A.M. Best Revises Outlook to Negative on the Canadian Life Insurance Market.

OLDWICK, N.J. -- While the Canadian economy has not experienced the devastating impact from the global financial crisis as many other developed markets have, Canada has clearly been adversely affected by the global economic downturn. This is evidenced by the sharp erosion in the value of the Canadian dollar, rising unemployment, significant declines in the Toronto Stock Exchange (TSX) index, constricted lending practices and declines in net household worth and overall consumer confidence. While nearly all life insurers in Canada have been negatively impacted in some way by the financial turmoil, those entities with large exposure to equity markets--either through segregated fund products or as asset managers--have been most affected.

In light of the historic level of economic disruption in North America, A.M. Best has revised its outlook on the Canadian life insurance segment to negative from stable. Over the last several months, A.M. Best has taken a number of negative rating actions in the life insurance sector. A.M. Best expects that the pace of these rating actions may accelerate as it reviews the results for life and annuity companies throughout the year. It is A.M. Best's expectation that a number of negative rating actions--including downgrades of issuer credit ratings (ICR) and financial strength ratings (FSR) as well as outlook revisions--may occur as a result of this review.

Canadian life insurers are experiencing mounting pressures as the global financial crisis hampers their ability to maintain a conservative capital base as well as sustain the favorable revenue and earnings streams recorded in recent years. A.M. Best notes that certain companies with exposure to equity-linked products have bolstered their capital position by issuing debt or equity at a time when liquidity was at a premium, resulting in less than optimal pricing. On the regulatory front, the Office of the Superintendent of Financial Institutions (OSFI) provided added flexibility for financial institutions issuing high quality preferred shares by allowing those securities to count as Tier 1 capital, relaxing reserving requirements and revising its minimum capital rules for segregated fund guarantees (SFG).

As recently as September 2008, A.M. Best viewed the Canadian life industry as stable. While the Canadian economy remained resilient at that time, market conditions have deteriorated significantly and expectations for growth in Canada in 2009 have recently been revised to be modestly negative.

The global contagion has clearly impacted Canada's equity markets. This in turn has led to large net outflows in mutual funds and grim outlooks for equity-linked products. Lower fund values translate immediately into lower fee revenues. Longer term, guarantees that are "in the money" will result in payouts. Although the ultimate financial impact cannot be assessed at this time and remains largely dependent upon future stock market performance, A.M. Best expects the overall operating performance for companies with large exposures to deteriorate.

In addition, while many Canadian life insurers employ thorough enterprise risk management (ERM) strategies, the effectiveness of these strategies are being tested under true stressed conditions for the first time. A.M. Best will continue to monitor the ERM programs employed by life companies in conjunction with the overall financial and operating performance experienced during the near to medium term.

Although fundamentals for the vast majority of life companies are currently adequate, A.M. Best believes that the unprecedented negative financial conditions will challenge Canadian life insurers in the near term as uncertainty continues regarding the depth and duration of the lingering financial crisis. Continued deterioration in economic fundamentals would lead to higher credit defaults, ongoing equity market volatility, lower consumer confidence and higher unemployment. As a result, life insurers would be pressured by weakening of product sales, earnings and capital adequacy. While A.M. Best notes that any negative rating actions will continue to be company-specific, the ongoing macroeconomic deterioration has led to a change in outlook for the entire segment.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.