The prospect of a prolonged period of low interest rates is likely to hurt life insurers, notes UBS Securities Canada Inc. in a research report.

“More than anything, low interest rates for longer, are bad for [life insurance companies],” it says, adding that the impact is expected to be much more significant at Manulife Financial Corp. (TSX:MFC), among the Canadian insurers, due to its higher rate sensitivity.

UBS predicts that Manulife will report a loss of $1.48 billion in its fiscal third quarter, 84¢ per share.

It sees Sun Life Financial Inc. (TSX:SLF) reporting comparatively better earnings of $150 million, or 26¢ per share, “due to much lower interest rate sensitivity, and a much lower actuarial charge projected in the quarter.”

“We would also expect lower interest rates to increase earnings sensitivity to interest rates, which has negative implications should rates decline further and require higher capital levels,” the report says.

Higher equity markets, up 9.7% quarter over quarter, should partially provide an offset, the report says. “While much higher markets are positive for Canadian [life insurer] earnings and capital, we do not see this as a sustainable source of earnings growth,” it adds.

The outlook continues to remain negative due to low interest rates, UBS concludes. “We think that [life companies] are fairly valued assuming 3.5% interest rates in 2013. Timing and level of higher rates remain a key risk to valuation,” it cautions. “We continue to prefer banks due to better visibility, growth, ROEs, and capital, with less risk.”

IE