The election of Donald Trump is offering an unexpected lift to Canada's largest insurers, the latest sign of a turnaround for companies that have struggled under the weight of low interest rates for the better part of a decade.
Sun Life Financial Inc. and Manulife Financial Corp. capped the life and health insurers' third-quarter earnings season with results that surpassed expectations and revealed strong investment gains.
But it was Mr. Trump's win, and the jump in interest rates that followed, that largely drove a sector rally that saw many insurers' shares hit their highest points so far this year on Thursday.
Manulife's stock rose 9 per cent as the company posted third-quarter profit that increased to $1.1-billion, from $622-million a year earlier. Sun Life's shares were up nearly 10 per cent on a 35-per-cent rise in profit reported Wednesday evening. And Great-West Lifeco Inc. shares, which were hit hard last week, got a 3.3-per-cent lift.
The share price gains for the Canada's largest three insurers, all of which have significant operations south of the border, mirrored those recorded by other large insurers, such as MetLife Inc. and Prudential Financial Inc. as the promise of an economic boost brought by the newly elected Republican pushed up bond yields. U.S. 10-year treasuries have climbed, marking investors' expectation for a stronger U.S. economy, higher inflation and higher interest rates from a business-friendly Mr. Trump.
Such a shift in rates would be a boon for insurance companies that invest the premiums they collect from customers in the steady fixed-income asset class in order to pay claims years in the future. The current prolonged period of low rates has put pressure on insurers, causing them to reprice products, introduce hedges and alter their investment strategies. Even with those measures now firmly in place, the overhang has weighed on share prices – none are yet trading above prerecession highs, even with Thursday's run-up.
Peter Routledge, analyst at National Bank Financial, noted the market's recent fondness for insurance stocks after Sun Life reported results on Wednesday and said the companies could benefit further.
"The spike in U.S. 30-year bond yields following the U.S. presidential election … gives us more cause for cautious optimism," Mr. Routledge said. This wasn't because of the direct impact on Sun Life's results, he added, "but, rather, due to the beneficial impact of higher long-term interest rates on equity market sentiment" toward the life insurers.
Donald Guloien, chief executive officer of Manulife, said there could be more at play than just the election results after an analyst suggested there were "a couple of Donalds that seem to be driving the stock right now" on the company's earnings call.
"In fairness, interest rates in the United States have been going up since early September, when predictions were in an entirely different direction," Mr. Guloien said. "I think what's really driving it is the fact that unemployment rates are essentially at full employment levels – 4.9 per cent – median wages in the United States are up 5.5 per cent for the first time in 20 years, and the upward movement in rates and yield curve all benefits us."
It is still unclear what impact the government changes in the U.S. will have on the lifecos with business south of the border.
"I'd say it's too early to speculate on what president-elect Trump and a Republican-led Congress may actually do," Dean Connor, CEO of Sun Life, said, adding that the company wouldn't be affected by potential changes to Obamacare (the Patient Protection and Affordable Care Act), which could be altered by Mr. Trump.
"If it does change, we don't see it having a big impact on our business because the vast majority of our business is not health-care-related – we're not in the business of paying personal health-care claims," Mr. Connor said.
Sun Life operates in the the United States through its Boston-based money manager MFS Investment Management and its growing group benefits business, which provides employees with benefits such as disability insurance, dental coverage and vision care.
Other market movements may also benefit the lifecos. Manulife posted investment gains of $297-million, compared to $220-million in charges one year ago.
"The sizable investment gains was clearly a positive, as the negative impact from declining oil prices appears to be behind Manulife," said Tom MacKinnon, analyst at BMO Nesbitt Burns, in a note to clients.
By the numbers
9.82%: One-day increase in share price of Sun Life Financial
9.21%: One-day increase in share price of Manulife Financial
3.31%: One-day increase in share price of Great-West Lifeco