Manulife Financial Corporation announced November 20 that it has entered into a reinsurance agreement with the Reinsurance Group of America (RGA) worth $5.4-billion. The deal includes the reinsurance of a $2.4-billion block of Manulife’s long-term care (LTC) business on a full risk transfer business. The company says it will continue to administer all reinsured policies.
When the deal is combined with an earlier reinsurance transaction with Global Atlantic (that company agreed to reinsure $13-billion, including $6-billion of LTC reserves – 14 per cent of the company’s LTC reserves at the time – a deal that was completed in February 2024), upon closing they say the company will have cumulatively reduced LTC reserves by 18 per cent and LTC morbidity sensitivity by 17 per cent.
A high return, low risk business
Manulife’s president and CEO, Roy Gori says the deal is part of the company’s ongoing plan to transform Manulife from a high risk, low return business to a high return, low risk business. “Earlier this year, we closed the largest ever LTC reinsurance transaction and I’m pleased to announce today a second historic LTC transaction in less than a year,” Gori told analysts in a call following the company’s announcement. “These initiatives will reduce the range of outcomes on our LTC blocks, generating value for shareholders, while also improving the retained block’s attractiveness to potential counterparties.”
The transacted LTC block in question is younger than the block reinsured previously by Global Atlantic. The transaction also includes a legacy block of U.S. structured settlements.
“In connection with the transaction, we expect to dispose of $1.5-billion of alternative long-duration assets (ALDA),” the company adds in a statement about the transaction.
The LTC block, meanwhile, represents six per cent of Manulife’s total LTC reserves as of the end of September 2024. The company says it has similar characteristics to its retained LTC block of business, with a greater proportion of active life reserves than in the block ceded in the previous transaction.
Share buybacks
The transaction is expected to release $800-million which Gori and the company say will be used for share buybacks. “We are committed to repurchasing for cancellation the full 90-million common shares allowed under our current NCIB (normal course issuer bid) program, which expires in February 2025,” the company states. Further buybacks, they add, will require a new program and the approval of the Office of the Superintendent of Financial Institutions (OSFI) and the Toronto Stock Exchange (TSX).
In the same call with analysts after the announcement was made, Gori confirmed the company’s interest and intention to put a new NCIB in place after the current program expires.
Credit rating remains unchanged
Following the announcement, Morningstar DBRS weighed in with a new note, Morningstar DBRS Comments on Manulife’s Announced $5.4 Billion Reinsurance Transaction, saying the company’s credit ratings remain unchanged.
The ratings agency points out that the reserves are related to the company’s U.S. legacy business, adding that they view the transaction positively, as Manulife is continuing to reduce its product risk profile.
“Furthermore, this and previous reinsurance transactions validate many of Manulife’s reserving assumptions and free up capital that can be invested in higher return-on-equity businesses, consistent with its longstanding strategy. Morningstar DBRS expects Manulife’s de-risking to continue under the leadership of the incoming president and CEO, Phil Witherington,” they write.
