Canada insurance regulator eases capital rules

TORONTO (Reuters) - Canada's insurance regulator on Tuesday eased guidelines on the capital that insurers need to set aside for guaranteed payments on segregated funds, lifting a concern that weighed on their share prices as equities markets plunged recently.

Shares of Manulife Financial (MFC.TO: Quote), the country's largest life insurer, had tumbled as investors fretted over capital ratios that regulators require to assure that companies can cover future obligations on segregated funds.

Similar to mutual funds, segregated funds come with insurance coverage and some guarantee the return of the original investment. When equity markets fall, insurers need to keep more capital in reserve to ensure they can make such payments.

Anticipation of the new guidelines, announced after the bell on Tuesday, boosted Manulife's shares by 11 percent. The stock closed at C$23.49 on the Toronto Stock Exchange, recovering much of Monday's 15 percent stock price tumble.

Sun Life Financial (SLF.TO: Quote) shares jumped 14.3 percent to close at C$30.06 a share,

The Office of the Superintendent of Financial Institutions sent a letter to the life insurance industry on Tuesday, saying that current capital requirements for segregated fund guarantees are susceptible to dramatic swings that may not reflect the risk tied to future obligations.

"The extent of this volatility in capital requirements is inconsistent with the purpose of building capital to absorb future unexpected losses," the regulator said in a letter, posted on its website.

The revisions, described as an interim step, seek to reduce this volatility and to ensure that capital levels are appropriate to long and short-term payment obligations, it said. Capital should increase as the payment dates become closer, the regulator said.

Earlier on Tuesday, the regulator said capital ratios reported by Canadian insurance companies are "well above" minimum requirements, but company models tend to produce volatile capital requirements as markets fluctuate.