Moody's affirms Manulife ratings; changes outlook to negative
Toronto, November 06, 2008 -- Moody's Investors Service affirmed the Aa1 insurance financial strength
(IFS) ratings, but changed the outlook to negative from stable for
Manulife Financial Corporation's (Manulife's) subsidiaries,
which include Manufacturers Life Insurance Company (MLI), John Hancock
Life Insurance Company (JHLICo), and John Hancock Life Insurance
Company (USA) (JHUSA), following Manulife's announcement of
3Q08 results.
In affirming the ratings, Moody's noted Manulife's financial
profile continues to benefit from a diversified and predictable earnings
base, strong financial flexibility, and well-positioned
franchises in North America and Asia. In recent years, the
company has complemented strong profitability performance with a conservative
capital structure.
According to Moody's, the change in Manulife's rating outlook is
based on two factors: (1) the company's intention to borrow to meet
an increase in required regulatory reserves and capital in its variable
annuities and segregated funds businesses, which has resulted from
equity market declines, and (2) the potential for additional pressure
on capital adequacy and financial leverage if equity markets decline further.
According to lead analyst Peter Routledge, "Manulife entered
this period of financial turmoil with excellent financial flexibility.
To raise regulatory capital, however, the company intends
to increase its borrowings, modestly weakening its flexibility going
forward. The company also retains a significant exposure to equity
markets, which could further strain profitability, capital,
and financial flexibility if markets fall meaningfully below today's
levels."
Moody's observed that Manulife, unlike most of the other large
writers of variable annuities and segregated funds in North America,
has not implemented a meaningful equity hedging program, making
the company more vulnerable than other insurers to equity market volatility.
Moody's went on to note that, as equity markets declined,
the reserves and capital required against Manulife's variable annuity
and segregated fund guarantees rose substantially. Although the
company's primary regulator, the Office of the Superintendent
of Financial Institutions (OSFI), recently eased those requirements,
they would rise with further equity market declines. Moody's
cautioned that falling equity markets do not impose an immediate cash
demand on Manulife because policyholders can only exercise the guarantees
several years in the future. These guarantees are commitments by
Manulife to protect their variable annuity and segregated fund policyholders
against severe equity market declines, but usually take affect several
years after the initial investment.
Nonetheless, both OSFI and the U.S. insurance regulators
require Manulife to increase reserves and capital at its Canadian and
U.S. operating companies as equity markets fall.
As a result, the company has stated its intention to raise C$3
billion of debt to downstream to operating subsidiaries and strengthen
their capital adequacy. Financial leverage and earnings coverage
ratios will drop to the Aa range from the Aaa range as a result of the
increased borrowing.
Mr. Routledge noted that "weaker consolidated financial flexibility
at Manulife may well be temporary, assuming the company retires
this debt as equity markets stabilize and the company's very strong
earnings capacity helps to rebuild capital quickly. However,
if equity markets decline significantly from today's levels before
stabilizing, then Manulife's financial flexibility and capitalization
will weaken further and this could lead to a downgrade."
Moody's commented that the ratings could be downgraded if one or more
of the following occurs: (a) MLI's Canadian capital adequacy
(or MCCSR) ratio falls below 200% and is likely to remain there
for an extended period; (b) adjusted financial leverage rises above
20% for a sustained period or earnings coverage ratio falls below
12x; (c) Manulife fails to expand its hedging program for equity
risk; (d) Manulife's profitability comes under sustained pressure
with return on equity falling below 15% accompanied by greater
volatility; (e) Manulife's ratio of goodwill to equity rises
above 40%.
The rating outlook of Manulife could return to stable if one or more of
the following occurs: (a) Manulife's financial leverage and
coverage ratios return to their strong 2007 levels (below 20% for
financial leverage, earnings coverage above 12x); (b) Manulife
stabilizes its MCCSR ratio at 200% or higher; (c) the company
expands its hedging program for equity risk.
Manulife has made some progress in implementing a hedging program in 2008
to offset the equity market risk associated with some of the new variable
annuity policies the company writes in the U.S. An expansion
of this program would have a limited beneficial impact on Manulife's
capital required, given existing capital rules. Nonetheless,
expanding the hedging program across Manulife's segregated fund
and variable annuity businesses would mitigate the underlying economic
risk in these products. In Moody's view, expanding
the hedging program effectively would be consistent with Manulife's
current Aa1 IFS ratings.
The following ratings were affirmed with the outlook changed to negative
from stable:
Issuer: John Hancock Canadian Corporation
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Financial Services, Inc.
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Global Funding II
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Life & Health Insurance Company
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Life Insurance Co. of New York
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Life Insurance Company
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Life Insurance Company (USA)
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: John Hancock Variable Life Insurance Company
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: Manufacturers Life Insurance Company
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: STructured Asset Repackaged Trust,Ser. 2002-2
..Outlook Actions:
....Outlook, Changed To Negative From
Stable
Moody's last rating action on Manulife occurred on September 27,
2007 when the rating agency upgraded its subsidiaries' IFS ratings
to Aa1 from Aa2.
Manulife Financial Corporation, headquartered in Toronto,
Canada, is an international provider of life insurance, pension,
and investment products. On September 30, 2008 the company
reported consolidated total general-fund and segregated-fund
assets of C$331 billion, common shareholders' equity of C$25
billion, and year-to-date net income available to
common shareholders of C$2.4 billion.
Moody's insurance financial strength ratings are opinions on the ability
of insurance companies to repay punctually their senior policyholder claims
and obligations.
For more information, visit our website at www.moodys.com/insurance.
Toronto
Peter Routledge
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
(416) 214-1635
New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
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