From ScotiaQ2/21 Review - Tail Risk Continues to Cast a Shadow
OUR TAKE: Positive.
Manulife's Q2 results avoided many of the issues that drove the underperformance of the shares in the wake of the first quarter's earnings report. These issues included a big hit to reported earnings from rising rates, as well as downward pressure on the firm's key capital ratio and a rising leverage ratio. This time around MFC's reported EPS was actually above core (helped by material investment gains), its LICAT ratio actually rose (pro forma significant debt redemptions), and leverage moved back down close to the company's 25% target. And yet, despite the favorable market reaction on earnings day, we believe upside here remains constrained by tail risk. The firm's legacy exposure is still a concern despite neutral LTC experience in Q2 and Management's assurance that a VA transaction is still a very real possibility sometime this year. Beyond that, questions about the impact of IFRS 17 are front and center, and involve concerns about the hit to book value on implementation, but also the implications for earnings growth given how significant a growth driver new business gains have been over the past few quarters in particular.
KEY POINTS Results Review: MFC reported core EPS of $0.83, versus us at $0.79 and the Street at $0.78. This result was up 6% Y/Y (+17% in constant currency terms), driven by a return of core investment gains, robust new business gains of $328M (or $0.14/share), and a 51% Y/Y increase in Global WAM earnings being partially offset by a $222M decline in experience gains and a $104M decline in earnings on surplus. EPIF of $1,055M was up 8% in constant currency terms (down 1% Y/Y in CAD) but below our estimate of $1,132M. Policyholder experience was negative, but LTC experience remained neutral. On a segmented basis relative to our numbers Global WAM delivered the biggest beat, while Canada was also above our expectations. Asia was in line, and the US was below our estimate. MFC’s LICAT ratio was flat Q/Q at 137% (and up 4 points from Q1’s pro forma LICAT of 133%), while MFC’s leverage ratio decreased 358bp Q/Q to 25.9%, modestly above the firm's 25% target.
Changes to our Estimates, Price Target and Recommendation: Our 2021E core EPS estimate increases 2% to $3.36 and 2022E core EPS estimate is also up 2% to $3.75. The increase in 2021 reflects the core beat as well as a more favorable outlook for new business gains and for WAM earnings. We continue to value the shares at 1.0x Q4/22E book, and so our price target stays unchanged at $28. We reiterate our Sector Perform recommendation despite the steep valuation discount to peers.