CEO says Manulife's record deal propels portfolio towards higher-ROE, lower-risk focus
Manulife Financial Corp. has finalized a $5.8bn reinsurance agreement with RGA Life Reinsurance Co. of Canada, a move designed to divest certain Canadian policies considered less profitable, as reported by BNN Bloomberg.
This deal allows the Toronto-based insurance and asset management giant to unlock $800m in capital, which it intends to redistribute to shareholders through share buybacks.
Manulife will maintain its role in managing these policies, which comprise a block of Canadian universal life insurance policies characterized by their low return on equity.
This transaction is heralded as the largest of its kind in the universal life reinsurance arena within the Canadian insurance sector.
“This transaction is the largest universal life reinsurance transaction in the Canadian insurance industry and represents another milestone in our journey to transform our portfolio to higher-ROE and lower-risk businesses,” stated Roy Gori, CEO of Manulife.
Following the announcement, Manulife's shares experienced a 1.2 percent uptick to $33.06, reflecting a 13 percent increase year-to-date. This performance notably surpasses the 3.5 percent growth observed in the S&P/TSX Composite Financials Sector Index.
The initiative is part of Manulife's broader strategy to enhance its profitability by offloading assets with low returns on equity, thereby reducing the requisite capital reserve under regulatory standards.
While such deals may diminish core earnings due to the cessation of revenue from the policies, they are viewed as beneficial for the company's overall financial health.
The relationship between Manulife and RGA, a subsidiary of the Chesterfield, Missouri-based Reinsurance Group of America Inc., is established, marked by two previous transactions.
The anticipated completion of this latest deal early in the second quarter is expected to contribute an additional 1 Canadian cent to Manulife's core earnings per share on an annualized basis after the effect of the share buybacks is accounted for.
The policies involved in this transaction are described as “very long-term and provide guaranteed pricing for the policyholder,” making this block particularly significant for reinsurance, according to TD Securities analyst Mario Mendonca.
RGA's participation in the deal is facilitated by its unique balance sheet management practices, which differ from Manulife's approach.
“RGA has 'different internal targets, a different internal management approach and different assets backing the liability,'” Marc Costantini, global head of inforce management at Manulife, explained in an interview.
With an increasing trend of reinsurance deals in the industry, both among publicly traded companies and private equity firms, Manulife is “very selective” in its partnerships.
Chief financial officer Colin Simpson emphasized the company's commitment to engaging with reinsurers that are sufficiently capitalized and capable of meeting their obligations, noting, “Not all private equity-backed reinsurers are created the same.”
