JMRD Market Observer for March 10, 2017- Canadian Life Insurance Companies

In This Week’s JMRD Market Observer



  • Canadian Life Insurance – Initiating Coverage: Rising rates help lifecos, but expectations need to be managed

  • NBFM Fixed Income Update- Stage set for a FOMC rate hike in March

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports



Canadian Life Insurance – Initiating Coverage: Rising rates help lifecos, but expectations need to be managed


Bank Rating Price Target ($mln) Yld Current Q4/17 Current Target 2015A 2016A 2017E 2018E Return

Growth intertwined with rates outlook. In the Canadian large cap financials landscape, lifecos are positioned as a “growth-y” sector, with elevated EPS growth forecasted by consensus over the next two years. Although there are some distinct growth drivers for the lifecos (e.g., ex-Canada growth, Wealth management), we believe these expectations are driven in large part by an outlook for rising interest rates. To be fair, based on the historical relationship between sector valuation and the U.S. 10-year, we estimate that current P/B multiples are “pricing in” a U.S. 10-year of ~2.6%, which isn’t outrageous. However, some perspective on how rates impact these companies is important: (1) the near-term impact of higher rates is most apparent in capital ratios; (2) rates have a more gradual impact on earnings; and (3) sudden rate moves can also yield some negative outcomes. On the latter point, MFC’s $330 mln Q4/16 charge related to yield curve steepening and SLF’s MFS subsidiary experiencing US$5.6 bln negative market impact on its AUM, which was partially driven by fixed income fund value declines, stand out as recent examples.


Balance sheets and capital ratios are an important sector attribute. There’s a lot to like about lifeco balance sheet and capital positions: (1) all companies have leverage ratios below 30%; (2) regulatory capital positions are well above the regulatory minimums, with higher rates providing a tailwind to excess capital generation; and (3) actuarial reserve charges that have historically been a source of material book value/capital erosion have become relatively small. With strong balance sheets, the companies are in a good position to adapt to a new regulatory capital regime, the LICAT, which comes into effect in 2018. Moreover, capital deployment via higher dividends, share buybacks and M&A are potential stock catalysts.


Our valuation approach emphasizes book value as much as earnings. We rate IAG and SLF as Outperform. The lifeco sector is inherently challenging for investors (and analysts) due to its opaque accounting and frequent bouts of earnings volatility, which negatively impacts sector valuation. In turn, it is not surprising to see that long-term value creation from the stocks is closely tied to book value growth and relative ROE performance. Accordingly, we place an equal weighting to P/B and P/E multiples in our sector valuation (and, frankly, we use P/E primarily to benchmark against the Big-6 banks). In this vein, our stock selection criteria include: (1) track record of book value stability; (2) preference towards strong/stable MCCSR ratios and low balance sheet leverage; (3) a “high valuation” earnings mix; and (4) relative valuation. On the latter point, we are biased towards stock that have more realistic ROE expansion implied in their P/B multiples. Based on our criteria, we are assigning Outperform ratings to IAG and SLF. 


See the full article.



NBFM Fixed Income Update- Stage set for a FOMC rate hike in March


Bottom-line: FOMC members have shown less patience for more clarity on the fiscal side than we thought and stand ready to make a move in March. Our base case scenario now includes 3 rate hikes in 2017 instead of only two. We have not altered our year end forecast for 10-year Treasury yields.


See the full article.



JMRD Basket Corner


DIG Basket


Canadian Natural Resources (CNQ) – Canadian Natural jumped nearly 10% after snapping up oil sands assets at 40% discount from ‘motivated’ sellers


TD Bank (TD) – TD Falls on Reports Tellers Were Pressured to Hit Sales Targets


Whitecap (WCP) – In the context of a range bound commodity price outlook over the next couple of years (US$55-60/bbl WTI), we highlight Whitecap as one of our best oil-weighted ideas. The attached report details the key drivers which underscore NBF’s investment case.


See the full article.


All-Cap Growth Basket


Enercare (ECI) – Enercare reported Q4 results ahead of NBF and consensus. ECI reported Q4/16 revenue of $293 mln (vs. $282 mln est. & $142 mln Q4/15), acquisition adj. EBITDA of $72.7 mln (vs. $65.2 mln est. & $58.1 mln Q4/15) and DCPS (NBF definition) of $0.32 reflecting a 69% payout ratio (vs. $0.28/82% est. & 0.24/88% Q4/15). Results were similarly ahead of the Street’s top-line and EBITDA forecasts of $287 mln and $69 mln, respectively. On Friday, the shares traded at a new all-time high.


See the full article. 


Parkland Fuels (PKI) – NBF hosted Parkland’s management this week for marketing meetings. The takeaways supporting our favorable investment bias. These include: Internal + financial capacity to absorb another large acquisition, Convenience store opportunity significant, propane a likely source of ongoing accretive M&A, positioned for growth within Parkland USA and valuation relative attractive given momentum.


See the full article.


Savaria Corporation (SIS) – Savaria reported revenue of $31.0 million was up 16.5% y/y, including 8% organically. Most notably in NBF’s view was the record 19.0% adj. EBITDA margin (up from 16.4% y/y thanks to cost control, volume and mix). Adj. EBITDA of $5.9 million beat our $5.2 million forecast (Street: $5.5 million) while EPS of $0.10 was in line with our $0.09 estimate (Street: $0.10). In addition, Savaria announced it had secured a major contract for wheelchair lifts in the stations of a Bus Rapid Transit (BRT) system in China. The project consists of 37 stainless steel inclined platform lifts to be installed in the city of Wuhan, the capital of the province of Hubei, and is valued at $1.1 million CAD. The project will be completed by the end of June 2017. Over 10 million people live in Wuhan, making it the most populous city in Central China. The 16-kilometer BRT system serves in excess of 500,000 passengers per day. Wuhan plans to add seven more BRT lines in the next 3 years.


See the full article.


U.S. Growth Basket


Arista Networks (ANET) Analysts Applaud Arista’s Cloud Opportunity After Analyst Day Vail Resorts (MTN) – On Friday, Vail reported better-than-expected second-quarter revenue and profit, helped by “robust destination guest spending trends”. The company also raised its full-year net income forecast and increased its dividend by 30%. The shares moved higher by 5.5% to a new all-time high



Retirement Corner





Reads of the Week














Economic Calendar


Monday March 13th – None

Tuesday March 14th – Canada Teranet/National Bank Home Price Index

Wednesday March 15th – US Retail Sales, US CPI, US Empire State Index

Thursday March 16th – US Housing Starts, Us Initial Jobless Claims

Friday March 17th – Canada Manufacturing Sales; US Industrial Production, US Consumer Sentiment



Earnings Reports


Monday March 13th – Air Boss of America, Bird Construction, Black Diamond Group, Spinmaster

Tuesday March 14th – Cardinal Energy, Delphi Energy, Surge Energy,

Wednesday March 15th – Ag Growth Int’l, Bellatrix, Birchcliff Energy, Bonterra Energy, Northwest Company, Pinecliff Energy,

Thursday March 16th – AutoCanada, Bioamber, HNZ Group, Premium Brands,

Friday March 17th – None



Have a good weekend!

By | 2017-03-20T14:07:35+00:00 March 10th, 2017|JMRD Updates|0 Comments

Leave A Comment