The Bank of Canada’s recent rate hike is a “muted positive” for Canadian life insurance companies, but interest rates will have to go much higher before they have a truly meaningful impact on their businesses, say financial analysts.
On July 12, the Bank of Canada raised its overnight lending rate by one quarter percentage point, to 0.75 per cent from 0.5 per cent.
Share prices rose slightly
Shares in Canadian life insurers Manulife Financial Corp., Sun Life Financial Inc. and Industrial Alliance Insurance and Financial Services Inc. rose slightly following the rate hike. For example, a month before the rate hike, Manulife shares on the Toronto Stock Exchange’s S&P/TSX composite index stood at $24.11, but a day after the Bank of Canada rate increase were up to $25.22. Sun Life went from $45.56 a month before to $47.01 and IAG shares increased slightly from $63.82 to $64.13.
Manulife and Sun Life are more affected by the U.S. Federal Reserve rates rather than those of the Bank of Canada, say financial analysts. And they are also more sensitive to longer-term rates and accompanying bond prices rather than short-term rates.
Long-term rates more important
“It’s good that short-term rates have gone up and frequently increases in short-term rates help lift rates farther along the yield curve,” said Meny Grauman, financial services analyst with Cormark Securities Inc. “But it’s really long rates – 10-years-plus— that are more important for life insurance companies in general. What we’ve seen both in Canada and the U.S. is that central banks are raising short-term rates.”
Paul Holden, a financial services analyst with CIBC World Markets, said some of the yields on the longer term bonds in the U.S. are now bouncing back.
Higher rates that eventually turn into higher yields are also good for life insurers in that they require less regulatory capital. “There are also some earnings implications for the companies which are positive both for earnings and required regulatory capital,” added Holden.
But both analysts said it will take more central bank rate hikes on both sides of the border for Canadian life insurance companies to see meaningful changes.
“Right now, it’s a muted positive,” Grauman said of the impact of the recent Bank of Canada rate hike on life insurers.