AM Best has commented that the Credit Ratings (ratings) of Manulife Financial Corporation (MFC) (Toronto, Canada) [NYSE: MFC] and its subsidiaries remain unchanged following the Nov. 15, 2021, announcement that the company has entered into an agreement to reinsure a significant portion—more than 75%—of its legacy U.S. variable annuity (VA) block to Venerable Holdings Inc. The block consists mainly of policies with guaranteed minimum withdrawal benefit riders. The reinsurance deal is expected to close during first-quarter 2022.
The transaction is in line with MFC’s previously announced strategy of identifying opportunities to de-risk its liability profile by transferring all or a portion of higher risk and more capital-intensive businesses to third parties, as well as pursuing other internal measures to improve business performance. AM Best believes that MFC’s reinsurance agreement with Venerable Holdings Inc. is a net positive as it is expected to release a significant amount of capital and allow the company to redeploy that capital into its other higher growth and less capital-intensive businesses, as well as reduce its exposure to equity market volatility and interest rate sensitivity. While MFC has announced that it will increase share repurchases to offset the loss in earnings per share, AM Best notes that overall capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains strong.
Upon closing, the transaction is expected to positively benefit capital by approximately $2.0 billion, including a one-time increase in net income of $750 million, and will reduce U.S. VA net amount-at-risk by approximately 75%, as well as generate a 54% reduction, excluding the impact from the company’s hedges, in the company’s equity market sensitivity from VA guarantees.
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