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. All trends are Stable.
KEY CREDIT RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect the Company’s top tier insurance franchise across North America and Asia, resilient profitability amid a challenging market environment, as well as the reduced volatility of earnings. The Company has made progress in de-risking the legacy insurance portfolio by closing on two reinsurance transactions related to the U.S. variable annuity block in 2022 and is working toward further decreasing its exposure to guaranteed products. Manulife’s ratings are also underpinned by strong diversification in its distribution channels, regional footprint, and product offerings. With a strategy focused on growing the proportion of earnings coming from the Asia region, the Company is set to benefit from favourable demographic trends but is also subject to risks stemming from the multijurisdictional operational complexities and higher geopolitical tensions.
CREDIT RATING DRIVERS
The ratings would be upgraded if Manulife makes further progress in de-risking it legacy products portfolio consisting of policy guarantees and long-term care products, while increasing profitability metrics and maintaining its strong capitalization profile. Conversely, the ratings would be downgraded if there is significant deterioration in the Company’s risk profile or profitability metrics combined with a decline in capital ratios.
CREDIT RATING RATIONALE
The Company’s broad and diverse franchise is supported by leading market shares in Canada, the United States, and Asia, where it provides a large variety of financial protection and savings products. Manulife is well positioned to capitalize on its strategic objective of strengthening its presence in several key Asian markets where favourable demographic trends are leading to rapidly growing insurance and asset management needs. In addition to being a large and effective competitor in its chosen markets, the Company is well diversified by geography, product, and distribution channel. This has helped it maintain sales even as formerly popular products have been replaced with new universal and whole life products, retirement plan services, and mutual funds. Geographic and product diversification supports earnings stability by, for example, mitigating adverse financial impact coming from different geographies and product types over time.
Manulife’s earnings capacity reflects its strong franchise in most of its chosen markets. The Company has made progress on multiple fronts in terms of profitability, including improvements in expense efficiency, resulting in stronger and more stable earnings. The adoption of IFRS 17 and IFRS 9 is expected to have a further positive impact on net income stability in the future.
Manulife has improved its product risk profile following the closing of two reinsurance transactions in 2022 for more than 80% of its legacy U.S. variable annuity block. 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. Adoption of IFRS 17 and IFRS 9 will also allow Manulife to decrease its earnings and capital sensitivity to interest rates movements, which also provides support to the ratings. However, its fairly large and complex hedging program also comes with 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 mitigate these risks. Moreover, the Coronavirus Disease (COVID-19) pandemic and challenging macroeconomic and financial market environment has proven Manulife’s ability to successfully navigate market volatility though prudent risk management.
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, all of 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 largely predictable claims profile. Its product offerings characteristics and features protect it from sudden and large policy redemption demands.
Manulife and its subsidiaries are 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 138% at March 31, 2023, which is above the ratios 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. At 29.4% in Q1 2023 (as calculated by DBRS Morningstar, based on four-quarter rolling average), we view leverage as elevated given Manulife’s high rating level, but it remains close to the Company’s long-term target. Positively, DBRS Morningstar notes the longer-term improvement in the fixed-charge coverage ratio to 11.6% (based on annual three-year weighted average, as calculated by DBRS Morningstar).
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/416784 (July 4, 2023).
The Grid Summary Grades for Manulife are as follows: Franchise Strength – Very Strong/Strong; Risk Profile – Strong/Good; Earnings Ability – Strong; Liquidity – Very Strong; Capitalization – Strong.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 14, 2023; https://www.dbrsmorningstar.com/research/417109). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023; https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.
The following methodology has also been applied
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) - https://www.dbrsmorningstar.com/research/411694
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.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 www.dbrsmorningstar.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.
DBRS Morningstar 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.
This credit 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:
The last credit rating action on this issuer took place on July 29, 2022.
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 credit 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar 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, Head of Canadian Insurance, Global FIG
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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