Wednesday, March 21, 2007

Sun Life Continues to Gain US VA Market Share

  
Scotia Capital, 21 March 2007

Event

• U.S. variable annuity (VA) Q4/06 industry stats were released on March 19.

What It Means

• Sun Life continues to gain significant market share in U.S. VA sales, and we expect the trend to continue. The company's 19% QOQ gain in its market share of U.S. VA sales (from 1.1% to 1.3%, climbing to 17th position), builds on the 10% gain in its market share in Q3/06. After nearly two years of remaining virtually flat, over the past two quarters the company has registered its largest QOQ gains in market share in three years (with position climbing from 19th in Q1/06 to 17th in Q4/06). The company's investment in distribution is really starting to bear fruit. With a new innovative product launched March 5, 2007 we expect the momentum to continue.

• MFC's market share, on the other hand, was flat QOQ. Its market share, however, has declined from 6.4% in Q1/06 to 5.6% in Q4/06, and its market position has fallen from 6th to 9th.

• We expect the valuation spread between the companies, currently 10% on a forward P/E basis, to continue to track toward its 6% average, as opposed to expand.
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Scotia Capital, 21 March 2007

Event

• While it is difficult to jump to conclusions, initial indications imply the impact of the budget's proposal to restrict interest deductions on investment in foreign affiliates may not be material for Canadian insurers. Four reasons:

What It Means

• 1. Interest on Canadian debt, especially for lifecos, is small at less than 0.3% of total expenses (for other sectors the figure is 10x this). Specifically, interest on Canadian debt is $0.08 or 3% of 2008E EPS for MFC, $0.08 or 3% of 2008E EPS for GWO, $0.12 or 3% of 2008E EPS for SLF, and $0.40 or 12% of 2008E EPS for KFS (who has already said impact is immaterial).

• 2. The foreign affiliates, especially for the lifecos, pay foreign tax. The proposal is to remove the deduction except to the extent the foreign affiliate pays tax, which might imply the ultimate net impact is the interest paid on debt (conservatively assuming it is entirely invested in foreign affiliates) times the difference in Canadian and foreign tax rates, or less than 1/4 the figures in #1 above.

• 3. Any negative impact will be mitigated to some extent by the positive impact of the proposal to remove withholding taxes.

• 4. Proposals don't go into effect until 2010, so ample time for tax planning.
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