Investors seem to be waking up to the fact that Canadian life insurance companies are sensitive to low interest rates and weak stock market activity. After Monday's warning from Sun Life Financial Inc. that it would report a big loss for the third quarter, Sun Life shares plunged 9 per cent and dragged down Manulife Financial Corp. as well.
Industrial Alliance Insurance and Financial Services Inc. held up reasonably well on Monday, prompting a downgrade on Tuesday from Michael Goldberg, an analyst at Desjardins Securities. He cut his recommendation on the stock to "hold" from "buy," arguing that investors were oblivious to the interest-rate challenges only because the company doesn't recognize them until the fourth quarter.
"Recall that Industrial Alliance does not recognize the impact of interest rate movements in its quarterly results, unlike Manulife and Sun Life," he said in his note. "In the fourth quarter, we expect a significant earnings impact from an IRR adjustment for the low interest-rate environment. But management may warn about this expected fourth quarter weakness from its annual assumption review when it reports third quarter results." They arrive on Nov. 2.
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Mr. Goldberg warned last week that life insurance companies were going to be facing some severe interest-rate-inspired headwinds and cut his target prices accordingly. At the time, he trimmed his target on Industrial Alliance to $37.50 from $44.50. Now, at last, the market seems to be paying heed to the interest rate threat: Industrial Alliance shares were recently spotted down 5.4 per cent in afternoon trading on Tuesday.