Fitch Ratings downgraded the debt and preferred stock ratings of Manulife Financial Corp. by one notch, but affirmed the ratings on the firm’s operating subsidiaries.

The rating agency said that the downgrade for the parent company reflects its decision “to move to standard notching of parent company ratings relative to insurance company subsidiary ratings. This is primarily as a result of the increased volatility in earnings and capital of the group, declining fixed-charge coverage at the holding company level, and a moderate increase in financial leverage.”

Fitch said that the affirmation of the operating subsidiaries’ ratings reflects MFC’s strong business and operating profiles and the expected strong level of capitalization in 2009. It adds that it views the capitalization of MFC’s operating companies as quite strong, but adds that 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.”

“Additional strengths include MFC’s strong North American market positions as a result of increased scale, solid operating performance in domestic individual life insurance, group insurance and retirement, as well as its profitable international insurance businesses in Asia and Japan, which have offset in part the earnings declines in variable annuities and fee-based businesses,” it says.

Fitch said it believes MFC has good financial flexibility and a consistent 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.

It also believes the strong dividend capacity of MFC’s chief operating subsidiary is a key support to its ability to pay fixed charges and common stock dividends in 2009 and that U.S. insurance operations are less likely to be a significant source of dividends to the parent company.

The firm maintains a negative outlook on the ratings based on its “view that near-term conditions in the financial markets will likely continue for an extended period, which could cause the company to experience higher-than-expected volatility in its financial results and additional challenges in 2009.” It also cautions about the the potential for higher-than-expected credit related investment losses; and the potential need to raise additional capital.

IE