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Rating Action:

Moody's downgrades Manulife's IFS to Aa3; outlook negative

18 Mar 2009

Approximately C$5.6 Billion of securities affected

Toronto, March 18, 2009 -- Moody's Investors Service downgraded the insurance financial strength (IFS) ratings of Manulife Financial Corporation's (Manulife; TSX: MFC) subsidiaries to Aa3 from Aa1. These subsidiaries include Manufacturers Life Insurance Company (MLI), John Hancock Life Insurance Company (JHLICo), and John Hancock Life Insurance Company (USA) (JHUSA). The debt ratings of Manulife's subsidiaries were also downgraded by two notches. Moody's also downgraded the short-term debt rating of John Hancock Financial Services, Inc. to Prime-2 from Prime-1. The rating outlook for Manulife's subsidiaries is negative. This rating action concludes the review for downgrade initiated on February 12, 2009.

Vice President and Senior Credit Officer, Peter Routledge, said: "Moody's based its decision to downgrade Manulife on the company's weakened financial flexibility and capitalization, caused by the decline in equity markets globally. This substantial decline in equity markets has caused a rise in the reserves and regulatory capital that Manulife must set aside for the guarantees it writes on its variable annuity and segregated fund products."

WEAKENED FINANCIAL FLEXIBILITY AND VULNERABILITY OF REGULATORY CAPITAL TO EQUITY MARKET DECLINES DRIVES DOWNGRADE

Moody's stated that it decided to downgrade Manulife's IFS rating two notches, as opposed to one, to reflect the fact that the life insurer has greater sensitivity to further equity market declines than many of its peers. This fact is not only a consequence of the size of its variable annuity (also known as segregated funds) business and its direct investments in equity securities, but also the company's decision not to institute a comprehensive hedging program for its variable annuity guarantees prior to 2008. Although Manulife did institute a hedging program for all new U.S. business in 2008 and plans to expand that program to Canada and Japan in 2009, the company's older blocks of variable annuity / segregated fund policies remain unhedged, although a small portion does benefit from reinsurance.

Manulife reported the following sensitivities of its capital and earnings to equity markets: (1) MLI's regulatory capital ratio (known as MCCSR) will decline 2 percentage points for every 1 percentage point decline in the equity markets; and (2) MLI will suffer a C$1.6 billion rise in reserve charges (after-tax) for equity market guarantees for every 10% drop in equity markets. By contrast, some of Manulife's peers have reported significantly less onerous sensitivities -- with MCCSR and reserve charge sensitivities a fraction of Manulife's. Equity markets, Moody's notes, are down approximately 10-15% since the start of 2009, and had been down 20% earlier this year, highlighting the potential for further volatility in regulatory capitalization.

To meet rising capital requirements at its primary operating company, MLI, Manulife has successfully raised over the past five months C$2 billion in debt, C$2.3 billion in common equity, and C$450 million in hybrid instruments. Manulife, however, now employs a higher level of debt in its capital structure as a result, leading to higher financial leverage and lower earnings and cash coverage ratios. Mr. Routledge added: "Although Manulife currently maintains a level of financial flexibility consistent with its Aa3 insurance financial strength rating, it could weaken if equity markets decline further. Given the sensitivity of Manulife's regulatory capitalization to equity markets, and the impact of that sensitivity on the company's financial flexibility, Moody's decided to downgrade the rating two notches."

NEGATIVE OUTLOOK REFLECTS CONTINUING VULNERABILITY TO EQUITY MARKET DECLINES AND THE POTENTIAL FOR INVESTMENT PORTFOLIO IMPAIRMENTS

The negative outlook reflects the company's continuing susceptibility to declines in the equity markets. As noted above, Manulife, unlike most of the other large writers of variable annuities and segregated funds in North America, has not implemented a comprehensive equity hedging program, making the company more vulnerable than peers to equity market volatility. After giving benefit for Manulife's C$450 million preferred share equity raise this month, Moody's estimates MLI's MCCSR at or around 200%, which is low relative to historic standards and relative to Moody's expectations at Manulife's current Aa3 IFS rating level. Assuming a C$2.4 billion charge for higher variable annuity guarantee reserves (given equity markets are down 15%), Moody's estimates a consolidated financial leverage ratio of over 25% at present, versus 22% at the end of 2008.

Mr. Routledge also noted: "Anticipated higher losses on Manulife's investment portfolio, as the credit cycle downturn continues in 2009, was another consideration in assigning the negative outlook. Although Manulife has a lower percentage of its investment portfolio allocated to structured credit products, Moody's expects the company's credit costs to rise in 2009 and 2010, further straining earnings and capital generation."

DIVERSIFIED LIFE INSURANCE FRANCHISE SUPPORTS FINANCIAL STRENGTH

Moody's went on to note that the C$2.3 billion issuance of common equity in 4Q08 was indicative of the underlying strength of Manulife's core franchises in Canada, the United States, and Asia. Manulife's financial profile continues to benefit from a diversified earnings base, strong financial flexibility, and well-positioned franchises in North America and Asia. In recent years, the company had complemented strong profitability performance with a conservative capital structure, though market conditions have eroded that position somewhat.

Moody's commented that the ratings could be downgraded further if one or more of the following occurs: (a) MLI's Canadian capital adequacy (or MCCSR) ratio stays below 200% for an extended period; (b) adjusted financial leverage rises above 30% or earnings coverage ratio falls below 6x for a sustained period; (c) dividend capacity from MLI remains constrained for an extended period; (d) MLI's profitability comes under sustained pressure with return on equity falling below 10% accompanied by greater volatility; (e) investment impairment charges in 2009 exceed C$4 billion.

Moody's said that Manulife's outlook could be returned to stable if: (a) Manulife's financial leverage was judged likely to remain in the mid-20s; (b) earnings coverage was likely to rise above 8x; (c) Manulife stabilized its MCCSR ratio at 200% or higher; and / or (d) the company successfully completed the expansion of its hedging program for equity risk. Expanding the current hedging program comprehensively across all Manulife's segregated fund and variable annuity businesses would help mitigate the underlying economic risk in these products and be consistent with Moody's expectations for an Aa-rated life insurer.

The following ratings were downgraded with a negative outlook:

Manufacturers Life Insurance Company -- insurance financial strength to Aa3 from Aa1;

John Hancock Life Insurance Company (USA) -- insurance financial strength to Aa3 from Aa1;

John Hancock Life Insurance Company -- insurance financial strength to Aa3 from Aa1, senior unsecured to A1 from Aa2, surplus notes to A2 from Aa3;

John Hancock Variable Life Insurance Company -- insurance financial strength to Aa3 from Aa1;

John Hancock Life & Health Insurance Company -- insurance financial strength to Aa3 from Aa1;

John Hancock Life Insurance Co. of New York -- insurance financial strength to Aa3 from Aa1;

John Hancock Global Funding II -- backed senior secured to Aa3 from Aa1;

John Hancock Canadian Corporation -- backed senior secured to A3 from A1;

STructured Asset Repackaged Trust, Ser. 2002-2 -- backed senior secured to Aa3 from Aa1.

The following rating was downgraded:

John Hancock Financial Services, Inc. -- short-term rating for commercial paper to Prime-2 from Prime-1.

Manulife Financial Corporation, headquartered in Toronto, Canada, is an international provider of life insurance, pension, and investment products. On December 31, 2008 the company reported consolidated total balance sheet and segregated-fund assets of C$376 billion, common shareholders' equity of C$27 billion, and annual net income available to common shareholders of C$487 million.

The last rating action was on February 12, 2009 when Moody's placed Manulife's ratings on review for downgrade following the company's earnings report for the fourth quarter of 2008.

The principal methodology used in rating the Manulife family of companies was Moody's Global Rating Methodology for Life Insurers, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating Manulife can also be found in the Credit Policy & Methodologies directory.

Moody's insurance financial strength ratings are opinions on the ability of insurance companies to pay 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

Moody's downgrades Manulife's IFS to Aa3; outlook negative
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