Posted on the Globe & Mail's Streetwise by Andrew Willis:
As investors shift their focus from equity to credit portfolios at Canada's life insurers, the last quarter's best performers could turn out to be this quarter's goats.
The sharp selloff in stocks at the end of 2008 undermined results at life insurers with relatively large exposure to equities, such as Manulife Financial. In contrast, Great-West Lifeco's heavy weighting in bonds helped it sail through the storms.
The first three months of 2009 saw stocks rally, while credit markets continued to post weak results. So in previewing the sector's quarterly earnings and the four major Canadian life insurance company, Desjardins Securities flagged the potential for problems at insurers with relatively largely holdings of corporate bonds.
“This quarter was not marked by any credit-related catastrophes, but we believe that we have not yet faced the worst of the current credit cycle,” said a report Tuesday from Desjardins analyst Michael Goldberg. “Although we still believe that equity risk will take the spotlight this quarter in terms of earnings impact, we will also be watching for unrealized losses in lifeco bond portfolios.”
Based on what's been disclosed to date, Mr. Goldberg said: “In terms of credit risk exposures, we are most concerned with Sun [Life Financial] and Great-West.”
He said Great-West Lifeco had $6.1-billion of unrealized bond losses at the end of 2008, while Sun Life Financial had $1.8-billion of unrealized losses on its portfolios.
The Desjardins analyst said he “does not have many credit concerns” for Industrial Alliance, “but we will continue to watch for any further ABCP-related markdowns.”And when it comes to Manulife, the country's largest insurer and a company that's been humbled by the equity market meltdown, Mr. Goldberg said: “We are also relatively less concerned with Manulife's credit risk due to its well-diversified bond portfolio and conservative investment style.”