Change that works for insurance corporations, pt. 2

After the Alberta government's attempt to stay the decision to overturn the soft-injury cap (thereby keeping the cap in place until after the appeal) failed yesterday Stelmach announced he will not do anything to protect Albertans from the large insurance rate increases he anticipates will stem from the court decision overturning the ban.

As the Journal explains, "the government itself has control over the costs for mandatory coverage, and its rate board annually orders rates to go up or down, based on its judgement." Indeed, both Kevin Taft and Brian Mason pledged to enact a rate freeze if elected. Nonetheless, and in keeping with his 'government does not control the economy' mantra, Stelmach will let the companies appeal to the board for a rate increase, even while the appeal is pending.

Ultimately, I don't think Stelmach's refusal to freeze will be that all that costly to ordinary Albertans because: a) I think the actual costs that  accrue from the abolishment of the cap are greatly overexaggerated, and b) since the "independence" of the rate board, which will ultimately decide whether or not the companies' are allowed to increase, has been legitimately called into question (it's chaired by a former PC party president), the board will probably choose the politically expedient option anyways (i.e. a low to no increase).

Nonetheless, between Stelmach's eagerness to side with auto insurance corporations, his government's refusal to release the climate change report (at least probably not until after the election) and his accusing reporters of being liberal supporters, I think 'Honest Ed' is starting to look more and more like this guy.

Comments

[Stephen Kelly]

We are well aware of this insurance corporation issue that annoys most fair minded Albertans to date.

We forget too our beloved Alberta Heritage Fund (AHF) for our future generations is seldom discussed as an issue in this election; probably because on a percentage basis it is on par with a very second rate performing mutual hedge fund in comparison to other global funds of similar statute.

Instances of investment performance are seldom scrutinized in detail and there are enough examples of questionable past return on investment (ROI) issues with the AHF.

According to the Sovereign Wealth Fund Institute and figures, its worth around US$ 16 Billion from its 1976 inception. Although Alberta is not a country like Norway that is an energy producer/exporter with only a million more people and far less energy reserves then us,their fund started in 1990 is now worth $329 Billion from our US$ 16 Billion. That is 20 times our fund.

In fact, according to the Petersen Institute, an ex FSU nation the country of Kazakhstan at US$19 Billion started in 2000 outperforms us to date.

An official commented on this in Alberta Finance quite proudly that we are 'not a country' and we in the fund are 'being prudent with our unique strategic focus'compared to any other state. Despite loans and investments made in other provinces, if that was the case from what that official said the Alaska Permanent Fund started in the same year is worth nearly three times our fund at US$ 40 Billion.

Our accountability, governance and transparency scores were moderate neither good or poor from figures provided by the Petersen Institute. It certainly contradicts what was commented on by the official and there is enough public information available to question anyone within the AHF in regards to these types of returns.

We need to rise with the talent that is available in this province from the mediocrity we have experienced from a government that has underperformed in this area in regards to managing and overseeing this fund over many many years.

There is no question we are capable of better and its this attitude of improving ourselves creating value for others in our communities that built this province in the first place whatever our origins.

Something to ponder on Monday when we all head to the polls.

[ch]

Stephen: It sounds like you know waaaaay more than I do about the Heritage Fund and it's performance, but I think it's an interesting subject so I hope you don't mind if I respond to your comment with a couple questions (I hope I'm not putting you on the spot):

1. It's pretty well-known that the Heritage Fund pales in comparison to its international counterparts, but you raise an interesting point about issues with investment performance. I always thought the HF's pathetic state was simply due to attrition and the failure to inflation-proof it. Are you really suggesting that these guys can't even pick good investments for it either?

2. Do you the creation of that new nonprofit corporation to oversee last year has/will make a difference for the problems you identify?

[Stephen Kelly]

I will answer this matter as best that I can from your two questions

1. Most proper fund managers when they look after prudent returns hedge their financial instruments whether they are shares/stocks, bonds, currencies etc. Without getting into a long discussion, there never is a full explanation other then GAAP procedures to give focus and clarity of what channels are in place that if a long term holding in a block of shares is held as an example and the market price is less then the share that the shares are hedged against any indices to protect value rather then sit weeks and months on end in a negative holding.

The benchmark is more internal and it should be placed in comparison to its other sovereign wealth fund indices, not just general indices of markets around North America.

Most Albertans and Canadians are aware of where global growth has taken place over the last 32 years because you know how litle your Canadian dollar buys in most of these countries. Sadly the fund was never an initiator to have a percentage of the fund invest heavily in emerging markets.

The mix of the fund is pretty much tied to North America when many other funds of this nature have a global mix. The returns from Asian and in particular the China and India economies as any fund manager is aware of the last 6 or 7 years far outweigh the current portfolio the AHF have instituted.

If they were 'being prudent' how is it you do not have holdings in this country that give you greater exposure into these growing marketplaces globally? If China and India's middle class is growing then invest aggresive into say potash that this country produces for people in Asia to grow more food.

Also over 32 years, the Canadian dollar despite parity today was a poor performing currency in comparison to most other nations for a long time that accelerated from 2003 only on the backbone of a general global commodity boom for resources that has occured to date.

Even then, the fund shows more quarterly losses then positive ones to this date.

So whether they can pick good or bad investments is not the point here, the real question is can you pick and time quality investments that grow progressively returns over a short, mid term or longer period of time in different performance cycles? That I feel gives Albertans greater scrutiny and a litmus test as to the quality of the funds performances in sector areas.

A well known accountant said to me at a luncheon today where we were discussing different topics entirely when that person brought up the election quoted ' as a conservative when I came to this province in 1979 this fund despite their $32 Billion claims that it has made has hardly moved in returns and I can only judge that the people behind this have not lived up to the citizens expectations and mine within this area; its beyond disturbing and I really shake my head on all of this.' This accountant did not see this blog either. Knowing the high credibility of this individual, I found what that person had to say more then just ironic.

2. I take it you are asking 'do I think' here.

I feel that unless you set out well defined parameters and they have changed over the years all the time with the Alberta Heritage Savings Fund, you need to focus and have targets set that puts your record on the line.

It should be managed externally in my opinion the AHF by different specialist sectors which are scrutinized to S&P Fund Micropal tables (like schools and colleges are). The new non profit corporation needs to be paid properly like all exceptional managers to oversee the AHF based on risk management criteria and performance. If you examine very recent performance, you would be perhaps a little concerned.

Good solid fund managers of at least 15 years global experience not just from North America but with international experience in major financial centers should be guiding investment decisions.

In essence you pay qualified people well to initiate 8 to 12% returns and the fund targets seem to be rather low and convoluted as to direction from what public information has been mentioned from their own information on this topic. If they can't meet targets then they need to be replaced.

As for investment decisions, up the general provincial energy royalties, place income accrued into the fund and if the cycle is right, energy companies doing business in Alberta even if they are multinationals have a good portion of the fund back investing into their own shares.

So what does it matter paying more royalties when the fund and the people in this province invest in your global business holding shares as a vote of confidence and thanks for investing into this province? Its a way different world now from 1976 with foreign direct investment and energy companies repatriating funds back out of Alberta still benefit! And over the years then to 2020, the fund grows on a much more lucrative exponential basis as to what it should be properly doing in the first place for the people of this province who truly benefit then from the returns.

After all, we can't have funds in FSU nations and emerging countries outperform us and I would think Albertans would not like to feel that their future fund operates second rate in the greater global context capacity when they know that it is capable of much better.

Unfortunately and surprisingly, all this has seldom been discussed in this election when it was a great source of pride for Albertans in the 1970s.

It is on the minds of a few people today and would be to others if they knew of and examined this topic in further greater detail as to their own futures from what was promised in 1976 at this funds inception.