(Repeats Sunday column)
* Results rebound seen on equity gains
* Credit charges, depressed fee income will still drag
* Valuations seen attractive vs banks
By Andrea Hopkins
TORONTO, July 27 (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 this 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 beneficiaries."
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.
BUMPY REPORTING SEASON
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)