Moody’s affirms Manulife rating, outlook stable

Moody’s says that the rating affirmation reflects the “reasonably conservative” financing of the acquisition, which includes approximately $2.1 billion of new equity, and suggests that financial flexibility metrics, such as leverage and coverage, and capital adequacy, “will deteriorate only marginally and will remain within rating expectations.”

From a strategic point of view, Moody’s also says that the transaction will enhance MLI’s position in the Canadian life insurance market, particularly in wealth management. “The target company appears to be a good fit,” said Moody’s senior vice president, David Beattie, and “while the transaction is not without integration risk, it will provide a base to expand into the relatively underpenetrated Quebec group market.”

However, the rating agency also says that it believes Manulife “has paid a full price for the business, and goodwill will increase significantly.”

In a separate report, Fitch Ratings says that Standard Life’s decision to sell its Canadian business and return most of the proceeds to shareholders “will weaken the group’s credit profile by reducing diversification and removing a key source of earnings.”

Fitch notes that the Canadian business accounted for around a third of Standard Life’s operating profit in 2013. “The sale will therefore reduce geographical and business diversification, and reduce profitability. This increases the risk for creditors, while shareholders accrue most of the benefit,” it says.

“Profitability will also be more closely tied to the level of financial markets, as earnings from unit-linked pension savings are driven by fees based on the value of assets under management,” it notes.

The deal will also have some positive credit implications, Fitch suggests. “It will reduce the group’s exposure to the risk that annuity holders will outlive expectations, and to the credit risk associated with assets used to back these annuities. But these benefits will not offset the loss of diversification,” it says.

Another tangential benefit of the sale, Fitch says, could be to reduce uncertainty about the impact of the forthcoming Solvency II regime for global insurers. “We believe the Canadian regulatory regime will ultimately be treated as equivalent to the EU’s for Solvency II purposes. But Canada is not actively seeking Solvency II equivalence and, if it were not granted, Standard Life’s Canadian operations could have faced significantly higher capital requirements under continued ownership by an EU-headquartered parent,” it says.