As interest rates rise, lifecos’ strong profits continue

Despite the fact that higher interest rates are weighing on the economic environment, the big Canadian life insurers are enjoying near-record profits, according to DBRS Morningstar.

In a new report, the rating agency said that the big four lifecos — Manulife Financial Corp., Sun Life Financial Inc., Great-West Lifeco Inc. and Industrial Alliance Group — turned in strong fourth-quarter financial results and full-year earnings that “were better than expected as the industry almost matched its record 2021 profitability.”

Combined, the big four reported total net income in 2022 of $14.1 billion, down just 4% from the record level of 2021, it noted.

The strong results came against the backdrop of rising interest rates, which DBRS said generally represents a positive for insurers overall.

Higher rates “had a mixed impact on earnings,” it said, “with long-term insurance business lines positively affected and wealth and asset management lines negatively affected.”

Assets under management and administration “trended lower during the year because of weaker asset valuations,” DBRS said, adding that net flows were negative for all four lifecos in the fourth quarter, “closing a challenging year for retail wealth management services amid weakening investor sentiment.”

Still, some firms managed positive asset growth, as acquisitions helped offset the negative net flows.

Higher interest rates also weigh on insurers’ capital levels, the report noted.

However, the industry’s strong profits cushioned the negative impact of higher rates on insurers’ capital and debt levels, DBRS said.

Looking further out, most of the insurers’ debt is expected to roll over at higher rates in the next five years, which could pressure earnings, it said.

In the meantime however, the credit rating trends on all big four lifecos are stable, “reflecting their strong financial positions and the supportive interest rate environment for the profitability of their insurance businesses,” DBRS said.

Additionally, the report noted that a major change in financial reporting standards will loom over the industry in the year ahead.

“The transition to IFRS 17 reporting will be a big theme for the industry in 2023 as investors and other market participants familiarize themselves with the new reporting environment,” said Patrick Douville, vice president of insurance with DBRS Morningstar, in a release.

“We expect lifecos themselves to take some time to get comfortable with their post-transition capital buffers and sensitivities, after which they may be more confident in making large strategic capital allocation decisions,” he added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.