A Sun Life Financial sign is seen outside of their building before their annual general meeting for shareholders in Toronto May 7, 2014. Insurance companies begin reporting quarterly results Wednesday, staring with Sun Life Financial Inc. after markets close. On Thursday, Manulife Financial Corp., Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc. will follow.Mark Blinch/Reuters
Energy prices, interest rates and economic growth are big themes in the spotlight for Canadian insurance companies this week.
Investors and analysts will be looking for the implications of recent market turns when the four largest insurers report their financial results and outlooks. So far, analysts have mixed projections for how the profitability these companies will compare with a year earlier.
The prolonged period of low interest rates is an industry spectre that continues to haunt life insurance businesses. In the fourth quarter of 2014, U.S. and Canadian government-bond yields declined meaningfully. Lower yields squeeze the profits insurers collect off the premiums they invest.
But companies have now prepared for this low-rate reality and "capital positions are expected to remain robust," BMO Nesbitt Burns analyst Tom MacKinnon said in a recent research note.
Insurance companies begin reporting quarterly results Wednesday, staring with Sun Life Financial Inc. after markets close. On Thursday, Manulife Financial Corp., Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc. will follow.
Since the low-rate environment seems here to stay, "we expect life insurers to continue their pivot towards wealth management activities to offset the headwinds from their protection franchises," Peter Routledge, analyst with National Bank Financial, said in a note.
Wealth and asset management growth has been a major focus of insurers in recent years. In September, Manulife acquired the Canadian business of Standard Life PLC in a $4-billion deal that was largely driven by potential wealth management gains in Canada and abroad. That deal just closed.
The other cloud over the coming year is lower oil prices.
Manulife actually owns an energy production subsidiary called NAL Resources Management Ltd., which extracts oil and natural gas from sites in Alberta and Saskatchewan. This operation is major contributor to the company's roughly $1.8-billion in equity investment in the sector, which is expected to take a big hit, said Mr. MacKinnon.
But even without such a pipeline to the sector, other Canadian insurers will be influenced by oil's slide. Combined with a fallen Canadian dollar, the projection of reduced oil prices has led to lower economic growth forecasts from the Bank of Canada. Amid these conditions, the United States may offer a brighter growth outlook.
"In contrast to the outlook in Canada, our neighbours to the south continue to enjoy a strengthening economic environment," said Mr. Routledge. "Robust job creation will drive higher household spending, a trend enhanced by lower oil prices."
He views Manulife and Sun Life as the companies best positioned to benefit from this improvement, particularly in their wealth-management businesses.
Sun Life just showed its fondness for that market through its recent acquisition of U.S. money manager Ryan Labs Inc., a fixed-income focused firm that invests on behalf of pension funds and institutions.
And there could be more small deals in the wings. With insurers' balance sheets near target levels, even with interest rate pressure, "we expect capital deployment and return to be a theme in 2015," Robert Sedran, analyst with CIBC World Markets, said in a note.