Manulife Financial Corporation’s (MFC) ratings outlook has been upgraded to “stable” from “negative” by Moody’s Investors Service (MCO) following Manulife’s capital raise of C$2.5 billion (US$2.37 billion) through stock offering. Moody’s has affirmed its ratings of “Aa3″.

According to the rating agency, Manulife’s insurance subsidiaries – Manufacturers Life Insurance Co. and John Hancock Life Insurance Co. – are capable of generating solid levels of income under normal market conditions. However, earnings of these companies are greatly correlated to market declines as a result of their significant exposure to variable annuities which are not hedged. Nevertheless, Manulife has begun hedging its newly written variable annuity guarantees in the U.S. last year and in Canada this year and intends to do so in Japan by this year end.

Manulife has implemented several capital bolstering initiatives in the past several months. The company has infused C$4.8 billion through common equity and C$1.8 billion in other Tier 1 capital instruments year-to-date. It has also slashed its dividend by half.

According to the rating agency, the upgrade of ratings reflects that such capital strengthening actions would enable the company to absorb a substantial decline in equity markets and improve its financial flexibility. Additionally, the dividend cut would allow the company to retain a bigger share of its earnings if it becomes profitable next year.

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

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

Zacks Investment Research

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