GREAT-WEST LIFECO INC. $28 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; SI Rating: Above average) is one of Canada’s largest insurance companies, with $191.3 billion in assets under administration. It sells its insurance products directly and through brokers to both individuals and groups. Power Financial controls about 75% of Great-West.

The company also provides wealth management and other financial services. Great-West gets roughly 50% of its profit from Canada, 30% from the U.S. and 20% from Europe.

Great-West’s revenues rose from $16.1 billion in 2001 to $23.9 billion in 2005, or 10.4% compounded annually. Much of that growth is due to Great-West’s 2003 purchase of rival Canada Life Financial Corp. for $7.2 billion in cash and stock.

Consequently, profits rose at a compounded annual rate of 29.4%, from $0.70 a share (total $515 million) in 2001 to $1.96 a share ($1.8 billion) in 2005.

In the three months ended June 30, 2006, earnings before unusual items rose 2.0%, to $0.51 a share (total $475 million) from $0.50 a share ($453 million) a year earlier. Revenue grew 15.8%, to $6.6 billion from $5.7 billion.

New computers improve efficiency

Investments in new computers hindered the company’s profit growth in the latest quarter. But these investments should improve Great-West’s efficiency, and cut its operating costs.

The rising Canadian dollar also hurt its growth. In fact, on a constant currency basis, per-share earnings would have grown 11% in the second quarter.

The company is now looking to the U.S. and Europe to spur long-term growth, mainly through small acquisitions. For example, it recently agreed to administer 2,600 small and mid-sized pension plans in the U.S., and purchased part of the annuity business of a leading UK insurance company.

These moves strengthen Great-West’s share of these niche markets, and expanded its salesforce. That gives it more opportunities to sell its new clients other products and services.

The company also earns income based on the value of the securities it manages. Raising its fee-based income cuts its exposure to volatile stock markets.

Stock buybacks cut dilution

Great-West is an aggressive buyer of its own stock. That helps offset the dilution caused by its stock option plans.

It spent $57 million on buybacks in 2005, and $30 million more in the first half of 2006.

The company has a lengthy history of increasing its dividend every six months. It recently raised the quarterly payout 7.3%, from $0.22375 to $0.24. The new annual rate of $0.96 yields 3.4%.

The stock has stayed in a narrow range for the past two years. It now trades at 13.1 times the $2.13 a share it will probably earn in 2006.

Great-West Lifeco is a buy.