Credit risk managers have a (bad?) habit of using baseball analogies when talking about the investment cycle. A typical answer to the question, “Where are we in the cycle?” might be something like, “Feels like the 7th inning,” to signal that a good credit cycle is getting long in the tooth and may turn soon.
To continue the analogy, the pandemic in many ways felt like a long rain delay. Unprecedented fiscal and monetary intervention pretty much side-lined any market-driven changes. With the development of vaccines in early 2021, the tarps started being rolled back and we began to anticipate a return to a more normal market dynamic in 2022.
Assuris’ Assessment of Industry Asset Values and Credit Risk
Here at Assuris, we spend a lot of time thinking about industry-wide and company-specific risk within the life insurance sector. So, it may not surprise you that asset values and credit risk were top of mind for us as we started to emerge from the pandemic. During 2021, we spoke to credit and asset specialists at our member companies, our regulatory partners, the Bank of Canada and other experts – as well as doing our own basic research – to develop a view on overall industry asset value and credit risk.
We found that our industry continues to be well diversified across asset classes and credit exposure and is well-positioned to continue successfully navigating through these uncertain times.
We did note a few sectors that have greater exposure to a decrease in value post-pandemic, such as non-essential retail, commercial and residential real estate, but found that the industry’s overall exposure to these sectors is modest and well managed from a risk point of view.
Industry Asset Allocation Snapshots
We thought you might be interested in a couple of snapshots of the industry’s holdings.
Canadian insurers remain mainly invested in fixed income assets (making up 80-85% of total industry assets). Industry asset allocation has been stable over the last six years, as illustrated on the following table:
The alternative assets category is mainly invested in commercial mortgages, residential mortgages and real estate.
We do see a difference in portfolio holdings of the large companies compared to mid-sized and smaller companies:
As we move through 2022, inflationary pressures, interest rate changes, managing investment strategies under IFRS 17 and, above all, the reemergence of geopolitical risk have once again made it tough to call the credit cycle. While we remain vigilant, the life insurance industry is facing a new phase of uncertainty with a position of strength thanks to its diversification and focus on risk management.
