Despite continued market uncertainty, Canadian life insurers’ investment portfolios should remain stable in 2023, according to commentary released by DBRS Morningstar on Wednesday.
After years of increasing assets under management and administration driven by positive net flows and rising markets, 2022 saw a slowdown for most insurers, as well as a decline in net income, attributable “in part to equity market volatility as well as to interest rate movements,” the rating agency said.
Looking to the remainder of 2023, rising interest rates should boost life insurers’ portfolios in the longer term. However, growth in AUMA will remain muted if market volatility continues and inflation persists. With higher inflation reducing purchasing power, investors also have less discretionary income to invest.
“The year 2023 also brings with it the possibility of a recession, which dampens the outlook both for premiums written for insurance products, as well as net sales of mutual and segregated funds,” said Komal Rizvi, vice-president of insurance with DBRS Morningstar, in a release.
In the current higher-yield environment, investors are also choosing lower-fee options.
Depending on the trajectory of the economy and the severity of a potential recession, the level of defaults or impairments, in the lifecos’ investment portfolios, may also increase, but given their high credit quality, any increases should remain manageable, DBRS Morningstar said.
Conversely, demand for annuity products could increase, as the payouts can be higher in a higher-yield environment. The strong labour market also bodes well for group insurance, which usually correlates to gross domestic product growth, and higher inflation can be combated by raising premium rates, when applicable.
Therefore, according to DBRS Morningstar, business models that are well diversified should remain stable. This confidence is a result of life insurers’ high levels of capitalization, the rating agency said, including robust solvency ratios, moderate amounts of leverage, and high debt coverage.
“Overall, despite the headwinds, the outlook for the Canadian life insurance sector is expected to remain stable for the remainder of 2023,” the commentary said.
Lastly, DBRS Morningstar’s high financial strength ratings make upward rating movements less likely in 2023. Financial strength ratings for the Big 4 insurers — The Canada Life Assurance Company, Sun Life Assurance Company of Canada, The Manufacturers Life Insurance Company and Industrial Alliance and Financial Services Inc. — are currently in the AA rating range category.
Given the high ratings, coupled with high capital buffers, DBRS Morningstar said it is unlikely it will make significant rating changes for the sector as a whole.