Monday, 16 October 2017

Canadian Life Insurers; Screening for value - GWO, MFC & SLF

I wanted to look at some Life Insurance businesses to see if I can find some big cap value positions. These three large Canadian LI businesses offer attractive dividend yields and seem to be relatively attractively valued. In this piece I will demonstrate a quick screening process that helps me to focus on individual equities.

Soft Factors

These companies have slightly different overall profiles. Manulife (TSE: MFC) has generally struggled since the financial crisis due to aggressive underwriting of guaranteed investment policies ahead of the 2009 crash. MFC does however have a strong business in Asia with good growth prospects and was one of the first western insurers to target Asian markets. It has the biggest market cap of the three at CAD$51bn. 

It has generally been a poor performer since the GFC; losing 39% of its value over 10 years. 

(MFC Blue -39%, SLF Red -6% and GWO Yellow -0% )

Great West Lifeco (TSE: GWO) is the second largest by market cap at CAD$36bn and it largely escaped the problems that hit Manulife as it was late the investment guarantees party. GWO is more focused in Europe through its Canada Life and Irish Life subsidiaries than MFC. The management have an excellent reputation and unlike MFC it didn't cut its dividend following the crisis.

Finally Sun Life (TSE: SLF) is the smallest of the three at CAD$30bn. This company sits somewhere between MFC and GWO in terms of its risk exposure but like GWO it has better weathered the storms of the last crisis - it has restructured selling its struggling US Life and Annuity business to focus on more group life products and the Canadian domestic market.

Financial Screening

I use a simple sheet developed by the UK Value Investor to screen stocks for 10 year performance when looking for the best investment opportunities or to compare several companies across industries. The results from screening these three companies gave some interesting basic data points which made me prefer GWO. 

[The metrics used are generally only useful for defensive value investments i.e large and stable acyclical businesses as the screening won't like cyclical value plays like CMMC for obvious reasons.]

Profitability, Yield and Growth

The first thing to note is a quick look at 10 year average ROCE - this gives us a good picture as to the underlying quality of returns from these businesses. GWO and SLF both have strong returns on capital employed at 9.1%, MFC on the other hand is weak with the return at just 6.1%. This indicates that both GWO and SLF are better managed at least historically have generated better returns. 

Dividend yields are similar across all three businesses although GWO has a slightly higher yield at 3.8% vs 3.3% for SLF - these are all broadly comparable. On the growth front again MFC is the laggard with a paltry 60bps growth rate. This estimate is based on 3 year average revenue, earnings and dividend growth. Both SLF and GWO have low but acceptable growth rates given these are large mature businesses in slow growing markets.

Risk Metrics

SLF is the standout when looking at risk due to its much higher debt load against its overall profitability. The greater leverage of the business (in the debt ratio / 5 year avg earnings) makes it inherently more risky and it should exhibit greater volatility in earnings. Both MFC and GWO have low debt ratios. 

Dividend cover is good for all three businesses at >1x - investors in these kind of defensive value businesses investors expect strong and consistent dividend returns. In addition as highly regulated businesses they must preserve capital so if these ratios were to drop below 1x an immediate dividend cut would be highly likely.

Note so far that GWO has both the best ROCE, dividend yield, dividend coverage and the second best growth rate and debt/ earnings ratio. It gets better though, it's also the cheapest...


A high level assessment of valuation based on PE ratios indicates that GWO is the cheapest on a 10 year average basis at 16.9x with SLF the most expensive but both SLF and MFC trade at premiums to GWO. Some of this is to do with the way that GWO has managed to generate higher consistent earnings since 2007 due to its lower risk profile in the crisis on 2008/9.

The current PE ratios make GWO cheaper than MFC but it trades at a premium to SLF. All three stocks trade in a pretty close range.


The basic high level screen indicates that GWO is better value due to it's cheaper long term PE ratio and better dividend yield. Not only that but the dividend is better covered (meaning room to go higher), the business has a lower risk profile due to lower debt and the growth rate is decent with a high (for a mature business) ROCE over 9%. MFC looks the least favourable stock here and SLF is pretty neutral but has a few bright spots.

Net/net I think the best stock for further examination in detail is GWO.

Disclosure: I have no positions in GWO, SLF or MFC at this time. This may change in the future. These are opinions only, not investment advice. If in doubt read my disclaimer.

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