Warning: Weak Interest Rates

Some of Canada's biggest insurance companies are turning their focus to Asia and the lucrative wealth management business as they work to offset losses in their traditional markets due to persistently low interest rates.

Manulife Financial Corp. (TSX:MFC) and rival Sun Life Financial (TSX:SLF) reported second-quarter earnings that were battered by the impact of volatile equity markets and weak interest rates on their investments.

Each forecasted low interest rates could cost them hundreds of millions of dollars in the next few years if rates they stay where they are.

And each noted they would focus on expanding footprints in Asia and growing asset management businesses in attempts to reposition themselves in the low-interest rate economy.

Manulife, which reported a $300-million loss in its second quarter on Thursday, said it expects to book additional charges of $400 million in 2013 if interest rates stay at current low levels.

The Canadian insurance giants have blamed challenging equity markets and interest rates, which have been hitting insurers who invest much of the money they make from policyholders.
Falling stocks and bond yields — battered by fears of a slowing global economy — reduce projected future returns on investment portfolios, which are used to guarantee future policy payouts.

Meanwhile, wealth management has been an increasingly attractive niche for financial services firms as baby boomers age and younger generations see employee-sponsored pension plans erode — phenomena that have led individuals to focus on retirement savings plans and investment portfolios.

And Asian markets, with expanding middle classes, are seeing steady increases in demand for insurance policies and investment plans.