Canadian life insurers' earnings have benefited from market appreciation over the past several quarters, with the Morningstar Canada Index posting a total return of around 33% over the past 12 months, according to Morningstar analysis.
Morningstar has increased its fair value estimates for no-moat Great-West Lifeco to $65 per share, Manulife Financial to $48 per share, and Sun Life Financial to $89 per share. The firm also plans to raise its fair value estimate for no-moat Power Corporation of Canada by around 26% to $73 per share.
After taking a more granular view of business mix and cyclicality, Morningstar analysts reduced their cost of equity assumptions to 10% for both Great-West and Manulife and 9.1% for Sun Life. The valuation increase for Power Corporation is driven by updated fair value estimates for Great-West and no-moat IGM Financial, the asset manager behind Investors Group and Mackenzie Investments, which together account for more than 80% of the holding company's asset value.
The sector's capital position is a relevant backdrop to these valuations. OSFI, which sets capital requirements for federally regulated life insurers through the Life Insurance Capital Adequacy Test, confirmed in mid-2025 that it would postpone the next LICAT revision from 2027 to sometime after 2028 and reduce capital requirements for qualifying domestic infrastructure debt and equity.
Well-capitalized Canadian life insurers typically report LICAT ratios well above OSFI's minimum thresholds, giving the sector room to absorb volatility even as trade-related uncertainty builds.
Morningstar flagged a potential headwind stemming from North American trade policy. On July 1, the US declined to renew the US-Mexico-Canada Agreement (USMCA) in its current form, opting instead to move to an annual review process rather than confirm the deal's automatic 16-year extension.
The agreement remains fully in force and does not expire until 2036, and existing trade rules continue to apply while negotiations proceed, but the shift introduces a recurring cycle of uncertainty in place of the long-term certainty businesses had anticipated.
Morningstar cautioned that if negotiations between the US and Canada are delayed or run into major difficulties, the Canadian market could face a significant correction, which would create headwinds for these companies' life insurance and asset-based fee income businesses.
Not all four companies carry the same exposure to that USMCA-related risk. Manulife has leaned increasingly on Asia for growth, with the region's insurance earnings helping offset weaker results in its Canadian operations and in global wealth and asset management in recent quarters. Sun Life has likewise built a diversified insurance, wealth and health business spanning Canada, the US and Asia.
That diversification means a North American trade shock would likely hit these insurers' domestic Canadian earnings and asset-based fee income more directly than their international operations, whereas Great-West and Power Corporation, with more concentrated exposure to Canadian and US markets through IGM Financial's asset management business, may be more closely tied to the outcome of the ongoing trade negotiations.
