Friday, November 03, 2006

Life Insurance Co Valuations Somewhat Stretched

Scotia Capital, 3 November 2006


• Canadian lifeco share prices have increased 5% in the last two days with the catalyst being the proposed taxation of Income Trust distributions.

What It Means

• We believe valuations are somewhat stretched at current levels. The forward P/E multiple for the group is 13.6x, well above the 12.5x average for the sector since 2002. The only time the group has traded at a forward P/E multiple of 13.6x or higher was from February through April of 2006, peaking at 14.3x in March 2006 (since then the sector has been flat).

• Versus U.S. lifecos, Canadian lifecos are a 12% premium on a forward P/E basis, well above the 5% average. The only time the group has traded at a premium greater than 12% relative to the U.S. lifecos was in February through April of 2006 (at which time it peaked at a 15% premium).

• Versus Canadian banks, Canadian lifecos are trading at a 4% premium on a forward P/E basis (versus 2% average premium) We would expect the banks, with a significantly higher dividend yield (over 3%, versus the Canadian lifecos at 2.2%) would be a more logical beneficiary of fund flows out of income trusts. As well, a declining long term rate scenario, similar to what we're seeing, is generally more punitive to the lifecos.