Insurers Shares Beating Banks by Most in 25 Years

Canadian life insurance stocks led by Manulife Financial Corp. are outperforming banks by the most in more than two decades as they gain from business abroad while lenders face slower consumer borrowing.

The six-company Standard & Poor’s/TSX Life and Health Insurance Index rose 19 percent this year through yesterday including dividends, while the eight-member S&P/TSX Commercial Banks Index rose 1 percent. That’s the most insurers have commanded over banks year-to-date since at least 1987, according to data compiled by Bloomberg.

“The momentum definitely does tip in favor of the insurers at present as opposed to the banks,” John Aiken, a Toronto-based analyst at Barclays Plc, said in a May 30 phone interview. “If you’re looking to invest in Canadian financials, you’re looking at a slowing environment for the Canadian banks and potentially a recovery in earnings” for the insurers.

Consumer lending is a key area of revenue for banks such as Toronto-based Canadian Imperial Bank of Commerce, where it contributed 69 percent to profit in the second quarter. Canadian loan growth is cooling as households carry a record debt-to-income ratio of 165 percent. Meanwhile, Manulife and Sun Life Financial Inc., both based in Toronto, are benefiting from joint ventures, distribution partnerships, and acquisitions in countries including Vietnam and China.

Shares of Manulife, Canada’s largest life insurance company, gained 22 percent this year through yesterday on a total return basis while Royal Bank of Canada, the largest lender, rose 2.4 percent. Manulife declined 0.7 percent to C$16.15 at 4:33 p.m. in Toronto today and Royal fell 1.2 percent to C$59.41.

‘Consumer Ceiling’

Spokesmen at Manulife, Sun Life, CIBC, and RBC declined to comment.

“We’re in the early stages of loan deceleration for the Canadian banks, who rely so much on Canadian borrowers,” said Kash Pashootan, portfolio manager with First Avenue Advisory of Raymond James Ltd. in Ottawa who manages about C$125 million ($123 million) and owns CIBC and Manulife. “The consumer is pretty much at the ceiling -- they’ve reached maximum capacity. Insurance companies see the slowdown in domestic markets and are relying on Asia where interest rates and growth are higher,” Pashootan said in a May 28 phone interview.

Household credit growth decelerated to 4.1 percent in April from 4.3 percent in March, the slowest annual pace since February 1996, according to Bank of Canada data. Housing markets have cooled, with Toronto sales down 9.6 percent on a year-to-date basis to May, after Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year.

Asian Business

“We saw this quarter what life without robust Canadian retail looks like for the banks,” Sumit Malhotra, an analyst with Macquarie Capital Markets, said in a phone interview from Toronto June 7. “Conversely, after four years of challenges the life insurers have -- no pun intended -- come back to life.” The companies are “getting a lift” partly from their businesses outside of Canada, he said.

Canadian property and casualty firms are also rallying, led by E-L Financial Corp., a Toronto-based investment company which yesterday agreed to sell its Dominion of Canada General Insurance Co. unit to Travelers Cos. for $1.1 billion. It rose 9.5 percent on the news, bringing its advance for the year to 49 percent.

Last year, Manulife’s Asia unit including China and Cambodia, made up about 33 percent of core earnings, up from around 20 percent in 2007, according to the insurer. Sun Life, which operates in seven Asian countries, had 8.6 percent of income from its Asian business, up from 5.4 percent in 2007. Both insurers operate in Indonesia, which has 250 million people -- about 40 percent of Southeast Asia’s population -- and annual economic growth that hasn’t fallen below 4 percent in a decade.

Rallying Stocks

Manulife, owner of Boston-based John Hancock Financial, announced June 4 in Toronto that it’s partnering with Ho Chi Minh City Development Joint Stock Commercial Bank in Vietnam, which is targeting 6 percent growth in gross domestic product in 2014, to promote its bancassurance business, or selling insurance through a bank. Sun Life Chief Executive Officer Dean Connor said in a March interview with Bloomberg that company acquisitions may be “more likely” in Asia than other regions.

Insurers are also benefiting from rallying stock markets, which boost the investment income they use to pay out annuities. Higher interest rates may also fatten margins between income and payouts to beneficiaries.

Canada is expected to boost its benchmark interest rate in the third quarter of 2014, according to the weighted average of 25 economists surveyed by Bloomberg News. The yield on the 10-year Government of Canada note has risen to 2.2 percent, the highest since March 2012, from 1.7 percent on May 2.

Interest Rates

“Rising interest rates are positive operationally for both banks and insurers but the impact is much more meaningful for the lifecos,” Malhotra said. “We think the life insurance companies will have earnings growth in the double-digit range for the next couple of years, whereas for the banks it’s going to be more like mid-single digits and we’re crossing our fingers it doesn’t get worse.”

Manulife’s net income would slip C$600 million if there was a 100 basis point decline in market interest rates and it would gain C$400 million per 100 basis point rise in rates, according to Manulife’s latest quarterly filing. Last year, Manulife’s sensitivity was a C$900 million loss with a 100 basis point decline in rates.

To be sure, insurers are playing catch up to banks. None of the three largest life insurers in Canada has raised dividends since 2008 and the global financial crisis. Half of the eight biggest lenders, including Canadian Imperial, raised dividends in the second quarter.

‘Global Presence’

Manulife profit declined 56 percent in the latest quarter as sales dropped at units in both Canada and Asia, two regions where the insurer raised prices last year. Sun Life, the third-largest insurance provider, had profit that beat analysts’ estimates, aided by a 76 percent increase in operating income from its Asia unit.

Banks such as RBC had mixed results from domestic loan growth. Bank of Montreal reported a 0.7 percent decline in Canada banking and Royal Bank’s personal and commercial banking jumped 11 percent.

“Where are these businesses making money and are those sources growing, staying static or shrinking?” Pashootan said. “Insurance companies have a global presence. But the risk and reward of holding the Canadian banks is not as compelling as it was two to three years ago.”

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