July 26, 2009 / 2:33 PM / in 8 years

BAY STREET-Stock market surge to boost Canada life insurers

 * Results rebound seen on equity gains
 * Credit charges, depressed fee income will still drag
 * Valuations seen attractive vs banks
 By Andrea Hopkins
 TORONTO, July 26 (Reuters) - Canada's big four life
insurers now look to be better bets than either their U.S.
rivals or the big Canadian banks as a surging stock market
brings profits bouncing higher after three awful quarters.
 Analysts say credit concerns and reserve questions have set
the stage for a noisy quarter when the Big Four start reporting
quarterly results next week. But almost all say the insurers
have ground to make up, and they make investment sense.
 "The lifecos are more sensitive to equity market movements
and the banks are more sensitive to credit," said Desjardins
Securities analyst Michael Goldberg. "I have continuing
concerns about credit, while I think the worst is over for
equities, which says to me the lifecos should be relative
 With the U.S. stock market up 15 percent and Toronto stocks
19 percent higher than the first quarter, Manulife Financial
Corp MFC.TO, Great-West Lifeco Inc GWO.TO, Sun Life
Financial Inc SLF.TO and Industrial Alliance Insurance and
Financial Services Inc IAG.TO are all expected to report
second-quarter profits.
 That reflects the investments the giant firms make with the
money handed over by clients, rather than in the policy sales
that have slumped in the recession.
 Manulife, North America's largest insurance company, made
losses in the fourth quarter of 2008 and the first quarter of
2009 as stock markets tumbled and investments soured. Sun Life,
Canada's No. 3 insurer, also suffered a first-quarter loss.
Great-West and IAG avoided losses in the first quarter, but
earnings slumped.
 Manulife also had to set aside cash for guarantees it
included in products with performance tied to the market.
 "When you get a sharp rebound in the equity market, the
costs to the company of the guarantees can fall dramatically,
so that should be a plus to the income statement in the
(second) quarter, just as it was a minus in the first quarter,"
Scotia Capital analyst Tom MacKinnon said.
 The analyst said he thought life insurers were particularly
attractive compared with bank stocks. He noted that while they
traditionally trade at similar multiples, insurers as a sector
are now cheaper than banks.
 Canadian life insurer shares have climbed just 9.4 percent
on average so far this year, compared with a 43.2 percent gain
by the banks, CIBC analysts said in a July 19 note.
 "In our view, for those willing to look through the valley,
regardless of how we cut it, valuations appear attractive. As
conditions return to normal we see attractive upside for the
group," TD Newcrest analyst Doug Young wrote.
 Opinions vary about which insurers will outperform in the
second quarter -- each of the Big Four got at least one vote in
analysts' previews. Dividends are expected to be unchanged.
 This may be because analysts are unsure how the firms will
account for weaker credit and shifts in the money they hold
against various liabilities.
 "Despite the sharp rally in equity markets, overall EPS
results are expected to remain volatile ... We continue to have
low confidence in our quarterly EPS forecasts," BMO Capital
Markets analyst John Reucassel warned.
 Analysts said the surge in stock markets will give the
insurers the chance to rebuild capital and shuffle reserves, a
tactic Manulife has already pledged to employ. Equity-related
reserve releases will likely be mopped up by reserve increases
in other areas, rather than used to boost earnings.
 "We are not certain if the other lifecos will choose to
follow (Manulife's) lead ... This could be the main driver of
the difference between our expectations and actual results,"
CIBC analysts wrote.
 Another hurdle is the how the credit risk of downgraded or
defaulted bond issues will affect results.
 "We estimate that, in aggregate, equity markets will
increase lifecos' earnings by C$1.5 billion ($1.4 billion) and
credit losses might cost the lifecos C$550 million in
earnings," the CIBC analysts wrote.
Reporting   Company                      Reuters Estimate
   date                                  (EPS, Pre Except)
 Jul 28     Industrial Alliance IAG.TO      C$0.64
 Aug  6     Sun Life SLF.TO                 C$0.90
 Aug  6     Manulife MFC.TO                 C$0.66
 Aug  6     Great-West Life GWO.TO          C$0.85
 ($1=$1.09 Canadian)
 (Reporting by Andrea Hopkins; Editing by Jeffrey Hodgson and
Janet Guttsman)

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