Year ended December 31, 2017 with comparative figures for 2016

(tabular amounts in thousands)

  1. Reporting entity

    Canadian Life and Health Insurance Compensation Corporation (“Assuris”, the “Corporation”) is a federally incorporated not-for-profit organization established to provide Canadian policyholders with specified levels of protection against loss of benefits due to the financial failure of their life insurance company. All insurance companies that are licensed to issue policies covered by the Corporation are Members. As a not-for-profit organization, the Corporation is exempt from income taxes under the Income Tax Act.

    For a full description of the protection provided, assessment principles and other corporate matters, reference should be made to the Corporation’s By-Laws and Memorandum of Operation.

    The Corporation is domiciled in Canada. The address of the Corporation’s registered office is 250 Yonge Street, Suite 3110, P.O. Box 23, Toronto, Ontario M5B 2L7.

  2. Basis of preparation

    1. Statement of compliance

      The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.

      The consolidated financial statements for the year-ended December 31, 2017 were approved for issue by the Board of Directors on February 22, 2018.

    2. Basis of consolidation

      The consolidated financial statements of the Corporation for the year ended December 31, 2017 include the funds of the Corporation, and its direct wholly-owned subsidiary CompCorp Life Insurance Company (“CompCorp Life”). All inter-company transactions are eliminated upon consolidation.

    3. Funds

      The Corporation is funded by assessments levied on its Members.

      Administrative assessments are assessed to Members to cover the administrative costs of the Corporation. Each member is assessed $6,000 plus an amount based on its capital required in Canada as filed with its solvency regulator.

      Specific Assessments are assessed to Members to cover the costs of protecting the policyholders of a failed Member or to provide funds to the Liquidity Fund. Each Member’s assessment is based on its capital required in Canada as filed with its solvency regulator.

      Extraordinary assessments may be made to cover the costs of protecting the policyholders of a failed Member. Each Member’s extraordinary assessment is based on its premium income from policies written after a date after the failure.

      Assessments are recognized on an accrual basis as revenue or contributions to the appropriate restricted funds.

      Investment income earned by the funds is recognized in the respective fund.

      The Administrative Fund and the Liquidity Fund are considered by management to be internally restricted under the By-Laws, which define the purpose and the assessment process for each fund. The By-Laws also outline the permitted transfers between the funds.

      The Administrative Fund represents the income and costs of administration not associated with a particular insolvency.

      The Liquidity Fund provides the Corporation with a source of liquid assets to provide immediate support to the policyholders of a Member determined by the Board to be a “Troubled Member”.

      The fund is not designed to provide for the cost of supporting policyholders. When the Board authorizes the Corporation to make a financial commitment to a Troubled Member, a separate fund will be established to account for the costs and obligations to that Member. Transfers from the Liquidity Fund to this separate fund, which reduce the Liquidity Fund below its target level, will be recorded as an inter-fund receivable. Assessments to Members to cover funding needs in connection with the Troubled Member will be recognized as income in the separate fund.

    4. Basis of measurement

      The consolidated financial statements of the Corporation have been prepared on the historical cost basis, except for bonds, which are carried at fair value through other comprehensive income, and Exchange Traded Funds (ETFs) which are carried at fair value through income.

    5. Functional and presentation currency

      These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency. Except as otherwise indicated, all financial information presented in Canadian dollars has been rounded to the nearest thousand.

    6. Use of estimates

      The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised.

    7. Liquidity format

      The Corporation presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within twelve months after the reporting date (current) and more than twelve months after the reporting date (non-current) is presented in note 5.

  3. Significant accounting policies

    The significant accounting policies have been applied consistently to all periods presented in these consolidated financial statements.

    1. Cash and cash equivalents

      Cash and cash equivalents are highly liquid investments composed of bank balances, overnight bank deposits and short-term investments with original maturities of three months of less. They are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. Interest income is recorded on an accrual basis.

    2. Investments

      From 1 January 2017, the Corporation classifies its financial assets in the following measurement categories:

      • those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and
      • those to be measured at amortized cost.

      The classification depends on the Corporation’s business model for managing the financial assets and the contractual terms of the cash flows.

      At initial recognition, the Corporation measures a financial asset at its fair value. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

      Bonds are carried at fair value through other comprehensive income. The Corporation holds bonds to collect contractual cash flows and to sell. Contractual cash flows represent solely payments of principal and interest. Interest income is recorded on an accrual basis using the effective interest rate method. Realized gains and losses are recognized immediately in profit or loss.

      Exchange Traded Funds (ETFs) are measured at fair value through profit or loss. Interest income is recorded on an accrual basis using the effective interest rate method. Unrealized and realized gains or losses are recognized immediately in profit or loss.

      Cash and cash equivalents, accrued investment income and accounts receivable are measured at amortized cost.

      The Corporation assesses on a forward-looking basis, the expected credit losses associated with assets carried at Fair Value through Other Comprehensive Income (FVOCI). The impairment methodology applied depends on whether there has been a significant increase in credit risk. The Corporation considers the probability of default upon initial recognition of the asset and whether there has been a significant increase in credit risk on an ongoing basis throughout each reporting period. To assess whether there is a significant increase in credit risk the Corporation compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive forwarding-looking information, including external credit ratings, actual or expected adverse changes in business, and other external factors.

    3. Securities lending

      The Corporation participates in a securities lending program, through a Lending Agent that is a financial institution, for the purpose of generating fee income. Non-cash collateral, which exceeds the fair value of the loaned securities by at least 2%, is retained by the Lending Agent until the underlying securities have been returned.

      The fair value of the loaned securities is monitored on a daily basis with additional collateral obtained as the fair value of the underlying securities fluctuates. While in the possession of counterparties, the loaned securities may be transferred to others or re-pledged by such counterparties. The Lending Agent indemnifies the Corporation against any shortfalls in collateral.

      These transactions are conducted under terms that are usual and customary to securities lending activities as well as requirements determined by exchanges where a financial institution acts as a Lending Agent (note 7(c)).

    4. Property and equipment

      Property and equipment consists of computer equipment, software and leasehold improvements, measured at cost less accumulated depreciation and accumulated impairment losses, if any. Computer equipment and software are depreciated over four years on a straight-line basis. Leasehold improvements are amortized over the lease term of ten years on a straight-line basis.

    5. Employee future benefits

      Executives of the Corporation are eligible to earn awards under the Long-Term Incentive Plan (LTI). These awards are determined based on the executive’s performance in the year before the award is granted. The award is adjusted based on corporate performance over the next three years and paid at the end of that period. A payment will be made only if the executive is still employed by the Corporation and the corporate performance has been satisfactory. The LTI liability is recognized over the four-year performance period and reported on the Statement of Financial Position. Similarly, the expense is recognized each year over the four-year period as the corporate performance is achieved and the employee is still in service. The expenses for the year are recorded in salaries and benefits.

  4. Future accounting changes

    The following new standards are not effective for the year ended December 31, 2017, and have not been applied in preparing these consolidated financial statements.

    IFRS 15 Revenue from Contracts with Customers effective January 1, 2018. The standard addresses how and when to recognize revenue. The Corporation’s primary source of revenue is the Administrative Assessment. The revenue is recognized in the same fiscal year as the performance obligation to our members. Adoption of the standard will not have a material impact on the financial statements.

    IFRS 16 Leases effective January 1, 2019. The Corporation extended its current lease for the office premises in April 2017. The new lease expires in July 2028. We are in the process of evaluating the impact of adopting the standard.

  5. Timing of Expected Recovery or Settlement of Assets and Liabilities

     

    December 31, 2017

    December 31, 2016

     

    Less than 12 months

    Over 12 months

    Total

    Less than 12 months

    Over 12 months

    Total

    Assets

               
    Cash and cash equivalents
    $
    894
    $
    $
    894
    $
    3,519
    $
    $
    3,519
    Bonds held by custodian 11,588 101,292 112,880 18,510 82,810 101,320
    Bonds used under securities lending 14,264 583 14,847 12,161 12,161
    ETFs held by custodian 3,317 3,317
    ETFs used in securities lending 975 975
    Accrued investment income 602 602 561 561
    Accounts receivable and prepaids 44 44 50 50

    Total Assets

    27,392 106,167 133,559 34,801 82,810 117,611

    Liabilities

               
    Accounts payable and accrued liabilities 854 854 704 704
    Employee future benefits 177 266 443 173 266 439

    Total Liabilities

    1,031 266 1,297 877 266 1,143
  6. Administrative Fund and Liquidity Fund Information

    1. Consolidated Statements of Financial Position

       

      December 31, 2017

      December 31, 2016

       

      Administrative Fund

      Liquidity Fund

      Year ended

      Administrative Fund

      Liquidity Fund

      Year ended

      Assets

                 
      Cash and cash equivalents
      $
      677
      $
      217
      $
      894
      $
      2,234
      $
      1,285
      $
      3,519
      Bonds (note 7)            
      Held by custodian 2,802 110,078 112,880 1,000 100,320 101,320
      Used in securities lending 14,847 14,847 12,161 12,161
      Exchange Traded Funds (note 7)            
      Held by custodian 3,317 3,317      
      ETFs used in securities lending 975 975      
      Total Investments 2,802 129,217 132,019 1,000 112,481 113,481
      Accrued investment income 602 602 11 549 560
      Accounts receivable and prepaid 41 3 44 40 11 51
      Due from (to) other funds 120 (120) 74 (74)
      Equipment (note 8) 687 687 181 181

      Total Assets

      4,327 129,919 134,246 3,540 114,252 117,792

      Liabilities

                 
      Accounts payable and accrued liabilities 850 5 855 700 4 704
      Employee future benefits (note 9) 443 443 439 439

      Total Liabilities

      1,293 5 1,298 1,139 4 1,139

      Members’ Funds (note 6(c))

                 
      Administrative 3,065 3,065 2,401 2,401
      Liquidity 131,288 131,288 114,248 114,248

      Accumulated Other Comprehensive Income

                 
      Net unrealized loss on investments (31) (1,374) (1,405)

      Total Members’ Funds

      3,034 129,914 132,948 2,401 114,248 116,649

      Total Liabilities and Members’ Funds

      4,327 129,919 134,246 3,540 114,252 117,792
    2. Consolidated Statements of Comprehensive Income

       

      December 31, 2017

      December 31, 2016

       

      Administrative Fund

      Liquidity Fund

      Total

      Administrative Fund

      Liquidity Fund

      Total

      Revenue

                 
      Investment income (note 10)
      $
      55
      $
      2,009
      $
      2,064
      $
      27
      $
      2,067
      $
      2,094
      Administrative Assessment (note 12) 6,000 6,000 4,000 4,000
      Other net changes in Fair Value on ETFs through income (96) (96)
      Other income 3 3 3 3
        6,058 1,913 7,971 4,030 2,067 6,097

      Expenses

                 
      Salaries and benefits 3,133   3,066 3,066
      Professional fees 390 390 381 381
      Directors fees 473 473 540 540
      Travel and meetings 207 207 187 187
      External services 212 212 184 184
      General office and administration 978 72 1,050 972 71 1,043
      Operating expenses 5,393 72 5,465 5,330 71 5,401
      Net Operating Income 665 1,841 2,506 (1,300) 1,996 696

      Members’ Contributions

                 
      Specific Assessment (note 12) 15,200 15,200
      Net Income 665 17,041 17,706 (1,300) 1,996 696

      Other Comprehensive Income Statement

                 
      Other Comprehensive Income at Jan 1, 2017 on reclassification 5 579 584
      Change in unrealized loss (36) (1,953) 1,989
      Net unrealized loss on investments (31) (1,374) 1,405
      Total Comprehensive Income (Loss) 634 15,667 16,301 (1,300) 1,996 696
    3. Consolidated Statement of Changes in Members’ Funds

       

      December 31, 2017

      December 31, 2016

       

      Administrative Fund

      Liquidity Fund

      Total

      Administrative Fund

      Liquidity Fund

      Total

      Members’ Funds, beginning of the year
      $
      2,400
      $
      114,248
      $
      116,648
      $
      1,701
      $
      114,252
      $
      115,953
      Total Comprehensive Income (Loss) 634 15,667 16,301 (1,300) 1,996 696
      Transfer of funds (note 11) 2,000 (2,000)

      Members’ Funds, end of the year

      3,034 129,915 132,949 2,401 114,248 116,649
  7. Investments

    1. Fair values

      Fair values of bonds and Exchange Traded funds are determined by reference to quoted market bid prices.

    2. Effective interest rates

       

      Remaining term to maturity

      December 31, 2017

      December 31, 2016

       

      Within 1 year

      1 to 5 years

      Carrying Value

      Effective Rates %

      Carrying Value

      Effective Rates %

      Government of Canada
      $
      25,852
      $
      44,918
      $
      70,770
      1.0-2.1
      $
      60,297
      0.7-1.6
      Canadian provinces 42,079 42,079 1.8-2.1 41,799 0.8-1.8
      Canadian corporate and municipalities 19,170 19,170 1.8-2.4 11,970 1.0-2.1
        25,852 106,167 132,019 1.0-2.4 114,066 0.7-2.1
    3. Credit risk

      The Corporation has an objective to maximize the return on its investments without taking undue credit risk. The policy is to invest in Government of Canada, Provincial, Municipal, corporate bonds and ETFs.

      Under the investment policy, the maximum investment in each category is:

      Investment

      Limit

      Restrictions

      December 31, 2017

      December 31, 2016

      Government of Canada Unlimited None 53% 51%
      Canadian provinces 80% total portfolio 15% in any one province 29% 36%
      Canadian corporate and municipalities 25% total 5% for anyone issuer 18% 13%

      Qualified investments have to be rated by at least two of the approved rating agencies – Standard & Poor’s, Moody’s and DBRS. In 2017 and 2016, the Corporation’s credit risk related to bonds with the following ratings:

      Bonds by rating

      December 31, 2017

      December 31, 2016

      AAA
      $
      79,438
      $
      60,032
      AA 28,461 24,951
      A 20,419 28,498

      Total Bonds

      128,318 113,481
    4. Interest rate risk

      The Corporation is exposed to changes in the fair value of its fixed income securities due to changes in interest rates. In sustained periods of lower interest rates, the interest income will be reduced, as the reinvestment yields on maturing securities are lower. Changes in interest rates have a limited impact on income, as the Corporation does not actively trade securities, but holds them to maturity.

      An immediate hypothetical 100 basis point increase in interest rates for all maturities would decrease the fair value of the bond portfolio by $2,936,528 (2016 – $2,913,474).

    5. Bonds used in securities lending program

      As at December 31, 2017, the Corporation had loaned bonds with a fair value of approximately $15,839,346 (2016 – $12,036,502) and had accepted eligible securities as collateral with a fair value of approximately $16,647,240 (2016 – $12,670,782). Income from securities lending was $12,000 (2016 – $4,400).

  8. Property and equipment

     

    Cost

    Accumulated Depreciation

    December 31, 2017

    Cost

    Accumulated Depreciation

    December 31, 2016

    Computer equipment and software
    $
    257
    $
    140
    $
    117
    $
    343
    $
    228
    $
    115
    Leasehold improvements 483 12 471 386 328 58
    Furniture 100 1 99 46 39 7
      840 153 687 775 595 180
  9. Employee Future Benefits

    Employee future benefit costs are recognized in salaries and benefits expense.

    The change in the employee future benefits obligation is provided in table below.

     

    December 31, 2017

    December 31, 2016

    Opening Balance LTI
    $
    439
    $
    250
    Paid during the year (170)
    Accrued benefit obligation – current year 174 189
      443 439
  10. Investment income

    Investment income was derived from the following sources:

     

    2017

    2016

    Cash and cash equivalents
    $
    5
    $
    27
    Bonds 1,967 2,067
    Exchange traded funds 92
      2,064 2,094
  11. Specific Assessment

    The Specific Assessment was assessed to members in 2017. The purpose of this assessment is to increase the Liquidity Fund to a Base Level of $200 million by 2021, to meet potential liquidity needs. The assessment for each member is proportional to the capital required in Canada as filed with its solvency regulator. In accordance with the Corporation’s By-Laws, during 2016, the Board of Directors authorized a Specific Assessment of $15,200,000 for 2017.

  12. Administrative Assessment

    An annual Administrative Assessment is assessed to members to cover the cost of administration not associated with a particular insolvency. The assessment for each company varies, as described in our By-Laws, depending on the member’s size. In accordance with the Corporation’s By-Laws, during 2017, the Board of Directors authorized an Administrative Assessment of $6,000,000 for 2017 (2016 – $4,000,000).

  13. Related Party Transactions

    Key personnel of the Corporation are employees with authority and responsibility for planning, controlling and directing activities of the Corporation including members of the Board of Directors. Remuneration expenses for key personnel are the only related party transactions.

     

    2017

    2016

    Directors fees
    $
    473
    $
    540
    Salaries 1,216 1,183
    Other benefits 392 395
      2,081 2,118
  14. Lease Commitments

    In July 2008, the Corporation entered into an agreement to lease office premises for a period of ten years. In April 2017, the lease agreement was extended to July 31, 2028. The balance of our commitment under this agreement is:

     

    Total

    January 2018 – July 2018
    $
    200
    August 2018 – July 2021 966
    August 2021 – July 2024 998
    August 2024 – July 2028 1,345
      3,509
  15. Adoption of IFRS 9 Financial Instruments

    In 2017, the Board of Directors of the Corporation approved the change in accounting policy for the measurement of bonds. From January 1, 2017, bonds, which were previously measured at amortized cost, are measured and reported at Fair Value Through Other Comprehensive Income (FVOCI).

    The accumulated unrealized gain on bonds at January 1, 2017 of $584,448 was recorded in Other Comprehensive Income (OCI). Subsequent changes in unrealized gain (loss) on bonds will be recorded in OCI. Any balance within OCI for bonds that are sold will be reclassified to profit or loss.