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Manulife CEO Roy Gori, seen in September, 2017, appointed a new executive to focus solely on fixing ‘legacy’ units such as GE.Christopher Katsarov/The Globe and Mail

For the second time in as many months, a surprising shakeup in the American insurance market has dimmed the prospects for one of Manulife Financial Corp.'s most troublesome businesses, suggesting once again that the fixes promised by the insurer's newly minted chief executive officer will come with costs attached.

Dating back to the global financial crisis, Manulife has struggled to manage its long-term care and variable annuity divisions in the United States, both of which were acquired when the insurer bought John Hancock for $15-billion in 2003. The problems persisted for previous chief executive officer Don Guloien's entire tenure; after he retired last fall, Manulife's new leader, Roy Gori, appointed a new executive to focus solely on fixing these "legacy" units.

Of the two, U.S. long-term care is often seen as the more pressing issue, in part because policy holders are living longer, healthier lives, so a sudden economic recovery won't change its fundamentals. The business is rooted in demographics.

Largely for this reason, American giant General Electric Co. unveiled a stunning $9.5-billion (U.S.) writedown on its own long-term care insurance portfolio Tuesday, admitting it had "underappreciated the risk in this book" of business. The charge includes an $8.9-billion increase in policy benefit reserves.

The writedown follows a major review initiated last fall, during which GE consulted with its auditor, KPMG, and insurance regulators. Although the company was required to reassess its insurance reserves annually, the recent thorough analysis made GE's new CEO, John Flannery, realize the company's assumptions were off-base – something that shocked analysts, prompting one to ask on a conference call whether GE's annual auditor, KPMG, should be fired.

"Virtually the entire industry has experienced greater claims than originally anticipated," said GE Capital chief risk officer Ryan Zanin, adding that more people are making claims than expected, and that they make them for longer than anticipated.

The composition of each insurer's long-term care portfolio is different, so comparing the two isn't an exact science. Manulife has also already made some reforms to its long-term care business, such as asking regulators whether it can boost premiums three times between 2010 and 2016, after finding existing reserves weren't large enough to cover its growing claims. As well, the insurer has incurred sizable long-term care reserve charges since 2010, the latest worth $415-million following a triennial review of this business in 2016.

Manulife declined to comment Tuesday, but Mr. Gori, the new CEO, was asked about Manulife's long-term care business at a conference last September and said "we believe that we are adequately reserved."

As GE's experience illustrates, however, internal projections can be off the mark. A rival's actions can also prompt a recalculation of benchmarks, which is what recently transpired with Manulife's U.S. annuity business.

In December, Talcott Resolution, a unit of Hartford Financial Services Group that is stuffed with variable annuities, announced its sale to a group of six institutional investors for $2.05-billion (U.S.). To get the deal done, Hartford had to discount the price and then booked a $3.2-billion after-tax loss on the sale – suggesting Manulife's equivalent business may have less value that originally hoped.

Mr. Gori has also already made a significant strategy change based on assumptions that differed from his predecessor's. Right before Christmas, Manulife announced plans to reduce its exposure to "alternative long duration assets" (ALDA), such as timberland and agricultural crops, to free up $2-billion in capital. To do so, Manulife will incur a $1-billion (Canadian) charge.

"In and of itself the GE news is not a direct read-through for Manulife, but it does serve as a reminder that – just like the ALDA news last month – an outright exit from these 'legacy' businesses for Manulife will not happen without a cost to shareholders," Bank of Nova Scotia analyst Sumit Malhotra wrote in an e-mail.

Personal Finance columnist Rob Carrick encourages the use of robo-advisers to cut through the complexity of getting started investing in Exchange Traded Funds.

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