While the U.S. life industry’s perfect storm has resulted in significant challenges and rating downgrades for U.S. insurers, a more stable environment in the Canadian life industry has contributed to Canadian life companies outperforming their U.S. peers, according to a special report by A.M. Best Co.

In the report entitled “Canadian Life Industry Calmer Waters Than U.S. Life Industry’s Perfect Storm”, A.M. Best says the Canadian economy has not suffered to the same degree as the U.S. economy.

While a bear equities market also impacted Canada, Canadian credit markets have not suffered to the same extent as those in the United States. Canadian life companies, while experiencing some significant investment impairments in the telecommunications sector, performed better than U.S. life companies with respect to the degree of impaired assets. Furthermore, Canadian life companies have not encountered the same low interest rate environment as exists in the United States, which has enabled them to better manage spreads and reinvestment risk.

Althought, the volatile equity markets have reduced fee-based income for both Canadian and U.S. life companies, A.M. Best says Canadian life companies have benefited from local regulations that allow increases in management expense ratios, for example on segregated funds, upon providing policyholders six months’ notice.

Some Canadian life companies have been able to mitigate the extent of declines in fee-based income, despite the fall in equity markets, due to their proactive ability to increase management expense ratios.

While U.S. life companies experienced declines in capital and surplus levels, Canadian life companies’ capitalization is strong says the ratings agency. Canadian life companies continued to increase capitalization, both in absolute terms and on a risk-adjusted basis. While most Canadian life companies manage their minimum continuing capital and surplus requirement (MCCSR) within the 175% to 185% range, according to A.M. Best large players — for example, Sun Life Financial Group and Manulife Financial Group –typically maintain MCCSR in excess of 200%, reflecting their strong capital positions and solid recurring earnings streams.

While A.M. Best continues to view the Canadian life market as stable, it says that as Canadian firms grow through acquisition they might be challenged to maintain satisfactory interest coverage on debt obligations and to effectively digest and integrate sizable acquisitions.

Despite these concerns, the ratings agency believes that the Canadian life companies’ strong capitalization is sustainable given the prevailing environment. It says the relatively strong Canadian economy and manageable interest-rate environment allow Canadian life companies to better maintain pricing and persistency in their products, adequately manage spreads and minimize reinvestment risk.

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