The excerpted article was written by Barbara Shecter | Financial Post
The coronavirus pandemic and efforts to contain it have changed the outlook for Canadian insurance companies, which are rolling out their results this week.
With the industry’s exposure to sectors such as real estate and travel, and asset classes including mortgages and corporate bonds turning into potential “headwinds,” analysts are eyeing a wide range of trends for clues to the size and duration of the impact.
Sun Life Financial Inc., which reported its results after markets closed Tuesday, gave some indication of what to expect.
Stock market declines dragged the Toronto-based insurer’s net income to $391 million for the first quarter, down from $623 million in the corresponding quarter a year ago. But underlying net income grew to $770 million from $717 million, for the quarter ending March 31.
Gabriel Dechaine, who tracks financial services companies at National Bank Financial, declared it a strong quarter, but said “the outlook remains grim.”
In what he called a “sign of the times,” Sun Life reported credit experience losses for only the second time in the past 34 quarters.
“At $15 million after-tax, credit losses were relatively small, though the figure could easily increase as the pace of credit downgrades and defaults may rise,” the analyst wrote in a note to clients.
The uncertainty was shared by Dean Connor, Sun Life’s chief executive, who said in a statement late Tuesday that it is still difficult to determine “how the business will be impacted by future claims and investment experience.”
Group insurance and pensions, which account for roughly a third of the insurer’s profits, could see both reduced premiums and fee-earning assets as unemployment rises in Canada, Dechaine said, adding that high disability claims could also add pressure.
What’s more, social distancing and the economic outlook will “clearly” have an impact on sales volumes despite the adoption of digital sales tools, the analyst wrote. He added that investments in such sales technology would add costs to system, which could exceed unit costs built into pricing.
In addition to the industry-wide issues, some insurers are also saddled with weaker capital positions or exposure to hard-hit sectors, such as oil and gas, which was already reeling from supply and pricing issues unrelated to the pandemic.
Manulife Financial Corp., Great-West Lifeco Inc. and IA Financial Group are also rolling out quarterly results this week and investors will be on the lookout for surprises — positive or negative — on all these fronts, said Dechaine.
“We are more cautious on the longer-term picture,” Dechaine wrote of the insurance sector as a whole in a recent note to clients. In it, the analyst said persistently low interest rates will put pressure on insurance company reserves, the funds they must set aside to meet obligations as they fall due.
Moreover, holdings that had been expected to boost earnings may now turn into headwinds that could “transform into longer-term investment-return degradation,” he wrote.
Once quarterly figures are digested, analysts will also be digging through the numbers to try to discern longer-term trends.
Mario Mendonca, a financial services analyst at TD Securities, expects the longer-term outlook to be better for banks than for insurance companies. As the 2008-2009 financial crisis demonstrated, trading and capital markets revenue should rebound for the banks at some point as the economy starts to recover.
“Ultimately, we expect the low interest rate environment to weigh on the insurers longer than the banks because of the much longer duration of the (insurers’) liabilities,” he wrote in a recent note to clients, explaining that he believes policy responses to the pandemic will keep rates low for a while.