Life insurers’ earnings are strong due to a variety of factors, including solid underwriting fundamentals and increased sales

By Megan Harman |


The outlook for the Canadian life insurance industry is stable, as it has managed to grow earnings and remain well capitalized despite various ongoing challenges, according to A.M. Best Co. Inc.'s Canadian Review & Preview report published this week.

The Oldwick, N.J.-based credit-rating agency's report notes that life insurers' earnings were strong in 2016, thanks to solid underwriting fundamentals, increased sales, less volatile investment performance and the expansion of the insurers' wealth and asset-management businesses.

The strong performance was in spite of challenges such as low interest rates, economic uncertainty, concerns about legacy blocks of business that could add volatility to future earnings and capital, and limited prospects for domestic organic growth in the mature Canadian market.

"Ordinary life product sales continue to be strong for the industry, especially for participating whole life products," says Ed Kohlberg, associate director, life ratings, at A.M. Best, in a statement. "Over the past years, self-directed actions, such as a continuing strategy of re-pricing products, a changing product mix, and a greater focus on fee-based income also helped profitability in this difficult low interest rate environment."

Participating direct premiums in Canada increased by 43% from 2012 to 2016, according to A.M. Best. That compares with 23% growth in all product lines in Canada during the same period.

Although a majority of the premiums written by Canadian insurers are in Canada, a growing proportion of business is coming from other jurisdictions as insurers have expanded their international operations, the report notes. Canada accounted for 59% of direct premiums written in 2016, down from 66.1% in 2012. The U.S. accounted for approximately 15% of premiums, unchanged from 2012, while the proportion of business written in Asia and elsewhere grew to 22% in 2016 from 14.9% in 2012.

The industry has undergone considerable consolidation in recent years, the report notes, including notable deals such as Toronto-based Manulife Financial Corp.'s acquisition of Standard Life PLC's Canadian-based operations and Winnipeg-based Great-West Lifeco Inc.'s (GWL) recent acquisition of Kitchener, Ont.-based Financial Horizons Group Inc.

Canada's top three life insurance groups — Manulife, GWL and Toronto-based Sun Life Financial Inc. — hold 63% market share as measured by net premiums written as of yearend 2016, according to the report.

A.M. Best does not anticipate any further "significant" consolidation, according to Anthony McSwieney, senior financial analyst, life ratings. However, he says that considering most companies are well capitalized, more acquisitions are possible.

"It's always possible that deals like these could occur as operational strategies are reassessed," says McSwieney in a statement.

All of the Canadian life insurance companies have financial strength ratings of A- (Excellent) or higher — and none have negative outlooks, according to the report.

Looking ahead, key challenges facing the industry will include continued economic uncertainty; regulatory changes, including a new solvency standard and new accounting standards that will likely be costly to implement; and evolving technology that will require considerable investment.

The stable outlook for the Canadian life insurance industry contrasts with the negative outlook for the U.S. life/annuity industry, according to A.M. Best. It notes that growing volatility on both the economic and regulatory fronts, as well as continued interest rate pressures, have contributed to a challenging operating environment south of the border.

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