Morningstar DBRS Confirms Credit Ratings on Manulife Financial Corporation at A (high) and The Manufacturers Life Insurance Company at AA, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed all credit ratings of Manulife Financial Corporation (Manulife or the Company) and its related entities, including Manulife's Issuer Rating at A (high) and the Financial Strength Rating of The Manufacturers Life Insurance Company (MLI) at AA. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's top tier franchise across North America and Asia, diversified earnings supporting income stability and a reduced risk profile. In early 2024, the Company executed additional key reinsurance deals involving various legacy and low ROE businesses, including the largest ever block of long-term care (LTC) policies, amounting to $6 billion in reserves. These de-risking transactions are important milestones as they help improve Manulife's overall risk profile, validate many of Manulife's reserving assumptions, and increase the likelihood of further de-risking actions that will free up capital for the Company to continue to invest in higher ROE businesses, consistent with its longstanding strategy. Countering some of the advantages are reduced earnings and increased counterparty and/or re-capture risks. Manulife's credit ratings are further underpinned by a quality risk management framework, but Morningstar DBRS notes that its growing Asia region is exposed to a unique set of macroeconomic, geopolitical, and regulatory challenges.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if Manulife were to make further material progress in de-risking its legacy products portfolio consisting of policy guarantees and long-term care products, while increasing profitability metrics and maintaining a strong capitalization profile. Conversely, Morningstar DBRS would downgrade the credit ratings if there were sustained and significant deterioration in the Company's risk profile or profitability combined with a decline in capital ratios.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Very Strong/Strong
The Company enjoys leading market shares in Canada, the United States, and several Asian markets, where it provides a variety of protection and savings products. As such, the Company is well-diversified by geography, product, and distribution channel. This has helped it maintain earnings stability by mitigating adverse financial impacts coming from different geographies, asset classes, and product types. Over the years, Manulife has been updating its product offerings based on the operating and market environment generally favoring less-capital-intensive products such as retirement planning and wealth management and other offerings with few or very modest guarantees.

Risk Profile Building Block Assessment: Strong/Good
The enterprisewide risk management framework is robust and appropriately aligned with the Company's size and complexity of operations including its many regulatory jurisdictions where it operates. Management is committed to further de-risking of its legacy/low ROE book and has taken concrete steps in this direction. Following the two large reinsurance transactions related to the U.S. variable annuity block in 2022, Manulife reinsured a total of $18.8 billion in reserves across two reinsurance deals that closed in early 2024. The first transaction, announced in December 2023, relates to the legacy U.S. LTC block ($6 billion in reserves), two Japan whole-life products ($5.6 billion in reserves), and U.S. structured settlements ($1.6 billion in reserves). The second transaction is for the low ROE Canadian Universal Life block ($5.8 billion in reserves). While reinsurance transactions bring heightened counterparty risk considerations including re-capture risk, structural protections, including the creation of overcollateralized trusts and agreed-upon investment guidelines, partly mitigate this risk. On the upside, Manulife benefits from reduced balance sheet risks and capital releases.

Earnings Ability Building Block Assessment: Strong
The 2019-22 period shows very good growth in earnings and improved earnings stability; however, the adoption of IFRS 17 in January 2023 has introduced accounting changes that make 2023 not comparable to historical data. Manulife generated $5.1 billion in net income attributed to shareholders during 2023 equating to an ROE of 12%. Net income achieved in 2023 represents an increase relative to the comparable transitional net income calculated for 2022 despite write-downs related to commercial real estate exposures. It is important to note that under the new IFRS 17 framework, contractual service margin (CSM) can also be considered a strong indicator of long-term profitability, given that part of the new business gains are now recorded in this account and will be recognized into profit over the life of the contract. Manulife has generated over $2 billion in CSM through new business in 2023, of which close to 75% is attributable to the Asian region, indicating the strength of potential future earnings. Morningstar DBRS believes that Manulife's profitability is sustainable in the longer term, supported by increasing insurance sales and the resulting new business CSM, fee income growth in its Global WAM segment, and disciplined expense management.

Liquidity Building Block Assessment: Very Strong
The Company has a high proportion of government bonds in its investment portfolio, robust levels of cash and different types of committed lines of credit which contribute to its very strong liquidity position. The Company centrally manages its liquidity program and benefits from a large proportion of policies with a predictable claims profile. Its product offerings characteristics and features protect it from sudden and large policy redemption demands. Manulife has also been proactive in adopting new liquidity metrics that are regularly re-assessed including through liquidity stress testing.

Capitalisation Building Block Assessment: Strong
The Company's financial leverage ratio (including preferred shares and hybrids) as calculated by Morningstar DBRS under IFRS 17, was 31.8% based on the four-quarter rolling average as of Q1 2024. Manulife's financial leverage has been at a higher level due to the adoption of IFRS 17. Morningstar DBRS views this level of leverage to be somewhat high for a AA-rated insurance company, which is taken into consideration together with Company's prudent pre-financing initiatives, as well as excellent access to capital markets and the strong fixed charge ratios.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (15 April 2024) https://dbrs.morningstar.com/research/431180. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/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
dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on July 19, 2023.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Nadja Dreff, Senior Vice President, Sector Lead
Rating Committee Chair: Michael Driscoll, Managing Director
Initial Rating Date: August 01, 1989

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

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