* Profits seen up in Q4 for major lifecos
* Rise in stocks, economy to boost earnings
* A gradual return to normal seen despite volatility
By Andrea Hopkins
TORONTO, Feb 9 After a volatile year, Canada's
big life insurance companies are expected to report higher
fourth-quarter profits this week, boosted by stock market gains
and a brighter economic outlook.
The big insurers -- Manulife Financial Corp (MFC.TO), Great
West Lifeco (GWO.TO), and Sun Life Financial (SLF.TO) -- are
emerging from the financial crisis with an eye once again on
growth, though analysts warn they will continue to tweak
accounting details to reflect 2009's market volatility.
"We're certainly going to see better earnings than we did a
year ago," said Edward Jones analyst Craig Fehr.
"We're seeing an investor base coming back into the market
... a consumer that feels a little bit better and is willing to
spend again on things like insurance premiums," Fehr said.
The return of customers who want to buy insurance and
wealth-management products is part of the good news for lifecos
in the fourth quarter. While sales generate higher fee income,
they also give insurers more money to invest -- and stock
market gains are set to boost the bottom lines.
Equity markets continued to recover in the quarter, with a
5.5 percent increase in the S&P 500 and a 3.1 percent rise in
Toronto's S&P/TSX composite index.
Those gains were not as large as they were in the third
quarter, but the rise in the value of the lifecos' huge stock
holdings compared with the fourth quarter of 2008 will ensure
everyone records a profit after disappointing results in the
second and third quarters of 2009.
Still, some analysts said the longer-term outlook remains
murky, dependent on the overall state of the economic recovery
and the appetite of consumers to buy wealth-management
"If the markets and the economy follow a double-dip
profile, there is no assurance that equity market volatility
will not return in the future," Desjardins Securities analyst
Michael Goldberg wrote in his earnings preview.
The big three lifecos report earnings on Thursday, while
No. 4 Industrial Alliance Insurance and Financial Services
(IAG.TO) will report on Friday.
RETURN TO GROWTH
The insurers' huge investments in stock and credit markets
plunged in 2008 and much of 2009. As well, their core earnings
have been clouded by changes to the actuarial assumptions they
use to value their long-term assets, making it difficult for
investors to gauge the underlying strength of the businesses.
Manulife, North America's largest lifeco, and Sun Life,
Canada's No. 3, both took big hits adjusting their assumptions
in the third quarter, and smaller changes also could be in
store in the fourth quarter. Analysts expect all of the
companies to book year-end revisions.
"Management could be forced to build reserves yet again
following year-end assumption reviews, which presents some
downside risk to our estimates," National Bank Financial
analyst Robert Sedran wrote. Nevertheless, Sedran, too, expects
better results compared with both the third quarter and the
Insurers are forced to build reserves when the falling
value of investments threatens their ability to pay long-term
obligations such as insurance settlements and annuities. The
cash used to build the reserves comes directly out of
Gains on equity investments could allow the insurers to
release some of reserves built in leaner times, boosting
earnings, but the typically prudent companies will likely use
the cash to shore up other reserves rather than release any to
shareholders this time around.
Analysts expect the insurers to leave dividend levels where
they are after a surprise cut by Manulife in the second quarter
earned it the ire of shareholders.
The determination of all of the insurers to guard high
levels of capital has largely been praised by analysts.
Overall, Edward Jones' Fehr said the return of economic
growth in Canada, combined with the growth of the lifecos into
underserved markets overseas, bodes well for long-term growth.
"For many many quarters now the core growth of these
companies -- which is selling insurance policies and wealth
products and services -- has been overshadowed by some of the
accounting treatment and the impact that comes from the
financial markets," he said.
"As we move forward we're going to see more of a focus on
core growth, and the Canadian insurance companies shake out
quite well," Fehr said.
(Reporting by Andrea Hopkins; editing by Peter Galloway)