* Profits to rise sharply on strong markets
* Shares may struggle to build on recent gains
* Manulife, Great-West to report on Thursday
By Cameron French
TORONTO, Feb 6 Canadian life insurers are
expected to report higher profits on the back of stronger
equity markets and recovering bond yields, but the results may
give only a temporary bump to shares that have surged over the
past three months.
The quarterly earnings will cap what has been a challenging
year for the industry, particularly top insurer Manulife
Financial (MFC.TO), which lost C$2.4 billion ($2.42 billion)
and C$947 million in the last two quarters due to tepid
"It was the perfect storm against them in the second
quarter, and this is almost the perfect storm for them," said
John Aiken, an analyst at Barclays Capital.
Weak markets -- particularly corporate bond yields that
troughed in the third quarter -- force the insurers to hold
more reserves to pay off future liabilities.
But Canadian stocks rose 9 percent during the fourth
quarter, and bond yields have skyrocketed since October, so the
insurers can now bring those reserves back into the earnings.
Manulife, the insurer most sensitive to markets, has also
embarked on a hedging program to reduce its earnings
volatility, a move that has helped draw investors back, even as
it reduces the company's exposure to rebounding markets.
Robert Sedran, an analyst at CIBC World Markets, expects
higher bond yields to add 38 Canadian cents a share to
Manulife's bottom line, while higher equity markets should to
add 28 Canadian cents a share.
For rival Sun Life Financial (SLF.TO), stock and bond
movements are expected to add 36 Canadian cents a share to the
bottom line. The impact on other insurers will be more muted.
Sedran notes that strong markets don't just help the
insurers' balance sheets, and their wealth management
components should see higher profits.
"Higher equity market levels lead to higher assets under
management and corresponding fees," he said in a note.
Manulife and Great-West Lifeco (GWO.TO) report results on
For Starmine chart: link.reuters.com/zah87r
Manulife, Sun Life and Great-West should all handily beat
year-ago results, according to Thomson Reuters I/B/E/S, while
profit at Industrial Alliance (IAG.TO) should fall slightly.
Analysts say the volatile market-driven profit has obscured
reasonably strong core results. With market concerns receding,
core profitability should get more attention.
"I think that bodes pretty well for a sector that in my
view has seen valuations just be very depressed for quite some
time now," said Edward Jones analyst Craig Fehr.
But while the stock prices were depressed for much of last
year, recent market optimism has driven the shares sharply
higher and reduced the potential boost to stocks from a strong
Manulife shares are up than 30 percent since the end of
November, while Sun Life has risen just under 20 percent, and
Great-West is up nearly 5 percent.
"Generally, what I think is going to happen is a fairly
strong reaction to positive earnings," said Aiken. "But as we
come out of earnings season, I think some of that excitement
may deflate out of the valuation."
Analysts also say talk of higher dividends -- expected from
Canada's banks this year -- could be premature for insurers.
Manulife investors, in particular, would welcome such talk.
The company halved its payout in late 2009 to preserve capital
during the financial crisis.
(Additional reporting by Euan Rocha; editing by Janet