Bank of Montreal 2014 Annual Report Download - page 145

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We designate the obligations related to certain annuity contracts at
fair value through profit or loss, which eliminates a measurement
inconsistency that would otherwise arise from measuring the annuity
liabilities and offsetting changes in the fair value of the investments
supporting them on a different basis. The fair value of these annuity
liabilities as at October 31, 2014 of $407 million ($329 million in 2013)
is recorded in other liabilities in our Consolidated Balance Sheet. The
change in fair value of these annuity liabilities resulted in a decrease of
$37 million in non-interest revenue, insurance income for the year
ended October 31, 2014 (increase of $7 million in 2013). Changes in the
fair value of investments supporting these annuity liabilities are also
recorded in non-interest revenue, insurance income.
Insurance-Related Liabilities
We are engaged in insurance businesses related to life and health
insurance, annuities and reinsurance.
Insurance claims and policy benefit liabilities represent current
claims and estimates of future insurance policy benefits. Liabilities for
life insurance contracts are determined using the Canadian Asset
Liability Method, which incorporates best-estimate assumptions for
mortality, morbidity, policy lapses, surrenders, investment yields, policy
dividends, administration costs and margins for adverse deviation. These
assumptions are reviewed at least annually and updated to reflect actual
experience and market conditions. The Actuarial Standards Board
(“ASB”) made changes to the Canadian actuarial standards of practice
with respect to economic reinvestment assumptions used in the
valuation of insurance contract liabilities. The changes, which took effect
on October 15, 2014, resulted in an ultimate reinvestment rate of 3.3%,
introduced credit spreads based on underlying investment mix and
provided limits on the benefit of non-fixed income investments. The
impact resulted in a decrease in our insurance-related liabilities with
little to no increase in our reported sensitivity to changes in interest
rates. Insurance claims and policy benefit liabilities are included in Other
liabilities – Insurance-related liabilities.
A reconciliation of the change in insurance-related liabilities is as
follows:
(Canadian $ in millions) 2014 2013
Insurance-related liabilities, beginning of year 6,115 6,040
Increase (decrease) in life insurance policy benefit
liabilities from:
New business 476 324
In-force policies 346 (55)
Changes in actuarial assumptions and
methodology (291) (201)
Foreign currency 21
Net increase in life insurance policy benefit liabilities 533 69
Change in other insurance-related liabilities 179 6
Insurance-related liabilities, end of year 6,827 6,115
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. Reinsurance amounts
included in non-interest revenue, insurance income in our Consolidated
Statement of Income for the years ended October 31, 2014, 2013 and
2012 are shown in the table below.
(Canadian $ in millions) 2014 2013 2012
Direct premium income 1,850 1,567 1,357
Ceded premiums (450) (434) (410)
1,400 1,133 947
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 III 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 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).
On September 19, 2014, we issued $1.0 billion of 3.12%
subordinated debt under our Canadian Medium-Term Note Program. The
issue, Series H Medium-Term Notes, Tranche 1, is due September 19,
2024. The notes reset to a floating rate on September 19, 2019. The
notes include a non-viability contingent capital provision, which is
necessary for the notes to qualify as regulatory capital under Basel III. As
such, the notes are convertible into a variable number of our common
shares if OSFI publicly announces that the bank is or is about to become
non-viable or a federal or provincial government in Canada publicly
announces that the bank has accepted or agreed to accept a capital
injection to avoid non-viability.
During the year ended October 31, 2013, we did not issue any
subordinated debt. During the years ended October 31, 2014 and 2013,
we did not redeem any of our subordinated debt.
158 BMO Financial Group 197th Annual Report 2014