Canadian Life Insurance Industry Edward Kohlberg, CPA, FLMI, CLU Associate Director Anthony McSwieney Senior Financial Analyst A.M. Best Annual Insurance Market Briefing Canada September 5, 2018
Canadian Life Market Segment Outlook Is Stable Outlook is stable, but remains cautious Rating outlook reflects limited rating actions Company specific results remain key to rating actions Does not preclude positive or negative rating actions 2
Benchmarking Balance Sheet Strength Strongest CRT-1 a+/a 14% 23% Very Strong Strong Adequate a-/bbb+ Strongest Very Strong Strong Weak Very Weak a/a- bbb+/bbb/bbb- bb+/bb/bb- b+ and below 63% 3
Benchmarking Operating Performance Assessment Notches 5% Very Strong +2 Strong +1 Adequate 0 Marginal -1 36% 59% Strong Adequate Marginal Weak -2 Very Weak -3 4
Benchmarking Business Profile Assessment Notches 4% 9% Very Favorable +2 Favorable +1 Neutral 0 Limited -1 64% 23% Very Favorable Favorable Neutral Limited Very Limited -2 5
Benchmarking ERM Assessment Notches 5% 4% Very Strong +1 Appropriate 0 Marginal -1 Weak -2 Very Weak -3/4 91% Very Strong Appropriate Marginal 6
CAD Billions Pretax Earnings 18 16 14 16 17 14 12 13 13 10 8 6 4 2 0 2013 2014 2015 2016 2017 Source: A.M. Best data and research 7
Industry Trends: Direct Premiums Written 90 Canada and United States only CAD Billions 80 70 60 50 40 0.6 11.1 24.1 0.7 12.0 25.3 0.9 0.8 14.4 13.3 26.7 27.9 0.6 15.5 27.1 30 20 8.3 9.7 9.6 10.7 8.8 10 0 21.7 23.1 25.3 24.9 23.4 2013 2014 2015 2016 2017 Source: A.M. Best data and research Life Annuity A&S Participating Other 8
DPW Geographic Diversification 100 % 90 80 70 60 50 12.6 12.4 15.5 19.2 18.5 7.4 6.9 12.9 13.5 8.7 6.3 9.2 14.9 13.4 13.1 40 30 20 10 67.1 67.3 60.9 61.1 59.1 0 2013 2014 2015 2016 2017 Canada U.S. Europe Asia/Other Source: A.M. Best data and research 9
CAD Billions Mutual Fund Deposits by Geographical Distribution 140 120 100 52 80 39 42 60 40 12 21 45 49 51 20 25 29 9 9 13 13 17 0 2013 2014 2015 2016 2017 Canada U.S. Other Source: A.M. Best data and research 10
Regulatory LICAT IFRS 17 11
Innovation A.M. Best Survey: Part of Business Model in Need of Update A.M. Best Survey: Needed Technology Improvement Underwriting, 10.0% Improving the customer (and agent) experience 33.3 Product Innovation 18.0% Legacy administrative & claims systems 29.9 Customer Experience 26.5% Distribution 18.5% Data aggregation and data mining 10.4 22.9 New business/underwriting systems Data Mining and Technology 27.0% Risk management/ compliance 3.5 0 5 10 15 20 25 30 35 Source: A.M. Best data and research 12
Interest Rate and Macro Concerns Bank of Canada increased overnight rate in July 2018 25 basis points to 1.5% Rate was.75% this time last year Forecast up to 2.25% in early 2019 10 Year may go up to 3.0% in 2019 Economic uncertainty in Canada Low household ownership of life insurance High Household debt Can it derail the economy? 13
% 10-Yr Government Bond Yield 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 Source: Bank of Canada 14
FX Rate 1 0.9 0.8 0.7 0.6 CAD/USD CAD/Euro CAD/GBP 0.5 0.4 15
Toronto Composite Index (CAD) TSX vs. S&P 500: 1 Year Performance 17000 4000 16500 16000 3500 3000 15500 15000 14500 2500 2000 S&P 500 (USD) 14000 TSX Composite Index S&P Index 1500 13500 1000 Source: Bank of Canada 16
Invested Assets (CAD Billions) Investment Income 1,000 900 800 700 600 500 400 300 200 100 36 30 24 18 12 6 Investment Income (CAD Billions) 0 2013 2014 2015 2016 2017 Invested Assets Interest, Dividends & Income Invest. Income Excluding Derivatives 0 Source: A.M. Best data and research 17
Canadian Life Companies Investments Distribution of Invested Assets (%) Category 2013 2014 2015 2016 2017 Bonds 62.1 63.6 64.2 64.9 66.2 Total Stock 7.2 6.3 5.6 6.1 6.3 Mortgage Loans 13.6 12.1 11.7 11.3 11.0 Real Estate 3.8 3.4 3.8 3.4 3.5 Policy Loans 2.7 2.4 2.3 2.0 1.9 Cash & Short-term 5.1 5.4 5.0 4.6 4.5 Derivatives 1.8 2.9 3.2 3.0 2.0 Other Invested Assets 3.8 3.9 4.2 4.6 4.5 Total 100 100 100 100 100 Source: A.M. Best data and research 18
Bond Segmentation Canadian Life Bond Portfolio Distribution Portfolio Components 2013 2014 2015 2016 2017 Government 36.0 36.6 36.3 36.9 35.7 Municipal, Public Authority, Schools 4.9 5.1 5.3 6.1 6.3 Corporate Public 43.5 43.5 43.0 42.1 42.5 Corporate Private 15.5 14.8 15.4 14.8 15.5 Total 100.0 100.0 100.0 100.0 100.0 Portfolio Components 2013 2014 2015 2016 2017 Government 150,726,576 184,790,070 198,338,871 209,634,829 215,389,285 Municipal, Public Authority, Schools 20,372,922 25,854,965 28,774,003 34,663,432 38,026,288 Corporate Public 182,099,465 219,576,686 234,885,758 239,158,173 255,457,991 Corporate Private 65,006,522 74,773,331 83,957,924 84,079,100 93,141,265 Total 418,205,485 504,995,052 545,956,556 567,535,534 602,014,829 Source: A.M. Best data and research 19
Corporate Segmentation Sector/Country 2013 2014 2015 2016 2017 Energy 8.4 9.3 9.3 11.4 10.0 Basic Materials 2.9 2.7 2.4 2.3 2.1 Industrial 9.3 9.7 11.1 10.5 10.1 Consumer Cyclical 6.6 6.5 6.7 4.4 4.9 Consumer Non-Cyclical 6.6 6.6 6.5 7.8 7.5 Diversified/(Health Care) 2.3 2.2 2.2 2.3 2.6 Financial 28.5 27.4 26.2 21.6 21.9 Technology 1.3 1.3 1.5 1.9 2.0 Communications 3.7 3.8 3.7 3.9 3.8 Utilities 22.6 23.3 23.8 24.9 25.2 Other 7.9 7.0 6.5 9.0 9.9 Total All Sectors 100.1 99.8 99.9 100.0 100.0 Canada 39.9 39.4 36.5 37.6 35.9 United States 37.4 37.9 39.0 41.4 40.0 Other 22.8 22.7 24.5 20.9 24.1 Total 100.1 100.0 100.0 99.9 100.0 Source: A.M. Best data and research 20
Survey Question What areas are crucial to L/A success over the next 2 years? Improving product distribution 17.2 Upgrading information systems Improving the customer experience Reducing administrative costs Innovative product development 16.0 15.4 14.8 14.2 Upgrading analytic / predictive analysis capabilities Improving underwriting effectiveness 5.9 6.5 Enterprise risk management strategy Mergers / Acquisitions 4.1 4.1 International expansion 1.8 0 2 4 6 8 10 12 14 16 18 20 Source: A.M. Best data and research % 21
Audience Polling Question: 2018 Review Preview U.S. What do you view as the biggest opportunity for the industry? Retirement Income Solutions Pension Risk Transfer Direct to Consumer Channel Technology: Data Analytics/Predictive Modeling Other 22
Biggest Challenges for the Industry Capital Management Aging Distribution Low Interest Rates Regulatory Changes Outdated Business Model Need For Innovation and Technology Improvements Longevity Exposure Cyber Risk 23
Q&A 24
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