BAY STREET-Rich valuations pose risk to Canada insurer shares

Sun Feb 3, 2013 10:29am EST
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* Top insurers set to report a strong fourth quarter

* Stocks rose 20-40 pct in 2012

* Analysts say bond yields don't justify stock levels

By Cameron French

TORONTO, Feb 3 (Reuters) - After ringing up share-price gains last year that led the market, Canada's life insurers look ripe for a setback even if they post blockbuster quarterly results over the next couple of weeks.

Insurers such as Sun Life Financial Inc and Manulife Financial Corp have reduced their exposure to equity markets over the past two years, but their shares are heavily influenced by bond yield movements.

While yields have been on the rise since hitting historical lows last July, Canadian insurance stocks have positively sky-rocketed. That suggests that investors are betting on a further substantial rise in yields, a gamble that not everyone is willing to make.

"The Canadian lifeco valuations suggest a steepening of the yield curve, a pretty considerable one," said Peter Routledge, an analyst at National Bank Financial, referring to a graph of rising long-term bond yields. "That's a big bet and it's not one that we'd make."

Higher yields make the insurers' investment products more appealing and also increase the expected returns from the bonds they hold to offset their long-dated insurance liabilities.   Continued...