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Manulife Insurance Toronto headquarters seen in Toronto in September, 2017. Manulife stock climbed 32 cents to close at $32.98 on the TSX.Christopher Katsarov/The Globe and Mail

Manulife Financial Corp. has signed a deal to reinsure more than $5.8-billion of risk on its books, freeing up about $800-million in capital that will be used for future share buybacks.

Manulife MFC-T announced on Monday that RGA Life Reinsurance Company of Canada will reinsure $5.8-billion of the company’s reserves of lower return-on-equity Canadian universal life insurance contracts in an effort to increase the overall ROE in the company’s remaining portfolio.

The transaction – which the company says is one of the largest universal life reinsurance deals in Canada – will also allow the insurer to sell $600-million of alternative long-duration assets (ALDA), such as annuity products, that were backing the contracts.

Monday’s deal, which is expected to close in the second quarter of 2024, will free up $800-million in capital and, pending Toronto Stock Exchange approval, allow the company to buy back up to approximately 5 per cent of its common shares.

Reinsurers are insurers to the insurance industry, and they help spread the cost of risk in certain areas of the business. Over the past several years, Manulife has been concluding reinsurance deals to cut down on the amount of risk it holds in its insurance portfolio.

Last December, the company struck a deal with Global Atlantic to reinsure more than $13-billion of risk, including $6-billion in its long-term care insurance business. In 2021, Manulife announced a similar deal to reduce risk with Pennsylvania-based Venerable Holdings Inc. to reinsure three-quarters of its U.S. variable annuity business.

Manulife chief executive Roy Gori said the company has released $11-billion in capital since 2018, and has improved its core return on equity by about 5 per cent since 2017.

“We remain highly focused on exploring additional organic and inorganic actions to deliver value to shareholders,” Mr. Gori added in a statement.

Markets reacted positively to the transaction, with Manulife stock climbing 32 cents to close at $32.98 on the TSX.

RGA is a subsidiary of Reinsurance Group of America Inc., a Missouri-based global reinsurance company founded in 1973 that specializes in life and health insurance. This is the third reinsurance deal Manulife has concluded with RGA. In 2012, Manulife completed a U.S. deal with RGA and did a second transaction about four years ago, according to Marc Costantini, Manulife’s global head of inforce management.

Mr. Costantini told The Globe and Mail he first began speaking with RGA about the Canadian universal life business in the spring of 2023, but as the Global Atlantic deal got nearer to closing, he had to briefly pause discussions with RGA until December. Now, he says, as Manulife remains committed to improving the profitability of its inforce business, the deal will also “further reduce” the company’s sensitivities to markets.

“This is a very attractive multiple – obviously 16 times in terms of the value of the capital release in comparison to the forgone earnings – so very attractive economics,” Mr. Costantini said in an interview. “And we’re using that obviously in share buybacks, which will create value for our shareholders.”

While the transaction will also see an annual reduction to core earnings of about $50-million and net income to shareholders of about $40-million, Mr. Costantini says it will be “accretive” to core earnings per share as Manulife completes the share buybacks.

Royal Bank of Canada analyst Darko Mihelic flagged the deal in a research note as “modestly positive,” saying that despite the forgone earnings, the insurer will be able to “shed another low return-on-equity business.”

“We believe that these transactions reflect Manulife’s appetite to reinsure lower ROE parts of its business and also confirms that there are reinsurers in the marketplace that have an appetite to take on these exposures,” Mr. Mihelic wrote. “We view this as a positive as we believe that it may mean we could see Manulife enter into additional U.S. LTC reinsurance deal(s) in the future.”

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