Plunging oil prices drain life insurers’ profitability

By Hubert Roy | April 07 2016 07:00AM

The steep decline in oil prices in Q4 2015 sapped life insurers’ Canadian earnings considerably.

The impact of oil was highlighted when life insurers’ results for Q4 2015 were announced. Financial analysts’ main finding: the plunge in oil prices struck more than one market segment.

Manulife was hit the hardest by the oil dive. The insurer estimates that the impact of the oil decline pared its 2015 net earnings by $900 million. CEO Donald Guloien confirmed that Manulife will miss its target of net earnings of $4 billion in 2016 for that reason. The insurer expects the slowdown sparked by the oil crisis to drag down its net earnings by $400 million this year.

Sun Life Financial reported exposure of $5.6 billion to the energy market, amounting to 4% of the assets in its portfolio. The insurer also mentioned particular investment exposure to transporters of crude oil, natural gas and refined petroleum products. The lifeco has smaller investments in the oil exploration and production segment. CEO Dean Connor points out that Sun Life has less global energy sector exposure than its North American competitors.

Real estate market

Plummeting oil prices also rocked the real estate market. Sun Life owns several office buildings in Alberta, a province particularly hit by this trend; it also finances mortgages. This market represents $2.6 billion in assets for the insurer.

“[Alberta] continues to see real estate and economic fundamentals deteriorate. However, our portfolio remains solid. There have been no material increases in receivables. Our vacancy levels remain similar to last quarter, no mortgages were in default and construction loans are being paid. While we have not experienced a meaningful decline in the value of our Alberta real estate portfolio to date, a prolonged economic downturn in the region would likely lead to weaker prices for commercial real estate,” says Stephen Clarkson Peacher, president of Sun Life Investment Management.

Will a one-letter downgrade in Sun Life’s energy sector assets affect the insurer’s solvency ratio? Peacher doubts that this scenario could affect Sun Life Financial’s Minimum Continuing Capital and Surplus Requirements.

Disability-driven decline

At Great-West Lifeco, a drop in Q4 2015 earnings in Canada is pinned on a rise in disability claims. This decrease was sparked by the economic slowdown in western Canada, which affected claims incidence and termination rates, says CFO Garry MacNicholas. The holding company points out that its exposure to the energy market is moderate.

Dave Johnston, president and Chief Operating Officer, Canada of Great-West Lifeco, says the slowdown began in late Q3 2015. “In disability, our results were below expectations in the fourth quarter. Up until about mid-year, things were quite well behaved. The deterioration was more pronounced in Alberta. When companies are laying off employees, it’s more difficult to get employers back, to take back employees. This happens periodically, and, generally the response is through pricing action, that will come as we go to each of the clients’ renewals over the next 12 months,” he explains. 

Johnston forecasts a margin of loss in this segment at about 5%. “It is manageable. I don’t think we’ll be alone in seeing the impact of the economy,” he says.


Life insurance: the Big Three prosper in Canada

The three leading lifecos in Canada garnered strong sales in the life insurance market.

Great-West Lifeco reports that individual life insurance sales surged by 17% in Q4 2015, versus the corresponding period of 2014. For all segments, the holding company’s sales soared by 81% in 2015 compared with 2014. CEO Paul Mahon wants to consolidate and extend the insurer’s leadership position in the Canadian market through organic growth.

The insurer plans to make strategic investments in digital services, innovation and data analysis. One example: “This fall, we launched a pilot of an innovative health and wellness platform to improve health outcomes of members, and healthcare costs for sponsors,” Mahon says.

Great-West Lifeco also released the HelloLife platform, which helps people create a retirement program tailored to their specific needs.

At Sun Life Financial, individual life insurance sales passed the $100 million mark in Q4 2015, a first for the insurer. CEO Dean Connor told a teleconference of financial analysts that the Canadian career network sales force is now over 4,100 advisors strong.

Segregated fund business

Segregated fund business is also robust, Connor continues. Since Sun Life launched its new platform in May, sales grew by $259 million.

Connor also noted that Sun Life was one of 12 companies included in the new Standard & Poor’s Long-Term Value Creation Global Index. Sun Life is the only North American insurer to make the index, comprising 246 companies that have the potential to create long-term value, based on sustainability criteria and financial quality.

“More of our business is group business, which is less volatile,” Connor continues. “We’ve also created options for growth, [including] Wealth business in Canada. Over the medium term, we are optimistic about our business.”

At Manulife, insurance sales rose by 24% worldwide. The largest increase occurred in Canada. In Q4 2015, sales totalled $303 million, for an increase of 76%. Total insurance sales in 2015 stood at $825 million, up 43% compared with 2014.

“By keeping the customer at the centre of everything we do and by innovating to create new and extraordinary customer experiences we are on track to set ourselves apart from the competition, becoming a leading disruptor in the industry,” Guloien says.