OREANDA-NEWS. 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).

At the same time, Fitch downgraded the ratings on MFC's non-cumulative perpetual preferred stock to 'BBB-' from 'BBB' and upgraded the ratings on The Manufacturers Life Insurance Company's subordinated debt to 'A' from 'A-'.

A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

The rating affirmation is based upon the company's continued improvement in core 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 core earnings basis was 8.3x through the first half of 2015, up from 7.2x for the full year of 2014.

Fitch published newly updated insurance notching criteria on July 14, 2015 via an update to its master criteria report, 'Insurance Rating Methodology.' Today's rating actions reflect application of the updated notching criteria to MFC's ratings.

KEY RATING DRIVERS

MFC has reported improved core earnings since 2013. Fitch believes that MFC's earnings volatility has declined 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.

Core earnings for the first half of 2015 were up 20% to CAD1.7 billion. Key drivers of the improved profitability were higher fee income on increased assets under management in MFC's wealth management businesses, the contribution from recent acquisitions, the impact of strong sales in Asia and the strengthening of the US dollar. MFC's core return on common shareholders' equity was 9.6%. Despite the improvement in core earnings, Fitch believes MFC's profitability remains low for the current rating category.

MFC's return on common shareholder's equity declined to 7.4% during the first half of 2015 as MFC's reported net income to common shareholders declined to CAD1.3 billion versus CAD1.7 billion for the same period in 2014. The decline was driven by the impact of the steepening interest rate yield curve, lower investment related experience gains and integration costs related to recent acquisitions.

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.

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 236% at June 30, 2015. MFC's financial leverage ratio has improved in recent years due to reductions in debt and improved organic capital generation. Financial leverage was 20% and total debt and preferred stock to capital was 25% at June 30, 2015.

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.

Under Fitch's updated notching criteria, Canada is classified as having a 'Group Solvency' style of regulation. However, since more than 30% of MFC's earnings and capital comes from countries outside of Canada, notching from operating to holding company ratings employs the 'Ring Fencing' approach. This has resulted in an affirmation of holding company IDR and various debt rating.

Fitch downgraded or affirmed the following hybrid securities including:
--Fitch downgraded the non-cumulative perpetual preferred securities of Manufacturers Financial Corporation by one notch under the new criteria, based on a recovery assumption of 'Poor' and a non-performance risk assumption of 'Moderate'. These securities are now notched down by four from the holding company Issuer Default Rating (IDR).
--Fitch affirmed the convertible MaCS II series 1 securities of Manufacturers Financial Capital Trust II based on a recovery assumption of 'Poor' and non-performance risk of 'Minimal'. They continue to be notched down by two from the holding company IDR.
--Fitch affirmed the surplus notes of John Hancock Life Insurance Co., reflecting standard notching for U.S. surplus notes, which did not change in the criteria update.

The subordinated debt ratings of Manufacturers Life Insurance Company were upgraded by one notch, based on a baseline recovery assumption of 'Below Average'. These securities are now notched down one from the insurance company IDR. They are guaranteed on a subordinated basis by Manulife Financial Corporation, but the guarantee is considered neutral to the rating.

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%.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Manulife Financial Corporation
--CAD350 million 4.65% non-cumulative class A, series 2, preferred stock to 'BBB-' from 'BBB';
--CAD300 million 4.50% non-cumulative class A, series 3, preferred stock to 'BBB-' from 'BBB';
--CAD200 million 4.20% non-cumulative rate reset, preferred class 1, series 3 stock to 'BBB-' from 'BBB';
--CAD200 million 4.40% non-cumulative rate reset, preferred class 1, series 5 stock to 'BBB-' from 'BBB';
--CAD250 million 4.60% non-cumulative rate reset, preferred class 1, series 7 stock to 'BBB-' from 'BBB';
--CAD250 million 4.40% non-cumulative rate reset, preferred class 1, series 9 stock to 'BBB-' from 'BBB';
--CAD200 million 4% non-cumulative rate reset, preferred class 1, series 11 stock to 'BBB-' from 'BBB';
--CAD200 million 3.8% non-cumulative rate reset, preferred class 1, series 13 stock to 'BBB-' from 'BBB';
--CAD200 million 3.90% non-cumulative rate reset, preferred class 1, series 15 stock to 'BBB-' from 'BBB';
--CAD350 million 3.9% non-cumulative rate reset, preferred class 1, series 17 stock to 'BBB-' from 'BBB';
--CAD250 million 3.8% non-cumulative rate reset, preferred class 1, series 19 stock to 'BBB-' from 'BBB'.

Fitch has upgraded the following ratings:

The Manufacturers Life Insurance Company
--CAD550 million 4.21% fixed/floating subordinated debentures due 2021 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
--CAD500 million 4.165% fixed/floating subordinated debentures due 2022 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
--CAD200 million 2.819% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
--CAD250 million 2.926% fixed/floating subordinated debentures due 2023 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
--CAD500 million 2.811% fixed/floating subordinated debentures due 2024 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
--CAD500 million 2.64% fixed/floating subordinated debentures due 2025 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
-- CAD750 million 2.1% fixed/floating subordinated debentures due 2025 (Manulife Financial Corp. guarantor) to 'A' from 'A-';
-- CAD350 million 2.389% fixed/floating subordinated debentures due 2026 (Manulife Financial Corp. guarantor) to 'A' from 'A-'.

Fitch has affirmed the following ratings with a Stable Outlook:

Manulife Financial Corporation
--Long-term IDR 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-'.

The Manufacturers Investment Corporation
--IDR at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

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+'.

Manulife Financial Capital Trust II
--CAD1 billion 7.405% MaCS II series 1 at 'A-'.

The Manufacturers Life Insurance Company
--Insurer Financial Strength (IFS) at 'AA-';
--IDR 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-'.