TD Action Note: Impact Positive and Upgrade to $37.00 Reinsurance of 75% of U.S. VA Values Block at 10x Earnings
Event
Yesterday after the close, MFC announced the reinsurance of 75% of its legacy U.S. VA block (88% with higher-risk GMWB; 12% with low-risk GMDB riders). The transaction releases $2bln of deployable capital, reflecting an after-tax gain of $750mm and net LICAT capital release of $1.3bln. The transaction reduces the guaranteed value to $7bln from $33bln, increases MFC's BV/share by 1.5%, and should be neutral to earnings after the buyback. The deal is expected to close in Q1/22.
Impact: POSITIVE
The after-tax gain supports the view that MFC has been conservative in establishing reserves on the VA block, which we believe lends support to the notion that other blocks, including LTC, are also conservatively reserved. The transaction reduces the net amount-at-risk to $0.5bln (primarily low-risk GMDB), reducing MFC's equity-market sensitivity by 54% to $1.2bln (from $2.7bln) for a 30% drop in markets. Management has committed to buying back stock to offset the $200mm of lost earnings.
At a price of $25/share, MFC could buy back ~80mm shares or 4.1% of shares outstanding, more than offsetting the 2.9% dilution from selling the block. The company previously announced a 2% NCIB, and with a further 3% buyback to neutralize the impact on EPS from this transaction, taking the buyback to 5% or ~97mm shares. We assume that the deal will close at-or-near the beginning of 2022 and that 97mm shares will be repurchased at a rate of ~25mm quarterly.
The transaction with Venerable has been structured through a trust that will be overcapitalized with daily top-ups to a required balance. The trust also has clearly defined investment guidelines to limit the potential that the VA risk falls back to MFC. Venerable owns/manages legacy VA blocks and was created by an investor group led by Apollo and other insurance-specialist entities.
TD Investment Conclusion At ~10x earnings, the deal values the VA block well-above MFC's P/E (2022E) of ~7x. As the non-legacy business includes the high-value Wealth and Asian businesses, we believe the market implicitly puts a negative value on MFC's legacy businesses. At 10x, this transaction illustrates MFC's discount valuation and supports the 50%+ upside to our target price and ACTION LIST BUY rating.