Fitch Ratings has joined DBRS Ltd. in downgrading its ratings on Manulife Financial Corp. (TSX:MFC) , in the wake of the company’s surprisingly weak second quarter results.

The rationale for the one notch downgrade, according to Fitch, includes Manulife’s “continued high level of earnings and capital volatility”, and concern over the company’s “run-rate earnings levels that continue to be negatively impacted by adverse market conditions.” It is Fitch’s view that Manulife’s capital market sensitivity “has not declined significantly over the last six months” and that its’ earnings and capital volatility are more consistent with the new lower rating level.

Fitch adds that any improvements in capital sensitivity and a rebound in MFC’s earnings in the short term are dependent to a significant degree upon capital market improvements, including higher interest rate levels and equity market prices. “This uncertainty, as well as the possibility of a potentially sizable charge in [the third quarter] for MFC’s pending annual review of actuarial methods and assumptions, leads Fitch to believe that MFC’s run rate earnings will not likely rebound to pre-2008 levels within the next 12-18 months.”

Notwithstanding the downgrade, Fitch says that Manulife has a strong capital position, below-average exposure to credit-related risk, good liquidity and excellent business profile. It also views the firm’s investment portfolio as well diversified and high quality.

The ratings outlook is stable, reflecting Fitch’s view that “current capitalization provides sufficient cushion over the next 12 to 18 months at the current rating level to absorb future investment related credit losses and negative operating results, including results driven by equity and interest rate related volatility in Fitch’s core stress scenarios.”

Fitch says that key rating concerns include Manulife’s large exposure to equity market declines related to segfund/variable annuity guarantees, and uncertainty regarding the possible size of a charge in the third quarter.

IE