March 17, 2017 / 8:49 PM / 4 months ago

Fitch Affirms Manulife Financial; Outlook Stable

14 Min Read

(The following statement was released by the rating agency) CHICAGO, March 17 (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. KEY RATING DRIVERS MFC's ratings reflect very strong capitalization, continued improvement in core operating earnings and solid business profile with significant geographic and product diversification. Offsetting these positive factors are MFC's modest fixed charge coverage, which Fitch views as low for the rating category, above-average asset risk and net earnings sensitivity to market-related impacts. 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 230% at Dec. 31, 2016. The Office of the Superintendent of Financial Institutions issued the final Life Insurance Capital Adequacy Test (LICAT) guideline for Canadian life insurers with an effective date of Jan. 1, 2018. The LICAT will replace the MCCSR framework and Fitch expects MFC to remain in a strong capital position under the new framework. MFC's financial leverage increased to 24% at Dec. 31, 2016 on a pro forma basis following the issue of USD750 million of subordinated debt in February 2017. With consideration for potential debt redemptions in second- and third-quarter 2017, MFC's financial leverage is expected to drop to approximately 23%. In 2016, MFC reported net income attributed to shareholders of CAD2.9 billion, a 34% increase over the prior year. The increase primarily reflected growth in core earnings and an improvement in investment-related experience, partially offset by an increase in charges related to the direct impact of markets. Higher core earnings was largely driven by strong new business and in-force growth in Asia, investment gains of CAD197 million (compared with nil in 2015) and a CAD142 million release of tax and related provisions as a result of the closure of multiple tax years in the U.S., partially offset by higher macro hedging costs. Non-core charges totaled CAD1.1 billion in 2016, which was primarily related to market-related impacts and unfavorable updates to actuarial methods and assumptions. This compares with non-core charges of CAD1.2 billion in 2015, which primarily reflected fair value losses related to oil and gas investments along with charges related to actuarial methods and assumptions. Core earnings-based ROE remained flat at 10% in 2016, which is below expectations for the current rating category. MFC remains committed to increase core ROE to 13% or higher over the medium term, driven primarily by organic growth of less capital intensive/higher ROE businesses, particularly Asia and WAM businesses, contributions from recent acquisitions and strategic partnerships in Asia along with greater investment-related experience. Key challenges to profitability improvements include sustained low interest rates, currency movements, potential financial market volatility and an uncertain global economy. MFC continued its de-risking initiative in 2016 by announcing that it was discontinuing new sales of stand-alone individual LTC in the U.S. The company wrote off a LTC distribution-related intangible asset of CAD97 million. Fitch views MFC's 8.1x fixed charge coverage ratio as below the median guideline for the current rating category. Improved core earnings were offset by higher interest expense and preferred dividends on recent debt and preferred share issuances in 2016. Favorably, under Canadian regulations, MFC has greater flexibility to upstream common stock dividends from operating subsidiaries to the regulated holding company without regulatory approval than most U.S. peers. MFC has a higher allocation to alternative asset classes relative to its peers, which causes greater variability in investment results. MFC's 2016 risky assets ratio, defined as below investment-grade bonds net impairments, equities and MFC's alternative long duration assets (ALDA) portfolio divided by total equity, of 139% is above the median guideline for the current rating category. Excluding the ALDA portfolio, which was the basis for Fitch's previous calculation, MFC's risky asset ratio is 60%. RATING SENSITIVITIES Key rating triggers for MFC that could lead to a downgrade include: --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%; --Risky asset ratio above 140%; --A sustained drop in MFC's risk-adjusted capital position evidenced by an MCCSR ratio below 200% and a less favorable view of capital under the LICAT framework; --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 (ROE) 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 rates and equity markets; --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 Issuer Default Rating (IDR) at 'A'; --Medium term notes at 'A-'; --Senior notes at 'A-'; --Subordinated notes at 'BBB+'; --Non-cumulative preferred stock at 'BBB-'. The Manufacturers Life Insurance Company --Insurer Financial Strength (IFS) at 'AA-'; --IDR at 'A+'; --Subordinated notes at 'A'. The Manufacturers Investment Corporation --IDR at 'A'; --Short-Term IDR at 'F1'; --Commercial paper at 'F1'. Manulife Finance, L.P. --Subordinated notes (Manulife Financial Corp. guarantor) at 'BBB+'. Manulife Financial Capital Trust II --MaCS II at 'A-'. John Hancock Life Insurance Co (U.S.A.) --IFS at 'AA-'; --IDR 'A+'; --Surplus notes 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 Dafina M. 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