The American ratings agency A.M. Best has upgraded its outlook for Canadian life insurers, revising their financial strength ratings from negative to stable. By doing so, the rating firm says it wants to emphasize that the entire industry has successfully weathered the financial crisis.
However, A.M. Best says that this improved outlook for the sector does not reflect individual changes at specific insurers. Instead, the ratings firm indicates that it was the sector's overall performance that it wishes to reflect with this rating action.
A.M. Best lowered its rating outlook for the life insurance industry in March 2009. At the time, the financial crisis was the main reason behind the ratings agency's decision to assign a negative outlook to Canadian life insurers, but it also considered the impact of low rates interest, stock market volatility and rising credit defaults. A.M. Best says it now believes that the industry is well capitalized. The ratings firm also notes that players who are primarily active in Canada have successfully weathered the financial crisis.
However, in a press release issued on Aug. 31, A.M. Best analysts said that the industry still faces some challenges and suggest that the Canadian economy will not recover as quickly as had been forecast earlier in the year. "The overall strength and shape of the global economic recovery, and specifically that in the United States, remains uncertain, and the potency of this recovery will continue to impact Canada," they commented.
The ratings agency also notes that even if the results of insurers in Canada have improved, they remain well below those reported before the crisis. "Sales in certain segments remain sluggish, and companies with outsized product exposure to equity market risks likely will remain under pressure," say the A.M. Best analysts.
Despite these constraints, A.M. Best has improved its outlook for the sector since it does not expect major fluctuations in the ratings for Canadian life insurers. Over both the short and medium term A.M. Best says it foresees a stable environment during which the number of downgrades will equal the number of upgrades. The agency also says that, given the current short-term volatility in the stock markets, reductions in capital and earnings will be viewed negatively.