Higher interest rates and stronger equity markets are improving the outlook for Canadian life insurance firms, says UBS Securities Canada Inc. in a new report.

According to the report, higher interest rates and stronger markets should underpin higher earnings at the life insurers. UBS says that every 1% increase in rates currently adds $1.8 billion in income to Manulife Financial Corp. and $225 million to $325 million to Sun Life Financial. Sensitivities and hedging costs are also likely to decline, reducing downside risk, UBS adds.

UBS explains that much higher rates are positive for life insurance companies because they can reinvest at higher rates, and they also positively impact the actuarial valuation of policyholder liabilities by increasing returns from future cash flows. “In this context, we project that higher interest rates should underpin higher reported earnings, book value, returns, and valuation, which is fundamentally driven by return on equity,” it says.

“Given recent U.S. political, fiscal, tax, and economic impacts, which have contributed to pushing the U.S. 10-year bond yield higher… we have a more neutral outlook [on the Canadian lifecos],” UBS says.

At the same time, interest rate, equity market, regulatory, and accounting risks still remain, the report notes. “The economy remains on a soft footing. This means that interest rates and markets could fall again,” UBS says, noting that this could significantly undermine returns and valuations.

IE