A.M. Best Co. has raised its outlook on Manulife Financial Corp. to stable from negative, citing its strong capital position and the insurer’s efforts to reduce risk.
The rating agency said that its revised outlook on Manulife reflects its “strong regulatory capital position despite earnings volatility”; and, the insurer’s ongoing efforts at de-risking its balance sheet by reducing its exposure to equity and interest rate risk. It also cited the firm’s move to focus on less market sensitive product lines, while de-emphasizing or re-designing products such as variable annuities and long-term care businesses.
“Over the last few years, MFC’s various strategic actions have moderated the impact of the macro-economic challenges and equity market volatility on its consolidated risk profile and balance sheet. Key strategic actions have included accelerated macro and dynamic hedging programs, changes in product design and pricing and the targeting of specific products for growth in its various geographical markets while reducing the sales of capital intensive products. Furthermore, significant capital raising has helped to solidify its balance sheet position,” it says.
Partially offsetting the positive rating factors, A.M. Best notes are Manulife’s volatile financial results, which it says are due to the company’s large variable annuity book with secondary guarantees and remaining exposure to equity market and interest rate risks. It says recent losses also reflect Manulife’s continued exposure to equity market and interest rate volatility, despite the continued progress in implementing its hedging programs, which have exceeded the company’s targets. Additionally, financial leverage for the current period has approached the high end of A.M. Best’s expectation for the current ratings due to recent debt and preferred share offerings.
A.M. Best says it continues to have concerns regarding Manulife’s large long-term care book of business, which has not performed favourably, but that it acknowledges the progress the company continues to make in achieving its targeted price increase approvals. It says it believes Manulife’s future earnings will be pressured as the low interest rate environment continues and uncertainty remains in the equity markets.