YPG: Ticker Change to YLO

November 6th, 2010

Yellow Media Inc. has announced:

that Yellow Pages Income Fund (the Fund) has completed today the previously announced plan of arrangement pursuant to which the Fund’s income trust structure has been converted into a dividend paying publicly traded corporation named Yellow Media Inc. On May 6, 2010, unitholders of the Fund approved the conversion to a corporate structure by a vote of 99.8 percent. Under the plan of arrangement, unitholders of the Fund received, for each unit of the Fund held, one common share of the resulting public corporation. Common shares of Yellow Media Inc. will commence trading on the Toronto Stock Exchange on November 1, 2010 under the symbol YLO.

This ticker change applies to the company’s four series of preferred shares outstanding: The Operating Retractibles, YPG.PR.A and YPG.PR.B are now YLO.PR.A and YLO.PR.B, respectively. The FixedResets YPG.PR.C and YPG.PR.D, are now YLO.PR.C and YLO.PR.D respectively.

It is of interest to note the following from the 3Q10 Management Discussion and Analysis:

On June 8, 2010, Yellow Media Inc. received approval from the Toronto Stock Exchange on its notice of intention to renew its normal course issuer bid for its preferred shares, Series 1 and preferred shares, Series 2 through the facilities of the Toronto Stock Exchange from June 11, 2010 to no later than June 10, 2011, in accordance with applicable rules and regulations of the Toronto Stock Exchange.

Under its normal course issuer bid, Yellow Media Inc. intends to purchase for cancellation up to but not more than 1,174,691 and 720,000 of its outstanding preferred shares, Series 1 and preferred shares, Series 2, respectively, representing 10% of the public float of each series of preferred shares outstanding on June 8, 2010.

For the first nine months of 2010, Yellow Media Inc. purchased for cancellation 604,748 preferred shares, Series 1 for a total cash consideration of $15 million including brokerage fees at an average price of $24.76 per share and 260,250 preferred shares, Series 2 for a total cash consideration of $5.2 million including brokerage fees at an average price of $20.17 per share. The carrying value of these preferred shares, Series 1 and Series 2 was $14.9 million and $6.4 million, respectively.

Since June 11, 2009, the total cost of repurchasing preferred shares amounted to $33.9 million, including brokerage fees.

Posted in Issue Comments | 3 Comments »

MFC and the John Hancock LTC Fiasco

November 6th, 2010

In their 2Q10 Quarterly Report to Shareholders, MFC stated:

The Company expects to complete its annual review of all actuarial methods and assumptions in the third quarter. In that regard, we expect that the methods and assumptions relating to our Long Term Care (“LTC”) business may be updated for the results of a comprehensive long-term care morbidity experience study, including the timing and amount of potential in-force rate increases. The study has not been finalized but is scheduled to be completed in the third quarter. We cannot reasonably estimate the results, and although the potential charges would not be included in the calculation of Adjusted Earnings from Operations, they could exceed Adjusted Earnings from Operations for the third quarter. There is a risk that potential charges arising as a result of the study may not be fully tax effected for accounting and reporting purposes.
…
JH LTC sales in the second quarter increased by 72 per cent compared to the prior year. This reflected the increased group sales from new member enrollments and new group clients as well as increased retail sales in advance of price increases and product re-positioning to improve margins. The Federal Long Term Care Insurance Program, where John Hancock is now the sole carrier, also contributed to the increase in sales from the prior year. As a result of the price increases, JH LTC retail sales are expected to slow during the second half of the year.
…
In both the second quarter of 2010 and 2009, John Hancock reported unfavourable long-term care morbidity experience. A comprehensive morbidity experience study is expected to be completed in the third quarter of 2010 and if the study concludes that the recent level of experience is expected to continue, price increases and policy liability increases would be required.

In the 3Q10 News Release they stated:

[Chief Financial Officer Michael] Bell added, “There were a number of notable items impacting our financial results this quarter. We completed our annual review of all actuarial methods and assumptions in the third quarter, and this resulted in a total net charge of just over $2 billion. This reserve strengthening included a significant charge related to our John Hancock Long-Term Care (“LTC”) business, where we completed a comprehensive long-term care claims experience study, including an assessment of the positive expected impacts of in-force rate increases.”
…
John Hancock Long-Term Care (“JH LTC”) sales increased 20 per cent in the third quarter compared to the prior year, driven by sales of retail products which increased in advance of June new business price increases taking effect. As a result of the recently completed claims experience study and the continuing low interest rate environment, JH LTC has temporarily suspended new group sales and is planning other retail product changes. JH LTC sales are expected to decline in the fourth quarter of 2010. In addition, JH LTC will be raising premiums on in-force business and is actively working with regulators to implement increases that are on average 40 per cent and affect the majority of the in-force business.

They also provide a handy table of their enormous actuarial charge:

(C$ millions)
Assumption		 To
Policy Liabilities		 To Net Income
Attributable to
Shareholders
Mortality and morbidity
   Long-term care $1,161 $ (755)
   Other (258) 182
 
Lapses and policyholder behaviour 648 (485)
Expenses (116) 104
Investment returns
   Variable annuity parameter update 872 (665)
   Ultimate reinvestment rates/grading for corporate spreads 441 (309)
   Other 94 (175)
 
Other valuation model methodology and model refinements (10) 72
Net Impact $2,832 $(2,031)

This charge of over a billion dollars on LTC pricing is explained as follows:

Long-term care mortality and morbidity changes

John Hancock Long-Term Care completed a comprehensive long-term care claims experience study, including estimated favourable impacts of in-force rate increases. As a result:

  • Expected claims costs increase primarily due to increased ultimate incidence at higher attained ages, anti-selection at older issue ages and improved mortality, partially offset by better experience on business sold in the last seven years due to evolving underwriting tools. These collectively resulted in an increase in Active Life Reserves of $ 3.2 billion.
  • Disabled Life Reserves were also strengthened by $0.3 billion to reflect emerging continuance and salvage experience for Retail and Fortis blocks.
  • Claims margins were harmonized for the pre and post rate stabilization blocks. The reduction in margins resulted in a reserve release of $0.2 billion.
  • Expected future premium increases reduced reserves by $2.2 billion resulting in a total of $3.0 billion of future premium increases assumed in the reserves. Premium increases averaging approximately 40 per cent will be sought on 80 per cent of the in-force business. We have factored into our assumptions our best estimate of the timing and amount of state approved premium increases. Our actual experience obtaining price increases could be materially different than we have assumed, resulting in further policy liability increases or reserve releases which could be material.

Kimberly Lankford reported in October:

The specific size of the increase may vary, depending on your age and when you purchased the policy, says Marianne Harrison, president of John Hancock Long-Term Care. The increase applies to both individual and group policies, and the largest increases will be restricted to older policies. But the rate hike will not apply to Leading Edge or Custom Care II Enhanced policies, two of their newer policies that are subject to stricter standards for setting premiums. Nor will the price hikes affect the long-term-care policy run by John Hancock for federal employees, which already had a premium increase of up to 25% in the spring.

But for many policyholders, the proposed price hike comes on top of a rate increase of 13% to 18% in 2008. The other long-term-care insurance leaders, Genworth and MetLife, also increased premiums for many of their policies around that time.

John Hancock is raising rates after a study found that the number of claims, the length of claims and the use of benefits from 1990 to 2010 were much higher than the company had expected — particularly the open-ended expense of providing lifetime benefits in an era when people live longer thanks to medical advances and then require extensive long-term care. “The claims on the lifetime coverage on our older policies were higher than our original policy assumptions,” says Harrison. (John Hancock stopped selling new policies with lifetime benefits in June 2010.)

“This is a last resort, from our perspective,” says Harrison. “But this is not a viable product if we do not have the appropriate money there to pay claims in the long term.”

It has also been reported:

[Marianne Harrison, president of John Hancock Long Term Care] is disclosing the rate increase and group policy suspension in a telephone conference with the company’s LTC insurance distributors [September 20, 2010].

Hancock announced the moves after its recent claims study showed unfavorable claims patterns, Harrison said in an interview.

Hancock’s claims studies, conducted every few years, examine LTC morbidity and termination claim trends based on actual experience. The last time Hancock undertook a thorough LTC claims review was in 2006, the company says.

This year’s study encompassed both open and closed claims, looking at all LTC claims Hancock received from 1990 to 2010.

As the LTC block continued to mature, Hancock’s latest study found it had twice the number of claims it found in its 2006 study. For older policy holders—ages 80 and up—the block had 4 times as many.

The severity and duration of claims in 2010 also were much higher than in 2006, Harrison says, while claims terminations were lower than expected.
…
Hancock has more than 1.2 million LTC insurance customers–700,000 individual, 350,000 group, and 224,000 under the federal program. Of all these policies, 47,000 have received benefits. Hancock says it has paid more than $3 billion in LTC claims, and now pays more than $1.5 million in claims per day.

Hancock announced in January:

John Hancock has launched a new interactive microsite, www.GetMoreWithMultilifeLTC.com, to help brokers and consultants explore and establish LTC insurance plans for businesses with up to 1,000 employees.
…
“Over the past 22 years, we have seen LTC insurance increase in popularity among large employers,” said Marianne Harrison, President, John Hancock Long-Term Care. “Today, we’re seeing small and mid-size employers showing greater interest in meeting the LTC needs of their employees, yet few of them know who to turn to for LTC advice and services. This site, in addition to the access to our team of experts, will be very helpful to brokers and consultants who want to provide this important coverage to businesses throughout the US.”

All this may be compared with the action taken by their competitors:

Genworth Financial Inc. says it will raise rates 18% on two older blocks of comprehensive long term care (LTC) insurance.
The policies, no longer marketed, were sold by two Genworth subsidiaries, Genworth Life and Genworth Life of New York.

Genworth, Richmond, Va. (NYSE:GWN), is increasing the rates because the percentage of policyholders in the blocks who have let policies lapse has been lower than expected, the company says.

Now, I will be the first to agree that insurance is a complicated business. And I will also agree wholeheartedly that I am not an expert on insurance and its pricing. But this fiasco goes to the root of investor confidence in MFC, because it is a very real indication that questions need to be asked about their basic competence.

This is a massive write-off, and the degree of under-pricing indicated by the proposed rate increases is astronomical. How can you possibly underprice something by 40% and not know that something is out of whack? Why was a major sales initiative on this product initiated in January, only to have sales through that channel cancelled in October? Shouldn’t you have a reasonable idea of profitability before you spend money on new increasing sales?

Isn’t anybody looking at a report of actual versus actuarial claims expenses and thinking ‘Claims are at 200% of projections for this product, and at 400% for this subgroup … gee, maybe we should have a proper look at it’?

Why was the actuarial review of LTC not done sooner? The prior one was in 2006, so that’s four years between reviews. How are the topics for review chosen? Is there some system of monitoring in place so that an informed decision can be made regarding the areas in which review is required? If not, why not? If so, then it seems as if the system failed: write-offs and price increases on this scale indicate that the review was well overdue. If there is a system, why did it fail and how can investors have any confidence that it will not fail in the future?

Update 2010-11-11: MetLife is exiting the LTC business:

MetLife Inc., the largest U.S. life insurer, will halt the sale of new long-term care coverage after citing “financial challenges” in the business.
…
Long-term care policies provide coverage to help pay for home-health aides or residence in a nursing home or assisted- living facility. New York-based MetLife will accept applications for new coverage through Dec. 30 and continue to honor previously written contracts after that date, the company said.
…
“Many Americans remain at risk for needing long-term care services,” MetLife said. The insurer is reviewing a way to combine the coverage with other contracts “ which the company believes can effectively address the long-term care financing needs of the public as well as its business goals.”

Posted in Issue Comments | 1 Comment »

Flash Crash Report Criticism Continues

November 6th, 2010

Hal Weitzman of the Financial Times highlights a purported Need for consistent market structure to avoid ‘flash crash’:

Gary Katz, head of the International Securities Exchange, owned by Deutsche Boerse, dismissed the suggestion that US regulators should focus on creating incentives for market-makers.

“When the market begins to fall like that, there are no incentives big enough to persuade market-makers to catch a falling knife,” Mr Katz said.

Tom Whittman, president of Nasdaq OMX, which operates one of the biggest US options-trading platforms, agreed. “Market-makers wouldn’t have stayed in the market on May 6,” he said. “They’d rather pull out and pay a fine.”

Ed Boyle, who runs NYSE Euronext’s options business, said the “flash crash” indicated there were bigger and more serious structural issues for regulators, such as the existence of “dark pools” for share trading.

“There has to be a more consistent market structure than simply incentives for market-makers,” Mr Boyle said.

Bill Brodsky, chief executive of the Chicago Board Options Exchange, said the Securities and Exchange Commission’s report on the “flash crash”, which pinpointed a single trade by Waddell and Reed, a Kansas City-based firm, was suspect.

“The SEC never figured out what happened on May 6,” Mr Brodsky said. “The SEC report just doesn’t add up in my view.”

In the absence of any argument to support the idea that structural issues were at the root of the crash, I’ll have to dismiss Ed Boyle’s remarks as self-serving.

Brodsky’s remarks were also reported by Reuters:

“We went on for months and months and still didn’t know what happened,” William Brodsky, chief executive of Chicago Board Options Exchange parent CBOE Holdings Inc (CBOE.O), told a Futures Industry Association conference.

The report’s explanation of the May 6 crash “just doesn’t add up in my view,” he said on Thursday
…
Brodsky, who recently headed up the World Federation of Exchanges, criticized the report’s “vague reference to a Kansas City firm (Waddell),” adding, “we need to know what happened across all markets” that day.

“We failed because it took so long to figure out what happened, and they never figured out what happened,” he said of the CFTC and the SEC, which is expected to make further changes to the marketplace to avoid a repetition of the crash.

The Wall Street Journal continues to tout “order toxicity”:

“Complementary to circuit breakers based on price action, they could have circuit breakers based on our metric,” said Marcos Lopez de Prado, one of the authors of the study released last month and head of high frequency futures at hedge fund Tudor Investment Corp.

The study has already caught the attention of regulators as they look for ways to avoid another flash crash, especially given that Maureen O’Hara, one of the Cornell professors that co-authored the study, is a member of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues. The committee’s first task after it was formed in mid-May was to review the market events of May 6, when stock prices fell dramatically before staging a rapid rebound, and make recommendations related to market structure issues that may have contributed to that day’s volatility.

Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority, mentioned the study Friday during a meeting of the Joint CFTC-SEC Advisory Committee. Ketchum noted that a way for market participants to predict toxicity and hedge accordingly “could be really valuable.” The question, he said, is “how do you create an environment where people can offload some of that toxicity risk?”

That ain’t the question, Ketchum. The question is “is it possible to predict future toxicity?”. As has been noted on PrefBlog there is not a shred of evidence in the paper regarding predictive power of “Order Toxicity” – it’s just another piece of Technical Analytical gargage (fifty year old technical analytical garbage, at that) that explains everything and predicts nothing. But one of the authors has good political connections, so we haven’t heard the last of it.

Meanwhile, an executive with the CME has flatly contradicted a central element of the SEC report’s conclusions:

An algorithm-powered order to sell 75,000 futures contracts linked to the S&P 500 stock index, entered by a mutual fund as the session’s volatility ramped up, did take into account price and time parameters, according to Scot Warren, managing director of equity indexes for CME.

“This was a sophisticated algorithm that took time and price into consideration,” said Warren, contesting descriptions of the trade as an emergency bet that helped spark a rout in stock prices.

Warren said the session’s activity revealed a “fundamental supply and demand imbalance” that spooked buyers from the market.

The second paragraph above is a bit puzzling, because the part that says he is “contesting descriptions” is not a direct quote – it might very well be the reporter’s interpretation. If somebody really, really, needed to unload 75,000 contracts, then I am prepared to believe that the algorithm executed this task in an efficient manner – the same way I would unload 100,000 horribly illiquid preferred shares in a day if the client insisted on it (after acknowledging in writing that I considered it a really stupid idea!).

The question is, was it really in Waddell Reed’s clients’ best interests to unload 75,000 contracts as quickly as possible? With no limit price? That’s a $4.6-billion trade, which Waddell Reed has defended as being a highly astute hedge based on a keen awareness of risk. You mean to tell me they were $4.6-billion worried about the market in the afternoon of May 6 and were $0.00 worried in the morning? I’m prepared to listen, but to me the whole Flash Crash story is just another tale of a cowboy vaporizing his clients’ money.

The SEC report was discussed on PrefBlog in the post Flash Crash: Incompetence, Position Limits, Retail.

Posted in Miscellaneous News | No Comments »

November 5, 2010

November 5th, 2010

Gregg Berman of the SEC has contradicted Nanex:

There is no indication thus far that “one or more parties flooded the market with quotes” to cause delays in exchange feeds that list stock prices,Gregg Berman, a senior adviser to the SEC’s trading and markets division, said today at a Washington meeting to discuss the May 6 plunge.

Berman’s comments were at odds with speculation by Nanex LLC, a market-data provider, which said high-frequency traders destabilized New York Stock Exchange trading by submitting and then canceling thousands of rapid-fire orders.

OK, Mr. Berman, you say there’s no evidence that there was quote-stuffing to destabilize the markets. Fair enough. But (a) do you agree that a very high volume of orders led to delays in the tape? and (b) If so, what is your explanation?

And, of course, the booHooHoo brigade is fighting for the rights of twerps from good schools to make a fat living:

Brooksley Born, a former CFTC chairman serving on the panel advising the agencies, said investor confidence has been eroded by concerns that high-frequency traders have better access to markets and information.

Born said she sees “major problems” with the level of order cancellations by high-frequency traders. She said she’s worried that some firms submit “fraudulent” quotes to get a sense of where asset prices are heading.
…
Regulators should consider placing restrictions on algorithmic transactions and limiting how many contracts a single firm can trade, said CFTC Commissioner Bart Chilton. Permitting high-frequency traders to buy and sell 10 percent of a market 10 times in 10 seconds doesn’t seem to provide any benefit to financial markets, he said.

“It seems there is a good argument that this type of trading is, in essence, parasitical trading,” Chilton said. “Given what we saw on May 6th, appropriate limits on financial futures and robotic algos seems warranted.”

Um … why should you care whether any benefit is provided to financial markets? Isn’t your job to ensure there is no harm done to the financial markets? It’s a totally different mind-set. It’s too bad Chilton didn’t let the rest of us know what the “good argument” is. And by the way, Ms. Born, in what way are the quotes submitted “fraudulent”?

One semi-legitimate worry is the idea that momentum trading causes negative convexity:

Robert Cook, director of the SEC’s trading and markets unit, said regulators are examining how brokers and other firms create algorithms, how they test the computer programs and what information is disclosed to customers about how they work. An SEC task force began looking at algorithm use before the crash, and it is an area of “further inquiry,” Cook said.

Regulators are also examining whether a firm’s algorithm could “cascade,” causing executions to affect market prices in ways that trigger further action by the computerized-trading system, said Andrei Kirilenko, a senior economist at the CFTC.

… but frankly I don’t see how that becomes an SEC problem. The Nanex critique of the SEC report has been discussed on PrefBlog.

It was another hot day on heavy volume for the Canadian preferred share market, with PerpetualDiscounts gaining 24bp and FixedResets up 3bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.2961 % 2,208.8
FixedFloater 4.89 % 3.48 % 25,289 19.22 1 1.2762 % 3,436.9
Floater 2.70 % 2.37 % 57,000 21.32 4 0.2961 % 2,384.9
OpRet 4.79 % 2.85 % 81,355 1.88 9 -0.0297 % 2,392.4
SplitShare 5.84 % -13.63 % 66,403 0.09 2 0.1614 % 2,410.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0297 % 2,187.6
Perpetual-Premium 5.62 % 5.03 % 166,311 3.09 24 0.1132 % 2,025.0
Perpetual-Discount 5.32 % 5.34 % 258,068 14.87 53 0.2447 % 2,048.7
FixedReset 5.19 % 2.86 % 340,951 3.22 50 0.0272 % 2,293.3
Performance Highlights
Issue Index Change Notes
BAM.PR.I OpRet -1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-12-05
Maturity Price : 25.50
Evaluated at bid price : 26.52
Bid-YTW : -32.90 %
SLF.PR.A Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 21.97
Evaluated at bid price : 22.35
Bid-YTW : 5.36 %
BAM.PR.G FixedFloater 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 25.00
Evaluated at bid price : 22.22
Bid-YTW : 3.48 %
SLF.PR.B Perpetual-Discount 2.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 22.62
Evaluated at bid price : 22.81
Bid-YTW : 5.32 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.P FixedReset 224,830 Nesbitt crossed blocks of 112,700 and 100,000, both at 26.59.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.59
Bid-YTW : 2.37 %
RY.PR.I FixedReset 104,625 TD crossed 97,700 at 26.62.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.65
Bid-YTW : 2.79 %
SLF.PR.D Perpetual-Discount 65,456 Nesbitt crossed two blocks of 25,000 each, both at 21.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 5.37 %
BAM.PR.T FixedReset 65,435 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 23.09
Evaluated at bid price : 25.00
Bid-YTW : 4.17 %
MFC.PR.B Perpetual-Discount 50,784 TD crossed 25,000 at 21.41.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 5.53 %
BMO.PR.K Perpetual-Discount 46,345 TD crossed 25,000 at 24.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-05
Maturity Price : 24.58
Evaluated at bid price : 24.82
Bid-YTW : 5.29 %
There were 54 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | 1 Comment »

MFC Vague on Capital Requirements; Downgraded by Moody's; S&P Watch-Negative

November 5th, 2010

Manulife Financial Corporation has released its 3Q10 Financials. The Press Release states:

The net loss attributed to shareholders of $947 million included the following notable items:

  • Net gains of $1,041 million related to higher equity markets and lower interest rates.
  • Charges of $2,031 million related to basis changes resulting from the annual review of all
    actuarial methods and assumptions.

  • A $1,039 million (US$1,000 million) goodwill impairment charge on our U.S. Insurance business related to the economic outlook and the repositioning of that business.
  • Other notable items netted to a $303 million gain and are described in more detail below.

After adjusting for these notable items, adjusted earnings from operations was $779 million.

They made a lot of Long-Term Care sales in the States … but was it profitable and can it be sustained?

John Hancock Long-Term Care (“JH LTC”) sales increased 20 per cent in the third quarter compared to the prior year, driven by sales of retail products which increased in advance of June new business price increases taking effect. As a result of the recently completed claims experience study and the continuing low interest rate environment, JH LTC has temporarily suspended new group sales and is planning other retail product changes. JH LTC sales are expected to decline in the fourth quarter of 2010. In addition, JH LTC will be raising premiums on in-force business and is actively working with regulators to implement increases that are on average 40 per cent and affect the majority of the in-force business.

There are not enough details given to form a firm opinion … but a 40% increase in rates? on average? That has all the hallmarks of a major fuck-up. Do these guys know what they’re doing?

They do provide a clearer warning of the effect of OSFI’s new risk requirements:

The Office of the Superintendent of Financial Institutions (“OSFI”) has been conducting a review of segregated fund/variable annuity capital requirements. On October 29, 2010, OSFI issued a draft advisory containing new minimum calibration criteria for determining capital requirements for segregated fund business written after January 1, 2011. It is expected that the new calibration criteria will increase capital requirements on these products and our 2011 product offerings will be developed and priced taking into account these new rules. As drafted the new capital requirements will also apply to subsequent deposits to existing contracts and to contracts that reset their guarantee levels after January 1, 2011.

… and the capital requirements for seg funds will be getting even stricter:

OSFI is also expected to continue its consultative review of its capital rules for more general application, likely in 2013. OSFI notes that it is premature to draw conclusions about the cumulative impact this process will have, but the general direction has been one of increased capital requirements. OSFI has stated that increases in capital may be offset by other changes, such as hedge recognition. The Company will continue to monitor developments. However, at this time, it appears that it is more likely than not that the capital requirements for in-force business will increase and this increase could be material.

They are worried by the IFRS Exposure Draft on Insurance Contracts (see also commentary on SLF 3Q10) and are busily sleazing around the regulators and politicians to get an exemption:

This mismatch between the underlying economics of our business and reported results and potentially our capital requirements could have significant unintended negative consequences on our business model which would potentially affect our customers, shareholders and the capital markets. We believe the accounting rules under discussion could put Canadian insurers at a significant disadvantage relative to their U.S. and global peers, and also to the banking sector in Canada. We are currently reviewing the proposals contained in the Exposure Draft, and, along with other companies in the Canadian insurance industry, expect to provide comments and input to the IASB. The insurance industry in Canada is also currently working with OSFI and the federal government with respect to the potential impact of these proposals on Canadian insurance companies, and the industry is urging policymakers to ensure that any future accounting and capital proposals appropriately consider the underlying business model of a life insurance company and in particular, the implications for long duration guaranteed products which are much more prevalent in North America than elsewhere.

Sadly, Prentice has already been bought hired by CIBC, but there are probably many other politicians for sale eager to devote their expertise to the private sector.

DBRS comments:

DBRS has reviewed the Q3 2010 results of Manulife Financial Corporation (Manulife or the Company) released today and believes that, notwithstanding the negative net earnings figure, the Company is on the right track to restoring sustainable profitability. The ratings of Manulife and its affiliates remain unchanged, including the Issuer Rating of its major operating subsidiary, The Manufacturers Life Insurance Company (MLI), at AA (low). The ratings were recently downgraded on August 9, 2010.
…
The Company has been actively repositioning its product offering by selectively increasing prices and emphasizing products that are less capital intensive. Integrated risk management and control is leading to a systematic reduction in equity and interest rate risk through portfolio shifts. As part of its risk management framework, the Company has now hedged 54% of its variable annuity exposures to equity markets and has plans to use actions based on time schedules and market triggers to reach its risk reduction goals. The Company expects to reduce its equity sensitivity by approximately 60% by 2012 and approximately 75% by 2014. It also expects to take actions to further reduce its interest rate exposures, as measured by the impact on shareholders’ net income, by approximately 25% by the end of 2012 and approximately 50% by the end of 2014. While this could ultimately be expensive for the Company, DBRS believes that ridding itself of this equity market and interest rate risk hangover is fundamental to restoring market confidence in the Company’s longer-term outlook.

DBRS did not comment on the size of the write-down due to changes in actuarial assumptions: they had previously estimated a charge of $700- to $800-million.

Moody’s downgraded the operating subsidiaries:

Moody’s Investors Service downgraded the insurance financial strength (IFS) ratings of Manulife Financial Corporation’s (Manulife; TSX: MFC, unrated) subsidiaries to A1 from Aa3. These subsidiaries include Manufacturers Life Insurance Company (MLI) and John Hancock Life Insurance Company (USA) (JHUSA). Short-term ratings were affirmed. The rating outlook for Manulife’s subsidiaries is stable. These rating actions conclude the reviews for downgrade initiated on August 5, 2010.
…
The rating agency said the downgrades follow MFC’s announcement of a nearly $1 billion net loss in 3q10 and incorporated the following business developments. First, Manulife’s acknowledgement of higher morbidity experience within its US long-term-care block and the resulting need for an average rate increase exceeding 40% in coming months. Also, the company faces the challenge of redesigning products to restore earnings power, combined with the possibility of continued earnings volatility until the firm’s enhanced market-risk hedging program is substantially complete.

Moody’s said the downgrades also reflect Manulife’s diminished financial flexibility because of reduced earnings coverage and increased financial leverage. At the end of the third quarter, Moody’s estimates that Manulife’s adjusted financial leverage is now over 30%, which exceeds Moody’s limit on this rating sub-factor. Furthermore, the company faces further goodwill charges as it adopts IFRS accounting in 2011. Although these goodwill write-downs are non-cash, they will lead to further deterioration on Moody’s leverage metrics. MLI reported a 234% minimum continuing capital and surplus requirements (MCCSR, the Canadian regulatory capital ratio for life insurers) ratio at the end of the third quarter, which Moody’s views as strong; however, this was due in part to the downstreaming of proceeds from debt raised at the parent as capital to MLI. As the firm’s total leverage increases, management’s ability to deploy double leverage to capitalize the operating company decreases.
…
According to Moody’s, upward pressure on the ratings would result from a substantial completion of the company’s equity and interest rate hedging programs, the maintenance of a MCCSR ratio above 220% and an NAIC RBC ratio at JHUSA of at least 325% on a sustained basis, with improved financial flexibility including adjusted leverage below 30% and earnings coverage above 8x on a sustained basis. Downward pressure would result from a failure to complete the hedging programs, a MCCSR ratio that dropped below 200%, and/or an NAIC RBC ratio at JHUSA of less than 275%.

S&P had the grace to admit the actuarial change was larger than expected:

2010–Standard & Poor’s Ratings Services today said it placed its ‘A’ counterparty credit rating on Manulife Financial Corp. (TSX/NYSE:MFC) on CreditWatch with negative implications. At the same time, Standard & Poor’s placed its ‘AA’ counterparty credit and financial
strength ratings on MFC’s core and guaranteed insurance operating subsidiaries on CreditWatch with negative implications.
…
“We placed the ratings on all of the companies in the Manulife group on CreditWatch negative because of Manulife’s continuing earnings volatility and material noncash goodwill impairments that could reach C$3.2 billion,” said Standard & Poor’s credit analyst Robert Hafner. “These goodwill impairments include $2.2 billion under IFRS accounting rules that could follow in the
first quarter of 2011.”

“The earnings volatility is evident in the group’s consolidated third-quarter loss of C$947 million that includes a basis change charge of about C$2 billion arising from its annual review of all actuarial assumptions and methods,” said Mr. Hafner. “These charges somewhat exceed the amount we assumed when we lowered the ratings on the group on Aug. 5 and assigned a negative outlook.”

Posted in Issue Comments, Regulation | 3 Comments »

November 4, 2010

November 5th, 2010

The mortgage rep & warranty issue in the States, briefly mentioned on October 25 is getting more interesting:

Total losses from repurchases by the banks, which also include Wells Fargo & Co., Citigroup Inc., PNC Financial Services Group Inc. and U.S. Bancorp, may amount to about $43 billion from 2009 to 2012, Vandana Sharma, an S&P credit analyst, wrote in a report today. The banks have accounted for about $12.4 billion so far, she said.

Fannie Mae, Freddie Mac and bond insurers such as MBIA Inc. are pressing lenders to honor promises to buy back mortgages if they’re later found to be based on inaccurate data. Known as representations and warranties, the promises cover defects such as inflated appraisals or misstatements about borrowers.
…
The repurchases will only become “systemic” and affect credit ratings if more so-called private-label mortgage investors pursue the six lenders, according to the report.

A group of such investors, including Bill Gross’s Pacific Investment Management C
o. and BlackRock Inc., last month moved to use Bank of America’s allegedly faulty mortgage servicing to overcome hurdles blocking them from seeking repurchases. Typically, mortgage bond trustees must make the claim on their behalf.

I trust nobody thinks that you get appointed to a nice job as mortgage bond trustee by making waves and rocking the boat.

The Kansas City Fed has released a working paper by Nada Mora titled Lender Exposure and Effort in
the Syndicated Loan Market:

This paper tests for agency problems between the lead arranger and syndicate participants in the syndicated loan market. One problem comes from adverse selection, whereby the lead arranger has a private informational advantage over participants. A second problem comes from moral hazard, whereby the lead arranger puts less effort in monitoring when it retains a smaller loan portion. Applying an instrumental variables strategy, I find that borrowers’ performance is influenced by the lead’s share. Dynamic tests extract active contributions made by the lead, supporting a monitoring interpretation. Loan covenants serve as a mechanism to induce the lead arranger to monitor.

Monitoring and skin in the game are more important than might be otherwise thought, because nearly half of the borrowers are “opaque”, where opacity is defined as:

Dummy = 1 indicating publicly traded borrowers without a debt rating, and 0 otherwise. This information is from Compustat.

The Republican majority in the House may be seeking to undermine Dodd-Frank:

Hours after Republicans secured control of the U.S. House, the council of federal regulators studying how to implement the so-called Volcker rule received a warning from the lawmaker in line to be their new overseer.

U.S. Representative Spencer Bachus, the Alabama Republican who may become chairman of the House Financial Services Committee, said in a Nov. 3 comment letter to the new Financial Stability Oversight Council that the rule barring bank holding companies from trading on their own accounts will undermine U.S. competitiveness and cut profits at the largest banks.

“Depending on how U.S. regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from U.S. banks to banks based abroad,” wrote Bachus, who offered an amendment during the legislative process that would have disabled the rule until other countries established similar regulation.

I regret to advise that the “Market Action” portion of this report will be delayed. My internet connection has decided to become useless – I can connect to the internet, but I can’t get any data. Thank you, Bell Canada! These words are being typed via my Blackberry, but unfortunately HIMIPref™ is not (yet) an app downloadable for $1.99 from the App Store! I will update this post when Bell replaces the hamsters in the wheel.

Update, 2010-11-5: Sorry for the delays.

November 4 was another red-hot day on the Canadian preferred share market, with PerpetualDiscounts up 23bp and FixedResets gaining 14bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.2184 % 2,202.3
FixedFloater 4.96 % 3.54 % 26,300 19.15 1 -0.2727 % 3,393.5
Floater 2.70 % 2.38 % 54,764 21.29 4 -0.2184 % 2,377.9
OpRet 4.79 % 2.87 % 81,466 1.88 9 0.2252 % 2,393.1
SplitShare 5.85 % -13.84 % 66,140 0.09 2 0.1212 % 2,406.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2252 % 2,188.3
Perpetual-Premium 5.63 % 5.02 % 164,378 3.09 24 0.0685 % 2,022.7
Perpetual-Discount 5.34 % 5.38 % 257,621 14.85 53 0.2321 % 2,043.7
FixedReset 5.20 % 2.88 % 339,797 3.22 50 0.1404 % 2,292.6
Performance Highlights
Issue Index Change Notes
POW.PR.B Perpetual-Discount -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-04
Maturity Price : 23.88
Evaluated at bid price : 24.15
Bid-YTW : 5.58 %
ELF.PR.G Perpetual-Discount -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-04
Maturity Price : 20.28
Evaluated at bid price : 20.28
Bid-YTW : 5.92 %
BAM.PR.P FixedReset 1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 28.03
Bid-YTW : 3.87 %
CIU.PR.B FixedReset 1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 28.80
Bid-YTW : 2.67 %
MFC.PR.B Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-04
Maturity Price : 21.43
Evaluated at bid price : 21.43
Bid-YTW : 5.51 %
TRP.PR.A FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.75
Bid-YTW : 2.96 %
BAM.PR.O OpRet 1.15 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.50
Bid-YTW : 2.85 %
IAG.PR.C FixedReset 1.51 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.49
Bid-YTW : 3.16 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.N Perpetual-Discount 213,701 RBC crossed blocks of 123,500 at 25.08 and then 74,100 at 25.14.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-04
Maturity Price : 24.80
Evaluated at bid price : 25.04
Bid-YTW : 5.27 %
RY.PR.I FixedReset 104,630 Desjardins crossed 98,500 at 26.62.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.62
Bid-YTW : 2.82 %
CM.PR.P Perpetual-Premium 101,780 Desjardins crossed blocks of 20,000 and 50,000, both at 25.26. RBC crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-28
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 5.14 %
MFC.PR.D FixedReset 57,159 TD crossed 25,000 at 27.85; Nesbitt crossed 12,600 at 28.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.95
Bid-YTW : 3.44 %
BNS.PR.O Perpetual-Premium 46,270 Desjardins crossed 40,000 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-26
Maturity Price : 25.00
Evaluated at bid price : 25.79
Bid-YTW : 5.08 %
GWO.PR.M Perpetual-Premium 43,495 Nesbitt crossed blocks of 12,000 and 19,600, both at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 5.69 %
There were 45 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | 1 Comment »

FixedReset Index Yield Sets New All-Time Low

November 4th, 2010

As briefly noted yesterday, the FixedReset Index set a new all-time low yield record as of the close November 3 with a mark of 2.88%.


Click for Big

This is all the more impressive since changes to the index in October added three lower-quality, higher-yielding issues to the index, which had an effect on the determination of the median yield.

To celebrate, I am publishing the constituents of the FixedReset index, sorted in various ways:

Given that the DEX Short-Term Corporate Index yields about 2.5% and the ZCS short term corporate ETF yields 2.4% before fees, a yield of 2.88% is not entirely unreasonable: the interest-equivalent is 4.03%, giving a pre-tax spread of about 150bp to cover things like the additional credit risk and extension risk of the FixedResets. But I’m not entirely convinced that the market actually thinks that way.

Posted in Index Construction / Reporting | 1 Comment »

IAG Silent on Regulatory Change

November 4th, 2010

Industrial Alliance has released its third quarter financials, and managed to do so without mentioning any prospects for regulatory change. This is the same policy as was followed with the 2Q10 Shareholders’ Report.

However, it was another good quarter:

Top-line growth in the third quarter continued to show strong momentum. Premiums and deposits increased 15% to $1.4 billion and the value of new business rose 44% to $41.4 million. For the nine-month period, premiums and deposits were up 31% over 2009 and 7% over 2007 – the Company’s record year. This growth is fuelled primarily by the Individual Wealth Management sector that continues to benefit from stock market gains and high net sales.
…
Top-line growth in the third quarter continued to be strong for the fourth quarter in a row. Almost all sectors contributed to this growth, with Individual Wealth Management in the lead as a result of the upswing in equity markets. For the period ended September 30th, this sector had gross sales of $686.7 million, up 29% over the previous year, and net sales of $243.3 million, up 52% over 2009. For the first nine months of 2010, Industrial Alliance ranked second in Canada for net sales of segregated funds, with a 34.1% market share, and fifth in terms of net mutual fund sales.

There are a few changes planned for their asset mix and hedging practice:

Management has taken a number of initiatives to reduce its sensitivity to interest rate risk. These initiatives are in the process of being implemented and will include a 5% increase in the proportion of stocks backing long-term liabilities. Had these initiatives been in place at September 30, 2010, the Company expects that it would be able to absorb a 15% decline in equity markets and that provisions for future policy benefits would not have to be strengthened as long as the S&P/TSX remains above 10,500 points.

Additionally, as part of its risk management process, the Company has implemented a dynamic hedging program to manage the equity risk related to its guaranteed annuity (GMWB) product, effective October 20th, 2010. The GMWB portfolio represents approximately $1.5 billion of assets under management, including $900 million in equities. The Company also entered into a reinsurance agreement during the third quarter to share 60% of the longevity risk related to its $2.5 billion insured annuity block of business.

As far as current sensitivities are concerned:

The Company’s sensitivity analysis varies from one quarter to another according to numerous factors, including changes in the economic and financial environment and the normal evolution of the Company’s business. The results of these analyses show that the leeway the Company has to absorb potential market downturns remains very high overall.

At September 30, 2010, the analysis was as follows:

  • Stocks matched to the long-term liabilities – The Company believes that it will not have to strengthen its provisions for future policy benefits for stocks matched to long-term liabilities as long as the S&P/TSX index remains above 9,400 points.
  • Solvency ratio – The Company believes that the solvency ratio will stay above 175% as long as the S&P/TSX index remains above 7,650 points, and will stay above 150% as long as the S&P/TSX index remains above 6,450 points.
  • Ultimate reinvestment rate (“URR”) – The Company estimates that a 10 basis point decrease (or increase) in the ultimate reinvestment rate would require the provisions for future policy benefits to be strengthened (or would allow them to be released) by some $44 million after taxes.
  • Initial reinvestment rate (“IRR”) – The Company estimates that a 10 basis point decrease (or increase) in the initial reinvestment rate would require the provisions for future policy benefits to be strengthened (or would allow them to be released) by some $25 million after taxes.

They estimate that a sudden 10% decline in equity markets would take $18-million off their net income; unfortunately, they neither provide pro-forma figures reflecting the asset mix changes, nor provide estimates of the effect of larger equity market declines – which will, of course, not be proportional to the adverse effect of such a normal correction.

Posted in Issue Comments, Regulation | No Comments »

SLF Coy on Capital Rule Changes

November 4th, 2010

Sun Life Financial has released its 3Q10 Financials. They had a decent – not great – quarter, but I’m more interested in their commentary on the capital rules:

In Canada, the Office of the Superintendent of Financial Institutions Canada (OSFI) is considering a number of changes to the insurance company capital rules, including new guidelines that would establish stand-alone capital adequacy requirements for operating life insurance companies, such as Sun Life Assurance, and that would update OSFI’s regulatory guidance for non-operating insurance companies acting as holding companies, such as Sun Life Financial Inc.

These proposals from the US Treasury (hopping mad about AIG) are now over a year old and can’t be implemented too soon according to me. Julie Dickson alluded to the possibility in a speech.

In addition, OSFI may change the definition of available regulatory capital for determining regulatory capital to align insurance definitions with any changed definitions that emerge for banks under the proposed new Basel Capital Accord.

Presumably this (mainly) refers to efforts to make the loss-absorption potential of regulatory capital more explicit (although the proposals are framed in such a way that it simply represents a regulatory-political end-run around the bankruptcy courts).

OSFI is considering more sophisticated risk-based modeling approaches to Minimum Continuing Capital and Surplus Requirements (MCCSR), which could apply to segregated funds and other life insurance products. In particular, OSFI is considering how advanced modeling techniques can produce more robust and risk-sensitive capital requirements for Canadian life insurers. This process includes internal models for segregated fund guarantee exposures. On October 29, 2010 OSFI released a draft advisory, for consultation with the industry and other stakeholders, setting out revised criteria for determining segregated fund capital requirements using an approved model. It is proposed that the new criteria, when finalized, will apply to qualifying segregated fund guarantee models for business written on or after January 1, 2011. The Company is in the process of reviewing the advisory to determine the potential impact of the proposed changes, and will continue to actively participate in the accompanying consultation process.

It is very disappointing that they are not more specific, given that implementation is two months’ away.

In particular, the draft advisory on changes to existing capital requirements in respect of new segregated fund business may result in an increase in the capital requirements for variable annuity and segregated fund policies currently sold by the Company in the United States and Canada on and after the date the new rules come into effect. The Company competes with providers of variable annuity and segregated fund products that operate under different accounting and regulatory reporting bases in different countries, which may create differences in capital requirements, profitability and reported earnings on these products that may cause the Company to be at a disadvantage compared to some of its competitors in certain of its businesses. In addition, the final changes implemented as a result of OSFI’s review of internal models for in-force segregated fund guarantee exposures may materially change the capital required to support the Company’s in-force variable annuity and segregated fund guarantee business.

Scary words, but no meat in the sandwich.

Similar was their commentary on the proposed rules regarding hedging:

On July 30, 2010 the International Accounting Standards Board (IASB) issued an exposure draft for comment, which sets out recognition, measurement and disclosure principles for insurance contracts. The insurance contracts standard under IFRS, as currently drafted, proposes that liabilities be discounted at a rate that is independent of the assets used to support those liabilities. This is in contrast to current rules under Canadian GAAP, where changes in the measurement of assets supporting actuarial liabilities is largely offset by a corresponding change in the measurement of the liabilities.

The Company is in the process of reviewing the exposure draft, and is working with a number of industry groups and associations, including the Canadian Life and Health Insurance Association, which submitted a comment letter to the IASB on October 15, 2010. It is expected that measurement changes on insurance contracts, if implemented as drafted, will result in fundamental differences from current provisions in Canadian GAAP, which will in turn have a significant impact on the Company’s business activities. In addition, the IASB has a project on accounting for financial instruments, with changes to classification, measurement, impairment and hedging. It is expected the mandatory implementation of both these standards will be no earlier than 2013.

The IASB continues to make changes to other IFRSs and has a number of ongoing projects. The Company continues to monitor all of the IASB projects that are in progress with regards to the 2011 IFRS changeover plan to ensure timely implementation and accounting.

The proposed new standard has been discussed on PrefBlog. The CLHIA letter does not appear to have been made public by the CLHIA but has been published by IFRS. I can’t say I find the CLHIA arguments – or those of the sell-side analysts quoted in the appendix – particularly convincing. It boils down to another round of the market-value vs. historical cost debate, but they spend more time discussing why fair value will be so inconvenient than on why it is inferior.

As far as earnings are concerned:

Sun Life Financial reported net income attributable to common shareholders of $453 million for the quarter ended September 30, 2010, compared to a loss of $140 million in the third quarter of 2009. Net income in the third quarter of 2010 was favourably impacted by $156 million from improved equity market conditions, and $49 million from assumption changes and management actions. The Company increased its mortgage sectoral allowance by $57 million, which reduced net income by $40 million, in anticipation of continued pressure in the U.S. commercial mortgage market, however overall credit experience continued to show improvement over the prior year. The net impact from interest rates on third quarter results was not material as the unfavourable impact of lower interest rates was largely offset by favourable movement in interest rate swaps used for asset-liability management.
…
In its interim MD&A for the third quarter of 2009, the Company provided a range for its “estimated 2010 adjusted earnings from operations”(2) of $1.4 billion to $1.7 billion. Based on the assumptions and methodology used to determine the Company’s estimated adjusted earnings from operations, the Company’s adjusted earnings from operations for the third quarter of 2010 were $353 million and $1,087 million for the nine months ended September 30, 2010. Additional information can be found in this news release under the heading Estimated 2010 Adjusted Earnings from Operations.

So it looks like, at best, they’re going to just squeeze in to the bottom of that range.

Q3 2010 adjusted earnings from operations

($ millions) Q3’10
————————————————————————-
Adjusted earnings from operations(1) (after-tax) 353
Adjusting items:
Net equity market impact 156
Management actions and updates to actuarial estimates and
assumptions 49
Tax 16
Sectoral allowance in anticipation of continued pressure in
the U.S. commercial mortgage market (40)
Net interest rate impact (15)
Currency impact (6)
Other experience gains (losses) (includes $32 million
unfavourable mortality/morbidity experience and $4 million
unfavourable credit impact) (60)
————————————————————————-
Common shareholders’ net income 453
————————————————————————-

and

Market risk sensitivities

September 30, 2010
————————————————————————-
Changes in Net income(3)
interest rates(1) ($ millions) MCCSR(4)
————————————————————————-
1% increase 225 – 325 Up to 8 percentage points increase
1% decrease (375) – (475) Up to 15 percentage points decrease
————————————————————————-

Changes in equity markets(2)
————————————————————————-
10% increase 75 – 125 Up to 5 percentage points increase
10% decrease (175) – (225) Up to 5 percentage points decrease
————————————————————————-
————————————————————————-
25% increase 125 – 225 Up to 5 percentage points increase
25% decrease (575) – (675) Up to 15 percentage points decrease
————————————————————————-

Given that the Globe & Mail reports .. :

[UBS analyst Peter] Rozenberg calculated that the weighted average equity markets in the United States, Canada, Japan and Hong Kong increased 9.7 per cent quarter over quarter.

… it is a bit disappointing not to see a better match-up between the published sensitivity to a 10% equity market decline and the adjusting entry in the derivation of operating earnings.

It is also disappointing to see that their commentary on potential regulatory changes is so similar to their commentary in the 2Q10 report.

Posted in Issue Comments, Regulation | 2 Comments »

November 3, 2010

November 3rd, 2010

Naked access has been banned:

SEC commissioners voted 5-0 today to approve a rule that requires brokers to implement pre-trade risk controls when clients use the firms’ identification codes to trade directly on exchanges. Agency officials proposed the regulation in January, saying they were concerned that a computer malfunction or human error might trigger an order that would erode a broker’s capital.

The SEC rule targets so-called naked-sponsored access, in which a customer uses a broker’s identification code while bypassing pre-trade risk controls. The tactic is used by traders whose strategy of buying and selling thousands of shares in milliseconds would be slowed if they executed through a broker.

I would have thought that the potential for erosion of the brokers’ capital was the brokers’ problem. But nowadays, I guess, everything is a public utility.

The FOMC statement was pretty much as expected:

Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
…
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
…
Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

The FRBNY gave details of the implementation; it should be noted that they are also reinvesting principal repayments received from their mortgage portfolio. However, the market was unimpressed by the term-structure of the proposed purchases:

Treasury 30-year bond fell the most in two months after the Federal Reserve said it will buy fewer of the securities than anticipated by investors in its $600 billion program of purchases to boost the economy.

The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched the highest since May 2008 on concern the Fed will be successful in reigniting inflation.
…
“The yield curve should start to steepen because the Fed will focus on 5- to 6- years,” said William Larkin, a fixed income portfolio manager in Salem, Massachusetts at Cabot Money Management, which manages $500 million. “The risk once they finish is that inflation will be elevated. There’s a good chance we’ll be rip-roaring in terms of growth and inflation.”

Thirty-year bond yields rose 13 basis points to yield 4.06 percent at 4:02 p.m. in New York, the biggest rise since Sept. 9. The 3.875 percent bonds due in August 2040 rose [sic – I think they meant “declined” – JH] 2 8/32, or $22.50 per $1,000, to 96 26/32.
…
The difference between rates on 30-year bonds and Treasury Inflation Protected Securities, touched 2.74 percent, the highest since May 2008 when the financial crisis was intensifying.

The Potash takeover has been blocked; apparently if Canadians are allowed sell their (minority) position in the company at a good price, we’re too damn stupid to reinvest the money and will just waste it on beer and prostitutes. I eagerly await the next sermon on productivity.

Today’s most surprising news is that Premier Dad has done something intelligent:

Premier Dalton McGuinty announced Wednesday that 75 PhD students will receive full four-year scholarships, each worth $40,000 annually, starting in the 2011-12 school years. The program is billed as the first of its kind in Canada.

It remains to be seen just what fields of study will be emphasized.

The Canadian preferred share market had another good day, with both PerpetualDiscounts and FixedResets up 20bp, on continued high volume (Desjardins had a good day!). This is getting really dull. Remember the good old days of the Panic of 2007, when you read this blog just to find out how much money you’d lost? And it took half an hour just to scan the Performance Highlights table? That was fund. FixedResets set a new all-time yield low … I’ll post about it in a while.

PerpetualDiscounts now yield 5.37%, equivalent to 7.52% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.2% (OK, a little over. Sue me) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 230bp, a slight (and perhaps meaningless) tightening from the 235bp reported on October 29.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3739 % 2,207.1
FixedFloater 4.94 % 3.52 % 26,120 19.18 1 1.1494 % 3,402.8
Floater 2.70 % 2.37 % 56,997 21.33 4 0.3739 % 2,383.1
OpRet 4.80 % 3.31 % 79,275 1.88 9 -0.0467 % 2,387.7
SplitShare 5.86 % -14.48 % 65,974 0.09 2 0.4056 % 2,403.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0467 % 2,183.3
Perpetual-Premium 5.63 % 5.12 % 160,469 3.09 24 0.0530 % 2,021.3
Perpetual-Discount 5.35 % 5.37 % 257,574 14.80 53 0.2031 % 2,039.0
FixedReset 5.20 % 2.88 % 344,769 3.23 50 0.2047 % 2,289.4
Performance Highlights
Issue Index Change Notes
IAG.PR.C FixedReset -1.53 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.08
Bid-YTW : 3.67 %
BMO.PR.K Perpetual-Discount -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 24.21
Evaluated at bid price : 24.44
Bid-YTW : 5.37 %
BNA.PR.C SplitShare 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 5.89 %
MFC.PR.B Perpetual-Discount 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.57 %
BAM.PR.G FixedFloater 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 25.00
Evaluated at bid price : 22.00
Bid-YTW : 3.52 %
MFC.PR.E FixedReset 1.20 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.91
Bid-YTW : 3.69 %
MFC.PR.C Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 5.57 %
ELF.PR.G Perpetual-Discount 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 5.85 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.K Perpetual-Discount 176,198 Desjardins crossed blocks of 76,200 and 86,700, both at 24.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 23.73
Evaluated at bid price : 24.00
Bid-YTW : 5.02 %
TD.PR.R Perpetual-Premium 120,060 Desjardins crossed blocks of 69,000 shares, 32,900 and 11,800, all at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 5.14 %
CM.PR.P Perpetual-Premium 94,780 Desjardins crossed blocks of 25,000 and 68,400, both at 25.26.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-28
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 5.12 %
SLF.PR.C Perpetual-Discount 85,594 RBC crossed blocks of 50,000 and 22,800, both at 20.69.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.83
Evaluated at bid price : 20.83
Bid-YTW : 5.41 %
BAM.PR.T FixedReset 81,735 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 23.07
Evaluated at bid price : 24.92
Bid-YTW : 4.19 %
BMO.PR.L Perpetual-Premium 64,960 Desjardins crossed 56,700 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-24
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 5.05 %
There were 54 other index-included issues trading in excess of 10,000 shares.

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