Manulife Financial Faces Rating Action

A.M. Best Co. reiterated the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of ‘aa-’ of the life insurance subsidiaries of Manulife Financial Corporation (MFC - Analyst Report).The outlook was upgraded to stable from negative.

Subsequently, the credit rating agency also affirmed the ICR of ‘a-’ and existing debt ratings of MFC and upgraded the outlook to stable from negative.

The affirmations came on the back of the company’s exposure as well as strong presence in Canada, U.S and Asian markets along with a diversified suite of product offering. Also, A.M. Best noted that actions taken by Manulife over the past few years have helped the company weather macro-economic challenges and equity market volatility.

Various strategic actions comprising hedging programs, raising capital, changes in product design and pricing, focusing on particular products for growth lowering sales of capital intensive products have not only enhanced the company’s risk profile but also have strengthened the balance sheet.

However, Manulife’s large variable annuity book with secondary guarantees coupled with exposure to volatile interest rates dwarfs the positives to some extent.

The outlook upgradation encompasses Manulife’s solid regulatory capital position, continued focus on lowering the company’s exposure to equity and interest rate risk, thereby gradually de-risking the balance sheet, focus on less market sensitive product lines and working on products such as variable annuities and long-term care businesses.

However, the credit rating agency stated that based on the current fundamentals, Manulife remains strongly positioned at its present rating level over the near to medium term. However, the rating might trend down if the company faces continued decline in risk-adjusted capitalization, operating performance fails to satisfy A.M. Best and financial leverage and interest coverage fall below A.M. Best’s guidelines.

There was no earnings momentum on the stock over the last 7 days. The rating affirmations along with upgardation in outlook might encourage analysts to pull their estimates upward. The Zacks Consensus Estimate for fourth-quarter 2011 is 16 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, 18 cents per share and $1.43 per share.

We maintain our Neutral recommendation on Manulife Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Toronto, Canada, Manulife Financial operates as a life insurance company. The company also offers reinsurance services. The company competes with MetLife Inc. (MET - Analyst Report).

Read the full analyst report on MET

Read the full analyst report on MFC