Wednesday, July 23, 2008

Preview of Life Insurance Cos Q2 2008 Earnings

RBC Capital Markets, 23 July 2008

Macro environment negative for lifecos (but not as bad as in Q1/08)

• We expect currency translation to negatively impact the big 3 lifecos' YoY earnings growth by 5% on average with Manulife being the most impacted (6%). The Canadian dollar strengthened against the US dollar (9%) and the British Pound (10%). Industrial Alliance is not impacted by currency movements.

• US and Japanese long-term interest rates were each up by 22 basis points sequentially - the largest positive move since Q2/06. Higher long-term interest rates positively impact all lifecos, but Manulife should benefit most due to its geographic and business mix.

• North American and Japanese equity markets were up during the quarter, which is positive for reserves, but their average levels were down YoY, which hurts growth for all lifecos' fee based businesses. We believe Great-West is least exposed to equity market volatility. Industrial Alliance should benefit most from the 8% sequential rise in the S&P/TSX index, given its exposure to the Canadian market.

• The ratio of downgrades to upgrades for North American high yield debt has increased in 2008, but remains well-below levels seen in 2002-2003. Also, there were no widespread defaults of corporate bonds, which we believe benefits Manulife and Sun Life the most since they have more exposure to lower quality classes of bonds.

• We have lowered Q2/08 EPS estimates for Manulife and Industrial Alliance. Our estimate for Manulife is down from $0.84 to $0.78 on the back of less favourable equity market movements. We have reduced our estimate for Industrial Alliance from $0.84 to $0.83 given expected weather-related weakness in its P&C insurance business.
Scotia Capital, 21 July 2008

Canadian Lifecos – Economic headwinds Slow EPS growth

• The weak macro environment will continue to take its toll on the lifecos. In terms of the economic backdrop, Q2/08 was another tough quarter, albeit not as tough as Q1/08 was. Given the weakness in equity markets in the United States in particular, as well as a modest increase in expected provisions with respect to credit concerns, in no way sub-prime related but more so due to the spillover effect of the sub-prime meltdown, we have reduced our EPS estimates. Exhibit 1 outlines the reduction (the majority of the 2008 reduction is expected to be in Q2/08), with Exhibit 2 detailing the corresponding reductions in our share price targets.

• Weakening S&P 500 hurts Manulife (MFC) the most. While the S&P 500 was up 1.3% on average QOQ, it was down 3% from Q1/08 to Q2/08, which could likely put pressure on EPS, more so for Manulife (Sun Life hedges this much more than MFC does), as reserves for guarantees on U.S. variable annuities, which are essentially mark to market, have increased. The 10% quarter-over-quarter Q1/08 decline in U.S. equity markets resulted in a $0.14 EPS hit for Manulife due to this reserve marking-to-market, so a 3% QOQ decline in Q2/08 could result in a $0.04 hit to EPS.

• Credit woes. Credit worries, more related to the spillover effect of the sub-prime meltdown, rather than the sub-prime issue itself (to which the Canadian lifecos’ exposure is immaterial), will likely continue to mount. Our concerns lie with financials and auto bonds. We expect some modest increases in default provisions, similar to what happened in Q1/08, when Sun Life increased provisions for Sprint/Nextel bonds, a move that hurt EPS by $0.05. In Q2/08, we might possibly see an increase in provisions related to the recent decline in GMAC bonds ($0.06 for GWO, $0.03 for MFC, and $0.05 for SLF), although we believe these could be securitized/pledged or already fully reserved for. As well, Sun Life’s larger exposure to financials (28% of bonds, versus 23% for MFC and 17% for GWO) could translate into an increase in provisions. Should Washington Mutual bonds continue to decline, we could see up to a $0.09 EPS hit for Sun Life, with no material hit for GWO or MFC. Finally, we see no material impact from the relatively small exposure to Fannie Mae and Freddie Mac bonds.

GWO’s exposure at $2.2 billion (2.2% of invested assets, 21% of common equity) ranks the highest, and would be comparable to the average Canadian bank exposure when measured as a percentage of common equity (23% for the banks, on average). MFC, at $2.3 billion (1.4% of invested assets and 10% of common equity) and SLF, at $0.8 billion (0.7% of invested assets and 5% of common equity) have significantly less exposure.

• Credit spreads remain wide – will continue to hurt Sun Life until it announces a hedging strategy (possibly this quarter?). Until these come in, Sun Life, which hasn’t been able to hedge the credit spread duration risk on its book value guarantee U.S. fixed annuity business, will continue to suffer. While we do not expect an increase in reserves to cover this risk, since the spreads at the end of Q2/08 were unchanged QOQ, we do not expect Sun Life to benefit from any potential release in reserves (likely $0.05 in EPS at least) until spreads come in. However, should the company announce a new hedging strategy to cover this risk (50% probability in our opinion), we suspect the stock should to react favourably.

• Nice rebound in S&P/TSX helps mitigate the pain from the S&P 500, but is this sustainable? While this will help, in our estimate, the S&P/TSX exposure of the Canadian lifecos is likely more bent towards financial services (MFC’s small position in CIBC for one) than oils.

• Reaching the end of the YOY negative drag from currency. While the negative impact of currency on a YOY basis will weigh on YOY EPS growth by upwards of 8% on U.S. business, this will likely become less significant going forward, forecast to be just a 4% YOY drag on Q3/08 and actually a 2% tailwind by Q4/08. On a QOQ basis, the impact of currency is neutral.

• A tough 2008, but 2009 should be significantly better. Assuming, as our strategist does, the S&P/TSX appreciates 8% on average in 2009 and the S&P 500 appreciates 5%, credit spreads gradually contract, the Canadian dollar remains at par to the U.S. dollar, long-term interest rates gradually increase, and increased provisions for default (likely hurting EPS by $0.05-$0.10 in 2008) are immaterial in 2009, we expect 13%-14% average EPS growth. It might sound high but we believe it is not. The group averaged 14% EPS growth from 2001 to 2007, and an impressive 16% excluding currency, at a time when equity markets were up on average 7%-8%. Plus, the group is coming off a low base, as we see 2008 EPS growth to be essentially flat YOY for the big three and just 5% for the whole group, excluding the impact of currency. Exhibit 3 shows EPS growth rates.

Great-West Lifeco Inc.

1-Sector Outperform – $34 one-year target, based on 2.6x 6/30/09E BV and 12.6x 2009E EPS
• We are looking for EPS of $0.57 for Q2/08, $0.05 below consensus.
• Putnam will likely continue to be weak, with assets down 3% QOQ and margins at 18%.
• More U.K. payout annuity (another $13 billion block added in February) means more yield enhancement opportunities to help drive EPS growth, especially now with wider credit spreads.
• We look for an update on tax reforms with respect to U.K./Isle of Man single premium bonds, where sales have recently been weak.
• We look for a 3% to 6% dividend increase.

Industrial-Alliance Insurance and Financial Services Inc.

2-Sector Perform – $37 one-year target, based on 1.5x 6/30/09E BV and 10.7x 2009E EPS
• We are looking for EPS of $0.79 in Q2/08, $0.02 below consensus.
• Wealth management top line could very well continue to be weak.
• We are paying close attention to group insurance claims experience which has been poor over the last two quarters.
• Industrial-Alliance is the most sensitive of the Canadian lifecos to declining interest rates and declining equity markets; this makes us somewhat cautious.
• Unless another acquisition is made, we see 2009 EPS growth in the 9%-10% range.

Manulife Financial Corporation

1-Sector Outperform – $41 one-year target, based on 2.3x 6/30/09E BV and 12.6x 2009E EPS
• We are looking for EPS of $0.69 for Q2/08, $0.05 below consensus.
• Weakening S&P 500 hurts MFC the most. The 10% QOQ decline in U.S. equity markets resulted in a $0.14 EPS hit for MFC in Q1/08 due to mark-to-marking of guarantees on variable annuities. The 3% QOQ decline in Q2/08 could result in a $0.03 EPS hit.
• Top-line momentum expected to continue across all divisions.
• Japan could continue to be strong.
• Any update on the acquisition front? – the buyback pace has slowed.

Sun Life Financial Inc.

1-Sector Outperform – $50 one-year target, based on 1.6x 6/30/09E BV and 11.1x 2009E EPS
• We are looking for EPS of $0.95 for Q2/08, $0.05 below consensus.
• Credit spreads remain wide – will likely continue to hurt Sun Life until it announces a hedging strategy (possibly this quarter?).
• We expect some modest increases in default provisions.
• We look for a 3% to 6% dividend increase.
BMO Capital Markets, 16 July 2008

Over the last year, the Canadian life and health index outperformed the Canadian bank index, the U.S. peers and the S&P 500, but underperformed the S&P/TSX Composite (Table 1). During the second quarter of 2008, the Canadian Life & Health index underperformed the S&P/TSX composite and the Canadian bank index. Year to date, the Canadian lifecos have underperformed. The recent underperformance may reflect concerns on future credit deterioration among the Canadian lifecos and concerns on future acquisitions given increased acquisition opportunities in the U.S. While we cannot gauge the impact of acquisitions until a deal is announced, we believe that the Canadian lifecos, in general, have a good track record of acquisitions. With respect to asset quality, we believe that the Canadian lifecos should distinguish themselves relative to their peers in terms of asset quality through the next credit cycle.

For the industry, we are projecting an average drop of 2% in EPS. In force profit growth, higher income on capital, lower new business strain, good expense gains and continued modest share buybacks, primarily from MFC and SLF, should be more than offset by a stronger Canadian dollar, lower investment gains and fee income, lower sales and a more challenging operating environment. Our Q2/08 EPS estimates are based on a C$/US$ exchange rate of 1.000 versus an average rate of 1.010 for the quarter and the current rate of 1.002.

In this preview, we discuss four industry-wide conditions that are important to all four insurers: credit and equity markets, low long-term interest rates, currency and buybacks. The last section of the report goes through each company independently.

Equity Markets Less Volatile; Credit Trends Weakening

One of the major drivers in lifeco earnings over the last five years has been the strong equity markets. Earnings from lifecos are increasingly sensitive to events in the equity markets, as the percentage contribution from wealth management (versus protection) has almost doubled since 2000. The average of the S&P 500 fell 7.6% year over year, while the average S&P/TSX Composite was up 2.1% on a year-over-year basis (Table 2). Performance in the major Asian markets was mixed with the average Hang Seng index in Hong Kong up 20% year over year, while Japan’s average Nikkei index was down 23% during the same time period. Accordingly, year-over-year growth in average equity market levels should be a positive for Q2/08 earnings in Canada and Hong Kong, with lower levels of investment gains from the U.S. operations and Japan. Versus Q1/08, the average composites have all increased by 2–6%. Some of the lost earnings due to the additional reserves required last quarter to support embedded product guarantees may be recovered during the quarter, but not all.

On the credit side, U.S. subprime (and Alt-A) mortgage exposure in the Canadian lifecos is low, averaging 0.7% of total assets versus a U.S. average of 3.2% (Table 3). We expect that credit will continue to deteriorate given the continued writedowns that have been taken by the global investment banks. However, widening credit spreads in Canada and the U.S. should help the life insurers improve portfolio yields over time. For a full discussion of credit quality and the impact of a weaker credit outlook at the Canadian lifecos, please see our report entitled “What to Expect When Expecting Weaker Credit Conditions” dated June 24, 2008.

Long-Term Interest Rates – Rate of Decline Decelerating

Long-term interest rates, as represented by the 10-year government bond yields, have been on a downward trend over the last year. The average 10-year rate for the quarter has fallen by 69 basis points year over year to 3.67% in Canada and 98 basis points to 3.86% in the U.S. Quarter over quarter, average rates in the U.S. have rallied modestly, up 22 basis points from 3.64%; however, in Canada, the average 10-year rate was down from 3.73%. Partially offsetting some of the recent weakness in long-term rates, credit spreads continue to widen. Lower long-term interest rates pose a variety of challenges to life insurers, most important of which is the impact on the discount rates used to calculate policyholder reserves and premiums charged on new products.

Interestingly, the Canadian Asset Liability Method (CALM) used to prospectively calculate policyholder reserves, as defined by the Consolidated Standards of Practice of the Canadian Institute of Actuaries, describes that the best estimate risk-free ultimate reinvestment rate (URR), beyond 40 years into the future, be the average of the 60- and 120-month moving averages of long-term risk free yields (Charts 1 and 2). In our case, we ave proxied the long-term yields with the 10-year government bond yield. While a discussion of CALM is beyond the scope of this preview, we believe there are some noteworthy observations:

• The CALM URR does not exhibit the same volatility as the actual rate.

• Despite falling rates, the Canadian lifecos have successfully managed to grow earnings through this environment since 2002.

• While current interest rates are below the URR, investors should note that a number of adjustments are applied to this URR to derive the valuation URR used in the calculation of actuarial liabilities. These adjustments include assumptions on credit spreads (net of defaults) and additional provisions for risk of asset depreciation (C1 risk) and interest rate mismatches (C3 risk), all subject to the lifeco’s current investment strategy and worst-case scenario. When applied, these adjustments will reduce the URR, reflecting the conservative nature required in valuing long-tailed liabilities.

• To the extent that the valuation URR is below the current rate, a margin of safety exists that can mitigate the requirement for additional reserve increases.

Under Canadian GAAP, reserves are “fair valued” quarterly and, as a result, reflect some impact of the decline in long-term interest rates. In addition, since pricing new policies is based on assumed investment returns, low long-term interest rates reduce potential future investment return assumptions and hence increase the cost of insurance. While it is difficult to isolate the impact of low long-term interest rates in any given quarter or year, we believe the current rate environment creates a long term earnings growth headwind for the life insurance industry.


The Big 3 Canadian lifecos generate approximately 29–47% of total earnings in Canada and the balance is generated outside of Canada, primarily in the U.S., or in U.S. dollar–based jurisdictions. We estimate that the U.S. and U.S. dollar–based jurisdictions accounted for 23–62% of total earnings a year ago and last quarter.

At the extremes, Manulife has the most U.S. dollar exposure and Industrial Alliance has the least. We estimate the average C$/US$ exchange rate of 1.0100 in Q2/08 versus 1.0985 a year ago, 1.0053 last quarter and the current rate of 1.0020 (Chart 3). It is important for investors to remember that the currency fluctuations are a translation issue rather than an economic issue.

Our 2008E EPS assume an average exchange rate of 1.0000 C$/US$ versus the current exchange rate of 1.0020 C$/US$. Earnings sensitivities to different F/X rates are shown in Table 4. In the past we have adjusted our exchange rate forecasts after quarterly results have been released. Of note, our EPS sensitivity analysis to changes in exchange rates has historically projected too severe an impact on lifeco earnings.

While the fluctuations in exchange rates have a short-term translation impact on earnings, the stronger Canadian dollar provides the Canadian lifecos with a more valuable currency to make acquisitions. We expect the Big 3 Canadian lifecos to remain very active in the U.S. market. Specifically, we expect that MFC would entertain large acquisitions such as Principal Financial Group, Lincoln National or Ameriprise, among others. SLF may also consider these types of deals but may be more willing to acquire blocks of business rather than entire companies. We believe SLF’s tolerance for larger deals (i.e. above US$1–2 billion) has increased. With the acquisition of Putnam, GWO is likely to focus on this integration over the next year but would probably continue to make relatively smaller 401(k) acquisitions.

Share Buybacks

The deterioration of the global credit environment coupled with the further asset writedowns by the U.S. investment banks continue to add fuel to the financial-led bear markets. Canadian banks have essentially stopped or dramatically slowed their buybacks during the last six months. Year to date, only Royal Bank has bought back 1.2 million shares. However, the Canadian lifecos continue to maintain balance sheets that support the return capital to shareholders through buybacks, with MFC and SLF being the most active participants. For the second quarter of the year, SLF is estimated to have repurchased 2.4 million shares, while MFC is estimated to have repurchased approximately 3.0 million. The sustained buyback activity among the lifecos has led to total payout ratios (dividends + buybacks)that were higher than the banks’ in 2007 and the start of 2008.

Sun Life – Partly Cloudy

Sun Life (SLF) will report its Q2/08 earnings on Thursday, July 31. We are projecting a decrease of 3% in EPS to $1.00 (mean estimate is $1.00) from $1.03 a year ago. The reduction in our estimate is driven by the rapid appreciation of the Canadian dollar over the past year and the more challenging operating environment. On a constant-currency basis, our estimate would have been $1.03, flat from Q2/07. Although we expect to see continued improvement in new business strain in U.S. individual insurance and scale improvements in U.S. group benefits, we are also expecting lower investment gains and the possibility of lower sales due to the current market volatility. A modest reduction in the weighted average shares outstanding should help partially offset the challenges to EPS growth (Table 6). In line with last quarter, we believe that investors will focus on the short-term impact of wider spreads, new business strain levels in U.S. insurance earnings in Canada, scale efficiencies in U.S. group, total company sales levels and net flows in U.S. VA and MFS.

Results from Q1/08 were relatively weak, reflecting the negative impact of severe spread widening in fixed annuities, weaker credit experience and some softness in Canada. Sales results were mixed across the organization, with strength in Asia and segregated funds in Canada offset by relatively weaker results in individual insurance and mutual funds. The company’s balance sheet remains very strong and SLF ended last quarter with roughly $1 billion in excess capital.

With the increased volatility in the equity markets, we expect to see moderating wealth management sales and AUM growth in the quarter, although the company’s Income ON Demand (IOD) VA should still generate attractive sales growth, given the lack of competition from its U.S. peers with similar product features. Net flows in the U.S. VA segment should continue to be supported by the IOD VA and the company’s recently launched living benefits rider for its Retirement Income Escalator, despite any lapses the company may experience on its legacy non-IOD VAs. We suspect that the market volatility may continue hinder net flows at MFS in the quarter. Pre-tax margins at MFS should remain in the mid-30s.

Canada remains the bread and butter for SLF. However, growth in Canada over the past several years has been disappointing. In Q1/08, earnings from Canada fell 1% year over year and were down 6% on a quarter-over-quarter basis. The key to earnings growth in Canada is to improve productivity among the company’s career sales force and continue growing its wealth management AUM and expense controls, trends which we will continue to monitor.

In force profits and income on capital should remain steady contributors to earnings in the quarter and benefits from finalizing its AXXX funding structure should continue to support earnings in U.S. insurance. As well, continued scale efficiencies from the EGB acquisition in U.S. group should help support earnings growth in the quarter.

Short-term earnings headwinds continue to include the volatile equity markets, uncertainty on credit (in conjunction with lower interest rates) and appreciation in the Canadian dollar. Although acquisition opportunities currently remain sparse, it may take another 3–12 months of volatile equity markets and/or bad credit to rejuvenate M&A activity, particularly in the U.S. SLF remains Market Perform rated.

Manulife – Credit and Capital

Manulife (MFC) is scheduled to report Q2/08 earnings on Thursday, August 7 and we are projecting EPS of $0.69 (mean estimate is $0.75), down 3% from $0.71 the same quarter last year. The reduction in our estimate is primarily driven by the rapid appreciation of the Canadian dollar over the past year and, on a constant-currency basis, our estimate would have been $0.73, up 3% from Q2/07. We are projecting in force profit growth from Canada and Asia and US Protection. Equity market volatility will slow AUM growth and may create earnings headwinds for wealth management businesses in the U.S. and Japan. US Fixed products may face a tough challenge due to the non-recurrence of strong investment gains experienced in 2007. Last year, earnings also benefited from very good credit experience with $16 million in credit recoveries, an event that is unlikely to recur in the near term.

Investment income in the U.S. should be lower in the quarter given the fact that the average S&P 500 has dropped by almost 8% year over year. However, with the new investment income allocation methodology adopted by MFC last quarter, actual investment earnings are expected to more closely match how the company manages its assets in relation to its risk positions. This may result in some modification of investment gains/losses between segments but the total company investment results do not change. We have not restated the historical segmented earnings to account for the new allocation methodology (Table 7).

Q1/08 results were very disappointing at $0.57 per share, well below the mean estimate of $0.71 per share. We believe this is the first real “miss” from Manulife since its IPO in late 1999. The primary driver of the decline in earnings was related to the equity markets, which caused a $265 million reduction in net income, or $0.18 per share. This non-cash charge, primarily due to the new investment accounting rules, should reverse over time as the equity markets recover; however, equity market performance in Q2/08 was not sufficient to recapture this expense and, as a result, we doubt that there would be any significant recovery in the second quarter. Although Q1/08 results were disappointing, they did mask some very positive underlying trends, specifically outstanding sales growth in all jurisdictions and a very strong balance sheet.

Credit remains strong at MFC, but, last quarter, credit provisions did rise while recoveries fell. The company maintains that it is not experiencing any significant credit deterioration, with the exception of housing industry in the U.S. Its “watch list” is not growing in any significant way, but it does expect that more normal credit conditions in the coming quarters will require taking the “occasional” provision. Sales growth may be a challenge in the quarter, but, steady in force profit growth and interest on capital should help mitigate (at least partially) the situation. Moreover, MFC should remain active in its share buyback program, estimated at 3.0 million in the second quarter.

Wealth management sales in the U.S. and Japan may face a difficult environment given the continued equity market volatility. In the U.S., VA sales competition remains high; however, we hope to see good VA sales given the very encouraging net flows over the past few quarters and strong demand for its US Income Plus for Life rider. In Japan, MFC posted strong sales last quarter. Although the volatile economic conditions could create some sales (and earnings) headwinds, we believe that MFC will continue to expand its distribution arrangement in an attempt to increase penetration. GMWB sales in Canada have been very promising over the past several quarters, and we believe that in the current market environment, minimum guarantee features continue to support good sales momentum. The company also recently launched Canada’s first group GMWB in June.

We continue to believe that MFC has the most attractive long term outlook for all the large Canadian financial services companies given its global reach and strong competitive positions in Asia and the U.S. Short-term earnings headwinds include the volatility in the global credit and equity markets, and low long term interest rates could be a long-term headwind to earnings. Because of MFC’s global diversification, the rising Canadian dollar may also moderate earnings growth; however, U.S. acquisitions will become cheaper. With a recent $1 billion debt issue, MFC now has an estimated $4 billion in excess capital, which we believe will give additional support to its already strong capital ratios. We also believe MFC still has additional leverage capacity (not to mention the ability to issue shares) to fund large acquisitions. While large acquisition targets dominate the market view on MFC, we would not be surprised to see MFC make smaller acquisitions in the 401(k) market and mutual fund segments in the U.S. MFC remains rated Outperform.

Great-West Life – More Than Putnam

Great-West Life (GWO) is expected to report its Q2/08 earnings on Wednesday, July 30. We are projecting EPS of $0.60 (mean estimate is $0.62) down from $0.61 a year ago and flat with last quarter. On a constant-currency basis, EPS would have been $0.61, flat with a year ago. Canada and Europe are expected to report another good quarter and the U.S. should show modest growth with increases from financial services, partially offset by poor performance at Putnam. (Table 8).

On April 1, GWO announced that it completed the sale of its U.S. healthcare operations to CIGNA. The sale completes the company’s repositioning in the U.S. to focus on financial services. While significant challenges remain at Putnam, we believe that the U.S. business is now poised for strong growth once industry conditions stabilize.

While we expect that investors are likely to remain focused on Putnam’s issues and fund performance, we believe that the Canadian and European results should remain strong. Growth in premiums and deposits in Canada have been very good for the company over the last 12 months and similar trends remain in Europe. Aside from Putnam, GWO’s U.S. financial services operation remains acquisitive, particularly in the 401(k) space.

Equity market volatility, however, has slowed the growth in AUM at Putnam and net flows will remain an issue; and are unlikely to show any sustained improvement until the end of 2009 at the earliest (Chart 4). Putnam mutual funds experienced US$4.3 billion in net outflows in Q1/08, and AUM growth was adversely impacted by poor equity markets.

European sales last quarter were down, primarily driven by lower sales of savings products in the U.K. and Isle of Man due to changes in capital gains taxes and new German insurance contract laws. GWO remains bullish on Germany and is in the process of introducing a new product in that country. Sales in Canada were also down in Q1/08, reflecting the challenges of the operating environment; however, the company managed to retain its lead position in the individual segregated funds market.

GWO’s asset portfolio remains strong. Gross impaired and net impaired assets continued to decline last quarter. Although GWO has the highest exposure to monoline wrapped bonds (approximately $3.5 billion) in the lifeco group, over half of the exposure (58%) is in Europe and does not cover structure financed transactions, but mainly traditional utilities, water, and other municipal services.

During the quarter, several management changes were announced at the company. Aside from the senior management changes at GWO, Putnam also announced a new CEO and the hiring of two new portfolio managers. Bob Reynolds, previously vice chairman and COO at Fidelity Investments, should help bring a new perspective to Putnam and aid in the turnaround as the new CEO. We believe that change is required at Putnam to revive the franchise and these steps represent a move in that direction. Nonetheless, mounting a turnaround at Putnam in the midst of volatile markets remains a long-term project.

We continue to rate GWO Outperform, based on strong growth outlooks in Canada and Europe, valuation improvement in the U.S. business as it focuses more on financial services rather than healthcare, and attractive valuation based on relative P/E and relative yield. Although faced with challenges, since the Putnam acquisition closed last August, its earnings represent less than 3% of GWO’s, and the remaining 97% of the company’s business operations are performing well (see our report entitled “Putnam Concerns Weigh on Share Price but May Be Overdone”, dated April 10, for our views on the Putnam acquisition).