Canadian life insurance companies (lifecos) have shifted asset allocations in the face of historically low interest rates without sacrificing the quality of their investment portfolios, according to a new report from New York-based credit-rating agency Moody’s Investors Service Inc.
“Canadian life insurers have enhanced their yields by lengthening durations and investing in less-liquid assets, but have nevertheless maintained the quality of their portfolios. Credit risk in their debt securities portfolios has risen only slightly since 2010, allowing for a reasonable return on risk,” says David Beattie, senior vice president with Moody’s.
The Moody’s report notes that the Big Three lifecos — Sun Life Financial Inc., Manulife Financial Corp., both based in Toronto, and Winnipeg-based Great-West Lifeco Inc. — have been able to boost yields by shifting assets to longer-duration assets from public equities. For example, all three firms have expanded their direct investments in real estate. In addition, the Moody’s report notes that Manulife, in particular, has also increased its investments in other long-duration alternative assets substantially, such as oil and gas, timberland and farmland.
Despite this shift, the Moody’s report says that investment-grade fixed-income bonds remain the focus of these firms’ portfolios in general.
The Moody’s report also points out that the longer durations of these investments expose insurers to more liquidity risk and greater mark-to-market sensitivity to interest rates. It also cautions that a further rise in risk appetite “could become a concern if credit conditions were to deteriorate from their current, extremely favourable levels.”