Changes in Manulife’s Portfolio Asset Mix

Manulife Financial Corp. (PSE: MLF) has announced that following a review of the investment strategy of its legacy businesses, it has made the decision to reduce the allocation to alternative long duration assets (ALDA) in its portfolio asset mix over the next 12-18 months.

“The change in the asset mix of our legacy businesses is an important step in our commitment to optimize the return on capital of our portfolio. The reduction in alternative long duration assets will result in more efficient capital usage and an improved risk profile,” said Manulife President & CEO Roy Gori. “As we execute on investment asset dispositions over the next 12-18 months, we will free up capital which can be redeployed to support our future growth.”

This decision to change the portfolio asset mix is expected to result in a charge to net income attributable to shareholders of approximately $1 billion after-tax or $0.50 per common share in the fourth quarter and to free up $2 billion in capital over the next 12-18 months. The decision will negatively impact core earnings in the short-term by approximately $50-60 million per year after-tax, until such time as Manulife redeploys the net $1 billion capital benefit towards higher return businesses.

In Manulife’s third quarter earnings press release, the company stated that an incremental 1% decline in the U.S. corporate tax rate would result in an immediate $60 million charge, but improve expected future net income and core earnings by approximately $15 million per year. Manulife also stated that there were other components of the draft legislation that could be adverse to the company, but that prospects for these changes were unknown.

With the U.S. tax legislation finalized and signed into law, Manulife is now in a position to update that disclosure. The company estimates a charge of approximately $1.9 billion, after-tax, or $0.96 per common share and that the lower corporate tax rate is expected to benefit net income and core earnings by approximately $250 million per year commencing in 2018. The charge will be included in the Company’s fourth quarter results, which will be reported on February 7, 2018.

The estimated amount of the charge reflects the impact of U.S. tax reform on policyholder liabilities and deferred tax assets which includes the lowering of the U.S. corporate tax rate from 35% to 21% and limits on the tax deductibility of reserves.

The combined change in portfolio asset mix and the impact of U.S. tax reform is expected to have a beneficial impact on common shareholders’ return on equity (ROE). The Company’s estimates for fourth quarter charges, longer-term earnings benefits, freed up capital and ROE are based on currently available information and may change as additional information becomes available.