The major Canadian life insurance companies are exposed to the troubled energy sector, but that exposure is not yet a credit concern for the big insurers, says DBRS Ltd. in a report published on Wednesday.
The report from the Toronto-based credit rating agency looks at the big insurers and their direct investment exposure to the oil and gas sector, and their indirect exposures, such as mortgages and real estate assets in the oilpatch.
“Generally, DBRS considers the exposures of Canadian life insurers to the oil and gas sector to be manageable from a credit perspective, given current earnings levels, total invested assets and regulatory capital cushions,” the DBRS report says.
The report notes that the four major Canadian life insurers — Manulife Financial Corp., Sun Life Financial Corp., Great-West Lifeco Inc. and Industrial Alliance Insurance and Financial Services Inc. — have varying levels of exposure to the sector. As a percentage of invested assets, they have “reasonable” direct exposures to oil and gas holdings, the report says.
While current exposures are reasonable, “… a severe regional economic decline affecting asset valuations and national default rates across Canada could have negative implications …” for the credit position of the big insurers, the report adds.
That said, DBRS believes that energy assets will recover, if held long enough. As well, a significant portion of the insurers’ liabilities are longer term, so they “have the ability to wait for the commodity cycle to play out, avoiding realized losses,” the DBRS report says.
DBRS expects a slow recovery in oil prices, as supply and demand slowly returns to equilibrium. Credits in the energy sector are likely to remain under pressure in 2016, the credit rating agency says, but supply will come into balance with demand in 2017, supporting higher prices.
Photo copyright: xtockimages/123RF