Office of the Superintendent of Financial Institutions
This Guideline, which applies to life insurance companies and life
insurance holding companies incorporated under the Insurance Companies
Act,Footnote 1 establishes the Office of
the Superintendent of Financial Institutions’ (OSFI) expectations for the
disclosure of a company’s source of earnings (SOE). The methodology for
the calculation of an SOE analysis was developed in co- operation with the
Canadian Institute of Actuaries (CIA).
The revised Guideline is effective for annual financial reporting periods
in fiscal years beginning on or after January 1, 2011.
This Guideline outlines OSFI’s expectations regarding the methodology,
content and form of the SOE disclosure, which is intended to be a
supplement to the disclosure required by International Financial Reporting
Standards (IFRSs). The Guideline should be used in combination with other
OSFI guidelines applicable to life insurance companies.
Public disclosure of reliable and timely information facilitates the
understanding of the financial position of companies by both existing and
prospective stakeholders, including shareholders, policyholders, analysts,
directors, management and regulators. Because of the complexities and
inherent uncertainties in the insurance industry, this SOE disclosure
should enhance the ability of a company’s stakeholders to better form a
view as to the quality, potential volatility and sustainability of
OSFI expects SOE disclosure to appear in either the notes to the annual
public financial statements or as part of other disclosures within or
accompanying the company’s public annual report (for example, as a part of
a management discussion and analysis (MD&A) section, a supplementary
disclosure section or another form of management commentary accompanying
the company’s annual report). Where a company does not issue annual public
financial statements or an annual report, OSFI expects SOE disclosure to
be publicly available, e.g. upon request or on an internet web site. It is
expected that the company will include some commentary explaining the SOE
analysis methodology and results, and not just present the numbers in
Source of earnings analysis is a methodology for identifying and
quantifying the various sources of IFRSs income of a life insurance
company. It is a presentation of net income in a different format from the
traditional income statement form. It provides an analysis of the
difference between actual income and the income that would have been
reported had all assumptions at the start of the reporting period been
realized during the reporting period.
For blocks of business that have life insurance contract liabilities
valued according to the CIA Standards of Practice, the best-estimate
assumptions referred to in this Guideline are those that were used in the
valuation of insurance contract liabilities at the end of the previous
reporting period. For blocks of business that are not valued in this
manner (e.g. annual group life and health), the best-estimate assumptions
used should be those that were used in the most recent business plan or
The income that is to be analyzed is the consolidated net income that
appears in the company’s financial statements. For stock companies, this
includes any transfers from the participating accounts to the shareholder
account, but does not include an analysis of earnings of the participating
accounts. For mutual insurance companies, it includes all income.
Where it is not in conflict with this Guideline, the methodology used
should be consistent with any SOE material promulgated by the CIA.
OSFI expects the following SOE format would be the minimum disclosure to
be shown. Additional detail can be added at the discretion of the company.
OSFI expects the disclosure to show at least two years’ results, including
when IFRS is introduced.
Source of Earnings Analysis
This component of the SOE represents the portion of the consolidated net
income on business in-force at the start of the reporting period that was
expected to be realized based on the achievement of its best-estimate
assumptions. It includes, but is not limited to, the following.
This component of the SOE represents the point-of-sale impact on net
income of writing new business during the year. This is the difference
between the premium received and the sum of the expenses incurred as a
result of the sale and the new liabilities established at the point of
sale. The definition of what constitutes new business should be consistent
with other metrics in the financial statements that refer to new business.
This component of the SOE represents gains and losses that are due to
differences between the actual experience during the reporting period and
the best-estimate assumptions at the start of the reporting period. This
component should also include the impact of currency changes. It should
not include the effect on net income of management actions or changes in
assumptions during the year. See the Appendix for further explanation of
what is included under management actions and changes in assumptions.
For non-insurance contracts (e.g. investment contracts) backed by assets
classified as available for sale (AFS), the change in the liability will
be included in net income but any changes in assets that are AFS will
appear in other comprehensive income (OCI). If this is material to a
company, the effect of this is expected to be disclosed in commentary or
in a footnote to the above SOE table.
This component of the SOE includes the following.
Refer to the Appendix for further explanation of what is included under
Management Actions and Changes in Assumptions.
This component of the SOE represents the result of any source of earnings
not addressed under the previous categories. Any such additional source of
earnings should be disclosed separately if they are material, given the
materiality level used in producing the financial statements.
This component of the SOE can also reflect situations where a company is
not able to identify fully all components of the SOE. Where this part of
the component is large, the company should endeavor to refine its analysis
This component of the SOE represents the net income earned on the
company’s surplus funds.
All companies are expected to disclose the above components to allow for
consistent comparisons between companies. Companies may consider it
appropriate to show further detail as subcomponents. This is especially
important where such amounts are material, and is encouraged where it does
not conflict with this Guideline and would better allow the stakeholders
to understand the SOE analysis. The additional disclosure could take the
form of expanding the table shown above, or it could be included in a
commentary accompanying the SOE analysis.
While IFRS 8 only applies to certain entities, OSFI expects, at a minimum,
the SOE analysis to be disclosed at the same level as that required in
respect of the segmented information reported in the notes under IFRS 8,
whether or not the company is required to apply IFRS 8 for financial
OSFI encourages companies to exercise the option of disclosing SOE
information at a more detailed level of segmentation if this would give
more meaningful information to the company’s stakeholders, or if a more
detailed level is consistent with other disclosure in the public financial
statements. For instance, if a more detailed level of disclosure of
financial information is used in the MD&A to explain the company’s
operations, the company should consider disclosing the SOE on a consistent
This appendix provides further explanation of the components to be
included under the category of Management Actions and Changes in
Any material amounts or transactions included in this category of the SOE
analysis should be disclosed as separate items within this category. For
instance, if in the same segment there is a material increase in income
due to a new reinsurance contract and a decrease in income due to a
valuation basis change, the two amounts should be shown separately.
Materiality in this case should be based on a level that is appropriate
for the size of the segment, and not based on the materiality level used
for the total company.
Management actions should include the following. These are examples and
are not meant to be all-inclusive.
Basis changes should include the following. These are examples and are not
meant to be all-inclusive.
This Guideline does not
apply to Canadian incorporated fraternal benefit societies or property and
casualty companies, or to Canadian branches of foreign life insurance
companies, fraternal benefit societies, or property and casualty
Return to footnote 1 referrer