29 September 2008

Life Insurance Cos Exposure to AIG, Lehman, WaMu

Scotia Capital, 29 September 2008

• Sun Life will take a $0.30 EPS hit on its $270 million WaMu bond exposure. Combined with $334 million in LEH exposure (75% write-down is a $0.28 EPS hit), and the $315 million AIG bond exposure ($88 million at holdco with a 60% writedown and the rest at op. co. with a 40% write-down for an estimated $0.16 EPS) gives a total $0.74 EPS hit in Q3/08.

• MFC's disclosed WaMu bond exposure, $41 million, translates into a $0.02 EPS hit. $380 million LEH bond exposure translates into a $0.14-$0.16 EPS hit and its $47 million AIG holdco and $212 million AIG op. co bond exposure is a $0.04 EPS hit. Total $0.20 Q3/08 EPS hit.

• GWO's disclosed $101 million LEH bond exposure ($0.05 EPS hit) and $149 million AIG holdco and $116 million AIG op.co bond exposure (total estimated AIG EPS hit of $0.09 EPS), for a total EPS Q3/08 hit of $0.14, we estimate. NAIC filings show just $47 million in WaMu bonds, for an estimated $0.04 EPS hit. IAG's $16 million AIG op. co. exposure would be a $0.08 EPS hit.
Financial Post, Jonathan Ratner, 29 September 2008

Two Canadian financial names involved in the turmoil south of the border should see a significant impact if things progress the way they appear to be.

Sun Life Financial Inc. has disclosed $270-million in exposure to Washington Mutual Inc. bonds and will not recover any of this now that the largest U.S. savings and loan has failed, according to RBC Capital Markets. Analyst Andre-Philippe Hardy cut his third quarter earnings estimate by 58% from 53¢ per share to 22¢ as a result. This follows a 4¢ per share reduction as a result of weak equity markets, and 14¢ and 26¢ cuts as a result of credit exposures to AIG and Lehman Brothers, respectively.

“The greatest near term risks to earnings related to credit are downgrades on financial services holdings (which represent approximately 28% of Sun Life’s bond portfolio) and their impact on reserves,” Mr. Hardy told clients. “If bonds held by Sun Life start seeing more downgrades in ratings, it would force them to strengthen their reserves (which has an earnings impact) even if there is no default or impairment.”

The analyst does feel Sun Life shares offer appealing upside and rates them at “outperform” with a $47 price target.

He is also growing more bullish on CIBC, which faces plenty of downside risk due to its structured financed holdings hedged with financial guarantors. However, Mr. Hardy said that the U.S. government’s Troubled Asset Relief Program could lead to stabilization in the value of these assets, as they could be bought for more than market value.

“If the value of structured finance assets indeed stabilizes, we believe CIBC’s stock should benefit, as a key source of uncertainty would be reduced,” the analyst said.

He upgraded CIBC to “sector perform” from “underperform” and boosted his price target to $65 per share from $62. However, $1-billion in writedowns before tax are expected from the bank in the fourth quarter as a result of wider credit default swap spreads of guarantors compared to the end of July.