DBRS Morningstar Comments on Manulife Financial Corporation’s Announced $13 Billion Reinsurance Transaction Related to Four Blocks of Business

DBRS Limited (DBRS Morningstar) notes that on December 11, 2023, Manulife Financial Corporation (Manulife or the Company) entered into an agreement with Global Atlantic Financial Group (Global Atlantic) to reinsure four blocks of its legacy/low-return on equity (ROE) business. The transaction will have no impact on the Company’s current credit ratings, including its Issuer Rating of A (high) with a Stable trend by DBRS Morningstar. Manulife will reinsure $13 billion in reserves: $6 billion related to U.S. long-term care (LTC), $5.6 billion related to two Japan whole-life products, and $1.6 billion associated with U.S. structured settlements. Manulife’s LTC business is part of a legacy portfolio that the Company has been actively working toward de-risking, including by lowering its exposure; this represents the largest ever LTC reinsurance transaction. The reinsurance deal was priced at book value. Given the terms of the deal and the resulting marketability of this block of business, further LTC block transactions may be possible.

DBRS Morningstar views this transaction as largely aligned with the Company’s strategy to lower its exposure to legacy and low-ROE business. The transaction is positive for Manulife’s risk profile as it will reduce LTC reserves by 14% and sensitivity to morbidity risk by 12%. There will be a neutral impact on Manulife’s regulatory capital ratio since the full $1.2 billion of capital release will be returned to shareholders via share buybacks. While the Company’s counterparty risk will increase slightly due to this agreement, DBRS Morningstar notes that structural protections (including the creation of overcollateralized trusts and agreed-upon investment guidelines) will partly mitigate this risk. Moreover, prior successful experience with large reinsurance transactions for legacy blocks and two previous transactions with Global Atlantic further mitigate any counterparty risk concerns.

The reinsurance deal is expected to close in H1 2024, subject to certain regulatory approvals for the counterparty. Manulife plans to launch its Normal Course Issuer Bid in February 2024.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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