The Canadian Life Insurance

Industry and International

Competition
Week 1 October 31, 2016

INTRODUCTION
REGULATION

Agenda

Introductions and Objectives

Course Outline
Life Insurers Canada and Globally
P&C Insurance in Canada
Life Insurer Measures
Regulation of Insurance Companies
Regulatory Capital - MCCSR

Introductions

Lee Watchorn
clfw@rogers.com
416-564-6767
3

Course Objectives
To Gain an Understanding of:
The Life Insurance Business and its role in
Canada and Internationally
Life Insurance Products and Services
The Issues Facing the Life Insurance
Industry
The Strategies of The Largest Canadian
Life Insurers
4

Course Outline
1. The Life Insurance Industry
2. Products & Distribution / Pensions
3. The Big 3 in Canada / Financial Reporting /
Risk Management
4. Canadian Company Strategies/ Globalization
5. Discussion Paper Presentations
6. Assets & Asset/Liability Management /
Reinsurance / Governance

Guest Lecturer (Week 3)

Mr. Jackie Au
Equity Research Analyst
Sionna Investment Managers

Guest Lecturer (Week 4)

Mr. Dave Bennett
Senior Vice President
Group Insurance
Equitable Life of Canada
7

Course Grading

Discussion Paper
Discussion Paper Presentation
Term Paper
Class Participation

40%
10%
40%
10%

Readings
CLHIA Fact Book
Annual Reports Great West Lifeco,
Manulife, Sun Life
Readings for the next class will be outlined
at the end of each class and posted on the
CMD

Breaking News
9

Canadian Financial Services

Not so long ago,
Banks, Insurers, Trust Companies and
Investment Dealers entirely separate

Today
Large banks and insurers provide virtually all
financial services
Specialists and niche players
10

CLHIA FACT BOOK

What does it tell you about

the life insurance industry?
Questions?
11

The Canadian Life Insurance Industry

156 life and health insurance providers

Industry employs 148,600 people in Canada
$84.2 billion in benefits paid in Canada
$690 billion in long-term investments in
Canada
$1,566 billion in total assets (51% foreign)
Total tax contribution in Canada $6,639 million
12

Life Companies
General Fund Assets in Canada (Billions)

Bonds
Mortgages
Stocks
Real Estate
Other
Cash
Reinsurance Assets

Total

2014

2015

230.2
39.8
69.0
12.5
38.7
13.2
45.0

237.8
39.6
73,2
13.3
47.3
12.1
46.9

448.4

470.3
13

Segregated Funds in Canada (Millions)

Bonds
Stocks
Mutual Funds
Mortgage Loans
Real Estate
Cash
Other Assets

2014
28,774
40,763
183,533
3,858
7,709
6,655
1,478

2015
30,132
40,935
200,221
3,952
8,266
6,662
1,740

Total

272,770

291,908
14

Life Companies in Canada

Payments to Policyholders(Millions)

Life Insce - Death

Life Insce Other
Annuities
Health Plans

Total

2014

2015

6,281
4,822
41,503
30,917

6,395
4,712
40,877
32,182

83,523

84,166
15

Life Companies
Premiums in Canada (Millions)
2014

2015

Group Life
4,275
4,077
Individual Life
13,838
14,392
Individual Annuities
14,606
14,699
Group Annuities
27,921
30,271
Health Plans
38,731
39,942

Total

99,371

103,381
16

Market Share of Canadian Premium

(By Company Ownership)
1997

2014

Canadian

73%

Canadian

89%

Foreign

27%

Foreign

11%

17

Canadian Registered Life Companies

Foreign Operations (2015)
Out of Canada premiums of 67.3 billion
42% of worldwide total

Out of Canada assets of 804 billion

51% of worldwide total

18

Canadian Registered Life Companies

Premiums by Region (2015)
Canada
U.S.
Asia
U.K. & Europe
Other

57.9%
18.7
8.0
8.4
7.0

19

Canadas Big Three

Great West, Manulife, Sun Financial

Among Canadas largest companies

Dominate Canadian Insurance Market
Strong international presence
Rapid growth and consolidation after demutualization (2000)
Challenges after 2008 interest rates and equity markets

20

Major Company Profiles

Sun Life
Growth in Asia
Interest rates and Seg Funds
U.S. Withdrawal

Great West

Manulife

John Hancock in U.S.

Growth in Asia
Standard Life Acquisition
Interest rates and Seg Funds

Power Corp Ownership

Very Steady Results
Focus on Mature Markets
Irish Life Acquisition
Retirement Plan Services
21

Opportunities and Challenges

Opportunities
Building on a strong
financial base
Consolidating position in
mature markets
Using expertise and
experience to grow in
developing markets

Challenges
Interest Rates
Global Economy
Competition
Demographic trends
Regulation & Taxation
Slow growth markets

22

Canadian Life Companies

2015 Revenue in Millions

Manulife
Great West
Sun Life
Industrial

2013
18,672
26,446
13,874
6,023

2014
54,388
39,181
25,764
7,517

2015
34,430
33,820
19,274
8,300

RBC Life

1,004

2,076

1,863

23

Property & Casualty Insurance

Personal Home and Auto

Liability
Commercial
Marine
Farm
D&O
Etc
24

Property & Casualty Insurers

2015 Revenue in Millions

Intact
ICBC
Aviva Canada
Co-operators Group
RSA

Economical

8,118
4,542
3,975
3,596
2,883
2,118
25

Canadian Banks
2015 Revenue in Millions

RBC 43,279
Toronto-Dominion 37,532
Bank of Nova Scotia 31,244
Bank of Montreal
23,784
CIBC
17,424
Manulife 34,430 Great West 33,820 Sun Life 19,274
26

Fortune Global Rankings

US $ Revenue 2015 in Billions
2014 Rank in Brackets

33 AXA(20)
41 Ping An (96)
54 China Life (94)
104 Met Life (121)
114 Nippon Life (138)
126 Prudential U.K. (74)
150 AIG (152)

129.3
110.3
101.3
70.0
67.1
63.1
58.3

Manulife 394 Power Corp 351 RBC-297

27

What measures should you look

at in assessing the relative
performance of a Life Insurance
Company?
Is Revenue a good measure?

28

SUN LIFE REVENUE

2014 2015
Net Premiums 9,996
10,395
Investment Income
Fair Value Changes*
6,172
Fee Income
4,453 5,324
TOTAL

25,764

5,143 5,516
-1,961

19,274

* Changes in fair value through profit or loss

29

Manulife Revenue
2014

2015

Net Premiums

17,813
15,929
Investment Income
10,744 11,465
Mark to Market*
17,092 -3,062
Other Revenue
8,739
10,098
TOTAL

54,388 34,430

* Realized and unrealized gains (losses) on assets supporting insurance and investment
contract liabilities and on the macro hedge program

30

Manulife Net Premiums

2014 2015
Gross Premiums
25,156
32,020
Ceded to Reinsurers
-7,343
Closed Block Ceded*
-7,996
Net Premiums
17,813
15,929

-8,095

*Premiums ceded, net of commission and additional consideration relating to Closed

Block reinsurance transaction

31

Possible performance measures for a

Life Insurance Company?
Total Revenue
Premium Income
Amounts of Insurance
Assets/Assets under Mgmt
Market Capitalization
Earnings
Capital
32

Premium Income / Amounts of

Insurance
Premiums affected by reinsurance and
business mix
Life insurance a relatively small portion of
companys business

33

Assets under Administration

(Billions)

GWL
Sun Life
Manulife
AXA 964 (US$)

2013

2014

2015

758
640
599

1063
734
691

1213
891
935

Met Life 878 (US$)

34

Market Capitalization
In Billions

RBC
Manulife
TD
GWL
Sun Life

10/07

10/10

10/12

10/15

10/16

68.4
63.0
49.7
32.9
29.5

79.9
22.4
65.3
24.5
15.4

84.3
22.4
75.3
21.5
14.4

108.8
44.0
101.4
34.2
27.5

125.5
38.4
111.4
33.3
27.1

35

Net Earnings Common Shareholders

(Millions)

2007

2008

2009

2010

Manulife

4,302

487

1,338

(470)

Great West

2,056

1,396

1,627

1,657

Sun Life

2,219

785

534

1,583
36

Net Earnings Common Shareholders

(Millions)
2010
CGAAP

2010
IFRS

2011

2012

44

1,698

Manulife

(470)

(1,742)

Great West

1,657

1,615

2,022

1,806

Sun Life

1,583

1,406

(370)

1,554
37

Net Earnings Common Shareholders

(Millions)
2013

2014

2015

Manulife

2,999

3,375

2,075

Great West

2,278

2,546

2,762

942

1,762

2,185

Sun Life

38

2016 Results
The three major Canadian Life companies
reported their 2nd quarter and first half results
in August.
How did each company do and what affected
their results?

39

2016 Net Income ($Millions)

Q1

Q2

YTD

Manulife 2015723
2016

600
1045

1,323
704

Sun Life 2015 441

2016 540

726
480

1,167
1,020

Great West 2015

2016

700
620

659
671

1,749

1,359
1,291
40

Possible performance measures for a

Life Insurance Company?
Total Revenue
Premium Income
Amounts of Insurance
Assets/Assets under Mgmt
Market Capitalization
Earnings
Capital
41

REGULATION
Canada
Federal
Provincial

International
42

Federal Regulation OSFI

Office of the Superintendent of Financial Institutions
Act of Parliament 1987
Mission To protect the rights and interests of
depositors, policyholders, pension plan members,
and creditors of financial institutions and
contribute to public confidence in a competitive
financial system.
Regulates via a combination of on-site visits and
the collection of financial data
43

Provincial Regulation

Quebec Registered Companies (AMF)

Sales Practices
Consumer Protection
Securities Commissions

44

International Regulation
United States
State Regulation
Sarbanes Oxley
Dodd Frank
SEC

Other Countries
U.K. / Europe
Solvency II
ORSA

India & China

45

OSFI Supervisory Framework

Risk Based Supervision
The objective of the Supervisory Framework
is to provide an effective process to assess the
safety and soundness of regulated financial
institutions. This is achieved by evaluating an
institutions risk profile, financial condition,
risk management processes and compliance
with applicable laws and regulations.
46

The Appointed Actuary (AA)

Fellow of the Canadian Institute of Actuaries (CIA) must be
appointed by all companies
Work subject to independent peer review
Certifies that liabilities are valued in accordance with accepted
actuarial practice and make appropriate provision for all
policyholder benefits
Reports on expected future financial condition (Dynamic Capital
Adequacy Testing DCAT)
Confirms calculation of MCCSR
Reports on fairness of the dividend and other policies
AA must have access to CEO and Board
AA must report to OSFI if asked to do inappropriate things
Appointment of new AA notified to OSFI
47

OSFI Guidelines for Assessing

Capital Adequacy
Regulatory Capital and Internal Capital
Targets
Minimum Continuing Capital and Surplus
Requirements
48

OSFIs Capital Assessment Criteria

Adequacy of capital to support risk profile
and business plan
Ability to access capital
Quality of capital
Quality of capital management policy
Role of Senior Management and Board in
capital management processes
49

Regulatory Capital MCCSR

(Minimum Continuing Capital and Surplus Requirement)
Risk based capital system determined initially by industry
and adopted and modified by OSFI
Ratio of Available to Required Capital (Formula Driven)
Total Required Capital is sum of capital requirements for
five risk components
1.
2.
3.
4.
5.

Asset Default Risk

Mortality, Morbidity, Lapse Risk
Changes in Interest Rate Risk
Segregated Funds Risk
Foreign Exchange Risk

Large Canadian companies traditionally 200% +

50

Capital Required for Asset Default Risk

Factor applied to asset values
Asset Class

Factor (%)

Government Bonds 0
Bonds AAA 0.25
<B
16
Mortgages NHA
0
- Residential 2
- Commercial 4
Equity Common
15
- Preferred AAA, P1
1
Real Estate 7
Factor reduced for assets backing participating policies
51

Regulatory Capital Ratios

Minimum ratio allowable by OSFI = 120%
20% extra because operational risk is not covered by formula

Supervisory Target (when OSFI intervenes) =150%

Additional margin to cover strategic and reputational risks and
other potential risks

Higher internal target in companys Capital Policy.

Management action plan required if target breached.

Large Canadian companies traditionally 200% MCCSR or

higher

52

Tier 1 Capital
Tier 1 capital is core capital and excludes
some capital included in total capital in
MCCSR e.g. Goodwill, negative reserves
Tier 1 Supervisory Target is 105% - Minimum
60%

53

Some Problems with MCCSR

Too formulaic, doesnt respond well enough to
each companys situation
Largely independent of companys accounting
conservatism
Can negatively impact business decisions
Certain factors only covered broadly
Some factors not covered
Management, legal, systems, diversification,
hedging, etc
54

Future Capital Requirements

Need to improve MCCSR
Advances in theory
Product complexity & globalization
Risk concentration & diversification

IFRS - Insurance Phase II

Focus on Risk
- ERM, Risk Appetite, ORSA

55

MCCSR (%)
2010 2012 2014 2015
Sun Life
Manulife
GWL

228
249
203

209
211
207

217
248
224

240
223
238
56

Policyholder & Depositor

Guarantees
CDIC (Federal crown corporation) Insures
eligible deposits at deposit-taking institutions
Assuris Run and funded by insurance industry
Life companies must be members
Life company policyholders received virtually
100% payment in 1990s insolvencies (Les
Cooperants, Sovereign Life, Confederation Life)

57

Discussion Paper
(See CMD for more Details)

Students can work alone or with a partner

Students can choose one of the topics listed or
a topic of their choice which must be
approved by the instructor
Limit of 2 groups for any one topic
Week 2 -Topic to be confirmed
Week 4 (November 21) - Papers due
Week 5 - Papers will be presented and
discussed in class
58

Term Paper Topics

(See CMD for more Details)

Individual paper
Students must study one of the 3 major Canadian
Life companies
Students who choose one of the majors for their
discussion paper must choose a different
company for their term paper
Company to be chosen or assigned no later than
week 4
Paper must be submitted no later than December 16
59

Week 2
Insurance Company Products and
Distribution
Selection of Risks
Pensions

60

Week 2 Readings
Great West Lifeco Annual Report
Segmented Operating Results Canada Pages 53-60

Submission by the Canadian Institute of Actuaries Presented to

the House of Commons Standing Committee on Finance August
2007 Pages 1-12
http://www.actuaries.ca/members/publications/2007/207076e.pdf

Retooling Canadas Ailing Pension System Now, For The Future

http://www.actuaries.ca/members/publications/2009/209097e.pdf

CIA Position Paper Meeting the Needs of Canadas Future

Retirees (To be posted on CMD)
f
61

Week 2 Questions for Discussion

Why do people need insurance company
products and what products do they need?
How do people buy insurance company
products today and how will they buy
products tomorrow?
Is life insurance bought or sold?

62

Week 2 Questions for Discussion

How do people finance their retirement?
What are the different types of Pension
plans?
How are pension benefits financed?

63

Week 3 Questions for Discussion

3rd Quarter Results for Great West Lifeco,
Manulife & Sun Life will be released in the next
two weeks
Please come to class in Week 3 prepared to
discuss these results and the results year-to-date.

64