Post by
SunsetGrill on Dec 11, 2023 10:10am
TD - Analysis $34 Target
Manulife Financial Corp. (MFC-T, MFC-N) C$27.08 | US$19.94 MFC Reinsures Four Legacy Blocks, Including $6bn of LTC Mario Mendonca, CFA, CA Marcel Mclean, CFA Event This morning, MFC announced four reinsurance transactions involving legacy businesses (including $6bn of LTC) that will release over $1.2bn of capital and a 50mm share NCIB. The deal is expected to close in H1/24. Impact:
POSITIVE MFC reinsured $13bn of reserves involving four legacy blocks, including 14% of total LTC reserves as well as portions of U.S. structured settlements and two Japan whole-life products. We believe the market implicitly or explicity assigns a negative value to LTC. This transaction reduces MFC's LTC reserves by 14% and is expected to reduce changes in morbidity assumption sensitivities by 12%. Additionally, ALDA will be reduced by $1.7bn (or ~3%). However, ~$30bn of ALDA is guaranteed on policies where MFC takes the risk (a lot of ALDA is on participating insurance where MFC is not exposed) so exposure is reduced by ~5-6%. Similar to VA transaction (link), this LTC reinsurance transaction validates that MFC reserves were appropriate as demonstrated by the ability to transact with external parties. The transaction is expected to be slightly dilutive to earnings in the near term, but neutral to positive when considering buybacks. The deal is expected to reduce core earnings by ~$130mm and net income attributed to common shareholders by ~$15mm, and given the $1.2bn capital release, represents a 9.5x core earnings multiple. Assuming the full capital release is attributed to buybacks, this reflects $0.01 core EPS accretion ($0.07 accretion to EPS) and a 13bps improvement in core ROE (33bps to ROE). Our estimates currently reflect MFC buying back 15mm shares per quarter through Q4/24 (~4% of shares outstanding). The transaction is priced at book value including a $270mm ceding commission on the LTC block (MFC to pay related to differing return assumptions on deployed capital) as well as a modest negative ceding commission on U.S. structured settlements, offset by positive ceding commissions on the Japan blocks. The deal is a full risk transfer with the reinsurance representing an 80% quota share of the ceded LTC block and 100% quota share of other ceded blocks. MFC will continue to administer all reinsured policies.