* EPS of C$0.33, down from C$0.70 in Q3 2007
* Profit hurt by stock market declines, credit losses
* Obtains C$3 billion term loan to bolster capital
* Stock reverses course, down 2 pct at C$25.28 (Recasts, adds CEO comments, Moody's outlook)
By Lynne Olver
TORONTO, Nov 6 (Reuters) - Life insurer Manulife Financial Corp (MFC.TO) said on Thursday that it has obtained financing to shore up its regulatory capital position, easing recent concerns, but steep declines in stock markets and losses on fixed-income securities sliced its quarterly profit in half.
Manulife's capital position had been a key focus in recent weeks, and the company said that it will borrow C$3 billion from six large Canadian banks to provide additional regulatory capital to subsidiaries, as needed.
Manulife shares initially rose after the news, but by afternoon they had reversed course and were down 2 percent at C$25.28.
Moody's Investors Service changed the outlook on Manulife's operating subsidiaries to negative from stable, saying that the company's borrowing would modestly weaken its future flexibility. Moody's affirmed the company's current Aa1 financial strength ratings.
Responding to tough questions from analysts, Manulife Chief Executive Dominic D'Alessandro told a conference call the company did not hedge its exposure to equity market declines -- which would push up its reserve requirements -- because it did not expect such severe volatility.
"We didn't expect all of these financial institutions to fail, in one week we had massive reorganization of the financial sector," D'Alessandro said in one exchange with an analyst.
"Maybe you guys saw it at Citibank but we didn't see it."
It would have been "prohibitively expensive" to start hedging when volatility was at its peak, D'Alessandro added.
He also said the company had concerns about issuing new equity, noting that it did not work out "particularly well" for other companies recently, and issuing shares would have been more expensive than the financing it did obtain.
But executives said they might yet issue equity if acquisition opportunities arise, and that they are still interested in deals.
"We're not going to miss that opportunity," D'Alessandro said of potential consolidation. The company's practice is to fund big transactions when they are imminent, not ahead of time, he added.
In the third quarter, Manulife's earnings fell to C$510 million ($433 million), or 33 Canadian cents a share, down from C$1.07 billion, or 70 Canadian cents, in the same 2007 period.
Analysts had expected earnings of 40 Canadian cents a share before items, according to Reuters Estimates.
Manulife sells insurance and wealth-management products in Canada, the United States and Asia.
As stock markets slid in September and October, investors grew concerned that Manulife would have to raise new capital to offset future guaranteed payments to certain annuity and segregated fund holders, as required by regulators. Its stock hit a year low of C$21.17 on Oct. 27.
The pressure on Manulife shares eased on Oct. 28 when Canada's financial institutions regulator said life insurers would get more time to put aside capital for guaranteed payments to be made many years in the future. The interim rule change relates to segregated funds.
The new C$3 billion five-year loan, which will be fully drawn by Nov. 20, can be repaid any time without penalty, Manulife said.
"The bank loan significantly reinforces their excess capital position and puts any capital issues to bed," said Tom MacKinnon, an analyst at Scotia Capital.
Manulife estimated that with the new loan, recent stock market moves and the new capital rules, its regulatory capital ratio would have been "a very robust 225 percent" on Oct. 31, above its target range of 180 to 200 percent.
D'Alessandro and Chief Financial Officer Peter Rubenovitch stressed that the company's balance sheet is strong.
"We're better capitalized than anyone that has reported," the CEO said.
Manulife was stung by C$574 million in stock market related charges in the latest quarter, including costs tied to its seg fund and variable annuity guarantees.
Executives said they expect to adjust pricing or features of the variable annuity products to reduce their risk and improve profitability.
The company also took previously announced charges of C$253 million on losses for various debt securities, including Lehman Brothers Holdings LEHMQ.PK. ($1=$1.18 Canadian) (Reporting by Lynne Olver; Editing by Peter Galloway)