Will private capital solve Canada's infrastructure crisis?

0:00Welcome to this special edition of Hub Dialogues brought to you in partnership with the Canadian Life and Health Insurance Association. Be sure to check out the other content they've published with us. You can do that right now on our website, www.thuhub.ca. Now let's get on with our program. Welcome to Hub Dialogues. I'm your host Sean Speer, Editor at Large at the Hub. I'm pleased to be joined today by Stephen Frank, President and CEO of the Canadian Life and Health Insurance Association. With the Carnegie Government aiming to catalyze a trillion dollars in investment over the next five years, we discuss the role that Canada's life and health intrars can play as a major source of long-term capital. We also explore what makes an infrastructure project investable, why so much Canadian capital is deployed abroad, and what governments can do to unlock more private investment here at home. The next voice will hear us mong and conversation with Stephen Frank from the Canadian Life and

1:02Health Insurance Association. Stephen, thanks for joining us at Hub Dialogues. It was my pleasure to be here, Sean. Thank you. I'm what you're looking forward to the discussion. Yeah, me too, Stephen. I spent a lot of time preparing for our conversation. I know a little bit about the industry through the lens of the pharmacare debate and some of the other issues where the CLHA has been a real leader, but I must admit, like I suspect a lot of our listeners viewers, I knew less about the industry as a major source of capital in Canada's economy, and I look forward exploring that with you. Let's start, Stephen, if you'll permit me with the forthcoming investment summit, because the government, the Prime Minister, have set out some really ambitious goals around boosting private sector investment in Canada over the coming years, and your industry is part

2:03of that story. Some of your members, in fact, are participating in the forthcoming summit at a big picture level. What do you want the government and Canadians more broadly to know and understand about the insurance industry as a source of investment capital that, like me, they may not fully appreciate today? Well, if there's one takeaway from our discussion today, I hope people understand that we are a big player in this space. We're one of the largest institutional investors in Canada, and in fact, the global lifengers are one of the largest institutional investors around the globe. We hold in Canada today over a trillion dollars of assets. 90% of those we hold for the long term, and that's an important point I'll come back to later. But what that means is we buy an asset, whether it's a bond or an infrastructure asset or a mortgage or something. We will hold that for 10, 20, 30, even 50 years. We're not in the business of churning and trying to place bets on things.

3:04We want to hold those assets because they're a great match for the business of insurance, and we can begin with that a little bit. So we're very significant over a trillion dollars. And the fact that we're such patient, long-term investors, which is right at the heart of the discussions we're having with the government today and it with Canadians about the need to build out our productive capacity to broaden our relationship, invest in this country. We're going to be a big part of that solution. And we're really pleased that this is an agenda that's risen up to the top in Canada. And the engineers of it being a bit of it on the down low. Yeah, indeed. Now, just bear with me. Let's walk through some of the nuts and bolts here because people will understand life insurance company as a company that sells insurance, but they don't necessarily think of you as a major source of investment as you just set out. How does that work, practically speaking? How does selling insurance ultimately turn an insurance company into a major source of

4:05investment capital? Well, I think that's the rub of it. This isn't something we do off the side of our desk. It's not a separate business line that we're trying to generate a business off of. It's fundamental. It's actually a derivative of being an insurance company. So it's fundamental of being an insurer. So I'll give you a very stylized example. And I apologize to any listeners who are expert in this area, they're going to cringe. But this is just to sort of illustrate the point. If I were to sell you a term insurance product to the age of 65, so if you were to die at any time up to 65, I'm going to pay you a settlement. Okay? Let's assume you bought that at 35, which is a pretty typical age. People are buying their first home or having their first kid or they're getting married. They start to think about insurance. So in the case, I've made you a 30 year promise that at any point from the age of 35 to 65, if something happens, I'm going to pay you. And I'm going to start collecting premium every month for 30 years.

5:06So money's coming in the door and I need to do something with that. And so I have to invest it and I need to invest it for 30 years. So I'm a natural function of being an insurer. We've got premium coming in. We need to invest that and we're thinking long term, 10, 20, 30 years so that we can always honor our promises to you. So that's how insurance just generates the need to be an investor. And if you multiply that scenario by 30 million people, we're generating an incredible amount of premium income every month. We need to invest that and do something with it not only to ensure we can pay you if something we're unfortunately to happen, but to cover our operating costs and capital costs and stuff. So that's how you get to a trillion dollars of assets. That's why 90% plus we hold it. We don't trade it. It's for the long term. We're doing that so that we make sure we have the money we need to fulfill our promise to you in the future. So insurance is a natural generator of investments. Indeed.

6:06Now you've talked about the scale of investment and the bias towards long term assets. Alabrate a bit for us, Stephen. What would a portfolio for one of your member companies broadly look like? Well, first thing I'll say is we're very diversified and very prudent in our investment. So we take extremely seriously the commitment we've made to you. We need to trust that if something happens, we will fulfill our promise and we absolutely want to do that. So we're very prudent with our assets. It tends to be very diversified mix. So if you look at a balance sheet of an insurer, you would see a large number of corporate and government bonds. So we're heavy purchasers of government bonds at all levels. We have a lot of commercial and residential mortgages, blocks of business that are longer term. We do a little bit of equities and stocks. We have a lot of real estate is an area we're interested in as well. So to give you a sense of magnitude, at the end of 2024 or 2024, we had about $111 billion

7:07of provincial municipal bonds that we held, again for the long term, got about $25 billion of federal bonds that we own. And one thing, and we'll talk about that as we go along today that we're increasingly interested in, is infrastructure. It's a no one of those assets that last 20, 30, 40 years, it's very stable through investment cycles. It's an excellent match for us to help make sure that we're paying those promises that we've made. And so we've got $50 billion of infrastructure investments we've made in Canada and we want to do a lot more going forward. So broad, we have a broad portfolio. We make sure it's well diversified. We tend to be on the safer end of a typical investor. A lot of bonds, a lot of the safer types of assets. But it's all about providing that stability, the predictability, and the long term investments that we're looking for. So that would be what a typical answer would look like. We'll get into a conversation, Stephen, about what your member companies are looking for

8:09as sources of capital, the role of public policy to boost the type of high quality assets that they're targeting. But if you'll just bear with me as we help our listeners and viewers start to think about the insurance industry and maybe in different ways than they had in the past, I want to ask you about how to think about what your companies do versus say the maple-8 pension funds, which of course are increasingly top of mind when it comes to questions around pools of capital and major investments. How should we think about the distinction between an insurer and an investor? Well, I mean, pension funds typically are put to the front of the line when we talk about infrastructure for good reason. And they're very similar to the model I just described. So pension will be collecting contributions from people every month. They're going to invest those for 20, 30, 40 years so they've got the money they need to pay a pension.

9:10And insurer is going to collect premiums every month and we're going to invest those for 10, 20, 30 years so we can meet our insurance obligations to you. So in that sense, it's fairly similar. But there's a couple of important areas where we differ. I think these are important from a policy perspective. It would want to highlight for you. One of them is just the scale and size of what we're interested in doing. So you mentioned the maple-8. Those are very, very large pension funds. Typically, they're looking for deal sizes of $500 million in up. They're not interested in much smaller. It doesn't help move their returns and portfolios. In sure as on the other hand, we of course want to participate in those very large deals and we do all the time. But we're also going to be able to go down sort of into that mid-market. So we'll do it $200 million. We'll do a $50 million transaction. And in the context of Canada, I think that's really important to understand. The infrastructure gap that we have, certainly some of it is very large nation building. But the bulk of it when you look at the statistics is at the municipal level.

10:11It's not only building new infrastructure, but it's maintaining and all the upkeep of what we have is a pretty aging infrastructure in Canada. And those types of projects tend to be on the little smaller end. It will be a struggle to get a large pension fund to want to invest into a water-tuning plant and under bay or something like that. Maybe it's $50 million. And ensure it's much more likely to want to participate. So we've got a deal size that hits a bit of a sweet spot. It could be very helpful to help build out Canada going forward. And of course, we want to participate in those larger ones too. And so we really stress that with government and others that we can be helpful at a tier that maybe the pension funds may not be as interesting and interested in. And the other piece is that we are as a financial institution, we're regulated. So companies that are set up federally or regulated by OSFee, which is the federal regulator. We've got a handful very large ensures regular incorporating Quebec. So they're regulated by the AMF. But to summarize for a listener what that means, it means we're supervised.

11:15So we've got people watching everything we do. Are we managing our risks prudently? How are we managing those assets? How are we understanding the risks of those assets? So we're being supervised. There's regulatory capital that's imposed into our business. So you need to set aside a bit of money in case there's a bad day into the future. And we think it's very positive actually. It adds confidence into the system. And again, we want Canadians to have extreme confidence that we're going to be there when they need us. So if you throw that all into the wash and you were to put sort of a pension fund and an insurer together, pension funds will look a little different. They'll have a lot more equity that they're investing in. They'll have a lot more private assets that they're investing in. And if you look on and ensure we're going to have a lot of fixed income, a lot of government bonds. We're going to have a lot of mortgages potentially. And we love sort of cash generating infrastructure assets that are really good for match for reliability. So we look a little bit different once you get under the hood.

12:16It's a function of the size of the deal we like. It's a function of being regulated, a function of the business. But similar in the sense, we like those long-taded assets and we like the predictability that they bring. Yeah, I really appreciate you, Stephen, indulging me here to almost provide a primer on the insurance industry. As an investor and a source of capital because if far listeners viewers are anything like me, it's just not the lens that they typically apply to your member companies. If you'll permit me, I want to now transition to how we supercharge investment in Canada. Generally, an investment from the insurance industry more particularly. And it brings me to Prime Minister Carnies, ambitious school around boosting private investment in Canada by a trillion dollars over the next five years. And it got me thinking as I was preparing for the conversation, how we ought to think about the nature of the problem because, of course,

13:18diagnosing the problem is the first point in identifying the right solutions. Is it your judgment and the judgment of the industry that Canada's real problem, Stephen, is a lack of capital, a shortage of capital? Or is the problem that we have enough capital, but we don't have enough attractive things to invest in? How are you and the industry thinking about that question? Well, first I'll just reiterate, we're glad that we're asking the question. Like it's not the problem. This needs to be at the forefront and we need to be attracting that investment. So a trillion dollars sounds like a lot. But when you do a ground up, look at the infrastructure needs and investment needs in this country, that is sort of the magnitude we're talking about. And so congratulations to the county government for putting a spotlight on it. That's the challenge that we're facing here. And we've got a significant gap, not only in what we need to build new, but maintaining and upgrading what we've already built.

14:18Look, I think to the heart of your question, is it an access to capital or is it a project? It's probably more the projects, which is the issue. There's significant investment capacity within our industry, the investment funds, and globally if there's an attractive investable asset coming to market, people will show up to bid. And so I would say it's more that we need to supercharge that pipeline. And the prime minister's talking about these projects of national significance and stuff. So that's all, I think, going in the right direction. But just to give you a sense of what we're dealing with here as an insurer, we're collecting all these premiums every month. We actually are not finding enough high quality assets in Canada. To invest in some of that is going abroad. And what that, you know, in a perfect world, we'd rather not have to do that. We want to collect Canadian dollar premiums. We want to have Canadian dollar obligations to pay. All things equal. We're better off having Canadian assets to match against that. As soon as we take it outside of Canada, we've got four exchange risks.

15:21And a whole bunch of other stuff you need to manage. So we have a strong bias to say more, more investable assets in Canada. We will be there to invest in those. And there's a real demand to do more here. So I think, you know, it's helpful to talk about the financials. And it's important to make sure we don't have regulatory barriers to our investors. And there's a few that we could clear away. But fundamentally, let's get that pipeline of projects coming online. I think you're going to find a lot of interest in stepping up to invest in those. And we're talking hundreds and billions of dollars. You could probably repage, shake back into Canada. Simply allow people to do a better matching of those liabilities and assets. And just, you know, investable assets are commodity around the world. Everybody's chasing. And Canada has more. Yeah, let's pursue that point further because I discovered, as I was preparing for our conversation, this idea that you and your colleagues talk about, investable assets or investable projects. What actually makes an infrastructure project investable from an insurers point of view?

16:27What kinds of Canadian infrastructure, Steve, and energy transmission ports, pipelines, data centers, etc are particularly well suited to insurance capital? Well, I'll say yes to all of the above. I'll take one of everything. Like we love energy assets. We like transmission, transportation, communication networks, pipelines, electrical transmission. Data centers is a new thing we're talking a lot about. Defense assets. We've got an interest in those. So we're a little bit agnostic to the underlying asset. We will sort of buy anything that is investable. And I'll tell you a minute, in a minute, what we sort of mean by that. But the given example, just recent investments are industry is sort of led on. We've done a major wind farm in Quebec, the PPW1 wind farm or a major investor there. The SAC John battery energy storage facility. We used to be called Tilbury here in Ontario, major investment, Cali and airport up north. So we're pretty agnostic as to the type of asset that we'll invest in.

17:29And we're also highly for listeners. We partner extremely well with First Nations on many of these projects. We are a source of loan capital into the First Nations so that they can make equity investments into this project. We want them to have a fair stake in the upside and all this too. So we do a lot of work with First Nations communities across Canada. So what does it mean once you wash all that away to be investable? Well, we want predictable long-term cash flows, 20, 30 years out. We want to know what those revenues are going to look like. We simply need regulatory and permitting certainty. Nothing's going to stop us from signing a check today. Like not being sure if the asset is going to come on market tomorrow. Five years, ten years from now or never. But you're not going to sign a hundred million dollar check. If you have no confidence as to when that's going to start paying you back. So the regulatory predictability, transparency, certainty is a real issue we need to address

18:31in Canada. And so we're looking for that in all projects that we might consider. And then underlying all that, we need a good counter-party credit. So we need counter parties that are stable and have the ability to repay. We need good concessionary rights, which is important to a lot of mining deals we may do. So the project economics have to support doing a deal. And then of course in our context as a regulated industry, we've got sort of regulatory hurdles and other criteria that we need to be met. So we'll invest in any infrastructure asset that's predictable in long-term, has regulatory certainty, and where the underlying economics would support an investment. Yeah, it's such a positive message, Steven. And as someone who spent time working in the government, I can tell you a kind of uncommon one. Most industries come into Ottawa or provincial capital, arguing for why they need subsidies or preferences or whatever. You're essentially saying, we've got cash. You want more investment in this economy.

19:33And we want to be part of the solution, which naturally pumps the question, what's the disconnect here? We've got a government that wants more capital. We've got an infrastructure deficit as you explained. And we've got insurance industry that all things being equal would like to repratiate billions of dollars into Canada's economy. How do we solve what is the source of the disconnect? And why don't we start to talk a bit about how we solve it? Yeah. Well, I guess in the Canadian context, maybe three items, I would point to it. To go back to this regulatory certainty and pipeline, we're all looking forward to seeing what this list of nation building projects is. We're looking forward to working with the Carnegie Mellon, helping to get those off the ground. So those kinds of things are absolutely critical. We need investable projects to come to market. And people will be there to take a real hard look at investing into those. So we need to get that regulatory uncertainty dealt with. And that's important. There are certain small little things within the insurance context that hold this back

20:36a little bit. I would characterize them as sort of unduly restrictive definitions of what an infrastructure asset is. So in our world, the insurance act would say that we can't invest in something that doesn't have a public entity on the back end. Well, if you start looking at data centers, for example, with AI or other things like that, which we would say are big infrastructure investment, they may not have a government on the back end. It might be Google or Amazon or very highly credit worthy investors. So we want to be able to play in those spaces too. So there's some room to broaden the definition of infrastructure that would let us be a little bit more fully. And then finally, I'll just go back to one of the things I touched on earlier, a large proportion of the need in Canada is not the multi-billion dollar nation building stuff, but it's the less sexy, smaller, smaller, provincial deals or smaller municipal areas. And for a small population like Canada that's highly dispersed, it can be a challenge to

21:37fit a square peg into a round hole. So helping municipalities, helping smaller provinces get some expertise in this area, maybe providing a bit more standardization in the types of terms and contracts that apply to deals, looking to bundle smaller projects together. For a country like Canada, we're going to need to think creatively on how we're going to get capital into where a lot of that needs going to be. So regulatory certainty, I would say number one, two, there are some legal areas that we'd like to see some flexibility on. And then let's just recognize Canada for what it is. It's a series of smaller provinces and communities and they need support. Let's look for ways to engage them in finding solutions there too. But like you said, it's a good problem. Everybody seems to want to get to the same output and we're all rolling in the same direction. So I'm hopeful that we'll all find a path through in the short term. Yeah, your point about different communities and different needs is well taken. I know that you mentioned Thunder Bay earlier because you know of my bias.

22:40Well done buttering up the host, Stephen. I said I love talking to you and the industry because you kind of talk to talk and walk the walk. You aren't seeking subsidies or other government benefits. You really want to deploy private capital into the economy. And in that vein, one of the slightly counterintuitive but really interesting issues that the industry has raised is the growing role of government when it comes to financing major projects and the risk that that actually crowds out private capital. There's a kind of theory that one often hears about crowding in capital. But you make the argument as I understand it that institutions like the Canadian infrastructure bank and others may in some instances go from supporting projects on the margins where there may be a role for the state to displacing private capital and in projects that ought to

23:45be supported by the private sector. How far listeners and viewers understand this point because it seems to be that it's one that you don't often hear. But it speaks to the need for government to kind of think comprehensively about how they're influencing investment decisions both through direct policy like taxation and regulation. But then through these kind of interactive unseen ones like inadvertently crowding out private capital. Well, I think that's exactly what we've observed. So we, you know, back when Minister Marno was creating the Canadian infrastructure bank, we are very heavily involved in the development of that program. And we were sort of cautiously optimistic at the time because it was described just as you as you laid out, you know, that they were going to target deals that were just marginally no and try and get them into the marginally yes category. So certain, ten things that I need as an investor to get comfortable and I've got nine of them checked off and there's one I just can't quite get there.

24:45Like maybe they come in and they take a very small first loss piece and that makes this in an investment grade and I'm I'm ready now to say yes. And so the idea was to crowd in private investment and to turn the marginal nose to marginal yeses. And so that's what we are understanding of the mandate and the operation. Unfortunately over time our experiences been that they've sort of turned into a bit of a competitor for us in the market. And so they they would sort of we would observe them subsidizing projects, for example, that are already commercially viable may have multiple private investors lining up to do do deals on an invest and they might come in with some, you know, unusually flexible or below market financing to the component and of course we can't compete with that. Yes. Which puts in a very difficult place to compete in an RFP or others when we're sort of fighting the balance sheet of the federal government. Yes. You know, that's losing trade every time.

25:46We've started to see deals that just never come to market. They've already locked up their their their their their support from one of these public agencies. We were concerned that those mandates have shifted a little over time. And as private pairs we're saying to people we've got capital we want to deploy. We're very good at doing it. Let's get back to more of a collaboration with these public investment agencies. So we see it as a missed opportunity really. And and maybe a reset is needed and I would I would, you know, I have to note that the government has said they've committed to do a wholesale review of the mandates of all the public investment agencies, the federal ones anyway, we're fully supportive of that. Look forward to that process. But it's an important thing to get right because you're absolutely right. Right now, maybe we haven't quite figured out how how best to work public and privately together so that we're juicing the returns and not just sort of displacing. We've got a lot of policymakers or people adjacent to the policymaking world. Steven who listened to the podcast.

26:48We've talked about some of the policy related issues that your member companies are thinking about that may influence their decision on yes or no with respect to certain investable assets or projects. If the prime minister and the premieres were around a table and you they asked you for some concrete proposals to try to improve the investment conditions and enable your members to deploy more capital in the country, what would though what would they might be and perhaps wearing my hat as someone who used to advise a prime minister of politician. If the government's delivered on your demands, how quickly could the industry respond? Well, we'll use the magic of the rule of three, right? So I'll give you three things I would suggest. One, let's get the regulatory environment squared away. Let's get those projects more quickly to market. Let's increase the certainty that things are going to actually get built once they've come out. So I think a focus on that is entirely warranted.

27:50And you know, in the spring economic update, the government announced a one project, one review concept. Like that's exactly the kind of thing we need to be leaning in on and really making sure it gets traction and roll out across all projects, including the nation building ones, but the smaller ones too. Like we've got we've got to sort of make that our modus operandi in Canada. And there are certain legislative things like let's make sure the definition of what's an investible infrastructure is the modern one. The data centers should be on that list, defense assets probably should be on that list. So the third would be like they'll think we just talked about. Let's make sure we're not working across purposes with these government investment agencies. Let's make sure their mandates are clear. They're crowding in the private sector. And I think there's some some work we could do there. So if you if you crack those three things, how quickly could we be there? If an attractive asset came on market on Monday, we would be looking at it and we would probably

28:52be wanting to participate like there's not a there's not like one one year timeline that we need to get organized. Like we've got investment teams. We're looking to do more as these things come on to market. I think you're going to find investors are pretty interested. And so we should just, you know, like this investment summit's a great, you know, potentially, let's hopefully it's a success. We all want to be success. Maybe it's a launching pad to getting some energy and excitement around some of this. And we can move. I'm confident as quickly as government can start to make some of these things available to us. Okay. Final question. Let's project forward and say five years from now. If the government moves on some of the issues that you've raised, if the summit creates the kind of momentum that you're talking about, paint a picture of what that future looks like. What would be say that the what would be say different about the portfolios of Canadian life insurers or what would your members own or finance in Canada that they that they

29:55may not today? Well, I don't I don't think our portfolios going to change materially. We're going to have a broad asset base. We're going to have government bonds. We're going to have infrastructure and all those kind of things. But I think we'll be doing more in Canada than we've been doing a broad. That's a good thing. Like that's what I would look for as success is that we're not seeing those premium dollars we're collecting here going outside. We're finding good assets to buy in Canada. So for me, success would be a really robust pipeline of assets. We're investable and the insurers are able to play a bigger role in Canada than we are today. Certain types of things you may see us and we're having really good discussions with, you know, in this area of building out our military and the kinds of investments that are going to be needed there. Lots of opportunity. And we've got some appetite to be helpful there. So you may see us more of a player in the defense space as we build out our AI infrastructure of some interesting infrastructure that's going to be needed there. So you may see us be doing a little bit more of that. So, you know, when you think of defense policy, AI build a diversifying trade like we can

30:57be helpful in all of those macro policy environments and we've got a lot we can bring to help be part of the solutions there. And the last thing I'll say now, I want to sort of congratulate you Sean and the hub on this because it's a drone you've been banging on for many years now. But we need to shift the proportion of the role of private investment and public investment. You need more private participation in the Canadian economy. And as a proportion, maybe a little bit less on the public side, you know, private is good at picking good transactions. We're better dealing with winners and losers and governments. We're good at dealing with risk. We're good at pricing risk. Those are the things we do extremely well. That's how you build a sustainable economy that can compete globally. And so we should be doing more of that. And as you've been talking at Nazim, you know, governments have limited fiscal capacity. There's limits to how much they should be borrowing and how big a deficit and debt should be. So if they're going to borrow money, target it where there's not already a private solution

31:59available and like we're saying we want to do this. So like let's not compete. Let's be working collaboratively. So I see opportunity for the private sector to really play a much bigger role in our economy. And I, you know, sort of a free marketer myself. You got to believe that that's going to be good for a slower term. So those would be some of the things I would look for. It's a more bigger role for us, maybe a more productive role in partnering with some of these government investment agencies and just more opportunity for the private sector to do what it does really well. Great message to wrap up what has been a really interesting and insightful conversation. Stephen Frank, the president CEO of the Canyon Life and Health Insurance Association. Thank you so much for joining us at Hub Dialogs. My pleasure, Sean. Thank you very much for the time. This episode was brought to you in partnership with the Canadian Life and Health Insurance Association. Be sure to check out the other content they've been publishing on the hub. You can do that right now on our website, triplew.the hub.ca.