BAY STREET-Firm quarter, murky outlook seen for Canada lifecos
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* Top 4 Canadian insurers all seen profitable in quarter
* Firm stock markets, rising yields likely boosted profits
* Shares expected to struggle after recent gains
TORONTO, April 29 (Reuters) – Stronger stock markets and
rising bond yields likely stoked profits at Canada’s life
insurers during the first quarter, but a recent market reversal
suggest the insurers’ shares will struggle to build on recent
gains.
Top player Manulife Financial will kick off the
sector’s results on Thursday and is expected to post a profit of
32 Canadian cents a share, according to Thomson Reuters I/B/E/S.
That represents an improvement on losses in both the third and
fourth quarters of 2011.
“It’ll be the first quarter where we’ve had uniform positive
EPS (earnings per share) across the sector in three quarters. In
that sense it will be a very good quarter,” National Bank
Financial analyst Peter Routledge.
Routledge then added the caveat: “But that’s
backwards-looking.”
With stock indexes and bond yields having come substantially
off their first-quarter peaks, investors are unlikely to be
impressed by the stronger results, he said, as renewed market
weakness points to more hardship in the second quarter.
“It’ll be a good quarter, but no one will be worried about
that, they’ll be worried about what risks still exist,” he said.
Under Canadian accounting rules, life insurers must keep
adjusting their projected returns from the huge investment
portfolios that back their policy obligations. Negative market
moves force them to take reserves out of profits.
In the first quarter, the SP/TSX composite index
rose 3.7 percent, its best quarterly gain since early 2011. And
Canada’s 10-year bond yield, which hit a
multi-decade trough of 1.84 percent in December, climbed to a
2012 high of 2.3 percent in March.
The moves in both markets will pad insurer results.
But since the end of March, investors have taken fright from
fresh signs of trouble in Europe’s debt crisis and unexpectedly
weak U.S. economic data. This has sent Toronto stocks down more
than 1 percent this month. Bond yields have dropped as investors
have shifted back into the safe-haven market.
With the companies’ shares still more or less riding the
euphoria of the early market rise, analysts warn the stage could
be set for a retracement.
“We believe the stocks have likely captured the upside
sentiment going into results, so a miss could be met with a
near-term sell-off,” Scotia Capital analyst Joanne Smith said in
a note.
YEAR-TO-DATE STRENGTH
Manulife shares are up 26 percent year to date, while Sun
Life Financial has risen 29 percent, and Industrial
Alliance is up 20 percent.
Great-West Lifeco, which has a much smaller
exposure to markets than its rivals, is up 22 percent.
While the percentage gains sound lofty, the climb is from
the multi-year lows the stocks hit late last year, and the
shares of all four insurers are substantially below their levels
of 12 months ago.
“We’re sort of playing it like a call on the markets, if you
like, rather than the nitty gritty day-to-day core businesses,”
said Caldwell Securities portfolio manager John Kinsey, who
recently bought shares of Sun Life and Manulife.
CORE IMPROVEMENTS, HEDGING
While the insurers’ results are still dependent on market
moves, the volatility has come down substantially from two years
ago due to hedging by the companies, as well as a repositioning
away from market-sensitive businesses.
Indeed, analysts say the core operations of the companies
are improving, and they have been heartened by developments such
as Sun Life’s stated objective last month to boost its operating
income to C$2 billion by 2015 from C$104 million last year.
Many think the quality of the insurers’ businesses is high.
Manulife, for instance, is dominant in Canada, growing in Asia,
and owns U.S. insurer John Hancock. And while the companies’
share prices may be a bargain compared with that quality,
analysts say investors may be jumping the gun by buying on
recent market moves.
“I don’t think you need to aggressively chase these things,
when they are trading at premiums to book value,” said Robert
Sedran, an analyst at CIBC World Markets.
“I think we’re in a market where a lot of these macro risks
that they’re dealing with haven’t vanished.”
(Editing by Jeffrey Hodgson and Peter Galloway)