Great-West Joins Insurance Rally With Deal

Great-West Lifeco Inc.’s C$1.75 billion ($1.72 billion) agreement to buy Irish Life Group Ltd. signals a return to growth for the Canadian insurance industry that has spent years since the financial crisis seeking to contain damage from plunging stock prices.

The acquisition is the biggest takeover by a Canadian insurer since February 2007, bolstered by a stock rally that has seen insurance shares outperform banks over the past year.

“There’s no question the markets appear to be viewing Canadian lifecos much more favorably,” Great-West Chief Executive Officer Allen Loney said yesterday in a telephone interview. “The rally in our stock is not why we’re doing the transaction, but it’s been very helpful, obviously.”

Great-West, based in Winnipeg, Manitoba, is among the six-company S&P/TSX Life and Health Insurance Index that rallied 23 percent in the 12 months through yesterday, outpacing both the benchmark S&P/TSX Composite Index and an index of Canadian financial firms. Shares of the company, controlled by Montreal’s Desmarais family, have risen 18 percent in that period and closed at the highest in almost two years yesterday. The shares fell 0.8 percent to C$27.20 at the close in Toronto.

Canada’s second-largest insurer abandoned a previous attempt to buy Irish Life from the Irish government in 2011 amid concerns about “the macro-economic situation,” Loney said.

Europe Confidence

“An acquisition in Ireland lends some confidence to the fact that people and investors are getting more comfortable with the issues in Europe and see the potential for positive change over time,” Anish Chopra, managing director and fund manager with TD Asset Management Inc., which manages about C$204 billion, said in a phone interview yesterday.

Great-West said the acquisition will add about C$215 million, or 10 percent, to the company’s 2014 earnings. The insurer is expected to earn adjusted profit of C$2.12 billion in 2013, according to the average estimate of analysts surveyed by Bloomberg.

Great-West profit has moved largely in line with stock markets in the last five years, rising to C$2.12 billion in 2011, after falling as low as C$1.45 billion in 2008 from C$2.11 billion in 2007, according to data compiled by Bloomberg.

‘Jump Start’

“We believe that an insurance acquisition provides precisely the right vehicle for GWO to jump start flat-lining earnings,” Mario Mendonca, an analyst with Canaccord Genuity said in a note the day before the transaction was announced.

The transaction will be the biggest for the Canadian insurance industry since Great-West bought Boston-based Putnam Investments for $3.9 billion in August, 2007. The deal will be funded by about C$1.25 billion of subscription receipts to Desmarais family-owned companies Power Financial Corp. and IGM Financial Inc.

Paul Desmarais Sr., 86, has a net worth of C$5.1 billion, according to the Bloomberg Billionaires index.

“From a strategic point of view, it was an opportunity to go from a relatively modest market position to being a market-leading position in the Irish market,” said Loney, who added that Great-West may participate in further consolidation in Europe.

“We are on the lookout for acquisitions in Europe and in the United States,” he said. “They have to be absorbed efficiently, and we’re just starting that process in Ireland, and they have to be financed.”

Manulife, Sun Life

Insurance companies globally have been sensitive to equity markets and interest rate movements since the credit crisis that began in the third quarter of 2007. Companies including Hartford Financial Services Group Inc. and Genworth Financial Inc. have retreated from sales of variable annuities, in which obligations to clients can increase when stock markets fall.

Manulife Financial Corp., Canada’s largest insurer, increased its hedging program in 2010 to reduce market sensitivity, while Sun Life Financial Inc. agreed in December to sell its U.S. annuity business to a firm owned by Guggenheim Partners LLC.

“There seems to be an admission that, while some of the circumstances for life insurance companies have not been too positive in the past, the insurance companies are very adaptable and will come through this period in good shape,” Loney said.

Sun Life Financial, Canada’s third-largest insurer, announced a deal in January with Khazanah Nasional Bhd to buy 98 percent of Aviva Plc and CIMB Group Holdings Bhd’s Malaysian insurance joint venture for 1.8 billion Malaysian ringgit ($580 million).

Constrained Valuations

Still, the prospects for Canadian insurers trading at a premium multiple to their U.S. peers “will become increasingly difficult” on a lackluster 2013 profit outlook, John Aiken, an analysts with the investment banking unit of Barclays Plc.

“We think the valuations are going to be constrained,” Aiken said in a telephone interview. “When you look at where their valuations are trading at in terms of their history, we’re still not in the great environment that we were back in day. We definitely think that’s going to be a bit of a restriction.”

The S&P/TSX Life and Health Insurance index is trading at about a 55 percent premium to the Standard & Poor’s 500 Life & Health Insurance Index based on a forward price-earnings ratio basis, a valuation measure that compares share price to expected earnings, according to data compiled by Bloomberg News.

Ian Nakamoto, director of research with MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion in assets for clients, including shares of Great-West Life, said the insurer may be getting a good deal in Ireland.

“The government is a motivated seller,” Nakamoto said in a phone interview yesterday. It may also be easier to do a deal in Europe than Asia, he said. “When you go into Asia the price of acquisition is still quite high. You have many more bidders, prices wouldn’t be as attractive.”

Great-West sounds like its “more committed to Europe than ever,” Nakamoto said.

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