Moody’s Investors Service has affirmed the ratings on Manulife Financial Corp. and all of its subsidiaries following its announcement of a $2.1 to $2.3 billion issuance of common equity and an estimated fourth quarter loss of $1.5 billion, including a $2.7 billion reserve increases for equity market-related policy guarantees.

The rating outlook on all companies remains negative.

Moody’s vp and senior credit officer, Peter Routledge, stated that “in Moody’s view, Manulife’s equity raise does not materially improve Manulife’s financial flexibility in the near term, nor will it compensate for lower earnings going forward, mainly the product of lower fee income on Manulife’s equity-linked contracts such as variable annuities and segregated funds.”

Routledge noted that “the equity issuance will improve Manulife’s regulatory capital adequacy, offsetting the equity market-related reserve increase, but the company has just begun to expand its hedging program to mitigate its equity market exposure in a comprehensive fashion.”

The rating agency added that with regard to Manulife’s financial flexibility, the company’s anticipated $1.5 billion fourth quarter loss, combined with common and preferred share dividend payments, will consume nearly all of the $2.1 billion increment in common equity. Thus, the equity issuance will not materially improve financial leverage.

Meanwhile, Moody’s noted that earnings coverage for interest payments has been weakened by lower anticipated earnings, due to lower fee income on Manulife’s variable annuities and segregated funds. In addition, capital pressures at subsidiary Manufacturers Life Insurance Co. will constrain Manulife’s ability to upstream cash to its lead holding company.

Nonetheless, Moody’s believes that the equity issuance of $2.1 billion will augment Manulife’s capital adequacy at Manufacturers Life, which writes the vast majority of its variable annuity and segregated fund contracts.

Manulife estimated that its Canadian regulatory capital ratio, known as MCCSR, would be 235% at the end of November 2008, after giving effect to the additional capital provided by the $2.1 billion in common equity and a further $2 billion from a recently established credit facility. Were equity markets to remain at today’s levels, Moody’s estimates that Manulife’s MCCSR would remain well above 200%, a performance viewed by Moody’s as consistent with a Aa-level rating, after absorbing the $1.5 billion loss in the fourth quarter.

Finally, Moody’s noted that Manulife, unlike most of the other large writers of variable annuities and segregated funds in North America, has not implemented a meaningful equity hedging program, making the company more vulnerable than peers to equity market volatility. Manulife did implement a hedging program in 2008 to offset the equity market risk associated with some of the new variable annuity policies the company writes in the U.S., and expanded to all new U.S. product sales late this year. Expanding this program comprehensively across all Manulife’s segregated fund and variable annuity businesses would mitigate the underlying economic risk in these products, Moody’s said..

Moody’s said that the rating outlook on Manulife could return to stable if:

> Manulife’s financial leverage and coverage ratios return to their strong 2007 levels ;

> Manulife stabilizes its MCCSR ratio at 200% or higher;

> the company expands its hedging program for equity risk.

Moody’s commented that the ratings could be downgraded if one or more of the following occurs:

> Manufacturers Life’s Canadian capital adequacy (or MCCSR) ratio falls below 200% and is likely to remain there for an extended period;

> adjusted financial leverage rises above 20% for a sustained period or earnings coverage ratio falls below 12x;

> Manulife fails to expand its hedging program for equity risk;

> Manulife’s profitability comes under sustained pressure with return on equity falling below 15% accompanied by greater volatility;

> Manulife’s ratio of goodwill to equity rises above 40%.

IE