In light of the level of economic disruption in North America, A.M. Best has revised its outlook on the Canadian life insurance segment to negative from stable, the rating agency said Thursday.

“While nearly all life insurers in Canada have been negatively impacted in some way by the financial turmoil, those entities with large exposure to equity markets — either through segregated fund products or as asset managers — have been most affected, A.M. Best said in release.

Over the last several months, A.M. Best has taken a number of negative rating actions in the life insurance sector. The rating agency says it expects that the pace of these rating actions may accelerate as it reviews the results for life and annuity companies throughout the year.

It adds that a number of negative rating actions, including downgrades of issuer credit ratings and financial strength ratings, as well as outlook revisions, may occur as a result of this review.

“Canadian life insurers are experiencing mounting pressures as the global financial crisis hampers their ability to maintain a conservative capital base as well as sustain the favorable revenue and earnings streams recorded in recent years,” A.M. Best says.

It notes that certain companies with exposure to equity-linked products have bolstered their capital position by issuing debt or equity at a time when liquidity was at a premium, resulting in less than optimal pricing.

As recently as September 2008, the rating agency viewed the Canadian life industry as stable, but market conditions have deteriorated significantly and expectations for growth in Canada in 2009 have recently been revised to be modestly negative.

The downturn in global equity markets has led to large net outflows in mutual funds and grim outlooks for equity-linked products. “Although the ultimate financial impact cannot be assessed at this time and remains largely dependent upon future stock market performance, A.M. Best expects the overall operating performance for companies with large exposures to deteriorate,” it says.

Although fundamentals for the vast majority of life companies are currently adequate, A.M. Best believes that the unprecedented negative financial conditions will challenge Canadian life insurers in the near term.

‘Life insurers would be pressured by weakening of product sales, earnings and capital adequacy,” it says.

“While any negative rating actions will continue to be company-specific, the ongoing macroeconomic deterioration has led to a change in outlook for the entire segment,” A.M. Best says.

IE