What effect will a U.S. credit-rating downgrade have on Canadian life insurance companies, which tend to hold a lot of U.S. debt securities? According to Michael Goldberg, an analyst at Desjardins Securities, the effect will be relatively small - but there will be an impact.
He used Manulife Financial Corp. as an example, given that it holds an estimated $19-billion in U.S. Treasuries. If credit rating agencies cut the U.S. credit rating one notch from its current triple-A rating (a growing likelihood as negotiations to lift the country's debt ceiling drag on, and on), regulations would require Manulife to strengthen its reserves by $20-million.
Mr. Goldberg puts that number in perspective: It amounts to less than 1 cent per share after tax. "It is immaterial but not zero," he said in a note.
He has a "buy" recommendation on the stock, along with a 12-month price target of $21.
Nonetheless, the shares have been falling more or less in line with the rest of the market this week, when investors grew particularly worried about the political impasse in Washington and began to fully appreciate the likelihood of a downgrade.
As of midday trading on Friday, Manulife shares were down 4.1 per cent this week, versus a 4-per-cent decline for the S&P/TSX composite index and a 3.4 per cent decline for the S&P 500.