The big three life insurers maintain strength but face headwinds

By The IJ Staff | April 27 2018 11:30AM

Photo: Freepik

Canada’s three biggest life insurers are continuing to maintain their strength and stability; “however, they face headwinds stemming from underperforming lines of business and the continued low interest rate environment,” says a new Fitch Ratings peer report.

The report compares key credit factors associated with Great-West LifeCo Inc., Manulife Financial Corp., and Sun Life Financial, Inc.. Fitch says the three companies' Insurer Financial Strength (IFS) ratings remain very strong, within the 'AA' category.

Multi-national market presence

“The three Canadian life insurers' key credit themes remain centered on very strong business profiles underpinned by strong brand reputations, multi-national market presence and diversified operations,” says Fitch. Other strengths include the companies' balance sheet measures, generally stable operating performance and stable financial leverage metrics.

However, Fitch says that headwinds related to legacy liability exposures and underperforming lines of business are offsetting the companies’ strengths. “When comparing each organization, Manulife and Sun Life both maintain legacy blocks of business that are susceptible to changes in interest rates and equity markets, while Great-West has maintained difficulty growing its asset management business to scale,” says Anthony Beato, Director at Fitch Ratings.

Legacy blocks of business

"When assessing each of the three Canadian legacy blocks of business, we believe Manulife remains the most susceptible to capital and earnings volatility, driven by its Variable Annuity and Long-Term Care exposures. Notwithstanding the company's active decision to discontinue the marketing and sales of these products, we view the lack of empirical evidence in the mortality, morbidity and policyholder behavior characteristics assumptions associated with the underwriting and pricing of this business as inherently riskier," said Beato.

LICAT impact

Fitch’s report also looks at the impact of the new Life Insurance Capital Adequacy Test (LICAT) on the insurers. The three insurers will report their initial LICAT ratios in conjunction with Q1 2018 earnings. While, Fitch anticipates that all three insurers will maintain very strong capital positions, it expects Manulife to be most affected.

"Under the new LICAT framework, we believe that the conservative risk philosophy of Great-West and significant de-risking efforts by Sun Life to lessen sensitivity to interest rate shifts, will lead to continued differentiation in capitalization metrics. However, we expect Manulife to be most adversely impacted by the new framework as a result of its exposure to alternative long-duration asset classes and long-term guarantee products. Additionally, we believe that as insurers navigate LICAT's implementation, it will lead to tactical shifts in strategy, including modest product changes in an effort to obtain offsetting credits for diversification and participating/adjustable products." added Beato.

To learn more, Fitch's Canadian Life Insurers' Peer Review is available at