Canadian Lifecos – Discreetly Outperforming… For Good Reason

Canadian Lifecos – Discreetly Outperforming… For Good Reason

July 21, 2025

Funds in focus: Brompton Lifeco Split Corp., Life & Banc Split Corp., Brompton North American Financials Dividend ETF

Canadian Lifecos Have Reduced Interest Rate Sensitivity

Canadian life insurance companies (“Lifecos”) have significant exposure to various macroeconomic factors including interest rates, equity markets, and corporate credit. Interest rates typically have the biggest impact on the sector as Lifeco reserves and earnings have historically had a high degree of economic sensitivity to changes in interest rates. This is the result of a duration mismatch between a Lifeco’s insurance liabilities and its invested assets. Most life insurance products result in a long duration liability for the company that writes the policy. This occurs since buyers of life insurance policies are often in their early 40s and therefore expected to live for several decades. A Lifeco’s invested assets, on the other hand, typically have a shorter duration profile. This mismatch means that Lifecos are generally helped by rising interest rates and hurt by declining interest rates.

Over the past decade, however, the Canadian Lifecos have taken significant steps to reduce the pain caused by low interest rates, while still maintaining some upside exposure to higher rates. The biggest factors contributing to this are:

Shift in business mix to focus on products with less interest rate sensitivity;
Re-pricing of insurance products to account for low interest rates when determining the customer premiums;
Better management of the asset and liability mismatch through the investment portfolio and hedging activities; and
Focus on cost cutting and operating efficiency.

Canadian Lifecos are Generating Higher and More Consistent Returns

As a result of these measures, the life insurance sector has been able to generate higher and more consistent returns over the past several years. Exhibit 1 shows the median quarterly return on equity (ROE) for the Canadian Lifecos from 2009 to present. For the period from 2009 to 2012 the median ROE averaged 7.0%, while this improved to 12.2% for the period from 2013 to 2024 and is expected to rise to 16.1% in 2025-2026 according to Bloomberg consensus forecasts.

Exhibit 1 – Better earnings quality through consistently higher ROEs

Source: Bloomberg (June 30, 2025)

Additionally, while some of these factors, such as a shift in business mix and better balance sheet management, also reduce the benefits of higher interest rates, other factors, such as product re-pricing and operating efficiency, mean that the Lifecos stand to benefit significantly from the rise in rates we have seen over the past two years as new premiums are invested into higher yielding assets.

Valuation Disconnect: Canadian Lifecos are Trading at a Significant Discount

In our view, higher and more stable returns demonstrate that Canadian Lifecos have been producing better quality earnings over the past several years than they did a decade ago. We believe that this should have translated into an improvement in valuations. However, we believe that this has only just begun. Exhibit 2 shows that the Canadian Lifecos currently trade at only 10.8x forward P/E, which is a substantial discount to the broad market. Given the improvement in fundamentals, we believe that valuations can continue to push higher over the next several quarters.

Exhibit 2 – Valuation multiples look attractive

Source: Bloomberg (June 30, 2025)

Given the improvement in earnings quality and the expectation for higher ROEs in 2025 and 2026, we believe that there is upside potential in valuations and that the Lifecos present an excellent buying opportunity at this time.

Brompton’s Approach

At Brompton, we have decades of experience investing in Financials and have several products that investors can use to get exposure to the Canadian Lifecos, including in our split share funds and ETFs.

Brompton Lifeco Split Corp. (LCS) and Life & Banc Split Corp. (LBS) invest in Canada’s four largest life insurance companies, offering enhanced capital appreciation potential and monthly cash distributions.

Brompton North American Financials Dividend ETF (BFIN) provides monthly distributions and the opportunity for capital appreciation through an investment in an actively managed, diversified portfolio of large cap North American financial services companies.

¹Returns are for the periods ended June 30, 2025, and are unaudited. The tables show the compound return on the Class A shares Brompton Lifeco Split Corp. and Life & Banc Split Corp. and the CAD and USD units of Brompton North American Financials Dividend ETF, for each period indicated. Past performance does not necessarily indicate how the funds will perform in the future. The performance information shown is based on the net asset value per Class A Share or net asset value per unit, as applicable, and assumes that distributions made by the funds on their Class A Shares or units, during the in the periods shown were reinvested (at the net asset value per Class A Share or net asset value per unit) in additional Class A Shares or units of the respective fund. Past performance does not necessarily indicate how the funds will perform in the future.

²An estimate of the annual yield an investor would receive if the most recent monthly distribution remained unchanged for the next 12 months, stated as a percentage of the closing market price of the Class A Shares or units on June 30, 2025. Source: LSEG Workspace.

This document is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the annual information form or prospectus, as applicable, before investing.

Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

You will usually pay brokerage fees to your dealer if you purchase or sell shares of the investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them.

There are ongoing fees and expenses with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in the public filings available at www.sedarplus.ca. The indicated rates of return are the historical annual compounded toral returns including changes in share value and reinvestment of all distributions and do not take into account certain fees such as redemption costs or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information contained in this document was published at a specific point in time. Upon publication, it is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the funds, to the future outlook of the funds and anticipated events or results and may include statements regarding the future financial performance of the funds. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Mike Clare Circle Headshot

Michael D. Clare

Senior Vice President & Senior Portfolio Manager

Michael Clare has over 18 years of experience in financial services and is a Senior Vice President and Senior Portfolio Manager with Brompton Group. Mr. Clare is a member of Brompton’s portfolio management team and is a co-manager of investment funds at Brompton with combined assets of approximately $3 billion. He specializes in portfolio construction, security analysis, and covered call strategies with a focus on technology, health care, financials, energy, global equities, and low volatility strategies.

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