Lifesavers

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  By Guest Blogger Doug Rowat

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When investors think of Canadian financials most think of the Canadian banks.

And this makes sense. The Big Six banks dominate our daily financial lives, and combined, have a staggering market cap of nearly $800 billion. For perspective, Canada’s entire GDP is only about $3 trillion.

But an often-overlooked component of the Canadian financial sector is the lifecos. And this makes sense as well. After all, the largest Canadian lifeco, Manulife Financial, wouldn’t even crack the top five Canadian banks by market cap, and the four major lifecos (including also Sun Life Financial, Great-West Lifeco and iA Financial) are combined still significantly smaller than Royal Bank all by itself. Add in the fact that many of the lifecos have significantly underperformed this year and it’s easy to see why they’ve become financial-sector afterthoughts.

But forgetting them entirely would be a mistake. Canadian lifecos provide a critically important interest-rate hedge and, given Trump’s wildly uncertain trade policies, this hedge could prove highly valuable in the months ahead.

But first, why are lifecos interest-rate sensitive?

A lifeco’s primary business is issuing insurance policies and the interest-rate sensitivity stems from its policy obligations. Most life insurance products have a long duration. Buyers of life insurance policies are often in their working years and therefore expected to live for several decades. A lifeco’s invested assets, on the other hand, typically have a shorter duration because (1) assets must be kept safe to meet policy obligations and, (2) policies have to be paid out frequently.

This duration mismatch means that lifecos benefit from rising interest rates. Basically, rising rates give insurers an opportunity to roll their maturing shorter-duration investments into steadily higher-yielding investments. Thus, higher interest rates, all else being equal, increase insurers investment returns and, thus, their profitability.

So, how might this relationship play out in terms of a lifeco’s share-price performance? To illustrate, I’ll use the US 10-year Treasury yield as a rough proxy for the prevailing rising-interest-rate environment of the past five years.

The US 10-year Treasury yield bottomed in mid-2020 at a miniscule half a percent due to accommodative rates during the global pandemic. However, it eventually became clear that an inflation problem was brewing due to a combination of the low rates and an abundance of stimulus money. Treasury yields slowly began to rise. Why? Because investors anticipated, correctly as it turned out, that central banks would need to deal with the inflation problem by raising interest rates.

The US 10-year Treasury yield has thus increased steadily since bottoming in mid-2020. And below are how Canada’s four major lifecos have performed over this period:

Manulife Financial and Sun Life share prices vs 10-year Treasury yield

Source: Bloomberg, Turner Investments

Great-West Lifeco and iA Financial share prices vs 10-year Treasury yield

Source: Bloomberg, Turner Investments

Now, an argument might be made that Canadian equities (and the Canadian banks) also performed well during this period, and while this is true, they didn’t perform nearly as well as the lifecos:

Key lifecos have strongly outperformed the broader Canadian market during the current rising-interest-rate cycle

Source: Bloomberg, Turner Investments. Return data from July 31, 2020 to July 25, 2025

Ensure that your lifeco exposure is achieved through a broad-based ETF and don’t expose yourself to the company-specific operational risks of individual stocks. And remember also the drawbacks of overconcentration. Investors who overconcentrate their Canadian financial-sector exposure in the Big Six banks and ignore Canadian lifecos are missing out on the protection that lifecos might provide if interest rates were to rise from here.

Economists currently forecast another Fed rate cut later this year. But this is hardly a certainty. Tariffs are creating significant inflation risk. Indeed, US inflation has ticked higher over the past two months particularly in areas that are sensitive to tariffs (appliances, electronics, apparel, toys, etc.).

Fed Chair Jerome Powell has also made it clear that he won’t be pressured by Trump’s demands for lower rates and will be guided only by the data. And Powell recently corrected Trump in real time over the Fed’s renovation budget showing how impossible it is for this guy to be intimidated:

Powell, as the expression goes, gives zero sh*ts. So, if inflation rises, interest rates, and therefore Treasury yields, could move higher as well. And this is the environment where Canadian lifecos have historically shined.

Lifecos may therefore offer a new type of insurance in the months ahead: Trump protection.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/08/02/lifesavers/