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Why this earnings season may not be kind to Canadian insurance stocks

The corner of Bay Street and Adelaide streets in the heart of Toronto’s financial district.

Gloria Nieto/The Globe and Mail

Earnings season is poised to test what has been one of the hottest segments in Canadian stocks over the past three months.

Life insurance stocks are on their best run in more than three years – a stretch of time that has generally been fruitless for lifeco shareholders.

But while investor enthusiasm is running high, the group's quarterly financial results are shaping up to be "unspectacular," according to Canaccord Genuity.

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"Several earnings tailwinds are fading … which we do not believe are reflected in consensus estimates for some stocks," analyst Gabriel Dechaine said in a note.

Canadian lifecos begin reporting third-quarter financials on Wednesday. The lead-up has seen renewed interest in the segment as bond yields have risen.

Since the last reporting season, Canada's life insurance stocks have collectively risen by more than 10 per cent, opening up a double-digit spread in performance over the S&P/TSX composite index over that time.

The last time lifecos beat the index by a margin of that size was in the second quarter of 2013, said Mr. Dechaine. Then, the U.S. 10-year benchmark bond yield had increased by about 80 basis points.

Life insurance stocks tend to have a positive relationship with bond yields. Insurer profits are partly driven by gains made on reinvested premiums, so the low-rate era has been a tough environment for lifecos to navigate.

On a total return basis, the Canadian lifeco sector has been flat for more than two years, while yields around the world have been compressed by central bank stimulus. The most recent rally has also coincided with a spike in yields. But this time, the U.S. 10-year has added only about 30 basis points, which Mr. Dechaine cites as one reason to be cautious about the lifeco resurgence.

Additionally, yields are still extremely low by historical standards. Low rates are reflected in the amount of money lifecos set aside as actuarial reserves. Both Manulife Financial Corp. and Sun Life Financial Inc. are expected to report the results of their annual reserve reviews, along with earnings.

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In addition to reserve charges, the market will be closely watching financial reports for trends in investment gains and foreign-exchange translation. Great-West Lifeco Inc. is most-heavily exposed to currency pressures, with Europe accounting for about 45 per cent of the company's profits.

The weakening of the British pound after the vote to leave the European Union will prove a drag on Great-West's earnings. This stock is cause for the most caution, said Mr. Dechaine, who rates it a "sell."

Manulife, as well as Industrial Alliance Insurance and Financial Services Inc., meanwhile, both get "hold" ratings, while Sun Life has Canaccord's only "buy" rating of the group.

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About the Author
Investing reporter

Tim Shufelt joined the Globe and Mail in August, 2013, primarily to cover investments for Report on Business. Prior to the Globe, he worked as a staff writer at Canadian Business magazine, a business reporter at the Financial Post, and covered city news and courts for the Ottawa Citizen. More


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