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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.
Routledge and other analysts see 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.
Canada's 30-year bond yield 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.
"It's yet another quarter to highlight the challenges lifecos face in this operating environment," said Robert Sedran, an analyst at CIBC World Markets, who also expects losses from Industrial Alliance and Sun Life, as likely Manulife as well.
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.
Darko Mihelic of Cormark Securities is calling for a "noisy, ugly" quarter and is even more bearish than Routledge. He sees a loss of 16 Canadian cents a share from Manulife, a loss of 67 Canadian cents a share at Sun Life, and a loss of C$1.05 a share at Industrial Alliance.
Analysts are less concerned with No. 2 life insurer Great-West, majority-owned by Power Financial (PWF.TO) and considered the least vulnerable to financial markets.
Despite the dour predictions, Mihelic actually upgraded Manulife to a "buy" from "market perform", positing that negative market sentiment is already baked in to the stock.
However, a meaningful stock rally from the insurers seems unlikely until rates rebound, an event Routledge doesn't expect 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 was down 13 Canadian cents at C$26.22 on the Toronto Stock Exchange on Thursday, while Manulife was down 4 Canadian cents at C$11.86, and Sun Life was down 16 Canadian cents at C$19.97. All three stocks recently hit their lowest levels since the 2008-09 market crash.
Reporting By Cameron French; Editing by Frank McGurty