Canada's Life Insurers Seen Posting Mixed 3Q Results
03 November 2010 - 6:48AM
Dow Jones News
Low interest rates are expected to damp third-quarter earnings
at Canada's life insurers, offsetting modest relief from rebounding
equities, analysts say.
Sun Life Financial Inc. (SLF.T, SLF) and Industrial Alliance
Insurance and Financial Services Inc. (IAG.T) report their results
Wednesday, while Manulife Financial Corp. (MFC.T, MFC) reports on
Thursday. Great-West Lifeco Inc. (GWO.T), controlled by Montreal's
Desmarais family, is scheduled to report next week.
"It's going to be a bit noisy in terms of the headline numbers,
but the operating results will be reasonable," said Craig Fehr, an
analyst at Edward Jones in St. Louis. "I don't think, by any
stretch, these companies are firing on all cylinders yet. They've
been fighting a lot of headwinds for several quarters now, but they
are managing their results somewhat effectively."
Equity markets rebounded during the third quarter, which ended
Sept. 30. The S&P 500 gained 10.7%, while the S&P/TSX
Composite Index climbed 9.5%. But, sluggish economic growth kept
interest rates on their downward trajectory, with long-term
government rates in Canada and the U.S. falling between 20 and 42
basis points.
When stock prices or bond yields decline, insurers must build up
their reserves to cover the long-term obligations on their
products, such as annuities. Unlike in the U.S., Canadian insurers
are required to mark-to-market their investments.
The earnings of the three largest life insurers--Manulife,
Great-West Lifeco and Sun Life--are sensitive to interest rate and
equity fluctuations in varying degrees. Great-West and Sun Life are
far less exposed to market fluctuations than Manulife, which not
only sold more long-term guaranteed product, it failed to hedge its
investment portfolio.
Each 1% decline in interest rates reduces earnings by C$2.7
billion, Manulife has said. The company, which embarked on a
hedging program earlier this year, plans to hedge or reinsure at
least 70% of its variable annuity guaranteed value by the end of
2012, up from 51%. It didn't make any progress in hedging its book
in the second quarter, and analysts say they don't expect to see
much headway in the third quarter either.
Manulife, which owns U.S. insurer John Hancock Financial,
sideswiped investors in the second quarter when it posted a loss of
C$2.4 billion, its biggest ever, sending its stock price reeling.
The company took charges of C$3.2 billion from falling rates and
equity prices.
The life insurer forewarned in August that it will take
third-quarter charges arising from changes to its actuarial
assumptions, including increased morbidity in its long-term care
business in the U.S. and additional assumed volatility in its
variable-annuity business and modifications to its ultimate
reinvestment rate, or URR, that is the risk that future proceeds
may need to be reinvested at a lower potential interest rate.
"It's really Manulife that'll have the messy quarter," said BMO
Capital Markets analyst Tom MacKinnon.
He forecasts the company to report a loss of 89 Canadian cents a
share. That is higher than the mean estimate of 73 Canadian cents
from 11 analysts polled by Thomson Reuters. MacKinnon expects
Manulife to post a per-share operating profit of 36 Canadian cents,
which will evaporate from anticipated charges, including a 60
Canadian cent-a-share hit from its U.S. long-term care
business.
According to Thomson Reuters, Sun Life is expected to report a
profit of 61 Canadian cents a share, while per-share mean estimates
for Great-West and Industrial-Alliance are 48 Canadian cents and 73
Canadian cents, respectively.
Unlike many analysts who are cautious on the sector, Edward
Jones' Fehr has buy ratings on Manulife, Sun Life and Great-West.
For investors with a longer investment horizon, he said the stocks
are attractive buys.
"The valuations for these companies are very cheap because
they're reflecting very pessimistic expectations," he said. "The
environment isn't going to turn around for them in one to two
quarters. It's going to be a longer-term timeframe. We have to see
interest rates rise over time for these companies to start
performing well."
-By Caroline Van Hasselt, Dow Jones Newswires; 416-306-2023;
caroline.vanhasselt@dowjones.com