Great-West Lifeco Inc. $29 – Toronto symbol GWO

GREAT-WEST LIFECO INC. $29 (Toronto symbol GWO; SI Rating: Above average) is Canada’s largest insurance company, with assets under administration of $174.1 billion. Power Financial Corp. owns 75% of the company’s stock.

In the three months ended September 30, 2005, Great-West earned $421 million, up 1.7% from $414 million a year earlier. However, per-share income remained unchanged at $0.47 a share. If you exclude a restructuring charge and extra provisions for claims related to hurricanes in the United States, the company would have earned $0.51 a share in the most recent quarter. Revenue rose 5.1%, to $5.2 billion from $4.95 billion.

Most of Great-West’s recent earnings growth comes from its Canadian operations (45% of revenue), mainly due to expense reductions following the acquisition of rival insurer Canada Life Financial in 2003. So far, Great-West has cut its annual costs by $407 million. That’s 23% ahead of its original target. It should finish absorbing these operations in early 2006, and ultimately save $420 million.

Earnings from Great-West’s European operations (30% of revenue) continue to grow strongly thanks to recent acquisitions. Although profits at its U.S. division (25% of revenue) are also showing signs of improvement, the rising Canadian dollar means that these earnings now translate into fewer Canadian dollars, particularly since most of Great-West’s currency hedges have expired.

The stock now trades at 14.4 times the $2.02 a share it likely earned in 2005. The $0.84 dividend yields 2.9%.

Great-West Lifeco is a buy.

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