Rough quarter expected from Canada insurers

Fri Jan 13, 2012 3:21pm EST
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By Cameron French

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: Quote) and Sun Life Financial (SLF.TO: Quote), Canada's No. 1 and No. 3 insurers, as well as No. 4 insurer Industrial Alliance (IAG.TO: Quote).

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.   Continued...