Industrial Alliance Continues its Momentum: profit, return and business
growth up sharply in the second quarter of 2010
QUEBEC CITY, July 27 /CNW Telbec/ - Industrial Alliance Insurance and Financial Services Inc. ("Industrial Alliance" or "the Company") ended the second quarter of 2010 with net income to common shareholders of $57.7 million, compared to $32.1 million for the second quarter of 2009. If the temporary impact of the asymmetric evolution between the fair value of the debt instruments and that of the underlying assets is excluded, net income to common shareholders amounted to $58.4 million on regular operations, compared with $51.4 million in the second quarter of 2009. This result translates into diluted earnings per common share of $0.69 ($0.64 in the second quarter of 2009) and a return on common shareholders' equity of 11.7% on an annualized basis and 12.8% for the last twelve months (12.1% and 1.3% respectively in the second quarter of 2009 and for the twelve months ended June 30, 2009).
The higher profit for the quarter was driven primarily by the overall improvement in economic conditions in Canada and the stock market upswing over the last year, despite the downturn in the last few months.
Top-line growth in the second quarter of 2010 was very strong, continuing the momentum of the previous quarters. Premiums and deposits amounted to $1.6 billion, a record for a second quarter and a year-over-year increase of 33%, and value of new business was up 28% to reach $35.9 million in the second quarter. This growth comes primarily from the Individual Wealth Management sector, which benefited from extremely strong segregated fund and mutual fund sales (respective year-over-year increases of 98% and 113%).
"These excellent results once again demonstrate the Company's vitality and the strength of our business model," said Yvon Charest, President and Chief Executive Officer. "Despite the weakness of the economic recovery and stock market volatility, our return for the last twelve months is within our 12% to 14% target range, and we didn't post any credit losses. Top-line growth continues to be very strong. Financial strength is also very good. And we took a big step in our US market development strategy by concluding the acquisition of American-Amicable."
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Profitability Highlights
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Net income
to common
shareholders 57.7 32.1 80% 118.0 78.3 51%
Less: gain
(loss)
resulting
from the
variation
in the fair
value of debt
instruments
and
underlying
assets
(after taxes) (0.7) (19.3) - 0.4 (11.8) -
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Net income
to common
shareholders
on regular
operations 58.4 51.4 14% 117.6 90.1 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
(diluted) $0.68 $0.40 $0.28 $1.44 $0.97 $0.47
Earnings per
common share
(diluted)
on regular
operations $0.69 $0.64 $0.05 $1.45 $1.12 $0.33
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Second quarter annualized Trailing twelve months
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Return on
common
shareholders'
equity 11.5% 7.6% - 13.1% 1.1% -
Return on
common
shareholders'
equity on
regular
operations 11.7% 12.1% - 12.8% 1.3% -
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Highlights
Following are the highlights of the second quarter (all of the Company's results are explained in more detail in the Management's Discussion and Analysis that follows this news release).
Profitability - Following are the main factors that explain the second quarter profitability:
- The overall improvement in economic conditions and the stock market
recovery in the last year increased the expected profit on in-force
business to $91.5 million in the second quarter, up 15% year over year.
The increase was driven primarily by the Individual Wealth Management
sector, where the expected profit on in-force business almost doubled,
thanks to an 18% increase in funds under management over the last year.
- The stock market downturn in the last quarter slowed earnings growth
during the period. It is estimated that if the stock markets had
maintained a regular growth rate (about 7% for 2010), net income to
common shareholders would have been approximately $4.1 million higher
($0.05 per common share).
- New business strain in the Individual Insurance sector was higher than
expected, primarily due to strong sales. Individual Insurance strain
was 17% higher year-over-year, amounting to $26.4 million, on top-line
growth of 27%. This strain should be recovered in the form of profits
over time, as the assumptions used for pricing materialize.
- The auto and home insurance subsidiary had a second consecutive
excellent quarter, with a $3.0 million net profit in the second quarter
of 2010, compared to $2.9 million in the first quarter of 2010 and
$1.4 million in the second quarter of 2009.
- The redemption by the IA Clarington subsidiary of a commission
financing agreement resulted in expenses of $1.0 million after taxes.
This redemption should help to improve profitability somewhat in the
next few quarters.
- The Company did not suffer any credit losses and obtained good
experience results in the Group Insurance sector for the third
consecutive quarter.
The Company posted a $0.7 million loss after taxes ($0.01 per common share) in the second quarter resulting from the unfavourable evolution of the difference between the fair value of the debt instruments and that of the underlying assets ($19.3 million loss after taxes in the second quarter of 2009, or $0.24 per common share). This loss results from the unfavourable evolution of risk premiums during the quarter. This loss is, by definition, temporary, and does not affect the Company's earning power.
Business growth - Top-line growth was very strong in the second quarter. Year-over-year, premiums and deposits reached a record high for the third consecutive quarter, totalling $1.6 billion in the second quarter, a 33% increase compared to the second quarter of 2009. At $35.9 million, value of new business grew 28% in the second quarter compared to the same period last year.
As with the previous quarters, strong top-line growth was mainly driven by the stock market recovery in the last year, which carried gross sales in the Individual Wealth Management sector to $894.6 million, an 89% increase year over year, and net sales to $414.5 million, almost four times more than in the second quarter of 2009. According to industry data, Industrial Alliance was ranked second in Canada in terms of net segregated fund sales after the first two quarters of 2010, with a 25.4% market share, and fourth in terms of net mutual fund sales.
Sales in the Individual Insurance sector were also very good, reaching $43.1 million in the second quarter of 2010, a year-over-year increase of 27%. Sales were up in almost all markets, all product categories, all distribution networks and all regions.
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Business Growth Highlights
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Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums and
deposits 1,592.5 1,197.3 33% 3,399.1 2,435.8 40%
Value of
new business 35.9 28.1 28% 74.6 56.5 32%
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June 30, March 31, December 31, June 30,
2010 2010 2009 2009
-------------------------------------------------------------------------
Assets under
management
and under
administration 59,880.8 60,687.7 58,406.6 53,958.1
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Solvency - The Company ended the second quarter with a solvency ratio of 224%, which is slightly higher than the ratio of 223% recorded as at March 31, 2010 and above the Company's 175% to 200% target range. During the quarter, the solvency ratio benefited from reduced capital requirements related to the reduction in market value of stock market securities. However, the solvency ratio suffered slight downward pressure, primarily due to higher capital requirements related to the increase in market value of bonds, resulting from the decrease in long-term interest rates during the quarter.
The acquisition of American-Amicable Holding, Inc., which was completed on July 20, 2010, reduced the solvency ratio to 215% on a pro forma basis as at June 30, 2010. This ratio is above the Company's target range.
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Financial Strength Highlights
-------------------------------------------------------------------------
(In millions of
dollars, unless June 30, March 31, December 31, June 30,
otherwise indicated) 2010 2010 2009 2009
-------------------------------------------------------------------------
Solvency ratio 224% 223% 208% 202%
Net impaired investments 9.8 13.3 13.0 14.2
Net impaired investments
as a % of total
investments 0.06% 0.08% 0.08% 0.09%
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Quality of investments - The overall quality of the investment portfolio remained very good in the second quarter - and even improved in several respects - despite concerns about the strength of the economic recovery and market upheavals.
In terms of credit, no new securities defaulted during the second quarter, and no new provisions were posted in the books. Net impaired investments decreased during the quarter, from $13.3 million as at March 31, 2010 to $9.8 million as at June 30, 2010, which represents just 0.06% of total investments (0.08% as at March 31, 2010). This decrease primarily results from the favourable settlement of a conventional mortgage loan in the US. Settlement of this loan helped to reduce the delinquency rate of the mortgage loan portfolio, from 0.34% as at March 31, 2010 to 0.22% as at June 30, 2010.
With respect to events that made headlines during the quarter, the Company has very little direct exposure to securities issued by certain European countries that are currently going through a crisis in their public finances. Industrial Alliance also has very little direct exposure to securities that have received the most media attention in the last two years.
Dividend - The Company's good profitability and financial strength have enabled the Board of Directors to announce the payment of a quarterly dividend of $0.2450 per common share. This dividend is the same as the one announced in the last quarter. It corresponds to a payout ratio of 35.5% of earnings, which is slightly above the Company's 25% to 35% target range. The Company expects the dividend payout ratio to remain in the upper part of the target range in 2010.
Conclusion of the American-Amicable acquisition - On July 20, 2010, Industrial Alliance announced the conclusion of the acquisition of all outstanding shares of American-Amicable Holding, Inc. (American-Amicable). The transaction was announced on April 28, 2010. American-Amicable will operate as part of the Company's wholly-owned US subsidiary IA American Life Insurance Company. This acquisition is an important step in the Company's development strategy in the US, as it gives Industrial Alliance immediate scale and presence on the US market.
American-Amicable is a life and health insurance company that primarily markets traditional life insurance products to individuals. The cost of the transaction amounted to US$145.3 million, including excess capital of $45 million, and was financed from cash on hand. The acquisition is expected to be immediately accretive to Industrial Alliance's earnings by $0.05 per share on an annual basis.
Sensitivity analysis - The Company took advantage of the publication of its second quarter results to update its sensitivity analyses. The results of these analyses show that the leeway the Company has to absorb potential market downturns remains very high. Hence, the provisions for future policy benefits will not have to be strengthened for the stocks matched to the long-term liabilities as long as the S&P/TSX index remains above 9,400 points. The solvency ratio will remain above 175% as long as the S&P/TSX index remains above 7,300 points (7,650 if the acquisition of American-Amicable is taken into account) and will remain above 150% as long as the S&P/TSX index remains above 5,750 points (6,150 if the acquisition of American-Amicable is taken into account).
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SECOND QUARTER OF 2010
and for the six-month period ended June 30, 2010
July 27, 2010
Industrial Alliance Continues its Momentum:
profit, return and business growth
up sharply in the second quarter of 2010
ECONOMIC AND FINANCIAL ENVIRONMENT IN THE SECOND QUARTER OF 2010
The results for Industrial Alliance Insurance and Financial Services Inc. ("Industrial Alliance" or "the Company") are partially attributable to the prevailing economic and financial environment. In this respect, after going through one of the worst financial crises in its history, the Canadian economy continued to show signs of recovery in the second quarter. However, winds of uncertainty have begun to blow through the global economies in the last few months due to the public finance crisis in certain European countries and the fragility of the economic recovery in certain countries.
Thus, after strong growth since the peak of the financial crisis, in addition to showing signs of volatility, the stock markets dropped in the second quarter, with the S&P/TSX index losing 6.2% of its value. However, the Canadian stock market remained positive year over year, gaining 8.9% between June 30, 2009 and June 30, 2010. Long-term interest rates also declined in the last few months and remain at historically low levels.
Industrial Alliance benefited from the overall improvement in economic conditions in Canada and the stock market upswing in the last year, even though profit growth was somewhat slowed by the stock market downturn in the second quarter. Nevertheless, the Company posted very satisfying results for the second quarter, both in terms of business growth and profitability.
The excellent results for the quarter once again demonstrate the Company's vitality and the strength of its business model. Despite the weakness of the economic recovery and stock market volatility, the Company's return for the last twelve months is within its 12% to 14% target range, and the Company didn't post any credit losses. Top-line growth continues to be very strong. Financial strength is also very good. And the Company took a big step in its US market development strategy by concluding the acquisition of American-Amicable.
PROFITABILITY
The Company ended the second quarter of 2010 with net income to common shareholders of $57.7 million, compared to $32.1 million for the second quarter of 2009. If the temporary impact of the asymmetric evolution between the fair value of the debt instruments and that of the underlying assets is excluded, net income to common shareholders amounted to $58.4 million on regular operations, compared with $51.4 million in the second quarter of 2009. This result translates into diluted earnings per common share of $0.69 ($0.64 in the second quarter of 2009) and a return on common shareholders' equity of 11.7% on an annualized basis and 12.8% for the last twelve months (12.1% and 1.3% respectively in the second quarter of 2009 and for the twelve months ended June 30, 2009).
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Profitability
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Net income
to common
shareholders 57.7 32.1 80% 118.0 78.3 51%
Less: gain
(loss)
resulting
from the
variation
in the fair
value of debt
instruments
and
underlying
assets
(after taxes) (0.7) (19.3) - 0.4 (11.8) -
-------------------------------------------------------------------------
Net income
to common
shareholders
on regular
operations 58.4 51.4 14% 117.6 90.1 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
(diluted) $0.68 $0.40 $0.28 $1.44 $0.97 $0.47
Earnings per
common share
(diluted)
on regular
operations $0.69 $0.64 $0.05 $1.45 $1.12 $0.33
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Second quarter annualized Trailing twelve months
-------------------------------------------------------------------------
Return on
common
shareholders'
equity 11.5% 7.6% - 13.1% 1.1% -
Return on
common
shareholders'
equity on
regular
operations 11.7% 12.1% - 12.8% 1.3% -
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Following are the main factors that explain the profitability for the quarter:
- The overall improvement in economic conditions and the stock market
recovery in the last year increased the expected profit on in-force
business to $91.5 million in the second quarter, up 15% year over year.
The increase was driven primarily by the Individual Wealth Management
sector, where the expected profit on in-force business almost doubled,
thanks to an 18% increase in funds under management over the last year.
- The stock market downturn in the last quarter slowed earnings growth
during the period. It is estimated that if the stock markets had
maintained a regular growth rate (about 7% for 2010), net income to
common shareholders would have been approximately $4.1 million higher
($0.05 per common share).
- New business strain in the Individual Insurance sector was higher than
expected, primarily due to strong sales. Individual Insurance strain
was 17% higher year-over-year, amounting to $26.4 million, on top-line
growth of 27%. This strain should be recovered in the form of profits
over time, as the assumptions used for pricing materialize.
- The auto and home insurance subsidiary had a second consecutive
excellent quarter, with a $3.0 million net profit in the second quarter
of 2010, compared to $2.9 million in the first quarter of 2010 and
$1.4 million in the second quarter of 2009.
- The redemption by the IA Clarington subsidiary of a commission
financing agreement resulted in expenses of $1.0 million after taxes.
This redemption should help to improve profitability somewhat in the
next few quarters.
- The Company did not suffer any credit losses and obtained good
experience results in the Group Insurance sector for the third
consecutive quarter.
The Company posted a $0.7 million loss after taxes ($0.01 per common share) in the second quarter resulting from the unfavourable evolution of the difference between the fair value of the debt instruments and that of the underlying assets ($19.3 million loss after taxes in the second quarter of 2009, or $0.24 per common share). This loss results from the unfavourable evolution of risk premiums during the quarter. This loss is, by definition, temporary, and does not affect the Company's earning power.
All lines of business except Individual Insurance obtained a higher operating profit year over year in the second quarter. Individual Wealth Management benefited from the stock market upswing in the last year and extremely strong sales of segregated funds and mutual funds. Group Insurance benefited from good experience results. Group Pensions took advantage of the overall improvement in the economic environment. Individual Insurance was the only sector where the operating profit decreased, primarily due to the stock market downturn during the quarter.
-------------------------------------------------------------------------
Operating Profit by Line of Business
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance 20.9 32.3 (35%) 48.1 58.1 (17%)
Individual
Wealth
Management 20.9 11.2 87% 43.2 17.4 148%
Group Insurance 12.7 7.8 63% 23.4 13.4 75%
Group Pensions 4.2 2.8 50% 9.2 6.4 44%
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Total 58.7 54.1 9% 123.9 95.3 30%
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SOURCES OF EARNINGS
Following is an analysis of the Company's profitability for the second quarter of 2010 according to the sources of earnings.
-------------------------------------------------------------------------
Sources of Earnings
-------------------------------------------------------------------------
Year-to-date
Second quarter as at June 30
(In millions of
dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating profit
Expected profit on
in-force 91.5 79.6 177.8 153.6
Experience gains
(losses) (6.2) (1.5) (2.2) (12.6)
Gain (strain) on sales (26.6) (24.0) (51.7) (45.7)
Changes in assumptions 0.0 0.0 0.0 0.0
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Subtotal 58.7 54.1 123.9 95.3
Income on capital
Investment income 26.0 17.7 46.0 34.3
Gains on assets
available for sale 2.1 2.0 3.7 2.5
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Subtotal 28.1 19.7 49.7 36.8
Income taxes (22.4) (19.4) (45.0) (35.4)
-------------------------------------------------------------------------
Net income to
shareholders on
regular operations 64.4 54.4 128.6 96.7
Less: dividends on
preferred shares 6.0 3.0 11.0 6.6
-------------------------------------------------------------------------
Net income to common
shareholders on
regular operations 58.4 51.4 117.6 90.1
Plus: gain (loss)
resulting from the
variation in the
fair value of debt
instruments and
underlying assets
(after taxes) (0.7) (19.3) 0.4 (11.8)
-------------------------------------------------------------------------
Net income to common
shareholders 57.7 32.1 118.0 78.3
-------------------------------------------------------------------------
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Expected profit on in-force - The expected profit on in-force amounted to $91.5 million for the second quarter of 2010, a year-over-year increase of 15%. The increase mainly affected the Individual Wealth Management sector and is primarily explained by the stock market upswing in the last year (the S&P/TSX index averaged 11,882 points in the second quarter, up 20% year over year). The expected profit on in-force is down for the Group Insurance sector. The Company expects profitability in this sector to continue to suffer the effects of the economic slowdown in 2010. The increase in the expected profit on in-force is consistent with the guidance that the Company gave to the financial markets when it published its fourth quarter 2009 results.
Experience gains (losses) - The Company recorded $6.2 million in experience losses in the second quarter of 2010. These losses are primarily explained by the stock market downturn during the quarter, which reduced the Company's profit by $5.8 million ($4.1 million after taxes), by $1.3 million in expenses ($1.0 million after taxes), following the redemption by the IA Clarington subsidiary of a commission financing agreement, and by lower than expected revenues for certain distribution subsidiaries. These losses were partially offset by experience gains in the Group Insurance sector, resulting primarily from favourable experience for long-term disability insurance.
Gain (strain) on sales - New business strain was $26.6 million in the second quarter of 2010, which is 11% higher than the same period last year. The strain comes almost entirely from the Individual Insurance sector and is primarily explained by the strong growth of sales in this sector in the second quarter (27% higher year over year).
If the Individual Insurance sector alone is taken into account, strain, expressed as a percentage of sales (measured in terms of first-year annualized premiums), amounted to 61% in the second quarter (67% in the second quarter of 2009). This rate exceeds the Company's 50% to 55% mid-term target range.
Income on capital - Income on capital amounted to $28.1 million in the second quarter of 2010, which is 43% higher than in the second quarter of 2009. Other than normal growth of investment income, this increase is explained by the following two factors:
- The very good profitability of the auto and home insurance subsidiary.
This subsidiary realized a pre-tax profit of $4.3 million in the second
quarter of 2010 ($3.0 million after taxes), compared to $2.1 million in
the second quarter of 2009 ($1.9 million after taxes).
- Additional revenues of some $2.0 million ($1.5 million after taxes)
following capital issuances by the Company in the last few quarters.
The Company also realized $2.1 million in gains in the second quarter
from the sale of financial securities matched to equity.
Income taxes - Income taxes totalled $22.4 million for the second quarter of 2010, which is $3.0 million higher than the second quarter of 2009. This increase essentially results from an increase in profit for the period. The effective tax rate amounted to 25.8% in the second quarter of 2010 (26.3% in the second quarter of 2009), which is in line with the Company's expectations of approximately 26% to 27% in the medium term.
Other item - The Company posted a $0.7 million loss after taxes ($0.01 per common share) in the second quarter resulting from the unfavourable evolution of the difference between the fair value of the debt instruments and that of the underlying assets ($19.3 million loss after taxes in the second quarter of 2009, or $0.24 per common share). This loss is, by definition, temporary, and does not affect the Company's earning power. This loss results from the unfavourable evolution of risk premiums during the quarter.
Debt instruments that were part of the Company's balance sheet when the new accounting standards on financial instruments took effect on January 1, 2007, were classified as "held for trading." For these debt instruments, any difference between the variation in the fair value of the debt instruments and that of the corresponding assets must be recognized immediately on the income statement, which creates a temporary volatility effect on the results. However, the impact of this volatility will be eliminated on January 1, 2011, since the Company expects to use the transition to the new international financial reporting standards (IFRS) to reclassify its debentures currently classified "held for trading."
SENSITIVITY ANALYSIS
The Company took advantage of the publication of its second quarter results to update its sensitivity analyses. The results of these analyses vary from one quarter to another according to numerous factors, including changes in the economic and financial environment and the normal evolution of the Company's business. Additional sensitivity analyses were performed after the end of the quarter to take into account the acquisition of American-Amicable Holding, Inc., concluded on July 20, 2010. The results of these analyses show that the leeway the Company has to absorb potential market downturns remains very high.
- Stocks matched to the long-term liabilities - The Company believes that
it will not have to strengthen its provisions for future policy
benefits for stocks matched to long-term liabilities as long as the
S&P/TSX index remains above about 9,400 points.
- Solvency ratio - The Company believes that the solvency ratio will stay
above 175% as long as the S&P/TSX index remains above 7,300 points
(7,650 if the acquisition of American-Amicable is taken into account)
and will remain above 150% as long as the index remains above
5,750 points (6,150 if the acquisition of American-Amicable is taken
into account).
All other sensitivity analyses remain virtually unchanged compared to the first quarter 2010 update.
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Sensitivity Analysis
-------------------------------------------------------------------------
Including
American-
As at June 30, Amicable
2010 acquisition
-------------------------------------------------------------------------
Stocks matched Level of S&P/TSX index 9,400 points 9,400 points
to the long-term requiring a strengthening
liabilities of the provisions for
future policy benefits
for stocks matched to
long-term liabilities
-------------------------------------------------------------------------
Solvency ratio Level of S&P/TSX index 7,300 points 7,650 points
for the solvency ratio
to be at 175%
Level of S&P/TSX index 5,750 points 6,150 points
for the solvency ratio
to be at 150%
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Net income Impact on the net income ($18 million) ($18 million)
of a sudden 10% decrease
in the stock markets
(impact for a complete
year)
-------------------------------------------------------------------------
Ultimate Impact on the net income ($42 million) ($44 million)
reinvestment of a 10 basis point
rate (URR) decrease in the URR
-------------------------------------------------------------------------
Initial Impact on the net income ($24 million) ($25 million)
reinvestment of a 10 basis point
rate (IRR) decrease in the IRR
-------------------------------------------------------------------------
BUSINESS GROWTH
Top-line growth in the second quarter of 2010 was very strong, continuing the momentum of the previous two quarters. Year over year, premiums and deposits and value of new business grew by 33% and 28% respectively. This third consecutive quarter of strong growth was driven primarily by the overall improvement in economic conditions and the stock market upswing over the last year. Following are the highlights of the second quarter.
Premiums and Deposits
For the third consecutive quarter, premiums and deposits obtained record year-over-year highs, totalling $1.6 billion in the second quarter of 2010, a 33% increase over 2009. As with previous quarters, growth was primarily driven by the Individual Wealth Management sector, thanks to the stock market recovery and exceptional net sales in the last year. The Individual Insurance and General Insurance sectors also did well, each obtaining their best growth rates to date.
The results for the first two quarters are on track to surpass the Company's record year in 2007. After two quarters, premiums and deposits reached a new high of $3.4 billion in 2010, a 40% increase year over year, and 6% higher than the first two quarters of 2007.
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Premiums and Deposits
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance 267.9 231.8 16% 536.6 458.4 17%
Individual
Wealth
Management 894.6 473.8 89% 1,977.2 1,062.8 86%
Group
Insurance 260.3 237.8 9% 494.5 470.4 5%
Group
Pensions 130.2 219.9 (41%) 313.9 377.5 (17%)
General
Insurance 39.5 34.0 16% 76.9 66.7 15%
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Total 1,592.5 1,197.3 33% 3,399.1 2,435.8 40%
-------------------------------------------------------------------------
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Sales by Line of Business
Following are the second quarter sales highlights by line of business. Sales are defined as new fund entries during the period. Refer to note 1 at the end of this report for the definition of sales for each line of business.
Individual Insurance - The Individual Insurance sector continued on the previous quarter's momentum, with $43.1 million in sales, up 27% year over year. Sales continued to be strong for traditional insurance protection (measured according to minimum premiums), as was the case throughout the financial crisis, and more than doubled for the "savings" component of Universal Life policies (measured by excess premiums), a sign that investor confidence is gradually returning to the stock markets. The number of policies sold continues to grow steadily (6% in the second quarter and 7% for the year to date), which shows the stability and depth of the Company's distribution networks.
Individual Wealth Management - For the third consecutive quarter, sales of Individual Wealth Management products reached a new year-over-year quarterly high, thanks to the market recovery in the last year and exceptional net sales. Gross sales were $894.6 million, an 89% increase year over year. The Individual Wealth Management sector also benefited from continued growth in sales of the Ecoflextra guaranteed minimum withdrawal benefit and from IA Clarington's successful launch of a closed end fund in April.
Net sales were also strong, increasing from $108.5 million in the second quarter of 2009 to $414.5 million in the second quarter of 2010, almost four times more. This performance enabled the Company to continue to grow its market shares. According to industry data, Industrial Alliance was ranked second in Canada in terms of net segregated fund sales after the first two quarters of 2010, with a 25.4% market share (fourth in 2009, with 10.1% of the market). For mutual funds, the Company is ranked fourth in terms of net sales in the first half of 2010. This result is well ahead of the Company's seventeenth place ranking in the industry in terms of assets (as at June 30, 2010).
Group Insurance: Employee Plans - Sales in this sector continue to reflect the lingering effects of the recent economic crisis that has affected business opportunities. As a result, second quarter sales amount to $13.9 million, down 34% year over year. On a positive note, the Company did well in terms of profitability, with good experience results for the third consecutive quarter.
Group Insurance: Creditor Insurance - Growth resumed in the Creditor Insurance sector, ending the second quarter with $50.8 million in sales, a 20% increase year over year. This increase is substantially higher than that of car sales, which were up 5% in Canada in the second quarter. Sales in this sector rely on car sales, since the products are distributed primarily through car dealers.
Group Insurance: Special Markets Group (SMG) - After holding its ground throughout the financial crisis, SMG had its first quarter of double-digit growth, with $28.3 million in sales, up 14% over last year. The overall improvement of economic conditions contributed to this result. This sector specializes in certain insurance markets that are not well served by traditional insurance carriers.
Group Pensions - The Group Pensions sector ended the second quarter with sales of $130.2 million, down 41% year over year. Sales in this sector can fluctuate considerably from one quarter to another due to the size of the mandates granted.
-------------------------------------------------------------------------
Sales(1)
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance
Minimum
premiums 34.7 30.1 15% 64.7 56.4 15%
Excess
premiums 8.4 3.8 121% 18.2 9.0 102%
-------------------------------------------------------------------------
Total 43.1 33.9 27% 82.9 65.4 27%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Individual
Wealth
Management
General fund 123.9 101.2 22% 239.9 223.4 7%
Segregated
funds 291.4 147.2 98% 723.6 364.9 98%
Mutual
funds(2) 479.3 225.4 113% 1,013.7 474.5 114%
-------------------------------------------------------------------------
Total 894.6 473.8 89% 1,977.2 1,062.8 86%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Group Insurance
Employee
Plans 13.9 21.1 (34%) 35.5 45.5 (22%)
Creditor
Insurance 50.8 42.4 20% 81.1 71.7 13%
Special
Markets
(SMG) 28.3 24.8 14% 57.2 53.5 7%
Group Pensions 130.2 219.9 (41%) 313.9 377.5 (17%)
-------------------------------------------------------------------------
Assets Under Management and Under Administration
Strong premium growth and positive net fund entries in most activity sectors weren't quite enough to offset the stock market downturn, such that assets under management and under administration (AUM/AUA) were down 1% in the second quarter, totalling $59.9 billion as at June 30, 2010. However, AUM/AUA were up 3% for the year to date and up 11% year over year.
-------------------------------------------------------------------------
Assets Under Management and Under Administration
-------------------------------------------------------------------------
(In millions of June 30, March 31, December 31, June 30,
dollars) 2010 2010 2009 2009
-------------------------------------------------------------------------
Assets under management
General fund 18,623.6 18,206.0 17,626.5 16,222.5
Segregated funds 11,669.7 11,935.1 11,450.3 10,091.3
Mutual funds 7,019.4 7,056.4 6,615.7 5,756.4
Other 527.0 542.1 563.3 640.7
-------------------------------------------------------------------------
Subtotal 37,869.7 37,739.6 36,255.8 32,710.9
Assets under
administration 22,011.1 22,948.1 22,150.8 21,247.2
-------------------------------------------------------------------------
Total 59,880.8 60,687.7 58,406.6 53,958.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Value of New Business
Value of New Business (VNB) reached $35.9 million ($0.43 per common share) in the second quarter of 2010, a year-over-year increase of 28%. The increase is primarily attributable to excellent sales in the Individual Wealth Management sector.
The Value of New Business is based on three components: the level of sales, profit margins and changes in the discount rate. As the following table shows, VNB grew by $10.9 million in the second quarter due to the substantial increase in sales, mainly of segregated and mutual funds, but individual insurance as well. This increase was partially offset by a $2.4 million decrease in profit margins, mainly due to changes to the valuation assumptions at the end of 2009. Finally, VNB was negatively impacted by $0.7 million resulting from the increase in the discount rate, net of changes in interest rates and expected stock market returns (the discount rate was increased from 6.50% in 2009 to 7.25% in 2010).
-------------------------------------------------------------------------
Value of New Business by Component
-------------------------------------------------------------------------
(In millions of dollars) Year-to-date
Second as at
quarter June 30
-------------------------------------------------------------------------
Value of new business in 2009 28.1 56.5
Increase (decrease) in sales 10.9 26.4
Improvement (deterioration) of profit margins (2.4) (6.4)
Increase in discount rate (0.7) (1.9)
-------------------------------------------------------------------------
Value of new business in 2010 35.9 74.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FINANCIAL STRENGTH
Following are the financial strength highlights for the second quarter.
Solvency
The Company ended the second quarter with a solvency ratio of 224%, which is slightly higher than the ratio of 223% recorded as at March 31, 2010 and above the Company's 175% to 200% target range.
During the quarter, the solvency ratio benefited from reduced capital requirements related to the reduction in market value of stock market securities. However, the solvency ratio suffered slight downward pressure, primarily due to higher capital requirements related to the increase in market value of bonds, resulting from the decrease in long-term interest rates during the quarter.
Following the acquisition of American-Amicable Holding, Inc., which was completed on July 20, 2010, the solvency ratio on a pro forma basis as at June 30, 2010 amounted to 215%, which is still above the Company's target range (see below for more details on this acquisition).
-------------------------------------------------------------------------
Solvency
-------------------------------------------------------------------------
(In millions of
dollars, unless June 30, March 31, December 31, June 30,
otherwise indicated) 2010 2010 2009 2009
-------------------------------------------------------------------------
Available capital
Tier 1 2,260.9 2,209.6 1,961.9 1,793.6
Tier 2 340.0 348.0 343.1 306.0
-------------------------------------------------------------------------
Total 2,600.9 2,557.6 2,305.0 2,099.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Required capital 1,159.7 1,149.1 1,107.2 1,041.2
Solvency ratio 224% 223% 208% 202%
-------------------------------------------------------------------------
Capitalization
The Company's capital totalled $3,003.6 million as at June 30, 2010, which is 2% ($53.8 million) higher than March 31, 2010. This growth is primarily explained by the increase in retained earnings (resulting from the income for the quarter reduced by the dividends paid to common shareholders).
-------------------------------------------------------------------------
Capitalization
-------------------------------------------------------------------------
(In millions of June 30, March 31, December 31, June 30,
dollars) 2010 2010 2009 2009
-------------------------------------------------------------------------
Equity
Common shares 647.1 643.6 545.7 541.2
Preferred shares 425.0 425.0 325.0 225.0
Retained earnings 1,330.4 1,293.2 1,254.8 1,166.8
Contributed surplus 22.7 22.2 21.6 21.0
Accumulated other
comprehensive income 25.6 18.1 10.5 (10.0)
-------------------------------------------------------------------------
Subtotal 2,450.8 2,402.1 2,157.6 1,944.0
Debentures 525.9 521.3 519.8 514.0
Participating
policyholders' account 26.9 26.4 25.7 28.1
-------------------------------------------------------------------------
Total 3,003.6 2,949.8 2,703.1 2,486.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Leverage
The increase in the Company's capital slightly reduced the debt ratios, from 17.7% as at March 31, 2010 to 17.5% as at June 30, 2010, if the debentures alone are considered in the debt items, and from 32.1% as at March 31, 2010 to 31.7% as at June 30, 2010 if the preferred shares are added. These ratios are in line with credit agency requirements for Industrial Alliance.
-------------------------------------------------------------------------
Debt Ratio
-------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
2010 2010 2009 2009
-------------------------------------------------------------------------
Debentures/capital 17.5% 17.7% 19.2% 20.7%
Debentures + preferred
shares/capital 31.7% 32.1% 31.3% 29.7%
-------------------------------------------------------------------------
Book Value per Common Share and Market Capitalization
Industrial Alliance's book value per common share continued to grow in the second quarter, reaching a new record high of $24.20 as at June 30, 2010, up 2% compared to March 31, 2010. This growth was primarily driven by the increase in retained earnings (resulting from the income for the quarter reduced by the dividends paid to common shareholders).
The Company's market capitalization amounted to $2,919.7 million as at June 30, 2010, down very slightly from March 31, 2010. This change is comparable to that of Industrial Alliance's stock price, which decreased from $35.00 as at March 31, 2010 to $34.90 as at June 30, 2010.
The Company had 83,659,871 issued and outstanding common shares as at June 30, 2010, compared to 83,491,771 as at March 31, 2010. The increase during the quarter comes from the issuance of 168,100 common shares following the exercise of options under the Company's stock option plan.
-------------------------------------------------------------------------
Book Value per Common Share and Market Capitalization
-------------------------------------------------------------------------
(In millions of
dollars, unless June 30, March 31, December 31, June 30,
otherwise indicated) 2010 2010 2009 2009
-------------------------------------------------------------------------
Book value per common
share $24.20 $23.68 $22.77 $21.41
Market capitalization 2,919.7 2,922.2 2,592.5 2,068.7
-------------------------------------------------------------------------
QUALITY OF INVESTMENTS
There were few changes to the composition and quality of the Company's investments in the second quarter. The majority of the portfolio is made up of fixed-income securities and the overall quality remains very high. Following are the highlights of the second quarter.
Composition of Investments
The Company's investment portfolio is composed of various categories of assets, the main ones being bonds, mortgage loans, stocks and real estate. The total value of the portfolio grew by $408.3 million in the second quarter, from $17,005.3 million as at March 31, 2010 to $17,413.6 million as at June 30, 2010, an increase of 2%. Most of this increase is attributable to net purchases of new bonds and growth in the fair market value of these securities, a result of the drop in interest rates during the quarter.
Except for a slight increase in the proportion of bonds (0.8 percentage points), a result of the investment activities for these securities, and the impact of the previously mentioned interest rates, the distribution of investments by asset category did not change significantly in the second quarter. The stock portfolio decreased slightly (0.9 percentage points), as the market value of these securities were affected by the stock market downturn in the second quarter.
-------------------------------------------------------------------------
Composition of Investments
-------------------------------------------------------------------------
(In millions of
dollars, unless June 30, March 31, December 31, June 30,
otherwise indicated) 2010 2010 2009 2009
-------------------------------------------------------------------------
Book value of
investments 17,413.6 17,005.3 16,490.2 15,151.7
Distribution of
investments by asset
category
Bonds 59.3% 58.5% 57.1% 55.7%
Mortgage loans 19.0% 19.6% 20.6% 22.8%
Stocks 10.7% 11.6% 11.5% 10.6%
Real estate 3.8% 3.8% 3.9% 4.2%
Other 7.2% 6.5% 6.9% 6.7%
-------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quality of Investments
Despite concerns about the strength of the economic recovery and market volatility, the overall quality of the Company's investment portfolio remained at a very high level, and even improved in several respects.
-------------------------------------------------------------------------
Quality of Investments
-------------------------------------------------------------------------
(In millions of
dollars, unless June 30, March 31, December 31, June 30,
otherwise indicated) 2010 2010 2009 2009
-------------------------------------------------------------------------
Net impaired investments 9.8 13.3 13.0 14.2
Net impaired investments
as a % of total
investments 0.06% 0.08% 0.08% 0.09%
Bonds - Proportion rated
BB or lower 0.18% 0.21% 0.07% 0.15%
Mortgage loans -
Delinquency rate 0.22% 0.34% 0.36% 0.30%
Real estate - Occupancy
rate 94.2% 93.9% 94.4% 94.2%
-------------------------------------------------------------------------
- In terms of credit, no new bonds defaulted during the quarter and no
new provisions were posted in the books.
- Net impaired investments decreased during the quarter, from
$13.3 million as at March 31, 2010 to $9.8 million as at June 30, 2010,
representing just 0.06% of total investments (0.08% as at March 31,
2010). This decrease primarily results from the favourable settlement
of a conventional mortgage loan in the US, which helped reduce the
delinquency rate of the mortgage loan portfolio, from 0.34% as at
March 31, 2010 to 0.22% as at June 30, 2010.
- The overall quality of the bond portfolio remains very high. The
proportion of bonds rated BB or lower decreased from 0.21% as at
March 31, 2010 to 0.18% as at June 30, 2010. This decrease is primarily
attributable to the sale of a bond during the quarter.
- The real estate occupancy rate improved slightly during the quarter
(94.2% as at June 30, 2010 compared to 93.9% as at March 31, 2010) and
the market value of the real estate portfolio is still much higher than
the book value (the market to book value ratio was 125.5% as at
June 30, 2010 compared to 126.3% as at March 31, 2010).
- The Company received $1.4 million in repayments of principal for the
notes resulting from non-bank sponsored asset-backed commercial paper
(ABCP) in the second quarter (total repayments of $3.6 million for the
year to date). Industrial Alliance's exposure to ABCP was reduced to
$87.4 million as at June 30, 2010 (compared to $88.8 million as at
March 31, 2010). The overall devaluation due to credit risk taken for
the ABCP amounted to $35.6 million as at June 30, 2010, which is equal
to 40.7% of the nominal value of the ABCP held. The Company believes
that this devaluation is appropriate under the current market
conditions.
- With respect to events that made headlines during the quarter, the
Company has very little direct exposure to securities issued by certain
European countries that are currently going through a crisis in their
public finances. Industrial Alliance also has very little direct
exposure to securities that have received the most media attention in
the last two years. The Company has no investments in the US subprime
mortgage loan market, no investments in US automobile manufacturers, no
investments in monolines, and a $22.6 million investment in the
securities of UK financial institutions (the Company no longer holds
capital notes in UK companies following the sale of a bond during the
quarter).
Finally, still in terms of investment quality, the following two statistics on institutional fixed-income securities continued to improve during the quarter:
- Unrealized losses on corporate fixed income securities classified as
"available for sale" amounted to $9.5 million as at June 30, 2010,
compared to $11.3 million as at March 31, 2010.
- The nominal value of bonds whose market value has been 20% or more
lower than the nominal value for six or more months amounted to
$34.0 million as at June 30, 2010, the same level as at March 31, 2010.
This figure, which increased during the financial crisis, reached a
high of $111.5 million as at June 30, 2009, to subsequently decrease as
the financial crisis abated. The unrealized losses on these bonds
(measured according to the difference between the market value and the
nominal value) continued to decrease in the second quarter of 2010,
from $9.0 million as at March 31, 2010 to $8.7 million as at June 30,
2010. Most of these securities are classified as "held for trading."
CREDIT RATINGS
There are no events to report concerning the credit ratings assigned to Industrial Alliance. All of the Company's credit ratings remained stable in the second quarter. In fact, Industrial Alliance's credit ratings remained stable throughout the financial crisis that began in the fall of 2008, which attests to the Company's capacity to absorb the effects of financial market upheaval and to properly manage risk under such conditions.
-------------------------------------------------------------------------
Industrial Alliance Credit Ratings as at July 26, 2010
-------------------------------------------------------------------------
Agency Type of Evaluation Rating Outlook
-------------------------------------------------------------------------
Standard Financial Strength A+ (Strong) Negative
& Poor's Subordinated Debentures A -
Industrial Alliance Trust
Securities (IATS) (global scale) A- -
Preferred Shares (global scale) A- -
-------------------------------------------------------------------------
A.M. Best Financial Strength A (Excellent) Stable
Issuer Credit Rating a+ Stable
Subordinated Debentures a- -
Industrial Alliance Trust
Securities (IATS) bbb+ -
Preferred Shares bbb+ -
-------------------------------------------------------------------------
DBRS Claims Paying Ability IC-2 Stable
Subordinated Debentures A Stable
Industrial Alliance Trust
Securities (IATS) A (low)yn Stable
Preferred Shares Pfd-2 (high)n Stable
-------------------------------------------------------------------------
SUBSEQUENT EVENTS
The Company concluded an acquisition in the US after the end of the second quarter and took an additional step toward the acquisition of a small US life insurance portfolio.
Conclusion of the Acquisition of American-Amicable Life Insurance Company in the US
On July 20, 2010, Industrial Alliance announced that it had concluded the acquisition of all outstanding shares of American-Amicable Holding, Inc. (American-Amicable). The transaction was announced on April 28, 2010. American-Amicable will operate as part of the Company's wholly-owned US subsidiary IA American Life Insurance Company (IA American). This acquisition is an important step in the Company's development strategy in the US, as it gives Industrial Alliance immediate scale and presence on the US market.
American-Amicable is a life and health insurance company that primarily markets traditional life insurance products to individuals. It is licensed to sell life insurance in 49 states and territories, and its products are marketed through a national distribution network of more than 6,000 independent agents. IA American, which now has more than 8,200 agents country-wide, will maintain both the American-Amicable platform in Waco, Texas and the IA American base in Scottsdale, Arizona.
The cost of the transaction amounted to US$145.3 million, including excess capital of $45 million, and was financed from cash on hand. It is expected to be immediately accretive to Industrial Alliance's earnings by $0.05 per common share on an annual basis. With the closing, the Company's solvency ratio as at June 30, 2010 decreased from 224% to 215% on a pro forma basis.
American-Amicable employs about 115 people, has more than 211,500 policies and $7.1 billion in in-force insurance. For the year ended December 31, 2009, total premiums amounted to $86 million and total assets amounted to $687 million. New business written over the last five years has averaged almost $24 million, representing a compound annual growth rate of 13% in its current markets. American-Amicable's balance sheet is debt-free and its portfolio is invested primarily in low-risk, fixed income securities. On March 2, 2010, its financial strength ratings were upgraded to A- (Excellent) by A.M. Best.
Approval to Acquire Golden State Mutual in the US
On July 19, 2010, through its IA American Life Insurance Company subsidiary, Industrial Alliance obtained approval from the Superior Court of Los Angeles (California) to acquire the individual life insurance portfolio of Golden State Mutual Life Insurance Company (Golden State Mutual). This approval is subject to a 60-day appeal period.
Golden State Mutual was placed under the protection of the state of California in September 2009 and in March 2010, Industrial Alliance signed a letter of intent to acquire its in-force block of business. The Company believes the transaction could be completed in the third quarter of 2010.
Founded in 1925, Golden State Mutual markets its products to retail clients. It has about 121,000 polices. In 2009, Golden State Mutual had premiums totalling US$10 million and invested assets of $70 million at the end of 2009.
DECLARATION OF DIVIDEND
The Company's good profitability and financial strength have enabled the Board of Directors to announce the payment of a quarterly dividend of $0.2450 per common share. This dividend is the same as the one announced in the last quarter. It corresponds to a payout ratio of 35.5% of earnings, which is slightly above the Company's 25% to 35% target range. The Company expects the dividend payout ratio to remain in the upper part of the target range in 2010.
Following are the amounts and dates of payment and closing of registers for the Company's common shares and the various categories of its preferred shares.
The Board of Directors has declared the payment of a quarterly dividend of $0.2450 per common share. The dividend is payable in cash on September 15, 2010, to the common shareholders of record as at August 20, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.2875 per non-cumulative class A preferred share series B. The dividend is payable in cash on September 30, 2010, to the preferred shareholders of record as at August 27, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.3875 per non-cumulative class A preferred share series C. The dividend is payable in cash on September 30, 2010, to the preferred shareholders of record as at August 27, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.3750 per non-cumulative class A preferred share series E. The dividend is payable in cash on September 30, 2010, to the preferred shareholders of record as at August 27, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.36875 per non-cumulative class A preferred share series F. The dividend is payable in cash on September 30, 2010, to the preferred shareholders of record as at August 27, 2010.
For the purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends paid by Industrial Alliance on its common and preferred shares since January 1, 2006 are considered to be eligible dividends. Unless otherwise indicated, all dividends paid by the Company are now eligible dividends for the purposes of such rules.
ADDITIONAL COMMENTS ON THE FINANCIAL RESULTS
Following is the presentation of the Company's second quarter 2010 financial results according to the financial statements.
Revenues
Revenues are composed of three items in the financial statements: premiums (which include the amounts invested by insureds in the Company's segregated funds, but exclude those invested by clients in mutual funds), net investment income and fees and other revenues. Revenues totalled $1.5 billion for the second quarter, which represents a 5% decrease compared to the same period the previous year, whereas for the six-month period ended June 30, 2010, revenues increased by 20%. The factors that contributed to these variations are explained below.
-------------------------------------------------------------------------
Revenues
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums 1,113.2 971.9 15% 2,385.4 1,961.3 22%
Net invest-
ment income 306.3 545.7 (44%) 686.5 605.9 13%
Fees and
other
revenues 108.3 90.0 20% 213.3 171.1 25%
-------------------------------------------------------------------------
Total 1,527.8 1,607.6 (5%) 3,285.2 2,738.3 20%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Premiums totalled $1.1 billion in the second quarter of 2010, a 15% increase year over year, whereas for the first six months, premiums totalled $2.4 billion, a 22% increase year over year. These increases are primarily explained by strong sales growth in the Individual Wealth Management sector.
If mutual fund deposits are added to the premiums, premiums and deposits totalled $1.6 billion in the second quarter of 2010, up 33% year over year. This growth reflects a 113% increase in mutual fund deposits in the second quarter of 2010 compared to the same period last year. For the six-month period ended June 30, 2010, premiums and deposits were up 40%, driven by strong growth of mutual fund and segregated fund sales compared to the same period in 2009.
-------------------------------------------------------------------------
Premiums and Deposits
-------------------------------------------------------------------------
Second quarter Year-to-date as at June 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums
General
fund 703.6 628.1 12% 1,379.0 1,258.7 10%
Segregated
funds 409.6 343.8 19% 1,006.4 702.6 43%
-------------------------------------------------------------------------
Subtotal 1,113.2 971.9 15% 2,385.4 1,961.3 22%
Deposits -
mutual
funds 479.3 225.4 113% 1,013.7 474.5 114%
-------------------------------------------------------------------------
Total 1,592.5 1,197.3 33% 3,399.1 2,435.8 40%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The main items that make up net investment income are: investment income as such (including interest income, dividends and net income from rental properties), the amortization of realized and unrealized gains and losses on real estate, realized gains and losses on the disposition of assets available for sale and variations in the market value of assets held for trading.
Since the adoption of the new accounting standards concerning financial instruments at the beginning of 2007, assets held for trading (other than real estate) have been accounted for at their market value. This accounting approach may lead to significant volatility of the net investment income from period to period since variations in the market value of these assets now directly influence net investment income rather than being amortized on the income statement, as was the case in the past. However, a large portion of these variations in market value are offset by corresponding variations in the provisions for future policy benefits, such that their impact on net income is largely mitigated.
Net investment income amounted to $306.3 million in the second quarter of 2010, compared to $545.7 million in the second quarter of 2009. The difference between these two amounts (a $239.4 million decrease) is primarily attributable to the decrease in the market value of the stock portfolio, a consequence of the stock market downturn. It is important to note that the majority of stocks and bonds are classified as held for trading and used as assets underlying the provisions for future policy benefits. For this reason, the impact of the decrease in net investment income on the results is largely neutralized by a corresponding increase in the provisions for future policy benefits.
For the first six months of 2010, net investment income was $80.6 million higher than the same period last year. This increase is primarily attributable to the good market performance in the first quarter of the year.
The table below provides an overview of the composition of net investment income.
-------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------
Year-to-date
Second quarter as at June 30
(In millions of
dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Investment income 120.8 158.1 270.2 267.1
Amortization of
realized and
unrealized gains
(losses) on real
estate 4.6 4.9 9.3 10.0
Gains (losses)
realized on assets
available for sale 2.1 2.0 4.5 2.5
Variation in the
market value of
assets held for
trading 178.8 382.9 402.4 328.5
Change in provisions
for losses - (2.2) 0.1 (2.2)
-------------------------------------------------------------------------
Total 306.3 545.7 686.5 605.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fees and other revenues represent fees earned from the management of investment funds (segregated funds and mutual funds), revenues from administrative services only (ASO) contracts and fees from the Company's brokerage subsidiaries. Year over year, fees and other revenues increased by $18.3 million in the second quarter and by $42.2 million for the first six months. These increases were driven by the growth of average investment fund assets under management. Even though the stock markets declined in the second quarter of 2010, average investment fund assets were higher than last year, which is explained by good sales growth in the last few quarters and by the fact that the S&P/TSX Index grew 9% between June 30, 2009 and June 30, 2010.
Policy Benefits and Expenses
Policy benefits and expenses totalled $1.4 billion in the second quarter of 2010, a year-over-year decrease of $119.7 million, whereas for the first six months they totalled $3.1 billion, a year-over-year increase of $487.3 million. Policy benefits and expenses are made up of the items shown in the table below.
-------------------------------------------------------------------------
Policy Benefits and Expenses
-------------------------------------------------------------------------
Year-to-date
Second quarter as at June 30
(In millions of
dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Variation in
provisions for
future policy
benefits 275.5 488.4 584.7 544.8
Payments to
policyholders and
beneficiaries 504.9 497.4 1,050.7 973.5
Net transfer to
segregated funds 351.7 282.0 870.9 569.8
Commissions 155.1 127.6 297.4 249.2
General expenses 110.2 101.5 215.1 193.9
Other 43.4 63.6 89.7 90.0
-------------------------------------------------------------------------
Total 1,440.8 1,560.5 3,108.5 2,621.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Provisions for future policy benefits grew by $275.5 million in the second quarter of 2010, compared to a $488.4 million increase in the second quarter of 2009, which represents a $212.9 million expense decrease for this item on the income statement. This decrease reflects the decrease in the market value of the underlying assets and largely offsets the decrease in investment income related to these assets. For the first six months of 2010, the expense related to the variation in the provisions for future policy benefits increased by $39.9 million compared to the same period last year.
The variation in provisions for future policy benefits evolves according to several factors, including the increase in premiums (upward impact on the provisions for future policy benefits), the return on the underlying assets (increase), claims incurred (decrease) and the net transfer to segregated funds (decrease). Since the new accounting standards concerning financial instruments took effect at the beginning of 2007, the variation in the market value of the assets underlying the provisions for future policy benefits (increase or decrease) must be added to this list of factors. The impact of the new accounting standards on the variation in provisions for future policy benefits has very little impact on net income, however, given that a corresponding variation in net investment income is recorded on the income statement, as explained above.
Payments to policyholders and beneficiaries in the second quarter of 2010 amounted to $504.9 million, a $7.5 million year over year increase. For the first six months of 2010, payments to policyholders and beneficiaries increased by $77.2 million. This increase reflects the normal evolution of business and the increase in the in-force block of business. Payments to policyholders and beneficiaries include benefits paid due to death, disability, illness or contract terminations, as well as annuity payments.
Year over year, net transfers to segregated funds increased by $69.7 million in the second quarter and by $301.1 million in the first six months. These increases are primarily explained by higher segregated fund sales in the Individual Wealth Management sector compared to last year. Net transfers to segregated funds are made up of amounts withdrawn from the general fund to be invested in segregated funds, less any amounts transferred from segregated funds to the general fund. Net transfers to segregated funds can vary from one period to another depending on the demand from clients, who at times favour general fund products, which usually offer guaranteed returns, and at other times are more attracted by segregated fund products, whose return fluctuates with the markets. Also, in a sector like Group Pensions, segregated fund deposits can fluctuate substantially from one quarter to another according to the size of the mandates granted by certain groups.
Year over year, commissions increased by $27.5 million in the second quarter and by $48.2 million in the first six months. The increase in commissions mainly results from higher sales in the Individual Insurance and Individual Wealth Management sectors. Commissions correspond to the remuneration of financial advisors for new sales and certain in-force contracts.
Year over year, general expenses increased by $8.7 million in the second quarter and by $21.2 million in the first six months. These increases are primarily explained by business growth, which led to an increase in payroll and an increase in expenses for medical exams and investigations, as well as an increase in the retirement plan expense. The auto and home insurance subsidiary's advertising campaign in the first quarter of 2010 also contributed to the increase in expenses.
Financial Results for the Last Eight Quarters
The following table presents a summary of Industrial Alliance's financial results for the last eight quarters.
-------------------------------------------------------------------------
Selected Financial Information
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise
indicated) Q2/2010 Q1/2010 Q4/2009 Q3/2009 Q2/2009 Q1/2009
-------------------------------------------------------------------------
Revenues 1,527.8 1,757.4 1,383.2 1,692.8 1,607.6 1,130.7
Net income
Net income
(net loss)
to common
share-
holders 57.7 60.3 67.4 60.1 32.1 46.2
Less: gain
(loss)
resulting
from the
variation
in the
fair value
of debt
instru-
ments and
underlying
assets
(after
taxes) (0.7) 1.1 5.3 1.1 (19.3) 7.5
-------------------------------------------------------------------------
Net income
(net loss)
to common
share-
holders on
regular
operations 58.4 59.2 62.1 59.0 51.4 38.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
Basic $0.69 $0.74 $0.84 $0.75 $0.40 $0.58
Diluted $0.68 $0.73 $0.83 $0.74 $0.40 $0.58
Earnings per
common share
on regular
operations
Basic $0.70 $0.73 $0.77 $0.74 $0.64 $0.48
Diluted $0.69 $0.72 $0.77 $0.73 $0.64 $0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Selected Financial Information
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise
indicated) Q4/2008 Q3/2008
-------------------------------------------------------------------------
Revenues 1,043.9 818.1
Net income
Net income
(net loss)
to common
share-
holders (110.2) 51.2
Less: gain
(loss)
resulting
from the
variation
in the
fair value
of debt
instru-
ments and
underlying
assets
(after
taxes) 7.8 0.3
-------------------------------------------------------------------------
Net income
(net loss)
to common
share-
holders on
regular
operations (118.0) 50.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
Basic ($1.37) $0.64
Diluted ($1.37) $0.63
Earnings per
common share
on regular
operations
Basic ($1.47) $0.63
Diluted ($1.46) $0.63
-------------------------------------------------------------------------
Cash Flows
Operating activities provided cash flows of $222.9 million in the second quarter, a year-over-year increase of $34.4 million. This increase reflects the normal evolution of business and variations in other assets and liabilities. A large part of the decrease in expenses associated with the variation in provisions for future policy benefits during the quarter was offset by a variation in the fair value of securities designated as "held for trading."
Investment activities used cash flows of $32.8 million in the second quarter of 2010, compared with $139.9 million in the second quarter of 2009, which represents a difference of $107.1 million. This difference primarily results from lower net purchases of bonds and stocks compared to the second quarter of 2009.
Financing activities used cash flows of $23.7 million in the second quarter of 2010, which is $0.3 million higher than the same period last year. Dividends on common and preferred shares were up over the second quarter of 2009, primarily due to new share issues in the first quarter of 2010. However, the increase was partially offset by the addition of capital which resulted from the common shares issued in the second quarter of 2010 (following the exercise of options under the Company's stock option plan).
Cash flows were up $83.9 million for the first six months of 2010, compared to a $17.7 million increase for the same period in 2009, which represents a $66.2 million difference. This difference essentially reflects changes in the normal course of operating, investment and financing activities during these periods.
-------------------------------------------------------------------------
Cash Flows
-------------------------------------------------------------------------
Year-to-date
Second quarter as at June 30
(In millions of
dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows related
to the following
activities:
Operating 222.9 188.5 330.1 323.0
Investment (32.8) (139.9) (391.6) (354.5)
Financing (23.7) (23.4) 144.6 52.0
Currency gain (loss)
on cash and cash
equivalents 0.5 (3.5) 0.8 (2.8)
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents 166.9 21.7 83.9 17.7
Cash and cash
equivalents at
beginning of period 298.9 254.5 381.9 258.5
-------------------------------------------------------------------------
Cash and cash
equivalents at end
of period 465.8 276.2 465.8 276.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity
The Company's main source of capital is fund entries related to operations, particularly premiums, net investment income and management fees and other revenues. This capital is primarily used to pay benefits to policyholders and beneficiaries, dividends to participating policyholders, commissions, operating expenses, interest charges and dividends to shareholders. Cash flows from operating activities are generally applied to payments that will have to be made at a later date, including the payment of dividends to shareholders. The Company maintains a prudent level of liquidity in order to honour its commitments by holding a good proportion of marketable securities and by strictly managing cash flows and matching.
Given the quality of its investment portfolio, and despite the financial market volatility, the Company does not expect its liquidity level to become insufficient in the near future. Due to the nature of its operations and its matching policy, the Company regularly finds itself in a positive cash flow position. This means that fund entries are regularly higher than fund disbursements.
The Company maintains a high level of liquidity. In an extreme scenario where the Company would have to redeem all of its redeemable contracts, easily convertible assets, which represent sources of liquidity, would cover two times the liquidity needed. Hence, according to this extreme scenario, the liquidity ratio totalled 200% as at June 30, 2010 (196% as at March 31, 2010 and 190% as at December 31, 2009).
Moreover, given the difficult liquidity conditions that prevailed in the financial markets at the end of 2008 and the beginning of 2009, the Company carried out additional simulations to take into account a lower level of liquidity for certain asset categories that are normally considered very liquid. According to the most demanding scenario considered in these simulations, which assumes that it would become totally impossible to liquidate bonds other than government bonds and preferred shares, the liquidity ratio amounted to 153% as at June 30, 2010 (150% as at March 31, 2010 and 145% as at December 31, 2009).
Moreover, as at June 30, 2010, the Company had operating lines of credit totalling $66.9 million (the same amount as at March 31, 2010 and December 31, 2009). As at June 30, 2010, the Company had not used any of the lines of credit. The purpose of these lines of credit is to facilitate financing of the Company's operations and meet its temporary working capital requirements.
Derivative Financial Instruments
The Company holds derivative contracts whose cash flow exchanges are calculated using a nominal reference amount of $987.2 million as at June 30, 2010, ($990.6 million as at March 31, 2010 and $1,091.9 million as at December 31, 2009). These contracts primarily aim to alleviate risks associated with interest rate, currency and stock market fluctuations. These contracts are primarily used for matching Universal Life policies.
The current credit risk related to derivative contracts, which corresponds to the amounts payable to the Company by the different counterparties as at June 30, 2010, is $11.6 million. This amount fluctuates from one period to another according to changes in the interest rates and equity markets. For example, it was $14.4 million as at March 31, 2010 and $12.5 million as at December 31, 2009.
The future credit risk related to these contracts, which corresponds to the amount that the counterparties could potentially owe the Company according to different market scenarios, was $34.7 million as at June 30, 2010 ($35.1 million as at March 31, 2010 and $42.4 million as at December 31, 2009).
On the nominal amount of $987.2 million, 96% of the Company's credit risk for derivative financial instruments as at June 30, 2010 was related to financial institutions whose lowest credit rating was AA low, the rest being related to institutions whose credit rating was A strong.
Related Party Transactions
There were no material related party transactions to report in the second quarter of 2010.
Accounting Policies and Main Accounting Estimates
The second quarter unaudited interim consolidated financial statements have been prepared according to Canadian generally accepted accounting principles (GAAP). Note 2 to the 2009 audited consolidated financial statements on pages 89 to 95 of the 2009 Annual Report contains the main accounting policies used by the Company.
These accounting policies require that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the date of the consolidated financial statements, and the reported amounts of revenues, policy benefits, and expenses during the period. Actual results could differ from management's best estimates. The most significant estimates are related to the determination of policy liabilities, employee future benefits, the fair values of invested assets and the goodwill and intangible assets depreciation test.
No changes were made to the accounting policies used by the Company for the period.
International Financial Reporting Standards (IFRS)
The Company will adopt IFRS on January 1, 2011 and will produce its first financial statements using IFRS in the first quarter of 2011. These statements will have to comply with IAS 34, "Interim Financial Reporting," which requires the presentation of corresponding comparative financial reporting in 2010. In addition, the interim financial statements will have to include an opening balance sheet as at January 1, 2010.
In order to be ready for the transition to IFRS, the Company has established a transition plan containing three phases: 1) determination of risks; 2) implementation of new standards; and 3) conversion.
The transition plan for meeting IFRS requirements is on schedule, which ensures that the Company will be able to meet IFRS requirements. Phase 3, which is the conversion phase, is currently under way. The Company is preparing its opening balance sheet as well as its balance sheet and income statement for the first quarter of 2010 according to IFRS based on the preliminary choices it has made. During the period it will continue to monitor the parallel accounting of financial data, continue to evaluate the financial consequences and impacts of the conversion to IFRS, and complete the design of the financial statements and the notes to the financial statements according to IFRS requirements. It will also evaluate the effect of the new accounting standards on disclosure controls and procedures and internal control over financial reporting and make the necessary changes. The adoption of IFRS will not lead to any significant changes to the Company's information systems. The training and communication plans will continue throughout the year.
The project managers regularly take stock of progress in the transition plan and convey key elements of the analyses to the project steering committee, management, the Audit Committee and the Board of Directors.
IFRS1 - "First-time Adoption of International Financial Reporting Standards"
To establish the opening balance sheet, the Company made choices based on IFRS 1, "First-time Adoption of International Financial Reporting Standards." Even though the Company has not yet made its final decisions, it currently expects to take advantage of the following exemptions.
-------------------------------------------------------------------------
Business combinations The Company will not restate acquisitions that
were made prior to the transition date due to
the complexity involved in obtaining historical
values and, consequently, will apply the
standard for business combinations
prospectively. This choice will not have any
impact on the Company's data.
-------------------------------------------------------------------------
Currency translation The Company expects to reset the currency
account translation gains and losses in self-sustaining
foreign operations, net of hedging activities,
to zero, which will result in an increase of
about $4 million in accumulated other
comprehensive income, and a decrease in retained
earnings for the same amount.
-------------------------------------------------------------------------
Fair value or amortized The Company expects to use the fair value as
cost used as presumed presumed cost for real estate held for
cost: real estate held investment, which will lead to an increase of
for investment and about $82 million in the value of these assets.
own-use properties However, since all of this real estate is
matched to the provisions for future policy
benefits, it will not have any impact on
retained earnings.
For own-use properties, the Company expects to
use the amortized cost as presumed cost. This
will lead to a reduction in retained earnings of
about $13 million before taxes.
-------------------------------------------------------------------------
Reclassification of The Company expects to use reclassification of
financial instruments financial assets and liabilities for certain
debentures and their underlying assets. This
choice will lead to a reduction of $11 million
before taxes in the book value of debentures
and, consequently, an $11 million increase in
retained earnings. The assets matching these
debentures will be reclassified from "designated
as held for trading" to "available for sale."
This will lead to a decrease of $9 million
before taxes in retained earnings and an
increase in the accumulated other comprehensive
income for the same amount. Use of this
transition rule will eliminate the effect of
volatility created in the Company's results by
the accounting asymmetry that currently exists
between these debentures and their underlying
assets.
-------------------------------------------------------------------------
Major Differences Between IFRS and GAAP
To date, the Company has determined the following major differences between IFRS and GAAP. The differences are presented in two categories: accounting differences and reporting differences.
-------------------------------------------------------------------------
Accounting Differences
-------------------------------------------------------------------------
Classification of For an insurer, one of the important aspects of
contracts the transition plan is the classification of
insurance contracts according to the definition
in IFRS 4, "Insurance Contracts." Since the
Company has classified the majority of its
contracts as insurance contracts, the Company
does not expect a material impact on its
results. Also, according to IFRS 4, which will
take effect on the changeover date, the Company
will continue to evaluate its provisions for
future policy benefits according to the Canadian
Asset-Liability Method (CALM). According to this
method, the evaluation of provisions for future
policy benefits is based on the book value of
the matched assets, which corresponds to the
current accounting method.
For the few contracts that will be classified as
investment contracts, no more premium income or
variation in the provisions for future policy
benefits will be posted on the income statement
for these contracts and, consequently, there
will no longer be an impact on the Company's net
income. The amounts for these contracts will be
posted directly as amounts on deposit under
liabilities on the balance sheet. This
represents about 1% of the Company's total
premium income. Under liabilities, these
contracts will either be measured at fair value
or at amortized cost, as chosen by the Company.
If they are measured at amortized cost, the
assets matching these liabilities will be
classified as available for sale according to
IFRS in order to reduce the matching spread.
A few other contracts, which are currently
accounted for as service contracts, will be
classified as insurance contracts. These
contracts will continue to generate the posting
of revenue on the income statement, but this
revenue will be reported under premiums rather
than other revenues. This represents about 1% of
the premium income.
-------------------------------------------------------------------------
Real estate held for According to Canadian GAAP as it applies to life
investment and health insurance companies, the value of
real estate held for investment is carried at
the moving average market method, whereby the
carrying value is adjusted towards fair value at
a rate of 3% per quarter of unrealized gains and
losses.
According to IAS 40, "Investment Property," for
real estate the Company classifies as investment
property, the Company must choose between the
cost model and the fair value model. The Company
plans to use the fair value model and report a
higher value in its balance sheet for this real
estate than currently posted according to
Canadian GAAP. However, since this real estate
is used to match the provisions for future
policy benefits in the matching process, any
variation in the fair value will be offset by a
corresponding adjustment in the provisions for
future policy benefits, such that there will be
no impact on the Company's net income.
-------------------------------------------------------------------------
Own-use property According to Canadian GAAP, the value of own-use
property is carried at the moving average market
method. Under IFRS, IAS 16, "Property, Plant and
Equipment," property that a corporation holds
for its own use may be valued at cost or using a
revaluation model, and a depreciation expense
for use of such property must be posted. The
Company intends to use the cost method to
evaluate its own-use property.
-------------------------------------------------------------------------
Earnings per share According to GAAP, even though the Company's
(EPS) IATS debentures can be converted into common
shares, they have no dilutive effect on the EPS
calculation, since they meet certain specific
criteria. However, since these criteria will no
longer exist under IFRS, these securities must
be considered as dilutive, which will have an
additional dilutive effect on the diluted EPS.
-------------------------------------------------------------------------
Employee future The Company is currently reviewing the impact of
benefits the different choices for accounting employee
future benefits, both for the opening balance
sheet and the accounting policy to adopt. This
could result in a significant impact on the
Company's opening balance sheet.
-------------------------------------------------------------------------
Goodwill Goodwill depreciation tests will cover more
detailed items, namely "cash generating units"
according to IFRS, rather than operating units
according to GAAP. The Company doesn't expect
any write-offs in this respect on its opening
balance sheet.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reporting Differences
-------------------------------------------------------------------------
Segregated fund assets While segregated fund assets and liabilities are
and liabilities currently reported separately from general fund
assets and liabilities, under IFRS they will be
included in the total general fund, but
presented on a separate line. This will add
about $11 billion to the general fund assets and
liabilities as at December 31, 2009.
-------------------------------------------------------------------------
Reinsurance Reinsurance amounts are currently presented on a
net basis. Under IFRS, they will have to be
presented on a gross basis, which will have an
impact on certain asset and liability balances,
as well as certain items on the income
statement, but will not have an impact on the
net income.
-------------------------------------------------------------------------
Pension fund assets According to GAAP, the pension fund is presented
in the financial statements at its net value
(liabilities minus assets). According to IFRS,
since the Company's pension fund assets do not
meet the eligibility criteria to continue this
presentation, the Company will have to report
these assets directly in the asset section,
without offsetting the liabilities. This will
increase the general fund assets and liabilities
by about $470 million.
-------------------------------------------------------------------------
Investment income and For purposes of presentation on the income
general expenses statement, investment expenses are currently
presented as a deduction from investment income
in order to determine the net investment income.
This offsetting will no longer be allowed under
IFRS, which will result in an increase in
investment income and an increase in general
expenses, but will have no impact on net income.
-------------------------------------------------------------------------
Other income and Commissions paid to fund brokers can no longer
commission expenses be offset against commission income, which will
increase other income and automatically increase
the commission expense. It will have no impact
on net income.
-------------------------------------------------------------------------
Derivatives While it was possible to offset assets and
liabilities resulting from derivative products
under GAAP, under IFRS the Company will have to
present them separately. This will have no
impact on net income.
-------------------------------------------------------------------------
The analyses performed as part of the transition to IFRS also take into account the tax aspects and incidence on the Company's regulatory capital. In this respect, the regulatory authorities will allow companies to take advantage of an option to gradually amortize the impact resulting from linear conversion over a period of two years, from the January 1, 2011 conversion date to December 31, 2012. Companies that take advantage of this option will have to do so on the conversion date and the choice will be irrevocable. Companies will also have to indicate in the notes to the financial statements that they made this choice and specify what their regulatory capital would correspond to without this choice.
The Company also monitors and analyzes changes made to IFRS given that these changes could influence the preliminary decisions. Changes are expected for financial instruments, among others. Phase I of IFRS 9, "Financial Instruments," was published in November 2009 and will take effect on January 1, 2013. Early adoption is possible, but is not authorized by the regulatory authorities.
Among the recently published Exposure Drafts, the following are of note: "Employee Benefits" (Exposure Draft published in April, dealing more specifically with defined benefit pension plans), "Provisions, Contingent Liabilities and Contingent Assets," and phase II of IFRS 9 "Financial Instruments." The Company is currently analyzing these Exposure Drafts and their impact on the Company. These Exposure Drafts should not take effect before 2013.
Significant modifications to come include phase II of IFRS 4, "Insurance Contracts," which covers the valuation and recognition of insurance contracts. This standard is currently being developed and should not take effect prior to 2013.
WARNING AND GENERAL INFORMATION
Internal Control Over Financial Reporting
No changes were made in the Company's internal control over financial reporting during the interim period ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). It also occasionally uses certain non-GAAP financial measures - adjusted data or data on regular operations - mainly concerning the profit, earnings per share and return on equity. These non-GAAP financial measures are always clearly indicated, and are always accompanied by and reconciled with GAAP financial measures. The Company believes that these non-GAAP financial measures provide investors and analysts with useful information so that they can better understand the financial results and perform a better analysis of the Company's growth and profitability potential. These non-GAAP financial measures provide a different way of assessing various aspects of the Company's operations and may facilitate the comparison of results from one period to another. Since non-GAAP financial measures do not have a standardized definition, they may differ from the non-GAAP financial measures used by other institutions. The Company strongly encourages investors to review its financial statements and other publicly-filed reports in their entirety and not to rely on any single financial measure. The data related to the solvency ratio, embedded value and the value of new business, as well as adjusted data or data on regular operations, as indicated above, are not subject to GAAP.
Forward-Looking Statements
This Management's Discussion and Analysis may contain statements relating to strategies used by Industrial Alliance or statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "may", "will", "could", "should", "would", "suspect", "expect", "anticipate", "intend", "plan", "believe", "estimate", and "continue" (or the negative thereof), as well as words such as "objective" or "goal" or similar words or expressions. Such statements constitute forward-looking statements within the meaning of securities laws. Forward-looking statements include, but are not limited to, information concerning the Company's possible or assumed future operating results. These statements are not historical facts; they represent only the Company's expectations, estimates and projections regarding future events.
Although Industrial Alliance believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially from expectations include, but are not limited to: general business and economic conditions (including but not limited to performance of equity markets, interest rate fluctuations, currency rates, investment losses and defaults, movements in credit spreads, market liquidity and creditworthiness of guarantors and counterparties); level of competition and consolidation; changes in laws and regulations including tax laws; liquidity of Industrial Alliance including the availability of financing to meet existing financial commitments on their expected maturity dates when required; accuracy of information received from counterparties and the ability of counterparties to meet their obligations; accuracy of accounting policies and actuarial methods used by Industrial Alliance; insurance risks including mortality, morbidity, longevity and policyholder behaviour including the occurrence of natural or man-made disasters, pandemic diseases and acts of terrorism; failure of information systems and Internet-enabled technology; breaches of computer security and privacy; dependence on third-party relationships including outsourcing arrangements; ability to maintain Industrial Alliance's reputation; regulatory investigations and proceedings and private legal proceedings and class actions relating to practices in the mutual fund, insurance, annuity and financial product distribution industries; the ability to adapt products and services to the changing market; the ability to implement effective hedging strategies; the ability to attract and retain key executives; the ability to complete acquisitions including the availability of equity and debt financing when required for this purpose; the ability to execute strategic plans; the disruption of or changes to key elements of Industrial Alliance's or public infrastructure systems; and environmental concerns. Additional information about material factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in Industrial Alliance's most recent annual report, under the "Risk Management" section of the Management's Discussion and Analysis and in the "Management of Risks Associated with Financial Instruments" note to Industrial Alliance's consolidated financial statements, and elsewhere in Industrial Alliance's filings with Canadian securities regulators, which are available for review at www.sedar.com.
Industrial Alliance does not undertake to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Management's Discussion and Analysis or to reflect the occurrence of unanticipated events, except as required by law.
Documents Related to the Financial Results
All documents related to Industrial Alliance's financial results are available on the Company's website at www.inalco.com, in the Investor Relations section, under Financial Reports. More information about the Company can also be found on the SEDAR website at www.sedar.com, as well as in the Company's Annual Information Form, which can be found on the Company website or the SEDAR website.
Conference Call
Management will hold a conference call to present the Company's results on Tuesday, July 27, 2010 at 4:00 p.m. (ET). To listen in on the conference call, dial 1 800 731-2911 (toll-free). A replay of the conference call will also be available for a one-week period, starting at 7:00 p.m. on Tuesday, July 27, 2010. To listen to the conference call replay, dial 1 800 558-5253 (toll-free) and enter access code 21474250. A webcast of the conference call (in listen only mode) will also be available on the Industrial Alliance website at www.inalco.com, as well as on the CNW website at www.cnw.ca.
About Industrial Alliance
Founded in 1892, Industrial Alliance Insurance and Financial Services Inc. is a life and health insurance company that offers a wide range of life and health insurance products, savings and retirement plans, RRSPs, mutual and segregated funds, securities, auto and home insurance, mortgage loans and other financial products and services. The fourth largest life and health insurance company in Canada, Industrial Alliance is at the head of a large financial group, which has operations in all regions of Canada, as well as in the United States. Industrial Alliance contributes to the financial wellbeing of over three million Canadians, employs more than 3,500 people and manages and administers some $60 billion in assets. Industrial Alliance stock is listed on the Toronto Stock Exchange under the ticker symbol IAG. Industrial Alliance is among the 100 largest public companies in Canada.
Notes
-----
1) Sales (new business) are defined as follows for each sector:
Individual Insurance: first-year annualized premiums; Individual
Wealth Management: premiums for the general fund and segregated funds
and deposits for mutual funds; Group Insurance: first-year annualized
premiums for Employee Plans, including premium equivalents
(Administrative Services Only (ASO) contracts), gross premiums
(premiums before reinsurance) for Creditor Insurance and premiums for
Special Markets Group (SMG); Group Pensions: premiums.
2) Mutual fund sales include the closed end fund issued by IA Clarington
Investments Inc. in April 2010.
CONSOLIDATED INCOME STATEMENTS
-------------------------------------------------------------------------
(in millions of
dollars, unless Quarters ended Six months ended
otherwise indicated) June 30 June 30
2010 2009 2010 2009
$ $ $ $
(unaudited)
Revenues
Premiums 1,113 972 2,385 1,961
Net investment
income 307 546 687 606
Fees and other
revenues 108 90 213 171
-------------------------------------------------------------------------
1,528 1,608 3,285 2,738
Policy benefits
and expenses
Payments to
policyholders and
beneficiaries 505 498 1,051 974
Net transfer to
segregated funds 352 282 871 570
Dividends,
experience rating
refunds and
interest on
amounts on
deposit 12 2 32 16
Change in provisions
for future policy
benefits 276 489 585 545
-------------------------------------------------------------------------
1,145 1,271 2,539 2,105
Commissions 155 127 297 249
Premium and other
taxes 19 16 36 31
General expenses 110 102 215 194
Financing expenses 12 45 21 42
-------------------------------------------------------------------------
1,441 1,561 3,108 2,621
Income before
income taxes 87 47 177 117
Less: income taxes 23 12 47 31
-------------------------------------------------------------------------
Net income 64 35 130 86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Less: net income
attributed to
participating
policyholders - - 1 1
-------------------------------------------------------------------------
Net income
attributed to
shareholders 64 35 129 85
-------------------------------------------------------------------------
Less: preferred
share dividends 6 3 11 7
-------------------------------------------------------------------------
Net income
available to
common
shareholders 58 32 118 78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common
share (in dollars)
basic 0.69 0.40 1.46 0.98
diluted 0.68 0.40 1.44 0.97
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at As at As at
June 30 December 31 June 30
(in millions of dollars) 2010 2009 2009
$ $ $
(unaudited) (unaudited)
Assets
Invested assets
Bonds 10,324 9,410 8,440
Mortgages 3,311 3,405 3,452
Stocks 1,860 1,896 1,602
Real estate 659 649 639
Policy loans 421 381 367
Cash and cash equivalents 466 382 276
Other invested assets 373 367 376
-------------------------------------------------------------------------
17,414 16,490 15,152
Other assets 720 646 601
Intangible assets 374 375 358
Goodwill 116 116 112
-------------------------------------------------------------------------
Total general fund assets 18,624 17,627 16,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segregated funds net assets 11,700 11,450 10,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Policy liabilities
Provisions for future policy
benefits 13,987 13,392 12,371
Provisions for dividends to
policyholders and experience
rating refunds 38 60 35
Benefits payable and provision
for unreported claims 152 139 172
Policyholders' amounts on deposit 240 212 204
-------------------------------------------------------------------------
14,417 13,803 12,782
Other liabilities 827 772 628
Future income tax 368 339 318
Net deferred gains 8 9 9
Debentures 526 520 514
Participating policyholders'
account 27 26 28
-------------------------------------------------------------------------
16,173 15,469 14,279
-------------------------------------------------------------------------
Equity
Share capital 1,072 871 766
Contributed surplus 23 22 21
Retained earnings and accumulated
other comprehensive income 1,356 1,265 1,157
-------------------------------------------------------------------------
2,451 2,158 1,944
-------------------------------------------------------------------------
Total general fund liabilities
and equity 18,624 17,627 16,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segregated funds liabilities 11,700 11,450 10,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEGMENTED INFORMATION
-------------------------------------------------------------------------
The Company operates principally in one dominant industry segment, the life and health insurance industry, and offers individual and group life and health insurance products, savings and retirement plans, and segregated funds. The Company also operates mutual fund, securities brokerage and trust businesses. These businesses are principally related to the Individual Wealth Management segment and are included in that segment with the Individual Annuities. The Company operates mainly in Canada and the operations outside Canada are not significant.
Segmented Income Statements
(in millions
of dollars) Quarters ended June 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 268 415 260 130 40 1,113
Net
investment
income 173 32 28 72 2 307
Fees and
other
revenues 9 90 2 9 (2) 108
-------------------------------------------------------------------------
450 537 290 211 40 1,528
-------------------------------------------------------------------------
Operating
expenses
Cost of
commitments
to policy-
holders 293 102 200 174 24 793
Net transfer
to segre-
gated funds - 331 - 21 - 352
Commissions,
general and
other
expenses 117 84 74 9 12 296
-------------------------------------------------------------------------
410 517 274 204 36 1,441
-------------------------------------------------------------------------
Income before
income taxes 40 20 16 7 4 87
Less: income
taxes 11 4 5 2 1 23
-------------------------------------------------------------------------
Net income
before
allocation
of other
activities 29 16 11 5 3 64
Allocation of
other
activities 2 - 1 - (3) -
-------------------------------------------------------------------------
Net income 31 16 12 5 - 64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 31 16 12 5 - 64
Attributed to
participating
policyholders - - - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions
of dollars) Quarters ended June 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 231 248 237 221 35 972
Net
investment
income 384 33 27 100 2 546
Fees and
other
revenues 3 73 3 7 4 90
-------------------------------------------------------------------------
618 354 267 328 41 1,608
-------------------------------------------------------------------------
Operating
expenses
Cost of
commitments
to policy-
holders 474 89 186 216 24 989
Net transfer
to segregated
funds - 186 - 96 - 282
Commissions,
general and
other expenses 119 68 75 14 14 290
-------------------------------------------------------------------------
593 343 261 326 38 1,561
-------------------------------------------------------------------------
Income before
income taxes 25 11 6 2 3 47
Less: income
taxes 5 3 2 1 1 12
-------------------------------------------------------------------------
Net income
before
allocation
of other
activities 20 8 4 1 2 35
Allocation
of other
activities 2 - - - (2) -
-------------------------------------------------------------------------
Net income 22 8 4 1 - 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 22 8 4 1 - 35
Attributed to
participating
policyholders - - - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Includes other segments and intercompany eliminations.
(in millions
of dollars) Six months ended June 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 537 963 494 314 77 2,385
Net
investment
income 438 63 49 133 4 687
Fees and
other
revenues 10 180 5 18 - 213
-------------------------------------------------------------------------
985 1,206 548 465 81 3,285
-------------------------------------------------------------------------
Operating
expenses
Cost of
commitments to
policyholders 691 192 380 358 47 1,668
Net transfer
to segregated
funds - 795 - 76 - 871
Commissions,
general and
other
expenses 213 173 140 18 25 569
-------------------------------------------------------------------------
904 1,160 520 452 72 3,108
-------------------------------------------------------------------------
Income before
income taxes 81 46 28 13 9 177
Less: income
taxes 21 12 8 3 3 47
-------------------------------------------------------------------------
Net income
before
allocation
of other
activities 60 34 20 10 6 130
Allocation
of other
activities 5 - 1 - (6) -
-------------------------------------------------------------------------
Net income 65 34 21 10 - 130
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 64 34 21 10 - 129
Attributed to
participating
policyholders 1 - - - - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions
of dollars) Six months ended June 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 458 588 470 378 67 1,961
Net
investment
income 366 56 45 136 3 606
Fees and
other
revenues 7 140 5 14 5 171
-------------------------------------------------------------------------
831 784 520 528 75 2,738
-------------------------------------------------------------------------
Operating
expenses
Cost of
commitments
to policy-
holders 559 200 368 358 50 1,535
Net transfer
to segregated
funds - 427 - 143 - 570
Commissions,
general and
other
expenses 201 137 136 19 23 516
-------------------------------------------------------------------------
760 764 504 520 73 2,621
-------------------------------------------------------------------------
Income before
income taxes 71 20 16 8 2 117
Less: income
taxes 17 6 5 2 1 31
-------------------------------------------------------------------------
Net income
before
allocation
of other
activities 54 14 11 6 1 86
Allocation
of other
activities 1 - - - (1) -
-------------------------------------------------------------------------
Net income 55 14 11 6 - 86
-------------------------------------------------------------------------
Attributed to
shareholders 54 14 11 6 - 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
participating
policyholders 1 - - - - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Includes other segments and intercompany eliminations.
Segmented General Fund Assets
(in millions
of dollars) As at June 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 9,969 2,249 1,595 3,224 377 17,414
Other
assets 289 209 88 48 86 720
Intangible
assets 52 318 2 2 - 374
Goodwill 55 41 20 - - 116
-------------------------------------------------------------------------
Total 10,365 2,817 1,705 3,274 463 18,624
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions
of dollars) As at December 31, 2009
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 9,274 2,128 1,607 3,128 353 16,490
Other
assets 242 178 99 42 85 646
Intangible
assets 49 322 3 1 - 375
Goodwill 55 41 20 - - 116
-------------------------------------------------------------------------
Total 9,620 2,669 1,729 3,171 438 17,627
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions
of dollars) As at June 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 8,346 1,949 1,541 3,041 275 15,152
Other assets 205 168 90 37 101 601
Intangible
assets 44 310 2 2 - 358
Goodwill 46 46 20 - - 112
-------------------------------------------------------------------------
Total 8,641 2,473 1,653 3,080 376 16,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Includes other segments and intercompany eliminations.
For further information: Jacques Carrière, Vice-President, Investor Relations, Office: 418 684-5275, Cellular: 418 576-3624, Email: [email protected], Website: www.inalco.com
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