Avg. Daily Trading Vol. 12,195,260
Event
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).
Key takeaways continued • P/H experience loss of $115mm (forecast $50mm loss) related to P/H insurance and annuity experience. LTC experience, while favourable in Q4/21, was less favourable than in Q4/20. We raised our forecast of quarterly P/H experience losses to $60mm from $30mm for 2022E and 2023E. • Asian core earnings (US$) were flat y/y, driven by good in-force business profitability and offset by COVID-19-related P/H losses and lower new business gains (down 9% y/y, but slightly higher than our forecast). Asian sales declined 12% y/y, reflecting lower COLI sales in Japan (down 50% y/y), partially offset by growth in H.K. (up 11% y/y, supported by the bank channel). As expected, COVID19 hurt sales momentum in Other Asia (flat y/y) as higher bank channel sales were offset by lower agency sales. P/H experience was also negative in Asia this quarter. We forecast Asian new business gains coming in essentially flat with 2021 in 2022E. • Insurance sales in Canada and the U.S. were very strong, up 20% and 41%, respectively, reflecting higher demand for insurance in the context of COVID-19 and MFC's new product line up. • WM core earnings were in line with our estimate and up 30% (CC) y/y, reflecting higher margins (scale benefits, higher revenue yield, partially offset by higher expenses), strong market performance, and very strong net flows ($8.1bln in Q4/21 vs. estimate of $8.3bln). Retail net flows were particularly strong in Asia. We forecast WAM earnings growth of 18-20% in 2022E/2023E. • Canadian core earnings were down 9% y/y, reflecting less favourable policyholder experience in group insurance and lower investment income. Additionally, recall the comparable quarter (Q4/20) benefited from a tax provision that did not repeat this quarter. New business value was up 26% y/y (higher margins in annuities and higher volumes in individual insurance), and APE sales were up 20% y/y (individual insurance and annuities). We forecast expected profit growth in the high-single digits in Canada and slightly negative policyholder experience in 2022E. • U.S. core earnings were up 1% y/y, reflecting higher new business gains (higher sales and margins) and other experience gains, partially offset by lower investment income (down US$30mm y/y). APE sales were up 41% y/y, reflecting strong International sales and higher customer demand in the U.S. We forecast expected profit declining 14% and slightly negative policyholder experience in 2022E.
Justification of Target Price We set our target prices by applying premiums/discounts to our group target P/E applied against a four-quarter forward EPS (starting Q3/22E). Our group target P/E is set at 10.5x11.0x, an ~10% discount to the bank target P/E of 11.5x12.0x. Our approach is to establish a group target P/E, and apply premiums and discounts to the individual insurers (relative to the group target), largely based on: 1) business momentum; 2) our view regarding the potential for positive or negative earnings revisions; and 3) historical premiums and discounts. We apply a 4% discount to the group target P/E in arriving at our 10.1x target P/E for MFC. Our target price remains $39.00. Key Risks to Target Price The key risks to our target price include: significant downturn in equity markets; a sudden spike/decline in interest rates/deterioration in credit conditions; adverse revisions to regulatory capital rules; unfavourable litigation outcomes; appreciation of the Canadian dollar relative to the U.S. dollar and yen; regulatory scrutiny into industry sales practices; potential for underpriced business to translate into reserve charges/margin deterioration; and changes in tax regulations that affect the attractiveness of insurance and annuity products