• Expecting a Solid Q4/05 – Raising Price Targets. In advance of what we expect will be a solid Q4/05 reporting season, we are rolling forward our EPS estimates one quarter and raising our sector target multiple by 1 point to 15x. Our underlying EPS estimates and ratings remain unchanged.
• Raising Target P/E by 1x to 15x to Reflect Higher Rates. In concert with the recent concerted upward push in bond yields in both Canada and the U.S., we are raising our sector target P/E multiple to 15x from 14x. In our view, this target valuation more closely reflects current business conditions and long-term sector valuation. Gently rising interest rates should improve both: (i) crediting spreads on insurance and guaranteed wealth products; and (ii) customer demand as a result of better anticipated returns. Based on the historical valuation relationship between lifeco P/E’s and bond yields, a yield of 5% for the 10-year bond correlates to a 15x-plus P/E environment. Interest rates in both Canada and the U.S. haverisen in recent weeks to test the previous November 2005 highs. In RBC Capital Markets' view, a break higher will set the conditions for a sustained expansion in the sector P/E to this 15x target range.
• Favouring Lifecos over Banks. Canadian lifeco valuations have expanded a multiple point in the last 3 months, now trading at 14.2x consensus forward earnings – this represents a break-out from the 11-13.5x range since Spring 2002, when Canadian government 10-year bond yields fell below 5%. Despite the strong price performance, lifecos continue to trade at only a 5% premium to the banks (as has been the case through much of the year), and well below the 14% premium since demutualization. RBC Capital Markets expects lifecos to outperform the banks in a modestly rising interest rate environment.
New Price Targets: GWO $33.00; IAG $36.00; MFC $86.00; SLF $52.00
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• Raising Target P/E by 1x to 15x to Reflect Higher Rates. In concert with the recent concerted upward push in bond yields in both Canada and the U.S., we are raising our sector target P/E multiple to 15x from 14x. In our view, this target valuation more closely reflects current business conditions and long-term sector valuation. Gently rising interest rates should improve both: (i) crediting spreads on insurance and guaranteed wealth products; and (ii) customer demand as a result of better anticipated returns. Based on the historical valuation relationship between lifeco P/E’s and bond yields, a yield of 5% for the 10-year bond correlates to a 15x-plus P/E environment. Interest rates in both Canada and the U.S. haverisen in recent weeks to test the previous November 2005 highs. In RBC Capital Markets' view, a break higher will set the conditions for a sustained expansion in the sector P/E to this 15x target range.
• Favouring Lifecos over Banks. Canadian lifeco valuations have expanded a multiple point in the last 3 months, now trading at 14.2x consensus forward earnings – this represents a break-out from the 11-13.5x range since Spring 2002, when Canadian government 10-year bond yields fell below 5%. Despite the strong price performance, lifecos continue to trade at only a 5% premium to the banks (as has been the case through much of the year), and well below the 14% premium since demutualization. RBC Capital Markets expects lifecos to outperform the banks in a modestly rising interest rate environment.
New Price Targets: GWO $33.00; IAG $36.00; MFC $86.00; SLF $52.00
