Equity Market Declines Increase Risk to Insurers' Capital Reserves

Declines in equity markets have increased the risk to the capital reserves of Canadian insurers, which have historically been well capitalized, according to André-Philippe Hardy, at RBC Capital Markets.

Fresh research by the analyst suggests Sun Life Financial Inc. (SLF) is likely to have “the most capital” at this juncture, ahead of rival Manulife Financial Corp. (MFC), after both took steps recently to top up their reserves. The research suggests Bay Street will continue to monitor capital levels of leading insurers closely, and that future moves to strengthen reserves are possible.

Great-West Lifeco Inc. (GWLOF.PK), Canada’s third largest insurer, is in the process of raising about C$1-billion, amid signs that appetite may be limited after Manulife joined Toronto-Dominion Bank (TD) and Royal Bank (RY) in tapping the market.

Bank of Montreal (BMO), which is handling the sale of about C$600-million in new shares for Great West, said last week that it was also issuing C$450-million in debt for its own reserves by selling bonds that will pay an unusually high interest rate of 10.2% and count towards its regulatory capital.

Mr. Hardy noted that:

[Valuations for life insurers] are as low as they have been since the companies have been public. The combination of weak credit and equity markets, combined with low interest rates is likely to lead to continued pressure on profitability.

He added in a research note that Canadian insurance companies continue to have “less credit risk than their U.S. peers, and that their exposures to fixed income securities are generally conservative.”

Comments

[Evan Grey Owl:]

"Equity Market Declines Increase Risk to Insurers' Capital Reserves"

Please. Share this with the federal government of your southern neighbor.
They seem to have missed what role the equities market plays in reducing systemic risk and maintaing personal wealth and therefore corporate profitability.

2008 Dec 15 04:38 PM