(The following statement was released by the rating agency) Fitch Ratings-New York-March 08: Fitch Ratings has affirmed Manulife Financial Corporation and its core insurance related operating subsidiaries' ratings, including Manufacturers Life Insurance Company (MLI) and John Hancock Life Insurance Company's (USA) (JHUSA) Insurer Financial Strength (IFS) ratings at 'AA-'(Very Strong). The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS Manulife's ratings reflect the company's very strong, diversified business profile, which provides the company with significant product and geographic diversification, along with its very strong capitalization and continued improvement in its core earnings capabilities. Offsetting these strengths includes Manulife's pressured fixed-charge coverage (FCC), elevated financial leverage metrics when compared to peers, above-average asset risk and net income sensitivities derived from various mark-to-market related impacts. Through year-end 2017, Manulife continued to improve upon its earnings profile, reporting 14% growth in core earnings to CAD4.6 billion and a pre-tax return on assets (ROA) of 90bps. These improvements were driven by higher core investment gains, strong new business and in-force growth in Asia and higher fee income in its wealth and asset management segment. This growth was partially offset by the impact of changes in foreign exchange rates and insurance/annuity policyholder experience charges. Fitch views Manulife's pre-tax ROA as modest when compared against 'AA' rated peers of similar size, scope and ratings expectations. Key challenges that have the potential to affect Manulife's prospective performance include a sustained low interest rate environment, currency movements, financial market volatility, and legacy-product experience volatility. Although the company has made efforts to decrease its risk profile, Fitch believes tail-risk remains present due to Manulife's above-average equity and interest rate risk. Manulife's capitalization, on a risk-adjusted basis, remains a rating strength, with its flagship operating company MLI maintaining a minimum continuing capital and surplus requirement (MCCSR) ratio of 224% as of year-end 2017. This was a decline over the prior period, and was a result of U.S. tax reform-related activity and portfolio mix changes. Fitch expects Manulife to continue to maintain its very strong capitalization measures under the new Canadian Life Insurance Capital Adequacy Test (LICAT) guideline effective January 2018, which replaced the current MCCSR framework. Fitch views Manulife's financial leverage measures as somewhat elevated versus its peers. On a pro forma basis for its recently announced CAD250 million preferred share issue and CAD200 million senior note redemption, the company reported total leverage of 30% and financial leverage of 23% through year-end 2017. These figures are in line with the prior year as a result of equity contraction yoy, due to charges associated with U.S. tax reform (CAD1.8 billion) and Manulife's decision to change the portfolio asset mix that supports its legacy businesses (CAD1 billion). Through year-end 2017, Manulife reported core-earnings FCC of 7.3x, a decrease when compared to the prior period as a result of higher debt service and early redemption activity. Fitch views Manulife's FCC measures as volatile and pressured for the rating level, despite its historic improving trend. Fitch estimates that Manulife's core earnings would need to improve in excess of CAD2 billion or by over 30% to achieve our 'AA' IFS ratio guidelines. Manulife's liquidity remains strong, with an emphasis on its high-quality and liquid fixed-income portfolio. Fitch believes that from a cash flow perspective, under Canadian regulation, the company has greater flexibility to upstream dividends from its operating subsidiaries to its non-operating holding company without prior regulatory approval. Offsetting its strong liquidity profile is its higher risky asset exposure as defined by Fitch, compared to both peers and rating guidelines. This ratio consists of below investment-grade bonds, net impairments, equities, and Manulife's alternative long-duration asset (ALDA) portfolio, versus total equity, which as of year-end 2017 was 147% and is above the maximum guideline of 74% for the current rating level. In line with Manulife's recent announcement, Fitch expects the company to decrease its risky asset exposure over the next 18-24 months, with active portfolio reallocations into more stable investment vehicles. Fitch continues to view Manulife's U.S. segment, operating under the John Hancock brand, as core to the overall Manulife family of companies. The segment as of year-end 2017 contributed 50% of Manulife's total premium and deposits, and accounted for 58% of its assets under management and administration. John Hancock offers several retirement savings products, a wide selection of retail mutual fund offerings, and a broad portfolio of insurance products including universal, variable, and term life insurance targeting the high net worth and emerging affluent markets. Offsetting these strengths includes legacy long-term care liability and variable annuity contract exposure, which have the potential to cause capital and earnings volatility. RATING SENSITIVITIES Key rating sensitivities for Manulife that could lead to a downgrade include: --Sustained deterioration in capitalization measures under the new LICAT regime; --Core earnings deterioration evidenced by return on equity (ROE) measures below 8% and return on assets (ROA) below 65bps; --Core-earnings FCC below 6x, with financial leverage and total leverage above 25% and 35%, respectively; --Risky asset ratio above 140%; --Large-scale acquisition or divestment that could adversely impact leverage and capitalization measures. Key rating triggers for Manulife that could lead to an upgrade include: --Continued strength in its capitalization measures under the prospective LICAT regime; --Reduced exposure associated with legacy variable annuity contracts, long-term care liabilities and alternative asset classes; --Sustainable core earnings measures evidenced by ROE in excess of 12%; --Stability in reported net income; --Reductions in financial leverage to consistently below 20%; --Improved core-earnings FCC consistently in excess of 10x. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Manulife Financial Corporation --Long-Term Issuer Default Rating (IDR) 'A'; --Medium term notes at 'A-'; --Senior notes 'A-'; --Subordinated notes at 'BBB+'; --Non-cumulative preferred stock 'BBB-'. The Manufacturers Life Insurance Company --Insurer Financial Strength (IFS) at 'AA-'; --IDR at 'A+'; --Subordinated notes at 'A'. The Manufacturers Investment Corporation --IDR at 'A'; --Short-Term IDR at 'F1'; --Commercial paper at 'F1'. Manulife Financial, L.P. --Subordinated notes (Manulife Financial Corp. guarantor) at 'BBB+'. Manulife Financial Capital Trust II --MaCS II at 'A-'. John Hancock Life Insurance Co. (U.S.A.) --IFS at 'AA-'; --IDR at 'A+'; --Surplus notes at 'A'. The John Hancock Life Insurance Company of New York --IFS at 'AA-'. John Hancock Life & Health Insurance Company --IFS at 'AA-' Contact: Anthony J Beato Director +1-646-582-4509 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jamie R. Tucker, CPA Director +1-212-612-7856 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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