Manulife Financial Corp. will shed three-quarters of its U.S. variable-annuity business, freeing up about $2-billion in capital and setting the stage for more stock buybacks and growth in its Asia business.
Manulife has contracted with Venerable Holdings Inc., a Pennsylvania company owned in part by a number of major U.S. buyout firms, to reinsure the annuities. That means Venerable, not Manulife, will take on the risk of paying out the annuities.
The deal allows Manulife to further put its stumbles from the 2008-09 financial crisis in the rear-view mirror. Roy Gori, the company’s chief executive officer, called the deal “a significant milestone for Manulife” in a statement announcing the transaction.
Investors bid up Manulife stock by more than 2 per cent in early trading Tuesday.
The transaction covers 163,000 policies with either guaranteed minimum withdrawal or death benefits issued between 2003 and 2012 by Manulife’s John Hancock Life Insurance Co. Unlike fixed annuities, these annuities are tied to the stock market, allowing the holders to share in gains as markets rise – and, in many cases, lock in higher benefits. When markets fall, however, insurers can be on the hook for large unfunded liabilities to cover the cost of protecting investors against losses.
While Manulife and other insurers have since rejigged their annuities to minimize the risks, Manulife still had a huge block of the business on its books. By getting Venerable to reinsure the contracts, Manulife shifts the risk to Venerable – Manulife says the annuities it’s shedding would have given it a $1.5-billion loss in the event of a 30-per-cent decline in the stock market.
There are about $2-billion in benefits: Manulife expects a $750-million after-tax gain, plus the deal frees up $1.3-billion in capital that had to be explicitly designated to back up the risks of those contracts.
The downside: The deal will cut about $200-million from Manulife profits in the near term, with the number declining over time.
Manulife said it intends to use “a significant portion” of the capital released to buy back shares and “neutralize” the impact of the transaction on its fully diluted earnings per share. The company had just announced a new stock-buyback program earlier this month for up to 2 per cent of its shares; Manulife now says it will ask regulators to expand that to 5 per cent of the company’s stock.
In a research note, analyst Meny Grauman of Scotia Capital wrote “it is hard to not have a favourable view of a transaction that reduces tail risk, boosts management credibility, and delivers more favourable terms than what the market had been expecting.” He said most investors had expected any deal Manulife would strike to get rid of the annuity risk would result in a reduction in book value per share, a measure of its assets and liabilities. Instead, Mr. Grauman noted, Manulife anticipates a 1.5-per-cent increase in book value per share.
“And yet as much as we hate to inject any negativity into this announcement, the reality is that this deal does not mean that the market will stop worrying about MFC’s tail risk,” he continued, noting that the legacy annuities business will still account for 22 per cent of Manulife’s earnings. While the deal is good, it won’t do more than modestly narrow MFC’s valuation gap with peers, he added.
Bloomberg Intelligence analyst Jeffrey Flynn says the deal is “an important step in shifting [Manulife’s] mix even more toward faster-growth Asia markets.” Profits from Asian operations made up more than a third of Manulife’s overall earnings in the third quarter.
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