Why lifecos are underappreciated by investors

Canada’s life insurance stocks remain underappreciated by investors despite significant efforts to improve efficiency and productivity over the industry, says Charles Marleau, president and senior portfolio manager at Palos Investment Funds in Montreal.

“The market is not pricing within the improved earnings quality, strong capital ratios, growing Asian operations and wealth management business,” Marleau said inside a commentary to clients.

“We believe the multiples at which lifecos are trading will continue to expand in order to better reflect the improvements in operations.”

Marleau said the country’s lifecos are taking advantage of better risk management strategies and also the decision to exit or reprice some items that put them in trouble during the financial crisis.

“We are also seeing capital ratios which are at the higher end of historical levels,” he said. “Furthermore, the lifecos have been implementing efficiency and productivity measures, all changes that will continue to bring high quality earnings while reducing volatility.”

If that isn’t enough, the audience is also experiencing favourable macroeconomic tailwinds in the stronger U.S. dollar and steeper yield curve, he added, while stronger balance sheets should allow them to continue growing their dividends.

Marleau is committed to both Sun Life Financial Inc. and Manulife Financial Corp. through his firm’s Palos Income Fund.

He said both companies are industry leaders that should benefit most “from the industry’s new business plan and strategy.”