Two risks weighing down life insurers’ balance sheets

In addition to low long-term interest rates, two other risks are weighing down insurers’ balance sheets, and their investment portfolios in particular, says Gabriel Dechaine, Managing Director, Canadian Bank and Insurance Analyst at National Bank Financial.

The two most important risks after low interest rates are the quality of corporate bonds that insurers hold in their investment portfolios, and their investments’ exposure to the real estate sector, he explains.

Regarding corporate bonds, Dechaine mentions the end of the 2008-2009 post-crisis boom. “In the last decade, insurers have made profits because there were fewer write-downs or payment defaults in corporate bond portfolios.” Actuaries’ assumptions also factor in the risk of a credit rating downgrade in insurers’ investment portfolio. “If the number of downgrades and bankruptcies is lower than expected, insurers’ profits rise. This has been true since the end of the 2009 crisis. But we are in the reverse cycle these days,” he explains.

Even so, Dechaine expects this risk to remain minimal for now. “The situation could still deteriorate as insurers' corporate bond portfolios are exposed to sectors such as energy, hotels and tourism,” he continues. This exposure is still marginal for now, but he says he is watching it closely.

Dechaine is also monitoring insurers' investment portfolios’ exposure to assets related to real estate risk. “Companies own properties and rent them out. They also hold commercial mortgages. The combination of the two accounts for 10% to 15% of insurers' investment portfolios. When the value of a building increases, insurers make gains. However, between May and June everyone thought that 80% of the workforce would stay at home and offices would be empty. Insurers would then lose money on rents. The situation seems less serious today, yet the fear lingers,” he says.