OLDWICK, N.J.--(BUSINESS WIRE)--July 7, 2003--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. titled, "Canadian Life Industry Calmer Waters Than U.S. Life
Industry's Perfect Storm."
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.
The volatile equity markets have reduced fee-based income for both
Canadian and U.S. life companies, as the level of assets under
management has declined. However, 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.
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, 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.
A.M. Best continues to view the Canadian life market as stable,
reflecting strong capitalization, conservative accounting/actuarial
practices, a relatively strong economy, a manageable interest-rate
environment and strong management teams. However, as Canadian life
companies attain growth through larger acquisitions and related
increased financial leverage, companies might be challenged to
maintain satisfactory interest coverage on debt obligations and to
effectively digest and integrate sizable acquisitions.
A.M. Best believes that the Canadian life companies' strong
capitalization is sustainable given the prevailing environment. 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. A.M. Best also expects that the large
Canadian life companies will manage their balance sheets more
aggressively, with increased financial leverage and higher levels of
intangible assets as a result of acquisition strategies.
BestWeek subscribers can download a free printed copy of this full
four-page special report or a combination of the printed report plus a
spreadsheet file of the report data for $25 from www.bestweek.com.
Nonsubscribers can download a printed copy of the full report for
$25 or a combination of the printed report plus a spreadsheet file of
the report data for $50 from www.bestweek.com.
A.M. Best Co., established in 1899, is the world's oldest and most
authoritative insurance rating and information source. For more
information, visit A.M. Best's Web site at www.ambest.com.