Canada Insurance Regulator Eases Capital Guidelines

Canada’s insurance regulator on Tuesday eased guidelines on the capital that insurers need to set aside for guaranteed payments on segregated funds, lifting a concern that weighed on their share prices as equities markets plunged recently.

Shares of Manulife Financial, the country’s largest life insurer, had tumbled as investors fretted over capital ratios that regulators require to assure that companies can cover future obligations on segregated funds.

Similar to mutual funds, segregated funds come with insurance coverage and some guarantee the return of the original investment. When equity markets fall, insurers need to keep more capital in reserve to ensure they can make such payments.

Anticipation of the new guidelines, announced after the bell on Tuesday, boosted Manulife’s shares by 11 percent. The stock closed at C$23.49 (US $18.65) on the Toronto Stock Exchange, recovering much of Monday’s 15 percent stock price tumble. Sun Life Financial shares jumped 14.3 percent to close at C$30.06 (US $23.87) a share,

The Office of the Superintendent of Financial Institutions sent a letter to the life insurance industry on Tuesday, saying that current capital requirements for segregated fund guarantees are susceptible to dramatic swings that may not reflect the risk tied to future obligations.

“The extent of this volatility in capital requirements is inconsistent with the purpose of building capital to absorb future unexpected losses,” the regulator said in a letter, posted on its web site.

The revisions, described as an interim step, seek to reduce this volatility and to ensure that capital levels are appropriate to long and short-term payment obligations, it said. Capital should increase as the payment dates become closer, the regulator said.

Earlier Tuesday, the regulator said capital ratios reported by Canadian insurance companies are “well above” minimum requirements, but company models tend to produce volatile capital requirements as markets fluctuate.

That can result in an increase in required capital for payment obligations that will not come due for many years, Rod Giles, a spokesman for OSFI, said in an emailed statement.

On Oct. 13, Manulife gave an update on its capital position as of the end of September. But as stock markets fell steeply since then, analysts speculated that Manulife would have to raise more capital. It has various ways it could do so, but the chance that it would have to issue more equity that would dilute the value of its current shares was a concern, analysts said.

Adjusting reserve models used by the insurers, rather than changing the regulatory framework or taking other governmental steps, is the most efficient way to address concerns about capital, John Reucassel, an insurance analyst at BMO Capital Markets, said in a research note Tuesday morning.

Insurers have long periods, about a decade on average, to recoup funds through fee income and rising stock markets before they have to make payouts, he noted.

“We believe that this should help alleviate some of the acute investor concerns on the capital position of the Canadian lifecos and particularly Manulife,” Reucassel wrote.

(Reporting by Lynne Olver; Editing by Frank McGurty)