Fixed Income Quarterly—Insurance
Page 3
Chart 3: Life Insurers Issuance
Regulatory Update – On November 12, 2013, OSFI released an update to its Life Insurance Regulatory Framework, origi- nally published in September 2012. Some key developments include:
Corporate Governance – An updated corporate governance guideline was published in January 2013 and implemented in 2014. The goal of the guideline is to help the board of directors and senior management to identify and manage risks being undertaken by an institution. In addition, the guideline addresses the role of the risk committee at the Board for large and complex institutions and provides insight on the role of the chief risk officer.
Own Risk and Solvency Assessment – The final version of the Own Risk and Solvency Assessment (ORSA) Guideline was released in November 2013, with implementation starting January 2014. The primary objective of ORSA is to get the insurer to self-assess its risks and solvency requirements and employ appropriate processes that reflect the nature, scale and complexity of its own risks.
Segregated Funds – Work on developing an internal models framework for segregated funds has been halted to acceler- ate the development of the standardized approach for segre- gated funds. OSFI expects the work on the internal models framework will resume once the new standardized approach is completed.
Capital Framework – The implementation of the new life insurance capital framework was pushed out to 2018 from 2016. In addition, OSFI now plans on running another quan- titative impact study in 2014, with draft guidelines expected in 2015, and final guidelines in 2016. OSFI did state that, “it continues to believe that, in aggregate, the industry currently has adequate financial resources (total assets) for its current risks.”
Global Systemically Important Insurers (G-SII) – On July 18, 2013, the Financial Stability Board (FSB) published the first set of Global Systemically Important Insurers (G-SIIs) framework. In line with our expectations, no Canadian insur- ers were included on the initial list.
Global Insurance Capital Standard – The IAIS announced timelines in October 2013 for developing a global insurance capital standard for internationally active insurance groups (IAIGs) and simple backstop capital requirements for G-SI- Is. The IAIS indicated that full implementation of the former will begin in 2019, while the latter is expected to be ready for implementation in late 2014.
(C$ Billion) $5.0
$4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5
0.0
MFC SLF GWO IAG Other
$4.4
$3.0
$2.6
$2.1
$2.2
$1.7 $1.6
$1.7
$1.1
$0.8
$0.5
$0.8 $0.8
$0.5
$0.2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
As at March 31, 2014 Source: BMO Capital Markets
Potential Changes to the URR Calculation – On December 13, 2013, the Actuarial Standards Board (ASB) released the long-awaited exposure draft for revisions to the economic re- investment assumptions and assumed investment strategies utilized for long-tail liability cash flows under the Canadi- an Asset Liability Method (CALM). The comment period ended on February 14, 2014, and final implementation is tar- geted for Q4/14.
Overall, we believe the exposure draft is positive for the in- dustry, particularly for Manulife and Industrial Alliance, as it will likely result in less onerous URR charges going forward. That being said, the proposed changes to limits in non-fixed income assets could offset some of this benefit.
Table 2: Life Insurers 2014 Financing Requirements
1. Excluding preferred shares that we believe will not be redeemed
2. Includes $250 million of opco sub debt issued on November 29, 2013 to
prefund 2014 maturities
3. SLF redeemed $500 million of sub debt on March 31, 2014 Source: BMO Capital Markets, Bloomberg
C$ mm
2014 Uses of Cash
2014 Sources of Cash
Issuer
Debt
Preferred Shares1
Debt
Preferred Shares
Common Shares
Remaining Financing Requirements
GWO 0 0 0 0 0 0 IAG 150 0 0 0 0 150 MFC2 1,000 800 750 200 0 850 SLF3 500 250 0 0 0 0
Total 1,650 1,050 750 200 0 1,000