The outlook for the Canadian life insurance industry is largely stable, says Moody’s Investors Service in a new report.

Moody’s says that the performance of the industry’s big three players will be solid over the
next 12-18 months due to the higher, more reliable earnings that resulted from industry consolidation.

The market is dominated by the three largest players – Sun Life Assurance Co. of Canada, Great-West Life Assurance Co., and Manufacturers Life Insurance Co. – who control two-thirds of the overall market. This poses a challenge for smaller players which will have to specialize in a particular niche or risk being marginalized and, ultimately, become acquisition targets.

The largest Canadian life insurers also have extensive operations abroad. Approximately 50% of the big three companies’ revenues were derived from international operations. About one-third of their earnings came from the U.S.

“Because the domestic Canadian market is mature, I expect that the proportion of total earnings coming from non-Canadian businesses will increase,” said Peter Routledge, Moody’s vice president-senior analyst and author of the report. “Their earnings within Canada are quite stable and provide a foundation for growing their international businesses.”

Despite these strengths, the industry is also facing some challenges, Moody’s adds. Financial leverage for some players remains high, relative to international peers, it notes. In Moody’s view, high financial leverage reduces a life insurer’s flexibility to adapt to unexpected events and thereby increases credit risk. “Though an outgrowth of successful domestic consolidation, international expansion also comes with its own set of risks,” said Routledge. “These risks include integration risk and adapting strategies to new markets.”