As Canada's insurers get ready to release earnings, it looks like another quarter to avoid the companies.
"Investing in the insurance sector amounts to a waiting game," analyst Peter Routledge of National Bank Financial writes in his preview of the quarter's profit reports. "At some point, we will see long-term interest rates rise and equity markets stabilize, appreciating in a less volatile fashion than that observed over the past three years. But that point likely lies sometime well into the future."
Manulife Financial Corp. is still the most exposed, say analysts, because its plan to reduce its vulnerability to falling stock markets and interest rates is still a work in progress.
But analyst John Aiken of Barclays Capital also points to Sun Life as a company that could be in the market's crosshairs if its earnings are weak and concerns grow that its capital is close to breaching a key level. Many industry analysts watch a ratio called the Minimum Continuing Capital and Surplus Requirements (known by the shorthand MCCSR), that is also a measuring stick for the industry's regulator. When that ratio approaches 210 per cent, some investors start to expect regulators will demand a capital raise.
"We forecast that the weaker earnings anticipated in the quarter as well as funding movements will weigh on the regulatory capital ratios for Manulife and Sun Life. While we expect a larger impact on Manulife, we believe that Sun Life approaching and potentially breaching the 210 per cent level will once again raise questions about its capital levels and could weigh on its relative valuation coming out of the quarter," Mr. Aiken wrote in his preview.
Mr. Routledge is more sanguine about Sun Life, which is his second pick in the sector, believing its asset management business is undervalued.
If you must own an insurer, where the two analysts do agree is that the best bet in the sector remains Great-West Life, because its connection to markets is the least strong.