10 June 2009

Canadian Lifecos Less Exposed to CRE & Commercial Mortgages than Peers

Scotia Capital, 10 June 2009

• There is no doubt that commercial real estate (CRE) is increasingly becoming an issue for all financial services companies. As well, but perhaps not necessarily to the same degree, commercial mortgages and commercial mortgage backed securities (CMBS) are potential concerns.

• With significantly less exposure, we believe the Canadian lifecos look very good relative to their peers, namely U.S. lifecos and Canadian banks, with respect to these concerns.


• Not only are the Canadian lifecos significantly less exposed than their peers, but at under 9x 2010E P/E (GWO is 8.8x, IAG is 7.7x, MFC is 8.7x and SLF is 9.5x), they are also much more attractively priced. The Canadian lifecos trade at a 20% discount to P/E ratio (consensus 2010E) of the Canadian banks, versus their long-term average of a 2% premium.
Financial Post, 8 June 2009

The news on Friday that job losses in the U.S. are declining at a smaller pace than expected is good for stocks and even better for Canada's life insurance companies, says Desjardins Securities analyst Michael Goldberg.

"With job losses getting smaller and doing better than consensus forecasts, investors are likely to view the jobs data as one of the 'green shoots' they have been looking for that signal pending economic recovery and contribute to improved investor confidence which has driven the stock market recovery since early March," said Mr. Goldberg in a note to clients. "We view this as particularly good news for lifecos,"

He noted that since March 9, when the current rally in North America began, Canadian stocks have outperformed U.S. stocks, Canadian banks have outperformed the market and Canadian lifecos have outperformed the banks.

The catalyst for the banks has been reduced fear surrounding potential dividend cuts, Mr. Goldberg said. Meanwhile life insurance companies owing to their higher beta, have benefited simply from the rally itself.

"What is good for stocks generally is even better for lifecos," he wrote, adding Manulife remains the most sensitive of the lifecos to stock market performance.

Mr. Goldberg was quick to remind clients, however, that while job losses may be moderating, there are now 5.9 million fewer people employed (4.3%) than at the cycle peak 16 months ago.

That means less income to spend, and people, businesses and banks are still vulnerable to bankruptcies, he wrote.