Monday, July 9, 2012

Canadian Life Insurers: An Area of Great Opportunity and Dividend Rewards. Manulife, SunLife, and Great-West.

The Globe and Mail's Boyd Erman wrote today that it is "another quarter to avoid life insurers." Canada's life insurance stocks have been in the basement for some time now. Collectively, Manulife (TSE: MFC), SunLife (TSE: SLF), Great-West Life (TSE: GWO), et. al. have been languishing behind the rest of the TSX since the financial crisis reared its ugly head in 2008-2009. Of course, many prices have started to begin a slow recovery, but they are still well-off their peaks. Generally, a stock with the bad news already priced-in presents a buying opportunity for the Intelligent Investor, and this is especially the case if profits and dividends are intact and reasonably attractive.

Stock market volatility has been one of the biggest reasons why Canadian life insurance stocks have taken it on the chin. In particular, guaranteed retirement incomes, or variable annuity plans, which promised investors an income stream of 5% for life, with adjustments upward if markets did well. At the time they were issued, 5% seemed like a reasonable rate for both parties... but with long-term interest rates as low as they are, the insurance companies are on the hook for what now seems like a fairly healthy guarantee. In addition, when stock markets rise and decline with so much volatility, the insurance companies have to keep forking over money into side accounts reserved for segregated funds, or funds that guarantee the investor 75% to 100% of their account value should the markets decline and they pass away, or if they have held it for ten years. When there was a time where it seemed stock markets never decline over a 10 year period, this guarantee did not seem expensive... now many insurance companies are experience significant costs associated with these products.

The current stock market and rate environment, however, is highly unusual. Interest rates are extraordinarily low, and this will not continue indefinitely. It is a historical anomaly, and when it is rectified, the insurers will be able to earn significantly more cash from their invested premiums.

For the Intelligent Investor, the company that seems to present the least risk is Great-West Life (TSE: GWO). It has healthy profits, a nice dividend (5.44%), and it does not have as much exposure to volatile equity markets. The company that may present the most opportunity? Probably Manulife if you include its significant growth prospects in South-East Asia. 

Disclosure: I own or indirectly control shares in Great-West Life and Manulife Financial.

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