DBRS Morningstar Confirms Ratings on Manulife Financial Corporation at A (high) and The Manufacturers Life Insurance Company at AA with Stable TrendsInsurance Organizations
DBRS Limited (DBRS Morningstar) confirmed all 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. The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The ratings and trends reflect the Company’s powerful franchise across Canada, the United States, and Asia, as well as the strong execution of a renewed strategic vision that has focused on derisking the legacy insurance portfolio and reducing the volatility of earnings generated by movements in equity markets and interest rates, while improving profitability and maintaining conservative regulatory capital ratios. Manulife’s ratings are also underpinned by a very strong risk management framework, excellent liquidity, good product diversification, and a growing footprint in life insurance in Asia and wealth management globally. In addition, Manulife’s financial profile has remained resilient amid the peak of the Coronavirus Disease (COVID-19) pandemic.
Manulife’s ratings also consider its relatively large, although decreasing, exposure to guaranteed products in Canada and the United States, which can result in earnings volatility, as well as the complexities of operating a global insurance organization with increasing exposure to emerging markets. Headwinds from the coronavirus pandemic can still pose additional challenges, particularly given the development of new variants that can delay the ongoing economic recovery in most markets where Manulife operates.
The ratings are well placed in the current rating category. However, over the long term, the ratings would be upgraded if Manulife continues to improve profitability and further reduce its exposure to policy guarantees and long-term care products, while maintaining its strong capital profile.
Conversely, the ratings would be downgraded if there is persistently weaker profitability combined with a sustained deterioration in financial leverage and coverage ratios. The ratings would also be downgraded if the Company experiences an adverse event causing regulatory capital to decline substantially.
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, and global brand recognition. With more than 130 years of history, Manulife provides a large variety of financial protection and savings products. The Company has a long tradition of operating internationally and is well positioned to capitalize on its strong presence in key Asian markets where the demand for insurance and wealth management solutions are growing faster than the global average. In the last few years, Manulife has benefitted from a renewed strategic vision and excellent execution that has already produced tangible results in terms of an improved risk profile and profitability.
Manulife’s earnings capacity reflects its solid market position. The Company has made strong progress on multiple fronts in terms of profitability, including improvements in expense efficiency and earnings growth across all lines, especially in Asia and Global Wealth and Asset Management. More importantly, Manulife has also managed to decrease its quarter-to-quarter earnings volatility. Although the pandemic negatively affected Manulife's profitability in H1 2020, DBRS Morningstar notes a significant recovery since then. However, some headwinds remain as governments might need to reinstate social distancing measures amid new variants, which could delay or mute the economic recovery.
Manulife has materially derisked its legacy portfolios of guaranteed products and long-term care policies. The Company remains committed to continue its portfolio optimization plan and expects that the contribution to core earnings of the relatively riskier variable annuity and long-term care products will become less than 15% by 2025. Manulife has also largely decreased its earnings and capital sensitivity to equity markets and interest rates movements, which also provides support to the ratings. However, this requires a fairly large and complex hedging program that poses additional challenges in terms of operational, counterparty, and model risk, as well as collateral spikes in certain market conditions. Positively, Manulife’s strong risk management infrastructure is viewed as sophisticated enough to help mitigate these risks. Moreover, the coronavirus pandemic has proven Manulife’s ability to successfully navigate extreme market volatility and unprecedented business conditions.
DBRS Morningstar views Manulife’s liquidity position as very strong. The Company has a high proportion of government bonds in its investment portfolio, robust levels of cash, as well as excellent access to capital markets and committed lines of credit. The Company centrally manages its liquidity program and benefits from a large proportion of policies with claims levels that are well within its capabilities. This profile results in a claims distribution that should be largely predictable.
DBRS Morningstar regards Manulife and its subsidiaries as being very well capitalized. Total regulatory capital remains very strong, with the Company maintaining a Life Insurance Capital Adequacy Test (LICAT) Total Ratio for its major operating subsidiary, MLI, of 137% at June 30, 2021, which is above those of relevant peers in Canada and supportive of its current rating level. This LICAT Total Ratio translates to approximately $23 billion of regulatory capital above the supervisory target. The Company’s financial leverage ratio (including preferred shares and hybrids) as calculated by DBRS Morningstar was 25.9% at Q2 2021, a small improvement since YE2020. Although this level of leverage is slightly high for a AA-rated insurance company, DBRS Morningstar notes the continuous improvements in leverage that Manulife has achieved in the past two years, as well as the strong commitment from its management to operate with a leverage target of 25%. Manulife’s interest charge and fixed charge coverage ratios have also improved in F2020 and H1 2021 as a consequence of stronger profitability after the initial adverse impact of the pandemic in H1 2020. Although Manulife has high levels of regulatory capital, strong earnings in recent years, and ample access to diversified capital funding sources, DBRS Morningstar expects the Company to keep a prudent debt management amid the pandemic, including maintaining its conservative debt maturity profile.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
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 Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/381667; July 16, 2021) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/379424; May 31, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262; February 03, 2021).
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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal 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 Insurance Companies and Insurance Organizations” (July 16, 2021) was used to evaluate the Issuers, while the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (May 31, 2021) was used to rate subsidiary debt issuances guaranteed by Manulife Financial Corporation and “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (February 03, 2021) was used to assess ESG factors.
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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: June 12, 2003
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- Global Methodology for Rating Insurance Companies and Insurance Organizations (Archived) / July 16, 2021
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (Archived) / February 3, 2021