A.M. Best Co. has affirmed the financial strength ratings (FSR)
of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of the life
insurance subsidiaries of Manulife Financial Corporation (MFC)
(Toronto, Canada) (NYSE:MFC). Concurrently, A.M. Best has affirmed the
ICR of “a-” as well as all existing debt ratings of MFC. The outlook for
all ratings is stable. (See link below for a detailed listing of the
companies and ratings.)
The rating affirmations reflect Manulife’s favorable earnings in 2013
due to recent interest rate increases, adequate risk-adjusted
capitalization relative to its current ratings level and strong market
position in its core lines in North America and Asia. Recent de-risking
initiatives have led to an increased focus on less capital intensive
lines of business and should result in less volatility in reported
earnings over time. This strategy favors growth in sales of mutual
funds, wealth products and less interest sensitive protection products.
MFC continues to maintain significant scale in its core business lines
and has seen growing assets under management.
Over the last few years, MFC’s various strategic actions have moderated
the impact of the macro-economic challenges and equity market volatility
on its consolidated risk profile and balance sheet. While the company is
currently adequately hedged per its risk targets, recent changes in
hedging strategies, product design and pricing look to improve
profitability. Other strategic actions include curtailing or suspending
the sales of capital intensive products, such as annuities in the United
States (e.g., variable annuities and book value fixed deferred
annuities).
Offsetting rating factors include MFC’s significant in-force exposure to
equity market and interest rate risk, particularly within its insurance
segments. Despite the recent de-risking strategies, A.M. Best believes
that MFC will continue to face challenges in managing its large book of
in-force business given the continued historically low interest rate
environment and global economic uncertainty.
In addition, MFC’s consolidated historical earnings trends have been
volatile. This is mainly due to Canadian International Financial
Reporting Standards (IFRS), which generally result in more volatile
results for interest and equity market sensitive liabilities. A.M. Best
also remains concerned over MFC’s long-term care book of business,
currently written through John Hancock Life Insurance Company (U.S.A.),
but notes that the company continues to make progress in achieving its
targeted price increase approvals on its inforce blocks and is currently
only selling de-risked and repriced retail long-term care products at
significantly reduced levels. In addition, MFC’s exposure to real
estate, through direct mortgage loans and commercial real estate,
remains high as a percentage of total invested assets. A.M. Best
recognizes that the direct mortgage loans have been conservatively
underwritten with low loan-to-values and high debt service coverage
ratios and continue to have low amounts in arrears. In addition,
approximately 28% of the company’s mortgage portfolio is insured by a
federal government agency, Canada Mortgage and Housing Corporation
(Canada’s national housing agency). MFC’s leverage continues to be
elevated and above target levels partially due to pre-financing
activities.
A.M. Best believes MFC’s ratings are well positioned at their current
rating level for the near to medium term. Key factors that could result
in negative rating actions include a significant and sustained decline
in MFC’s risk-adjusted capitalization; operating performance that does
not meet A.M. Best’s expectations over a sustained period; or difficulty
in managing large in-force blocks of interest and equity market
sensitive business.
For a complete list of Manulife Financial Corporation and its
subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/121810manulife.pdf.
The methodology used in determining these ratings is Best’s Credit
Rating Methodology, which provides a comprehensive explanation of A.M.
Best’s rating process and contains the different rating criteria
employed in the rating process. Best’s Credit Rating Methodology can be
found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world’s oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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Copyright Business Wire 2013