* Noisy quarter expected, assumption changes promised
* No dividend cuts expected after Manulife cut in Q2
* Stronger stock market offset by credit deterioration
By Andrea Hopkins
TORONTO, Nov 3 There will be a lot of complex
provisions and one-time items when Canada's big life insurers
report quarterly earnings this week but the bottom line is they
will stay profitable and their dividends appear safe.
Analysts and investors have been keenly awaiting
third-quarter earnings season since North America's largest
life insurer, Manulife Financial Corp (MFC.TO), surprised
everybody in August by halving its dividend -- the only
dividend cut taken by a big Canadian financial services company
since the global economic crisis rocked lenders and insurers.
Manulife and No. 3 lifeco, Sun Life Financial Inc (SLF.TO),
warned at the end of the second quarter that they would update
the actuarial assumptions on which they base investment returns
and costs, a move that will add a lot of complexity to the
While the outlook for the lifecos is better than it was
when stock markets were falling -- and insurance investments
were plunging alongside -- analysts said the dust has not yet
settled from the calamitous year that has passed.
"This quarter for investors is going to be about trying to
sift through a lot of noise. I think when you do that, it will
be fairly positive," said Edward Jones analyst Craig Fehr.
"Certainly headwinds exist for insurance companies in the
near term, but at the core, many of these companies are
performing quite well and ... when the dust starts to settle in
the financial markets, some of that core earnings power will
start to shine through a little better. I just think it's going
to take more time."
With reserve adjustments once again expected, analysts said
the goal will be to try to see through all the accounting fog
to what lies beneath -- the business of selling insurance and
investing premiums in global markets.
"I think there's going to be much more focus on what the
underlying earnings are, rather than what the actual reported
numbers are," said Scotiabank insurance analyst Tom MacKinnon.
Earnings season will be kicked off by the smallest of the
big four lifecos, Industrial Alliance Insurance and Financial
Services (IAG.TO) on Wednesday, followed by Manulife, Great
West Lifeco Inc (GWO.TO) and Sun Life on Thursday.
At first glance, the quarter should be a good one for the
insurers, with a sharp rise in global stock markets and
tightening credit spreads boosting earnings.
But advance warning by Manulife and Sun Life on their need
to build reserves make the quarter tough to read.
"Corporate bond yields declined in the quarter, while
credit-related losses likely trended above normal, and these
two negatives were likely only partially offset by stronger
equity markets," TD Newcrest analyst Doug Young wrote in a
The market turmoil that rocked global economies in the last
year has made life hard for insurers, which make their money
not so much by selling insurance as by investing the money from
premiums in stock and bond markets worldwide.
Market volatility is forcing some of the big lifecos to
update the assumptions they use to value their annuities and
funds, which are often based on interest rates.
Insurers are huge investors in the fixed income market and
make long-term assumptions of their liabilities based on where
interest rates are. Because the recession has pushed short-term
rates to historic lows, the insurers must reassess what the
returns on their investments will be.
Sun Life said in August that third-quarter income will be
reduced by C$450 million to C$550 million when it updates the
actuarial assumptions used to value its variable annuities.
Still, the life insurers were well capitalized at the end
of the second quarter and capital levels -- measured by the
minimum continuing capital and surplus ratios (MCCSR) -- are
expected to remain adequate in the third quarter.
That means dividends should be unchanged this time around,
despite the surprise cut by Manulife in August.
"The outlook for dividends is a little better than in past
quarter ... capital is in a far better position than a year
ago," Fehr said.
Some analysts also believe the lifecos are a good
investment compared with their banking peers, whose share
prices have climbed since stock markets began rebounding in
March and April.
"When you've got the insurers sitting here in the area of 9
times (price to earnings) and the banks at 12ish, they
certainly are attractive versus their financial peers,"
"But the insurers are supposed to be known for good
stability in earnings and we haven't seen it, so the discount
is warranted, to some extent. But therein lies the
opportunities as well."
(Reporting by Andrea Hopkins; editing by Peter Galloway)