S&P Lowers Manulife Ratings - Analyst Blog

Manulife Financial Corporation’s (MFC) long-term counterparty credit ratings were lowered by Standard & Poor's Ratings Services to 'A+' from 'AA-'. The outlook assigned is negative. The company has also been removed from the CreditWatch listing.

The rating action reflects the rating agency’s concern that the recent reorganization of its U.S. subsidiary would reduce its cash flow diversification.

Manulife has completed its subsidiary reorganization on Dec. 31, 2009, following which its U.S. insurance unit became an indirect subsidiary of Manufacturers Life Insurance Co. (MLI).

According to the rating agency, though the reorganization may result in increased in capital and operational efficiencies, the reduced diversification may result in reduced cash flows at times of severe stress events.

The negative outlook additionally reflects Manulife’s sensitivity to the equity markets and declining interest rates, and the pressure on its core earnings and capital adequacy levels. The ratings may be lowered by one notch by the ratings agency if a decline in equity market occurs prior to the company’s adequate hedging of its equity-linked liabilities, a decline in its capital levels or if earnings remain well below the company’s historical levels. In a reverse situation, the ratings outlook may also be revised to stable.

Manulife experienced a loss of C$172 million in the third quarter of 2009. The variable annuity business remains a drag on the company’s earnings. Additionally, the downside was driven by a decrease in interest rates. The variable annuity and segregated fund deposits were significantly down from the prior year period.

Manulife has implemented several capital bolstering initiatives in the past several months through common equity offering and other Tier 1 capital instruments. It has also slashed its dividend by half.

Other than Manulife, companies such as Principal Financial Group (PFG) and Lincoln National Corp. (LNC) have also been adversely impacted by the severe equity market downturn. The variable annuity businesses of these companies have particularly been the worst hit.

Read the full analyst report on "MFC"
Read the full analyst report on "PFG"
Read the full analyst report on "LNC"
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