The rating agency Fitch has reviewed the outlooks of the three largest life insurance companies operating in Canada.
One insurer failed to impress the analysts.
Great-West Lifeco’s recent deal set off alarm bells. Fitch said the acquisition of the U.S. insurer Massachusetts Mutual Life Insurance Company’s Retirement Services business elevated the holding company's leverage.
Fitch analysts consequently maintained their negative outlook, and kept GWO subsidiaries’ financial strength rating at AA (very strong). They point out that this transaction includes a sizeable portion of goodwill, a financial measure that identifies the difference between a financial value identified at acquisition and the market value after a given period.
All the same, Fitch views this acquisition as synergistic with the Empower Retirement business. They expect the move to gradually bolster earnings.
In addition, the effects of the pandemic remain manageable for Great-West Lifeco. The insurer’s business profile is also very strong, as is its capital position and financial flexibility, Fitch continues.
Fitch analysts rate earnings as generally stable, despite the effects of the Putnam acquisition several years ago, which hindered the insurer’s performance.
“Fitch views Putnam as an ill-timed acquisition that continues to underperform despite restructuring efforts. Favorably, the claims effects of the pandemic were muted due to GWO's diversified risk exposure. The Mass Mutual acquisition further increases Empower's scale and could result in the U.S. becoming a more meaningful earnings contributor for GWO,” the agency says.
Stable outlook for Manulife...
Fitch analysts affirmed a rating for Manulife that reflects more stability, but it is still slightly lower than Great-West Lifeco's rating. Manulife is rated AA-, versus AA for Great-West Lifeco.
Fitch analysts say Manulife's business profile has helped it manage the effects of the pandemic. However, they believe the insurer is overexposed to interest rates and to legacy liabilities including long-term care insurance (LTC), variable annuities and universal life insurance with secondary guarantees.
For long-term care insurance in the U.S. alone, Fitch estimates US$28 billion in above-average exposure for the industry at the end of 2020. The analysts expect management of this product line to remain challenged as a result of low interest rates and above-average underwriting and pricing risk, as well as high reserve and capital requirements.
... and for Sun Life
Sun Life also maintains its financial strength rating. Its rating of AA was affirmed, with a stable outlook.
This insurer also has a very strong business profile, Fitch analysts note. "Our assessment of the company's business risk has also improved, reflective of management's execution to shift new business writings towards less capital intensive and higher margin products, such as protection, group benefits and investment management offerings.”
However, these strengths are partially offset by “Sun Life's exposure to its U.S. legacy run-off business, made up primarily of universal life insurance products with secondary and no-lapse guarantees, which can create a degree of capital and earnings volatility in a low-for-long interest rate environment,” Fitch explains.
