Manulife Financial has released its 1Q09 results, so we can take a quick look at their exposures.
Earnings suffered with the markets:
The quarter’s net loss was primarily driven by continued declines across all equity markets, particularly in the U.S. Reserve strengthening for segregated fund guarantees resulted in an accounting charge of $1,146 million and credit impairments were $121 million. Also affecting earnings this quarter were fair value adjustments of $277 million primarily for declines in commercial real estate values, $255 million of equity related charges and $72 million related to credit downgrades. Earnings for the quarter, excluding these items, totaled $803 million and cash provided by operating activities of $2.5 billion reflected the non-cash nature of these charges.
…
In light of continued equity market volatility and sensitivity, the Company conducted a strategic review of its segregated fund product portfolio and started implementing changes to its product offerings in the quarter. In the U.S., fees were increased, deferral bonuses were reduced, additional features were withdrawn, and equity exposure was reduced in several key funds. In Canada, the hedging program for new segregated fund business was successfully implemented at the end of March, and $1.5 billion of inforce business was hedged. New business in North America is now hedged on an ongoing basis.
Does a phrase involving barn doors and stolen horses come to anybody else’s mind, or is it just me?
Exposures:
| MFC Exposures | |
| Tangible Holdco Equity* CAD Millions |
15,480 |
| Other Tier 1 | 30.8% |
| Stock Leverage | 51%** |
| Bond Leverage | 985% *** |
| Seg Fund Leverage | 1,062% |
| Effect of +1% Interest Rates | 8.6% |
| Effect of -10% Equity Market | 12.3% |
| Tangible Holdco Equity is Common Shares (16,177) plus Contributed Surplus (161) plus Retained Earnings (11,356) plus Non-Controlling interest in subsidiaries (222) less Accumulated other Comprehensive Loss (2,221) less Goodwill (8,055) and Intangibles (2,160) = 15,480. | |
| Other Tier 1 = Liabilities for preferred shares and capital instruments (3,683) + Preferred Shares (1,080) = 4,763 / THE | |
| Stock Leverage is Stocks on the balance sheet (7,946) divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable. | |
| Bond Leverage is bonds on the balance sheet (84,295) + mortgages (31,795) + Private Placements (26,235) + Policy Loans (7,746) + Bank Loans (2,439) = 152,510 divided by Tangible Holdco Equity. MFC has substantial derivative investments, but does not disclose the notional values of these positions, making this estimate rather unreliable. | |
| Equity effect = 1,900 / THE | |
| Interest rate effect = 1,336 / THE; note that a decrease in interest rates will cost them money. This figure is taken from the 2008 Annual Report since they couldn’t be bothered to disclose it in 1Q09. | |
| Sources: Financial Supplement, Slides and 2008 Annual Report. | |
Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:
- Corresponding US calculations are not disclosed
- As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level
As noted by DBRS:
The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.