EQUITY RESEARCH
August 15, 2023 Industry Update
Lifecos – Q2 Post View
Earnings Quality Questioned; Prefer The P&C Names
Our Conclusion
We have become incrementally less positive on the group. Excess capital
remains a positive theme, but the net benefit of higher interest rates is
questionable given significantly negative market impacts that are excluded
from adjusted earnings. Also when we look at valuation multiples and
consensus EPS estimates, there appear to be fewer inefficiencies to exploit.
We are neutral on the life insurance sector and prefer the P&C insurers. We
have no Outperformers among the lifecos. We rate both IFC and DFY as
Outperformers, while our colleague Nik Priebe rates FFH Outperformer.
Key Points
• SLF moves up our pecking order. Given that we are neutral on the
sector, we think it makes sense to hold the high-quality name. Earnings
mix, capital and ROE support the quality argument for SLF.
• IAG hinges on capital deployment. IAG no longer looks like it can
grow EPS faster than the group on an organic basis. The story rests now
on the deployment of excess capital. The path to outperformance is too
transaction contingent to get us past a Neutral rating.
• MFC carries the most investment risk. MFC’s earnings are the most
geared to investment returns and MFC has the highest investment
allocation to alternatives. We expect continued noise on this front for at
least the next two quarters. Also economic and financial trends in China
put into question the sustainability of the rebound in insurance sales.
• Excess capital is biggest positive. Capital is the biggest factor in
favour of the lifecos over the banks. We expect IAG, MFC and SLF to be
repurchasing shares over the next 12 months, while most of the banks
will be issuing shares. Also we are seeing a number of bolt-on
acquisitions. IAG holds the most excess capital, equal to 20% of its
current market capitalization.
• Mind the earnings gap. Reported EPS were 34% lower than adjusted
EPS on average. The biggest driver of that differential was market
experience, which could continue in the near term based on the
devaluation of interest rate sensitive assets (e.g., real estate,
infrastructure, private equity). MFC took the biggest hit in Q2 and we
think remains the most at risk.
• Valuation multiples in the right range. The group is trading at 9.1x P/E
(NTM consensus) on average vs. a five-year average of 8.9x. Relative
P/Es for each of GWO, IAG, MFC and SLF are close to five-year
averages. There are no obvious outliers on valuation, but perhaps there
is an argument in favour of IAG when excess capital is taken into
account