Investors can expect "awful" results when Canadian life insurers report fourth quarter earnings in the coming weeks, says Michael Goldberg of Desjardins Securities.
He told clients in a note:
[IA]'s earnings clearly showed the difficulties experienced from weak equity markets and, to a lesser extent, credit issues. We expect the other Canadian lifecos to be more affected than IA by both factors.
It is hardly a secret that the country's top life insurance companies are struggling from the downturn in equity markets, what with the 40% drop in share prices last year following the bankruptcy announcement of Lehman Bros. (OTC:LEHMQ) What perhaps is less obvious, is the effect credit markets could have on earnings.
Mr. Goldberg wrote:
Although equity market weakness is the main culprit for current lifecos earnings and performance sensitivity, we are also concerned about credit quality because of the large potential closures lurking in their giant bond portfolios.
Keep in mind that reserve strengthening for equities is a non-cash charge usually related to potential payments far in the future, and equity prices can recover over time. On the other hand, credit impairments or defaults have less potential for future recovery.
He continues to rate Manulife Financial his "top pick" with IA rated "buy" and both Great-West and Sun Life rated "hold."