Higher rates could lead to new products, more premium revenue for lifecos: DBRS Morningstar

The outlook for Canadian life insurers remains stable for 2024 with signs of modestly improving earnings and stable capital levels despite an uncertain economic outlook, according to commentary released by DBRS Morningstar on Monday.

Interest rates are likely to remain higher than pre-2022 levels, which will increase earnings through higher investment yields from fixed assets and potentially lower insurance liabilities. Lifecos can also generate more premium revenue as higher interest rates make annuity and some insurance products more appealing to consumers, the report said.

Manulife Financial Corp. re-entered the annuities market in Canada last month after exiting in 2018, and Desjardins Group last week began offering the first advanced life deferred annuities in Canada.

“The outlook for Canadian lifecos continues to be stable, with insurers likely to benefit from the higher interest rate environment in the medium to long term,” Komal Rizvi, DBRS Morningstar’s vice-president of insurance, said in a release.

Although the outlook is mostly positive, there may be an increase in impairments in insurers’ invested asset portfolios, particularly in private credit, mortgage loan, and real estate asset classes. However, any increased risk is manageable as the Big Four lifecos’ direct real estate exposure remains low at 4% of total invested assets and average mortgage loan-to-value ratios remain low, according to DBRS Morningstar.

Canadian life insurers’ regulatory capital levels generally increased when IFRS 17 was implemented in January 2023, a major accounting change that affected how financial results were reported. In addition, life insurance capital adequacy test (LICAT) ratios were all substantially above the minimum requirement, which provides a capital buffer to protect against adverse developments.

Insurers could deploy the excess capital through dividends or by offering new products. For example, the high interest rate has led to the popularity of accumulation-type savings products with a guaranteed investment component, individual fixed annuities and pension risk transfer. Companies could also invest in digitizing their business processes and leveraging technology to improve efficiency.

“Diversified operations, good risk management practices and high capital levels should help lifecos successfully navigate an uncertain macroeconomic environment,” Rizvi said.

Given already high credit ratings, it’s unlikely that there will be positive rating changes. Big Four insurers — the Canada Life Assurance Company, Sun Life Assurance Company of Canada, the Manufacturers Life Insurance Company and Industrial Alliance and Financial Services Inc. — remain in the AA rating range.

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.