Archive for the ‘Regulatory Capital’ Category

IAG Posts Solid 3Q09 Earnings

Wednesday, November 4th, 2009

IAG has released its package of materials for 3Q09.

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They can’t resist getting a poke into MFC and SLF, both of whom are expected to incur significant charges for policyholder benefits assumption changes:

The Company’s past prudence in terms of evaluating the provisions for future policy benefits was rewarded once again this quarter, since the Company did not have to strengthen its provisions for future policy benefits in the third quarter. In addition, according to the indications available at this time, and if current market conditions prevail until the end of 2009, the Company believes that the in-depth review of the various valuation assumptions that it performs at the end of the year should not lead to a significant adjustment to the provisions for future policy benefits in the fourth quarter, and should therefore not have a material impact on year-end net profit.

Their MCCSR is remaining strong:

The Company ended the third quarter with a solvency ratio of 197% as at September 30, 2009, which is slightly below the ratio of 202% recorded as at June 30, 2009. However, if the $100 million preferred share issue concluded on October 15, 2009 is included, the solvency ratio amounts to 207% on a pro forma basis, which is higher than the Company’s 175% to 200% target range. There was downward pressure on the solvency ratio in the third quarter primarily due to the higher capital requirements related to the increase in market value of stocks and bonds (a consequence of the stock market upswing, the reduction in long-term interest rates and the purchase of new securities). The decrease in the solvency ratio was, however, mitigated by the contribution of the net income to the available capital, net of the normal increase in required capital related to business growth.

The equity ratio has declined substantially from 3Q08, but is holding steady and is acceptable at levels of over 150%:

IAG Equity-only MCCSR
Item 3Q09 2Q09 4Q08 3Q08
Equity 1,790.9 1,719.0 1,634.2 1,787.4
Required Capital 1,090.4 1,041.2 967.1 981.0
Equity Ratio 164% 165% 169% 182%
Equity is taken from the table “Capitalization” and consists of all elements of reported equity, less preferred shares.
Required Capital is taken from the table “Solvency”

Sensitivity is constant:

Hence, the provisions for future policy benefits will not have to be strengthened for the stocks matched to the long-term liabilities (including the segregated funds guarantee) as long as the S&P/TSX index remains above about 8,200 points (7,850 in the last update). The solvency ratio will remain above 175% as long as the S&P/TSX index remains above about 7,300 points (7,100 in the last update) and will remain above 150% as long as the index remains above 5,800 points (5,450 in the last update).

The results of all other sensitivity analyses concerning the impact of a decrease or increase in the stock markets or interest rates on the net profit, the ultimate reinvestment rate (“URR”) or the initial reinvestment rate (“IRR”) remain unchanged (for more details refer to the Management’s Discussion and Analysis that follows this news release).

ELF 3Q09 Results

Tuesday, November 3rd, 2009

E-L Financial has announced its 3Q09 results:

E-L Financial Corporation Limited (“E-L Financial”) (TSX:ELF)(TSX:ELF.PR.F)(TSX:ELF.PR.G) today reported that for the quarter ended September 30, 2009, it incurred a net operating loss(1) of $23.7 million or $7.89 per share compared with net operating income of $49.5 million or $14.13 per share in 2008. On a year to date basis, E-L Financial earned net operating income of $15.2 million or $2.30 per share compared with $82.9 million or $22.64 per share in 2008.

The net loss for the quarter was $130.8 million or $40.17 per share compared with a net loss of $25.1 million or $8.30 per share for the comparable period last year.

(1)Use of non-GAAP measures

The villain of the piece was their General Insurance division – which is Dominion of Canada – which has now accumulated a YTD operating loss (non-GAAP) of $42.8-million compared to a loss of $11-million in the first half of the year. Life Insurance (Empire Life) continues to show a healthy operating and net profit YTD.

The headline net loss of $130.8-million YTD is largely due to the first-quarter write-down of available-for-sale investments, which was reported on PrefBlog.

The press release doesn’t have much detail and the financials are not yet available on SEDAR.

OSFI Does Banks Another Favour

Monday, October 19th, 2009

The Office of the Superintendent of Financial Institutions has announced:

Deposit-taking institutions and life insurance companies are required to deduct, from tier 1 capital, identified intangible assets in excess of 5% of gross tier 1 capital. The requirement applies to identified intangible assets purchased directly or acquired in conjunction with or arising from the acquisition of a business. These include, but are not limited to, trademarks, core deposit intangibles, mortgage servicing rights, purchased credit card relationships, and distribution channels. Identified intangible assets include those related to consolidated subsidiaries, subsidiaries deconsolidated for regulatory capital purposes, and the proportional share in joint ventures subject to proportional consolidation.

Section 3064 of the CICA Handbook, Goodwill and Intangible Assets, requires that computer software that is an integral part of the related hardware (such as the operating system) is to be treated as property, plant and equipment, while software that is not an integral part of the related hardware is to be treated as an intangible asset. Section 3064 is effective for fiscal years beginning on or after October 1, 2008.

This advisory confirms that, pending a future review of the treatment of intangible assets:

  • computer software now classified as an intangible asset solely due to the requirements of CICA Handbook Section 3064 is not included in the definition of identified intangible assets under the CAR and MCCSR guidelines for deposit taking institutions and life insurance companies.
  • property and casualty insurers and cooperative credit associations are not required to include computer software in the amount of intangible assets deducted from capital.

RBC has disclosed:

On November 1, 2008, we adopted Canadian Institute of Chartered Accountants Handbook section 3064, Goodwill and Other Intangible Assets . As a result of adopting Section 3064, we have reclassified $805 million of software from Premises and equipment to Other intangibles on our Consolidated Balance Sheets and corresponding depreciation of $53 million from Non-interest expense – Equipment to Non-interest expense – Amortization of other intangibles on our Consolidated Statements of Income. Amounts for prior periods have also been reclassified.

They already have a goodwill deduction from Tier 1 capital, so if the accounting change had been passed through by OSFI, this would have resulted in an additional deduction of about $750-million, about 2% of their current $31,324-million total.

Bank Software & Tier 1 Capital
CAD Millions
Bank Software
Classification
Changed
Tier 1
Capital
Percentage
RY 750 31,324 2.4%
TD 557 (?) 21,219 2.6%
CM 650 (?) 14,194 4.6%
BNS 791 (?) 23,062 3.4%
BMO 510 20,090 2.5%
NA Guess!
Numbers are estimates, and highest reasonable estimate of impact is reported here

TD Issues IT1C: CaTS 6.631% 99-Year Notes with Reset

Wednesday, September 9th, 2009

TD has announced:

an issue of $750,000,000 TD Capital Trust IV Notes – Series 3 due June 30, 2108 (“TD CaTS IV – Series 3 Notes”). The TD CaTS IV – Series 3 Notes are subordinated, unsecured debt obligations of the Trust and are expected to qualify as Tier 1 Capital of TDBFG. Any Tier 1 Capital raised by TDBFG over the 15% regulatory limit will temporarily be counted as Tier 2B Capital. The expected closing date is September 15, 2009.

From the date of issue to, but excluding, June 30, 2021, interest on the TD CaTS IV – Series 3 Notes is payable semi-annually at a rate of 6.631% per year. Starting on June 30, 2021, and on every fifth anniversary thereafter until June 30, 2106, the interest rate on the TD CaTS IV – Series 3 Notes will reset as described in the prospectus.

On or after December 31, 2014, the Trust may, at its option and subject to certain conditions, redeem the TD CaTS IV – Series 3 Notes, in whole or in part.

In certain circumstances, the TD CaTS IV – Series 3 Notes and interest thereon may be automatically exchanged for, or paid by the issuance of, non-cumulative Class A first preferred shares of TDBFG.

The TD CaTS IV – Series 3 Notes will not be listed on any stock exchange.

The Trust and TDBFG intend to file a prospectus supplement with the securities regulators in each of the provinces and territories of Canada with respect to the offering of the TD CaTS IV – Series 3 Notes.

The prospectus supplement is not yet available. It is of interest that the 6.631% coupon is equivalent to 4.74% dividend, which may – possibly – be a clue as to the level of possible high quality FixedReset preferreds. Note that the initial 6.631% rate on the CaTS IV is set for 12 years, although there is a five-year call.

MFC 2Q09 Results: Common Dividend Slashed

Thursday, August 6th, 2009

Manulife Financial announced today:

its decision to reduce the Company’s quarterly common share dividend by 50% from $0.26 to $0.13 per share, payable on and after September 21, 2009 to shareholders of record at the close of business on August 18, 2009. The revised dividend will preserve approximately $800 million for MFC on an annualized basis as part of the Company’s strategic focus on building fortress levels of capital.

Preferred share dividends were, of course, not affected. Preferred Dividends must be paid in full for as long as the common shareholders are getting even a nickel.

MFC is also offering discounted common shares to participants in its common share DRIP. Sadly, this DRIP is not open to preferred shareholders; there are only three such plans that offer discounted common to preferred shareholders, and one of them is iffy.

Manulife common performed badly on news of the dividend cut. It’s my guess that the cut has been on their to-do list for some time; doing it now means the stock price will be hurt, but doing it at the peak of gloominess earlier would have had it slaughtered.

The new release stated:

Manulife Financial Corporation (“MFC”) today reported shareholders’ net income of $1,774 million for the second quarter ended June 30, 2009, compared to $1,008 million in the second quarter of 2008. Fully diluted earnings per share was $1.09 compared to $0.66 in 2008.

The quarter’s earnings were primarily driven by the significant increase in global equity markets which resulted in non-cash gains of $2,622 million, of which $2,379 million related to segregated fund guarantees. Partially offsetting these gains were the impact of lower corporate bond rates and, to a lesser extent, the continued pressure on credit. The decline in interest rates and other fixed income related items resulted in non-cash charges of $1,116 million, primarily as a result of the lower investment returns assumed in the valuation of policy liabilities. In addition, credit impairments totaled $109 million, other than temporary impairments (“OTTI”) on equity investments were $53 million and actuarial related charges for downgrades amounted to $106 million. During the quarter the Company increased its tax related provisions on leveraged lease investments by $139 million and reported net charges for changes in actuarial methods and assumptions of $87 million. Excluding the aforementioned items, earnings for the quarter totaled $776 million compared to $745 million a year ago.

We expect to complete our annual review of all actuarial assumptions in the third quarter, and our current expectation is that the updated assumptions will result in a material charge to earnings that will likely be recorded next quarter. Although we have not completed our assessment nor have we reached any conclusions, the preliminary information indicates that the possible change in assumptions with respect to policyholder behavior for segregated fund guarantee products may result in a charge not to exceed $500 million.

Exposures:

MFC Exposures
Tangible Holdco Equity*
CAD Millions
16,784
Other Tier 1 30.1%
Stock Leverage 58%**
Bond Leverage 890% ***
Seg Fund Leverage 1,061%
Effect of +1% Interest Rates 8.0%
Effect of -10% Equity Market 11.3%
Tangible Holdco Equity is Common Shares (16,250) plus Contributed Surplus (169) plus Retained Earnings (12,693) plus Non-Controlling interest in subsidiaries (209) less Accumulated other Comprehensive Loss (2,914) less Goodwill (7,608) and Intangibles (2,015) = 16,784.
Other Tier 1 = Liabilities for preferred shares and capital instruments (3,634) + Preferred Shares (1,419) = 5,053 / THE
Stock Leverage is Stocks on the balance sheet (9,688) divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable.
Bond Leverage is bonds on the balance sheet (83,725) + mortgages (31,379) + Private Placements (24,701) + Policy Loans (7,090) + Bank Loans (2,458) = 149,353 divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable.
Equity effect = 1,900 / THE
Interest rate effect = 1,336 / THE; note that a decrease in interest rates will cost them money. This figure is taken from the 2008 Annual Report since they couldn’t be bothered to disclose it in 2Q09, despite all their blather about “de-risking”.
Sources: Financial Supplement, Slides and 2008 Annual Report.

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

  • Corresponding US calculations are not disclosed
  • As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.

Update, 2009-8-7: DBRS has commented:

that today’s decision by Manulife Financial Corporation’s (Manulife or the Company) Board of Directors to reduce its dividend rate by 50% is expected to preserve close to $800 million annually in shareholder capital. This is the latest in a recent line of actions taken by the Company to build and preserve capital following the adverse impact of weakening equity markets and falling interest rates on its actuarial reserves and reported earnings. While DBRS regards this dividend reduction as extraordinary for a Canadian financial institution, the decision is nevertheless prudent in the context of the current operating and market environment. There are no implications for the Company’s ratings at this time. However, DBRS recognizes that further large losses without a corresponding build-up in common equity capital would likely lead to downward pressure on the ratings.

MFC: Innovative Tier 1 Capital Issue

Monday, July 6th, 2009

Manulife Financial has announced:

that Manulife Financial Capital Trust II (the “Trust”), a trust wholly-owned by The Manufacturers Life Insurance Company (“MLI”), will issue $1 billion of Manulife Financial Capital Trust II Notes – Series 1 due December 31, 2108 (“MaCS II – Series 1”). The MaCS II – Series 1 are expected to qualify as Tier 1 capital of MLI for regulatory purposes. The Trust intends to file a final prospectus with the Canadian securities regulators as soon as possible.

Interest on the MaCS II – Series 1 is payable semi-annually. From the date of issue to but excluding December 31, 2019, the rate of interest on the MaCS II – Series 1 will be fixed at 7.405% per annum. Starting on December 31, 2019, and on every fifth anniversary after such date, the rate of interest on the MaCS II – Series 1 will be reset as described in the prospectus filed by the Trust and MLI.
On or after December 31, 2014, the Trust may, at its option and subject to certain conditions, redeem the MaCS II – Series 1, in whole or in part.

In certain circumstances, the MaCS II – Series 1 or interest thereon may be automatically exchanged or paid by the issuance of non-cumulative Class 1 Preferred Shares of MLI.

The transaction is expected to close on July 10, 2009. An amount equivalent to the net proceeds will be used by Manulife Financial Corporation (“MFC”) to acquire liquid assets for possible future retirement of amounts outstanding under MFC’s credit facility or for general corporate purposes. The offering is not expected to initially result in an increase to MLI’s reported MCCSR ratio (Minimum Continuing Capital and Surplus Requirements for Life Insurance Companies).

The use of proceeds is not entirely clear to me, but no prospectus is yet available. MLI has “Adjusted Net Tier 1 Capital” of a little under $13.6-billion as of 1Q09, according to OSFI, and these notes, according to the press release, will add to this total. But the offering is not expected to increase MLI’s MCCSR, and proceeds may be used to pay of MFC’s debt.

So how will the money flow from MLI to its parent MFC? Share buyback? Redemption of bonds? Enormous dividend? It must be out of Tier 1 Capital somehow, but it’s just not clear.

Be that as it may, the yield of 7.405% seems about right. MFC’s preferreds are trading to yield around 6.4% (the perps) or 4.85%-5.35% for the fixed Resets. The reset mechanism of this new issue is not specified in the press release, but can probably be expected to be similar to FixedResets (check the prospectus!).

Most importantly, however, these notes are Tier 1 Capital of the operating subsidiary, not the parent, which is worth a notch or two in credit quality all by itself. DBRS rates MLI‘s prefs at Pfd-1 and sub-debt at AA(low), compared to MFC’s Pfd-1(low) and senior debt (MTNs) at AA(low).

Update 2009-7-7: From the Preliminary Prospectus (via SEDAR):

The gross proceeds to the Trust from the Offering of $

ELF 1Q09 Results

Wednesday, May 13th, 2009

E-L Financial has released (via SEDAR, dated May 8 ) its 1Q09 Financials, so let’s have a look.

For the three months ended March 31, 2009, E-L Financial earned net operating income of $34.5 million or $9.64 per share compared with a net operating loss of $5.7 million or $2.46 per share for the first quarter of 2008.

Net loss for the quarter was $133.7 million or $41.00 per share compared with a net loss of $21.4 million or $7.20 per share for the comparable period last year.

The results were impacted by two significant events that occurred in the first quarter. The general insurance operation incurred a net loss of $148.2 million for the first quarter ($2.9 million net loss in the first quarter of 2008). An impairment provision was recorded for its common equity pooled fund units in the amount of $226.1 million, before income tax, most of which was recorded as an unrealized loss in other comprehensive income in 2008. These pooled fund units were written down since the fair value was less than cost and, early in the second quarter, they were redeemed in kind, as a result of the general insurance operation’s decision to change its third part equity investment manager.

Secondly, on March 4, 2009, proposed amendments to the Income Tax Act passed third reading causing them to become substantively enacted for accounting purposes. Under these amendments, certain capital losses have been re-characterized as income losses for tax purposes. These amendments also result in most insurance investments and policy liabilities being taxed on a fair value basis, consistent with changes in accounting rules for financial instruments adopted in 2007. The impact of these amendments using fair values as of March 4, 2009 was a one-time increase to net income of $102.4 million. Most of this increase is due to a tax recovery relating to the recognition of unused tax losses on equity investments previously classifi ed as capital losses which were not considered to be recoverable and therefore not recognized in 2008.

Exposures:

ELF Exposures
Tangible Holdco Equity*
CAD Millions
2,276
Other Tier 1 8.8%
Stock Leverage 78%**
Bond Leverage 183% ***
Seg Fund Leverage 147%
Effect of +1% Interest Rates 0.9%
Effect of -10% Equity Market *** 1.6%
Tangible Holdco Equity (THE) is Common Shares (72) plus Retained Earnings (2,121) plus Non-controlling interest in subsidiaries (130) plus Participating Policyholders’ interest (60) less Other Comprehensive Income (107) = 2,276.
Other Tier 1 = Preferred Shares (200) = 200 / THE
Stock Leverage is Stocks in Portfolio Investments (772) + General Insurance (594) + Life Insurance (403) divided by Tangible Holdco Equity. Note that there is an unrecognzed loss of 200 in the stocks in “Portfolio Investments”
Bond Leverage is bonds in Portfolio Investments (41) + General Insurance (1,297) + Mortgages/Commercial Loans in General Insurance (49) + Life Insurance (2,257) + M/CL in Life Insurance 237) + Policy Loans (38) + Policy Contract Loans (143) + Reinsurance recoverable (112) = 4,174 divided by Tangible Holdco Equity.
Equity effect = Net Income (5) +OCI (16) + SegFunds (16) / THE
Interest rate effect = Net income (24) LESS OCI (4) = 20 / THE (Note that this is reversed; it is a decrease in rates that frightens them, implying their longs have lower duration than their shorts)
Sources: MD&A, 4Q08; MD&A, 1Q09; Financials, 1Q09

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

  • Corresponding US calculations are not disclosed
  • As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.

IAG 1Q09 Results

Monday, May 11th, 2009

Industrial Alliance has released its 1Q09 results, so we can take a quick look at their exposures.

Industrial Alliance ended the first quarter of 2009 with net income to common shareholders of $46.2 million, compared to $61.7 million for the same period in 2008. This result translates into diluted earnings per common share of $0.58 ($0.76 in the first quarter of 2008) and a return on common shareholders equity of 11.2% on an annualized basis (14.5% in the first quarter of 2008).

The results for the quarter benefited from a $7.5 million gain after taxes ($0.10 per common share) resulting from the favourable evolution of the gap between the market value of the debt instruments and that of the underlying assets. Debt instruments were classified as “held-for-trading” when the new accounting standards took effect on January 1, 2007. Hence, any difference between the variation in the market value of the debt instruments and the corresponding assets must be recognized immediately on the income statement. However, this difference should be gradually eliminated by the time the debt instruments mature, which is in the next five years.

On the other hand, the results for the quarter were affected by the current economic and financial environment, which reduced the Company’s expected income by about $9.9 million after taxes ($0.12 per common share).

Profit declined somewhat due to weaker equity & credit markets; $89-million due to lower fee income on Assets Under Management; $25-million due to increased actuarial liabilities; but mainly provisions for credit losses $138-million and other provisions, $19-million.

Exposures:

IAG Exposures
Tangible Holdco Equity*
CAD Millions
1,195
Other Tier 1 18.7%
Stock Leverage 139%**
Bond Leverage 1,021% ***
Seg Fund Leverage 749%
Effect of +1% Interest Rates 1.3%
Effect of -10% Equity Market 1.4%
Tangible Holdco Equity (THE) is Common Shares (541) plus Contributed Surplus (20) plus Retained Earnings and Other Comprehensive Income (1,101) less Goodwill (115) and Intangibles (352) = 1,195.
Other Tier 1 = Preferred Shares (224) = 224 / THE
Stock Leverage is Stocks on the balance sheet (1,332) + Equity contracts (333) divided by Tangible Holdco Equity.
Bond Leverage is bonds on the balance sheet (8,114) + mortgages (3,507) + Policy Loans (366) + Interest Rate Contracts (171) + Credit Contracts (39) = 12,197 divided by Tangible Holdco Equity.
Equity effect = 17 / THE (Figure includes some recovery; amount not disclosed)
Interest rate effect = 15 / THE (actual disclosure in 2008 AR is 10bp -> $1.5-million)
Sources: 2008 Annual Report and 1Q09 Earnings Release and 1Q09 MD&A.

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

  • Corresponding US calculations are not disclosed
  • As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.

GWO 1Q09 Results

Friday, May 8th, 2009

Great-West Lifecol has released its 1Q09 results, so we can take a quick look at their exposures.

I won’t be quoting from the earnings release. GWO considers their press release to be TOP SECRET and has encrypted the PDF: “All contents of the document are encrypted and search engines cannot access the document’s metadata … Content Copying: Not Allowed”. I asked them (or one of their affilliated companies, can’t remember which) about this some time ago but, being mere investor scum, was not favoured with a reply.

Profit declined somewhat due to weaker equity & credit markets; $89-million due to lower fee income on Assets Under Management; $25-million due to increased actuarial liabilities; but mainly provisions for credit losses $138-million and other provisions, $19-million.

Exposures:

GWO Exposures
Tangible Holdco Equity*
CAD Millions
3,474
Other Tier 1 81.5%
Stock Leverage 157%**
Bond Leverage 2,644% ***
Seg Fund Leverage 2,214%
Effect of +1% Interest Rates 15.2%
Effect of -10% Equity Market 16.6%
Tangible Holdco Equity is Common Shares (5,737) plus Accumulated & Contributed Surplus (6,988) plus Non-controlling interests (2,365) less Accumulated other Comprehensive Loss (754) less Goodwill (5,431) and Intangibles (3,582) = 3,474.
Other Tier 1 = Capital Trust securities & debentures (755) + Preferred Shares (748) + Perpetual Preferred Shares (1,328) = 2,831 / THE
Stock Leverage is Stocks on the balance sheet (5,459) divided by Tangible Holdco Equity.
Bond Leverage is bonds on the balance sheet (66,715) + mortgages (17,312) + Policy Loans (7,842) = 91,869 divided by Tangible Holdco Equity.
Equity effect = 184 / THE
Interest rate effect = 169 / THE
Sources: Financial Supplement and Earnings Release.

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

  • Corresponding US calculations are not disclosed
  • As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.

MFC 1Q09 Results

Friday, May 8th, 2009

Manulife Financial has released its 1Q09 results, so we can take a quick look at their exposures.

Earnings suffered with the markets:

The quarter’s net loss was primarily driven by continued declines across all equity markets, particularly in the U.S. Reserve strengthening for segregated fund guarantees resulted in an accounting charge of $1,146 million and credit impairments were $121 million. Also affecting earnings this quarter were fair value adjustments of $277 million primarily for declines in commercial real estate values, $255 million of equity related charges and $72 million related to credit downgrades. Earnings for the quarter, excluding these items, totaled $803 million and cash provided by operating activities of $2.5 billion reflected the non-cash nature of these charges.

In light of continued equity market volatility and sensitivity, the Company conducted a strategic review of its segregated fund product portfolio and started implementing changes to its product offerings in the quarter. In the U.S., fees were increased, deferral bonuses were reduced, additional features were withdrawn, and equity exposure was reduced in several key funds. In Canada, the hedging program for new segregated fund business was successfully implemented at the end of March, and $1.5 billion of inforce business was hedged. New business in North America is now hedged on an ongoing basis.

Does a phrase involving barn doors and stolen horses come to anybody else’s mind, or is it just me?

Exposures:

MFC Exposures
Tangible Holdco Equity*
CAD Millions
15,480
Other Tier 1 30.8%
Stock Leverage 51%**
Bond Leverage 985% ***
Seg Fund Leverage 1,062%
Effect of +1% Interest Rates 8.6%
Effect of -10% Equity Market 12.3%
Tangible Holdco Equity is Common Shares (16,177) plus Contributed Surplus (161) plus Retained Earnings (11,356) plus Non-Controlling interest in subsidiaries (222) less Accumulated other Comprehensive Loss (2,221) less Goodwill (8,055) and Intangibles (2,160) = 15,480.
Other Tier 1 = Liabilities for preferred shares and capital instruments (3,683) + Preferred Shares (1,080) = 4,763 / THE
Stock Leverage is Stocks on the balance sheet (7,946) divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable.
Bond Leverage is bonds on the balance sheet (84,295) + mortgages (31,795) + Private Placements (26,235) + Policy Loans (7,746) + Bank Loans (2,439) = 152,510 divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable.
Equity effect = 1,900 / THE
Interest rate effect = 1,336 / THE; note that a decrease in interest rates will cost them money. This figure is taken from the 2008 Annual Report since they couldn’t be bothered to disclose it in 1Q09.
Sources: Financial Supplement, Slides and 2008 Annual Report.

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

  • Corresponding US calculations are not disclosed
  • As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.