PrefBlog

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.