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:
| SLF Leverage | |||
| Item | 3Q09 | 2Q09 | 4Q08 |
| Tangible Common Equity |
8,272 | 8,678 | 8,332 |
| Bond Exposure | 81,188 | 81,565 | 81,376 |
| Bond Leverage | 981% | 940% | 977% |
| Reported Bond Sensitivity | ??? | ??? | ??? |
| Bond Sensitivity / Equity | ??? | ??? | ??? |
| Equity Exposure | 4,710 | 4,612 | 4,458 |
| Equity Leverage | 57% | 53% | 54% |
| Reported Equity Sensitivity | 150 | 237.5 | 312.5 |
| Equity Sensitivity / Equity | 2% | 3% | 4% |
| Tangible Common Equity is Common Shareholders’ Equity less goodwill less intangibles | |||
| Bond Exposure is Bonds-Held-for-Trading plus Bonds-Available-for-Sale plus Mortgages and Corporate Loans | |||
| Bond Leverage is Bond Exposure divided by Tangible Common Equity | |||
| Reported Bond Sensitivity is the midpoint of the reported effect on earnings of an adverse 100bp move in interest rates, for AFS and HFT bonds taken together. | |||
| Equity Exposure is Stocks-Held-For-Trading plus Stocks-Available-for-Sale | |||
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.
[…] word-for-word identical with those of Mr. White) and warnings in MFC’s 3Q09 results and SLF’s 3Q09 results … I suspect that this is going to happen, sooner rather than later: Events such as those at […]