Monday, August 06, 2007

Life Insurance Cos' Exposure to Subprime

The Globe and Mail, Tara Perkins, 6 August 2007

At 3 p.m. last Wednesday, Great-West Lifeco Inc. chief executive officer Raymond McFeetors welcomed analysts to the insurer's conference call on second-quarter financial results from "hot and steamy Winnipeg," and proceeded to tell them that it was "one of the best quarters ever for Great-West Lifeco."

About half an hour into the call, an analyst asked whether the company could outline its exposure to the U.S. subprime mortgage market.

Executives were prepared to answer. Great-West has about $1.2-billion of subprime through various pools its purchases, and the vast majority of that - 99.2 per cent - is rated triple-A, the safest rating.

The details came fast and furious. One of the company's U.S. executives said Great-West's subprime exposure is "about 5 per cent of our total assets."

In trading on the Toronto Stock Exchange, Great-West's stock was whacked.

It appears there might have been a misunderstanding, said Genuity Capital Markets analyst Mario Mendonca, who follows the company. He said the $1.2-billion exposure actually represents less than 1 per cent of Great-West's total assets.

Apparently, the executive had meant that the exposure is 5 per cent of the insurer's U.S. assets. That might not have been clear to some investors.

Too late.

At a time when the market is waiting for the next subprime-related shoe to drop, investors are shooting first and asking questions later.

Great-West stock, which closed Tuesday at $35.05, had fallen 5 cents to $35 shortly after 1:30 p.m. Wednesday, prior to the conference call. By about 3:45, the stock had dropped 85 cents. It closed down 88 cents, or 2.5 per cent, at $34.17.

That came on a rocky day for the broader market, which was also reeling from subprime concerns. Great-West is controlled by Montreal's Desmarais family.

"We believe the market completely ignored [Great-West's] stronger-than-expected earnings, 15-per-cent dividend increase, and strong P&D [premiums and deposits] and instead focused on the word 'subprime' in taking the stock down almost 3 per cent near the close," Mr. Mendonca of Genuity wrote in a note to clients the day after the earnings call.

Investors and analysts are scouring financial firms' earnings statements and tuning into conference calls, on the alert for any mention of subprime mortgage exposure.

Numerous major Canadian financial players, including all of the major banks, have not yet reported quarterly earnings since the subprime situation degenerated dramatically.

Toronto-based Manulife Financial Corp., the country's biggest insurer, will report Wednesday.

Canada's third-biggest insurer, Sun Life Financial Inc., also of Toronto, was the first to report last Tuesday, and kicked off the disclosure of subprime mortgage exposure. Sun Life's total exposure is about $400-million, chief financial officer Rick McKenney told analysts during a conference call.

"Total U.S. residential mortgage exposure is less than 4 per cent of invested assets. And of that, residential mortgage-backed and asset-backed securities with subprime exposure represents less than half of 1 per cent of total invested assets," Mr. McKenney said.