Fitch Puts Outlook-Negative on MFC

Fitch Ratings has announced:

Fitch Ratings has affirmed Manulife Financial Corporation (MFC) and its primary insurance related operating subsidiaries’ ratings, including The Manufacturer’s Life Insurance Company (MLI) and John Hancock Life Insurance Company (U.S.A.) (JHUSA). At the same time Fitch assigned a ‘A-‘ rating to MLI CAD550m 4.21% fixed/floating subordinated debentures due 2021 (Manulife Finance Corp. guarantor), and a ‘BBB’ rating to MFC’s CAD200m offering of Non-cumulative Rate Reset Class 1, Series 5 preferred shares, both completed in Q411. A complete list of ratings actions is at the end of this release. The Outlook has been revised to Negative for all ratings.
Fitch’s rationale for the ratings includes MFC’s strong capital position, below-average exposure to credit-related risk, good liquidity and strong business profile with significant geographic and product diversity. Additional positive considerations include MFC’s progress in the effective hedging of volatility of earnings and capital related to interest rate and equity market risks.

The Negative Outlook is driven by Fitch’s concerns about negative trends in adjusted earnings and the company’s financial leverage, which is at the high end of rating expectations. MFC’s run rate profitability has been negatively affected by the unfavourable reserve adjustments for product-related experience and policyholder behaviour. Over the near term, Fitch expects reported profitability to be negatively impacted by an extended period of lower interest rates.

Fitch estimates financial leverage increased to 25.8% at year-end 2011 versus 21.0% at 31 December 2010 due in part to a change in Fitch’s hybrid rating criteria in 2011.

Fitch considers MFC’s debt service capacity as below average for the rating and expects earnings based, fixed charge coverage to range between 5 times (x) and 7x in a generally flat equity market scenario in 2012.

Key rating triggers for MFC that could lead to a downgrade include:
–Shortfall in adjusted earnings to below CAD2.5bn for 2012
–Fixed Charge coverage below 5.5x on a 12-month basis
–Financial leverage notably increases from current levels on Fitch’s equity-adjusted leverage basis
–Operating company MCCSR ratio below 190%

Key ratings triggers for MFC that could lead to a revision of the Outlook to Stable include:
–Improved profitability and related fixed charge coverage to 8X
–Significant reduction in earnings volatility on a sustained basis
–Significant reduction in capital and earnings sensitivity to equity markets on a sustained basis
–A decrease in financial leverage to 25%

Manulife Financial Corporation
–CAD250m 4.40% non-cumulative rate reset, preferred class 1, series 5 stock – ‘BBB’

Meanwhile DBRS commented on MFC’s 11Q4:

DBRS has reviewed Manulife Financial Corporation’s (MFC or the Company) Q4 2011 results, released on February 8, 2012, and believes there were no surprises. There are therefore no rating implications at this time.

For the year, the Company’s earnings before goodwill impairments yielded a return on equity (ROE) of 3.2% in 2011. This remains below the Company’s targeted 12% ROE but also includes a number of notable non-cash items related to market movements which, if excluded, would have produced an ROE of 11.5%.

The Company’s weak reported earnings have prevented an accumulation of retained earnings in recent years as dividend payout ratios remain elevated. Correspondingly, even though the Company’s debt levels have remained flat, the erosion of shareholder equity from $27.5 billion at the end of 2009 to $22.6 billion at the end of 2011 has caused the Company’s total debt ratio to increase to 32.9% from 25.2%. Broader financial leverage, as measured by average assets to common equity, has increased to 10.0 times from below 7.5 times. Although reported earnings coverage is adequate to meet fixed-charge obligations, the earnings, excluding notable items coverage (largely non-cash adjustments), is in excess of 6.0 times.

MFC has many preferred share issues outstanding: MFC.PR.A (OperatingRetractible), MFC.PR.B & MFC.PR.C (DeemedRetractible), MFC.PR.D, MFC.PR.E, MFC.PR.F, MFC.PR.G and the new issue announced today, (FixedReset).

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