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Manulife Financial Corp. MFC-T has signed a deal with Global Atlantic to reinsure more than $13-billion of risk on its books, freeing up about $1.2-billion in capital that will be used for future share buybacks.

Manulife announced on Monday that Global Atlantic and its partners will reinsure four separate blocks of business, including $6-billion of the company’s reserves for its long-term care business, representing 14 per cent of the insurer’s total reserves. The company said the transaction involving the long-term care block is one of the largest long-term care reinsurance deals ever done.

Global Atlantic will also reinsure $1.6-billion of Manulife’s U.S. structured settlements, an investment product that provides exposure to derivatives, and $5.6-billion in two types of Japanese whole life policies.

Manulife chief executive Roy Gori said on an analyst call he also expects to dispose of $1.7-billion of alternative long-duration assets, such as annuity products that were backing the four business units.

“This is a major milestone in our strategy to reshape our portfolio by reducing risk, improving return on equity, strengthening capital, growing high-return businesses and delivering value to shareholders,” Mr. Gori said during an analyst call on Monday.

Manulife’s Frances Donald is no dismal scientist

Markets reacted positively to the deal, with Manulife stock closing up 3.2 per cent to $27.95 on Monday.

Reinsurers are known as the insurers to the insurance industry, and help spread the cost of risk in certain areas of the business. Part of Monday’s deal consists of a block of higher-risk long-term care policies sold between 1987 and 2006, with an average issue date of 2001.

During the call, Marc Costantini, Manulife’s global head of in-force management, said the portion of the long-term business being reinsured had more “generous policy holder benefits,” including a higher percentage of lifetime benefits and policies with inflation protection for the benefits.

Until this point, Mr. Gori said there had been “questions in the market” as to whether a long-term care transaction would “even be possible.”

“There has been a bit of an overhang in the industry as to whether the assumptions in long-term care that are underpinning the business are valid or fair,” he said in an interview with The Globe and Mail. “So this transaction was actually a tremendous outcome and we really do think that this will be a catalyst for future long-term care transactions, which will bode well for the industry and for us.”

Mr. Costantini told The Globe he first began discussions about the long-term care business with Global Atlantic – as well as other interested parties – at the start of 2023.

“We’ve always been out in the market looking to see whether any other parties would be interested in acquiring this business or reinsuring it,” Mr. Costantini said. However, the gap between the price a reinsurer was willing to pay and what insurance companies wanted was too far apart, he said. “But we saw it narrow quite significantly over the last few years and then specifically for this transaction, which facilitated the ability to execute it.”

This is the third reinsurance deal Manulife has arranged with Global Atlantic. In 2012, Global reinsured a portion of Manulife’s U.S. fixed annuities business, and in 2020, it reinsured a block of U.S. bank-owned life insurance policies.

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.

Monday’s deal, which is expected to close in the first half of 2024, will free up $1.2-billion in capital and allow the company to buy back up to approximately 2.8 per cent of common shares starting in February, 2024.

While the deal will see Manulife forgo $130-million of core earnings from the business being transferred, Mr. Gori said the transaction will “be accretive” to both core earnings per share and core earnings once share buybacks are completed.

The core earnings contribution from long-term care and variable annuities will drop down to 11 per cent from 24 per cent in 2017. (Several other reinsurance deals have also contributed to the decline in earnings contribution over the years.)

Scotiabank analyst Meny Grauman said in a research note that while the deal only covers 14 per cent of Manulife’s long-term care reserves, the transaction is a “positive development” as the market has “long wondered how big a haircut would be needed” in order to get a long-term care reinsurance deal done.

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