Canadian Life Insurers' Investment Portfolios Have Experienced Minimal Asset Quality Deterioration During the Global Pandemic

DBRS Morningstar published a commentary describing the impact of the Coronavirus Disease (COVID-19) global pandemic on the asset quality of Canadian life insurance companies’ investment portfolios, which have performed very strongly despite the global economic slowdown since the end of Q1 2020. Canadian life insurers’ investment portfolios have remained mostly unaffected thanks to the avoidance of non-investment-grade corporate bonds and equity securities in sectors affected by social-distancing restrictions such as retail, airlines, and hospitality.

Key highlights include:

-- Social-distancing restrictions adopted during the pandemic resulted in material economic contraction globally, potentially increasing the risk of asset quality deterioration in insurance companies’ investment portfolios.

-- Canadian life insurance companies benefitted from having in place well diversified investment portfolios and conservative investment policies before the beginning of the global pandemic.

-- Despite a large number of credit downgrades negatively affecting fixed-income securities in certain sectors, Canadian life insurers’ investment portfolios suffered minimal asset quality deterioration during the peak of the global pandemic.

-- Given the resurgence in the number of cases as a result of new coronavirus variants, significant uncertainty remains regarding the speed of the economic recovery, which could further pressure asset quality of certain assets, particularly real estate.

“Life insurers typically tailor their investment portfolios to meet the complex requirements of their product liabilities, risk appetite, and solvency requirements. Generally, their investment portfolios are diversified across assets classes, industry sectors, and geographies. Fixed-income instruments are currently the predominant asset class in life insurers’ investment portfolio given the need to closely match the duration of assets and liabilities while generating a steady income flow from these investments. In absolute and relative terms, credit experience and impairments were minimal for Canadian life insurance companies’ investment portfolios during the peak of the pandemic. Nevertheless, there could still be a negative impact from credit downgrades in investment portfolios during the next few quarters if governments around the world need to tighten restrictions because of the resurgence of coronavirus cases. We expect that most Canadian life insurers will able to successfully navigate this scenario given their strong capitalization buffers and conservative investment portfolios,” said Marcos Alvarez, Senior Vice President and Head of Insurance.