New commentary from the DBRS Morningstar group of companies shows that Canadian life insurance investment portfolios have performed exceedingly well since the beginning of the COVID-19 pandemic, despite the material global economic contraction which has occurred since the first quarter of 2020.
The firm says Canadian life insurance companies benefitted from having well diversified investment portfolios and conservative investment policies in place before the pandemic hit. They add that despite the large number of credit downgrades which have negatively affected fixed income securities in certain sectors, Canadian life insurers’ investment portfolios suffered minimal asset quality deterioration.
That said, they also add that significant uncertainty remains regarding the speed of the economic recovery and the pressure a slowdown could place on certain assets, particularly real estate. (DBRS Morningstar says Canadian life insurers currently only allocate three per cent of their investment portfolios to real estate assets.)
“Fixed income instruments are currently the predominant asset class in life insurers’ investment portfolios,” says DBRS Morningstar’s senior vice president and head of insurance, Marcos Alvarez. “In absolute and relative terms, credit experience and impairments were minimal for Canadian life insurance companies’ investment portfolios during the peak of the pandemic. Nevertheless, there could still be a negative impact from credit downgrades in investment portfolios during the next few quarters if governments around the world need to tighten restrictions because of the resurgence of coronavirus cases. We expect that most Canadian life insurers will be able to successfully navigate this scenario.”
The firm’s most recent global macroeconomic scenarios anticipate a return to positive economic growth in 2021 and 2022. The report, Canadian Life Insurers’ Investment Portfolios Have Experienced Minimal Asset Quality Deterioration During the Global Pandemic, also looks at the percentage of bonds that insurers hold – bonds accounted for 68 per cent of Canadian life insurers’ invested assets. Of those, 98 per cent were investment grade at the end of 2020.
“Canadian life insurance companies have mostly maintained the asset mix of their investment portfolios during the last decade, with some reductions in short-term investments and mortgages following the global financial crisis,” they write. “The percentage of non-investment-grade bonds has remained steady through the pandemic.”