Analysis: Low rates put Canadian insurers under pressure

Tue Nov 29, 2011 5:08pm EST
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By Cameron French

TORONTO (Reuters) - The prospect of a prolonged period of stagnant or falling interest rates could force Canada's life insurers into a long-term struggle to raise the value of their shares from their current 2-1/2 year lows.

Because they are not reaping sufficient funds from investments, the insurers could be forced to go to markets to raise more capital, or to cut dividends, which would tend to push stock prices down even further. A dividend cut at Sun Life Financial is a possibility in the near term, analysts say.

The scenario of a multiyear period of rock-bottom interest rates reminiscent of Japan's "lost decade" in the 1990s was up until recently seen merely as a theoretical worst-case scenario.

But the deepening slide of sovereign debt prices on both sides of the Atlantic has industry observers now taking the problem seriously.

In a speech this month, Julie Dickson, Canada's superintendent of financial institutions, said a prolonged period of long-term low rates would be a "game changer" for the insurance industry.

"We encourage life insurers to recognize the transformational changes - like sustained low interest rates - that are occurring in their operating environment," she said.

National Bank Financial analyst Peter Routledge also sees the industry in a precarious position.

He recently wrote a research note gaming out the impact of a "Japan-light" scenario of sustained low interest rates, including a 30-year bond rate of 2.62 percent, just below the 2.7 percent yield on the bond on Monday.   Continued...