PrefBlog

Manulife has issued its 4Q08 Press Release, which includes the entertaining line:

During the quarter, the Company successfully raised $4,275 million of new capital, consisting of $2,275 million of common shares and $2,000 million of term loans.

Inablility to discern a difference between term loans and capital might go a long way towards explaining their problems!

Of the $2,920 million equity related loss, $2,407 million is due to the post tax increase in segregated fund guarantee liabilities, comprised of $1,805 million for the reduction in the market value of the funds being guaranteed and $602 million because the sharp drop in swap interest rates reduced the discount rates used in the measurement of the obligation. The remaining $513 million of the equity related loss is on equity investments supporting non-experience adjusted policy liabilities ($196 million), reduced capitalized future fee income on equity-linked and variable universal life products ($100 million), impairments on equity positions in the Corporate and Other segment ($158 million) and lower fee income ($59 million).
…
Regulatory capital adequacy is primarily managed at the insurance operating company level (MLI and JHLICO). MLI’s Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio of 233 as at December 31, 2008 has increased by 40 points from 193 per cent as at September 30, 2008. The increase in MLI’s new capital, funded largely by MFC’s common equity issuance and $2 billion term loan, plus the changes OSFI made to the capital requirements were in excess of the fourth quarter loss, dividends to its parent MFC and capital increases in segregated fund guarantees as a result of the equity market declines. JHLICO’s Risk-Based Capital (“RBC”) ratio is calculated annually and is estimated to be 400 per cent at December 31, 2008 compared to a regulatory target of 200 per cent.

Page 9 of their presentation slides is comprised of the following table:

Page 36 shows that they have a net unrealized loss of $5.2-billion on a fixed income portfolio of $112.6-billion, a decline of 8%.

What I am trying to obtain is a view as to how well their default assumptions reflect credit spreads. Given that an unrealized loss of $5,200-million translated into impairment charges of $128-million (a transmission rate of just under 2.5%), it appears to me that they are (probably!) relying totally on credit ratings as an estimator of default risk. For an unleveraged and diversified investor, this is not entirely unreasonable (subject to sanity checks!); for a leveraged investor – such as MFC and any other insurer – it is … somewhat suspect.

This entry was posted on Friday, February 13th, 2009 at 3:37 pm and is filed under Regulatory Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.