Canadian life insurers’ earnings have benefited from market appreciation over the past several quarters. The Morningstar Canada Index has had a strong total return of around 33% in the past 12 months.
The bottom line: We’ve increased our fair value estimates for no-moat Great-West GWO to C$65 per share, Manulife MFC to C$48, and Sun Life SLF to C$89. We also plan to increase our fair value estimate for no-moat Power Corporation of Canada POW by around 26% to C$73 per share.
- After taking a more granular view of business mix and cyclicality, we are reducing our cost of equity assumptions to 10.0% for both Great-West and Manulife and 9.1% for Sun Life.
- The valuation increase for Power Corporation is driven by our updated fair value estimates for Great-West and no-moat IGM Financial IGM, which account for over 80% of the holding company’s asset value.
Bears say: Early this month, the United States did not renew its trilateral trade agreement with Canada and Mexico, known as USMCA, deciding to conduct annual reviews of the treaty going forward.
- If the new negotiations between the US and Canada are delayed or encounter major difficulties, the Canadian market could face a significant correction, which would be headwinds for these companies’ life insurance and asset-based fee income businesses.
