Fitch Ratings' says its outlook for the Canadian life sector remains stable in 2019. Generally favorable macroeconomic conditions will be supportive of life companies’ growth, says the ratings agency.

"We expect Canadian life insurers to maintain their strong capital positions and for profitability metrics to exhibit a stable to improving trend supported by rising interest rates and generally benign credit markets," said Jamie Tucker, Director at Fitch Ratings in a report, 2019 Outlook: Canadian Life Insurance, published Nov. 28. "However, partially offsetting this is the protracted low interest rate environment, which remains a headwind. The sector remains vulnerable to an outsized market shock, which we view as inevitable due to global central bank tightening and global trade uncertainty."

Fitch expects Canada’s big three life insurers (Great West Lifeco, Manulife and Sun Life) to continue to dominate the market and benefit from the resulting scale advantages. “Capitalization is anticipated to remain a ratings strength with all three of the Canadian life insurers reporting life insurance capital adequacy test (LICAT) ratios of at least 130% as of third-quarter 2018. Financial leverage is viewed as manageable and consistent with the high investment-grade end of the spectrum, which is expected to persist in 2019,” says Fitch.

Mature market

Because of the maturity of the Canadian life insurance market, Fitch says it expects insurers to continue to diversify their earnings in fast growing emerging markets, including within Asia.

While the ratings agency expects to see strong underlying results with ROEs in the low to mid-double-digit levels in 2019 for life insurers, it also anticipates that legacy underperforming business will remain a drag on earnings. Fitch expects that insurers will continue to look for ways to “remediate the business through restructuring and/or divestitures.”

Fitch says that liabilities that “remain exposed to the protracted low interest rate environment include long-term care insurance, segregated funds with guarantees and universal life with secondary guarantees. However, Fitch does not anticipate material reserve strengthening for Canadian life insurers associated with the legacy exposure in 2019,” says the report.