A N N U A L R E P O R T

Transcription

1 A N N U A L R E P O R T 2015

2 TABLE OF CONTENTS About Equitable Life of Canada 1 Five-Year Review of Highlights 2 Message to Policyholders 3 Management s Discussion and Analysis 5 Responsibility for Financial Reporting 16 Appointed Actuary s/auditors Reports 17 Consolidated Financial Statements 18 Notes to Consolidated Financial Statements 23 Participating Account Management Policy/Dividend Policy 40 Senior Management/Subsidiaries 41 Corporate Governance 42 Board of Directors 43

3 ABOUT EQUITABLE LIFE OF CANADA Canadians have turned to Equitable Life since 1920 to protect what matters most. We work with independent advisors across Canada to offer individual insurance, savings and retirement and group benefits solutions to meet your needs. But we re not your typical financial services company. We have the knowledge, experience and ability to find solutions that work for you. We re friendly, caring and interested in helping. And we re owned by our participating policyholders, not shareholders. So we can focus on your interests and on providing you with personalized service, security and wellbeing. Equitable Life is represented by independent advisors serving Equitable Life policyholders. They are supported by more than 550 staff located at our Head Office in Waterloo and across Canada. OUR COMMITMENT TO MUTUALITY Equitable Life is proud to be one of Canada s largest mutual life insurance companies, and we believe our mutual status best serves the long-term interests of our policyholders. Participating policyholders share in the Company s success they are eligible to receive dividends supported by distributable earnings from all lines of business. Participating policyholders also elect our Board of Directors and have a right to vote on various other Company issues. As well, we are not driven by shareholder pressures for quarterly results. Our mutual structure allows us to manage the Company with a focus on the long term. We are able to offer continuity and stability and are dedicated to meeting our commitments to customers now and in the future. In addition, our mutual status has allowed us to prepare for and succeed in difficult market conditions. We have sufficient earnings and capital to meet our future growth targets, and we continue to grow steadily. Finally, we believe that being mutual allows us to provide better levels of service than a publicly traded company. OUR HISTORY Sydney Tweed started The Ontario Equitable Life and Accident Insurance Company in a second floor office in Waterloo, Ontario in November Within the first week, the Company had a solid footing with $300,000 of insurance in force. By the end of the first year, the Company had more than $7 million of insurance in force, a record unequalled by any Canadian life insurance company at that time. A philosophy of growth and a commitment to our policyholders was instilled from the beginning. During the Great Depression the Company pioneered an inexpensive family income policy offering security to families during insecure times. In 1936 the name changed to The Equitable Life Insurance Company of Canada, demonstrating the commitment to provide all Canadians with protection. The following are some of Equitable Life s key milestones: 1963: Adopted a mutual ownership structure 1968: Achieved $1 billion of life insurance in force 1971: Opened our new Head Office at One Westmount Road North in Waterloo 2009: Achieved $50 billion of life insurance in force 2015: Reached $3.5 billion of assets under administration, $1 billion of segregated funds and $0.5 billion of policyholders equity 1 EQUITABLE LIFE OF CANADA

4 FIVE-YEAR REVIEW OF HIGHLIGHTS As at December 31 (Dollar amounts in thousands except where otherwise indicated) Net income 53,800 52, ,550 44,656 8,486 Net premium revenue 556, , , , ,349 Segregated funds deposits 168, , , , ,096 ASO/HCSA premium equivalents & investment contract deposits 85,538 77, ,391 47,797 40,134 Total premiums and deposits 810, , , , ,579 Dividends to participating policyholders 17,925 15, ,951 11,305 10,977 Assets General fund 2,453,158 2,334,802 2,119,562 2,097,334 2,013,867 Segregated funds 1,009, , , , ,569 Assets under administration 3,462,450 3,307,382 3,033,082 2,913,082 2,749,436 Increase in assets under administration 4.7% 9.0% 4.1% 6.0% 7.3% Participating policyholders equity 500, , , , ,406 Life insurance in force (billions $) MCCSR 216% 210% 228% 195% 190% Return on policyholders equity 11.4% 12.5% 16.1% 13.5% 2.8% Sales Individual 58,148 51,608 45,947 38,786 41,869 Savings and Retirement 229, , , , ,178 Group 43,794 23,522 48,776 53,437 29, 011 NET INCOME PREMIUMS AND DEPOSITS DIVIDENDS TO PARTICIPATING POLICYHOLDERS (Dollar amounts in millions) (Dollar amounts in millions) (Dollar amounts in millions) 2015 ANNUAL REPORT 2

5 MESSAGE TO POLICYHOLDERS Despite a challenging economic environment, we are pleased to report that Equitable Life had a strong year on all fronts. OUR STRATEGIC FOCUS In 2011, having achieved our previous five-year plan, we set out to review Equitable Life of Canada s businesses from the bottom up and set the Company s direction for the next five years. As part of that review, we developed a new five-year strategy for the Company and established several key objectives, including: Delivering earnings consistent with a 12% return on equity; Maintaining financial strength with a total Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio in excess of 200%; Increasing market share in all lines of business; Building out our product offering; Investing in technology to enhance service; Pursuing unit cost reductions, efficiency and scale; and Supporting our culture of employee engagement. Four years into this renewed focus, we are pleased to report that our strategy is working and that we are delivering on all of our objectives. and deposits and reached $3.5 billion in assets under administration. We have demonstrated our ability to stay on course and to focus on growth despite a highly competitive environment. We are pleased to report a number of achievements on our sales front, and in particular, results for our Individual line of business, which achieved $58.1 million in new annualized premiums. This represents a 13% increase over the past year, which extends a three-year trend of greater than 12% growth in sales each year. Our Group line of business experienced a positive turnaround in 2015, finishing the year with $43.8 million in sales, representing an 86% increase over last year s results. As well, our Savings and Retirement line of business also had a successful year, reaching $230 million, a 2.9% increase over last year. Of note, 2015 marked our highest sales ever for segregated funds. In any year, we would be pleased with these results; in the challenging economic environment that prevailed throughout 2015, however, these results are noteworthy. OUR RESULTS Despite a challenging economic environment, we are pleased to report that Equitable Life of Canada had a strong year on all fronts. In 2015, the Company continued to perform well, executed against plans, and delivered solid financial results. Of note, we realized earnings of $53.8 million, which resulted in a return on policyholders equity of 11.4%. With these earnings, we were able to achieve a Minimum Continuing Capital and Surplus Requirements ratio of 216%. These earnings were supported by our strong investment portfolio which performed well in 2015; our conservative approach continues to provide ongoing stability and growth in earnings. In 2015, we also experienced continued and steady growth. We achieved a new high of $810 million for premiums MEETING OUR CUSTOMERS NEEDS Every day, Equitable Life is focused on achieving operational excellence that allows us to meet our customers needs. In every line of business, we have been hitting or exceeding key productivity and service level standards that impact our customers experience. We ve achieved this through process improvements and through enhanced technology. In fact, our ability to leverage and expand on our technologies has been a key achievement over the past year. Our Individual team has launched the pilot for our e-application, EZcomplete, and we have enhanced our EZClaim autoadjudication for Group. We ve also increased our touchless paper processing through Document Services, which has enhanced our speed and accuracy and allowed us to take further steps to reduce the amount of paper we produce. 3 EQUITABLE LIFE OF CANADA

6 OUR PRODUCT PORTFOLIO A key tenet of our long-term strategy is to expand the breadth of our product offering. In the fall, we expanded our Savings and Retirement offering with the addition of Pivotal Select Protection Class, a product that offers a 100% maturity benefit guarantee and a 100% death benefit guarantee the highest level of guarantees of our Pivotal Select segregated fund contract. In Group, we entered into a new product line, the group creditor business, through a new distribution relationship. We also extended myflex Benefits, a program that offers a competitive benefits plan with flexible options to small businesses, beyond its initial pilot program. In Individual, we introduced new highly competitive rates on our term products, maintaining our position as one of the top 3 in terms of pricing. In addition to expanding our product portfolio, our distribution channel grew significantly in 2015, with the productivity of our wholesale network at an all-time high. INVESTING IN OUR PEOPLE AND OUR COMMUNITIES In 2015, we were proud to be named one of Waterloo Area s Top Employers for the eighth year in a row, and to have received the Platinum Award for workplace health from Waterloo Region, recognizing our achievements as a Gold Award recipient for the previous four years. At Equitable Life, fostering an engaged workforce is one of our core values. It is only through the drive and commitment of our people that our accomplishments in 2015 were possible. We are also committed to being a good corporate citizen and to making the communities we serve better, healthier and more caring places to live. We demonstrated this in 2015 through many charitable efforts. With each initiative, our employees also showed their commitment to giving back; they demonstrated unwavering generosity, donating both money and time to make our internal charitable campaigns a success, and to support countless other organizations in Kitchener-Waterloo and in communities across Canada Financial Highlights Net income of $53.8 million, for a return on policyholders equity of 11.4%. Dividends to participating policyholders increased by 15% to $17.9 million. Participating policyholders equity increased to $500 million. Capital strength, as measured by the MCCSR ratio, ended the year at 216%. Premiums and deposits increased by 6.8% to $810 million. Assets under administration grew 4.7% to $3.5 billion. Segregated fund assets exceeded $1 billion. Sales in all lines of business exceeded last year. The Management s Discussion and Analysis (starting on page 5) provides more details about our achievements and results in A Look Ahead During a year that saw continued economic uncertainty, we are proud of our achievements. We have demonstrated we can not only execute well but that we can thrive in a volatile environment. Throughout the coming year, we will prioritize efforts that enable continued strong results and that allow us to maintain our base and grow into the future. With positive results for 2015 and a continued focus on execution and financial stability, we are well prepared for what 2016 may bring. In an economy that promises to be unpredictable and an environment that will bring increased competition and regulatory pressures, we are confident we will remain steadfast and strong. Douglas W. Dodds, FCPA, FCMA Chairman of the Board Ronald E. Beettam, FSA, FCIA President and Chief Executive Officer 2015 ANNUAL REPORT 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS Equitable Life sustained its strong and stable capital position in The results reflect a continued commitment to achieving growth and financial stability. The Management s Discussion and Analysis (MD&A) provides an opportunity to discuss the financial position and performance of The Equitable Life Insurance Company of Canada ( the Company ) in 2015 compared to The MD&A provides analysis both in total and for the major reportable lines of business OVERVIEW OF CONSOLIDATED RESULTS Equitable Life of Canada achieved solid earnings of $53.8 million in These earnings led to a return on policyholders equity of 11.4%. These results reflect a continued commitment to achieving growth and financial stability. The Company s Individual line of business realized a profit of $31.0 million in 2015, up 7.2% from last year s earnings of $28.9 million. This was achieved, in part, because of record sales, but Individual earnings were also positively impacted by strong expense management, positive investment experience and the appreciation of U.S. dollar assets backing linked accounts. Earnings in the Group line of business were up over 2014 by 7.1% reaching $8.2 million in Our Savings and Retirement line of business realized net income of $0.4 million in 2015, down from $1.4 million in Equitable Life sustained its strong and stable capital position in The Company s Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio finished the year at 216%, well above the minimum level set out by the Office of the Superintendent of Financial Institutions Canada (OSFI). The Company s participating policyholders equity, one of the key measures of a mutual life insurer s financial stability, increased 12% to $500 million, from $446 million at the end of As in previous years, Equitable Life s investment portfolio performed extremely well in Our conservative approach continues to provide ongoing stability and growth. MCCSR RATIO FINISHED THE YEAR AT 216% CAUTION REGARDING FORWARD LOOKING STATEMENTS The MD&A includes forward-looking statements with respect to the business operations and strategy, as well as the financial performance and condition of the Company. These statements are predictive in nature and generally can be identified by the use of forward-looking words such as may, will, expect, intend, estimate, anticipate, believe, or continue or the negative thereof or similar variations. By their nature, forward-looking statements require assumptions to be made about future events or conditions and are subject to inherent risks and uncertainties that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially from the Company s expectations include, but are not limited to, general economic and market conditions, including changes in interest rates. Readers are advised to carefully consider these factors when evaluating the Company s forward-looking statements. The Company does not undertake to update or revise any forward-looking statements to reflect any changes in events or conditions occurring after the publication of the MD&A. 5 EQUITABLE LIFE OF CANADA

8 Equitable Life also had a solid year from a growth perspective in Premiums and deposits reached a new high of $810 million, up 6.8% from the previous year. In addition, assets under administration reached $3.5 billion, growing 4.7% from Segregated fund assets increased to over $1 billion for the first time in the Company s history. Company growth was supported by strong sales results. The Individual line of business achieved record sales of $58.1 million in new annualized premiums, up 13% from The Group line of business achieved $43.8 million in sales, an 86% increase over Savings and Retirement sales were $230 million, a 2.9% increase over the previous year. Total dividend payments to participating policyholders increased 15% to $17.9 million in 2015 from $15.6 million the previous year despite a continued low interest-rate environment. Total life insurance in force grew by 8.9% during the year to $92 billion, compared to $85 billion at the end of 2014, a reflection of the continued growth in sales and inforce business. PREMIUMS AND DEPOSITS UP 6.8% LIFE INSURANCE IN FORCE GREW BY 8.9% PARTICIPATING POLICYHOLDERS EQUITY INCREASED 12% ASSETS UNDER ADMINISTRATION LIFE INSURANCE IN FORCE PARTICIPATING POLICYHOLDERS EQUITY (Dollar amounts in billions) (Dollar amounts in billions) (Dollar amounts in millions) 2015 ANNUAL REPORT 6

9 OVERVIEW OF LINE OF BUSINESS RESULTS Individual (Dollar amounts in thousands) Percentage change Net income $ 30,951 $ 28, % Net premium revenue 265, , % Dividends to participating policyholders 17,934 15, % Gross annualized premiums in force 369, , % Sales new annualized premiums 58,148 51, % FINANCIAL RESULTS The Individual business achieved net income of $31.0 million in 2015, up from $28.9 million in This was achieved, in part, because of record sales. Earnings in 2015 were positively impacted by strong expense management, positive investment experience and the appreciation of U.S. dollar assets backing linked accounts. These were partially offset by lower interest rates, negative equity markets, and poor withdrawal experience. Dividends to participating policyholders increased 15% to $17.9 million in 2015 from $15.6 million the previous year. The increase in dividends was due primarily to the increase in both the number of participating policyholders and the in-force premiums for participating policies during the year. FUTURE DIRECTION The Individual business will continue to focus on growing our market share in our target market life insurance sold to middle income families through the independent advisor distribution channel. This will be accomplished through an ongoing commitment to superior service, offering a full line of quality products, and investing in technology to make it even easier to do business with Equitable Life. Initiatives supporting these efforts include improving back office processes through electronic processing and auto-ingestion; enhancing the client access portal and expanding client self-service; expanding our electronic selling process through web-based electronic applications across all of our products; and developing client-focused market concepts. Many of these efforts will also lower unit costs. Individual sales were strong in 2015 at $58.1 million, up 13% from $51.6 million the previous year, primarily due to an increase in traditional participating whole life and term insurance sales. Equitable Life continues to experience strong growth in gross annualized premiums in force with an 11% increase in PRODUCTS In 2015, Individual repriced its suite of term products to maintain its competitive top 3 position in its target markets. We have also reviewed all of our products for the upcoming policyholder tax legislation changes effective January 1, 2017 and have commenced pricing and administrative projects to comply with these changes. In addition, we have taken a large step forward to improve our electronic submission of applications by the development of the web-based EZcomplete Term Application to be launched in the first quarter of Individual remains focused on providing competitive product features and underwriting, as well as superior service for both policyholders and independent advisors in ANNUALIZED PREMIUMS IN FORCE (Dollar amounts in millions) 7 EQUITABLE LIFE OF CANADA

10 Savings and Retirement (Dollar amounts in thousands) Percentage change Net income $ 446 $ 1,425 (68.7)% GIA, payout and investment contracts 64,601 66,516 (2.9)% Segregated funds 165, , % Total sales 229, , % General fund assets 455, , (5.0)% Segregated funds assets 998, , % Total assets under administration 1,454,075 1,441, % FINANCIAL RESULTS 2015 was a successful year for the Savings and Retirement line of business. Despite reserve strengthening related to changes in investment assumptions, this line of business achieved net income of $0.4 million in 2015, down from $1.4 million in also marked a record year in segregated fund sales at Equitable Life with sales of $165 million. Across all products, total sales increased by 2.9% to $230 million in This $6.5 million increase resulted from a year over year increase in segregated funds ($8.4 million), payout annuities ($2.0 million), and Funeral Plans-Canada ($2.1 million) sales, offset by a reduction in accumulation (GIA) sales ($6.0 million) which was driven by the continued low interest rate environment. The positive sales momentum in segregated funds and Funeral Plans-Canada is expected to continue as we progress through FUTURE DIRECTION Equitable Life is committed to delivering competitive financial solutions to meet the evolving investment and retirement income needs of Canadians. This will be achieved by developing and maintaining quality products to meet investors needs, delivering superior service to both customers and advisors and enhancing administrative efficiency. In 2016, the Pivotal Select Segregated fund line-up will be further enhanced with the launch of a low load sales charge option. We expect these enhanced product offerings to continue the positive momentum with increased sales and improved efficiencies. Through these efforts, Equitable Life will strengthen its position as a national competitor in the savings and retirement marketplace. PRODUCTS Savings and Retirement offers an array of fixed income and segregated fund investment products to meet a range of client objectives. Our product offering includes guaranteed interest accounts (GIAs), payout annuities, and Pivotal Select, Equitable Life s multi-class segregated fund offering. In 2015, Equitable Life further expanded their Pivotal Select Platform, launching Pivotal Select Protection Class for clients that value maximum protection. ASSETS UNDER ADMINISTRATION In addition, Equitable Life offers pre-need funeral funding through a strategic alliance with Funeral Plans-Canada, one of Canada s largest independent pre-need marketing companies (Dollar amounts in billions) 2015 ANNUAL REPORT 8

11 OVERVIEW OF LINE OF BUSINESS RESULTS Group (Dollar amounts in thousands) Percentage change Net income $ 8,208 $ 7, % Net premium revenue 231, ,849 (0.5)% ASO/HCSA premium equivalents 81,203 72, % Total premiums and equivalents 312, , % Gross annualized premiums in force 363, , % Sales new annualized premiums 43,794 23, % FINANCIAL RESULTS Equitable Life s Group business realized net income of $8.2 million in 2015, up 7.1% from The claims ratio, which is the ratio of claims to premiums, for all benefits improved by 1% relative to Poor health claims experience was offset by improved life and long-term disability (LTD) claims experience. Overall expenses were lower in 2015 relative to 2014 resulting in additional net income. Sales rebounded in 2015 growing by 86% relative to Through a partnership with Bingham Group Services (BGS), Group launched a Group Creditor line of business, taking advantage of the distribution network BGS has constructed. The launch of this product contributed to the growth of sales in Total premiums and equivalents were $313 million in 2015, up 2.4% from the previous year. Gross annualized premiums and premium equivalents in force, which includes administrative services only (ASO) and health care spending account (HCSA) contracts, were up 3.8% to $364 million. Both of these measures reflect the higher sales as well as a decrease in terminations. PRODUCTS As mentioned above, Group also launched the Group Creditor product through partnership with BGS. Creditor products provide life, disability and critical illness insurance coverage as an ancillary purchase to those taking out mortgages, automobile loans, or general leasing of equipment. FUTURE DIRECTION Equitable Life s Group development agenda continues to focus on expanding web and mobile services, product options that help employers balance flexibility and cost, and the evolution of drug plan management options. In 2016, for example, Group will launch a program to reduce costs associated with high cost drugs through a partnership with BioScript. ANNUALIZED PREMIUMS IN FORCE The Group product line includes life, accidental death and dismemberment, short-term and long-term disability, dental and extended health care benefits. Through partnerships, Equitable Life also offers group critical illness and a number of health and wellness-related services. In 2014, Equitable Life introduced myflex Benefits, a cafeteriastyle flex plan for businesses between five and 35 employees. It allows small employers to offer a competitive benefits plan and provide their team the coverage they need with predictable costs. In 2015, the number of wholesalers further expanded to increase the distribution of this product (Dollar amounts in millions) 9 EQUITABLE LIFE OF CANADA

12 INVESTMENT OPERATIONS FINANCIAL RESULTS In 2015, total assets under administration reached $3.5 billion. General fund invested assets increased by $95 million to $2.1 billion in the year, and segregated funds increased $37 million to $1.0 billion. Regular investment income, which excludes the impacts of equity market and interest rate performance, rose by $14 million in 2015 to $93 million. The growth in regular income is the primary driver of investment performance to Company income and reflects the solid growth in the portfolio. The primary contributors to the increase in regular investment income were higher dividends on our common equity portfolio, foreign exchange gains and interest on debt private placements. Market value changes on the investment portfolio are volatile but have limited impact on net income. In 2015, market value changes contributed $72 million, down from $202 million in The majority of this income is offset by changes in liabilities or are passed through to the policyholder. While financial conditions remain challenging, with low interest rates and volatile equity markets, the investment portfolio remains solid. There were no impaired assets or assets in arrears in any of the portfolios, and investment income continues to contribute positively to net income. BONDS AND DEBENTURES The bond and debenture portfolio increased to $934 million in 2015 compared with $913 million in Bond prices were positively impacted by lower interest rates, adding $3 million; the remaining increase was due to growth in assets under administration. The bond and debenture portfolio represents approximately 46% of total general fund managed assets. All of Equitable Life s bonds and debentures are rated investment grade and none were in default. MORTGAGES The mortgage loan portfolio increased to $149 million in 2015, compared with $138 million at the end of Commercial mortgage loans represent 7% of total general fund managed assets. There were no commercial mortgages in arrears at year-end. PRIVATE PLACEMENTS Debt private placements at the end of 2015 totaled $198 million, compared with $166 million at the end of Private placements allow for sourcing of quality assets with higher yields and/or better terms than are available in the public markets. The private placement portfolio is rated investment grade with no arrears at year-end. INVESTMENT PROPERTY Investment property investments totaled $126 million compared with $122 million at the end of No properties were bought or sold during the year. While fundamentals in the Canadian commercial real estate market were under pressure, the portfolio appreciated incrementally in the year. FUTURE DIRECTION Managing in a low interest rate environment will remain a challenge over the coming year. Market volatility continued throughout 2015 as low prices for oil and other commodities weighed on the Canadian economy, and we expect these conditions to remain in the coming year. We invest to ensure asset class and issuer diversification, remaining focused on risk management and sustainable returns. EQUITIES COMMON SHARES The common equity portfolio was $415 million in 2015 compared with $388 million in Equities supporting returns credited to policyholders under the Company s universal life products accounted for $331 million or 16% of total general fund managed assets. The increase in common equities is entirely due to growth in the equities supporting these policies, with all associated income passed through to the policyholder. GENERAL FUND MANAGED ASSETS 6.2% INVESTMENT PROPERTY 9.7% PRIVATE PLACEMENTS 2.1% OTHER EQUITIES PREFERRED SHARES The preferred share portfolio at the end of 2015 totaled $175 million, compared with $195 million at the end of The fixed reset preferred share structure was the primary contributor to a decline in market values over 2015 with the S&P/TSX Preferred Share index down 19.3%. Interest rate cuts by the Bank of Canada increased the reset risk and resulted in a broad based repricing of the fixed reset structure. 7.3% MORTGAGES 8.6% PREFERRED SHARES 20.3% COMMON SHARES 45.8% BONDS AND DEBENTURES 2015 ANNUAL REPORT 10

13 SOURCES OF EARNINGS ANALYSIS 2015 Individual (Dollar amounts in thousands) Savings and Retirement Group Surplus Total Expected profits on inforce business $ 20,232 $ 4,855 $ 7,560 $ $ 32,647 Impact of new business 23,264 (8,789) ,749 Experience gains (losses) (8,495) 5,783 2,601 (111) Management actions and changes in assumptions 3,731 (2,805) 560 1,486 Earnings on operations 38,732 (956) 10,995 48,771 Earnings on surplus 18,566 18,566 Income before income taxes 38,732 (956) 10,995 18,566 67,337 Income taxes 7,781 (1,402) 2,787 4,371 13,537 Net income $ 30,951 $ 446 $ 8,208 $ 14,195 $ 53, Individual Savings and Retirement Group Surplus Total Expected profits on inforce business $ 17,889 $ 4,900 $ 10,585 $ $ 33,374 Impact of new business 17,286 (8,181) 9,105 Experience gains (losses) (5,203) 4, (90) Management actions and changes in assumptions 6,387 (1,691) (459) 4,237 Earnings on operations 36,359 (10) 10,277 46,626 Earnings on surplus 18,715 18,715 Income before income taxes 36,359 (10) 10,277 18,715 65,341 Income taxes 7,497 (1,435) 2,611 4,307 12,980 Net income $ 28,862 $ 1,425 $ 7,666 $ 14,408 $ 52,361 Earnings for 2015 can be analyzed as being derived from the following sources: Expected profits on inforce business The expected profit on inforce business represents the profit anticipated from business in force if actual experience is in line with expected assumptions as to mortality, morbidity, lapse, interest and expenses. Impact of new business Profit (or loss) arises at issue of new policies as a result of sales. It represents the excess (or deficiency) of profit margins incorporated in the product pricing over the conservative margins for adverse deviation incorporated in the reserves. Profits in Individual were strong due to business mix and a continued favourable pricing environment. The impact of new business for Savings and Retirement is negative. This is due to its relatively small size. A positive number is expected once critical mass is reached to fully support the acquisition-related expenses allocated to the line of business. The impact of new sales for traditional Group business is assumed to be zero with any profit for the sales in the year included with the inforce business. The Group Creditor line of business does produce a small gain at issue. Experience gains or losses Experience gains or losses emerge when actual experience differs from the assumptions underlying the expected profit. Experience losses arose in Individual primarily due to lower interest rates and equity returns and adverse policyholder behavior experience. Savings and Retirement had experience gains primarily from favourable investment experience. Experience gains occurred in Group primarily as a result of favourable investment and claims experience. 11 EQUITABLE LIFE OF CANADA

14 Management actions and changes in assumptions In 2015, there were a number of changes. Expense experience has been positive in Individual and resulted in a reserve release and updates to investment assumptions and asset modeling also led to a release. Asset modeling changes led to a reserve strengthening for Savings and Retirement. Group long-term disability experience was updated and resulted in a reserve release which was partially offset by a reserve strengthening for Group long-term disability expense assumption. Overall, assumption changes reduced reserves by $1,486. See also note 9 (d) to the financial statements. Earnings on surplus Earnings on surplus reflect the investment returns on assets supporting the Company's surplus. CAPABILITY TO DELIVER RESULTS Equitable Life maintains a strong financial position and adequate liquidity to ensure that it is able and well prepared to meet its obligations. Capital Equitable Life is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI), which requires insurance companies to maintain minimum levels of capital calculated in accordance with the MCCSR. The MCCSR formula prescribes the calculation of available capital for regulatory purposes and the amounts of required capital to be maintained, based on the risk characteristics of the underlying assets and liabilities held by the Company. The ratio of available capital to required capital is the MCCSR ratio. Equitable Life s ratio at December 31, 2015 was 216% as compared to 210% in 2014, which is well in excess of the minimum level required by OSFI. This ratio indicates a very strong capital position. To assess capital adequacy and financial strength under adverse conditions, Dynamic Capital Adequacy Testing (DCAT) is performed on an annual basis. The DCAT process analyzes the Company s potential future financial condition over a fiveyear period by reviewing the impact of a number of adverse scenarios, including decreasing stock market levels; declining interest rates; global economic downturn; lower lapses on lapse supported products; reinsurer default; and decreasing stock market levels plus lower interest rates. Testing in 2015 confirmed the Company s financial strength and ability to withstand significant, potentially adverse scenarios in the future. Source of funds The primary source of funds for Equitable Life is cash provided by operating activities, including premiums, net investment income and fee income. These funds are used primarily to pay policyholder benefits and expenses. Net cash flows generated from operating activities are generally invested to support future payment obligations and the payment of dividends to participating policyholders. Liquidity Primary requirements for liquidity are for payment of benefits and expenses as described above, and to pay dividends to participating policyholders. The Company maintains a conservative liquidity position and has an asset/liability matching program that actively manages the diversification, duration and credit quality of investments to ensure that the Company can meet its obligations ANNUAL REPORT 12

15 RISK MANAGEMENT A key corporate objective is i to preserve and enhance policyholders value at an acceptable level of risk. To manage the risks in its many business activities, the Company utilizes a comprehensive enterprise risk management framework that includes: identification of the risks, measurement, control and monitoring of risk, and regularr reporting to senior management and to the Board of Directors (the Board). Risk is defined as the probability or likelihood that the expected outcome of a plan, strategy or course of action does not materialize resulting in the possibility of loss. The Company s guiding principles for risk management are to: protectt policyholder interests, preserve and enhancee policyholder value, and apply appropriate prudence in making business decisions. This requires a balance of risk and reward to ensure value for stakeholders including policyholders, employees, independent producers and suppliers. The objective of risk management is not to eliminate risk, but to reduce uncertainty to an acceptable level in order to enhance value while preserving safety and soundness. Risk management strategies, policies and procedures reduce the probability of an adverse outcome by establishing the acceptable boundaries for risk taking, including: : establishing risk tolerance limits with mechanisms to measure and monitor risks, and ensuring compliance with these strategies, policies and procedures. People skilled in assessing and managing risk, and the availability of timely and accuratee information, are critical success factors for risk management. The Board has overall responsibility for reviewing and approving the risk management policies and procedures recommended by management, and ensuring adherence. The Board, on the recommendation of the Audit Committee, reviews and approves an annual risk assessment of the Company conducted by management. Risks associated with policy liabilities Insurance companies are in the business of assuming and managing risk. The risks vary depending on the product. Products are priced for f target levels of return and as experience unfolds, pricing assumptions are validated and profits emerge in each accounting period. Policy liabilities reflect reasonable expectations about future risk events, together with a margin. Although pricing on some products is guaranteed throughout the life of the contract, policy liability y valuation requires periodic updating of assumptions to reflect emerging experience. In this way, the statement of financial position reflects the current outlook for future policyholder obligations. The Board of Equitable Life has approved standards for both pricing and underwriting off product offerings. Management is responsible for the effectivee execution of these policies. A compliance process is in placee for these policies. The Appointed Actuary is equired to value the policy liabilities and report annually on the financial condition of the Company. The Audit Committee and the Board review the work of the Appointed Actuary. The significant risks associated with policy liabilities that the Company manages, monitors and controls are outlined below. Mortality and morbidity risk Many of the Company s products provide benefits in the event of death (mortality). Benefits due to disabling conditions and medical and dental costs (morbidity) are also important product features. Research and analysis is ongoing to provide the basis for pricing and valuation assumptions, which properly reflect the markets where thee Company is actively doing business. These risks are actively managed through underwriting, retention limits and claims management. Lapse (policy termination) risk Products are priced and valued to reflect the future expected lapse rates of contracts. Thiss risk of higher lapses is important for expense recovery (higher costs are incurred in early contract years) and for products where the surrender benefits exceed 13 EQUITABLE LIFE OF CANADA

16 actuarial reserves. The risk of lower lapses adversely affects income for products where reserves are higher than surrender benefits. Annual research studies support pricing and valuation assumptions for this lapse risk. For additional information on these risks, refer to notes 9 (a) and (b) of the financial statements. Risks associated with invested assets Equitable Life acquires and manages portfolios of assets to produce risk-adjusted returns in support of policyholder obligations and corporate profitability. The Board annually approves investment and lending policies, as well as procedures and guidelines. A comprehensive report on compliance with these policies, procedures and guidelines is provided to the Board on a regular basis. Periodically, the Internal Audit department also conducts an independent review of compliance with investment policies, procedures and guidelines. The significant risks associated with invested assets that the Company manages, monitors and controls are outlined as follows. Equity market risk Equity market risk is the potential for financial loss arising from declines and volatility in equity market prices. The Company derives a portion of its revenue from fee income generated by our segregated fund asset management business and from certain insurance contracts where fee income is levied on account balances that generally move in line with equity market levels. Accordingly, adverse fluctuations in the market value of such assets would result in corresponding adverse impacts to our fee income and net income. In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders) for this business, resulting in further adverse impacts on our net income and financial position. We also have direct exposure to equity markets from investments supporting our general account liabilities and employee benefit plans. Additional information on equity market risk is described in note 5 (c) of the financial statements. Interest rate risk Interest rate risk exists if asset and liability cash flows are not closely matched and interest rates change. For asset-liability management purposes, the general fund is divided into segments based on the characteristics of the liabilities the segment supports. The risks associated with the mismatch in portfolio duration and cash flow, asset prepayment exposure, asset default and pace of asset acquisition are quantified and reviewed regularly. Derivative products are used primarily to hedge imbalances in asset and liability positions. Derivative products are traded with counterparties approved by the Senior Credit and Investment Policy Committee of the Board or the Board itself. They may include interest rate and credit swaps, options, futures and forward contracts. The Company s risk management process governing the use of derivative instruments includes: The Company acts only as a limited end-user of derivative products, not as a market maker. The Company has strict operating policies. These policies: limit the use of derivative products to hedging or replicating an approved investment structure, permit transactions only with approved counterparties, specify limits on concentration of risk, document approval and issuer limits, document the required reporting and monitoring systems, and segregate trading and risk monitoring/reporting functions. The Company s outstanding derivative products at December 31, 2015 and the related exposures are described in note 4 (e) of the financial statements. Credit risk Equitable Life s policy is to acquire only investment-grade assets and minimize undue concentration of assets in any single geographic area, industry or company. Investment guidelines specify minimum and maximum limits for each asset class and any individual issuer. Portfolio risk and the marginal risk contribution for each asset are evaluated using industry standard simulation techniques. Credit risk for bonds, preferred shares, and mortgages is determined by recognized external credit 2015 ANNUAL REPORT 14

17 rating agencies and/or internal credit reviews. These portfolios are monitored continuously and reviewed regularly with the Senior Credit and Investment Policy Committee of the Board or the Board itself. Credit exposure also exists under reinsurance contracts. Products with mortality and morbidity risks have specific limits for the Company s risk retention approved by the Board. These limits are reviewed and updated from time to time. The financial soundness of companies to whom the Company has ceded risk is monitored on an ongoing basis. Currency risk Investments are normally made in the same currency as the liability being matched. Operational risk The Company has a well established planning process from which it determines strategic direction and business objectives. Plans and objectives are carefully monitored to ensure their implementation and effectiveness. Operational risk arises from problems in the performance of business functions including deficiencies or breakdowns in internal controls or processes, technology failures, human error or dishonesty and natural catastrophes. To control operational risk, there are specific policies and guidelines for each line of business. These guidelines, as outlined below, help identify operational risks and ensure that effective internal controls are in place to manage these risks. Business units are responsible for identifying risks and managing them in accordance with these policies, processes and controls. Senior management is apprised of these risks and the Audit Committee is updated at least once a year. The Internal Audit department audits the effectiveness of internal controls and reports to senior management and the Audit Committee at least annually. External auditors review the effectiveness of internal controls to the extent necessary to conduct an audit of the annual financial statements. They report to the Audit Committee annually on matters that come to their attention. Management and the Human Resources department also seek to ensure that effective people are placed in key positions. Ongoing training through internal and external programs prepares staff at all levels for the demands of their positions. Operating and reporting processes are reviewed and updated regularly, with periodic monitoring completed by the Internal Audit department. The Company also regularly reviews information systems and upgrades them when necessary. Liquidity risk The Company closely manages operating liquidity using the Standard & Poor s liquidity model. The Company generally maintains a conservative liquidity position that exceeds all the liabilities payable on demand. The Company s asset-liability management allows it to maintain its financial position by ensuring that sufficient liquid assets are available to cover its potential funding requirements. The Company invests in various types of assets with a view of matching them with its liabilities of various durations. To strengthen its liquidity further, the Company actively manages and monitors its capital and asset levels, the diversification and credit quality of its investments, forecasts cash and maintains liquidity above established targets. The Company also maintains contingency plans for the management of liquidity in the event of a liquidity crisis. Regulatory compliance Equitable Life s business operations involve a wide variety of activities that are subject to regulation. These activities include: product design, sales and marketing practices, underwriting practices, asset and liability management, financial reporting, employment practices, and employee conduct. The Company s compliance management program is designed to facilitate and monitor compliance functions, providing assurance to senior management and the Corporate Governance Committee that all statutory and regulatory obligations are met. The program promotes awareness of legal and regulatory risks that affect the business and the status of compliance with those laws. The program is supported by a reporting process that establishes accountability for compliance throughout the Company. The Internal Audit department conducts an independent audit of compliance controls throughout the Company. Further information on risk management, including quantifications, is included in note 5 to the financial statements. 15 EQUITABLE LIFE OF CANADA

18 RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements have been prepared by management, who is responsible for their integrity, objectivity and reliability. The accounting policies utilized are appropriate in the circumstances and fairly reflect the financial position, results of operations, and cash flows of the Company within reasonable limits of materiality. Management is responsible for ensuring that all annual report information is consistent with these consolidated financial statements. Management has established and maintains a system of internal controls that provides reasonable assurance that financial records are complete and accurate, assets are safeguarded and the organizational structure provides for effective segregation of responsibilities. The Company s Internal Audit department and Chief Compliance Officer monitor the systems of internal control for compliance. The control environment is enhanced by the selection and training of competent management, and a code of conduct policy that is to be adhered to by all employees carrying out the Company s affairs. The Board of Directors oversees management s responsibilities for financial reporting and has ultimate responsibility for reviewing and approving the consolidated financial statements. The Board of Directors is assisted in its responsibilities for these consolidated financial statements by its Audit Committee. This Committee consists of independent, outside directors not involved in the daily operations of the Company. The function of this Committee is to: review and recommend approval to the Board of Directors of all financial statements, review and assess the Company s business risk management processes, review the Company s internal audit and financial control systems, meet separately in camera with the internal and external auditors and the Appointed Actuary, recommend the nomination of the external auditors to the Board of Directors and approve their fee arrangements, and review other accounting and financial matters as required. In carrying out this function, the Committee meets with management and both the Company s external and internal auditors to approve the scope and timing of the respective audits, to review the findings, and to satisfy itself that the audit responsibilities have been properly discharged. The Appointed Actuary of the Company is named by the Board of Directors pursuant to Section 165 of the Insurance Companies Act to carry out an annual valuation of the Company s policy liabilities in accordance with accepted actuarial practice in Canada for the purpose of issuing reports to the policyholders and to the Superintendent of Financial Institutions Canada. The Appointed Actuary s report appears with these consolidated financial statements. KPMG LLP have been appointed external auditors pursuant to Section 337 of the Insurance Companies Act to report to the policyholders and to the Superintendent of Financial Institutions Canada regarding the fairness of presentation of the Company s consolidated financial position and results of operations as shown in the annual financial statements. Their report appears with these consolidated financial statements. The Office of the Superintendent of Financial Institutions Canada performs regular examinations on the affairs of the Company. Statutory reports are filed with insurance regulatory authorities in various jurisdictions and facilitate further review of operating results and enquiry by regulatory authorities. Ronald E. Beettam President and Chief Executive Officer A. David Pelletier Chair of the Audit Committee Waterloo, Ontario, February 9, ANNUAL REPORT 16