August 6, 2009 / 2:54 PM / in 9 years

WRAPUP 4-Canadian insurers offer mixed message, shares dive

* Manulife Q2 EPS C$1.09 vs C$0.66, cuts dividend

* Sun Life Q2 EPS C$1.05 vs C$0.91, beats forecasts

* Great West Q2 EPS C$0.437 vs C$0.63, below expectations

* Shares close sharply lower (Adds Manulife CEO comment, updates share prices)

By Andrea Hopkins

TORONTO, Aug 6 (Reuters) - Shares of Canada’s big insurers sank on Thursday after the three big lifecos reported mixed profits, and a dividend cut by Manulife overshadowed gains in equity investments.

While the second quarter showed Manulife Financial Corp (MFC.TO), Sun Life Financial Inc (SLF.TO) and Great West Lifeco Inc (GWO.TO) had turned the corner after last year’s stock market downturn hit their huge investment portfolios, they also made several cautious moves that spooked investors.

Canada’s largest insurer, Manulife, reported a 75 percent surge in profit, handily beating analysts’ expectations, but its surprise decision to cut its dividend in half sent the shares 14.8 percent lower in Toronto trade.

Sun Life, the country’s No. 3 insurer, wasn’t far behind. Shares fell 12.3 percent after the Toronto-based company reported a better than expected 14 percent rise in profit but warned of an income hit in the third quarter.

Profit at No. 2 insurer Great West fell, and came in below market expectations, as it booked provisions for future credit losses. Its shares fell 9.1 percent in Toronto.

While all three notched profits — after three awful quarters in which such an outcome was not assured — the dividend cut by Manulife was seen by one analyst as an acknowledgment that the sector has to get back to basics after making bad bets with risky products.

“You’re starting to see the realization that the insurance company model has to be revamped and it has to go back to having more security,” said portfolio manager Danielle Park, president of Venable Park Investment Counsel. “It actually has to beef up its own capital and its own balance sheet.”


Park said insurance companies had tried to win with new products guaranteeing future income for customers — similar to private pension plans — but they now see the market is more volatile than they had expected.

And while the dividend cut by Manulife may have spooked investors — who have long viewed the cash payouts as a nearly sacred by-product of Canada’s financial stocks — Park said it was a smart move.

“It makes sense that they now have to stop paying out so much and start reinvesting again in the base,” she said.

Manulife Chief Executive Donald Guloien said he does not believe Manulife is the only company that is wondering if dividends have climbed too high, and he said the cut does not mean the insurer has become purely defensive.

“If markets turn out to be more benign than (we’ve prepared for) we’ll end up with excess capital, some of which could be deployed to fund a strategic initiative and some of it would be deployed in organic growth,” he said. “Acquisitions are very realistic.”

Both Manulife and Sun Life benefited from the same tailwind of rising stock markets after several quarters of losses that cut the value of their huge investment portfolios.

But all three insurers face similar difficulties: low interest rates, which hurt returns on fixed-income investments, and the need to rebuild capital to cover promises made to customers who bought a guaranteed class of insurance products.

Manulife Financial Corp <MFC.TO said it had net income of C$1.09 a share, well above the 66 Canadian cents a share reported a year earlier and the 66 Canadian cents expected by analysts, according to Reuters Estimates.

But the Toronto-based insurance giant unexpectedly cut its dividend by 50 percent to 13 Canadian cents a share, saying it wanted to build “fortress levels” of capital to guard against future downturns and win approval of rating agencies and regulators.

Sun Life said its net income rose 14 percent to C$1.05 a share, above analysts’ expectations of a per share profit of 93 Canadian cents. Profit was boosted by a reserve release of C$432 million as a result of rising equity markets.

But Sun Life warned third-quarter income will be reduced by C$450 million to C$550 million when it updates the actuarial assumptions used to value its variable annuities, segregated funds and certain fixed annuities, which are often based on interest rates.

Insurers are huge investors in the fixed income market and make long-term assumptions of their liabilities based on where interest rates are. Because the recession has pushed short-term rates to historic lows, Sun Life and others are forced to reassess what the returns on their investments will be.

“Having low long-term interest rates on a net-net basis is generally a negative for insurance companies and some of that is going to work its way into the assumption changes that Sun Life and all of the insurance companies are going to make,” said Craig Fehr, an analyst at Edward Jones.

Great West said net income fell 27 percent to 43.7 Canadian cents a share as it set aside more money for future credit losses, reducing income by 27 Canadian cents a share.

Analysts had expected earnings of 49 Canadian cents a share, according to Reuters Estimates.

$1=$1.08 Canadian Reporting by Andrea Hopkins; editing by Rob Wilson

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