Rating action on Manulife

The rating agency A.M.Best has undertaken a favorable rating action on Manulife Financial Corporation (MFC - Analyst Report), whereby it affirmed the financial strength ratings (FSR) of A+ and issuer credit ratings (ICR) of "aa-" of the life insurance subsidiaries of the company.

The rating agency also affirmed the ICR of “a-” as well as all existing debt ratings of Manulife.

All the ratings are of investment grade and carry a stable outlook.

A.M.Best acknowledges Manulife’s dominant life insurers within its domestic Canadian market and its growing operations in the U.S. and several Asian countries.

Despite a difficult economic environment Manulife has been able to maintain the strength of its core business while at the same time growing assets under management.

The rating agency also views favorably the company’s strong balance sheet position and maintenance of adequate regulatory risk-adjusted capitalization. Manulife has made consistent efforts to reduce its business exposure to involuntary forces of equity and interest rate risks. These efforts include aggressive hedging programs, modification in product design and pricing and targeting specific products for growth in its various geographical markets. It also includes cutting down the sales of capital intensive products, especially variable annuities in the United States.

Alongside, Manulife’s exposure to real estate through direct mortgage loans and commercial real estate, forms a high percentage of total invested assets

Despite the hedging program undertaken by Manulife, the rating agency A.M.Best remains concerned with the company’s substantial existing exposure to the equity market and interest rate risk. This is particularly within its insurance segments, reduced interest coverage and a high financial leverage. Also while the company no longer sells U.S. variable annuities, it will face problems to manage the already written large book of this business, given the persistent low interest rates.

Moreover, Manulife’s earnings also witnessed significant volatility recently due to unfavorable reserve release, which was again caused by current interest and equity market conditions.

Over the near term, there are low chances of a change in ratings. However, over the long term factors that could result in negative rating actions include a significant and sustained decline in Manulife’s risk-adjusted capitalization, operating performance over a sustained period or difficulty in managing large in-force blocks of interest and equity market sensitive business.

Manulife currently retains a Zacks # 3 Rank, which translates into a short-term Strong Hold rating. The company closely competes with China Life Insurance Co. Ltd. (LFC - Analyst Report) and Sun Life Financial Inc. (SLF - Analyst Report).