11 January 2010

BMO NB & Scotia Capital Prefer Insurance Cos.

Scotia Capital, 11 January 2010

TSX Insurance over TSX Banks. Insurance stocks have underperformed Banks by roughly 40% in the last 12-months. More recently, however, the Insurance sector has easily outperformed, posting a gain of 12.9% in the last month versus -1.2% for the TSX Banks index. We believe Insurance will continue to outperform Banks in coming months as LT yields move up and the yield curve eventually starts flattening. As highlighted in Exhibit 6, yield curve flattening is typically accompanied by Insurance outperformance (chart- Insurance outperforms when the blue line is going down). In our Strategic Edge portfolio (SEP), we are currently 3% overweight Insurance and 3% underweight banks. We reiterate our insurance over banks call.
BMO Nesbitt Burns, 08 January 2010

We have trimmed our bank and utility weight in order to add a position in Manulife. Given almost $5 billion in new equity and a 50% dividend cut, Manulife has achieved ‘fortress’ levels of capital. With modestly higher equity markets and interest rates, and the absence of further valuation basis changes, Manulife’s earnings should be more predictable. John Reucassel is forecasting a recovery in earnings to $1.75 per share this year, and $2.00 per share next year.