As second-quarter earnings season for Canada’s insurance sector approaches, Desjardins Securities analyst Doug Young thinks investors continue to struggle to understand the impact of the implementation of new International Financial Reporting Standards (IFRS), saying “there is still much to learn.”
“We expect sequential trends (not absolute numbers) to be the main focus and we will be looking to better understand how to gauge the businesses on a go-forward basis under the new accounting guidelines,” he said.
“Based on what we know (1) higher equity markets should be a positive for wealth businesses sequentially; however, results will be pressured year-over-year by lower average AUM [assets under management]; (2) FX movements had a mixed impact; (3) based on our math, the macro environment (equity markets, rates, spreads) had a small mixed impact across the group; and (4) the reopening in Asia should be a positive (for MFC and SLF); however, we expect a bigger impact in 2H23.”
In a research note released Thursday titled Life lessons, Mr. Ho said quarterly results are not comparable to last year, calling 2022 “a transition year according to all of the lifecos.”
“Hence, sequential comparisons are more important for these operations,” he said. “That being said, we expect MFC’s and SLF’s Asia businesses to show improvement (eg in terms of sales) but more so in 2H23. For the wealth businesses, we expect sequential improvements (higher AAUM) but results will be tempered year-over-year. The US dollar depreciated slightly vs the Canadian dollar on an average basis sequentially (relevant for all lifecos), while the British pound and euro appreciated vs the Canadian dollar (relevant for GWO).
“Despite various headwinds, there are several earnings growth drivers for each company for 2023/24 including: (1) SLF — contribution from the DentaQuest (DQ) acquisition, potential turnaround in Asia, and SLC Management; (2) MFC — potential turnaround in Asia, and buybacks; (3) IAG — potential turnaround in U.S. auto sales (implications for its US extended vehicle warranty business), organic growth, digital initiatives, buybacks and leveraging distribution capabilities domestically; and (4) GWO — addition of and growth in MassMutual’s and Prudential’s U.S. retirement businesses.”
Mr. Ho lowered his recommendation for IA Financial Corp. Inc. to “hold” from “buy” with a $95 target (unchanged). The average on the Street is $98.11, according to Refinitiv data.
“The stock has performed well year-to-date and we fail to see any near- to mid-term catalysts that could lead to outperformance vs peers over the next year,” he said.
The analyst maintained a “buy” rating and $75 for Sun Life Financial Inc., which remains his “top pick” in the sector. The average is $73.43.
He also kept “hold” ratings for Manulife Financial Corp. ($28 target versus $28.93 average) and Great-West Lifeco Inc. ( $39 target versus $39.20 average).