S&P Upgrades MFC to P-2(high)

Standard & Poor’s has announced:

  • •Following a review of Canada-based Manulife Financial Corp. (MFC) group under our revised insurance criteria, we are raising our counterparty credit rating on MFC to ‘A’ from ‘A-‘ and affirming our ‘AA-‘ financial strength ratings on Manufacturers Life Insurance Co. and core subsidiaries. The outlook is stable.
  • •Since more than half its earnings come from outside the U.S., the ratings on MFC, which are now two notches below its group credit profile, are consistent with our criteria for non-U.S. insurance holding companies.
  • •The ratings reflect our view of the group’s very strong business and financial risk profiles, based on its highly diverse franchise, leading market positions and very strong capital and earnings.
  • •The stable outlook reflects our view that Manulife will sustain its very strong competitive position, very strong capital adequacy, and earnings capabilities.

More than half of MFC’s earnings are now from Canada and other non-U.S. sources, with Asia/Pacific growing the fastest. The narrower notching in Canada relative to the U.S. primarily reflects that the same regulator, the Office of the Superintendent of Financial Institutions (OSFI), supervises and regulates both the life insurance holding company and its operating subsidiaries. Under this regime, the regulator places limited restrictions on dividends between Canadian insurance operating companies and their parent regulated holding company.

Globally, Manulife faces low industry and country risk because its core businesses are in largely stable, major global markets, predominately Canada and the U.S. Within Canada, Manulife faces very low industry and country risk reflecting our view of very low country and low industry risks for its life insurance operations. Our view of Manulife’s country risk arises from the stable economic growth prospects, relatively effective and stable political institutions, sophisticated financial systems, and strong payment culture in Canada. In our view, Manulife’s life insurance operations are exposed to low Canadian industry risks due to high barriers to entry in a market dominated by a small number of life insurers and a strong institutional framework where the primary regulator, OSFI, maintains highly effective oversight of the industry. OSFI’s primary solvency metric, the minimum continuing capital and surplus requirement (MCCSR) ratio, comprehensively captures all insurance risks in each domestic life insurer and their international subsidiaries. Low industry risk also reflects that insurance products in Canada generally have less aggressive guarantees as well as a strong industry track record of very tight asset-liability matching. This is necessitated by a financial reporting and regulatory framework that applies fair-value accounting principles equally to both sides of the balance sheet. The framework also tends to be pro-cyclical, resulting in an earlier recognition of long-term adverse macroeconomic effects and relatively conservative reported financial results.

Geographically, Manulife’s premiums and deposits, as well as assets under management, are widely distributed: the U.S. represents 48% and 55%, respectively; Canada 24% and 25%; Asia 18% and 15%; and corporate and other, 10% and 5%, as of year-end 2012. The company’s strong market position reflects its top-three position among insurers in Canada, top-five position among individual life insurers in the U.S., and strong presence in key Asia-Pacific markets. Its core earnings are well balanced throughout its global operations: U.S. contributing 38%, Asia 33%, and Canada 29% as of year-end 2012.

We could lower the ratings if, contrary to our expectations:

  • •Manulife develops a deficiency in its ERM practices that leads us to view its ERM as merely adequate rather than strong;
  • •Manulife’s very strong competitive position weakens due to a loss of market position or brand strength; or
  • •Capital adequacy deteriorates and becomes materially deficient at the ‘AA’ confidence level as measured by our capital model.

We could also lower the ratings on MFC by widening the notching if, contrary to our expectations, earnings from the U.S. come to dominate the group’s earnings on a sustained basis.

While a positive rating action is also unlikely in the next 24 months, we could raise the rating if Manulife’s operating performance strengthens and consistently outperforms global peers, or if capital and earnings strengthen further to a level supportive of higher ratings.

S&P is surprisingly effusive in its praise for OSFI; but for those on the verge of getting carried away, I urge a comparison between the quoted levels of US and Canadian profitability, as measured by the relative contributions of premiums, deposits and AUM vs. profit.

MFC has the following preferred share issues outstanding:

  • MFC.PR.A, OperatingRetractible
  • MFC.PR.B, MFC.PR.C, DeemedRetractible

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