DBRS Comments on Manulife Equity Issue Q4 Earnings Outlook

DBRS has commented on today’s announced $2.125 billion equity issue by Manulife Financial Corporation (Manulife or the Company), which will allow Manulife to reduce the amount drawn on the earlier announced $3 million bank facility to $2 billion. Most of the new debt and equity is expected to be injected into the Company’s major operating subsidiary, The Manufacturers Life Insurance Company; with the intention of shoring up its regulatory capital. There are no rating implications stemming from these actions.

The net impact of the debt and equity issues will be to increase the regulatory Minimum Continuing Capital and Surplus Requirement (MCCSR) to an estimated 235% at the end of November 2008 from 193% at the end of September 2008, which puts the Company into a very attractive excess-capital position relative to its target range of 175% to 200% and relative to the industry peer group. The Company estimates that a 10% decline in the equity markets will be reflected in a 20 point decrease in the MCCSR ratio, suggesting that the markets will have to fall an additional 30% before the lower MCCSR target band is pierced. Pro forma the Q4 2008 results and the incremental debt and equity, the Company’s total debt and adjusted debt ratios, at 23.2% and 20.0%, respectively, are in line with the Company’s longer-term targets and consistent with the current rating.

As a result of continued equity markets deterioration in October and November totaling 21.1% and 23.1% in Canada and the United States, respectively, following declines of 15.6% and 19.5% to the end of September 2008, Manulife today announced that it would have to add an additional $2.7 billion to its actuarial reserves by year end, assuming that markets do not change from the November 30, 2008, levels (should the December 1. 2008, market decline of close to 10% in Canada and the United States be maintained, the reserve would have to be increased again). For the fourth quarter, the Company is expecting to report a net loss of $1.5 billion, reflecting both the variable annuities and segregated funds (VA and seg. fund) reserve increase as well as other unfavourable equity markets impacts and writedowns, on top of normalized operating earnings. For 2008, the Company expects to report total net income of just $900 million, which will result in a negative hit to retained earnings since the dividend payout is more than $1.4 billion.

Manulife is being more adversely affected by its exposure to VA and seg. fund guarantees than most of its competitors, reflecting its decision not to fully hedge its equity markets exposures, its relatively generous guarantee provisions designed to win market share and the large volumes of these products sold at the top of the equity markets cycle. However, the temporarily adverse impact of the unprecedented equity markets declines of the past few months must be understood in the context of the Company’s broadly diversified business segments, a strongly profitable book of in-force insurance business and financial flexibility, which has given the Company the ability to meet relatively stringent regulatory capital requirements at no cost to its credit rating.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Life Insurance Companies, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.