GWLIF

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Great-West Lifeco (GWLIF) is a global financial services holding company with a focus on insurance, retirement, and investment solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Great-West Lifeco, through its subsidiaries, is primarily a provider of financial and insurance products. It operates mainly through three reportable business segments: Canada, U.S., and Europe.

  • Canada: This segment offers a range of insurance and wealth management solutions to individuals and groups.
  • U.S.: Through its Empower subsidiary, the company operates within the retirement and investment space, primarily through defined-contribution plans.
  • Europe: This segment includes operations in Ireland, Germany, and the United Kingdom. It provides individual and group life, health, and pension insurance products.

Moat Analysis

  • Moat Rating: 3 / 5 While GWLIF benefits from several factors that create some level of competitive advantage, it does not possess the wide and enduring moat of, say, a technology company with network effects.

Its moat is primarily classified as a narrow moat.

  • Intangible Assets: GWLIF’s brand reputation, long history, and large customer base do create some level of loyalty. Customers may be hesitant to switch providers due to the complexity involved in changing financial and insurance plans. However, brand loyalty is not as strong as in consumer goods, where emotions and lifestyle are key factors.
  • Switching Costs: Switching costs are moderate, particularly for group retirement or insurance plans. Changing service providers for large employers can be complex and time-consuming, but such plans are often reevaluated at set intervals. However, individuals may find it less challenging to switch to different investment products or insurance providers if they find better deals or experiences.
  • Cost Advantages: Through its multiple entities, they achieve economies of scale and have a robust infrastructure, allowing them to be a large provider for financial products. They utilize technology to streamline processes and achieve high efficiency, reducing administrative costs. However, the nature of the financial sector is such that these processes and technologies can often be replicated. Also, being a global financial services company is expensive, and it isn’t a moat that is very difficult to surmount.
  • Network Effects: There is a limited network effect because these are not social products. However, some of their products can create a small level of inertia or network effect. For example, if a company is using Empower as their retirement plan, their employees are more likely to stay with the plan, but even then, they are able to move to different providers.

Legitimate Risks to the Moat and Business Resilience

  • Regulatory Changes: The financial services industry is heavily regulated, with many different compliance requirements. Changes in regulations can significantly affect GWLIF’s cost structure, business strategies, and overall profitability. More recent regulations also emphasize disclosure of information, that, when implemented, are making it more easy to compare financial products of different companies.
  • Interest Rate Sensitivity: GWLIF’s financial products, particularly in fixed-income and annuity-based products, are sensitive to interest rate fluctuations. Changes in interest rate can significantly affect their revenue and profitability. For example, a decrease in interest rates may reduce their return on investments, making their products less attractive.

The current economic environment has seen substantial and rapid rise in interest rates, which may cause customers to either turn away from its fixed products or reduce the value of the products it offers.

  • Economic Downturns: Recessions and economic downturns can reduce the purchasing power of customers and affect the value of existing investments. This can lead to a decrease in demand for GWLIF’s products, as well as higher claims and defaults.
  • Increased Competition: The financial sector is already a very competitive environment. With new players emerging and existing players launching new products, GWLIF might face increased competitive pressures, which can reduce the value or volume of its products.

Particularly with newer fintech companies that try to sell lower cost financial products with technology.

  • Technological Disruption: New financial technologies might provide services at a faster and more efficient rate than GWLIF. Without proper innovation and investment, their products may become outdated. This could make it easy for new companies to disrupt their products.

Business Overview

Great-West Lifeco operates as a diversified financial services provider with core businesses in life insurance, retirement plans, and investment management. The company has a presence in North America and Europe. It derives most of its revenue from premiums, fees, and other charges related to its insurance and asset management products.

  • Revenue Distribution:
    • A large share of revenue is derived from premiums on insurance contracts, primarily life, health and annuities.
    • Fees from investment products and pension management contracts.
      • Some revenue is generated from trading and investment activities.
  • Industry Trends:
    • The global insurance market is seeing greater demand for stable products, as well as those products that cover long-term health care costs. This is creating a bigger market for annuity-like products and health-care related insurance products.
    • The retirement and investment space is undergoing a gradual transition toward personalized portfolios, with the growth of low-cost ETFs and index funds.
    • Fintech continues to innovate, offering low-cost and streamlined alternatives to traditional financial services.
  • Margins: GWLIF’s operating margin is around 11% with a 10-11% profit margin. These numbers have been steady. Note that the insurance sector is prone to large variances in operating margins. Overall the management have focused on maintaining a consistent level of margins through pricing and management of expenses.
  • Competitive Landscape: Competition comes from the whole range of players from local insurance providers to other national-level players in asset management. The banking sector also forms part of the competition, as they also compete for people’s savings.
  • What Makes GWLIF Different: GWLIF’s size and scale provide them an advantage in different markets. Through their subsidiaries, they have a global presence with a diverse portfolio of financial services. They aim to provide value to their customers while focusing on creating value for shareholders through steady performance. They are more of a traditional financial company that is investing and acquiring other companies to diversify their offerings. In their recent acquisition, they acquired a health insurance provider, leveraging their expertise to provide services in the health industry.

Financials In-Depth

  • Revenue Trends: Revenue has generally increased over the long run, with more growth from its investments into insurance and retirement businesses. Note that revenue can fluctuate due to market conditions and interest rates.
  • Profitability: GWLIF’s profitability was good in the last few years but is susceptible to financial market conditions and is sensitive to interest rate changes.
  • Cash Flow: The cash flow is quite strong because of their large scale, with revenues coming directly from their products. They have generated consistent positive free cash flow.
  • Debt:
    • GWLIF has a fairly high debt-to-equity ratio compared to its peers and with limited amounts of cash, so they rely heavily on external financing to meet their regulatory standards and to pursue growth.

This can increase the risk to the company in times of economic downturns.

*  They have significant long-term debt. These tend to be fixed and are long-term obligations. *  **Capital Allocation:** They have mostly used capital for acquisitions and for funding growth. While share repurchases are a common option for many of their peers, GWLIF has consistently allocated their capital towards growth.

Understandability Rating: 4 / 5

The company has a few complexities that may cause it to be difficult to fully understand. It is also in the financial services, which can be complex for many. This makes its business harder to understand compared to, for example, a company that sells a consumer product. The complexity mostly comes from its business models, such as in insurance and pension markets, which rely on actuarial analysis and long-term projections to figure out its profitability. Another aspect that complicates analysis of the company comes from its global presence, where business environments, as well as regulations and legalities in different countries, makes understanding the business more difficult. It is not a simple, straightforward business. Finally, they also have a large number of subsidiaries making it more difficult for an outsider to fully grasp.

Balance Sheet Health: 3 / 5 Great-West LifeCo’s balance sheet health rating has a relatively middling assessment. The business does not have an ideal balance sheet. It has a lot of debt, but it has a steady stream of cash that can allow it to service this debt. This means they are not immediately threatened by debt, however, they have to watch the level of leverage they use so that they don’t over-extend themselves. This is coupled with the fact that they have low amounts of cash, which makes them less prepared for shocks in the market. The assets are composed of financial products and insurance premiums, which may have limited utility in hard times. Also, the liability side of the balance sheet includes many long-term promises in the form of pensions and other post retirement liabilities. This gives a 3 out of 5.

Recent Concerns/Controversies and Problems

  • Credit Crisis: The last few years in the financial industry were particularly difficult. The company has had to be cautious of its investments and how the interest rates can affect its fixed-income products and annuities.

In its most recent reports, the company did report that “the macro environment and investment market volatility were significant headwinds in our operations this quarter.”

  • Layoffs: To manage its costs, the company has been laying off some staff, as mentioned in one of the recent earnings call, which is also indicative of an attempt to improve its earnings, but at the same time, can affect its image and internal employee culture.
  • New Regulations: They are particularly cautious of new regulations, which may require them to change their business policies and increase their operational costs.

They also mentioned in the Q3 earnings call of 2023 that, “we have been very vocal in Canada about some very significant legislative changes that are being put forth by the federal government” that could influence earnings.

  • Earnings Volatility: Their earnings are highly susceptible to market volatility and interest rates. Their assets are primarily in insurance and other financial products, which can rapidly shift values in periods of high economic volatility. Management, although, has tried to manage risks by reducing the level of leverage.

These macro issues make it difficult for investors to properly understand where the company will lie in the near future.

Overall, Great-West Lifeco is a large financial player with a complex business and a moderately defensible moat. However, it faces legitimate challenges such as regulatory compliance and the need to adapt to changing technological environments. They have some structural advantages, such as scale and brand awareness, but do not have a clear edge when faced with an increasing competition. The financial health of the company is decent, but requires close monitoring for any structural issues.