11 February 2011

Great-West Lifeco Q4 2010 Earnings

Scotia Capital, 11 February 2011


• GWO's Q4/10 reported EPS of C0.54 per share included non-operating items which, in total, added C$0.09 per share, resulting in adjusted EPS of C$0.45, below our estimate of C$0.48, and consensus of C$0.51. Results varied from strong (U.S.) to mixed (Canada) to weak (Europe).


• While we were not surprised by the asset impairment provision in Europe, the size (C$121 million, or C$0.13 per share) was considerable compared to overall EPS, and Canada's mixed results are worth watching as IIIP earnings appear to have leveled off. Europe is another source of risk as the investment portfolio's exposure to "PIIGS" is high relative to equity (6%).


• GWO trades at a considerable premium to its peers at 13x our 2011E EPS and 2.3x BVPS, and while earnings have proven to be quite resilient and stable, the company's investment portfolio and high financial leverage continue to warrant caution.

Q4/10 Highlights

• Reported earnings included items that we believe do not represent core run-rate income - the benefit from a tax related item of C$0.04 per share, the benefit from an adjustment to the acquisition cost of Canada Life of C$0.07 per share, and the negative impact of currency translation of C$0.02 per share. All in, we calculate adjusted EPS as C$0.45 per share.

• Sales were strong pretty much across the board, with Canada individual sales up 20%, U.S. single premium whole life insurance policy sales rising 104% (on a constant currency basis), Putnam mutual fund sales jumping 16% (on a constant currency basis), and sales in the U.K. up 57%.

• Earnings were more of a mixed bag. In Canada, adverse mortality impacted the IIIP segment, which held down total segment earnings, after adjusting for unusual items.

• In the U.S., earnings improved significantly, even after adjustments for unusual items, primarily on higher interest margins, strong equity market performance, and sales. Partially offsetting these were lower mortality charges and higher expenses.

• In Europe, earnings were negatively impacted by C$121 million related to asset impairment provisions of C$50 million and a related increase in actuarial liabilities of C$71 million. These were partially offset by excess interest margins of C$43 million and a C$24 million positive adjustment to the acquisition price of Canada Life in 2003.

• We calculate ROE (excluding AOCI) on an annualized basis of 11.0% for Q4/10.