DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Medium-Term Notes rating of Manulife Financial Corporation (Manulife or the Company) to A (high) from “A,” its Unsecured Subordinated Debentures rating to “A” from A (low), and its Non-Cumulative Preferred Shares rating to Pfd-2 (high) from Pfd-2. In addition, DBRS Morningstar upgraded the Issuer Rating and Financial Strength Rating of The Manufacturers Life Insurance Company (MLI) to AA from AA (low), its Unsecured Subordinated Debentures rating to AA (low) from A (high), and its Non-Cumulative Preferred Shares rating to Pfd-1 from Pfd-1 (low). Concurrently, DBRS Morningstar upgraded the Fixed/Floating Subordinated Debentures of Manulife Finance (Delaware), L.P. to “A” from A (low). DBRS Morningstar also changed the trend on all ratings to Stable from Positive.
KEY RATING CONSIDERATIONS
The ratings upgrade reflects the Company’s powerful franchise in Canada, the United States and Asia as well as the execution of a renewed strategic vision that has focused on derisking the legacy insurance portfolio and reducing the volatility of earnings from movements in equity markets and interest rates, while leading its Canadian peers in terms of regulatory capitalization ratios. This derisking of the legacy insurance portfolio has materially improved the risk profile over the past decade. Moreover, we view Manulife’s performance in 2020 as resilient, given the adverse economic impact brought on by the Coronavirus Disease (COVID-19) pandemic globally. The ratings also consider Manulife’s relatively large exposure to guaranteed products in Canada and the United States, which can result in earnings volatility, as well as the additional complexities of operating an international insurance organization.
Given Manulife’s recent ratings upgrade, DBRS Morningstar does not see upward ratings pressure over the intermediate term. Over the longer term, if Manulife continues to improve profitability and derisk by further reducing its exposures to product guarantees and long-term care products, while maintaining its capital profile, the ratings would be upgraded.
Conversely, persistent weaker and volatile profitability combined with a sustained deterioration in financial leverage and coverage ratios would result in a ratings downgrade. An adverse event causing regulatory capital to decline substantially would also result in a ratings downgrade.
The Company’s broad and diverse franchise is supported by leading market shares in Canada, the United States, and Asia. The Company also has strong distribution capabilities, a broad product mix, global brand recognition, and management agility, all of which is supported by a solid risk management framework.
Positively, the Company continues to make improvements in its risk profile, earnings ability, and capitalization levels. Although profitability has weakened in the first half of 2020 because of the initial impact of the pandemic, earnings have remained resilient and in line with relevant peers by achieving a return on equity of 8.2% in the first half of 2020, per DBRS Morningstar’s calculations. Importantly, the Company’s financial leverage has improved to close to 25%, and Senior Management expects to maintain leverage around this level going forward.
Manulife has been making progress with its focus on growing its Global Wealth and Asset Management and Asian insurance operations, the business lines that provide the highest growth opportunities compared with the more mature insurance markets in North America. Together with the focus on expense management and a reduction of the impact of equity and interest rates volatility on the bottom line, these strategies have allowed Manulife to improve profitability in recent years.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
The Grid Summary Grades for Manulife Financial Corporation are as follows: Franchise Strength - Very Strong/Strong; Risk Profile - Strong/Good; Earnings Ability - Strong/Good; Liquidity - Very Strong; Capitalization: Strong.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020: https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020: https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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.dbrsmorningstar.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (July 21, 2020) was utilized to evaluate the Issuers, while the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (January 22, 2020) was used to rate subsidiary debt issuances guaranteed by Manulife Financial Corporation.
The last rating action on this issuer took place on October 4, 2019, when DBRS Morningstar changed the trends on all ratings to Positive from Stable.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIC
Initial Rating Date: June 12, 2003
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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