Looking at Canada’s Insurance Sector

Looking at Canada’s Insurance Sector

Excerpted article was written by Ryan Goldsman

Over the past six months, shares of a number of Canadian insurance companies have moved either sideways or fallen slightly. While insurance companies have offered investors fantastic long-term rates of return, it is essential for new investors to consider the next decade to have proper expectations.

Considering the current low interest rate environment, the challenges over the past decade have been significant for companies that take in float and invest the capital while waiting to pay it back out in the form of claims. Insurance companies may be the biggest benefactors from rising rates (from the Bank of Canada) or rising risk-free rates of return through government t-bills.

Over the past six months, the insurance company that held up the best is Manulife Financial Corp. (TSX:MFC)(NYSE:MFC). It has been flat (from a price perspective), and investors still received the quarterly dividend of $0.21 over that time. At a current price near $24.50, the dividend yield offered to new investors is approximately 3.4%. As of the most recent financial statements (March 31, 2017), the tangible book value amounts to $21.82 per share.

The second-biggest insurance company by market capitalization is Great-West Lifeco Inc .(TSX:GWO). Over the past six months, it has lost 3% while paying a quarterly dividend which yields 4.25% on an annual basis. While the company currently trades at a trailing 13 times earnings with a tangible book value of $16.49 per share, the current share price of almost $35 may not be the best option available to investors.

Next up is Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF). At almost $46 per share, it offers investors a dividend yield of approximately 3.75% and trades at 11.2 times trailing earnings. The tangible book value per share is $27.59 per share as of March 31, 2017. Over the past six months, shares have lost close to 11% while still paying quarterly dividends.

Last up is the much smaller Industrial Alliance Insur. & Fin. Ser.  (TSX:IAG). At $53.50 per share, it is the cheapest at a trailing price-to-earnings multiple of 10 times. The dividend yield, however, is only a little more than 2.5%, while the tangible book value is a solid $42.83 per share. Over the past six months, the price change has been close to negative 2%, but the dividends have been paid every quarter.

While the Canadian insurance industry offers investors a many different choices, it is important for investors to line themselves up with the right insurance company. While shares in the smaller Industrial Alliance Insur. & Fin. Ser. may offer higher potential for capital appreciation, the shares of Great-West Lifeco Inc. will probably be the least volatile while providing the most lucrative dividend at 4.25%.

Going forward, investors will need to ask themselves which insurance company they would like to invest in.

Source: The Motley Fool

Where to Invest With Increasing Interest Rates

South of the border, the chair of the Federal Reserve, Janet Yellen, is primed to announce a hike in interest rates in the coming weeks. Although this move may already be largely priced in to the equity markets, Canadian investors still need to stop and take a serious look at their investment holdings.

Although a small interest rate increase is by no means a disastrous event for investors, the reality is, what were otherwise fantastic returns may diminish to adequate returns. Higher interest rates translate to higher interest costs and lower net profit. Investors need to reset expectations in the years to come.

Many asset classes will decline in value if interest rates rise, so investors need to ask the question: “Where do I invest to benefit from rising interest rates?”

Obviously, long term bonds, REITs, and utility companies are not going to be anywhere the top of the list. Instead, the list will be topped by banks and insurance companies. In Canada, we have three large insurance companies that dominate the marketplace. Let’s look at each insurance company.

Manulife Financial Corp. (TSX:MFC)(NYSE:MFC)

Currently, Manulife is Canada’s biggest insurance company. Investors taking a new position will be offered a dividend yield of almost 3.5% and are picking up shares at a premium to tangible book value of 50% with a trailing price-to-earnings (P/E) ratio of 17 times.

Great-West Lifeco Inc. (TSX:GWO)

While the shares of Canada’s second-largest insurer are much less volatile, the dividend yield is approximately 4%, and shares trade at more than double the tangible book value. Although the trailing P/E is less than 14, shares are not necessarily a fantastic deal depending on what metric is used to evaluate the security.

Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF)

Shares of Sun Life offer new investors a dividend yield of just under 3.5% and trade at a premium to tangible book value in the amount of 82%. The trailing P/E ratio is currently 12.3 times.

While investors may be looking for somewhere to hide in the face of rising interest rates, the truth is that many other investors have already found their way into Canada’s insurance companies and big banks. Although valuations may not seem very attractive at current levels, the importance for investors is to understand what rising rates mean for the companies they are investing in.

As insurance companies invest the premiums received (this is called the float) into short-term, very low risk investments, the increase in interest rates will greatly benefit these companies over time.

Looking at all three Canadian insurers, investors should note the volatility and dividend yield of each stock. While low payout ratios translate to more money reinvested into the company, the truth is, growth is only good if it is profitable. Sometimes boring is better!

Six “pro” strategies for today’s highly uncertain market

Motley Fool Canada’s $250,000-real-money-portfolio service, Motley Fool Pro, is currently closed to new members. But lead advisor Jim Gilles is doing something special for investors who are worried about the market and where it will head in 2017.

He’s revealing the six strategies he uses in Pro to help members guardrail their portfolios and make money in up, down, and sideways markets.

Nearly half of Canadians lack a financial plan, putting their goals at risk

A new CIBC (TSX:CM) (NYSE: CM) poll finds that nearly half (46 per cent) of Canadians do not have a financial plan in place to reach their goals, despite many feeling concerned about their retirement years.

“While most of us have a fairly good sense of our financial goals, so many Canadians do not have a clear road map in place to achieve what they want today – and tomorrow,” says Sarah Widmeyer, Managing Director and Head of Wealth Strategies, CIBC. “Whether the goal is to eliminate debt, save more, or retire early, you can achieve success with a financial plan.”

Key poll findings include:

  • 54 per cent of Canadians surveyed have a financial plan, with
    • 64 per cent of them having a long-term plan that identifies their savings goals and the steps to achieve them;
    • And 36 per cent who describe it as only a budget they review regularly, a short-term plan or ‘other’.
  • 46 per cent of Canadians surveyed do not have a financial plan
    • with 42 per cent of them saying they ‘have a pretty good idea’ and don’t need to write it down.
  • When thinking about retirement, just over half (51 per cent) are most worried about increasing health care costs, 45 per cent are concerned about how to manage unexpected expenses, and 43 per cent worry that they won’t have enough money to live the life they want.

‘Life gets in the way’

According to previous CIBC polls, ‘paying down debt’ has been the top financial priority for Canadians for seven straight years, indicating few people are making headway on their goals.

“We all aim to have a sufficient nest egg for retirement and money to handle the unexpected, but everyday life has a tendency of getting in the way,” says Ms. Widmeyer. “By setting out a clear path to your goals, a financial plan can help you stay on track. It also gives you the confidence to manage surprises, so that setbacks don’t put your retirement dreams and other goals at risk.”

The poll finds that having a financial plan in place makes Canadians feel more confident in their ability to manage unexpected changes in their finances. Additionally, those who have a financial advisor (61 per cent) also feel better able to manage setbacks. The poll surveyed Canadians with household incomes above $100,000.

A financial plan and a budget are not the same: But both are important

The poll findings show that even among those who do have a financial plan, more than a third (36 per cent) appear to be confused about how it differs from a budget, pointing to a limited understanding of the full value and purpose of a financial plan.

“While budgeting and financial planning go hand-in-hand, a budget alone is insufficient in crafting the life you want in the future,” says Ms. Widmeyer. She adds that confusing a budget with a financial plan may leave Canadians ill-prepared.

Ms. Widmeyer describes a financial plan as a clear, written report detailing an individual’s personal goals, financial needs and priorities in areas such as income and expenses, taxes, mortgage planning, education needs, retirement, estate planning, and insurance. A financial plan also incorporates assumptions like inflation, the time to a goal and expected rates of return, which many may miss on their own, she adds.

“There are many things to consider depending on your life stage, income and lifestyle expectations,” says Ms. Widmeyer. “Is it better to pay down debt or save? Are you saving enough? Could you possibly retire earlier than you thought? These are some of the questions a financial plan can help you answer and where the real value of a plan lies.”

Tips to get started

For those who are unsure of where to start, Ms. Widmeyer offers these tips:

  1. Identify your short-term and long-term goals
  2. Take a detailed look at your budget
  3. Create a plan setting measurable and time-based goals
  4. Review your progress annually

“Now is the perfect time to speak to a financial advisor who can help you identify and prioritize your goals and set a plan to achieve them,” adds Widmeyer. “The keys to success are to have a plan in place, review your progress annually, and then make any changes as needed. This will keep you on track to achieve what’s important to you.”

A plan for ages

  • In your 20’s and 30’s – When you’re starting out, it’s important to manage debt effectively and keep an eye on savings. Taking advantage of the Home Buyer’s Plan can help you build a down payment for your first home, while saving through a TFSA could save your RRSP contribution room for years when you’re likely to earn a higher income. Read Paul and Andrea’s story.
  • In your 40’s and 50’s – For the sandwich generation, it’s all about balance. Competing priorities pull you in different directions, and can make it difficult to stay on track. Look for ways to maximize savings through Registered Education Savings Plans, and be sure to balance your portfolio to fit the right time horizon, risk tolerance and accurately forecast future cash flow. Read Xue and Mei-Lien’s story.
  • In your 60’s and beyond – For those at or nearing retirement, it’s important to understand your new income needs, lifestyle and plan for any unexpected health costs in order to set a clear course for the years ahead. Knowing the right time and amount to withdraw from Registered Retirement Income Funds to reduce tax liabilities and continue saving for later years, while discussing your estate can help protect your wealth and minimize taxes. Read Andrew and Jennifer’s story.

KEY POLL FINDINGS:

Percentage of Canadians surveyed with a financial plan detailing out financial decisions and activities for their household:

Yes,    

54%

No

46%

Top reasons Canadians surveyed without a financial plan feel they do not need one:

I have a pretty good idea of what I need to do and don’t need to write it down

42%

My situation is pretty simple and I don’t see the need for one

26%

Canadians’ surveyed top three most important goals for having a financial plan:

Saving for retirement

53%

Eliminating credit card or line of credit debt

38%

Paying off  their mortgage sooner

38%

Top retirement concerns among Canadians surveyed:

Increased health care costs

51%

Managing unexpected costs (e.g. health-related expenses, long-term care)

45%

Not having enough money to live the life I want

43%

Confidence of those with or without a financial plan in their ability to manage an unexpected life event or scenario:

Have a
financial
plan

Do not
have a financial
plan

Have a
financial
advisor

Do not
have a
financial
advisor

Someone in the household losing their job suddenly

70%

58%

69%

57%

A family illness or disability that left me or a family member unable to work for a few months

77%

72%

78%

68%

Medical expenses not covered by my insurance provider

77%

71%

78%

67%

A sudden, unexpected financial emergency (e.g. urgent home renovation, car repairs)

88%

80%

87%

80%

Divorce

51%

48%

52%

46%

Growing family

57%

59%

60%

55%

Financial Plan Poll Disclaimer:
From January 5 to 9, 2017, an online survey was conducted among 1,007 Canadian adults with a household income greater than $100,000 who are Angus Reid Forum panelists. For comparison purposes, a probability sample of this size has a margin of error of +/- 3%, 19 times out of 20.

About CIBC
CIBC is a leading Canadian-based global financial institution with 11 million personal banking and business clients. Through our three major business units – Retail and Business Banking, Wealth Management and Capital Markets – CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada with offices in the United States and around the world. Ongoing news releases and more information about CIBC can be found at www.cibc.com/ca/media-centre/ or by following on Twitter @CIBC, Facebook (www.facebook.com/CIBC) and Instagram @CIBCNow.

SOURCE CIBC – Consumer Research and Advice

Canada: Financial Services Regulatory: Seven Developments To Watch In 2017

Article by Sharissa Ellyn

New draft OSFI guideline: enterprise-wide model risk management

OSFI released a new draft Guideline E-23 – Enterprise-Wide Model Risk Management on December 21, 2016. Once finalized, Guideline E-23 will apply to banks, foreign bank branches, bank holding companies, and federally regulated trust and loan companies.

The draft guideline sets out OSFI’s expectations for a governance structure in connection with the development, review, approval, use and modification of internal risk management models. OSFI recognizes that smaller and less complex institutions might apply the controls set out in the guideline only in materially relevant areas.

Once the guideline is in effect, federally regulated financial institutions (FRFIs) will be expected to develop and operationalize enterprise-wide model risk management policies and to create and maintain inventories of risk management models they currently use and have recently decommissioned. OSFI has asked for comments on the draft guideline by February 28, 2017.

New FinTRAC guidance: PEPs and HIOs

On December 20, 2016, FinTRAC released new guidance for financial entities regarding politically exposed persons (PEPs) and heads of international organizations (HIOs). This guidance addresses the new requirements under Canada’s anti-money laundering (AML) regulations in connection with domestic PEPs and HIOs, which will be in force on June 17, 2017, (described in our post) as well as the existing requirements in connection with foreign PEPs.

In this guidance, FinTRAC states that regulated entities are not expected to assess all existing account holders immediately upon the coming into force date (June 17) of the new PEP and HIO obligations, but rather, a process must be established to assess existing account holders over time. One issue with the new requirements relates to the requirement (which arises in various circumstances) to take reasonable measures to determine whether a person is closely associated with a PEP or HIO. The government had indicated FinTRAC would provide guidance regarding the meaning of “close associate.” This new guidance is apparently intended to do that, however, institutions may find it is not particularly helpful in this regard. The guidance provides that the term “close associate” is not intended to capture every person who has been associated with a PEP or HIO. The guidance provides some examples of close associations – including business partners, romantic relationship partners, those involved in financial transactions, those who serve on the same boards, and those who closely carry out charitable works with a PEP or HIO.

According to the guidance, institutions must have a means to determine if a person associated with a PEP or HIO is or is not a close associate; it is unclear what this will entail. In line with previous guidance, this guidance provides (somewhat unhelpfully) that reasonable measures to determine whether a person is a PEP, HIO or a close associate of one of them include, but are not limited to (1) asking the client; (2) conducting an open source search; and (3) consulting a source of commercially available information.

Review of OSFI expectations for boards of FRFIs

OSFI recently advised all federally regulated financial institutions (FRFIs) that it plans a comprehensive review of its expectations for boards of directors of FRFIs. This review aims to ensure that boards can continue to be effective in their role.

The notice suggests that as part of this review, OSFI may consolidate expectations of boards and directors that are currently set out in its Corporate Governance Guideline as well as in many other specific guidelines and supervisory letters. Feedback, especially from smaller institutions, had indicated that the total of the expectations of boards and directors can be difficult to navigate. OSFI will begin its consultation by speaking directly to certain boards that represent a cross-section of the industry. These targeted discussions will be followed by a broader consultation. Anyone who wishes to participate in this consultation may contact OSFI at the phone number indicated in the notice.

Bank Act financial consumer protection framework

As described in our post, Bill C-29 would have amended the Bank Act to include a new consumer protection framework (which was promised for many years by successive federal governments). The amendments would have consolidated many current consumer protection provisions and added certain new requirements. However, following objections from Quebec, the proposed amendments to introduce the new framework were withdrawn before the bill was passed on December 15, 2016.

The controversial aspects of the proposed amendments provide that the new framework is intended to be a comprehensive and exclusive regime that is paramount to any province’s consumer protection laws. We understand that the proposed amendments will be reviewed by the Financial Consumer Agency of Canada to ensure they provide consumer protections that are at least as strong as those available under Quebec law. Following this review (and possible revision), it is expected the proposed amendments will be reintroduced as a new bill in the House of Commons.

FCAC to update supervision framework and principles for publishing decisions

On September 29, 2016, the Financial Consumer Agency of Canada (FCAC) released for public comment a proposed new Supervision Framework and proposed new Publishing Principles for FCAC Decisions. It appears the Supervision Framework, once finalized, will replace FCAC’s existing Compliance Framework. The Compliance Framework outlines how FCAC supervises and monitors regulated entities for compliance with regulatory requirements. Of note is FCAC’s new classification of regulated entities as Tier 1 or Tier 2 on the basis of their relative inherent risks of breaching their market conduct obligations. Tier 1 entities are those that present higher inherent risks as a result of their business models and service offerings. Tier 2 entities will be monitored less intensively than Tier 1 entities.

The new Supervision Framework will be supported by additional guidance documents and redesigned internal processes that will be developed and phased in over time. In the proposed new Publishing Principles, FCAC indicates that it makes public information about all violations and breaches of voluntary codes and public commitments. For violations, the commissioner of FCAC will decide on a case-by-case basis whether or not to publish the name of the regulated entity that committed the violation. For breaches of voluntary codes and public commitments, FCAC will publish anonymous information about the non-adherence. The consultation period has closed, but these documents have not yet been published in final form.

Further amendments to proceeds of crime regulations expected

As described in our post, various amendments to regulations under Canada’s AML legislation were published in final form in 2016. Certain of these amendments came into force on June 30, 2016, while the remaining amendments will be in force on June 17, 2017. A second package of amendments to Canada’s AML regulations to address prepaid payment products, virtual currencies and money services businesses without a physical presence in Canada was expected to be published in draft in fall 2016, but has not yet been released.

Review of the federal financial sector framework

On August 26, 2016, the federal government’s Department of Finance launched a consultation to review the federal financial sector framework. Each of the federal financial institutions statutes includes sunset clauses that require the government to review these statutes every five years. The current sunset dates were extended in 2016 by two years to 2019. The stated purpose of this review is to allow the government to consider whether the current framework effectively supports growth and positions the sector to meet the government’s stated policy objectives of stability, efficiency and utility.

The consultation paper provides useful background information about Canada’s financial services sector and information about the policy context and trends that influence the financial sector. Some of the trends discussed are the macroeconomic conditions in Canada (such as low interest rates and high household debt), increased concentration in the financial sector, the changing competitive landscape, the internationalization of financial institutions, financial innovation, and the emergence of fintech. The consultation paper concludes by setting out broad questions, which ask for comments on the trends and challenges that influence the financial sector, whether the current framework effectively balances the policy objectives, and what actions could be taken to strengthen the sector, promote economic growth and ensure the legislative framework remains modern and technically sound. The consultation period closed on November 15, 2016.

The consultation document indicates that the Department of Finance may make public some or all of the responses or may provide summaries of responses in public documents and that responses will be used in developing a policy paper for further consultation in 2017. This further consultation may lead to proposed amendments to the federal financial institutions statutes and regulations.

CIBC’s exposure to mortgage market raises concerns among some analysts

By Alexandra Posadzki

THE CANADIAN PRESS

TORONTO _ CIBC’s exposure to the residential mortgage market has increased, raising concerns among some analysts who say it comes at a time when Canada’s real estate market is at risk of a correction.

But the bank said its loan delinquencies remain low and stable, including in the hot housing markets of Toronto and Vancouver.

Edward Jones analyst Jim Shanahan says CIBC’s (TSX:CM) portfolio of uninsured mortgage and home equity loans is 5.4 times its regulatory capital.

That’s up from a year ago, when CIBC’s mortgage loan book was 4.7 times its regulatory capital, said Shanahan, adding that the bank is more at risk in the event of a correction than its peers.

The average for the four banks that have reported so far _ Scotiabank (TSX:BNS), Royal Bank (TSX:RY), CIBC (TSX:CM) and TD Bank (TSX:TD) is 3.3 times their regulatory capital.

“It’s clear that they’re more exposed to a sharp reduction in real estate values in Canada than any of the other major banks,” Shanahan said.

The bank’s exposure to residential mortgage loans is already “extraordinarily high,” and the fact that it has continued to grow is alarming, Shanahan said.

“They’ve continued to layer on more risk at a time when there are a lot of warning bells going off and regulators are expressing concern.”

Ottawa tightened mortgage lending rules in October in a bid to ensure that Canadians are not taking on more debt than they can handle.

The move was a response to growing concerns about rising household debt levels, which are at record highs relative to income, and soaring home prices, particularly in Toronto and Vancouver.

Shanahan was not the only analyst to take issue with CIBC’s growing exposure to the uninsured mortgage market.

The bank, which grew its fourth-quarter net income by 20 per cent to $931 million, was peppered with questions regarding its mortgage loan book during a conference call Thursday to discuss the bank’s results.

Chief risk officer Laura Dottori-Attanasio said the vast majority of the bank’s uninsured residential mortgage loans have high credit scores and low loan-to-value ratios. Loans that are small relative to the value of the house being purchased are typically considered less risky.

“We continued to be very pleased with the credit profile and quality of our uninsured mortgage portfolio,” Dottori-Attanasio told analysts during the conference call.

David Williamson, group head of retail and business banking, said he’s comfortable with the bank’s growing exposure to the residential mortgage market because of the quality of its loan book, particularly in Toronto and Vancouver.

“If you look at the loan to value for uninsured mortgages originated in BC over the last 12 months, of the four banks that have reported so far, ours is the lowest,” Williamson said.

Other banks have either kept their exposure to the uninsured mortgage market relatively flat or even reduced it by taking out portfolio insurance.

At TD Bank, which on Thursday reported that it grew its fourth-quarter net income by 25 per cent to $2.30 billion, uninsured mortgage loans are three times the bank’s regulatory capital, Shanahan said.

CP3

Sun Life Financial announces industry-leading underwriting and product changes

TORONTO, Nov. 21, 2016 /CNW/ – Sun Life Assurance Company of Canada (“Sun Life”) today announced significant individual insurance underwriting changes and enhanced life insurance products in Canada to make it easier and more convenient to access insurance.

The changes include:

  • Offering life insurance coverage of more than $3 million for people living with HIV, providing the most coverage for the broadest range of ages in the Canadian industry. Sun Life is rolling out HIV life coverage in other markets around the world. Sun Life has been a proud supporter of the Canadian Foundation for Aids Research (CANFAR) since 1996 and a sponsor of CANFAR’s Bloor Street Entertains since 2004.
  • Underwriting requirements such as medical exams, ECG, stress ECGs, oral fluid samples and urine HIV tests will no longer be routinely required for either critical illness or life insurance. Sun Life will now only need an application (no fluids or blood samples) from the majority of Canadians applying for these products. Over three-quarters of Sun Life’s critical illness insurance clients and half of life insurance clients will benefit from these changes.
  • Introducing automatic pre-screening for type 2 diabetes (using A1C test) when blood samples are required. Sun Life has proudly committed more than $17 million in support of diabetes awareness, prevention, care and research initiatives since 2012.
  • The transformation of its individual life insurance products making them more straightforward and flexible.

“This collection of underwriting and product enhancements represents some of the most comprehensive changes made in the industry in over a decade,” says Kevin Dougherty, President, Sun Life Financial Canada. “As part of our strategy, we are strengthening our commitment to making it easier for clients to plan for lifetime financial security and well-being. We are focused on continuing to develop innovative solutions that help do just that.”

Sun Life continually monitors global medical advances to review underwriting requirements and make the client experience easy and helpful. By removing many underwriting requirements, Sun Life is simplifying the application process for Canadians.

Enhanced life insurance products in Canada

In addition to making the mandatory tax exempt rule changes coming into effect January 1, 2017, Sun Life’s individual life insurance products are now even easier to understand and use.

Highlights include:

  • Being the first in the industry to offer clients the opportunity to have guaranteed paid-up participating life insurance policies in as little as eight or 10 years, while having protection for life.
  • Offering tailored universal life insurance with two new death benefit options, one targeted toward business owners and the other which gives clients the opportunity to leave their beneficiaries the basic insurance amount plus all payments made to the policy.
  • Offering diversified investment account options within universal life, including access to funds managed by Sun Life Global Investments (Canada) Inc.

“The new products demonstrate Sun Life’s commitment to understanding Canadians’ needs, and will provide them with a more comprehensive suite of insurance solutions that offer flexibility as their needs change throughout their lifetime,” says Mr. Dougherty.

Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies.

About Sun Life Financial

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