Why Sun Life and Manulife could see more competition in Asia
CIBC is betting U.S. tax reform could be a boon for Canada’s biggest insurance companies. In a note to clients, CIBC Capital Markets equity analyst Paul Holden wrote that Sun Life (SLF.TO), Manulife (MFC.TO) and Great West Lifeco (GWO.TO) should see a material benefit if U.S. lawmakers are able to push through their wide-ranging plans to lower the corporate tax rate, with Sun Life getting the biggest boost.
“Sun Life looks like it has the most to gain given it has the highest effective tax rate, a more favourable mix of business and less to lose on its deferred tax asset versus Manulife,” Holden wrote Tuesday.
As of the end of the third quarter, Manulife was carrying a little bit more than $4.6 billion worth of deferred tax assets – essentially, an accounting term for when a business has overpaid its taxes, which are eventually returned to the company in the form of tax relief down the line. Manulife said at the end of 2016 that each one-per-cent decrease in the U.S. corporate tax rate would result in a one-time charge of US$60 million.
Holden said such a writedown would likely blunt the impact of the tax cut for Manulife, but that he would expect a $19-million boost to the bottom line for each one-per-cent reduction.
On the flip side, Holden thinks Onex (ONEX.TO) and Intact Financial (IFC.TO) may be negatively impacted by the lower tax rate due to their corporate structures. Holden pointed to Intact’s $2.3-billion acquisition of OneBeacon, which has operations in Bermuda and Barbados, as exposing it to some punitive measures in the American tax overhaul.
“The proposed tax reform will place a 20-per-cent excise tax on premiums paid to offshore affiliated reinsurers, negating the tax advantage structure put in place by OneBeacon,” he wrote.
“We understand that Intact has other options as an offset, but we have to conclude that the tax bill can only go higher when the starting point is zero. At the very least, it is a risk to be aware of.”