Canadian Life Insurers Analysis
Introduction: The Q1 results of Canadian Life Insurers (Lifecos) have exceeded expectations, contributing to positive sentiments in the sector. This analysis delves into key findings, including earnings per share (EPS) growth, wealth and asset management performance, insurance sales, excess capital, and valuation, while also discussing individual companies’ performance and future outlook.
1. EPS Growth and Momentum: Adjusted EPS grew by an average of 14% year-on-year (Y/Y), outperforming consensus estimates by 1%, indicating robust momentum in the sector. Lifecos surpassed banks in terms of EPS performance, reinforcing the thesis favoring lifecos over banks, especially considering the anticipated Y/Y decline in bank EPS.
2. Wealth & Asset Management Performance: The sector witnessed strong growth in wealth and asset management, with average asset under management (AUM) increasing by 11% Y/Y. Despite the overall positive trend, SLF’s asset management earnings lagged behind peers, highlighting a need for improvement in future quarters.
3. Insurance Earnings and Sales Growth: APE sales saw a substantial increase of 27% Y/Y on average, indicating a favorable environment for insurance sales. Despite some divergence in insurance experience, the underlying growth drivers for insurance operations remain robust, sustaining investor interest in the stocks.
4. Excess Capital and Share Buybacks: Lifecos are well-capitalized, with excess capital providing options for acquisitions and share buybacks. All four lifecos engaged in share repurchases during the quarter, signaling confidence in their financial positions and commitment to enhancing shareholder value.
5. Valuation: Valuations of lifecos remain reasonable, with an average P/E of 9.50x (NTM consensus). Despite a slight premium for SLF compared to the group average, the overall sector is trading at a 10% discount to banks, aligning with historical trends.
CIBC’s (Analyst Rank #12) Updated Coverage :
- IAG: Upgraded to Outperformer due to strong Q1 results and discounted valuation. Improved sales and cost discipline, along with share buybacks, contribute to positive outlook.
- SLF: Despite a disappointing quarter, SLF maintains a positive outlook due to its strong management team and potential for improved earnings growth, particularly in asset management.
- MFC: Reported very strong Q1 results, with significant core earnings growth driven by cost reduction actions and strong net flows in wealth management.
- GWO: Reported strong results, with notable growth in wealth and asset management. Despite a slight premium to the group average, GWO’s potential for future growth is underscored by its strategic initiatives and acquisitions.
Outlook
- Strong Fundamentals: Q1 results underscored the resilience and strength of the lifeco sector. Across the board, adjusted earnings per share (EPS) increased by an average of 14% year-over-year (Y/Y), exceeding consensus estimates for three of the four major lifecos. Notably, companies like Great-West Lifeco (GWO), Industrial Alliance Insurance and Financial Services Inc. (IAG), and Manulife Financial Corporation (MFC) posted significant EPS growth rates of 18% or higher. This robust earnings growth reflects the effectiveness of their business strategies, operational efficiency, and diversified revenue streams.
- Favorable Valuations: Despite the positive performance, Canadian life insurers continue to trade at reasonable valuations, presenting an attractive investment opportunity. The sector’s average price-to-earnings (P/E) ratio stands at 9.50x (next twelve months consensus), representing a 10% discount compared to Canadian banks. Additionally, while there are variations in P/E multiples among individual companies, the overall trend suggests that lifecos are trading at historically reasonable levels, with potential upside for investors.
- Excess Capital: Canadian life insurers maintain robust capital positions, with excess capital representing significant optionality for value-enhancing activities such as acquisitions and share buybacks. The estimated excess capital to market capitalization ratio averages 14% across the sector, providing a solid financial foundation for future growth initiatives. Moreover, all major lifecos have been actively repurchasing shares, signaling confidence in their long-term prospects and commitment to returning value to shareholders.
- Diversified Revenue Streams: Lifecos benefit from diversified revenue streams, including insurance, wealth management, and asset management. Q1 results highlighted strong growth in wealth and asset management earnings, driven by favorable market conditions and solid asset growth. This diversification not only enhances revenue stability but also positions lifecos to capitalize on evolving market trends and investor preferences.
- Positive Industry Trends: Industry-specific trends, such as favorable demographics, increasing demand for insurance and wealth management products, and improving economic conditions, provide a supportive backdrop for lifeco growth. Additionally, higher interest rates, if sustained, could further boost earnings through improved investment returns and enhanced pricing for insurance products.
In summary, the outlook for Canadian life insurers remains constructive, underpinned by strong financial performance, attractive valuations, and strategic positioning. With solid fundamentals, prudent capital management, and a favorable operating environment, the lifeco sector is well-positioned to deliver continued growth and create value for shareholders in the foreseeable future.
