Manulife Financial hit with investment level downgrade from DBRS credit agency

Manulife Financial has been downgraded by credit rating agency DBRS after the insurance giant reported a $2.4 billion quarterly earlier this month.

The Dominion Bond Rating Service has pulled back Manulife’s long-term debt and preferred share ratings to AA (low) from AA.

The ratings agency said it expects earnings volatility to continue at elevated levels, despite the “best efforts” of management to contain the company’s exposure to volatility in equity markets.

The Toronto-based insurer took a big hit in the second quarter from the impact of lower equity markets and historically low interest rates that resulted in non-cash charges against the company’s reserve requirements.

About 51 per cent of its variable annuity business – which sells plans that guarantee a minimum return similar to private pensions – is hedged, leaving about half of that business exposed.

DBRS says Manulife will likely be forced to raise additional capital if it reports another negative quarter.

“The company’s financial flexibility has become increasingly constrained, as the most readily available sources of capital have already been tapped,” the ratings agency said.

“DBRS recognizes that the company’s heightened risk profile and the associated adverse impact on regulatory capital and financial flexibility can no longer support the pre-existing ratings and have resulted in the negative rating action.”

The Standard & Poor’s rating agency has also reduced Manulife’s rating to AA with a negative outlook from AA-plus.