Interest rates are expected to improve and fuel Canadian life insurers‘ upside in terms of EPS, presenting opportunities for investors buying in companies currently trading at 10 times earnings, and with a longer-term investment horizon, says Tom MacKinnon, Analyst at BMO Capital Markets.
“What you’ve got to have is a little bit of longer time frame and the ability to stomach volatility. But if you’re going to get these guys at under 10 times next year’s earnings, and I think again price to book multiples versus ROE that are probably in the area of 10% to 15% below where they normally have been over the last 11 years, you’ve got some valuation upside,” MacKinnon said.
MacKinnon likes Manulife Financial Corporation (MFC), one of the largest Canadian life insurers. He says the company is transitioning from capital-intensive businesses in the U.S. into higher-ROE markets in Asia, which currently is about 35% of its bottom line.
“We see [Manulife] as an ROE improvement play and certainly as a capital player as well, and probably further on down the road, a global consolidator. So all at 10 times earnings next year and all trading at under its U.S. GAAP book value and a modest premium to its Canadian GAAP book value. So that’s one we like,” MacKinnon said.
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