RE: Canaccord
Financials -- Insurance
A SLIGHT MISS IN THE QUARTER; FOCUS ON ROE OBJECTIVE; MAINTAIN HOLD RATING AND C$28.00 TARGET
GWO reported EPS of $0.54, up 15% YoY, above our estimate of $0.52, and higher than consensus of $0.53. There were no material items of note in the quarter. Relative to our estimate: the sum of experience gains and management actions was $192 million ($59 million of which were changes in assumptions and management actions) versus our estimate of $136 million. Higher experience gains reflect the benefit of yield enhancement in Europe. Expected profit was also stronger than forecasted, increasing 16% YoY with particularly strong YoY growth in Canada. It would appear that the normal seasonality we see in Canada (low Q1 expected profit) did not play out this quarter.
P&D excluding Putnam was $9.2 billion, up 5% YoY. We were looking for $9.6 billion. P&D was weaker than expected in both Canada and the U.S. while Europe was largely in line with expectations. Relative to last year, P&D was up in Europe and Canada but down in the U.S. ex Putnam. Sales in Canada were up YoY due to strong group insurance sales reflecting strong large case creditor/direct marketing sales and strong results in group retirement products (up 30% YoY), partially offset by lower universal life sales. While austerity measures in Europe remain a concern, very strong U.K. payout annuity sales, and a pickup in the yield enhancement program suggest that European earnings should not deteriorate, at least not in the near term. Gross flows of $7.4 billion at Putnam were higher than our estimate of $6.6 billion and up 30% from Q1/12. At $320 million in net outflows, the company remained in the negative flows territory after delivering a single quarter of inflows in Q3/12. We model for net inflows (albeit at a modest level) for Q2/13 and positive net flows of approximately $1.6 billion in full year 2013, reflecting the view that more buoyant markets and the company’s improving performance will drive better flows.
We estimate GWO delivering a ROE of 16.5-17% in 2013 and 2014. The high ROEs are a function of the company’s capital structure as well as the impact of IFRS which reduced the company’s common equity. Our 12-month target price of C$29.00 (up from C$28.00) reflects an 11.5x target P/E (a premium to the other life companies and in line with the banks) applied against 2014E EPS. We continue to rate GWO HOLD.