Q4 Earnings Expected to Be 'Awful' for Canadian Lifecos

Investors can expect "awful" results when Canadian life insurers report fourth quarter earnings in the coming weeks, says Michael Goldberg of Desjardins Securities.

The analyst said a whiff of what's to come was provided earlier this week when Industrial Alliance (IDLLF.PK) announced its Q4 numbers.

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. (LEHMQ.PK) 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.

The analyst reduced his 2008 and 2009 earnings estimates for Manulife Financial Corp. (MFC), IA, Great-West Life Co. (GWLOF.PK) and Sun Life Financial (SLF).

He continues to rate Manulife Financial his "top pick" with IA rated "buy" and both Great-West and Sun Life rated "hold."

Comments

[abcde_98:]

Look at any company with revenues/capital contributions (ie investable funds), whether insurers like ALL, AFL, SIGI, or technology companies like QCOM, and the list goes on: their businesses have suffered due to investment losses.

Things to look for:
1. Investment losses (realized, and unrealized), concentrations of any kind, hedging of concentrated positions, etc

2. New Sales(premiums), by product category....some are mre discretionary than others

3. Recurring sales(premiums), have insureds been cancelling their contracts, cashing out, etc?


As developed nations, funded by credit over several years, trend somewhat along the spectrum towards the cash economy (0% leverage), where will growth come from in general? and how do people allocate their cash (+diminished credit)?

Jan 30 08:46 AM