Exploring the Stability and Long-Term Benefits of Mutual Insurance with Martin Reeves

We feel that there has been a gap for a large mutual organization in the life insurance space in Canada. We view ourselves as the organization that can fill that gap. There are advantages and disadvantages to any organization and any model. But what's good for everyone is choice. What's good is options. For a long time it felt like that option was not as visible as it could have been because of the size of the relative organizations. Our commitment to mutuality is really driven off the fact that we think it's a fantastic model and it's a choice that Canadians deserve to have to be able to purchase their policies from a large, at scale, well established mutual. And our, our ambition is to, to prove that we are that option to be available to Canadians. And we're seeing it happen. We've been growing phenomenally and people as they learn more about mutual. It's always the same reaction, very curious, very interested.

What exactly is an actuary and why should you know about it? And more importantly, what is mutual insurance? What is a mutual insurance company all about? Well, we are joined today with Martin Reeves and he is the head of individual insurance business for Equitable Life of Canada. He's been with that company for over three years and he spent 17 years with a large multinational insurer. He has a absolutely incredible level of experience in the insurance industry. And as an actuary himself, he really understands things from the true dynamic of how they're built, product design, the entire gamut of the whole works. And so Martin, very excited to have you with us here today. Thanks for being a part of our program.

Well, it's an absolute pleasure and thank you for inviting me Richard. Very excited to be here.

Now I think we were talking right before we hit the record button and I personally kind of weird I suppose in that I'm actually interested, maybe even marginally fascinated with the idea of being an actuary. Not that I'm looking to go down that road, but I find myself constantly intrigued the more and the longer I've been in the insurance space. Something I knew very little, almost nothing about. And I seem to be, you know, constantly increasing that knowledge as I go. I'm very curious, I'd love to know a little bit about what maybe what prompted you to go down the route of becoming an actuary? Because it's a lot of schoolwork, there's. And maybe just give our listeners a bit of an understanding like what exactly does that mean and what's involved in being an actuary?

Yeah, absolutely. So maybe I'll answer in reverse if that's okay, I'll explain a little bit about what an actuary is and then how I got into it. So an actuary tends to be a financial risk professional. So it's someone who specializes in quantifying and measuring and pricing financial risk. And so generally where you see financial risk, there's a good chance you'll find an actuary very prominent in life insurance industries, health insurance industries, home auto insurance, any sort of property insurance industry. You'll also find a lot of actuaries in the pension industry. Again, wherever there's some sort of contingent event that can be predicted with a reasonable amount of accuracy and there's a financial implication to that event happening or not happening, that's something that's well suited for an actuary to take a look at. And so we're trained in finance statistics and probabilities and we kind of stir it all together to be able to price risk. Insurance really is sort of a means of sharing risk across a large group of people. And so as an actuary I sometimes get asked when I go to a party, a dinner party or something like that, well, can you tell me when, when you're, when I'm going to die? And I say no, but if there were, you know, a thousand of you, I could tell you how many would die this year, just not, not which ones. And so it's the ability to predict with the law of large numbers and then quantify financial impacts. I came into the profession very fortunate in high school, you know, typical high school student, not, not sure what I wanted to do was becoming very clear I wasn't going to make the NHL by that point and, but I liked math. And so I had a high school teacher suggested as a possible career path for people who like math, but applied math, not necessarily theoretical academia type mathematics. And so I explored it, learned a little more and it sounded like something I might be interested in and got into the program at the University of Manitoba and it really just clicked for me. I really enjoyed it. And here I am over 20 years later.

Yeah, amazing. And so when you, when you graduated, you came out of that program because it's, it's a pretty involved in depth program. I think maybe this is an inaccurate description, but for me to simplify, I would say basically, you know, an actuary is basically the engineer of, of risk. They engineer the probability of risk and then they, they map that out over long time frames regardless of the, whether it's for crops and you know, like say cars and houses and you know, what have you travel insurance and so on and so forth and, and, and my kind of like, you know, minimized description of the insurance industry is that insurance companies are in the business of managing risk fundamentally and they manage it through the value of pooling and the law of large numbers, as you indicated. So when, when you first graduated, were you able to instantly get started in the industry and was it in the life and health category right away? Did you, were you attracted to that kind of mode or is that just kind of the direction that the winds was blowing at that time frame?

Yeah, so I was fortunate. You're right. Like there are different industries you can pursue and you do specialize over time. And so I was able to get a couple of internships during my university summers and test a couple of industries. I did one in the health insurance industry in the US which was fascinating. That's a really interesting industry. And I also did an internship with a pension consulting firm. And so between those was much more interested in insurance and so said this, this is something I could enjoy and see myself doing. And, and life insurance was appealing to me like the long nature duration. There's a very heavy financial investment component to life insurance because these are very long tailed risks as opposed to something like auto insurance where you're pricing it year by year. It's, it's kind of a shorter horizon. And so those things led me to be quite interested in the life insurance space and was able to a, a permanent position right after graduation. And off I went.

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Yeah, I mean most actuaries get into it as I did, being interested in sort of Math and finance, which is great, it's interesting for a while. But what, what as my career and as people in similar positions, their career dance. What became more interesting was all the non math aspects, the human ele. And I got into it thinking, well, this is a job. And then it became very apparent to me how important insurance is and how meaningful in particular life insurance is. We've come to take it for granted. It's a well established industry and we take for granted that people get life insurance and it's there. But I take time from, from time to time to remind myself about how important life insurance is to protecting people, protecting their families, in addition to the other types of insur. That we provide. And so the human element really was a bit of a surprise coming into it. I got into it for the math, but stayed for the people, I guess you could say. And, and then just the whole business element, you get exposed to technology, distribution, all sorts of things. And so it's, it's a really big world. And so, so that really has led to a fulfilling career for me. You know, I still get to do a little bit of math here and there, but it's become smaller and smaller part of my day. And the business aspect, the human elements are what keep me engaged.

Yeah, incredible. And so now you find yourself of course with one of my favorite companies and that's Equitable Life of Canada and being, you know, Canada's largest mutual insurer. And that, that's something that I think a lot of people don't certainly in Canada maybe don't even know what that is. I mean our viewers will have a much better insight there. But for folks that are watching who are maybe newer, this is their first time, maybe expand a little bit on what exactly does it mean to be mutual and then why would that be important for people to understand?

Yeah, so mutual organization is generally mutual insurer, to be specific. A mutual insurer is an insurance company that is owned by its policyholders, its participating policyholders. And so what does that mean to be owned? Well, that's where we get our capital. And in most businesses, in particular large organizations, the company's capital is provided by, by shareholders. The capital is invested and then a profit is earned on the goods and services and the profit is returned to the shareholders, which is, which is fine. That works very well for most industries. Life insurance is unique and participating insurance in particular is unique in that the capital provided by the policyholder in the form of the premium payments because again, these are very long duration products. There's enough Premium at the outset to fund all the capital that we need. That means we don't need shareholders. And so the mutual is owned by the PAR policyholders because they've provided the capital for the organization, which means they get the profits of the organization. And we are beholden only to the policyholders. We don't have to split our focus between providing value for our clients and maximizing profit for shareholders. We only have one stakeholder. So being subject only to having to provide value for policyholders, we think gives us a great model and a great alignment of interest to provide great service for our clients who are also our owners.

Yeah, I think that's an amazing description. And so taking that me one step further, and you know, I'll confess I'm. I'm an owner. I'm one of those PAR owners. And as is my wife and my, my children. Although they have policies that I own, they will one day be owners themselves. So what, what does that look like from a. You said not being beholden to other people, and then you also talked about service. So from equitable standpoint, or even just in general from a broad scope, because there's many other mutuals in there, not so much in Canada, but certainly we have large base of folks from the America America watching us here, and they have a lot of mutuals down there. What do you think are some of the common themes that develop at the mutual company level versus a company that, let's just say, is owned by stockholders instead?

I, I think the first difference, and I've observed this firsthand, is just the, the focus on, on clients. All of our, our time and energy is, is spent working to the benefit of the client. We don't have to spend time preparing stock analyst presentations and reports. We don't have to do analysis for shareholders and stock analysts. So there's a lot of overhead that goes with being a publicly traded company that we don't have. We're not spending that time and energy and money and focus. We direct all of that energy into the goods and services that we provide for clients. And so we're very, very focused on providing great service for our clients. And we view it as our main differentiator. And we're able to just really focus on service and maximizing value for our clients. And we're not being pulled in multiple directions. That's all day, every day.

So it's interesting, you talk about like, you know, quarterly share reports and things that you need to do the reporting element. And obviously there's a, there's a High degree of not only a cost but a workload. There's manpower, manpower, energy that needs to be invested in that category if you need to abide by the reporting requirements of being a stock company. What are some of the other, I guess ancillary or maybe the things that people wouldn't naturally know or be inclined to think of about where there might be, I don't want to say cost savings, that's not an appropriate word, but just little subtle tweaks and benefits that a par owner at a mutual company might see or have the advantage of where maybe they wouldn't potentially have it the same way at a different company.

Yeah, it's a great question. And so it goes back to something I touched on earlier, which is that alignment of interest. So when you, when you're inside the company and you understand the nuts and bolts of how it all works, there are a lot of things that happen day to day and a lot of ways that that manifests. So for example, a really attractive asset, say we secure an investment that we feel is for the level of risk, has a high spread and it's a great asset. Well, in a company with multiple stakeholders, you have to say, well, where do we deploy that asset? Is it into the shareholder accounts or into the policyholder accounts? How, how do we best use this asset for us? Again, it's, it's, there's only one answer. How is this best applied for the policyholder? What is the best value created for the policyholder? Here we do things like allocating expenses. How much expense do allocate to this, to that, and again to shareholders versus policyholder impacts. There's only one answer. What's the best answer for the policyholder? So there's a lot of financial benefits that we think come through in more subtle implicit ways versus again which is a benefit of our structure and just being able to focus. So there's very explicit type things that may be, are a little bit more obvious, but there are a lot of hidden, implicit, subtle things that our clients, advisors would never have any way of knowing about. But when you're inside the machine and you see the way things are being run, the mindset, it can be quite different actually. And so those are a couple of examples of ways that the thinking is just different with a mutual organization.

Now I'm curious how much of that were you, you know, aware of prior to becoming a part of a mutual organization yourself? You had a very long extensive career with a company that, that I'm going to assume wasn't mutual and you've made that transition. So, you know, there's a learning curve with everything. You move from one job, one career, you. You have to, you know, make your, make your claim in the new location. But what, what would you say? How much of that have you discovered since you become a part of the organization versus maybe what you perceived would be. So prior to joining.

Yeah, it was having been on the other side for a very long time, didn't really know what it would be like. But you start to, over the course of your career, wonder like, well, we're making this decision. Would a competitor with a different structure. I think this is the way it would work over there. I think they would be unshackled from this sort of decision. And so I was always sort of curious if it was operating the way I thought it could work. And when the opportunity to join equitable presented itself, I was, I was very, it was very appealing to be, to be honest, the number one appeal was the mutual structure because I had these ideas in my head like, wow, imagine the things we could do if we were just focusing on the client all day, every day and we didn't have to do this, that and the other. And so was very fortunate to be offered the opportunity to join the organization. Came in and was very pleased to find all the things that I thought would be possible are reality. It's the way we work. Just the conversations that we have and the focus is so singularly on the client. It's almost cartoonish at times. It feels that way coming from that other place. And we always tease when we get a new team member coming from, from an organization with that public ownership structure. And someone will say something like, profit doesn't matter. We need to, to do the right thing for the client. We'll just pause and go, is that the type of conversation you would have had in your previous role? And they kind of chuckle and say, no. So we had such a, such an instance this morning. Morning. And we all did a good laugh. But I've been very pleased that it was as advertised, as expected, and it's been fantastic. I've been so pleased over the last three years being able to do this work again focusing just on our clients. It's. It's a great feeling.

Well, that's incredible. And it sounds like your natural curiosity really almost probably framed up the opportunity that finds you over with the organization now, which is very interesting. And so I'm curious. Let's, you know, just to dive a little bit deeper into, you know, par. Par capital. Par counts the Management of these, you know, these, these incredible, unbelievable assets of capital. Money is flowing in, money's flowing out, investments are being made, death claims get paid out, dividends are paid to PAR owners. There's a whole host of things here. You got to pay some expenses along the way. You know, Martin needs to get paid. Of course, he's doing a great job. We want to make sure he gets some of it. So what, what is some of the differences that you think, you know, our, our listeners should know about, you know, PAR count at say the mutual company versus PAR count over at a stock organization, at least in Canada, you know, we have again, American viewers, they have a little bit of a different scenario down south with how they structure things in a stock versus a mutual environment. And in Canada we're heavily regulated by the Insurance Companies act. And there are some specific things in place that do provide some protections for PAR owners over at a stock organization. But you know, what you've spoken to is really around mindset, around some of the little intricacies that you don't see that don't show up on a report, basically an annual report. But what are some things that people should know about, you know, how PAR accounts are maybe treated or dealt with from a, you know, an open block perspective, let's say at a, at a stock company versus at a mutual carrier.

Yeah, so you're right. It starts with sort of the Insurance Companies Act. So participating insurance is regulated specifically in the Insurance Companies act. And there's certain requirements that must be met if you operate, if you are offering participating insurance. So we joke a little bit. It's sort of like the champagne versus sparkling white wine. You have to meet certain criteria to be advertising advertisers participating. And the main requirement is that the assets of the PAR policyholders be segregated from the non participating assets. So you have to maintain separate books, separate set of accounts for your PAR policies from your nonpart policies. This is true for mutual organizations, as it is for non mutual, say again, a shareholder owned organization. So at that account level, they're identical in the requirements. Now the reason the PAR assets have to be separate from the non par assets is so that the profits of the PAR account can be provided back to the policyholders in the form of dividends. So it's really meant to ring fence the profits coming from those policies back to the PAR policyholders in the form of dividends. And so again, that's similar. Now where you start to differ, and this is lesser known, is that when you rise above the par, what we traditionally call the PAR fund the PAR account which holds the assets for the policyholder. All organizations have to hold a certain amount of capital or equity. This is again, we're an OSTE regulated entity. We have to hold capital to ensure we're able to meet our obligations to our policyholders under say, catastrophic type events. And so again, stock companies have equity and capital and mutual organizations have, let's call it surplus, to use consistent terminology here. So we have surplus, which again is provided by our PAR policyholders. The difference is the stock companies required to maintain the surplus from their PAR policyholders, again separate from the shareholder equity. So they actually have two surplus accounts or two equity accounts where the mutual organization only has one. All of our surplus is owned by our participating policyholders, where a stock organization will have their PARS surplus and their shareholder surplus. And so our board of directors is elected by our policyholders, a shareholders organization, their board of directors is elected by the shareholders. They create incentives to maximize shareholder profit. Our board is elected to maximize policyholder outcomes. And this is where you start to differ in both the structure and the behavior. And you could say chicken and egg, which comes first. But at the end of the day you end up with different incentives and different behaviors because there's only a single surplus account in the mutual organization which is owned by our PAR policyholders. And so we're trying to maximize value for the participating policyholders only by virtue of only having policyholder owned accounts.

Now that's fascinating. And you know, to take that one step further, I'm curious about, you know, dilution a little bit. So with an open block in a stock company, there's a percentage. And, and the way that my understanding is as the size of the account grows and it gets to a measure of scale, there's a sliver. And that percentage of a sliver actually can, can squeeze a little bit lower. But anytime that participating profits are declared, which are not guaranteed, but pretty ridiculously consistent in the country of Canada, which is pretty amazing, one of the really oldest financial products on the planet. And just because of the power of actuarial science and knowledge, you know, we can create a large degree of predictable consistency. What should people understand about the dilution? So a dividend is paid in mutual company, it's allocated based on a contribution principle. We can maybe speak to that a little bit. A dividend is paid in a stock company in an open block. And they, you know, that that means that it's not, it's, it's owned partially by shareholders to a degree. So they're required to send a chunk of that dividend allocation each year as it's declared back to the stock ownership pile. So maybe just expand on that a little bit.

Yeah, sure. So exactly right. The Insurance Company act has a provision which allows for the transfer, some transfer from the participating accounts to the shareholder accounts. And so it's a tiered scale, as you mentioned. So at a subscale per account. And the amount of the transfer, as you correctly described, is expresses a percentage of the dividends declared and distributed to the PAR policyholders. And so if, for example, a stock company declares a $100 dividend for its par policyholders, there's a schedule that, that regulates how much a stock company can transfer from the PAR accounts to shareholders. So at, at subscale, it's as much as 10%. 10% of the dividend can be transferred from the PAR accounts to the accounts at full scale. I believe the minimum is the smallest amount at the largest level is 2.5%. So every year, somewhere between 2.5 and 10% a year, it's not taken from the dividend. Generally when a par policy offered by a stock company declares their dividend, I.e. the participating policyholder's dividend, it's that participating surplus account in the background that's being used to transfer money from the PAR policyholders to the shareholder accounts.

And so that, that may not mean a whole lot. You know, let's just say it's a two and a half percent gets allocated shareholders. It doesn't seem like a lot because when we talk about in a percentage, it becomes a small number. But what I'm curious about, and I'm just, I'm just, as a thinking exercise, if that were to happen, let's say over a period of 50 years, there's a, there's that adds up to quite a bit of allocation. That's money that's no longer available inside of the, the PAR account for the PAR holders, that's been actually disseminated so that, that could be other assets that they couldn't acquire. I mean, what's the ripple effect of what that could, could blossom into? Just out of curiosity.

Yeah, I think, I think you've hit the nail on the head. Right. It's just money that's no longer available to the policyholders. And so it's, it's being transferred over the shareholder and it's shrinking the size of that part count. And so what does it mean? Well, exactly what it sounds like. The money's not there for the policyholders. And so it's not being deployed into improving service. It's not being deployed into providing greater value for the part policyholders. And the question is, what? What is the part policyholder getting for that transfer? They're paying full freight on expenses to manage the policy. There's full expense allocation of the part block. They're taking all the risk. As you correctly mentioned, that dividend's adjustable. It's adjustable because they get the good with the bad. They get the upside benefits. But the downside if things go sour. So they're taking the risk, they're paying the expenses, they're providing the capital. And so what are they getting in return for the 2%? I like to flip that question around. What are they not getting? Well, what are they getting? The question should always be what am I getting for that 2.5%? And the answer is, I don't know. It's not for me to answer, but, but I could say it equitable again. That money is belonging to the part policyholders and is being used to improve the value and the service that the policyholders receiving from our organization.

Yeah, very, very interesting. Now, I mean, we could, we could, we probably actually should even schedule an entire another episode where we can maybe do a deep dive down into this, this misleading and difficult to understand thing called the dividend scale interest rate. So I don't want to take us down that rabbit hole here now, but I would like to just kind of close this loop a little bit around the contribution principle. So, you know, I've read the, the dividend policy, the, you know, allocation dividends from the, the official policy from the website of the company as well as with other companies and this thing called a contribution principle, it makes a lot of sense to me, but I don't think people really understand what it is. And I, and to a degree, I suspect a lot of advisors who maybe do offer or sell PAR insurance also don't really know what that is and have never maybe explored it a lot. I think it's quite interesting and fascinating. I'd love for you to give your take, to give our viewer a bit of understanding. What does this aspect of the dividend policy really mean for participating owners?

Yeah, it's a good question. And so, so as I mentioned earlier, the dividends are a distribution of profit to the part policyholders. That's how we distribute the profit from the account back to the policyholders. We have to take all that profit and distribute it to all of our policyholders in a fair manner. Now, by, by virtue of what insurance is the whole concept is to pool your money together to pay out benefits. And so it's in one way not like a bank account or dollar in, dollar out. I know exactly how much money I have in my bank account. I give them a dollar, there's a dollar in the account, I take a dollar out, a dollar comes out. When we're talking about risk, you're putting money in to protect you in the event of an event that may or may not occur. In the case of life insurance, hopefully it doesn't occur. And so when we make profit, it means we paid out less than, than maybe than we anticipated or that was priced for whatever the case may be.

And so when you say pay out less, you mean primarily less like death claims or less expenses. So that, so that you made. There's assumptions that are made on a, on a graph, on a sheet of paper with a really obtuse calculation. And it says, hey, we made an estimate and we estimated we're going to pay this amount, but we actually came in under that amount. Therefore, we have an excess reserve based on the pricing of this individual when we sold the policy for them in that, you know, back on that day 10 years ago or whatever.

Absolutely. And, and without getting to kind of the hairy details, it's really the guaranteed values par would have guaranteed premium, guaranteed death benefit, and guaranteed cash values to, to the extent that the total amount of money goes above what we have to pay out in guaranteed death benefits and guaranteed cash values, there's a surplus, and that's the profit that we're going to distribute back. Now, how do we determine who gets how much of that profit? Is the answer to your question, the contribution principle. So we look at how much premium was contributed and then how much risk was consumed. Well, what was the total death benefit for that policyholder? So someone who paid more for a larger death benefit should maybe get a higher percentage of the profit. But it's more complex than that because you have different ages, risk classes, we have different types of risk. We have investment risk and returns. We have mortality and policyholder behavior. And so we do kind of a micro version of what you're describing. At the policyholder level, how much risk and premium did they contribute to the pool? And then divvy that up across all of our policyholders. And this we call the contribution principle. What did you contribute to the pool? Determine determines how much of the profit you get back in the form of a dividend.

So really, the more you engage or participate with the company, whether it's one policy or Multiple. If you had multiple, and there's different, let's say insurability risks in different ages or you got them at different times based on the pricing of a product when it was released at different iterations, you're actually creating almost like a level of diversity there. And how your overall contribution to that giant pool exists, would that be a fair assessment?

Yeah, absolutely. We have all sorts of different policyholders from all sorts of walks of life. Equitable actually sells the greatest number of participating whole life policies in Canada. And so we have a very diverse policy holder pool. We have young people, we have people in their golden years and everything in between. We have very, very affluent clients. We also have very middle market clients. And so this gives us a very diverse makeup of policyholders which helps to create a greater level of risk diversification. If every policyholder was the same age from the same socio demographic bucket and all these sorts of things, you'll get a little bit of diversification in that they're all not all going to die at the same time but. But there's just less diversification in things like how they behave, what options do they elect within their policy, how long are they going to be holding their policy for? So by having that very large client base, we have a very diverse mix of policyholders which allows us to have a very high level of diversification in our PAR account.

Now being a stats guy, you may not have any of these numbers available, but even just on a rounded basis, to the best of your ability, how many PAR policies would you, would you estimate that Equitable has.

Presently we have over a couple of hundred thousand PAR PAR policies. So hundreds of thousands and growing rapidly actually. But yeah, so that's a big base and the wide variety of people. We've been selling car insurance for decades, so we have policies that are decades old and we have policies that were issued yesterday.

And so yeah, I'm assuming probably issued to maybe someone on our team actually.

Good chance.

And so you talked about behavior and policy owner behavior. So I want to dig into that a little bit. I'm curious, what do you notice about the behavior of policy owners? Let's say for an example, let's talk more about, you know, the concept of utilization. So I'm a policy owner. I have outstanding policy loans with Equitable Life today. I have, I don't know, it's the 30th, at least in the last seven days. I can virtually guarantee an automated payment went in with a policy loan repayment on one of those policies. So from a behavior standpoint around. Let's just say that the, the, the accessing of collateral using the general pool and their, their cash values, collateral for a policy loan, which is an invested asset and the books of the PAR account and then repayment of those loans. What are some of the things you see happening around behavior there and what are some of the advantages, I guess maybe to the life company, a mutual company, when people are doing that and then also making repayments. Walk me through that a little bit.

Yeah, a couple of things come to mind. So firstly, the people who are engaging with their policy tend to understand the policy better. So we would view someone taking a loan as an engagement with the policy. They're using a feature that's available to them. So someone who's taking loans and repaying them is engaging with their policy and will tend to probably understand their policy better. They'll probably be working with an advisor. And that's usually how our clients get to know their policies. And so we're going to see people who have a better level of engagement, a high level of advice. These are the people that can generate the maximum value from their policies. These policies comes with a lot of options and features. And like any product or service, when there's lots of options and features, if you're not using them, you're not getting full value from what you've purchased. And so someone who's engaging regularly with their policy and understands it is most likely to get maximal value from their policy. Now, in terms of the loans themselves, they're great assets you mentioned. They're an invested asset for us and that's absolutely correct. It makes up up part of the invested pool of the PAR account. And it's a great asset. In fact, it's probably the best one we have because it comes with very, you know, I'd say good rate of return on a risk adjusted basis. We view them as riskless assets because the policy itself is collateral for the loan and the same person borrowing is holding the collateral. And so if they're unable to pay the loan, there's no default. We just end the, in the agreement with the policy. And so it's completely without risk, but generates a good level of return. Now when I say good level of return, what I mean is we generally tend to keep our policy loan interest rate very close to our dividend scale interest rate, which is the amount of interest being paid out to the policy. And what this does is from our perspective, perspective, it doesn't dilute the dividend scale interest rate. So someone taking a loan at A rate that's very similar to the interest we're paying on the account keeps us quite neutral but with less risk because again, that's a riskless asset versus the bonds or stocks or whatever else we happen to be invested in. And so, yeah, the policy loans for us are a fantastic asset class and it works very well for the clients as it does for us.

I love that. And I think it's important to understand because something you identified is that there's a way that you, you consider and think about management of not just the, obviously the asset base that the par count has, but also the relevance to say a policy loan interest rate and what you're doing on another side. So it's almost like the scales of balance to some degree, it sounds like is, is a little bit of the thinking process that's going on at the top level there. And you know, as a, as again as a policy owner, taken lots of policy loans, repaid a lot of policy loans, still have a lot outstanding, make regular monthly payments on a lot of, a lot of contracts. And some, I do a very ad hoc basis. There's some things that have made that easier. We'll talk about technology in a moment. But from a policy loan being an invested asset, obviously safe, riskless risk asset, there's also a degree of like minimizing risk that I see. And I'm just curious about that in that, you know, you, you have a, you have a, a liability. Liability is a death benefit that needs to be paid. It's, it's, we already know that amount. And if there's a, a loan because the cash value is fundamentally a, A, a present value of a future death benefit. And so, you know, the cash value, you know, people say, often I get these questions, how can the insurance company even do this? You know, Richard, tell me, how is this even possible? I said, well, actually every single day that the policy is in existence, the insurance company's risk goes down, not up, and they have the highest risk. On day one, when you make the first premium payment, you're putting a very little bit in and they're pledging this large magical number that's going to come in tax free and protect your family. So they're holding the bag in that first segment and over time, as they build up this cash value, which is your, your asset, it goes on your balance sheet in the asset column as that's building up and actually de risks because they're going to use that value, that capital accumulation, you know, the, the least, the allocation of it towards Paying the eventual death claim. So, you know, to me that makes a lot of sense, but I think for a lot of people, they don't understand how that's really working. It just, they see, wow, these numbers look really great on the page because we're always looking at an illustration and people can get bamboozled by the numbers. I think it's important to understand it at a deeper level. What's really going on in the background.

Yeah, I think you've described it well again, and, you know, you might contrast it with something like term insurance, which generally won't have a cash value. And that's just a pure risk transfer. I'm paying money to, to be protected with a death benefit in case I die over the next 10 years or whatever the case may be. But at the end of it, we walk away and we're sort of done. So a whole life policy is going to be there for you no matter what, no matter how long you live. And so the way that we, that we price for this is, is to look at the entire lifespan and set a premium that will effectively build up over time to cover the death benefit. Again, this isn't a lottery, right? And so the money is coming from the policyholders and going back to the policyholders. So if you live to be 100, for example, you've paid for yourself. You've, you've been able to contribute and be protected for all that time. And so what we've done is, is built up a cash value and that's really what you've put into the policy after accounting for the risk that, that you've been sharing along the way. And so not, not. It doesn't happen that often. It's starting to happen more often. But a lot of people don't know, generally a parable life policy is paid up. Even if it's life pay at age 100, it's paid up. We don't charge premiums anymore because the cash value reaches the death benefit. Generally, if you look out at the end of the illustration, it gets there because we say we didn't think there was any chance that you live in this long. So here's your death benefit, your age 100, you win. And so that's what's happening. The cash value is approaching that death matter because we know we're going to pay it out eventually. No one lives forever, at least not anyone has yet. And so that cash flow is really the client's money as they approach, as they approach that magical age 100, if they're fortunate Enough to get there.

Yeah. Incredible. And now a lot of advancements have been happening at least I think, you know, across the board in, you know, fintech, use a little buzzword with a hashtag there. But there's, there's a ton of investments happening in that environment all across the board, all over North America, all over the world, certainly in Canada. Some organizations seem to be a little bit more adept or better at implementing these new technologies and, or another way, I would say that is watching patiently by the side to see what other people will do and seeing how it maybe might not work out for them and then going ahead and building it in a way that doesn't make, that doesn't have that happen. Now I've been doing this now for a number of years and seeing that have happened to numerous number of times in the industry. There's a lot of large players in Canada, great companies of course, but Equitable really kind of sets apart in the thought process on how they look at not only technological investment, but how they look at, hey, we don't want to, we want to build something that is sustainable. We want to make sure that we're not, we're not going too early and creating a problem that wasn't well vetted. We've seen that happen in the industry a number of times. So what's your take on technology investment and advancement in, in, in the life company presently and what are some things that you see out into the future?

Yeah, I think again I agree with everything you said. We are of course investing in technology. We're investing in technology primarily to better serve our clients, whether it's through better digital access to their policies. Information ability to make changes or taking out policy loan is a good recent example. We've made that much, much, much easier and more digital.

So which is a huge advantage for our clients by the way and they absolutely love it. And as a client, likewise, very, very big fan.

That's great to hear. And so we're, we're investing in proven technologies. We're, we're not, we're not going to be the first into the pool on new technology. So the hot topic of course is AI and all of that. And what's nice for us is we don't have that pressure to trying to find the right words here but aggressively pursue technology for financial gains. Again, we're here to maximize value and outcomes for our clients and so we can sit around and wait to establish that we know exactly how this technology can help our clients without creating unnecessary risk. We were able to Be patient there because we don't have quarterly targets that we're being chased to hit and that that's going to incent us to take risks that are imprudent. So that's again another advantage of our structure. And you know, I think it's the same approach, the same with a lot of the insurance industry in Canada. Everyone's very cautiously optimistic about what's to come, but at the same time ensuring that the technologies are going to, to be clearly value add, but also making sure we understand how to use them safely without putting our clients at risk.

Yeah, that makes a lot of sense. Now I'm curious about the current interest rate environment. As with time of this recording, we've seen number of increases with the bank of Canada. It's applied a lot of pressure to mortgages, consumer debt and things of this nature. And in fact we talked earlier about the interest rate thinking process that goes on at Equitable Life relative to that scale of balance. And that same mindset around say policy loan interest rates isn't particularly shared by many of the other carriers in the country. They tend to operate on more of a rate or percentage that floats more so with prime as prime adjusts. And I'm not sure if there's some rationale that maybe you can enlighten me. I have no idea. I'm curious, of course, but what I'm wondering about specifically is as we see interest rates rise, you know, you have a bond portfolio, you've owned the bond for five years, 10 years, three years, it rolls out, you have capital back in the pool, you need to go and reallocate, you have to maintain a certain level in bonds, you know, triple a grade this, public that and so on. And so you're now able to purchase them at a higher rate. So there's some benefits there. There's also a combination of negatives that come with an interest rate environment increase. So there's, there's a little bit of both. There's an assumption, I think that it's, that's generally more positive. There's not a lot of consideration to, okay, well how does a rising interest rate environment maybe affect the pool in other ways? So I'd like to maybe just kind of explore that for listeners to give them an understanding from a macro level. What does that change in the interest rate environment? How can that affect the long term planning and thinking of the pool? And maybe it doesn't affect, it affects an existing policyholder maybe a little bit differently than a brand new policy holder policyholder. As we're designing maybe a new contract. So maybe walk us through that a little.

Sure, yeah, a few things. So I mean, interest rates are, are a bit counterintuitive in the investment space because generally if you're, you're holding a bond, interest rates go up, the value of the bond decreases. And so if you're a bond trader, a bond holder, there's this sense that oh, an interest increasing interest rate is, is bad, the value of my bond's going to go down. Having a PAR policy is different. We do hold bonds for the benefit of our PAR policyholders. But rising interest rates generally are going to be a tailwind for PAR policyholders because they're long term investors in interest rates. And so exactly as you described, as our bonds mature, as they pay coupons, as we get new premiums into the account from existing policyholders, those are all being reinvested at higher rates. And so even if you're sitting at home with a bond and you say, well, hang on a second, interest rates went up and the value of my bond went down, the only reason it went down is because if you went out to sell it, you have to give a discount to someone who could buy brand new issued bond at a higher rate. So we're not selling those bonds, we're holding them. We're getting exactly the coupon and the repayment of, of principle that we were promised at the time that we invested in the bond. And so we're not too fussed about the market value of our bond holdings. And that's, you see that come through in our div scale interest rate. It doesn't plummet when interest rates go up because it's not reflecting the market value of the PAR account, it's reflecting how much interest are we able to pay back to our policyholders.

It's more about cash flow over a long time frame. And that, that long term thinking, the ability to think only almost beyond one's own lifespan in the allocation of capital because of that pooled environment. You know, again, coming back to the law, large numbers, but now, you know, breaking it down into the specifics of a bond portfolio.

Yeah, exactly. And so you're, you're going to be investing that monthly or annual premium, whatever the case may be, into a higher interest rate now. And just as over the last 20 years decreasing interest rates have led to diff scale interest rates coming down, higher interest rates serve to benefit that dividend scale interest rate which will benefit the PAR policyholders who are in effect long term investors in interest rates.

And so in the Pricing scenario, you're building a new product, let's you know, you're not. I'm just hypothetically you're ready to launch a new product, make an adjustment to it, there's some repricing into consideration. Repricing goes to the data around like mortality, the expenses of the company, those kind of things. So as you increase advancements in technology, although those take an investment once they're done, that could almost decrease other expenses of the company over a long term time horizon. So that's one area of the, you know, the big pool of what's the profit at the end of the year? Well it's income minus expenses and here's some of the expenses. So then there's mortality changes, you know, people living longer, etc, so there's the expectation of when you're going to pay debt, death claims versus when they're actually paid. And then when someone's getting a new, let's say we're designing a new product, there's a, there's a measuring stick around what our expectations are. And so the interest rate marketplace will be part of that. But it also gets kind of reevaluated every, every few years because this thing called the smoothing effect that you guys do, I won't get into that too much but what are some of the things that people should consider around again, someone's building a brand new contract. What are the assumptions that go into that versus hey I got one 10 years ago and the assumptions there, well we're in a lower interest rate environment and you know, so what are some of the dynamics between those two things?

Yeah, interest is a bit unique versus say something like mortality or expense. So when we're pricing a new product for mortality for expenses, we're going to look at what do we, what are our assumptions around mortality today? What are our expectations around expenses today? And we'll use those values to build that product. The person who bought their policy 10 years ago, we would have done a similar exercise at that time and said what are our expectations around mortality expense Whatever the case may be 10 years ago. But what's unique about PAR is so let's take that 10 year ago example, we would have thought mortality would be X. Mortality has been improving for probably 100 years or more. In the western world people are living longer and so longer life serves to reduce the cost of life insurance or increase the profit of a life insurance issuer. That person who bought their policy 10 years ago, even though they might be thinking shoot, I missed out, I bought at the higher mortality Cost, don't worry, you bought a PAR policy. You're getting all the profit, we're realizing from the improvements in wire mortality. So that's the way something like mortality might work. Interest is different in a parking. We don't have to guess about what interest rates might be in the future. If we're issuing a fully guaranteed product, we're setting that rate once and interest rates might be higher, might be lower. We're going to have to make decisions around what we think it's going to be for the next 10 or 20 or however long the case may be with a PAR policy. We know that you're going to be contributing into that policy regularly. We're going to have the opportunity to reinvest at whatever interest rates happen to be at the time. And we're also going to be able to pass through that experience to the policyholder in the form of increasing, decreasing dividends, whatever the case may be. And so we don't have to guess at what the interest rate is going to be when we price a new policy. We give them the current div scale interest rate, that's what we're paying today. And they're jumping into the same pool with the person who bought their policy 10 or 20 years ago.

Yeah, fantastic. And then of course that circles us back to the contribution principle to some degree and all those, it's like a circle of all those things kind of happening together and then being assessed one time per year, which I think is really important now. You know, dividends themselves are not guaranteed. We can't, we, we can predict the future, but we can't guarantee a future. And one of the things you mentioned is the word experience. So when you're assessing all these things, you're assessing it based on the past experience being something you already have and therefore, you know, when dividends are paid. Of course, Equitable has a tremendous history of paying dividends on PAR policies every single year since 1936, I believe, which is basically the first anniversary of the very first par policy sold. So pretty much since you, you could say effectively from day one, you know, I wasn't alive in 1936, but from what I understand, and according to history books, it wasn't maybe the nicest financial time in Canada at that stage.

I've heard that kind of an interesting.

Thing to, just to consider from a, from a long term perspective. And of course we're getting closer. We're, we're, you know, roughly 10 years away from the hundred year anniversary of that first policy, which is quite astronomical. When you think about it and equitable being companies already crossed their, you know, 100 years old long history. What, what would you want people to think and understand about, let's just say dividends, knowing that they're not guaranteed, but understanding that there's been a consistency there ever since day one of issuing PAR contracts and reasonably beyond reasonably consistent history in the country of Canada, no less.

What is it?

Although not guaranteed once it's declared. So everyone comes in, you have a big meeting and the accountants fill out some paperwork and they say, cool, we're profitable this year, we can pay dividends. Here's what we estimate we can pay. You make that declaration in the announcement at that point, even though I haven't received it to my policy yet because my anniversary hasn't come up, once it's been declared, it's guaranteed to be paid in that year. What could you kind of expand on for our listeners to understand that more?

Yeah, that's right. So a couple of things. So dividends in the future are not guaranteed, but once they're paid, they become a guaranteed portion of the policy. So they vest immediately. Once we pay a policyholder a dividend, that dividend is there and it does not get taken away. So whether they purchase, if they're on a paid up addition option, they're getting now a guaranteed death benefit. At that moment, the future dividends, not guaranteed, but the ones that have been paid become a part of the guaranteed values of the policy. So that's important to understand is that we give but we don't take away. The second is that they're not guaranteed. And it is important to understand that. But you know, there are a lot of actuaries like myself that are, you know, prudently setting expectations and pricing these policies to be sustainable over the long period of time. And so this is something that for us as a mutual gun, our PAR products are our raison d'. Etre. You could say, without a strong PAR product, what are we? Who are we? And so it's in our best interest to as much as possible under promise over deliver, as opposed to the opposite. It does us no good to over promise and under deliver. Insurance is a business of trust. It's a business of reputation. And once you lose your reputation, it's a lot a lot easier to lose than it is to get back. And so the dividends are not guaranteed. They are adjustable. We've seen dividends increase, we've seen dividends decrease over our history. But it is a different thing than a stock investment, a stock, stock Dividend, which tends to be more volatile. We smooth the experience of mortality experience, expense experience, investment experience. We smooth that out to create a more stable ride. And so we squirrel away a bit of profit in the good years to help keep things nice and steady and stable in the, the years that resemble 1936. Hopefully we don't have another one of those.

Yeah, that's fantastic. And I love that. And it's, and that's part of what makes, you know, attracts me to the system so much is just again, it's, it's a system by design. It's pooling things together in free contract voluntarily with other free people, where we have a management team already in place that's done a great job of doing it for a really long time. And you know, you kind of just can have a lot of peace of mind in that. And I'm curious, you know, a couple of quick more questions for you, Martin. I'd love to know a little bit about this thing called price banding or you know, where you, you have a starting, say amount of a death benefit you're beginning with. And depending on where that begins, there's almost like some economy of scale that can be created I think maybe from the life company's perspective where you, you can almost.

Awesome.

I kind of refer to it as like going at Costco and you can buy more, more units at a better price somewhat. And so, you know, I think it's an area that is somewhat misunderstood maybe by the advisory community and certainly from the general public. Most of them probably don't even know that it exists. So what would be something you could share about that that people should be aware of when it comes to this thing called price banding?

Sure. Yeah. Again, a couple of things. So firstly, at a very high level, price banding simply refers to the fact that the price per dollar of death benefit, we often in the pricing world think we price it per thousand dollars of death benefit. And so the rate, even for the same individual, the rate that we charge per thousand of death benefit changes. It's sort of the more you buy, the more you save type of idea that you'll see in lots of industries. Right. If you, if you buy two, you get a bit of a discount. And so insurance is different. The way the reason we're able to pass through some savings is, is, you know, no, no more complex than just the fact there's an expense associated with issuing, managing, maintaining a policy. And the more money that goes into the policy, the more scale, the more economies scale that that occur and we can pass those savings through to policyholders by banding our price rates, meaning that the rate per thousand generally will decrease over time as, or, sorry, not over time, but as you increase the size of the policy. What the second piece is that maybe less well understood is that we can build in different assumptions for these different bands as well. So for example, a lot of studies support the idea that wealthy individuals live longer. And so we can account for potentially a lower mortality rate in the pricing ban. So that's the second thing that can serve to influence the rate we set per ban. On top of, you know, several other factors, but expense is certainly the most common one. But there are a few other little hidden things that can impact that rate per thousand as well.

Yeah, it's fascinating. I wouldn't have considered that. So I'm really glad I asked that question because that makes sense. Makes a lot of sense to me. There's, to a degree of affluence. It makes sense. You may have more financial capital to pay for better medical treatment or you might have a better life, might eat better quality food. All those things kind of make sense. And so plus the idea of, okay, well, managing a policy that's maybe $25,000 in death benefit versus one that's, you know, $1.3 million in death benefit, we obviously get a lot more capital for that. We can give them a discount, but it's also less to manage than we would need a whole bunch of 25,000 ones to get up to that same kind of level, I guess, is kind of the concept. So that's really interesting to hear. And I, I'm. Yeah, totally fascinating. I really appreciate it. And so thinking forward, then casting into the future, one of the common questions we get about is, you know, we've talked about mutual. The value of mutual. What we haven't talked about is this thing called de mutualization. Now in the late 90s and early 2000s, there was a host of, I'll call it amalgamation. Big companies buying up the little guys, amalgamating them, making very complex harpool accounting scenarios and, and then this demutualization. Now I believe, and correct me if I'm wrong, you require, I think, a 75 positive vote of a mutual company's par owners to be able to demutualize, which is, you know, to keep it simple. Be like taking the company public and, you know, being able to become a stock organization, you know, reflecting on the past. What was that like when it happened in the past? And although there's no intention for Equitable to do that, maybe just to give people understanding of, you know, if they're an owner today, what could that look like in the future? And then, you know, maybe a little bit about the commitment to keep things the way that they are. So what, what comes up for you there?

Yeah, yeah, a couple things. So I started my career just sort of at the tail end of the wake of demutualizations in Canada. And there are a lot of, of reasons that was occurring, but namely just rapid expansion. Right. There was an opportunity that a lot of those organizations sought to not just acquire each other, which had begun prior to denaturalizations. But I think one of the key drivers was international expansion. And so the ability to raise capital to expand into Asia in particular was identified as an emerging and growing market. And so the, the mutual structure, again the, the capital comes from the PAR policyholders and so it doesn't allow for rapid raising of capital that you would get in an ipo, for example. And so, so I started again my, my career in the tail end of that. And in Canada, as we observed, most of the large companies had merged with each other, demutualized and are often running in international markets. And there were a handful of mutuals left in Canada. You had mentioned earlier in the discussion, the US experience has been very different. There were some demutualizations, but there remain today a number of very large mutual organizations that never pursued that path. And so that into the second part of your question is the vision for equitable today is that. But we feel that there has been a gap for a large mutual organization in the life insurance space in Canada. We view ourselves as the organization that can fill that gap. There are advantages and disadvantages to any organization and any model. But what's good for everyone is choice. What's good is options. And for a long time it felt like that option was not as visible as it could have been because of the size of the relative organizations. And so our commitment to mutuality is really driven off the fact that we think it's a fantastic model and it's a choice that Canadians deserve to have to be able to purchase their policies from a large, at scale, well established mutual. And our ambition is to prove that we are that option to be available to Canadians. And we're seeing it happen. We've been growing phenomenally and people as they learn more about mutual. It's always the same reaction, very curious, very interested. And so that's fantastic for us in terms of how demutualizations occur. There's a bunch of legislation. It would depend on the articles and legal articles specific to the organization. They're guiding papers and documents around best practices. But as, as you, as you said, we're very committed to the mutual status. We think it's the value that we have to offer to our clients and we plan to remain, plan to remain mutual for a very long time, which we think will result in fantastic experience for our policyholders.

Well, and it certainly has, at least for this policyholder. So I do appreciate that and I also appreciate that, that long term commitment. And it's not a commitment that you, that you're just sharing with me for the first time. It's a commitment that I've actually heard since the very first day that I first got my first contract with Equitable going all the back back to 2010. And so that, that line has been ultra consistent regardless of the people who are working at the company at that time. And I, I really do appreciate that. So I wanted to just share that with you, even though my experience at the company is actually a little longer than yours, just from a different, a different vantage point and you know, one thing. So first off, I really appreciate also all the detail that you've given us, Martin, about the, the, the degree to which decision making processes are differentiated at a mutual level. And some of the advantages, while subtle, are actually quite dramatic. You know, it's kind of like rocking a pond and it's the ripples that get created at an organizational level by being focused on one, one client, one customer, the power owner, the client that you serve and not having distractions outside of that and also not having the financial need to support outside initiatives. And so there's a lot of almost economies of scale, you know, that are created around the ability to be so singular in your focus, which, which seems highly beneficial and also speaks a great deal to your success. Success. Now, kind of last couple things I want to know is just around what should PAR owners expect, you know, for this year? Is there any news about this year coming up or about reflecting on last year's success? I know you're a rapidly growing organization. I'm seeing these amazing news articles about incredible things around the, the amount of sales, the growth of PAR sales, the growth of the PAR count, the amount paid to PAR holders. You know, we have a lot of PAR holders that are equitable clients that, that watch our program. What would you like to leave them with in thinking about reflecting on say 2023 and what you've seen transpire even in 2024 so far?

Yeah, I mean the first thing is, first and foremost, absolutely just a huge thank you to our clients, our advisors, our partners, for your trust, your support, your loyalty. Equitable is on a fantastic run which absolutely could not happen without all of our policyholders, our clients and the advisors who place their trust and their clients trust in us. So first and foremost, a huge thank you to all our policyholders. We've been on a fantastic run, we're doing very well. We're very pleased with how things have been going for us. We've rebranded the organization which was really exciting in the fall for us. It's a refreshed look at 100 year old company. It's a reintroduction of sorts. We wanted to reintroduce ourselves to clients and we wanted to rebrand that really the brand logo is a representation of our commitment to our clients. And so that's been very exciting and for us it's a double down on mutuality, it's a double down on client focus and there's going to be great things happening. Again, we're very focused on creating fantastic experience and service for our clients. Whether it's digital service, whether it's through one of our client care representatives in person, whether it's through your advisor products. We're always looking to enhance the competitiveness and the value provided by our policies, our products. And so we're going to get into regular cadence of enhancements. We have some exciting things coming out later in the year. We recently relaunched our term insurance solution which we, we call Baby par. You know, we, it's really because of the conversion option and ability for someone who's not quite yet ready to purchase that PAR policyholder to create a contractual right to enter into that PAR policyholder pool. So we're really excited about our new term product. We have some, some exciting announcements coming up that not able to share too much about yet but our advisor friends have been invited to a couple of announcements coming up. And beyond that is just more of the same. More commitment to policyholders, more great policies, more great service, more great value and more opportunity for us to help Canadians.

I appreciate that you mentioned the term aspect. I refer to it as an option on your future tomorrows and no different than you can buy a real estate option to have the first right to go buy a piece of, of property that's quality. You could do that on your own life and the life of the people that you care about. And so I encourage everyone to take heed of Martin's words there. So thank you for sharing that Martin. Now, Martin, final question for you here. Something we like to do. Although you may not show up to work at Equitable every day wearing a cape, you do, you do provide your degree of actuarial superpowers in the organization. And you know, you and I've had a number of conversations, I've been on a number of your webinars. It's always a pleasure to understand your knowledge base, your natural curiosity, the way that you can relay the information that is actually generally quite complex in a very simplified format. And so you may not recognize that you're showing up as a hero to folks, but, but you probably are. And so our question for you, Martin.

Is who would you most like to.

Be a hero to?

Certainly my, my wife and children. My wife Lisa, we have four beautiful children. So job one is being a hero to them to the extent that I'm able. But beyond that, just everyday Canadians, just people just doing everything I can to, to help our policyholders protect their families and protect their loved ones the same way I tried to protect mine. And so I view it as my little bit of contribution to society. But it's, we really say from coast to coast, we're here for any and all Canadians at any time. In particular the times where they need help the most.

Fantastic. Martin, thanks so much for being with us on the program today. We look forward to having you back in the future, expanding more on the great announcements that you guys will share on a year by year basis at Equitable Life. And I just appreciate so much for you being on our program and sharing your knowledge and your vision of the future with Canada's largest mutual company. With that in mind, I would direct everyone who's watching, of course, on YouTube. Poof, right there. You'll see there's a great video that just popped up that says watch me. So you should go ahead and do that because we recommended that video just for you. Thanks again, Martin. Appreciate you.

Well, thank you very much for the opportunity to be here. Thanks, Richard. I appreciate it.