Wednesday, February 20, 2008

Review of Life Insurance Cos Q4 2007 Earnings

RBC Capital Markets, 20 February 2008

The high Canadian dollar, combined with weak equity markets and declining interest rates made for a difficult backdrop for the lifecos in Q4/07.

• Core EPS growth was highest at Manulife (14%) and lowest at Sun Life (3%).

• Manulife's EPS exceeded consensus expectations, Industrial Alliance's were in line, while Sun Life's and Great-West came up short.

• Currency was a drag on the earnings growth of all lifecos, except for Industrial Alliance which generates essentially 100% of its income from Canada. The drag on earnings growth related to currency was approximately 14% at Manulife, 8% at Great-West, and 7% at Sun Life. The average Canadian dollar rate against the U.S. dollar was up about 5% against Q3/06.

• The direct impacts of equity market and interest rate declines are more difficult to isolate, but we believe that reserves related to those assumptions were strengthened; while earnings on surplus and experience gains were weaker than they otherwise would have been.

• Near term pressure on earnings continues given movements in equities, interest rates and the Canadian dollar since the end of Q4/07. We are lowering our investment rating on Great-West to Sector Perform from Outperform. The downgrade reflects (1) a more neutral view on the lifeco sector versus banks (we are now relatively neutral on the 2 sectors); (2) our view that Great-West's stock may not be perceived to be as defensive as it was in the past given exposure to asset backed securities and greater exposure to equity markets than before as a result of the Putnam acquisition; (3) an increasingly difficult environment for Putnam to improve on mutual fund net sales, which we believe will have negative implications for the multiple investors will be willing to pay for Great-West.

• Great-West's stock trades at 12.1x NTM EPS, versus 11-12x for its peers and a 5-year average of 13.5x. We are using a 12.0x multiple in our target, below the five year average to reflect potentially a more difficult interest rate, currency, equity markets and credit environment.

• The total return implied by our 12-month target price of $34 per share is 10%, which no longer justifies an Outperform rating given the returns we expect for Canadian financial services stocks in the next 12 months.

• On the positive side, Great-West's earnings and shares should benefit from the integration of announced acquisitions in the U.S. and European divisions, lower credit risk in traditional bond portfolios and lower relative exposure to equity markets versus lifeco peers, even with Putnam now part of the company.
Financial Post, Duncan Mavin, 15 February 2008

Manulife Financial Corp. emerged from fourth quarter earnings season as the top pick among Canada’s giant life insurers for a number of analysts.

“We rate Manulife’s shares as Outperform, based on the company’s sales and earnings growth track record, excess capital holdings, and growth prospects in Asia,” said RBC Capital markets analyst Andre-Philippe Hardy in a note to clients.

Credit Suisse analyst Jim Bantis has a “neutral” rating on Manulife’s stock, but said the shares deserve to trade at a premium because of the “strong track record of management and diverse operating platform.”

Manulife was one of three big Canadian insurers to report profits on Thursday, announcing earnings per share of $0.75, a few cents more than most analysts had expected. Sun Life Financial Inc.’s earnings of $0.98 per share were slightly below expectations, while Great-West Lifeco Inc. said it earned $0.60 a share, which was also slightly below what analysts had forecast.

The strength of the Canadian dollar was cited by all the insurers as a negative factor in the fourth quarter results. In coming periods, earnings are expected to be hampered by economic factors that will depress equity markets.

Desjardins Securities analyst Michael Goldberg said Manulife remains his top pick for the sector, although he reduced his target price for Manulife stock from $48.50 to $47.50, “to reflect our concerns about equity market weakness.”