August 2, 2011 / 4:53 PM / 6 years ago

PREVIEW-Weak markets to pressure Canadian insurers' profits

* Profits seen falling from Q1, rising year-over-year

* Weaker stock prices, bond yields to hurt results

* Stocks undervalued, but near-term rebound unlikely

By Cameron French

TORONTO, Aug 2 (Reuters) - Canada’s big insurers are expected to report sluggish second-quarter results due to weaker stock prices, lower bond yields and sluggish U.S. growth, prompting analysts to suggest the stocks could remain under pressure for the foreseeable future.

However, the expected weak results at the so-called “big three” -- Manulife Financial (MFC.TO), Sun Life Financial (SLF.TO) and Great-West Lifeco (GWO.TO) -- mask generally solid fundamentals in an industry that is on a stronger footing than it was a year ago, they say.

“What we’re going to see is another quarter of poor reported numbers, because as much as much the insurers are trying to get away from it, the macro factors are still going to put pressure on the bottom line,” said John Aiken, an analyst at Barclays Capital in Toronto.

Analysts polled by Thomson Reuters I/B/E/S expect Manulife and Sun Life to report weaker net earnings from the first quarter, while Great-West -- which is the least vulnerable to market gyrations -- is seen reporting modest profit growth.

On a year-on-year basis, profit at all three should be higher, but analysts note that year-ago results were hurt by an even sharper drop in equity prices and bond yields, which put heavy pressure on Sun Life’s profit and sent Manulife to a C$2.4 billion loss.

Sun Life and Great-West will report results on Wednesday, while Manulife, the country’s largest life insurer, will release its results on Aug. 11.

MESSY RESULTS

In the wake of the 2008 stock slump, market volatility has made for messy quarterly results for the sector, as Canadian accounting rules force insurers to revalue the cost of future obligations based on the value of their stock and bond holdings.

Lower stock prices and bond yields force the insurers to take the difference out of profit.

Manulife, the insurer with the most exposure to market fluctuations, has spent much of the past year hedging that exposure, which has put it in a stronger position than a year before, but still vulnerable to market shifts.

Aiken recently lowered his 12-month price targets on the insurers, while CIBC World Markets analyst Robert Sedran does not have an “outperform” rating on any of the companies, despite his belief that their underlying businesses are strong.

“The balance sheet’s in good shape, the business is growing where they want it to grow, and now it’s a question of how do you value all this in what remains a very choppy environment,” he said of Manulife.

In addition to the market factors, Manulife and Sun Life both have substantial U.S. operations, putting results at the mercy of that country’s uneven economic recovery.

“You’ve got the economic headlines in the U.S. where the consumer is concerned about jobs, housing, everything else like that. Realistically, the last thing they want to do is layer on additional costs in the form of insurance,” said Aiken.

This has led to expectations that core earnings will show little quarter-on-quarter growth, giving investors little reason to pile into shares that have been on the defensive in recent weeks.

SHARES UNDERVALUED

The S&P/TSX composite index .GSPTSE fell 5.8 percent during the quarter, while 10-year U.S. Treasury yields -- which analysts use to estimate the actuarial assumptions -- dropped sharply during the period.

Shares of all three insurers also fell during the period, though as a group they slightly outperformed the broader market.

While analysts were not optimistic about a near-term rebound, they say the stocks are trading at historically cheap valuations. Scotia Capital analyst Joanne Smith said the stocks could be vulnerable if second-quarter results miss estimates.

“Earnings disappointments are not likely to be taken in stride this quarter as market sentiment remains in favor of (low-risk investments),” she said in a note.

$1=$0.96 Canadian Reporting by Cameron French

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