The ongoing economic recovery will support growth in the Canadian life insurance industry, says Moody’s Investors Service in a new report.
The rating agency says that its expects Canada’s economic recovery to drive earnings growth for the life insurance business in 2015. It also believes that a gradual rise in interest rates during the year ‘will help sustain revenue and improve the earnings of Canadian life insurers.’
‘In addition to the improving economy, the Canadian life insurance industry benefits from a favourable structure, with three dominant players sharing 60%-70% of premiums, and from strong asset valuations,’ says David Beattie, senior vice president at Moody’s.
Robust growth in assets under management (AUM) will also continue in 2015, Moody’s predicts; which it says will drive earnings growth too. However, it also cautions that this growth is shifting the business mix of the Canadian insurers, which ‘could increase earnings volatility under depressed market conditions.’
Moody’s expects that the insurers’ credit profiles will likely continue to improve in the year ahead. It also says that enhanced hedging programs will continue to minimize liability risk and support earnings stability. ‘They will mitigate charges driven by the mark-to-market increases to equity market-sensitive actuarial liabilities,’ it says.
The rating agency says that it expects Canadian insurers will continue to exercise discipline in pricing and designing new products, and better manage their in-force business, ‘improving profitability and limiting the risk profile of their in-force liabilities over time.’
In terms of risk, Moody’s warns that a prolonged market correction, along with sustained low interest rates, represents a major risk to the industry’s recovery.