Fitch Ratings has affirmed its ratings on Manulife Financial Corp. (TSX:MFC) and its primary operating subsidiaries.

The action follows the ratings agency’s review of Manulife’s release of third quarter financial results, which included a $947 million loss, and discussions with management. Key drivers of the third quarter results included approximately $2 billion in annual assumption and methodology changes and a $1 billion write off of goodwill, related to the repositioning of its U.S. life business, Fitch notes.

Fitch says it views the reported negative third quarter operating results “as falling marginally outside” its expectations, reducing the current capital cushion, 2010 profitability and financial flexibility. Offsetting these factors in Fitch’s view are Manulife’s strategic plans to strengthen reserves, reduce capital and earnings volatility through a time-based hedging strategy in the next 12 to 24 months; and plans to reposition its U.S. businesses in terms of product pricing, design and risk.

The rating agency has a stable outlook on Manulife, reflecting Fitch’s view that the firm;s current capitalization provides sufficient cushion over the next 12 to 18 months at the current rating level to absorb potential negative operating results and investment losses, including those driven by equity and interest rate related volatility.

Key rating concerns include Manulife’s large exposure to equity market declines related to unhedged inforce segregated fund and variable annuity guarantees, and its effect on Manulife’s long-term earnings profile, Fitch says. It notes that a key factor in maintaining a stable outlook is the successful execution of the hedging strategy. Additionally, further indications of significant inadequate product pricing or profitability would pressure the ratings, it says.

Fitch’s rationale for the current ratings includes Manulife’s strong capital position, below-average exposure to credit-related risk, good liquidity and very strong business profile with significant geographic and product diversity. It also considers the firm’s capital position as very strong.

IE