TD Report and Upgrade to $36.00Event MFC reported Q2/21 core EPS of $0.83, up 6% y/y (cc 18%) (estimate: $0.77; consensus: $0.78). Core ROE was 13.9% (forecast: 13.0%). Reported earnings were materially higher than core reflecting strong ALDA investment performance. BV/share was up 6% q/q (entirely reversing the hit L/Q). The increase in earnings was driven by strong new business gains (Asia) and the WM earnings (margins, net flows, market performance). Our estimates reflect core EPS growth of 19% (2021E) and 9% (2022E).
Impact: POSITIVE
Key takeaways: Asian core earnings were up 20% y/y, driven by a sharp increase in new business gains, up 56% y/y. Strong insurance sales volumes in H.K. and Asia Other, as well as higher margins (mix, product adjustments, expense management) drove the strong result. Insurance sales were strong in the U.S. and Canada as well, driving better-than-expected new business gains on a total company basis.
WM core earnings were up 62% y/y, reflecting sharply higher margins (scale benefits, higher revenue yield, and expense discipline), strong market performance, and very strong net flows ($8.6bn in Q2/21 vs. estimate of $2.1bln). We raised our core earnings forecast materially. We forecast WAM earnings growth of 29% and 17% in 2021 and 2022, respectively.
P/H experience gains and changes in assumptions suggest reserves remain appropriate, potentially conservative. While U.S. mortality was adverse (COVID-19), strong claims experience in Group (Canada) and neutral LTC experience are encouraging. Management guided to a neutral impact from the Q3/21 assumption review; however, the URR reduction could lead to a $550mm charge (expected).
LICAT was flat q/q despite retiring over $2bln in debt. The leverage ratio declined sharply to 25.9% and was better than our forecast.
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; 4) a renewed commitment to reduce expense growth and extract capital from the legacy business; and 5) valuation (MFC is trading at 1.0x BV/share)