Manulife Financial Corp. said it struck deals to offload billions of dollars in policy liabilities, allowing it to free up $1-billion in capital.
The insurer said late Thursday it will use some of that cash to boost its common share dividend by 14 per cent to 25 cents each quarter. It also announced plans to buy back up to 40 million of its common shares – an initiative often used to boost a company’s stock price.
The deals with Jackson National Life Insurance Co. and RGA Reinsurance Co., two firms that insure the risks of other insurance companies, will reinsure $12-billion worth of Manulife’s legacy U.S. liabilities, as well as some of its Canadian universal life policies, the company said.
As part of chief executive Roy Gori’s restructuring efforts, he set a goal of freeing up $5-billion worth of capital, which is about 20 per cent of the equity allocated toward legacy businesses, by 2022. Measures to achieve this would include reinsurance, sales and managing expenses.
The moves come as the insurer’s stock has sagged despite rising interest rates in Canada and the United States. Insurers typically benefit from rising rates as large portions of their investment portfolios are tied to fixed-income returns that rise in sync with rates.
Manulife, however, has wrestled with a portfolio of legacy contracts, particularly in the United States, that were signed years ago and promised solid payouts to their policyholders. Generating the returns necessary to deliver these payouts has been hard for Manulife and many other insurers over the past decade.
To reorient the company, Mr. Gori shook up its executive team in September, 2017, and created a position with direct responsibility for Manulife’s legacy businesses in North America. Naveed Irshad, who ran the insurer’s business in Singapore, took on the role.
Three months later, Mr. Gori made a splash by announcing plans to reduce Manulife’s exposure to “alternative long duration assets,” such as timberland and agricultural crops. The move was designed to free up $2-billion in capital over the span of 18 months. To do so, Manulife had to incur a $1-billion charge. (At the same time, Manulife announced a $1.9-billion writeoff tied to the new corporate tax laws in the U.S.)
The latest moves, announced Thursday, will “reinsure substantially all of [Manulife's] legacy U.S. individual and group pay-out annuities businesses, and mortality and lapse risk on a portion of its legacy Canadian universal life policies,” according to the company.
Reinsurance is a common product in the insurance industry, and it is used to help split the risk on a company’s books by relieving the original insurer – in this case, Manulife – of a portion of its liabilities.
Despite these actions, Manulife is still wrestling with a U.S. long-term care business, which is widely seen by analysts as its biggest problem. People are living longer, healthier lives and claims for home care often aren’t made until 20 to 40 years after a policy was first purchased. It has been tough for any insurer to manage its risk and generate adequate returns to cover those costs over the past decade of low rates.
Aside from these legacy businesses, Manulife benefited from a major development on an outstanding lawsuit this week.
Manulife and two other Canadian insurers are fighting lawsuits in Saskatchewan over the fine print of decades-old insurance contracts. At issue is whether the terms of universal life contracts allow some insurance products to be used as investment accounts by policyholders.
Sensing distress, Muddy Waters LLC, a well-known U.S. short-seller run by Carson Block, piled on in October by unveiling a campaign to lower Manulife’s share price.
Late Monday, however, the Government of Saskatchewan made changes to the province’s insurance regulations that will help protect Manulife by effectively capping how much money can be put in the accounts in question.
Since Manulife revealed the Saskatchewan rule changes, its stock has climbed 4.7 per cent. However, the shares have lost 20.6 per cent since the start of the year.