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Dividends may suffer if insurers seek government help

Manulife Financial Corp. headquarters is seen in Toronto Monday Dec. 9, 2002.

Kevin Frayer/The Canadian Press

Would shareholders of Canada's major life insurers be willing to forgo some dividends if regulators gave the companies a helping hand?

That's the question that Canaccord Genuity analyst Mario Mendonca is asking in a research note, after financial authorities in some other countries - most notably Sweden and Denmark - recently proposed putting a temporary floor on the discount rate that insurers and pension funds use to discount their liabilities.

The moves will offer some protection to those countries' insurers as low interest rates continue to deliver a pounding to their rivals around the globe. (Indeed, in the same note Mr. Mendonca cut his target price on Manulife, Sun Life and Great-West due to the potential that the Federal Reserve will announce a third round of quantitative easing as well as the likelihood that the European Central Bank will cut rates).

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"In Sweden's case, the authorities appear to have protected the insurers by setting the floor discount rate for the next 12 months at May 31, 2012 levels," Mr. Mendonca wrote. "In Denmark's case, the authorities specifically deal with the long end of the curve...

"But there's a catch: for both Sweden and Denmark, companies availing themselves of the floor could face restrictions on paying dividends or otherwise making payments to shareholders - any takers?"

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