Bank of Montreal 2015 Annual Report Download - page 155

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Liabilities
The components of the other liabilities balance were as follows:
(Canadian $ in millions) 2015 2014
Securitization and structured entities liabilities 21,673 22,465
Accounts payable, accrued expenses and other items 8,747 7,713
Accrued interest payable 969 1,050
Liabilities of subsidiaries, other than deposits 3,948 3,775
Insurance-related liabilities 7,060 6,827
Pension liability (Note 23) 364 229
Other employee future benefits liability (Note 23) 1,192 1,204
Total 43,953 43,263
Included in securitization and structured entities liabilities are amounts related to the notes issued by our credit protection vehicle have been
designated at fair value through profit or loss and are accounted for at fair value. This eliminates a measurement inconsistency that would otherwise
arise from measuring these note liabilities and offsetting changes in the fair value of the related investments and derivatives on a different basis. The
fair value of these note liabilities as at October 31, 2015 of $139 million ($139 million in 2014) is recorded in other liabilities in our Consolidated
Balance Sheet. The change in fair value of these note liabilities resulted in $nil in non-interest revenue, trading revenues, for the year ended
October 31, 2015 ($nil in 2014).
We designate the obligation related to certain investment contracts at fair value through profit or loss, which eliminates a measurement
inconsistency that would otherwise arise from measuring the investment contract liabilities and offsetting changes in the fair value of the
investments supporting them on a different basis. The fair value of these investment contract liabilities as at October 31, 2015 of $525 million
($407 million as at October 31, 2014) is recorded in other liabilities in our Consolidated Balance Sheet. The change in fair value of these investment
contract liabilities resulted in an increase of $24 million in insurance claims, commissions, and changes in policy benefit liabilities for the year ended
October 31, 2015 (increase of $37 million in 2014). For the year ended October 31, 2015, a gain of $20 million was recorded in other comprehensive
income related to changes in our credit spread. Changes in the fair value of investments backing these investment contract liabilities are recorded in
non-interest revenue, insurance revenue. The impact of changes in our own credit spread is measured based on movements in our own credit spread
over the year.
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, future 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.
A reconciliation of the change in insurance-related liabilities is as follows:
(Canadian $ in millions) 2015 2014
Insurance-related liabilities, beginning of year 6,827 6,115
Increase (decrease) in life insurance policy benefit liabilities from:
New business 235 476
In-force policies –346
Changes in actuarial assumptions and methodology (355) (291)
Foreign currency 42
Net increase (decrease) in life insurance policy benefit liabilities (116) 533
Change in other insurance-related liabilities 349 179
Insurance-related liabilities, end of year 7,060 6,827
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 of 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 premiums ceded are net against direct premium income and included in non-interest revenue, insurance revenue, in our
Consolidated Statement of Income for the years ended October 31, 2015, 2014 and 2013, as shown in the table below.
(Canadian $ in millions) 2015 2014 2013
Direct premium income 2,027 1,850 1,567
Ceded premiums (466) (450) (434)
1,561 1,400 1,133
Note 15: 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 8).
168 BMO Financial Group 198th Annual Report 2015