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Fitch Affirms Manulife Financial's Ratings Following Standard Life Acquisition Announcement

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Manulife Financial Corporation (TSE:MFC) including the holding company's Issuer Default Rating (IDR) at 'A' and all outstanding senior debt and hybrid issues, as well as the Insurer Financial Strength (IFS) ratings of all operating subsidiaries at 'AA-'. The Rating Outlook is Stable.

Today's action follows the announcement that MFC will be acquiring the Canadian-based operations of Standard Life plc (Standard Life Canada) for CAD4 billion, subject to certain adjustments. The transaction is expected to close in the first quarter of 2015 subject to customary regulatory and shareholder approvals.

KEY RATING DRIVERS

Fitch's affirmation reflects its belief that MFC's capitalization and leverage will not be materially affected by the acquisition and that Standard Life Canada can provide strategic benefits to MFC. This is partially offset by integration risk derived from the acquisition.

MFC announced that the acquisition will be funded, in part, from the issuance of approximately CAD2.1 billion of subscription rights with the balance to be funded by internal resources and possible debt and preferred share issuances. Fitch believes that MFC's pro forma financial leverage will increase modestly but will remain within an acceptable level for the company's current rating category. MFC is targeting an MCCSR ratio in the range of 235%-240% at close. At June 30, 2014 the company's MCCSR ratio was 243%.

Fitch believes that MFC's acquisition of Standard Life Canada allows the company to accelerate its growth strategy for its Canadian business, expand its presence in Quebec and increase its earnings contributions from fee-based businesses. Standard Life Canada is currently the fifth largest life insurer in Canada, with CAD52 billion of assets under management. Execution risk is mitigated in part by MFC's existing knowledge of the Canadian market. Additionally, MFC already had an established wealth and asset management partnership with Standard Life plc. Integration is expected to take between 18 and 24 months.

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 5.5x;

--An increase in financial leverage to over 25% or an increase in total leverage to over 35%;

--A sustained drop in the company'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%;

--Inability to successfully integrate the Standard Life acquisition.

Key ratings triggers for MFC that could lead to an upgrade include:

--Continued improvement in profitability on both a core earnings and reported net income basis;

--An increase in fixed-charge coverage on a core earnings basis to near 10x;

--Maintaining current capital and earnings sensitivity to interest rate and equity markets;

--A decline in financial leverage to near 20%.

Fitch has affirmed the following ratings with a Stable Outlook:

Manulife Financial Corporation

--Issuer Default Rating (IDR) 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, non-cumulative preferred stock at 'BBB';

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

--CAD300 million 4.50% class A, series 3, non-cumulative preferred 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 at 'BBB';

--CAD200 million 4.40% non-cumulative rate reset, preferred class 1, series 5 stock at '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 3.90% non-cumulative rate reset, preferred class 1, series 17 stock at '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-';

--CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (Manulife Finance Corp. guarantor) at 'A-';

--CAD200 million 2.819% fixed/floating subordinated debentures due 2023 (Manulife Finance Corp. guarantor) at 'A-';

--CAD250 million 2.926% fixed/floating subordinated debentures due 2023 (Manulife Finance Corp. guarantor) at 'A-';

--CAD500 million 2.811% fixed/floating subordinated debentures due 2024 (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.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013)

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=865294

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Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman
Director
+1-312-368-3122
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
or
Committee Chairperson
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-368-2321
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com