Fitch Affirms Manulife Financial's Ratings; Outlook Stable

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). A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

The ratings 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 CAD1.4 billion since the fourth quarter of 2014.

KEY RATING DRIVERS

MFC's core earnings through the first three months of 2016 were up 14% to CAD905 million. Key drivers of the improved profitability were strong growth in new business volumes, particularly in Asia, and CAD75 million related to changes in foreign currency rates, partially offset by higher macro hedging costs. For the same period, return on equity (ROE) based on core earnings was approximately 9%, below Fitch's median guideline of 13% for a company with an IFS rating in the 'AA' category.

Reported net income for the first three months of 2016 was up 46% to CAD1 billion. The increase was driven by an increase in core earnings across the segments and a variety of market related gains driven by interest rate movements and realized gains on the sale of AFS bonds, which more than offset lower than expected returns on alternative long-duration assets.

MFC remains committed to increase core ROE to 13% or higher over the medium term 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 impact 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 first quarter 2016 fixed-charge coverage of 9.2x, 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 over CAD5 billion with no increase in financial leverage for MFC 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 233% at March 31, 2016. MFC's financial leverage increased from a five-year low of 18% at year-end 2015 to 24% at March 31, 2016 on a pro forma basis following the issuance of SGD500 million of subordinated debt in May 2016 and USD1 billion of senior debt in June 2016. Fitch expects financial leverage will remain at current levels over the remainder of 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 its main operating subsidiary to the regulated holding company without regulatory approval than 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 MCCSR 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 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 rate 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 IDR at 'A';

--CAD400 million 5.505% medium term notes due 2018 at 'A-';

--CAD600 million 7.768% medium term notes due 2019 at 'A-';

--USD500 million 4.90% senior notes due 2020 at 'A-';

--USD1 billion 4.15% senior notes due 2026 at 'A-';

--USD750 million 5.375% senior notes due 2046 at 'A-';

--USD1 billion 4.7% senior notes due 2046 at 'A-';

--SGD500 million 3.181% fixed/floating subordinated debentures due 2026 at 'BBB+';

--CAD350 million 4.65% non-cumulative class A, series 2, preferred stock at 'BBB-';

--CAD300 million 4.5% non-cumulative class A, series 3, preferred stock at 'BBB-';

--CAD200 million 4.2% non-cumulative rate reset, preferred class 1, series 3 stock at 'BBB-';

--CAD200 million 4.4% non-cumulative rate reset, preferred class 1, series 5 stock t 'BBB-';

--CAD250 million 4.6% non-cumulative rate reset, preferred class 1, series 7 stock at 'BBB-';

--CAD250 million 4.4% 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-';

--CAD400 million 5.6% non-cumulative rate reset, preferred class 1, series 21 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-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

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