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TEXT - S&P comments on Manulife Financial
November 9, 2012 / 6:56 PM / 5 years ago

TEXT - S&P comments on Manulife Financial

(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)

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