TORONTO (Reuters) - Canadian life insurers are preparing to report another gloomy set of quarterly results due to unfavorable markets and writedowns, and analysts say it is still not time to buy their shares despite sky-high dividends and cheap valuations.
Three of the country's four largest insurers are expected to report losses for the fourth quarter, including sector heavyweight Manulife Financial (MFC.TO), which reports first, on Thursday.
"The environment continues to take its toll," said Robert Sedran, an analyst at CIBC World Markets. "Clearly 2011 was a very challenging year for the sector, and (the fourth quarter) will confirm it closed the year in a challenging fashion as well."
Market-related losses, while not as severe as in the third quarter, are expected to once again pressure the insurers' bottom lines as they have periodically over the three years since the 2008 financial crisis.
Under Canadian accounting rules, life insurers must bulk up their cash reserves when markets fall to ensure they can pay future policy liabilities.
While Canada's main equity market rose about 3 percent during the October-December period, the country's 30-year bond yield fell 28 basis points to 2.49 percent. The insurers use long-term bond yields to offset long-term policy obligations, so a reduction in bond yields can mean hundreds of millions in charges.
According to analysts surveyed by Thomson Reuters I/B/E/S, Manulife is expected to lose C$177 million ($177 million), or 11 Canadian cents a share, in the quarter, while No. 3 Canadian insurer Sun Life Financial (SLF.TO) is seen losing C$275 million, or 59 Canadian cents a share.
In addition to market-related losses, Manulife is expected to take a C$650 million hit on its U.S. life insurance business, while Sun Life is seen taking about C$775 million in charges related to its exiting of certain U.S. businesses and to account for changes in its dynamic hedge accounting.
Smaller rival Industrial Alliance (IAG.TO), which recognizes the full year impact of market moves in the fourth quarter, is expected to post a loss of C$89 million, or 96 Canadian cents a share.
All three posted profits in the fourth quarter of 2010, when market movements were favorable.
No. 2 insurer Great-West Lifeco (GWO.TO), which is less exposed to markets than its rivals, is expected to turn a profit of C$474 million, or 49 Canadian cents a share.
While losses are expected, the shortfalls for Manulife and Sun Life should be much less drastic than in the third quarter, when Manulife lost C$1.3 billion, and Sun Life lost nearly half that.
Manulife, which has suffered the most from market swings, has been busily exiting money-losing businesses and hedging its market exposure, while Sun Life has cut costs and also exited businesses in the United States that were a drag on earnings.
Analysts are still reluctant to recommend the stocks, however, even though the insurers' shares have ridden the market higher since late December and their dividend yields remain high.
Sun Life is currently paying a rich 6.9 percent, while Manulife, which cut its payout following the 2008 market crash, nonetheless sports a yield of 4.3 percent.
"While we believe the absolute worst should be over for the insurers, we see little reason to believe that there will be an immediate turn around either," said John Aiken at Barclays Capital.
CIBC's Sedran agreed, noting that the U.S. Federal Reserve's recent pledge to keep interest rates low for the next few years means bond yields are likely to remain under pressure.
"Our view on the sector is that a sideways scenario isn't good enough because it will still require some reserve builds," he said.
Manulife stock, at C$12.14 on Wednesday, is down 72 percent from its record high of C$44.23 in late 2007, while Sun Life's price of C$21.07 is 62 percent below its record high of C$56.50.
There is also some concern that Sun Life could cut its dividend, although Chief Executive Dean Connor, who took the helm in December, has suggested the payout will not be cut unless financial markets deteriorate.
Reporting By Cameron French; Editing by Peter Galloway