GREAT-WEST LIFECO INC. $32 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 892.5 million; Market cap: $28.6 billion; SI Rating: Above average) is Canada’s largest insurance company, with over $400 billion in assets under administration. Power Corp. controls 70% of Great-West’s shares.

Great-West sells life insurance and health insurance, directly and through brokers, to groups and individuals under the Great-West, London Life and Canada Life banners. Other services include retirement planning and wealth management. It also provides administrative services to pension fund managers.

Great-West’s revenues rose from $16.7 billion in 2002 to $27.3 billion in 2006, mainly due to its 2003 purchase of rival Canada Life. Earnings grew from $1.27 a share (total $931 million) in 2002 to $2.10 a share ($1.9 billion) in 2006. Great-West likely earned $2.45 a share in 2007.

The company continues to expand outside of Canada, which accounts for 50% of its earnings. The United States and Europe each supply 25% of Great-West’s remaining earnings.

In August 2007, Great-West acquired U.S.-based mutual fund manager Putnam Investments Trust. The purchase included Putnam’s 25% interest in T.H. Lee Partners, a private equity firm that serves high net worth investors.

Putnam ran into trouble over a mutual fund trading scandal a few years ago, which hurt its reputation. That explains why Great-West got it a bargain price of $4.2 billion, even though it had assets under management of $190 billion U.S. Fund redemptions at Putnam still exceed sales, but the rate is declining.

Putnam’s clientele a hidden asset

Owning a mutual fund company increases Great-West’s exposure to sometimes volatile stock markets. However, the takeover gives Great-West an opportunity to market insurance and other financial services to Putnam’s large individual and institutional client base. The Putnam acquisition also expanded Great-West’s operations in Europe, and gave it its first business in Japan.

To help pay for Putnam, Great-West has agreed to sell its U.S. health care business for $1.6 billion U.S. This division provides medical, dental, vision, life and disability coverage to 5,200 groups and 2.2 million individuals.

Larger insurers tend to dominate the U.S. health care industry. That’s because their size lets them negotiate better deals with medical service suppliers. Given these challenges, selling this operation makes sense for Great-West.

Great-West had to borrow the cash it needed to fund the balance of the Putnam acquisition. However, its long-term debt of $5.3 billion is still a reasonable 1.6 times its annual cash flow.

The stock trades at 11.6 times its likely 2008 earnings of $2.75 a share. Great-West’s current dividend of $1.10 a share yields 3.4%.

Great-West Lifeco is a buy.