Despite continued market uncertainty, Canadian life insurers’ investment portfolios are expected to remain stable in 2023, according to a commentary published Wednesday by DBRS Morningstar.
After years of growing assets under management and administration, driven by positive net flows and rising markets, most insurers have seen a slowdown in 2022, as well as a decline in net income, which is “partially attributable to stock market volatility as well as changes in interest rates.” – said the rating agency.
Looking to the remainder of 2023, rising interest rates should boost life insurers’ portfolios in the long term. However, AUMA’s growth will remain moderate if market volatility continues and inflation persists. As higher inflation reduces purchasing power, investors also have less discretionary income to invest.
“2023 also brings with it the possibility of a recession that worsens the outlook for both insurance product written premiums and mutual fund and segregated net sales,” Komal Rizvi, vice president of insurance at DBRS Morningstar, said in a release.
In the current higher-yield environment, investors are also choosing options with lower fees.
Depending on the trajectory of the economy and the severity of a potential recession, the level of defaults or impairments in lifecos’ investment portfolios could also increase, but given their high credit quality, any increases should remain manageable, DBRS Morningstar said.
Conversely, demand for annuity products may increase because payouts may be higher in a higher-return environment. A strong labor market also bodes well for group insurance, which tends to correlate with gross domestic product growth, and higher inflation can be combated by raising premium rates, if applicable.
Therefore, DBRS Morningstar believes that well-diversified business models should remain stable. The ratings agency said this confidence was driven by the life insurers’ high levels of capitalization, including solid solvency ratios, moderate leverage and high levels of debt coverage.
“Overall, despite unfavorable conditions, the outlook for the Canadian life insurance sector is expected to remain stable through the end of 2023.” – we read in the comment.
Finally, high DBRS Morningstar financial strength ratings make ratings upgrades less likely in 2023. Financial strength ratings for the Big Four insurers – Canadian Life Insurance Company, Canadian Sun Life Assurance, The Producers Life Insurance Company and Industrial Alliance i Financial Services Inc. — are currently in the AA rating range category.
Given the high ratings coupled with high capital buffers, DBRS Morningstar said it was unlikely to make significant ratings changes to the sector as a whole.
