DBRS Comments on Manulife Equity Issue

DBRS notes that on November 18, 2009, Manulife Financial Corporation (Manulife or the Company) announced a $2.5 billion equity issue which will significantly increase the amount of available capital to its primary operating life insurance subsidiary. Manulife also intends to retire the approximately $1 billion outstanding indebtedness under its Credit Facility with banks. At the end of September 2009, there was over $1 billion in cash held at the holding company. There are no rating implications stemming from these actions.

The equity issuance is consistent with the Company’s desire to have “Fortress Capital” to support its longer term financial strength and market franchise. This capital is a cushion against potential earnings volatility associated with heightened equity and credit market exposures, which can also be deployed for growth opportunities. Adjusting for the equity issue and the retirement of the bank debt, the net new capital improves the Company’s consolidated debt ratio (including preferred shares) to 25% from a relatively high 29% at the end of September 2009, and the adjusted debt ratio is 17.2% (down from 20.7%). DBRS anticipates that growth in retained earnings at normalized levels will reduce the total debt ratio to below 25%, which is the Company’s target.

If this $2.5 billon in common equity is injected into the Company’s major operating subsidiary, The Manufacturers Life Insurance Company (MLI), regulatory capital adequacy, as measured by the Minimum Continuing Capital and Surplus Requirement (MCCSR) ratio at MLI would be 256%, up from 229% at the end of September 2009. The Company is in an attractive excess capital position relative to the OSFI minimum of 150% and Manulife’s target of 200%, though given the Company’s higher relative market exposure to the equity markets and the current uncertain economic environment, DBRS regards the higher regulatory capital ratios as prudent.

Notes:
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.