Economic uncertainty fails to dampen Canadian life insurers' performance

In a commentary published on August 29, Morningstar DBRS noted that despite the economic challenges posed by a sluggish real estate market and rising household debt, Canada’s big four life insurance companies have shown resilience in the first half (H1) of 2024. 

In the report entitled Canadian Life Insurers Perform Well in H1 2024, Brush Off Impact of Weaker Real Estate Market, Morningstar DBRS reviewed the performance of Manulife, Great-West Lifeco, Sun Life, and iA Financial Group. 

According to Patrick Douville, Vice President, Global Insurance and Pension Ratings at Morningstar DBRS, these insurers have focused for several years on lower capital intensive products. These products shift investment risk to policyholders and limit other types of guarantees. “This trend, in addition to a lower capital framework uncertainty now that the transition to IFRS 17 is complete, has allowed lifecos to focus more on capital redeployment and on optimizing ROE (return on equity),” said Douville. 

Douville highlighted Manulife's move to raise its core ROE target to 18 per cent or higher within the next three years. “This should raise the bar for all four lifecos and put pressure on them to deploy excess capital,” he added. 

The agency also observed solid performance in insurance revenues and new business across the four insurers. However, in the wealth management sector, Sun Life reported mixed results, with net outflows of $29.7 billion from segregated funds and third-party managed assets. 

Commercial real estate exposure 

The life insurers’ real estate portfolios are well-diversified both geographically and in terms of property usage. “Weakness in the Canadian and global real estate sectors had some impact on results, mainly through the direct holdings of real estate properties, though this was limited and spread over multiple quarters, including throughout 2023,” the agency stated. 

“While lifecos still have significant exposure to office properties, many of those are own-use or leased to long term tenants,” the report added. Manulife and iA reported declines in revenues due to recent acquisitions and reinsurance impacts. 

In terms of solvency, the four insurers maintained stable and robust ratios, allowing three of them to proceed with share buybacks. Manulife, Sun Life, and iA collectively spent hundreds of millions of dollars on these buybacks in the first half of the year. Great-West did not follow suit, likely due to a lower capital ratio (LICAT ratio of 130 per cent in Q2 2024). 

Morningstar DBRS predicts that life insurers will demonstrate greater boldness in managing their financial capacities. “The question of capital redeployment remains central to the medium-term strategic outlook of the four lifecos, with opportunities in the U.S. and Asia likely to be pursued.”