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The Manulife Financial headquarters in Toronto.

Galit Rodan/The Globe and Mail

Manulife Financial Corp. is preparing to take two charges worth $2.9-billion in its fourth quarter as U.S. tax reforms and a new investment strategy reshapes the business.

The Toronto-based insurer said Friday evening that it would move to sell some private market assets, resulting in a one-time $1-billion hit to profits as the company aims to put capital toward investments that can offer higher returns.

At the same time, Manulife said that U.S. President Donald Trump's overhaul of the U.S. tax code would result in a second $1.9-billion charge as a result of some accounting changes, but that the move would be beneficial to the company's business south of the border over time. Both charges will be included in Manulife's fourth-quarter results, which are set to be released on Feb. 7.

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The charges come as chief executive officer Roy Gori, who took over this fall, forges ahead with his ambitious, multiphase plan to boost growth and earnings at the insurer. One of his first orders of business was a review of where the company's capital has been tied up, particularly in its legacy U.S. business lines, such as closed annuity books and, in particular, long-term-care insurance.

The first charge directly relates to the result of that analysis and includes a reorientation of part of the company's investment portfolio. Over the next year and a half, Manulife plans to sell some of its alternative assets, which are long-term holdings in sectors such as timberland, farmland, infrastructure and energy. Many of these assets are located in the U.S.

"We acknowledged previously that a significant portion of our capital is being tied up in businesses that are not generating adequate returns," Mr. Gori said. "So, focusing in on how do we actually improve the return of our legacy businesses was a huge priority for us."

Mr. Gori would not specify which holdings the company plans to sell, and he said Manulife is still evaluating what it will do with the excess capital. The company has previously stated that it will put more resources toward higher-growth businesses, such as wealth and asset management and Asian operations.

As the alternative assets are sold, about $2-billion in regulatory capital will be freed up at Manulife. But the move will also mean that the company's core earnings, a metric that strips out some accounting volatility, will be reduced by up to $60-million per year after tax until Manulife is able to put about $1-billion in capital to work in businesses that yield higher returns.

The second non-cash charge of $1.9-billion is an upfront hit related to major tax changes in the U.S. that are also expected to impact banks and other insurers. About one-third of Manulife's business is in insurance and wealth-management operations in the U.S.

On Friday, Mr. Trump signed sweeping changes to the U.S. tax code into law, which will impact corporations as well as individuals over the coming years. One of the biggest changes in the new bill is a decrease of the marginal corporate tax rate from 35 per cent to 21 per cent.

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For Manulife, that tax drop means changing the way it values the tax deductions it would expect to get from selling policies and paying out claims. A lower tax rate reduces the deductions the company forecast that it would receive years into the future, which is what led to the charge. But the changes should also result in higher earnings for Manulife over time as it pays out fewer tax dollars.

"Lower taxes are fundamentally a good thing for our business, in the United States, and of course any other jurisdiction where there are lower taxes as well," said Phil Witherington, incoming chief financial officer at Manulife, adding that both changes the company announced Friday would add to the company's return on equity.

Over time, the lower U.S. corporate tax rate will offer a boost to the company's net income and core earnings. Manulife expects this amount to be close to $250-million per year, starting in 2018.

Mr. Gori said he's trying to drive a sense of urgency at Manulife as he works to reshape the business and generate more value for the company's shareholders, adding that there is more work to be done.

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