Canadian insurers face another tough quarter

Wed Feb 8, 2012 2:40pm EST
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By Cameron French

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: Quote), 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: Quote) 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.   Continued...