TORONTO (Reuters) - Canadian life insurance stocks jumped on Wednesday, with sector heavyweight Manulife Financial (MFC.TO) rising 6.6 percent, as a more optimistic outlook from the U.S. Federal Reserve boosted bond yields and brightened the profit outlook for the sector.
Low yields have hammered the insurers' earnings over the past two years because the insurers use long-term bonds to back their policy obligations. Falling yields force them to revalue their portfolios lower and set aside reserves to make up the difference.
Yields on both Canadian bonds and U.S. Treasuries have surged as the U.S. Federal Reserve's economic outlook on Tuesday prompted traders to reduce safe-haven bond bets.
The benchmark 10-year U.S. treasury note yielded 2.27 percent on Wednesday, up from 2.13 percent on Tuesday and 2.03 percent on Monday. 30-year U.S. notes yielded 3.40 percent, up from 3.26 percent on Tuesday.
Manulife stock rose 6.6 percent to C$13.49, touching its highest point since October of last year.
National Bank of Canada analyst Peter Routledge said the stock was also likely getting some relief after declining last month, when Manulife said its chief financial officer was leaving.
"I think there was clearly some nervousness, and now with the more accommodative outlook for long-term interest rates, that's sort to come off a bit," he said.
Shares of smaller rival Industrial Alliance (IAG.TO), which is considered to have the most exposure to markets among Canadian insurers, led Wednesday's rise, climbing 11 percent to C$31.05.
Both Manulife and Sun Life took losses in the final two quarters of 2011 due largely to low bond yields and volatile stock markets, although both companies have taken steps to reduce their market exposure.
Industrial Alliance also took a loss in the fourth quarter.
"We've seen the writedowns over the last couple of years as interest rates have fallen, so now we're kind of getting the reverse effect here," said Tony Demarin, chief investment officer at Winnipeg's BCV Asset Management.
"Obviously it's magnified on the upside, just like it was magnified on the downside."
Despite the sharp jump on Wednesday, shares of the companies are still far below the levels at which they traded before the 2008 financial crisis.
They are also still struggling to make up for stock losses late last year that resulted from uncertainty about the U.S. recovery and the European financial crisis.
Reporting By Cameron French Editing by Peter Galloway