Canadian life insurance companies will report their quarterly results on May 5 and 6, and the numbers aren't likely to impress many investors.
This time, the benefits of a healthy stock market - usually a boon for insurance companies - will be offset by the stronger Canadian dollar and potentially higher credit losses. However, Doug Young, an analyst at TD Newcrest, argues that if the stock prices decline after the results are released, investors should pounce.
For one thing, any selloff could be due to factors beyond the actual financial results. For example, Mr. Young noted that expectations are spread widely among analysts covering the stocks, which raises the possibility that somebody, somewhere, is going to be disappointed with the results.
As well, he noted that three of the big insurance companies are expected to report on the same day, which can lead to some confusion in the market.
His order of preference puts Sun Life Financial Inc. at the top of the list, followed by Manulife Financial Corp. and Great-West Lifeco Inc. - all of which he recommends as "buys". He has a "hold" recommendation on Industrial Alliance Insurance and Financial Services Inc., because of concerns about the stock's steeper valuation.
"We remain overweight the Lifeco sector," he said in a note. "First and foremost, we view the groups' valuations as attractive, especially against its financial services peers, specifically the banks.
"Our view is based on our belief that economic conditions will improve over the coming year, leading to rising equity markets and interest rates, along with improved credit related losses. We believe investors are confused with the space, and justifiably so given what has transpired over the past year."
Many investors have been alarmed by how connected insurance companies' earnings are to the performance of the stock market. Indexes are still far from their highs despite an impressive recovery over the past 13 months. As well, Manulife horrified investors last year when it reduced its quarterly dividend, putting a big dent in its share price and raising the possibility of cuts elsewhere.
Performance has also been an issue. The two biggest names in the sector, Manulife and Sun Life, have seen their stocks rise 2.6 per cent and 16.8 per cent, respectively, over the past 12 months, after factoring in dividends. That lags the 34.4 per cent gain for the S&P/TSX composite index and pales next to the hefty returns from the Big Banks.
In a contrarian way, though, this could be good news. Mr. Young believes that many investors have stayed clear of insurance stocks, which could drive share prices higher as investor sentiment improves. However, he warned that the near-term could be bumpy.