Sun Life Financial Inc T.SLF.PR.G

TD Notes

[retiredcf]

Life Insurance Q2/23 Outlook

Relative Valuation Bank vs. Insurance - Reasonable Challenges in Banking Sector Tip Scales in Favour of Insurers

Canada's life insurance companies are scheduled to report Q2/23 results on August 4 (iA Financial [IAG-T]), August 8 (Sun Life Financial [SLF-T] and Great- West Lifeco [GWO-T]), and August 9 (Manulife Financial [MFC-T]). Our Q2/23 adjusted EPS estimates call for y/y growth ranging from a 4% decline for IAG and GWO to 7% growth for MFC and 15% for SLF. Our estimates are slightly higher than consensus for the large insurers and noticeably below for IAG. In IAG's case, our estimates reflect elevated expenses associated with the company's digitization initiatives and continued weakness in the U.S. dealer services environment.

With one quarter of IFRS 17 under our belt, we believe it is important to track the differences between reported and adjusted EPS. Significant differences between reported and adjusted earnings can arise from how the insurers report invested assets. There are significant differences across the companies regarding the carrying value of invested assets, and by extension, how changes in the fair value of the assets impact earnings and/or book value. Our reported EPS estimates (adjusted EPS plus items of note) are relatively close to adjusted EPS, as we do not expect significant equity market and interest-rate-related gains or losses this quarter.

While we continue to believe that MFC and IAG are undervalued, relative P/ E multiples and relative performance across the banks and insurers suggest that the shift to insurers may have run its course. In our Industry Bulletin, we demonstrate that the bank P/E premium over the insurers has fallen from nearly 40% in March 2022 to ~10% today; a premium not seen since immediately before the pandemic hit in March 2020.

Relative valuation no longer supports making a blanket call to favour the insurers over the banks; and making the call based on the direction of interest rates is not advisable, in our view. We believe the challenges facing the banking sector (housing market, capital constraints, moderating balance-sheet growth, uncertainty regarding timing and nature of credit cycle) tip the scales in favour of the insurance companies. We continue to believe that among the life insurance companies, ACTION LIST BUY-rated MFC and BUY-rated IAG offer the best medium-term upside among the large-cap financials we cover. We have downgraded IAG to BUY from Action List Buy, reflecting upside in the stock as well as pressure on earnings from elevated digitization spending and conditions in U.S. dealer services.