Rising interest rates and stronger equity markets have helped to increase earnings at two of Canada's largest life insurers.
Executives at Sun Life Financial Inc. and Manulife Financial Inc. said rising rates are having a positive impact on their business after reporting second quarter earnings. On Thursday, Manulife reported $259-million in profit, rebounding from a loss of $281-million in the same period last year.
"[Higher interest rates] benefit us by requiring us to hold less capital, margins typically improve, and it often means there's a better economic environment generally, so that's all good news for us," Manulife chief financial officer Steve Roder said in an interview Thursday. When rates are low, insurers must set aside more capital to ensure they can pay for future policy holder claims.
Manulife said that as much as $180-million of the charges it took in the last quarter could be reversed in future quarters, when the company moves surplus funds from Canadian treasury bills to other higher-yielding assets, and it accounts for other investment gains. Manulife reported $291-million in second-quarter charges related to items including losses on investments and unhedged variable annuity instruments.
Near-zero government interest rates have prevailed in North America since the depths of the recession that began in 2008 and in the past few months economic growth and lower unemployment have boosted rates on Canadian and U.S. bonds. The yields on the benchmark 10-year U.S. Treasuries rose from a low of 1.6 per cent in early May to above 2.6 per cent.
Moderate equity market improvement also gave Manulife a boost as the insurer reduced its hedging costs by $30-million this year, which the company believes is sustainable. The S&P 500 is up 19 per cent year to date, although the S&P/TSX has traded in a range, gaining just 1 per cent in the same time frame.
Even though Manulife management warned that investors should expect another hit in its third-quarter results, the fact that the charge would be Manulife's lowest in four years is a positive, Robert Sedran, an analyst at CIBC World Markets, said in a research note. "We had been expecting that trajectory, but it is still encouraging that things continue to improve, which should allow book value to build as well."
Rising interest rates and other signs of economic strength also helped buoy Sun Life Financial Inc.'s business, said the insurer's chief executive officer Dean Connor.
Better employment in the U.S. encourages more people to sign up for benefit plans, and disability rates drop, Mr. Connor said. Sun Life reported profit on continuing operations of $391-million after the market closed Wednesday.
The progress may take several quarters to show up, though. Sun Life lowered its profit target to $1.85-billion by the year 2015 from $2-billion, as a result of the sale of its U.S. annuities business and reduced expectations for its U.S. and Asian businesses.
Manulife said in its release that it still aims to earn $4-billion in annual "core" earnings by 2016. Speaking on a conference call Thursday, Manulife CEO Donald Guloien tempered investors expectations for further gains by saying that rising rates may not be permanent.
"Our sales are actually coming back pretty well, but we're going to watch it very carefully," he said. "Rates right now look like they're trending up, but that's probably anything but a permanent phenomenon."
Share prices at Manulife and Sun Life have risen by 64 per cent, and 55, respectively, in the past year.