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Rating Action:

Moody's affirms Manulife ratings; changes outlook to negative

06 Nov 2008
Moody's affirms Manulife ratings; changes outlook to negative

Toronto, November 06, 2008 -- Moody's Investors Service affirmed the Aa1 insurance financial strength (IFS) ratings, but changed the outlook to negative from stable for Manulife Financial Corporation's (Manulife's) subsidiaries, which include Manufacturers Life Insurance Company (MLI), John Hancock Life Insurance Company (JHLICo), and John Hancock Life Insurance Company (USA) (JHUSA), following Manulife's announcement of 3Q08 results.

In affirming the ratings, Moody's noted Manulife's financial profile continues to benefit from a diversified and predictable earnings base, strong financial flexibility, and well-positioned franchises in North America and Asia. In recent years, the company has complemented strong profitability performance with a conservative capital structure.

According to Moody's, the change in Manulife's rating outlook is based on two factors: (1) the company's intention to borrow to meet an increase in required regulatory reserves and capital in its variable annuities and segregated funds businesses, which has resulted from equity market declines, and (2) the potential for additional pressure on capital adequacy and financial leverage if equity markets decline further.

According to lead analyst Peter Routledge, "Manulife entered this period of financial turmoil with excellent financial flexibility. To raise regulatory capital, however, the company intends to increase its borrowings, modestly weakening its flexibility going forward. The company also retains a significant exposure to equity markets, which could further strain profitability, capital, and financial flexibility if markets fall meaningfully below today's levels."

Moody's observed 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 other insurers to equity market volatility.

Moody's went on to note that, as equity markets declined, the reserves and capital required against Manulife's variable annuity and segregated fund guarantees rose substantially. Although the company's primary regulator, the Office of the Superintendent of Financial Institutions (OSFI), recently eased those requirements, they would rise with further equity market declines. Moody's cautioned that falling equity markets do not impose an immediate cash demand on Manulife because policyholders can only exercise the guarantees several years in the future. These guarantees are commitments by Manulife to protect their variable annuity and segregated fund policyholders against severe equity market declines, but usually take affect several years after the initial investment.

Nonetheless, both OSFI and the U.S. insurance regulators require Manulife to increase reserves and capital at its Canadian and U.S. operating companies as equity markets fall. As a result, the company has stated its intention to raise C$3 billion of debt to downstream to operating subsidiaries and strengthen their capital adequacy. Financial leverage and earnings coverage ratios will drop to the Aa range from the Aaa range as a result of the increased borrowing.

Mr. Routledge noted that "weaker consolidated financial flexibility at Manulife may well be temporary, assuming the company retires this debt as equity markets stabilize and the company's very strong earnings capacity helps to rebuild capital quickly. However, if equity markets decline significantly from today's levels before stabilizing, then Manulife's financial flexibility and capitalization will weaken further and this could lead to a downgrade."

Moody's commented that the ratings could be downgraded if one or more of the following occurs: (a) MLI's Canadian capital adequacy (or MCCSR) ratio falls below 200% and is likely to remain there for an extended period; (b) adjusted financial leverage rises above 20% for a sustained period or earnings coverage ratio falls below 12x; (c) Manulife fails to expand its hedging program for equity risk; (d) Manulife's profitability comes under sustained pressure with return on equity falling below 15% accompanied by greater volatility; (e) Manulife's ratio of goodwill to equity rises above 40%.

The rating outlook of Manulife could return to stable if one or more of the following occurs: (a) Manulife's financial leverage and coverage ratios return to their strong 2007 levels (below 20% for financial leverage, earnings coverage above 12x); (b) Manulife stabilizes its MCCSR ratio at 200% or higher; (c) the company expands its hedging program for equity risk.

Manulife has made some progress in implementing 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. An expansion of this program would have a limited beneficial impact on Manulife's capital required, given existing capital rules. Nonetheless, expanding the hedging program across Manulife's segregated fund and variable annuity businesses would mitigate the underlying economic risk in these products. In Moody's view, expanding the hedging program effectively would be consistent with Manulife's current Aa1 IFS ratings.

The following ratings were affirmed with the outlook changed to negative from stable:

Issuer: John Hancock Canadian Corporation

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Financial Services, Inc.

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Global Funding II

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Life & Health Insurance Company

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Life Insurance Co. of New York

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Life Insurance Company

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Life Insurance Company (USA)

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: John Hancock Variable Life Insurance Company

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: Manufacturers Life Insurance Company

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Issuer: STructured Asset Repackaged Trust,Ser. 2002-2

..Outlook Actions:

....Outlook, Changed To Negative From Stable

Moody's last rating action on Manulife occurred on September 27, 2007 when the rating agency upgraded its subsidiaries' IFS ratings to Aa1 from Aa2.

Manulife Financial Corporation, headquartered in Toronto, Canada, is an international provider of life insurance, pension, and investment products. On September 30, 2008 the company reported consolidated total general-fund and segregated-fund assets of C$331 billion, common shareholders' equity of C$25 billion, and year-to-date net income available to common shareholders of C$2.4 billion.

Moody's insurance financial strength ratings are opinions on the ability of insurance companies to repay punctually their senior policyholder claims and obligations.

For more information, visit our website at www.moodys.com/insurance.

Toronto
Peter Routledge
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
(416) 214-1635

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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