Firm quarter, murky outlook seen for Canada lifecos

Mon Apr 30, 2012 7:16am EDT
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By Cameron French

TORONTO (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 (MFC.TO: Quote) 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 S&P/TSX composite index .GSPTSE 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.   Continued...