Insurers’ earnings to reflect growth, solid sales

Canadian life insurance companies have endured a few uneven quarters and are contending with mixed market conditions. But for investors looking at the underlying business performance, there's still plenty of opportunity for earnings growth.

Analysts are forecasting solid results when the three largest insurers report second-quarter earnings this week. Sun Life Financial Inc. and Great-West Lifeco Inc. will report on Wednesday, and Manulife Financial Corp. will follow on Thursday. The fourth-largest company, Industrial Alliance Insurance and Financial Services Inc., led the pack with a 28-per-cent increase in net income to $113.6-million last week. The results included a large tax gain of 15 per cent and beat analyst expectations.

"Although recent results have been messier than we would like, we expect core earnings growth to continue helped by higher assets under management that are in turn supported by solid sales performance, particularly in wealth management," Robert Sedran, analyst for CIBC World Markets, in a note to clients ahead of the quarter. Core earnings strip out the direct impact of interest rates and unsteady equity markets, as well as some other material and one-time items from reported results.

Insurance earnings have stabilized significantly since the global financial crisis, when companies were reeling from falling interest rates and rock-bottom equity markets. Companies have since tried to protect themselves from risks through hedging investments, and many have repositioned or repriced certain products to weather the new environment better.

Insurers still stand to benefit from equity market gains and rising interest rates. While international equity markets have advanced so far this year, lower yields on both longer-term bonds in Canada and the U.S. and the corporate bond market have presented challenges.

Still, this mixed investment environment should allow for net income growth in this quarter, said Mr. Sedran. "We expect better core results out of the group for the remainder of the year and look for the companies to report ongoing progress toward previously disclosed earnings targets," he said, adding that insurers should benefit from improved product sales and greater assets under management.

Insurers' capital ratios, which were a great concern during the recession, have climbed high enough that companies have begun to return some money to shareholders or put their capital to work in other ways. Late last year, Industrial Alliance increased its dividend, while Sun Life restructured internal reinsurance arrangements and paid down debt.

Manulife will need to bring down its leverage and increase earnings growth before it can boost its dividend, said Tom MacKinnon, analyst with BMO Nesbitt Burns, adding that he expects a dividend increase in early 2015. Investors will likely have to wait until next year for increased dividends at the other two insurers as well, with Mr. MacKinnon projecting an increase at Sun Life in early 2015 and at Great-West in mid-2015.