Mario Mendonca TD 12-Month Target Price: C$39.00Event MFC reported Q4/21 core EPS of $0.84, up 14% y/y (estimate: $0.81; consensus: $0.82), reflecting strong core investment gains, growth in fee income from WM operations, and in-force growth in Asia and Canada, partially offset by P/H experience losses. Core ROE was 12.7% and BV/share was up 7% y/y (up 9% ex-AOCI). Reported earnings were higher than core investment gains (higher fixed income reinvestment rates assumed in the valuation of reserves driven by a flatter yield curve and higher credit spreads). Relative to our estimates, higher new business gains and lower unallocated overhead costs were offset by higher P/H experience losses. We forecast core EPS growth of 10% in 2022E. Impact: POSITIVE Key takeaways:
MFC announced an NCIB for 5% of shares outstanding, consistent with our estimates. We estimate the NCIB will account for ~$2.7bln of the ~$13.9bln of deployable capital at Q4/21 (our estimate). We estimate that a 3% buyback would neutralize the earnings impact from the U.S. VA reinsurance agreement. The reinsurance agreement, which closed on February 1, released ~$2bln of capital. Reflecting the buyback and the benefit of earnings, we estimate the leverage ratio and LICAT to close 2022E at ~25% and 140%, respectively.
Regarding IFRS 17, management confirmed that the new standard should not materially impact capital strength. However, as IFRS 17 could create greater earnings volatility (including decisions management makes as to where to report the impact of changes in the discount rate, e.g., OCI), the company may need to alter hedging strategies, product design, reinsurance, and the investment portfolio, both of which could impact earnings. Ultimately, we expect the insurers to settle on an entirely new definition of core/underlying earnings to allow investors to assess the earnings power of the companies. TD Investment Conclusion Our positive outlook on MFC reflects: 1) greater confidence that the legacy businesses will not result in material hits to reported earnings and capital strength; 2) a strong capital ratio from the perspective of LICAT and core LICAT; 3) businesses that should support growth and an improving ROE — Asian Insurance and WAM; and 4) valuation (MFC is trading at 1.0x BV/share).