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Life Insurance Q2/21 Outlook
Unlike Q1/21, We Expect Investors to Focus on Business Momentum LICAT, Charges & Reserves Should Not Dominate the Discussion
Canada's life insurance companies are scheduled to report Q2/21 results on July 29 (iA Financial [IAG-T]), August 3 (Great-West Lifeco [GWO-T]), and August 4 (Manulife Financial [MFC-T] and Sun Life Financial [SLF-T]). Our estimates call for a reasonably good Q2/21 for the Canadian insurers, with adjusted (base/ core/underlying) EPS up 11% y/y against good Q2/20 results. Last quarter was characterized by hits to LICAT and book value, as well as heightened earnings volatility associated with the macro factors. In contrast, we expect Q2/21 to look and feel more like the second half of 2020, when the insurers reported strong wealth management results, improving insurance sales, and stable-to-improving LICAT ratios. If we have this right, the insurers should fare reasonably well coming out of Q2/21 reporting. Reflecting relative valuation and solid new business momentum, we expect MFC and IAG to gain ground this earnings season.
Manulife (ACTION LIST BUY): On a core basis, we forecast EPS of $0.77 versus $0.78 in the previous year and $0.82 in the previous quarter. We expect core earnings to be down 1% y/y against a strong year-ago quarter, which included very good policyholder experience and seed capital gains reported in earnings on surplus. In contrast, we expect Q2/21 to include core investment gains of $100mm after tax (~$130mm pre-tax) and very strong new business gains, particularly in Asia. We also forecast 21% y/y earnings growth from the wealth management segment. We believe that the stock's performance is very much leveraged to what drives results in any given quarter. Quarters characterized by accounting/reserve noise generally overwhelm MFC's solid fundamental performance. Unlike Q1/21, in Q2/21, we expect the market to focus on momentum in Asian insurance and wealth management rather than unusual accounting gains/losses driven by macro factors.
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