General Meeting Assemblée générale

Transcription

1 General Meeting Assemblée générale November novembre, 2005 Toronto, Ontario A Brief Review of the Most Common Valuation Metrics Applied by Investors and Equity Analysts Contents Metrics used to value life insurance companies Most investors ignore actuarial based valuation metrics Most commonly applied valuation metrics Price-to-book value relative to expected ROE Valuation and performance - theme driven Canadian insurer forward P/E Adjustments to bank P/E and P/B It s all relative Our approach to establishing target prices The Sun Life exception The Great-West Lifeco exception Metrics used to value life insurance companies Investors and analysts use a number of valuation metrics. All the valuation metrics have merits and flaws. Price to Forward Earnings * Price to Book Value or Expected Book Value * Price to Book versus Expected ROE * Dividend Yield Price to Embedded Value New Business Multiple {(P-EmV)/EmV Added} * Most commonly used valuation metrics 1

2 Most generalists ignore actuarial based metrics The market and equity analysts favor GAAP based valuation metrics such as P/E and P/B over the conceptually superior and actuarial based embedded value and sources of earnings disclosures. Investors became very disenchanted with EmV early in Generalists continue to believe (or at least willing to suspend disbelief) that $1.00 of earnings reported by a life insurance company is similar to $1.00 of earnings reported by other companies. GAAP results reported more frequently (quarterly). GAAP results are presented in more detail than SOE or EmV (geographic and/or product segmentation). Significantly more GAAP based supplementary data presented. GAAP results are based on standards and are audited/reviewed by independent third parties. EmV and SOE are not applied consistently across companies. Although SOE standards exist, we believe there is too much room for interpretation. Generalists believe SOE and EmV are prohibitively complex. Notes to financial statements are based on GAAP results. Most commonly applied valuation metrics Very little difference in P/E multiples within the groups and across the two sectors. Suggests investors do not see a material difference in earnings growth, stability or quality. Significantly higher P/B for the banks reflects higher ROE CANADIAN LIFE INSURANCE - ANALYSIS OF COMPARABLE VALUATIONS Earnings per Share Price to Earnings per Share Return on Equity Price Sh. O/S Market Book Dividend 28-Oct ($m) Cap ($m) Value Yield Company P/B.V. 04 TTM 05E 06E 04 TTM 05E 06E 05E 06E Manulife Financial , x x 15.8x 14.4x 12.5x 14.5% 15.6% 2.0% Sun Life , x x 14.3x 13.6x 12.2x 13.0% 13.6% 2.4% Sun Life - ex MFS , x x 13.2x 12.7x 11.5x 11.4% 12.3% na MFS , na x 24.1x 21.9x 17.5x nm nm na Great-West Lifeco , x x 14.4x 13.7x 12.1x 20.9% 20.5% 3.0% Industrial Alliance , x x 13.5x 12.8x 11.3x 14.2% 14.4% 1.7% Average 2.1x 15.3x 14.5x 13.6x 12.0x 15.6% 16.0% 2.3% CANADIAN BANKS - ANALYSIS OF COMPARABLE VALUATIONS Cash Earnings per share Price to Cash EPS Cash ROE Price Sh. O/S Market Book Dividend 28-Oct ($m) Cap ($m) Value Yield Company P/B.V. 04 TTM 05E 06E 04 TTM 05E 06E 05E 06E Bank of Montreal , x x 11.9x 12.5x 12.0x 18.3% 17.3% 3.4% Bank of Nova Scotia , x x 14.3x 13.3x 12.5x 20.0% 19.5% 3.2% CIBC , x x 12.5x 11.5x 11.9x 21.8% 23.3% 3.8% National Bank , x x 12.8x 12.4x 11.4x 20.6% 19.6% 3.0% Royal Bank , x x 16.4x 14.2x 12.8x 20.4% 20.1% 3.1% Toronto-Dominion , x x 13.4x 13.4x 12.2x 19.6% 18.2% 3.0% Average 2.6x 14.4x 13.6x 12.9x 12.2x 20.1% 19.7% 3.3% Price-to-book value relative to expected ROE Although few investors use the P/B versus expected ROE to make critical investment decisions, the relationship between P/B and ROE is often cited to support or refute an opinion on a particular stock. Current P/B 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x y = e x R 2 = PNX PRU SLF* AMH PL NFS PFG MET SLF 0.5x 4% 8% 12% 16% 20% 24% 2005E ROE SLF* - Sun Life excluding MFS We acknowledge that if P/B = linear function of ROE, the equation simplifies to P/E = a constant, that is, every company should have the same P/E multiple. LNC TMK MFC IAG JP AFL GWO In its simplest form, companies trading well above the curve are said to be overvalued or reflective of: Significant excess capital Very stable earnings Above average growth potential Strong upward momentum in ROE Significant share repurchase activity Above average dividend growth Growing exposure to wealth management 2

3 Valuation and performance theme driven In assessing absolute and relative valuation, we pay close attention to the theme of the day. We place each of the financial services companies into buckets characterized by what theme drives the stock up or down relative to its peers. The larger, more complex companies fit into several buckets. Acquisitions cause changes in our classifications. Economic themes Earnings Stability theme Equity market performance Track record Credit conditions Exposure to life insurance Interest rates Nature of operations Earnings Growth theme Capital themes Sales and P&D growth Excess capital Wealth management exposure Share buyback activity Exposure to Asia Dividend growth, payout ratio and yield Active acquirer Earnings quality Consolidation theme Disclosure Acquire or target? Understandability Regulatory reform, cross-pillar Plausibility Canadian insurer forward P/E Fluctuations in insurers forward P/E reflect macro factors such as interest rate environment, equity markets and credit concerns, as well as industry specific issues such as consolidation speculation and impact on insurers of 9/11. Canadian Insurer Forward P/E 18.0x acquisition apeculation (CLI) 16.0x 14.0x significant deterioration in equity markets and mounting credit concerns acquisition speculation (CL) shift to 2006E 12.0x 9/ x demutualization hype and flight to quality two years of solid earnings growth and flow of funds into financials & other interest sensitive stocks 8.0x 06/07/00 08/07/00 10/07/00 12/07/00 02/07/01 04/07/01 06/07/01 08/07/01 10/07/01 12/07/01 02/07/02 04/07/02 06/07/02 08/07/02 10/07/02 12/07/02 02/07/03 04/07/03 06/07/03 08/07/03 10/07/03 12/07/03 02/07/04 04/07/04 06/07/04 08/07/04 10/07/04 12/07/04 02/07/05 04/07/05 06/07/05 08/07/05 Source: Genuity Capital Markets Adjustments to bank P/E and P/B The market often compares insurer P/E to bank P/E. However, bank P/E and P/B multiples are often adjusted in several different ways. Cash earnings P/E multiples for the banks are based on cash earnings. The adjustment to get to cash earnings is the amortization of intangible assets. TD s acquisition of Canada Trust caused this shift. Adjustment for general credit allowances. Adjustment for excess capital. The typical adjustment is to remove excess capital from market capitalization, adjust EPS for earnings on excess capital and calculate an adjusted P/E or P/B. Adjustments for excess capital are rarely made for insurers. The introduction of the holding company structure for insurers caused Manulife and Sun Life to cease disclosing consolidated MCCSR. Accordingly, its is now difficult to estimate excess capital for the insurers. 3

4 It s all relative For most investors, absolute returns are not the priority. Most investors focus on delivering a return above their benchmark. Accordingly, relative performance and therefore relative valuation is paramount. Insurers versus Banks Indexed Performance 2 240% 220% 200% 1 Insurers outperfrom by 65% Insurers 2% Banks 13% Banks 12% Insurers 12% 06/30/00 09/22/00 12/15/00 03/09/01 08/24/01 11/16/01 02/08/02 05/03/02 10/18/02 01/03/03 03/28/03 06/20/03 12/05/03 02/27/04 05/21/04 08/13/04 01/28/05 04/22/05 07/15/05 YTD Banks outperform by 5% 30% 20% 10% 0% -10% -20% -30% -40% - - Bank less Insurer Performance (In Year) - Banks less Insurers Insurers Banks Source: Genuity Capital Markets Insurers versus bank valuation Relative P/E Shortly after demutualization, the relative stability of earnings for the Canadian insurers supported a significant P/E premium to the banks. Starting early in 2002, exposure to variable annuity guarantees Insurers relative to Banks stripped the premium from the 1 insurers. Canadian Insurer Forward P/E to Canadian Bank Forward P/E Strong earnings from the banks Canadian Insurer Performance to Canadian Bank Performance reflecting a perfect credit environment and declining interest rates, has not allowed the insurers to regain their premium. Deterioration in corporate/ consumer credit fueled by higher interest rates, strong C$ and higher oil prices, should highlight the relative stability of the insurers earnings. 06/30/00 09/22/00 12/15/00 03/09/01 08/24/01 11/16/01 02/08/02 05/03/02 10/18/02 01/03/03 03/28/03 06/20/03 12/05/03 02/27/04 05/21/04 08/13/04 01/28/05 04/22/05 07/15/05 Insurer Performance to Bank Performance Canadian insurers versus U.S. insurers valuation Canadian insurers track U.S. insurer valuation and performance much more closely than they do Canadian bank valuation and performance. Canadian Insurer versus Canadian Banks and U.S. Insurers 1 Canadian Insurer Forward P/E to U.S. Insurer Forward P/E Canadian Insurer Forward P/E to Canadian Bank Forward P/E 03/23/01 05/23/01 07/23/01 09/23/01 11/23/01 01/23/02 03/23/02 05/23/02 07/23/02 09/23/02 11/23/02 01/23/03 03/23/03 05/23/03 07/23/03 09/23/03 11/23/03 01/23/04 03/23/04 05/23/04 07/23/04 09/23/04 11/23/04 01/23/05 03/23/05 05/23/05 07/23/05 09/23/05 Since the last demutualization in Canada, the Canadian insurers have never traded at a discount to the U.S. insurers Relative earnings stability, diversification of earnings, lower credit risk and substantially stronger capital positions 4

5 Canadian insurers versus SPX Canadian insurers forward P/E is at of the SPX forward P/E, matching the high late in In our view, while the insurers could well outperform the banks, absolute upside could be limited. Canadian Insurers versus SPX 85% 3 Relative P/E Multiple 75% 65% 55% Canadian Insurer Forward P/E to SPX Forward P/E 300% 2 200% Insurer Performance to SPX Performance 45% Canadian Insurer Performance to SPX 40% Performance 06/30/00 09/22/00 12/15/00 03/09/01 08/24/01 11/16/01 02/08/02 05/03/02 10/18/02 01/03/03 03/28/03 06/20/03 12/05/03 02/27/04 05/21/04 08/13/04 01/28/05 04/22/05 07/15/05 Equity markets and interest rates Equity Markets Indexed Performance: Insurers versus Banks 1 Insurers versus Banks TSX Indexed TSX Indexed Although there are exceptions, Canada s insurers tend to outperform the banks in periods of rising equity markets. 40% 06/16/00 08/25/00 11/03/00 01/12/01 03/23/01 08/10/01 10/19/01 12/28/01 03/08/02 05/17/02 10/04/02 12/13/02 02/14/03 04/25/03 07/04/03 11/21/03 01/30/04 04/09/04 06/18/04 08/27/04 01/14/05 03/25/05 06/03/05 08/12/05 10/20/05 Interest Rates U.S. Life Insurance Index Forward P/E to S&P 500 U.S. insurers consistently outperform the broader market when interest rates decline. 40% 30% 03/04/94 02/03/95 01/05/96 12/06/96 11/07/97 10/09/98 09/10/99 08/11/00 07/13/01 06/14/02 05/09/03 04/09/04 03/11/05 U.S. Life Insurance Index Performance Forward P/E 10-Year Government Bond Yield Year U.S. Gov't Bond Yield Source: Genuity Capital Markets Our approach to establishing target prices Our target prices are based on a blend of target price to book multiples and target price to earnings multiples. In arriving at a target price to book value multiple, we generally rely on the target price to book value derived from a regression of current price to book value and forward ROE for North America s life insurance companies. If a company has material excess capital, we will generally apply a higher target price to book value multiple than what is derived strictly by the regression equation. We currently apply our target price to book value multiples to our estimate of Q2/06E book value per share. In arriving at a target price to earnings multiple, we rely on historical relative price to earnings multiples in the sector and four- to five-year CAGRs of EPS. We currently apply our target price to earnings multiples to 2006E EPS. Book Value per Share Return on Equity Earnings Per Share Dividends Current Q4/05E Q2/06E 2005E 2006E 2004E 2005E 2006E per Share 2004 Long-term % 14.5% 15.6% 15.5% Manulife Financial Sun Life Financial % 13.0% 13.6% 13.5% Sun Life (ex MFS) % 11.4% 12.3% 12.0% na Great-West Lifeco % 20.9% 20.5% 21.0% Industrial Alliance % 14.2% 14.4% 13.8% (A) (B) Regression Implied Target P/E Target Average GCM '00-'05E Implied Target on on 2006E Price on (A) and Target Total GCM EPS CAGR Target P/B Q2/06E BV EPS EPS '06E (B) Price Return Rating Growth Price x x % Buy 14% Manulife Financial Sun Life Financial x x % Hold 11% Sun Life (ex MFS) x x na na na Great-West Lifeco x x % Buy 19% Industrial Alliance x x % Hold 13% Average 2.1x 13.3x 13.9% 5

6 The Sun Life exception We apply a sum-of-the-parts approach to establish our target price on Sun Life. MFS and CI Funds are valued using traditional mutual fund metrics: P/E and EVto-EBITDA. Sun Life excluding MFS and CI Funds is valued using a blend of P/E and P/B as we do with the other insurers. 2006E Earnings to Current Value per Implied Implied Estimated SLF BV/share Value share P/B P/E '06E ROE MFS , nm 18.9x nm CI Funds * , nm 19.5x nm Sun Life excluding MFS and CIX 1, , x 12.2x 11.7% Total Company 2, , x 13.4x 13.4% Weighted average S/O in E EPS 3.55 nm - not meaningful * Genuity CI target price $ Sun Life owns approximately 100 m shares of CI. The Great-West Lifeco exception We believe Great-West Lifeco is a dividend story We track GWO s dividend yield relative to the bank dividend yield for a gauge of the company s attractiveness relative to the banks. Recently upgraded GWO on the basis of valuation and because stock suits stability of earnings theme GWO Dividend Yield to Bank Dividend Yield GWO offers attractive yield relative to Banks Fair Yield Relative to Banks Banks offer more attractive yield 03/01/90 01/01/91 11/01/91 09/01/92 07/01/93 05/01/94 03/01/95 01/01/96 11/01/96 09/01/97 07/01/98 05/01/99 03/01/00 01/01/01 11/01/01 09/01/02 07/01/03 05/01/04 03/01/05 Disclaimer Member of the Investment Dealers Association of Canada and the Canadian Investor Protection Fund, Participating Organization of The Toronto Stock Exchange and Toronto Venture Exchange Analyst s Certification I, Mario Mendonca, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. General Disclosure The opinions, estimates and projections contained herein are those of Genuity Capital Markets as of the date hereof and are subject to change without notice. Genuity Capital Markets makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, Genuity Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions that may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report of its contents. Information may be available to Genuity Capital Markets or its affiliates, which is not reflected herein. This report is not to be construed as an offer to sell, or solicitation for, or an offer to buy, any securities. Genuity Capital Markets, its affiliates and/or their respective officers, directors, partners or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. As an investment dealer, Genuity Capital Markets provides a variety of financial services, including investment banking services. It is possible that Genuity Capital Markets might seek to become engaged to provide such services to companies referred to in this report in the next three months. In accordance with the Investment Dealers Association of Canada Policy No. 11 Analyst Standards, Genuity Capital Markets hereby confirms that as of the date of this report: (i) The research analyst(s) referenced herein and any member of the research analyst s household, or an individual directly involved in the preparation of this report, does not hold a financial interest in the securities of the company in this report; (ii) Genuity Capital Markets, unless otherwise stated, does not hold as of the date of this report, a position whether long or short of 1% or more of the outstanding securities of any class of securities of the company mentioned in this report; (iii) The research analyst who prepared this report receives compensation that is based, in part, upon the firm s overall investment banking revenues; (iv) Genuity Capital Markets does not make a market in the securities referred to in this report; (v) No research analyst named on the front page of this report nor any member of the research analyst s household is an officer, director or employee of the company nor does any research analyst or a member of the research analyst s household serve in any advisory capacity to the companies mentioned in this report; and (vi) Other than what is disclosed above, Genuity Capital Markets is not aware of any actual material conflicts of interest for the research analyst, of which the research analyst knows or has reason to know in the preparation of this report. Stock Rating For purposes of our research report, our rating system is defined as follows: BUY The stock is expected to outperform others in the same industry sector and provide the best risk reward ratio. HOLD Stocks returns expected to be in-line with the sector average over 12-months or do not offer a compelling risk/reward profile. SELL Stocks returns expected to be significantly below the sector average over 12 months, or with unacceptable risk relative to the potential reward. Risk Rating LOW/AVERAGE RISK Stocks with less volatility than the market as a whole, with solid balance sheets and dependable earnings. ABOVE AVERAGE RISK Stocks with more volatility than the market. Financial leverage is considerable but not threatening, earnings are more erratic, or other quality concerns regarding accounting, management track record, and similar issues. SPECULATIVE Stocks of unproven companies or ones with very high financial leverage, suspicious accounting, or with other significant quality concerns. A speculative risk rating implies at least the possibility of financial distress leading to a restructuring. Research Dissemination Policy Genuity Capital Markets research is disclosed to all our institutional clients and prospective institutional clients at approximately the same time. Our research is currently disseminated by and third party service providers, such as Multex and First Call. To receive Genuity research, please contact your Genuity Capital Markets Registered Representative. Share Classification NV non-voting shares RS restricted voting shares SV subordinate voting shares UN units Additional Disclosures Genuity Capital Markets is acting as an advisor to CI Financial. 6