Intact Financial Corporation reports third quarter results
- Acceleration of direct written premium growth to 4.0%
- Operating income down as a result of the high number of severe summer
storms, as previously announced
- Book value per share up 9.9% year-to-date and a strong excess capital
position of $635 million
The company recorded a net loss of
Direct written premium growth accelerated by 4.0%, to
CEO's Comments
"While the pace of growth of our direct written premiums has been most encouraging, the high costs of property damage associated with the unusual number of summer storms resulted in one of our worst underwriting results since the 1998 ice storm. Despite the disappointing impact of these events, our underlying home insurance results continued to improve and our auto insurance business performed well both during the quarter and throughout 2009," said
"As the pricing environment shows increasing signs of firming up following a decline in underwriting margins, investment yields and excess capital across the industry, we are well positioned to take advantage of the underlying growth opportunities."
"Our financial situation is very strong with a continued increase in our excess capital position which reached
Dividend
The Board of Directors of Intact Financial Corporation declared a quarterly dividend of 32 cents per share on its outstanding common shares. The dividend will be payable on
Current Outlook
Home insurance premiums are increasing across the industry as a result of water-related damage, which is now the leading cause of home insurance claims. Personal auto insurance premiums are also increasing, reflecting medical cost inflation in Ontario. In commercial lines, there are more concrete signs of firming market conditions.
Consolidated Highlights
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In millions
of dollars,
except as
otherwise YTD YTD
noted Q3-2009 Q3-2008 Change 2009 2008 Change
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Direct
premiums
written
(excluding
pools) 1,144.1 1,100.3 4.0% 3,263.6 3,177.3 2.7%
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Underwriting
(loss)income(1) (53.2) 61.9 (185.9)% (2.1) 106.1 (102.0)%
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Net operating
income(2) 21.6 106.4 (79.7)% 183.5 285.8 (35.8)%
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Net (loss)
income (8.0) 57.3 (114.0)% 30.0 192.3 (84.4)%
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Net operating
income per
share
(dollars) 0.18 0.88 (79.5)% 1.53 2.33 (34.3)%
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Earnings
per share
Basic and
diluted
(dollars) (0.07) 0.47 (114.9)% 0.25 1.57 (84.1)%
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Return on
equity (ROE)
for the last (10.7)
12 months (1.2)% 9.5% pts
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Operating ROE
for the last (4.1)
12 months(3) 8.4% 12.5% pts
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Combined ratio
(excluding 11.2 3.6
MYA) 105.2% 94.0% pts 100.1% 96.5% pts
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(1) Underwriting income is defined as underwriting income excluding
market yield adjustment (MYA).
(2) Net operating income is defined as the sum of underwriting income,
interest and dividend income and corporate and distribution income
after tax.
(3) Defined as operating income for the last 12 months divided by the
average equity (excluding accumulated other comprehensive income)
for the same period. The average is calculated by adding the
beginning balance and the ending balance and dividing by two.
Operating Highlights
- Net operating income for the quarter amounted to $21.6 million
compared to $106.4 million in the third quarter of 2008. Net operating
income for the first nine months was $183.5 million, down 35.8%. The
decrease in both the quarter and year-to-date reflects the impact of
severe storms on property results.
- Direct premiums written increased 4.0% in the third quarter to
$1,144.1 million with gains in all lines of business, reflecting
increases in both premiums and the number of risks insured.
Year-to-date, direct premiums written increased 2.7% to
$3,263.6 million.
- Underwriting income in the quarter was down with a loss of
$53.2 million and a combined ratio of 105.2%
Personal auto results continued to be good with a combined ratio of
95.9% and underwriting income of $21.4 million. Direct written premium
growth was 4.5%, reflecting higher average premiums and an increase in
the number of risks insured as industry pricing continued to firm up,
primarily in Ontario.
Direct written premium growth in personal property increased 4.0%,
reflecting premium growth under Intact's initiatives to address the
industry-wide increase in water-related property claims. Overall,
personal property underwriting results were poor due to a high number
of severe storms resulting in a combined ratio of 129.3%. Underlying
performance in personal property excluding major weather related
claims improved year-over-year for the second consecutive quarter.
In the commercial insurance portfolio, direct written premiums
increased by 2.9%, showing further evidence of firming market
conditions. Strong underwriting performance in commercial auto
resulting in a combined ratio of 87.1% was offset by lower
underwriting results in commercial property and casualty (P&C).
Commercial P&C underwriting results decreased mainly due to a small
number of significantly large fires which led to a combined ratio of
109.0%.
Interest and dividend income, net of expenses, was healthy at
$72.9 million in the third quarter with a market-based yield of 4.4%
compared to 4.9% in the same quarter of last year.
Investments
The Canadian capital markets rebound that began in March continued to increase the overall market value of the company's invested assets. As the preferred share portfolio increased in value by 8.8%, the company recognized a
Capital Management
The company's financial position remains very strong at the end of the third quarter, with
Analyst Estimates
The average estimate of earnings per share and net operating income per share for the third quarter among the analysts who follow the company was
Conference Call
Intact Financial Corporation will host a conference call to review its earnings results later this morning at
The conference call is also available by dialling 416-644-3426 or 1-800-732-1073 (toll-free in
A replay of the call will be available at
About Intact Financial Corporation
Intact Financial Corporation (www.intactfc.com) is the largest provider of property and casualty insurance in the country with over
Intact Financial Corporation
Management's Discussion and Analysis
----------------------------------------------------
For the third quarter ended September 30, 2009
Table of contents
Section 1 - Intact Financial Corporation................................3
Section 2 - Canadian property and casualty insurance industry 12-month
outlook.....................................................3
Section 3 - Overview of consolidated performance........................4
Section 4 - Personal lines.............................................20
Section 5 - Commercial lines...........................................24
Section 6 - Corporate and distribution.................................25
Section 7 - Financial condition........................................27
Section 8 - Accounting and disclosure matters..........................34
Section 9 - Risk management............................................40
Section 10 - Other matters.............................................40
November 10, 2009
The following Management's Discussion and Analysis ("MD&A"), which was approved by the Board of Directors for the quarter ended
The company uses both generally accepted accounting principles ("GAAP") and certain non-GAAP measures to assess performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are unlikely to be comparable to any similar measures presented by other companies. Management of Intact Financial Corporation analyzes performance based on underwriting ratios such as combined, general expenses and claims ratios as well as other performance measures including and excluding the market yield adjustment ("MYA") to claims liabilities. These measures are defined in the company's glossary which is posted on the Intact Financial Corporation web site at www.intactfc.com. Click on "Investor Relations" and "Glossary" on the left navigation bar.
Forward-looking statements
This document contains forward looking statements that involve risks and uncertainties. The company's actual results could differ materially from these forward looking statements as a result of various factors, including those discussed hereinafter or in the company's 2008 Annual Information Form. Please read the cautionary note in section 10.2 of this document.
Certain totals, subtotals and percentages may not agree due to rounding. Additional information about Intact Financial Corporation, including the Annual Information Form, may be found online on SEDAR at www.sedar.com. A change column has been provided for convenience showing the variation between the current period and the prior period. Not applicable (n/a) is used to indicate that the current and prior year figures are not comparable, not meaningful, or if the percentage change exceeds 1,000%.
Notes:
- All references to direct premiums written in this MD&A exclude pools,
unless otherwise noted.
- "Intact", "the company", "IFC" and "we" are terms used throughout the
document to refer to Intact Financial Corporation and its
subsidiaries.
Section 1 - Intact Financial Corporation
1.1 Overview of the business
IFC is the largest provider of automobile, home and business insurance in
Section 2 - Canadian property and casualty insurance industry 12-month outlook
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P&C insurance industry IFC's strategy
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Pricing - Personal auto premiums - Maintaining pricing
and claims are increasing, reflecting discipline and commitment
environment medical cost inflation to adequate margins:
(12-month in Ontario. The Ontario - IFC has been increasing
outlook) Government recently its personal auto rates
announced some proposed in Ontario since
changes to the Ontario auto September 2007 to address
reforms (see Recent events) medical cost inflation
- Personal property premiums - IFC's personal property
are rising due to increases premiums are increasing
in water-related losses due to higher water
which are now the leading claims. Premium increases
cause of home insurance in 2008 and 2009
claims. year-to-date were in the
- In commercial lines, high single-digit range
concrete signs of price - Home insurance action
firming materialized in the plan is being implemented
third quarter, particularly to adapt to increases in
in Ontario. Though the water-related losses
Ontario market seems to be aiming at a 10-15% combined
firming at a faster pace, ratio improvement over
IFC expects that conditions 18 months:
will develop similarly - Rate adjustments and
across Canada over time enhanced segmentation
- Across all lines of business, - Greater efficiency in
there are indications of claims management
industry capacity - Loss prevention and
retrenchment education
- Product review
- IFC is positioned to
take advantage of organic
growth opportunities as
the commercial market
begins to firm up due to
the company's discipline,
pricing sophistication
and capacity for growth
- IFC is pursuing both
organic and acquisition
growth strategies with a
prudent and disciplined
approach
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Capital - Capital market weakness over - Strong financial position
Markets the last year has resulted in with $635.2 million in
investment losses, higher excess capital over an
borrowing costs and MCT of 170%
diminished excess capital - MCT ratio of 219.2%; up
levels across the industry 8.1 percentage points
- Pressure on industry capital from the second quarter
will likely continue over of 2009
the next year - $7.8 billion cash and
- Lower industry capital levels investment portfolio is
and investment yields could largely Canadian with
influence higher premiums minimal US exposure and
across the industry no leveraged investments
- The market-based yield of
the investment portfolio
remains healthy at 4.4%
despite the shift to a
more conservative asset
mix
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IFC had a combined ratio of 97.4% over the first six months of 2009, better than the industry average of 100.6% and the average for the top 10 largest P&C companies in
With its superior operational track record, substantial excess capital position and low debt-to-capitalization ratio, IFC remains positioned to grow organically through increases in customer count and margin expansion.
Section 3 - Overview of consolidated performance
Third quarter highlights
- Direct written premium growth accelerated to 4.0% with rate increases
in all lines of business reflecting firming industry conditions
- Overall combined ratio of 105.2% reflects the impact of a high number
of severe storms mainly affecting property policies
- Underwriting performance in auto lines was good with a combined ratio
of 95.9% in personal auto and 87.1% in commercial auto
- Significant increase in preferred share market values led to a
non-cash accounting loss on embedded derivatives of $30.4 million
- Book value per share up 9.9% year-to-date reflecting capital market
rebound
- Strong excess capital position of $635.2 million with an MCT of 219.2%
Consolidated financial results
Table 1 - Components of net income
(in millions
of dollars,
except as
otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
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Direct
premiums
written
(excluding
pools) 1,144.1 1,100.3 4.0% 3,263.6 3,177.3 2.7%
Underwriting
(loss) income
(excluding
MYA) (table 4) (53.2) 61.9 (185.9)% (2.1) 106.1 (102.0)%
Combined ratio
(excluding 11.2 3.6
MYA) 105.2% 94.0% pts 100.1% 96.5% pts
Interest and
dividend
income, net
of expenses
(table 7) 72.9 83.1 (12.3)% 215.4 250.5 (14.0)%
Net investment
gains (losses)
(table 8) 11.7 (81.3) (114.4)% (159.2) (135.8) 17.2%
Interest expense
on debt
outstanding 1.1 - n/a 1.1 - n/a
Income (loss)
before income
taxes (16.0) 68.7 (123.3)% 14.4 231.7 (93.8)%
Income tax
(benefit)
expense (8.0) 11.4 (170.2)% (15.6) 39.4 (139.6)%
Effective
income tax 66.7 91.3
rate (50.0%) 16.7% pts 108.3% 17.0% pts
Net (loss)
income (8.0) 57.3 (114.0)% 30.0 192.3 (84.4)%
Net operating
income
(table 13) 21.6 106.4 (79.7)% 183.5 285.8 (35.8)%
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Earnings per
share ("EPS")
- basic and
diluted
(dollars) (0.07) 0.47 (114.9)% 0.25 1.57 (84.1)%
Net operating
income per
share
(dollars) 0.18 0.88 (79.5)% 1.53 2.33 (34.3)%
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Return on
equity ("ROE")
for the last (10.7)
12 months (1.2)% 9.5% pts
Operating
return on
equity for
the last 12 (4.1)
months(1) 8.4% 12.5% pts
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Book value
per share
(dollars) 24.13 24.15 (0.1)%
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(1) Defined as operating income for the last 12 months divided by the
average equity (excluding accumulated other comprehensive income) for
the same period. The average is calculated by adding the beginning
balance and the ending balance and dividing by two.
3.1 Explanation of consolidated financial results
Table 2 - Changes in pre-tax operating income (year-over-year)
(in millions of dollars, except as otherwise noted) Q3-2009 YTD 2009
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Pre-tax operating income, as reported in 2008 142.9 370.3
Changes in underwriting income excluding MYA:
Change in favourable prior year claims development (42.4) (39.0)
Change in current accident year underwriting income (13.4) (63.4)
Increase in catastrophe losses (60.9) (13.1)
Change in income from Facility Association 1.6 7.4
Total change in underwriting income excluding MYA (115.1) (108.1)
Change in interest and dividend income,
net of expenses (10.2) (35.1)
Change in corporate and distribution 5.7 0.8
Pre-tax operating income, as reported in 2009 23.3 227.9
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Pre-tax operating income is a non-GAAP measure. Catastrophe claims are
defined as a single weather-related event resulting in aggregate claims
of $5.0 million or more.
Table 3 - Changes in income before income taxes (year-over-year)
(in millions of dollars, except as otherwise noted) Q3-2009 YTD 2009
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Income before income taxes, as reported in 2008 68.7 231.7
Change in net gains and losses on invested assets
and other gains excluding held for trading
("HFT") debt securities (table 8) 49.4 (51.8)
Change in pre-tax operating income (table 2) (119.6) (142.4)
Change in market yield effect (table 10) (14.5) (23.1)
Income (loss) before income taxes,
as reported in Q3-2009 (16.0) 14.4
Income tax (expense) benefit 8.0 15.6
Net (loss) income reported in 2009 (8.0) 30.0
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Third quarter 2009
The pace of direct written premium growth continued to pick up in the third quarter increasing to 4.0% from 2.8% in the second quarter and 1.0% in the first quarter. Average premiums and rates increased in every line of business, and written insured risks grew year-over-year in all segments except personal property. The top-line momentum reflects IFC's organic growth strategy and improving industry pricing conditions in both personal and commercial lines.
A high number of severe storms in the third quarter led to disappointing underwriting results with an overall combined ratio of 105.2%. The storms largely affected personal property and as a result, the combined ratio was 129.3% in that segment. In our largest business, personal auto, as well as commercial auto, underwriting income has been healthy throughout 2009 with combined ratios of 95.9% and 87.1%, respectively, in the third quarter. In the commercial P&C segment, results were negatively affected by a small number of significantly large fires as well as storm losses and lower prior year development which led to a combined ratio of 109.0% in that business, discussed in greater detail in section 5.2.
Weather conditions in the third quarter were abnormal with a significant number of events affecting our business, the largest of which were hail storms in Alberta and excessive rain and tornadoes in Central
Overall, the environment has continued to evolve as expected with higher anticipated premiums over the next 12 months in all lines of business due to three main factors affecting the industry as a whole: 1) a significant deterioration in underwriting margins in 2008, 2) lower investment yields and 3) lower levels of excess capital. These factors support better pricing conditions over the next year, industry capacity reductions and further market consolidation, benefiting strong and disciplined players in the market such as IFC.
Industry rates in personal lines are rising and in commercial lines, there are signs of firming market conditions. Personal auto rate increases averaged 6.3% year-to-date in Ontario, which is the largest personal auto market in
Canadian equity market conditions also continued to improve in the third quarter, as the company recorded realized equity gains of
Dividend and interest income was healthy in the third quarter at
Overall, the company recorded operating earnings of
The company's financial position is very strong with more than
Year to date 2009
Year to date direct written premium growth of 2.7% reflects higher average premiums, with unit growth picking up in the third quarter as industry pricing conditions continued to improve. As mentioned in the third quarter discussion, IFC's average rates are increasing in all lines of business.
Despite the healthy overall underwriting results in the first and second quarters, performance year-to-date was disappointing with an underwriting loss of
Underwriting profitability in personal auto was solid with a combined ratio of 93.8%, relatively unchanged from the same period in 2008. In commercial auto, underwriting performance was robust with a combined ratio of 83.1%, an improvement of 2.6 percentage points year-over-year as current and prior year income increased. Commercial P&C results were lower due to an increase in large losses mainly due to fires and lower prior year claims development. Personal property was most affected by the weather-related catastrophe claims in 2009 with a year-to-date combined ratio of 116.5%. Rate increases in both personal property and commercial P&C are accelerating to reflect higher claims.
Overall, net operating income was
Despite solid underwriting performance in the first two quarters and healthy investment income, year-to-date net income decreased to
Return on equity and operating return on equity
For the 12-months ended
Book value
Book value per share increased to
Recent events
Medium Term Note ("MTN") offering
On
Proposed auto reforms from Ontario Government
In Ontario, the personal auto insurance environment has been affected by medical claims inflation, with industry rates in Ontario increasing 12% since
3.2 Underwriting income
Table 4 - Net premiums earned, claims and general expenses
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
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Net premiums
earned 1,019.0 1,032.3 (1.3)% 3,018.9 3,020.2 0.0%
Net claims:
Current year
claims
(excluding
MYA) 722.9 717.7 0.7% 2,119.4 2,052.4 3.3%
Current
year
catastrophes 81.3 20.4 298.5% 100.4 87.3 15.0%
(Favourable)
prior year
claims
development
(excluding
MYA) (14.0) (56.4) (75.2)% (57.7) (96.7) (40.3)%
Total net
claims
(excluding
MYA) 790.2 681.7 15.9% 2,162.1 2,043.0 5.8%
Commissions,
net 143.7 142.6 0.8% 427.6 427.1 0.1%
Premium taxes,
net 35.9 35.8 0.3% 104.5 105.1 (0.6)%
General
expenses,
net 102.4 110.3 (7.2)% 326.8 338.9 (3.6)%
Total
underwriting
expenses 282.0 288.7 (2.3)% 858.9 871.1 (1.4)%
Total
underwriting
(loss) income
(excluding MYA) (53.2) 61.9 (185.9)% (2.1) 106.1 (102.0)%
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Table 5 - Underwriting ratios (excluding MYA)
YTD YTD
Q3-2009 Q3-2008 Change 2009 2008 Change
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11.5 3.9
Claims ratio 77.5% 66.0% pts 71.6% 67.7% pts
(0.3) (0.3)
Expense ratio 27.7% 28.0% pts 28.5% 28.8% pts
11.2 3.6
Combined ratio 105.2% 94.0% pts 100.1% 96.5% pts
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Table 6 - Annualized rate of favourable prior year claims development
(annualized rate, excluding MYA) Q3-2009 Q3-2008 YTD 2009 2008
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(Favourable) unfavourable prior
year claims development as a %
of opening reserves (1.5%) (6.0)% (2.0)% (4.0)%
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Favourable prior year claims development
Excluding MYA, favourable prior year claims development was
On a year-to-date basis, favourable prior year claims development was
Prior year claims development can fluctuate from quarter to quarter and year to year, and therefore, should be evaluated over longer periods of time. The historical rate of favourable prior year claims development as a percentage of opening claims has been approximately 3%-4% per year over the long term.
Industry pools
Industry pools consist of the "residual market" (or Facility Association) as well as risk-sharing pools ("RSP") in Alberta, Ontario,
3.3 Interest and dividend income, net of expenses
Table 7
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
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Interest income 44.4 47.0 (5.5)% 132.2 141.0 (6.2)%
Dividend income 32.6 40.2 (18.9)% 94.9 121.9 (22.1)%
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Interest and
dividend income,
before expenses 77.0 87.2 (11.7)% 227.1 262.9 (13.6)%
Expenses (4.1) (4.1) n/a (11.7) (12.4) (5.6)%
Interest and
dividend income,
net of expenses 72.9 83.1 (12.3)% 215.4 250.5 (14.0)%
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Market-based (0.5) (0.5)
yield 4.4% 4.9% pts 4.5% 5.0% pts
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The decline in interest and dividend income (before expenses) in the third quarter and year-to-date reflects strategic actions to de-risk the investment portfolio in 2008 and early 2009 including the reduction of the common share portfolio and increased investments in government bonds and treasuries. In the third quarter, the company began gradually shifting the portfolio toward the target long-term asset mix, reinvesting some cash into longer-term fixed income investments and moderately increasing the common share portfolio.
The market-based yield is a non-GAAP measure defined as the annualized total pre-tax dividend and interest income (before expenses) divided by the average fair values of equity and fixed income securities held during the reporting period. The market-based yield was 4.4% in the third quarter unchanged from the second quarter, and down from 4.9% in the third quarter of 2008. On a year-over-year basis, the lower yield is due to the change in mix of our portfolio to include more government bonds and treasuries and a significant decline in the risk-free interest rate compared to the same period in 2008. The market-based yield is a measure that may not be comparable to other companies since it is a non-GAAP measure.
3.4 Net investment gains (losses)
Table 8
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
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Debt securities
Gains (losses)
on available-
for-sale
("AFS")
securities 1.9 (4.8) 6.7 15.5 (1.6) 17.1
Gains (losses)
on derivatives 2.0 (6.6) 8.6 4.0 (10.8) 14.8
Impairment
losses - (4.0) 4.0 (8.4) (10.9) 2.5
Gains (losses)
on debt
securities
and related
derivatives 3.9 (15.4) 19.3 11.1 (23.3) 34.4
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Equity securities
Gains (losses),
net of
stand-alone
derivatives 21.3 (41.4) 62.7 (85.9) (50.1) (35.8)
Impairment
losses (7.5) (11.1) 3.6 (27.0) (64.7) 37.7
Gains (losses)
on embedded
derivatives (30.4) 5.9 (36.3) (72.3) 15.9 (88.2)
Losses on
equity
securities
and related
derivatives (16.6) (46.6) 30.0 (185.2) (98.9) (86.3)
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Total gains
(losses)
excluding HFT
debt securities (12.7) (62.0) 49.3 (174.1) (122.2) (51.9)
Gains (losses)
on HFT debt
securities(1) 24.4 (19.3) 43.7 14.9 (13.6) 28.5
Total net
gains (losses),
before income
taxes 11.7 (81.3) 93.0 (159.2) (135.8) (23.4)
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(1) The gains (losses) on HFT debt securities are offset by a MYA to
claims liabilities, with an objective of a minimal impact to net
income. The difference between the MYA and the gains and losses on
HFT debt securities is referred to as the "market yield effect" in
this MD&A. See table 10.
Third quarter 2009
Canadian equity market conditions continued to improve in the third quarter, as the company recorded realized equity gains of
The overall market value of the cash and investment portfolio increased to
Accounting for embedded derivatives
The company owns perpetual preferred shares with call options which give the issuer the right to redeem the shares at a particular price. Current Canadian GAAP accounting standards require that these options be accounted for separately from the preferred shares which are classified as AFS. Accounting standards also require that changes in the value of the preferred shares are recorded in other comprehensive income (OCI) while changes in the value of the option liability are recorded on the income statement, creating a mismatch. As the preferred shares increased in value during the quarter, the value of the associated option liability also increased. This change is recorded on the income statement in net investment gains (losses) (Table 8).
The International Accounting Standard Board (IASB) has recently issued a draft proposal to change the accounting treatment for embedded derivatives falling within the scope of IAS 39, "Financial Instruments: Recognition and Measurement". The proposal would no longer permit separate accounting, and would require embedded derivatives to be accounted for on the same basis as the underlying investment (or host contract). If this proposal is adopted, it will be effective for the company in 2012 and eliminate the current accounting mismatch.
Year-to-date 2009
The loss on invested assets in the first nine months of 2009 mainly reflects realized losses associated with the implementation of the financial hedging program in
Quality of the investment portfolio
The investment portfolio includes high-quality government and corporate bonds, as well as Canadian equity securities of large, publicly-traded, dividend-paying companies. Approximately 98.0% of the bonds are rated 'A' or better and 80.5% of the preferred shares are highly-rated as 'P1' or 'P2'. In addition, IFC does not invest in leveraged securities and the exposure to the U.S. market is minimal. IFC manages its investments prudently to protect capital and generate superior after-tax returns.
Portfolio asset mix
The following table shows the mix of the
Table 9 - Portfolio asset mix (GAAP)
September 30, June 30, March 31, December 31,
2009 2009 2009 2008
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Short-term notes,
including cash
and cash equivalents 5.5% 12.8% 11.8% 12.2%
Fixed income securities 53.9% 49.5% 53.5% 53.6%
Preferred shares 20.6% 20.9% 19.1% 18.5%
Common shares 16.0% 12.6% 11.2% 12.1%
Loans 4.0% 4.2% 4.4% 3.6%
Total invested assets
including cash and
cash equivalent 100.0% 100.0% 100.0% 100.0%
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In 2008 and early 2009, the company reduced its exposure to equity market fluctuations through various de-risking actions including the implementation of the financials hedging program in
Held-for-trading debt securities and market yield adjustment
Table 10 - Market yield effect
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Positive
(negative)
impact of
MYA on
underwriting (50.9) 7.3 (58.2) (54.4) (2.7) (51.7)
Net gains
(losses) on
HFT debt
securities 24.4 (19.3) 43.7 14.9 (13.6) 28.5
Market yield
effect (26.5) (12.0) (14.5) (39.5) (16.3) (23.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Claims liabilities are discounted at the estimated market-based yield of the assets backing these liabilities. HFT bonds and some AFS securities are used in the calculation of the market yield adjustment (MYA) to discount claims liabilities. The MYA to claims liabilities is generally offset by gains and losses on HFT debt securities. The objective is that these items offset each other with a minimal overall impact to income. Any mismatch between the MYA and the gains and losses on HFT debt securities is referred to as the "market yield effect" in this MD&A.
On a year-to-date basis, the market yield effect had a
The process of matching the weighted-dollar duration of the claims liabilities to assets classified as HFT works well under normal conditions. However, market fluctuations, change in yield curve, trading and change in asset mix can result in a positive or negative market yield effect.
Net pre-tax unrealized gains and losses on available-for-sale securities
Table 11
(in millions
of dollars, As at
except as September June March December September June
otherwise 30, 30, 31, 31, 30, 30,
noted) 2009 2009 2009 2008 2008 2008
-------------------------------------------------------------------------
Debt securities 44.0 18.5 37.3 30.4 (16.3) 3.2
Common shares (24.3) (61.7) (134.4) (140.7) (129.1) (46.7)
Preferred
shares (162.2) (292.1) (492.1) (522.5) (272.1) (215.5)
-------------------------------------------------------------------------
Total net
pre-tax
unrealized
loss position
at September
30, 2009 (142.5) (335.3) (589.2) (632.8) (417.5) (259.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As equity markets rebounded in the third quarter with a 9.8% increase in the S&P/TSX Composite Index and a 4.5% increase in the S&P/TSX Preferred Share Index, the unrealized loss position in the portfolio improved by
Since IFC typically holds preferred shares for the long term, unrealized gains and losses are generally not realized. Gains and losses in the common share portfolio are generally realized on an ongoing basis under normal capital market conditions reflecting the trading strategy in the high-dividend yield common share portfolio.
In determining the fair values of invested assets, the company relies mainly on quoted market prices. There are no invested assets in the AFS or HFT categories which are not quoted on an active market, except for a limited amount of fixed income securities that the company holds.
Recognition of an unrealized loss
Common shares classified as AFS are impaired if the current market value drops significantly below the book value, and if management believes that the value is unlikely to recover in the near- to mid-term. This is determined by an assessment of information available at the time. Debt securities and preferred shares are considered to be impaired when there is objective evidence that suggests the issuer will fail to make the contractual interest or principal payments due under the terms of the instrument.
The net unrealized loss position on AFS common shares at the end of
Table 12 - Aging of unrealized losses on AFS common shares
(in millions of
dollars, except as September 30, June 30, March 31, December 31,
otherwise noted) 2009 2009 2009 2008
-------------------------------------------------------------------------
(greater than) 25%
below book value for
(less than) 3
consecutive months 0.6 1.5 30.6 76.7
(greater than) 25%
below book value for
(greater than or
equal to) 3 and
(less than) 6
consecutive months 0.0 10.4 60.6 21.1
(greater than) 25%
below book value for
(greater than or
equal to) 6
consecutive months 18.6 45.8 5.7 1.8
Other unrealized
losses, net of
unrealized gains 5.1 4.0 37.5 41.1
Total net unrealized
losses on AFS
common shares 24.3 61.7 134.4 140.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above table provides information on the quality of the portfolio of AFS common shares. It is not intended to provide any indication of future impairments.
Other comprehensive income, net of taxes
The improvement in the unrealized loss position on AFS securities and dispositions of AFS securities resulted in positive other comprehensive income ("OCI") of
3.5 Net operating income
Table 13 - Components of net operating income
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Net underwriting
(loss) income
(excluding MYA) (53.2) 61.9 (185.9)% (2.1) 106.1 (102.0)%
Interest and
dividend
income
(table 7) 72.9 83.1 (12.3)% 215.4 250.5 (14.0)%
Corporate and
distribution
income (loss)
(table 21) 3.6 (2.1) (271.4)% 14.6 13.7 6.6%
Tax impact (1.7) (36.5) (95.3)% (44.4) (84.5) (47.5)%
Net operating
income
(excluding MYA) 21.6 106.4 (79.7)% 183.5 285.8 (35.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net operating income decreased in the third quarter mainly reflecting the impact of the severe storms on property underwriting results.
Table 14 - Reconciliation to net income
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Net (loss)
income (8.0) 57.3 (114.0)% 30.0 192.3 (84.4)%
Add losses
before HFT
debt
securities
(table 8) 12.7 62.0 (49.3) 174.1 122.2 51.9
Add market
yield effect
(table 10) 26.5 12.0 14.5 39.5 16.3 23.2
Tax impact (9.6) (24.9) 15.3 (60.1) (45.0) (15.1)
Net operating
income
(excluding MYA) 21.6 106.4 (79.7)% 183.5 285.8 (35.8)%
Average
outstanding
shares
(millions) 119.9 120.8 (0.9) 119.9 122.7 (2.8)
Net operating
income per
share (dollars) 0.18 0.88 (0.70) 1.53 2.33 (0.80)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (net and pre-tax) and net operating income per share are non-GAAP measures. Net operating income is defined as net income excluding the MYA and net gains on invested assets and other gains, after tax. Pre-tax operating income is defined as net operating income before income taxes. Net operating income per share is equal to net operating income for the period divided by the average outstanding number of shares for the same period. These measures are used by management and financial analysts to assess the company's performance; however, they may not be comparable to similar metrics published by other companies.
3.6 Selected quarterly information
Table 15
(in millions of dollars,
except as otherwise
noted) Q3-2009 Q2-2009 Q1-2009 Q4-2008 Q3-2008
-------------------------------------------------------------------------
Written insured risks
(thousands) 1,244.4 1,376.0 937.2 1,034.3 1,240.7
Direct premiums written
(excluding pools) 1,144.1 1,250.6 868.8 968.2 1,100.3
Total revenues 1,116.4 1,064.6 936.5 956.0 1,045.8
Net premiums earned 1,019.0 1,011.3 988.7 1,019.2 1,032.3
(Favourable)
unfavourable prior year
claims development(1) (14.0) (6.5) (37.2) (52.2) (56.4)
Net underwriting
(loss) income(1) (53.2) 43.2 7.9 11.0 61.9
Combined ratio (%)(1) 105.2% 95.7% 99.2% 98.9% 94.0%
Net operating
income(1) 21.6 92.9 69.1 75.1 106.4
Net (loss) income (8.0) 74.2 (36.3) (64.1) 57.3
EPS-basic/diluted
(dollars) (0.07) 0.62 (0.30) (0.53) 0.47
Net operating income
per share (dollars)(1) 0.18 0.77 0.58 0.63 0.88
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars,
except as otherwise
noted) Q2-2008 Q1-2008 Q4-2007 Q3-2007
---------------------------------------------------------------
Written insured risks
(thousands) 1,380.6 945.8 1,056.7 1,273.1
Direct premiums written
(excluding pools) 1,216.7 860.3 961.3 1,091.2
Total revenues 1,065.4 1,064.5 1,096.8 1,091.3
Net premiums earned 996.1 991.8 1,004.7 994.0
(Favourable)
unfavourable prior year
claims development(1) (41.2) 0.9 (62.4) (24.0)
Net underwriting
(loss) income(1) 43.4 0.8 68.2 29.0
Combined ratio (%)(1) 95.6% 99.9% 93.2% 97.1%
Net operating
income(1) 109.5 70.2 116.4 95.5
Net (loss) income 112.0 23.0 95.8 92.0
EPS-basic/diluted
(dollars) 0.91 0.19 0.77 0.74
Net operating income
per share (dollars)(1) 0.89 0.56 0.93 0.77
---------------------------------------------------------------
---------------------------------------------------------------
(1) Excluding MYA
3.7 Seasonality of the business
The property and casualty insurance business is seasonal in nature. While underwriting revenues are generally stable from quarter to quarter, underwriting income is typically higher in the second and third quarters of each year. This is driven by lower combined ratios in those periods, which is reflected in the seasonal index below. The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio to the annual combined ratio, excluding the MYA.
Table 16 - Seasonal indicator
Six-year
2008 2007 2006 2005 2004 2003 average
-------------------------------------------------------------------------
Q1 1.03 1.01 1.02 1.02 1.10 1.06 1.04
Q2 0.98 0.99 0.93 0.94 0.92 0.95 0.95
Q3 0.97 1.02 1.01 1.02 0.98 0.96 0.99
Q4 1.02 0.98 1.05 1.01 1.01 1.04 1.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Intact Financial Corporation has two segments: 1) Underwriting and, 2) Corporate and distribution. P&C insurance is divided into two lines of business, personal and commercial lines. Corporate and distribution includes income from the company's affiliated distribution network, as well as other corporate items.
Section 4 - Personal lines
4.1 Financial results
Table 17
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Direct premiums
written
(excluding pools)
Automobile 589.8 564.4 4.5% 1,652.0 1,604.5 3.0%
Property 281.5 270.7 4.0% 754.6 726.3 3.9%
Total 871.3 835.1 4.3% 2,406.6 2,330.8 3.3%
Written insured
risks (thousands)
Automobile 663.5 659.0 0.7% 1,919.6 1,920.6 (0.1)%
Property 461.8 464.6 (0.6)% 1,257.7 1,268.8 (0.9)%
Total 1,125.3 1,123.6 0.2% 3,177.3 3,189.4 (0.4)%
Net premiums
earned
Automobile 517.3 531.2 (2.6)% 1,535.5 1,546.9 (0.7)%
Property 231.1 226.8 1.9% 686.1 663.3 3.4%
Total 748.4 758.0 (1.3)% 2,221.6 2,210.2 0.5%
Net underwriting
income (loss)
(excluding MYA)
Automobile 21.4 49.0 (56.3)% 94.6 99.6 (5.0)%
Property (67.7) (27.6) 145.3% (112.9) (88.8) 27.1%
Total
(excluding MYA) (46.3) 21.4 (316.4)% (18.3) 10.8 (269.5)%
Market yield
adjustment (32.8) 4.6 (37.4) (35.1) (1.7) (33.4)
Net underwriting
(loss) income
(including
MYA) (79.1) 26.0 (105.1) (53.4) 9.1 (62.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 18 - Underwriting ratios
YTD YTD
Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Personal auto
Claims ratio
(excluding 7.8 1.7
MYA) 74.6% 66.8% pts 70.5% 68.8% pts
Expense (2.7) (1.5)
ratio 21.3% 24.0% pts 23.3% 24.8% pts
Combined
ratio
(excluding 5.1 0.2
MYA) 95.9% 90.8% pts 93.8% 93.6% pts
Personal property
Claims ratio
(excluding 15.6 2.8
MYA) 95.4% 79.8% pts 82.8% 80.0% pts
1.5 0.3
Expense ratio 33.9% 32.4% pts 33.7% 33.4% pts
Combined ratio
(excluding 17.1 3.1
MYA) 129.3% 112.2% pts 116.5% 113.4% pts
Personal lines
- total
Claims ratio
(excluding 10.3 2.2
MYA) 81.0% 70.7% pts 74.3% 72.1% pts
(1.3) (0.8)
Expense ratio 25.2% 26.5% pts 26.6% 27.4% pts
Combined ratio
(excluding 9.0 1.3
MYA) 106.2% 97.2% pts 100.8% 99.5% pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4.2 Explanation of financial results
Third quarter 2009
Direct written premium growth in personal auto was solid at 4.5% reflecting higher average premiums and an increase in units as industry pricing has continued to firm up, particularly in Ontario. Personal auto underwriting performance was good with a combined ratio of 95.9% despite higher storm-related catastrophe claims in the third quarter. Favourable prior year claims development decreased year-over-year mainly due to medical cost inflation in Ontario. IFC has been steadily increasing personal auto rates in the province over the last two years ahead of the market to reflect the higher cost of these accident benefit and bodily injury claims.
Direct written premium growth in personal property increased 4.0% reflecting premium increases under IFC's home insurance action plan. Overall, personal property underwriting results were disappointing due to a high number of severe storms which led to a combined ratio of 129.3%. Underlying performance in personal property excluding catastrophe claims improved year-over-year for the second consecutive quarter, showing some continued progress against the home insurance action plan.
Home insurance action plan
The property and casualty insurance industry in
Year to date 2009
IFC's organic growth strategy in personal lines gained traction in 2009 with direct written premium growth of 3.3% year-to-date amid improving industry conditions. As pricing increases and capacity retrenches across the industry, IFC can grow more quickly and expand its underwriting margins. In personal property, IFC is also moving rapidly to adapt to changes in claims experience through the home insurance action plan described above.
Year to date, personal auto underwriting results were stable on a year-over-year basis with a combined ratio of 93.8%. Direct written premiums increased 3.0% reflecting higher premiums while written insured risks remained stable. Industry personal auto premiums are increasing to take into consideration cost pressures associated with medical costs in Ontario. Cumulative industry rate increases in Ontario, the largest market in
Personal property underwriting results declined year-to-date with a combined ratio of 116.5% for the first nine months mainly reflecting the abnormal storm activity in the third quarter including excessive rain, hail and wind. Net catastrophe claims in 2009 totalled more than
Section 5 - Commercial lines
5.1 Financial results
Table 19
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Direct premiums
written
(excluding pools)
Automobile 73.6 72.8 1.1% 241.4 240.6 0.3%
P&C 199.2 192.4 3.5% 615.6 605.8 1.6%
Total 272.8 265.2 2.9% 857.0 846.4 1.3%
Written insured
risks (thousands)
Automobile 61.2 60.5 1.2% 202.9 200.8 1.0%
P&C 57.9 56.7 2.1% 177.4 177.0 0.2%
Total 119.1 117.2 1.6% 380.3 377.8 0.7%
Net premiums
earned
Automobile 79.5 80.8 (1.6)% 234.8 238.8 (1.7)%
P&C 191.1 193.5 (1.2)% 562.5 571.1 (1.5)%
Total 270.6 274.3 (1.3)% 797.3 809.9 (1.6)%
Net underwriting
income (loss)
(excluding MYA)
Automobile 10.2 17.9 (43.0)% 39.8 34.1 16.7%
P&C (17.2) 22.5 (176.4)% (23.5) 61.1 (138.5)%
Total
(excluding MYA) (7.0) 40.4 (117.3)% 16.3 95.2 (82.9)%
Market yield
adjustment (18.1) 2.7 (20.8) (19.3) (1.0) (18.3)
Net underwriting
income
(including
MYA) (25.1) 43.1 (68.2) (3.1) 94.2 (97.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 20 - Underwriting ratios
YTD YTD
Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Commercial auto
Claims ratio
(excluding 7.3 (3.6)
MYA) 58.7% 51.4% pts 55.0% 58.6% pts
1.9 1.0
Expense ratio 28.4% 26.5% pts 28.1% 27.1% pts
Combined ratio
(excluding 9.2 (2.6)
MYA) 87.1% 77.9% pts 83.1% 85.7% pts
Commercial P&C
Claims ratio
(excluding 18.0 14.0
MYA) 72.0% 54.0% pts 68.1% 54.1% pts
2.6 0.9
Expense ratio 37.0% 34.4% pts 36.1% 35.2% pts
Combined ratio
(excluding 20.6 14.9
MYA) 109.0% 88.4% pts 104.2% 89.3% pts
Commercial
lines - total
Claims ratio
(excluding 14.8 8.8
MYA) 68.1% 53.3% pts 64.2% 55.4% pts
2.5 0.9
Expense ratio 34.5% 32.0% pts 33.8% 32.9% pts
Combined ratio
(excluding 17.3 9.7
MYA) 102.6% 85.3% pts 98.0% 88.3% pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5.2 Explanation of financial results
Third quarter 2009
In commercial lines, direct written premium growth of 3.5% in commercial P&C and 1.1% in commercial auto was supported by positive rate increases and unit growth in both lines of business. Growth in the quarter shows further evidence of firming market conditions especially in Ontario. Higher industry loss ratios since 2007, lower investment income as well as lower excess capital are factors that are expected to lead to a hardening pricing environment in commercial lines over the next 12 months.
Strong underwriting income in commercial auto was offset by lower underwriting results in commercial P&C. The combined ratio in commercial auto remained strong at 87.1% but was higher year-over-year reflecting improved current year results offset by lower favourable prior year claims development. In commercial P&C, underwriting results decreased due to higher claims severity mainly associated with a small number of significantly large fires, storm losses and unfavourable prior year claims development compared to strong favourable development in the same quarter last year. Overall the combined ratio in commercial P&C was 109.0%. Net catastrophe claims in the third quarter increased to 5.7% of net earned premiums versus 3.0% of the third quarter in 2008.
IFC's commercial growth strategy is based on disciplined pricing and risk selection in the small- to medium-sized business segments. Growth in recent years has been moderate in commercial lines mainly due to highly competitive pricing conditions across the industry. However, in 2009, there have been indications that commercial pricing is beginning to firm up which creates the opportunity for IFC to accelerate growth within its target market segments while expanding underwriting margins.
Year to date 2009
Overall, direct written premiums in commercial lines increased 1.3% year-to-date with a 0.7% increase in written insured risks. The modest growth over the first nine months reflects the company's disciplined pricing strategy amid more competitive industry pricing in previous quarters. In the third quarter, the pace of IFC's growth increased as signs of firming market conditions continued to materialize.
Year to date underwriting performance in commercial auto has remained robust with a combined ratio of 83.1% for the first nine months of the year with improved current and prior year results. In commercial P&C, underwriting results were lower with a combined ratio of 104.2% due to a combination of increases in large losses related to fires and unfavourable prior year claims development.
Section 6 - Corporate and distribution
6.1 Financial results
Our corporate and distribution segment includes non-underwriting activities of the company's affiliated distribution network (
Table 21 - Corporate and distribution income
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Distribution
income 24.6 23.6 4.2% 74.4 71.9 3.5%
Distribution
expenses 20.0 20.2 (1.0)% 58.5 59.5 (1.7)%
Distribution
earnings 4.6 3.4 35.3% 15.9 12.4 28.2%
Corporate income
(loss), net (1.0) (5.5) (81.8)% (1.3) 1.3 (200.0)%
Corporate and
distribution
income (loss)
before income
taxes 3.6 (2.1) (271.4)% 14.6 13.7 6.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6.2 Explanation of financial results
The increase in corporate and distribution income mainly reflects the timing of certain corporate expenses, none of which are material in value.
Section 7 - Financial condition
7.1 Balance sheet highlights
The table below shows the significant balance sheet items as at
Table 22
As at
------------------------------
(in millions of dollars September 30, December 31,
except as otherwise noted) 2009 2008
-------------------------------------------------------------------------
Cash and cash equivalents 258.0 510.4
Invested assets
Debt securities 4,397.8 3,832.5
Equity securities 2,870.9 2,019.5
Loans 313.2 242.3
Total invested assets 7,581.9 6,094.3
Premiums receivable 1,664.5 1,469.4
Deferred acquisition costs 401.8 382.4
Reinsurance assets 273.6 224.2
Intangible assets and goodwill 315.8 297.2
Other assets 672.6 795.5
Total assets 11,168.2 9,773.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Claims liabilities 4,367.6 4,064.9
Unearned premiums 2,517.2 2,366.8
Debt outstanding 249.9 -
Other liabilities 1,140.5 709.1
Total liabilities 8,275.2 7,140.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share capital and contributed surplus 1,144.8 1,149.8
Retained earnings 1,843.9 1,928.9
Accumulated other comprehensive loss (95.7) (446.1)
Shareholders' equity 2,893.0 2,632.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Book value per share (dollars) 24.13 21.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents and invested assets increased by
Premiums receivable, deferred acquisition costs and unearned premiums increased due to a higher amount of direct written premiums in the third quarter of 2009 compared to the fourth quarter of 2008, consistent with the seasonality of the business. See section 3.7.
Reinsurance assets increased due to the reinsurance on the catastrophes that occurred during the third quarter.
Other assets decreased mainly due to tax refunds received during the first nine months of the year.
Claims liabilities increased in the first nine months of 2009 due to the higher numbers of catastrophes and severe weather events.
Debt outstanding: see section 7.4
Other liabilities increased due to new short positions and derivative liabilities associated with our hedged investment strategies.
7.2 Prior year claims development
The following table shows the development of claims liabilities for the 10 most recent accident years, with subsequent developments during the periods. The original reserve estimates are evaluated quarterly for redundancy or deficiency. The evaluation is based on actual payments in full or partial settlement of claims and current estimates of claims liabilities for claims still open or claims still unreported.
Table 23
Accident year
----------------------------------------------------
(in millions of
dollars, except as
otherwise noted) Total 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Original reserve 1,376.4 1,282.2 1,178.0 1,118.8 1,117.7
(Favourable)
unfavourable
development
during Q3 2009
Including MYA 25.1 12.3 9.4 2.3 2.1 1.9
Excluding MYA (14.0) 0.8 0.4 (4.0) (1.7) (1.3)
(Favourable)
unfavourable
development
during YTD 2009
Including MYA (15.4) 13.4 4.3 (1.5) (7.4) (10.5)
Excluding MYA (57.7) 1.0 (5.4) (8.2) (11.6) (14.0)
Cumulative
development
Excluding MYA 1.1 (5.2) (49.7) (134.5) (263.4)
As a % of
original reserve 0.1% (0.4)% (4.2)% (12.0)% (23.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accident year
-------------------------------------------
(in millions of
dollars, except as 1999 &
otherwise noted) 2003 2002 2001 2000 earlier
----------------------------------------------------------------
Original reserve 973.2 838.6 729.0 655.5 1,512.9
(Favourable)
unfavourable
development
during Q3 2009
Including MYA 1.1 (2.2) (1.0) 0.1 (0.9)
Excluding MYA (0.6) (3.4) (1.6) (0.4) (2.2)
(Favourable)
unfavourable
development
during YTD 2009
Including MYA (2.9) (10.5) (1.0) (1.5) 2.2
Excluding MYA (4.7) (11.8) (1.7) (2.1) 0.8
Cumulative
development
Excluding MYA (206.9) (40.5) 30.3 29.1 (8.5)
As a % of
original reserve (21.3)% (4.8)% 4.2% 4.4% (0.6)%
-----------------------------------------------------------------
-----------------------------------------------------------------
The annualized rate of prior year claims development for the 2008 accident year was slightly adverse mainly due to a combination of medical cost pressures in Ontario personal auto and adjustments to commercial P&C reserves.
Prior year claims development fluctuates between quarters and from year to year. The long-term historical average rate of favourable prior year claims development is 3-4% per year.
7.3 Shareholders' equity
As of
On
Under the company's long-term incentive plan ("LTIP"), certain employees were awarded performance units as part of their compensation. At the end of the performance cycle, the performance units will ultimately be converted to a certain number of restricted common shares to be purchased on the market based on the company's three-year average return on equity compared to the Canadian P&C industry average. In
Accumulated other comprehensive income (loss) ("AOCI") is a component of shareholders' equity. It reflects the unrealized gains or losses related to AFS assets, net of income taxes, shown in the table below.
Table 24
September 30, 2009
----------------------------------
(in millions of dollars,
except as otherwise noted) Pre-tax Taxes After-tax
-------------------------------------------------------------------------
Opening AOCI balance
on January 1, 2009 (632.8) 186.7 (446.1)
Increase in fair values
during the period 389.4 (113.0) 276.4
Realized losses reclassified
to income during the period 101.0 (27.0) 74.0
---------- ---------- ----------
AOCI as at September 30, 2009 (142.4) 46.7 (95.7)
-------------------------------------------------------------------------
Unrealized losses on AFS assets were
7.4 BLiquidity and capital resources
Table 25 - Cash flow and liquidity
(in millions of
dollars, except
as otherwise YTD YTD
noted) Q3-2009 Q3-2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Selected inflows
and (outflows)
Operating
activities:
Cash provided
by operating
activities 215.7 191.0 12.9% 460.7 389.2 18.4%
Investing
activities:
Purchases of
invested
assets, net
of sales (256.6) (42.0) 511.0% (772.1) 2.2 n/a
Financing
activities:
Dividends
paid (38.3) (37.3) 2.7% (115.1) (113.8) 1.1%
Net proceeds
from debt
issuance 248.8 - n/a 248.8 - n/a
Common shares
repurchased
for
cancellation - (77.3) (100.0)% - (176.0) (100.0)%
-------------------------------------------------------------------------
Change in cash
and cash
equivalents
during the
period 258.0 68.7 275.5% 258.0 68.7 275.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by operating activities, as well as the proceeds from the debt issuance, were mainly used for the purchase of invested assets and payment of dividends.
Capital and cash management
The company has a prudent capital management program in place to ensure that its capital is employed effectively. The company's excess capital could be used to pursue growth initiatives, to fund share buybacks in the future or to increase dividends.
Based on an MCT of 170%, the company's total excess capital position increased to
Although the minimum MCT ratio required by OSFI is 150%, the company maintains a higher internal operating target of 170%.
The following table presents the MCT ratio of the company's insurance subsidiaries with a total for all companies.
Table 26
MCT - P&C Insurance Companies
(in millions
of dollars,
except as Intact Belair Nordic Novex Trafalgar
otherwise Insur- Insur- Insur- Insur- Insur-
noted) ance ance ance ance ance Total
-------------------------------------------------------------------------
At September 30,
2009
Total
capital
available 1,111.4 225.8 872.6 198.9 180.7 2,589.4
Total
capital
required 524.5 99.0 420.0 73.0 65.0 1,181.5
Excess
capital 586.9 126.8 452.6 125.9 115.7 1,407.9
MCT % 211.9% 228.2% 207.7% 272.4% 277.9% 219.2%
Excess
at 150% 324.7 77.4 242.5 89.3 83.2 817.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31,
2008
Total
capital
available 867.5 186.1 673.3 196.3 173.3 2,096.5
Total
capital
required 454.0 84.2 359.4 66.5 58.9 1,023.0
Excess
capital 413.5 101.9 314.0 129.8 114.4 1,073.6
MCT % 191.1% 221.1% 187.4% 295.2% 294.1% 205.0%
Excess
at 150% 186.5 59.8 134.3 96.5 84.9 562.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On
Estimated MCT impact of changes in the market value of IFC's investments in common and preferred shares
The MCT is impacted by many factors including changes in the 1) market value of IFC's invested assets; 2) asset mix and income from invested assets; and 3) combined ratio.
Based on IFC's MCT of 219.2% on
Rating agencies
Table 27
Credit Ratings
A. M. Best Moody's DBRS
-------------------------------------------------------------------------
Intact
Financial a- A3 A (low)
Corporation Affirmed on Affirmed on Affirmed on
June 2, 2009 August 17, 2009 August 27, 2009
-------------------------------------------------------------------------
Financial Strength Ratings
A. M. Best Moody's
-------------------------------------------------------------------------
Insurance Subsidiaries of
Intact Financial Corporation A+ Aa3
Affirmed on Affirmed on
June 2, 2009 August 17, 2009
-------------------------------------------------------------------------
Financing
On
Effective
Section 8 - Accounting and disclosure matters
8.1 Internal controls over financial reporting
Management has designed and is responsible for maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
No changes were made to the company's internal controls over financial reporting during the period ended
8.2 Critical accounting estimates and assumptions
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The year-to-date results of the company reflect management's judgments regarding the impact of prevailing global credit, and equity market conditions. Given the uncertainty surrounding the continued volatility in these markets, and the general lack of liquidity in financial markets, the actual financial results could differ from those estimates.
There are no new critical accounting estimates or assumptions compared to the information provided in the annual MD&A.
8.3 New accounting standards and policies
The company's Unaudited Consolidated Interim Financial Statements have been prepared in accordance with GAAP. The principal accounting policies are described in the company's 2008 annual report. There have been no significant changes in those accounting policies except as follows.
Goodwill and intangible assets
Effective
In applying Section 3064, the Company has reclassified certain assets from Other assets to Intangibles on the unaudited consolidated balance sheets. The amount reclassified as at
Credit risk and the fair value of financial assets and financial liabilities
Effective
Debt outstanding
On
International financial reporting standards
The Canadian Accounting Standards Board ("AcSB") has confirmed
In order to prepare and implement the conversion to IFRS, the company has developed an IFRS changeover plan. This plan addresses and provides a timeline for key elements of the company's conversion to IFRS including:
- - Accounting policy changes
- - Information technology and data systems impacts
- - Education and training requirements
- - Internal control over financial reporting
- - Financial reporting requirements
- - Impacts on business activities
- - Actuarial and regulatory implications
A technical accounting policies team was formed, comprising approximately ten accounting professionals from within the company who have a sound knowledge of accounting standards and the company's operations. The team held various training sessions and awareness seminars across the company. On a quarterly basis, an IFRS update is presented to the members of the company's Audit and Risk Review Committee.
The team also partnered with the relevant functional areas of the company, including information technology, capital management and actuarial services, to assess the specific and overall impact of IFRS. The team's current assessment indicates that IFRS changeover is expected to have a low impact on business activities. However, as the implementation process moves forward, the company will continue to monitor the ongoing changes to IFRS and amend the changeover plan accordingly, especially as new exposure drafts or standards expected to impact the company are released.
The company is currently assessing the impact of the
Overall, the company's transition is currently in line with the company's changeover plan. The key accounting policy differences between IFRS and Canadian GAAP which will impact the company have been identified and are currently being assessed and quantified.
The IFRS 1 transition choices have been presented to the senior management. Although no transition choice or election has yet been made, the company is ready to make these choices and elections before the transition date to IFRS.
The company has identified the following key differences:
-------------------------------------------------------------------------
Accounting
Policy Key differences Potential Impacts
-------------------------------------------------------------------------
Employee First-time adopters can Recognizing all cumulative
benefits elect to recognize all actuarial gains and losses
(Defined cumulative actuarial gains at the date of transition
benefit and losses at the date of as an adjustment to
pension transition as an adjustment retained earnings is likely
plans) to opening retained earnings. to reduce the company's
Alternatively, entities may shareholders' equity and the
elect to use an IFRS prepaid pension asset
"corridor" approach that currently on the company's
leaves some actuarial gains balance sheet.
and losses unrecognised.
-------------------------------------------------------------------------
Post transition, entities Actuarial gains or losses
have the choice of recognized immediately to
recognising ongoing actuarial comprehensive income are
gains or losses in profit likely to create more
or loss over time using the volatility in the balance
"corridor" approach, or sheet than if the "corridor"
alternatively, immediately approach is chosen as they
to Comprehensive income. will be accounted for
directly in shareholders'
equity as incurred.
The company is currently
assessing the impacts each
choice will have on the
company's consolidated
financial statements.
-------------------------------------------------------------------------
Financial The company's accounting for Not expected to have a
instruments financial instruments is for significant impact.
the most part similar to IFRS.
Treatment of foreign exchange
gains/losses on monetary items
are recognized immediately in
the profit and loss (currently
presented in the other
comprehensive income part of
the balance sheet). First-time
adopters can also choose to
(re-)classify their financial
assets and financial
liabilities at the transition
date.
-------------------------------------------------------------------------
First-time adopters can also At this time, this transition
choose to (re-)classify their choice is not expected to
financial assets and have a significant impact as
financial liabilities at the the company's current
transition date. intention is not to change
its investments
classification.
-------------------------------------------------------------------------
IASB is currently revisiting The company is currently
the accounting rules monitoring and assessing the
pertaining to financial impacts the adoption of these
instruments. A revised IAS 39 (and further) amendments will
"Financial Instruments: have on its consolidated
Classification and financial statements. The
Measurement" is currently company's early assessment
scheduled to be released in indicates that the proposed
the fourth quarter of 2009 amendments could likely
and if adopted as currently affect how the company
proposed, could have a classifies and measures its
significant impact on how financial instruments,
financial instruments are including its embedded
classified and measured. This derivatives which is
revised standard is expected discussed in section 3.4.
to be effective for the
company from January 1, 2012.
-------------------------------------------------------------------------
8.4 Future accounting changes
Business combinations, consolidated financial statements and non-controlling interest
In
The recommendations of Section 1582, Business Combinations, which replaces Section 1581, Business Combinations, become effective
The recommendations of Section 1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Interests, which together replace Section 1600, Consolidated Financial Statements, also become effective on
Impairment of Financial Assets - Amendments to: Financial Instruments - Recognition and Measurement
On
The Company will adopt these amendments, which require retroactive application to
8.5 Related-party transactions
Subsequent to the disposal by ING Groep of its shareholding in the company, all related-party transactions are with entities associated with the Company's distribution segment.
Section 9 - Risk management
The company has not significantly changed its risk management strategy as compared to the information presented in the annual MD&A.
9.1 Estimated impact of changes in interest rates and equity prices
Impact of changes in interest rates
For our AFS debt or preferred securities a 100 basis point increase in interest rates would increase income before income taxes by approximately
Impact of changes in equity prices
As at
Key assumptions
The analysis in this section is based on the following assumptions: 1) the securities in the company's portfolio are not impaired; 2) interest rates and equity prices move independently; 3) shifts in the yield curve are parallel; 4) credit and liquidity risks have not been considered, and, 5) all of our debt securities and preferred shares are AFS. For our HFT debt securities, which are marked-to-market, the estimated impact on income before income taxes of a 100 basis point increase or decrease in interest rates is assumed to be offset by the MYA. In addition, it is important to note that AFS securities in an unrealized loss position, as reflected in OCI, may at some point in the future be realized either through a sale or impairment. See section 3.4, "Net investment gains (losses)".
Section 10 - Other matters
10.1 Cautionary note regarding forward-looking statements
Certain statements in this report or included by reference about the company's current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments are forward-looking statements. The words "may", "will", "would", "should", "could", "expects", "plans", "intends", "trends", "indications", "anticipates", "believes", "estimates", "predicts", "likely" or "potential" or the negative or other variations of these words or other similar or comparable words or phrases identify such forward-looking statements.
Forward-looking statements are based on estimates and assumptions made by management based on management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Many factors could cause the company's actual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements. These factors include, without limitation, the following: the company's ability to implement its strategy or operate its business as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the company writes; unfavourable capital market developments or other factors which may affect the company's invested assets and its pension plans funding obligations; the cyclical nature of the P&C insurance industry; management's ability to accurately predict future claims frequency; government regulations; litigation and regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; the company's reliance on brokers and third parties to sell its products; the company's ability to successfully pursue its acquisition and business strategies; the company's participation in the Facility Association (a mandatory pooling arrangement among all industry participants); terrorist attacks and ensuing events; the occurrence of catastrophic events; the company's ability to maintain its financial strength ratings; the company's ability to alleviate risk through reinsurance; the company's ability to successfully manage credit risk; the company's reliance on information technology and telecommunications systems; the company's dependence on key employees; general economic, financial and political conditions; the company's dependence on the results of operations of its subsidiaries; the accuracy of analyst earnings estimates or the consensus figure based upon such estimates; the volatility of the stock market and other factors affecting the company's share price; the limited trading history of its common shares; and future sales of a substantial number of its common shares. These factors are not intended to represent a complete list of the factors that could affect the Company and should be considered carefully by readers who should not place undue reliance on the company's forward-looking statements.
The company and management have no intention and accept no responsibility to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.
Intact Financial Corporation
Unaudited interim consolidated balance sheets
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
As at As at
September 30, December 31,
2009 2008
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 258.0 $ 510.4
Invested assets (note 3)
Debt securities 4,397.8 3,832.5
Equity securities 2,870.9 2,019.5
Loans 313.2 242.3
-------------------------
7,581.9 6,094.3
Accrued interest and dividend income 58.2 34.7
Premium receivables 1,664.5 1,469.4
Other receivables 285.9 247.0
Deferred acquisition costs 401.8 382.4
Reinsurance assets 273.6 224.2
Other assets 277.4 238.6
Income taxes receivable 29.9 221.0
Future income tax asset 21.2 54.2
Intangibles 148.5 136.4
Goodwill 167.3 160.8
-------------------------------------------------------------------------
Total assets $ 11,168.2 $ 9,773.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Claims liabilities (note 4) $ 4,367.6 $ 4,064.9
Unearned premiums 2,517.2 2,366.8
Debt outstanding (note 5) 249.9 -
Other liabilities 1,074.5 701.7
Income taxes payable 66.0 7.4
-------------------------
8,275.2 7,140.8
Shareholders' equity
Share capital (note 6) 1,061.5 1,061.5
Contributed surplus 83.3 88.3
Retained earnings 1,843.9 1,928.9
Accumulated other comprehensive loss (95.7) (446.1)
-------------------------
2,893.0 2,632.6
-------------------------------------------------------------------------
Total liabilities and equity $ 11,168.2 $ 9,773.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Intact Financial Corporation
Unaudited interim consolidated statements of income (loss)
For the periods ended September 30
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
Three months Nine months
--------------- ---------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenues
Gross premiums written
Direct $ 1,133.4 $ 1,119.8 $ 3,255.2 $ 3,200.0
Ceded (36.5) (23.7) (86.3) (73.0)
-------------------------------------------
Net 1,096.9 1,096.1 3,168.9 3,127.0
Changes in net unearned
premiums (77.9) (63.8) (150.0) (106.8)
-------------------------------------------
Net premiums earned 1,019.0 1,032.3 3,018.9 3,020.2
Interest and dividend income 77.0 87.2 227.1 262.9
Net investment gains
(losses) (note 9) 11.7 (81.3) (159.2) (135.8)
Distribution income and other 8.7 7.6 29.8 28.4
-------------------------------------------------------------------------
1,116.4 1,045.8 3,116.6 3,175.7
Expenses
Underwriting
Claims 841.2 674.5 2,216.5 2,045.8
Commissions, premium taxes
and general expenses 282.0 288.7 858.9 871.1
-------------------------------------------
1,123.2 963.2 3,075.4 2,916.9
Interest on debt outstanding 1.1 - 1.1 -
Distribution expenses and
other 8.1 13.9 25.7 27.1
-------------------------------------------
1,132.4 977.1 3,102.2 2,944.0
-------------------------------------------------------------------------
(Loss) income before
income taxes (16.0) 68.7 14.4 231.7
Income tax (benefit) expense (8.0) 11.4 (15.6) 39.4
-------------------------------------------------------------------------
Net (loss) income $ (8.0) $ 57.3 $ 30.0 $ 192.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share, basic
and diluted (in dollars) $ (0.07) $ 0.47 $ 0.25 $ 1.57
Dividends per share
(in dollars) $ 0.32 $ 0.31 $ 0.96 $ 0.93
Basic and diluted average
number of common shares
(in millions) 119.9 120.8 119.9 122.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of comprehensive income (loss)
For the periods ended September 30
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
Three months Nine months
--------------- ---------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Net (loss) income $ (8.0) $ 57.3 $ 30.0 $ 192.3
Net decrease (increase) in
unrealized losses on
available for sale
securities, net of income
taxes 147.0 (159.1) 276.4 (252.1)
-------------------------------------------
Reclassification of net
(gains) losses to income,
net of income taxes (9.1) 41.9 74.0 86.3
-------------------------------------------
Other comprehensive income
(loss) 137.9 (117.2) 350.4 (165.8)
-------------------------------------------------------------------------
Total comprehensive income
(loss) $ 129.9 $ (59.9) $ 380.4 $ 26.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Intact Financial Corporation
Unaudited interim consolidated statements of changes in shareholders'
equity
For the periods ended September 30
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
Accumulated
other
Share Contributed Retained comprehensive
capital surplus earnings loss Total
-------------------------------------------------------------------------
Balance as at
December 31,
2008 $ 1,061.5 $ 88.3 $ 1,928.9 $ (446.1) $ 2,632.6
Net income - - 30.0 - 30.0
Other comprehensive
income (loss) - - - 350.4 350.4
Common shares
repurchased for
cancellation - - - - -
Dividends paid - - (115.1) - (115.1)
Long-term incentive
plan ("LTIP") - (5.0) 0.1 - (4.9)
-------------------------------------------------------------------------
Balance as at
September 30,
2009 $ 1,061.5 $ 83.3 $ 1,843.9 $ (95.7) $ 2,893.0
-------------------------------------------------------------------------
Balance as at
December 31,
2007 $ 1,101.9 $ 97.2 $ 2,091.3 $ (118.3) $ 3,172.1
Net income - - 192.3 - 192.3
Other comprehensive
income (loss) - - - (165.8) (165.8)
Common shares
repurchased for
cancellation (40.4) - (135.6) - (176.0)
Dividends paid - - (113.8) - (113.8)
LTIP - (8.7) (4.0) - (12.7)
-------------------------------------------------------------------------
Balance as at
September 30,
2008 $ 1,061.5 $ 88.5 $ 2,030.2 $ (284.1) $ 2,896.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of cash flows
For the periods ended September 30
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
Three months Nine months
--------------- ---------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from (used in)
operating activities
Net (loss) income $ (8.0) $ 57.3 $ 30.0 $ 192.3
Adjustments for
non-cash items 24.7 200.7 210.7 340.8
Changes in net claims
liabilities 212.4 23.2 253.6 82.0
Changes in other operating
assets and liabilities (13.4) (90.2) (33.6) (225.9)
-------------------------------------------
Net cash flows from
operating activities (note 9) 215.7 191.0 460.7 389.2
Cash flows from (used in)
investing activities
Proceeds from sale of
invested assets 2,088.4 1,676.9 4,262.9 4,286.8
Purchases of invested assets (2,345.0) (1,718.9) (5,035.0) (4,284.6)
Purchase of brokerages and
books of business, net
of sales (9.8) 2.6 (40.8) (4.5)
Purchases of property and
equipment (12.5) (10.6) (33.9) (36.5)
-------------------------------------------
Net cash flows used in
investing activities (278.9) (50.0) (846.8) (38.8)
Cash flows from (used in)
financing activities
Common shares repurchased
for cancellation - (77.3) - (176.0)
Net proceeds from debt issuance 248.8 - 248.8 -
Dividends paid (38.3) (37.3) (115.1) (113.8)
-------------------------------------------
Net cash flows from (used in)
financing activities 210.5 (114.6) 133.7 (289.8)
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 147.3 26.4 (252.4) 60.6
Cash and cash equivalents,
beginning of period 110.7 42.3 510.4 8.1
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 258.0 $ 68.7 $ 258.0 $ 68.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Intact Financial Corporation
Notes to unaudited interim consolidated financial statements
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
Note 1 - Basis of presentation
These unaudited interim consolidated financial statements of Intact
Financial Corporation (formerly ING Canada Inc.) ("Intact" or the
"Company") have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") for interim financial statements
and do not include all the information required for annual financial
statements. Except as described below, these unaudited interim
consolidated financial statements use the same accounting policies as the
Company's audited consolidated financial statements for the fiscal year
ended December 31, 2008 and should be read in conjunction with the
Company's annual consolidated financial statements for the year then
ended. Certain comparative figures have been reclassified to conform to
the presentation adopted in the current periods.
Note 2 - Accounting policy changes
a) Applied during the current periods
Goodwill and intangible assets
Effective January 1, 2009, the Company applied the new Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and
Intangible Assets. This Section replaces Section 3062, Goodwill and Other
Intangible Assets, and Section 3450, Research and Development Costs, and
establishes standards for the recognition, measurement and disclosure of
goodwill and intangible assets. The provisions relating to the definition
and initial recognition of intangible assets, including internally
generated intangible assets, are equivalent to the corresponding
provisions of IAS 38, Intangible Assets, of International Financial
Reporting Standards ("IFRS").
In applying Section 3064, the Company has reclassified certain assets
from Other assets to Intangibles on the unaudited consolidated balance
sheets. The amount reclassified as at December 31, 2008 was $79.4. This
reclassification had no impact on the Company's net income for 2009.
Credit risk and the fair value of financial assets and financial
liabilities
Effective January 20, 2009, the Company applied the Emerging Issues
Committee ("EIC") abstract 173, Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities, EIC-173 requires an entity to
take into account its own credit risk and that of the relevant
counterparties when determining the fair value of financial assets and
financial liabilities, including derivative instruments. The adoption of
this new CICA abstract has not had a significant impact on the Company's
results or financial condition as credit risks associated with the
Company's financial assets and liabilities are incorporated into the
Company's valuation methodology.
Debt outstanding
On August 31, 2009, the Company completed an offering of $250.0 principal
amount of unsecured medium term notes (the "Notes"). The Notes together
with the cost of issuing debt are classified as Debt outstanding and
accounted for at amortized cost using the effective interest method.
b) Future accounting changes
Business combinations, consolidated financial statements and
non-controlling interest
In January 2009, the CICA issued three new accounting standards: Section
1582, Business Combinations, Section 1601, Consolidated Financial
Statements, and Section 1602, Non-controlling Interests, to converge the
accounting for business combinations and the reporting of non-controlling
interest to IFRS.
The recommendations of Section 1582, Business Combinations, which
replaces Section 1581, Business Combinations, become effective January 1,
2011 and should be applied prospectively with earlier adoption permitted.
This section establishes new guidance on the recognition and measurement
basis of all assets and all liabilities acquired through a business
combination.
The recommendations of Section 1601, Consolidated Financial Statements,
and Section 1602, Non-Controlling Interests, which together replace
Section 1600, Consolidated Financial Statements, also become effective on
January 1, 2011 and should also be applied prospectively with earlier
adoption permitted. These standards establish new guidance on the
accounting and presentation for non-controlling interests and for
transactions affecting non-controlling interests. These two new standards
must be adopted concurrently with Section 1582.
The Company is currently assessing the impact the adoption of these
Sections will have on its consolidated financial statements.
Impairment of Financial Assets - Amendments to: Financial Instruments -
Recognition and Measurement
On August 20, 2009, the CICA issued various amendments to Section 3855
which further reduced differences with IFRS. As a result of these
amendments debt instruments not quoted in an active market may be
classified as loans and receivables, and impairment will be assessed
using the same model for impaired loans. In addition, the new guidance
requires reversing an impairment loss relating to an available-for-sale
debt instrument when, in a subsequent period, the fair value of the
instrument increases and the increase can be objectively related to an
event occurring after the loss was recognized.
The Company will adopt these amendments, which require retroactive
application to January 1, 2009, in the fourth quarter of fiscal year
2009. The Company is currently assessing the impact that adopting these
amendments will have on its consolidated financial statements.
Note 3 - Invested assets and other financial instruments
a) Carrying value of invested assets
The Company's invested assets are classified into four categories as
defined by the CICA guidance on financial instruments: available for sale
("AFS"), classified or designated as held-for-trading ("HFT") and loans
and receivables.
Classified Designated Loans and
AFS as HFT as HFT receivables Total
-------------------------------------------------------------------------
As at September 30,
2009
Debt securities
Short-term notes 169.6 - - - 169.6
Fixed income 1,973.5 - 2,254.7 - 4,228.2
Equity securities
Preferred shares 1,614.6 - - - 1,614.6
Common shares 694.1 176.6 385.6 - 1,256.3
Loans - - - 313.2 313.2
-------------------------------------------------------------------------
4,451.8 176.6 2,640.3 313.2 7,581.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31,
2008
Debt securities
Short-term notes 293.8 - - - 293.8
Fixed income 1,781.2 - 1,757.5 - 3,538.7
Equity securities
Preferred shares 1,220.1 - - - 1,220.1
Common shares 727.7 - 71.7 - 799.4
Loans - - - 242.3 242.3
-------------------------------------------------------------------------
4,022.9 - 1,829.2 242.3 6,094.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company reclassified investments carried at cost from Loans to Other
assets. The amount reclassified at December 31, 2008 is $14.6. The
equivalent amount at September 30, 2009 is $20.3.
The risk management policies and procedures of the Company as well as
certain disclosures required by Sections 3862 and 1535 were provided in
the 2008 annual Management Discussion and Analysis under Section 9 and in
notes 3, 4, 5 and 13 of the 2008 annual audited consolidated financial
statements. The impact of changes in risk variables such as market prices
and interest rates is described in the Risk Management section of the
quarterly Management Discussion and Analysis which accompanies these
financial statements.
b) Unrealized gains and losses
HFT Total
invested invested
assets Other invested assets assets
-----------------------------------------------------
At
At fair Amortized Unrealized Unrealized carrying
value cost gains losses value
-------------------------------------------------------------------------
As at September 30,
2009
Debt securities
Short-term notes - 169.6 - - 169.6
Fixed income 2,254.7 1,929.5 48.0 (4.0) 4,228.2
Equity securities
Preferred shares - 1,776.8 45.9 (208.1) 1,614.6
Common shares 562.2 718.4 32.8 (57.1) 1,256.3
Loans - 313.2 - - 313.2
-------------------------------------------------------------------------
2,816.9 4,907.5 126.7 (269.2) 7,581.9
Net unrealized losses (142.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31,
2008
Debt securities
Short-term notes - 293.8 - - 293.8
Fixed income 1,757.5 1,750.8 57.1 (26.7) 3,538.7
Equity securities
Preferred shares - 1,742.6 1.8 (524.3) 1,220.1
Common shares 71.7 868.4 10.5 (151.2) 799.4
Loans - 242.3 - - 242.3
-------------------------------------------------------------------------
1,829.2 4,897.9 69.4 (702.2) 6,094.3
Net unrealized losses (632.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loans are carried at amortized cost. Their fair value is determined using
internal valuation models. As at September 30, 2009, these loans had a
fair value of $329.9 (December 31, 2008 - $268.8).
c) Positive and negative fair values of derivative financial instruments
Fair values
-------------------
Positive Negative
-------------------------------------------------------------------------
As at September 30, 2009
Where hedge accounting is applied 1.1 -
Where hedge accounting is not applied 2.8 10.5
Embedded derivatives - 76.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
Where hedge accounting is applied - 1.9
Where hedge accounting is not applied 9.0 2.3
Embedded derivatives - 4.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 4 - Net claims liabilities
Direct Net
claims Reinsurers' claims
liabilities share liabilities
-------------------------------------------------------------------------
For the three months ended
September 30, 2009
Balance, beginning of period 4,104.7 205.6 3,899.1
Claims incurred 862.4 58.1 804.3
Prior year (favourable) claims
development (19.9) (5.9) (14.0)
Increase due to changes in discount
rate 54.4 3.5 50.9
Claims paid (634.0) (5.3) (628.7)
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Balance, end of period 4,367.6 256.0 4,111.6
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For the three months ended
September 30, 2008
Balance, beginning of period 4,033.7 242.8 3,790.9
Claims incurred 744.5 3.2 741.3
Prior year (favourable) claims
development (49.6) (3.7) (45.9)
Decrease due to changes in discount
rate (22.6) (1.7) (20.9)
Claims paid (661.7) (10.4) (651.3)
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Balance, end of period 4,044.3 230.2 3,814.1
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For the nine months ended
September 30, 2009
Balance, beginning of period 4,064.9 207.0 3,857.9
Claims incurred 2,283.4 63.6 2,219.8
Prior year (favourable) claims
development (52.1) 5.6 (57.7)
Increase due to changes in discount
rate 58.1 3.7 54.4
Claims paid (1,986.7) (23.9) (1,962.8)
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Balance, end of period 4,367.6 256.0 4,111.6
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For the nine months ended
September 30, 2008
Balance, beginning of period 3,989.0 256.9 3,732.1
Claims incurred 2,158.9 16.0 2,142.9
Prior year (favourable) claims
development (91.0) (4.8) (86.2)
Decrease due to changes in discount
rate (11.8) (0.9) (10.9)
Claims paid (2,000.8) (37.0) (1,963.8)
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Balance, end of period 4,044.3 230.2 3,814.1
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Note 5 - Debt outstanding
On August 31, 2009, the Company completed an offering of $250.0 principal
amount of unsecured medium term notes (the "Notes"). The Notes bear
interest at a fixed annual rate of 5.41% until maturity on September 3,
2019, payable in equal semi-annual instalments commencing on March 3,
2010.
The fair value of the Notes as at September 30, 2009 is $255.2.
Effective December 31, 2008, the Company entered into an unsecured
committed credit facility of $150.0 which replaces the previous credit
facility of $100.0. This credit facility may be drawn as prime loans at
the prime rate plus a margin or as bankers' acceptances at the bankers'
acceptance rate plus a margin. As at September 30, 2009 the Company had
not drawn down under the facility.
Note 6 - Share capital
a) Issued and outstanding
As at September 30, 2009
---------------------------------------------
Issued and
Authorized outstanding
(number of (number of Share
shares) shares) Capital
-------------------------------------------------------------------------
Common shares Unlimited 119,906,567 $ 1,061.5
Class A shares Unlimited - -
Special share - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
---------------------------------------------
Issued and
Authorized outstanding
(number of (number of Share
shares) shares) Capital
-------------------------------------------------------------------------
Common shares Unlimited 119,906,566 $ 1,061.5
Class A shares Unlimited - -
Special share One 1 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On February 19, 2009, ING Groep completed the disposal of its entire 70%
shareholding in the Company via the sale of 36,183,480 of the Company's
common shares to a number of institutional investors on a private
placement basis and the sale of 47,757,920 common shares pursuant to a
"bought deal" secondary public offering. The Special share owned by ING
Groep was immediately converted into one common share and was also
disposed of through the secondary offering.
b) Normal course issuer bid
During the first nine months of 2008, the Company repurchased 4,566,195
common shares under its normal course issuer bid at an average price of
$38.53 per share for a total consideration of $176.0. Total cost paid,
including fees, was first charged to share capital to the extent of the
average carrying value of the common shares purchased for cancellation
and the excess of $135.6 was charged to retained earnings.
Note 7 - Stock-based compensation
The following table reconciles the beginning and ending balances of the
share units outstanding for both the Company's LTIP and employee share
purchase plan ("ESPP").
Three months Nine months
For the periods ended --------------- ---------------
September 30 2009 2008 2009 2008
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LTIP (share equivalents)
Outstanding, beginning of
period 287,498 355,130 306,864 616,115
Net change in estimate during
the period (20,635) 8,703 (40,001) (252,282)
-------------------------------------------------------------------------
Outstanding, end of period 266,863 363,833 266,863 363,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LTIP (restricted common shares)
Outstanding, end of period 342,731 289,236 342,731 289,236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ESPP (restricted common shares)
Outstanding, beginning of
period 101,567 77,371 89,906 66,228
Awarded during the period 31,325 22,126 77,323 62,289
Vested or forfeited during
the period (22,172) (17,030) (56,509) (46,050)
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Outstanding, end of period 110,720 82,467 110,720 82,467
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Note 8 - Related-party transactions
Subsequent to the disposal by ING Groep of its shareholding in the
Company (see note 6 a)), all related-party transactions are with entities
associated with the Company's distribution segment.
a) Revenues and expenses
Three months Nine months
For the periods ended --------------- ---------------
September 30 2009 2008 2009 2008
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Reinsurance ceded to related
entities
Ceded premiums earned - 3.7 - 11.1
Ceded claims - (0.2) - (0.1)
Expenses
Commissions 10.6 9.9 29.2 29.2
Other expenses - 4.5 3.0 13.7
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b) Balance sheet amounts
September 30, December 31,
As at 2009 2008
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Reinsurance payable - (0.4)
Loans 217.2 127.0
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Note 9 - Additional information
a) Consolidated statements of income
Three months Nine months
For the periods ended --------------- ---------------
September 30 2009 2008 2009 2008
-------------------------------------------------------------------------
Amounts included in net investment
gains (losses):
Related to HFT financial
instruments
Gains (losses) on HFT
securities 66.7 (40.6) 163.2 (61.9)
(Losses) gains on derivatives (41.4) 6.1 (150.1) 26.4
Related to AFS financial
instruments
Realized gains (losses) on AFS
securities 24.3 (38.5) (64.2) (41.2)
(Losses) gains on embedded
derivatives (30.4) 5.9 (72.3) 15.9
Impairments of fixed income
debt securities - (4.0) (8.4) (10.9)
Impairments of common share
equity securities (7.5) (11.1) (27.1) (64.7)
Other - 0.9 (0.3) 0.6
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Net investment gains (losses) 11.7 (81.3) (159.2) (135.8)
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b) Consolidated statements of cash flows
Three months Nine months
For the periods ended --------------- ---------------
September 30 2009 2008 2009 2008
-------------------------------------------------------------------------
Expense (revenue) amounts included
in non-cash items:
Amortization 12.0 10.9 32.9 30.3
LTIP - 10.4 (5.0) (0.2)
Employee future benefits 2.8 3.8 8.5 9.7
Income taxes recovered 22.9 30.6 162.8 55.7
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Note 10 - Segmented information
The Company has two reporting segments, the underwriting segment and the
corporate and distribution segment.
The Company's core business activity is property and casualty ("P&C")
insurance underwriting. The underwriting segment includes two lines of
business: personal lines and commercial lines. Personal lines include
automobile and property while commercial lines include automobile and
property and liability.
Corporate and distribution segment includes the results of the Company's
participation in broker and other operations.
a) Results of the Company's reportable segments
Corporate Inter-
and segment
Under- distri- elimina-
writing bution tions Total
-------------------------------------------------------------------------
For the three months ended
September 30, 2009
Revenues 1,019.0 30.0 (21.3) 1,027.7
Expenses 1,123.2 23.7 (19.7) 1,127.2
-------------------------------------------------------------------------
Subtotal (104.2) 6.3 (1.6) (99.5)
Interest and dividend income,
net of expenses 71.9 1.0 - 72.9
Interest on debt outstanding - (1.1) - (1.1)
Net investment gains (losses) 11.1 0.6 - 11.7
-------------------------------------------------------------------------
Total (loss) income before
income taxes (21.2) 6.8 (1.6) (16.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
September 30, 2008
Revenues 1,032.3 27.6 (20.0) 1,039.9
Expenses 963.2 30.1 (20.3) 973.0
-------------------------------------------------------------------------
Subtotal 69.1 (2.5) 0.3 66.9
Interest and dividend income,
net of expenses 80.6 2.5 - 83.1
Interest on debt outstanding - - - -
Net investment gains (losses) (85.5) 4.2 - (81.3)
-------------------------------------------------------------------------
Total (loss) income before
income taxes 64.2 4.2 0.3 68.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
September 30, 2009
Revenues 3,018.9 89.6 (59.8) 3,048.7
Expenses 3,075.4 69.4 (55.4) 3,089.4
-------------------------------------------------------------------------
Subtotal (56.5) 20.2 (4.4) (40.7)
Interest and dividend income,
net of expenses 212.4 3.0 - 215.4
Interest on debt outstanding - (1.1) - (1.1)
Net investment gains (losses) (158.8) (0.4) - (159.2)
-------------------------------------------------------------------------
Total (loss) income before
income taxes (2.9) 21.7 (4.4) 14.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
September 30, 2008
Revenues 3,020.2 86.1 (57.7) 3,048.6
Expenses 2,916.9 71.2 (56.6) 2,931.5
-------------------------------------------------------------------------
Subtotal 103.3 14.9 (1.1) 117.1
Interest and dividend income,
net of expenses 239.6 10.8 - 250.4
Interest on debt outstanding - - - -
Net investment gains (losses) (137.1) 1.3 - (135.8)
-------------------------------------------------------------------------
Total (loss) income before
income taxes 205.8 27.0 (1.1) 231.7
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b) Assets of the Company's reportable segments
Corporate Inter-
and segment
Under- distri- elimina-
writing bution tions Total
-------------------------------------------------------------------------
As at September 30, 2009
Invested assets 7,528.9 53.0 - 7,581.9
Other assets 3,029.5 395.7 (6.2) 3,419.0
Goodwill 74.4 92.9 - 167.3
-------------------------------------------------------------------------
Total assets 10,632.8 541.6 (6.2) 11,168.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
Invested assets 6,048.8 49.9 - 6,094.3
Other assets 3,217.6 303.4 (7.1) 3,518.3
Goodwill 74.4 86.4 - 160.8
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Total assets 9,340.8 439.7 (7.1) 9,773.4
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c) Results by line of business
Three months Nine months
For the periods ended --------------- ---------------
September 30 2009 2008 2009 2008
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Gross premiums written
Personal 860.5 854.5 2,398.0 2,353.2
Commercial 272.9 265.3 857.2 846.8
Underwriting (loss) income
Personal (79.2) 26.0 (53.5) 9.1
Commercial (25.0) 43.1 (3.0) 94.2
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For further information: Media inquiries: Ian Blair, Director, External Communications, (416) 341-1464 ext. 45251, Email: [email protected]; Investor inquiries: Michelle Dodokin, Vice President, Investor Relations, (416) 344-8044, Email: [email protected]
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