Fitch Affirms Manulife Financial; Rates Preferred Stock

Fitch Ratings has affirmed Manulife Financial Corporation (MFC) and its primary insurance related operating subsidiaries' ratings, including The Manufacturers Life Insurance Company (MLI) and John Hancock Life Insurance Company (U.S.A.) (JHUSA). A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

Fitch has also assigned a 'BBB' rating to previously issued MFC CAD250 million 3.8% million non-cumulative Rate Reset Class 1, series 19 preferred shares. Proceeds from the issuance were used for general corporate purposes, including future refinancing requirements.

KEY RATING DRIVERS

Fitch's rationale for the ratings reflects continued improvement in MFC's operating earnings, strong capital position, below-average exposure to credit-related risk, good liquidity and strong business profile with significant geographic and product diversity.

Offsetting these positives is MFC's debt service capacity, which Fitch views as low for the rating category. Fixed-charge coverage on a reported earnings basis was 8.5x through the first nine months of 2014 and 7.1x on a core earnings basis. Fitch expects core earnings-based, fixed charge coverage to improve to over 8x in 2015.

MFC reported an improvement in reported and core earnings in 2013 and thus far in 2014. Fitch believes that MFC's earnings volatility going forward will decline as a result of the de-risking initiatives taken by the company over the past several years. Key strategies include effective hedging of public equity market exposure and interest rates, shifts in business mix and product re-pricing of long-term care (LTC) and universal life products.

Key challenges that could impact MFC's ability to further improve profitability are sustained low interest rates, equity market volatility, and a faltering of the economic recovery. Fitch expects that these factors could constrain MFC's earnings growth over the near term. Additionally, they could significantly affect MFC's earnings and capital in a severe (albeit unlikely) economic scenario.

Return on common shareholder's equity increased to over 13% during the first nine months of 2014 as MFC's reported net income to common shareholders increased to CAD2.8 billion versus CAD1.7 billion for the same period in 2013. Results in both periods reflect the direct effect of capital markets, which Fitch adjusts for in its analysis.

Core earnings for the first nine months of 2014 were up 13% to CAD2.2 billion. Additionally, investment related gains in excess of investment related experience included in core earnings were again strong at CAD762 million. Key drivers of the improved profitability in 2014 were higher fee income on increased assets under management in MFC's wealth management businesses, lower net hedging costs and strengthening of the US dollar partially offset by lower favorable tax related items.

Fitch believes MFC is well-capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) ratio for MFC's leading operating company (MLI) at 248% at Sept. 30, 2014. MFC's financial leverage ratio has also improved due to reductions in debt and improved organic capital generation. Financial leverage was 19% and total debt and preferred stock to capital was 26% at Sept. 30, 2014, down from 22% and 30%, respectively, at year-end 2013.

MFC's liquidity is considered strong with a high-quality, liquid fixed-income portfolio. Fitch believes that under Canadian regulations, MFC has greater flexibility to upstream common stock dividends from operating subsidiaries to the regulated holding company without regulatory approval than most U.S. peers.

RATING SENSITIVITIES

Key rating triggers for MFC that could lead to a downgrade include:

-- Decline in core earnings;

-- Elevated charges for actuarial methods and assumptions or experience losses;

-- Fixed-charge coverage on a core earnings basis below 6x;

-- An increase in financial leverage to over 25% or an increase in total leverage to over 35%;

-- A sustained drop in MFC's risk-adjusted capital position with no plans or ability to rectify. This would include the MCCSR ratio falling below 200%. The ratings on the U.S. insurance subsidiaries could be impacted if the U.S. risk-based capital ratio fell below 400%;

-- Inability to successfully integrate the Standard Life Canada acquisition.

Key ratings triggers for MFC that could lead to an upgrade include:

-- Continued improvement in profitability on both a core earnings and reported net income basis;

-- An increase in fixed-charge coverage on a core earnings basis to over 10x;

-- Maintaining current capital and earnings sensitivity to interest rate and equity markets;

-- Continued maintenance of financial leverage near 20%.

Fitch has assigned the following rating:

Manulife Financial Corporation

-- CAD250 million 3.8% non-cumulative rate reset, preferred class 1, series 19 stock at 'BBB'.

Fitch has affirmed the following ratings with a Stable Outlook:

Manulife Financial Corporation

-- Long-term IDR at 'A';

-- CAD550 million medium term notes 5.161% due 2015 at 'A-';

-- USD600 million senior notes 3.40% due 2015 at 'A-';

-- CAD900 million medium term notes 4.079% due 2015 at 'A-';

-- CAD400 million medium term notes 5.505% due 2018 at 'A-';

-- CAD600 million medium term notes 7.768% due 2019 at 'A-';

-- USD500 million senior notes 4.90% due 2020 at 'A-';

-- CAD350 million 4.10% non-cumulative class A, series 1, preferred stock at 'BBB';

-- CAD350 million 4.65% non-cumulative class A, series 2, preferred stock at 'BBB';

-- CAD300 million 4.50% non-cumulative class A, series 3, preferred stock at 'BBB';

-- CAD200 million 4.20% non-cumulative rate reset, preferred class 1, series 3 stock at 'BBB';

-- CAD200 million 4.40% non-cumulative rate reset, preferred class 1, series 5 stock at 'BBB';

-- CAD250 million 4.60% non-cumulative rate reset, preferred class 1, series 7 stock at 'BBB';

-- CAD250 million 4.40% non-cumulative rate reset, preferred class 1, series 9 stock at 'BBB';

-- CAD200 million 4% non-cumulative rate reset, preferred class 1, series 11 stock at 'BBB';

-- CAD200 million 3.8% non-cumulative rate reset, preferred class 1, series 13 stock at 'BBB';

-- CAD200 million 3.90% non-cumulative rate reset, preferred class 1, series 15 stock at 'BBB';

-- CAD350 million 3.9% non-cumulative rate reset, preferred class 1, series 17 stock at 'BBB'.

The Manufacturers Investment Corporation

-- IDR at 'A';

-- Short-term IDR at 'F1';

-- Commercial paper at 'F1'.

Manulife Financial Capital Trust II

-- CAD1 billion 7.405% MaCS II series 1 at 'A-'.

Manulife Finance, L.P.

-- CAD550 million 4.448% fixed/floating senior debentures due 2026 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD650 million 5.059% fixed/floating subordinated debentures due 2041 (Manulife Financial Corp. guarantor) at 'BBB+'.

The Manufacturers Life Insurance Company

-- Insurer Financial Strength (IFS) at 'AA-';

-- IDR at 'A+';

-- CAD550 million 4.21% fixed/floating subordinated debentures due 2021 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD200 million 2.819% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD250 million 2.926% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD500 million 2.811% fixed/floating subordinated debentures due 2024 (Manulife Financial Corp. guarantor) at 'A-';

-- CAD500 million 2.64% fixed/floating subordinated debentures due 2025 (Manulife Financial Corp. guarantor) at 'A-'.

John Hancock Life Insurance Co (U.S.A.)

-- IFS at 'AA-';

-- IDR at 'A+';

-- USD450 million surplus notes 7.375% due 2024 at 'A'.

The John Hancock Life Insurance Company of New York

-- IFS at 'AA-'.

John Hancock Life & Health Insurance Company

-- IFS at 'AA-'.

John Hancock Global Funding II

-- Global MTN program at 'AA-'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

-- 'Insurance Rating Methodology' (Sept. 4, 2014)

Applicable Criteria and Related Research:

Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978699

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