Fitch Affirms Manulife Financial; Outlook Negative; Rates Pfd Stock and Sub Debt

Tue Sep 10, 2013 11:08am EDT

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(The following statement was released by the rating agency) CHICAGO, September 10 (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). See the full list of ratings at the end of this release. At the same time, Fitch has assigned a 'BBB' rating to MFC's CAD200 million non-cumulative Rate Reset Class 1, series 13 preferred shares. Proceeds from the issuance were used for general corporate purposes, including the refinancing of outstanding debt. The Rating 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 favorably views improved profitability on core operations in 2012 and thus far in 2013 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 fixed charge coverage. In evaluating the company's earnings performance Fitch looks at both core earnings and reported earnings. MFC's reported profitability has regularly been affected by significant, unfavorable updates to actuarial methods and assumptions over the past several 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. Despite an improvement in core earnings, Fitch views the reported 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 current rating as fixed-charge coverage on reported earnings was 1.9x through the first six months of 2013. Fixed charge coverage on a core earnings basis was 6.1x on a rolling 12-month basis through June 30, 2013. Fitch expects core earnings-based, fixed-charge coverage to continue 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 reported profitability declined through the first six months of 2013 and remains below Fitch's expectations for the rating. Return on common shareholder's equity declined to 6.5% as MFC's reported net income to common shareholders decreased to CAD735 million for the first half of 2013 versus CAD892 million for the same period in 2012. Results in both periods reflect the direct effect of capital markets, which Fitch adjusts for in its analysis. Core earnings for 2013 have increased by 9% to CAD1.2 billion. Key drivers of the lower reported profitability in 2013 were increases in charges for changes in actuarial reserves related to product assumptions and lower investment-related gains partially offset by reduced direct impacts of equity markets and interest rates. MFC posted its third consecutive quarter of record wealth sales, which was driven by a significant growth in its mutual fund business. 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 222% at June 30, 2013, up from 211% at year-end 2012. Fitch notes that MFC has made significant progress in reducing capital volatility with regard to equity markets and interest rate fluctuations. MFC's financial leverage was 23% at June 30, 2013. 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 rating: Manulife Financial Corporation --CAD200 million 3.80% non-cumulative rate reset, preferred class 1, series 13 stock at 'BBB'. Fitch has affirmed the following ratings with a Negative Outlook: Manulife Financial Corporation --Issuer Default Rating (IDR) 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, 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'; --CAD450 million 6.60% non-cumulative rate reset, 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 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 4.0% non-cumulative rate reset, preferred class 1, series 11 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 at 'A-'; --CAD200 million 2.819% fixed/floating subordinated debentures due 2023 (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-' Contact: Primary Analyst Tana M. Higman Director +1-312-368-3122 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bruce E. Cox Director +1-312-606-2316 Committee Chairperson Julie A. Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (August 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here 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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