(The following statement was released by the rating agency)
Nov 9 - Standard & Poor's Ratings Services said today that its ratings on
Manulife Financial Corp. (A-/Stable/--) and its affiliates (Manulife)
are unchanged following the company's release of third-quarter financial
results, including large basis changes (an annual review of assumptions required
under Canadian accounting) and a noncash goodwill write off.
In our view, earnings--excluding market effects and certain one-time
items--remain within expectations and supportive of the ratings. Manulife also
reported achieving its 2014 hedging targets for both its equity and interest
rate risk exposures, which we view as credit-favorable. In our March 21, 2012
report on Manulife, we said its earnings "will likely take at least four years
to recover to the historical annual run rate of more than C$4 billion," so the
company's resetting of its income targets to 2016 is not surprising.
Manulife's capitalization remains favorable, with a MCCSR (minimum continuing
capital surplus requirements) ratio of 204% that is above the 190%-200% range
we expect for the ratings. In our view, its capitalization will remain
sufficient to withstand significant market volatility and stay above the 190%
to 200% level we expect for the ratings.
The basis changes reported can be thought of in three categories. First,
assumption changes of C$(1.12) billion for variable annuity, segregated funds,
and universal life policies were mostly a result of macroeconomic factors. The
C$200 million noncash goodwill impairment charge also largely reflects
macroeconomic factors. Canadian IFRS financial reporting using fair value
concepts tends to have a procyclical effect on reported results. (see "How
Financial Accounting Regimes Of Life Insurers In Canada And the U.S. Diverge,"
published Nov. 1, 2011 on RatingsDirect). Consequently, we tend to look
through such market effects, particularly when capitalization remains
supportive of the ratings and we do not expect sustained macroeconomic
deterioration to emerge. Nevertheless, we recognize sustained macroeconomic
deterioration could have a material adverse effect on Manulife's earnings and
capitalization because of its remaining sensitivity to interest rates and
equity markets and could result in lower ratings. Second, we view the C$(244)
million basis changes that resulted from changes in exogenous actuarial
standards as one-time items not indicative of underlying performance. Third,
the other annual updates of C$358 million pertain to more or less routine
actuarial assumption changes that were, overall, favorable.
In addition, we expect Manulife to sustain its extensive competitive
advantages globally. We believe Manulife's future basis changes, excluding
market effects, will not be materially adverse. We expect Manulife to continue
to reduce its risk sensitivity to equity-market and interest-rate exposures.
We expect adjusted earnings, which in our view exclude the effects of market
volatility and many nonrecurring items, to continue to support fixed-charge
coverage of at least 5x.
(Caryn Trokie, New York Ratings Unit)