Volatile interest rates and credit performance during the second quarter are once again making life difficult for analysts who cover the life insurers, and their forecasts are likely to be all over the map when the reporting period starts at the end of July. But there’s one thing they all agree on - the downward slide in stock markets doesn’t bode well for the sector, especially Manulife (MFC).
The S&P/TSX fell 6% in the three months up to the end of June, the S&P 500 Index fell 11%, and Japan’s TOPIX was down 13%.
“We expect the declines in equity markets will lead to material reserve additions for Manulife and, to a lesser extent Sun Life (SLF), while we also expect lower interest rates to lead to reserve additions at Manulife,” RBC Capital Markets analyst Andre-Philippe Hardy wrote in a second-quarter preview note.
Low interest rates have been weighing on the insurers for at least a year and a half, and the impact that stock market declines has had on Manulife is well-known. But this quarter is likely to demonstrate that the pain isn’t over yet.
“We expect Manulife will lose money (54 cents per share) while we expect Sun life’s EPS to be 21 cents, which translates into a ROE of only 3.1%,” Mr. Hardy wrote.
CIBC analyst Rob Sedran has cut his estimates, and downgraded Manulife to “sector performer.” He now expects the company to post a Q2 loss of 44 cents per share, rather than a 41 cent per share profit.
In his note, he provides an example of a scenario that shows why it’s so difficult to predict insurance earnings with any certainty these days. Manulife doesn’t carry direct exposure to Greece or troubled sovereign credits. But, the European sovereign crisis is one of the factors behind the rally in U.S. 10-year government bonds, and Mr. Sedran expects that rally will force Manulife to take a $327 million after-tax charge for the quarter.
“In other words, given the extreme sensitivity to volatile market variables, Manulife carries significant indirect exposure to many issues against which it has no direct exposure or control,” he wrote. “Frankly, we would prefer direct exposure to Greece since it would be easier to contain the issue and its impact on valuation.”