DBRS Confirms Ratings on Manulife Financial Corporation at “A” and The Manufacturers Life Insurance Company at AA (low) with Stable Trends

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

KEY RATING CONSIDERATIONS
The rating confirmations reflect the Company’s powerful franchise across several key markets, its strong risk management framework and continued progress in hedging equity and interest rate risks, as well as its excellent liquidity and good product diversification and capitalization relative to peers. The ratings also incorporate Manulife’s above-average exposure to guaranteed products in Canada and the United States and the resulting volatility in profitability, while dealing with the heightened complexities of operating an international insurance organization.

RATING DRIVERS
The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to challenging operating environments, as well as its proactive financial and risk management. DBRS views upward rating actions as limited in the near term. However, positive rating pressure could arise from more consistent profitability on a quarter-to-quarter basis combined with lower financial leverage. Moreover, prudent gains from the successful execution of its customer-centric strategy, which supports its advisor channel, a reduced risk profile for its long-term guaranteed insurance products and a significant decrease in its exposure to long-term care could also prove to be positive for the ratings. Negative rating pressure could arise if the Company experiences persistent low profitability as measured by return on equity metrics, difficulty managing market volatility and hedging programs, or sustained deterioration in financial leverage (over 30%) and fixed-charge coverage ratios (below 7.0 times (x)).

RATING RATIONALE
In confirming the ratings, DBRS considered Manulife’s excellent global franchise, with its meaningful market shares in most 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 the Company operates adds to operational complexity. Manulife continues to implement a highly customer-centric strategic model rather than a more traditional product and distribution-centric one. The Company is increasing its direct marketing efforts and trying to accompany its customers through their different life stages by using advanced data analytics, including artificial intelligence, and providing direct advice while implementing well-received wellness program such as Vitality. Manulife has also been very successful in developing the affinity market for distributing simpler products, such as short-term life insurance.

Manulife has displayed proactive financial risk management. DBRS views favourably the after-hedging reduction in its 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. The Company’s large hedging programs introduce the risk of increased collateral requirements during periods of market volatility. Nevertheless, Manulife’s enterprise risk management program is comprehensive and continually improving.

Helped by its strong distribution, product mix, global brand recognition and an increased emphasis on risk management and innovation, Manulife has experienced high growth and improving profitability in recent years after excluding the impact of U.S. tax reform. More recently, Manulife has been making progress with its focus on growing its Global Wealth and Asset Management and Asian insurance operations. These business lines provide the highest growth opportunities compared with the more mature insurance markets in North America. Returns in the United States remain constrained by the Company’s large block of legacy businesses, including variable annuities and individual retail long-term care insurance (the latter was discontinued 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 are less capital intensive.

Manulife benefits from ample liquidity. It had consolidated cash of $17.2 billion at the end of Q2 2018, as well as a very large pool of liquid government bonds available for sale/repurchase and access to committed banking lines. DBRS notes that the non-operating holding company depends on dividend streams from MLI to provide funds for servicing its debt and paying dividend. However, the Company centrally manages its liquidity program and has a relatively stable dividend upstream flow from its subsidiaries.

The Company’s financial leverage remained stable at 29.4% at Q2 2018. Its fixed-charge coverage ratio improved to 9.0x for H1 2018 (8.8x for H1 2017) on higher profitability during 2018, bringing it more in line with the range for an AA-rated company. The Life Insurance Capital Adequacy test (LICAT) ratio for MLI, the Company’s primary operating subsidiary, reached 132% at June 2018, which is in line with the LICAT ratio of the main Canadian operating companies of Manulife’s peer insurance groups in Canada. This level translates into approximately $18 billion of regulatory capital above the supervisory target.

DBRS notes that the above press release was amended on June 25, 2019, to include the endorsement from DBRS Ratings Limited. The amendment was minor and would not impact the understanding of the reader.

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

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (January 2018), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrs.com.

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

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

Lead Analyst: Marcos T. Alvarez, Senior Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

For more information on this credit or on this industry, visit www.dbrs.com.