The Empire Life Insurance Company
Annual Report 2019
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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. Segmented Information
24. Commitments and Contingencies
25. Related Party Transactions
26. Capital Management
27. Risk Management
Glossary of Terms
Participating Account Management Policy
Participating Policyholder Dividends and Bonus Policy
Participating Account Financial Disclosure
Corporate Governance Over Risk Management
Corporate Information
Empire Life - Annual Report 2019
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8
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39
40
41
42
43
44
44
44
58
62
62
63
63
64
65
65
69
70
74
74
75
75
75
76
78
78
79
79
80
82
82
83
84
98
100
102
104
105
106
2019 FINANCIAL HIGHLIGHTS
155%
LICAT total ratio
as at December 31, 2019
Product
diversification
Strength of our capital base
Product diversification
Our Life Insurance Capital Adequacy Test
(LICAT) ratio is well above the minimum
requirements set by the industry regulator.
A high LICAT ratio demonstrates our
long-term ability to pay claims and our
prudent capital management.
What is an LICAT ratio?
The LICAT is intended to measure the
life insurer’s solvency position by
recognizing the long-term economics
of the life insurance business. OSFI has
established supervisory target levels of
70% for Core and 100% for Total capital.
by premium and fee income for the
12 months ended December 31, 2019
Empire Life is well-diversified across
three product lines:
Wealth Management
35%
Employee Benefits
32%
Individual Insurance
33%
Financial ratings
These financial ratings give you an
independent opinion of our financial
strength as an insurer and our ability
to meet policyholder obligations.
A (Excellent)
A.M. Best Company (As at June 14, 2019)
Financial Strength Rating: A
Issuer Rating: A
Subordinated Debt Rating: A (low)
DBRS (as at May 27, 2019.)
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 2019 Annual Report.
Common Shareholders’
Net Income
2019 (in millions)
$174
Common Shareholders’
Net Income
2018 (in millions): $137
Net Premium and Fee Income
2019 (in millions)
$1,172
Net Premium and Fee Income
2018 (in millions): $1,138
Total Assets Under Management
2019 (in millions)
$18,100
Total Assets Under Management
2018 (in millions): $ 16,415
MESSAGE FROM THE
CHAIRMAN OF THE BOARD
There is a well-known saying: hindsight is 20/20. It means it's easy to know the right thing to do after something has
happened, but it's hard to predict the future.
To me, the mark of a truly successful company is one that doesn’t worry about predicting short-term events, but
focuses on doing the right things for its customers over the long-term.
As we enter a new decade in 2020, it is evident that the vision of Empire Life is clear and the company is doing all the
right things to be competitive and relevant in an ever-changing industry.
In May, the Board was given the opportunity to see first-hand some of the excellent work the teams are doing in the
areas of digital and data to transform the business. The Board was very impressed with the passion with which team
members talked about their work, and how they are developing and using technology to meet the changing
preferences of consumers and to create a positive customer experience.
Increasingly, Canadians are concerned about the use of their personal information. With the pervasive use of
technology, companies need to be more vigilant than ever in protecting their customers’ information. For these
reasons, data security and privacy have become a key area of focus, and the Board will continue to provide the
necessary oversight to make sure the company is doing the right things to protect people’s privacy and personal
information.
The insurance industry continues to sail against the headwinds of the low interest rate environment, increasing
regulation and geo-political threats never seen before. Within this larger context, it will be imperative for companies to
practice sound expense management and continuously improve to achieve cost savings.
In May, Scott Ewert and Patricia Volker joined our Board of Directors, bringing with them valuable financial and
accounting expertise. After serving many years on the Board, Mark Taylor did not stand for re-election. On behalf of
the Board, we thank Mark for always being a steady voice and guiding force in the growth and success of Empire Life
during his lengthy service.
It is indeed hard to predict what the next decade will bring, but this I know. Empire Life has always thrived by focusing
on the right things, and most of all, by focusing on people. It is in this realm where the company shines, and I am
confident the people of Empire Life will do their utmost to ensure it continues to be their greatest competitive
advantage for decades to come.
Duncan N. R. Jackman
Chairman of the Board
February 26, 2020
Empire Life - Annual Report 2019
5
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
As we move into a new decade, the life insurance industry continues to be impacted by four major trends: lower
interest rates, demographic shift, digital technology, and increased regulation.
The continuing lower interest rate environment has significant implications for life insurers. At this time last year,
economists forecasted that rates would increase in 2019; that did not happen. While lower interest rates are good for
consumer debt holders, they are not positive for insurers, like us, with large fixed income portfolios that benefit from
higher yields. We rely on solid fixed income returns to build assets and fund guarantees within our products.
Our Chief Investment Officer, Ian Hardacre, reminds us of the importance of separating the economy and the market.
We’ve seen the longest economic expansion on record and it could be in the last phase of the cycle. But the path of
markets is not linear, and markets are much more volatile-events such as conflict in the Middle East, global trade,
Brexit and the post-Brexit transition, Coronavirus, and the looming U.S. presidential election have meant continued
volatility.
Equity markets are becoming more complex with the introduction of exchange-traded funds (ETFs) and other
synthetic instruments. We continue to execute on our disciplined, value-oriented approach to managing our
customers’ investments with a focus on downside protection. In fact, two of our funds celebrated significant
anniversaries in 2019; 25 years for Empire Life Asset Allocation Fund and 50 years for the Empire Life Elite Equity
Fund.
Studies show that Canadians are living longer and their biggest fear is outliving their investments. The baby boomer
generation are either retired or are in the process of preparing for retirement. Our Class Plus 3.0 investment product
continues to be relevant because it provides guaranteed income for life. We are uniquely positioned to support our
customers’ retirement income needs and grow our business.
But it is also important that we address the needs of younger customers who are looking for the income and lifestyle
protection that insurance products provide. We continue to build on our industry-leading digital capability that enables
us to respond to younger digital native consumers. They want to buy easy to understand life and health insurance
products online. We can deliver.
We have been able to use digital technology to improve our customer service. We have automated our business
processes. This has freed up customer support teams so they can answer customer questions. Over the past four
years, we have reduced our average call answering time by 95%, down to just 13 seconds. We have also invested in
developing our online portals so advisors and customers can access their data and our systems 24/7.
With great power comes great responsibility; with digital progress comes an increased need to protect the data we are
trusted with. Our customers count on us to responsibly manage and protect their information. We are constantly
evaluating and strengthening our data security and privacy protection processes and systems to meet or exceed
those expectations.
The resources required to manage increasing regulation at international, federal and provincial levels continue to be
of significant concern for insurers. We are facing far more aggressive consumer regulation and financial solvency
regulation than in the past, much of which increases operating costs dramatically without any offsetting revenue gains.
Nonetheless, it is a necessary part of our business. We are constantly measuring, monitoring and managing risk to
ensure we manage our business responsibly.
Business developments
We are pleased to report that Empire Life was once again named Life and Health Insurer of the Year at the 2019
Insurance Business Canada Awards. This is the third time in the past four years we have been so honoured.
We launched a new suite of six segregated funds combining passive and active management and added two new
standalone funds to our Guaranteed Investments Funds (GIF) contract: the Empire Life Global Dividend Growth GIF
and the Empire Life Short-Term High Income GIF. Our new multi-strategy GIFs provide exposure to ETFs and
actively-managed investments from third-party managers within one segregated fund solution.
We launched our interactive Retirement and Savings Tool which helps Canadians determine if they’re on track to
meet their savings goals.
For the fifth consecutive year, Empire Life segregated funds were recognized for their risk-adjusted performance,
winning three Fundata FundGrade A+ Awards.
Empire Life - Annual Report 2019
6
MESSAGE FROM THE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
We added a new 10-pay option for our EstateMax® and Optimax Wealth® participating life insurance portfolios to
offer consumers affordable, lifetime participating life insurance protection paid up in only 10 years. This product
enables advisors to satisfy the needs of even more consumers looking for flexible, guaranteed lifetime protection.
We added more functionality to our plan member and administrator portals. We also enhanced our direct billing
offering through a partnership with providerConnect, a web portal that allows service providers in Canada to submit
claims, accept payment or pay the patient, and view statements and claims reports online.
Fighting fraud continues to be a focus for the group benefits industry and the Canadian Life and Health Insurance
Association (CLHIA). In 2019, we created a new Find-a-Provider tool to help plan members find approved providers in
their area for services like physiotherapy, massage and naturopathy. Not only does the tool make it simple, fast and
easy for our plan members, but it also helps us mitigate benefits fraud, which affects our business results and, in turn,
can increase costs for administrators and plan members.
Financial results
At year-end 2019, our Life Insurance Capital Adequacy Test (LICAT) ratio was 155%, exceeding all prescribed and
recommended target levels. The LICAT is intended to improve the measurement of a life insurer’s solvency position
by recognizing the long-term economics of the business. The Office of the Superintendent of Financial Institutions
(OSFI) has established supervisory target levels of 70% for Core and 100% for Total LICAT capital.
Our assets under management, including segregated funds, mutual funds, participating insurance policies and
general assets, increased in 2019 to $18 billion, from $16 billion the previous year. Common shareholders’ net income
increased to $174 million, compared to $137 million in 2018, resulting in earnings per share (basic and diluted) of
$176.58 compared to $139.53 the previous year. These 2019 results were primarily due to significant changes in the
Company's reinsurance program relative to unfavourable assumption updates and experience losses last year.
Our results remain solid and reinforce our strategy of diversification across three lines of business. Net income for the
individual life and health insurance product line was $65 million, up from $19 million in 2018. In the wealth
management line, net income for 2019 was $74 million, up from $73 million in 2018.
In our employee benefit product line, net income decreased to $7 million, down from $24 million in 2018. Our results
in 2019 reflect our continued efforts in growing sales and adding new strategic partners building a solid foundation for
future success.
Our people and our purpose
One thing that has remained constant over the last decade is our focus on helping Canadians build wealth and protect
their financial security. Every member of our team understands that what we do every day makes a difference in the
lives of our customers. It is our responsibility to be there when they need us most.
As a company we are focused on continuous improvement. That means getting better at everything we do every day.
In order to make this possible we must invest in our employees and enable them to increase their skills and embrace
the future with optimism. Great teams accomplish great things.
We were honoured to be named one of Forbes’ Best Employers in Canada in 2019, and again in 2020. We will
continue our focus on being an employer of choice.
Looking to the future
Empire Life will celebrate its 100th anniversary in 2023. We will reach this milestone through the support of our
advisors who trust us to provide our products and services to their clients. We appreciate their faith in us and will
continue to work to serve our customers.
Mark Sylvia
President and Chief Executive Officer
February 26, 2020
Empire Life - Annual Report 2019
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 Empire Life’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 assumptions used in determining the profits in the actuarial liabilities at the point of sale exceeds the
expected profit margin assumed in the product pricing. The impact of new business also includes 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. Possible areas of variances include benefit claims, policy persistency, expenses, investment income
and others.
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 twelve months ended December 31
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital and
Surplus
Total
(in millions of dollars)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Expected profit on in-force business
$
113 $
121 $
25 $
22 $
52 $
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
(12)
13
(16)
98
—
(11)
(17)
(13)
(9)
(5)
97
—
—
2
9
—
19
4
32
—
2
(19)
51
86
—
50
7
(14)
(19)
24
—
$
190 $
194
(28)
(6)
37
194
54
(16)
(3)
(20)
154
37
—
54
—
37
$
$
98 $
97 $
9 $
32 $
86 $
24 $
54 $
37 $
247 $
191
24
24
2
8
19
1
15
7
60
40
74 $
73 $
7 $
24 $
67 $
24 $
39 $
30 $
187 $
151
Empire Life - Annual Report 2019
8
SOURCES OF EARNINGS
Wealth Management
Wealth Management’s 2019 earnings on operations were generally consistent with the level achieved in 2018.
Expected profit on in-force business was lower in 2019 due to lower fee income anticipated from a lower starting point
for assets under management (AUM) in 2019 compared to 2018. The impact of new business was primarily driven by
higher sales of fixed annuities partially offset by lower segregated fund and mutual fund sales. Experience gains in
2019 were primarily related to strong AUM growth in the segregated fund line fueled by strong equity market returns.
Experience losses in 2019 were driven by low AUM growth on the segregated fund line combined with investment
losses on the fixed annuity line. Losses from management actions and changes in assumptions were primarily driven
by unfavourable assumption updates in the fixed annuities line in each of 2019 and 2018.
Employee Benefits
Employee Benefit’s earnings on operations were lower than the level achieved in 2018. Expected profit on in-force
business was higher in 2019 due to the growth in the in-force block from strong sales activity in 2018. The impact of
new business was higher than 2018 levels as a result of on-going growth in sales in this line. Experience gains and
losses were nil in 2019, compared to 2018 where the line benefited from favourable health and disability claims
results.
Individual Insurance
The increase in Individual Insurance earnings on operations was primarily due to the favourable impact of updates to
policy liabilities related to changes in the Company's reinsurance programs, partially offset by more unfavourable
updates for policy liability methodology and assumptions, higher experience losses and a less favourable impact of
new business in 2019 relative to 2018.
Capital & Surplus
Earnings from Capital and Surplus in 2019 were higher than 2018 primarily from realized investment gains on assets
held in this segment. Interest expenses were also lower level due to the redemption of some of the Company's
subordinated debt in 2018.
Empire Life - Annual Report 2019
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
Dated as of February 26, 2020
This document provides 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,
2019 and 2018. This MD&A should be read in conjunction with the Company’s December 31, 2019 consolidated
financial statements, which form part of The Empire Life Insurance Company 2019 Annual Report dated February 26,
2020. Unless otherwise noted, both the consolidated financial statements and this MD&A are expressed in Canadian
dollars. Some variances may not reconcile and analysis of components may not sum to the analysis for the grouped
components due to rounding.
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 forward-looking information. See the Forward-Looking Statements and
Information section in this report.
The consolidated financial statements have been prepared in compliance with International Financial Reporting
Standards (IFRS), which is generally accepted accounting principles as set out in the Handbook of the Chartered
Professional Accountants of Canada. This MD&A makes reference to certain non-IFRS 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 under IFRS. See the Non-IFRS
Measures section in this report. Note that certain comparative amounts have been reclassified and restated to
conform with the presentation adopted in the current period.
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 (quarterly annualized)¹
Fourth quarter
$
$
2019
76
77.25
18.7%
$
$
2018
6
6.36
1.7%
$
$
Year
2019
174
176.58
11.1%
$
$
2018
137
139.53
9.4%
Empire Life reported fourth quarter common shareholders’ net income of $76 million for 2019, compared to $6 million
for 2018. In the fourth quarter of 2019, the Company enacted significant changes to its reinsurance program, which
included an increase in the Company's individual life insurance retention level, along with a recapture of a significant
amount of reinsured business. The net income impact of this reinsurance recapture initiative was $78 million. Full year
common shareholders’ net income was $174 million compared to $137 million in 2018. The increase in earnings was
primarily a result of the recapture initiative, partly offset by unfavourable assumption updates in the Wealth
Management and Individual Insurance lines and a deterioration of long term disability (LTD) experience in the
Employee Benefits line.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table provides a breakdown of the sources of earnings for the fourth quarter and year.
Sources of Earnings¹
(in millions of dollars)
Expected profit on in-force business
$
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
Fourth quarter
2019
47 $
(7)
5
48
94
16
110
30
79
(3)
2018
51 $
(12)
(26)
(22)
(9)
15
7
(3)
10
(3)
$
76 $
6 $
Year
2019
190 $
(28)
(6)
37
194
54
247
60
187
(13)
174 $
2018
194
(16)
(3)
(20)
154
37
191
40
151
13
137
The expected profit on in-force business for the fourth quarter and for the year decreased by 8% and 2% respectively,
due to lower than expected average assets under management in the Wealth Management line.
The impact of new business for the fourth quarter was primarily driven by lower new business strain in the Wealth
Management and Employee Benefits lines partially offset by higher strain in the Individual Insurance line. Lower sales
of fixed annuities in the fourth quarter of 2019 relative to the fourth quarter of 2018 were the primary contributor to
lower strain in the Wealth Management line. For the year, the impact of new business was higher than 2018 primarily
due to higher strain in the Employee Benefits line as block transfers from new specialty partners were added in the
first and second quarters of 2019.
The experience gains for the fourth quarter of 2019 compared to losses in the fourth quarter of 2018 were mainly
driven by lower investment losses in the Individual Insurance and Wealth Management lines. For the year, higher
experience gains from strong growth in segregated fund assets were offset by higher experience losses in the
Individual Insurance line from fixed income investments which contributed to higher overall experience losses in 2019
relative to 2018.
Management actions and changes in assumptions in the fourth quarter of 2019 were higher than 2018 due to the
favourable impact of the reinsurance recapture initiative. For the year, this favourable impact was partly offset by
updates to methodology and assumptions on policy liabilities and by deterioration in LTD claims experience in 2019
relative to 2018.
Earnings on surplus were higher for the year primarily due to realized gains on Available for sale (AFS) assets and
lower interest expense as a result of a lower level of subordinated debt, partially offset by higher hedge costs.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Information
Income Statement Financial Information
(in millions of dollars)
Revenue
Net premium income
Fee income
Investment income
Realized gain on FVTPL investments
Realized gain on AFS 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 (loss) after tax
Participating policyholders' portion
Shareholders' net income
Dividends on preferred shares
Common shareholders' net income
For the years ended December 31
2019
2018
2017
$
$
910
262
326
105
22
490
2,115
$
1,843
$
81
1,924
191
3
187
13
174
$
$
$
$
874
264
308
12
(1)
(318)
1,138
931
60
991
148
(3)
151
13
137
$
834
257
281
57
6
239
1,675
$
1,425
74
1,499
176
(5)
181
10
171
$
$
Return on common shareholders' equity
11.1%
9.4%
12.8%
Revenue volatility was driven primarily by the impact of market interest rate movements on the fair value change in
fair value through profit or loss investments. The impact of these movements on net income is significantly reduced
due to corresponding changes 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 and equity
As at December 31
2019
2018
2017
$
$
$
9,293 $
8,278 $
169
8,499
168
7,823
8,559
153
8,682
17,961 $
16,270 $
17,395
6,074 $
5,176 $
5,365
698
399
351
8,499
16,021
1,940
789
399
300
7,823
14,487
1,783
$
17,961 $
16,270 $
651
698
278
8,682
15,674
1,721
17,395
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Financial Information
(in millions of dollars)
Assets under management¹
General fund assets¹
Segregated fund assets¹
Mutual fund assets¹
Subordinated debt
Preferred shares
Available regulatory capital
Tier 1
Tier 2
Total
Surplus allowance and eligible deposits
Base solvency buffer
Required regulatory capital
LICAT total ratio
LICAT core ratio
MCCSR ratio
Cash dividends per share
Preferred shares series 1
Preferred shares series 3
Common shares
As at December 31
2019
2018
2017
$
9,462
$
8,447
$
8,499
7,823
139
399
250
145
399
250
1,616
$
1,476
$
669
2,285
1,109
2,191
$
$
N/A
155%
109%
N/A
653
2,129
887
2,029
N/A $
149%
103%
N/A
8,713
8,682
184
698
250
1,409
932
2,341
N/A
N/A
831
N/A
N/A
282%
For the years ended December 31
2019
2018
2017
1.4375
1.2250
69.7632
$
$
$
1.4375
1.2250
40.6060
$
$
$
1.4375
0.2584
—
$
$
$
$
$
$
Improvements to core and total capital were primarily driven by strong net income and strong growth in the Surplus
allowance. The Surplus allowance reflects the value of conservative margins in the insurance contract liabilities. The
Base solvency buffer increased due to overall growth in inforce business, as well as an increase related to the
changes in the Company's reinsurance program.
Effective January 1, 2018, Minimum Continuing Capital and Surplus Requirements (MCCSR) was replaced by the Life
Insurance Capital Adequacy Test (LICAT).
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results by Major Product Line
The following tables provide a summary of Empire Life results by major product line for the three months ended
December 31 and year for 2019 and 2018. A discussion of results is provided in the Product Line section of the
MD&A.
For the three months ended December
31
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital
and Surplus
Total
(in millions of dollars)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Revenue
Net premiums
Investment income
Fair value change in FVTPL investments
Realized gain (loss) on FVTPL
investments
Realized gain (loss) on AFS investments
including impairment write downs
Fee income
Total revenue
Expenses
Net benefits and claims
Net change in insurance and investment
contract liabilities
Policy dividends
Operating, commission and interest
expenses
Policy dividends
Total expenses
$
35 $
53 $
93 $
86 $
101 $
99 $
— $
— $
229 $
9
(6)
1
—
63
10
(18)
—
—
62
102
106
51
4
—
37
2
94
45
8
—
40
3
96
1
—
—
—
3
97
69
2
—
23
3
97
1
1
—
—
3
91
60
3
—
22
3
88
57
(194)
53
(70)
17
—
60
—
—
24
37
(147)
8
34
27
(42)
(6)
(2)
—
—
76
36
12
9
38
(4)
91
10
—
25
—
—
—
4
8
12
18
2
(1)
(2)
—
17
—
—
—
1
3
4
84
(200)
59
10
66
237
82
(86)
(7)
(1)
65
249
289
157
141
(141)
8
99
40
162
23
9
101
5
278
Net income (loss) after tax
$
8 $
11 $
— $
3 $
66 $
(15) $
13 $
13 $
87 $
11
Participating policyholders' portion
Dividends on preferred shares
Common shareholders' net income
8
3
$
76 $
1
3
6
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the years ended December 31
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital
and Surplus
Total
(in millions of dollars)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
$
159 $
155 $
360 $
340 $
390 $
379 $
— $
— $
910 $
Revenue
Net premiums
Investment income
Fair value change in FVTPL investments
Realized gain (loss) on FVTPL
investments
Realized gain (loss) on AFS investments
including impairment write downs
Fee income
Total revenue
Expenses
40
18
1
—
249
467
39
(35)
1
—
253
412
5
4
—
—
13
4
(1)
—
—
11
215
473
111
1
—
199
(279)
15
—
—
382
354
1,190
314
Net benefits and claims
206
185
256
230
Net change in insurance and investment
contract liabilities
Policy dividends
Operating, commission and interest
expenses
Income and other taxes
Total expenses
18
—
144
24
393
(17)
—
147
24
339
18
—
91
11
1
—
82
17
375
330
1,125
156
773
31
134
31
154
(34)
30
132
12
295
66
(5)
(7)
21
—
76
—
—
—
16
16
32
66
(3)
(4)
(2)
—
58
—
—
—
20
7
27
874
308
(318)
12
(1)
264
326
490
105
22
262
2,115
1,138
618
808
31
386
81
1,924
570
(50)
30
381
60
991
Net income (loss) after tax
$
74 $
73 $
7 $
24 $
65 $
19 $
44 $
31 $
191 $
148
Participating policyholders' portion
Dividends on preferred shares
Common shareholders' net income
3
13
(3)
13
$
174 $
137
Total Revenue
Net premiums for the fourth quarter were lower relative to the same period in 2018 primarily due to lower sales of
fixed annuity products in the Wealth Management line. For the full year, net premiums were higher relative to 2018
reflecting growth in all product lines.
Investment income for the year increased relative to 2018 primarily due to asset mix changes made in 2018 to
incorporate higher yielding securities.
Assets classified as Fair value through profit or loss (FVTPL) experienced a larger net loss in the fourth quarter
relative to the same quarter in 2018 primarily due to increases in market interest rates during the fourth quarter of
2019. For the year, assets classified as FVTPL experienced a gain primarily due to decreases in market interest rates
from their December 2018 values. For the same period in 2018, market interest rates increased, contributing to the
net loss in assets valued as FVTPL.
Fee income for the fourth quarter and the year increased by 2% and decreased by 1% respectively relative to the
same period in 2018 primarily related to segregated fund management and guarantee fees from changes in assets
under management. This is discussed in the Product Line Results - Wealth Management section later in this report.
Total Expenses
A substantial portion of the Net benefits and expenses changes are driven by the impact that market interest rate
movements have on the net change in insurance contract liabilities. Net benefits and claims increased for the fourth
quarter and the year by 11% and 8% respectively driven primarily by fixed annuities in the Wealth Management and
higher health benefit claims in the Employee Benefits line. Net benefits and claims variability is dependent on claims
incurred. Generally, claims rise year over year due to growth of the insurance blocks. Variability in claims amounts
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 more or less than what was estimated for in the insurance contract liabilities. Claims experience
is a combination of claims incurred compared to claims expected in product pricing and in insurance contract
liabilities.
Operating expenses, commissions and interest expenses decreased for the fourth quarter compared to 2018 primarily
due to lower operating expenses in the Individual Insurance line. For the year, operating expenses, commissions and
interest expenses were 1% higher than 2018 primarily due to higher operating expenses in the Employee Benefits
line.
Product Line Results - Wealth Management
(in millions of dollars)
Fixed Annuities
Assets under management¹
Gross sales¹
Net sales¹
Segregated Funds
Assets under management¹
Gross sales¹
Net sales¹
Fee income
Mutual Funds
Assets under management¹
Gross sales¹
Net sales¹
Fee income
Fourth quarter
2019
2018
Year
2019
$
958 $
944 $
958 $
35
—
53
23
8,480
7,806
243
(83)
62
139
2
(7)
—
244
(18)
61
145
2
(8)
1
159
13
8,480
856
(329)
246
139
8
(28)
2
2018
944
155
32
7,806
908
(118)
249
145
16
(27)
3
Net income after tax
$
8 $
11 $
74 $
73
Fixed annuities assets under management increased by 1% during the last 12 months. Gross sales in the fourth
quarter were 34% lower as customers shifted away from fixed income products. For the year, gross sales were 3%
higher compared to 2018, reflecting strong sales in this segment during the first three quarters of the year.
Segregated fund assets under management increased by 9% during the last 12 months primarily due an increase in
stock markets during the first quarter after a significant decline in the fourth quarter of 2018. Gross sales in the fourth
quarter were consistent with the fourth quarter of 2018 and lower for the full year primarily due to lower sales of
traditional segregated fund products, partially offset by an increase in sales of the Guaranteed Minimum Withdrawal
Benefit (GMWB) product. On October 23, 2019, Empire Life launched six new Multi-Strategy GIF segregated funds, to
offer customers a mix of investment management styles and greater diversification. The Company also launched a
new Short Term High Income GIF and reopened the Global Dividend Growth GIF. On November 12, 2018, Empire Life
launched a new No Load purchase option within the GIF and Class Plus 3.0 product lines, and added four global fund
options to Class Plus 3.0. The No Load option gives clients full access to their investments without any surrender
charges. On May 28, 2018, Empire Life introduced seven new global funds, a fee for service option and a preferred
pricing program to provide clients with more global and lower cost investment options within the GIF product line of
segregated funds.
Segregated fund fee income increased by 2% for the fourth quarter of 2019 and decreased by 1% for the full year
primarily due to lower average assets under management relative to the same periods in 2018.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mutual fund assets under management decreased during the last 12 months due to lower mutual fund sales. Empire
Life continues to explore various strategic alternatives with respect to its mutual fund business.
Product Line Results - Employee Benefits
(in millions of dollars)
Selected financial information
Annualized premium sales¹
Net premiums
Net income (loss) after tax
Fourth quarter
2019
2018
$
$
21 $
93
— $
12 $
86
3 $
7 $
Year
2019
104 $
360
2018
59
340
24
For the fourth quarter and year, annualized premium sales for Employee Benefits increased by 75% and 76%
respectively, relative to 2018. This is primarily due to large block transfers from new strategic distribution partners in
the first quarter of 2019, in addition to continued growth of the small to medium-sized business owner market. Over
the last two years, Empire Life has entered into a number of strategic partnerships to expand market share.
Net premiums for the fourth quarter and year increased by 8% and 6% respectively compared to the same period in
2018. Empire Life continues to focus on profitable sales in the employee benefits market where price competition
continues for all major product lines.
Net income declined in the fourth quarter of 2019 and full year relative to 2018 primarily due to a deterioration of long-
term disability experience as the experience gains observed in 2018 did not recur.
Product Line Results - Individual Insurance
(in millions of dollars)
Shareholders'
Fourth quarter
2019
2018
Year
2019
2018
Shareholders' annualized premium sales¹
$
5 $
6 $
Shareholders' net premiums
Benefits and Expenses
Net income (loss) after tax
Policyholders'
Policyholders' annualized premium sales¹
Policyholders' net premiums
Benefits and Expenses
Net income (loss) after tax
69
(87)
62
5
32
19
4
69
59
(16)
5
29
36
1
21 $
274 $
916
67
18
116
178
(1)
23
278
173
24
16
101
109
(4)
Net income (loss) after tax
$
66 $
(15) $
65 $
19
Shareholders' annualized premium sales declined for the fourth quarter and the year compared to 2018 primarily due
to lower sales of term life products. Policyholders' annualized premium sales were consistent with the fourth quarter of
the prior year and 13% higher for the full year from increased sales of the Company's participating life products.
Shareholders' total net premiums in the fourth quarter was consistent with the same quarter in 2018 and 1% lower for
the full year. Policyholders' net premiums were 10% and 15% higher for the fourth quarter and full year respectively,
compared to 2018 primarily due to the stronger sales of the Company's participating life products in 2019.
Shareholders' net income was higher for the fourth quarter and full year compared to 2018 primarily due to the impact
of the reinsurance recapture initiative and mortality table update, partially offset by changes in net the net investment
assumptions, as explained in more detail in the following table.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in millions of dollars)
Components of pre-tax income increase from update of policy liability assumptions
Year
2019
2018
Lapse/premium assumptions
Net investment assumptions
Mortality experience
Mortality table update
Reinsurance recapture
Other
$
(27) $
(120)
12
155
107
(69)
Total gain (loss) from update of policy liability assumptions (excludes policyholders' portion)
$
57 $
(59)
(3)
28
—
—
(3)
(38)
In 2019 the lapse/premium assumption change primarily related to updates of assumed lapse rates on renewable
term policies. The refinement to lapse/premium assumptions for 2018 were primarily related to the adjustment of the
lapse assumption on 10-year renewable term products and the enhancement of universal life lapse assumptions.
The primary drivers of the net investment assumptions change for 2019 were decreases to the initial reinvestment
rate (IRR) and ultimate reinvestment rate (URR) used in the valuation of liabilities. Updates were also made to the
equity investment return assumption, the planned level of equities matching policy liabilities, and to the maturity
assumptions for preferred shares. However, these items had a less significant impact when compared with the IRR
and URR updates. In 2018 the change due to net investment assumptions was minimal.
Updates to the mortality experience in 2019 were primarily related to revised projected assumptions for the individual
life business. In 2018, mortality assumption changes included updates for mortality experience and a revised mortality
improvement scale which is in line with the Canadian Institute of Actuaries promulgated mortality improvement scale.
In 2019 the individual insurance mortality tables were replaced by more recent industry tables. The updated tables
provide a more appropriate mortality projection, specifically at older ages. Actual/expected ratios were updated based
on a combination of Company and industry experience.
In 2019, the Company enacted significant changes to its reinsurance programs. Specifically, the reinsurers of the
Company's individual life policies were notified that in 2020 the Company will increase its individual life retention from
$500,000 to $1.5 million and the recapture provisions of all eligible reinsurance treaties would be enacted. The
recapture resulted in a substantial net liability decrease on both the universal life and non-participating blocks of
business as the present value of future reinsurance premiums was greater than the estimated future claims.
Several model enhancements were implemented in 2019. These enhancements include updates to return of premium
assumptions on universal life policies, reinsurance model refinements, and refinements to the mortality projection.
Other policy liability updates for 2018 were primarily related to refinements to the modelling of reinsurance treaties.
Results - Capital and Surplus
(in millions of dollars)
Net income (loss) after tax
Net income (loss) after tax shareholders' portion
Net income (loss) after tax policyholders' portion
Net income (loss) after tax
Fourth quarter
2019
2018
Year
2019
$
$
10 $
4
13 $
12 $
—
13 $
39 $
5
44 $
2018
30
1
31
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.
Net income from the shareholders' portion of capital & surplus was lower than the fourth quarter of 2018 primarily due
to a loss on hedging instruments in this portfolio relative to gains recorded in December 2018 from equity market
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
volatility, partially offset by higher realized gains on AFS assets. For the year, shareholders' net income was higher
than 2018 primarily due to higher realized gains on AFS assets, positive fair value changes in FVTPL assets and
lower interest expenses relative to 2018, partially offset by higher losses on hedging instruments. The interest
expense for 2018 was higher prior to the redemption of $300 million subordinated debentures in May 2018.
Shareholder Dividends
The declaration and payment of common shareholder dividends and the amounts thereof are at the discretion of the
Board of Directors.
Common shareholder dividends are reviewed on a quarterly basis and will depend upon various factors, including the
results of operations, the economic environment and the financial condition of Empire Life taking into account
regulatory restrictions on the payment of shareholder dividends, as well as any other factors deemed relevant by the
Board of Directors.
The Board of Directors declared a dividend of $113.435853 per common share on February 26, 2020 to all common
shareholders of record March 16, 2020 payable April 8, 2020. This dividend includes a regular quarterly dividend of
$22.0724 and an additional dividend of $91.363453 per common share, which was enabled by the strong capital
position of the Company at December 31, 2019.
The following table provides details of the amounts and dates for Empire Life’s per share common and preferred
share dividends.
Common shares
Non-Cumulative Rate Reset Preferred Shares, Series 1 (TSX: EML.PR.A)
Non-Cumulative Rate Reset Preferred Shares, Series 3
Amount of Dividend
per share
Payable Date
Record Date
$
$
$
113.435853
April 8, 2020
March 16, 2020
0.359375
0.306250
April 17, 2020
March 18, 2020
April 17, 2020
March 18, 2020
Empire Life advises that the above referenced dividends are eligible dividends for the purposes of the Income Tax Act,
Canada and any similar provincial tax legislation.
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
2019
368 $
(337)
(96)
(65) $
$
$
2018
346
(68)
(367)
(89)
Net change in cash and cash equivalents decreased by $65 million, made up of the following items:
• The increase in cash provided from operating activities in 2019 relative to 2018 was primarily due to lower
cash outflows related to changes in working capital levels.
• The increase in cash used for investing activities in 2019 relative to 2018 was primarily due to management
actions to deploy excess cash into higher yield investments in order to enhance investment income.
• The decrease in cash used for financing activities in 2019 relative to 2018 was due to the redemption of $300
million subordinated debentures on May 31, 2018.
For an analysis of liquidity for Empire Life, see note 10(e) and note 27(b) to the 2019 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 common
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
stocks or exchange-traded funds (ETFs) 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 reviews 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. Additional information regarding financial
instruments is included in notes 2(d), 3, 10(c), and 27 to the audited consolidated financial statements for the year
ended December 31, 2019.
Sources of Capital
Empire Life has issued private and public securities to strengthen its capital position and fund new business growth.
The securities outstanding are summarized in the following table.
(in millions of dollars)
Subordinated debentures
Equity
Preferred shares
Common shares
Total Equity
As at
December 31, 2019 December 31, 2018
$
$
$
$
400
250
1
251
400 $
250 $
1 $
251 $
As at
December 31, 2019 December 31, 2018
$
$
150 $
100 $
As at
150
100
Details of the Company’s outstanding preferred shares and subordinated debt are as follows:
Preferred Shares
(in millions of dollars)
Date Issued
Earliest Redemption
Date
Preferred shares
Preferred shares
January 2016
April 17, 2021
November 2017
January 17, 2023
Yield
5.75%
4.90%
(in millions of dollars)
Date Issued
Earliest Redemption
Date
Yield
December 31, 2019 December 31, 2018
Subordinated debentures(a)
Subordinated debentures(b)
200
(a) Series 2016-1 Subordinated 3.383% Unsecured Debentures due 2026. From December 16, 2021, interest is payable at 1.95% over the 3-month
Canadian Deposit Offering Rate (CDOR).
(b) Series 2017-1 Subordinated 3.664% Unsecured Debentures due 2028. From March 15, 2023, interest is payable at 1.53% over CDOR.
December 16, 2021
September 2017
December 2016
200 $
200 $
March 15, 2023
3.383%
3.664%
200
$
$
Empire Life’s debentures and preferred shares are rated by DBRS Limited (DBRS) and A.M. Best Company, Inc.
(A.M. Best). Empire Life’s DBRS issuer rating is “A”, its subordinated debt rating is “A (low)”, its financial strength
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
rating is “A” and its Preferred Share rating is Pfd-2. All ratings have a stable trend. According to DBRS, the assigned
ratings reflect Empire Life’s position as a consistently performing life insurer with a proven track record of generating
stable earnings while maintaining a conservative risk profile.
A.M. Best ratings of Empire Life are “A Excellent” financial strength rating, “a” long-term issuer credit rating, “bbb+”
Subordinated Debt rating, and “bbb” Preferred Share rating. All ratings have a stable trend. According to A.M. Best,
the ratings reflect Empire Life's balance sheet strength, which A.M. Best categorizes as very strong, as well as its
strong operating performance, neutral business profile and appropriate enterprise risk management.
Regulatory Capital
The Life Insurance Capital Adequacy Test (LICAT) is intended to improve the measurement of the life insurer's
solvency position by recognizing the long-term economics of the life insurance business. The Company continues to
have a strong capital position under the LICAT framework. Empire Life is required to maintain a minimum Core Ratio
of 55% and a Total Ratio of 90%. OSFI has established supervisory target levels of 70% for Core and 100% for Total
capital.
LICAT
(in millions of dollars)
Available capital
Tier 1
Tier 2
Total
Surplus allowance and eligible deposits
Base solvency buffer
LICAT total ratio
LICAT core ratio
Other Comprehensive Income
(in millions of dollars)
OCI, attributable to shareholders
OCI, attributable to policyholders
Total other comprehensive income
Dec 31
2019
Sep 30
2019
Jun 30
2019
Mar 31
2019
Dec 31
2018
$
$
1,616
$
1,562
$
1,549
$
1,507
$
669
681
674
692
2,285
$
2,243
$
2,223
$
2,200
$
1,109
2,191
155%
109%
944
2,133
149%
104%
937
2,115
149%
104%
921
2,083
150%
103%
Fourth quarter
2019
2018
$
$
(16) $
(4) $
(20) $
(7) $
(3)
(10) $
Year
2019
48 $
1
49 $
1,476
653
2,129
887
2,029
149%
103%
2018
(28)
(4)
(32)
Other comprehensive income (OCI) decreased in the fourth quarter primarily due to unrealized fair value losses on
AFS investments compared to a small gain in the fourth quarter of 2018 partially offset by a gain on remeasurement of
post-employment benefit liabilities. For the year, OCI increased relative to 2018 primarily due to unrealized fair value
gains on AFS assets in 2019 relative to unrealized fair value losses on AFS assets in 2018, and a lower loss on
remeasurement of the liability component of post-employment DB plans relative to 2018.
Remeasurement of defined benefit pension plans does not immediately impact LICAT as each quarter’s
remeasurement gain or loss is amortized over twelve quarters for LICAT 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, product pricing, 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 administrative and
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 7% market share of segregated funds, 1% market share for employee
benefits and 2% market share for new life insurance premiums. 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 its 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. In 2019, the Company acquired a minority interest in The Gryphin
Advantage Inc. as part of its continuing commitment to ensuring consumers have the availability of independent
advice in the marketplace.
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. Empire Life continued to achieve strong
growth in assets under management from its segregated fund business as a result of net new sales and equity market
appreciation. Empire Life is continuing to monitor and manage GMWB risk exposure and the competitive landscape
for this product.
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 its
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 it deploys to support business activities and strategic
objectives;
• The need to protect its brand; and
• The need to maintain (or improve) 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’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 future
activities;
• 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 it acts with integrity at all times.
The Board of Directors oversees and monitors Empire Life’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, with
specific focus on market, credit and liquidity risk including asset/liability management as well as capital management.
The Product Management Review Committee is responsible for overseeing management of corporate policy
established by the Risk and Capital Committee of the Board, with specific focus on insurance. Activities not delegated
to one of these two committees remain under the oversight of senior management. More information related to
governance can be found under the Corporate Governance over Risk Management section of Empire Life’s 2019
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 Product
Management Review 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 and capital management) are also approved by its Board, or a Board committee.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Caution Related to Sensitivities
In the sections that follow, Empire Life 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 Empire Life’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 Empire Life’s future net income, OCI, and capital sensitivities. Given the nature of these calculations,
Empire Life cannot provide assurance that actual impact will be consistent with the estimates provided. Changes in
risk variables in excess of the ranges illustrated may result in other than proportionate impacts.
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 hedging program may employ derivatives
positions including put options and futures. The extent of derivatives 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 LICAT purposes and policy liabilities on the statement of financial position related to
segregated fund guarantees. Therefore a by-product of hedging LICAT exposure is net income volatility, as the gains
or losses from hedging instruments are not necessarily offset by changes in policy liabilities related to segregated
fund guarantee risk. During the fourth quarter and for the year, Empire Life experienced a loss of $2 million and $11
million after tax respectively on its hedging program primarily due to rising Canadian stock indices. This compares to a
hedging program gain of $6 million and $2 million respectively for the comparable periods in 2018 primarily due to a
decline in Canadian stock prices in December 2018.
Empire Life’s LICAT ratio is also sensitive to stock market volatility, due primarily to liability and capital requirements
related to segregated fund guarantees. As of December 31, 2019, Empire Life had $8.5 billion of segregated fund
assets and liabilities. Of this amount, approximately $8.2 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 guarantee (with a minimum of 15 years between deposit and maturity date)
Guaranteed minimum withdrawal benefit (GMWB)
Dec 31
2019
Dec 31
2018
4%
46%
7%
43%
3%
47%
7%
43%
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 ignore all the deposits in the customer’s policy where the fund value is
above the guaranteed amount. Therefore, policy-based guarantees generally 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 are issued, the sensitivity is reduced. If period-end stock
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
markets are low relative to market levels at the time that segregated fund policies are issued, the sensitivity is
increased.
The segregated fund regulatory capital and liability framework includes the use of "zero floors" (i.e., negative liability
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. The liabilities are the greater of: (i) the average of the amounts
determined by averaging the results from adverse economic scenarios; and (ii) zero.
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, 2019 and December 31, 2018, the sensitivity of Empire Life shareholders’ net
income and LICAT ratio resulting from stock market increases and decreases is provided in the following table.
Sensitivity to equity risk:
Increase
Decrease
Impact on net income (in millions of dollars after tax)
20%
10%
10%
20%
30%
as at December 31, 2019
Segregated fund guarantees
Other equity risk
Equity hedge
Total
as at December 31, 2018
Segregated fund guarantees
Other equity risk
Equity hedge
Total
Sensitivity to equity risk:
Impact on LICAT
as at December 31, 2019
Segregated fund guarantees
Other equity risk
Equity hedge
Total
as at December 31, 2018
Segregated fund guarantees
Other equity risk
Equity hedge
Total
$
$
$
$
— $
— $
(10) $
(76) $
(229)
33
(2)
15
(1)
(12)
4
(20)
16
(65)
38
31
$
14
$
(18) $
(80) $
(256)
3
$
3
$
(11) $
(129) $
(269)
38
(6)
18
(4)
(15)
9
(46)
26
(118)
50
35
$
16
$
(16) $
(150) $
(337)
Increase
Decrease
20 %
10 %
10 %
20 %
30 %
3 %
(1)%
(3)%
(1)%
3 %
— %
(2)%
1 %
— %
(1)%
(2)%
(2)%
— %
(1)%
(1)%
(1)%
(6)%
— %
1 %
(4)%
(16)%
(22)%
1 %
3 %
1 %
3 %
(12)%
(18)%
(10)%
(16)%
(22)%
— %
1 %
(9)%
— %
2 %
(2)%
3 %
(14)%
(21)%
Empire Life's equity market sensitivity for segregated fund guarantees in a 20% and 30% stock market decline
decreased primarily as a result of improved equity markets during the 2019. The segregated fund guarantee liability
became positive at December 31, 2018 after an equity market decline in the fourth quarter. This increased net income
sensitivity as any changes to the liability when it is above a zero floor will flow through net income.
In 2019, the Company updated the methodology for calculating equity risk sensitivities. The new method refines the
assumptions used in calculating the baseline LICAT equity requirements as at the reporting date. In the table above,
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
figures presented for the impact of equity risk on LICAT as at December 31, 2018 are restated to conform with the
updated methodology.
The amount at risk related to segregated fund maturity guarantees and segregated fund death benefit guarantees,
and the resulting policy liabilities and LICAT base solvency buffer for Empire Life’s segregated funds is provided in the
following table.
Segregated Funds
Withdrawal Benefit >
Fund Value
Maturity Guarantee >
Fund Value
Death Benefit >
Fund Value
(in millions of dollars)
Fund Value
Amount
At Risk
Fund Value
Amount
At Risk
Fund Value
Amount
At Risk
Policy
Liabilities
LICAT
Capital
December 31, 2019
December 31, 2018
$
$
2,701 $
2,689 $
882 $
1,057 $
51 $
301 $
2 $
24 $
650 $
3,789 $
6 $
165 $
— $
4 $
465
433
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, 2019, the aggregate amount at risk for all three
categories of risk was $890 million. At December 31, 2018, the aggregate amount at risk for these three categories of
risk was $1,246 million. 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 policy 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.
In addition, Empire Life considers the sensitivity of its LICAT ratio 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 non-participating insurance business and segregated fund guarantees for December 31, 2019 and
December 31, 2018, is shown in the table below. This assumes no change in the ultimate reinvestment rate (URR).
The AFS bonds provide a natural economic offset to the interest rate risk attributable to Empire Life’s product
liabilities.
Sensitivity to Market Interest Rates LICAT
December 31, 2019 LICAT total ratio
December 31, 2018 LICAT total ratio
Impact of
50 bps Decrease
1 %
(5)%
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 Empire Life’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. If not managed effective, operational risk can impact Empire Life's ability to manage other risks. The following
is a further description of some operational risks and their associated risk management strategies.
(1) Legal and Regulatory Compliance Risk
Empire Life is governed by the Insurance Companies Act 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
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
insurance companies and companies providing other financial services. Material changes in the regulatory framework
could have an adverse effect on Empire Life. Failure to comply with regulatory requirements or public expectations
could adversely impact Empire Life’s reputation and ability to conduct business. Empire Life 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 Empire Life.
Empire Life’s corporate compliance department, headed by the Chief Compliance Officer, oversees the regulatory
compliance framework. This framework promotes risk-based management of regulatory compliance risk and includes
Company-wide policies, operating guidelines, programs to promote awareness of laws and regulations impacting
Empire Life, 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 Empire Life’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. The General Counsel reports regularly to the Audit Committee of the Board on litigation
activity.
(2) Model Risk
Empire Life uses models to support many business functions including investment analysis, product development and
pricing, valuation of policy liabilities, financial planning, asset/liability management, capital management, project
management and risk management. The risk of inappropriate use or interpretation of Empire Life’s models or their
output, or the use of deficient models, data or assumptions could result in financial losses or inappropriate business
decisions. Empire Life 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. The Chief Risk Officer reports regularly to the Risk and Capital Committee of the Board on model use and
related oversight activities.
(3) Human Resources Risk
Competition for qualified employees, including executives, is intense both in the financial services industry and non-
financial industries. If Empire Life 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,
Empire Life 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
Empire Life obtains many different types of services from a number of third-party service 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, Empire Life’s business may be adversely impacted. To
mitigate this risk, Empire Life has established contracting guidelines as well as a Company-wide outsourcing risk
management 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 Empire Life.
(5) Technology, Information Security and Business Continuity Risk
Empire Life 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 Empire Life.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
Empire Life has an enterprise-wide business continuity and disaster recovery program overseen by the Business
Continuity Planning Team and senior management. 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. Empire Life establishes and regularly tests business
continuity and disaster recovery plans and maintains off-site system facilities and other related services 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, Empire Life has an information security
program overseen by the VP Enterprise Services and Security, who reports at least annually to the Risk and Capital
Committee of the Board. This program consists of a number of standards, procedures and guidelines focused on
management of cybersecurity risk and maintenance of the security and integrity of the data entrusted to Empire Life.
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, Empire Life 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. The Chief
Privacy Officer reports regularly to the Conduct Review Committee of the Board on privacy and data security risks and
emerging trends.
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. Empire Life regularly reviews and adapts its business strategies and
plans in consideration of changes in the external business environment, economic, political and regulatory
environment. Empire Life’s financial performance is dependent upon its ability to implement and execute business
strategies and plans for growth.
Empire Life’s business strategies and plans are designed to align with risk appetite, capital position and financial
performance objectives. Empire Life periodically reassesses risk appetite taking into consideration the economic,
regulatory and competitive environments in which it operates. The current environment requires Empire Life to adapt
rapidly to new opportunities and challenges and to refine its strategies accordingly. If Empire Life 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.
Empire Life’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 Empire Life’s ability to execute these strategies. Identifying and implementing the
right set of initiatives is critical to achieving Empire Life’s business plan targets. Failure to implement these initiatives
could also lead to cost structure challenges.
Successful execution of Empire Life’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. Empire Life’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.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 27 to the 2019 consolidated financial statements.
Disclosure Controls and Procedures
Empire Life’s disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed by Empire Life 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 Empire Life’s disclosure controls and procedures as of December 31, 2019. Based on that evaluation, management
concluded that Empire Life’s disclosure controls and procedures were effective as at December 31, 2019.
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 Empire Life’s internal control over financial reporting was carried out as at December 31, 2019. Based
on that evaluation, management concluded that Empire Life’s internal control over financial reporting was effective as
at December 31, 2019. No changes were made in Empire Life’s internal control over financial reporting during the
year ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, Empire
Life’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 sensitivities to
risks related to policy liabilities are included in note 27 to the consolidated financial statements.
Financial Instrument Classification
Management judgment is used to classify financial instruments as fair value through profit or loss, available for sale 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
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
recorded in OCI. Additional information regarding pension and other employee future benefits is included in notes
2(k), and 12.
Provision for Impaired Investments
Empire Life maintains a prudent policy in setting the provision for impaired investments. When there is no longer
reasonable assurance of full collection of loan principal and loan interest related to a mortgage or policy contract loan,
management establishes a specific provision for loan impairment and charges the corresponding reduction in carrying
value to income in the period the impairment is identified. In determining the estimated realizable value of the
investment, management considers a number of events and conditions. These include the value of the security
underlying the loan, geographic location, industry classification of the borrower, an assessment of the financial
stability of the borrower, repayment history and an assessment of the impact of current economic conditions. Changes
in these circumstances may cause subsequent changes in the estimated realizable amount of the investment and
changes in the specific provision for impairment.
Available for sale securities are subject to a regular review for losses that are significant or prolonged. Objective
evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment
below its cost or if there is a significant adverse change in the technological, market, economic or legal environment in
which the issuer operates or the issuer is experiencing financial difficulties.
Outlook
The Canadian economy performed largely as expected in 2019 with GDP growth estimated at 1.6% for the full year,
the Canadian dollar weakened slightly to 1.32 (annual average) per U.S. dollar and annual unemployment was stable
at 5.6%, the lowest it has been since the 1970’s. Consumer spending has slowed down gradually throughout the year
and business investment in machinery and equipment has slowed significantly after a strong first quarter in 2018. A
number of uncertainties will continue in 2020 which may negatively impact the Canadian economy including slower
global demand, on-going trade tensions, geopolitical concerns (e.g. North Korea, Iran, Brexit, Italy), and central bank
monetary policy.
The Bank of Canada left the overnight rate unchanged in 2019, sitting at 1.75%. The Canadian Federal Bond yield
curve shifted down with the 5-year rate decreasing from 1.88% to 1.68% in 2019 and the 30-year rate decreasing
from 2.18% to 1.76% in 2019. Corporate and provincial bond spreads tightened during 2019. Interest rates have
generally been lower than typical levels for several years.
Global equity markets performed well in 2019 with the MSCI up over 27% for the year. The S&P 500 stock index was
up 28.9% and the S&P/TSX composite index was up 19.1% for the year. Stock market conditions impact the in-force
profit margins and new business growth for the segregated fund and mutual fund portions of Empire Life’s Wealth
Management product line.
Looking forward to 2020, the global economy is expected to have moderate growth. The Canadian economy is
expected to continue to grow at a slower pace than in 2019 with forecast GDP of 1.6% slightly below the estimated
2% in 2019. The western provinces are expected to continue to grow, with British Columbia benefiting from the natural
gas projects. Provinces in central Canada are expected to experience slower growth with oil production cuts and pull
back on capital spending plans. The Atlantic Provinces are expected to grow at a more moderate pace. Short-term
interest rates are expected to continue to rise in the U.S. as well as in Canada but at a much slower pace and likely in
the second half of the year. Overall the Canadian economy is well positioned to support continued growth of all
Empire Life’s product lines.
The individual insurance market continues to grow modestly even with the challenge of the persistent low long-term
interest rate environment that followed the financial crisis. 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 challenges for Empire Life’s Individual
Insurance product line. The segregated fund product line saw a decline in net sales while experience positive market
returns in 2019; fees will likely be impacted by competition going forward. Empire Life will continue to develop low cost
efficient products delivered digitally to satisfy consumer needs. Within the employee benefits product line, although
highly concentrated Empire Life will continue to penetrate its niche market to grow the business.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
As noted under the Regulatory Capital section, OSFI implemented its Life Insurance Capital Adequacy Test (LICAT)
Guidelines on January 1, 2018. This new Guideline established a new risk based regulatory capital framework for life
insurance companies and replaced the previous MCCSR Guideline. LICAT is intended to improve the quality of capital
available and provide a better alignment of risk measures with the long-term economics of the insurance business.
This new Guideline was developed in consultation with the Life Insurance Industry and OSFI. OSFI is also 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. OSFI has indicated that the effective date for the Guideline for segregated fund
guarantee will be implemented at the same time as IFRS 17. OSFI is continuing to review the application of Non-
Viable Contingent Capital (NVCC) for life insurance companies. If NVCC applied, new preferred shares and
subordinated debentures issued after the transition date would have to be compliant with the new regime to qualify as
capital.
The International Accounting Standards Board (IASB) issued IFRS 17, Accounting Standards for Insurance Contracts,
in May 2017. IFRS 17 will include fundamental changes 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 ability to implement both IFRS 17 and IFRS 9 concurrently. 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. Preparing for the adoption of IFRS 17 and IFRS 9 is a significant initiative for Empire Life and
for the industry. Empire Life is currently assessing the impact that IFRS 17 and IFRS 9 will have on Empire Life’s
consolidated financial statements as well as developing a plan to implement the changes required to be ready to
report under the new standards when they take effect.
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.
The industry is also improving the oversight of Managing General Agents (MGAs) and their advisors. 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, including, 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. The industry is also considering establishing a
licensing regime for all distribution firms. The licensing of distribution firms would clarify the accountability for the
distribution partners to adhere to the insurer’s code of conduct and provide on-going monitoring of the advisors
activities.
Quarterly Results
The following table summarizes various financial results on a quarterly basis for the most recent eight quarters:
(in millions of dollars, except per share amounts)
2019
2019
2019
2019
2018
2018
2018
2018
Dec 31
Sep 30
Jun 30 Mar 31
Dec 31
Sep 30
Jun 30 Mar 31
Revenue
Common shareholder's net income
$
$
249 $
475 $
603 $
788 $
289 $
197 $
388 $
76 $
35 $
20 $
43 $
6 $
35 $
57 $
264
39
Earnings per share - basic and diluted
$ 77.25 $ 35.29 $ 20.45 $ 43.59 $
6.36 $ 35.73 $ 58.14 $ 39.30
Forward-Looking Statements and Information
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements in this MD&A about Empire Life’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 risk including equity risk, hedging risk, interest rate risk, foreign exchange rate risk; liquidity risk; credit risk
including counterparty risk; insurance risk including mortality risk, policyholder behaviour risk, expense risk, morbidity
risk, product design and pricing risk, underwriting and claims risk, reinsurance risk; operational risk, including legal
and regulatory compliance risk, model risk, human resources risk, third-party risk, technology, information security and
business continuity risk; and business risk and strategic, including risk with respect to competition, risk with respect to
financial strength, capital adequacy risk, risk with respect to distribution channels, risk with respect to changes to
applicable income tax legislation, risk with respect to litigation, risk with respect to reputation, risk with respect to risk
management policies, risk with respect to intellectual property, risk 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 Empire Life; 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 Empire Life’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.
Empire Life 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.
Non-IFRS Measures
Empire Life uses non-IFRS measures including return on common shareholders’ equity, source of earnings, assets
under management, annualized premium sales, gross and net sales for mutual funds, segregated funds and fixed
annuities 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. Empire Life also
believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the
evaluation of issuers. Empire Life’s management also uses non-IFRS measures in order to facilitate operating
performance comparisons from period to period, to prepare annual operating budgets and to determine components
of management compensation. Empire Life believes that these measures provide information useful to its
shareholders and policyholders in evaluating Empire Life’s underlying financial results.
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Return on common shareholders’ equity is a profitability measure that presents the net income available to
common shareholders as a percentage of the average capital deployed to earn the income.
Sources of earnings breaks down Empire Life’s 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 the 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.
Assets under management is a non-IFRS measure of the assets managed by Empire Life, which includes general
fund assets, mutual fund assets and segregated fund assets. It represents the total assets of Empire Life and the
assets its customers invest in.
The following table provides a reconciliation of assets under management to total assets in Empire Life’s financial
statements.
Reconciliation of Assets Under Management
As at
(in millions of dollars)
Assets Under Management
General fund assets
Segregated fund assets
Total assets per financial statements
Mutual fund assets
Assets under management
December 31, 2019 December 31, 2018
$
$
9,462 $
8,499
17,961
139
18,100 $
8,447
7,823
16,270
145
16,415
The above table includes the following amounts held by Empire Life’s defined benefit (DB) pension plans.
As at
(in millions of dollars)
DB plan assets
Segregated fund assets
Mutual fund assets
December 31, 2019 December 31, 2018
$
203 $
14
182
12
1 See Non-IFRS Measures
Empire Life - Annual Report 2019
33
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, 2019.
Based on that evaluation, management concluded that the Company’s internal control over financial reporting was
effective as at December 31, 2019.
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 26, 2020
Edward Gibson
Senior Vice-President, Chief Financial Officer and
Chief Actuary
Kingston, Ontario
February 26, 2020
Empire Life - Annual Report 2019
34
INDEPENDENT AUDITOR'S REPORT
To the Policyholders and Shareholders of The Empire Life Insurance Company
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial
position of The Empire Life Insurance Company and its subsidiaries (together, the Company) as at December 31,
2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).
What we have audited
The Company's consolidated financial statements comprise:
•
•
•
•
•
•
the consolidated statements of financial position as at December 31, 2019 and 2018;
the consolidated statements of operations for the years then ended;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with
these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management's Discussion
and Analysis and the information, other than the consolidated financial statements and our auditor's report thereon,
included in the annual report.
Our opinion on the consolidated financial statements does not cover the other information and we will not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information,
we are required to report that fact. We have nothing to report in this regard.
Empire Life - Annual Report 2019
35
INDEPENDENT AUDITOR'S REPORT
Responsibilities of management and those charged with governance for the consolidated financial
statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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
Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or
conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the
disclosures, and whether the consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Company to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely responsible for
our audit opinion.
Empire Life - Annual Report 2019
36
INDEPENDENT AUDITOR'S REPORT
We communicate with those charged with governance regarding, among other matters, the planned scope and timing
of the audit and significant audit findings, including any significant deficiencies in internal control that we identify
during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Owen Thomas.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
February 26, 2020
Empire Life - Annual Report 2019
37
APPOINTED ACTUARY'S REPORT
To the Policyholders and Shareholders of The Empire Life Insurance Company
I have valued the policy liabilities and reinsurance liabilities of The Empire Life Insurance Company for its
Consolidated statements of financial position at December 31, 2019 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.
Dan Doyle, FSA, FCIA, MAAA
Fellow, Canadian Institute of Actuaries
Kingston, Ontario
February 26, 2020
Empire Life - Annual Report 2019
38
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)
2019
2018
$
140,333 $
204,921
32,384
7,509,652
474,029
842,029
2,930
169,827
55,363
66,520
27,959
6,530,080
395,860
795,123
10,424
193,074
51,949
69,180
Total cash and cash equivalents and investments
9,293,067
8,278,570
Accrued investment income
Insurance receivables (Note 4)
Current income taxes
Other assets (Note 5)
Property and equipment (Note 6)
Intangible assets (Note 7)
Investment in associate
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
$
$
35,401
48,728
—
23,096
22,016
22,357
17,541
35,388
46,701
23,666
20,202
24,576
17,804
—
8,498,583
17,960,789 $
7,822,790
16,269,697
106,037 $
95,578
44,592
698,372
6,073,868
28,866
34,224
32,924
8,805
399,098
8,498,583
16,020,947
249,500
985
19,387
1,636,152
33,818
1,939,842
105,171
93,548
—
788,801
5,176,423
25,154
34,031
32,008
10,288
398,767
7,822,790
14,486,981
249,500
985
19,387
1,527,712
(14,868)
1,782,716
$
17,960,789 $
16,269,697
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 2019
39
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)
2019
2018
$
1,091,828 $
1,020,640
(181,987)
909,841
325,717
490,381
105,331
21,886
261,745
2,114,901
720,316
(102,055)
897,445
(90,429)
937
31,438
172,470
214,263
(15,509)
14,425
1,843,301
18,675
3,770
249,155
58,497
$
$
$
190,658 $
3,219
187,439
13,496
173,943 $
176.58 $
(147,035)
873,605
308,428
(318,039)
11,900
(1,411)
263,941
1,138,424
670,256
(100,496)
(188,442)
138,000
85
30,124
164,656
202,395
(4,198)
18,132
930,512
19,037
3,922
184,953
37,064
147,889
(3,052)
150,941
13,496
137,445
139.53
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2019
40
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
For the year ended December 31
Net income
Other comprehensive income (loss), net of income taxes:
Items that may be reclassified subsequently to net income:
Unrealized fair value change on available for sale investments (Note 18)
Fair value change on available for sale investments reclassified to net income, including
impairment write downs (Note 18)
Net unrealized fair value increase (decrease)
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
2019
2018
$
190,658 $
147,889
65,612
(16,002)
49,610
(924)
48,686
(28,312)
649
(27,663)
(4,595)
(32,258)
$
$
$
239,344 $
115,631
3,949 $
235,395
239,344 $
(7,058)
122,689
115,631
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2019
41
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
For the year ended December 31
2019
2018
Preferred shares (Note 20)
$
249,500 $
— $
249,500 $
249,500 $
— $
249,500
Shareholders' Policyholders'
Total
Shareholders'
Policyholders'
Total
Common shares (Note 20)
Contributed surplus
Retained earnings
985
19,387
—
—
985
985
19,387
19,387
—
—
985
19,387
Retained earnings - beginning of year
1,492,447
Net income (loss)
Preferred share dividends declared
Common share dividends declared
187,439
(13,496)
(68,722)
35,265
3,219
—
—
1,527,712
1,395,002
190,658
(13,496)
(68,722)
150,941
(13,496)
(40,000)
38,317
(3,052)
—
—
1,433,319
147,889
(13,496)
(40,000)
Retained earnings - end of period
1,597,668
38,484
1,636,152
1,492,447
35,265
1,527,712
Accumulated other comprehensive income (loss)
Accumulated other comprehensive
income (loss) - beginning of year
Other comprehensive income (loss)
Accumulated other comprehensive
income (loss) - end of period
(15,766)
47,956
898
730
(14,868)
48,686
12,486
(28,252)
4,904
(4,006)
17,390
(32,258)
32,190
1,628
33,818
(15,766)
898
(14,868)
Total equity
$
1,899,730 $
40,112 $
1,939,842 $
1,746,553 $
36,163 $
1,782,716
Composition of accumulated other comprehensive income (loss) - end of period
Unrealized gain (loss) on available for
sale financial assets
Remeasurements of post-employment
benefit liabilities
Shareholder portion of policyholders'
accumulated other comprehensive
income
Total accumulated other
comprehensive income (loss)
$
46,212 $
2,513 $
48,725 $
(2,605) $
1,720 $
(885)
(14,167)
(740)
(14,907)
(13,283)
(700)
(13,983)
145
(145)
—
122
(122)
—
$
32,190 $
1,628 $
33,818 $
(15,766) $
898 $
(14,868)
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2019
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
For the year ended December 31
Operating activities
Net income
Non-cash items affecting net income:
Change in contract liabilities
Change in reinsurance liabilities
Fair value change in fair value through profit or loss assets
Realized (gain) loss on assets including impairment write downs on available for sale assets
Amortization related to 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
Purchases of property and equipment and intangible assets (Notes 6 & 7)
Investment in associate
Cash provided from (used for) investing activities
Financing activities
Dividends paid to common shareholders (Note 21)
Dividends paid to preferred shareholders (Note 21)
Interest paid on subordinated debt
Redemption of subordinated debt (Note 13)
Cash provided from (used for) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents - beginning of year (Note 3)
Cash and cash equivalents - end of year (Note 3)
Supplementary cash flow information related to operating activities:
Income taxes paid, net of (refunds)
Interest income received
Dividend income received
2019
2018
$
190,658 $
147,889
898,382
(90,429)
(490,381)
(127,217)
(88,161)
9,975
(1,147)
66,729
368,409
(188,357)
138,000
318,039
(10,489)
(85,178)
9,461
(1,806)
18,810
346,369
(2,298,947)
1,996,910
(1,679,078)
1,512,761
(10,738)
10,024
(4,425)
(11,968)
(17,541)
(336,685)
(68,722)
(13,496)
(14,094)
—
(96,312)
(64,588)
204,921
140,333 $
28,729 $
190,431
51,072
(10,093)
15,327
99,783
(6,986)
—
(68,286)
(40,000)
(13,306)
(14,094)
(300,000)
(367,400)
(89,317)
294,238
204,921
54,590
189,652
46,901
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Empire Life - Annual Report 2019
43
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 26, 2020.
2. Significant Accounting Policies
(a) Basis of preparation
The annual Consolidated Financial Statements of the Company for the year ended December 31, 2019
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 2019
44
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(l),10 and 27.
(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(k)
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. The decision to record a write-down, its amount and the
period in which it is recorded could change if management’s assessment of those factors were
different. Impairment write-downs on debt securities are not recorded when impairment is due to
changes in market interest rates, if future contractual cash flows associated with the debt security are
still expected to be recovered.
Additional information regarding impairment is included in Notes 2(d), 3(b), 10(c) and 27(c).
Empire Life - Annual Report 2019
45
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 and 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 2019
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)
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 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 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. Impairment losses previously recorded in Net
income are reversed if the fair value subsequently increases and can be objectively related to an
event occurring after the impairment loss was recognized.
(2) AFS equity instruments
Objective evidence of impairment of an equity instrument 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 is the same as described for
AFS debt instruments above with the exception that impairment losses previously recognized in
Net income cannot be subsequently reversed through Net income. 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.
Empire Life - Annual Report 2019
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)
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 or an assessment of the impact of current economic conditions. If
objective evidence of impairment is found, allowances for credit losses are established to adjust
the carrying value of these assets to their net recoverable amount and the impairment loss is
recorded in Net income. 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.
(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.
(vii) Securities lending
The Company engages in securities lending through its custodian as lending agent. Loaned securities are
not derecognized and continue to be reported within Investments in the Consolidated Statements of
Financial Position, as the Company retains substantial risks and rewards and economic benefits related
to the loaned securities. For further details, refer to Note 3(e).
(e) Reinsurance
The Company enters into reinsurance agreements 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 is written down to its recoverable amount and the impairment loss is
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.
Empire Life - Annual Report 2019
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)
(f) Property and equipment
Property and equipment comprises own use land, buildings, leasehold improvements and furniture and
equipment. All classes of assets are carried at cost less accumulated amortization including any
impairment losses, except for land, which is not subject to amortization. Cost includes all expenditures
that are directly attributable to the acquisition of an asset. Subsequent costs are included in the asset’s
carrying amount only when it is probable that future economic benefits associated with the item will flow to
the Company and the cost can be measured reliably.
Amortization is calculated to write down the cost of property and equipment to their residual values over their
estimated useful lives as follows:
Land
Building
Furniture and equipment
Leasehold improvements
No amortization
Five percent (declining balance)
Three to five years (straight-line)
Remaining lease term (straight-line)
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.
Empire Life - Annual Report 2019
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)
(h) Investment in Associates
Associates are entities over which the Company has significant influence but not control, generally
accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates
are accounted for using the equity method of accounting. Under the equity method, the investment is
initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s
share of the income or loss of the investee after the date of acquisition.
The Company’s share of post-acquisition income or loss is recognized in the Consolidated Statements of
Operations, and its share of OCI is recognized in the Consolidated Statements of Comprehensive Income.
The Company determines at each reporting date whether there is any objective evidence that each
investment in associates is impaired. The Company calculates the amount of impairment as the difference
between the recoverable amount of the associate and its carrying value and recognizes the amount as
share of income (loss) of associates in the Consolidated Statements of Operations. Income and losses
resulting from transactions between the Company and its associates are recognized in the Company’s
financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized
losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Accounting policies of associates have been changed where necessary to ensure consistency with the
policies adopted by the Company.
(i) Segregated funds
Certain insurance contracts allow the policyholder to invest in segregated investment funds managed by
the Company for the benefit of these policyholders. Although the underlying assets are registered in the
Company's name and the policyholder has no direct access to the specific assets, the contractual
arrangements are such that the segregated fund policyholder bears the risk and rewards of the fund's
investment performance. 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 27(a)(1).
(j) Subordinated debt
Subordinated debt is recorded at amortized cost using the effective interest rate method. Interest on
subordinated debt is reported as Interest expense in the Consolidated Statements of Operations.
(k) Employee benefits
The Company provides employee pension benefits through either a defined benefit or a defined
contribution component of its pension plan. The Company discontinued new enrolments in the defined
benefit component effective October 1, 2011 and introduced a defined contribution component effective
January 1, 2012 for new enrolments and for any existing employees who chose to transfer from the
defined benefit component. The Company also provides other post-employment benefits.
(i) Pension benefits
The defined benefit plan defines an amount of pension benefit that an employee will receive on
retirement, dependent on factors such as age, years of service and compensation. The liability
recognized in the balance sheet in respect of the defined benefit component is the present value of
the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The
defined benefit obligation is calculated annually by independent actuaries using the projected unit
Empire Life - Annual Report 2019
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)
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 actuaries and are not funded.
(iii) Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date or
whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company
recognizes termination benefits when it is demonstrably committed to either terminating the
employment of current employees according to a detailed formal plan without realistic possibility of
withdrawal or providing termination benefits as a result of an offer made to encourage voluntary
redundancy.
(l)
Insurance and investment contracts
(i) Product classification
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the
contract. Insurance risk is transferred when the Company agrees to compensate a policyholder if a
specified uncertain future event (other than a change in a financial variable) adversely affects the
policyholder and the insurance contract has commercial substance. Any contracts not meeting the
definition of an insurance contract under IFRS are classified as investment contracts or service
contracts, as appropriate. Products issued by the Company that transfer significant insurance risk
have been classified as insurance contracts in accordance with IFRS 4 Insurance Contracts.
Otherwise, products issued by the Company are classified as either investment contracts in
accordance with IAS 39 Financial Instruments: Recognition and Measurement or service contracts in
accordance with IFRS 15 Revenue from Contracts with Customers. The Company defines significant
insurance risk as the possibility of paying at least 2% more than the benefits payable if the insured
event did not occur. When referring to multiple contract types, the Company uses the terminology
policy liabilities.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the
remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all
rights and obligations are extinguished or expire. Investment contracts, however, can be reclassified
as insurance contracts after inception if insurance risk becomes significant.
The Company classifies its insurance and investment contracts into three main categories: short-term
insurance contracts, long-term insurance contracts and investment contracts.
Empire Life - Annual Report 2019
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)
(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
premium 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. Due to the long-term risks and
measurement uncertainties inherent in the life insurance business, a margin for adverse
deviation from best estimates is included in each assumption. These margins allow for
possible deterioration in future experience and provide for greater confidence that insurance
contract liabilities are adequate to pay future benefits. The resulting provisions for adverse
deviation have the effect of increasing insurance contract liabilities and decreasing the income
that otherwise would have been recognized at policy inception. Assumptions are reviewed
and updated at least annually and the impact of changes in those assumptions is reflected in
Gross change in insurance contract liabilities and/or Change in insurance contract liabilities
ceded 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.
Empire Life - Annual Report 2019
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)
(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, policy 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.
(m) Participating policies
The Company maintains an account in respect of participating policies (“participating account”), separate
from those maintained in respect of other policies, in the form and manner determined by OSFI under
sections 456-464 of the Insurance Companies Act. The participating account includes all policies issued
by the Company that entitle its policyholders to participate in the profits of the participating account. The
Company has discretion as to the amount and timing of dividend payments which take into consideration
the continuing solvency of the participating account. Dividends are paid annually, with a few older plans
paying dividends every five years as per contractual provisions. Participating policyholder dividends are
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 attributable to participating
policyholders is shown on the Consolidated Statements of Operations. Comprehensive income
attributable to participating policyholders is shown on the Consolidated Statements of Comprehensive
Income. The portion of Retained earnings and Accumulated other comprehensive income (AOCI) in
respect of participating policies is reported separately in the Policyholders’ equity section of the
Consolidated Statements of Changes in Equity.
Empire Life - Annual Report 2019
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)
(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.
(n) 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.
(o) Investment income
Interest income is recognized using the effective interest rate method. Fees that are an integral part of the
effective yield of the financial asset are recognized as an adjustment to the effective interest rate of the
instrument.
Dividend income is recognized when the right to receive payment is established, which is usually the ex-
dividend date.
Interest income and dividend income are included in Investment income in the Consolidated Statements
of Operations for all financial assets.
(p) Income taxes
Income tax expense for the period is comprised of current and deferred tax. Tax is recognized in the
Consolidated 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.
Empire Life - Annual Report 2019
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)
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to
be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the
amount are those that are enacted or substantively enacted at the end of each reporting period.
Deferred income tax assets and liabilities are recorded for the expected future income tax consequences
of events that have been reflected in the consolidated financial statements. Deferred income taxes are
provided for using the liability method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between tax and financial statement bases for assets and liabilities
and for certain carry-forward items.
Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is
probable that the deferred income tax assets will be realized. Deferred income tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates, on the date of their substantive enactment.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax
liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable
entity.
(q) Foreign currency translation
The Company uses the Canadian dollar as both its functional and presentational currency.
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the
transactions. Gains and losses resulting from the settlement of such transactions, and from the translation
of monetary assets and liabilities denominated in foreign currencies, are recognized in the Consolidated
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.
(r) Comprehensive income
Comprehensive income consists of Net income and OCI. OCI includes items that may be reclassified
subsequently to Net income: Unrealized fair value change on AFS 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.
(s) Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of
past events, it is probable that an outflow of resources will be required to settle the obligation and the
amount can be reliably estimated. If the outflow of economic benefits is not probable, a contingent liability
is disclosed unless the possibility of an outflow of economic benefits is remote. Any change in estimate of
a provision is recorded in Net income. Provisions are not recognized for future operating losses.
Provisions are measured 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.
(t) Leases
The Company leases certain property and equipment. When the Company enters into a lease as a
lessee, a right-of-use asset and a lease liability is recognized in the Statements of Financial Position. The
initial lease liability is computed based on the present value of the lease payments, discounted at the
Company's incremental borrowing rate. Subsequent to the initial recognition the lease liability is measured
at the amortized cost using the effective interest rate method and is included in Accounts payable and
Empire Life - Annual Report 2019
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)
other liabilities. Interest expense is included in operating expenses. The depreciation on the
corresponding right-of-use asset is included in operating expenses.
The Company has elected to apply the option to recognize lease payments for short-term and low level
assets on a straight-line basis over the lease term in operating expenses.
(u) Earnings per share (EPS)
Basic EPS is calculated by dividing the Net income 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.
(v) Accounting changes
(i) New accounting pronouncements adopted in 2019
IFRS 16 Leases
The Company adopted IFRS 16 effective January 1, 2019. The standard requires the capitalization of
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
elected to adopt IFRS 16 using the modified retrospective approach and comparative amounts have not
been restated. The comparative information remains as previously reported under IAS 17. The adoption
of IFRS 16 on January 1, 2019 did not have a significant impact on the Company's Consolidated
Financial Statements.
(ii) New accounting pronouncements issued but not yet effective
(1) IFRS 9 Financial Instruments
IFRS 9, effective for periods beginning on or after January 1, 2018 with retrospective application
replaces IAS 39 Financial Instruments: Recognition and Measurement with a new mixed
measurement model having three measurement categories of amortized cost, fair value through other
comprehensive income (FVTOCI) and FVTPL for financial assets.
Under IFRS 9, all financial assets currently within the scope of IAS 39 will be measured at either
amortized cost, FVTOCI or FVTPL. Classification will depend on the business model and the
contractual cash flow characteristics of the financial asset. All equity instruments will be measured at
FVTOCI or FVTPL. A debt instrument will be measured at amortized cost only if it is held to collect the
contractual cash flows and the cash flows represent principal and interest. For financial liabilities
designated as FVTPL, the change in the fair value attributable to changes in the liability’s credit risk
will be recognized in OCI.
On September 12, 2016, the IASB published an amendment to IFRS 4 Insurance Contracts (which
will be subsequently changed to IFRS 17 Insurance Contracts). The amendment provides two options
for insurance companies relating to IFRS 9:
•
•
a temporary exemption from IFRS 9 for entities that meet specific requirements (applied at the
reporting entity level);
and the ‘overlay approach’.
The Company has evaluated the criteria and will apply the temporary exemption for periods beginning
before January 1, 2022, which allows continued application of IAS 39 instead of adopting IFRS 9, if
the Company’s activities are ‘predominantly connected with insurance’. OSFI has also mandated that
all Federally Regulated Life Insurance Companies defer the application of IFRS 9 until IFRS 17 is
adopted.
Empire Life - Annual Report 2019
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)
Per the amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance
Contracts, companies applying the temporary exemption are required to disclose fair value
information with respect to their investments in financial assets whose contractual cash flows reflect
solely payments of principal and interest on the principal amount outstanding (SPPI), to enable users
of financial statements to compare insurers applying the temporary exemption with entities applying
IFRS 9. The Company’s fixed income invested assets presented in Note 3(a) include cash
equivalents, short-term investments, bonds, mortgages, loans on policies and policy contract loans
and primarily have cash flows that qualify as SPPI. Fixed income invested assets which do not have
SPPI qualifying cash flows as at December 31, 2019 and December 31, 2018 include mortgages with
fair values of $10.4 million and $11.5 million, respectively.
The Company is currently evaluating the impact of IFRS 9 on its Consolidated Financial Statements.
(2) IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive
principle-based framework for the recognition, measurement, presentation and disclosures of all
insurance contracts. The new standard will replace IFRS 4 Insurance contracts. IFRS 17 requires
entities to measure insurance contract liabilities at their current fulfillment cash flows and for revenue
to be recognized as the service is provided over the coverage period.
This new standard is expected to be effective for Empire Life on January 1, 2022 and is required to
be adopted retrospectively, if this is impracticable, the modified retrospective or fair value method
may be used.
In June 2019, the IASB issued an exposure draft to amend IFRS 17, including deferral of the effective
date by one year (to January 1, 2022). The exposure draft comment period ended on September 24,
2019 and the IASB plans to publish a final standard by mid-2020. The Company will continue to
monitor the IASB’s developments. The Company is currently assessing the impact of adopting this
standard and the proposed amendments on its Consolidated Financial Statements.
Empire Life - Annual Report 2019
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)
3. Financial Instruments
(a) Summary of Cash and cash equivalents and investments
The carrying values of cash and cash equivalents and investments are as follows:
As at December 31
2019
Fair value
through profit
or loss
Available for
sale
Total
carrying
value
Fair value
through profit
or loss
2018
Available for
sale
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
Canadian federal government
Canadian provincial governments
Canadian municipal governments
Total Canadian government bonds
Canadian corporate bonds by industry sector:
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Health care
Financial services
Communication services
Utilities
Real estate
Infrastructure
$
20,698 $
— $
20,698 $
11,418 $
— $
119,635
140,333
13,988
6,463
897
11,036
32,384
106,106
3,706,755
106,418
3,919,279
107,996
15,799
61,155
15,263
130,116
87,721
615,089
181,108
479,903
18,145
319,442
—
—
—
—
—
—
—
226,594
475,970
102,340
804,904
60,018
6,822
66,411
991
65,905
22,081
296,760
75,261
99,925
18,591
30,810
119,635
140,333
193,503
204,921
13,988
6,463
897
11,036
32,384
9,990
5,983
—
7,997
23,970
332,700
89,389
4,182,725
3,109,456
208,758
97,472
4,724,183
3,296,317
168,014
22,621
127,566
16,254
196,021
109,802
911,849
256,369
579,828
36,736
350,252
70,013
10,321
81,682
21,223
113,693
78,384
571,147
108,548
362,577
6,549
265,320
—
—
—
3,989
—
—
3,989
184,088
490,369
77,965
752,422
69,565
—
69,933
19,024
79,978
21,183
323,960
76,251
67,710
31,956
23,378
Total
carrying
value
11,418
193,503
204,921
9,990
9,972
—
7,997
27,959
273,477
3,599,825
175,437
4,048,739
139,578
10,321
151,615
40,247
193,671
99,567
895,107
184,799
430,287
38,505
288,698
Total Canadian corporate bonds
2,031,737
743,575
2,775,312
1,689,457
782,938
2,472,395
Total foreign bonds
Total bonds
10,157
—
10,157
8,946
—
8,946
5,961,173
1,548,479
7,509,652
4,994,720
1,535,360
6,530,080
Total preferred shares - Canadian
463,826
10,203
474,029
384,760
11,100
395,860
Common shares
Canadian common shares
Exchange-traded funds
Canadian real estate limited
partnership units
U.S.
Other
Total common shares
Total derivative assets
111,461
494,131
120,884
42,306
29,000
797,782
2,930
44,247
—
—
—
—
44,247
—
155,708
494,131
120,884
42,306
29,000
842,029
2,930
553,337
51,813
605,150
—
110,324
37,439
41,503
742,603
10,424
—
—
55
652
52,520
—
—
110,324
37,494
42,155
795,123
10,424
Empire Life - Annual Report 2019
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)
Loans and receivables
Mortgages
Loans on policies
Policy contract loans
—
—
—
—
—
—
169,827
55,363
66,520
—
—
—
—
—
—
193,074
51,949
69,180
Total financial instruments
$
7,398,428 $
1,602,929 $
9,293,067 $
6,361,398 $
1,602,969 $
8,278,570
The following table presents the fair value of cash and cash equivalents and investments classified by the
fair value hierarchy:
As at December 31
2019
2018
Level 1
Level 2
Total fair
value
Level 1
Level 2
Fair value through profit or loss:
Cash and cash equivalents
$
20,698 $
119,635 $
140,333 $
11,418 $
193,503 $
—
—
32,384
32,384
5,961,173
5,961,173
463,826
676,858
2,928
—
—
10,203
44,247
—
—
—
—
120,924
2
—
463,826
797,782
2,930
—
1,548,479
1,548,479
—
—
175,229
55,363
66,520
10,203
44,247
175,229
55,363
66,520
—
—
384,760
631,961
9,760
—
—
11,100
52,520
—
—
—
Total fair
value
204,921
23,970
23,970
4,994,720
4,994,720
—
110,642
664
384,760
742,603
10,424
3,989
3,989
1,535,360
1,535,360
—
—
193,391
51,949
69,180
11,100
52,520
193,391
51,949
69,180
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
$
1,218,760 $
8,079,709 $
9,298,469 $
1,101,519 $
7,177,368 $
8,278,887
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, 2019 or during the year ended
December 31, 2018.
For additional information on the composition of the Company’s invested assets and analysis of the
Company’s risks arising from financial instruments refer to Note 27 Risk Management.
Empire Life - Annual Report 2019
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)
(b) Impairments
(i) Loans and receivables
Investments in individual assets have been reduced by the following specific allowances for
impairment:
As at December 31
Impaired Loans
Mortgages
Policy contract loans
Total
2019
2018
Recorded
investment
Allowance for
impairment
Carrying
value
Recorded
investment
Allowance for
impairment
Carrying
value
$
$
5,531 $
2,678 $
2,853 $
6,424 $
2,896 $
813
460
353
813
478
6,344 $
3,138 $
3,206 $
7,237 $
3,374 $
3,528
335
3,863
The Company holds collateral with a fair value of $2,854 (2018 $3,590) in respect of these mortgages
and $353 (2018 $335) in respect of these policy contract loans as at December 31, 2019. Mortgage
loans are secured by real estate, and policy contract loans are secured by life insurance.
For the year ended December 31
Continuity of allowance for loan impairment:
Allowance - beginning of year
Provision for loan impairment
Write-off of loans
Allowance - end of year
2019
2018
3,374 $
634
(870)
3,138 $
3,474
333
(433)
3,374
$
$
The Company has recorded interest income of $669 (2018 $753) on these assets.
(ii) Available for sale
For the year-ended December 31, 2019, the Company reclassified a pre-tax loss of $1,811 (2018
$1,658) from OCI to Net income due to write downs of impaired AFS common and preferred shares.
Management considers these assets to be impaired due to the length of time that the fair value was
less than the cost and/or the extent and nature of the loss.
For additional information on the fair values of the Company’s AFS investments, refer to Note 3(a).
For analysis of the Company’s risks arising from financial instruments, refer to Note 27.
(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
2019
276,364 $
49,592
395
(634)
2018
261,218
46,987
556
(333)
325,717 $
308,428
$
$
Interest income includes $66,265 (2018 $64,893) relating to assets not classified as FVTPL.
Empire Life - Annual Report 2019
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)
(d) Derivative financial instruments
The values of derivative instruments are set out in the following table. The use of derivatives is measured
in terms of notional principal amounts, which serve as the basis for calculating payments and are
generally not actual amounts that are exchanged.
As at December 31
Exchange-traded
Notional
principal
2019
Fair value
assets
Fair value
liabilities
Notional
principal
2018
Fair value
assets
Fair value
liabilities
Equity index futures
$
49,964 $
Equity options
Over-the-counter
Foreign currency forwards
Cross currency swaps
537,772
37,103
20,980
585 $
2,342
28 $
—
42,968 $
431,459
458 $
9,302
3
—
402
1,610
32,896
16,839
664
—
Total
$
645,819 $
2,930 $
2,040 $
524,162 $
10,424 $
53
—
—
707
760
All contracts mature in less than one year. Fair value asset amounts are reported in the Consolidated
Statements of Financial Position as Derivative assets. Fair value liability amounts are reported in 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.
Cross currency swaps are valued by discounting the future cash flows for both legs at the underlying
market interest rate curves in each currency applicable at the valuation date. The sum of the cash flows
denoted in the foreign currency is converted with the spot rate applicable at that time. The foreign
currency leg, where Empire Life owes interest and principal, produces a negative fair value to Empire Life
while the Canadian dollar leg produces a positive fair value to Empire Life. The net of these amounts
represents the reported fair value of the cross currency swap. 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 27.
(e) Securities Lending
The Company has a securities lending agreement with its custodian. Under this agreement, the custodian
may lend securities from the Company’s portfolio to other institutions, as approved by the Company, for
periods of time. In addition to a fee, the Company receives collateral which exceeds the market value of the
loaned securities, which is retained by the Company until the underlying security has been returned to the
Company. In the event that any of the loaned securities are not returned to the custodian, at its option the
custodian may either restore to the Company securities identical to the loaned securities or it will pay to the
Company the value of the collateral up to but not exceeding the market value of the loaned securities on the
date on which the loaned securities were to have been returned (Valuation Date) to the custodian. If the
collateral is not sufficient to allow the custodian to pay such market value to the Company, the custodian shall
indemnify the Company only for the difference between the market value of the securities and the value of
such collateral on the Valuation Date. As a result, there is no significant exposure to credit risk associated with
this securities lending agreement.
Income recognized from securities lending activities was as follows:
For the year ended December 31
General funds
Segregated funds
Total
$
$
2019
986 $
1,706
2,692 $
2018
856
1,756
2,612
Empire Life - Annual Report 2019
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, 2019 and December 31, 2018, the aggregate fair values of the Company's securities
loaned and the collateral received were as follows:
As at December 31
2019
2018
General
Funds
Segregated
Funds
Total
General
Funds
Segregated
Funds
Total
Value of securities loaned
Value of collateral received
$
$
1,184,675 $
1,511,859 $
2,696,534 $
989,557 $
1,282,600 $
2,272,157
1,208,397 $
1,542,231 $
2,750,628 $
1,009,925 $
1,308,299 $
2,318,224
4. Insurance Receivables
As at December 31
Due from policyholders
Due and accrued from reinsurers
Fees receivable
Other
Insurance receivables
2019
3,047 $
17,927
15,512
12,242
48,728 $
2018
3,711
20,351
16,231
6,408
46,701
$
$
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
Right-of-use assets
Other assets
2019
13,180 $
6,231
3,685
23,096 $
2018
14,326
5,876
—
20,202
$
$
All amounts are expected to be recovered within one year of the Consolidated Statements of Financial
Position date except for right-of-use assets of $3,685 (2018 $nil). These financial instruments are short-term in
nature and their fair values approximate carrying value.
Empire Life - Annual Report 2019
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)
6. Property and Equipment
Cost
As at January 1, 2018
Additions
Disposals
As at December 31, 2018
Additions
Disposals
As at December 31, 2019
Amortization
As at January 1, 2018
Charge for the year
Disposals
As at December 31, 2018
Charge for the year
Disposals
As at December 31, 2019
Carrying amount
December 31, 2019
December 31, 2018
$
$
$
$
$
$
Land
Buildings
Furniture and
equipment
Leasehold
improvements
2,318 $
13,038 $
40,877 $
8,056 $
—
—
2,318
—
—
—
—
13,038
1
—
2,889
—
43,766
2,255
—
235
—
8,291
719
—
2,318 $
13,039 $
46,021 $
9,010 $
— $
(4,344) $
(26,771) $
(6,629) $
—
—
—
—
—
(435)
—
(4,779)
(413)
—
(4,346)
—
(31,117)
(4,780)
—
(312)
—
(6,941)
(342)
—
— $
(5,192) $
(35,897) $
(7,283) $
2,318 $
2,318 $
7,847 $
8,259 $
10,124 $
12,649 $
1,727 $
1,350 $
Total
64,289
3,124
—
67,413
2,975
—
70,388
(37,744)
(5,093)
—
(42,837)
(5,535)
—
(48,372)
22,016
24,576
There were no asset impairments in 2019 or 2018.
7. Intangible Assets
Cost
As at January 1, 2018
Additions
Disposals
As at December 31, 2018
Additions
Disposals
As at December 31, 2019
Amortization
As at January 1, 2018
Charge for the year
Disposals
As at December 31, 2018
Charge for the year
Disposals
As at December 31, 2019
Carrying amount
December 31, 2019
December 31, 2018
There were no asset impairments during 2019 or 2018.
Empire Life - Annual Report 2019
63
Intangible assets
$
$
$
$
$
$
62,892
3,862
—
66,754
8,993
—
75,747
(44,582)
(4,368)
—
(48,950)
(4,440)
—
(53,390)
22,357
17,804
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
8. Segregated Funds
(a) The following table identifies segregated fund assets by category of asset:
As at December 31
Cash
Short-term investments
Bonds
Common and preferred shares
Other assets
$
2019
8,482 $
595,621
1,857,955
6,100,714
13,577
8,576,349
2018
22,220
496,849
1,512,174
5,832,553
19,418
7,883,214
Less segregated funds held within general fund investments
Total
(77,766)
(60,424)
$
8,498,583 $
7,822,790
(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
2019
2018
Level 1
Level 2
Total
Level 1
Level 2
Total
Cash
Short-term investments
Bonds
$
8,482 $
— $
8,482 $
22,220 $
— $
—
—
595,621
1,857,955
—
595,621
1,857,955
6,100,714
—
—
5,829,250
496,849
1,512,174
3,303
22,220
496,849
1,512,174
5,832,553
Common and preferred shares
6,100,714
Total
$
6,109,196 $
2,453,576 $
8,562,772 $
5,851,470 $
2,012,326 $
7,863,796
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2019 and
December 31, 2018. There were no level 3 investments as at December 31, 2019 and December 31, 2018.
(c) The following table presents the change in segregated fund assets:
For the year ended December 31
Segregated fund assets - beginning of year
Additions to segregated funds:
Amount received from policyholders
Interest
Dividends
Other income
Net realized gains on sale of investments
Net unrealized increase in fair value of investments
Deductions from segregated funds:
Amounts withdrawn or transferred by policyholders
Net unrealized decrease in fair value of investments
Management fees and other operating costs
2019
2018
$
7,822,790 $
8,681,892
1,245,819
1,267,114
64,909
165,247
23,061
251,403
756,655
59,600
176,659
29,832
179,498
—
2,507,094
1,712,703
1,571,091
—
242,868
1,813,959
1,387,872
913,433
249,859
2,551,164
Net change in segregated funds held within general fund investments
(17,342)
(20,641)
Segregated fund assets - end of year
$
8,498,583 $
7,822,790
Empire Life - Annual Report 2019
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)
(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 the Company's estimated liability for those guarantees.
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
2019
37,551 $
16,688
2,456
15,902
22,981
95,578 $
2018
49,284
14,103
2,401
5,479
22,281
93,548
$
$
Of the above total, $969 (2018 $674) 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 an estimate of the amount that, together with estimated future
premiums and investment income, will be sufficient to pay future benefits, dividends, expenses, and
premium 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 due to the excess of future premiums payable
over the expected benefit of reinsurance. The change in reinsurance liabilities 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 2019
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)
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
Health
Annuity
Non-participating Group
Life
Health
Annuity
2019
Gross
insurance
contract
liabilities
Reinsurance
(assets)
liabilities
Gross
insurance
contract
liabilities
Net
2018
Reinsurance
(assets)
liabilities
Net
$
701,185 $
10,313 $
711,498 $
621,201 $
5,297 $
626,498
138
—
138
134
—
134
4,013,248
797,015
4,810,263
3,286,264
875,443
4,161,707
243,562
902,530
28,499
223,926
44,838
(8,476)
(8,875)
235,086
893,655
(1,345)
(90,260)
—
—
27,154
133,666
44,838
204,459
891,048
23,548
192,597
44,689
(8,332)
(10,689)
196,127
880,359
(915)
(72,003)
—
—
22,633
120,594
44,689
(87,517)
Segregated fund deferred acquisition costs
(84,058)
(84,058)
(87,517)
Total
$
6,073,868 $
698,372 $
6,772,240 $
5,176,423 $
788,801 $
5,965,224
The Company expects to pay $5,996,977 (2018 $5,085,826) of Insurance contract liabilities and $704,339
(2018 $784,507) 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
2019
87,517 $
25,872
(29,331)
84,058 $
2018
94,329
26,213
(33,025)
87,517
$
$
Of the above total, $30,576 (2018 $31,610) is expected to be amortized during the next year.
Empire Life - Annual Report 2019
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)
(b) Change in insurance contract liabilities and reinsurance assets/liabilities
For the year ended December 31
2019
Gross
insurance
contract
liabilities
Reinsurance
(assets)
liabilities
Gross
insurance
contract
liabilities
Net
2018
Reinsurance
(assets)
liabilities
Net
Balance - beginning of year
$
5,176,423 $
788,801 $
5,965,224 $
5,364,865 $
650,801 $
6,015,666
Changes in methods and assumptions
Non-participating policies
Changes for expected mortality/
morbidity
Update of mortality table
Lapse/premium assumption updates
Update of investment return
assumptions
Model enhancements and
other changes
Reinsurance recapture
Participating policies
Model enhancements and other
changes
Normal changes
New business
In-force business
Balance - end of year
(60,206)
137,622
31,968
47,618
(292,750)
(5,393)
(12,588)
(155,128)
26,575
—
36,584
(152,206)
127,213
119,718
16,964
136,682
(3,900)
59,077
(3,084)
10,783
69,860
(103,486)
(106,570)
(6,797)
—
—
22,823
7,386
6,753
—
(24,993)
—
59,407
3,486
(44)
—
(9,634)
3,967
(5,667)
(12,896)
3,436
(9,460)
31,649
590,335
2,292
229,576
33,941
819,911
41,738
(90,965)
4,357
46,095
(33,968)
(124,933)
$
6,073,868 $
698,372 $
6,772,240 $
5,176,423 $
788,801 $
5,965,224
Net changes in methods and assumptions summarized in the above tables are further explained as follows:
Changes for expected mortality in 2019 are primarily related to revisions of the projected assumptions for
individual life business, along with a smaller benefit from group long-term disability business. Changes in
2018 were due to similar updates, but were slightly offset by a small deterioration in mortality for immediate
annuities.
In 2019 the individual insurance mortality tables were replaced by more recent industry tables. The multipliers
which are applied to the industry table were also updated based on a combination of Company and industry
experience. This update results in a significant decrease to net liabilities.
In 2019 the lapse/premium assumption change is primarily related to updates of assumed lapse rates on
renewable term policies. In 2018 the lapse/premium assumption change was primarily related to refinements
in expected policyholder persistency for universal life policies and updates in expected lapse rates on
renewable term policies.
The primary drivers of the update of investment return assumptions for 2019 were promulgated updates to the
initial reinvestment rate (IRR) and ultimate reinvestment rate (URR) used in the valuation of policy liabilities.
Updates were also made to the equity investment return assumption, the planned level of equities matching
policy liabilities and to the maturity assumptions for preferred shares.
The primary changes in the net investment return assumptions for 2018 were due to a refinement to the
projection of equity assets backing the non-participating liability segment valuation at 2018 year-end, to reflect
a reduced reliance on these assets in the future, with a corresponding increased reliance on fixed income
instruments. This assumption change results in lower overall future yields and greater policy liabilities. This is
offset by improved projected returns on related to reinvestment assumptions on projected future investable
cash flows.
Empire Life - Annual Report 2019
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)
Several model enhancements were implemented in 2019. These enhancements include updates to return of
premium assumptions on Trilogy and Concordia policies, reinsurance model refinements, and refinements to
the mortality projection.
Model enhancements and other changes for 2018 are primarily related to enhancements to the modeling of
reinsurance for individual life insurance as well as an update in the unit maintenance expense assumptions
used in our projections.
In 2019 Empire Life notified the reinsurers of our individual life policies that in 2020 the Company will increase
its individual life retention from $500,000 to $1.5 million and the recapture provisions of all eligible reinsurance
treaties would be enacted. Updates to the production valuation model to reflect the recapture resulted in a
net liability decrease on both the universal life and non-participating blocks of business.
(c) Mix of assets allocated to insurance, annuity, investment contract liabilities and equity
Cash and cash equivalents & Short-term investments
$
119,451 $
7,956 $
1,816 $
43,494 $
172,717
As at December 31, 2019
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
4,860,681
24,083
103,865
797,783
588
54,695
425
20,940
605,503
139,158
176,915
—
—
—
23,697
5,251
156,599
1,886,869
7,509,652
6,586
4,854
—
—
668
—
643
—
188,395
44,246
2,342
—
42,398
142,305
169,827
474,029
842,029
2,930
55,363
66,520
169,139
$
5,982,511 $
958,480 $
171,166 $
2,350,049 $
9,462,206
As at December 31, 2018
Insurance
liabilities
Annuity
liabilities
Investment
contract
liabilities
Equity and
other
liabilities
Total
Cash and cash equivalents & Short-term investments
$
169,279 $
9,491 $
260 $
53,850 $
232,880
Bonds
Mortgages
Preferred shares
Common shares
Derivative assets
Loans on policies
Policy contract loans
Other
Total
4,158,384
33,214
33,978
761,181
1,122
51,949
1,495
22,874
544,822
149,767
177,337
—
—
—
22,758
5,083
14,908
1,811,966
6,530,080
4,098
4,852
—
—
—
623
139
5,995
179,693
33,942
9,302
—
44,304
140,241
193,074
395,860
795,123
10,424
51,949
69,180
168,337
$
5,233,476 $
909,258 $
24,880 $
2,279,293 $
8,446,907
Provisions made for anticipated future losses of principal and interest on investments and included as a
component of policy liabilities are $215,400 (2018 $189,300).
(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.
Empire Life - Annual Report 2019
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)
(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 the reporting date.
The Company defines cash demands or demand liabilities as those policyholder obligations that may be
called on immediately at the discretion of the policyholder. More specifically, demand liabilities include
cash surrender values under whole life insurance products as well as current accumulated values of
annuity products. Amounts would be gross of any surrender charge or market value adjustment allowed
under the terms of the contract. Demand liabilities are determined as though all such policyholders made
their call at the same time and as such cannot be readily compared to insurance contract liabilities that are
determined based on actuarial assumptions associated with lapse as well as other decrements.
The Company maintains a high level of liquid assets so that cash demands can be readily met. The
Company’s liquidity position is as follows:
As at December 31
Assets:
Cash and 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)
Lease liabilities
Other
Accounts payable and other liabilities
2019
2018
$
$
$
$
$
$
172,717 $
4,515,425
3,484,991
8,173,133 $
753,579 $
1,219,282
1,972,861 $
2019
39,011 $
42,616
2,554
2,040
3,683
16,133
106,037 $
232,880
3,873,302
3,129,406
7,235,588
702,440
1,169,807
1,872,247
2018
49,579
36,466
2,554
760
—
15,812
105,171
Of the above total, $42,616 (2018 $36,466) 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.
Empire Life - Annual Report 2019
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)
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.
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
2019
2018
2019
249,494 $
220,129 $
8,656 $
215,534
192,015
—
2018
8,352
—
(33,960) $
(28,114) $
(8,656) $
(8,352)
$
$
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).
Empire Life - Annual Report 2019
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 movement in the present value of the defined benefit obligations over the year is as follows:
Pension benefits
Other post-employment
benefits
As at December 31
2019
2018
2019
Present value of defined benefit obligation - beginning of year
$
220,129 $
227,019 $
8,352 $
Current service cost
Past service cost
Interest expense
Decrease (increase) in net income before tax
Remeasurements
(Gain) loss from changes in demographic assumptions
(Gain) loss from changes in financial assumptions
Actuarial (gain) loss from member experience
Decrease (increase) in OCI before tax
Employee contributions
Benefits paid
5,978
3,967
8,331
18,276
—
22,878
(116)
22,762
1,397
(13,070)
6,597
—
8,040
14,637
—
(8,891)
(681)
(9,572)
1,481
(13,436)
—
—
299
299
—
570
(282)
288
—
(283)
Present value of defined benefit obligation - end of year
$
249,494 $
220,129 $
8,656 $
The movement in the fair value of the Plan’s defined benefit assets over the year is as follows:
2018
9,697
—
—
329
329
66
(638)
(613)
(1,185)
—
(489)
8,352
As at December 31
Fair value of defined benefit assets - at beginning of year
Interest income
Administrative expense
Increase (decrease) in net income before tax
Remeasurements
Pension benefits
2019
2018
$
192,015 $
210,126
7,339
(243)
7,096
7,515
(195)
7,320
Return on plan assets, excluding amounts included in interest income
21,790
(17,030)
Gain (loss) from changes in demographic assumptions
Gain (loss) from changes in financial assumptions
Actuarial gain (loss) from member experience
Change in effect of asset limit
Increase (decrease) in OCI before tax
Plan transfers / curtailments
Employer contributions
Employee contributions
Benefits paid
Fair value of defined benefit assets - end of year
—
—
—
—
—
—
—
—
21,790
(17,030)
6,306
1,397
3,554
1,481
(13,070)
(13,436)
$
215,534 $
192,015
The actual return on defined benefit assets net of administrative expense, for the year ended December 31,
2019 was a gain of $28,886 (2018 loss of $9,710).
Defined benefit plan expense is recognized in Operating expenses. Remeasurements in the defined benefit
plan are included in OCI. Operating expenses also include $2,057 (2018 $1,691) 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, 2020 are approximately $4,721.
Empire Life - Annual Report 2019
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 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
2019
2018
Equity
Canadian
Foreign
Total equity
Debt
Canadian
Cash, cash equivalent, accruals
Mutual funds
Other
Total fair value of assets
$
75,336
50,977
126,313
65,194
6,711
8,312
9,005
35% $
24%
59%
30%
3%
4%
4% $
66,692
41,367
108,059
61,171
7,425
7,400
7,960
34%
22%
56%
32%
4%
4%
4%
$
215,535
100%
192,015
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
Rate of compensation increase
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
2019
2018
2019
2018
3.15%
3.85%
3.0%
n/a
n/a
n/a
3.85%
3.60%
3.0%
n/a
n/a
n/a
3.05%
3.70%
n/a
5.5%
4.0%
2040
3.70%
3.50%
n/a
6.7%
4.0%
2040
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
2019
21.97
24.66
23.83
26.34
2018
21.89
24.59
23.76
26.28
Empire Life - Annual Report 2019
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 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, 2019
Discount rate
Rate of compensation increase
Health care cost increase
Life expectancy
As at December 31, 2018
Discount rate
Rate of compensation increase
Health care cost increase
Life expectancy
Impact on Pension Benefit
Obligation
Impact on Other Post
Employment Benefit
Obligations
Change in
assumption
Increase
Decrease
Increase
Decrease
1% $
1% $
1%
(32,260) $
42,785 $
12,660 $
(11,262)
n/a
n/a $
1 year $
6,685 $
(6,887) $
(838) $
n/a
965 $
410 $
1,003
n/a
(817)
(398)
Impact on pension benefits
Impact on other post
employment benefits
Change in
assumption
Increase
Decrease
Increase
Decrease
1% $
1% $
1%
(26,633) $
10,509 $
n/a
36,824 $
(9,074)
n/a $
1 year $
5,403 $
(5,397) $
(791) $
n/a
885 $
400 $
944
n/a
(754)
(390)
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
2019
2018
15
12
11
14
13
11
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.
Changes in bond yields
A decrease in corporate bond yields will increase Plan obligations, although this will be partially offset by an
increase in the value of the Plans’ bond holdings.
Empire Life - Annual Report 2019
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)
Life expectancy
The majority of the Plans’ obligations are to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the Plans’ liabilities.
In case of the funded plans, the Pension Committee ensures that the investment positions are managed in
accordance with the investment philosophy outlined in the investment policy approved by the Human
Resources Committee of the Board. The fundamental philosophy is to achieve acceptably high investment
return over the long term without jeopardizing the level of security of the members’ benefits and without
introducing too much volatility into the Company’s future expense. The Company's objective is to match
assets to the pension obligations by investing in equities as well as fixed interest securities. The Company
monitors how the duration and the expected yield of the investments are matching the expected cash outflows
arising from the pension obligations. The Plan has not changed the processes used to manage its risks from
previous periods. Investments are well diversified, such that the failure of any single investment would not
have a material impact on the overall level of assets. The Plan invests primarily in Canadian Bonds and
Equities through its' ownership of units in Empire Life segregated and mutual funds. The Company believes
that equities offer the best returns over the long term with an acceptable level of risk.
The last triennial valuation on the Staff Pension Plan was completed in November 2018, as at December 31,
2017. The next triennial valuation will be completed in 2021, as at December 31, 2020.
13. Subordinated Debt
The table below presents the obligations included in Subordinated debt as at December 31.
As at December 31
Series 2016-1(1)
Series 2017-1(2)
Total Subordinated Debt
Fair Value
Interest rate
Earliest par call or
redemption Date
3.383% December 16, 2021
3.664%
March 15, 2023
2019
2018
Maturity
Carrying value
Carrying value
2026
2028
$
$
199,639
199,459
399,098 $
410,142 $
199,463
199,304
398,767
400,820
(1) Series 2016-1 Subordinated 3.383% Unsecured Debentures due 2026. From December 16, 2021, interest is payable at 1.95% over the 3-
month Canadian Deposit Offering Rate (CDOR).
(2) Series 2017-1 Subordinated 3.664% Unsecured Debentures due 2028. From March 15, 2023, interest is payable at 1.53% over CDOR.
14. Insurance Premiums
For the year ended December 31
2019
Gross
Reinsurance
ceded
Net
Gross
2018
Reinsurance
ceded
Life premiums
Health premiums
Total life and health premiums
Annuity premiums
$
525,273 $
(120,236) $
405,037 $
502,456 $
(110,326) $
407,262
932,535
159,293
(61,573)
(181,809)
(178)
345,689
750,726
159,115
363,144
865,600
155,040
(36,529)
(146,855)
(180)
Total insurance premiums
$
1,091,828 $
(181,987) $
909,841 $
1,020,640 $
(147,035) $
Net
392,130
326,615
718,745
154,860
873,605
Empire Life - Annual Report 2019
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)
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
2019
2019
249,714 $
12,031
261,745 $
2018
253,990
9,951
263,941
$
$
Gross
Reinsurance
ceded
Net
Gross
2018
Reinsurance
ceded
Life claims
Health claims
Total life and health claims
Annuity benefits
$
231,237 $
(67,615) $
163,622 $
243,402 $
(82,585) $
279,398
510,635
209,681
(31,146)
(98,761)
(3,294)
248,252
411,874
206,387
240,346
483,748
186,508
(16,505)
(99,090)
(1,406)
Benefits and claims paid
$
720,316 $
(102,055) $
618,261 $
670,256 $
(100,496) $
(b) Change in insurance contract liabilities and reinsurance ceded
For the year ended December 31
2019
Gross
Reinsurance
ceded
Net
Gross
2018
Reinsurance
ceded
Life
Health
Total life and health
Annuity
$
811,912 $
(73,845) $
738,067 $
(194,523) $
147,164 $
70,437
882,349
15,096
(18,398)
(92,243)
1,814
52,039
790,106
16,910
22,188
(172,335)
(16,107)
(8,392)
138,772
(772)
Change in insurance contract liabilities
$
897,445 $
(90,429) $
807,016 $
(188,442) $
138,000 $
17. Operating Expenses
Operating expenses include the following:
For the year ended December 31
Salary and benefits expense
Professional services
Rent, maintenance and amortization of right-of-use assets
Amortization of property and equipment and intangibles
Other
Total
$
$
2019
102,869 $
16,922
15,281
9,975
27,423
172,470 $
164,656
Significant components of other expenses include travel, advertising, and office supplies and services.
Empire Life - Annual Report 2019
75
Net
160,817
223,841
384,658
185,102
569,760
Net
(47,359)
13,796
(33,563)
(16,879)
(50,442)
2018
98,444
16,888
12,624
9,461
27,239
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
2019
59,644 $
(1,147)
58,497 $
$
$
During 2019 the Company paid income tax installments totaling $28,729 (2018 $54,590).
(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
2019
249,156 $
66,450
(10,360)
2,407
58,497 $
$
$
2018
38,870
(1,806)
37,064
2018
184,953
49,474
(10,152)
(2,258)
37,064
The current enacted corporate tax rates as they impact the Company in 2019 stand at 26.67% (2018
26.75%). Expected future tax rates are as follows:
2020
2021
2022
2023
2024
26.53%
26.46%
26.38%
26.38%
26.38%
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
Post-employment benefit plans
Other, net
Deferred income tax asset (liability)
2019
(10,882) $
(6,009)
11,169
(3,083)
2018
(9,867)
(5,527)
9,957
(4,851)
(8,805) $
(10,288)
$
$
Of the above total, $7,222 is expected to be paid (2018 $8,002 paid) more than one year after the
Consolidated Statements of Financial Position date.
Empire Life - Annual Report 2019
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)
The net movement on the deferred income tax account is as follows:
For the year ended December 31
Deferred income tax asset (liability) - beginning of year
Deferred income tax benefit (expense)
Statement of operations
Other comprehensive income
Deferred income tax asset (liability) - end of year
2019
2018
(10,288) $
(13,766)
1,147
336
1,806
1,672
(8,805) $
(10,288)
$
$
(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
2019
Before tax
Tax provision
(recovery)
After tax
Before tax
2018
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
$
89,474 $
23,862 $
65,612 $
(38,651) $
(10,339) $
(28,312)
(21,886)
(5,884)
(16,002)
1,411
762
649
(1,260)
(336)
(924)
(6,267)
(1,672)
(4,595)
Total other comprehensive income (loss)
$
66,328 $
17,642 $
48,686 $
(43,507) $
(11,249) $
(32,258)
The following income tax amounts are included in each component of shareholders’ OCI:
For the year ended December 31
2019
Before tax
Tax provision
(recovery)
After tax
Before tax
2018
Tax provision
(recovery)
After tax
Unrealized fair value change on available
for sale investments
Fair value change on available for sale
investments reclassified to net income,
including impairment write downs
Remeasurements of post-employment
benefit liabilities
Shareholder portion of policyholder other
comprehensive income (loss)
$
83,481 $
22,264 $
61,217 $
(33,305) $
(8,909) $
(24,396)
(16,920)
(4,520)
(12,400)
1,728
871
857
(1,205)
(321)
(884)
(5,973)
(1,593)
(4,380)
30
7
23
(458)
(125)
(333)
Total other comprehensive income (loss)
$
65,386 $
17,430 $
47,956 $
(38,008) $
(9,756) $
(28,252)
The following income tax amounts are included in each component of policyholders’ OCI:
For the year ended December 31
2019
Before tax
Tax provision
(recovery)
After tax
Before tax
2018
Tax provision
(recovery)
After tax
Unrealized fair value change on available
for sale investments
Fair value change on available for sale
investments reclassified to net income,
including impairment write downs
Remeasurements of post-employment
benefit liabilities
Shareholder portion of policyholder other
comprehensive income (loss) (Note 23)
$
5,993 $
1,598 $
4,395 $
(5,346) $
(1,430) $
(3,916)
(4,966)
(1,364)
(3,602)
(55)
(30)
(15)
(7)
(40)
(23)
(317)
(294)
458
(109)
(79)
125
(208)
(215)
333
Total other comprehensive income (loss)
$
942 $
212 $
730 $
(5,499) $
(1,493) $
(4,006)
Empire Life - Annual Report 2019
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)
19. Earnings Per Share
Earnings per share is calculated by dividing common shareholders' net income by the weighted average number
of common shares outstanding. The preferred shares issued (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
2019
2018
$
$
173,943 $
985,076
176.58 $
137,445
985,076
139.53
As at
December 31, 2019
December 31, 2018
Shares
authorized
Shares issued
and outstanding
Amount
Shares
authorized
Shares issued
and outstanding
Amount
Preferred shares
Series 1
Series 3
Common shares
unlimited
unlimited
2,000,000
5,980,000 $
4,000,000 $
149,500
100,000
unlimited
unlimited
5,980,000 $
4,000,000 $
149,500
100,000
985,076 $
985
2,000,000
985,076 $
985
In the fourth quarter of 2017, Empire Life issued to E-L Financial Corporation Limited 4,000,000 Non-Cumulative
Rate Reset Preferred Shares, Series 3 (Series 3 Preferred Shares) at $25 per share. Holders of Series 3
Preferred Shares are entitled to receive fixed non-cumulative quarterly dividends yielding 4.90% annually, as and
when declared by the Board of Directors of Empire Life, for the initial period ending on and including January 17,
2023. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of
Canada bond yield plus 3.24%. Holders of Series 3 Preferred Shares will have the right, at their option, to convert
their shares into Non-Cumulative Floating Rate Preferred Shares, Series 4 (Series 4 Preferred Shares), subject to
certain conditions, on January 17, 2023 and on January 17 every five years thereafter. Holders of the Series 4
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 3.24%.
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 $1,375 of income tax, was charged to retained
earnings.
Empire Life - Annual Report 2019
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars except for per share amounts, shares authorized and outstanding and where otherwise stated)
21. Dividends
Common shareholder dividends
Common shares
Preferred shareholder dividends
Series 1
Series 3
Dividend
declaration date
Shares issued
and outstanding
Dividend rate
per share
Total dividend
($ 000's)
Dividend
payment date
October 30, 2019
August 1, 2019
May 2, 2019
February 27, 2019
October 31, 2018
August 3, 2018
May 3, 2018
February 27, 2018
October 30, 2019
August 1, 2019
May 2, 2019
February 27, 2019
October 31, 2018
August 3, 2018
May 3, 2018
February 27, 2018
October 30, 2019
August 1, 2019
May 2, 2019
February 27, 2019
October 31, 2018
August 3, 2018
May 3, 2018
February 27, 2018
985,076
985,076
985,076
985,076
985,076
985,076
985,076
985,076
5,980,000
5,980,000
5,980,000
5,980,000
5,980,000
5,980,000
5,980,000
5,980,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17.440800
17.440800
17.440800
17.440800
10.151501
10.151501
10.151501
10.151501
0.359375
0.359375
0.359375
0.359375
0.359375
0.359375
0.359375
0.359375
0.306250
0.306250
0.306250
0.306250
0.306250
0.306250
0.306250
0.306250
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17,181
December 10, 2019
17,180
September 12, 2019
17,181
June 11, 2019
17,180
April 4, 2019
10,000
December 5, 2018
10,000
September 12, 2018
10,000
June 8, 2018
10,000
April 3, 2018
2,149
January 17, 2020
2,149 October 17, 2019
2,149
July 17, 2019
2,149
April 17, 2019
2,149
January 17, 2019
2,149 October 17, 2018
2,149
July 17, 2018
2,149
April 17, 2018
1,225
January 17, 2020
1,225 October 17, 2019
1,225
July 17, 2019
1,225
April 17, 2019
1,225
January 17, 2019
1,225 October 17, 2018
1,225
July 17, 2018
1,225
April 17, 2018
On February 26, 2020, subsequent to the date of these Consolidated Financial Statements, the Board approved the
following cash dividends:
•
•
•
$111,743 ($113.435853 per share) on the issued and outstanding Common Shares, payable on April 8, 2020.
$2,149 ($0.359375 per share) on the issued and outstanding Series 1 Preferred Shares, payable on
April 17, 2020.
$1,225 ($0.306250 per share) on the issued and outstanding Series 3 Preferred Shares, payable on April 17,
2020.
22. Shareholders' Equity Entitlement
Shareholders’ entitlement to $3,369 (2018 $3,137) of shareholders’ equity is contingent upon future payment
of dividends to participating policyholders.
Empire Life - Annual Report 2019
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)
23. Segmented Information
The Company operates in the Canadian life insurance industry and follows a product line management
approach for internal reporting and decision making. A description of the product lines is as follows:
The Wealth Management product line includes segregated funds, mutual funds, guaranteed interest rate
annuities and annuities providing income for life.
The Employee Benefits product line offers group benefit plans to employers for medical, dental, disability,
and life insurance coverage of their employees.
The Individual Insurance product line includes both non-participating and participating individual life and
health insurance products.
Capital and Surplus is made up of assets held in the shareholders’ and participating policyholders’ equity
accounts and other corporate items not allocated to other segments.
Operating results are segmented into three product lines along with the Company’s capital and surplus
as follows:
Net premiums from external customers
$
159,115 $
360,383 $
390,343 $
— $
For the year ended December 31, 2019
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
909,841
276,364
325,717
490,381
183,162
215,123
473,402
56,555
66,418
(5,106)
110,575
(6,572)
105,331
502
228
156,018
772,537
—
31,438
5,120
59,233
74,951
—
10,566
3,770
16,192
65,468
21,198
(29)
—
—
—
—
1,553
—
14,425
—
—
15,882
44,049
21,886
261,745
618,261
807,016
937
31,438
9,975
172,470
198,754
14,425
18,675
3,770
58,497
190,658
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
30,202
39,656
17,772
1,147
101
249,018
206,387
16,910
937
—
1,965
61,333
83,162
—
—
—
23,898
74,182
6,445
4,520
4,313
181
85
12,528
255,856
17,569
—
—
2,890
50,351
40,641
—
8,109
—
2,525
6,959
Empire Life - Annual Report 2019
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)
Net premiums from external customers
$
154,860 $
339,852 $
378,893 $
— $
For the year ended December 31, 2018
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Interest income
Total investment income
Fair value change in fair value through profit or loss assets
Realized gain (loss) on fair value through profit or loss
assets
Realized gain (loss) on available for sale assets including
impairment write downs
Fee income from external customers
Net benefits and claims
Net change in insurance contract liabilities
Change in investment contract provision
Policy dividends
Amortization of property and equipment and intangibles
Total operating expenses
Net commission expense
Interest expense
Premium tax
Investment and capital tax
Income tax expense (recovery)
Net income (loss) after tax
31,166
38,776
(35,073)
816
227
252,878
185,102
(16,880)
85
—
1,930
59,368
87,936
—
—
—
23,594
73,279
Total
873,605
261,218
308,428
(318,039)
5,870
4,059
168,194
199,215
(964)
(279,132)
55,988
66,378
(2,870)
9
206
10,613
230,428
727
—
—
2,138
45,595
36,328
—
8,354
—
8,483
23,860
14,635
(3,560)
11,900
48
388
154,230
(34,289)
—
30,124
5,393
58,248
73,933
—
10,683
3,922
(2,119)
19,315
(1,892)
62
—
—
—
—
—
1,445
—
18,132
—
—
7,106
31,435
(1,411)
263,941
569,760
(50,442)
85
30,124
9,461
164,656
198,197
18,132
19,037
3,922
37,064
147,889
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, 2019
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
958,480 $
171,166 $
5,982,511 $
2,350,049 $
9,462,206
8,480,294
—
18,289
—
8,498,583
9,438,774 $
171,166 $
6,000,800 $
2,350,049 $ 17,960,789
For the year ended December 31, 2018
Wealth
Management
Employee
Benefits
Individual
Insurance
Capital &
Surplus
Total
944,448 $
153,194 $
5,057,860 $
2,291,405 $
8,446,907
7,805,676
—
17,114
—
7,822,790
8,750,124 $
153,194 $
5,074,974 $
2,291,405 $ 16,269,697
$
$
$
$
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.
Empire Life - Annual Report 2019
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)
24. Commitments and Contingencies
Investment Commitments
In the normal course of business, outstanding investment commitments are not reflected in the Consolidated
Financial Statements. There was $22,867 (December 31, 2018, $13,000) of outstanding commitments as at
December 31, 2019. The outstanding commitment is payable at any time up to and including April 30, 2021.
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.
25. Related Party Transactions
The Company is a 98.4% 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, 99.4% 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.
In the fourth quarter of 2017, the Company issued 4,000,000 Non-Cumulative Rate Reset Preferred Shares,
Series 3 to E-L Financial Corporation Limited at $25 per share. Refer to Note 20 for further details.
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
$
$
2019
6,140 $
398
6,538 $
2018
6,866
535
7,401
Post-employment benefits are comprised of employer current service costs for pension and other post-
employment benefits.
Empire Life - Annual Report 2019
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)
26. 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. Effective
January 1, 2018, OSFI has implemented the new Life Insurance Capital Adequacy Test (LICAT)
framework. Under this framework, the Company’s capital adequacy will be measured as a ratio of Available
Capital plus Surplus Allowance and Eligible Deposits divided by a Base Solvency Buffer. The components of
the LICAT ratio are determined in accordance with the guidelines defined by OSFI. The regulator has
established a Supervisory Target Total Ratio of 100% and a Supervisory Target Core Ratio of 70%. As at
December 31, 2019 and December 31, 2018 the Company was in compliance with the applicable regulatory
capital ratios.
Empire Life - Annual Report 2019
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)
27. Risk Management
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. Given the nature of these calculations, the Company cannot provide
assurance that actual impact will be consistent with the estimates provided. 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.
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 common stocks or exchange-traded funds (ETFs) 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 LICAT position. Regulatory pressure to
increase capital escalates as the LICAT 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.
Empire Life - Annual Report 2019
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)
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 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. Investments and
asset/liability management 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 LICAT position on a
regular basis and reports at least quarterly to the Board on the Company’s LICAT.
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,
LICAT position and results of operations. The Company has reinsured a portion of its segregated
fund death benefit guarantee. The Company also has a semi-static, economic hedging program.
The objective of the economic hedging program is to partially protect the Company from possible
future LICAT 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
Empire Life - Annual Report 2019
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)
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.
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 Chief
Risk Officer 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 capital requirements.
The following table summarizes the estimated potential impact on the Company of a change in
global equity markets. The Company uses a 10% increase or decrease in equity markets as a
reasonably possible change in equity markets. The Company has also disclosed the impact of a
20% increase or decrease in its equity market sensitivity. The amounts in the following table
include the effect of Empire Life’s general fund equity risk economic hedging program (described
above). For segregated fund guarantees the level of sensitivity is highly dependent on the level of
the stock market at the time of performing the estimate. If period end equity markets are high
relative to market levels at the time that segregated fund policies were issued, the sensitivity is
reduced. If period end equity markets are low relative to market levels at the time that segregated
fund policies were issued, the sensitivity is increased.
Shareholders' net income (including segregated fund guarantees)*
$
13,800 $
(17,521) $
31,350 $
(80,143)
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$ nil $ nil $ nil $ nil
$
3,245 $
(3,245) $
6,490 $
(6,490)
$ nil $ nil $ nil $ nil
As at December 31, 2019
10% Increase 10% Decrease
20% Increase 20% Decrease
Shareholders' net income (including segregated fund guarantees)*
$
16,371 $
(15,902) $
34,749 $
(149,572)
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$ nil
$ nil
$ nil
$ nil
$
$
2,590 $
1,257 $
(2,590) $
(1,257) $
5,180 $
2,514 $
(5,180)
(2,514)
As at December 31, 2018
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
Empire Life - Annual Report 2019
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)
For the life insurance business, the Company’s policy is to use equity investments to cover a
portion of the 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 equity investments 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 9.0%
(2018 8.8%). The Company uses an assumption of 7.7% (2018 8.0%) 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 1.0% decrease in future
equity market returns would result in an increase to policy liabilities thereby reducing Net income
by approximately $127,300 (2018 $110,500).
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
$
$
2019
2018
648,049
$
352,369
7.0%
4.3%
444,366
$
110,324
4.8%
1.3%
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.
Empire Life - Annual Report 2019
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)
The following tables summarize the estimated immediate financial impact on Net income and OCI
as a result of an immediate change in interest rates.
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
Shareholders' net income
Policyholders' net income
Shareholders' other comprehensive income
Policyholders' other comprehensive income
$
$
$
$
$
$
$
$
As at December 31, 2019
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
20,751 $
(22,972) $
39,524 $
(48,444)
233 $
(254) $
446 $
(531)
(45,776) $
(1,288) $
54,420 $
(82,907) $
117,484
1,422 $
(2,442) $
2,979
As at December 31, 2018
50 bps
Increase
50 bps
Decrease
100 bps
Increase
100 bps
Decrease
8,361 $
204 $
(39,075) $
(1,905) $
(9,248) $
(222) $
15,932 $
(19,494)
391 $
46,055 $
(71,171) $
2,101 $
(3,614) $
(463)
99,089
4,399
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 will need 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 1.0% 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 $52,500 (2018 $38,000). This assumes no change in the URR assumption.
Empire Life - Annual Report 2019
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)
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 3.1%
(2018 3.2%) plus a maximum amount for credit spreads minus asset default rates of 0.8% (2018
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 3.9% (2018 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, much closer matching of the asset and liability cash flows is possible which helps
mitigate the potential impact on the business from a sudden increase or decrease in interest
rates. For annuity business, the impact a 1.0% decrease in assumed IRR has on policy liabilities
and subsequently on Net income is negligible as a result of the matching process described
above.
Interest rate risk in Empire Life's investment portfolio is managed through Investment Committee
established limits and regular reporting by management to the Investment Committee and the
Board. The Company’s investment guidelines establish investment objectives and eligible interest
rate sensitive investments, as well as establish diversification criteria, exposure, concentration
and asset quality limits for these investments. The Asset Management Committee oversees
sensitivity to interest rates. The objective is to maximize investment yields while managing the
default, liquidity and reinvestment risks at acceptable levels and within risk tolerances. Product
development and pricing policies and practices also require consideration of interest rate risk in
the design, development and pricing of the products.
(3) Foreign exchange rate risk
Foreign exchange rate risk arises when the fair value of cash flows of a financial instrument
fluctuate due to changes in exchange rates. This can create an adverse effect on earnings and
equity when measured in the Company’s functional currency.
The Company’s primary foreign currency exposure arises from portfolio investments denominated
in US dollars. A 10% fluctuation in the US dollar would have an impact of approximately $ nil
(2018 $ nil) on shareholders' Net income, $ nil (2018 $ nil) on policyholder's Net income, $ nil
(2018 $ nil) on shareholders’ OCI and $ nil (2018 $ nil) on policyholders’ OCI. The Company’s
exposure to foreign currency risk in its financial liabilities is not material.
The Company uses derivative instruments, including futures contracts and foreign currency
forward contracts, to manage foreign exchange risks. Improper use of these instruments could
have an adverse impact on earnings. The Company manages this risk by applying limits
established by the Investment Committee in its investment guidelines, which set out permitted
derivatives and permitted uses for derivatives, as well as limits to the use of these instruments. In
particular, no leverage is permitted in the use of derivatives and strict counterparty credit
restrictions are imposed.
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 Risk and Capital Committee of the Board.
Empire Life - Annual Report 2019
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)
(b) Liquidity risk
Liquidity risk is the risk that an entity will not be able to fund all cash outflow commitments or
obligations as they fall due or that, in order to fund commitments, an entity may have to sell assets at
depressed prices resulting in losses at time of sale. Cash outflows could be in the form of benefit
payments to policyholders, expenses, asset purchases and interest on debt. The majority of the
Company’s obligations relate to its policy liabilities, the duration of which varies by line of business and
expectations relating to key policyholder actions or events (i.e. cash withdrawal, mortality, and
morbidity). The remaining obligations of the Company relate to the subordinated debt (refer to Note 13
- Subordinated Debt) and to ongoing operating expenses as they fall due, which are expected to settle
in a very short period of time.
The Company’s liquidity risk management strategy is to ensure that there will be sufficient cash to
meet all financial commitments and obligations as they become due.
The Company’s liquidity risk management program is monitored by management and by the Board of
the Company through regular reporting to the Investment Committee. The Company monitors its cash
flow obligations and meets its liquidity needs by holding high quality marketable investments that may
be easily sold, if necessary, and by maintaining a portion of investments in cash and short-term
investments.
The Company maintains a liquidity policy requiring an assessment of the Company’s liquidity risk and
specific procedures so that liquidity needs are met. Compliance with the policy is monitored by the
Asset Management Committee and exposures and breaches are reported to the Investment
Committee of the Board. The Company’s current liquidity position as at December 31 is provided in a
table in Note 10(e). Based on the Company’s historical cash flows and current financial performance,
management believes that the cash flows from the Company’s operating activities will continue to
provide sufficient liquidity for the Company to satisfy debt service obligations and to pay other
expenses.
The following table shows details of the expected maturity profile of the Company's undiscounted
obligations with respect to its financial liabilities and estimated cash flows of policy liabilities.
Subordinated debt that are not due at a single maturity date are included in the tables in the year of
final maturity. Actual maturities could differ from contractual maturities because of the borrower’s right
to call or extend prepay obligations, with or without prepayment penalties. 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 2019 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, 2019
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$
71,689 $
162,523 $
513,593 $
23,596,531 $
24,344,336
3,823
14,094
13,496
227,908
331,010
115
12,418
51,294
232,280
7,044
11,665
439,960
—
42,616
9,882
—
—
—
37,788
505,348
245,776
277,568
465,559
1,007,834
23,606,413
25,410,816
—
—
—
115
Total
$
331,125 $
465,559 $
1,007,834 $
23,606,413 $
25,410,931
Empire Life - Annual Report 2019
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)
Insurance contract liabilities
Investment contract liabilities
Subordinated debt
Preferred shares
Accounts payable and Other liabilities
Total liabilities
Operating lease commitments
As at December 31, 2018
1 year or less
1 - 5 years
5 - 10 years Over 10 years
Total
$
96,260 $
189,647 $
492,727 $
23,285,372 $
24,064,006
4,084
14,094
13,496
230,291
358,225
3,106
10,685
51,708
245,776
8,230
506,046
5,884
9,704
453,240
—
36,525
8,714
—
—
—
33,187
519,042
259,272
275,046
992,196
23,294,086
25,150,553
3,129
—
12,119
Total
$
361,331 $
511,930 $
995,325 $
23,294,086 $
25,162,672
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, 2019, 1.9% (2018 2.8%) of cash and investments were held in
these shorter duration investments.
(c) Credit risk
Credit risk is the possibility of loss from amounts either owed by financial counterparties, such as
debtors, reinsurers and other financial institutions, or in connection with issuers of securities held in an
asset portfolio. The Company is subject to credit risk which arises from debtors or counterparties who
are unable to meet their obligations under debt or derivative instruments. This credit risk is derived
primarily from investments in bonds, debentures, preferred shares, cash and cash equivalents,
mortgages and from reinsurers under reinsurance agreements.
The Company manages this risk by applying its investment guidelines and product design and pricing
risk management policy established by the Investment Committee and Risk and Capital Committee of
the Board respectively. The investment guidelines establish minimum credit ratings for issuers of
bonds, debentures and preferred share investments, and provide for concentration limits by issuer of
such debt instruments. Management and Board committees review credit quality relative to investment
purchases and also monitor the credit quality of invested assets over time. Management reports
regularly to the Investment Committee of the Company’s Board on the credit risk to which the portfolio
is exposed. The Reinsurance Risk Management Policy (along with supporting material in the Product
Design and Pricing Risk Management Policy) establishes reinsurance objectives and limits, and
requires ongoing evaluation of reinsurers for financial soundness. The Company enters into long-term
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.
Empire Life - Annual Report 2019
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)
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
2019
$
140,333 $
32,384
7,509,652
474,029
2,930
169,827
113,107
55,363
66,520
35,401
48,728
13,180
2018
204,921
27,959
6,530,080
395,860
10,424
193,074
95,975
51,949
69,180
35,388
46,701
14,326
$
8,661,454 $
7,675,837
Mortgages, Loans on policies and Policy contract loans are fully or partially secured.
The Company has made provision in its Consolidated Statements of Financial Position for credit
losses. Provisions have been made partly through reduction in the value of the assets (see Note 3(b))
and partly through a provision in policy liabilities (see Note 10(c)).
Concentration of credit risk
(1) Bonds and debentures
The concentration of the Company’s bond portfolio by investment grade is as follows:
As at December 31
AAA
AA
A
BBB (and lower ratings)
Total
2019
2018
Fair value % of Fair value
Fair value % of Fair value
$
348,815
1,167,357
4,831,528
1,161,952
5% $
16%
64%
15%
281,470
628,471
4,561,261
1,058,878
$
7,509,652
100% $
6,530,080
4%
10%
70%
16%
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 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
2019
2018
$
4,182,725
$
3,599,325
55.7%
55.1%
Empire Life - Annual Report 2019
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 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
2019
2018
Fair value % of Fair value
Fair value % of Fair value
$
75,119
769,237
700,976
5,964,320
1% $
10%
9%
80%
87,560
810,260
743,107
4,889,153
$
7,509,652
100% $
6,530,080
1%
12%
11%
76%
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
2019
2018
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.
$
$
4,744,433
$
4,248,837
51.1%
51.3%
199,877
$
181,684
2.2%
2.2%
(2) Preferred shares
The Company’s preferred share investments are all issued by Canadian companies, with 1%
(2018 1%) rated as P1, 97% rated as P2 (2018 99%) and the remaining 2% (2018 nil %) rated
as P3.
(3) Mortgages
Mortgages in the province of Ontario represent the largest concentration with $169,058 or
99% (2018 $193,074 or 100%) 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
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Net premium income
Fee and other income
Total
$ 159.1 $ 154.9 $ 360.4 $ 339.8 $ 390.3 $ 378.9 $
— $
— $ 909.8 $ 873.6
249.0
252.9
12.5
10.6
0.2
0.4
—
—
261.7
263.9
$ 408.1 $ 407.8 $ 372.9 $ 350.4 $ 390.5 $ 379.3 $
— $
— $ 1,171.5 $ 1,137.5
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.
Empire Life - Annual Report 2019
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)
The principal risk the Company faces under insurance contracts is the risk that experience on claims,
policy lapses and operating expenses will not emerge as expected. To the extent that emerging
experience is more favourable than assumed in the valuation, income will emerge. If emerging
experience is less favourable, losses will result. Therefore, the objective of the Company is to
establish sufficient insurance liabilities to cover these obligations with reasonable certainty.
The computation of insurance liabilities and related reinsurance recoverable requires “best estimate”
assumptions covering the remaining life of the policies. Assumptions in use are based on past
experience, current internal data, external market indices and benchmarks which reflect current
observable market trends and other published information. These assumptions are made for mortality,
morbidity, longevity, lapse, expenses, inflation and taxes. Due to the long-term risks and measurement
uncertainties inherent in the life insurance business, a margin for adverse deviations from best
estimates is calculated separately for each variable and included in policy liabilities. These margins
are intended to allow for possible deterioration in experience and to provide greater confidence that
policy liabilities are adequate to pay future benefits. The effect of these margins is to increase policy
liabilities over the best estimate assumptions.
The margins for adverse deviation used by the Company are within the target range established by
the CIA. A correspondingly larger margin is included in the insurance contract liabilities if an
assumption is susceptible to change or if there is more uncertainty about the best estimate
assumption. Each margin is reviewed annually for continued appropriateness.
Policy liability assumptions are reviewed and updated at least annually by the Company’s Appointed
Actuary. The impact of changes in those assumptions is reflected in earnings in the year of the
change. Details related to the changes in assumptions are also discussed with the Audit Committee of
the Board. The methods for arriving at the most important of these assumptions are outlined below.
Also included are measures of the Company’s estimated net income sensitivity to changes in best
estimate assumptions in the non-participating insurance liabilities, based on a starting point and
business mix as of December 31, 2019. 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 2.0% increase in the best estimate mortality
assumption would increase policy liabilities thereby decreasing Net income by approximately
$15,800 (2018 $12,300).
For annuity business, lower mortality (or longevity) is financially adverse so a 2.0% decrease in
the best estimate mortality assumption would increase policy liabilities thereby decreasing Net
income by approximately $3,300 (2018 $4,100).
(2) Policyholder behaviour (termination or lapse)
Policy termination (lapse) and surrender assumptions are based on a combination of the
Company’s own internal termination studies (conducted annually) and recent CIA industry
experience. Separate policy termination assumptions are used for permanent cash-value
business, for renewable term insurance, term insurance to age 100 and for universal life
insurance. In setting policy termination rates for renewable term insurance, it is assumed that
extra lapses will occur at each renewal point and that healthy policyholders are more likely to
lapse at that time than those who have become uninsurable.
Empire Life - Annual Report 2019
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)
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 10.0% adverse change in the lapse
assumption would result in an increase to policy liabilities thereby decreasing Net income by
approximately $152,300 (2018 $132,800). For products where fewer terminations would be
financially adverse to the Company, the change is applied as a decrease to the lapse assumption.
Alternatively, for products where more terminations would be financially adverse to the Company,
the change is applied as an increase to the lapse assumption.
(3) Expenses
Policy liabilities provide for the future expense of administering policies in force, renewal
commissions, general expenses and taxes. Expenses associated with policy acquisition and issue
are specifically excluded. The future expense assumption is derived from internal cost studies and
includes an assumption for inflation.
An increase in the level of expenses would result in an increase in expenditure thereby reducing
profits for the shareholders.
For non-participating insurance business and annuity business combined, a 5% increase in the
maintenance expense assumption would result in an increase to policy liabilities thereby reducing
net income by approximately $6,300 (2018 $6,900).
(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 $7,900 (2018 $6,700).
(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.
Empire Life - Annual Report 2019
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)
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 a Product
Design and Pricing Risk Management Policy governing all of its major product lines. This policy,
which is established by the Product Management Review Committee ("PMRC") 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 principles for prudent out product design and pricing
approval authorities, product concentration limits, and required product development monitoring
processes and controls.
(6) Underwriting and claims risk
The Company is subject to the risk of financial loss resulting from the selection and underwriting of
risks to be insured and from the adjudication and settlement of claims. Many of the Company’s
individual insurance and group disability products provide benefits over the policyholder’s lifetime.
Actual claims experience may differ from the mortality and morbidity assumptions used to
calculate the related premiums. Catastrophic events such as earthquakes, acts of terrorism or an
influenza pandemic in Canada could result in adverse claims experience.
In addition to the risk management controls described above under Product Design and Pricing
Risk, the Company also manages underwriting and claims risk through its Underwriting and
Liability Risk Management Policy which governs each of its major product lines. This policy is
established by the PMRC and approved by the Risk and Capital Committee of the Board. It
defines the Company’s underwriting and claims management philosophy and sets out principles
for prudent underwriting and claims management including, underwriting classification claims
requirements, approval authorities and limits, and ongoing risk monitoring. The Company uses
reinsurance to mitigate excessive exposure to adverse mortality and morbidity experience. The
PMRC reviews and establishes retention limits for its various product lines and the Risk and
Capital Committee of the Board recommends changes to these retention limits for approval by the
board.
(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.
Empire Life - Annual Report 2019
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)
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. The PMRC 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 2019
97
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.
Experience Gains and Losses
This source of earnings represents gains or losses due to the difference between actual experience and the best
estimate assumptions.
Empire Life - Annual Report 2019
98
GLOSSARY OF TERMS (unaudited)
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.
Life Insurance Capital Adequacy Test (LICAT)
The LICAT measures the capital adequacy of an insurer and is one of several indicators used by OSFI to assess an
insurer's financial condition. The LICAT Ratio is the ratio of eligible capital to the base solvency buffer, each as
calculated under OSFI's published guidelines.
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 2019
99
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 account.
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. 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.
The Investment Committee receives monthly reporting on general fund asset mix and performance and investment
transactions for all funds by asset segment. In addition, on at least a quarterly basis, management and the Company’s
investment managers report to the Investment Committee, and through the Investment Committee to the Board of
Directors, on portfolio content, asset mix, the Company’s matched position, the performance of general and
segregated funds, and compliance with the investment guidelines. The investment guidelines are reviewed at least
annually by the Board.
Investment Income Allocation
Investment income is recorded directly to each asset segment. A portion of investment income is allocated to or from
the Shareholders’ Capital and Surplus segment from or to the participating account’s asset segments in proportion to
the deficiency or excess of funds over assets of each segment.
Expense Allocation
General expenses are allocated to the participating account using cost centre methods. Expenses associated directly
with the participating account are so charged. Expenses arising from or varying directly with various functional
activities are charged to the participating account in proportion to statistics appropriate to each cost centre. Expenses
incurred by overhead cost 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.
Empire Life - Annual Report 2019
100
PARTICIPATING ACCOUNT MANAGEMENT POLICY
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 Product Management Review Committee. Material amendments must be approved by the Product
Management Review Committee and the Board. The principal factors that would be expected to change the policy
include changes in legislation, regulation of participating account, accepted actuarial practice, capital requirements,
taxation and accounting rules or fundamental changes to the circumstances of the Company.
This policy will also be reviewed if the Company decides to stop accepting new business in the participating account.
Empire Life - Annual Report 2019
101
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 each policy issued in the participating account of Empire Life that entitles 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.
Empire Life - Annual Report 2019
102
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 Product Management Review Committee. Material amendments must be approved by the Product
Management Review Committee and the Board. The principal factors that would be expected to change the policy
include changes in legislation, regulation of participating account, accepted actuarial practice, capital requirements,
taxation and accounting rules or fundamental changes to the circumstances of the Company.
This policy will also be reviewed if the Company decides to stop accepting new business in the participating account.
Empire Life - Annual Report 2019
103
PARTICIPATING ACCOUNT FINANCIAL DISCLOSURE
Participating Surplus
Surplus and Accumulated OCI - beginning of year
$
36,163
$
43,221
2019
2018
Net Income and OCI, before dividends
Amounts transferred to shareholders per S.461 of the ICA
Amounts transferred to shareholders per S.462(a) of the ICA, if included in net income
Net Income and OCI
Policyholder dividends, excluding ERRs
Surplus and Accumulated OCI - end of year
Total Participating Assets
Section 462 transfer as a % of Distributable Profits
38,086
25,166
—
(2,699)
35,387
—
(2,100)
23,066
(31,438)
(30,124)
40,112
36,163
$
780,330
$
692,355
7.61%
7.62%
Empire Life - Annual Report 2019
104
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 senior management level risk
committees, which report to the Board of Directors and/or its Committees 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 seven times in 2019 and is scheduled to
meet at least six times in 2020.
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 compliance risk, model risk, human resources risk, third
party risk and technology, information security and business continuity risk) and business and strategic risk. Please see the section
titled “Risk Factors” in the Company’s Annual Information Form available at www.sedar.com for more details on these risks.
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, succession planning, workforce 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 the
Company’s Code of Business Conduct, conflicts of interest, the Company’s personal trading policy, confidentiality of information,
consumer complaints, privacy, regulatory compliance and outsourcing.
The Risk and Capital Committee is responsible for oversight of the Company’s risk and capital management activities.
The Committee also assists the Board in its oversight role with respect to the management of the Company’s enterprise risk
management framework and risk appetite framework; the identification, review and assessment of the Company’s primary risks;
the review and assessment of the Company’s risk management strategies; and the deployment and use of capital.
Empire Life - Annual Report 2019
105
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
310-1167 Kensington
Calgary, Alberta T2N 1X7
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
310-1167 Kensington
Calgary, Alberta T2N 1X7
403 262-6386
1 888 263-6386
The Empire Life Insurance Company is a member of Assuris. Assuris is the not for profit
organization that protects Canadian policyholders if their life insurance company fails.
Details about Assuris’ protection are available at www.assuris.ca or by calling the Assuris
Information Centre at 1 866 878-1225.
ONTARIO
Burlington Retail Sales Office
307-5500 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
307-5500 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
Empire Life - Annual Report 2019
106
BOARD OF DIRECTORS
SHAREHOLDERS' DIRECTORS
POLICYHOLDERS' DIRECTORS
HONORARY CHAIRMAN
John F. Brierley 1, 2, 5
Corporate Director
Scott F. Ewert 1, 4, 5
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
Vice President and Chief Financial Officer
Harold W. Hillier 1, 2, 3, 4
E-L Financial Corporation Limited
Corporate Director
HONORARY DIRECTOR
The Right Honourable John N. Turner
Edward M. Iacobucci 1, 2, 3
Mark Sylvia
Dean, Faculty of Law
University of Toronto
Duncan N.R. Jackman 5
Chairman of the Board
President and Chief Executive Officer
The Empire Life Insurance Company
Jacques Tremblay 3, 5
Partner
The Empire Life Insurance Company
Oliver Wyman Actuarial Consulting
Clive P. Rowe 4, 5
Partner
Oskie Capital
Patricia M. Volker 1
Corporate Director
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 2019
107
CORPORATE MANAGEMENT
Mark Sylvia
President and Chief Executive Officer
Richard Carty
General Counsel and Senior Vice-President, Human Resources
Edward Gibson
Senior Vice-President, Chief Financial Officer and Chief Actuary
Ian Hardacre
Senior Vice-President and Chief Investment Officer
Michael Perry
Senior Vice-President, Group Solutions
Steve Pong
Senior Vice-President, Retail
Kathy Thompson
Senior Vice-President and Chief Risk Officer
Empire Life - Annual Report 2019
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EMPIRE LIFE ANNUAL REPORT 2019
The Empire Life Insurance Company (Empire Life) is a proud Canadian company
that has been in business since 1923. We offer individual and group life and health
insurance, investment and retirement products, including mutual funds through our
wholly-owned subsidiary Empire Life Investments Inc.
Empire Life is among the top 10 life insurance companies in Canada1 and is rated A
(Excellent) by A.M. Best Company2. Our mission is to make it simple, fast and easy
for Canadians to build wealth, generate income, and achieve financial security.
Follow us on social media @EmpireLife or visit www.empire.ca
for more information.
1 Based on total assets as reported in December 31, 2018 OSFI filings
2 As at June 14, 2019. For the latest rating, access www.ambest.com.
Transfer Agent and Registrar
AST Trust Company (Canada)
1 Toronto Street, Suite 1200
Toronto, Ontario, M5C 2V6
Phone 416-682-3860
Toll Free 800-387-0825
www.astfinancial.com/ca-en
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.®
empire.ca info@empire.ca 1 877 548-1881
A-0004-EN-02/20