A.M. Best Co. has affirmed the financial strength rating and issuer credit ratings of Manulife Financial Corp. and its subsidiaries, but says the outlook for all ratings has been revised to negative from stable.

A.M. Best says the revised outlook reflects its “concern with the group’s significant global equity market exposure within its wealth management sector, expected reduced earnings stream and somewhat reduced financial flexibility and interest coverage.”

Given the significant declines and ongoing weakness in global equity markets, the rating agency says it expects Manulife to record a lower level of fee income on its managed assets and higher reserve charges for its equity-linked products.

Additionally, Manulife’s large portfolio of segregated fund products, which is only partially hedged, exposes its earnings and capital to equity market fluctuations, A.M. Best says. Manulife is a significant player in the variable annuity market in the United States, Canada and Japan.

A.M. Best notes that the sharp decline in global equity markets has put a strain on the group’s capital. Should sharp equity market declines continue, this could require additional funding to maintain its favorable risk-adjusted capital levels.

In the insurer’s favour, the rating agency says Manulife’s risk-adjusted capitalization remains favorable, supported by a $2.275 billion common equity raise in fourth quarter 2008 and changes to the Canadian regulatory capital formula.

A.M. Best notes that Manulife has strong franchise and market positions in all core markets in which it operates in Canada, the United States and Asia.

“However, given the weakness in the global economy and expectations of higher credit defaults, continuation of these high investment returns will likely be a challenge in the near term.”

IE