UpgradeA very quiet BB. GLTA
Ahead of the start of first-quarter earnings season for Canadian life insurance companies, Scotia Capital analyst Meny Grauman thinks the issues facing the industry haven’t changed since the end of 2020, seeing the market continues to “balance near-term operating performance against a longer-term outlook for a sustained rise in interest rates.”
“The pandemic continues to rage in most jurisdictions, including Canada, as the third wave of the virus appears to be the toughest yet, but the good news is that equity markets continue to look through these negative headlines and focus on recovery as vaccination efforts gather steam,” he said in a research report released Thurday. “While the rate outlook is a key positive for the sector as a whole, it certainly does not appear to be a near-term catalyst given that the earnings impact is largely indirect and will only become apparent over time. Our outlook for the lifecos then is for steady and consistent results with an emphasis on execution, especially for GWO which is busy integrating its recently closed MassMutual acquisition and for IAG which continues to integrate its IAS vehicle warranty business in the U.S.”
Mr. Grauman is forecasting first-quarter earnings per share for the sector to rise by 4 per cent from the fourth quarter of 2020 and rise 37 per cent year-over-year.
“The year-over-year increase reflects a resilient operating environment and ongoing solid credit experience that continues to stand up to the pressures of the global pandemic, as well as the reemergence of core investment gains from MFC in particular. With the exception of SLF all of our estimates are higher than consensus, led by GWO and MFC at 4 per cent.”
With that view, he made a series of changes to stocks in his coverage universe on Thursday.
His changes included:
- IA Financial Corp. Inc. (“sector outperform”) to $84 from $72. Average: $74.50.
“Among the names we cover we continue to highlight IAG as our top pick in the space even though valuation is not quite what it was this time last year (or even a few months ago),” he said. “Despite significant year-to-date outperformance, consensus continues to be below the midpoint of Management’s 2021 core EPS guidance of $7.60 to $8.20 (using the firm’s new definition of core earnings). Coming off the company’s latest investor day we remain convinced that there is still unrealized value in this name especially given IAG’s extremely conservative reserve position and its guidance that ROE can move into the 13-15-per-cent range by 2023 even with the introduction of IFRS 17. We also continue to like SLF which despite still trading at a significant premium to peers on a price-to-book basis, is still very attractive in absolute terms with the company only trading at 10.1 times consensus 2022 earnings.”