(In U.S. dollars unless noted)
By Lynne Olver
TORONTO, Oct 9 (Reuters) - Shares of Canadian financial stocks, and life insurance companies in particular, took a severe drubbing on Thursday, dragged down by fears over the outlook for U.S. insurers and on irrational selling rather than business fundamentals, analysts said.
The Dow Jones U.S. life insurance index .DJUSIL slumped 18.5 percent, helping to send Canadian-based insurers lower.
Shares of Manulife Financial Corp MFC.TO, North America’s largest insurer by market value, plunged 11.3 percent to C$30.24, its lowest level in three years, while smaller rival Sun Life Financial SLF.TO fell 14 percent to C$27.55, its lowest level since mid-2003.
Jukka Lipponen, an analyst at Keefe, Bruyette & Woods who follows Manulife Financial, said capital raises at U.S. insurers Hartford Financial Services Group HIG.N and MetLife Inc MET.N had prompted concern that all insurance companies would have to take similar dilutive steps to shore up capital.
MetLife sold 75 million shares at a discount on Thursday to raise nearly $2 billion, while Europe’s biggest insurer, Allianz SE, said this week it would invest $2.5 billion in Hartford Financial.
In addition, Newark, New Jersey-based insurer Prudential Financial Inc PRU.N warned late in the session that its third-quarter profit would be cut sharply by losses on annuities and investments, and a charge for a legal settlement.
Lipponen described the fall in North American insurance stocks as “unbelievable.” Short-selling and perhaps some hedge funds liquidating positions may have added to the freefall, he said.
“This market is completely irrational so it’s very difficult to try to figure out what to do,” Lipponen said.
The valuations for many financial stocks are “ridiculous,” although Canada’s Manulife is trading at a fairly significant premium to its peers, he noted.
In a research note, BMO Capital Markets analyst John Reucassel said concerns about U.S. life insurers’ asset quality have “migrated to Canadian lifecos,” even though U.S. life insurers take “materially higher credit risk” than their Canadian peers do.
Large bank stocks were not immune to the selling pressure on Thursday.
The country’s biggest, Royal Bank of Canada RY.TO, tumbled 9 percent to C$41.40 while Canadian Imperial Bank of Commerce CM.TO slumped 9 percent to close at C$50.50.
In Toronto, the S&P/TSX financials index, which includes banks, insurance companies and asset managers, fell a more mild 7.7 percent .SPTTFS.
“It’s very difficult for investors to operate in this market, all the fundamentals are just flushed away,” said David Cockfield, senior vice president at Leon Frazer & Associates in Toronto, who attributed the declines to a resumption of short selling in financial stocks.
Cockfield said that securities regulators should have left the temporary short-selling ban in place.
“The people causing the market selloff are strictly market players, they have no interest in the fundamentals whatsoever,” he said.
Even fat dividend yields on some Canadian bank stocks provided no support on Thursday. The dividend yield on Bank of Montreal BMO.TO, for example, rose to 7.5 percent at its closing stock price of C$37.25.
“They’re right up there, but that doesn’t seem to be any protection,” Cockfield said.
“People get into a state of fear, and they think their stocks are going to zero. It’s that kind of market. You’ve got to be a real hero to step into these markets.”
$1=$1.15 Canadian Reporting by Lynne Olver; editing by Rob Wilson