What's the outlook for Canadian life insurers in 2024?

Higher interest rates, inflation, and softer economic growth to have mixed impact

What's the outlook for Canadian life insurers in 2024?

After persevering through the daunting 2023 macroeconomic environment, including weak markets, rising interest rates, and a softening economy, Canada’s life insurers will continue to have a stable outlook and some hints of improvement over the next year.

In a recently published outlook, DBRS Morningstar said the steep and sharp increases in interest rates since 2022 was initially a negative for Canadian lifecos, as significantly reduced bond valuations led to large unrealized losses in their fixed income portfolios.

With interest rates likely to stay above their pre-2022 levels, the report said life insurers are likely to see a lift to their earnings both in terms of yields on their fixed income investments and potentially lower insurance liabilities.

“The prolonged low interest rate environment caused insurers to hedge away from their portfolios much of the interest rate risk that can arise when rates drop, which while prudent, also reduced some of the upside they would have otherwise gained during the spike in interest rates over the past year and a half,” the report said.

Certain insurance and annuity products could also become more compelling to customers given today’s higher interest rates, DBRS Morningstar added, creating the potential for more premium revenue.

Read more: Are guaranteed retirement income products looking good again?

As insurers become able to offer more attractive pricing for products that had fallen by the wayside in the low-rate climate that persisted for more than a decade, insurers also stand to see better sales on these products, the report added.

“We expect inflation to remain elevated in the near future, potentially increasing operational expenses and claims costs,” DBRS Morningstar said. “However, this impact is likely to be minimal given Canadian lifecos' history of good expense management and largely fixed claims costs.”

Canadian life insurers’ investment portfolios are conservatively managed, it said, with nearly half of the portfolios among the country’s four major lifecos placed in investment-grade fixed-income securities and government bonds.

While they hold a fairly sizable proportion of their portfolios in mortgage loans – a risk in the current environment – that’s offset by the low average loan-to-value ratios of those holdings.

“Direct real estate exposure is relatively small, at only 4% of total invested assets,” the report said. “Nonetheless, it presents some risks given real estate investments have lower valuations in the current environment, especially for commercial real estate in certain under-pressure sectors such as office and retail.”

Read more: Can a 'beds and sheds' real estate strategy weather the looming recession?

Despite mounting geopolitical headwinds and the Canadian economy’s negative GDP growth in the third quarter of 2023, the report noted Canadian life insurers’ general history of successfully operating through economic downturns by virtue of diversification across geographies and product lines, as well as their sizable franchises.

“Overall, we expect Canadian lifecos to maintain their Stable trends, driven primarily by their strong capital levels and ability to consistently generate good earnings,” the report said.