Canadian life insurance stocks tend to move up and down on investor expectations for North American growth and changes in interest rates. This year, they’ve mostly been moving up.
Investors have enjoyed great returns from the sector, led by Industrial Alliance Insurance and Financial Services Inc., which is up 50 per cent so far in 2013. Its larger brethren – Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. – have each gained more than 30 per cent.
Behind these numbers lie steady financial performance. Analysts are forecasting the solid results to continue when the four report third-quarter earnings this week. Sun Life and Industrial Alliance will lead the pack, reporting first on Wednesday, Nov. 6, and Manulife and Great-West will follow on Thursday.
Insurance earnings cause less heartburn now than they did during the global financial crisis, when companies were suffering from falling interest rates and rock-bottom equity markets. Insurers have since tried to shield themselves from interest rate and balance sheet risk through hedging investments; many have eliminated or repriced certain products to adapt to the new environment.
The current investment climate – modestly higher government bond yields and rising equity markets – is allowing the insurers to build their businesses at home and abroad. The S&P/TSX composite index gained 5.5 per cent in the third quarter, while the S&P 500 was up 5 per cent.
“In light of the steadily improving market conditions, investor focus continues to shift from worrying about Lifecos’ downside exposure to wondering about who has the most torque to rising rates and equities,” Robert Sedran, an analyst with CIBC World Markets, said in a recent report.
At Great-West Lifeco, analyst John Aiken of Barclays is expecting a “positive quarter” with sequential earnings growth of 9 per cent with the inclusion of Irish Life in its third-quarter results.
After a strong second quarter, Sun Life’s “core” earnings may be level with its last quarter, without any growth, Mr. Sedran said. Over at Manulife, core earnings per share might come in higher than the second quarter, and well above the loss the company took in the third quarter of 2012.
Broader market movements have a big impact on investors’ view of insurance-company valuations, said analyst Peter Routledge in a recent note. But there’s a flip side to that. If equity markets tumble, “investors should expect a disproportionate correction in sector valuations,” Mr. Routledge said. “We look at Canadian life insurers as quasi-wealth-management companies, given the current composition of their balance sheets and income statements.”
The global wealth management businesses of Canada’s four largest life insurers now accounts for between 35 and 45 per cent of their total earnings, according to Tom MacKinnon, analyst with BMO Nesbitt Burns.
More recently some experts have expressed concern that the Bank of Canada’s decision to put plans to raise its key interest rate on hold will affect insurers.
The “removal of the tightening bias is likely to mean that the problems insurers have with prevailing low rates are likely to continue for a longer time,” said Paul Masson, a financial economist and professor at University of Toronto.
Not everyone agrees that there’s cause for concern. Even if longer-term rates were to come down a little bit based on the expectation that short-term rates stay lower for longer, the impact on insurers would be tolerable, said Tom MacKinnon, analyst at BMO Nesbitt Burns.
Either way, investors may be able to find more upside in banks, where Mr. Routledge said “relative valuations appear more favourable.”