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Tough times for insurance analysts Add to ...

Pity the analysts?

Forecasting quarterly profits for life insurers is difficult work at the best of times, but since the financial crisis erupted it's been downright painful. Just as it appeared that most of the bedlam had passed, last week's first-quarter results and stock market turmoil show that life isn't getting any easier for the analysts.

There are a large number of moving parts that can have a huge impact on the insurers, and most of them - such as stock market volatility and interest rates - are out of the companies' control. Even core numbers - from sales of life insurance policies to variable annuities - are tough to assess in advance because the financial crisis has caused consumers to behave differently.

Taken at face value, the profits that Manulife and Sun Life announced last week far surpassed analysts' estimates.

Sun Life's earnings of 72 cents per share were well above the consensus call for 60 cents, noted RBC Capital Markets analyst Andre-Philippe Hardy, whose own estimate had been 57 cents.

Why? "Credit related costs were well below our estimates, equity market impacts were in line, the positive impact from changes in assumptions was not expected and earnings excluding those factors were lower than we expected."

Manulife's earnings of 64 cents per share came in well ahead of the consensus estimate of 45 cents, noted CIBC analyst Robert Sedran, whose own estimate was 43 cents. If you ignore all of the unusual or one-time items, the insurer earned 40 cents per share, he added. Nevertheless, Mr. Sedran increased his 2010 earnings per share estimate for the company to $1.92 from $1.80 to reflect the fact that the company beat expectations this quarter.

In his note to clients, Mr. Sedran outlined how Manulife's showing differed from his estimate. The company's "experience gains" came in at $555-million, compared to his forecast of $45-million. "Strain" was higher than expected, at $142-million versus his estimate of $85-million. And, "contrary to our forecast of a modest negative impact, changes in interest rates and spreads had a negligible impact this quarter. In fact, interest rate movements based on the rates [Manulife]uses for actuarial valuation purposes were marginally favorable, which is in contrast to the slightly negative interest rate movements observed in the market."

Aware that the crisis had made it difficult to get a sense of its underlying earnings, Manulife began providing analysts with its own estimate of "adjusted earnings from operations" in mid-2009. It initially said it expected that measure to be between $750-million and $850-million for each quarter in 2010, but in March it had to revise that down to $700-million to $800-million.

Ask Sun Life chief executive Don Stewart whether he pities analysts these days and he chuckles, then acknowledges that he does have some sympathy.

"I do agree that it is very difficult to predict with precision where a specific set of results will come out," he says. For his part, he says he's focusing on the longer term. A dearth of retirement savings coupled with the inability of governments to shoulder both the pension and health-care costs that are emerging mean that the outlook for the life insurance sector is very strong in the long haul, he says. "The shorter haul is obviously much more troublesome."

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