DBRS Confirms Ratings on Manulife Financial Corporation and Affiliates

DBRS Limited (DBRS) confirmed the Issuer Rating and Medium-Term Notes rating of Manulife Financial Corporation (MFC or the Company) at “A,” its Unsecured Subordinated Debentures at A (low) and its Non-Cumulative Preferred Shares rating at Pfd-2. DBRS has also confirmed the Financial Strength Rating (FSR) and Issuer Rating of The Manufacturers Life Insurance Company at AA (low), as well as its Unsecured Subordinated Debentures rating at A (high) and its Non-Cumulative Preferred Shares rating at Pfd-1 (low). At the same time, DBRS has confirmed the Fixed/Floating Subordinated Debentures of Manulife Finance (Delaware), L.P. at A (low), as well as the Manulife Financial Capital Trust Notes II - Series 1 rating of Manulife Financial Capital Trust II at “A.” All trends are Stable.

In confirming the ratings, DBRS considered Manulife’s excellent global franchise, with its meaningful market shares in the majority of the jurisdictions in which the Company operates. The Company’s extensive insurance and wealth management operations in Canada, the United States and in numerous countries in Asia offer a high degree of product and geographic diversification; however, dealing with the different legal, regulatory, solvency and accounting requirements for the numerous jurisdictions in which it operates adds to operational complexity. Manulife has displayed proactive financial risk management and DBRS views favourably the reduction in interest rate and equity market risk from historical highs, although the Company is still susceptible to market volatility arising from its large books of segregated funds and annuities, as well as from the alternative assets in its invested assets portfolio. In addition, the Company’s large hedging programs introduces the risk of increased collateral requirements during periods of market volatility. Nevertheless, Manulife’s enterprise risk management program is comprehensive and continually improving.

In recent years, Manulife has been making progress with its focus on growing its global wealth and asset management and Asian insurance operations, as these business lines provide the highest growth opportunities, compared with the more mature insurance markets of Canada and the United States. Returns in the United States in particular are dampened by the Company’s large block of legacy businesses, including variable annuities and more recently, long-term care insurance, which the Company stopped selling in December 2016. To create a less risky product portfolio, Manulife has been deemphasizing sales of products where the Company is liable for long-duration guarantees and emphasizing sales of those products that reduce strain and are less capital-intensive.

In September 2017, MFC announced structural changes in its business lines, as well as changes in its senior leadership team. The changes emphasize the Company’s growing focus on its Global Wealth and Asset Management (Global WAM) business and its objective of improving profitability in its legacy businesses. Global WAM will become a primary reporting segment encompassing all these businesses in all jurisdictions, as compared to the current structure, where each major division (Canada, the United States and Asia) has its own separate Insurance, Wealth and Asset Management and Other Wealth businesses. Among other management changes, MFC has also hired a new head of Manulife Asia, appointed a new CFO starting in 2018, and appointed new leadership for John Hancock and Manulife Canada. MFC has also created a North American Legacy Business segment with a dedicated leader. DBRS views the added emphasis on managing this legacy business as a positive development, given the potentially adverse impact that the legacy businesses can have on MFC’s profitability and capital.

Helped by its strong distribution, product mix, global brand recognition and an increased emphasis on risk management and innovation, MFC has experienced high growth and improving profitability in recent years. DBRS considers MFC to have excellent earnings capacity, as well as good liquidity and capitalization. The Company’s financial leverage has remained stable at 29.2% at Q2 2017, while the fixed-charge coverage ratio has improved to 8.6 times (x) for H1 2017 (7.4x for H1 2016) on higher profitability, bringing it more in line within the range for an AA-rated company. The Company’s Minimum Continuing Capital and Surplus Requirements ratio continues to be strong at 230%, positioning it well to adapt to the January 2018 implementation of the new Life Insurance Capital Adequacy Test.

The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to challenging operating environments, as well as its proactive financial management.

RATING DRIVERS
Negative rating pressure could arise if the Company pursues an aggressive acquisition policy that results in an elevated risk profile, difficulty managing market volatility and hedging programs, or if there is a substantial deterioration in leverage and fixed-charge ratios. Conversely, positive rating pressure could arise from more consistent profitability, combined with lower financial leverage. Similarly, meaningful profit gains from a successful execution of MFC’s customer-centric strategy could also prove to be positive for the ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.