Canadian life insurers saw their financial leverage ratios increase in 2016, although they remain below their U.S. counterparts, according to a new report from Fitch Ratings.
The financial leverage ratio (FLR) for the publicly-traded Canadian insurers rose modestly to 21% in 2016, the report says. All of the big three Canadian firms saw their leverage ratio increase, it notes.
In the U.S., insurers’ leverage ratios were more or less unchanged during the year, at 26.2%.
Financial leverage is generally lower at Canadian companies due to their use of larger amounts of preferred debt in their capital structure, the report notes.
During 2017, Fitch expects a modest reduction in financial leverage, stemming from companies’ efforts to reduce outstanding debt, along with the rising cost of issuing debt in the U.S. Interest coverage metrics are expected to remain under pressure, as insurers continue face earnings challenges, the report adds.
“Given the uncertainty surrounding how the post-election bump in interest rates and subsequent Federal Reserve actions will affect the speed at which interest rates may increase, Fitch expects the life insurance industry may continue to take advantage of the current lower interest rate environment to strengthen its capital base or prefund upcoming maturities,” says Douglas Meyer, managing director at Fitch, in a statement published on Friday.
“Interest coverage for U.S. based insurers declined during 2016 driven by continued pressure on earnings from headwinds associated with low interest rates, adverse mortality and a stronger U.S. dollar whereas Canadian insurers were impacted by elevated levels of debt associated with prefunding activities as well as continued earnings pressure, leading to a decline in fixed-charge coverage,” adds Meyer.