Standard & Poor’s Ratings Services says that despite the fact it views the Canadian life and health insurance industry as be among the strongest financially in the world, it is maintaining a negative outlook on the sector.

S&P’s outlook on the Canadian life and health insurance industry was changed to negative from stable in August 2000.

In a new report, the rating agency says it is continuing the negative outlook because of the challenges facing the industry. They include: the negative impact of weak global equity markets on both investments and fee-based asset-management businesses; the negative impact of declining yields on fixed-income investments and margin compression on spread-based businesses; continued deterioration in asset quality due to the difficult credit environment; the continued pressure for insurers to increase their ROEs; and, consolidation, which introduces integration risk, and often increased financial leverage.

S&P says the Canadian life industry still has a number of fundamental strengths working in its favor, including: the general stability of protection-based products; strong capital; very high-quality investment portfolios that are well-diversified and include a lower proportion of non-investment grade credits and equity investments than their global peers; and, increased market discipline brought about by demutualization and industry consolidation.

Although many companies in the industry remain strong, S&P says several are disproportionately exposed to the perceived risks:

  • S&P expects that most of the long-term ratings on Great-West Lifeco and its subsidiaries will be lowered a notch and a negative outlook will be maintained following its expected purchase of Canada Life Financial Corp. later this year;
  • Standard Life’s outlook was changed to negative from stable on May 28 to reflect S&P’s concerns the company’s operating performance may not meet expectations. This follows a double-notch downgrade that took place Jan. 29;
  • The outlook on Sun Life remains negative, and reflects S&P’s view of the operational and integration risks that remain from the firm’s two recent acquisitions, the integration of parts of its Canadian asset management business with CI Fund Management Inc., and more recently the soft financial performance of some of its U.S. operations;
  • The negative outlook on Transamerica Life Canada reflects the relatively high amount of segregated fund risk that the company has taken on relative to its peer group, and the impact of the weak global capital markets on its actuarial reserves.