Canada’s life and annuity insurers generated a net income increase of 27 per cent in 2021, a jump to $15.9-billion for the year. The industry also generated favorable underwriting results, despite the pandemic, “the impact of which was unexpectedly muted,” AM Best researchers write in their most recent Best Market Segment Report, Canada Insurance: Favorable Results in 2021 Despite Pandemic. 

“Pre-tax net income, based on International Financial Reporting Standards for Canada’s life insurance companies increased at the fastest pace in five years, to $19.3-billion, from $14.4-billion in 2020. Net income also increased. Overall earnings were bolstered by investment gains and new business growth, including higher net fee income from higher average assets under management due to the favourable equity markets,” they write.

They add that favourable equity markets and low interest rates have caused investors to move into mutual funds, increasing those deposits substantially, particularly during the last two years in Canada. This is reflected in rising inflows from both retail and institutional investors. “Canada’s life and annuity insurers have gravitated to these less capital-intensive and more fee-driven retirement products in recent years.” They add this has been a positive growth driver for the industry but has also been increasing the segment’s exposure to market volatility.

“AM Best expects more market volatility over the near term, which could dampen mutual fund inflows and reduce fees driven by assets under management.” 

Despite regulatory challenges and economic uncertainty, they say the industry’s rating remains stable thanks to persistently strong regulatory capital levels, favourable earnings and underwriting and an effort to continue refining business profiles through acquisition, continued divestiture of legacy business, capital and interest sensitive business and a heightened focus on innovation.

They also say greater clarity among stakeholders about the impact International Financial Reporting Standard 17 (IFRS 17) will have on balance sheets and business contributed to the rating. 

“Contrary to expectations at the start of the pandemic, the overall impact on Canada’s life and annuity insurers was more muted, with many insurers achieving record levels of capitalization while maintaining strong operating earnings,” they write. “Canada’s life and annuity insurers are generally less sensitive to interest rates than their U.S. counterparts because they have been de-risking their balance sheets for over a decade.” 

Headwinds the industry is currently facing down include inflationary pressures, resulting in higher operating costs and wage inflation, increased geopolitical tension and economic instability globally and the potential impact IFRS 17 will have on company’s financial resources over the next year.