TORONTO (Reuters) - Canadian insurers endured a rocky third-quarter reporting season, and the early view is that the final fiscal quarter will bring more of the same, as low interest rates and one-time charges hold back their results.
"We expect another terrible reporting season for the life insurers in Q4," National Bank Financial analyst Peter Routledge said in a note on Friday.
In a preview of financial results to be released next month, Routledge sees adjusted losses from Manulife Financial (MFC.TO) and Sun Life Financial (SLF.TO), Canada's No. 1 and No. 3 insurers, as well as No. 4 insurer Industrial Alliance (IAG.TO).
Both Manulife and Sun Life took losses in the third quarter, largely because of retreating long-term bond yields that have been driven lower as the European sovereign debt crisis. The lower yields force the insurers to build reserves to ensure their projected investment returns match long-term obligations.
Routledge points out that Canadian 30-year bond yields fell 28 basis points to 2.49 percent during the final quarter of 2011, while the comparable U.S. bond yield held steady at 2.89 percent.
In addition to the impact of lower rates, both Manulife and Sun Life are expected to take hefty charges.
Routledge expects Manulife to take a $650 million hit related to its U.S. life insurance business. Sun Life is seen taking a C$650 million ($636.88 million) charge to account for a change in how it accounts for dynamic hedges and a C$126 million hit associated with its exiting of certain U.S. businesses.
He projects an adjusted loss of 8 Canadian cents a share for Manulife, while Sun Life is expected to lose 65 Canadian cents a share, and Industrial-Alliance, which recognizes the full year of interest rate moves in the fourth quarter, is expected to lose 94 Canadian cents a share.
Routledge did not mention a quarterly estimate for No. 2 insurer Great-West, majority-owned by Power Financial (PWF.TO) and considered the least vulnerable to financial markets.
While one-time charges will account for the bulk of the quarterly losses, Routledge says the insurance companies' shares will get little relief until rates rebound, which he doubts will happen this year.
"Until events in Europe begin to resolve themselves favorably, we do not expect interest rates to move materially higher and put upward pressure on insurance company valuations," he wrote.
He cut his price target on Industrial Alliance to C$31 from C$34 on concerns that the European crisis could trigger another slide in long-term yields.
Industrial Alliance closed at C$26.35 on the Toronto Stock Exchange on Thursday, while Manulife ended at C$11.89, and Sun Life closed at C$20.12. All three stocks recently hit two-year lows.
($1 = 1.0206 Canadian dollars)
Reporting By Cameron French