PrefBlog

Standard & Poor’s has announced:

• The earnings volatility of the Manulife group of companies exceeds our expectations for higher ratings, and the group has significant variable annuity and segregated fund guarantee values that remain unhedged.
• In addition, Manulife Financial Corp. reported a C$2.4 billion net loss for the quarter ended June 30, 2010, and there could be material charges in the next quarter arising from its annual review of all actuarial methods and assumptions.
• As a result, we have lowered our counterparty credit rating on Manulife Financial Corp. to ‘A’ from ‘A+’ and our counterparty credit and financial strength ratings on its core and guaranteed insurance operating subsidiaries to ‘AA’ from ‘AA+’.
• The outlook is negative because of the continuing earnings volatility and the associated pressure on fixed-charge coverage and capitalization levels.

…
We could lower the ratings again if 2011 earnings continue to be highly volatile (whether because of unhedged variable annuity guarantee values or risk exposures), if fixed-charge coverage is less than the 6x-8x expected for similarly rated holding companies in 2011, or if capitalization is not solidly redundant at the ‘AA’ confidence level. Alternatively, if the group meets these conditions on a sustained basis and the group maintains its broad competitive advantages and relatively conservative investment risk profile, we would likely affirm the ratings.

MFC has the following preferred shares outstanding: MFC.PR.A (OpRet); MFC.PR.B & MFC.PR.C (PerpetualDiscount); MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™ and all are included in the noted indices.

This follows a similar cut in the SLF credit rating in April, although that one was on the basis of sustainable earnings rather than volatility.

Moody’s doesn’t rate MFC, but it does rate the subsidiaries … and it’s not too happy:

Moody’s Investors Service has placed on review for possible downgrade the Aa3 insurance financial strength (IFS) ratings of the life insurance subsidiaries of Manulife Financial Corporation (Manulife; TSX: MFC, unrated) – including The Manufacturers Life Insurance Company (MLI), and John Hancock Life Insurance Company (U.S.A). Other affiliated ratings were also placed on review for possible downgrade (see complete list, below). The rating action follows Manulife’s announcement of a C$2.4 billion net loss in 2Q10, as well as the likelihood of a sizeable charge in 3Q10 for unfavorable long-term care morbidity experience.

Commenting on the review for possible downgrade, Moody’s said that the poor experience of MFC’s U.S. long-term care (LTC) block was not anticipated in its 2009 rating downgrades of MFC’s life insurance subsidiaries. In addition, MFC’s 2Q10 results were materially worse than peers’, due to its more sizeable unhedged exposure to variable annuity/segregated funds and its greater sensitivity to low interest rates on its long-tailed, guaranteed insurance liabilities (i.e., LTC and universal life insurance with secondary guarantees).

This entry was posted on Thursday, August 5th, 2010 at 5:40 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.