OSFI Looking Closely at Lifeco Consolidated Capital

The Office of the Superintendant of Financial Institutions has released a remarks by Julie Dickson to the 2009 Life Insurance Forum.

Of greatest interest was the short section on consolidated capital. When the tenor the speech is taken together with the prior speech by Mark White (amusingly, Ms. Dickson’s remarks on this specific topic are almost word-for-word identical with those of Mr. White) and warnings in MFC’s 3Q09 results and SLF’s 3Q09 results … I suspect that this is going to happen, sooner rather than later:

Events such as those at AIG have shown that holding company strength is important to their regulated subsidiaries. This is particularly true where the holding company is the primary issuer of capital or is required to raise debt. As OSFI regulates non-operating insurers acting as holding companies, we are considering updating our current regulatory guidance for these entities to promote a more integrated and consistent approach to determining regulatory capital requirements. For example, OSFI’s MCCSR tests could be used to evaluate the group’s consolidated risk-based capital – and a test similar to the asset-to-capital multiple (ACM) test could be used to evaluate leverage.

Update, 2009-11-14: I just realized! She didn’t repeat the following assertion from Mr. White’s speech:

OSFI regulates both non-operating insurers acting as holding companies, and entities that are formed as holding companies under applicable financial institution legislation. Currently, this only affects the life insurance industry.

… which I believe to be incorrect. E-L Financial owns both Empire Life (a lifeco) and Dominion General (P&C).

3 Responses to “OSFI Looking Closely at Lifeco Consolidated Capital”

  1. prefhound says:

    Is this why POW prefs A,B,C trade to yield 25 bp more than PWF or GWO discount prefs (6.25 vs 6%)? What has the historical relationship between holdco and opco yield been in this case? What is reasonable to you? Seems to me they traded earlier this year at similar yields.

    If one believes that POW and PWF should have similar yields, some relative mispricings are closing in on $1.

  2. jiHymas says:

    With respect to LifeCos, the preferred share spread between holdco and opco is not readily observable, since only the holdco issues preferreds.

    There are only a few exceptions to this general rule: e.g., CL.PR.B is issued by Canada Life, one of the opcos of the GWO holdco (which is then controlled by PWF, controlled by POW). There’s also a GWL preferred still trading.

    The PWF/POW pairing is more of a traditional parent/subsidiary relationship, as with, for instance, BAM/BPP and (until not so long ago) BCE/BC.

    Parents can be rated above, below, or equal to their subsidiaries. There are two opposing forces:

    • It’s better to be closer to the money, i.e., to be an OpCo
    • It’s better to be diversified, i.e., to be a HoldCo

    The rating relationship will depend upon the CRA’s evaluation of the strength of the two forces. In the case of POW/PWF, they have determined that being closer to the money is more important, while in the case of PWF/GWO they consider the effects to be about equal.

    Note that PWF is rated P-1(low) by S&P and Pfd-1(low) by DBRS, while POW is rated P-2(high) and Pfd-2(high), respectively. The spread indicates that the market is OK with that evaluation.

  3. [...] … which is somewhat less emphatic than her statement on the issue last November. [...]

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