Wednesday, October 04, 2006

Life Insurance Cos: Why Int Rates & Oil Prices Matter

Scotia Capital, 4 October 2006


• The Scotia Capital Insurance Weekly Update, released yesterday, contains a piece entitled "Lifecos versus the market? Versus the banks? It boils down to an oil call and an interest rate call".

What It Means

• In a market where sector rotation is increasingly important, in particular as it relates to Canadian lifecos versus the market and versus the Canadian banks, our answer is a simple one, and history proves it. If you think oil prices are going to fall, then overweight financials, and if you think long-term interest rates are going to fall, then overweight the banks versus the lifecos.

• As oil prices have fallen so have long term interest rates, not necessarily a good thing for Canadian lifecos. With Scotia Economics forecasting further declines in Canadian and U.S. 10-yr bond yields we remain somewhat cautious, despite the sector's inherent defensive characteristics.

• At a 10% premium to the U.S. lifecos (on a forward P/E basis, above its 5% mean) and a 3% premium to the banks (above its 1%-2% mean), we remain market weight, and would not advocate overweight unless the sector fell significantly below its mean relative to other financials, and/or long term interest rates started to climb.