ING Canada Reports 2008 Third Quarter Results
Operating income per share up 14.3% on improved underwriting results
Net income impacted by financial market volatility
Strong financial position with significant excess capital and no debt
TORONTO, Nov. 12 /CNW/ - ING Canada Inc. (TSX: IIC) reported net
operating income of $106.4 million or $0.88 per share for the quarter ended
September 30, 2008 up from $95.4 million or $0.77 per share recorded in the
same quarter of last year on improved underwriting performance. Direct
premiums written increased marginally in the quarter to $1,100.3 million,
excluding industry pools, as the company remains committed to its disciplined
approach to risk selection and pricing.
Despite improved operating performance, net income declined to $57.3
million or $0.47 per share down from $92.0 million or $0.74 per share, last
year. The decline reflects $62.0 million of realized losses on investment
associated with the turbulent financial market conditions.
CEO's comments
Charles Brindamour, President and CEO, commented:
"Our operating performance continues to improve with a significant
increase in the profitability of our auto and commercial insurance activities
during the quarter. This improvement resulted from numerous underwriting and
pricing initiatives taken over the last twelve months to address the increased
costs in claims in personal insurance, and our strategy to concentrate on the
most profitable segments of commercial insurance.
"Our investment activities are generating substantial interest and
dividend income with a 4.9% yield. During the quarter we reduced the impact of
the volatility of the capital markets on our balance sheet by decreasing our
common share portfolio by $260 million and reinvesting the proceeds in
Canadian government treasury bills.
"We also exercised prudence in the management of our capital base by
suspending for the time being our share repurchase plan after acquiring nearly
75% of the planned repurchases. Overall, our balance sheet is strong with
approximately $500 million in excess capital and no debt. This positions us
well among financial institutions and allows us to pursue our growth
strategy."
Dividend and share buyback
ING Canada declared a quarterly dividend of 31 cents per share on its
outstanding common shares. The dividend will be payable on December 31 to
shareholders of record on December 15. Since announcing its normal course
issuer bid in February, the company has acquired for cancellation as of
September 30, 4.6 million shares for $176.0 million. In late September, given
the extraordinary market volatility, the company suspended for the time being
the purchase of shares. The decision reflects the company's prudent practices
in managing its financial resources.
Recent events
On October 21st, Moody's Investors Services affirmed its long-term issuer
rating of A3 to ING Canada and the insurance financial strength rating of Aa3
to its insurance subsidiaries with a stable outlook.
On November 3rd, the company announced that it was discontinuing its use
of the debt rating services provided by Standard & Poor's. Upon the cessation
of its coverage, S&P reaffirmed the A+ rating of ING Canada's primary
insurance subsidiaries with a stable outlook.
Consolidated Highlights
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In millions of
dollars, except
as otherwise 2008 2007 2008 2007
noted Q3 Q3 Change YTD YTD Change
--------- --------- --------- --------- --------- ---------
Direct
Premiums
Written 1,100.3 1,091.2 0.8% 3,177.3 3,147.3 1.0%
Underwriting
Income(1) 61.9 29.0 113.4% 106.1 120.8 (12.2)%
Net Operating
Income(2) 106.4 95.4 11.5% 285.8 340.7 (16.1)%
Net Operating
Income Per
Share 0.88 0.77 14.3% 2.33 2.67 (12.7)%
Net Income 57.3 92.0 (37.7)% 192.3 412.6 (53.4)%
Net Income Per
Share ($)
Basic and
Diluted 0.47 0.74 (36.5)% 1.57 3.24 (51.5)%
Return on
Equity - last
12 months 9.5% 16.0% (6.5)pts
Combined Ratio
(excluding MYA) 94.0% 97.1% (3.1)pts 96.5% 95.9% 0.6 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 income after tax
Current Outlook
The profitability of the industry will continue to be under pressure as a
result of increases in claims and weaker capital market conditions.
The increase in claims costs in auto insurance in Ontario and Alberta as
well as the water-related damages in home insurance will lead to premium
increases in personal insurance.
The unprecedented volatility and instability of the capital markets will
likely result in additional investment losses for the industry and a reduction
of its excess capital position.
The Canadian economy is weakening under the pressures of the global
financial crisis and reduced commodity prices. However, the property and
casualty insurance industry tends to be less sensitive to economic slowdown
than many other sectors.
ING Canada is well-positioned to continue to outperform the property and
casualty industry in the current environment due to its significant scale,
pricing and underwriting discipline, prudent investment management and its
strong financial position.
Operating Highlights
- Net operating income, which is defined as the sum of underwriting
income, interest and dividend income and corporate income after tax,
increased 11.5% to $106.4 million during the quarter but decreased
16.1% to $285.8 million for the first nine months mainly as a result
of the impact of the severe winter and spring storms.
- Direct premiums written reached $1,100.3 million during the quarter,
a 0.8% increase over the same quarter of last year. The slow pace of
growth reflects our continued pricing discipline in both personal and
commercial lines. In home and auto insurance, higher average amounts
insured and higher rates more than compensated for the decline in the
number of risks insured. In commercial insurance premiums declined
slightly, as competitive pressures continue, despite a 1.6% increase
in the number of risks insured. For the first nine months of the
year, total direct premiums written increased by 1.0%.
- Underwriting income, excluding the market yield adjustment, improved
significantly during the quarter to reach $61.9 million. The combined
ratio improved 3.1 percentage points to 94.0% with underwriting
income rising substantially in all lines of business, except personal
property.
Personal auto insurance results improved by $22.4 million during the
quarter with a combined ratio of 90.8% reflecting the impact of
premiums increases and better current accident year results. Personal
property insurance continued to be impacted by excessive rain and
seasonal storms in Quebec and Ontario and sustained an underwriting
loss of $27.6 million with a combined ratio of 112.2%. Our commercial
insurance business posted a solid performance with a combined ratio
of 85.3% and an underwriting income of $40.4 million, up from
$23.2 million. The increased profitability in commercial insurance
reflects an improved current year experience as well as more
favourable prior year claims development.
For the first nine months of the year, underwriting income declined
12.2% to $106.1 million due to the severe storms that took place both
during the winter and spring months. The combined ratio for the first
nine months was 96.5%.
- Interest and dividend income, net of expenses decreased slightly to
$83.1 million as a result of the share buyback program. For the first
nine months of the year, interest and dividend income amounted to
$250.5 million compared to $258.4 million the year before.
Investments
- Net losses on invested assets, excluding held-for-trading debt
securities, totalled $62.0 million, up from $9.5 million last
year. The turbulence of the financial markets and the disposition of
$259.5 million of common shares held in our investment portfolio
resulted in realized losses of $41.4 million. Impairments to both
equity and debt securities were down 47% to $15.1 million. For the
year to date, we realized a loss of $122.2 million compared to a gain
of $113.4 million during the corresponding period of last year.
Analyst Estimates
The average estimate of earnings per share and operating earnings per
share for the third quarter among the analysts that follow the company were
$0.85 and $0.86 respectively.
Conference Call
ING Canada will host a conference call to review its earnings results
later this morning at 10:00 a.m. ET. To listen to the call via live audio
webcast and to view the presentation slides and supplementary financial
information, visit our website at www.ingcanada.com and click on "Investor
Relations".
The conference call is also available by dialling 416 915-5763 or
1-800-814-4941 (toll-free in North America). Please call ten minutes before
the start of the call.
A replay of the call will be available at 12:30 p.m. ET today through
11:59 p.m. ET on November 20. To listen to the replay, call 416 640-1917 or
1-877-289-8525 (toll-free in North America). The passcode is 21287153 followed
by the number sign. A transcript of the call will also be available on ING
Canada's website.
About ING Canada
ING Canada offers automobile, property and liability insurance to
individuals and businesses through its insurance subsidiaries. It is the
largest provider of property and casualty insurance in the country with more
than $4 billion in direct premiums written. The company's investment
subsidiary manages a portfolio of approximately $7 billion, comprised mainly
of high quality Canadian securities.
Management's Discussion and Analysis
For the third quarter ended September 30, 2008
Table of contents
Section 1 - ING Canada............................................... 3
Section 2 - Canadian property and casualty insurance
industry outlook.................................................... 4
Section 3 - Overview of consolidated performance..................... 5
Section 4 - Personal lines........................................... 13
Section 5 - Commercial lines......................................... 15
Section 6 - Corporate and distribution............................... 16
Section 7 - Financial condition...................................... 18
Section 8 - Accounting and disclosure matters........................ 21
Section 9 - Risk management.......................................... 23
Section 10 - Other matters........................................... 23
November 11, 2008
The following Management's Discussion and Analysis ("MD&A"), which was
approved by the Board of Directors for the quarter ended September 30, 2008,
is intended to enable the reader to assess the company's results of operations
and financial conditions for the three- and nine-month periods ended September
30, 2008, compared to the corresponding periods in 2007. It should be read in
conjunction with the company's Unaudited Interim Consolidated Financial
Statements and accompanying notes, as well as the MD&A and the Consolidated
Financial Statements in the company's 2007 Annual Report.
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. ING Canada
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 ING
Canada web site at www.ingcanada.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 2007 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 ING Canada, 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 or if the percentage change exceeds
1,000%.
Notes:
- All references to direct premiums written in this MD&A exclude pools,
unless otherwise noted.
- "ING", "ING Canada" and "the company" are terms used throughout the
document to refer to ING Canada Inc. and its subsidiaries.
Section 1 - ING Canada
1.1 Overview of the business
ING Canada is the largest provider of property and casualty ("P&C")
insurance in Canada offering automobile, property and liability insurance to
approximately four million individuals and businesses across Canada. Overall,
the company has an approximate 11% market share and is the leading private
sector P&C insurer in Ontario, Quebec, Alberta and Nova Scotia. ING Canada
distributes insurance through brokers under ING Insurance and Grey Power, and
direct-to-consumers through belairdirect. ING Canada's investment management
subsidiary manages the invested assets of the company and its insurance
subsidiaries.
Section 2 - Canadian property and casualty insurance industry outlook
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P&C industry ING Canada's response
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Pricing and - Increases in claims in personal - Pricing strategies
claims auto in Ontario and Alberta demonstrate commitment
environment will likely lead to premium to sustaining
(12-month increases appropriate
outlook) - In Ontario, industry underwriting margins
personal auto rate are - Proactive in addressing
starting to rise as expected, claims trends
in response to higher - Focusing on innovation,
accident benefit & bodily supply chain management
injury ("AB/BI") and efficiency in
- The Alberta Insurance Rate claims
Board approved a 5.0% rate - Taking robust actions
increase on mandatory personal in home insurance in
auto insurance effective in pricing, segmentation
November 2008 and claims to build a
- Increases in water-related sustainable competitive
damages could drive higher advantage
personal property premiums - Reducing Insurance-to-
- Commercial insurance has Value gap in property
remained competitive, lines
particularly on large accounts - Differentiating
'AcceL', ING's small
business commercial
offering from others on
the market
- Ready to exploit growth
opportunities
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Economic - Overall, P&C industry results - Focusing on strong
conditions are not greatly correlated execution in core
with economic cycles underwriting business
- Demand for P&C insurance is - Enhancing our risk
relatively inelastic; personal selection model that
auto insurance is mandatory puts emphasis on
and property insurance is financial stability, a
required on mortgaged factor that will give
properties us even greater
- The expense base for P&C advantage in a weak
insurance companies is largely economy
variable - Identifying
opportunities to
maximize quality growth
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Capital - Capital markets have - Financial position is
Markets experienced intense strong with $502
volatility and instability million(1) in excess
in recent months, which have capital and no debt
resulted in investment losses, - $6.8 billion investment
higher borrowing costs and portfolio is largely
diminished excess capital Canadian with minimal
position in the industry US exposure and
includes no leveraged
structured investments
- Reduced balance sheet
volatility through
changes in the
portfolio mix and by
taking a cautious
approach toward share
repurchases
- Lower excess capital
levels in the industry
could create more
opportunities for ING
to consolidate in the
Canadian market
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(1) Assumes Minimum Capital Test ("MCT") of 170%
We expect the P&C industry will face continued pressure as a result of
higher claims and weaker capital market conditions. However, ING Canada is
well-positioned to continue to outperform the P&C industry in the current
environment due to our significant scale, pricing and underwriting discipline,
prudent investment and capital management practices, and strong financial
position.
Section 3 - Overview of consolidated performance
Third quarter highlights
- Net operating income per share increased 14.3% driven by robust
underwriting income
- Combined ratio improved by 3.1 percentage points to 94.0%
- Net earnings impacted by capital market volatility and our actions to
reduce equity portfolio
- Financial position is strong with significant excess capital and no
debt
Consolidated financial results
Table 1 - Components of net income
(in millions of
dollars,
except as
otherwise YTD YTD
noted) Q3-2008 Q3-2007 Change 2008 2007 Change
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Direct
premiums
written
(excluding
pools) 1,100.3 1,091.2 0.8% 3,177.3 3,147.3 1.0%
Underwriting
income
(excluding
MYA) 61.9 29.0 113.4% 106.1 120.8 (12.2)%
Combined ratio
(excluding MYA) 94.0% 97.1% (3.1)pts 96.5% 95.9% 0.6 pts
Interest and
dividend income,
net of expenses
(table 7) 83.1 84.7 (1.9)% 250.5 258.4 (3.1)%
(Losses) gains
on invested
assets and
other gains
(table 8) (81.3) (2.8) n/a (135.8) 76.8 (276.8)%
Income before
income taxes 68.7 116.8 (41.2)% 231.7 539.1 (57.0)%
Income tax
expense 11.4 24.8 (54.0)% 39.4 126.5 (68.9)%
Effective
income tax
rate 16.7% 21.2% (4.5)pts 17.0% 23.5% (6.5)pts
Net income 57.3 92.0 (37.7)% 192.3 412.6 (53.4)%
Net operating
income
(table 17) 106.4 95.4 11.5% 285.8 340.7 (16.1)%
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Earnings per
share ("EPS")
- basic and
diluted
(dollars) 0.47 0.74 (36.5)% 1.57 3.24 (51.5)%
Net operating
income per
share (dollars) 0.88 0.77 14.3% 2.33 2.67 (12.7)%
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Return on equity
("ROE") for the
last 12 months 9.5% 16.0% (6.5)pts
Book value per
share (dollars) 24.15 25.70 (1.55)
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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) Q3-2008 YTD 2008
-------------------------------------------------------------------------
Pre-tax operating income, as reported in 2007 119.9 421.7
Change in favourable prior year claims development 32.4 56.8
Changes in current accident year from:
Underwriting income 9.2 (8.1)
Losses from catastrophes (3.8) (55.9)
Results from Facility Association (5.1) (7.7)
Change in underwriting income excluding MYA 32.7 (14.9)
Change in interest and dividend income, net of
expenses (1.6) (7.9)
Change in corporate and distribution (8.3) (28.8)
Pre-tax operating income, as reported in 2008 142.7 370.1
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Pre-tax operating income is a non-GAAP measure. Catastrophe claims are
defined as a single event resulting in $5.0 million or more in aggregate
claims.
Table 3 - Changes in income before income taxes (year-over-year)
(in millions of dollars, except as otherwise noted) Q3-2008 YTD 2008
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Income before income taxes, as reported in 2007 116.8 539.1
Change in net gains on invested assets and other
gains excluding held for trading ("HFT") debt
securities (table 8) (52.5) (235.6)
Change in pre-tax operating income (table 2) 22.8 (51.6)
Change in market yield effect (table 9) (18.4) (20.2)
Income before income taxes, as reported in 2008 68.7 231.7
Income tax (11.4) (39.4)
Net income as reported in 2008 57.3 192.3
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Third quarter 2008
Operating performance was strong in the third quarter, driven by a $32.7
million increase in underwriting income and a 3.1 point improvement in the
combined ratio to 94.0%. The increase in underwriting income was due to
pricing and underwriting discipline in both personal and commercial lines,
strong operational execution and the high quality of the portfolio. The pace
of direct premiums written growth has been more modest in recent quarters
reflecting our commitment to sustaining appropriate underwriting margins
through pricing discipline.
Underwriting income rose substantially in all lines of business, except
personal property which was impacted by excessive rain and other seasonal
storms in Ontario and Quebec. In personal auto, the combined ratio improved by
3.9 percentage points to a healthy 90.8% reflecting lower current year claims.
We have been adjusting our premiums in personal lines to reflect higher
material and labour costs and higher water-related property claims. These
premium adjustments are flowing through to higher net earned premiums as
existing policies renew and new policies are written.
Commercial lines continued to deliver robust underwriting income with
combined ratios of 88.4% in commercial non-auto and 77.9% in commercial auto.
The 74.1% increase in commercial underwriting income reflects our successful
strategy to concentrate in the small and medium-size commercial segments, as
well as effective claims and expense management. In addition, commercial
underwriting results benefited from more favourable prior year claims
development.
Despite turbulent capital market conditions, our financial position is
strong with no debt, significant excess capital and an MCT ratio of 199.9%. On
the investment side, we continue to manage our $6.8 billion portfolio
prudently and have no leveraged structured investments. The equity portfolio
is 100.0% Canadian, including common and preferred shares of high-quality,
dividend-paying Canadian companies. Approximately 90.0% of the preferred share
portfolio is top-rated at either P1 or P2 and more than 95.0% of the fixed
income portfolio is rated 'A' or better.
In the current environment, we took proactive steps to reduce balance
sheet volatility by decreasing our common share portfolio by $259.5 million
providing additional insulation through this period of financial market
uncertainty. The proceeds of the asset dispositions were largely reinvested in
Canadian government treasury bills. In total, we recognized a $62.0 million
net loss on invested assets excluding held-for-trading bonds in the third
quarter, reflecting the sharp decline in market valuations, the reduction of
the common share portfolio and $15.1 million in impairments.
Overall, net operating income per share increased 14.3% on strong
underwriting performance, but earnings per share decreased by 36.5% to $0.47
reflecting the impact of capital market turbulence.
Year-to-date 2008
Direct premiums written increased by 1.0% overall as we maintained
pricing discipline in both personal and commercial lines. Rates in personal
lines are being adjusted to reflect higher material and labour costs and
higher water-related property claims. The commercial business has remained
robust due to our pricing discipline and portfolio shift toward smaller
accounts that are more profitable compared to larger commercial accounts. Our
pricing strategies demonstrate commitment to sustaining appropriate margins in
our underwriting business, even if it results in slower organic growth in the
near-term.
Underwriting income decreased to $106.1 million compared to $120.8
million in the first three quarters of 2007 mainly due to severe seasonal
storms in Central Canada over the first nine months of 2008. The storms led to
higher overall claims, including $87.3 million in catastrophe claims compared
to $31.4 million in catastrophe claims over the same period in 2007. In
Central Canada, we experienced near-record snowfall in the first quarter and
severe hail, rain and wind storms over the last two quarters.
Current year results in personal auto improved slightly year-over-year
despite the storms, leading to a combined ratio of 93.6% for the first three
quarters; a slight improvement of 0.4 points year-over-year. Personal property
underwriting performance was most impacted by the seasonal storms, resulting
in a loss of $88.8 million year-to-date; a large portion of which was related
to catastrophe claims. In commercial lines, underwriting income increased
markedly year-over-year due to more favourable prior year claims development.
Overall, net income decreased to $192.3 million, down from $412.6 million
in the first nine months of last year. The drop reflects lower operating
income and recognized investment losses, mainly in the common share portfolio.
Capital market volatility and the sale of a portion of the common share
portfolio contributed to a realized loss on equity securities compared to a
gain over the same period in 2007. In addition, at the beginning of 2008, we
had an unrealized loss position in the investment portfolio versus a large
unrealized gain position at the same point in 2007. Refer to table 8 for more
information on unrealized gains and losses on AFS securities.
Return on equity
ROE for the 12-month period ending September 30, 2008 was 9.5% compared
to 16.0% at September 30, 2007, reflecting lower net income explained above.
Book value
Book value per share decreased to $24.15 in the third quarter from $25.70
in the same quarter last year. The change reflects an increase in the
accumulated other comprehensive loss as capital market valuations declined
sharply in 2008, as well as the impact of share repurchases made under the
normal course issuer bid announced on February 20, 2008.
Normal course issuer bid ("NCIB")
ING Canada announced its NCIB in February 2008 to buy back up to 6.2
million shares over the following 12 months. At the end of September 2008, the
NCIB was 73.4% complete with approximately 4.6 million shares repurchased at
an average price of $38.53. ING Canada's majority shareholder, ING Groep N.V.,
has also participated in the NCIB to maintain its proportionate share
ownership at 70%.
In light of extraordinary capital market volatility in the third quarter,
we suspended for the time being the NCIB and consequently have not bought back
any shares since mid September. This decision reflects the company's prudent
capital management practices and is consistent with the Advisory published by
the Office of the Superintendent of Financial Institutions (OSFI) on October
22, 2008.
Standard & Poor's debt rating services
On November 3, 2008, we announced that we have discontinued debt rating
services provided by Standard & Poor's. Upon the cessation of its coverage,
S&P's reaffirmed the A+ rating of ING Canada's primary insurance subsidiaries.
We are rated by three other rating agencies; therefore, we felt it was
unnecessary to continue rating services with S&P's.
3.2 Underwriting income
Table 4 - Net premiums earned, claims and general expenses
(in millions of
dollars,
except as
otherwise YTD YTD
noted) Q3-2008 Q3-2007 Change 2008 2007 Change
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Net premiums
earned 1,032.3 994.0 3.9% 3,020.2 2,927.4 3.2%
Net claims:
Current year
claims
(excluding
MYA) 717.7 692.8 3.6% 2,052.4 1,961.5 4.6%
Current year
catastrophes 20.4 16.6 3.8 87.3 31.4 55.9
(Favourable)
prior year
claims
development
(excluding
MYA) (56.4) (24.0) (32.4) (96.7) (39.8) (56.9)
Total net
claims
(excluding
MYA) 681.7 685.4 (0.5)% 2,043.0 1,953.1 4.6%
Commissions,
net 142.6 135.6 5.2% 427.1 436.8 (2.2)%
Premium taxes,
net 35.8 34.3 4.4% 105.1 101.9 3.1%
General
expenses, net 110.3 109.7 0.5% 338.9 314.8 7.7%
Total
underwriting
expenses 288.7 279.6 3.3% 871.1 853.5 2.1%
Total
underwriting
income
(excluding
MYA) 61.9 29.0 113.4% 106.1 120.8 (12.2)%
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Table 5 - Underwriting ratios (excluding MYA)
YTD YTD
Q3-2008 Q3-2007 Change 2008 2007 Change
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Claims ratio 66.0% 69.0% (3.0)pts 67.7% 66.7% 1.0 pts
Expense ratio 28.0% 28.1% (0.1)pts 28.8% 29.2% (0.4)pts
Combined ratio 94.0% 97.1% (3.1)pts 96.5% 95.9% 0.6 pts
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Table 6 - Annualized rate of favourable prior year claims development
YTD Full year
(annualized rate, excluding MYA) Q3-2008 2008 2007 2006
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(Favourable) unfavourable prior
year claims development as a % of
opening reserves (6.0)% (3.4)% (2.9)% (4.9)%
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Favourable prior year claims development
Excluding MYA, favourable prior year claims development was $56.4 million
in the third quarter, 6.0% of opening reserves on an annualized basis, and
$96.7 million year-to-date, or 3.4% of opening reserves, annualized. The rate
of development in the third quarter was higher than the long-term average of
3-4%, partly due to a change in estimates as explained on page 19.
Prior year claims development can fluctuate from quarter to quarter 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, but has
varied from year to year and between quarters.
Industry pools
Industry pools consist of the "residual market" as well as risk-sharing
pools ("RSP") in Alberta, Ontario, Quebec, New Brunswick and Nova Scotia.
These pools are managed by the Facility Association except the Quebec RSP. In
the third quarter, the net effect of transfers in and out of these pools,
including the Facility Association, lowered year-over-year personal auto
underwriting income by $7.0 million, excluding MYA. The negative impact from
industry pools reflects a shift in the timing of risk ceding and other prior
year reserve adjustments that benefited industry pool results in the third
quarter of 2007.
3.3 Interest and dividend income, net of expenses
Table 7
(in millions of
dollars,
except as
otherwise YTD YTD
noted) Q3-2008 Q3-2007 Change 2008 2007 Change
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Interest income 47.0 48.9 (3.9)% 141.0 146.8 (4.0)%
Dividend income 40.2 40.6 (1.0)% 121.9 126.2 (3.4)%
Interest and
dividend income,
before expenses 87.2 89.5 (2.6)% 262.9 273.0 (3.7)%
Expenses (4.1) (4.8) 0.7 (12.4) (14.6) 2.2
Interest and
dividend income,
net of expenses 83.1 84.7 (1.9)% 250.5 258.4 (3.1)%
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Market-based
yield 4.9% 5.1% (0.2)pts
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The decline in interest and dividend income (before expenses) in the
third quarter and year-to-date reflects lower rates and the impact of capital
management initiatives in 2008, including the share buyback program (NCIB)
announced in February 2008.
The market-based yield is a non-GAAP measure defined as total pre-tax
dividend and interest income (before expenses) divided by the average fair
values of equity and debt securities held during the reporting period. The
market-based yield was 4.9% in the third quarter, down from 5.1% in the same
quarter of last year. This measure may not be comparable to other companies
since it is a non-GAAP measure.
3.4 Gains and losses on invested assets and other gains
Table 8
(in millions of
dollars,
except as
otherwise YTD YTD
noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Debt securities
Losses on
AFS
securities (4.8) (3.6) (1.2) (1.6) (4.8) 3.2
(Losses)
gains on
derivatives (6.6) (10.8) 4.2 (10.8) 4.0 (14.8)
Impairments (4.0) (27.9) 23.9 (10.9) (29.2) 18.3
Losses on debt
securities
and related
derivatives (15.4) (42.3) 26.9 (23.3) (30.0) 6.7
-------------------------------------------------------------------------
Equity
securities
(Losses)
gains, net
of
derivatives (41.4) 14.7 (56.1) (50.1) 137.9 (188.0)
Impairments (11.1) (0.4) (10.7) (64.7) (13.0) (51.7)
Gains on
embedded
derivatives 5.9 18.5 (12.6) 15.9 18.5 (2.6)
(Losses)
gains on
equity
securities
and related
derivatives (46.6) 32.8 (79.4) (98.9) 143.4 (242.3)
-------------------------------------------------------------------------
Total (losses)
gains excluding
HFT debt
securities (62.0) (9.5) (52.5) (122.2) 113.4 (235.6)
(Losses) gains
on HFT debt
securities(1) (19.3) 6.7 (26.0) (13.6) (36.6) 23.0
Total (losses)
gains, before
income taxes (81.3) (2.8) (78.5) (135.8) 76.8 (212.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The (losses) gains 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 9.
Third quarter
Capital market conditions worsened in the third quarter, dramatically
affecting debt and equity market valuations. In light of these circumstances,
we took actions to reduce balance sheet volatility by decreasing our common
share portfolio by $259.5 million. The proceeds were largely reinvested in
Canadian government treasury bills. As a result of the asset dispositions, we
recognized losses of $22.7 million on the common shares.
Capital market volatility and the reduction of the common share portfolio
led to a total of $41.4 million in realized net equity losses in the third
quarter, compared to $14.7 million in gains on equities in the same quarter of
2007. We also incurred $11.1 million in equity impairments and $4.0 million in
debt impairments; both reflecting weak capital market conditions that have
persisted for more than a year. Overall, we recorded a loss on invested assets
of $62.0 million excluding held-for-trading bonds, compared to a $9.5 million
loss in the same quarter of 2007.
Year-to-date
Though every sector has been impacted by global capital market
conditions, the financial sector has been most significantly affected. Our
investment portfolio is more exposed to the financial sector due to our equity
portfolio strategy that is designed to capture higher dividends which are
non-taxable for financial institutions. The combination of higher exposure to
financials, an active trading strategy in the common share portfolio and a
sharp decline in market valuations over the last year are reflected in
recognized losses on equity securities of $98.9 million in 2008 year-to-date,
compared to a gain of $143.4 million in the same period last year. We also
began 2008 with an unrealized loss position compared to an unrealized gain
position at the beginning of 2007. Further, we incurred $64.7 million in
equity impairments and $10.9 million debt impairments in the first three
quarters of 2008. The decline of common share market values makes up the
majority of the $122.2 million loss on invested assets, excluding
held-for-trading bonds.
Held-for-trading debt securities and market yield adjustment
Table 9 - Market yield effect
(in millions of
dollars,
except as
otherwise YTD YTD
noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Positive
(negative)
impact of MYA 7.3 (0.3) 7.6 (2.7) 40.5 (43.2)
Net (losses)
gains on HFT
debt securities (19.3) 6.7 (26.0) (13.6) (36.6) 23.0
Market yield
effect (12.0) 6.4 (18.4) (16.3) 3.9 (20.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The MYA to claims liabilities is offset by gains and losses on HFT debt
securities with the objective that these items offset each other with a
minimal overall impact to 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. Claims liabilities are discounted at the estimated market yield
of the assets backing these liabilities.
In the third quarter, capital market conditions resulted in a $12 million
negative market yield effect. We match the weighted duration of the
liabilities and HFT assets, and this process works well under normal
conditions. In the third quarter, long-term yields increased significantly
more than short-term yields, resulting in the mismatch.
Unrealized gains and losses on available for sale securities
Table 10
(in millions
of dollars, As at
except as -----------------------------------------------------------
otherwise September June March December September June
noted) 30, 2008 30, 2008 31, 2008 31, 2007 30, 2007 30, 2007
-------------------------------------------------------------------------
Debt securities (16.3) 3.2 40.7 2.6 (13.8) (24.3)
Common shares (129.1) (46.7) (73.7) (37.8) 47.8 81.9
Preferred
shares (272.1) (215.5) (175.8) (141.0) (64.5) (49.3)
Total net
unrealized
(loss) gain
position at
September 30 (417.5) (259.0) (208.8) (176.2) (30.5) 8.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of the end of September 2008, the company had $417.5 million in
unrealized losses on invested assets compared to $259.0 million at the end of
the second quarter. The increase in the unrealized loss position reflects a
sharp decline in common share market values in the third quarter as well as
the widening of credit spreads and interest rate increases which adversely
impacted the market value of preferred shares and bonds. Since the preferred
shares are typically held long term, the unrealized gains and losses would
generally not be realized. Gains and losses in the common share portfolio are
likely to be realized on an ongoing basis reflecting the trading strategy in
the high-dividend yield common share portfolio.
Recognition of an unrealized loss
Common shares 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. Preferred shares are
generally only impaired if the issuer stops paying dividends, declares
bankruptcy or shows other signs of significant deterioration in the financial
health of its underlying business.
Other comprehensive income
Unrealized losses on AFS securities and dispositions of AFS securities
resulted in negative other comprehensive income ("OCI") of $117.2 million in
the third quarter. Lower market values of our common and preferred shares,
which are classified as AFS, reflect less favourable market conditions in
2008.
3.5 Selected quarterly information
Table 11
(in millions
of dollars,
except as
otherwise
noted) Q3-08 Q2-08 Q1-08 Q4-07 Q3-07 Q2-07
-------------------------------------------------------------------------
Written
insured risks
(thousands) 1,240.7 1,380.6 945.8 1,056.7 1,273.1 1,399.7
Direct
premiums
written
(excluding
pools) 1,100.3 1,216.7 860.3 961.3 1,091.2 1,209.8
Total revenues 1,045.8 1,065.4 1,064.5 1,096.8 1,091.3 1,152.2
Net premiums
earned 1,032.3 996.1 991.8 1,004.7 994.0 976.7
(Favourable)
unfavourable
prior year
claims
development (62.7) (70.3) 38.4 (45.4) (20.7) (37.6)
(Favourable)
unfavourable
prior year
claims
development
(excluding MYA) (56.4) (41.2) 0.9 (62.4) (24.0) (5.2)
Net underwriting
income (loss)
(including MYA) 69.1 74.9 (40.7) 47.5 28.7 92.3
Net underwriting
income
(excluding MYA) 61.9 43.4 0.7 68.2 29.0 53.1
Combined ratio
(%) (including
MYA) 93.3% 92.5% 104.1% 95.3% 97.1% 90.6%
Combined ratio
(%) (excluding
MYA) 94.0% 95.6% 99.9% 93.2% 97.1% 94.6%
Net operating
income
(excluding MYA) 106.4 109.5 70.2 116.4 95.5 132.5
Net income 57.3 112.0 23.0 95.8 92.0 194.3
EPS-basic/diluted
(dollars) 0.47 0.91 0.19 0.77 0.74 1.56
Net operating
income per
share (dollars)
(excluding MYA) 0.88 0.89 0.56 0.93 0.77 1.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 11
(in millions
of dollars,
except as
otherwise
noted) Q1-07 Q4-06 Q3-06
-------------------------------------------
Written
insured risks
(thousands) 950.4 1,051.1 1,242.9
Direct
premiums
written
(excluding
pools) 846.3 955.6 1,059.1
Total
revenues 1,099.6 1,095.8 1,080.2
Net premiums
earned 956.7 979.6 954.5
(Favourable)
unfavourable
prior year
claims
development (12.2) (24.3) (69.1)
(Favourable)
unfavourable
prior year
claims
development
(excluding MYA) (10.7) (24.3) (69.1)
Net underwriting
income (loss)
(including MYA) 40.3 62.3 95.9
Net underwriting
income
(excluding MYA) 38.7 62.3 95.9
Combined ratio
(%) (including
MYA) 95.8% 93.6% 89.9%
Combined ratio
(%) (excluding
MYA) 96.0% 93.6% 89.9%
Net operating
income
(excluding MYA) 112.8 101.8 132.3
Net income 126.2 109.4 156.8
EPS-basic/diluted
(dollars) 0.95 0.82 1.17
Net operating
income per
share (dollars)
(excluding MYA) 0.84 0.76 0.99
-------------------------------------------
-------------------------------------------
Seasonality of property and casualty insurance
Property and casualty insurance is seasonal in nature. Underwriting
revenues are generally stable from quarter to quarter; however, combined
ratios are typically lower in the second and third quarters of each year due
to seasonal weather conditions.
ING Canada 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 12
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Written insured
risks (thousands)
Automobile 659.0 681.1 (3.2)% 1,920.6 1,972.9 (2.7)%
Property 464.6 476.7 (2.5)% 1,268.8 1,281.5 (1.0)%
Total 1,123.6 1,157.8 (3.0)% 3,189.4 3,254.4 (2.0)%
Direct premiums
written
(excluding pools)
Automobile 564.4 565.6 (0.2)% 1,604.5 1,604.6 -
Property 270.7 258.7 4.6% 726.3 689.2 5.4%
Total 835.1 824.3 1.3% 2,330.8 2,293.8 1.6%
Net premiums earned
Automobile 531.2 505.9 5.0% 1,546.9 1,492.7 3.6%
Property 226.8 213.5 6.2% 663.3 619.4 7.1%
Total 758.0 719.4 5.4% 2,210.2 2,112.1 4.6%
Net underwriting
income (loss)
(excluding MYA)
Automobile 49.0 26.6 84.2% 99.6 90.2 10.4%
Property (27.6) (20.8) 32.7% (88.8) (23.3) 281.1%
Total (excluding
MYA) 21.4 5.8 269.0% 10.8 66.9 (83.9)%
Market yield
adjustment 4.6 (0.2) 4.8 (1.7) 25.7 (27.4)
Net underwriting
income
(including MYA) 26.0 5.6 20.4 9.1 92.6 (83.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 13 - Underwriting ratios
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Personal auto
Claims ratio
(excluding MYA) 66.8% 70.6% (3.8) pts 68.8% 69.0% (0.2) pts
Expense ratio 24.0% 24.1% (0.1) pts 24.8% 25.0% (0.2) pts
Combined ratio
(excluding MYA) 90.8% 94.7% (3.9) pts 93.6% 94.0% (0.4) pts
Personal property
Claims ratio
(excluding MYA) 79.8% 77.1% 2.7 pts 80.0% 69.9% 10.1 pts
Expense ratio 32.4% 32.6% (0.2) pts 33.4% 33.8% (0.4) pts
Combined ratio
(excluding MYA) 112.2% 109.7% 2.5 pts 113.4% 103.7% 9.7 pts
Personal lines -
total
Claims ratio
(excluding MYA) 70.7% 72.5% (1.8) pts 72.1% 69.2% 2.9 pts
Expense ratio 26.5% 26.7% (0.2) pts 27.4% 27.6% (0.2) pts
Combined ratio
(excluding MYA) 97.2% 99.2% (2.0) pts 99.5% 96.8% 2.7 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4.2 Explanation of financial results
Third quarter 2008
In personal auto, direct premiums written growth was flat in the third
quarter as rate increases were offset by a decline in written insured risks.
We have been raising personal auto rates in Ontario over the last year in
response to higher accident benefit and bodily injury claims in the province,
negatively impacting our unit growth in the near term. Overall, current
accident year results in personal auto improved slightly year-over-year
despite severe hail storms in Alberta. Net underwriting income increased $22.4
million to $49.0 million and the combined ratio improved 3.9 percentage points
to 90.8% in the third quarter.
In personal property, direct premiums written were up 4.6%, due to
increases in insured amounts and higher rates. We have been increasing direct
written rates and enhancing our pricing segmentation to reflect an increase in
water-related property claims. In addition, we are adjusting insured values to
ensure that higher material costs and labour rates are factored into our
premiums and our customers retain adequate coverage. Overall, personal
property sustained an underwriting loss of $27.6 million reflecting higher
property claims associated with excessive rain in Ontario and Quebec in the
third quarter. Robust actions are being taken to build strength and
sustainable advantage in home insurance through claims innovation,
segmentation and better management of water losses, which now make up
approximately 40.0% of personal property claims.
Year-to-date 2008
In personal auto, direct premiums written were flat reflecting the
near-term impact of higher premiums on unit growth in this segment as well as
the run-off of a large group agreement. The group agreement was large in terms
of the number of policies but had a low average premium and margin. In the
first nine months of the year, current accident year results in personal auto
were stable, despite severe snow, hail and excessive rain that hit Central
Canada. Personal auto generated underwriting income of $99.6 million
year-to-date versus $90.2 million in the same period last year as current year
results improved.
In personal property, higher average insured amounts and higher rates
resulted in a 5.4% increase in direct premiums written. Overall, personal
property sustained an underwriting loss of $88.8 million reflecting higher
claims caused by severe snow, hail, rain and wind storms in Central Canada in
2008, compared to significantly lower levels of precipitation in the same
region over the comparable period of 2007.
Section 5 - Commercial lines
5.1 Financial results
Table 14
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Written insured
risks (thousands)
Automobile 60.5 58.8 2.9% 200.8 193.0 4.0%
Non-auto 56.7 56.5 0.4% 177.0 175.8 0.7%
Total 117.2 115.3 1.6% 377.8 368.8 2.4%
Direct premiums
written
(excluding pools)
Automobile 72.8 72.5 0.4% 240.6 239.5 0.5%
Non-auto 192.4 194.3 (1.0)% 605.8 614.0 (1.3)%
Total 265.2 266.8 (0.6)% 846.4 853.5 (0.8)%
Net premiums earned
Automobile 80.8 80.4 0.5% 238.8 239.5 (0.3)%
Non-auto 193.5 194.3 (0.4)% 571.1 575.7 (0.8)%
Total 274.3 274.7 (0.1)% 809.9 815.2 (0.7)%
Net underwriting
income
(excluding MYA)
Automobile 17.9 9.4 90.4% 34.1 20.1 69.7%
Non-auto 22.5 13.8 63.0% 61.1 34.0 79.7%
Total (excluding MYA) 40.4 23.2 74.1% 95.2 54.1 76.0%
Market yield
adjustment 2.7 (0.1) 2.8 (1.0) 14.7 (15.7)
Net underwriting
income
(including MYA) 43.1 23.1 20.0 94.2 68.8 25.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 15 - Underwriting ratios
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Commercial auto
Claims ratio
(excluding MYA) 51.4% 61.8% (10.4) pts 58.6% 63.7% (5.1) pts
Expense ratio 26.5% 26.6% (0.1) pts 27.1% 27.9% (0.8) pts
Combined ratio
(excluding MYA) 77.9% 88.4% (10.5) pts 85.7% 91.6% (5.9) pts
Commercial non-auto
Claims ratio
(excluding MYA) 54.0% 58.6% (4.6) pts 54.1% 58.7% (4.6) pts
Expense ratio 34.4% 34.3% 0.1 pts 35.2% 35.4% (0.2) pts
Combined ratio
(excluding MYA) 88.4% 92.9% (4.5) pts 89.3% 94.1% (4.8) pts
Commercial lines
- total
Claims ratio
(excluding MYA) 53.3% 59.5% (6.2) pts 55.4% 60.2% (4.8) pts
Expense ratio 32.0% 32.0% - 32.9% 33.2% (0.3) pts
Combined ratio
(excluding MYA) 85.3% 91.5% (6.2) pts 88.3% 93.4% (5.1) pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5.2 Explanation of financial results
Third quarter 2008
Direct premiums written in commercial lines were down slightly
year-over-year reflecting good unit growth offset by lower average premiums.
The decrease in the average premium reflects the shift in our portfolio toward
small- and medium-sized commercial segments which are more profitable. Though
the market remains highly competitive, our commercial units have continued to
grow. At the same time, we have maintained our pricing discipline with low
single-digit rate decreases over the last 12 months.
Commercial underwriting income increased by 74.1% year-over-year with
very healthy combined ratios below 90.0% in commercial non-auto and below
80.0% in commercial auto, demonstrating strong execution of our targeted
strategy and commitment to maintaining a high quality portfolio. Current year
results improved slightly year-over-year overall and favourable prior year
claims development increased compared to the same quarter last year.
Year-to-date 2008
Direct premiums written in commercial lines were down slightly reflecting
the dynamics discussed above. In all lines of business, our priority is to
price policies appropriately to maintain an adequate margin, despite
aggressive price competition.
Underwriting income in commercial lines improved markedly year-to-date
notwithstanding $17.5 million in catastrophe claims associated with seasonal
storms in the first nine months of the year. Despite the catastrophe claims,
commercial underwriting income improved by $41.1 million primarily due to more
favourable prior year claims development.
Section 6 - Corporate and distribution
6.1 Financial results
Our corporate and distribution segment primarily includes the results of
the company's affiliated distribution network (Canada Brokerlink, Grey Power
and Equisure), and other activities.
Table 16 - Corporate and distribution income
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Distribution income 23.6 25.9 (8.9)% 71.9 82.2 (12.5)%
Distribution expenses 20.2 21.3 (5.2)% 59.5 64.0 (7.0)%
Distribution
earnings 3.4 4.6 (26.1)% 12.4 18.2 (31.9)%
Corporate (loss)
income, net (5.5) 1.6 (443.8)% 1.3 24.3 (94.7)%
Corporate and
distribution (loss)
income before
income taxes (2.1) 6.2 (133.9)% 13.7 42.5 (67.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6.2 Explanation of financial results
In the third quarter, corporate and distribution income decreased due to
the impact of certain corporate allocations. Year-to-date corporate and
distribution income decreased to $13.7 million from $42.5 million in the
comparable period in 2007 mainly due to the release of a $28.0 million
provision in 2007. The provision was related to a prior year divestiture and
became redundant.
6.3 Net operating income
Table 17 - Components of net operating income
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Net underwriting
income
(excluding MYA) 61.9 29.0 113.4% 106.1 120.8 (12.2)%
Interest and
dividend income 83.1 84.7 (1.9)% 250.5 258.4 (3.1)%
Corporate and
distribution (loss)
income (table 16) (2.1) 6.2 (133.9)% 13.7 42.5 (67.8)%
Tax impact (36.5) (24.5) 49.0% (84.5) (81.0) 4.3%
Net operating income
(excluding MYA) 106.4 95.4 11.5% 285.8 340.7 (16.1)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net operating income increased by 11.5% in the third quarter due to
strong underwriting performance. Year to date, net operating income was $285.8
million compared to $340.7 million over the same period last year. The
decrease was mainly due to catastrophe claims and other claims associated with
severe seasonal storms in the first nine months of 2008.
Table 18 - Reconciliation to net income
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Net income 57.3 92.0 (37.7)% 192.3 412.6 (53.4)%
Add losses (deduct
gains) before HFT
debt securities
(table 8) 62.0 9.5 52.5 122.2 (113.4) 235.6
Add market yield
effect (table 9) 12.0 (6.4) 18.4 16.3 (3.9) 20.2
Tax impact (24.9) 0.3 (25.2) (45.0) 45.4 (90.4)
Net operating income
(excluding MYA) 106.4 95.4 11.5% 285.8 340.7 (16.1)%
Average outstanding
shares (millions) 120.8 124.5 (3.7) 122.7 127.5 (4.8)
Net operating income
per share (dollars) 0.88 0.77 0.11 2.33 2.67 (0.34)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Changes in the definition of net operating income and underwriting
measures
Since the first quarter of 2008, the MYA to claims liabilities is
excluded from net operating income and underwriting measures discussed in
this MD&A. The MYA reflects the impact of changes in the discount rate
applied to the company's claims liabilities based on the market-based
yield of the underlying assets. The MYA can fluctuate substantially from
quarter to quarter as market yields vary, therefore, it has been excluded
from net operating income and underwriting measures which focus on core
operating performance. The MYA is matched with gains and losses on HFT
debt securities, which are also excluded from net operating income. The
objective is that these two items offset each other with a minimal
overall impact to income (see table 9). 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.
-------------------------------------------------------------------------
Section 7 - Financial condition
7.1 Balance sheet highlights
The table below shows the significant balance sheet items as reported on
December 31, 2007 and September 30, 2008.
Table 19
As at
(in millions of dollars, ----------------------------------------
except as otherwise noted) September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Invested assets, accrued
investment income and cash 6,957.0 7,292.1
Premiums receivable 1,521.6 1,440.8
Deferred acquisition costs
and reinsurance assets 639.5 653.1
Other assets 1,026.3 1,003.7
Total assets 10,144.4 10,389.7
Claims liabilities 4,044.3 3,989.0
Unearned premiums 2,441.1 2,333.5
Other liabilities 762.9 895.1
Total liabilities 7,248.3 7,217.6
Shareholders' equity 2,896.1 3,172.1
Book value per share (dollars) 24.15 25.48
-------------------------------------------------------------------------
Invested assets, accrued investment income and cash, decreased by $335.1
million mainly due to distributions to shareholders through dividend payments
and the normal course share buyback. Also, the company's unrealized net losses
on invested assets increased by $241.3 million in September 2008 compared to
December 2007 due to a decline in equity market values.
Premiums receivable and unearned premiums are higher due to an increase
in direct premiums written in the first nine months of 2008 compared to the
same period in 2007.
Deferred acquisition costs and reinsurance assets were lower, consistent
with seasonality of the business.
Claims liabilities were higher when compared to last year due to a
greater number of policies in force, an increase in claims severity, and a
number of catastrophes that occurred during the first nine months of 2008.
This is partially offset by a decrease related to a change in estimate to the
rate used to discount claims liabilities.
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 as well as on current estimates of claims liabilities for
claims still open or claims still unreported.
Table 20
(in millions of Accident year
dollars, except as -----------------------------------------------------
otherwise noted) Total 2007 2006 2005 2004 2003
-------------------------------------------------------------------------
Original reserve 1,282.2 1,178.0 1,118.8 1,117.7 973.2
(Favourable)
unfavourable
development
during Q3 2008
including MYA (62.7) (13.4) (17.3) (11.2) (4.7) (6.7)
Excluding MYA (56.4) (11.5) (16.0) (10.3) (4.0) (6.1)
(Favourable)
unfavourable
development
during YTD 2008
including MYA (94.6) 18.8 (34.1) (26.7) (19.0) (5.9)
Excluding MYA (96.7) 18.2 (34.5) (27.0) (19.2) (6.1)
Cumulative
development
(including MYA) 18.8 (43.4) (119.9) (246.3) (185.2)
As a % of original
reserve 1.5% (3.7)% (10.7)% (22.0)% (19.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accident year
--------------------------------------------
1998
2002 2001 2000 1999 & earlier
----------------------------------------------------------------
Original reserve 838.6 729.0 655.5 587.0 1,400.3
(Favourable)
unfavourable
development
during Q3 2008
including MYA (7.0) (0.8) 1.6 (3.8) 0.6
Excluding MYA (6.7) (0.6) 1.7 (3.7) 0.8
(Favourable)
unfavourable
development
during YTD 2008
including MYA (10.9) (7.8) (3.6) (4.2) (1.2)
Excluding MYA (11.0) (7.9) (3.6) (4.2) (1.3)
Cumulative
development
(including MYA) (29.3) 32.4 31.3 32.8 (100.8)
As a % of original
reserve (3.5)% 4.4% 4.8% 5.6% (7.2)%
----------------------------------------------------------------
----------------------------------------------------------------
During the third quarter, the company modified the market yield estimate
used in the discounting of claims liabilities to more accurately reflect the
impact of the tax treatment of dividends on preferred shares. Since dividends
are non-taxable for financial institutions, we decided to use a pre-tax
equivalent yield for preferred shares which is consistent with the yield on
debt securities used in the same calculation. This change was treated as a
change in estimate in the third quarter, and as a result, underwriting income
excluding MYA increased by $14 million, most of which was included in
favourable prior year development.
7.2 Shareholders' equity
As of October 31, 2008, the share capital was comprised of 119,906,566
common shares and one Special Share issued and outstanding. The Special Share
is convertible into one common share. ING Groep holds 70% of the issued and
outstanding common shares and the Special Share. Refer to ING Canada's Annual
Information Form for more detailed information on the rights of common
shareholders and the owner of the Special Share.
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 determined by the company's
three-year average return on equity compared to the Canadian P&C industry
average. In May 2008, the company completed the award of 322,221 pre-tax
shares, as required under the Plan for the three year performance cycle of
2005-2007. For the current ongoing cycles, the total estimate is 363,833 as at
September 30, 2008.
Shareholders' equity was reduced as a result of the normal course issuer
bid share buyback during the quarter. The total consideration paid for the
repurchase was $176.0 million including fees. An amount of $40.4 million was
deducted from share capital and the remainder of $135.6 million from retained
earnings. The statements of changes in shareholders' equity provide a complete
reconciliation of the changes that occurred during the quarter. There were
119,906,566 outstanding common shares on September 30, 2008.
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.
Table 21
September 30, 2008
(in millions of dollars, ---------------------------------
except as otherwise noted) Pre-tax Taxes After-tax
-------------------------------------------------------------------------
Opening AOCI balance on January 1, 2008 (176.3) 58.0 (118.3)
Changes in fair values during the period (369.4) 117.3 (252.1)
Realized losses (gains) reclassified to
income during the period 128.2 (41.9) 86.3
AOCI as at September 30, 2008 (417.5) 133.4 (284.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the first nine months, the company sold AFS assets resulting in
realized net losses of $128.2 million. These were transferred to net gains on
invested assets and other gains in the income statement. AFS assets lost value
during the first nine months due to unfavourable capital market conditions,
representing a reduction of $369.4 million in AOCI.
7.3 Liquidity and capital resources
Table 22 - Cash flow and liquidity
(in millions of
dollars, except as YTD YTD
otherwise noted) Q3-2008 Q3-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Selected inflows and
(outflows)
Operating activities:
Cash provided by
operating
activities 191.0 299.2 (36.2)% 389.2 403.8 (3.6)%
Investing activities:
Proceeds from the
sale of invested
assets, net of
(purchases) (42.0) (255.2) (83.6)% 2.2 103.5 (97.9)%
Financing activities:
Dividends paid (37.3) (33.6) 11.0% (113.8) (103.3) 10.2%
Common shares
repurchased for
cancellation (77.3) - - (176.0) (501.2) (64.9)%
Net cash at the end
of the period 68.7 1.4 n/a 68.7 1.4 n/a
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by operating activities was used in investing and financing
activities such as the payment of dividends, the acquisition of equity
positions in brokers and the repurchase of common shares.
Capital and cash management
The company had approximately $565.7 million in excess capital in its
insurance subsidiaries on September 30, 2008 based on an MCT of 150%. In
addition, the company had no long-term debt and $103.1 million available at
the holding company level at the end of September 2008. 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: 1) support growth through
acquisitions as part of ING Canada's market consolidation strategy; 2) buy
back shares in the future; or, 3) increase dividends.
The following table presents the MCT of the company's insurance
subsidiaries with a total for all companies.
Table 23
MCT - P&C Insurance Companies
(in millions
of dollars,
except as
otherwise ING Belair Nordic ING Novex Trafalgar
noted) Insurance Insurance Insurance Insurance Insurance Total
-------------------------------------------------------------------------
At September
30, 2008
Total
capital
available 940.7 200.9 765.4 189.1 169.7 2,265.8
Total
capital
required 511.9 92.8 400.6 68.5 59.6 1,133.4
Excess
capital 428.8 108.1 364.8 120.6 110.1 1,132.4
MCT % 183.8% 216.5% 191.1% 276.1% 284.7% 199.9%
Excess
at 150% 172.9 61.7 164.5 86.3 80.3 565.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December
31, 2007
Total
capital
available 940.4 196.0 814.1 159.2 140.7 2,250.4
Total
capital
required 525.0 96.7 439.9 72.4 63.7 1,197.7
Excess
capital 415.4 99.3 374.2 86.8 77.0 1,052.7
MCT % 179.1% 202.8% 185.0% 219.8% 220.9% 187.9%
Excess
at 150% 152.8 51.0 154.1 50.6 45.2 453.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On February 19, 2008, the Board of Directors increased the company's
quarterly dividend by $0.04 to $0.31, a 14.8% increase. A quarterly cash
dividend of $0.31 per common share was paid on March 30, 2008, June 30, 2008
and September 30, 2008.
Rating agencies
ING Canada Inc.'s long-term issuer rating with Moody's Investors Services
is A3 and the company's five principal operating insurance subsidiaries are
rated Aa3 for insurance financial strength (IFS). ING Canada Inc.'s unsecured
debt is rated A (low) by DBRS. ING Canada Group has an A+ (Superior) rating
from A.M. Best.
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 September 30, 2008 that have materially
affected, or are reasonably likely to materially affect the company's internal
controls over financial reporting.
8.2 Critical accounting estimates and assumptions
The preparation of financial statements in conformity with Canadian GAAP
requires managements 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
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 2007 annual report. There have been no significant
changes in those accounting policies except as follows.
Financial instruments and capital
Effective January 1, 2008, the company applied the new Canadian Institute
of Chartered Accountants' ("CICA") Handbook Sections 3862, Financial
Instruments - Disclosure, 3863, Financial Instruments - Presentation and 1535,
Capital Disclosures revising and enhancing disclosure requirements. These new
sections place increased emphasis on disclosures about the nature and extent
of risks arising from financial instruments and how the company manages those
risks and require the disclosure of both qualitative and quantitative
information that enables users of financial statements to evaluate the
company's objectives, policies and processes for managing capital. The risk
management policies and procedures of the company as well as certain
disclosures required by Sections 3862 and 1535 were provided in the 2007
annual Management Discussion & Analysis under Section 9 and in notes 3, 4, 5
and 13 of the 2007 annual 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 this MD&A.
Effective March 15, 2008, the company also applied the new Emerging
Issues Committee ("EIC") abstract 169, Determining Whether a Contract is
Routinely Denominated in a Single Currency, which deals with multicurrency
contracts and provides further guidance for Section 3855, Financial
Instruments - Recognition and Measurement. The adoption of this new CICA
abstract has not had any significant impact on the company's results or
financial condition.
Goodwill and intangible assets
Effective January 1, 2009, the company will apply the recommendations of
the CICA of Section 3064, Goodwill and Intangible Assets. This Section will
replace Section 3062, Goodwill and Other Intangible Assets, and Section 3450,
Research and Development Costs, which establish 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").
International financial reporting standards
The Canadian Accounting Standards Board (AcSB) has confirmed January 1,
2011 as the date IFRS will replace current Canadian standards and
interpretations as Canadian generally accepted accounting principles (Canadian
GAAP) for publicly accountable enterprises.
In order to prepare for the conversion to IFRS, the company is developing
an IFRS changeover plan. This plan will address 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, and
- Actuarial and regulatory implications
The company will establish a cross-functional IFRS team and will be
providing training to key employees.
The plan will highlight the need to identify key accounting policy
changes as the first step in the conversion process. Once these changes have
been identified, other elements of the plan will be addressed. In order to
facilitate this identification process, the plan will provide for education
and training to be provided to selected employees involved in the transition.
As implications of the conversion are identified, information technology
and data systems impacts will be assessed. Similarly, impacts on business
activities will be assessed as differences are identified between the
company's current accounting policies and IFRS.
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 available-for-sale debt or preferred securities a 100 basis point
increase in interest rates would increase income before income taxes by
approximately $8.7 million as a result of gains of marking to market the
written call option liabilities embedded in our redeemable preferred shares. A
100 basis point increase would also decrease OCI by approximately $177.6
million. Conversely, a 100 basis point decrease in interest rates would lower
income before income taxes and increase OCI by the same amounts, respectively.
Impact of changes in equity prices
As at September 30, 2008, management estimates that a 10.0% increase in
equity markets would increase income before income taxes by approximately $1.0
million and increase OCI by $70.4 million. Excluding the impact of any
impairment, a 10.0% decrease in equity prices would have the corresponding
opposite effect, lowering income before income taxes and OCI by the same
amounts.
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 available-for-sale. For our
HFT debt securities, which are marked-to-market through the P&L, 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, "Gains and losses on invested assets and
other gains".
Section 10 - Other matters
10.1 Related-party transactions
The company has ongoing transactions with related parties consisting
mostly of:
1. management and advisory services with ING Groep and affiliated
companies; and,
2. reinsurance by an affiliated company
These transactions are carried out in the normal course of operations and
are measured at the amount of consideration paid or received as established
and agreed by the related parties. Management believes that such exchange
amounts approximate fair value.
In addition, the company has related-party transactions with investees
accounted for as long-term investments. These transactions consist primarily
of loans and commission expenses.
10.2 Cautionary note regarding forward-looking statements
Certain statements in this report 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", "anticipates", "believes",
"estimates", "predicts", "likely" or "potential" or the negative or other
variations of these words or other similar 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 view 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 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 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 could affect the company's invested
assets; the cyclical nature of the P&C insurance industry; its 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 strategy; the significant influence of ING Groep; 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; and future sales of a substantial
number of its common shares. These factors should be considered carefully, and
readers should not place undue reliance on the company's forward-looking
statements. Management has no intention and accepts no responsibility to
update or revise any forward-looking statements as a result of new
information, future events or otherwise, except as required by law.
Unaudited interim consolidated financial statements
For the third quarter ended September 30, 2008
ING Canada Inc.
Unaudited interim consolidated balance sheets
(in millions of Canadian dollars)
-------------------------------------------------------------------------
As at As at
September 30, December 31,
2008 2007
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 68.7 $ 8.1
Invested assets (note 3)
Debt securities 3,704.9 3,886.7
Equity securities 2,879.0 3,140.3
Loans and equity investments 246.4 210.8
-------------------------
6,830.3 7,237.8
Premium receivables 1,521.6 1,440.8
Accrued interest and dividend income 58.0 46.2
Other receivables 317.0 264.8
Deferred acquisition costs 392.0 379.6
Reinsurance assets 247.5 273.5
Other assets 300.8 280.1
Income taxes receivable 129.5 168.4
Future income tax asset 60.9 68.7
Intangible assets 58.6 61.8
Goodwill 159.5 159.9
-------------------------------------------------------------------------
$ 10,144.4 $ 10,389.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Claims liabilities (note 4) $ 4,044.3 $ 3,989.0
Unearned premiums 2,441.1 2,333.5
Other liabilities 757.2 862.6
Income taxes payable 5.7 32.5
-------------------------
7,248.3 7,217.6
Shareholders' equity
Share capital (note 5) 1,061.5 1,101.9
Contributed surplus 88.5 97.2
Retained earnings 2,030.2 2,091.3
Accumulated other comprehensive loss (284.1) (118.3)
-------------------------
2,896.1 3,172.1
-------------------------------------------------------------------------
$ 10,144.4 $ 10,389.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ING Canada Inc.
Unaudited interim consolidated statements of income
For the periods ended September 30
(in millions of Canadian dollars, except as otherwise noted)
-------------------------------------------------------------------------
Three months Nine months
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues
Premiums written
Direct $ 1,119.8 $ 1,081.2 $ 3,200.0 $ 3,140.3
Ceded 23.7 23.7 73.0 72.2
---------------------------------------------------
Net 1,096.1 1,057.5 3,127.0 3,068.1
Changes in net
unearned premiums (63.8) (63.4) (106.8) (140.7)
---------------------------------------------------
Net premiums earned 1,032.3 994.1 3,020.2 2,927.4
Interest and dividend
income 87.2 89.5 262.9 273.0
Net (losses) gains on
invested assets and
other gains (81.3) (2.8) (135.8) 76.8
Distribution and
other 7.6 10.4 28.4 66.0
-------------------------------------------------------------------------
1,045.8 1,091.2 3,175.7 3,343.2
Expenses
Underwriting
Claims 674.5 685.7 2,045.8 1,912.6
Commissions, premium
taxes and general
expenses 288.7 279.6 871.1 853.4
---------------------------------------------------
963.2 965.3 2,916.9 2,766.0
Distribution and other 13.9 9.1 27.1 38.1
---------------------------------------------------
977.1 974.4 2,944.0 2,804.1
-------------------------------------------------------------------------
Income before income
taxes 68.7 116.8 231.7 539.1
Income tax expense 11.4 24.8 39.4 126.5
-------------------------------------------------------------------------
Net income $ 57.3 $ 92.0 $ 192.3 $ 412.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share,
basic and diluted
(dollars) $ 0.47 $ 0.74 $ 1.57 $ 3.24
Dividends per share
(dollars) $ 0.31 $ 0.27 $ 0.93 $ 0.81
Basic and diluted
average number of
common shares (in
thousands) 120,834 124,473 122,699 127,457
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of comprehensive (loss) income
For the periods ended September 30
(in millions of Canadian dollars)
-------------------------------------------------------------------------
Three months Nine months
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $ 57.3 $ 92.0 $ 192.3 $ 412.6
Unrealized losses on
available for sale
securities
Change during the
period (219.5) (43.7) (369.4) (97.6)
Income taxes 60.4 11.1 117.3 33.6
---------------------------------------------------
(159.1) (32.6) (252.1) (64.0)
Reclassified to
income
From available for
sale securities 61.0 (14.6) 128.2 (122.7)
Income taxes (19.1) 5.7 (41.9) 46.7
---------------------------------------------------
41.9 (8.9) 86.3 (76.0)
-------------------------------------------------------------------------
Other comprehensive
loss (117.2) (41.5) (165.8) (140.0)
Comprehensive (loss)
income $ (59.9) $ 50.5 $ 26.5 $ 272.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ING Canada Inc.
Unaudited interim consolidated statements of changes in shareholders'
equity
For the nine-month periods ended September 30
(in millions of Canadian dollars)
-------------------------------------------------------------------------
Accumulated
other
Contrib- compre-
Share uted Retained hensive
capital surplus earnings loss Total
-------------------------------------------------------------------------
Balance as at
December 31,
2007 $ 1,101.9 $ 97.2 $ 2,091.3 $ (118.3) $ 3,172.1
Comprehensive
income - - 192.3 (165.8) 26.5
Common shares
repurchased for
cancellation
(note 5) (40.4) - (135.6) - (176.0)
Dividends paid - - (113.8) - (113.8)
Stock-based
compensation - (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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance as at
December 31,
2006 $ 1,183.9 $ 93.5 $ 2,143.4 $ - $ 3,420.8
Transition
adjustments - - (4.3) 109.1 104.8
Comprehensive
income - - 412.6 (140.0) 272.6
Common shares
repurchased for
cancellation
(note 5) (82.0) - (419.2) - (501.2)
Dividends paid - - (103.3) - (103.3)
Stock-based
compensation - 4.8 - - 4.8
-------------------------------------------------------------------------
Balance as at
September 30,
2007 $ 1,101.9 $ 98.3 $ 2,029.2 $ (30.9) $ 3,198.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of cash flows
For the periods ended September 30
(in millions of Canadian dollars)
-------------------------------------------------------------------------
Three months Nine months
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from (used
in) operating
activities
Net income $ 57.3 $ 92.0 $ 192.3 $ 412.6
Adjustments for
non-cash items 200.7 75.3 340.8 125.6
Changes in net claims
liabilities 23.2 97.4 82.0 158.4
Changes in other
operating assets and
liabilities (90.2) 34.5 (225.9) (292.8)
---------------------------------------------------
Cash provided by
operating activities
(note 7) 191.0 299.2 389.2 403.8
Cash flows from (used
in) investing
activities
Proceeds from sale of
invested assets 1,676.9 1,711.0 4,286.8 9,465.2
Purchase of invested
assets (1,718.9) (1,966.2) (4,284.6) (9,361.7)
Purchase of
brokerages and books
of business (0.6) (6.0) (5.3) (12.1)
Sale of brokerages
and books of
business 2.0 (0.7) 2.1 2.4
Purchase of property
and equipment and
other (9.4) (7.9) (37.8) (17.7)
---------------------------------------------------
Cash (used in)
provided by
investing activities (50.0) (269.8) (38.8) 76.1
Cash flows from (used
in) financing
activities
Common shares
repurchased for
cancellation (77.3) - (176.0) (501.2)
Dividends paid (37.3) (33.6) (113.8) (103.3)
---------------------------------------------------
Cash used in
financing activities (114.6) (33.6) (289.8) (604.5)
-------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents 26.4 (4.2) 60.6 (124.6)
Cash and cash
equivalents,
beginning of period 42.3 5.6 8.1 126.0
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 68.7 $ 1.4 $ 68.7 $ 1.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ING Canada Inc.
Notes to unaudited interim consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
-------------------------------------------------------------------------
1) Basis of presentation
These unaudited interim consolidated financial statements of ING
Canada Inc. ("ING" 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 interim unaudited consolidated financial statements use the
same accounting policies as were used for the Company's audited
consolidated financial statements for the fiscal year ended
December 31, 2007 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 period.
2) Accounting policy changes
a) Applied during the period
Financial instruments and capital
Effective January 1, 2008, the Company applied the new Canadian
Institute of Chartered Accountants' ("CICA") Handbook Sections 3862,
Financial Instruments - Disclosure, 3863 Financial Instruments -
Presentation and 1535 Capital Disclosures revising and enhancing
disclosure requirements. These new sections place increased emphasis
on disclosures about the nature and extent of risks arising from
financial instruments and how the Company manages those risks and
require the disclosure of both qualitative and quantitative
information that enables users of financial statements to evaluate
the Company's objectives, policies and processes for managing
capital. The risk management policies and procedures of the Company
as well as certain disclosures required by Sections 3862 and 1535
were provided in the 2007 annual Management Discussion & Analysis
under Section 9 and in notes 3, 4, 5 and 13 of the 2007 annual
consolidated financial statements. The impact of changes in risk
variables such as market prices and interest rates are described in
the Risk Management section of the quarterly Management Discussion &
Analysis related to these financial statements.
Effective March 15, 2008, the Company also applied the new Emerging
Issues Committee ("EIC") abstract 169, Determining Whether a Contract
is Routinely Denominated in a Single Currency, which deals with
multicurrency contracts and provides further guidance for
Section 3855 Financial Instruments - Recognition and Measurement. The
adoption of this new CICA abstract has not had any significant impact
on the Company's results or financial condition.
b) Future accounting changes
Goodwill and intangible assets
Effective January 1, 2009, the Company will apply the recommendations
of the CICA of Section 3064, Goodwill and Intangible Assets. This
Section will replace Section 3062, Goodwill and Other Intangible
Assets, and Section 3450, Research and Development Costs, which
establish 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").
International financial reporting standards
The Accounting Standards Board ("AcSB") has issued an exposure draft
proposing to incorporate IFRS into the CICA Handbook over the period
ending December 31, 2010. After this transitional period, the Company
will cease to use Canadian GAAP and will adopt IFRS on January 1,
2011. The Company monitors this transition to IFRS and is analyzing
the impact that the adoption of the IFRS will have on its
consolidated financial statements.
3) Invested assets and other financial instruments
a) Invested assets
The Company's invested assets are separated into three categories:
available for sale ("AFS"), held-for-trading ("HFT") and loans.
Class- Desig-
ified nated
AFS as HFT as HFT Loans Total
---------------------------------------------------------------------
As at September 30, 2008
Debt securities
Short-term notes 198.1 - - - 198.1
Fixed income
securities 1,800.1 - 1,706.7 - 3,506.8
Equity securities
Preferred shares 1,515.8 - - - 1,515.8
Common shares 1,046.5 50.2 266.5 - 1,363.2
Loans and equity
investments 22.0 - - 224.4 246.4
---------------------------------------------------------------------
4,582.5 50.2 1,973.2 224.4 6,830.3
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2007
Debt securities
Short-term notes 18.9 - - - 18.9
Fixed income
securities 2,162.8 - 1,705.0 - 3,867.8
Equity securities
Preferred shares 1,430.8 - - - 1,430.8
Common shares 1,427.6 72.9 209.0 - 1,709.5
Loans and equity
investments 22.6 - - 188.2 210.8
---------------------------------------------------------------------
5,062.7 72.9 1,914.0 188.2 7,237.8
---------------------------------------------------------------------
---------------------------------------------------------------------
b) Unrecognized gains and losses
HFT Total
invested invested
assets Other invested assets assets
-----------------------------------------------
At Unamor- Unreal- Unreal- At
fair tized ized ized fair
value cost gains losses value
---------------------------------------------------------------------
As at September 30, 2008
Debt securities
Short-term notes - 198.1 - - 198.1
Fixed income
securities 1,706.7 1,816.4 16.2 (32.5) 3,506.8
Equity securities
Preferred shares - 1,787.9 6.8 (278.9) 1,515.8
Common shares 316.7 1,171.8 19.0 (144.3) 1,363.2
Loans and equity
investments - 250.2 12.0 (3.8) 258.4
---------------------------------------------------------------------
2,023.4 5,224.4 54.0 (459.5) 6,842.3
Net unrealized losses (405.5)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2007
Debt securities
Short-term notes - 18.9 - - 18.9
Fixed income
securities 1,705.0 2,160.2 21.2 (18.6) 3,867.8
Equity securities
Preferred shares - 1,571.8 8.8 (149.8) 1,430.8
Common shares 281.9 1,464.5 74.3 (111.2) 1,709.5
Loans and equity
investments - 211.7 - (0.9) 210.8
---------------------------------------------------------------------
1,986.9 5,427.1 104.3 (280.5) 7,237.8
Net unrealized losses (176.2)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company has no exposure to leveraged capital notes in structured
investment vehicles, directly or through the use of total return swap
derivatives as at September 30, 2008 (December 2007 - $19.8 million).
c) Positive and negative fair values of derivative financial
instruments
Fair values
-------------------
Positive Negative
---------------------------------------------------------------------
As at September 30, 2008
Designated as fair value hedge 1.3 -
Not designated in a hedging relationship 27.7 21.4
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2007
Designated as fair value hedge 2.4 -
Not designated in a hedging relationship 4.7 18.4
---------------------------------------------------------------------
---------------------------------------------------------------------
d) Equities sold short
As at As at
September 30, 2008 December 31, 2007
---------------------- ----------------------
Fixed Fixed
income income
securities securities
Fair pledged as Fair pledged as
value collateral value collateral
---------------------------------------------------------------------
Long positions 40.6 - 62.1 -
Short positions 41.0 38.6 62.0 63.7
---------------------------------------------------------------------
---------------------------------------------------------------------
4) Net claims liabilities
a) Movements
Direct claims Reinsurers' Net claims
liabilities share liabilities
---------------------------------------------------------------------
For the nine months ended
September 30, 2008
Balance as at December 31, 2007 3,989.0 256.9 3,732.1
Transition adjustment - - -
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)
---------------------------------------------------------------------
Balance as at September 30, 2008 4,044.3 230.2 3,814.1
---------------------------------------------------------------------
---------------------------------------------------------------------
For the nine months ended
September 30, 2007
Balance as at December 31, 2006 3,823.5 270.4 3,553.1
Transition adjustment 18.0 2.0 16.0
Claims incurred 1,998.4 5.4 1,993.0
Prior year (favourable) claims
development (40.5) (0.6) (39.9)
Decrease due to changes in
discount rate (45.1) (4.6) (40.5)
Claims paid (1,775.1) (20.9) (1,754.2)
---------------------------------------------------------------------
Balance as at September 30, 2007 3,979.2 251.7 3,727.5
---------------------------------------------------------------------
---------------------------------------------------------------------
The decrease due to changes in discount rate includes the impact of
modifications in the calculation of the rate estimate used in
discounting claims liabilities. This change in estimate resulted in a
net decrease of $14 million in the net claims liabilities as at
September 30, 2008 and it was made to reflect a more accurate
discounting calculation. The corresponding reduction of claims
expenses has been recognized in the statements of income in the
current period.
5) Share capital
a) Normal course issuer bid
On February 22, 2008, the Company commenced its normal course issuer
bid to purchase for cancellation during the ensuing 12-month period
ending February 21, 2009, up to 6,223,638 common shares. The actual
number of common shares which may be purchased and the timing of any
such purchases will be determined by the Company. Under the terms of
the normal course issuer bid, ING Canada's majority shareholder, ING
Groep, is permitted to participate to maintain its proportionate
share ownership at 70%. As at September 30, 2008, 4,566,195 common
shares have been repurchased under the issuer bid at an average price
of $38.53 per share for a total consideration of $176.0 million and
ING Groep participated proportionately. 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 million was charged to retained earnings.
b) Substantial issuer bid
On March 30, 2007, the Company completed a substantial issuer bid
under which it purchased for cancellation 9,259,239 of its common
shares at $54.00 per share for a total consideration of
$500.0 million plus fees of $1.2 million, net of income taxes. 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 $419.2 million was charged to
retained earnings.
c) Issued and outstanding
As at September 30, 2008
--------------------------------------------
Issued and
Authorized outstanding
(shares) (shares) Amount
---------------------------------------------------------------------
Common Unlimited 119,906,566 $ 1,061.5
Class A Unlimited - -
Special One 1 -
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2007
--------------------------------------------
Issued and
Authorized outstanding
(shares) (shares) Amount
---------------------------------------------------------------------
Common Unlimited 124,472,761 $ 1,101.9
Class A Unlimited - -
Special One 1 -
---------------------------------------------------------------------
---------------------------------------------------------------------
d) Stock-based compensation
The following table reconciles the beginning and ending balances of
the share units outstanding for both the Company's long-term
incentive plan ("LTIP") and employee share purchase plan ("ESPP").
Three months Nine months
For the periods ended ------------------- -------------------
September 30 2008 2007 2008 2007
---------------------------------------------------------------------
LTIP (share equivalents)
Outstanding, beginning of
period 355,130 707,400 616,115 545,274
Net change in estimate
during the period 8,703 (4,350) (252,282) 157,776
Outstanding, end of period 363,833 703,050 363,833 703,050
---------------------------------------------------------------------
LTIP (restricted common
shares)
Outstanding, end of period 289,236 - 289,236 -
---------------------------------------------------------------------
ESPP (restricted common
shares)
Outstanding, beginning of
period 77,371 51,696 66,228 22,892
Awarded during the period 22,126 17,686 62,289 46,490
Vested or forfeited during
the period (17,030) (4,854) (46,050) (4,854)
Outstanding, end of period 82,467 64,528 82,467 64,528
---------------------------------------------------------------------
---------------------------------------------------------------------
6) Related-party transactions
a) Revenues and expenses
Three months Nine months
For the periods ended ------------------- -------------------
September 30 2008 2007 2008 2007
---------------------------------------------------------------------
Reinsurance ceded to related
entities
Ceded premiums earned 3.7 5.4 11.1 15.6
Ceded claims (0.2) (0.5) (0.1) 0.2
Expenses
Commissions 9.9 9.2 29.2 26.8
Other expenses 4.5 4.5 13.7 13.5
---------------------------------------------------------------------
---------------------------------------------------------------------
b) Balance sheet amounts
As at As at
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Reinsurance (payable) receivable - 2.4
Loans 118.6 90.4
---------------------------------------------------------------------
---------------------------------------------------------------------
7) Additional information
a) Consolidated statements of income
Three months Nine months
For the periods ended ------------------- -------------------
September 30 2008 2007 2008 2007
---------------------------------------------------------------------
Amounts included in net
(losses) gains on invested
assets:
Related to HFT financial
instruments
Realized gains (losses) 2.1 (2.4) (3.5) (0.5)
Unrealized (losses) gains (42.7) 7.9 (58.5) (26.2)
Derivative financial
instruments gains (losses) 12.0 (5.3) 42.4 1.2
Impairment of AFS invested
assets (15.1) (28.3) (75.6) (42.2)
---------------------------------------------------------------------
---------------------------------------------------------------------
b) Consolidated statements of cash flows
Three months Nine months
For the periods ended ------------------- -------------------
September 30 2008 2007 2008 2007
---------------------------------------------------------------------
Amounts included in non-cash
items:
Amortization 10.9 5.4 30.3 10.1
Stock-based compensation 10.4 1.6 (0.2) 4.8
Employee future benefits 3.8 1.8 9.7 5.4
Income taxes recovered (paid) 30.6 (2.2) 55.7 (141.7)
---------------------------------------------------------------------
---------------------------------------------------------------------
8) Segmented information
The Company has two reportable segments, the underwriting segment and
the corporate and distribution segment.
The Company's core business activity is property and casualty ("P&C")
insurance underwriting. Underwriting segment includes two lines of
business: personal lines and commercial lines. Classes in personal
lines include automobile and property. Classes in commercial lines
encompass primarily automobile and other, primarily property and
liability.
Corporate and distribution segment includes the results of the
Company's broker operations and the results of other operations.
a) Results of the Company's reportable segments
Inter-
Corporate segment
and dist- elimin-
Underwriting ribution ations Total
---------------------------------------------------------------------
For the three months ended
September 30, 2008
Revenues 1,032.3 23.7 (16.1) 1,039.9
Expenses 963.2 26.2 (16.4) 973.0
---------------------------------------------------------------------
Subtotal 69.1 (2.5) 0.3 66.9
Interest and dividend
income, net of expenses 83.1
Net gains (losses) on
invested assets and
other gains (81.3)
---------------------------------------------------------------------
Total income before
income taxes 68.7
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended
September 30, 2007
Revenues 994.1 27.8 (17.3) 1,004.6
Expenses 965.3 21.6 (17.3) 969.6
---------------------------------------------------------------------
Subtotal 28.8 6.2 - 35.0
Interest and dividend
income, net of expenses 84.6
Net gains (losses) on
invested assets and
other gains (2.8)
---------------------------------------------------------------------
Total income before
income taxes 116.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Inter-
Corporate segment
and dist- elimin-
Underwriting ribution ations Total
---------------------------------------------------------------------
For the nine months ended
September 30, 2008
Revenues 3,020.2 74.3 (45.9) 3,048.6
Expenses 2,916.9 59.4 (44.8) 2,931.5
---------------------------------------------------------------------
Subtotal 103.3 14.9 (1.1) 117.1
Interest and dividend
income, net of expenses 250.4
Net gains (losses) on
invested assets and
other gains (135.8)
---------------------------------------------------------------------
Total income before
income taxes 231.7
---------------------------------------------------------------------
---------------------------------------------------------------------
For the nine months ended
September 30, 2007
Revenues 2,927.4 117.5 (51.5) 2,993.4
Expenses 2,766.0 65.5 (42.0) 2,789.5
---------------------------------------------------------------------
Subtotal 161.4 52.0 (9.5) 203.9
Interest and dividend
income, net of expenses 258.4
Net gains (losses) on
invested assets and
other gains 76.8
---------------------------------------------------------------------
Total income before
income taxes 539.1
---------------------------------------------------------------------
---------------------------------------------------------------------
b) Assets of the Company's reportable segments
Inter-
Corporate segment
and dist- elimin-
Underwriting ribution ations Total
---------------------------------------------------------------------
As at September 30, 2008
Goodwill 74.4 85.1 - 159.5
Invested assets 6,719.6 110.7 - 6,830.3
Other 2,840.6 320.8 (6.8) 3,154.6
---------------------------------------------------------------------
Total assets 9,634.6 516.6 (6.8) 10,144.4
---------------------------------------------------------------------
---------------------------------------------------------------------
As at September 30, 2007
Goodwill 74.4 85.1 - 159.5
Invested assets 6,730.9 537.1 (1.2) 7,266.8
Other 2,869.4 242.5 (14.1) 3,097.8
---------------------------------------------------------------------
Total assets 9,674.7 864.7 (15.3) 10,524.1
---------------------------------------------------------------------
---------------------------------------------------------------------
c) Results by line of business
Three months Nine months
For the periods ended ------------------- -------------------
September 30 2008 2007 2008 2007
---------------------------------------------------------------------
Direct premiums written
Personal 854.5 814.1 2,353.2 2,286.0
Commercial 265.3 267.1 846.8 854.3
Underwriting income
Personal 26.0 5.6 9.1 92.6
Commercial 43.1 23.1 94.2 68.8
---------------------------------------------------------------------
---------------------------------------------------------------------
For further information: Media Enquiries: Gilles Gratton, Vice President
- Corporate Communications, (416) 217-7206, Email:
gilles.gratton@ingcanada.com; Investor Enquiries: Michelle Dodokin, Vice
President - Investor Relations, (416) 344-8044, Email:
michelle.dodokin@ingcanada.com
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