Bank of Montreal 2012 Annual Report Download - page 156

Notes
dividends, administration costs and margins for adverse deviation. These
assumptions are reviewed at least annually and updated to reflect actual
experience and market conditions. Insurance claims and policy benefit
liabilities are included in Other liabilities – Insurance-related liabilities.
The effect of changes in actuarial assumptions on policy benefit
liabilities was not material during either 2012 or 2011.
A reconciliation of the change in the Insurance-related liabilities is
as follows:
(Canadian $ in millions) 2012 2011
Insurance-related liabilities, beginning of year 5,380 5,058
Increase (decrease) in life insurance policy liabilities
from:
New business 245 290
In-force policies 260 (105)
Changes in actuarial assumptions 92 (51)
Foreign currency (1) –
Net increase in life insurance policy liabilities 596 134
Change in other insurance-related liabilities 64 188
Insurance-related liabilities, end of year 6,040 5,380
Reinsurance
In the ordinary course of business, our insurance subsidiaries reinsure
risks to other insurance and reinsurance companies in order to provide
greater diversification, limit loss exposure to large risks and provide
additional capacity for future growth. These ceding reinsurance
arrangements do not relieve our insurance subsidiaries from their direct
obligation to the insureds. We evaluate the financial condition of the
reinsurers and monitor their credit ratings to minimize our exposure to
losses from reinsurer insolvency.
Reinsurance assets related to our life insurance business are
included in other assets, insurance-related assets. See Note 14 for
further information.
Reinsurance amounts included in non-interest revenue, insurance
income in our Consolidated Statement of Income for the years ended
October 31, 2012 and 2011 are shown in the table below.
(Canadian $ in millions) 2012 2011
Direct premium income 1,357 1,348
Ceded premiums (410) (392)
947 956
Note 17: Subordinated Debt
Subordinated debt represents our direct unsecured obligations, in the
form of notes and debentures, to our debt holders and forms part of our
Basel II regulatory capital. Subordinated debt is recorded at amortized
cost using the effective interest rate method. The rights of the holders of
our notes and debentures are subordinate to the claims of depositors
and certain other creditors. We require approval from the Office of
Superintendent of Financial Institutions Canada (“OSFI”) before we can
redeem any part of our subordinated debt. Where appropriate, we enter
into fair value hedges to hedge the risks caused by changes in interest
rates (see Note 10).
During the year ended October 31, 2012, we redeemed all of our
Series D Medium-Term Notes, Tranche 2 at a redemption amount equal
to $1,000, representing an aggregate redemption of $1.2 billion, plus
unpaid accrued interest to, but excluding, the date fixed for redemption.
During the year ended October 31, 2011, we issued $1.5 billion of
3.979% subordinated debt under our Canadian Medium-Term Note
Program. The issue, Series G Medium-Term Notes, Tranche 1, is due
July 8, 2021. This issue is redeemable at our option with the prior
approval of OSFI at par commencing July 8, 2016. This issue qualifies
as part of our Basel II regulatory Tier 2 Capital and Total Capital.
The term to maturity and repayments of our subordinated debt required over the next five years and thereafter are as follows:
(Canadian $ in millions,
except as noted) Face value Maturity date Interest rate (%)
Redeemable at our
option beginning in
2012
Total (7)
2011
Total
November 1, 2010
Total
Debentures Series 16 100 February 2017 10.00 February 2012 (1) 100 100 100
Debentures Series 20 150 December 2025
to 2040
8.25 Not redeemable 150 150 150
Series C Medium-Term Notes
Tranche 2 500 April 2020 4.87 April 2015 (2) 500 500 500
Series D Medium-Term Notes
Tranche 1 700 April 2021 5.10 April 2016 (3) 700 700 700
Tranche 2 1,200 June 2017 5.20 Redeemed –1,200 1,200
Series F Medium-Term Notes
Tranche 1 900 March 2023 6.17 March 2018 (4) 900 900 900
Series G Medium-Term Notes
Tranche 1 1,500 July 2021 3.98 July 2016 (5) 1,500 1,500 –
Total (6) 3,850 5,050 3,550
(1) Redeemable at the greater of par and the Canada Yield Price after their redemption date of
February 20, 2012 until their maturity date of February 20, 2017.
(2) Redeemable at the greater of par and the Canada Yield Price prior to April 22, 2015, and
redeemable at par commencing April 22, 2015.
(3) Redeemable at the greater of par and the Canada Yield Price prior to April 21, 2016, and
redeemable at par commencing April 21, 2016.
(4) Redeemable at the greater of par and the Canada Yield Price prior to March 28, 2018, and
redeemable at par commencing March 28, 2018.
(5) Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016,
and at a floating rate equal to the rate on three-month Canadian Dealer Offered Rate
(“CDOR”) plus 1.09%, paid quarterly, thereafter to maturity. This issue is redeemable at par
commencing July 8, 2016.
(6) Certain subordinated debt recorded amounts include quasi fair value adjustments that
increase their carrying value by $243 million ($298 million in 2011) as they are part of fair
value hedges (see Note 10).
(7) All of our subordinated debt has a term to maturity of five years or more.
Please refer to the offering circular related to each of the issues above for further details on Canada
Yield Price calculations and definitions of Government of Canada Yield.
BMO Financial Group 195th Annual Report 2012 153