Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Great-West Lifeco GWO reported decent numbers in the first quarter as base earnings came in at C$1.03 billion, or C$1.11 per share, up 6% from C$1.05 per share in the previous year. The firm reported an adjusted return on equity of 17.2% during the quarter.
Why it matters: First-quarter results were driven by higher base earnings in the retirement and wealth businesses, improved expense efficiency, and favorable currency movements. These were partially offset by provisioning related to the California wildfires and unfavorable mortality experience.
Base earnings in the retirement business were up 18% in constant currency due to strong net inflows in Empower and operating margin expansion of about 400 basis points in the business. Base earnings in the wealth business were also up 8% in constant currency during the quarter.The company is benefiting from the inherent operating leverage in its retirement and wealth business. Great-West’s total assets under administration grew by 13% on a year-over-year basis to $3.24 trillion in the first quarter.
The bottom line: We plan on maintaining our C$44.50 per share fair value estimate for no-moat-rated Great-West Life after incorporating the latest results. The firm’s fundamentals remain strong, but we are concerned about its valuation and believe the shares are in overvalued territory.
Higher interest rates and buoyant capital markets have been a tailwind for the company in recent quarters, resulting in higher investment earnings and assets under management. A correction in capital markets or lower rates would be a net negative for the company.
Key stats: Base earnings in the group benefits business were up 3% on a constant currency basis as Europe demonstrated strong premium growth.
Base earnings in the insurance and risk solutions business were down 7% on a constant currency basis due to unfavorable mortality experience and claims provision related to the California wildfire.
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