12 January 2006

Scotia Capital Increases $ Targets on Cdn Insurance Companies

Scotia Capital, 12 January 2006

Modestly increasing targets to reflect 2007 estimates, to fully incorporate 2007E EPS and 2007E ROE estimates.

• We are modestly increasing our share price targets for the lifecos to reflect our 2007 EPS and ROE estimates. We expect 2007E ROE to be 20.7% for GWO, 14.6% for IAG, 16.0% for MFC, and 13.9% for SLF.

• While we still recommend market weight in the lifeco sector, largely due to growing excess capital positions, we do note that valuations, at 14.1x NTM estimated EPS, up from 12.6x only 5 months ago, are at their highest level in the last four years, and, at 87% of the S&P 500 forward multiple, are at an all-time high. Versus other financials valuations are perhaps a little stretched, with the lifeco group at a 7% premium to the Canadian banks (NTM P/E) versus a 2% average, and a 10% premium to the U.S. lifecos versus a 5% average.

• With considerable excess capital, and dividend payout ratios at or near the low-end of company target ranges, we expect the lifecos to increase dividends at rates well above EPS growth rates, which we expect to be 14% in 2006 and 12% in 2007.

• We expect the current multiple will contract from its lofty 14.1x NTM estimated EPS level to the 13.3x level implied in our one-year share price targets.

• We are also modestly increasing our share price targets for the P&C insurers to fully incorporate 2007E operating ROE and 2006E BVPS. Our share price targets reflect the implied P/BV multiple based on our 2007E operating ROE, as per the current regression for each of the largely personal lines insurers (in the case of ING Canada, the largely commercial lines insurers (in the case of Northbridge), and the specialty auto writers (in the case of Kingsway). Our 2007E operating ROE estimates are 15.0% for ING Canada, 12.4% for Kingsway and 11.7% for Northbridge. For further details, please refer to our Insurance Weekly Update piece of December 5, 2005 entitled Simplifying the Valuation of Canadian P&C Insurers.

• Very favorable industry conditions in Canadian auto continue to boost profitability for ING Canada. We expect the trend will continue through 2006. We expect the U.S. non-standard market (a significant portion of Kingsway's business) remains much more competitive and perhaps somewhat irrational in our view, and as such, premium growth for Kingsway's U.S. operations continues to decline. We anticipate acquisition activity to heat up in the Canadian P&C market in 2006, and expect ING Canada, with over $1 billion in excess capital and debt capacity, to be active.

• We are somewhat cautious, especially for lower-rated direct commercial lines players (such as Northbridge) as we believe the magnitude of price increases in the January renewal season is up for debate, and we believe that higher leverage to any significant improving pricing trends lies with the reinsurers and the high-rated direct writers. We will continue to revisit our view as January renewals are finalized.