Canaccord
Financials -- Insurance
SOLID FINANCIAL TRANSACTION
On February 19, GWO announced an agreement to acquire Irish Life from the Irish government for total proceeds of Euro 1.3 billion ($1.75 billion). While the deal should move GWO’s 2013E and 2014E EPS growth to 9% and 13%, respectively, beyond the estimated earnings accretion, we do not view Irish Life or Ireland generally as meaningfully augmenting GWO’s long-term growth potential. In this respect, we view the deal as a solid financial transaction, but not one we would call strategically significant to the company as a whole.
Based on GWO’s disclosures, the purchase price values Irish Life at 10.5x 2014E earnings and 1.3x book value at June 30, 2013. Including after pretax synergies of $54 million, the deal values Irish Life 8.2x at 2014E earnings. Although estimated synergies may appear light (10-15% of Irish Life expenses), with much of Irish Life’s workforce unionized, we believe it is appropriate to be conservative. Using the June 2012 Irish Life results, GWO is paying a 20-25% discount to the Irish Life’s embedded value. In our view, this suggests that GWO is taking into account the potential loss of in-force business through the high level of surrender activity (insurance and investment) at this time. Since 2007, lapsation has doubled to 20%. The risk for GWO is if the high level of lapsation continues for significantly longer than GWO priced into the transaction and builds into reserves at closing. Taking into consideration the very conservative nature in which the deal is being financed, we believe GWO can afford to be very conservative in building reserves, which should enhance future profits.
The deal is estimated to add 10 cents to 2014E EPS (4% accretive). Management’s 10 cent estimate is based on acquired business adding $215 million and is consistent with annualizing Irish Life’s first half 2012 earnings and the inclusion of most of the estimated synergies. In raising our 2014E earnings by almost $240 million and 2014E EPS by $0.12 per share, we are building in very modest yield enhancement benefits.
We are maintaining our HOLD rating on Great-West Lifeco. Our 12-month target price of C$28.00 (up from C$26.00) is based on an 11.2x P/E applied to our 2014E EPS, reflecting a 7% P/E premium to group. We believe the premium multiple is supported by GWO’s greater earnings stability. While we continue to favour the banks, our target prices suggest better upside potential in Industrial Alliance and Great-West Lifeco than MFC and SLF.