Industrial Alliance has released its 1Q09 results, so we can take a quick look at their exposures.
Industrial Alliance ended the first quarter of 2009 with net income to common shareholders of $46.2 million, compared to $61.7 million for the same period in 2008. This result translates into diluted earnings per common share of $0.58 ($0.76 in the first quarter of 2008) and a return on common shareholders equity of 11.2% on an annualized basis (14.5% in the first quarter of 2008).
The results for the quarter benefited from a $7.5 million gain after taxes ($0.10 per common share) resulting from the favourable evolution of the gap between the market value of the debt instruments and that of the underlying assets. Debt instruments were classified as “held-for-trading” when the new accounting standards took effect on January 1, 2007. Hence, any difference between the variation in the market value of the debt instruments and the corresponding assets must be recognized immediately on the income statement. However, this difference should be gradually eliminated by the time the debt instruments mature, which is in the next five years.
On the other hand, the results for the quarter were affected by the current economic and financial environment, which reduced the Company’s expected income by about $9.9 million after taxes ($0.12 per common share).
Profit declined somewhat due to weaker equity & credit markets; $89-million due to lower fee income on Assets Under Management; $25-million due to increased actuarial liabilities; but mainly provisions for credit losses $138-million and other provisions, $19-million.
Exposures:
| IAG Exposures | |
| Tangible Holdco Equity* CAD Millions |
1,195 |
| Other Tier 1 | 18.7% |
| Stock Leverage | 139%** |
| Bond Leverage | 1,021% *** |
| Seg Fund Leverage | 749% |
| Effect of +1% Interest Rates | 1.3% |
| Effect of -10% Equity Market | 1.4% |
| Tangible Holdco Equity (THE) is Common Shares (541) plus Contributed Surplus (20) plus Retained Earnings and Other Comprehensive Income (1,101) less Goodwill (115) and Intangibles (352) = 1,195. | |
| Other Tier 1 = Preferred Shares (224) = 224 / THE | |
| Stock Leverage is Stocks on the balance sheet (1,332) + Equity contracts (333) divided by Tangible Holdco Equity. | |
| Bond Leverage is bonds on the balance sheet (8,114) + mortgages (3,507) + Policy Loans (366) + Interest Rate Contracts (171) + Credit Contracts (39) = 12,197 divided by Tangible Holdco Equity. | |
| Equity effect = 17 / THE (Figure includes some recovery; amount not disclosed) | |
| Interest rate effect = 15 / THE (actual disclosure in 2008 AR is 10bp -> $1.5-million) | |
| Sources: 2008 Annual Report and 1Q09 Earnings Release and 1Q09 MD&A. | |
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.