04 December 2006

BMO CM's Outlook on Life Insurance Cos

BMO Capital Markets, 4 December 2006

We recently revised our target prices for a few of the lifecos and made one change in recommendation, downgrading Industrial Alliance to Market Perform from Outperform due to share price appreciation. As well, we are introducing our 2008 EPS estimates. 2008E EPS growth estimates range from 10% at Sun Life and IAG to 12.5% at Great-West and 14% at Manulife. The growth rates reflect continued strength in in-force profits, modest gains in equity markets, share buybacks and a less benign credit environment. Q4/06 results should be well supported by good North American equity markets, a benign credit environment, a modest deterioration in the Canadian dollar, and share buybacks.

• SLF remains Outperform rated. We have consistently argued that the key to enhancing shareholder value was increasing the ROE. The company's ROE gap with the other Canadian financial services companies is narrowing, which should enhance the valuation of the shares. The company has demonstrated steady, but modest improvement in business fundamentals combined with an accelerated share buyback, which we continue to believe is the most appropriate use of excess capital. As a result, we increased our target price slightly to $54 from $53, reflecting 13.5x 2007E EPS and 1.8x 2007E book value. In addition, we are introducing our 2008E EPS of $4.40, reflecting growth of 10% from 2007 estimates.

• GWO is also rated Outperform. We continue to believe that there are some positive fundamental trends at Great-West, including excellent new business growth results in Canada, strong earnings and sales growth in Europe, and good growth prospects from the U.S. financial services segment. While we remain concerned about U.S. healthcare over the long-term, the company is taking a prudent approach to this division and results are becoming less material to the overall group. U.S. healthcare earnings are expected to account for roughly 10% of 2006E earnings, down from 24% in 2003. In addition, despite the relative underperformance of its shares over the last 12-24 months, GWO has a good dividend yield, 20%+ ROE and management has an exceptional track record of capital allocation. We increased our target price to $38 from $36, reflecting 15.8x 2007E EPS and 3.1x 2007E BVPS. We are also introducing our 2008E EPS of $2.70.

• IAG was downgraded to Market Perform from Outperform due to strong share price performance of 28% over the last 12 months, which compares favourably to the 11% rise in the S&P/TSX Life & Health index of an 11% increase. The shares have significantly outperformed over the last 12 months, and the valuation discount has narrowed. Despite the downgrade, business growth rates continue to be attractive, margins have improved, and the company also announced plans to increase its payout ratio to 28% over the next 18 months, which translates into 30% dividend growth during this timeframe. As such, we increased our target price to $40 from $38, reflecting 1.9x 2007E BVPS and 13.6x 2007E EPS. In addition, we are also introducing our 2008 EPS estimate of $3.25.

• MFC remains Market Perform rated. Manulife remains unique in Canada given its leading market positions in North America and world class Asian platform. The company's medium to long-term EPS growth target of 15% per annum remains very achievable, but achieving this in the shorter term may be challenging given unsustainably high investment gains in the institutional fixed business in 2006 and the fact that interest rates remain low. Manulife is well capitalized with superior long-term earnings and dividend growth potential with a strong acquisition track record and global scope. As such, Manulife should remain a core holding in any portfolio and its valuation appears relatively attractive compared to the banks. Our target price remains unchanged at $42 and we are introducing our 2008 EPS estimate of $3.20.