January 26, 2016 / 5:47 PM / 2 years ago

Fitch Affirms Manulife Financial; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, January 26 (Fitch) Fitch Ratings has affirmed Manulife Financial Corporation (MFC) and its primary insurance related operating subsidiaries' ratings, including The Manufacturers Life Insurance Company (MLI) and John Hancock Life Insurance Company (U.S.A.) (JHUSA). A full list of rating actions follows at the end of this release. The Rating Outlook is Stable. The affirmation is based on the company's continued improvement in core operating earnings, strong capital position, good liquidity and solid business profile with significant geographic and product diversity. Offsetting these positives is MFC's debt service capacity, which Fitch views as low for the rating category, and the company's above-average exposure to the oil and gas sector in its alternative investment portfolio, which has led to fair value losses totalling CAD1 billion in the fourth quarter of 2014 and the first three quarters of 2015. KEY RATING DRIVERS MFC's core earnings through the first nine months of 2015 were up 18% to CAD2.6 billion. Key drivers of the improved profitability were higher fee income on increased assets under management in MFC's wealth management businesses, the impact of strong sales in Asia and the strengthening of the U.S. dollar. For the same period return on earnings (ROE) based on core earnings was 10%, below Fitch's median guideline of 13% for a company with an IFS rating in the 'AA' category. Reported net income for the first nine months of 2015 was down 32% to CAD1.9 billion primarily due to CAD626 million of fair value losses related to the company's oil and gas investments. Results for 2015 were also impacted by CAD354 million of charges related to changes in actuarial methods/assumptions, up from CAD139 million in 2014. MFC remains committed to achieving CAD4 billion in core earnings in 2016 by growing its Asian, wealth, and asset management businesses; building its Canadian franchise; growing its lower risk, higher return U.S. businesses; and focusing on expense management. Fitch views the key challenges that could affect MFC's ability to further improve profitability as sustained low interest rates, currency movements, financial market volatility, and a faltering of the global economy. Fitch expects that these factors could constrain MFC's earnings growth over the near term. Additionally, they could significantly affect MFC's earnings and capital in a severe (albeit unlikely) economic scenario. Favorably, Fitch believes that MFC's earnings volatility has declined as a result of the de-risking initiatives taken by the company over the past several years. Key strategies include effective hedging of public equity market exposure and interest rates, shifts in business mix and product re-pricing of long-term care (LTC) and universal life products. Fitch considers MFC's debt service capacity as low for the rating level despite an improvement in recent years. MFC's September 2015 year-to-date pretax fixed-charge coverage of 8.6x, as estimated by Fitch and based on MFC's 'core' earnings, is below expectations for the current rating category. Fitch estimates that MFC's core earnings would have to improve to approximately CAD4.6 billion with no increase in financial leverage for it to achieve the median guideline of 12x for a company with an IFS rating in the 'AA' category. Fitch believes MFC is well capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) ratio for MFC's leading operating company (MLI) at 226% at Sept. 30, 2015. MFC's financial leverage ratio has improved in recent years due to reductions in debt and improved organic capital generation. MFC's financial leverage has declined from a high of 25% at year-end 2011 to 18% at Sept. 30, 2015 on a pro forma basis following the issue of CAD1 billion of subordinated debt in November 2015. Fitch expects MFC's financial leverage will not increase significantly from current levels in 2016. MFC's liquidity is considered strong with a high-quality, liquid fixed-income portfolio. Fitch believes that under Canadian regulations, MFC has greater flexibility to upstream common stock dividends from operating subsidiaries to the regulated holding company without regulatory approval than do most U.S. peers. RATING SENSITIVITIES Key rating triggers for MFC that could lead to a downgrade include: --Decline in core earnings; --Elevated charges for actuarial methods and assumptions or experience losses; --Fixed-charge coverage on a core earnings basis below 6x; --An increase in financial leverage to over 25% or an increase in total leverage to over 35%; --A sustained drop in MFC's risk-adjusted capital position with no plans or ability to rectify. This would include the minimum continuing capital and surplus requirement ratio falling below 200%. The ratings on the U.S. insurance subsidiaries could be impacted if the U.S. risk-based capital ratio fell below 400%; --Large acquisitions that are outside the company's historical risk preference or that have a material impact on the company's leverage and capitalization. Key ratings triggers for MFC that could lead to an upgrade include: --Improvement in return on equity based on core earnings to 12% or higher; --Stability in reported net income; --An increase in fixed-charge coverage on a core earnings basis to over 10x; --Maintaining current capital and earnings sensitivity to interest rate and equity markets; --Continued maintenance of financial leverage at or below 20%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Manulife Financial Corporation --Long-term IDR at 'A'; --CAD400 million medium term notes 5.505% due 2018 at 'A-'; --CAD600 million medium term notes 7.768% due 2019 at 'A-'; --USD500 million senior notes 4.90% due 2020 at 'A-'; --CAD350 million 4.65% non-cumulative class A, series 2, preferred stock at 'BBB-'; --CAD300 million 4.50% non-cumulative class A, series 3, preferred stock at 'BBB-'; --CAD200 million 4.20% non-cumulative rate reset, preferred class 1, series 3 stock at 'BBB-'; --CAD200 million 4.40% non-cumulative rate reset, preferred class 1, series 5 stock t 'BBB-'; --CAD250 million 4.60% non-cumulative rate reset, preferred class 1, series 7 stock at 'BBB-'; --CAD250 million 4.40% non-cumulative rate reset, preferred class 1, series 9 stock at 'BBB-'; --CAD200 million 4% non-cumulative rate reset, preferred class 1, series 11 stock at 'BBB-'; --CAD200 million 3.8% non-cumulative rate reset, preferred class 1, series 13 stock at 'BBB-'; --CAD200 million 3.9% non-cumulative rate reset, preferred class 1, series 15 stock at 'BBB-'; --CAD350 million 3.9% non-cumulative rate reset, preferred class 1, series 17 stock at 'BBB-'; --CAD250 million 3.8% non-cumulative rate reset, preferred class 1, series 19 stock at 'BBB-'. The Manufacturers Life Insurance Company --Insurer Financial Strength (IFS) at 'AA-'; --IDR at 'A+'; --CAD550 million 4.21% fixed/floating subordinated debentures due 2021 (Manulife Financial Corp. guarantor) at 'A'; --CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (Manulife Financial Corp. guarantor) at 'A'; --CAD200 million 2.819% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) at 'A'; --CAD250 million 2.926% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) at 'A'; --CAD500 million 2.811% fixed/floating subordinated debentures due 2024 (Manulife Financial Corp. guarantor) at 'A'; --CAD500 million 2.64% fixed/floating subordinated debentures due 2025 (Manulife Financial Corp. guarantor) at 'A'; --CAD750 million 2.1% fixed/floating subordinated debentures due 2025 (Manulife Financial Corp. guarantor) at 'A'; --CAD350 million 2.389% fixed/floating subordinated debentures due 2026 (Manulife Financial Corp. guarantor) at 'A'; --CAD1 billion 3.181% fixed/floating subordinated debentures due 2027 (Manulife Financial Corp. guarantor) at 'A'. The Manufacturers Investment Corporation --IDR at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Manulife Finance, L.P. --CAD550 million 4.448% fixed/floating senior debentures due 2026 (Manulife Financial Corp. guarantor) at 'A-'; --CAD650 million 5.059% fixed/floating subordinated debentures due 2041 (Manulife Financial Corp. guarantor) at 'BBB+'. Manulife Financial Capital Trust II --CAD1 billion 7.405% MaCS II series 1 at 'A-'. John Hancock Life Insurance Co (U.S.A.) --IFS at 'AA-'; --IDR at 'A+'; --USD450 million surplus notes 7.375% due 2024 at 'A'. The John Hancock Life Insurance Company of New York --IFS at 'AA-'. John Hancock Life & Health Insurance Company --IFS at 'AA-'. Contact: Primary Analyst Tana M. Higman Director +1-312-368-3122 Fitch Ratings, Inc., 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=998404 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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