Lifecos’ hot streak should keep on rolling

Manulife Financial Corp. is expected to lead red- hot Canadian life insurance stocks even higher over the next 12 months, but only if earnings in the sector continue to improve as expected, analysts say.

“For the lifecos, we believe the multiple expansion theme has largely played out and that it is now time for earnings growth to drive the next leg higher in these stocks,” Robert Sedran, a CIBC analyst, said in a note to clients.

Shares in Canada’s top four life insurers climbed an average of 45% in 2013, representing the best performance for the group since the financial crisis.

Mr. Sedran thinks a repeat of last year is unlikely, but still anticipates returns, including dividends, in the high- single to low-double digits based on average earnings growth of 6.7% for the group.

His top pick is Manulife, which is expected to grow its bottom line by 15.6% this year. He has a sector outperformer rating on the stock and $ 22 price target.

Great West Lifeco Inc., Sun Life Financial Inc. and Industrial Alliance Insurance and Financial Services Inc. are all rated sector performers with respective price targets of $ 34, $ 39 and $ 52.

The lifecos are executing well against their

strategies

RBC analyst Darko Mihelic also expects core EPS growth for the lifecos to be solid and thinks reported earnings may surprise to the upside over the next few years.

“We believe the lifecos are on track to achieve and most likely exceed stated 2015 and 2016 earnings targets,” he said. “The macro environment is supportive, and the lifecos are executing well against their respective strategies.”

Mr. Mihelic is encouraged by the group’s improving capital position and believes the country’s life insurers are positively altering their business mix by focusing their efforts and capital on wealth management more than life insurance and variable annuity guarantees.

That should support higher valuations over the longer term, he said, but warned it may already be priced into the market, leaving limited room for gains over the next year.

“We can only justify one Outperform rating for [ Manulife],” he said.

“We believe MFC has the most upside of the group to higher equity markets and interest rates and that valuations could surpass long- term averages in a better environment.”