The ratings of Canada’s life insurers are currently being driven by a highly diversified business profile and geographic diversification, according to a recent peer review by Fitch Ratings.
The largest Canadian life insurers represent more than two-thirds of their domestic market. Considering their operating scale, earnings diversification, brand recognition and distribution capabilities, as well as their wide range of product offerings and diversification across business lines, Fitch views their business profile as favourable.
According to the review, they also benefit from high geographic diversification, as more than half of the big three Canadian life insurers earnings – Sun Life Financial, Great-West and Manulife – are generated outside of Canada.
All three insurers have a presence in the US, while Manulife has a long history and strong market presence in Asia, and Sun Life Financial has been growing its market presence there.
Additionally, according to Fitch, Great-West Lifeco Inc.’s (GWO) earnings benefit from its diverse earnings streams in Europe, along with material contributions from its reinsurance
Operations.
Regarding asset management contributions, the review noted that Sun Life and Manulife’s asset management arms are material earnings contributors, though they faced headwinds over recent years from ongoing fee compression.
Fitch said that it expects earnings contributions from each of the three companies’ asset management arms to decline over the near term due to declines in assets under management stemming from higher interest rates and equity market declines.
When talking about exposure to legacy businesses, the review noted that all three insurers retain exposure that performs below profitability targets and are no longer viewed as core.
Of the three, Manulife was viewed as most exposed to legacy liabilities, particularly long-term care insurance. On a positive note, Fitch added, Manulife reduced its exposure to variable annuities through a reinsurance transaction, which closed in early 2022.
Despite this exposure, Fitch believes that the current macroeconomic headwinds remain manageable for the three large Canadian life insurers.
The rating agency added: “Rising interest rates are expected to be a long-term positive as overall book yields climb, although volatility in alternative assets prices and valuations may lead to declines in investment income for the industry. Canadian life insurers also remain exposed to adverse policyholder behaviour in a rapidly rising rate environment.”
The review concluded with a note regarding the revision of Great-West’s Outlook, from negative to stable, saying: “[It] reflects GWO’s strong financial results while integrating the acquired Massachusetts Mutual Life Insurance Company’s Retirement Services business and expectation that the Prudential Financial, Inc.’s full service retirement business will be integrated in line with expectations. Fitch also believes GWO will continue to reduce its financial leverage in line with rating expectations.”
