The experts predicted it. Now the companies are doing it! The demutualized insurance companies are allowing their reserves to decrease in order to increase the now more important return on shareholders’ equity (ROE). Since going public, the five Canadian insurers who recently demutualized have greater access to capital, but are also under pressure to increase the performance of this capital. The reserves are practically idle and all say they will put the capital to better use to increase their return on equity figures.
Reserves are typically measured by a company’s minimum continuing capital and surplus requirement (MCCSR), which is the minimum amount that the regulator requires insurers to keep in reserve to cover all of the risks it incurs. The MCCSR is a key measure of companies’ financial capacity to fulfil their obligations, and for a mutual company, is an indicator of its financial strength and ability to grow and expand.
Representatives of the recently demutualized companies were questioned on the impact of being on the market and how they plan to adapt. A summary of the questions and answers are provided in the accompanying table. Since Great-West has always been a public company, we have included it in this article and in the table to provide a standard for the comparative results.
A shared trend among the demutualized insurers is that all will maintain an MCCSR over and above the minimum requirement of 150%, but not by very much. All are in the 175 to 200 percent range – a reasonable goal for high quality credit according to The Canadian Bond Rating Service (CBRS) – and all would like to be in the 14% and above range for ROE.
Raymond McFeetors, CEO of Great-West said that he would be concerned if the MCCSR is over 200%, as this would indicate an inefficient use of capital. Great-West’s MCCSR, however, was 210% last year. Mr. McFeetors said that you build, save, plateau then look for acquisitions. He said that a target MCCSR is a little misleading because it is driven by the rating agencies.
Yvon Sauvageau, Vice-President of Financial Services with Industrial-Alliance said that it used to be that the company with the highest MCCSR was the best, but that makes it difficult to get a good return. His target for Industrial-Alliance is between 12 to 14%. He said he resists stating 15% because 12 to 14% is a viable number and the company does not want to change a lot of things. “Life is a very capital-intensive business,” he said, “you have to spend a little to grow your new business.”
The impact on the financial direction of the companies was made when they decided to go public. All of them stated that this transition started over two years ago. A couple of the biggest impacts have been the change in corporate culture to speed up the process of reporting financial results, and the focus on core-business operations. In Manulife’s case, the biggest change was six years ago when there was a change in management, said Peter Rubenovitch, Executive Vice President and CFO. Since that time the company has drastically focussed its business by selling off all its non-core operations, a total 20 businesses in six years.
Another major change in corporate culture, partly due to market pressures and partly because of the rapidly changing industry, has been an increased focus on the short-term results. Financial planning, said Karen Maidment, CFO with Clarica, is still discussed in terms of the long-term forecast, however that plan is reviewed more frequently to account for the short-term results.
Asked if Great-West would face any added competition for investors now that five large insurers have entered the public market, Mr. McFeetors said that the demutualization of the other companies ironically decreases the pressure to perform rather than increase it. He said that they have been operating inefficiently for years in many ways, like pricing for example. “Over time they will be forced away from that and that will be an advantage to us.”