Manulife Financial announces $5.4bn reinsurance deal with RGA, including long-term care reserves

Manulife Financial Corporation has confirmed a significant $5.4 billion reinsurance agreement with Reinsurance Group of America (RGA), a transaction that includes $2.4 billion of long-term care (LTC) reserves. This deal marks another milestone in Manulife’s strategy to optimize its portfolio, enhance returns, and reduce risk exposure.

Transaction highlights

The reinsurance arrangement covers two distinct blocks of legacy business—$2.4 billion in LTC reserves and $3.0 billion in U.S. structured settlement reserves. For the LTC segment, the agreement represents a full-risk transfer, significantly reducing Manulife’s LTC reserve sensitivity to changes in morbidity assumptions. This transaction, when combined with a prior LTC reinsurance deal completed earlier in 2024, will collectively reduce Manulife’s LTC reserves by 18% and morbidity sensitivity by 17%.

Manulife plans to release $0.8 billion in capital as part of the transaction, with the intention to return these funds to shareholders primarily through share buybacks. This capital release aligns with the company’s ongoing commitment to enhancing shareholder value.

Financial impact and valuation

The transaction, priced at close to 1.0 times book value, reflects a modest negative ceding commission of 4% on LTC reserves. Despite this, it is expected to enhance Manulife’s return on equity (ROE) and maintain a neutral impact on earnings per share (EPS) after share buybacks. Roy Gori, Manulife’s President and CEO, stated that the deal, priced at 11.4 times core earnings, accelerates the company’s transformation towards a higher-return, lower-risk portfolio.

Marc Costantini, Manulife’s Global Head of Strategy and Inforce Management, highlighted the transaction’s validation of prudent reserve assumptions and its strategic importance in improving the return profile of the company’s inforce business.

Structural protections and strategic alignment

Manulife emphasized that the transaction includes robust structural protections, such as over-collateralized trusts to secure investment assets. The reinsurance agreement applies a 75% quota share to the ceded LTC and structured settlement blocks. Additionally, Manulife will continue to administer reinsured policies, ensuring no disruption to customer service.

The LTC block involved in the deal includes younger, active life reserves, which provide further validation for Manulife’s reserve assumptions. This is particularly significant given that the ceded block mirrors characteristics of Manulife’s retained LTC portfolio.

Shareholder benefits and capital optimization

The capital release resulting from the deal underscores Manulife’s focus on capital optimization. The company intends to utilize the $0.8 billion in released capital for share buybacks under its current normal course issuer bid (NCIB) program, which allows the repurchase of up to 90 million shares until February 2025. Any buybacks beyond this will require a new NCIB program subject to regulatory and exchange approvals.

Manulife expects to dispose of $1.5 billion in alternative long-duration assets (ALDA) as part of the transaction, further aligning its investment strategy with its de-risking objectives.

This latest reinsurance transaction not only supports Manulife’s ongoing transformation but also reinforces its position as a leader in executing complex, value-creating deals. Scheduled for closure in early 2025, pending regulatory approvals, the agreement marks another step in the company’s strategy to reshape its portfolio for higher returns while maintaining robust risk management practices.