The Sun Life Financial building in Toronto.The Globe and Mail
In the last few years, surprises from Canadian life insurers have tended to be of the sort that investors hate: Writedowns, unexpected losses, and provisions resulting from market moves. So Sun Life Financial Inc. made itself a lot less likely to provide such surprises by selling its U.S. annuities business on Monday, and yet it's getting little love from markets.
The reason is valuation. Sun Life's stock has been on such a tear that it is already expensive relative to other insurers, reflecting expectations that this deal would get done. Now the focus shifts to earnings, and unless Sun Life can quickly redeploy the proceeds from the sale into something that generates a solid profit stream, there seems to be little upside here for the stock.
As Canaccord Genuity Corp. analyst Mario Mendonca pointed out in a note, the company was trading at 10.4 times expected 2013 earnings before the sale, in line with Great-West Lifeco Inc. (i.e. the boring life insurer). Life insurers with more market sensitivity and likelihood to surprise in topsy turvy markets, such as Manulife Financial Corp. and Industrial-Alliance, were trading at 9.2 times and 9.3 times 2013 earnings, respectively. So there's no reason for the market to boost the multiple accorded to Sun Life to reflect its new safer status – as it's already there.
Add to that the roughly 8 per cent cut in earnings resulting from the sale of the business, and Sun Life starts to look expensive. BMO analysts predict the company will need to find a way to deploy the proceeds that generates an internal rate of return (IRR) in the neighbourhood of 12 to 13 per cent to offset the lost profit.
So in the meantime, Mr. Mendonca cut the company to a "sell."
Other analysts were a little more charitable, mostly keeping their ratings unchanged but bumping up price targets by $1 to reflect a more predictable Sun Life that doesn't have to spend time worrying about its U.S. operations and can get on to other things.
Until Sun Life can explain what those other things are, it appears the outperformance in its stock versus other insurers is likely over.