Moody’s Investors Service affirmed the ratings and changed the outlook to positive from stable for Manulife Financial Corporation’s subsidiaries.

According to Moody’s, the change in the rating outlook is based on several factors: a diversified and growing earnings base; very strong life insurance franchises in Canada and the U.S; and a conservative capital structure.

Regarding Manulife’s earnings base, the rating agency said there are three major trends in Manulife’s performance since the April 2004 acquisition of John Hancock Financial Services Inc.: solid earnings growth primarily driven by the Canadian and U.S. wealth management divisions; a recovery in the U.S. Protection division’s earnings from an initial decline that was due mainly to a product redesign effort; and, stability in the combined earnings, indicating diversification benefits, from the potentially more volatile of Manulife’s divisions (Asia & Japan, reinsurance, and guaranteed and structured financial [roducts).

Moody’s said Manulife’s solid earnings are a product of strengthened franchises in the U.S. and Canada. The John Hancock acquisition elevated Manulife to the ranks of one of the largest and most diversified life-insurance operations in the U.S. With this acquisition, Manulife also acquired Maritime Life and cemented its market position in Canada — solidifying its top tier position in virtually all market segments. The resulting market clout obtained by Manulife in the U.S. and Canada gives it the flexibility to protect its margins and extract attractive profits, the rating agency explained.

The firm added that complementing Manulife’s earnings base and franchise strength is one of the more conservative capital structures among stock life insurance companies. Manulife has reduced its financial leverage to approximately 18% (after reducing common equity by 50% of goodwill and intangibles) from 23% before the John Hancock acquisition.

Moody’s remains concerned, however, with Manulife’s exposure to secondary guarantees. Manulife has written a significant amount of guaranteed minimum death benefits, maturity benefits, and withdrawal benefits on its variable annuity product line in the Canada and the U.S. Though it
manages this risk carefully, Moody’s notes that Manulife is exposed to “catastrophic risk” – a high severity, low frequency occurrence of a prolonged and steep equity market downturn.

Moody’s commented that the ratings could be upgraded if the company continues to: achieve post-acquisition improvement in its earnings capacity, predictability, and quality, without material operational setbacks; and, maintain its leverage and capital adequacy ratios.