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Canada’s largest insurance companies are bracing for another challenging year after plummeting stock markets wreaked havoc on their latest financial results, signalling the global financial crisis is tightening its chokehold on this country’s financial services sector.

Manulife Financial Corp., Canada’s biggest insurer, said plunging stock prices fuelled a bigger-than-expected fourth-quarter loss of $1.87 billion. It had warned investors in December to expect a loss of about $1.5 billion, its first ever since going public in 1999.

Great-West Lifeco Inc., Canada’s second-largest insurance company, posted its own quarterly loss of $907 million after absorbing big impairment charges that it blamed on "the significant deterioration in financial markets."

Sun Life Financial Inc., meanwhile, saw its fourth-quarter profit tumble by 77 per cent because of the capital markets carnage. Canada’s third-leading insurer predicts the turbulence could extend into 2010 and is setting aside more than $100 million for future asset defaults.

Until now, major banks have borne the brunt of the crisis. Analysts, however, are now suggesting the near-term outlook for insurers is also darkening, particularly for those with segregated funds businesses that are vulnerable to equity market swings. Those products are similar to mutual funds but have added wealth protection guarantees. When markets fall, companies are required to pad their reserves at the expense of earnings.

"My expectation is that the operating environment is going to continue to be difficult in 2009," said Craig Fehr, an analyst with Edward Jones. "Management has some influence on how they position their business in this environment, but there are some external factors that are out of their control."

He speculated that any further deterioration in credit and equity markets could prompt companies to raise more capital, possibly through stock sales. Manulife has already taken that route, raising more than $2 billion in December. Sun Life also raised capital by selling its 37 per cent stake in CI Financial Income Fund to the Bank of Nova Scotia in a $2.3 billion cash-and-share deal.

But following yesterday’s poor financial results, Moody’s placed Manulife’s ratings on review and downgraded those of Sun Life no credit check payday loans. There was also renewed speculation that federal regulators could offer the industry more relief.

Rod Giles, a spokesperson for the Office of the Superintendent of Financial Institutions, said the regulator is not planning any imminent changes to its minimum continuing capital and surplus requirements but noted that it "consults on capital rules on a fairly continuous basis."

"That being said, the office also monitors the external environment of financial institutions on an ongoing basis and would not rule out other changes being considered if market conditions or business developments were to warrant this," he added.

Last year, OSFI relaxed the rules about how much money insurers must put aside to backstop their segregated funds businesses. That was followed by a federal budget proposal to create a new Canadian Life Insurers Assurance Facility to guarantee insurers’ wholesale term borrowing. While those moves should provide insurers with some relief, investors should not count on more help from regulators or legislators going forward, Fehr said.

For its part, Manulife lost $1.87 billion, or $1.24 a share, in the quarter ended Dec. 31. That compared with a profit of $1.14 billion, or 75 cents a share, in the same period last year. Manulife said the sharp decline in global equity markets led it to increase its balance sheet reserves to cover investment guarantees linked to some of its products to $5.783 billion at the end of 2008 from $526 million at the end of 2007. Premiums and deposits for the quarter were $18.5 billion, up 6 per cent from $17.4 billion a year earlier.

Great-West later posted a quarterly loss of $907 million, or $1.01 a share, compared with a profit of $537 million, or 60.1 cents a share last year. The results were hurt by charges related to its U.S.-based Putnam money management unit.

Sun Life, meanwhile, said its quarterly earnings sank to $129 million, or 23 cents a share, from year-ago $555 million, or 97 cents a share.

With files from the Star’s wire services

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