Morningstar DBRS Comments on Manulife's Announced $5.4 Billion Reinsurance Transaction

DBRS Limited (Morningstar DBRS) notes that on November 20, 2024, Manulife Financial Corporation (Manulife or the Company) announced an agreement with Reinsurance Group of America (RGA) to reinsure $2.4 billion of reserves related to its legacy U.S. long-term care (LTC) business and $3.0 billion related to its legacy U.S. structured settlements business. While the Company's credit ratings remain unchanged, including its Issuer Rating of A (high) with a Stable trend, Morningstar DBRS views the transaction positively, with the Company further reducing 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 strategy to continue under the leadership of the incoming president and CEO, Phil Witherington, who will take on the top role following the retirement of Roy Gori in May 2025. (See "Morningstar DBRS Comments on Manulife CEO's Announced Retirement and the Appointment of Phil Witherington as Successor" at https://dbrs.morningstar.com/research/443159.)

The transaction is positive for Manulife's risk profile as it will reduce LTC reserves by 6% and sensitivity to morbidity risk by 7%. The impact on Manulife's regulatory capital ratio will be neutral since the full $0.8 billion of capital release will be returned to shareholders via share buybacks. While a reinsurance transaction brings heightened counterparty risk considerations including re-capture risk, structural protections, including the creation of overcollateralized trusts, partly mitigate this risk. Morningstar DBRS also notes that Manulife has had multiple successful prior reinsurance transactions for legacy blocks with RGA (most recently in Q1 2024 to reinsure a large block of the Canadian Universal Life policies), which further mitigates counterparty risk concerns.

The reinsurance deal is expected to close in early 2025, subject to certain regulatory approvals for the counterparty.

In a December 12, 2023, press release (see "DBRS Morningstar Comments on Manulife Financial Corporation's Announced $13 Billion Reinsurance Transaction Related to Four Blocks of Business" at https://dbrs.morningstar.com/research/425204), Morningstar DBRS commented on the largest ever LTC reinsurance transaction in the market, amounting to $6 billion of Manulife's LTC reserves that were ceded to Global Atlantic and the possibility of more such transactions in the future. The newly entered reinsurance agreement validates that assumption and could lead to similar de-risking reinsurance deals in the future.

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