Credit Suisse Previews Canadian Lifecos' Q4

The Canadian life insurance index has fared even worse than the S&P/TSX composite and banks stocks, falling 48% from its 2007 high. This presents investors with a dilemma as individual stock valuations and the lifeco sector as a whole look compelling. At the same time, concerns about a prolonged U.S. recession remain at the forefront, so investment portfolios remain vulnerable and this warrants caution until macro conditions stabilize.

In the fourth quarter, lifecos saw their profitability and capital levels impacted. This was a result of reserve building tied to steep declines in equity markets, higher credit provisions with increasing corporate credit defaults and downgrades, lower recurring revenue due to investment losses and falling funds under management, and weaker sales momentum in an environment of deteriorating macro conditions.

However, Credit Suisse analyst Jim Bantis noted that there were some offsetting factors: common equity offerings and asset dispositions to strengthen capital positions, as well as a favourable currency translation with the weaker Canadian dollar versus the USD.

He told clients that it is time to put 2008 behind us. However, there is the matter of fourth quarter results that must be dealt with first. Manulife Financial Corp. (MFC), Sun Life Financial Inc. (SLF), Great-West Lifeco Inc. (GWLOF.PK) all report on Feb. 12.

Industrial Alliance Insurance and Financial Services Inc. (IDLLF.PK) surprised the Street with its pre-announced loss of C$1.37 per share. While Mr. Bantis expected that its results would be impacted by credit impairment and equity market declines, he did not foresee the nature and the impact of the company’s assumption changes. These included the lowering of the ultimate reinvestment rate and higher reserves for future equity market declines.

“We would expect the large Canadian Lifecos to use the fourth quarter to proactively address these issues as well,” the analyst said.

Great-West, which is controlled by Power Financial Corp., agreed to buy Putnam Investments in Feb. 2007. Mr. Bantis said it was clearly ill-timed and may present a goodwill impairment issue given the persistent outflows and estimated 20% to 25% decline in assets under management since the purchase date.

However, he noted that the absence of a meaningful variable annuities presence in the U.S. has been a significant advantage for Great-West. “With its steady credit performance and strong capital base, Great-West should continue to regain its historical premium.”