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Rock-bottom rates will take toll on insurers

Canada’s life insurance sector is expected to show more bumps and bruises from declining interest rates and stock markets.

Alex Slobodkin/iStockphoto

Great-West and Industrial Alliance kick off second-quarter earnings season for the Canadian life insurers this week, and the sector is expected to show more bumps and bruises from declining interest rates and stock markets.

Capital levels are likely to hover around the point at which markets would have started to get nervous not so long ago, but investors, rating agencies and regulators appear to be giving the firms a bit more leeway these days as rock-bottom rates take their toll.

U.S. long-term treasury rates declined 56 to 58 basis points during the quarter, according to RBC analyst Andre-Philippe Hardy.

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BMO Capital Markets analyst Tom MacKinnon suggests that the market pay close attention to equity market impacts as the results come out.

"Equity markets are likely more important than movements in treasury yields – particularly for Manulife…" he wrote in a note to clients, pointing out that interest rate hedging has been better than expected in the sector.

The S&P/TSX fell by 6 per cent and the S&P 500 by 3 per cent during the quarter.

Manulife has already signalled that it will be taking a charge relating to its stock exposure and reinvestment rate, and CIBC analyst Rob Sedran expects that the hit will amount to about $750-million.

Once the impact of stock markets and interest rates is removed, Mr. Sedran is expecting profits for the sector to be roughly flat.

For Great-West, the first out of the gate, Mr. MacKinnon is forecasting earnings per share of 44 cents, a touch below the consensus expectation. He'll be keeping an eye on the company's changes in actuarial assumptions.

Industrial Alliance is the only other lifeco to report this week.

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"We expect Industrial Alliance to be negatively impacted from lower equity markets but we do not expect any interest rate impact until the fourth-quarter," Mr. Hardy wrote.

All this being said, as Mr. Sedran pointed out: "Despite the fact the companies have taken risk levels lower and have significantly improved disclosures around the impact of market risks, the headline [profit] numbers have proven very difficult to forecast accurately."

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