PrefBlog

Fitch Ratings has announced it:

has downgraded the ratings of Manulife Financial Corporation (MFC) and its operating subsidiaries. At the same time Fitch assigns an ‘A’ rating to MFC’s Non-cumulative Preferred Class A, Series 4. The Rating Outlook is Negative. (See complete list of ratings actions at the end of this release.)

The rating action reflects Fitch’s updated review of MFC’s exposure to the volatile global equity market conditions, which are having a negative impact on MFC’s earnings performance and capital levels. In Fitch’s view, MFC’s earnings and capital volatility are outside of Fitch’s rating rationale for the prior ratings. The key driver of this heightened volatility is the combination of MFC’s outsized, unhedged equity market exposure and the potential for further equity market declines in the next 12 to 18 months.

The total effect of the approximately 23% decline in global equity markets in fourth-quarter 2008 was estimated to account for $2.9 billion of MFC’s reported $1.9 billion net loss available to common shareholders. MFC’s high degree of sensitivity to the equity markets was driven primarily by significant increased actuarial reserving for guarantees on its $74 billion book of guaranteed segregated funds /variable annuities business. Additional drivers were declines in values of common equities in the investment portfolios of its operating entities, as well as its equity exposure to variable life reserves, and declining fee revenue.

Fitch notes that this equity market volatility is two-sided and that a significant advance in equity market levels could result in increases in reported earnings and capital for MFC due to declining reserving and capital requirements on the segregated fund/variable annuity guarantee business.

While Fitch views the capitalization of MFC’s operating companies as quite strong at year-end 2008 when measured by risked-based capital metrics, these levels are being challenged due to the recent equity market declines and anticipated increases in actuarial reserve and capital requirements related to the large block of unhedged variable annuity guarantees written before 2008. Fitch does not envision any near-term liquidity problems as the guarantees are not near-term cash claims.

Fitch believes MFC has good financial flexibility and the ability to raise capital to meet potential capital requirements and/or potential acquisition-related needs at the new rating levels through the issuance of debt or additional forms of equity through its recently increased Canadian and new U.S. shelf registrations.

Fitch rates Sun Life Financial Preferreds at “A”; Great-West Lifeco Preferreds at “A”; and National Bank Preferreds at “A”; inter alia.

Manulife has the following preferreds outstanding: MFC.PR.A (OpRet); MFC.PR.B (PerpetualDiscount); and MFC.PR.C (PerpetualDiscount). These issues were last mentioned on PrefBlog when S&P Downgraded to P-1(low) on February 24.

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