PrefBlog

The Office of the Superintendent of Financial Institutions has released a new draft version of the capital guidelines for Deposit Taking Institutions. Comments are being accepted to November 19, but I won’t bother – OSFI has never shown any good-faith interest in encouraging public debate.

2.1.1.4. Examples of acceptable features

Outlined below are examples of certain preferred share features that may be acceptable in tier 1
capital instruments:

• a simple call feature that allows the issuer to call the instrument, provided the issue cannot be redeemed in the first five years and, after that, only with prior supervisory approval
• a dividend that floats at some fixed relationship to an index or the highest of several indices, as long as the index or indices are linked to general market rates and not to the financial condition of the borrower
• a dividend rate that is fixed for a period of years and then shifts to a rate that floats over an index, plus an additional amount tied to the increase in common share dividends if the index is not based on the institution’s financial condition and the increase is not automatic, not a step-up, nor of an exploding rate nature
• conversion of preferred shares to common shares where the minimum conversion value or the way it is to be calculated is established at the date of issue. Examples of conversion prices are: a specific dollar price; a ratio of common to preferred share prices; and a value related to the common share price at time of conversion.

2.1.1.5. Examples of unacceptable features

Examples of preferred share features that will not be acceptable in tier 1 capital are:

• an exploding rate preferred share, where the dividend rate is fixed or floating for a period and then sharply increases to an uneconomically high level
• an auction rate preferred share or other dividend reset mechanism in which the dividend is reset periodically based, in whole or part, on the issuer’s credit rating or financial condition
• a dividend-reset mechanism that does not specify a cap, consistent with the institution’s credit quality at the original date of issue

These examples have not changed since the November 2007 edition.

Sun Life has announced:

that Sun Life Capital Trust II, a trust established by Sun Life Assurance Company of Canada (“SLA”), will issue in Canada $500 million principal amount of Sun Life ExchangEable Capital Securities Series 2009-1 due December 31, 2108 (“SLEECS Series 2009-1”) under a final prospectus that it intends to file with the Canadian securities regulators as soon as possible. The SLEECS Series 2009-1 are expected to qualify as regulatory capital of SLA. The net proceeds of the issue will be used by SLA for general corporate purposes, including investments in subsidiaries.

Interest on the SLEECS Series 2009-1 will be payable semi-annually. The interest rate on the SLEECS Series 2009-1 from the date of issue to but excluding December 31, 2019 will be 5.863% per annum. On that date and thereafter on each fifth anniversary of that date, the interest rate on the SLEECS Series 2009-1 for the ensuing five years will be reset at a rate equal to 3.40% above the then-yield on a Government of Canada bond having a term to maturity of five years.

As described further in the prospectus, the SLEECS Series 2009-1 may in certain circumstances be automatically exchanged for a series of SLA preferred shares, and in certain other circumstances a series of SLA preferred shares may be issued in lieu of interest payable on the SLEECS Series 2009-1.

On or after December 31, 2014, subject to certain conditions, the SLEECS Series 2009-1 may be redeemed in whole or in part at the option of Sun Life Capital Trust II.

The issue of SLEECS Series 2009-1 is underwritten by a syndicate co-led by Scotia Capital Inc. and RBC Dominion Securities Inc., and is expected to close on November 20, 2009.

Note that these are issued at the level of SLA, the OpCo, which is intrinsically a better credit than SLF (the holdco), and in times of trouble they will convert to SLA prefs. DBRS rates existing SLEECS at A(high), the same as SLF sub-debt.

The following is from the preliminary prospectus:

From the Closing Date to but excluding •, 2019, the interest rate on the SLEECS will be fixed at •% per annum. Assuming the SLEECS are issued on •, 2009, the first interest payment due on the SLEECS on •, 2009 will be $• per $1,000 principal amount of SLEECS. Each interest payment on the SLEECS after the first interest payment (subject to the reset of the interest rate from and after •, 2019) will be in the amount of $• per $1,000 principal amount of SLEECS. Starting on •, 2019, and on every 5th anniversary of such date thereafter until •, 2104 (each such date, an “Interest Reset Date”), the interest rate on the SLEECS will be reset at an interest rate per annum equal to the Government of Canada Yield plus •%. The SLEECS will mature on •, 2108

On or after •, 2014, the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the SLEECS, redeem the SLEECS, in whole or in part. The redemption price per $1,000 principal amount of SLEECS redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of SLEECS redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding tax. The redemption price payable by the Trust will be paid in cash. See “Description of the Trust Securities — SLEECS—Trust Redemption Right”.

Interest Reset Date means •, 2019, and every fifth anniversary of such date thereafter until •, 2104, on which dates the interest rate on the SLEECS and the SLA Debenture will be reset as described in this prospectus.

In bad times, the SLEECS convert to SLA preferred shares paying 30-Year Canadas + •

The SLF sub-debt, 5.4 of pretend-2037, are quoted by Perimeter to yield 6.24% (which will almost certainly assume a call at par in 2037, but I haven’t checked that), while the ENB 7.22 of 2030 are quoted at 5.73. … so the SLEECS seem kind of expensive to me. However, they will be quoted, traded and indexed as pretend-ten-years, and if anything goes wrong, who cares?

They’re busy little beavers over at the Great-West Lifeco treasury! Hard on the heels of the GWO.PR.X redemption call, they have unveiled two financing announcements today. The first is the announcement of a 30-year debenture issue:

Great-West Lifeco Inc. (Lifeco) announced earlier today that it had entered into an agreement with a syndicate of agents co-led by RBC Capital Markets and BMO Capital Markets for the sale on an agency basis of $200 million aggregate principal amount of debentures maturing November 16, 2039 (the “Debentures”).

The Debentures will be dated November 16, 2009, will be issued at par and will mature on November 16, 2039. Interest on the Debentures at the rate of 5.998% per annum will be payable semi-annually in arrears on May 16 and November 16 in each year, commencing May 16, 2010, until November 16, 2039. The Debentures are redeemable in whole or in part at the greater of the Canada Yield Price and par, together in each case with accrued and unpaid interest. The Debenture offering is expected to close on or about November 16, 2009. The net proceeds will be used by the Company for general corporate purposes and to augment the Company’s current liquidity position.

The syndicate of agents will include RBC Capital Markets, BMO Capital Markets, CIBC World Markets Inc., Scotia Capital Inc., TD Securities Inc., Merrill Lynch Canada Inc., National Bank Financial Inc., Casgrain & Company Limited, and Desjardins Securities Inc.

They have also announced another issue of long debs – at least, I think it’s a different issue, the press release is not entirely clear – in an exchange offer for Innovative Tier 1 Capital:

Great-West Lifeco Inc. (Lifeco) announced today that it is making an offer to acquire (the “Offer”) up to 170,000 of the outstanding Great-West Life Trust Securities – Series A (“GREATs”) of Great-West Life Capital Trust and up to 180,000 of the outstanding Canada Life Capital Securities – Series A (“CLiCS”) of Canada Life Capital Trust. If more than 170,000 GREATs or 180,000 CLiCS are tendered to the Offer, the tenders will be subject to pro ration.

Lifeco also announced today that it has entered into an agreement with a syndicate of agents co-led by RBC Capital Markets and BMO Capital Markets for the sale of $200 million aggregate principal amount of debentures on an agency basis (the “Debentures”).

Pursuant to the Offer, holders of GREATs and CLiCS will have the opportunity to tender all or a portion of their GREATs and/or CLiCS, as applicable, for the applicable GREATs or CLiCS purchase price payable, at the election of the depositing securityholder, either in (a) cash, or (b) debentures with a term to maturity of approximately 30 years plus cash equal to the amount, if any, by which the GREATs purchase price (described below) or CLiCS purchase price (described below), as the case may be, exceeds the debenture price (described below).

The purchase price for the GREATs will provide a yield on each GREATs to December 31, 2012 equal to the yield of the 2% Government of Canada bond due September 1, 2012, as determined one business day prior to the expiration of the Offer, plus a spread of 1.20%. The purchase price for the CLiCS will provide a yield on each CLiCS to June 30, 2012 equal to the yield of the 3.75% Government of Canada bond due June 1, 2012, as determined one business day prior to the expiration of the Offer, plus a spread of 1.05%. In addition, the debentures to be issued under the Offer will provide a yield to maturity equal to the yield to maturity of a 5% Government of Canada due June 1, 2037 plus an equivalent credit spread to the Debentures to be determined and included in the Offer to Purchase and Circular to be mailed to all holders of the GREATs and CLiCS shortly.

The Company will publicly announce the determination of the purchase prices for the GREATs and the CLiCS as well as other details regarding the debentures offered as consideration payable for the GREATs and CLiCS by way of a news release and will post such release on the Company’s website not later than 5:00 p.m. (Toronto time) on the business day immediately prior to the expiration date of the Offer (such date currently expected to be December 15, 2009).

According to the 2008 Annual Report (which is copy-protected because it’s SECRET), there were $350-million GREATs outstanding, which are Tier 1 Capital of GWL. There was a total of $450-million CLiCS outstanding, $300-million of which were Series A. They disclose that subsidiaries of GWO held $167-million of the total, but do not provide a breakdown of his holding into Series A & B. CLiCS are Tier 1 Capital of Canada Life.

CLiCS were issued in February 2002 with a 6.679% coupon and the Series A were due to mature 2012-6-30 according to the prospectus on SEDAR.

The GREATs were issued in December 2002 and have a pretend-maturity of 2012-12-31 according to SEDAR.

GWO seems to be rejigging its capital structure somewhat! We will see if this is a normal term-extension type of refinancing (the GWO debs will be worse credits than the CLiCs & GREATs), or whether there’s something else cooking….

Manulife Financial has released its 3Q09 results and – as they warned in the 2Q09 release – results were severely impacted by changes in actuarial assumptions:

the Company completed its annual review of all actuarial assumptions in the third quarter. This resulted in a charge to earnings of $783 million, including $469 million due to changes in assumptions of policyholder behaviour for segregated fund guarantee products (a charge that was within the Company’s previously communicated expectations of less than $500 million). The remainder of the charge included assumption changes related to morbidity and other policyholder behaviour, partially offset by assumption changes related to mortality, expenses and investment related items.

The morbidity charge comes as something of a shock, and details are a little skanty:

Driven by increases due to impact from higher projected net long-term care claims costs. Partially offsetting these increases were reductions from mortality releases in Japan and the Reinsurance Division.

They make particular note of the potential for being regulated at the holdco level:

In Canada, OSFI has announced that it (i) will be proposing a method for evaluating stand-alone capital adequacy for operating life insurance companies, such as MLI, (ii) is considering updating its regulatory guidance for non-operating insurance companies acting as holding companies, such as MFC, and (iii) is reviewing the use of internally-modeled capital requirements for segregated fund guarantees. The outcome of these initiatives is uncertain and could have a material adverse impact on the Company or on its position relative to that of other Canadian and international financial institutions with which it competes for business and capital.

They disclose their market risk sensitivity as:

The interest scenario we have adopted uses the structure of the prescribed scenario that currently produces the highest policy liability, which is a gradual decline in market interest rates from current market levels to lower assumed ultimate reinvestment rates over 20 years, with additional prudence introduced through use of lower ultimate reinvestment rates than the maximum levels permitted. The decrease in sensitivity to public equity market values reflects the impact of significantly improved equity markets in 2009, which has both reduced the liability for existing segregated fund guarantees and reduced the sensitivity of this liability to changes in equity market levels. Additional sensitivity reduction resulted from the increase in the amount of business that is hedged. Sensitivity to other non fixed income assets has increased from 2008 due to additional acquisitions of non fixed income assets in 2009 in support of the Company’s long-term investment strategy and the inclusion of the impact of future income taxes.

“Non Fixed Income Assets” are described as:

Other non fixed income assets include commercial real estate, timber and agricultural real estate, oil and gas, and private equities

Private equity, I’m convinced, is a way to dress up equities as bonds, valuing them on the basis of discounted cash flows since they don’t have a publicly quoted market price. Somewhere in the world, for some company, somehow, that masquerade is going to blow up some day. However, MFC is less than forthcoming on just how these investments – and their risks – are valued.

The fact that they will experience a loss due to interest decreases implies that their assets have lower duration than their liabilities.

Various leverage factors may be calculated as:

I confess that I’m a bit perplexed at their sensitivity reporting. I have taken the sensitivities above from the table “Sensitivity of Policy Liabilities to Changes in Asset Related Assumptions” but in the section headed “Net Income Sensitivity to Interest Rate and Market Price Risk” they state:

The potential impact on net income attributed to shareholders as a result of a change in policy liabilities for a one per cent increase in government, swap and corporate rates at all maturities across all markets was estimated to be a gain of approximately $1,600 million as at September 30, 2009 (December 31, 2008 – approximately $1,100 million) and for a one per cent decrease in government, swap and corporate rates at all maturities across all markets was estimated to be a charge of approximately $2,000 million as at September 30, 2009 (December 31, 2008 –approximately $1,300 million).

… which are the same numbers. Taken literally, this would mean that changes in policy liabilities flow straight through to the bottom line, which would make sense only if their assets were comprised of 100% cash.

The earnings release quotes Chief Financial Officer Michael W. Bell as saying:

As a result of the decline in interest rates and changes in lapse assumptions, our interest rate sensitivity has increased.

Later on, just after the table showing the sensitivities, the release states:

The increase in the sensitivity to changes in market interest rates is primarily due to the impact of the current lower market interest rates on liabilities with minimum interest guarantees and changes in lapse assumptions.

I get the “minimum interest guarantee” part, but am a little fogged by the “changes in lapse assumptions”. I can only assume that they are assuming that this means they are assuming they will get fewer gifts in future from policyholders terminating agreements that are in the policyholders’ favour, but this is not spelt out – and neither is the breakdown between the two major components of the sensitivity.

Their presentation slides include the remark:

Changes in interest rates impact the actuarial valuation of in-force policies by changing the future returns assumed on the investment of net future cash flows

By and large, I’d guess they’re making long-term guarantees backed by short-term investments … the banks’ “maturity transformation” in reverse – and, what’s more, making this a big bet.

Sun Life Financial has released its 3Q09 results and – as they warned in the 2Q09 release – results were severely impacted by changes in actuarial assumptions:

Sun Life Financial Inc.2 reported a net loss attributable to common shareholders of $140 million for the quarter ended September 30, 2009, compared with a net loss of $396 million in the third quarter of 2008. Net losses in the third quarter of 2009 were impacted by the implementation of equity- and interest rate-related actuarial assumption updates of $513 million and reserve increases of $194 million for downgrades on the Company’s investment portfolio. These decreases were partially offset by reserve releases of $161 million as a result of favourable equity markets. Results in the third quarter of 2008 were impacted primarily by asset impairments and credit-related losses and a steep decline in equity markets. Results last year also included earnings of $31 million or $0.06 per share from the Company’s 37% ownership interest in CI Financial, which the Company sold in the fourth quarter of 2008.

They make particular note of the potential for being regulated at the holdco level:

In Canada, OSFI has proposed a method for evaluating stand-alone capital adequacy and is considering updating its current regulatory guidance for insurance holding companies. While the impacts on the life insurance sector are not known, it remains probable that increased regulation (including at the holding company level) will lead to higher levels of required capital and liquidity and limits on levels of financial leverage, which could result in lower returns on capital for shareholders.

They disclose their market risk sensitivity as:

the impact of an immediate 10% drop across all equity markets would be an estimated decrease in net income in the range of $125 million to $175 million.
…
an immediate 1% parallel decrease in interest rates would result in an estimated decrease in net income in the range of $325 million to $400 million. The increase in sensitivity to a downward movement in interest rates from the second quarter of 2009 is primarily due to the implementation of equity- and interest rate-related assumption updates.

The fact that they will experience a loss due to interest decreases implies that their assets have lower duration than their liabilities.

Various leverage factors may be calculated as:

I don’t understand their interest rate senstivity figure for 3Q09. The 3Q09 Earnings Release states:

The estimated impact of an immediate parallel increase of 1% in interest rates as at September 30, 2009, across the yield curve in all markets, would be an increase in net income in the range of $150 million to $200 million. Conversely, an immediate 1% parallel decrease in interest rates would result in an estimated decrease in net income in the range of $325 million to $400 million. The increase in sensitivity to a downward movement in interest rates from the second quarter of 2009 is primarily due to the implementation of equity- and interest rate-related assumption updates.

While the 2Q09 Report to Shareholders states:

For held-for-trading assets and other financial assets supporting actuarial liabilities, the Company is exposed to interest rate risk when the cash flows from assets and the policy obligations they support are significantly mismatched, as this may result in the need to either sell assets to meet policy payments and expenses or reinvest excess asset cash flows under unfavourable interest environments. The estimated impact on the Company’s policyholder obligations of an immediate parallel increase of 1% in interest rates as at June 30, 2009, across the yield curve in all markets, would be an increase in net income in the range of $100 to $150. Conversely, an immediate 1% parallel decrease in interest rates would result in an estimated decrease in net income in the range of $200 to $275.

Bonds designated as available-for-sale generally do not support actuarial liabilities. Changes in fair value of available-for-sale bonds are recorded to OCI. For the Company’s available-for-sale bonds, an immediate 1% parallel increase in interest rates at June 30, 2009, across the yield curve in all markets, would result in an estimated after-tax decrease in OCI in the range of $325 to $375. Conversely, an immediate 1% parallel decrease in interest rates would result in an estimated after-tax increase in OCI in the range of $325 to $375.

Adding the AFS and HFT bond figures for 2Q09 results in an estimate of $525 to $650, which is greater than the estimate in the 3Q09 release, whereas the commentary implies it should be less. It is probable that the 3Q09 figure reflects only AFS bonds, but I’ll wait until the 3Q09 report is available before updating the table.

Just to confuse matters, the 4Q08 earnings release states:

The estimated impact from these obligations of an immediate parallel increase of 1% in interest rates as at December 31, 2008, across the yield curve in all markets, would be an increase in net income in the range of $100 to $150 million. Conversely, an immediate 1% parallel decrease in interest rates would result in an estimated decrease in net income in the range of $150 to $200 million.

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%:

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).

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.

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.

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.

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:

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.