Manulife Q3 2009 Earnings

Scotia Capital, 6 November 2009

Q3/09 Misses but Underlying EPS in Line

• A miss on larger reserve hits than expected (interest and lapse related) - but underlying EPS in line. As expected Q3/09 was noisy. Details are outlined in Exhibit 1. We were relatively impressed that the underlying EPS was in line with our estimate, and was 4% higher QOQ than the underlying EPS of $0.48 in Q2/09. Credit hits continue to be low and very manageable.

• Economic backdrop improves for Q4/09 - could finally be a "noiseless" quarter. With an annual detailed assumption review behind us (proactively putting the lapse issue to bed), long term interest rates rising (corporate yields are up 20 bp since Sep 30), equity markets generally less volatile, and credit hits diminishing ($0.07 EPS in Q3/09, versus $0.13 in Q2/09 and $0.29 in Q1/09), Q4/09 is shaping up to be a much welcomed "quieter" quarter, something all lifecos need to improve earnings visibility.

• Sales were mixed as MFC de-risks and rebalances product mix - we were encouraged by rebound in individual insurance sales - suggest brand and franchise remains strong. Individual insurance sales regained momentum, especially in the U.S., with sales up 19% QOQ (peers up 8%) and down 4% YOY (peers down 10%). In Canada momentum returned as well, with individual insurance sales down 2% YOY (top 4 up 7%) but up 5% QOQ (top 4 up 3%). Asia remains impressive with Japan individual insurance sales up 22% YOY and Asia (ex Japan) individual insurance sales up 11%. YOY. Wealth management sales excluding variable annuities were impressive, up 51% YOY in Asia and down just 2% YOY in Canada (slightly better than the industry). The U.S. and Japan VA sales remain weak as MFC de-risks its portfolio, down 63% YOY in the U.S. and down 68% YOY in Japan.

• 30% of total VA book is now hedged. MFC took advantage of attractive terms and hedged another $3.8B (in Canada), as the percentage of the total VA book now hedged climbed from 20% at Q4/08 to 30% as at Q3/09. We believe a 100% hedge undertaking is far too costly in this current environment, and essentially throws a lot of money at what could possibly be yesterday's problem. We believe the company is providing a far less costly and more shareholder friendly solution through de-risking the product mix, opportunistically hedging, and minimizing sensitivity of its capital base through a subsidiary reorganization. Maybe somewhere down the road up to 70% of the book may be hedged, but certainly not at these market levels.

• Sub-reorg reduces capital sensitivity. We estimate that after the sub-reorganization, the consolidated MCCSR would be 226% (including $1B at holdco), with each 10% move in equity markets hurting the MCCSR by 11 points. That means this consolidated MCCSR will not fall below 200% unless the S&P500 falls to 790.

• Decreasing 2010E EPS by $0.10 to reflect credit a modest expected $0.10 EPS credit hit. We've made similar credit adjustments across all the big three Canadian lifecos, as we're moving to a more conservative stance. Exhibit 2 outlines the development of our 2010E $2.20 EPS estimate. We essentially see a 2% quarterly increase in underlying EPS each quarter (conservatively less than the 4% in Q3/09) commensurate with a 2% quarterly increase in equity markets, with net experience gains of $0.05 in EPS, in part due to equity markets expected to be up 10% next year. Experience gains/assumption changes have generally averaged $0.59 annual EPS since 2004.

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Sun Life Q3 2009 Earnings

Scotia Capital, 6 November 2009

Q3/09 Misses on Credit - Significantly lowering EPS

• A miss, once again on larger credit hits than expected. A noisy quarter, with credit hits $0.10 higher than expected and the gain from equity markets $0.07 less than expected.

• Underlying EPS somewhere between $0.67 and $0.72 - our estimate was $0.72. Details are shown in Exhibit 1. SLF management suggests the underlying may be closer to $0.72, claiming an investment underperformance of $0.05 in EPS, that should be made up in the near term as SLF enhances yield.

• Credit woes continue. EPS hits for credit continue to disappoint, but the pace declines, totalling $0.35 in Q3/09, down from $0.78 EPS in Q2/09 and $0.44 in Q1/09. Of concern is a $4.4B structured products portfolio (just 4% of invested assets) which accounted for about half the credit hits in the quarter. This portfolio was 96% investment grade in Q1/09, falling to 95% in Q2/09 and 90% in Q3/09, with a 5% decline in overall market value. Slippage is largest in the non-agency RMBS portfolio (MV $931 million, 83% investment grade, down from $1B and 89% investment grade in Q2/09), and the CDO/Other ABS portfolio (MV $749 million, 76% investment grade, down from $796 million and 85% at Q2/09).

• Significantly reducing 2010E EPS in light of a more conservative credit outlook and management's view of 2010 "normalized" EPS. Management's $2.50-$3.03 2010 "normalized" earnings exercise (which excludes experience gains and assumption changes, which together have averaged about $0.30 EPS annually since 2004) will likely force down consensus from its $3.10 level (in line with our estimate). We outline our approach to a $2.80 2010E EPS estimate in Exhibit 2, which assumes equity markets will end 2010 at S&P 500 of 1,150, up 10% over 2009. We've assumed experience losses of $0.30, primarily credit driven, and no assumption

• U.S. sales were strong - but expect U.S. VA sales momentum to decline as company de-risks product - Canadian sales mixed, but momentum improving. SLF's momentum continued in the U.S. with U.S. domestic VA sales up 128% YOY and 32% QOQ (we expect momentum to turn negative in Q4 as the company de-risks the product, Q3/09 sales were likely strong in anticipation of a price cut), and core U.S. individual life sales up 23% YOY. Canadian sales were somewhat mixed, but momentum is improving, with individual insurance sales flat YOY (top 4 were up 7%) and down 10% QOQ (top 4 were up 3%), and wealth management sales down 13% YOY and down 14% QOQ.

• Solid quarter for MFS. $7.7B in net sales ($1.9B retail and $5.8B institutional) and margins, at 28%, were up from 23% at Q2/09 and 21% at Q1/09.

• Capital position remains strong. We estimate the MCCSR for SLF's Canadian subsidiary, at 219%, can withstand a 35%-40% drop in equity markets before it hits 200%. That said, we can't say the same with confidence about SLF's U.S. subsidiary (about 1/4 the company's total capital and 40% of the company's total equity market risk) which required $1B in capital in late 2008/early 2009. We expect the holdco has some capital, although it will likely decline by $400 million in Q4/09 to pay for Lincoln's U.K. block.

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Great-West Lifeco Q3 2009 Earnings

Scotia Capital, 6 November 2009

• EPS of $0.47, vs. our $0.43 estimate. In line with consensus of $0.48.

Implications

• Unlike the other big lifecos, GWO's limited equity market sensitivity and minimal interest rate sensitivity once again resulted in a fairly steady quarter - $0.04 above our estimate and $0.01 below consensus - underlying EPS at $0.49 in line with our estimate.

• Sales momentum continues in U.S. Financial Services, as several new cases propel the top line 50% YOY and 57% QOQ. As well, sales momentum continues in Canada, with individual insurance sales up 13% YOY and individual wealth management sales down just 3% YOY (better than prior quarters). Sales in the U.K. were down sharply (40%), but not as bad as the market (down 50%).

• While Putnam net sales, at negative US$1.8B, were much better than previous quarters, they were slightly worse than our negative US$1B - US$ 1.5B estimate. Putnam margins, at negative 11%, remain weak.

Recommendation

• With a much lower risk profile, significantly less EPS volatility, an excellent track record, attractive 10.6x multiple and 5.2% yield, we reiterate our 1-Sector Outperform rating.

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Barron's Article on Canadian Banks

Barron's, Dimitra Defotis, 2 November 2009

A Canadian native likes to give this quiz to his u.s. friends: What's the most boring word in investing? Answer: "Canadian." How can you make it even more boring? Put the word "banks" behind it.

But boring can be beautiful, especially when trouble erupts.

Yes, the shares of banks in the Great White North were badly bruised during last year's global meltdown, but they deserved better. Thanks to strict regulation, Canada's banks don't make subprime loans, and a typical mortgage term is only five years, greatly moderating balance-sheet risk. The largest banks have a virtual monopoly, controlling their regional markets for residential mortgages, credit cards, retail deposits and brokerage services. With their stout balance sheets and conservative bent, Canada's banks look healthy. Indeed, a recent World Economic Forum report rated the Canadian banking system as the world's soundest. In comparison, Switzerland was No. 16. The U.S. limped in at No. 40, just behind Germany (at No. 39) and ahead of the U.K. (at No. 44).

This isn't to say that Canada's financial system weathered the 2007-2008 financial debacle unscathed. Combined, the five largest banks -- Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montréal, along with No. 6 National Bank of Canada -- have had more than $22 billion in write-downs in their securities and trading businesses since early 2007. But their American and European counterparts have fared far worse, and none of the Canadians has needed a government bailout. And now, RBC analyst André-Philippe Hardy argues, they are even less exposed to credit risk than in the past because loans make up 40% of assets, versus 45% in 2008 and 70% in the 1980s and 1990s.

Another positive: In Canada, when someone defaults on a mortgage, lenders have more recourse than do mortgage lenders in the U.S. What's more, RBC research views Canadian banks as well-insulated from some of the troubles to the south, even though they operate in the States. Through October 2008, the Canadians had only $16 billion in U.S. residential mortgages on their balance sheets -- a mere 3.5% of their total residential loans.

In some ways, anyone who invests in one of the five biggest Canadian banks -- all of which trade in both New York and Toronto -- pays a premium; in other ways, the stocks are bargains. Royal Bank of Canada, Toronto-Dominion and Bank of Nova Scotia are the group's most attractive members because they boast the most potential to boost profits through foreign growth. Each sells at more than two times book value, while some of their U.S. peers fetch less than book. But they all boast substantial dividends, rack up higher returns on assets and sell at lower multiples of current and expected earnings than their south-of-the-border rivals. The largest Canadian banks trade at an average of about 12 times estimated 2010 profits, compared with 13.7 times for JPMorgan Chase, 19.9 for Bank of America and 72 for Citigroup.

The northern banks are benefiting from a robust Canadian dollar that makes it easier to expand by buying foreign companies; operations abroad already account for about a third of their earnings. And they are being helped by the fact that Canada's recession has been somewhat milder than those in the U.S. or much of Europe.

"The next 12 months still look good," Rohit Sehgal, a money manager at Toronto's Goodman & Co. Investment Counsel, says of the Canadian banks, which he thinks should be helped by cost-cutting, a more favorable yield curve and a likely decline in nonperforming loans.

Based on normalized earnings projections, RBC estimates that TD and Scotiabank shares could rise more than 18% over the next year. Wall Street analysts see the pair climbing by a more modest 14% and 8%, respectively, and Royal Bank advancing by 10%. Add dividends, and the potential total returns look juicier.

Royal Bank of Canada, with a stock- market value of $70 billion, is Canada's titan. The bank also has the highest Tier 1 ratio -- a measure of capital ad- equacy -- at 12.9%. Royal Bank gets about a third of its earnings from the capital-markets division, which includes investment banking, trading and underwriting in the U.S. and Canada, and trading operations in London.

Dominic Grestoni, a money manager for Winnipeg-based I.G. Investment Management, says the bank is an accomplished asset manager and has had success selling mutual funds through its branches.

At its recent price of 51.81 (all the figures in this story are in U.S. dollars), Royal Bank is the group's most expensive member. But the stock historically has traded at a premium, and RBC's 15% return on equity is a bit above the group's average of 14%.

Analysts expect Royal Bank to earn $4.02 for its fiscal 2010 year, which ends next October, according to Thomson Reuters. That would be a decline of 3% from the $4.14 expected for fiscal 2009. (Twelve analysts surveyed by Bloomberg are looking for $4.35 next year.) Still, profit is expected to jump 18% in 2011, assuming the recession eases, global investment banking expands and U.S. operations recover. "Royal Bank globally [has] the opportunity to do better than the other banks," says money manager Sehgal. "You pay the highest multiple [see table on previous page] and get the lowest yield, but I am willing to do that because it ranks extremely well on any criteria."

Royal Bank's CEO, Gordon Nixon, tells Barron's that any large acquisition is likely to be in the company's wealth-management business, already the largest among its domestic peers. The bank has forked over $7 billion since 2000 to pick up U.S. retail banks, though its returns on acquisitions have been low. It has more than 430 branches in the States and, Nixon says, a U.S. acquisition is unlikely, "given balance-sheet weakness."

Toronto-Dominion Bank is likely to report only a slight increase in fiscal 2010 earnings, to $5.11 per share from the $5.07 expected for fiscal 2009, which ended in October. The company, which owns the TD Waterhouse and TD Ameritrade discount and online brokerages, has made a big push into the U.S., where it has more than 1,000 locations, about as many as it has at home.

Its Tier 1 ratio, at 11.2% as of the end of the third quarter, is in line with the average for U.S. competitors, and its return on equity, at 13.2%, is strong, but slightly below the average for the big Canadian banks. Since 2005, Toronto-Dominion has spent $20 billion on acquisitions, including Commerce Bancorp, whose U.S. branches are known for a high level of service.

Bank of Nova Scotia, in contrast, has been focused on Latin America in its global operations, which generate more than a third of its profits. Scotiabank, as it's known, has made retail-oriented acquisitions in the Caribbean, Mexico, Chile, Peru and other locales and is Canada's most international bank. The bank's return on equity, at 17.5%, is second only to National Bank's 20%. While its core business is retail banking, Scotiabank is expanding its wealth-management, brokerage and investment-banking operations. This year, it's likely to earn $3.30 a share. The figure should rise to $3.35 in 2010 and to $4.24 in 2011.

As for the other big banks, Canadian Imperial has made a foray into the Caribbean, while Bank of Montreal has expanded in Chicago and Milwaukee.

Grestoni, the I.G. Investment Management money manager, has made the three largest Canadian banks his largest holdings. He's sold some of his Bank of Montreal stake; he considers it a laggard in retail businesses, including mutual funds and wealth management. While the Montreal bank moved into the U.S. early, buying Harris Bank in Chicago more than a decade ago, and community banks also in the Chicago area, those operations struggled during the credit crisis.
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In sum, if the markets sell off, Canadian bank shares won't be immune. And if the global economy doesn't recover as strongly as analysts expect, 2011 profits might not be as robust as forecast. But, at the least, boring can help investors sleep better, especially when it pays a nice dividend.

The Bottom Line: Shares of Canada's three largest banks offer potential upside of 8% to 18% over the next 12 months. And that doesn't count the substantial dividends that they offer.

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Where Do Bank Stocks Go From Here?

Financial Post, John Greenwood, 26 Octber 2009

Like their peers around the world, Canadian banks got clobbered on stock markets as the financial crisis raged. But as the gloom cleared, their shares -- unlike those of many foreign banks that had the misfortune of owning toxic credit investments -- rocketed skyward, leading the way in one of the most spectacular stock market rallies in decades.

By early August, they had regained nearly all the ground lost since the storm broke in September 2008, collectively rising about 65% from the lows of March.

But for nearly three months since then, bank shares have mostly treaded water -- the sole exception Royal Bank of Canada, which peaked at the end of August instead of the beginning. As the broader Toronto market ploughed ahead, investors have been left wondering if that's all there is for the bank rally.

Brad Smith, an analyst at Blackmont Capital Inc., said he's not surprised.

"More than anything else, what you are seeing is a natural period of consolidation that you would expect to occur after a significant advance driven by improved earnings multiples going forward," said Mr. Smith. "So it's not surprising we are seeing this temporary lull."

Shares in Royal Bank last week closed at $53.39, down 59¢. Bank of Montreal ended at $52.03, down $1.01. Canadian Imperial Bank of Commerce was $1.09 lower at $64.36. Toronto-Dominion Bank was down 67¢ at $64.97, while Bank of Nova Scotia finished at $46.34, down 53¢.

Mr. Smith said the market is still trying to decide if the early optimism around the Canadian banks and their lack of exposure to subprime mortgages justifies the spectacular rise in shares, arguing that the upcoming forth-quarter earnings --due in early November -- will provide a lot of the answers.

One concern is that much of the good news that analysts are expecting has already been factored into the shares, so unless the results include some positive surprises, it could be bad news for investors.

"The banks are trading at roughly 13 times expected 2010 earnings but the reality is that, historically, the range is between eight and 15 times earnings, so we are much closer to peak multiple levels than troughs," said Mr. Smith.

Another issue that will likely affect the banks is proposed new regulations that have come out of Group of 20 nations discussions. In recent weeks, the focus has been on executive bonuses but the rules are expected to cover everything from how much capital banks are required to hold to the amount of leverage they can take on.

"These are the kinds of things that really do affect profitability," said an analyst who asked not to be identified. "No one knows [what the regulations will ultimately look like], so until you get some clarification you just have to hold your breath."

For its part, the federal government has argued that since banks in this country didn't get mixed up in the kind of toxic investments and reckless risk-taking that brought down so many of their global peers, Canadian regulations aren't in need of the kind of overhaul they're getting in the United States and Europe.

But critics say that unless Ottawa follows suit with its fellow G20 countries, it risks upsetting the global balance and becoming a magnet for foreign firms that want to sidestep the rules in their home jurisdictions.

"Capital markets is a global business," said Mr. Smith. "You can't have pockets of regulation that are different from the rest because all the capital will tilt into those jurisdictions."

Another explanation for why bank shares haven't moved is that investment dollars are being drawn toward more attractive sectors such as energy.

At a time when there is so much uncertainty over financial services, the logic around oil and gas is simple. Against the backdrop of an improving global economy, oil prices have been moving steadily higher over the past few months.

"At the end of the day, a guy pulling oil out of the ground [in today's economy] has less risk than a guy sitting on a bunch of loans."

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TD Canada Trust Tests New Branch Format

The Toronto Star, Rita Trichur, 24 October 2009

Inside Toronto-Dominion Bank's corporate headquarters, its secret code name is "Bravo." But on the streets of Brampton, folks are calling it the "branch of the future."

Canada's second-largest bank has chosen this fast-growing GTA city as the testing ground for a daring new experiment that is set to revolutionize personal banking in this country.

Its new prototype branch, at 135 Father Tobin Rd., features an ultramodern design that could eventually become standard fare at all TD locations across Canada. The new "Bravo" branch resembles a cross between Starbucks and Ikea with plenty of high-tech banking gizmos.

Borrowing a page from those venerable retailers, TD's goal is to make its new branch a destination for consumers by giving them a trendy place to hang out with their family and friends.

Its open-concept layout includes marketing gimmicks like a lounge area with complimentary coffee-based beverages, a special kids' zone, a community room and a free coin counter that are also available to non-clients.

Executives are hoping that fresh approach to customer service will translate into more sales of financial products like mortgages, lines of credit and mutual funds. It is an unconventional business strategy made famous by Commerce Bancorp, the New Jersey-based bank that TD bought in 2007.

For the Canadian banking industry, however, the approach marks a dramatic shift from the late 1990s when banks were actively pushing consumers out of branches to lower-cost platforms like online, telephone banking and automatic teller machines.

Tim Hockey, president and chief executive officer of TD Canada Trust, says the new pilot branch is designed to take the "stress" out of branch banking for consumers.

"There was a concept that Starbucks used that I always thought was kind of interesting. And that is `the third place,'" Hockey said.

"And the concept there is you've got your home, you've got your work (but) everybody needs a third place. A place to go where, just like that old Cheers sitcom, `Everybody knows your name.'"

Old-fashioned relationship-building not only makes clients feel appreciated, but it also makes it easier for banks to sell them a wider range of products and services.

And while clients continue to use the Internet, telephone and ATM channels, nearly 85 per cent of TD Canada Trust's revenues "are still generated at the branch level," BMO Capital Markets analyst John Reucassel said in a report this week. He noted the "key" to TD's financial performance is its "focus on service and convenience."

TD's new pilot branch attempts to take customer service to the next level. There are state-of-the-art videophones that can be used to connect customers to live investment experts.

Clients can also use free computers to surf the web or relax in its lounge to catch up on their reading. The bank supplies a range of high-end magazines in addition to local community newspapers.

"You can just sit and have a coffee," said branch manager Nupi Dhillon, as she gestured to the free beverage machine. Children, meanwhile, are free to explore the adjacent kids' area that features an array of books, toys and a pint-sized computer.

In an effort to build stronger ties with the local community, both customers and non-customers alike are invited to use the branch's high-tech community room to hold meetings. The no-cost service is expected to be a hit with non-profit groups and small-business owners.

Other signature items include a document shredder and a free coin counter – an idea inspired by the Commerce's wildly popular Penny Arcade coin machine.

Commerce, established in 1973, based its business model on a stable of Burger King outlets also owned by its founder, Vernon Hill. Its banking strategy was based on a "Wow" culture that often included free treats for children and dogs.

TD has often mused about importing those ideas to Canada. It hopes its new branch experiment will succeed in generating priceless word-of-mouth advertising to attract new clients.

"Quite frankly, the average Canadian consumer doesn't feel all that warmly disposed to their average bank,'' Hockey said. ``So, we're trying to change that, one customer at a time."

Other banks also appear to be sharpening their focus on luring customers back to branches at a time when the recession has taken a bite out of their investment banking profits.

For instance, larger rival Royal Bank of Canada opened 25 new branches this year, while renovating and remodelling more than 100 others. Another 20 new branches are planned for 2010.

Canadian Imperial Bank of Commerce, Canada's fifth-largest bank, has accelerated its branch strategy. CIBC originally said it would open, expand or relocate 70 branches by 2011. It now plans to complete all 70 by the end of next year, with 41 of those branches ready by the end of 2009.

Christina Kramer, CIBC's executive vice-president of retail markets, said the bank has invested $280 million in its strategy. It is the biggest branch investment in CIBC's history.

"Clients do like coming into a branch to have a face-to-face discussion with an adviser," Kramer said. "It helps establish a relationship. It also helps us spend some quality time really understanding their personal goals and needs."

It is an industry about-face from the late 1990s when banks, especially those in concentrated markets, had an incentive "to lower branch-service quality" in order to steer consumers toward lower-cost online banking, suggests research from the Bank of Canada.

"Between 1998 and 2006, the top eight Canadian banks have on average reduced the number of retail branches they operate by 23 per cent, despite a 37 per cent increase in deposits," says the working paper authored by Jason Allen, Robert Clark and Jean-Francois Houde.

Customers, it seems, pushed back. While Canada is one of the "most developed" online banking markets in the world, banks are facing the stark reality that many older customers still prefer traditional teller service, according to ComScore Inc. That repudiation has helped make bricks-and-mortar branches all the rage again, proving the Internet has yet to render old-fashioned branch service obsolete.

"In the 1990s, everybody in the industry believed that branches – because the Internet was so hot – everybody believed that nobody would want to go in the branch anymore," Hockey said.

"Here we are 10 years later easily, and they're never more popular."

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Preview of Life Insurance Cos Q3 2009 Earnings

Scotia Capital, 19 October 2009

Canadian Lifecos – Another Noisy Quarter – Economic Backdrop Improving – Valuations Remain Very Attractive

• Another quarter with a lot of moving parts. As was the case in Q2/09, we expect the continued rebound in equity markets in Q3/09 will be offset to some extent by reserve increases, primarily related to declining long-term corporate rates, but also due to increasing policy persistency on lapse-supported products. Some have pre-announced, suggesting in Q2/09 earrnings releases that, given the pronounced market volatility, Q3/09 results would be affected by prospective actuarial assumption changes. In particular, MFC suggested in its Q2/09 release that preliminary information suggested a change in lapse assumptions for variable annuity/segregated fund guarantee business may result in a Q3/09 charge not to exceed $500 million ($0.30 EPS). MFC also suggested that changes in assumptions for other factors, which could not be estimated at that time, could result in additional charges to earnings. Our best guess is these charges, which we estimate to be $0.62 EPS, will be interest rate driven, as long corporate bond yields continue to fall. SLF also “pre-announced” at Q2/09, suggesting the company expects to take a Q3/09 charge of $350 million to $450 million ($0.80-$0.98 EPS) as it updates its stochastic economic scenario generator in accordance with updated professional guidance – guidance which we can gather applies only to SLF’s stochastic methodology, all others using a deterministic approach to which the revised guidelines do not apply. We’re somewhat uncertain as to whether IAG, the most sensitive of all the lifecos to interest rate changes, will book a charge for lower bond yields, in particular as they relate to long-term Quebec bonds (which generally support actuarial liabilities). However, our guess is that IAG will not, since it generally reviews this assumption at Q4, and the yields on these bonds have started to climb since the end of Q3/09. GWO, the least sensitive to changes in equity markets and interest rates, will likely have the least amount of noise in its results. Finally, we expect the Q3/09 to be marked with credit hits (although not nearly as high as in previous quarters) as companies continue to increase default provisions as bonds are downgraded and credit conditions – at least in the eyes of the rating agencies (often the last to move) – remain uncertain.

• Focus will be on underlying earnings. For Q3/09, we expect this to be $0.49 for GWO, $0.60 for IAG, $0.50 for MFC, and $0.72 for SLF. We expect SLF to provide some sort of clarification as to what the underlying earnings are/will be going forward.

• Modestly trimming 2010 EPS estimates – largely due to currency. We reduced our 2010E EPS estimates by $0.05 for MFC and SLF and $0.04 for GWO, largely to reflect the impact of currency. In keeping with Scotia Economics’ recent move, we bumped our average Canadian dollar estimate for 2010 to US$0.98 (from US$0.96) and £0.59 (from £0.56), and are keeping it at ¥87.

• While it could be argued to wait on the group until we get a quarter with good earnings visibility that further reinforces that underlying earnings are not only achievable, but more importantly beatable, we think it’s better to be early. We know lifecos are complicated enough as it is, and noisy quarters make it worse. And while it can be argued we need to wait for good earnings visibility, one could argue it’s better to be early, especially given the fact that equity markets continue to climb, and, perhaps even more importantly, long-term interest rates are climbing, which is clearly a positive for the group. In the last two weeks, U.S. long-term corporate A and AA yields have increased 25 basis points (bp), Canadian long-term provincial bond yields have increased 16 bp, and Canadian and U.S. long-term treasury yields have increased 20 bp. There are signs of momentum in the group as well. While Canadian lifecos have underperformed the U.S. lifecos and the Canadian banks by 30% and 5%, respectively, in the last three months, they have outperformed in the last 30 days, bettering the U.S. lifecos by 2% and the Canadian banks by 6%. And finally, they’re still very attractive relative to these other financials. There’s still a significant discount between the Canadian Lifecos (10x 2010E EPS) and where they historically trade vis-à-vis the U.S. lifecos (Canadian lifecos currently at a 4% premium on a P/E basis, well below the average 13% premium) and the banks (Canadian lifecos are at a 20% discount, well below the 1% discount average).

Great-West Lifeco Inc.
1-Sector Outperform – $31 one-year target, based on 2.3x 9/30/10E BVPS and 12.2x 2010E EPS
• We’re looking for EPS of $0.43 for Q3/09, $0.05 below consensus, with underlying EPS of $0.49. Our 2010 EPS estimate is $2.30, $0.02 below consensus.
• Should be a relatively clean quarter – unlike the other lifecos. GWO is the least sensitive in the group to changes in equity markets and interest rates
• Still some minor credit hits (we estimate $0.09 in EPS), largely related to U.K. hybrids, but should be of less concern as market values of these securities continue to climb.
• Good sales momentum in Canada likely to continue.
• Putnam margins likely to remain under pressure, but net sales could be encouraging (expect them to be negative US$1B-$US1.5B, the best they've been since early 2008)

Industrial-Alliance Insurance and Financial Services Inc.
2-Sector Perform – $33 one-year target, based on 1.5x 9/30/10E BVPS and 10.3x 2010E EPS
• We’re looking for EPS of $0.61 in Q3/09, $0.05 below consensus, with underlying EPS of $0.60. Our 2010 EPS estimate is $3.00, $0.16 above consensus.
• No credit hits expected, primarily based on IAG’s “Canada only” asset portfolio.
• Expect no Q3/09 EPS hit from declining interest rates (IAG is the most sensitive by far) – but keeping a close eye particularly on long-term Quebec bond yields – which have declined 28 bp in Q3/09. The fact that these rates have climbed 18 bp since Sep 30 is encouraging, but if they remain flat through Dec 31/09 we'd expect a $0.30 EPS hit.
• Sales likely to remain weak but could be plateauing.

Manulife Financial Corporation
1-Sector Outperform – $28 one-year target, based on 1.7x 9/30/10E BVPS and 11.0x 2010E EPS
• We are looking for EPS of $0.34 for Q3/09, $0.04 below consensus, with underlying EPS of $0.50. Our 2010E EPS estimate is $2.30, $0.11 above consensus.
• A noisy quarter. We expect an estimated $0.81 EPS gain from equity markets will be offset by $0.92 EPS charge due to actuarial reserve assumption adjustments, which include $0.30 EPS in pre-announced lapse rate assumption changes on VA business and an estimated $0.62 EPS in reserve assumption changes related to declining interest rates
• The recent rise in long term Corporate rates (Corporate A rates up 23 bp since Sep 30) is very positive for MFC.
• We expect to hear more about steps the company is taking to mitigate the sensitivity of the company’s capital to changes in equity markets. The new structure we believe will reduce MCCSR sensitivity such that a 10% drop in equity markets will reduce the MCCSR ratio by 13% (new structure) as opposed to 20% (old structure).
• Sales will likely remain mixed. Strong in Asia but weak in the U.S.

Sun Life Financial Inc.
2-Sector Perform – $37 one-year target, based on 1.3x 9/30/10E BVPS and 11.0x 2010E EPS
• We are looking for Q3/09 EPS loss of $0.06, $0.05 above consensus, with underlying EPS of $0.72. Our 2010E EPS estimate of $3.10 is in line with consensus.
• Another messy quarter – a lot of moving parts. We estimate a $0.90 EPS hit for reserve assumption changes related to new actuarial guidelines (affect SLF only), $0.06 EPS hit for declining interest rates, $0.25 EPS credit hits, offset by $0.36 EPS in equity market gains and $0.07 EPS gain from narrowing credit spreads.
• Company track record continues to make us a little nervous with respect to credit – we look for $0.25 EPS in credit-related hits.
• Looking for some “guidance” as to what is sustainable EPS.
• U.S. sales momentum likely to continue.

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