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Headwinds to plague lifecos for years to come

Lifeco investors have seen shares sink since the financial crisis rocked markets and interest rates hit record lows. Now, the head of two of the country’s largest lifecos are warning it could be another three years until they see a meaningful turnaround.

“We’re cautiously optimistic [on the Canadian economy], but we are planning for interest rates being at persistently low levels for a considerable period of time,” Kevin Dougherty, president of Sun Life Financial Canada. “What happened in the second quarter, interest rates got to unprecedented levels, you could go back 100 years and not find long-term interest rates at the levels they hit in the second quarter.”

Dougherty’s comments come after Sun Life (SLF-T) warned this week that it could report a $50-million charge in both the third and fourth quarter if the current environment persists. It added that it could post as much as $500 million in charges between 2013 and 2015.

Dougherty says Sun Life is trying to build a company “that will persist extremely well, even in these conditions,” adding that if there is a return to more normal interest rates, “you’ll see a lot of upside in the industry.”

Manulife Financial (MFC-T) is also warning investors that the problems facing the insurer aren’t likely to disappear until at least 2015. Now the insurer says it will fall short of a goal to increase its net profit nearly three fold to $4 billion by 2015.

“The goal was set back in 2010 when we had a different outlook for the general economy, interest rates and equity markets,” Manulife CEO Donald Guloien tells BNN. “Since then we’ve been able to improve a lot of our operating performance, but the headwinds created by interest rates and the stock market in general makes it more realistic to set the goal lower.”

Guloien says the company will continue to focus on its growing Asian operations as a way to offset headwinds facing its North American operations. And Guloien confirmed to BNN it’s eyeing ING Group’s Asian insurance business.

“It would fit very nicely [with Manulife],” he says. “[But] we are extremely disciplined not know to try and outbid the highest bidder in an auction…I work for the shareholders and it’s got to be a really good deal for our shareholders and adding significantly to earnings in a fairly short period of time before I would be enticed to do a deal and I would not expose our shareholders to an undue financing risk.”

Concern about the prospects for lifecos is also being raised by Bay Street.

Barclays analyst John Aiken says lifecos will struggle to grow their business while earnings will likely remain volatile.

“We believe that the market will likely take the [recent] earnings of both as relative positives, however, we do not believe that it will be enough to ignite the stocks as the declines in regulatory capital and modest outlook for the third quarter will likely dampen enthusiasm,” he says.

Mario Mendonca, an analyst at Canaccord Genuity, is lowering his 2012 earnings per share estimate for Sun Life to $1.98 from $2.55.

“Given the complexity of the issues involved as well as the potential for material charges, we believe the right approach is to remain cautious and skeptical,” he said in a note to clients. He maintains a “hold” on the stock and $24-price target.

“The uncertainty associated with changing the businesses, regulatory capital uncertainty, and the on-going vulnerability to market and economic shocks supports staying on the sidelines,” he says.

And Peter Routledge, analyst at National Bank Financial, told clients he’s lowering his price target on Sun Life Financial from $26 to $24 because of the macroeconomic headwinds facing the company.

“Sun Life Financial faces several macroeconomic headwinds on the life insurance side of the business. This includes potential reserve increases of $600 million through 2015 to reflect lower long-term interest rates, which may cause Sun Life to fall short of its $2 billion net income target by 2015,” he said.

“While the market seems to have priced in much of the downside, we do not expect Sun Life to trade above book value over the next year,” he says. CTV Two CTV News CTV News Channel BNN - Business News Network CP24