* Canada's largest insurer down 8.9 pct
* Fears about markets exposure seen as overstated
* Manulife reports quarterly results on Thursday
By Cameron French
TORONTO, Aug 8 (Reuters) - Shares of Manulife Financial (MFC.TO) were down 8.9 percent on Monday, extending a one-week drop of more than 18 percent, as S&P's downgrade of the U.S. credit rating and concerns about European debt levels prompted investors to sell assets perceived as higher risk.
However, analysts said Manulife's sharp retreat was not warranted by the broader market's decline or the U.S. credit downgrade, and suggested the insurer's results on Thursday could provide the stage for a rebound.
Shares of Canada's largest insurer were down C$1.21 at C$12.46 on the Toronto Stock Exchange late in the session.
Standard & Poor's shook investor confidence with its downgrade of the top-tier AAA credit rating of the United States to AA-plus late Friday on concerns about high debt levels. That sent global stock prices plunging on Monday, and pulled down yields on the 10-year U.S. Treasury bond.
The stock slide -- Canada's benchmark S&P/TSX index was down 4 percent at one point -- added to a 6 percent drop in the previous week on concerns about global growth and European sovereign debt.
Manulife took steep losses last year due to weak stock markets and low bond yields, prompting the company to hedge much of its market exposure, and leaving it better positioned to handle the current market gyrations, analysts say.
John Aiken, an analyst at Barclays Capital, agreed the insurer's stock is being punished for its past volatility.
"When investors look at the Canadian financials without doing the digging or the legwork, Manulife has historically been known as the name which has the most risk, so it's the first to be sold," said Aiken.
The insurer's exposure to markets cost it billions in the wake of the 2008 financial crisis and forced it to halve its dividend in 2009.
Aiken said the recent selloff in Manulife's shares is not warranted by either the general market plunge, or the S&P downgrade, the latter of which should have little direct impact on Manulife or its main rivals Sun Life Financial (SLF.TO) and Great-West Lifeco (GWO.TO).
National Bank Financial analyst Peter Routledge, who upgraded Manulife in May in the belief the market was unfairly attaching too much risk to the shares, said he expects the insurer's results to show its markets sensitivity has materially diminished over the past year.
"It seems overdone," Routledge said of Monday's drop in the share price.
"My sense is that the stock has declined as if it was as sensitive as it was last year, but it isn't."
Aiken noted that Sun Life's results last week threw additional uncertainty into assumptions for the sector, as the insurer actually recorded a gain from the impact of falling bond yields, rather than a loss.
This leaves open the door for Manulife to show a better than expected result, he said.
$1=$0.99 Canadian Reporting by Cameron French; editing by Rob Wilson