Manulife Financial Corp. will further strengthen its financial and capital position by issuing $2.125 billion in common equity, the company announced Tuesday.

The common share issue would raise its regulatory capital ratio to one of the highest levels in the company’s history, Manulife said.

Specifically, $1.125 billion is being sold by way of private placement to eight existing institutional investors and $1 billion to a syndicate of underwriters in a “bought deal” public offering.

The purchase price of the shares acquired by the private placement investors and under the public offering is $19.40 per share. The private placement investors will receive a commitment fee equal to 2.062% of their individual commitments. The private placement and the public offering are expected to close on or about Dec. 11. Concurrently, Manulife will reduce its credit facility with the Canadian banks that was announced on Nov. 6 to $2 billion.

On a pro forma basis, after giving effect to the $2.125 billion of common equity and the remaining $2 billion credit facility, and reflecting global equity market levels as of the end of November 2008, the consolidated capital ratio or MCCSR is estimated to be approximately 235%, one of the highest in the company’s history.

“This issue of common shares along with the renegotiated credit facilities will noticeably bolster our already strong capital position” said CEO Dominic D’Alessandro, in a release. “These transactions provide us with the flexibility to absorb the accounting impact of future volatility in financial markets and, as importantly, will allow us to take advantage of acquisition opportunities that are emerging out of the current industry environment.”

Manulife also provided an update on its expected earnings for 2008. Assuming global equity markets closed at the end of November 2008 levels, net income for the year is estimated to be approximately $900 million.

“We are disappointed with this poor performance,” said D’Alessandro. “It is primarily due to the unprecedented decline in worldwide equity markets which for the 11 months ended Nov. 30, 2008 are down by 33% in Canada, 39% in the U.S. and by an average of 45% in Asia. However, our business fundamentals continue to be very solid, as evidenced by our strong insurance sales and new business embedded value growth.”

As a result of these market declines, MFC also expects to increase its reserves for variable annuity guarantees to approximately $5 billion at Dec. 31, up from $526 million at the beginning of the year, notwithstanding that potential payments under such guarantees would occur seven to 30 years in the future.

For the two months ended Nov. 30, 2008, equity markets have declined by 21% in Canada, 23% in the U.S. and 24% in Japan. “As a result, an estimated increase in reserves for variable annuities of approximately $2.7 billion is expected to be recorded in the fourth quarter if equity markets remain unchanged, Manulife said.”

Primarily because of this anticipated increase in reserves for variable annuities, and also due to the effect on investment and other revenue of sharply lower equity markets, Manulife anticipates an estimated loss for the fourth quarter of approximately $1.5 billion.

“It is important to note that the increase in reserves represents a non-cash charge which has been estimated as if the equity market deterioration was permanent. While conservative, this approach ensures that we have a very strong balance sheet”, noted D’Alessandro. “Should markets recover, as one would normally expect, these reserves would be released into income.”

MFC has granted the underwriters an over-allotment option, exercisable in whole or in part at any time up to 30 days after closing, to purchase up to an additional $150 million in common shares at the same offering price. Should the over-allotment option be exercised in full, the total gross proceeds of the public offering would be $1.150 billion.

On Monday, Manulife saw its shares drop $3.54, or 14.75%, to end at $20.46.


IE