixed interest annuity products into matching assets and the partial investment of the proceeds from
Empire Life’s fourth quarter 2016 issuance of $200 million of subordinated debt.
Empire Life - Annual Report 2016
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
The increase in cash provided by financing activities during 2016 relative to 2015 was primarily due to Empire Life’s
issuance $200 million of subordinated debt during the fourth quarter of 2016 and its issuance of $149.5 million of
preferred shares during the first quarter of 2016.
For an analysis of liquidity for Empire Life, see note 10(e) and note 28(b) to the 2016 consolidated financial
statements.
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 and credit rating restrictions 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, 2016.
Capital Resources
Dec 31
2016
Sep 30
2016
Jun 30
2016
Mar 31
2016
Dec 31
2015
MCCSR Ratio
248%
213%
213%
219%
201%
Empire Life continues to maintain a strong balance sheet and capital position. Empire Life’s debentures and preferred
shares are rated by DBRS Limited (“DBRS”) and A.M. Best Company, Inc. (“A.M. Best”). On May 27, 2016, 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), its financial strength rating of “A” (sixth highest of 22
categories) and its Preferred Share rating 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 improved and consistent levels of profitability and fixed charge
coverage. On December 16, 2016, Empire Life issued $200 million principal amount of unsecured subordinated
debentures due December 16, 2026 by way of private placement in Canada. On December 15, 2016 DBRS assigned
a subordinated debt rating of “A (low)” with a stable trend to these debentures.
Empire Life - Annual Report 2016
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
On May 27, 2016, 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), its financial strength rating of “A
(Excellent)” (third highest of 16 categories) and its Preferred Share rating 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. On
December 16, 2016, A.M. Best assigned a subordinated debt rating of “bbb+” with a stable trend to Empire’s
December 16, 2016 subordinated debenture issue.
Empire Life’s risk-based regulatory capital ratio, as measured by MCCSR, of 248% as at December 31, 2016
continued to be above the requirements set by the Office of the Superintendent of Financial Institutions Canada
(“OSFI”) as well as Empire Life’s minimum internal targets.
The MCCSR ratio increased 35 percentage points from the previous quarter and increased by 47 percentage points
for the full year. The increase for the fourth quarter and full year was primarily due to increases in available regulatory
capital. For the year this was partly offset by increases in required regulatory capital, as shown in the table below.
The increase for the fourth quarter and full year 2016 was primarily due to Empire Life’s issuance of $200 million
principal amount of unsecured subordinated debentures on December 16, 2016 (as described below) which increased
Empire Life’s MCCSR ratio by 26 percentage points. The increase for the full year was also due to Empire Life’s
issuance of $149.5 million of preferred shares in the first quarter of 2016 (as described below) which increased
Empire Life’s MCCSR ratio by 20 percentage points.
(millions of dollars)
Available regulatory capital
Tier 1
Tier 2
Total
Required regulatory capital
Dec 31
2016
Sep 30
2016
Jun 30
2016
Mar 31
2016
Dec 31
2015
$
$
$
1,206 $
1,123 $
1,089 $
1,078 $
707
541
535
528
1,913 $
1,664 $
1,624 $
1,606 $
771 $
781 $
762 $
734 $
918
504
1,422
708
The increase in Tier 1 available regulatory capital from the previous quarter was primarily due to net income. The
increase in Tier 1 available regulatory capital for the year was primarily due to net income and Empire Life’s issuance
of $149.5 million of Preferred Shares in the first quarter of 2016.
Tier 2 available regulatory capital increased from the previous quarter and for the full year primarily due to Empire
Life’s issuance of $200 million principal amount of unsecured subordinated.
Regulatory capital requirements decreased from the previous quarter but increased for the full year. The decrease for
the quarter was primarily due to decreased requirements related to lapses and interest rate risk, both of which
benefited from rising long-term interest rates during the fourth quarter. The increase for the full year was primarily due
to increased requirements related to asset default and segregated fund guarantees.
During the first quarter of 2016, Empire Life completed a Canadian public offering of $149.5 million of Preferred
Shares. Empire Life is using the net proceeds from the offering for regulatory capital and general corporate purposes.
The offering closed during the first quarter and commenced trading on the Toronto Stock Exchange under the ticker
symbol EML.PR.A. 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 December 16, 2016, the Company issued $200 million principal amount of unsecured subordinated debentures
with a maturity date of December 16, 2026. The interest rate from December 16, 2016 until December 16, 2021 is
3.383%, and the rate from December 16, 2021 until December 16, 2026 is equal to the 3-month Canadian Bankers’
Acceptance Rate plus 1.95%.
Empire Life - Annual Report 2016
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Comprehensive Income
(in millions of dollars)
Other comprehensive income (loss)
Less: Participating Policyholders
Other comprehensive income (loss), attributable to shareholders
Fourth quarter
2016
2015
$
$
(16) $
—
(16) $
3 $
(1)
3 $
Year
2016
3 $
(2)
1 $
2015
(13)
1
(12)
Other comprehensive income (OCI) decreased in the fourth quarter but increased for the full year of 2016 relative to
the comparable periods of 2015. For the fourth quarter, this was primarily due to unrealized fair value decreases
relating to AFS bonds in 2016, primarily due to interest rate movements (interest rates increased during the fourth
quarter of 2016). This was partly offset by a large gain in the fourth quarter on the re-measurement of the liability
component of post-employment defined benefit (“DB”) plans resulting from increased interest rates. For the full year
2016, the increase in OCI was primarily due to re-measurement of the asset component of post-employment defined
benefit (“DB”) plans (described below) and lower realized gains reclassified to net income relating to AFS bonds.
OCI includes the re-measurement of DB plans which had a gain for the full year in 2016 compared to a loss in 2015.
The 2016 result for DB plans was primarily due to stock market increases in 2016, compared to stock market
decreases in 2015.
Unrealized fair value increases and decreases on AFS bonds in OCI do not impact MCCSR. Re-measurement of DB
plans does not immediately impact MCCSR as each quarter’s re-measurement 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 10 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.
Empire Life - Annual Report 2016
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 will continue to improve competitiveness by focusing on long-term performance, providing
low cost products to customers along with broadened distribution reach. Although industry sales and Empire Life sales
were down in 2016, Empire Life achieved strong growth in assets under management from its segregated fund
business as a result of equity market appreciation. Empire Life is continuing to monitor and manage GMWB risk
exposure and the competitive landscape for this product The fourth quarter 2014 product launch by Empire Life
included a new version of its GMWB product which commands a higher price and reduces the amount of risk to
Empire Life while still offering a competitive guaranteed income solution to customers
Within the broader employee benefits marketplace in Canada, Empire Life continues to focus on the small group
employer market with fewer than 200 employees representing the majority of Canadian companies. 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. At current reinsurance price levels in the Canadian market place, a company
may reduce new business strain and improve profitability in the short term by opting to increase the amount of
insurance risk reinsured to third parties. 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. 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. Because of the reasonable long-term returns of this product line, management
continues to focus on steady growth, technology development and process improvement in order to continue to have
a cost structure that allows us to compete while generating an acceptable long-term financial contribution. Empire Life
is continuously reviewing its Individual Insurance product mix 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 appetite defines the aggregate level of risk the Company is willing to take to achieve its business
strategies. The risk appetite supports the pursuit of shareholder value but does not compromise the Company’s
ability to pay claims and fulfil policyholder commitments.
Empire Life - Annual Report 2016
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Framework 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 2016 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 Business
Conduct, 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.
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.
Empire Life - Annual Report 2016
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
Market Risk
Empire Life has equity market risk related to its segregated fund products and from equity assets backing life
insurance liabilities. Empire Life has a semi-static hedging program. 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 currently employs put options and short positions on key equity indices. The
extent of options used is monitored and managed on an ongoing basis, giving consideration to equity risk and the
level of available capital.
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 fourth quarter and full year of 2016
Empire Life experienced a loss of $5 million and $28 million after tax respectively on its hedging program primarily
due to rising Canadian stock prices compared to a loss of $1 million and a gain of $2 million respectively for the
comparable period in 2015.
Empire Life’s MCCSR ratio is also sensitive to stock market volatility, due primarily to liability and capital requirements
related to segregated fund guarantees. As of December 31, 2016, Empire Life had $8.1 billion of segregated fund
assets and liabilities. Of this amount, approximately $7.8 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
2016
Dec 31
2015
1.2%
49.7%
6.1%
43.0%
0.4%
51.5%
5.9%
42.2%
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.
Empire Life - Annual Report 2016
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Generally as stock markets and interest rates rise the magnitude of the negative
liabilities will also rise. 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% and a 30%
decrease at December 31 for 2016 and 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 2016 and 2015,
the sensitivity of Empire Life shareholders’ net income to changes in segregated fund guarantee insurance contract
liabilities resulting from stock market increases and decreases is as follows:
Sensitivity to segregated fund guarantees:
(in millions of dollars after tax)
December 31, 2016 Shareholders' net income
December 31, 2015 Shareholders' net income
Increase
Decrease
20%
10%
10%
20%
30%
$ nil $ nil $ nil $
$ nil $ nil $ nil $
(10) $
(10) $
(117)
(109)
As per the sensitivity table, the impact of stock market changes on the segregated fund guarantee liabilities is not
linear. As noted earlier, Empire Life also has equity market risk related to its equity assets backing life insurance
liabilities. Based on stock market levels as at December 31, 2016 and 2015, the sensitivity of Empire Life
shareholders’ net income (including 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):
Sensitivity excluding equity risk hedge
(in millions of dollars after tax)
December 31, 2016 Shareholders' net income
December 31, 2015 Shareholders' net income
Increase
Decrease
20%
10%
10%
20%
30%
$
$
51
44
$
$
25
22
$
$
(25) $
(22) $
(60) $
(54) $
(196)
(207)
The equity risk hedging program provides relief in adverse scenarios, but incurs losses in positive scenarios.
The December 31, 2016 and 2015 amounts in the following table include the effect of Empire Life’s equity risk
hedging program (described above):
Sensitivity including equity risk hedge
(in millions of dollars after tax)
December 31, 2016 Shareholders' net income
December 31, 2015 Shareholders' net income
Increase
Decrease
20%
10%
10%
20%
30%
$
$
36
27
$
$
18
12
$
$
(16) $
(7) $
(36) $
(19) $
(148)
(149)
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.
Empire Life - Annual Report 2016
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Based on stock market levels on the dates indicated below the sensitivity of Empire Life’s MCCSR ratio to stock
market increases and decreases for all Empire Life stock market exposures, including segregated fund guarantees, is
as follows (excluding the effect of Empire Life’s equity risk hedging program):
Excluding Equity Risk Hedge MCCSR
Sensitivity to stock markets
December 31, 2016 MCCSR Ratio
December 31, 2015 MCCSR Ratio
Increase
Decrease
20%
10%
10%
20%
30%
(0.7)
1.2
(0.2)
0.7
(12.1)
(13.9)
(35.3)
(31.6)
(40.1)
(50.0)
The December 31, 2016 and 2015 amounts in the following table include the effect of Empire Life’s equity risk
hedging program (described below):
Including Equity Risk Hedge MCCSR
Sensitivity to stock markets
December 31, 2016 MCCSR Ratio
December 31, 2015 MCCSR Ratio
Increase
Decrease
20%
10%
10%
20%
30%
(5.4)
(3.0)
(2.6)
(1.8)
(9.7)
(10.6)
(30.4)
(24.8)
(30.2)
(40.0)
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, 2016
December 31, 2015
$
$
2,530 $
2,343 $
627 $
593 $
37 $
124 $
1 $
4 $
324 $
1,415 $
4 $ nil $
17 $ nil
$
150
130
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
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, 2016, the aggregate amount at risk for these three
categories of risk (reported in the above table) was $632 million, an increase from the aggregate amount at risk of
$614 million as at December 31, 2015.
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 2016 decreased
from the December 2015 levels for GMWB withdrawal benefit exposure primarily due to GMWB sales volume in 2016.
The quarterly update of segregated fund policy data on our stochastic model resulted in an increase in required
regulatory capital.
Empire Life - Annual Report 2016
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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, 2016 MCCSR Ratio
December 31, 2015 MCCSR Ratio
Before The Sale of
AFS Assets
After The Sale of
AFS Assets
50 bps Decrease
50 bps Decrease
(20)%
(17)%
(15)%
(13)%
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.
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 business conduct. 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 Conduct Review 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.
Empire Life - Annual Report 2016
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
(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
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.
Empire Life - Annual Report 2016
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business and Strategic Risk
Business and strategic 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 2016 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 Company’s disclosure controls and procedures as of December 31, 2016. Based on that evaluation,
management concluded that the Company’s disclosure controls and procedures were effective as at December 31,
2016.
Empire Life - Annual Report 2016
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2016. Based
on that evaluation, management concluded that the Company’s internal control over financial reporting was effective
as at December 31, 2016. No changes were made in the Company’s internal control over financial reporting during
the year ended December 31, 2016, 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 judgment 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.
Empire Life - Annual Report 2016
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Impaired Investments
Empire Life maintains a prudent policy in setting the provision for impaired investments. When there is no longer
reasonable assurance of full collection of loan principal and loan interest related to a mortgage or policy contract loan,
management establishes a specific provision for loan impairment and charges the corresponding reduction in carrying
value to income in the period the impairment is identified. In determining the estimated realizable value of the
investment, management considers a number of events and conditions. These include the value of the security
underlying the loan, geographic location, industry classification of the borrower, an assessment of the financial
stability of the borrower, repayment history and an assessment of the impact of current economic conditions. Changes
in these circumstances may cause subsequent changes in the estimated realizable amount of the investment and
changes in the specific provision for impairment.
Available for sale securities are subject to a regular review for losses that are significant or prolonged. Objective
evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment
below its cost or if there is a significant adverse change in the technological, market, economic or legal environment in
which the issuer operates or the issuer is experiencing financial difficulties.
Outlook
The Canadian economy continued to experience slow growth in 2016. Much of the weakness came from low
investments in the oil industry and disruption in the output in Alberta oil sands. Unemployment hovered near 7% for
most of the year. The sluggishness in Canada reflected the uncertainty in the Global economy. The momentum in the
US in 2015 didn’t spill over into 2016 as expected. Growth in China for most of 2016 was sluggish compared to prior
years while the economy shifts to a more market driven consumer based economy. Business confidence in the UK
and the Euro zone was damaged by the potential impact from the Brexit referendum. The headwinds from the global
economy was partially offset by increased consumer spending, an increase in infrastructure spending, and continued
growth in the residential housing market in Canada. The Canadian economy picked up momentum in the second half
of 2016. The Canadian long-term interest rates increased from 1.72% at the end of the second quarter to 2.31% at the
end of fourth quarter 2016. While corporate and provincial bond spreads decrease slightly during this period, the
increase in yields brought some relief after a significant decrease in interest rates that occurred in 2014. Interest rates
have generally been lower than typical levels for several years. 2016 Global stock markets rallied in 2016. 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. The Canadian resource heavy stock market
rose by 17.5% in 2016 compared to a decrease of 11.1% in 2015. The U.S. S&P 500 stock index rose by 9.5% in
2016 compared to a decrease of 0.7% in 2015. The increase in the Canadian and U.S. stock markets has a positive
impact on Empire Life’s fees from the segregated funds in the wealth management business. The strengthening of the
Canadian dollar resulted in a slightly weaker performance for assets denominated in U.S. dollars which contributed to
the performance of many of Empire Life’s segregated funds. 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 has
experienced modest growth in the past few years and there continues to be uncertainty resulting in mixed economic
indicators. Consumers are the primary stimulus for growth and home sales continue to rise particularly in central
Canada and the far western regions of Canada. The recession in parts of western Canada caused by the drop in the
oil price appears to have run its course. With recent stability in oil prices and progress in the approval of key pipelines,
Alberta’s economy is expected to expand in 2017. Overall the Canadian economy is expected to grow by 2%
depending on the contribution the federal fiscal stimulus will provide to growth. With the new administration in the U.S,
the uncertainty surrounding Canada’s trade with its largest trading partner could have a material impact on growth in
Canada in 2017. This could ultimately have a negative impact on all of Empire’s lines of business.
Empire Life - Annual Report 2016
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Individual Insurance product line has been challenged by a persistent 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 and 2016, interest rate volatility continued in 2016. Empire Life has decreased its emphasis on long-term life
insurance products in favor 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 2017.
Regulatory changes related to segregated fund guarantees continues to evolve. OSFI is reviewing the overall
approach for determining capital requirements for segregated fund guarantee risks. Changes to the capital required
for products with guaranteed income may ultimately impact the industry’s ability to offer these products at reasonable
prices to the consumer.
On September 12, 2016, OSFI released its final version of 2018 guideline - Life Insurance Capital Adequacy Test.
This new Guideline, effective January 1, 2018, will establish a new regulatory capital framework for life insurance
companies, which will replace the current MCCSR Guideline. This new Guideline was developed in consultation with
the Life Insurance industry and OSFI does not expect that it will have a material impact on the capital required by the
industry as a whole, in comparison to MCCSR. Empire life is assessing the impact of the new framework and will
provide further information once the assessment is completed and OSFI concurs with Empire’s application of the new
Guidelines.
The IASB has set January 1, 2021 for the adoption of IFRS 17 Accounting for Insurance Contracts. IFRS 17 will
include fundamental differences from the CALM method (equivalent to IFRS 4 Insurance Contracts) that Empire Life
currently applies for the valuation of insurance contracts and revenue recognition. The IASB has also granted a
temporary exemption from the application of IFRS 9 Financial Instruments to allow insurance companies the option of
implementing both IFRS 17 and IFRS 9 effective 2021. IFRS 9 applies to the measurement of financial assets, the
expected credit loss model and hedge accounting. For Insurance Contracts and Financial Instruments accounting the
goal is global consistency under IFRS as opposed to the differing approaches in each country that exist today. In 2014
OSFI issued the Capital Adequacy Guidelines for Banks in Canada based on the Basel III capital standards for Banks
worldwide. The Guidelines include requirements that ensure that investors in non-common regulatory capital
instruments will bear the loss in the event that the bank may become non- viable as a going concern. These new
financial instruments issued by banks must comply with new regulations in order to be included in the banks’ capital
ratios. OSFI has indicated that they are exploring the applicability of these rules for insurance companies. Empire Life
is not aware of any immediate plans by OSFI to make similar changes for life insurance companies.
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 the
measurement of Empire Life’s net income in the future and capital ratios.
The Canadian Securities Administrators (“CSA”) has increased disclosure requirements for mutual fund companies,
including point of sale requirements and customer relationship model initiatives. Mutual fund fees continue to be an
area of interest for Canadian securities regulators. The CSA 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 monitor these
developments and assess the possible impact to 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.
Empire Life - Annual Report 2016
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
In 2016 changes to tax rules that deal with the exemption status of certain life insurance policies effective 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 exempt test represent a significant change to the tax regime that
has existed over the past 30 years. These changes required all life insurance companies to review the design and the
pricing of their life insurance product offerings. Empire Life has either modified or withdrawn certain product offerings
to comply with the new tax rules.
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)
2016
2016
2016
2016
2015
2015
2015
2015
Dec 31
Sep 30
Jun 30 Mar 31
Dec 31
Sep 30
Jun 30 Mar 31
Revenue
Common shareholders' net income
$
$
(25) $
453 $
564 $
416 $
391 $
212 $
53 $
38 $
25 $
37 $
16 $
22 $
41 $
44 $
643
26
Earnings per share - basic and diluted
$ 53.34 $ 38.67 $ 25.21 $ 37.81 $ 16.43 $ 22.49 $ 45.34 $ 25.97
For the fourth quarter of 2016, total revenue at Empire Life decreased to negative $25 million compared to $391
million in the fourth quarter of 2015. The decrease was primarily due to a large loss in the fourth quarter on FVTPL
investments in 2016 compared to a net gain for the same period in 2015. In 2016, the loss was from a decrease in
bond prices (due to an increase in market interest rates). In 2015, the net gain was primarily from an increase in bond
prices (due to a decrease in market interest rates) and an increase in US stock 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 and stock market movements on Fair value change in FVTPL investments. The
impact of this on net income is significantly reduced due to a corresponding change in insurance contract liabilities.
For the fourth quarter of 2016, net income was higher relative to 2015 due to higher profit from the Individual
Insurance product line primarily attributable to improved stock market conditions in 2016, a favourable update of
policy liability assumptions for the Individual Insurance product line in 2016 (compared to an unfavourable update in
2015) and management actions to improve asset/liability matching in 2016. See Product Line Results sections earlier
in this report for further information on quarterly results.
Empire Life improved its matching position throughout 2016 by increasing its investment in real estate limited
partnership units during the first nine months of 2016 and by making changes to its bond investments. The improved
matching position resulted in a gain in all four quarters of 2016 from updating insurance contract liabilities.
Net income variability during the most recent eight quarters was often 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 quarters ending June 30, 2016, March 31, 2015 and December 31, 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. In addition, unfavourable Individual Insurance mortality, surrender and lapse experience
lowered net income in the first, second and third quarters of 2016 and the third quarter of 2015. The annual update of
Individual Insurance policy liability assumptions lowered net income in the fourth quarter of 2015. During the first and
third quarters of 2016, the first three quarters of 2015 and the fourth quarter of 2014, 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.
Empire Life - Annual Report 2016
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 including counterparty 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.
Empire Life - Annual Report 2016
37
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 sources 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
2016
2015
7,780 $
8,082
15,862
189
16,051 $
6,996
7,368
14,364
171
14,535
As at December 31
2016
2015
195 $
13
183
11
$
$
$
Empire Life - Annual Report 2016
38
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, 2016.
Based on that evaluation, management concluded that the Company’s internal control over financial reporting was
effective as at December 31, 2016.
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 24, 2017
Ron Friesen
Senior Vice-President and Chief Financial Officer
Kingston, Ontario
February 24, 2017
Empire Life - Annual Report 2016
39
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, 2016 and December
31, 2015 and the consolidated statements of operations, comprehensive income, changes in equity, and cash flows
for the years then ended, and the related notes, which comprise a summary of significant accounting policies and
other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The
Empire Life Insurance Company and its subsidiary as at December 31, 2016 and December 31, 2015 and their
financial performance and their cash flows for the years then ended in accordance with International Financial
Reporting Standards.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
February 24, 2017
Empire Life - Annual Report 2016
40
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, 2016 and their change in the Consolidated statements
of operations for the year then ended in accordance with accepted actuarial practice in Canada including selection of
appropriate assumptions and methods.
In my opinion, the amount of policy liabilities net of reinsurance liabilities, makes appropriate provision for all policy
obligations and the Consolidated financial statements fairly present the results of the valuation.
Leonard Pressey, F.S.A., F.C.I.A.
Fellow, Canadian Institute of Actuaries
Kingston, Ontario
February 24, 2017
Empire Life - Annual Report 2016
41
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)
2016
2015
$
368,873 $
199,770
102,874
5,521,172
285,184
929,611
3,855
264,309
47,969
80,944
33,652
5,193,439
194,680
801,778
14,649
289,221
46,925
84,921
Total cash and cash equivalents and investments
7,604,791
6,859,035
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
Total liabilities
Equity
Preferred shares (Note 20)
Common shares (Note 20)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total equity
Total liabilities and equity
$
$
40,551
53,097
—
39,680
27,683
14,341
26,023
47,909
3,361
26,257
23,911
9,225
8,082,033
15,862,176 $
7,367,823
14,363,544
79,600 $
97,135
32,536
533,357
5,003,450
13,903
32,957
29,555
8,989
498,603
8,082,033
14,412,118
149,500
985
19,387
1,267,049
13,137
1,450,058
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
$
15,862,176 $
14,363,544
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 2016
42
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
Less: net income (loss) attributable to participating policyholders
Shareholders' net income (loss)
Less: preferred share dividends declared (Note 21)
Common shareholders' net income
Earnings per share - basic and diluted (Note 19)
(2,000,000 shares authorized; 985,076 shares outstanding)
2016
2015
$
1,002,252 $
(120,752)
881,500
254,913
11,873
20,114
11,739
228,369
1,408,508
665,420
(72,670)
204,767
2,531
40
28,564
145,004
197,651
(2,492)
9,297
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
1,178,112
1,138,752
19,529
3,996
206,871
49,705
157,166 $
(3,439)
160,605
7,884
152,721 $
14,226
4,000
129,950
27,492
102,458
(6,119)
108,577
—
108,577
155.03 $
110.22
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2016
43
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
For the year ended December 31
Net income
2016
2015
$
157,166 $
102,458
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)
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
6,287
(8,553)
(2,266)
5,400
3,134
160,300 $
(1,710) $
162,010
160,300 $
4,118
(13,922)
(9,804)
(3,016)
(12,820)
89,638
(7,203)
96,841
89,638
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2016
44
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31
2016
2015
Shareholders' Policyholders'
Total
Shareholders'
Policyholders'
Preferred shares (Note 20)
$
149,500 $
— $
149,500 $
— $
— $
Common shares (Note 20)
Contributed surplus
Retained earnings
985
19,387
—
—
985
985
19,387
19,387
—
—
Total
—
985
19,387
Retained earnings - beginning of year
1,075,120
Net income (loss)
Preferred share dividends declared
Preferred share issue costs net of
income tax (Note 20)
Common share dividends declared
160,605
(7,884)
(3,775)
—
46,422
(3,439)
—
—
—
1,121,542
157,166
(7,884)
(3,775)
—
966,543
108,577
52,541
(6,119)
1,019,084
102,458
—
—
—
—
—
—
—
—
—
Retained earnings - end of period
1,224,066
42,983
1,267,049
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
3,588
1,405
4,993
6,415
1,729
8,144
10,003
3,134
13,137
15,324
(11,736)
7,499
(1,084)
22,823
(12,820)
3,588
6,415
10,003
Total equity
$
1,398,931 $
51,127 $
1,450,058 $
1,099,080 $
52,837 $
1,151,917
Composition of accumulated other comprehensive income (loss) - end of period
Unrealized gain (loss) on available for
sale financial assets
$
11,287 $
9,239 $
20,526 $
15,148 $
7,644 $
22,792
Remeasurements of post-
employment benefit liabilities
Shareholder portion of policyholders'
accumulated other comprehensive
income
Total accumulated other
comprehensive income (loss)
(7,014)
(375)
(7,389)
(12,163)
(626)
(12,789)
720
(720)
—
603
(603)
—
$
4,993 $
8,144 $
13,137 $
3,588 $
6,415 $
10,003
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2016
45
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 paid to preferred shareholders (Note 21)
Interest paid on subordinated debt
Preferred share issue (Note 20)
Preferred share issue costs net of income tax (Note 20)
Debt Issue (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
2016
2015
$
157,166 $
102,458
204,807
2,531
(11,873)
(31,853)
(77,215)
5,065
(639)
44,273
292,262
85,647
40,251
85,677
(61,361)
(73,515)
4,369
761
(35,723)
148,564
(2,319,608)
1,946,146
(2,081,180)
1,918,878
(8,177)
11,151
(69,222)
(13,953)
(453,663)
(5,735)
(8,610)
149,500
(3,775)
199,124
330,504
169,103
199,770
368,873 $
12,370 $
139,405
35,150
(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
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2016
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
1. Description of Company and Summary of Operations
The Empire Life Insurance Company (the “Company” or “Empire Life”) was founded in 1923 when it was
organized under a provincial charter in Toronto. Authorization to continue as a federal corporation was
obtained in 1987. The Company underwrites life and health insurance policies and provides segregated funds,
mutual funds and annuity products for individuals and groups across Canada. The Company is a subsidiary of
E-L Financial Corporation Limited (the "Parent” or “E-L”). The head office, principal address and registered
office of the Company are located at 259 King Street East, Kingston, Ontario, K7L 3A8. Empire Life is a
Federally Regulated Financial Institution, regulated by the Office of the Superintendent of Financial
Institutions, Canada (OSFI). 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 24, 2017.
2. Significant Accounting Policies
(a) Basis of preparation
The annual Consolidated Financial Statements of the Company for the year ended December 31, 2016
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 ELII 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 2016
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 2016
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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 2016
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
Empire Life - Annual Report 2016
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
recorded in Net income (loss). If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be objectively related to an event occurring after the impairment
was recognized, the impairment loss is reversed by adjusting the allowance account and the
reversal is recognized in Net income (loss).
(v) Derecognition
A financial asset is derecognized when the contractual rights to its cash flows expire or the Company
has transferred its economic rights to the asset and substantially all risks and rewards. In instances
where substantially all risks and rewards have not been transferred or retained, the assets are
derecognized if the asset is not controlled through rights to sell or pledge the asset.
(vi) Other
Insurance receivables and trade 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 Statements 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 Statements 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.
Empire Life - Annual Report 2016
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
Amortization is calculated to write down the cost of property and equipment to their residual values over their
estimated useful lives as follows:
Land
Building
Furniture and equipment
Leasehold improvements
No amortization
Five percent (declining balance)
Three to five years (straight-line)
Remaining lease term (straight-line)
Amortization is included in Operating expenses in the Consolidated 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 Statements 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).
Empire Life - Annual Report 2016
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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.
(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
Empire Life - Annual Report 2016
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
definition of an insurance contract under IFRS are classified as investment contracts or service
contracts, as appropriate. Products issued by the Company that transfer significant insurance risk
have been classified as insurance contracts in accordance with IFRS 4 Insurance Contracts.
Otherwise, products issued by the Company are classified as either investment contracts in
accordance with IAS 39 Financial Instruments: Recognition and Measurement or service contracts in
accordance with IAS 18 Revenue. The Company defines significant insurance risk as the possibility of
paying at least 2% more than the benefits payable if the insured event did not occur. When referring
to multiple contract types, the Company uses the terminology policy liabilities.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the
remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all
rights and obligations are extinguished or expire. Investment contracts, however, can be reclassified
as insurance contracts after inception if insurance risk becomes significant.
The Company classifies its insurance and investment contracts into three main categories: short-term
insurance contracts, long-term insurance contracts and investment contracts.
(1) Insurance contracts
The Company’s insurance contract liabilities are determined using accepted actuarial practices
according to standards established by the Canadian Institute of Actuaries (CIA) and the
requirements of OSFI. The Company uses 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
Empire Life - Annual Report 2016
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 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.
Empire Life - Annual Report 2016
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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.
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.
Empire Life - Annual Report 2016
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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.
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.
Empire Life - Annual Report 2016
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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.
(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 2016
(1) Amendment to IAS 1 Presentation of financial statements (“IAS 1”)
The IASB has issued amendments to IAS 1, as part of its major initiative to improve presentation and
disclosure in financial reports. The amendments clarify the guidance in IAS 1 on materiality and
aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of
accounting policies. Adoption of the amendment on January 1, 2016 did not have a significant impact
on the consolidated financial statements.
(2) IFRS Annual Improvements 2012-2014
In September 2014, the IASB issued a limited number of amendments to clarify the requirements of
four IFRS standards. Adoption of the 2012-2014 improvements on January 1, 2016 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 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. In April 2016, IASB issued amendments to IFRS
15 clarifying the guidance on identifying performance obligations, accounting for licences of
intellectual property and the principal versus agent assessment, and to provide additional practical
expedients on transition. The standard and the amendments are effective for annual periods
beginning on or after January 1, 2018, with retrospective application. The Company is evaluating the
impact of IFRS 15 on its consolidated financial statements.
Empire Life - Annual Report 2016
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(2) 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 set out in the September
2016 amendment to IFRS 4 Insurance Contracts which allows eligible insurers to defer the adoption
of IFRS 9 until the new insurance contracts standard is adopted, or 2021 at the latest.
(3) 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 evaluating the impact of IFRS 16 on its consolidated financial
statements.
(4) Amendments to IAS 12 Income Taxes (“IAS 12”)
In January 2016, the IASB issued amendments to clarify the requirements for recognizing deferred
tax assets on unrealized losses. The amendments clarify the accounting for deferred tax where an
asset is measured at fair value and that fair value is below the asset’s tax base. They also clarify
certain other aspects of accounting for deferred tax assets. The amendments are effective from
January 1, 2017. The Company is evaluating the impact of the amendments to IAS 12 on its
consolidated financial statements.
(5) Amendments to IAS 7 Statement of cash flows (“IAS 7”)
In January 2016, the IASB issued an amendment to IAS 7 introducing an additional disclosure that
will enable users of financial statements to evaluate changes in liabilities arising from financing
activities. The amendment is part of the IASB’s Disclosure Initiative, which continues to explore how
financial statement disclosure can be improved. The amendment is effective from January 1, 2017.
The Company is evaluating the impact of the amendments to IAS 7 on its consolidated financial
statements.
Empire Life - Annual Report 2016
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
Asset category
Cash and cash equivalents
Cash
Cash equivalents
Total cash and cash equivalents
Short-term investments
Canadian federal government
Canadian provincial governments
Canadian municipal governments
Corporate
Total short-term investments
Bonds
December 31, 2016
December 31, 2015
Fair value
through
profit or loss
Available for
sale
Total
carrying
value
Fair value
through
profit or loss
Available for
sale
Total
carrying
value
$
14,278 $
— $
14,278 $
21,390 $
354,595
368,873
4,983
—
3,963
24,045
32,991
—
—
354,595
368,873
178,380
199,770
69,883
—
—
—
74,866
—
3,963
24,045
69,883
102,874
4,781
5,994
—
17,881
28,656
Canadian federal government
Canadian provincial governments
Canadian municipal governments
81,516
2,614,635
78,743
288,200
310,369
72,819
369,716
2,925,004
151,562
76,053
2,523,693
52,099
Total Canadian government bonds
2,774,894
671,388
3,446,282
2,651,845
Canadian corporate bonds by industry sector:
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Health care
Financial services
Communications
Utilities
Real estate
Infrastructure
50,679
10,716
54,162
17,037
78,747
69,543
504,027
45,101
317,114
6,726
278,675
43,649
—
33,343
27,028
65,110
22,084
343,255
28,148
42,408
—
37,338
94,328
10,716
87,505
44,065
143,857
91,627
847,282
73,249
359,522
6,726
316,013
Total Canadian corporate bonds
1,432,527
642,363
2,074,890
40,999
10,789
61,790
17,190
78,697
70,821
475,027
1,484
274,431
—
279,858
1,311,086
— $
—
—
21,390
178,380
199,770
4,996
—
—
—
4,996
214,285
322,456
69,687
606,428
53,352
—
15,650
23,925
52,401
13,001
386,044
24,444
33,070
—
22,193
624,080
9,777
5,994
—
17,881
33,652
290,338
2,846,149
121,786
3,258,273
94,351
10,789
77,440
41,115
131,098
83,822
861,071
25,928
307,501
—
302,051
1,935,166
Total bonds
4,207,421
1,313,751
5,521,172
3,962,931
1,230,508
5,193,439
Total preferred shares - Canadian
274,871
10,313
285,184
189,645
5,035
194,680
Common shares
Canadian
Common shares
Real estate limited partnership units
U.S.
Other
Total common shares
Total derivative assets
582,582
75,594
181,600
22,866
862,642
3,855
66,969
—
—
—
66,969
649,551
75,594
181,600
22,866
929,611
—
3,855
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
Empire Life - Annual Report 2016
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
As at
Asset category
(continued)
Loans and receivables
Mortgages
Loans on policies
Policy contract loans
December 31, 2016
December 31, 2015
Fair value
through
profit or loss
Available for
sale
Total
carrying
value
Fair value
through
profit or loss
Available for
sale
Total
carrying
value
—
—
—
—
—
—
264,309
47,969
80,944
—
—
—
—
—
—
289,221
46,925
84,921
Total financial instruments
$
5,750,653 $
1,460,916 $
7,604,791 $
5,135,598 $
1,302,370 $
6,859,035
The following table presents the fair value of cash and cash equivalents and investments classified by the
fair value hierarchy:
As at
Fair value through profit or loss:
December 31, 2016
Level 1
Level 2
Total fair
value
December 31, 2015
Level 1
Level 2
Total fair
value
Cash and cash equivalents
$
14,278 $
354,595 $
368,873 $
21,390 $
178,380 $
199,770
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
—
—
32,991
32,991
4,207,421
4,207,421
—
—
28,656
28,656
3,962,931
3,962,931
274,871
787,048
3,265
—
—
10,313
66,969
—
75,594
590
274,871
862,642
3,855
69,883
69,883
1,313,751
1,313,751
—
—
10,313
66,969
189,645
679,551
14,482
—
—
5,035
61,831
—
60,396
167
189,645
739,947
14,649
4,996
4,996
1,230,508
1,230,508
—
—
5,035
61,831
—
—
—
269,171
269,171
47,969
80,944
47,969
80,944
—
—
—
300,186
300,186
46,925
84,921
46,925
84,921
$
1,156,744 $
6,452,909 $
7,609,653 $
971,934 $
5,898,066 $
6,870,000
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, 2016 or during the year
ended December 31, 2015.
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:
Empire Life - Annual Report 2016
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
As at December 31
Impaired Loans
Mortgages
Policy contract loans
Total
2016
2015
Recorded
investment
Allowance for
impairment
Carrying
value
Recorded
investment
Allowance for
impairment
Carrying value
$
$
6,649 $
3,152 $
3,497 $
5,963 $
2,600 $
813
502
311
813
525
7,462 $
3,654 $
3,808 $
6,776 $
3,125 $
3,363
288
3,651
The Company holds collateral with a fair value of $3,500 (2015 $3,370) in respect of these mortgages
and $311 (2015 $288) in respect of these policy contract loans as at December 31, 2016. Mortgage
loans are secured by real estate, and policy contract loans are secured by life insurance.
Continuity of allowance for loan impairment:
Allowance - beginning of year
Provision for loan impairment
Write-off of loans
Allowance - end of year
$
$
2016
3,125 $
529
—
3,654 $
2015
2,836
545
(256)
3,125
The Company has recorded interest income of $789 (2015 $858) on these assets.
As at December 31, 2016 loans and receivables past due but not impaired are $ nil (2015 $ nil).
(ii) Available for sale
For the year-ended December 31, 2016, the Company reclassified a pre-tax loss of $777 from OCI to
Net income due to write downs of impaired AFS common and preferred shares (2015 $2,379).
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
2016
218,589 $
35,970
883
(529)
2015
220,681
38,225
849
(545)
254,913 $
259,210
$
$
Included in interest income is $53,134 (2015 $63,449) 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.
Empire Life - Annual Report 2016
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
As at December 31
2016
2015
Notional
principal
Fair value
assets
Fair value
liabilities
Notional
principal
Fair value
assets
Fair value
liabilities
Exchange-traded
Equity index futures
Equity options
Over-the-counter
Foreign currency forwards
Total
$
$
128,708 $
1,471 $
213 $
94,312 $
977 $
325,348
1,794
28,247
590
—
25
299,876
13,505
175,368
167
482,303 $
3,855 $
238 $
569,556 $
14,649 $
340
—
36
376
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 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
2016
4,050 $
26,461
17,844
4,742
53,097 $
2015
3,229
22,810
18,506
3,364
47,909
$
$
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
values.
5. Other Assets
Other assets consist of the following:
As at December 31
Trade accounts receivable
Prepaid expenses
Other assets
2016
33,731 $
5,949
39,680 $
2015
20,803
5,454
26,257
$
$
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 2016
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
6. Property and Equipment
Cost
As at January 1, 2015
Additions
Disposals
As at December 31, 2015
Additions
Disposals
As at December 31, 2016
Amortization
As at January 1, 2015
Charge for the year
Disposals
As at December 31, 2015
Charge for the year
Disposals
As at December 31, 2016
Carrying amount
December 31, 2016
December 31, 2015
$
$
$
$
$
$
Land
Buildings
Furniture and
equipment
Leasehold
improvements
2,318 $
12,947 $
24,907 $
6,341 $
—
—
2,318
—
—
91
—
13,038
—
—
5,899
—
30,806
6,577
—
56
—
6,397
822
—
2,318 $
13,038 $
37,383 $
7,219 $
— $
(2,912) $
(17,320) $
(5,156) $
—
—
—
—
—
(498)
—
(3,410)
(476)
—
(2,205)
—
(19,525)
(2,712)
—
(557)
—
(5,713)
(439)
—
— $
(3,886) $
(22,237) $
(6,152) $
2,318 $
2,318 $
9,152 $
9,628 $
15,146 $
11,281 $
1,067 $
684 $
Total
46,513
6,046
—
52,559
7,399
—
59,958
(25,388)
(3,260)
—
(28,648)
(3,627)
—
(32,275)
27,683
23,911
There were no asset impairments in 2016 or 2015.
Empire Life - Annual Report 2016
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
7. Intangible Assets
Cost
As at January 1, 2015
Additions
Disposals
As at December 31, 2015
Additions
Disposals
As at December 31, 2016
Amortization
As at January 1, 2015
Charge for the year
Disposals
As at December 31, 2015
Charge for the year
Disposals
As at December 31, 2016
Carrying amount
December 31, 2016
December 31, 2015
Intangible assets
$
$
$
$
$
$
44,337
5,502
—
49,839
6,554
—
56,393
(39,505)
(1,109)
—
(40,614)
(1,438)
—
(42,052)
14,341
9,225
There were no asset impairments during 2016 or 2015.
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
2016
$
262,838 $
142,710
1,668,044
5,990,431
54,212
8,118,235
2015
301,764
151,203
1,528,873
5,362,003
59,085
7,402,928
Less segregated funds held within general fund investments
Total
(36,202)
(35,105)
$
8,082,033 $
7,367,823
Empire Life - Annual Report 2016
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(b) The following table presents the investments of the segregated funds measured on a recurring basis at fair
value classified by the fair value hierarchy:
As at December 31
2016
2015
Level 1
Level 2
Total
Level 1
Level 2
Total
Cash and cash equivalents
$
60,370 $
202,468 $
262,838 $
42,827 $
258,937 $
Short-term investments
Bonds
—
—
Common and preferred shares
5,990,431
142,710
1,668,044
—
142,710
1,668,044
5,990,431
—
—
5,362,003
151,203
1,528,873
—
301,764
151,203
1,528,873
5,362,003
Total
$
6,050,801 $
2,013,222 $
8,064,023 $
5,404,830 $
1,939,013 $
7,343,843
There were no transfers between Level 1 and Level 2, and there were no Level 3 investments during the year
ended December 31, 2016 or during the year ended December 31, 2015.
(c) The following table presents the change in segregated fund assets:
For the year ended December 31
2016
2015
Segregated fund assets - beginning of year
$
7,367,823 $
6,948,475
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
1,349,159
1,521,736
67,562
125,173
29,340
277,602
286,056
63,259
130,732
32,306
412,110
—
2,134,892
2,160,143
1,194,885
—
224,700
1,419,585
1,245,387
262,012
224,593
1,731,992
Net change in segregated funds held within general fund investments
(1,097)
(8,803)
Segregated fund assets - end of year
$
8,082,033 $
7,367,823
(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.
Empire Life - Annual Report 2016
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
9. Insurance Payables
As at December 31
Claims due and accrued
Payable to agents
Premiums paid in advance
Due to reinsurance companies
Other
Insurance payables
2016
54,625 $
12,050
1,902
12,151
16,407
97,135 $
2015
38,159
11,297
2,267
11,707
13,907
77,337
$
$
Of the above total, $2,985 (2015 $1,305) 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 values.
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.
Empire Life - Annual Report 2016
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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:
As at December 31
Participating Individual
Life
Annuity
Non-participating Individual
Life
Annuity
Health
Non-participating Group
Life
Annuity
Health
2016
Reinsurance
(assets)
liabilities
Gross
insurance
contract
liabilities
Net
Gross
insurance
contract
liabilities
2015
Reinsurance
(assets)
liabilities
Net
$
554,486 $
(406) $
554,080 $
547,978 $
(2,111) $
545,867
179
—
179
192
—
192
3,191,047
625,926
3,816,973
3,011,228
623,305
3,634,533
915,889
168,981
23,289
52,631
191,582
(11,036)
(8,800)
(757)
—
(71,570)
904,853
160,181
22,532
52,631
120,012
908,073
154,455
21,564
56,398
194,029
(12,439)
(9,274)
(626)
—
(68,029)
895,634
145,181
20,938
56,398
126,000
Segregated fund deferred acquisition
costs
(94,634)
—
(94,634)
(95,234)
—
(95,234)
Total
$
5,003,450 $
533,357 $
5,536,807 $
4,798,683 $
530,826 $
5,329,509
The Company expects to pay $4,933,196 (2015 $4,710,118) of Insurance contract liabilities and $531,976
(2015 $529,604) of Reinsurance liabilities more than one year after the Consolidated Statements of
Financial Position date. The remaining 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
2016
95,234 $
34,171
(34,772)
94,633 $
2015
89,925
38,551
(33,242)
95,234
$
$
Of the above total, $37,775 (2015 $37,876) is expected to be amortized during the next year.
Empire Life - Annual Report 2016
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(b) Change in insurance contract liabilities and reinsurance assets/liabilities
For the year ended December 31
2016
Reinsurance
(assets)
liabilities
Gross
insurance
contract
liabilities
Net
Gross
insurance
contract
liabilities
2015
Reinsurance
(assets)
liabilities
Net
Balance - beginning of year
$
4,798,683 $
530,826 $
5,329,509 $
4,713,462 $
490,575 $
5,204,037
Changes in methods and assumptions
Improvements in mortality/morbidity
experience
Lapse assumption updates
Update of investment return
assumptions
Model enhancements and
other changes
Normal changes
New business
In-force business
Balance - end of year
(15,843)
31,764
12,543
(6,356)
(3,300)
25,408
(45,126)
67,282
36,149
8,364
(8,977)
75,646
32,906
(3,523)
29,383
(37,843)
(10,160)
(48,003)
(44,247)
44
(44,203)
8,599
(1,250)
7,349
79,275
120,912
(10,939)
10,762
68,336
131,674
77,241
15,068
(10,535)
17,683
66,706
32,751
$
5,003,450 $
533,357 $
5,536,807 $
4,798,683 $
530,826 $
5,329,509
Changes in methods and assumptions summarized in the above tables are further explained as follows:
Improvements for mortality experience for 2016 are primarily related to the individual life business, which was
offset by a small deterioration in mortality for immediate annuities.
Improvements for mortality/morbidity experience for 2015 are primarily related to the individual life business.
The lapse rate assumption update for 2016 was primarily related to an increase of lapse experience on
renewable term 10 business. The remainder was related to regular experience updates for term to 100 and
20-pay life policies.
The lapse rate assumption update for 2015 was primarily related to Empire Life’s term to 100 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 Term-to-100 Insurance Policies and Lapse
Experience released September 2015. This was partially offset by an update to lapse rate margins to reflect
company and industry experience.
The investment return assumption for 2016 was primarily due to regular updates to reinvestment rates and
credit spreads for the CALM valuation as well as enhancements to the modeling of preferred shares cash
flows for deferred and immediate annuity business.
The investment return assumption for 2015 was primarily related to a refinement of the projected amount of
equities backing individual life liabilities. In addition, there were several enhancements to the CALM model for
future reinvestment assumptions.
Model enhancements and other changes for 2016 related to enhancements to the modeling of reinsurance
treaties and terms for individual life insurance and updates to Group LTD termination rate experience study. In
addition, maintenance expense unit costs for individual life business increased slightly as a result of changes
in expense allocations related to sales and inforce business.
Model enhancements and other changes for 2015 relate to lower expenses unit costs that were offset by
refinements to target fund value mix for universal life policies and other minor changes to assumptions and
methodologies.
Empire Life - Annual Report 2016
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(c) Mix of assets allocated to insurance, annuity, investment contract liabilities and equity
Cash and cash equivalents & Short-term investments
$
114,547 $
15,006 $
218 $
341,976 $
471,747
As at December 31, 2016
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
3,628,303
45,574
28,043
862,642
2,061
47,969
335
36,126
488,382
215,600
199,822
—
—
—
30,848
6,430
7,102
3,135
2,906
—
—
—
449
93
1,397,385
5,521,172
—
54,413
66,969
1,794
—
49,312
132,703
264,309
285,184
929,611
3,855
47,969
80,944
175,352
$
4,765,600 $
956,088 $
13,903 $
2,044,552 $
7,780,143
As at December 31, 2015
Insurance
liabilities
Annuity
liabilities
Investment
contract
liabilities
Equity and
other
liabilities
Total
Cash and cash equivalents & Short-term investments
$
62,748 $
20,676 $
245 $
149,753 $
233,422
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
Provisions made for anticipated future losses of principal and interest on investments and included as a
component of policy liabilities are $155,700 (2015 $163,500).
(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 2016
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
Canadian federal 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
2016
2015
471,747 $
3,294,720
2,807,447
6,573,914 $
624,818 $
1,141,199
1,766,017 $
233,422
3,136,487
2,459,446
5,829,355
586,695
1,099,332
1,686,027
2016
42,806 $
20,505
1,087
238
14,964
79,600 $
2015
21,905
23,685
767
376
12,412
59,145
$
$
$
$
$
$
Of the above total, $20,505 (2015 $23,685) 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 2016
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
2016
2015
2016
218,059 $
209,311 $
9,727 $
207,281
195,310
—
2015
9,684
—
(10,778) $
(14,001) $
(9,727) $
(9,684)
$
$
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
2016
2015
2016
2015
Present value of defined benefit obligation - beginning of year
$
209,311 $
192,948 $
9,684 $
10,531
Current service cost
Interest expense
Decrease (increase) in net income before tax
Remeasurements
(Gain) loss from changes in demographic assumptions
(Gain) loss from changes in financial assumptions
Actuarial (gain) loss from member experience
Decrease (increase) in OCI before tax
Employee contributions
Benefits paid
6,233
8,635
14,868
—
888
177
1,065
1,707
(8,892)
6,817
8,038
14,855
—
(5,873)
12,992
7,119
1,823
(7,434)
Present value of defined benefit obligation - end of year
$
218,059 $
209,311 $
13
367
380
—
154
(98)
56
—
(393)
9,727 $
29
400
429
(2,133)
(177)
1,384
(926)
—
(350)
9,684
Empire Life - Annual Report 2016
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
2016
2015
Fair value of defined benefit assets - at beginning of year
$
195,310 $
185,919
Interest income
Administrative expense
Increase (decrease) in net income before tax
Remeasurements
Return on plan assets, excluding amounts included in interest income
Increase (decrease) in OCI before tax
Employer contributions
Employee contributions
Benefits paid
8,138
(780)
7,358
8,487
8,487
3,311
1,707
7,355
(682)
6,673
2,083
2,083
6,246
1,823
(8,892)
(7,434)
Fair value of defined benefit assets - end of year
$
207,281 $
195,310
The actual return on defined benefit assets net of administrative expense, for the year ended December 31,
2016 was a gain of $15,845 (2015 gain of $8,756).
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
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
Pension benefits
Other post-employment
benefits
2016
2015
2016
2015
$
$
$
6,233 $
6,817 $
13 $
8,635
(8,138)
780
8,038
(7,355)
682
367
—
—
7,510 $
8,182 $
380 $
(8,487) $
(2,083) $
— $
—
888
177
—
—
(5,873)
12,992
—
—
154
(98)
—
29
400
—
—
429
—
(2,133)
(177)
1,384
—
(926)
Decrease (increase) in OCI before tax (Note 18(d))
$
(7,422) $
5,036 $
56 $
Defined benefit plan expense is recognized in Operating expenses. Remeasurements in the defined benefit
plan are included in OCI. Operating expenses also include $927 (2015 $823) 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, 2017 are approximately $4,607.
Empire Life - Annual Report 2016
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
The Plan invests primarily in Empire Life segregated and mutual funds. The fair value of the underlying assets
of the funds and other investments are included in the following table:
As at December 31
Equity
Canadian
Consumer discretionary
Consumer staples
Energy
Financials
Industrials
Information technology
Materials
Telecom services
Utilities
Total Canadian
Foreign
Total equity
Debt
Government of Canada
Provincial governments
Municipal governments
Canadian corporations
Total debt
Cash, cash equivalent, accruals
Mutual funds
Other
Total fair value of assets
2016
2015
$
3,525
7,763
17,421
28,284
9,937
7,219
2,875
6,730
2,554
86,308
36,805
123,113
11,038
14,662
490
33,819
60,009
6,783
8,863
8,513
2% $
4%
9%
15%
5%
3%
1%
3%
1%
43%
18%
61%
5%
7%
—%
16%
28%
3%
4%
4%
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%
$
207,281
100% $
195,310
100%
Fair value is determined based on Level 1 inputs for equities and Level 2 inputs for debt.
The following weighted average assumptions were used in actuarial calculations:
As at December 31
Defined benefit obligation as at December 31:
Discount rate - defined benefit obligation
Discount rate - net interest
Inflation assumption
Rate of compensation increase
Future pension increases
Assumed health care cost trend rates at December 31:
Initial health care cost trend rate
Cost trend rate declines to
Year ultimate health care cost trend rate is reached
Pension benefits
Other post-employment
benefits
2016
2015
2016
2015
4.0%
4.2%
2.0%
3.5%
3.0%
n/a
n/a
n/a
4.2%
4.0%
2.0%
3.5%
3.0%
n/a
n/a
n/a
3.8%
4.0%
n/a
n/a
n/a
7.3%
4.5%
2026
4.0%
3.9%
n/a
n/a
n/a
7.5%
4.5%
2026
Empire Life - Annual Report 2016
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
2016
21.64
24.08
22.98
25.27
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, 2016
Discount rate
Rate of compensation increase
Health care cost increase
Claim rate
Life expectancy
As at December 31, 2015
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
Change in
assumption
1%
1%
1%
10%
(26,091)
12,094
n/a
n/a
35,166
(10,577)
n/a
n/a
1 year
5,321
(5,437)
(964)
n/a
1,138
905
449
1,163
n/a
(956)
(905)
(438)
Impact on pension benefits
Impact on other post
employment benefits
Increase
Decrease
Increase
Decrease
Change in
assumption
1%
1%
1%
10%
(24,832)
10,444
n/a
n/a
33,832
(9,080)
n/a
n/a
1 year
4,565
(4,690)
(969)
n/a
1,110
894
414
1,171
n/a
(955)
(895)
(407)
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
2016
2015
14
10
11
14
11
15
Empire Life - Annual Report 2016
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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, 2016
10% Increase 10% Decrease
20% Increase 20% Decrease
9,499 $
456 $
(9,499) $
(456) $
18,998 $
(18,998)
912 $
(912)
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)
$
$
$
$
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, 2016
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
(1,491) $
(72) $
1,716 $
83 $
(2,757) $
(133) $
3,657
176
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
$
$
$
$
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.
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.
Empire Life - Annual Report 2016
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 will be completed in 2017, 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. The fair value
of these debentures is $301,062 as of December 31, 2016 (2015 $305,244), and is within level 2 of the fair
value hierarchy. The fair value is provided by a third party bond pricing service.
On December 16, 2016, the Company issued $200,000 principal amount of unsecured subordinated
debentures with a maturity date of December 16, 2026. The interest rate from December 16, 2016 until
December 16, 2021 is 3.383%, and the rate from December 16, 2021 until December 16, 2026 is equal to the
3-month Canadian Deposit Offering Rate plus 1.95%. Interest is payable semi-annually at December 16 and
June 16 until December 16, 2021, quarterly thereafter with the first such payment on March 16, 2022. The
Company may call for redemption of the debentures on or after December 16, 2021 subject to the approval of
OSFI. The holders have no right of redemption. The fair value of these debentures is $199,870 as
of December 31, 2016, and is within level 2 of the fair value hierarchy. The fair value is provided by a third
party bond pricing service.
The debentures are subordinated in right of payment to all policy contract liabilities of the Company and all
other senior indebtedness of the Company.
14. Insurance Premiums
For the year ended December 31
2016
Gross
Reinsurance
ceded
Net
Gross
2015
Reinsurance
ceded
Life premiums
Health premiums
Total life and health premiums
Annuity premiums
$
470,115 $
(93,167) $
376,948 $
460,324 $
(85,418) $
356,057
826,172
176,080
(27,337)
(120,504)
(248)
328,720
705,668
175,832
342,489
802,813
144,224
(26,170)
(111,588)
(233)
Total insurance premiums
$
1,002,252 $
(120,752) $
881,500 $
947,037 $
(111,821) $
Net
374,906
316,319
691,225
143,991
835,216
Empire Life - Annual Report 2016
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
2016
2016
219,152 $
9,217
228,369 $
2015
208,085
8,733
216,818
$
$
Gross
Reinsurance
ceded
Net
Gross
2015
Reinsurance
ceded
Life claims
Health claims
Total life and health claims
Annuity benefits
$
185,379 $
(53,948) $
131,431 $
207,352 $
(67,549) $
267,921
453,300
212,120
(16,261)
(70,209)
(2,461)
251,660
383,091
209,659
257,559
464,911
262,408
(14,528)
(82,077)
(2,911)
Benefits and claims paid
$
665,420 $
(72,670) $
592,750 $
727,319 $
(84,988) $
(b) Change in insurance contract liabilities and reinsurance ceded
For the year ended December 31
2016
Gross
Reinsurance
ceded
Net
Gross
2015
Reinsurance
ceded
Net
139,803
243,031
382,834
259,497
642,331
Net
Life
Health
Total life and health
Annuity
$
188,221 $
4,342 $
192,563 $
193,091 $
33,569 $
226,660
11,911
200,132
4,635
(3,215)
1,127
1,404
8,696
201,259
6,039
4,340
197,431
(112,210)
4,504
38,073
2,178
8,844
235,504
(110,032)
Change in insurance contract liabilities
$
204,767 $
2,531 $
207,298 $
85,221 $
40,251 $
125,472
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
2016
83,428 $
16,077
12,450
5,065
27,984
2015
83,301
19,658
11,290
4,369
28,547
145,004 $
147,165
$
$
Significant components of other expenses include travel, advertising, and office supplies and services.
Empire Life - Annual Report 2016
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
2016
50,344 $
(639)
49,705 $
$
$
During 2016 the Company paid income tax installments totaling $12,370 (2015 $34,185).
(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 on dividends
Miscellaneous
Income tax expense
2016
206,871 $
55,214
(7,343)
1,834
49,705 $
$
$
2015
26,731
761
27,492
2015
129,950
34,580
(7,503)
415
27,492
The current enacted corporate tax rates as they impact the Company in 2016 stand at 26.69% (2015
26.61%). Expected future tax rates are as follows:
2017
2018
2019
2020
2021
26.66%
26.64%
26.61%
26.58%
26.59%
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)
2016
(7,041) $
(5,584)
3,698
5,475
(5,537)
(8,989) $
2015
(8,485)
(5,896)
2,847
6,300
(2,676)
(7,910)
$
$
Of the above total, $4,827 is expected to be paid (2015 $403 received) more than one year after the
Consolidated Statements of Financial Position date.
Empire Life - Annual Report 2016
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 tax asset from preferred share issue (Note 20)
Deferred income tax benefit (expense)
Statement of operations
Other comprehensive income
Deferred income tax asset (liability) - end of year
$
$
2016
(7,910) $
248
639
(1,966)
(8,989) $
2015
(8,243)
—
(761)
1,094
(7,910)
(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
2016
Before tax Tax provision
(recovery)
After tax
Before tax
2015
Tax provision
(recovery)
After tax
Unrealized fair value change on available
for sale investments
Fair value change on available for sale
investments reclassified to net income,
including impairment write downs
Remeasurements of post-employment
benefit liabilities (Note 12)
Total other comprehensive income (loss)
$
$
8,576 $
2,289 $
6,287 $
5,612 $
1,494 $
4,118
(11,740)
(3,187)
(8,553)
(19,128)
(5,206)
(13,922)
7,366
4,202 $
1,966
1,068 $
5,400
(4,110)
(1,094)
(3,016)
3,134 $
(17,626) $
(4,806) $
(12,820)
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
2016
Before tax Tax provision
(recovery)
After tax
Before tax
2015
Tax provision
(recovery)
After tax
Unrealized fair value change on available
for sale investments
Fair value change on available for sale
investments reclassified to net income,
including impairment write downs
Remeasurements of post-employment
benefit liabilities (Note 12)
Shareholder portion of policyholder other
comprehensive income (loss)
$
3,465 $
925 $
2,540 $
5,775 $
1,537 $
4,238
(8,759)
(2,358)
(6,401)
(17,762)
(4,783)
(12,979)
7,024
156
1,875
5,149
(3,919)
(1,043)
(2,876)
39
481 $
117
(171)
(52)
(119)
1,405 $
(16,077) $
(4,341) $
(11,736)
Total other comprehensive income (loss)
$
1,886 $
The following income tax amounts are included in each component of policyholders’ OCI:
For the year ended December 31
2016
Before tax Tax provision
(recovery)
After tax
Before tax
2015
Tax provision
(recovery)
After tax
$
5,111 $
1,364 $
3,747 $
(163) $
(43) $
(120)
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)
$
2,316 $
1,729 $
(1,549) $
(465) $
(1,084)
(2,981)
(829)
(2,152)
(1,366)
(423)
342
(156)
91
(39)
587 $
251
(117)
(191)
171
(51)
52
(943)
(140)
119
Empire Life - Annual Report 2016
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 shares issued in 2016 (refer to Note 20) do not dilute EPS
as the preferred 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
20. Capital Stock
2016
2015
$
$
152,721 $
985,076
155.03 $
108,577
985,076
110.22
As at
December 31, 2016
December 31, 2015
Shares
authorized
Shares issued and
outstanding
Amount
Shares
authorized
Shares issued and
outstanding
Amount
Preferred shares
Series 1
unlimited
5,980,000 $
149,500
—
— $
Common shares
2,000,000
985,076 $
985
2,000,000
985,076 $
—
985
In the first quarter of 2016, Empire Life issued to the public 5,980,000 Non-Cumulative Rate Reset Preferred
Shares, Series 1 (Series 1 Preferred Shares) at $25 per share. Holders of Series 1 Preferred Shares are 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%.
Holders of Series 1 Preferred Shares will have the right, at their option, to convert their shares into Non-
Cumulative Floating Rate Preferred Shares, Series 2 (Series 2 Preferred Shares), subject to certain conditions,
on April 17, 2021 and on April 17 every five years thereafter. Holders of the Series 2 Preferred Shares will be
entitled to receive non-cumulative quarterly floating dividends, as and when declared by the Board of Directors of
Empire Life, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.99%.
The cost of issuance of the Series 1 Preferred Shares, $5,150 less $1,375 of income tax, was charged to retained
earnings.
Empire Life - Annual Report 2016
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
21. Dividends
Preferred shareholder dividends
On February 25, 2016 the Board approved a cash dividend of $0.2402 per share on the issued and outstanding
Series 1 Preferred Shares, payable on the 17th day of April, 2016.
On April 28, 2016 the Board approved a cash dividend of $0.359375 per share on the issued and outstanding
Series 1 Preferred Shares, payable on the 17th day of July, 2016.
On July 28, 2016 the Board approved a cash dividend of $0.359375 per share on the issued and outstanding
Series 1 Preferred Shares, payable on the 17th day of October, 2016.
On October 27, 2016 the Board approved a cash dividend of $0.359375 per share on the issued and outstanding
Series 1 Preferred Shares, payable on the 17th day of January, 2017.
On February 24, 2017, subsequent to the date of these financial statements, the Board approved a cash dividend
of $0.359375 per share on the issued and outstanding Series 1 Preferred Shares, payable on the 17th day of April,
2017.
Common shareholder dividends
There were no common shareholder dividends paid in 2016 or 2015.
22. Shareholders' Equity Entitlement
Shareholders’ entitlement to $4,357 (2015 $4,586) 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
2016
2015
$
$
51,127 $
618,314 $
52,837
609,423
Transfers to shareholders’ account
In 2016, the Company transferred $2,206 (2015 $2,057), equal to 7.8% (2015 7.9%) 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.
Empire Life - Annual Report 2016
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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.
Operating results are segmented into three product lines along with the Company’s capital and surplus
as follows:
Net premiums from external customers
Interest income
Total investment income
Fair value change in fair value through profit or loss assets
Realized gain (loss) on fair value through profit or loss assets
Realized gain (loss) on available for sale assets including
impairment write downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of 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
Net premiums from external customers
Interest income
Total investment income
Fair value change in fair value through profit or loss assets
Realized gain (loss) on fair value through profit or loss assets
Realized gain (loss) on available for sale assets including
impairment write downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of 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
For the year ended December 31, 2016
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
$
175,832 $
31,983
338,908 $
6,074
41,125
(4,290)
(173)
(162)
217,430
209,659
6,039
40
—
1,562
47,053
84,883
—
—
—
20,008
62,080
3,723
322
647
(158)
9,767
258,986
(4,392)
—
—
1,218
41,333
33,558
—
9,604
—
4,124
9,996
366,760 $
— $
150,642
175,785
21,692
47,979
6
1,035
124,105
205,651
—
28,564
2,285
55,489
76,718
—
9,925
3,996
25,689
83,120
29,890
34,280
(5,851)
(28,339)
12,053
137
—
—
—
—
—
1,129
—
9,297
—
—
(116)
1,970
For the year ended December 31, 2015
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
$
143,991 $
35,854
325,223 $
6,036
43,673
(28,153)
1,276
(30)
205,957
259,497
(110,032)
426
—
1,748
52,604
86,019
—
—
—
18,980
59,220
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
366,002 $
— $
140,376
171,119
(56,408)
38,114
444
1,338
130,180
240,742
—
25,991
1,582
51,586
69,797
—
7,010
4,000
(7,440)
(1,257)
38,415
40,860
1,021
1,620
18,642
258
—
—
—
—
—
999
—
8,959
—
—
13,733
38,710
Total
881,500
218,589
254,913
11,873
20,114
11,739
228,369
592,750
207,298
40
28,564
5,065
145,004
195,159
9,297
19,529
3,996
49,705
157,166
Total
835,216
220,681
259,210
(85,677)
42,233
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
Empire Life - Annual Report 2016
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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
For the year ended December 31, 2016
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
969,991 $
152,586 $
4,613,014 $
2,044,552 $
7,780,143
8,061,128
—
20,905
—
8,082,033
9,031,119 $
152,586 $
4,633,919 $
2,044,552 $ 15,862,176
For the year ended December 31, 2015
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
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
$
$
$
$
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
Investment Commitments
In the normal course of business, outstanding investment commitments are not reflected in the Consolidated
Financial Statements. In January 2016 the Company made a $20,000 commitment to purchase additional units in
a real estate limited partnership. Draws on this commitment are payable on demand up to and including July 31,
2018.
On January 29, 2016, a cash call was settled to purchase units for $2,000 in this real estate limited partnership.
On June 29, 2016, a cash call was settled to purchase units for $6,667 in this real estate limited partnership.
On July 14, 2016, a cash call was settled to purchase units for $1,666 in this real estate limited partnership.
At December 31, 2016 there remained $9,667 (December 31, 2015, $ nil) of outstanding cash calls to purchase
units in the real estate limited partnership.
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 2016 were $2,884 (2015 $3,079). The future aggregate
minimum lease payments under non-cancellable operating leases are as follows:
As at December 31
2016
2017
2018
2019
2020
2021 (and thereafter)
2016
— $
2,934
2,880
2,816
1,694
5,647
15,971 $
$
$
2015
2,662
2,098
1,840
1,777
761
—
9,138
Empire Life - Annual Report 2016
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
Other contingencies
The Company operates in the insurance industry and is subject to legal proceedings in the normal course of
business. While it is not practicable to forecast or determine the final results of all pending or threatened legal
proceedings, management does not believe that such proceedings (including litigation) will have a material
effect on its results and financial position.
The Company by-laws provide indemnification to its current and former directors, officers and employees to
the extent permitted by law, against contractual indemnities and liabilities arising from their service to the
Company. The broad general nature of these indemnification by-laws does not permit a reasonable estimate
of the maximum potential amount of any liability.
In certain cases, the Company would have recourse against third parties with respect to the foregoing items
and the Company also maintains insurance policies that may provide coverage against certain of these items.
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 and long-term employee benefits
Post-employment benefits
Total
$
$
2016
6,554 $
524
7,078 $
2015
6,314
616
6,930
Post-employment benefits are comprised of employer current service costs for pension and other post-
employment benefits.
Empire Life - Annual Report 2016
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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, 2016 and December 31, 2015 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
2016
1,206,134 $
707,205
2015
917,617
504,430
1,913,339 $
1,422,047
$
$
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 2016
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
The Company buys investment quality bonds to support, to a very large extent, the liabilities under the
insurance and annuity policies of the Company. The Company’s investment strategy also includes the use
of publicly-listed “large cap” common stocks to support the liabilities under its insurance policies. Cash
flows arising from these investments are intended to match the liquidity requirements of the Company’s
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.
Empire Life - Annual Report 2016
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 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.
Empire Life - Annual Report 2016
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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.
Shareholders' net income (including segregated fund guarantees)*
$
17,682 $
(15,674) $
36,045 $
(35,579)
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$ nil $ nil $ nil $ nil
$
$
2,340 $
2,563 $
(2,340) $
(2,563) $
4,680 $
5,126 $
(4,680)
(5,126)
As at December 31, 2016
10% Increase 10% Decrease
20% Increase 20% Decrease
Shareholders' net income (including segregated fund guarantees)*
$
11,804 $
(6,789) $
27,044 $
(18,989)
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)
As at December 31, 2015
10% Increase
10% Decrease
20% Increase
20% Decrease
*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 9.1% (2015 8.9%). The Company
uses an assumption of 7.6% (2015 7.8%) 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 $111,600 (2015 $116,500).
Empire Life - Annual Report 2016
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
The following table identifies the concentration of the Company's common equity holdings in
Empire Life's investment portfolios:
As at December 31
Holdings of common equities in the 10 issuers to which the Company had the greatest exposure
Percentage of total cash and investments
Exposure to the largest single issuer of common equities
Percentage of total cash and investments
(2) Interest rate risk
$
$
2016
2015
330,213
$
286,544
4.5%
75,594
$
1.0%
4.2%
60,396
0.9%
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 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.
As at December 31, 2016
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
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
$
$
$
$
$
$
$
$
8,451 $
169 $
(33,479) $
(1,586) $
(9,438) $
(184) $
16,030 $
(19,995)
323 $
39,351 $
(61,087) $
1,745 $
(3,014) $
(386)
84,574
3,649
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) $
16,349 $
987 $
34,385 $
(54,631) $
1,452 $
(2,652) $
(20,608)
(1,186)
73,483
2,987
Empire Life - Annual Report 2016
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 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 $47,400 (2015 $56,200). 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% (2015 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.
Empire Life - Annual Report 2016
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 $11,095
(2015 $ nil) on shareholders' Net income, $ nil (2015 $ nil) on shareholders’ OCI and $ nil (2015 $
nil) on policyholders’ OCI. The Company’s exposure to foreign currency risk in its financial
liabilities is not material.
The Company uses derivative instruments, including futures contracts and foreign currency
forward contracts, to manage foreign exchange risks. Improper use of these instruments could
have an adverse impact on earnings. The Company manages this risk by applying limits
established by the Risk and Capital 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.
Empire Life - Annual Report 2016
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 2016 Consolidated Financial Statements are based on the
present value of the estimated cash flows. Due to the use of assumptions, actual cash flows will differ
from these estimates.
Insurance contract liabilities
Investment contract liabilities
Subordinated debt
Preferred shares
Accounts payable and Other liabilities
Total liabilities
Operating lease commitments
As at December 31, 2016
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$
72,467 $
218,061 $
531,530 $
18,003,489 $
18,825,547
1,784
15,376
8,596
220,540
318,763
2,934
7,864
46,884
160,087
7,191
4,794
530,518
—
20,505
3,986
—
—
—
18,428
592,778
168,683
248,236
440,087
1,087,347
18,007,475
19,853,672
8,220
4,297
520
15,971
Total
$
321,697 $
448,307 $
1,091,644 $
18,007,995 $
19,869,643
Insurance contract liabilities
Investment contract liabilities
Subordinated debt
Accounts payable and Other liabilities
Total liabilities
Operating lease commitments
As at December 31, 2015
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$
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
Total
$
273,045 $
234,061 $
811,373 $
17,498,719 $
18,817,198
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, 2016, 6.2% (2015 3.4%) of cash and investments were held in
these shorter duration investments.
Empire Life - Annual Report 2016
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(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 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
2016
$
368,873 $
102,874
5,521,172
285,184
3,855
264,309
95,473
47,969
80,944
40,551
53,097
33,731
2015
199,770
33,652
5,193,439
194,680
14,649
289,221
94,922
46,925
84,921
26,023
47,909
20,803
$
6,898,032 $
6,246,914
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)).
Empire Life - Annual Report 2016
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 (and lower ratings)
Total
2016
2015
Fair value % of Fair value
Fair value % of Fair value
$
380,423
591,132
3,689,809
859,808
7% $
11%
66%
16%
308,435
524,546
3,628,158
732,300
$
5,521,172
100% $
5,193,439
6%
10%
70%
14%
100%
Credit ratings are normally obtained from Standard & Poor's (S&P) and Dominion Bond Rating
Service (DBRS). In the event of a split rating, the lower rating is used. Issues not rated by a
recognized rating agency (i.e. S&P, DBRS, or Moody's) are rated internally by the Investment
Department. The internal rating assessment is documented referencing suitable comparable
investments rated by recognized rating agencies and/or methodologies used by recognized rating
agencies.
Provincial bonds represent the largest concentration in the bond portfolio, as follows:
As at December 31
Provincial bond holdings
Percentage of total bond holdings
2016
2015
$
2,925,004
$
2,845,599
53.0%
55.0%
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
2016
2015
Fair value % of Fair value
Fair value % of Fair value
$
59,872
586,444
637,529
4,237,327
1% $
11%
12%
76%
66,769
560,124
571,599
3,994,947
$
5,521,172
100% $
5,193,439
1%
11%
11%
77%
100%
The following table discloses the Company's holdings of fixed income securities in the 10 issuers
(excluding the federal government) to which the Company had the greatest exposure, as well as
exposure to the largest single issuer of corporate bonds.
As at December 31
2016
2015
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.
$
$
3,534,308
$
3,480,719
46.5%
50.8%
154,112
$
151,859
2.0%
2.2%
Empire Life - Annual Report 2016
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
(2) Preferred shares
The Company’s preferred share investments are all issued by Canadian companies, with 1%
(2015 4%) of these investments rated as P1 and the remaining 99% (2015 96%) rated as P2.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $264,309 or
100% (2015 $288,622 or 99%) of the total mortgage portfolio.
(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
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Net premium income
Fee and other income
Total
$
$
176 $
144 $
339 $
325 $
367 $
366 $
— $
— $
882 $
217
207
9
9
2
1
—
—
228
835
217
393 $
351 $
348 $
334 $
369 $
367 $
— $
— $ 1,110 $ 1,052
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.
Empire Life - Annual Report 2016
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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, 2016. For participating business it is assumed that changes will
occur in policyholder dividend scales corresponding to changes in best estimate assumptions such
that the net change in participating insurance contract liabilities is immaterial.
(1) Mortality
The Company carries out annual internal studies of its own mortality experience. The valuation
mortality assumptions are based on a combination of this experience and recent CIA industry
experience. An increase in the rate of mortality will lead to a larger number of claims (and claims
could occur sooner than anticipated), which for life insurance, will increase expenditures and
reduce profits for the shareholders.
For non-participating insurance business, a 2% increase in the best estimate mortality assumption
would increase policy liabilities thereby decreasing Net income by approximately $9,700 (2015
$11,900).
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 $4,000 (2015 $4,500).
(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 $118,400 (2015 $113,500). 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.
Empire Life - Annual Report 2016
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 $5,900 (2015 $5,500).
(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.
For individual critical illness business, the incidence rates (or rates of accident or sickness) are the
key assumption related to morbidity. An increase in incidence rates would result in an increase in
the number of claims which increases expenditures and reduces shareholders’ profits. For group
long-term disability business the termination rates (or rates of recovery) are the key assumption
related to morbidity. A decrease in termination rates would result in disability claims persisting
longer which increases expenditures.
For non-participating insurance business where morbidity is a significant assumption, a 5%
adverse change in the assumption would result in an increase to policy liabilities thereby reducing
Net income by approximately $6,500 (2015 $6,300).
(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.
Empire Life - Annual Report 2016
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
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 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.
Empire Life - Annual Report 2016
99
GLOSSARY OF TERMS (unaudited)
Accumulated Other Comprehensive Income (AOCI)
A separate component of shareholders’ and policyholders’ equity which includes net unrealized gains and losses on
available for sale securities, unamortized gains and losses on cash flow hedges, unrealized foreign currency
translation gains and losses and remeasurement of post-employment benefit liabilities. These items have been
recognized in comprehensive income, but excluded from net income.
Active Market
An active market is a market in which the items traded are homogeneous, willing buyers and sellers can normally be
found at anytime and prices are available to the public.
Available For Sale (AFS) 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 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 2016
100
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 Common 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 2016
101
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 policyholders to
participate in the profits of the participating account. Most policies are credited with dividends annually, while a few
older plans receive the dividends every five years as per contractual provisions.
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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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.
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PARTICIPATING POLICYHOLDER DIVIDENDS AND BONUS POLICY
Company management will review the underlying experience, assumptions and procedures for participating dividend
scales annually. Material changes in actual experience will be passed through to participating policyholders within two
years of the experience change to the extent that they are not anticipated in the current dividend scale. Company
management will prepare a written report which describes the underlying experience, assumptions and procedures for
the proposed dividend scale recommendations.
The dividend scales may also be adjusted to reflect specific policyholder behaviour, such as experience for lapses or
for policy loans taken at guaranteed rates.
For certain blocks of policies, the policyholder dividend scale may be determined using methods which are designed
to approximate the contribution to income of those blocks.
Termination dividends are not payable under any participating policies issued by Empire Life.
Appointed Actuary
Annually, the Board will consider the Appointed Actuary’s opinion on the continuing fairness of this policy to
participating policyholders.
Process to Approve (and Frequency)
This policy is reviewed annually by the Vice President & Product Actuary. All non-material amendments must be
approved by the Chief Actuary. Material amendments must be approved by the Board. The principal factors that
would be expected to change the policy include changes in legislation, regulation of participating account, accepted
actuarial practice, capital requirements, taxation and accounting rules or fundamental changes to the circumstances
of the Company.
This policy will also be reviewed if the Company decides to stop accepting new business in the participating account.
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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 Risk and Capital Committee of the Board of Directors and
an internal risk management department, led by the Chief Risk Officer, which 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 2016 and is scheduled to meet at least six times in 2017.
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 and strategic 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 2016
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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
200 -36 York Mills Road
Toronto, Ontario M2P 2E9
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
200-36 York Mills Road
Toronto, Ontario M2P 2E9
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 2016
107
BOARD OF DIRECTORS
SHAREHOLDERS' DIRECTORS
POLICYHOLDERS' DIRECTORS
HONORARY CHAIRMAN
John F. Brierley 1, 2, 5
Corporate Director
Edward M. Iacobucci 1, 2, 3
Dean, Faculty of Law
University of Toronto
Duncan N.R. Jackman 3, 5
Chairman of the Board
Mark J. Fuller 2, 3, 5
The Honourable Henry N.R. Jackman
President and Chief Executive Officer
Honorary Chairman
Ontario Pension Board
The Empire Life Insurance Company
Harold W. Hillier 1, 2, 4
Corporate Director
HONORARY DIRECTOR
The Right Honourable John N. Turner
Mark Sylvia
President and Chief Executive Officer
The Empire Life Insurance Company
The Empire Life Insurance Company
Clive P. Rowe 4, 5
Partner
Oskie Capital
Stephen J.R. Smith 4, 5
Chairman and President
First National Financial LP
Mark M. Taylor 1, 4
Corporate Director
Jacques Tremblay 5
Partner
Oliver Wyman Actuarial Consulting
1 Member of Audit Committee
2 Member of Conduct Review Committee
3 Member of Human Resources Committee
4 Member of Investment Committee
5 Member of Risk and Capital Committee
Empire Life - Annual Report 2016
108
CORPORATE MANAGEMENT
Mark Sylvia
President and Chief Executive Officer
Richard Carty
General Counsel and Senior Vice-President, Human Resources
Richard Cleaver
Senior Vice-President and Chief Technology Officer
Ron Friesen
Senior Vice-President and Chief Financial Officer
Edward Gibson
Senior Vice-President and Chief Actuary
Ian Hardacre
Senior Vice-President and Chief Investment Officer
Sean Kilburn
Senior Vice-President, Retail
Steve Pong
Senior Vice-President, Group Solutions
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EMPIRE LIFE ANNUAL REPORT 2016
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 get the investment, insurance and group benefits coverage they
need to build wealth, generate income, and achieve financial security.
Follow Empire Life on Twitter @EmpireLife or visit our website, www.empire.ca
for more information.
1 Based on general fund and segregated fund assets in Canada as at December 31, 2015 as reported in regulatory filings
2 As at May 27, 2016
Transfer Agent and Registrar
CST Trust Company
320 Bay Street, 3rd Floor
Toronto, Ontario, M5H 4A6
Phone: 416-682-3860
Toll Free: 800-387-0825
www.canstockta.com
Stock Exchange Listing
Preferred Shares, Series 1 EML.PR.A
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-02/17