CHICAGO--(BUSINESS WIRE)--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). See the full list of ratings at the end of this release.
At the same time, Fitch has assigned an 'A-' rating to previously issued MLI CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (MFC guarantor), and a 'BBB' rating to MFC's CAD250 million non-cumulative Rate Reset Class 1, series 7 preferred shares, CAD250 million non-cumulative Rate Reset Class 1, series 9 preferred shares, and CAD200 million non-cumulative Rate Reset Class 1, Series 11 preferred shares. A complete list of ratings actions is at the end of this release. The Outlook remains Negative for all ratings.
KEY RATING DRIVERS
Fitch's rationale for the ratings includes MFC's strong capital position, below-average exposure to credit-related risk, good liquidity and strong business profile with significant geographic and product diversity. Additional positive considerations include MFC's reduced risk profile driven by better hedging of volatility of earnings and capital related to interest rate and equity market risks. Fitch favourably views improved profitability in 2012 and notes that MFC's adjusted earnings have met the lower end of expectations.
The Negative Outlook is driven by Fitch's continued concerns about low profitability and earnings and their effect on organic capital generation and low-fixed charge coverage. MFC's reported profitability has regularly been affected by significant, unfavorable updates to actuarial methods and assumptions over the past two years. These charges are related to updates to actuarial standards, charges related to the impact of the current macro-economic climate and other changes to actuarial methods and assumptions, including product-related experience and policyholder behavior. Fitch views the earnings volatility over time as not consistent with MFC's current rating level.
Key challenges to profitability improvements could be driven by sustained low interest rates, financial market volatility, and a faltering of the weak economic recovery. Fitch expects these factors to constrain MFC's earnings growth over the near term, and in a severe, albeit unexpected, economic scenario, they could significantly affect the company's earnings and capital.
Fitch considers MFC's debt service capacity as below average for the rating as fixed-charge coverage on reported earnings was 3.5x and on a core earnings basis 5.6x in 2012. Fitch expects core earnings-based, fixed-charge coverage to exceed 5.5x in 2013. 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 most U.S. peers.
MFC's profitability improved in 2012 but remains below Fitch's expectations for the rating. Return on common shareholder's equity increased to 7.2% in 2012 as MFC's reported net income to common shareholders increased to CAD1.624 billion for 2012 versus CAD44 million for 2011. Results in both periods reflect the direct effect of capital markets, which Fitch adjusts for in its analysis. Core earnings for 2012 remained flat at CAD2.2 billion and investment related gains were again strong at CAD937 million above core investment gains. Key drivers of profitability in 2012 were reduced direct effects of lower interest rate levels and equity markets and lower goodwill impairments, offset by increases in charges for changes in actuarial reserves related to product assumptions. MFC posted record insurance and wealth sales in 2012.
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 211% at Dec. 31, 2012. Fitch notes that MFC has made significant progress in reducing capital volatility with regards to equity markets and interest rate fluctuations. MFC's financial leverage was 25% at year-end 2012 versus 26% at year-end 2011. Total debt and preferred stock to capital of 32% is at the high end of expectations and is expected to remain elevated in 2013. Financial leverage ratios are expected to decline modestly in the intermediate term driven by improved organic capital generation.
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 below 5.5x
--Financial leverage increases to above 30% from current levels
--Operating company MCCSR ratio below 190%
Key ratings triggers for MFC that could lead to a revision of the Outlook to Stable include:
--Maintain profitability and related fixed-charge coverage consistent with 2012
--Maintain current earnings volatility levels
--Sustain current capital and earnings sensitivity to equity markets
Fitch has assigned the following ratings:
The Manufacturers Life Insurance Company
--CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (Manulife Finance Corp. guarantor) at 'A-'
Manulife Financial Corporation
--CAD250 million 4.60% non-cumulative rate reset, preferred class 1, series 7 stock 'BBB'
--CAD250 million 4.40% non-cumulative rate reset, preferred class 1, series 9 stock 'BBB'
--CAD250 million 4.00% non-cumulative rate reset, preferred class 1, series 11 stock 'BBB'
Fitch has affirmed the following ratings with a Negative Outlook:
Manulife Financial Corporation
--Issuer Default Rating (IDR) at 'A'
--CAD350 million medium term notes 4.67% due 2013 at 'A-'
--CAD1 billion medium term notes 4.896% due 2014 at 'A-'
--CAD550 million medium term notes 5.161% due 2015 at 'A-'
--USD600 million senior notes 3.40% due 2015 at 'A-'
--CAD900 million medium term notes 4.079% due 2015 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 4.10% class A, series 1, preferred stock at 'BBB'
--CAD350 million 4.65% class A, series 2, preferred stock at 'BBB'
--CAD300 million 4.50% class A, series 3, preferred stock at 'BBB'
--CAD450 million 6.60% non-cumulative, preferred class A, series 4 stock at 'BBB'
--CAD350 million 5.60% non-cumulative rate reset, preferred class 1, series 1 stock at 'BBB'
--CAD200 million 4.20% non-cumulative rate reset, preferred class 1, series 3 stock 'BBB'
--CAD250 million 4.40% non-cumulative rate reset, preferred class 1, series 5 stock - 'BBB'
The Manufacturers Investment Corporation
--IDR at 'A'
--Short-term IDR at 'F1'
--Commercial paper at 'F1'
Manulife Financial Capital Trust II
--CAD1 billion 7.405% MaCS II series 1 at 'A-'
Manulife Finance, L.P.
--CAD550 million 4.448% fixed/floating senior debentures due 2026 (Manulife Finance Corp. guarantor) at 'A-'
--CAD650 million 5.059% fixed/floating subordinated debentures due 2041 (Manulife Finance Corp. guarantor) 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 Finance Corp. guarantor) 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-'
John Hancock Global Funding II
--Global MTN program at 'AA-'
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2011)
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
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