Canadian Insurers Ready to Rebound

07/01/2008 12:00 am EST

Focus: GLOBAL

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Tom Slee, contributor to Internet Wealth Builder, says two large Canadian life insurers have had deceptively weak results and should post strong growth in the future.

Canadian life insurance companies' current lackluster results are deceptive and we could see an earnings rebound. Moreover, the stocks are oversold [and] represent a buying opportunity.

Nearly all of the major Canadian insurers reported mediocre first-quarter numbers. It was a miserable scorecard in what is supposed to be a recession-proof industry that escaped the credit and liquidity problems plaguing other financial institutions.

[But] life insurance companies now have to comply with new reporting requirements [that] mark balance sheet assets and liabilities to market values. [Also,] Canadian life insurers are rapidly increasing their wealth management operations and are becoming more exposed to investment markets.

All of this is a plus for investors. Results are more transparent and wealth managers tend to trade at relatively attractive multiples. Despite their poor earnings, the major insurers strengthened their balance sheets, further penetrated the Asian markets, shopped for acquisitions, and reported strong sales. The groundwork for an earnings recovery is being laid. Profits this year are likely to be flat but will gather strength going into 2009.

Manulife Financial (NYSE: MFC) reported first-quarter earnings of 57 cents a share versus 67 cents in 2007, well below the 71 cents many analysts had predicted-mainly from a $265 million increase in reserves.

On the plus side, Manulife reported strong sales in all sectors and Asian earnings, including Japan, are increasing steadily. The company [also] continues to keep a tight grip on expenses. Costs were up 2% year over year while growth is running at 10%, as we increasingly see benefits from the acquisition of giant John Hancock. Hancock gives MFC a brand in the US comparable to MetLife and Prudential and has made it the number one individual life seller in the US.

[Meanwhile], there are several excellent candidates ready to replace chief executive officer Dominic D'Alessandro, who is due to retire next May. One of their challenges will be to maintain the company's exceptional investment record and interpret the new accounting rules so that results are more consistent.

All things considered, Manulife should make about $2.75 a share this year and $3.40 or more in 2009. MFC remains a Buy [below $35 Monday], with a slightly reduced target of $45.

Sun Life Financial (NYSE: SLF) posted first-quarter earnings of 93 cents a share, down from 96 cents in 2007 and well below the $1.00 Bay Street was anticipating [due partly to] technical adjustments required by the new accounting rules. We could see a snap back in earnings if [the adjustments] are reversed.

Sun continues to thrust into China and India and with a strong capital position is seeking acquisition opportunities. To quote chief executive officer Donald Stewart: "2008 is a bumpy ride" due to the erratic markets. Earnings are likely to come in at around $4.00 a share, and we could see $4.50 a share in 2009.

Sun Life remains a Buy [below $41 Monday] with a reduced target of $55.

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