Ratings agency AM Best announced Sept. 13 that it is maintaining its stable rating outlook for Canada’s life insurance industry, thanks to the industry’s focus on maintaining strong regulatory capitalization levels and favourable earnings and underwriting in the face of low interest rates. Companies are also being praised for diversifying their earnings and business profiles internationally.
Regulatory concerns feature prominently in the report, which also looks at the industry’s investments, at accounting changes and the impact they could have on financial statements and at the growing importance of enterprise risk management systems. The LICAT (Life Insurance Capital Adequacy Test), for example, “is now a known element that has been absorbed into the industry’s strategic planning process with little concern,” says the report entitled Canada Insurance: Still profitable amid growing challenges.
“AM Best considers Canada’s life insurance industry well capitalized,” says AM Best. “Capitalization (as measured by LICAT) evidences the industry’s structural strength, with essentially all companies exceeding general targeted scores above 120 per cent. Indeed, most met or exceeded 130 per cent. Total equity continues to grow organically through strong net income which has allowed companies to continue to pay out dividends to shareholders.”
Although domestic growth opportunities remain limited, they say pricing discipline remains strong, helping Canadian life insurers maintain their focus on growing their core lines of business. “Capital continues to grow for insurers through solid earnings over the past year due to solid underwriting fundamentals, growth in direct premiums and solid equity market performance during the year, despite poor equity market performance in the last quarter.”
A shift towards lower risk
Although interest rate pressures continue to mount, new product pricing as well as a shift towards lower risk and lower duration liabilities are offsetting interest rate pressures, says AM Best. “These events have been further supported by ongoing expense saving initiatives through automation and the elimination of redundant processes. As a result, they have been able to unlock more capital from insurance operations, which they have either returned to shareholders or used to support growing operations.”
Direct premiums were up across all regions in 2018, driven by improvements in life, annuity and accident and sickness. The report points out that Asia and Europe are primarily responsible for growth, given Canada’s domestic market maturity.
Pension risk transfer
Niche markets such as the Canadian pension risk transfer market have also been growing for several years. Despite the decline in mutual fund growth, AM Best says mutual fund deposits will also continue to have a positive impact on the industry’s business.
Pretax net income for Canada’s life insurance companies on an International Financial Reporting Standard (IFRS) basis improved year over year in 2018 by 25% to CAD $14.2 billion.
Insurance assets grew by approximately 5%, or $60.1 billion, in 2018, compared with just below 1%, or $10.3 billion, in 2017.
Source: AM Best.