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(Louie Palu/The Globe and Mail)
(Louie Palu/The Globe and Mail)

Lifecos facing hurdle of low rates Add to ...

You think earnings are going to hurt the share prices of life insurance companies? Well, low interest rates could cause even more pain.

Michael Goldberg, an analyst at Desjardins Securities, argued that earnings are already under pressure because life insurance companies tend to suffer with the broader equity market, which slumped in the third quarter. But the bigger damage will likely come from interest rates – which have remained lower for longer than Mr. Goldberg had anticipated and are showing no real signs of shifting direction any time soon.

Low rates create havoc on investment returns for life insurance companies, which are set to start reporting their third-quarter results on November 2.

As a result, Mr. Goldberg lowered his price targets on a number of stocks. For Great-West Lifeco Inc. , his target fell to $25.50 from $29; for Industrial Alliance Insurance and Financial Services Inc. , it fell to $37.50 from $44.50; for Manulife Financial Corp. , it fell to $18 from $21; and for Sun Life Financial Inc. , it fell to $30 from $34.

Meanwhile, dividend growth is probably stuck in neutral: “In view of the more negative earnings outlook for all the lifecos, we do not foresee a resumption of dividend growth by any of these companies within our forecast horizon to the end of 2012,” he said in a note.

Then again, he is by no means all doom-and-gloom on the sector. Indeed, with share prices down sharply in recent months over the crumbling confidence in the global economy, Mr. Goldberg’s targets imply plenty of upside potential. And if you think that interest rates have bottomed out and will rise eventually, well, now might be a good time to buy some of these beaten-up stocks.

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