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Clouds darken for lifecos: analyst

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A low interest rate environment and volatile equity markets will continue to weigh on life insurers, analysts at RBC said in a note to clients. The analysts have lowered their target prices and raised their risk ratings for many of the country's leading life insurers, adding that they continue to prefer banks stocks.

"We are [lowering target prices] now as interest rates are likely to remain low in upcoming quarters and equity markets could be volatile," Andre-Philippe Hardy, an analyst at RBC Capital Markets, said in a note to clients. "In such an environment, we believe that valuation multiples will remain low as reserving and capital risk would be elevated relative to a normal environment."

Hardy says Manulife will be the most affected of the lifecos, as it has longer liabilities than its peers and greater exposure to variable annuities.

"Manulife has reduced its exposure to movements in equity markets and interest rates in the last year (even with equity sensitivities going up in Q3/11), which has positive implications for earnings visibility and capital strength relative to recent years, but the company's earnings volatility is still likely to be elevated and if interest rates remain low for an extended period, reserving risks will increase in our view," he said.

Canadian banks, on the other hand, are in a better position, according to Hardy.

"We perceive Canadian banks as being better capitalized, and dividend increases are likely (which is not the case for lifecos)," he said.

  • Great West Life (GWO-T) Co has a 'sector perform' and 'average risk' rating and a $23 price target.
  • Industrial Alliance (IAG-T) has a 'sector perform' and 'above average risk' rating and a $31price target.
  • Manulife Financial (MFC-T) has a 'sector perform' and 'above average risk' rating and a $13 price target.
  • Sun Life Financial (SLF-T) has a 'sector perform' and 'above average risk' rating and a $23 price target.
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