Desmarias Dynasty

Bloomberg, Lisa Kassenaar, 31 July 2009

Deep among the pine forests of rural Quebec lies a private estate the size of Manhattan, a refuge where French President Nicolas Sarkozy has gone to relax.

Former U. S. presidents George H. W. Bush and Bill Clinton have played golf here, on 18 meticulously groomed holes with a bright-yellow cottage for respite at the 13th tee. Pheasant shoots are orchestrated from the hunting lodge; opera is performed in the music pavilion. An original of Auguste Rodin's The Thinker and a statue of Thomas Jefferson adorn the rough, granite hills.

At the heart of the property is a grand residence surrounded by formal gardens called Cherlieu -- which means beloved place -- that's modeled on a 16th-century Palladian villa. This is the home of Paul Desmarais Sr., a white-haired, Canadian billionaire whose obscurity outside Quebec masks his family's vast connections and influence in global business and politics.

"They keep a very low profile," says Brian Mulroney, who met Mr. Desmarais in 1965 and, as Canada's prime minister from 1984 to 1993, introduced him to president Ronald Reagan and Bush. "That's the way they like it."

Mr. Desmarais, 82, started out with a backwoods Ontario bus line in 1951. Now, he and his family control Power Corporation of Canada, a holding company headquartered in an unmarked, eight-story building on Montreal's leafy Victoria Square. Paul Sr.'s sons, Paul Jr., 54, and Andre, 52, are co-chief executives. Together, the brothers govern a labyrinthine business empire that extends from Denver to Geneva to Hong Kong, with seats on 38 related corporate boards.

Power Corp. owns 66% of Power Financial Corp., a web of North American insurance and asset management companies with 2008 revenue of $36.5-billion. In 2007, the Desmarais bought Putnam Investments, a once mighty, Bostonbased mutual fund company that had been wounded by a trading scandal and weak fund performance.

The US$3.9-billion deal closed two months before the Standard & Poor's 500 Index peaked in October 2007. Power Financial's biggest challenge is to make good on plans to renovate Putnam into a flagship for U. S. expansion, after the mutual fund manager's assets were almost halved by the 2008 plunge in global markets.

In Europe, the Desmarais have been partners with Albert Frere, one of Belgium's richest men, for almost two decades. Together, they hold stakes in Total SA, Europe's third-biggest oil and gas company, based in Courbevoie, France; Paris-based Lafarge SA, the world's biggest cement maker; and Paris-based GDF Suez SA, the world's second-biggest utility. Paul Desmarais Jr. is a director of all three.

In China, the Desmarais own 4.3% of Hong Kong-based Citic Pacific Ltd., a steel, mining and real estate development company with a market value of US$7.2-billion as of July 13. Andre Desmarais joined the board in 1997. His father first ventured into China in the 1970s.

"Power Corp. is like an iceberg -- large and largely invisible," says David Beatty, a professor of strategic management at the University of Toronto.

Those who bet on Power Corp. in the 15 years from 1993 to 2008 earned slightly more than investors in Omaha, Neb.-based Berkshire Hathaway, according to data compiled by Bloomberg. Power Corp.'s average annual return in the period, including reinvested dividends, was 14.5%. Berkshire, which pays no dividend, returned an average of 14.1%.

The Desmarais also run a US$1.6-billion, Paris-based private equity firm called Sagard Private Equity Partners. Investors include companies managed by the Frere family; Bernard Arnault, CEO of luxury goods giant LVMH Moet Hennessy Louis Vuitton SA; and Laurent Dassault of the French aviation family, who's on Power Corp.'s board.

The unit is named for Sagard, Que., a French Canadian hamlet of 260 people that's about 480 kilometres from Montreal and adjacent to Mr. Desmarais's 6,070-hectare estate.

Four years ago, Paul Sr. built the villagers a yellow, wooden Roman Catholic church. In December, he attended Christmas services there with the maids, cooks and gardeners who work on his property.

Some visitors to the estate arrive by helicopter. They come for quiet weekends or for enormous costume parties. Cirque de Soleil has performed there. Guests have included King Juan Carlos of Spain and assorted National Hockey League stars.

"They rank with the best and most generous hosts in the world," says Mr. Mulroney, 70, in an interview the morning after a four-day visit to Sagard. "The only thing they don't do is tuck you in at night."

Paul Sr. also owns a home in Palm Beach, Fla., and another in New York. He was Canada's eighth-richest man in 2008, worth $4.1-billion, according to Canadian Business magazine. That was a slide from fourth in 2007 -- partly reflecting a plunge of 44% in the shares of Power Corp. as the global economy shuddered. Profit fell 41% to $868-million in 2008, the lowest amount since 2002.

At Power Financial, where shares declined 44% last year, net income dropped 35% to $1.34-billion, hurt by lower fee income from its prime holding, Winnipeg-based insurance firm Great-West Lifeco Inc., and $983-million in writedowns and other costs related to Putnam.

Power Corp. and Power Financial's stocks, which trade in Toronto, have rebounded in 2009. Power Corp. stock traded at $29.53 this week, up 26.4% for the year. Power Financial was at $29.98, up 21%.

The family's mystique is fed by its policy of avoiding the press. "No one really knows the full extent of their power," says John Aiken, an analyst at Dundee Securities Corp. in Toronto who covers Canadian banks and insurers. "They are an enigma, and I think they like perpetuating that." The father and sons all declined to comment for this story.

Like Berkshire Hathaway, Power Corp. relies on the insurance business for steady returns. Power Financial's core companies have been built up with numerous small acquisitions. The Desmarais keep cash high and borrowing low. Power Corp. had $5.3-billion in cash on its balance sheet at the end of 2008 and just $6.4-billion in long-term debt, according to Bloomberg data.

Power Corp.'s dividend payout in 2008 was $1.11 a share, up from 91¢ in 2007. That put the Desmarais' dividend cheque at more than $130-million. Paul Sr., directly and through holding companies, controls 48.6 million participating preferred shares of Power Corp., which carry 10 votes each. He also holds 72 million common shares, according to the company.

He doesn't collect dividends from Power Corp.'s other publicly traded units: Power Financial; Great-West; IGM Financial Inc., Canada's biggest mutual fund company; and Geneva-based Pargesa Holding SA, home of Power's European investments.

Power Financial CEO Jeffry Orr sits for an interview in a third floor boardroom of Power Corp.'s Montreal head office. The walls are lined with paintings by Jean-Paul Riopelle, a Quebec-born abstract expressionist. Elsewhere in the building is a collection of 18th-century neoclassical French antiques and a filing cabinet said to have been used by Talleyrand, Napoleon's foreign minister.

While earnings declined in 2008, Power Financial's $36.5-billion in revenue represented a jump of 27%, as receipts from Europe doubled, the company reported. "Our fundamental strategy hasn't changed," Mr. Orr says. He aims to grab market share in life insurance, retirement products and asset management as millions of households in North America and Europe, hurt by falling home and equity prices, set more money aside. "They are going to need to save," he says.

The brothers, who took over as co-CEOs in 1996, go into deep detail at dozens of board meetings a year, Mr. Orr says. "They're very active shareholders with active oversight, but they aren't running the businesses themselves," he says. "It's a very fine line."

Paul Jr. is Power Corp.'s chairman; Andre is deputy chairman and president. The father's only official title is chairman of Power Corp.'s executive committee.

A third generation is in training. Paul Desmarais III, 27, is a banker in the special situations group at Goldman Sachs Group Inc. in New York. His brother Nicolas, 23, has worked at consulting firm Bain & Co. in San Francisco. Both are members of Young Canadians in Finance, which sponsored discussions at a Montreal conference.

Paul Sr., in his ninth decade, now spends most of his time on his estate. He helped design the Sagard mansion, which was finished in 2003. The library is filled with architecture books, says Tom McBroom, the Toronto golf course designer who spent six years working with Desmarais on the meandering loop of fairways and greens strung out through the woods.

"I would stay over, and he would be up late at night in his housecoat going over the plans for the house," Mr. Mc-Broom says. Sometimes in the evenings, he says, Paul Sr. and Jacqueline would sit and talk about the old days -- when they had no high-powered friends and Paul, to save money, would drive one of his buses.

Yet the dynasty was already in the making. Sitting in the back as the bus bumped along were Paul Jr. and Andre, who would grow up to inherit their parents' business empire.

• Power Corp. and the Desmarias Family, 25 May 2006

;

Preview of Insurance Cos Q1 2009 Earnings

Scotia Capital, 20 April 2009

Canadian Lifecos - Another Tough Quarter but Capital Positions Remain Strong - Focus Turns to Credit

• Declining equity markets make for another tough quarter. Obviously, Manulife is the most sensitive, and with equity markets, on a Manulife weighted average basis, down 9% quarter over quarter (QoQ), its EPS should suffer to the tune of $0.88, as outlined in Exhibit 1. Despite its hedging efforts, Sun Life’s EPS should be hit by $0.45 EPS, consistent with its guidance, and could suffer more pain depending on any extraordinary hedging breakage costs. Due to Industrial-Alliance’s unusual Q4/08 practice of reserving more than what was needed under mark-to-market accounting in what was a throwaway quarter, the company has softened the blow of declining equity markets in Q1/09 (we estimate by as much as $0.15 in EPS), making the EPS hit from a 3% decline in the S&P/TSX just $0.07, as per guidance. Finally, for Great-West Lifeco, the least sensitive Canadian lifeco by far to equity markets due to its lack of U.S. variable annuity exposure and its decision to write Canadian segregated fund business with minimal guarantees, guidance suggests a $0.10 hit to EPS from a GWO weighted 6% decline in equity markets.

• We’ve significantly cut our 2009 and 2010 EPS estimates for Sun Life, largely due to credit concerns. We took $1.00 and $1.20, respectively, off our 2009 and 2010 EPS estimates for Sun Life, in part to reflect continued concerns with respect to credit (Sun Life makes us the most nervous in this regard) and in part to reflect continued profitability issues with respect to its sub-scale U.S. operations. GWO and MFC 2009 EPS estimates were each trimmed by $0.20 to reflect a more uncertain credit environment, with 2010 EPS estimates reduced by $0.20 (MFC) and $0.08 (GWO). With no sensitivity to U.S. credit, estimates for IAG were left unchanged. Our estimates assume markets end 2009 at 925 (S&P 500) and 10,000 (S&P/TSX) with a further 8% appreciation in 2010.

• We see healthy Q1/09 capital ratios. We peg MCCSR ratios at 232% for GWO, 202% for IAG, 218% for MFC, and 228% for SLF, as outlined in Exhibit 2, all well above regulatory minimums (120%), regulatory watch-list levels (150%), and comfortably above target ranges (175% or 180% to 200%). IAG can withstand a 17% drop in equity markets from current levels (i.e. S&P/TSX of 7100) before its MCCSR ratio hits 175%, and a 35% drop (i.e., S&P/TSX of 5450) before it hits 150% levels. We estimate MFC (on a do nothing basis) can withstand a 20% drop in equity markets from current levels (i.e., S&P 500 of 625) before its ratio hits 180%, and a 35% drop in equity markets (i.e., S&P 500 of 515) before it hits regulatory watch-list 150% levels.

• An increasing focus on credit. In our opinion, equity markets often move first and credit issues generally lag. While equity market volatility will continue to be an issue, we see 2009 unfolding with an increasing focus on credit. We believe the commercial real estate sector will continue to face strain as the macro economic downturn worsens. Moody’s now forecasts peak-to-trough commercial real estate price declines of 30%-plus, and while it did not speculate on commercial real estate loan delinquency trends, at over 5% currently, there’s clearly more downside (1991 peaks were 12%). It also indicated that commercial mortgage-backed securities (CMBS) delinquency rates are approaching 1% for more recent vintages, and delinquency rates should continue to head higher as economic fundamentals deteriorate (historical average is 0.6%), with CMBX spreads widening dramatically over the past 12 months.

• Sun Life most likely to suffer as credit continues to weigh. SLF’s track record in this regard speaks for itself. A total of $1.20 EPS in credit hits in the past two quarters (excluding LEH/Wamu and AIG) versus $0.04 for GWO, $0.21 for IAG, and $0.14 for MFC. As well, gross unrealized losses on fixed income securities trading below 80% of acquisition cost for more than six months represent 3.1% of fixed income assets for SLF, significantly higher than 1.8% for GWO, 0.8% for MFC and 0.4% for IAG.

• Relatively low CMBS exposure and generally of good quality – but NAIC filings show SLF’s CMBS portfolio is trading 57% of amortized cost, significantly below peers. CMBS relative exposures for the Canadian lifecos are significantly less than those of the U.S. lifecos, at 24%, 22%, and 12% of BV (ex AOCI) for GWO, MFC, and SLF, respectively, versus 43% on average for U.S. lifecos. As well, 90% and 85% of MFC’s CMBS investments are in relatively safer AAA tranches and pre-2005 vintages (75% and 86%, respectively, in the case of Sun Life) versus just 76% and 62% on average for U.S. lifecos. NAIC filings disclose the MV of the CMBS portfolio, and, assuming the unlikely case that CMBSs are written down to MV (liquidity constraints have blown out spreads on what are traditionally long-term holdings), we can estimate the after-tax EPS hit. Sun Life’s CMBS portfolio, with a market value at just 57% of amortized cost per the NAIC statements, is the most questionable (GWO is 95%, MFC is 85% and the average for the U.S. lifeco group is 78%). Furthermore, a full impairment down to MV would result in a $1.04 EPS hit for SLF versus $0.10 for GWO, $0.39 for MFC, and a very high $1.70-$2.00, on average, for the U.S. lifeco group.

• Relatively low U.S. commercial mortgage and real estate exposure and significantly less than U.S. lifecos. Total after-tax exposure as a percent of BV (ex AOCI) is just 7% for GWO, 24% for MFC, and 18% for SLF, well below the 79% for MET and PRU and the 45% average for the U.S. lifeco group. As well, defaults and losses on the lifecos’ commercial mortgage portfolios should perform better than CMBS conduits (especially those of the post-2005 vintage) because the loans are less leveraged (generally around 60% loan-to-value), were made on higher-quality property, and with higher-quality borrowers.

• U.K. financials hybrid exposure – a 50% write-down, although not expected, would hurt GWO by $0.74 EPS, SLF by $0.49, and MFC by $0.11. We suspect some hits will be taken in 2009, but given the long-term nature of these securities, we suspect the hits will be confined to only the riskiest preferreds, largely those in Tier 1. This would put GWO’s potential EPS hit in the $0.20-$0.30 range.

Great-West Lifeco Inc.
1-Sector Outperform – $27 one-year target, based on 1.8x 3/31/10E BVPS and 10.5x 2010E EPS
• We are looking for EPS of $0.45 for Q1/09, $0.01 below consensus.
• Another weak quarter for Putnam. We expect net sales of negative US$3-US$4 billion.
• We expect the decline in equity markets to hurt EPS by $0.10 and credit hits to be $0.03 EPS – while U.K. financial hybrid exposure weighs, we do not expect any significant hit in Q1/09 and expect a modest charge ($0.20) in 2009.

Industrial-Alliance Insurance and Financial Services Inc.
2-Sector Perform – $28 one-year target, based on 1.2x 3/31/10E BVPS and 8.5x 2010E EPS
• We are looking for EPS of $0.60 in Q1/09, $0.02 above consensus.
• A cleaner quarter than the rest of the group, with the decline in equity markets hurting EPS by $0.07 and credit hits hurting EPS by just $0.03. IAG is most likely to come out of the quarter with an increase in EPS estimates.
• Top line could very well continue to be weak. The negative top-line momentum in individual insurance sales will likely continue, building on a 14% YOY drop in Q4/08, a 16% YOY drop in sales in Q3/08 (22% organically), and a 1% YOY drop in Q2/08 (8% organically).

Manulife Financial Corporation
1-Sector Outperform – $30 one-year target, based on 1.6x 3/31/10E BVPS and 10.8x 2010E EPS
• We are looking for EPS loss of $0.40 for Q1/09, $0.05 below consensus.
• We expect the decline in equity markets to hurt EPS by $0.88 (per guidance), and credit hits of $0.08 in EPS, but increasing yields since Dec 31/08 could provide a modest boost.
• Conference call should have lots of talk about capital and acquisitions – likely no deal in immediate term.

Sun Life Financial Inc.
2-Sector Perform – $33 one-year target, based on 1.2x 3/31/10E BVPS and 9x 2010E EPS
• We are looking for EPS loss of $0.20 for Q1/09, $0.59 below consensus.
• We estimate the decline in equity markets to hurt EPS by $0.45.
• Credit makes us nervous with SLF. SLF’s recent track record has been one of more credit hits than its peers, as does its CMBS portfolio ($2B and trading at just 57% of amortized cost), and its fixed income security portfolio (3.1% of which is more than 20% below amortized cost for more than 6 months), and its $500 million (MV) U.K. bank hybrid portfolio.

__________________________________________________________

RBC Capital Markets, 3 April 2009

Q1/09 results to be weak, but better than Q4/08, in our view

We expect the four lifecos to report YoY declines in earnings per share, driven by challenging equity and credit markets.

• Our EPS estimates for Industrial Alliance are in line with consensus, while they are below for the other three companies.

• Directionally, the short-term pressure on earnings is greatest on Manulife, in our view, driven by a much greater exposure to equities.

• Sun Life has the most exposure to deteriorating credit while Industrial Alliance has the least, in our view.

• We are lowering our Q1/09 EPS estimates for three of the lifecos. Our estimate for Manulife is up significantly as we had updated our numbers for the company near the market trough during the quarter.

Lifecos continue to be levered plays on equity markets

The most important factor for lifeco shares is equity market direction as, in the short term, the health of their capital positions is most impacted by movements in equity markets. This is particularly true for Manulife. Also key to the lifeco shares is the direction of credit spreads, which we view as a broad indicator of credit quality, although we believe that Canadian lifecos have less credit risk than both U.S. lifecos and Canadian banks.

Our favourite lifeco shares are Sun Life's

We think valuation (0.86x book value) is too low even though the company's performance in credit has been weaker than peers. Sun Life has a stronger capital position than peers and lower exposure to equities than Manulife. The company has exposure to a recovery in equities in 2009 as well as the higher U.S. dollar. The management changes in the U.S. division as well as the potential for acquisitions of assets from distressed sellers gives us hope that performance in the U.S. division, as well as the firm's competitive position, might improve. We rate Sun Life's shares Outperform.

ING Canada's shares are also attractive

We like the shares of ING Canada as the company has less exposure to credit and equity market challenges than banks/lifecos, in our view, and as a result the company is less likely to post weak earnings results. The company is well-capitalized, with $425 million in excess capital and no debt. We believe the probability of an acquisition this year has risen, and that it could be a positive catalyst for shares of ING Canada. In our view, ING Canada deserves a P/B multiple at the upper end of the industry, as it has a superior track record of ROE and underwriting outperformance, conservative reserving practices, a risk profile that is lower than that of the average U.S. P&C insurer and very little balance sheet leverage.

Company-specific highlights

Industrial Alliance (May 6)

• We expect Q1/09E core EPS of $0.56, in-line with consensus estimates of $0.58. Our EPS estimate represents a decline of 29% versus Q1/08 but is up significantly from the $1.47 per share loss in Q4/08.

• Our estimated Q1/09 hit from equity markets is $5 million ($0.06 per share), given the 3% drop in the S&P/TSX Composite Index since the end of Q4/08.

• Relative to its peers, Industrial Alliance should benefit from its more conservative credit exposure (62.5% of its bond portfolio is invested in government or government-related issuers and only 6.7% of bonds are BBB-rated, versus 22.1% for the Big 3).

• We expect EPS growth to face a relatively easy margin comparison on new individual insurance sales (at 56% of new sales in Q1/08, strain was slightly above management’s mid-term guidance of between 50% and 55%).

• We expect year over year comparisons in the company’s P&C insurance business to benefit from what we perceive to have been a relatively uneventful quarter in terms of harsh winter weather, particularly versus the difficult conditions faced in Q1/08. Q1 is typically the worst quarter for P&C insurance profitability.

• We reduced our full year 2009 EPS estimate by an additional $0.04 to reflect the negative impact of the company’s $100 million subordinated debenture issuance, which closed on March 27.

Great-West Life (TBD)

• We expect Q1/09E operating EPS of $0.37, below consensus estimates of $0.45. Our EPS estimate represents a decline of 38% versus Q1/08 and 37% sequentially, as the company’s earnings should be negatively impacted by weak credit and equity markets.

• Our estimated Q1/09 hit from equity markets is $190 million ($0.20 per share).

• The company disclosed that a 10% drop in equity markets would result in a $245 million increase in actuarial liabilities (assumes a 10% decline in the value of T.H. Lee – which we have excluded in our estimate). Our estimated impact from equity markets assumes a 9% blended decline in Q1/09 (Great-West has exposure to more than one country’s equity markets).

• Our estimated Q1/09 hit from credit markets is $115 million ($0.12 per share).

• We expect credit-related costs to be larger in Q1/09 than they were in Q4/08. We expect continued reserve strengthening as the ratio of downgrades to upgrades of bonds continued to climb in Q1/09. (Exhibit 7)

• We expect Putnam to report assets under management of US$99 billion as at the end of Q1/09, down 41% YoY and 6% sequentially. We forecast a pre-tax margin of negative 5.0% in Q1/09, well down from 14.2% in Q1/08 but an improvement from the negative 20.7% margin reported in Q4/08.

• We expect U.S. operations, which includes Putnam and financial services, to generate an $8 million loss in Q1/09 compared to $108 million in Q1/08. The primary differences versus Q1/08 are the negative impacts from credit and equity market weakness and the sale of the healthcare division (which closed on April 1, 2008).

• We expect the mid-Q1/08 $13 billion acquisition of Standard Life’s payout annuity block of business to positively impact Q1/09 earnings for the European division, but will likely largely offset by weakness in global credit and equity markets.

• Despite the positive effect of a 19% average increase YoY in the U.S. dollar versus the Canadian dollar, we do not expect currency translation to be material to Q1/09E earnings versus Q1/08, given weakness in the U.S. division. In a more normal year, we estimate that a 10% decline in the Canadian dollar versus all other currencies would positively impact Great-West’s earnings by 5%.

Manulife (May 7)

• We expect Q1/09E core EPS of ($0.18), slightly below consensus estimates of ($0.10). Our EPS estimate is well below the $0.57 reported in Q1/08 but an improvement from the $1.24 loss per share reported in Q4/08.

• Our estimated Q1/09 hit from equity markets is $1.4 billion ($0.86 per share).

• The company disclosed that a 10% drop in equity markets would result in a $1.6 billion decrease in earnings; our estimated impact from markets assumes a 9% decline in Q1/09, based on the company’s exposure to different equity markets worldwide.

• Our estimated Q1/09 hit from credit markets is $140 million ($0.09 per share).

• We expect credit-related costs to be above the $128 million reported in Q4/08 and expect continued reserve strengthening as the ratio of downgrades to upgrades of bonds continued to climb in Q1/09. (Exhibit 7).

• We expect sales growth to decline year over year, due to volatile equity markets and overall economic uncertainty.

• Recent price increases in certain product lines (i.e. U.S. retail LTC) and the revamping of the company’s U.S. variable annuity product line (less generous guarantees and higher pricing) will also hinder sales growth, in our view.

• Product introductions and the success of the still relatively new MGA channel in Japan should continue to bolster insurance sales in Asia/Japan, although we expect the pace to slow from the triple-digit growth of recent quarters.

• We expect year-over-year growth in the Value of New Business (VNB) to be muted, hindered by weak expected wealth management product sales given the state of equity markets globally, and by our expectation that insurance sales (outside the U.S.) will also begin to slow.

• We expect currency fluctuations to only modestly impact earnings this quarter versus Q1/08, as strength in the U.S. dollar versus the Canadian dollar and Japanese Yen versus the U.S. dollar (beneficial for MFC) are largely offset by weak expected results out of non-Canadian divisions. Manulife’s U.S., Hong Kong, Japanese and reinsurance operations typically account for almost 70% of earnings.

Sun Life (May 7)

• We expect Q1/09E core EPS of ($0.09), well-below consensus estimates of $0.21. Our EPS estimate represents a decline of 110% versus Q1/08, but an improvement from the $1.25 loss in the prior quarter. We believe consensus estimates do not fully reflect the negative impact from credit and equity market weakness during the quarter.

• Our estimated Q1/09 hit from equity markets is $285 million ($0.51 per share).

• Management has disclosed that each 10% decline in equity markets would reduce net income by $275-350 million ($0.49- $0.63 per share). Our estimated impact from markets assumes a 9% blended decline in Q1/09.

• Our estimated Q1/09 hit from credit markets (including credit spreads) is $272 million ($0.49 per share).

• Approximately $200 million of our estimated $272 million impact is related to writedowns and downgrades; we estimate that downgrades increased by 20% versus Q4/08.

• The remaining negative impact from credit relates to spread widening (primarily affecting the U.S. fixed annuity business). We expect the negative earnings impact to result from the widening of spreads on asset-backed securities, as CMBS spreads ended the quarter largely unchanged, despite widening significantly during the three months.

• We expect year-over-year growth in the Value of New Business (VNB) to be muted, hindered by weak expected wealth management product sales given the state of equity markets globally, and by our expectation that insurance sales will be challenged by the weakness in global economies.

• We expect MFS to report almost 60% lower YoY net income in Q1/09, primarily due to the impact of weak equity markets on AUM. Operating margins are likely to stabilize at 18% (they were 17% in Q4/08) but are well down from the 32% level in Q4/07.

• We expect currency translation to only minimally positively impact Q1/09E earnings versus Q1/08, as reduced earnings in the U.S. largely temper the positive effect of a 19% average increase YoY in the U.S. dollar versus the Canadian dollar. In a more normal year, we estimate that a 10% decline in the Canadian dollar versus all other currencies would positively impact Sun Life’s earnings by 5%.

Power Financial (May 12)

• We expect Power Financial to report Q1/09E EPS of $0.46, in line with consensus estimates. Our EPS estimate represents a decline of 31% versus Q1/08 and 22% sequentially.

• We expect Great-West to report Q1/09E EPS of $0.37, down 38% versus Q1/08. Great-West accounts for 70% of Power Financial’s Q1/09 estimated EPS.

• We expect IGM Financial to report Q1/09E EPS of $0.52, down 35% versus Q1/08. IGM Financial accounts for 22% of Power Financial’s Q1/09 estimated EPS.

• Pargesa and Other income are expected to report earnings of $26 million in Q1/09, above the $4 million recorded in Q1/08.

• Power Financial’s shares do not typically trade based on earnings as investors usually focus on net asset value.

Power Corporation (May 13)

• We expect Power Corporation to report Q1/09E EPS of $0.47, in line with consensus estimates. Our EPS estimate represents a decline of 27% versus Q1/08 and 12% sequentially. We expect lower earnings YoY at Power Financial to more than offset higher contributions from investment funds.

• Similar to Power Financial, Power Corporation’s shares do not typically trade based on earnings as investors usually focus on net asset value.

ING Canada (May 13)

• We expect Q1/09E operating EPS of $0.48, in line with consensus estimates. Our operating EPS estimate represents a decline of 14% versus Q1/08 and 23% sequentially. Note, consensus EPS is a blend of operating and GAAP EPS.

• The primary reason for our lower year over year EPS estimate is our expectation for lower interest and dividend income – the company’s investment portfolio (excluding cash) decreased from $7.2 billion to $6.1 billion in the past year.

• We believe a more benign winter for many regions of the country will positively impact year over year comparisons for Canadian P&C businesses. The company’s Q1/08 results were also negatively impacted by a $10 million increase in provisions for its Alberta auto business.

• We expect a 3.1% increase in earned premiums in Q1/09 versus Q1/08 primarily due to an increase in the number of insured risks and insured amounts in personal property and rate increases in personal auto.

• ING Canada began raising Ontario auto rates several quarters before its peers, however, based on the most recent available data, the industry’s rate increases have begun to close the rate gap (the entire industry raised rates by an average of 5.6% in 2008). Although being an early mover has hurt premium growth for ING Canada in recent quarters, we expect underwriting profitability and ROE to benefit longer term.

• Book value growth will once again likely be slowed by continued weakness in equity markets (although ING Canada’s exposure to common equities has decreased from 25% of invested assets to 12%).

• We estimate a net realized investment loss of $20 million (pre-tax) in Q1/09, given the combination of a 3% drop in the S&P/TSX Index and the company’s $134 million unrealized loss position on common equities as at Q4/08.

;

Preview of Life Insurance Cos Q3 2007 Earnings

RBC Capital Markets, 11 October 2007

The insurers report Q3/07 results between October 30th and November 8th. Macro environment mixed for lifecos in Q3/07

• North American and Japanese equity markets were up on a year-over-year basis, which benefits all lifecos, but Great-West least so. Japanese equity markets were down sequentially, which may have a negative impact on Manulife's Japanese variable annuity reserves.

• We expect currency translation to negatively impact the big 3 lifecos' earnings growth by 2% on average with Manulife being the most impacted (3% to 4%). The Canadian dollar strengthened against the US Dollar (+6.2%) and the Japanese Yen (+9.1%), but weakened against the Euro (-0.9%) and the British Pound (-1.5%) on a year-over-year basis. Similar to Q2/07, we expect currency translation to have a negative impact on book value growth in Q3/07. Industrial Alliance is not impacted by currency translation.

• There were no major credit losses we are aware of, which benefits Manulife and Sun Life the most since they have more exposure to lower quality classes of bonds.

• Canadian long-term interest rates were up QoQ and YoY on average (though end of period rates at Q3 had declined vs Q2), while US and Japanese rates were down sequentially and on a year-over-year basis on average. Lower long-term interest rates negatively impact all lifecos, but Industrial Alliance and Manulife most so. If Canadian interest rates remain at current levels, they should have a positive impact on H2/07 earnings, though lower rates in the US and Japan may offset any positive benefit that Manulife would get from higher interest rates in Canada.

We expect Great-West to lead the group with EPS growth of 19%. We believe that main drivers for YoY growth at Great-West are: (i) increased profitability from European operations; (ii) earnings contributions from 401(k) acquisitions made in H2/06 and decreased integration expenses related to those acquisitions; and (iii) earnings contributions from the Putnam acquisition which closed on August 3rd.

Sun Life (October 30)

• We expect Q3/07E core EPS of $0.98, below consensus of $1.00. Our EPS estimate represents growth of 5% versus Q3/06 and 2% sequentially.

• Positive variable annuity flows in Q3/07 would provide additional confidence to investors that wholesaler productivity improvements experienced in Q2/07 are sustainable. New products such as Sun Life’s SunDex Bonus Fixed annuity, which was launched at the end of July 2007, may have a positive impact on annuity flows in the quarter. Improving performance in the annuities division is important as it accounted for 75% of US earnings in 2006 (including fixed annuities and equity indexed annuities).

• The growth rate of the non-MFS related Value of New Business for the 12 months ending June 30, 2007 lagged the growth in individual insurance and health sales, which implies a change in product mix or a deterioration in margins. Price increases implemented in Q1/07 for US individual insurance may have a positive impact on margins in Q3/07.

• Sun Life is expected to recapture a large portion of the strain recognized in Q4/06 and Q1/07 in H2/07 due to the implementation of a funding structure in June 2007. We estimate that the recapture of strain may benefit H2/07 earnings by $80-$120 million (pre-tax).

• We expect currency fluctuations to negatively impact earnings by approximately 2% this quarter versus Q3/06 due to the Canadian dollar appreciating by 6.2% YoY versus the US dollar. Partially offsetting this would be the appreciation of the Pound (+1.5% YoY) versus the Canadian dollar. US operations account for 33% of total earnings and U.K. operations account for approximately 8% of total earnings.

• We expect currency translation to negatively impact Q3/07E book value per share by $1.09.

Great-West Life (October 31)

• We expect Q3/07E operating EPS of $0.63 above consensus of $0.61. Our EPS estimate represents growth of 19% versus Q3/06 and 3% sequentially.

• Great-West closed the Putnam transaction on August 3rd. We are expecting Putnam to contribute $24 million in net income or $0.03 in Q3/07.

• US financial services should benefit from favourable comparables due to (i) poor morbidity experience in Q3/06 that impacted earnings by approximately US$12 million and (ii) 401(k) related acquisitions made in H2/06. Management indicated Q3/07 should be the last quarter of integration expenses (US$5 million) related to the acquisition of the US Bank business.

• We expect the European division to continue to positively surprise investors, based on:

• the strengthening British pound against the Canadian dollar;

• life reinsurance operations that are in a position to gain market share from the larger players, as primary insurers look to diversify their counterparty exposures; and

• the shift of acquired investment portfolios that back payout annuities toward higher yielding securities.

• We expect currency translation to negatively impact Q3/07E earnings by approximately 1% to 2% this quarter versus Q3/06. Great-West’s US and Reinsurance earnings should be negatively impacted due to the strengthening of the Canadian dollar versus the US dollar (up 6.2% YoY). Partially offsetting this is our expectation of positive earnings translations from Great West’s European operations due to the strengthening of the Euro (up 0.9% YoY) and the British Pound (up 1.5% YoY) versus the Canadian dollar. US operations (including Reinsurance and excluding Putnam) account for approximately 32% earnings, while European operations account for approximately 18% of earnings.

• We expect currency translation to negatively impact Q3/07E book value per share by $0.50.

Manulife (November 6)

• We expect Q3/07E core EPS of $0.70, slightly below consensus of $0.71. Our EPS estimate represents growth of 10% versus Q2/06 and (1)% sequentially.

• We believe that Q3/07 Japanese variable annuity sales results may top Manulife's previous best quarter of US$1.05 billion (Q1/06). Manulife's shares should react positively to an improvement in Japanese variable annuity sales as sales had declined to approximately US$400 million per quarter since July 2006, when a key product was shelved for regulatory reasons.

• We are expecting a sizeable year-over-year increase in the Value of New Business (VNB) driven primarily by (i) improved variable annuity sales results in Japan; (ii) our expectation that insurance sales will continue to be strong following a 15% increase in sales in Q2/07 compared to Q2/06 and (iii) an easy comparable due to Manulife’s Q3/06 VNB of $384 million that was negatively impacted by the shelving of a key variable annuity product in Japan.

• Positive equity market returns and good credit conditions should benefit Manulife’s earnings from (i) surplus (ii) variable annuities in the US and Japan and (iii) its John Hancock Fixed Investment division.

• The strengthening Canadian dollar versus the US dollar (up 6.2% YoY) and the Japanese Yen (up 9.1% YoY) should translate into an earnings drag of approximately 3% to 4% compared to Q3/06 for Manulife. Manulife’s US operations account for 45% of earnings and its Japanese operations account for 8%.

• We expect currency translation to negatively impact Q3/07E book value per share by $0.89.

Industrial Alliance (November 7)

• We expect Q3/07E core EPS of $0.78, above consensus of $0.77. Our EPS estimate represents growth of 13% YoY versus Q3/06 and 1% sequentially.

• At a recent presentation, management indicated that individual insurance sales would increase in H2/07 versus H2/06 while strain from individual insurance sales would decrease in line with its guidance of 50% to 55%. If Industrial Alliance delivers these results, we believe its shares would react positively.

• In August, IAG reported it had approximately $200 million of non-bank issued asset backed commercial paper (ABCP) and that it transferred approximately 50% of its exposure to its general fund in order to protect investors invested in money market funds from any potential losses. We expect IAG to provide an update on any write-downs related to its ABCP when it reports its earnings.

Power Corporation (November 8)

• We expect Power Corporation to report Q3/07E EPS of $0.69, up 19% versus Q3/06. The increase in earnings is a result of our expectation that Power Financial’s Q3/07 earnings will increase 19% year over year (see below). Power Financial represents approximately 100% of Power Corporation’s Q3/07 estimated EPS since the remaining component “Other Assets” is expected to have a negative contribution to earnings in Q3/07.

Power Financial (November 8)

• We expect Great-West to report Q3/07E EPS of $0.63, up 19% versus Q3/06. The expected increase in Great-West’s earnings is driven by: (i) integration of announced acquisitions including Putnam; (ii) continued strong growth in Europe; and (iii) potential improvements in US healthcare. Great-West represents 75% of Power Financial’s Q3/07 estimated EPS.

• We expect IGM Financial to report Q3/07 EPS of $0.81, up 13% versus Q3/06. IGM Financial represents 23% of Power Financial’s Q3/07 estimated EPS.

• We expect Pargesa to report an increase in core earnings of approximately 40% in Q3/07 versus Q3/06. The expected increase in Pargesa’s earnings is driven by: (i) increased ownership in Lafarge, Pernod Ricard and Suez; and (ii) increased dividend payments at Total, Suez, and Lafarge. Pargesa represents 3% of Power Financial’s Q3/07 estimated EPS

Valuation

IAG Our 12-month price target of $45 is a combination of our P/E, price to book and embedded value methodologies. It implies an approximate forward multiple of 13.0x earnings, compared to the 5-year average forward multiple of 11.8x. Our P/B target of 2.1x in 12 months is at the low end of our target for lifecos given a lower expected ROE. Our target P/E multiple of 13.0x 2008E earnings is higher than the company’s 5-year average forward P/E, as we believe Industrial Alliance is well positioned to benefit from higher interest rates, has increased its geographic diversification and has limited exposure to deteriorating credit quality. Offsetting those positives are uncertain equity markets and increased competition in the Canadian individual insurance market. Our target multiple on embedded value of 1.4x is lower than for the other two domestic lifecos, reflecting the mature nature of the Canadian insurance industry.

GWO: Our 12-month price target of $40 is a combination of our P/E and price to book methodologies. It implies an approximate forward multiple of 13.9x earnings, compared to the 5-year average forward multiple of 13.4x. Our P/B target of 3.1x in 12 months is at the high end of our target for lifecos given a higher expected ROE than average. Our target P/E multiple of 13.5x 2008E earnings is in line with the company’s 5-year average forward P/E to reflect potential benefits from recent acquisitions, a more accommodating currency and limited exposure to deteriorating credit quality. Offsetting those positives are uncertain equity markets and increased pressure on US healthcare earnings.

MFC: Our 12-month price target of $47 is a combination of our P/E, price to book and embedded value methodologies. It implies an approximate forward multiple of 14.5x earnings, compared to the 5-year average forward multiple of 13.1x. Our P/B target of 2.9x in 12 months is at the high end of our target for lifecos given a higher expected ROE than average. Our target P/E multiple of 14.5x 2008E earnings is above the company's 5-year average forward P/E to reflect potential benefits from higher interest rates, rapidly growing value of new business, and potential for upward EPS revisions as our expected earnings growth is below what the company has historically achieved and is targeting, partially offset by deteriorating credit quality, uncertain equity market performance and lack of benefits from transformational acquisitions. Our target multiple on embedded value of 2.0x is higher than for the other two Canadian lifecos, reflecting higher prospects for growth in value of new business, because of the company's positioning in Asia and the US

SLF: Our 12-month price target of $57 is a combination of our P/E, price to book and embedded value methodologies. It implies an approximate forward multiple of 12.5x earnings, compared to the 5-year average forward multiple of 12.1x. Our P/B target of 2.1x in 12 months is at the low end of our target for lifecos given a lower expected ROE. Our target P/E multiple of 13.0x 2008E earnings is above the company's 5-year average forward P/E to reflect potential benefits from higher interest rates, partially offset by deteriorating credit quality, uncertain equity market performance and lack of benefits from transformational acquisitions. Our target multiple on embedded value of 1.6x reflects the mature nature of the Canadian insurance industry and superior growth prospects in Asia.

POW: Our 12-month target price of $43 is based on a 12-month target NAV of $50 target price and a discount to NAV of 15% which is the mid-point of the average discount to NAV over the past 17 years (14%) and the past 5 years (16%). The current discount to NAV is 14%. Our target NAV is based on a $45 price target for Power Financial.

PWF: Our 12-month target price of $45 is based on a target NAV of $49 and a discount to NAV of 9% which is slightly above the trailing 5-year average of 8% and below the trailing 16-year average of 13%. Our target NAV is based on (1) a target price of $40 for Great-West which implies an approximate forward multiple of 13.9x earnings, compared to the 5-year average forward multiple of 13.4x (2) a target price of $59 for IGM Financial which is based on a sum-of-the-parts NAV approach. We separately value: the mutual fund business; the non-mutual fund business; and IGM's 4.2% stake in Great-West Life.; (3) a price of C$113.13 for Pargesa which is in line with the current stock price.

;

Power Financial & GDF-Suez

The Globe and Mail, Eric Reguly, 4 September 2007

The blockbuster merger of Suez SA and Gaz de France SA, formally announced yesterday, has put Montreal's billionaire Desmarais family at the centre of the world's third-largest power utility.

The family's impeccable investment and political connections paid off: The Desmarais got there with a little help from their friends - Albert Frère, their European partner and agent, and none other than Nicolas Sarkozy, the new President of France.

GDF-Suez, as the new company is to be called, will have a market value of €90-billion - the equivalent of $130-billion - and will count Groupe Bruxelles Lambert (GBL) among its top shareholders. GBL is the Brussels investment company ultimately controlled by the Desmarais family, through their Power Corp. of Canada empire, and Groupe Frère Bourgeois, where Mr. Frère and son Gérald reign supreme.

At last count, GBL held a 9.5-per-cent equity stake, and 13.2 per cent of the votes, in Suez. Those stakes will be diluted by half in the roughly one-for-one share swap merger with Gaz de France. But the enlarged company, which will be 35 per-cent owned by the French state, will have the market and industrial presence to qualify as a "global energy leader," the companies said in a press release.

Suez is one of Europe's biggest sellers and traders of natural gas and electricity. Gaz de France, owned 80 per cent by the French state, is Europe's biggest gas network operator. Together they will have annual revenue of €72-billion. GDF-Suez will rank as Europe's top buyer and seller of gas and will own the continent's biggest gas transmission and distribution businesses. It will be the global leader in liquefied natural gas (LNG), the fastest-growing energy sector.

In the power industry, only OAO Gazprom, the Russian gas producer, and Electricité de France, the state-run operator of 58 nuclear reactors, will be bigger.

Mr. Frère, who is chairman of GBL and vice-chairman of Suez, has been one of the biggest advocates of the Suez-Gaz de France merger. The deal was announced 18 months ago as a defensive measure; the Italian utility Enel had made a hostile offer for Suez (though Suez and Gaz de France had secretly contemplated a union for years). It immediately ran into political and valuation problems and was declared moribund several times.

Politically savvy French investors knew no progress would be made until the May French election was out of the way.

Over the summer, negotiations reopened among Suez, Gaz de France and the Mr. Sarkozy's government. The President reportedly was in favour of the merger but only if Suez were to spin off its hefty environmental arm, whose businesses operate water treatment plants and waste services. The spinoff, resisted by Suez, would reduce Suez's valuation. This would put it roughly on par with Gaz de France's, allowing a true merger of equals.

The Financial Times reported yesterday that a phone call to Mr. Sarkozy from Mr. Frère in the past few days helped to break the impasse. The exact nature of the discussion is not known. But the timing of the merger announcement suggests the phone call and meetings with other key Suez shareholders, including Areva, the French nuclear reactor builder, built momentum for the deal. In the end, Suez, as Mr. Sarkozy wanted, agreed to spin off 65 per cent of the environmental business to Suez shareholders.

Power Corp. was not available for comment on the Labour Day holiday. It is not known whether the Desmarais family got involved in the discussions with the government. Paul Desmarais Sr., the chairman of Power Corp.'s executive committee, and sons Paul Jr. and André know Mr. Sarkozy. The President reportedly has gone to the Desmarais' Charlevoix estate in Quebec for private holidays.

As the family's point man in Europe, it is more likely the Desmarais family let Mr. Frère handle the merger negotiations. Mr. Frère is one of the most powerful businessmen in Europe and has had a close relationship with Paul Sr. since the late 1970s, when the two men each had minority investments in Paribas, a French investment bank. Since then, they have created one of Europe's top industrial holding companies.

GBL has investments valued in the billions of dollars. As of the end of July, they included 3.9 per cent of Total, the French energy giant, 26.3 per cent of Imerys, a minerals processing company, 17.3 per cent of Lafarge, the world's biggest cement and building materials company, and 6.2 per cent of Pernod, the second-biggest wine and spirits business. Last year, GBL had adjusted net assets of €16.7-billion.

The Desmarais and Frère families have ambitious goals as investors and being passive isn't one of them. The stated goal of Pargesa, the holding company directly atop GBL, is the creation of long-term value and "to exercise control, or major influence, over the companies in which the Group holds interests."

Already, there is speculation that GDF-Suez, backed by the French government, GBL and the other powerful shareholders, will embark on an acquisition spree after the merger closes next year. Analysts think takeovers are inevitable, if only because the new company will have relatively little debt.

;

Great-West Buys Putnam

Scotia Capital, 2 February 2007

• We believe attractively financed deal has limited downside and provides an opportunistic entry point into a business that only makes sense in the long run. No question in our minds that if you're in the retirement business in the U.S. (as is GWO in 401(k) business and 457 business) than it makes sense to be in the U.S. mutual find business, provided you can find an attractive entry point. We believe the effective and tax-efficient financing of the deal, a desperate seller, and what has proven to be a turnaround story of late; all point to what we believe to be an attractive opportunity. Financing the transaction with a limited number of shares, and thus capitalizing on a US$550 million tax asset to help finance the deal, perhaps put the company at an advantage over other bidders, as did its employee friendly plan to not "slash and burn" but rather assist Putnam as it more or less continues to "synergize itself". Putnam management "buy-in" is key, in our opinion, and will own about 5%-6% of Putnam.

• It’s a margin improvement and net sales improvement story - but that's what Putnam has been doing. Net sales have improved from negative US$63 billion in 2003 to negative US$52 billion in 2004 to negative US$34 billion in 2005 to negative US$21 billion in 2006, as gross sales are now running at least 10% better, and redemption rates have come down from levels north of 25% to those in line with industry average (18%-20%). EBITDA margins, which Putnam now suggests are running at 20%, have improved substantially as well, but still have lots of room to improve to be near industry averages of 25%-30%. Finally, for a company that is one-half the size it was about five years ago, it has maintained distribution shelf space in both domestic retail (60% of its US$192 billion in assets), and domestic institutional (20% of its assets) as well as international (20% of assets). For the first time in several years assets are up YOY (2006 AUM are up 2% over 2005).

• We get $0.06 EPS accretion in the first 12 months following the Q2/07 close assuming the company's target is achieved, and limited downside risk of $0.03 dilution if there is no margin improvement. The math is relatively simple. The "planned improvement" scenario, which as per management, implies about 8 to 10 points of EBITDA margin improvement (2/3rds due to cost and 1/3 due to revenue) and net flows going from negative US$21 billion in 2006 to negative US$1 billion in 2007, yields $242 million in Putnam earnings (based on the company suggested 14.5x multiple on the US$3 billion price for Putnam assuming these "planned improvements"). Removing current inter-company capital, loans, overhead, as well as earnings from T.H. Lee Partners, GWO management suggests the margin on the business is below 20%, or in the 16% range. Thus, assuming the 8 to 10 points of margin improvement as well as the improvement in net sales, i.e., the assumptions underlying the $242 million in Putnam earnings, we get the "target" EPS accretion scenario of $0.06. Assuming no improvement in margins we get EPS dilution of $0.03, and assuming margins improve 5 points over and above the target we get $0.11 in EPS accretion. Naturally margin improvement goes hand-in-hand with fund flow improvement, but if fund flows remained at negative US$20 billion next year but the margins improved to the targeted levels we would decrease our EPS estimates by $0.02 maximum. Details are below in Table above.

• We see several sources of margin improvement. One, we believe GWO will get some expense relief as retention bonuses are "relaxed" to some extent going forward. Retention will be fostered through a new employee ownership plan. Two, we believe the absence of some Marsh & McLennan overhead charges, as well as the absence of inter-company shared expenses will help margin improvement. Thirdly, we believe that leverage from an extensive internal cost-cut program, one that has cut the employee base in half over the last several years, will increasingly impact the bottom line. Finally, this is a leverage game, and we believe that with redemption rates and gross sales growth rates continuing to improve, there is substantial upside.

• We believe our estimates are conservative for several reasons. One, we haven't incorporated the impact of the company purchased 25% ownership in the private equity firm T.H. Lee Partners. Management indicated it sees the opportunity to improve cash flow matching in its Canadian individual insurance fund with the T.H. Lee assets. Lift here, as well as additional investment income, could be in the $0.02 per share range. Two, we haven't incorporated any additional revenue synergies with GWO's exiting retirement businesses, namely its 401(k) and 457 businesses. Three, we haven't incorporated the potential benefit from GWO "rejigging" any current Putnam distribution or fund management agreements. Four, we have conservatively increased our EPS by only $0.04 in 2008 (as opposed to the "targeted" $0.06 per share) and by only $0.01 in 2007 (as opposed to the targeted $0.03, assuming the deal closes at the end of Q2/07). Five, financing is not finalized yet. Equity financing could be lower than the assumed $1.2 billion maximum.

• We expect Power Financial to contribute about one-half of the maximum $1.2 billion equity financing. On the call Power Financial indicated it likely would contribute less than its ownership (currently 70.6%) but more than the 26% in GWO stock it purchased to support the Canada Life deal.

• Favourable views from rating agencies. With little balance sheet impact (debt-to-total capital ratio will climb from 30% to 32%, far below the 35% leverage ratio the company had at the close of the Canada Life deal), the initial reaction from Moody's, S&P and Fitch have all been positive.

__________________________________________________________

Financial Post, Duncan Mavin, with a file from Sean Silcoff

Great-West Lifeco Inc.' s US$3.9-billion acquisition of Putnam Investments nabs the Canadian life insurance company not only a large-scale asset manager in the United States but also a stake in a significant player in the red-hot private-equity industry.

As part of GWL's acquisition of Putnam, the Winnipeg-based life insurer -- a unit of Power Financial Corp. -- gets a 25% stake in Thomas H. Lee Partners, a private-equity firm with funds of US$19.7-billion.

The Putnam deal, announced yesterday after months of speculation, values the stake in T.H. Lee at US$350-million.

Robert Gratton, chief executive of Montreal-based Power Financial, described the investment in T.H. Lee as "one of [Putnam's] jewels."

That being said, acquiring Putnam's stake in T.H. Lee was not crucial to the deal, said GWL chief executive Ray McFeetors.

"But it is a key opportunity to Great-West Life," Mr. McFeetors said. "It's rare, if ever, that you can acquire an interest in an entity like this. We're very excited about the financial opportunity that it brings as a seasoned private- equity investor."

The global private-equity industry has grown at a rapid pace in recent years. Private-equity funds are forecast to raise up to US$500-billion of new capital in 2007, up from a record US$432- billion record set last year.

However, GWL's acquisition of a stake in a private-equity firm is the first foray of its kind by a Canadian life insurer, and surprised some analysts. However, the deal could provide a way for GWL to grow its equity investments without becoming overexposed to the instability of the equity markets.

"It's an interesting back door into investing in equities," said Genuity Capital Markets analyst Mario Mendonca.

GWL will take a share of the returns on T.H. Lee's equity investments "without getting the volatility that you would get from investing directly in equities that would then have to be marked to market for accounting purposes," Mr. Mendonca said.

T.H. Lee's six funds are expected to return profits over a long period of time, and this would match well against GWL Canada's insurance policy liabilities.

Mr. McFeetors said the deal to buy Putnam Investments from U.S. insurance brokerage Marsh & McLennan Cos. Inc. was concluded at two o'clock on Thursday morning and has been in the works since last October.

Putnam is the 10th-largest mutual fund manager in the United States with US$192-billion of assets under management.

It has operations in Europe and Japan as well as the U.S. The Boston-based company has a strong brand in the U.S. investment management industry and has 169,000 financial advisor relationships.

Putnam will operate as a separate business unit within GWL, and existing management of the company will also be retained after the deal, Mr. McFeetors said.

"Putnam is one of the oldest and largest investment managers in the U.S. and carries credible brand equity," said Desjardins Securities analyst Michael Goldberg. The acquisition is an "opportunistic expansion of [GWL's] business platform," Mr. Goldberg said.

However, Putnam has also had its problems in recent periods.

The company's reputation took a hit when it was caught up in a fund-share-trading scandal in the U.S. mutual fund industry in 2003, and it has also suffered from low margins and net redemptions of investor funds.

Executives at Putnam said they have a plan to improve margins, while net fund outflows have slowed.

The asset manager saw total net redemptions of US$63-billion in 2003, and US$52-billion in 2004. However, that figure was down to US$21-billion last year, and Putnam is forecasting net redemptions of less than US$1-billion this year.

"We don't think we're catching this at the bottom, we're catching this as it's rebounding already," said Power Financial's Mr. Gratton.

__________________________________________________________

Financial Post, Sean Silcoff

It's well known in Canadian business that when Paul Desmarais is buying, it's not a good time to sell, and when he's selling, it's not a good time to buy.

The wily 80-year-old billionaire, and his two sons, Andre and Paul Jr., sit atop Power Corp. of Canada, which indirectly controls Canada's largest mutual fund firm, IGM Financial Inc., and multinational insurance giant Great-West Lifeco Inc, (GWL) among other global interests.

That you probably already knew. If you needed reminding, Power got there in part with some shrewd deal-making, including the sale of Montreal Trust and Consolidated Bathurst, a pulp and paper firm, in 1989, at the top of the market.

It is that track record that won a lot of goodwill from the market yesterday, because there are many aspects to GWL's purchase of U.S. mutual fund firm Putnam Investments for US$3.9-billion that had some observers quietly wondering whether the Desmarais clan had lost its Midas touch.

"They're buying something that isn't very good, so we have to put a lot of faith in management," Genuity Capital Markets analyst Mario Mendonca said. "If it was another company ? I'd be tempted to downgrade the stock."

Putnam hardly seems like typical quarry for Power. The sullied mutual fund unit of Marsh & McLennan Cos. Inc. was likely worth more than US$20-billion in 2000 when it had US$371-billion under management.

That asset base has fallen by almost half since then, due to poor fund performance in the early 2000s, and then Putnam's role in a U.S. mutual fund industry scandal involving price-fixing, bid rigging and fund trading.

The results since then have been, what's a kind way to put it, relatively less awful. Net redemptions improved from US$63-billion in 2003 to US$21-billion last year. A new executive team led by Charles Haldeman improved margins and put better managers in place of some key funds. Putnam is now a place where rules are followed, and closely.

Putnam is seen as a loser, with a lot to prove. The mutual fund industry in the U.S. is still under pressure, with heavy redemptions. A turnaround "is going to take a very long time," said a top executive with a Canadian asset management firm. "It's damaged goods."

Enter Power. In fact, Putnam is exactly what GWL/Power has been looking for, said Robert Gratton, executive chairman of Power Financial (the holding company between Power and GWL). "We don't think we're catching this at the bottom, [but] as it's rebounding already."

In fact, for a group that has been eyeing expansion outside of Canada for three years, Putnam is a sensible catch. The Haldeman team is not just staying on, but throwing in $200-million of their own skin into the purchase. That is a good sign. They believe net redemptions will shrink to less than US$1-billion this year, and they can get margins up from 20% to 27%, close to industry averages. The bad rep from a few years back has passed, Power/GWL executives concluded after interviewing hundreds of industry professionals. In fact, Power shows no interest in actively managing Putnam, believing the upside will come if the team they've inherited just do their jobs.

"We were not fazed by the fact there were temporary market conditions," Mr. Gratton said. "We're in these businesses for the long term. The demographics are there. The market will continue to grow. In the U.S., our focus has been and continues to be of retirement accumulation of savings and retirement. Mutual funds are an essential component of any retirement plans."

There's growth in them thar Boomers. Plus, more U.S. firms are shedding their managed pension plans: The amount of Fortune 200 firms with defined benefit plans shrunk to 53% last year, from 82% in 1996, leaving more people to control their own retirement nest eggs through tax-deferred 401(k) plans, according to Mercer Human Resources Consulting.

That means more mutual fund buyers. "That's a very big plus," Mr. Gratton said.

Putnam may be no overnight success story, and there are still risks. But this is a long-term bet: that a robust 70-year-old business will get over a hiccup and return to form. Just imagine 10 years from now. Marsh will look like it sold out of a solid business at a low point. And everyone will be talking about how old Paul Desmarais made yet another savvy and well-timed deal, smiling all the way.

__________________________________________________________

Financial Post, Sean Silcoff

Great-West Lifeco, a subsidiary of Power Financial Corp., yesterday said it would buy Putnam Investments's mutual fund management business and a 25% stake in T.H. Lee Partners for US$3.9-billion. The Financial Post's Montreal bureau chief, Sean Silcoff, spoke to Power Financial executive chairman Robert Gratton and chief executive Jeffrey Orr about the deal. Here is an excerpt of their conversation:

Q Why are you buying Putnam, a company that seems in need of a fix?

JO The existing management team is already three years into a plan to have Putnam back into a growth mode, and that plan is well-developed and well underway. So we're coming in, we think, at a very good time. We also understand the asset management business very well. So we can add our expertise to the expertise management already has.

Q Is the turnaround working?

RG If one looks at the net flows, which have been negative for four or five years, there's absolutely a vewry clear pattern of those numbers improving in the last three years in a dramatic fashion. The performance of the funds themselves has also changed in a very significant fashion over the last three years. We don't think we're catching this at the bottom, we're catching this as it's rebounding already.

Q Putnam was at the centre of a scandal in the mutual fund industry in the U.S. earlier this decade. Is there any residue left over?

JO We think that has faded significantly. All of our work talking to financial advisors and distributors in the U.S. would confirm that. There is a great store of goodwill in the Putnam name.

RG We saw that especially in the institutional market, which is of course even more sensitive to that than the broad retail market. There's a clear, positive perception there now about the name and reputation. And we've surveyed that before we bought.

Q Did you feel it was important to be more careful with this purchase? How did you approach differently than past deals?

RG I hope we've always been extremely careful on each one. I believe this was no different than the others -- the same level of due diligence, the same review. What's different about it is with this one there's no combination anticipated with another company because we don't have a mutual fund company in the U.S., whereas the other large acquisitions we've made in the last 10 years all had some form of combination. Therefore the action plan and the business plan that results from this one is different. The improvements to the business of Putnam will be internally generated by management. When we approached this one we had to be absolutely satisfied the team there was broad enough, competent enough to implement the full business plan.

Q And you had to be absolutely satisified all residue of scandal had to be gone?

RG Another piece of the reputation has to do with the compliance area, because they had regulatory problems. They've been through compliance audits, reviews by outside people each year. The results coming out of that are very very positive. There's a culture of compliance now.

Q Why did you want to buy into mutual funds? It's a sector that hasn't done well lately. Did you smell an opportunity?

RG Indeed. We're in these businesses for the long term. We're extremely bullish on the market for value-added financial services for the next 15 to 20 years. The demographics are there. The market will continue to grow. One of the best products is the range of mutual funds that one can buy. So in the U.S. our focus has been and continues to be of retirement accumulation of savings and retirement. And mutual funds are an essential component of any retirement plan. That is why we got there. We were not fazed by the fact there were temporary market conditions.

Q Why did Power Financial choose GWL to be its growth platform in the U.S.?

RG Lifeco chose itself first. They've got a very large business there already, and [when management reviewed] their strategy with us in terms of expanding their U.S. business, we identified mutual funds as a good place to be. But some other day, it could be Investors (Power Financial subsidiary IGM Financial) that comes forward with something they'd want to buy. There's room for [Great-West] and IGM in Canada; there sure is room for Lifeco and IGM in the United States.

Q Do you think you got a good price?

RG We think we got the company at the right price. And we did not buy it for some optimistic future scenarios. We bought it on the basis of the current economics of the business, at a low multiple compared to the rest of the industry.

__________________________________________________________

The Globe and Mail, Andrew Willis, 2 February 2007

The Desmarais family signalled it wants insurer Great-West Lifeco Inc. to join the top ranks of U.S. money managers yesterday with the $4.6-billion acquisition of Putnam Investment Trust, the 10th-largest U.S. mutual fund company.

Great-West is buying a Boston-based money manager with $225-billion in assets and global reach, and betting that Putnam will rebound from poor fund performance and the 2003 market-timing scandal.

Putnam parent Marsh & McLennan Cos. Inc. put the unit up for sale in September as the insurance brokerage moved to streamline its businesses.

Winnipeg-based Great-West is a strong player in all sectors of the Canadian insurance market, but its U.S. operations are focused on group life insurance.

Chief executive officer Raymond McFeetors said the company decided in July of 2005 to bulk up its offerings of retirement savings products, "so we've been looking at mutual fund companies for two years."

"The U.S. asset management industry is just starting to consolidate. My view is we will end up with half a dozen companies, each with well over a trillion dollars under management," said Mr. McFeetors, who added that Great-West is "a proven consolidator" that aspires to be in that elite group.

U.S. mutual fund leader Fidelity Investments has $2.9-trillion in assets.

Great-West has $197-billion in assets, so the Putnam acquisition doubles the company's size to $422-billion.

The insurer is 71 per cent owned by Power Financial Corp., a holding company controlled by Power Corp. of Canada, all of which are part of the Desmarais family's empire.

The Montreal-based conglomerate is already the top player in the domestic fund industry as the owner of IGM Financial Inc., parent to Investors Group and Mackenzie Financial Corp., which together have $107-billion of assets.

Putnam CEO Charles Haldeman and his team will remain in place and will own 4 per cent of the company, compared with management's current 11-per-cent stake.

"Uncertainty in ownership was troublesome in the marketplace," said Mr. Haldeman, who joined Putnam three years ago as part of an executive housecleaning. The Harvard MBA said he looked forward to boosting sales and cutting costs with Great-West's help and moving profit margins that are now under 20 per cent back to industry norms of 28 per cent.

"They can teach as a lot, and challenge us a lot," Mr. Haldeman said.

Power Financial chairman Robert Gratton said his company's due diligence with stockbrokers and institutional investors showed Putnam is coming back.

"The trend is clear. We've done extensive blind surveys during the due diligence," Mr. Gratton said. He said Great-West, not IGM Financial, was the natural buyer of Putnam because of its extensive U.S. operation.

Great-West won a hotly contested five-month auction, with a number of U.S. and foreign money managers bidding on Putnam. This deal was finally signed early yesterday morning in the lobby of Toronto's Four Seasons Hotel, only after the executives' last-minute negotiations were interrupted by the noisy arrival of a visiting NBA team, the Washington Wizards.

Putnam is a 70-year-old franchise that represents one of the better-known mutual fund brands. The company's recent woes mean Great-West is buying at a discount price: Putnam is changing hands at 14.5 times earnings in a sector that typically commands 22 times earnings.

Analysts agree there is a potential market leader in this union if investors continue to return to Putnam, which boasted $420-billion (U.S.) of assets just five years ago.

"Upfront financial benefits look slim, but we credit Great-West with the ability to foster improvement over the medium term and drive acceptable economics," said insurance analyst Jason Bilodeau at UBS Securities.

As part of the purchase, Great-West also acquires Putnam's 25-per-cent ownership stake in one of the leading U.S. private funds, T.H. Lee Partners. The $12-billion Boston-based fund has been around since 1974, and has been called "the teddy bear at the gate" because of its preference for friendly deals. T.H. Lee has owned companies such as Snapple and Dunkin' Donuts.

To finance the deal, Great-West has figured a way to cash in on future Putnam tax deductions related to the goodwill incurred in the purchase.

Great-West will use what's known as a "securitization" to raise $644-million (Canadian), a sum that will be paid back as Putnam generates future tax benefits.

In addition, Great-West plans to sell up to $1.2-billion of shares, with Power Financial ready to purchase a portion of this equity. The insurer will borrow up to $1.6-billion to finance the remainder of the purchase.

Great-West was advised by Morgan Stanley. Marsh's financial advisers were Goldman Sachs Group Inc. and Merrill Lynch & Co.

New York-based Marsh, the world's largest insurance brokerage, is expected to use the money from the sale to pay down debt and expand its Mercer consulting and Kroll security units.

Great-West shares closed up 35 cents yesterday at $34.84 on the Toronto Stock Exchange, while parent Power Financial saw its stock rise 95 cents to close at $38.52.

Power surge

Power Corp. patriarch Paul Desmarais Sr., Canada's fifth-richest man, got his start in business by buying his parents' bus company in Sudbury for a dollar in 1951. He now heads the 31st-largest company on the Standard & Poor's/TSX composite index. Power Corp. of Canada has a market value of $16-billion, and Mr. Desmarais Sr. has a net worth of $4.41-billion, according to Canadian Business magazine.

Mr. Desmarais Sr. began his foray into financial services by buying control of insurer Imperial Life for about $12-million in 1963. He then acquired Montreal newspaper La Presse, and by 1968 had gained control of Power Corp., at one time an electric utility. Through a web of holding companies, the Desmarais family controls fund firm IGM Financial Inc. and insurer Great-West Lifeco Inc.

;