Canadian Insurers Beat Profit Forecasts

August 6, 2009

Two of Canada’s big insurers reported better than expected profits on Thursday, boosted by stock market gains, but their share prices sank as one insurer cut its dividend and the other warned of clouds ahead.

Manulife Financial Corp, Canada’s largest insurer, said it had net income of C$1.09 a share in the second quarter, well above the 66 Canadian cents a share reported a year earlier and the 66 Canadian cents expected by analysts, according to Reuters Estimates.

But the Toronto-based insurance giant unexpectedly cut its dividend in half to C$0.13 a share, saying it preferred to guard “fortress levels” of capital.

Manulife stock fell 8.4 percent to C$24.01 in early trade on the Toronto Stock Exchange.

Canada’s No. 3 insurer, Sun Life Financial Inc, said it net income rose 14 percent in the quarter to C$1.05 a share, as the surge in global equity markets boosted the value of its big investments in the stock market.

Profit was boosted by a reserve release of C$432 million as a result of rising equity markets, pushing its earnings past analyst expectations of a profit of 93 Canadian cents a share, according to Reuters Estimates.

But Sun Life warned that third-quarter income will be reduced by between C$450 million and C$550 million by changes to the assumptions it uses to value its assets and liabilities, and its shares fell 8.0 percent to C$34.60 in early trade.

Sun Life said the hit will come when it updates the equity and interest rate related assumptions used to value its variable annuities, segregated funds and certain fixed annuities.

Insurance companies are huge investors in the fixed income market and make long-term assumptions of their liabilities based on where interest rates are. Because the recession has pushed short-term interest rates to historic lows, Sun Life and others are forced to reassess what the returns on their investments will be.

“Having low long-term interest rates on a net-net basis is generally a negative for insurance companies and some of that is going to work its way into the assumption changes that Sun Life and all of the insurance companies are going to make,” said Craig Fehr, an analyst with Edward Jones.

Fehr said all of Canada’s big life insurers — Great West Lifeco is set to report earnings later on Thursday — are benefiting from the same tailwind of rising stock markets after several quarters of equity losses.

“(Equity markets) have been a huge headwind for several quarters in a row now and we’ve finally seen that reverse trend, and it is benefiting them now in the aspect of reserve releases as opposed to giant reserve builds,” Fehr said.

Manulife said that while it was pleased with strong growth across its business lines in the second quarter, it wants to achieve “fortress levels” of capital. Cutting the dividend was the best way of doing that, it said.

Manulife said that while its minimum continuing capital and surplus ratio, at 242 percent, is up from 200 percent in the same quarter last year, it must anticipate more conservative economic scenarios and be prepared to respond to risks and opportunities.

Sun Life also warned of possible clouds on the horizon.

“Recent equity market gains are encouraging, however a full, broad-based economic recovery will take time and credit conditions remain a headwind in the current environment,” Chief Executive Donald Stewart said in a statement.

Shares of Great West, which is set to report its earnings around midday in Toronto, followed Manulife and Sun Life lower, down 4.8 percent at C$25.62.

The broader financial index was down 3.2 percent on Thursday morning.

($1=$1.07 Canadian) (Reporting by Andrea Hopkins; editing by Rob Wilson)

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