Mario Mendonca, TDEvent GWO reported Q1/22 base EPS of $0.87 vs. our estimate of $0.88 and consensus of $0.85. Reported EPS was slightly lower at $0.83. Base EPS was up 9% y/y, reflecting higher equity markets (higher fee income) and better mortality experience in Europe and U.S. Reinsurance. Base ROE was 14.7% (target: 14-15%), and BV/share was up 5% y/y and down less than 1% q/q, reflecting FX changes. Relative to our estimate, lower expected profit growth (Reinsurance particularly) was offset by much stronger yield enhancement gains.
Key takeaways: Business growth was mostly strong. Canadian group and individual wealth net flows were in solidly positive territory, partially mitigating the effects of weak markets. Empower and Personal Capital contributed US$29bln (large plan sales) and US$1.2bln in net flows, respectively. While large plan sales are lower margin, they do contribute to covering fixed costs. In Europe, insurance/annuity sales doubled y/y and wealth sales were up 59% y/y. Strong sales momentum over the last 12 months supports improving earnings momentum going forward. Putnam reported net outflows of US$2.4bln.
Empower's base earnings (cc) were up 26% y/y, reflecting the ongoing contribution from the MassMutual deal (including US$80mm of annualized synergies), stronger markets, and good investment experience. The acquisition of Prudential's full-service retirement business will take Empower's participant count to ~17mm and AUA to US$1.4tln. The deal is expected to be 8-9% EPS accretive once fully integrated.
TD Investment Conclusion Our BUY rating is supported by GWO's strong capital position, and leading positions across most segments in Canada and U.S. group retirement. The recently closed acquisitions in the U.S. retirement services business, and related expense synergies should lead to good earnings momentum in 2022 and 2023. Cost synergies on MassMutual and Prudential deals are expected to be US$160mm and US$180mm, respectively, over the next 24 months.
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 Q4/22E). Our group target P/E is set at 10.5x11.0x, an ~15% discount to the bank target P/E of 12.0x12.5x. 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 5% premium to the group target P/E in arriving at our 11.0x target P/E for GWO. Our target price remains at $44.00.