Life insurers benefit in high interest rate world

It has been a mixed year for Canada’s life and health insurers as slumping stock markets put pressure on their wealth management business, but core insurance operations turned in solid results.

Analysts see a challenging year ahead as economic pressures have varying impacts on their operations. Higher rates mean better yields on their investments, but it also slows economic growth. Slower growth puts downward pressure on share prices which reduces the value of their assets under administration (AUMs). That crimps the fees they generate from wealth management.

The good news for investors is that while these forces play out, the companies offer some of the highest and safest dividends and safe, steady growth once conditions improve.

“We have a favorable view of the life insurance sector,” says Tim Johal, a vice president and portfolio manager based in Winnipeg with Mackenzie Investments. Mr. Johal is the lead portfolio manager for the  Mackenzie Canadian Dividend Fund which has $2.5 billion in AUM. Canada’s two biggest life insurers, Sunlife Financial Inc. (TSC:SLF) and Manulife Financial Corp. (TSX:MFC)  are among the top holdings in the fund.

Mr. Johal says the sector has held up well and stands to rebound in 2023 as rate increases peak and inflation eases.

“Rising interest rates are a positive for [the sector],” he says. “Acquisitions will support growth and the stocks are attractively valued. As well, the dividends are sustainable and growing which will continue to add value to shareholders.”

Manulife is the only one of the big three life insurers to break even year-to-date with a 1 per cent increase versus a decline of 12 per cent for the TSX Capped Financials Index. The shares yield 5.4 per cent at current prices.

 Great West Lifeco Inc. (TSX:GWO) the worst performer of the group, has seen an 16 per cent share price decline which has pushed its yield up to 6.3 per cent, the highest in the group.

In between the two, is Sunlife, which has broadened its base with wealth management acquisitions and is targeting emerging markets for growth in insurance and other financial services. Its shares are down 10 per cent with its dividend yielding 4.6 per cent.

Mr. Johal says high interest are good for the profitability of their core insurance business which is welcome following a lean decade when rates fell close to zero. Diversification has helped them withstand changing conditions.

He adds that Canadians may think of these companies as only selling life insurance, they have become diversified financial services companies.

 “We like the stability of that core insurance business,” he says. “But outside of that, each of these companies has growth drivers that aren’t obvious.”

Like Sunlife, Manulife is tilting towards global wealth management and Asia. Great West Life, controlled by Power Corp., which also owns Mackenzie indirectly, has been expanding its presence in US retirement services.

Mr. Johal notes that the average forward price to earnings ratio for the group is 8.5, below the 10-year-average of 10.5 which gives plenty of reasons to be optimistic.

 Nigel D’Souza, an analyst with Veritas Investment Research Corp. in Toronto, sees the global economic outlook as offering stiff headwinds for profits. Where Mr. Johal sees rebound potential in wealth management for the sector, Mr. D’Souza sees higher risk.

That’s one reason he favours Manulife. The majority of Manulife’s profit is generated by core insurance with about 30 per cent from wealth management. Sunlife generates about 40 per cent of earnings from wealth and asset management.

“If we are entering a recession, there’s more stability there,” Mr. D’Souza says, adding that Manulife has the strongest capital position out of the life insurers, trades at the lowest multiple and has the most stable earnings.

“If you’re just betting on equity markets doing better why do that owning Sun Life? Why not just own a market exchange traded fund (ETF) or an index fund?” he says.

Mr. D’Souza agrees the life insurers have sustainable dividends, but is less optimistic about near term growth for the payouts. He also sees Asia as a long term opportunity for Manulife and Sunlife.

The CEOs of both companies acknowledged the importance of emerging markets in recent calls with analysts to discuss quarterly earnings. Sunlife CEO Kevin Strain noted that Asian insurance sales were strong as the region emerged from Covid restrictions. Sunlife “continues to enhance and expand offerings for high-net-worth clients in Asia,” he added.  Manulife CEO Roy Gorin acknowledged “resilient” results in Asia and continues to invest in its ManulifeMOVE app as a one-stop gateway for customers.  

Mr. Johal sees a smoother road in 2023 with more upside potential than down.

“The risks appear more than priced into the stocks and these companies are good risk managers.  The decline in equity prices and the rise of interest rates hasn’t hurt them as much as they would have maybe 10 years ago. They’re more balanced.”

This is an edited version of an that article appeared in the Globe Advisor section of the Globe and Mail’s Report on Business on Dec. 19, 2022. For reprint information please view this page.