Friday, February 13, 2009

Sun Life Q4 2008 Earnings

Scotia Capital, 13 February 2009

• $1.25 EPS loss (ex the $1.48 EPS gain from sale of CI), well below our $0.14 loss estimate and consensus of a $0.10 gain.

What It Means

• 2/3 of miss was due to much higher credit hits than anticipated (total credit hits were $0.95 EPS) and 1/3 of miss wasdue to higher equity market hits than anticipated (total of $1.22 in EPS).

• Credit woes continue - company suggests this could extend well into 2010. In Q3/08 ex LEH/Wamu and AIG credit hits for SLF were $0.25 in EPS, versus about $0.05 for the other Canadian lifecos. In Q4/08 it got worse. Credit hits were $0.95 EPS for SLF, versus $0.08 for MFC and $0.01 for GWO.

• MCCSR is 232%. A 10% decrease in equity markets hurts the MCCSR by just 3 to 5 points, so SLF's capital is fine even if markets fall very significantly.

• SLF upped its sensitivity from a $0.40 EPS to a $0.49-$0.62 EPS range. We've decreased our estimates for all the lifecos to assume a modest 1%-2% increase in equity markets in 2009, down from a 6%-7% increase.
The Globe and Mail, Tara Perkins & Andrew Willis, 13 February 2009

Canada's biggest life insurers are scaling back takeover plans after an ugly quarter that saw their investments hammered.

The big three players in life insurance are still weighing acquisitions, but executives at Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. are more focused on hunkering down and preserving capital in the wake of fourth-quarter results.

"We are going through some extraordinarily difficult times," said Manulife chief executive officer Dominic D'Alessandro. "We've not seen markets behave like this in 100 years."

The insurers are focusing on their financial cushions and preparing for any trouble on the horizon.

"The theme for our whole industry is to build and maintain a strong capital position," said Sun Life chief executive officer Donald Stewart. Sun Life sees "considerable opportunities for acquisitions," and the price of deals has fallen, but the overall mood is cautious in the wake an unprecedented swoon in debt and equity markets, Mr. Stewart said.

Like Sun Life, Manulife is in the midst of exploring a few specific takeover opportunities. Both firms are expected to bid on small units of American International Group Inc., but not AIG's Asian crown jewels, which they coveted in the past. "It doesn't mean we're still not interested, but our primary focus is on maintaining our capital levels close to where they are," Mr. D'Alessandro said.

"And if we were to undertake M&A activity, it would be financed with capital appropriate not to weaken our overall position," Mr. D'Alessandro added.

As stock markets plunged by more than 20 per cent in the last three months of 2008, Manulife lost $1.87-billion. Sun Life lost $696-million, if a big gain from the sale of its stake in CI Financial Income Fund is factored out, although its final profit came in at $129-million in the quarter. Winnipeg-based Great-West Life lost $907-million after writing down the value of Putnam Investments, the U.S. investment business it bought in 2007, by $1.35-billion.

"Clearly we've got some tough slugging ahead and it's better to be safe than sorry and we're going to look at ways to bolster our capital," Mr. D'Alessandro said in an interview.

"I hope that at some point we'll be able to report to you that the tide has turned, and we're regaining or we're stopping the bleeding at least, and the strength of the franchise and our businesses will become apparent to you once again," Mr. D'Alessandro, who is scheduled to retire in May, told analysts on a conference call.

"Our facts are that our contracts are under water by about $26-billion," he said of Manulife's troubled variable annuity and segregated funds business.

Plunging stock markets have caused a shortfall in the amount of money the insurer has invested for payments that are due to be made to customers decades from now.

As a result, it is having to sock away billions of dollars, although it can release the reserves in the future if markets improve.

The situation overshadowed Manulife's underlying operating results, which executives say are among the best ever.

"Virtually every other measure of our operating success would indicate that this is one of our best years, but for that theoretical charge associated with the market," Manulife chief investment officer Don Guloien, who will succeed Mr. D'Alessandro in May, said in an interview.

"We've written a hell of a lot of profitable new business," Mr. D'Alessandro said.

During a conference call with analysts, Mr. Stewart faced criticism of the insurer's risk management skills, and the dependability of its dividend. His response was to point to Sun Life's strong balance sheet and explain: "While the dollar values [of the losses] are large, so too is the magnitude of the economic events we have experienced."

Great-West chief executive officer Allen Loney said that despite the writedown on Putnam, the company plans to keep expanding its U.S. wealth management division, but growth in that sector will likely slow.

"Our core continuing operations performed well, especially considering the global economic environment," Mr. Loney said.