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By Tara Perkins

S&P has cut Manulife Financial Corp.’s (MFC) rating from double-A-minus to single-A-plus as it had said it would once the insurer completed a reorganization of its U.S. subsidiary.

Manulife CEO Don Guloien went ahead with the planned reorganization, which was completed Dec. 31, despite the rating agency’s warning. He believes that the complex and technical shuffle, which involves merging two of Manulife’s John Hancock subsidiaries into another, will decrease the company’s sensitivity to stock markets and smooth its capital levels.

S&P said in November that it thought the move would do more damage than good by increasing the risk that Manulife won’t have the cash flow it needs in times of extreme stress.

On Monday, the credit rating agency reiterated that “although the reorganization results in many benefits to Manulife, including increased capital and operational efficiency, it’s our opinion that the reduced diversification increases the potential for reduced cash flows to [Manulife Financial Corp.] during severe or extreme stress events...”

It noted that Manulife raised about $2.5 billion in common equity in late November, improving the quality and quantity of its capital, but said that is “inadequate to fully mitigate the volatility of earnings and capitalization arising from [Manulife’s] risk exposures.”

S&P added that it could still lower the insurer’s ratings by a notch if stock markets fall significantly before its equity portfolio is adequately hedged, if its profits remain lower than normal, or if its capitalization falls below levels required to maintain the rating.

Manulife’s troubles come from its massive variable annuity business. As the value of the stocks it holds to support that business tumbled during the financial crisis, the company was forced to sock away billions in capital. Its executives had chosen, years ago, to leave the portfolio unhedged. About 30% of it is now hedged.

Source: Manulife Kicks Off 2010 with a Ratings Cut