(Reuters) - Shares of Industrial Alliance Insurance and Financial Services (IAG.TO) plunged nearly 11 percent on Wednesday after the company reported an unexpected 28 percent profit drop on the back of weak markets and claims-related losses.
Weak equity markets took a larger-than-expected bite from the company's individual insurance and wealth management businesses, but it was higher life insurance mortality rates and disability claims that surprised analysts.
"They had some pretty significant negative experience around the traditional insurance risks, like mortality, disability and the stuff they should be better at pricing," said CIBC World Markets analyst Robert Sedran, calling the shortfall "troubling".
Speaking on a conference call, Chief Executive Yvon Charest said the higher mortality rates were simply an aberration in a longer-term decreasing trend. He said the higher disability claims were disappointing, but not abnormal.
"Actions are currently being taken to improve this overall situation," he said.
All told, the Quebec City-based life insurer and wealth manager earned a net C$45.7 million, ($45 million), or 53 Canadian cents a share, in the third quarter.
That compared with a year-before profit of C$63.5 million, or 75 Canadian cents a share, and was short of analysts' expectations of a profit of 74 Canadian cents a share as compiled by Thomson Reuters I/B/E/S.
"The environment in the quarter was certainly one of the most difficult that we have experienced since 2008 and 2009 and resulted in one of our most disappointing quarters," Charest said.
He said that if bond yields, which retreated in the third quarter, fell further in the fourth quarter, the company would have to strengthen actuarial reserves. Strengthening reserves usually entails a charge to earnings.
Weak equity markets - the Toronto Stock Exchange's benchmark S&P/TSX composite index .GSPTSE fell 12.6 percent during the quarter - stripped 19 Canadian cents a share from the company's bottom line, it said.
RBC Capital Markets analyst Andre-Philippe Hardy said in a note he had expected a market impact of only 11 Canadian cents a share, chalking the majority of the shortfall up to "hedge ineffectiveness".
The insurer's stock plunged C$3.52, or 10.9 percent, to close at C$28.76 on the Toronto Stock Exchange.
Shares of other Canadian insurers did not appear to be affected, suggesting investors considered the profit shortfall to be due to company-specific reasons.
Industrial Alliance is Canada's No. 4 life insurer. Larger rival Sun Life Financial (SLF.TO) reports results later on Wednesday. Canada's biggest insurer, Manulife Financial (MFC.TO), reports on Thursday.
Reporting by Cameron French in Toronto; editing by Peter Galloway