Out of the Big Three life insurers, Manulife has seen its share price decline the least – down 4 per cent year-to-date.Fred Lum/the Globe and Mail
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It has been a mixed year for Canada’s life and health insurers as slumping stock markets put pressure on their wealth management business, but core insurance operations turned in solid results.
Analysts see a challenging year ahead as macroeconomic pressures have varying impacts on their operations. Higher rates mean better yields on their investments, but it also slows economic growth. Slower growth puts downward pressure on share prices, which reduces the value of their assets under administration (AUM). That crimps the fees they generate from wealth management.
The good news for investors is that while these forces play out, the companies offer some of the highest and safest dividends and steady growth once conditions improve.
“We have a favourable view of the life insurance sector,” says Tim Johal, vice president and portfolio manager at Mackenzie Investments in Winnipeg.
Mr. Johal is lead portfolio manager for Mackenzie Canadian Dividend Fund, which has $2.6-billion in AUM. Canada’s two biggest life insurers, Sun Life Financial Inc. SLF-T and Manulife Financial Corp. MFC-T are among the top holdings in the fund.
He says the insurance sector has held up well and stands to rebound in 2023 as interest rate increases peak and inflation eases.
“Rising interest rates are positive for [the sector],” he says. “Acquisitions will support growth and the stocks are valued attractively. The dividends are sustainable and growing, which will continue to add value to shareholders.”
Out of the Big Three life insurers, Manulife has seen its share price decline the least – down 4 per cent year-to-date. That compares to a decline of 13 per cent for the S&P/TSX Capped Financials Index. The shares yield 5.5 per cent at current prices.
Great-West Lifeco Inc. GWO-T, the worst performer of the group, has seen an 20 per cent share price decline this year, which has pushed its yield up to 6.5 per cent – the highest in the group.
In between the two is Sun Life, which has broadened its base with wealth management acquisitions and is targeting emerging markets for growth in insurance and other financial services. Its shares are down 8 per cent with its dividend yielding 4.6 per cent.
Mr. Johal says high interest are good for the profitability of their core insurance business, which is welcome following a lean decade when rates fell close to zero during the pandemic. Diversification has helped them withstand changing conditions.
He adds that while Canadians may think of these companies as only selling life insurance, they have become diversified financial services companies.
“We like the stability of that core insurance business,” he says. “But outside of that, each of these companies has growth drivers that aren’t obvious.”
Like Sun Life, Manulife is tilting toward global wealth management and Asia. Great-West Life, controlled by Power Corp., which also owns Mackenzie indirectly, has been expanding its presence in U.S. retirement services.
Mr. Johal notes that the average forward price-to-earnings ratio for the group is 8.5, below the 10-year-average of 10.5, which gives plenty of reasons to be optimistic.
Nigel D’Souza, analyst and partner with Veritas Investment Research Corp. in Toronto, sees the global economic outlook as offering stiff headwinds for profits. Where Mr. Johal sees rebound potential in wealth management for the sector, Mr. D’Souza sees higher risk.
That’s one reason he favours Manulife. The majority of Manulife’s profit is generated by core insurance, with about 30 per cent from wealth management. Sun Life generates about 40 per cent of earnings from wealth and asset management.
“If we’re entering a recession, there’s more stability there,” Mr. D’Souza says, adding that Manulife has the strongest capital position out of the life insurers, trades at the lowest multiple and has the most stable earnings.
“If you’re just betting on equity markets doing better, why do that owning Sun Life? Why not just own a market exchange-traded fund or an index fund?” he says.
Mr. D’Souza also says the life insurers have sustainable dividends, but he’s less optimistic about near-term growth for the payouts. He sees Asia as a long-term opportunity for Manulife and Sun Life.
The chief executive officers of both companies acknowledged the importance of emerging markets in recent calls with analysts to discuss quarterly earnings. Sun Life CEO Kevin Strain noted that Asian insurance sales were strong as the region emerged from COVID-19 restrictions.
Sun Life “continues to enhance and expand offerings for high-net-worth clients in Asia,” he added. Manulife CEO Roy Gori also acknowledged “resilient” results in Asia and continues to invest in its ManulifeMOVE app, which promotes a healthy lifestyle, as a one-stop gateway for customers.
Mr. Johal sees a smoother road in 2023 with more upside potential than down.
“The risks appear more than priced into the stocks and these companies are good risk managers,” he says. “The decline in equity prices and the rise of interest rates hasn’t hurt them as much as they would have maybe 10 years ago. They’re more balanced.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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