Intact Financial Corporation reports third quarter results

-  Acceleration of direct written premium growth to 4.0%
    -  Operating income down as a result of the high number of severe summer
       storms, as previously announced
    -  Book value per share up 9.9% year-to-date and a strong excess capital
       position of $635 million

TORONTO, Nov. 11 /CNW/ - Intact Financial Corporation (TSX: IFC) today reported net operating income for the quarter ended September 30, 2009 of $21.6 million, or $0.18 per share, down 79.7% from the corresponding quarter of last year. Good automobile underwriting performance was offset by the impact of the high number of severe weather events, mainly affecting property results, for an overall combined ratio of 105.2%.

The company recorded a net loss of $8.0 million, or $0.07 per share, compared to net income of $57.3 million, or $0.47 per share, for the same period last year, primarily reflecting lower underwriting results, the impact of market yield effect and a non-cash accounting loss related to the increase in value of its preferred shares portfolio.

Direct written premium growth accelerated by 4.0%, to $1,144.1 million, with increases in all lines of business, reflecting growth initiatives and firming industry conditions.

CEO's Comments

"While the pace of growth of our direct written premiums has been most encouraging, the high costs of property damage associated with the unusual number of summer storms resulted in one of our worst underwriting results since the 1998 ice storm. Despite the disappointing impact of these events, our underlying home insurance results continued to improve and our auto insurance business performed well both during the quarter and throughout 2009," said Charles Brindamour, President and CEO, Intact Financial Corporation.

"As the pricing environment shows increasing signs of firming up following a decline in underwriting margins, investment yields and excess capital across the industry, we are well positioned to take advantage of the underlying growth opportunities."

"Our financial situation is very strong with a continued increase in our excess capital position which reached $635.2 million. In addition, our book value grew by nearly 10% since the beginning of the year as a result of improved capital market conditions," said Mr. Brindamour.

Dividend

The Board of Directors of Intact Financial Corporation declared a quarterly dividend of 32 cents per share on its outstanding common shares. The dividend will be payable on December 31, 2009 to shareholders of record on December 14, 2009.

Current Outlook

Home insurance premiums are increasing across the industry as a result of water-related damage, which is now the leading cause of home insurance claims. Personal auto insurance premiums are also increasing, reflecting medical cost inflation in Ontario. In commercial lines, there are more concrete signs of firming market conditions.

Consolidated Highlights

-------------------------------------------------------------------------
    In millions
     of dollars,
     except as
     otherwise                                       YTD       YTD
     noted         Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Direct
     premiums
     written
     (excluding
     pools)        1,144.1   1,100.3      4.0%   3,263.6   3,177.3      2.7%
    -------------------------------------------------------------------------
    Underwriting
     (loss)income(1) (53.2)     61.9  (185.9)%      (2.1)    106.1  (102.0)%
    -------------------------------------------------------------------------
    Net operating
     income(2)        21.6     106.4   (79.7)%     183.5     285.8   (35.8)%
    -------------------------------------------------------------------------
    Net (loss)
     income           (8.0)     57.3  (114.0)%      30.0     192.3   (84.4)%
    -------------------------------------------------------------------------
    Net operating
     income per
     share
     (dollars)        0.18      0.88   (79.5)%      1.53      2.33   (34.3)%
    -------------------------------------------------------------------------
    Earnings
     per share
     Basic and
     diluted
     (dollars)       (0.07)     0.47  (114.9)%      0.25      1.57   (84.1)%
    -------------------------------------------------------------------------
    Return on
     equity (ROE)
     for the last                       (10.7)
     12 months       (1.2)%     9.5%      pts
    -------------------------------------------------------------------------
    Operating ROE
     for the last                        (4.1)
     12 months(3)      8.4%    12.5%      pts
    -------------------------------------------------------------------------
    Combined ratio
     (excluding                          11.2                           3.6
     MYA)            105.2%    94.0%      pts     100.1%     96.5%      pts
    -------------------------------------------------------------------------
    (1)  Underwriting income is defined as underwriting income excluding
         market yield adjustment (MYA).
    (2)  Net operating income is defined as the sum of underwriting income,
         interest and dividend income and corporate and distribution income
         after tax.
    (3)  Defined as operating income for the last 12 months divided by the
         average equity (excluding accumulated other comprehensive income)
         for the same period. The average is calculated by adding the
         beginning balance and the ending balance and dividing by two.

Operating Highlights

-  Net operating income for the quarter amounted to $21.6 million
       compared to $106.4 million in the third quarter of 2008. Net operating
       income for the first nine months was $183.5 million, down 35.8%. The
       decrease in both the quarter and year-to-date reflects the impact of
       severe storms on property results.

    -  Direct premiums written increased 4.0% in the third quarter to
       $1,144.1 million with gains in all lines of business, reflecting
       increases in both premiums and the number of risks insured.
       Year-to-date, direct premiums written increased 2.7% to
       $3,263.6 million.

    -  Underwriting income in the quarter was down with a loss of
       $53.2 million and a combined ratio of 105.2%

       Personal auto results continued to be good with a combined ratio of
       95.9% and underwriting income of $21.4 million. Direct written premium
       growth was 4.5%, reflecting higher average premiums and an increase in
       the number of risks insured as industry pricing continued to firm up,
       primarily in Ontario.

       Direct written premium growth in personal property increased 4.0%,
       reflecting premium growth under Intact's initiatives to address the
       industry-wide increase in water-related property claims. Overall,
       personal property underwriting results were poor due to a high number
       of severe storms resulting in a combined ratio of 129.3%. Underlying
       performance in personal property excluding major weather related
       claims improved year-over-year for the second consecutive quarter.

       In the commercial insurance portfolio, direct written premiums
       increased by 2.9%, showing further evidence of firming market
       conditions. Strong underwriting performance in commercial auto
       resulting in a combined ratio of 87.1% was offset by lower
       underwriting results in commercial property and casualty (P&C).
       Commercial P&C underwriting results decreased mainly due to a small
       number of significantly large fires which led to a combined ratio of
       109.0%.

       Interest and dividend income, net of expenses, was healthy at
       $72.9 million in the third quarter with a market-based yield of 4.4%
       compared to 4.9% in the same quarter of last year.

Investments

The Canadian capital markets rebound that began in March continued to increase the overall market value of the company's invested assets. As the preferred share portfolio increased in value by 8.8%, the company recognized a $30.4 million non-cash accounting loss on the embedded derivatives of its perpetual preferred shares.

Capital Management

The company's financial position remains very strong at the end of the third quarter, with $635.2 million in excess capital and a minimum capital test of 219.2%, 8.1 percentage points higher than the end of the second quarter of 2009. The significant increase in the excess capital position includes the $250 million medium-term note offering in August, the proceeds of which were reinvested in the company's investment portfolio. Year-to-date, the company's book value per share rose to $24.13 from $21.96.

Analyst Estimates

The average estimate of earnings per share and net operating income per share for the third quarter among the analysts who follow the company was $0.12 and $0.14 respectively.

Conference Call

Intact Financial Corporation 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, the statistical supplement and other information not included in this press release, visit our website at www.intactfc.com and link to "Investor Relations."

The conference call is also available by dialling 416-644-3426 or 1-800-732-1073 (toll-free in North America). Please call ten minutes before the start of the call.

A replay of the call will be available at 12:00 p.m. ET November 11 through 11:59 p.m. ET on Thursday, November 19. To listen to the replay, call 416-640-1917 or 1-877-289-8525 (toll-free in North America). The passcode is 4166128. A transcript of the call will also be available on Intact Financial Corporation's website.

About Intact Financial Corporation

Intact Financial Corporation (www.intactfc.com) is the largest provider of property and casualty insurance in the country with over $4 billion in premiums. Its 7,000 employees offer home, auto and business insurance under the Intact Insurance, Novex Group Insurance, belairdirect and Grey Power brands.

Intact Financial Corporation
                         Management's Discussion and Analysis
                         ----------------------------------------------------
                         For the third quarter ended September 30, 2009

    Table of contents

    Section 1 - Intact Financial Corporation................................3
    Section 2 - Canadian property and casualty insurance industry 12-month
                outlook.....................................................3
    Section 3 - Overview of consolidated performance........................4
    Section 4 - Personal lines.............................................20
    Section 5 - Commercial lines...........................................24
    Section 6 - Corporate and distribution.................................25
    Section 7 - Financial condition........................................27
    Section 8 - Accounting and disclosure matters..........................34
    Section 9 - Risk management............................................40
    Section 10 - Other matters.............................................40

    November 10, 2009

The following Management's Discussion and Analysis ("MD&A"), which was approved by the Board of Directors for the quarter ended September 30, 2009, 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, 2009, compared to the corresponding periods in 2008. 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 Audited Consolidated Financial Statements in the company's 2008 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. Management of Intact Financial Corporation analyzes performance based on underwriting ratios such as combined, general expenses and claims ratios as well as other performance measures including and excluding the market yield adjustment ("MYA") to claims liabilities. These measures are defined in the company's glossary which is posted on the Intact Financial Corporation web site at www.intactfc.com. Click on "Investor Relations" and "Glossary" on the left navigation bar.

Forward-looking statements

This document contains forward looking statements that involve risks and uncertainties. The company's actual results could differ materially from these forward looking statements as a result of various factors, including those discussed hereinafter or in the company's 2008 Annual Information Form. Please read the cautionary note in section 10.2 of this document.

Certain totals, subtotals and percentages may not agree due to rounding. Additional information about Intact Financial Corporation, including the Annual Information Form, may be found online on SEDAR at www.sedar.com. A change column has been provided for convenience showing the variation between the current period and the prior period. Not applicable (n/a) is used to indicate that the current and prior year figures are not comparable, not meaningful, or if the percentage change exceeds 1,000%.

Notes:

-  All references to direct premiums written in this MD&A exclude pools,
       unless otherwise noted.
    -  "Intact", "the company", "IFC" and "we" are terms used throughout the
       document to refer to Intact Financial Corporation and its
       subsidiaries.

Section 1 - Intact Financial Corporation

1.1 Overview of the business

IFC is the largest provider of automobile, home and business insurance in Canada insuring approximately four million individuals and businesses across Canada. Overall, the company has an approximate 11% market share and is the leading property and casualty ("P&C") insurer in Ontario, Quebec, Alberta and Nova Scotia. IFC distributes insurance through brokers under the Intact Insurance brand and direct-to-consumers through Grey Power and belairdirect. In addition to its core underwriting business, IFC also manages its own $7.8 billion portfolio of cash and invested assets.

Section 2 - Canadian property and casualty insurance industry 12-month outlook

-------------------------------------------------------------------------
                   P&C insurance industry        IFC's strategy
    -------------------------------------------------------------------------
    Pricing      - Personal auto premiums       - Maintaining pricing
     and claims    are increasing, reflecting     discipline and commitment
     environment   medical cost inflation         to adequate margins:
     (12-month     in Ontario. The Ontario        - IFC has been increasing
     outlook)      Government recently              its personal auto rates
                   announced some proposed          in Ontario since
                   changes to the Ontario auto      September 2007 to address
                   reforms (see Recent events)      medical cost inflation
                 - Personal property premiums     - IFC's personal property
                   are rising due to increases      premiums are increasing
                   in water-related losses          due to higher water
                   which are now the leading        claims. Premium increases
                   cause of home insurance          in 2008 and 2009
                   claims.                          year-to-date were in the
                 - In commercial lines,             high single-digit range
                   concrete signs of price      - Home insurance action
                   firming materialized in the    plan is being implemented
                   third quarter, particularly    to adapt to increases in
                   in Ontario. Though the         water-related losses
                   Ontario market seems to be     aiming at a 10-15% combined
                   firming at a faster pace,      ratio improvement over
                   IFC expects that conditions    18 months:
                   will develop similarly           - Rate adjustments and
                   across Canada over time            enhanced segmentation
                 - Across all lines of business,    - Greater efficiency in
                   there are indications of           claims management
                   industry capacity                - Loss prevention and
                   retrenchment                       education
                                                    - Product review
                                                  - IFC is positioned to
                                                    take advantage of organic
                                                    growth opportunities as
                                                    the commercial market
                                                    begins to firm up due to
                                                    the company's discipline,
                                                    pricing sophistication
                                                    and capacity for growth
                                                  - IFC is pursuing both
                                                    organic and acquisition
                                                    growth strategies with a
                                                    prudent and disciplined
                                                    approach
    -------------------------------------------------------------------------
    Capital     - Capital market weakness over    - Strong financial position
     Markets      the last year has resulted in     with $635.2 million in
                  investment losses, higher         excess capital over an
                  borrowing costs and               MCT of 170%
                  diminished excess capital       - MCT ratio of 219.2%; up
                  levels across the industry        8.1 percentage points
                - Pressure on industry capital      from the second quarter
                  will likely continue over         of 2009
                  the next year                   - $7.8 billion cash and
                - Lower industry capital levels     investment portfolio is
                  and investment yields could       largely Canadian with
                  influence higher premiums         minimal US exposure and
                  across the industry               no leveraged investments
                                                  - The market-based yield of
                                                    the investment portfolio
                                                    remains healthy at 4.4%
                                                    despite the shift to a
                                                    more conservative asset
                                                    mix
    -------------------------------------------------------------------------

IFC had a combined ratio of 97.4% over the first six months of 2009, better than the industry average of 100.6% and the average for the top 10 largest P&C companies in Canada of 103.3%.

With its superior operational track record, substantial excess capital position and low debt-to-capitalization ratio, IFC remains positioned to grow organically through increases in customer count and margin expansion.

Section 3 - Overview of consolidated performance

Third quarter highlights

-  Direct written premium growth accelerated to 4.0% with rate increases
       in all lines of business reflecting firming industry conditions
    -  Overall combined ratio of 105.2% reflects the impact of a high number
       of severe storms mainly affecting property policies
    -  Underwriting performance in auto lines was good with a combined ratio
       of 95.9% in personal auto and 87.1% in commercial auto
    -  Significant increase in preferred share market values led to a
       non-cash accounting loss on embedded derivatives of $30.4 million
    -  Book value per share up 9.9% year-to-date reflecting capital market
       rebound
    -  Strong excess capital position of $635.2 million with an MCT of 219.2%

Consolidated financial results

Table 1 - Components of net income

(in millions
     of dollars,
     except as
     otherwise                                       YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Direct
     premiums
     written
     (excluding
     pools)        1,144.1   1,100.3      4.0%   3,263.6   3,177.3      2.7%
    Underwriting
     (loss) income
     (excluding
     MYA) (table 4)  (53.2)     61.9  (185.9)%      (2.1)    106.1  (102.0)%

    Combined ratio
     (excluding                           11.2                           3.6
     MYA)           105.2%     94.0%       pts    100.1%     96.5%       pts
    Interest and
     dividend
     income, net
     of expenses
     (table 7)        72.9      83.1   (12.3)%     215.4     250.5   (14.0)%
    Net investment
     gains (losses)
     (table 8)        11.7     (81.3) (114.4)%    (159.2)   (135.8)    17.2%
    Interest expense
     on debt
     outstanding       1.1         -       n/a       1.1         -       n/a

    Income (loss)
     before income
     taxes           (16.0)     68.7  (123.3)%      14.4     231.7   (93.8)%

    Income tax
     (benefit)
     expense          (8.0)     11.4  (170.2)%     (15.6)     39.4  (139.6)%

    Effective
     income tax                           66.7                          91.3
     rate           (50.0%)    16.7%       pts    108.3%     17.0%       pts

    Net (loss)
     income           (8.0)     57.3  (114.0)%      30.0     192.3   (84.4)%
    Net operating
     income
     (table 13)       21.6     106.4   (79.7)%     183.5     285.8   (35.8)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per
     share ("EPS")
     - basic and
     diluted
     (dollars)       (0.07)     0.47  (114.9)%      0.25      1.57   (84.1)%

    Net operating
     income per
     share
     (dollars)        0.18      0.88   (79.5)%      1.53      2.33   (34.3)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Return on
     equity ("ROE")
     for the last                       (10.7)
     12 months      (1.2)%      9.5%       pts
    Operating
     return on
     equity for
     the last 12                         (4.1)
     months(1)        8.4%     12.5%       pts
    -------------------------------------------------------------------------
    Book value
     per share
     (dollars)       24.13     24.15    (0.1)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Defined as operating income for the last 12 months divided by the
        average equity (excluding accumulated other comprehensive income) for
        the same period. The average is calculated by adding the beginning
        balance and the ending balance and dividing by two.

3.1 Explanation of consolidated financial results

Table 2 - Changes in pre-tax operating income (year-over-year)

(in millions of dollars, except as otherwise noted)    Q3-2009  YTD 2009
    -------------------------------------------------------------------------
    Pre-tax operating income, as reported in 2008            142.9     370.3
      Changes in underwriting income excluding MYA:
        Change in favourable prior year claims development   (42.4)    (39.0)
        Change in current accident year underwriting income  (13.4)    (63.4)
        Increase in catastrophe losses                       (60.9)    (13.1)
        Change in income from Facility Association             1.6       7.4
          Total change in underwriting income excluding MYA (115.1)   (108.1)
        Change in interest and dividend income,
         net of expenses                                     (10.2)    (35.1)
        Change in corporate and distribution                   5.7       0.8
    Pre-tax operating income, as reported in 2009             23.3     227.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Pre-tax operating income is a non-GAAP measure. Catastrophe claims are
    defined as a single weather-related event resulting in aggregate claims
    of $5.0 million or more.

Table 3 - Changes in income before income taxes (year-over-year)

(in millions of dollars, except as otherwise noted)    Q3-2009  YTD 2009
    -------------------------------------------------------------------------
    Income before income taxes, as reported in 2008           68.7     231.7
      Change in net gains and losses on invested assets
       and other gains excluding held for trading
       ("HFT") debt securities (table 8)                      49.4     (51.8)
      Change in pre-tax operating income (table 2)          (119.6)   (142.4)
      Change in market yield effect (table 10)               (14.5)    (23.1)
    Income (loss) before income taxes,
     as reported in Q3-2009                                  (16.0)     14.4
    Income tax (expense) benefit                               8.0      15.6
    Net (loss) income reported in 2009                        (8.0)     30.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Third quarter 2009

The pace of direct written premium growth continued to pick up in the third quarter increasing to 4.0% from 2.8% in the second quarter and 1.0% in the first quarter. Average premiums and rates increased in every line of business, and written insured risks grew year-over-year in all segments except personal property. The top-line momentum reflects IFC's organic growth strategy and improving industry pricing conditions in both personal and commercial lines.

A high number of severe storms in the third quarter led to disappointing underwriting results with an overall combined ratio of 105.2%. The storms largely affected personal property and as a result, the combined ratio was 129.3% in that segment. In our largest business, personal auto, as well as commercial auto, underwriting income has been healthy throughout 2009 with combined ratios of 95.9% and 87.1%, respectively, in the third quarter. In the commercial P&C segment, results were negatively affected by a small number of significantly large fires as well as storm losses and lower prior year development which led to a combined ratio of 109.0% in that business, discussed in greater detail in section 5.2.

Weather conditions in the third quarter were abnormal with a significant number of events affecting our business, the largest of which were hail storms in Alberta and excessive rain and tornadoes in Central Canada. Storm costs totalled approximately $115 million net of reinsurance, including net catastrophe claims of $81.3 million which were nearly four times higher than in the same period of 2008. Approximately three-quarters of the claims impacted the personal property business. Excluding catastrophe claims, underlying results in personal property improved for the second quarter in a row, showing some continued signs of progress against our home insurance action plan. Premiums in IFC's personal property business have increased in high single-digits in 2008 and 2009, with plans for more robust premium adjustments into the fourth quarter.

Overall, the environment has continued to evolve as expected with higher anticipated premiums over the next 12 months in all lines of business due to three main factors affecting the industry as a whole: 1) a significant deterioration in underwriting margins in 2008, 2) lower investment yields and 3) lower levels of excess capital. These factors support better pricing conditions over the next year, industry capacity reductions and further market consolidation, benefiting strong and disciplined players in the market such as IFC.

Industry rates in personal lines are rising and in commercial lines, there are signs of firming market conditions. Personal auto rate increases averaged 6.3% year-to-date in Ontario, which is the largest personal auto market in Canada. In personal property, premiums are expected to continue to rise in the high single-digit range due to dramatic increases in water-related losses in recent years, which are now the leading cause of home insurance claims. On the commercial side, rates are starting to increase in selected lines of business with indications of industry capacity retrenchment, particularly in Ontario.

Canadian equity market conditions also continued to improve in the third quarter, as the company recorded realized equity gains of $21.3 million and only modest impairments of $7.5 million. The market value of every asset class increased from the second quarter, including the company's preferred shares which appreciated by 8.8% in the third quarter. As the value of the preferred share portfolio rose for the second quarter in a row, the company recorded a non-cash accounting loss of $30.4 million on written call option embedded derivatives associated with its perpetual preferred shares.

Dividend and interest income was healthy in the third quarter at $72.9 million with a market-based yield of 4.4%, unchanged from the second quarter, and down from 4.9% in the third quarter of 2008. The change in the yield year-over-year reflects actions to de-risk the portfolio.

Overall, the company recorded operating earnings of $21.6 million compared to $106.4 million in the same quarter last year, mainly reflecting the impact of the severe storms on property underwriting results. The company recorded a total net loss of $8.0 million due to disappointing underwriting performance, the non-cash accounting loss on embedded derivatives discussed previously and a $26.5 million negative impact from the market yield effect discussed in section 3.4.

The company's financial position is very strong with more than $635.2 million of excess capital and an MCT of 219.2% at the end of the third quarter. The significant increase in the excess capital position largely reflects the $250 million medium-term note offering in August 2009, the proceeds of which were reinvested in the company's investment portfolio. In addition, higher market values associated with the Canadian equity market rebound also contributed to the increase in the excess capital position. The medium term note offering is discussed under "Recent events."

Year to date 2009

Year to date direct written premium growth of 2.7% reflects higher average premiums, with unit growth picking up in the third quarter as industry pricing conditions continued to improve. As mentioned in the third quarter discussion, IFC's average rates are increasing in all lines of business.

Despite the healthy overall underwriting results in the first and second quarters, performance year-to-date was disappointing with an underwriting loss of $2.1 million and a combined ratio of 100.1% mainly due to an increase in weather-related claims and lower favourable prior year development, described previously.

Underwriting profitability in personal auto was solid with a combined ratio of 93.8%, relatively unchanged from the same period in 2008. In commercial auto, underwriting performance was robust with a combined ratio of 83.1%, an improvement of 2.6 percentage points year-over-year as current and prior year income increased. Commercial P&C results were lower due to an increase in large losses mainly due to fires and lower prior year claims development. Personal property was most affected by the weather-related catastrophe claims in 2009 with a year-to-date combined ratio of 116.5%. Rate increases in both personal property and commercial P&C are accelerating to reflect higher claims.

Overall, net operating income was $183.5 million, down year-over-year primarily due to lower underwriting results as well as lower dividend and interest income due to the shift to a more conservative asset mix. The market-based yield of the investment portfolio remained solid at 4.5%, generating $215.4 million of interest and dividend income over the first nine months of 2009 compared to $250.5 million for the same period in 2008.

Despite solid underwriting performance in the first two quarters and healthy investment income, year-to-date net income decreased to $30.0 million from $192.3 million in the comparable period last year. This mainly reflects disappointing weather-related underwriting results in the third quarter, a negative market yield effect of $39.5 million explained in section 3.4 (table 10), and the implementation of a financial hedging program in February 2009 which led to a non-recurring loss of $82.9 million in the first quarter. In addition, as preferred share market values increased in the second and third quarters, total non-cash accounting loss of $72.3 year-to-date was recognized on written call option embedded derivatives associated with the perpetual preferred shares, contributing to the year-over-year decrease in net income.

Return on equity and operating return on equity

For the 12-months ended September 30, 2009, IFC's operating return on equity (excluding other comprehensive income or OCI) was 8.4% while return on equity was negative. The difference between return on equity and operating return on equity (excluding OCI) reflects net investment losses associated with general capital market weakness in the last half of 2008 and early 2009, strategic de-risking of the investment portfolio, and the implementation of IFC's financials hedging program in the first quarter of 2009.

Book value

Book value per share increased to $24.13 in the third quarter, up 9.9% from $21.96 at the end of 2008 and $23.36 at the end of the second quarter reflecting the capital market rebound, beginning in March 2009.

Recent events

Medium Term Note ("MTN") offering August 2009

On August 31, 2009, IFC completed its offering of $250 million principal amount of unsecured medium term notes (the "Notes"). The Notes bear interest at a fixed annual rate of 5.41% until maturity on September 3, 2019. Details of the offering are set out in the pricing supplement which is available on the SEDAR website for IFC at www.sedar.com. The net proceeds of the offering will be used by IFC for general corporate and investment purposes.

Proposed auto reforms from Ontario Government

In Ontario, the personal auto insurance environment has been affected by medical claims inflation, with industry rates in Ontario increasing 12% since January 2008 to help recoup the costs. To address this issue, on November 2, 2009, the Ontario government released a list of changes to the personal auto regime intended to provide greater choice for consumers while creating a more stable cost environment. Though further clarity is needed on some of the proposed changes, the new reforms set the right direction to keep inflation in check and maintain the affordability of the product for consumers.

3.2 Underwriting income

Table 4 - Net premiums earned, claims and general expenses

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Net premiums
     earned        1,019.0   1,032.3    (1.3)%   3,018.9   3,020.2      0.0%
    Net claims:
      Current year
       claims
       (excluding
       MYA)          722.9     717.7      0.7%   2,119.4   2,052.4      3.3%
      Current
       year
       catastrophes   81.3      20.4    298.5%     100.4      87.3     15.0%
      (Favourable)
       prior year
       claims
       development
       (excluding
       MYA)          (14.0)    (56.4)  (75.2)%     (57.7)    (96.7)  (40.3)%
    Total net
     claims
     (excluding
     MYA)            790.2     681.7     15.9%   2,162.1   2,043.0      5.8%
    Commissions,
     net             143.7     142.6      0.8%     427.6     427.1      0.1%
    Premium taxes,
     net              35.9      35.8      0.3%     104.5     105.1    (0.6)%
    General
     expenses,
     net             102.4     110.3    (7.2)%     326.8     338.9    (3.6)%
    Total
     underwriting
     expenses        282.0     288.7    (2.3)%     858.9     871.1    (1.4)%
    Total
     underwriting
     (loss) income
     (excluding MYA) (53.2)     61.9  (185.9)%      (2.1)    106.1  (102.0)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Table 5 - Underwriting ratios (excluding MYA)

YTD       YTD
                   Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------

                                          11.5                           3.9
    Claims ratio     77.5%     66.0%       pts     71.6%     67.7%       pts

                                          (0.3)                         (0.3)
    Expense ratio    27.7%     28.0%       pts     28.5%     28.8%       pts
                                          11.2                           3.6
    Combined ratio  105.2%     94.0%       pts    100.1%     96.5%       pts
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Table 6 - Annualized rate of favourable prior year claims development

(annualized rate, excluding MYA)   Q3-2009   Q3-2008  YTD 2009      2008
    -------------------------------------------------------------------------
    (Favourable) unfavourable prior
     year claims development as a %
     of opening reserves                (1.5%)    (6.0)%    (2.0)%    (4.0)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Favourable prior year claims development

Excluding MYA, favourable prior year claims development was $14.0 million in the third quarter, or 1.5% of opening reserves on an annualized basis compared to particularly strong favourable prior year development in the same quarter of 2008. The year-over-year decrease in favourable prior year development in the third quarter was attributed to increases in personal auto medical claims in Ontario and a $5.1 million adjustment for higher costs associated with the new harmonized sales tax. These factors will be reflected in IFC's premiums.

On a year-to-date basis, favourable prior year claims development was $57.7 million, or 2.0% of opening reserves on an annualized basis. The year-over-year decrease was largely driven by adjustments to commercial P&C reserves in the second quarter as well as medical costs related to personal auto claims in Ontario.

Prior year claims development can fluctuate from quarter to quarter and year to year, and therefore, should be evaluated over longer periods of time. The historical rate of favourable prior year claims development as a percentage of opening claims has been approximately 3%-4% per year over the long term.

Industry pools

Industry pools consist of the "residual market" (or Facility Association) as well as risk-sharing pools ("RSP") in Alberta, Ontario, Quebec, New Brunswick and Nova Scotia. In the third quarter, the net impact of industry pools negatively impacted personal auto underwriting income by $13.6 million year-over-year, excluding MYA. The negative impact reflects changes in the Facility Association reserves, as well as other adjustments to the pools.

3.3 Interest and dividend income, net of expenses

Table 7

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Interest income   44.4      47.0    (5.5)%     132.2     141.0    (6.2)%
    Dividend income   32.6      40.2   (18.9)%      94.9     121.9   (22.1)%
    -------------------------------------------------------------------------
    Interest and
     dividend income,
     before expenses  77.0      87.2   (11.7)%     227.1     262.9   (13.6)%
    Expenses          (4.1)     (4.1)      n/a     (11.7)    (12.4)   (5.6)%
    Interest and
     dividend income,
     net of expenses  72.9      83.1   (12.3)%     215.4     250.5   (14.0)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Market-based                          (0.5)                         (0.5)
     yield            4.4%      4.9%       pts      4.5%      5.0%       pts
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

The decline in interest and dividend income (before expenses) in the third quarter and year-to-date reflects strategic actions to de-risk the investment portfolio in 2008 and early 2009 including the reduction of the common share portfolio and increased investments in government bonds and treasuries. In the third quarter, the company began gradually shifting the portfolio toward the target long-term asset mix, reinvesting some cash into longer-term fixed income investments and moderately increasing the common share portfolio.

The market-based yield is a non-GAAP measure defined as the annualized total pre-tax dividend and interest income (before expenses) divided by the average fair values of equity and fixed income securities held during the reporting period. The market-based yield was 4.4% in the third quarter unchanged from the second quarter, and down from 4.9% in the third quarter of 2008. On a year-over-year basis, the lower yield is due to the change in mix of our portfolio to include more government bonds and treasuries and a significant decline in the risk-free interest rate compared to the same period in 2008. The market-based yield is a measure that may not be comparable to other companies since it is a non-GAAP measure.

3.4 Net investment gains (losses)

Table 8

    (in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Debt securities
      Gains (losses)
       on available-
       for-sale
       ("AFS")
       securities      1.9      (4.8)      6.7      15.5      (1.6)     17.1
      Gains (losses)
       on derivatives  2.0      (6.6)      8.6       4.0     (10.8)     14.8
      Impairment
       losses            -      (4.0)      4.0      (8.4)    (10.9)      2.5
      Gains (losses)
       on debt
       securities
       and related
       derivatives     3.9     (15.4)     19.3      11.1     (23.3)     34.4
    -------------------------------------------------------------------------
    Equity securities
      Gains (losses),
       net of
       stand-alone
       derivatives    21.3     (41.4)     62.7     (85.9)    (50.1)    (35.8)
      Impairment
       losses         (7.5)    (11.1)      3.6     (27.0)    (64.7)     37.7
      Gains (losses)
       on embedded
       derivatives   (30.4)      5.9     (36.3)    (72.3)     15.9     (88.2)
      Losses on
       equity
       securities
       and related
       derivatives   (16.6)    (46.6)     30.0    (185.2)    (98.9)    (86.3)
    -------------------------------------------------------------------------
    Total gains
     (losses)
     excluding HFT
     debt securities (12.7)    (62.0)     49.3    (174.1)   (122.2)    (51.9)
    Gains (losses)
     on HFT debt
     securities(1)    24.4     (19.3)     43.7      14.9     (13.6)     28.5
    Total net
     gains (losses),
     before income
     taxes            11.7     (81.3)     93.0    (159.2)   (135.8)    (23.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The gains (losses) on HFT debt securities are offset by a MYA to
        claims liabilities, with an objective of a minimal impact to net
        income. The difference between the MYA and the gains and losses on
        HFT debt securities is referred to as the "market yield effect" in
        this MD&A. See table 10.

Third quarter 2009

Canadian equity market conditions continued to improve in the third quarter, as the company recorded realized equity gains of $21.3 million with only modest impairment losses of $7.5 million. The market value of every asset class increased from the second quarter, including the company's preferred shares which appreciated by 8.8% in the third quarter. As the value of the preferred share portfolio rose for the second quarter in a row, the company recorded a non-cash accounting loss of $30.4 million on written call option embedded derivatives associated with its perpetual preferred shares.

The overall market value of the cash and investment portfolio increased to $7.8 billion in the third quarter due to higher market values associated with the equity market improvement and the cash infusion from the proceeds of the $250.0 million medium term note offering in August 2009. Due to higher asset market values, the unrealized loss position improved by $192.8 million to $142.5 million, as shown in table 11.

Accounting for embedded derivatives

The company owns perpetual preferred shares with call options which give the issuer the right to redeem the shares at a particular price. Current Canadian GAAP accounting standards require that these options be accounted for separately from the preferred shares which are classified as AFS. Accounting standards also require that changes in the value of the preferred shares are recorded in other comprehensive income (OCI) while changes in the value of the option liability are recorded on the income statement, creating a mismatch. As the preferred shares increased in value during the quarter, the value of the associated option liability also increased. This change is recorded on the income statement in net investment gains (losses) (Table 8).

The International Accounting Standard Board (IASB) has recently issued a draft proposal to change the accounting treatment for embedded derivatives falling within the scope of IAS 39, "Financial Instruments: Recognition and Measurement". The proposal would no longer permit separate accounting, and would require embedded derivatives to be accounted for on the same basis as the underlying investment (or host contract). If this proposal is adopted, it will be effective for the company in 2012 and eliminate the current accounting mismatch.

Year-to-date 2009

The loss on invested assets in the first nine months of 2009 mainly reflects realized losses associated with the implementation of the financial hedging program in February 2009 and non-cash losses on embedded derivatives associated with the increase in the market value of IFC's perpetual preferred shares in the second and third quarters. The financial hedging program has reduced IFC's exposure to the financial sector which has been particularly volatile over the last year, while the company retains an income stream from the same investments.

Quality of the investment portfolio

The investment portfolio includes high-quality government and corporate bonds, as well as Canadian equity securities of large, publicly-traded, dividend-paying companies. Approximately 98.0% of the bonds are rated 'A' or better and 80.5% of the preferred shares are highly-rated as 'P1' or 'P2'. In addition, IFC does not invest in leveraged securities and the exposure to the U.S. market is minimal. IFC manages its investments prudently to protect capital and generate superior after-tax returns.

Portfolio asset mix

The following table shows the mix of the $7.8 billion investment portfolio.

Table 9 - Portfolio asset mix (GAAP)

September 30,     June 30,    March 31, December 31,
                                 2009         2009         2009         2008
    -------------------------------------------------------------------------
    Short-term notes,
     including cash
     and cash equivalents        5.5%        12.8%        11.8%        12.2%
    Fixed income securities     53.9%        49.5%        53.5%        53.6%
    Preferred shares            20.6%        20.9%        19.1%        18.5%
    Common shares               16.0%        12.6%        11.2%        12.1%
    Loans                        4.0%         4.2%         4.4%         3.6%
    Total invested assets
     including cash and
     cash equivalent           100.0%       100.0%       100.0%       100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

In 2008 and early 2009, the company reduced its exposure to equity market fluctuations through various de-risking actions including the implementation of the financials hedging program in February 2009. As at September 30, 2009, IFC's common share exposure net of total return swaps was 9.0% (not shown in the table).

Held-for-trading debt securities and market yield adjustment

Table 10 - Market yield effect

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Positive
     (negative)
     impact of
     MYA on
     underwriting    (50.9)      7.3     (58.2)    (54.4)     (2.7)    (51.7)
    Net gains
     (losses) on
     HFT debt
     securities       24.4     (19.3)     43.7      14.9     (13.6)     28.5
    Market yield
     effect          (26.5)    (12.0)    (14.5)    (39.5)    (16.3)    (23.2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Claims liabilities are discounted at the estimated market-based yield of the assets backing these liabilities. HFT bonds and some AFS securities are used in the calculation of the market yield adjustment (MYA) to discount claims liabilities. The MYA to claims liabilities is generally offset by gains and losses on HFT debt securities. The objective is that these items offset each other with a minimal overall impact to income. Any mismatch between the MYA and the gains and losses on HFT debt securities is referred to as the "market yield effect" in this MD&A.

On a year-to-date basis, the market yield effect had a $39.5 million negative impact mainly due to a mismatch caused by the de-risking of the bond portfolio where the proportion of corporate bonds was reduced. As a result, the market yield rate used to discount claims liabilities fell, and was not offset by gains on HFT bonds.

The process of matching the weighted-dollar duration of the claims liabilities to assets classified as HFT works well under normal conditions. However, market fluctuations, change in yield curve, trading and change in asset mix can result in a positive or negative market yield effect.

Net pre-tax unrealized gains and losses on available-for-sale securities

Table 11

(in millions
     of dollars,                              As at
     except as   September      June     March  December September      June
     otherwise          30,       30,       31,       31,       30,       30,
     noted)           2009      2009      2009      2008      2008      2008
    -------------------------------------------------------------------------
    Debt securities   44.0      18.5      37.3      30.4     (16.3)      3.2
    Common shares    (24.3)    (61.7)   (134.4)   (140.7)   (129.1)    (46.7)
    Preferred
     shares         (162.2)   (292.1)   (492.1)   (522.5)   (272.1)   (215.5)
    -------------------------------------------------------------------------
    Total net
     pre-tax
     unrealized
     loss position
     at September
     30, 2009       (142.5)   (335.3)   (589.2)   (632.8)   (417.5)   (259.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

As equity markets rebounded in the third quarter with a 9.8% increase in the S&P/TSX Composite Index and a 4.5% increase in the S&P/TSX Preferred Share Index, the unrealized loss position in the portfolio improved by $192.8 million at September 30, 2009 compared to June 30, 2009.

Since IFC typically holds preferred shares for the long term, unrealized gains and losses are generally not realized. Gains and losses in the common share portfolio are generally realized on an ongoing basis under normal capital market conditions reflecting the trading strategy in the high-dividend yield common share portfolio.

In determining the fair values of invested assets, the company relies mainly on quoted market prices. There are no invested assets in the AFS or HFT categories which are not quoted on an active market, except for a limited amount of fixed income securities that the company holds.

Recognition of an unrealized loss

Common shares classified as AFS are impaired if the current market value drops significantly below the book value, and if management believes that the value is unlikely to recover in the near- to mid-term. This is determined by an assessment of information available at the time. Debt securities and preferred shares are considered to be impaired when there is objective evidence that suggests the issuer will fail to make the contractual interest or principal payments due under the terms of the instrument.

The net unrealized loss position on AFS common shares at the end of September 2009 was $24.3 million and can be further analysed as follows:

Table 12 - Aging of unrealized losses on AFS common shares

(in millions of
     dollars, except as  September 30,     June 30,    March 31, December 31,
     otherwise noted)            2009         2009         2009         2008
    -------------------------------------------------------------------------
    (greater than) 25%
     below book value for
     (less than) 3
     consecutive months           0.6          1.5         30.6         76.7
    (greater than) 25%
     below book value for
     (greater than or
     equal to) 3 and
     (less than) 6
     consecutive months           0.0         10.4         60.6         21.1
    (greater than) 25%
     below book value for
     (greater than or
     equal to) 6
     consecutive months          18.6         45.8          5.7          1.8
    Other unrealized
     losses, net of
     unrealized gains             5.1          4.0         37.5         41.1
    Total net unrealized
     losses on AFS
     common shares               24.3         61.7        134.4        140.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

The above table provides information on the quality of the portfolio of AFS common shares. It is not intended to provide any indication of future impairments.

Other comprehensive income, net of taxes

The improvement in the unrealized loss position on AFS securities and dispositions of AFS securities resulted in positive other comprehensive income ("OCI") of $137.9 million in the third quarter. On a year-to-date basis, the decrease in the unrealized loss position reflects two main factors including improved equity market conditions in the second and third quarters and the realization of $82.9 million in losses in the first quarter associated with the implementation of the financial hedging program.

3.5 Net operating income

Table 13 - Components of net operating income

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Net underwriting
     (loss) income
     (excluding MYA) (53.2)     61.9   (185.9)%     (2.1)    106.1   (102.0)%
    Interest and
     dividend
     income
     (table 7)        72.9      83.1    (12.3)%    215.4     250.5    (14.0)%
    Corporate and
     distribution
     income (loss)
     (table 21)        3.6      (2.1)  (271.4)%     14.6      13.7       6.6%
    Tax impact        (1.7)    (36.5)   (95.3)%    (44.4)    (84.5)   (47.5)%
    Net operating
     income
     (excluding MYA)  21.6     106.4    (79.7)%    183.5     285.8    (35.8)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Net operating income decreased in the third quarter mainly reflecting the impact of the severe storms on property underwriting results.

Table 14 - Reconciliation to net income

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Net (loss)
     income           (8.0)     57.3  (114.0)%      30.0     192.3   (84.4)%
    Add losses
     before HFT
     debt
     securities
     (table 8)        12.7      62.0     (49.3)    174.1     122.2      51.9
    Add market
     yield effect
     (table 10)       26.5      12.0      14.5      39.5      16.3      23.2
    Tax impact        (9.6)    (24.9)     15.3     (60.1)    (45.0)    (15.1)
    Net operating
     income
     (excluding MYA)  21.6     106.4   (79.7)%     183.5     285.8   (35.8)%
    Average
     outstanding
     shares
     (millions)      119.9     120.8      (0.9)    119.9     122.7      (2.8)
    Net operating
     income per
     share (dollars)  0.18      0.88     (0.70)     1.53      2.33     (0.80)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Operating income (net and pre-tax) and net operating income per share are non-GAAP measures. Net operating income is defined as net income excluding the MYA and net gains on invested assets and other gains, after tax. Pre-tax operating income is defined as net operating income before income taxes. Net operating income per share is equal to net operating income for the period divided by the average outstanding number of shares for the same period. These measures are used by management and financial analysts to assess the company's performance; however, they may not be comparable to similar metrics published by other companies.

3.6 Selected quarterly information

Table 15

(in millions of dollars,
     except as otherwise
     noted)                  Q3-2009   Q2-2009   Q1-2009   Q4-2008   Q3-2008
    -------------------------------------------------------------------------
    Written insured risks
     (thousands)             1,244.4   1,376.0     937.2   1,034.3   1,240.7
    Direct premiums written
     (excluding pools)       1,144.1   1,250.6     868.8     968.2   1,100.3
    Total revenues           1,116.4   1,064.6     936.5     956.0   1,045.8
    Net premiums earned      1,019.0   1,011.3     988.7   1,019.2   1,032.3
    (Favourable)
     unfavourable prior year
     claims development(1)     (14.0)     (6.5)    (37.2)    (52.2)    (56.4)
    Net underwriting
     (loss) income(1)          (53.2)     43.2       7.9      11.0      61.9
    Combined ratio (%)(1)      105.2%     95.7%     99.2%     98.9%     94.0%
    Net operating
     income(1)                  21.6      92.9      69.1      75.1     106.4
    Net (loss) income           (8.0)     74.2     (36.3)    (64.1)     57.3
    EPS-basic/diluted
     (dollars)                 (0.07)     0.62     (0.30)    (0.53)     0.47
    Net operating income
     per share (dollars)(1)     0.18      0.77      0.58      0.63      0.88
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (in millions of dollars,
     except as otherwise
     noted)                  Q2-2008   Q1-2008   Q4-2007   Q3-2007
    ---------------------------------------------------------------
    Written insured risks
     (thousands)             1,380.6     945.8   1,056.7   1,273.1
    Direct premiums written
     (excluding pools)       1,216.7     860.3     961.3   1,091.2
    Total revenues           1,065.4   1,064.5   1,096.8   1,091.3
    Net premiums earned        996.1     991.8   1,004.7     994.0
    (Favourable)
     unfavourable prior year
     claims development(1)     (41.2)      0.9     (62.4)    (24.0)
    Net underwriting
     (loss) income(1)           43.4       0.8      68.2      29.0
    Combined ratio (%)(1)       95.6%     99.9%     93.2%     97.1%
    Net operating
     income(1)                 109.5      70.2     116.4      95.5
    Net (loss) income          112.0      23.0      95.8      92.0
    EPS-basic/diluted
     (dollars)                  0.91      0.19      0.77      0.74
    Net operating income
     per share (dollars)(1)     0.89      0.56      0.93      0.77
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    (1) Excluding MYA

3.7 Seasonality of the business

The property and casualty insurance business is seasonal in nature. While underwriting revenues are generally stable from quarter to quarter, underwriting income is typically higher in the second and third quarters of each year. This is driven by lower combined ratios in those periods, which is reflected in the seasonal index below. The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio to the annual combined ratio, excluding the MYA.

Table 16 - Seasonal indicator

Six-year
            2008      2007      2006      2005      2004      2003   average
    -------------------------------------------------------------------------
    Q1      1.03      1.01      1.02      1.02      1.10      1.06      1.04
    Q2      0.98      0.99      0.93      0.94      0.92      0.95      0.95
    Q3      0.97      1.02      1.01      1.02      0.98      0.96      0.99
    Q4      1.02      0.98      1.05      1.01      1.01      1.04      1.02
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Intact Financial Corporation has two segments: 1) Underwriting and, 2) Corporate and distribution. P&C insurance is divided into two lines of business, personal and commercial lines. Corporate and distribution includes income from the company's affiliated distribution network, as well as other corporate items.

Section 4 - Personal lines

4.1 Financial results

Table 17

(in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Direct premiums
     written
     (excluding pools)
      Automobile     589.8     564.4      4.5%   1,652.0   1,604.5      3.0%
      Property       281.5     270.7      4.0%     754.6     726.3      3.9%
      Total          871.3     835.1      4.3%   2,406.6   2,330.8      3.3%
    Written insured
     risks (thousands)
      Automobile     663.5     659.0      0.7%   1,919.6   1,920.6    (0.1)%
      Property       461.8     464.6    (0.6)%   1,257.7   1,268.8    (0.9)%
      Total        1,125.3   1,123.6      0.2%   3,177.3   3,189.4    (0.4)%
    Net premiums
     earned
      Automobile     517.3     531.2    (2.6)%   1,535.5   1,546.9    (0.7)%
      Property       231.1     226.8      1.9%     686.1     663.3      3.4%
      Total          748.4     758.0    (1.3)%   2,221.6   2,210.2      0.5%
    Net underwriting
     income (loss)
     (excluding MYA)
      Automobile      21.4      49.0   (56.3)%      94.6      99.6    (5.0)%
      Property       (67.7)    (27.6)   145.3%    (112.9)    (88.8)    27.1%

    Total
     (excluding MYA) (46.3)     21.4  (316.4)%     (18.3)     10.8  (269.5)%
      Market yield
       adjustment    (32.8)      4.6     (37.4)    (35.1)     (1.7)    (33.4)
      Net underwriting
       (loss) income
       (including
       MYA)          (79.1)     26.0    (105.1)    (53.4)      9.1     (62.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Table 18 - Underwriting ratios

YTD       YTD
                   Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Personal auto
      Claims ratio
      (excluding                           7.8                           1.7
      MYA)           74.6%     66.8%       pts     70.5%     68.8%       pts
      Expense                             (2.7)                         (1.5)
       ratio         21.3%     24.0%       pts     23.3%     24.8%       pts
      Combined
       ratio
       (excluding                          5.1                           0.2
       MYA)          95.9%     90.8%       pts     93.8%     93.6%       pts
    Personal property
      Claims ratio
       (excluding                         15.6                           2.8
       MYA)          95.4%     79.8%       pts     82.8%     80.0%       pts
                                           1.5                           0.3
    Expense ratio    33.9%     32.4%       pts     33.7%     33.4%       pts
      Combined ratio
       (excluding                         17.1                           3.1
       MYA)         129.3%    112.2%       pts    116.5%    113.4%       pts
    Personal lines
     - total
      Claims ratio
       (excluding                         10.3                           2.2
       MYA)          81.0%     70.7%       pts     74.3%     72.1%       pts
                                          (1.3)                         (0.8)
      Expense ratio  25.2%     26.5%       pts     26.6%     27.4%       pts
      Combined ratio
       (excluding                          9.0                           1.3
       MYA)         106.2%     97.2%       pts    100.8%     99.5%       pts
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

4.2 Explanation of financial results

Third quarter 2009

Direct written premium growth in personal auto was solid at 4.5% reflecting higher average premiums and an increase in units as industry pricing has continued to firm up, particularly in Ontario. Personal auto underwriting performance was good with a combined ratio of 95.9% despite higher storm-related catastrophe claims in the third quarter. Favourable prior year claims development decreased year-over-year mainly due to medical cost inflation in Ontario. IFC has been steadily increasing personal auto rates in the province over the last two years ahead of the market to reflect the higher cost of these accident benefit and bodily injury claims.

Direct written premium growth in personal property increased 4.0% reflecting premium increases under IFC's home insurance action plan. Overall, personal property underwriting results were disappointing due to a high number of severe storms which led to a combined ratio of 129.3%. Underlying performance in personal property excluding catastrophe claims improved year-over-year for the second consecutive quarter, showing some continued progress against the home insurance action plan.

Home insurance action plan

The property and casualty insurance industry in Canada has experienced difficult results in home insurance over the last few years due to rising water-related claims, changing weather patterns and higher reconstruction costs. IFC is addressing these issues in the personal property segment through a robust action plan to improve the combined ratio by 10-15%, outlined in detail in IFC's first quarter report. The main initiatives include rate adjustments and changes in pricing segmentation, adjusting insured amounts, review of the claims process, product design review, as well as efforts to promote loss prevention and education.

Year to date 2009

IFC's organic growth strategy in personal lines gained traction in 2009 with direct written premium growth of 3.3% year-to-date amid improving industry conditions. As pricing increases and capacity retrenches across the industry, IFC can grow more quickly and expand its underwriting margins. In personal property, IFC is also moving rapidly to adapt to changes in claims experience through the home insurance action plan described above.

Year to date, personal auto underwriting results were stable on a year-over-year basis with a combined ratio of 93.8%. Direct written premiums increased 3.0% reflecting higher premiums while written insured risks remained stable. Industry personal auto premiums are increasing to take into consideration cost pressures associated with medical costs in Ontario. Cumulative industry rate increases in Ontario, the largest market in Canada, averaged 6.3% in 2009 year-to-date.

Personal property underwriting results declined year-to-date with a combined ratio of 116.5% for the first nine months mainly reflecting the abnormal storm activity in the third quarter including excessive rain, hail and wind. Net catastrophe claims in 2009 totalled more than $81.2 million in personal property to the end of September compared to $57.2 million over the same period in 2008.

Section 5 - Commercial lines

5.1  Financial results

    Table 19

    (in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Direct premiums
     written
     (excluding pools)
      Automobile      73.6      72.8      1.1%     241.4     240.6      0.3%
      P&C            199.2     192.4      3.5%     615.6     605.8      1.6%
      Total          272.8     265.2      2.9%     857.0     846.4      1.3%
    Written insured
     risks (thousands)
      Automobile      61.2      60.5      1.2%     202.9     200.8      1.0%
      P&C             57.9      56.7      2.1%     177.4     177.0      0.2%
      Total          119.1     117.2      1.6%     380.3     377.8      0.7%
    Net premiums
     earned
      Automobile      79.5      80.8    (1.6)%     234.8     238.8    (1.7)%
      P&C            191.1     193.5    (1.2)%     562.5     571.1    (1.5)%
      Total          270.6     274.3    (1.3)%     797.3     809.9    (1.6)%
    Net underwriting
     income (loss)
     (excluding MYA)
      Automobile      10.2      17.9   (43.0)%      39.8      34.1     16.7%
      P&C            (17.2)     22.5  (176.4)%     (23.5)     61.1  (138.5)%
    Total
     (excluding MYA)  (7.0)     40.4  (117.3)%      16.3      95.2   (82.9)%
      Market yield
       adjustment    (18.1)      2.7     (20.8)    (19.3)     (1.0)    (18.3)
      Net underwriting
       income
       (including
       MYA)          (25.1)     43.1     (68.2)     (3.1)     94.2     (97.3)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Table 20 - Underwriting ratios

                                                     YTD       YTD
                   Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Commercial auto
      Claims ratio
       (excluding                          7.3                          (3.6)
       MYA)          58.7%     51.4%       pts     55.0%     58.6%       pts
                                           1.9                           1.0
      Expense ratio  28.4%     26.5%       pts     28.1%     27.1%       pts
      Combined ratio
       (excluding                          9.2                          (2.6)
       MYA)          87.1%     77.9%       pts     83.1%     85.7%       pts
    Commercial P&C
      Claims ratio
       (excluding                         18.0                          14.0
       MYA)          72.0%     54.0%       pts     68.1%     54.1%       pts
                                           2.6                           0.9
      Expense ratio  37.0%     34.4%       pts     36.1%     35.2%       pts
      Combined ratio
       (excluding                         20.6                          14.9
       MYA)         109.0%     88.4%       pts    104.2%     89.3%       pts
    Commercial
     lines - total
      Claims ratio
       (excluding                         14.8                           8.8
       MYA)          68.1%     53.3%       pts     64.2%     55.4%       pts
                                           2.5                           0.9
      Expense ratio  34.5%     32.0%       pts     33.8%     32.9%       pts
      Combined ratio
       (excluding                         17.3                           9.7
       MYA)         102.6%     85.3%       pts     98.0%     88.3%       pts
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

5.2 Explanation of financial results

Third quarter 2009

In commercial lines, direct written premium growth of 3.5% in commercial P&C and 1.1% in commercial auto was supported by positive rate increases and unit growth in both lines of business. Growth in the quarter shows further evidence of firming market conditions especially in Ontario. Higher industry loss ratios since 2007, lower investment income as well as lower excess capital are factors that are expected to lead to a hardening pricing environment in commercial lines over the next 12 months.

Strong underwriting income in commercial auto was offset by lower underwriting results in commercial P&C. The combined ratio in commercial auto remained strong at 87.1% but was higher year-over-year reflecting improved current year results offset by lower favourable prior year claims development. In commercial P&C, underwriting results decreased due to higher claims severity mainly associated with a small number of significantly large fires, storm losses and unfavourable prior year claims development compared to strong favourable development in the same quarter last year. Overall the combined ratio in commercial P&C was 109.0%. Net catastrophe claims in the third quarter increased to 5.7% of net earned premiums versus 3.0% of the third quarter in 2008.

IFC's commercial growth strategy is based on disciplined pricing and risk selection in the small- to medium-sized business segments. Growth in recent years has been moderate in commercial lines mainly due to highly competitive pricing conditions across the industry. However, in 2009, there have been indications that commercial pricing is beginning to firm up which creates the opportunity for IFC to accelerate growth within its target market segments while expanding underwriting margins.

Year to date 2009

Overall, direct written premiums in commercial lines increased 1.3% year-to-date with a 0.7% increase in written insured risks. The modest growth over the first nine months reflects the company's disciplined pricing strategy amid more competitive industry pricing in previous quarters. In the third quarter, the pace of IFC's growth increased as signs of firming market conditions continued to materialize.

Year to date underwriting performance in commercial auto has remained robust with a combined ratio of 83.1% for the first nine months of the year with improved current and prior year results. In commercial P&C, underwriting results were lower with a combined ratio of 104.2% due to a combination of increases in large losses related to fires and unfavourable prior year claims development.

Section 6 - Corporate and distribution

6.1 Financial results

Our corporate and distribution segment includes non-underwriting activities of the company's affiliated distribution network (Canada Brokerlink, Grey Power and Equisure), and other activities.

Table 21 - Corporate and distribution income

    (in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Distribution
     income           24.6      23.6      4.2%      74.4      71.9      3.5%
    Distribution
     expenses         20.0      20.2    (1.0)%      58.5      59.5    (1.7)%
      Distribution
       earnings        4.6       3.4     35.3%      15.9      12.4     28.2%
    Corporate income
     (loss), net      (1.0)     (5.5)  (81.8)%      (1.3)      1.3  (200.0)%
    Corporate and
     distribution
     income (loss)
     before income
     taxes             3.6      (2.1) (271.4)%      14.6      13.7      6.6%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

6.2 Explanation of financial results

The increase in corporate and distribution income mainly reflects the timing of certain corporate expenses, none of which are material in value.

Section 7 - Financial condition

7.1 Balance sheet highlights

The table below shows the significant balance sheet items as at December 31, 2008 and September 30, 2009.

Table 22
                                                              As at
                                               ------------------------------
    (in millions of dollars                       September 30,  December 31,
     except as otherwise noted)                           2009          2008
    -------------------------------------------------------------------------
    Cash and cash equivalents                            258.0         510.4
    Invested assets
      Debt securities                                  4,397.8       3,832.5
      Equity securities                                2,870.9       2,019.5
      Loans                                              313.2         242.3
      Total invested assets                            7,581.9       6,094.3
    Premiums receivable                                1,664.5       1,469.4
    Deferred acquisition costs                           401.8         382.4
    Reinsurance assets                                   273.6         224.2
    Intangible assets and goodwill                       315.8         297.2
    Other assets                                         672.6         795.5

    Total assets                                      11,168.2       9,773.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Claims liabilities                                 4,367.6       4,064.9
    Unearned premiums                                  2,517.2       2,366.8
    Debt outstanding                                     249.9             -
    Other liabilities                                  1,140.5         709.1

    Total liabilities                                  8,275.2       7,140.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Share capital and contributed surplus              1,144.8       1,149.8
    Retained earnings                                  1,843.9       1,928.9
    Accumulated other comprehensive loss                 (95.7)       (446.1)

    Shareholders' equity                               2,893.0       2,632.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Book value per share (dollars)                       24.13         21.96
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Cash and cash equivalents and invested assets increased by $1.2 billion from December 31, 2008 mainly reflecting the recovery of the capital markets during the second and third quarters and the issuance of $250.0 million of medium term notes in August 2009 (see section 7.4).

Premiums receivable, deferred acquisition costs and unearned premiums increased due to a higher amount of direct written premiums in the third quarter of 2009 compared to the fourth quarter of 2008, consistent with the seasonality of the business. See section 3.7.

Reinsurance assets increased due to the reinsurance on the catastrophes that occurred during the third quarter.

Other assets decreased mainly due to tax refunds received during the first nine months of the year.

Claims liabilities increased in the first nine months of 2009 due to the higher numbers of catastrophes and severe weather events.

Debt outstanding: see section 7.4

Other liabilities increased due to new short positions and derivative liabilities associated with our hedged investment strategies.

7.2 Prior year claims development

The following table shows the development of claims liabilities for the 10 most recent accident years, with subsequent developments during the periods. The original reserve estimates are evaluated quarterly for redundancy or deficiency. The evaluation is based on actual payments in full or partial settlement of claims and current estimates of claims liabilities for claims still open or claims still unreported.

Table 23
                                              Accident year
                         ----------------------------------------------------
    (in millions of
     dollars, except as
     otherwise noted)     Total     2008     2007     2006     2005     2004
    -------------------------------------------------------------------------
    Original reserve             1,376.4  1,282.2  1,178.0  1,118.8  1,117.7
    (Favourable)
     unfavourable
     development
     during Q3 2009
      Including MYA        25.1     12.3      9.4      2.3      2.1      1.9
      Excluding MYA       (14.0)     0.8      0.4     (4.0)    (1.7)    (1.3)
    (Favourable)
     unfavourable
     development
     during YTD 2009
      Including MYA       (15.4)    13.4      4.3     (1.5)    (7.4)   (10.5)
      Excluding MYA       (57.7)     1.0     (5.4)    (8.2)   (11.6)   (14.0)
    Cumulative
     development
      Excluding MYA                  1.1     (5.2)   (49.7)  (134.5)  (263.4)
      As a % of
       original reserve             0.1%   (0.4)%   (4.2)%  (12.0)%  (23.6)%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                        Accident year
                         -------------------------------------------
    (in millions of
     dollars, except as                                      1999 &
     otherwise noted)      2003     2002     2001     2000  earlier
    ----------------------------------------------------------------
    Original reserve      973.2    838.6    729.0    655.5  1,512.9
    (Favourable)
     unfavourable
     development
     during Q3 2009
      Including MYA         1.1     (2.2)    (1.0)     0.1     (0.9)
      Excluding MYA        (0.6)    (3.4)    (1.6)    (0.4)    (2.2)
    (Favourable)
     unfavourable
     development
     during YTD 2009
      Including MYA        (2.9)   (10.5)    (1.0)    (1.5)     2.2
      Excluding MYA        (4.7)   (11.8)    (1.7)    (2.1)     0.8
    Cumulative
     development
      Excluding MYA      (206.9)   (40.5)    30.3     29.1     (8.5)
      As a % of
       original reserve (21.3)%   (4.8)%     4.2%     4.4%   (0.6)%
    -----------------------------------------------------------------
    -----------------------------------------------------------------

The annualized rate of prior year claims development for the 2008 accident year was slightly adverse mainly due to a combination of medical cost pressures in Ontario personal auto and adjustments to commercial P&C reserves.

Prior year claims development fluctuates between quarters and from year to year. The long-term historical average rate of favourable prior year claims development is 3-4% per year.

7.3 Shareholders' equity

As of October 31, 2009, share capital was comprised of 119,906,567 common shares.

On February 19, 2009, ING Groep completed the sale of its entire 70% ownership position in ING Canada via the sale of 36,183,480 of ING Canada common shares to a number of institutional investors through a private placement and the sale of 47,757,920 common shares pursuant to a "bought deal" secondary public offering. The Special Share owned by ING Groep was immediately converted into one common share and was also sold in the secondary offering.

Under the company's long-term incentive plan ("LTIP"), certain employees were awarded performance units as part of their compensation. At the end of the performance cycle, the performance units will ultimately be converted to a certain number of restricted common shares to be purchased on the market based on the company's three-year average return on equity compared to the Canadian P&C industry average. In May 2009, the company delivered 53,495 restricted common shares, as required under the LTIP for the three year performance cycle of 2006-2008. For the current ongoing cycles, the total estimate of units accrued by employees is 266,863 as at September 30, 2009.

Accumulated other comprehensive income (loss) ("AOCI") is a component of shareholders' equity. It reflects the unrealized gains or losses related to AFS assets, net of income taxes, shown in the table below.

Table 24
                                                   September 30, 2009
                                           ----------------------------------
    (in millions of dollars,
     except as otherwise noted)            Pre-tax        Taxes    After-tax
    -------------------------------------------------------------------------
    Opening AOCI balance
     on January 1, 2009                     (632.8)       186.7       (446.1)
    Increase in fair values
     during the period                       389.4       (113.0)       276.4
    Realized losses reclassified
     to income during the period             101.0        (27.0)        74.0
                                           ----------  ----------  ----------
    AOCI as at September 30, 2009           (142.4)        46.7        (95.7)
    -------------------------------------------------------------------------

Unrealized losses on AFS assets were $632.8 million on January 1, 2009. During the period, the company sold AFS assets resulting in pre-tax realized net losses of $101.0 million. These were transferred to net investment losses in the income statement. The fair value of AFS assets increased during the period due to the capital market recovery, representing a pre-tax increase of $389.4 million in AOCI.

7.4 BLiquidity and capital resources

Table 25 - Cash flow and liquidity

    (in millions of
     dollars, except
     as otherwise                                    YTD       YTD
     noted)        Q3-2009   Q3-2008    Change      2009      2008    Change
    -------------------------------------------------------------------------
    Selected inflows
     and (outflows)
    Operating
     activities:
      Cash provided
       by operating
       activities    215.7     191.0     12.9%     460.7     389.2     18.4%
    Investing
     activities:
      Purchases of
       invested
       assets, net
       of sales     (256.6)    (42.0)   511.0%    (772.1)      2.2       n/a
    Financing
     activities:
      Dividends
       paid          (38.3)    (37.3)     2.7%    (115.1)   (113.8)     1.1%
      Net proceeds
       from debt
       issuance      248.8         -       n/a     248.8         -       n/a
      Common shares
       repurchased
       for
       cancellation      -     (77.3) (100.0)%        -     (176.0) (100.0)%
    -------------------------------------------------------------------------
    Change in cash
     and cash
     equivalents
     during the
     period          258.0      68.7    275.5%     258.0      68.7    275.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Cash provided by operating activities, as well as the proceeds from the debt issuance, were mainly used for the purchase of invested assets and payment of dividends.

Capital and cash management

The company has a prudent capital management program in place to ensure that its capital is employed effectively. The company's excess capital could be used to pursue growth initiatives, to fund share buybacks in the future or to increase dividends.

Based on an MCT of 170%, the company's total excess capital position increased to $635.2 million at the end of the third quarter reflecting the $250 million medium term note issue and higher investment market values. The company's MCT level at September 30, 2009 was very strong at 219.2% representing an 8.1 percentage point increase compared to June 30, 2009 and a 14.2 percentage point increase from December 31, 2008.

Although the minimum MCT ratio required by OSFI is 150%, the company maintains a higher internal operating target of 170%.

The following table presents the MCT ratio of the company's insurance subsidiaries with a total for all companies.

Table 26

    MCT - P&C Insurance Companies

    (in millions
     of dollars,
     except as      Intact    Belair    Nordic     Novex Trafalgar
     otherwise      Insur-    Insur-    Insur-    Insur-    Insur-
     noted)           ance      ance      ance      ance      ance     Total
    -------------------------------------------------------------------------
    At September 30,
     2009
      Total
       capital
       available   1,111.4     225.8     872.6     198.9     180.7   2,589.4
      Total
       capital
       required      524.5      99.0     420.0      73.0      65.0   1,181.5
      Excess
       capital       586.9     126.8     452.6     125.9     115.7   1,407.9
      MCT %         211.9%    228.2%    207.7%    272.4%    277.9%    219.2%
      Excess
       at 150%       324.7      77.4     242.5      89.3      83.2     817.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    At December 31,
     2008
      Total
       capital
       available     867.5     186.1     673.3     196.3     173.3   2,096.5
      Total
       capital
       required      454.0      84.2     359.4      66.5      58.9   1,023.0
      Excess
       capital       413.5     101.9     314.0     129.8     114.4   1,073.6
      MCT %         191.1%    221.1%    187.4%    295.2%    294.1%    205.0%
      Excess
       at 150%       186.5      59.8     134.3      96.5      84.9     562.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

On February 17, 2009, the Board of Directors increased the company's quarterly dividend by $0.01 to $0.32, a 3.2% increase. A quarterly cash dividend of $0.32 per common share was paid on March 31, 2009, June 30, 2009 and September 30, 2009.

Estimated MCT impact of changes in the market value of IFC's investments in common and preferred shares

The MCT is impacted by many factors including changes in the 1) market value of IFC's invested assets; 2) asset mix and income from invested assets; and 3) combined ratio.

Based on IFC's MCT of 219.2% on September 30, 2009, a 10% increase or decrease in the market value of IFC's portfolio of common shares would result in an approximate 0.5 percentage point increase or decrease in the MCT, respectively, all else being equal. Similarly, a 10% increase or decrease in the market value of IFC's preferred share portfolio would have approximately a 7.5 percentage point increase or decrease in the MCT, respectively, all else being equal.

Rating agencies

Table 27

    Credit Ratings
                            A. M. Best            Moody's               DBRS
    -------------------------------------------------------------------------
    Intact
     Financial                      a-                 A3             A (low)
     Corporation           Affirmed on        Affirmed on        Affirmed on
                          June 2, 2009    August 17, 2009    August 27, 2009
    -------------------------------------------------------------------------


    Financial Strength Ratings
                                               A. M. Best            Moody's
    -------------------------------------------------------------------------
    Insurance Subsidiaries of
     Intact Financial Corporation                      A+                Aa3
                                              Affirmed on        Affirmed on
                                             June 2, 2009    August 17, 2009
    -------------------------------------------------------------------------

Financing

On August 31, 2009, the company completed an offering of $250.0 million principal amount of unsecured medium term notes (the "Notes"). The Notes bear interest at a fixed annual rate of 5.41% until maturity on September 3, 2019, payable in equal semi-annual instalments commencing on March 3, 2010.

Effective December 31, 2008, the company entered into an unsecured committed credit facility of $150.0 million which replaces the previous uncommitted credit facility of $100.0 million. This credit facility may be drawn as prime loans at the prime rate plus a margin or as bankers' acceptances at the bankers' acceptance rate plus a margin. As at September 30, 2009 the company had not drawn down under the facility.

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, 2009 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The year-to-date results of the company reflect management's judgments regarding the impact of prevailing global credit, and equity market conditions. Given the uncertainty surrounding the continued volatility in these markets, and the general lack of liquidity in financial markets, the actual financial results could differ from those estimates.

There are no new critical accounting estimates or assumptions compared to the information provided in the annual MD&A.

8.3 New accounting standards and policies

The company's Unaudited Consolidated Interim Financial Statements have been prepared in accordance with GAAP. The principal accounting policies are described in the company's 2008 annual report. There have been no significant changes in those accounting policies except as follows.

Goodwill and intangible assets

Effective January 1, 2009, the Company applied the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets. This Section replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs, and establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets, including internally generated intangible assets, are equivalent to the corresponding provisions of IAS 38, Intangible Assets, of International Financial Reporting Standards ("IFRS").

In applying Section 3064, the Company has reclassified certain assets from Other assets to Intangibles on the unaudited consolidated balance sheets. The amount reclassified as at December 31, 2008 was $79.4 million. This reclassification had no impact on the company's net income for 2009.

Credit risk and the fair value of financial assets and financial liabilities

Effective January 20, 2009, the company also applied the new Emerging Issues Committee ("EIC") abstract 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities, EIC-173 requires an entity to take into account its own credit risk and that of the relevant counterparties when determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of this new CICA abstract has not had a significant impact on the company's results or financial condition as credit risks associated with the company's financial assets and liabilities are incorporated into the company's valuation methodology.

Debt outstanding

On August 31, 2009, the company completed an offering of $250.0 million principal amount of unsecured medium term notes. The Notes together with the cost of issuing debt are classified as Debt outstanding and accounted for at amortized cost using the effective interest method.

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 and implement the conversion to IFRS, the company has developed an IFRS changeover plan. This plan addresses and provides a timeline for key elements of the company's conversion to IFRS including:

- -  Accounting policy changes
    - -  Information technology and data systems impacts
    - -  Education and training requirements
    - -  Internal control over financial reporting
    - -  Financial reporting requirements
    - -  Impacts on business activities
    - -  Actuarial and regulatory implications

A technical accounting policies team was formed, comprising approximately ten accounting professionals from within the company who have a sound knowledge of accounting standards and the company's operations. The team held various training sessions and awareness seminars across the company. On a quarterly basis, an IFRS update is presented to the members of the company's Audit and Risk Review Committee.

The team also partnered with the relevant functional areas of the company, including information technology, capital management and actuarial services, to assess the specific and overall impact of IFRS. The team's current assessment indicates that IFRS changeover is expected to have a low impact on business activities. However, as the implementation process moves forward, the company will continue to monitor the ongoing changes to IFRS and amend the changeover plan accordingly, especially as new exposure drafts or standards expected to impact the company are released.

The company is currently assessing the impact of the October 2009 OSFI Draft Advisory titled "Conversion to International Financial Reporting Standards (IFRSs) by Federally Regulated Entities (FREs).

Overall, the company's transition is currently in line with the company's changeover plan. The key accounting policy differences between IFRS and Canadian GAAP which will impact the company have been identified and are currently being assessed and quantified.

The IFRS 1 transition choices have been presented to the senior management. Although no transition choice or election has yet been made, the company is ready to make these choices and elections before the transition date to IFRS.

The company has identified the following key differences:

-------------------------------------------------------------------------
    Accounting
    Policy       Key differences                Potential Impacts
    -------------------------------------------------------------------------
    Employee     First-time adopters can        Recognizing all cumulative
    benefits     elect to recognize all         actuarial gains and losses
    (Defined     cumulative actuarial gains     at the date of transition
    benefit      and losses at the date of      as an adjustment to
    pension      transition as an adjustment    retained earnings is likely
    plans)       to opening retained earnings.  to reduce the company's
                 Alternatively, entities may    shareholders' equity and the
                 elect to use an IFRS           prepaid pension asset
                 "corridor" approach that       currently on the company's
                 leaves some actuarial gains    balance sheet.
                 and losses unrecognised.
    -------------------------------------------------------------------------
                 Post transition, entities      Actuarial gains or losses
                 have the choice of             recognized immediately to
                 recognising ongoing actuarial  comprehensive income are
                 gains or losses in profit      likely to create more
                 or loss over time using the    volatility in the balance
                 "corridor" approach, or        sheet than if the "corridor"
                 alternatively, immediately     approach is chosen as they
                 to Comprehensive income.       will be accounted for
                                                directly in shareholders'
                                                equity as incurred.

                                                The company is currently
                                                assessing the impacts each
                                                choice will have on the
                                                company's consolidated
                                                financial statements.
    -------------------------------------------------------------------------
    Financial    The company's accounting for   Not expected to have a
    instruments  financial instruments is for   significant impact.
                 the most part similar to IFRS.
                 Treatment of foreign exchange
                 gains/losses on monetary items
                 are recognized immediately in
                 the profit and loss (currently
                 presented in the other
                 comprehensive income part of
                 the balance sheet). First-time
                 adopters can also choose to
                 (re-)classify their financial
                 assets and financial
                 liabilities at the transition
                 date.
    -------------------------------------------------------------------------
                 First-time adopters can also   At this time, this transition
                 choose to (re-)classify their  choice is not expected to
                 financial assets and           have a significant impact as
                 financial liabilities at the   the company's current
                 transition date.               intention is not to change
                                                its investments
                                                classification.
    -------------------------------------------------------------------------
                 IASB is currently revisiting   The company is currently
                 the accounting rules           monitoring and assessing the
                 pertaining to financial        impacts the adoption of these
                 instruments. A revised IAS 39  (and further) amendments will
                 "Financial Instruments:        have on its consolidated
                 Classification and             financial statements. The
                 Measurement" is currently      company's early assessment
                 scheduled to be released in    indicates that the proposed
                 the fourth quarter of 2009     amendments could likely
                 and if adopted as currently    affect how the company
                 proposed, could have a         classifies and measures its
                 significant impact on how      financial instruments,
                 financial instruments are      including its embedded
                 classified and measured. This  derivatives which is
                 revised standard is expected   discussed in section 3.4.
                 to be effective for the
                 company from January 1, 2012.
    -------------------------------------------------------------------------

8.4 Future accounting changes

Business combinations, consolidated financial statements and non-controlling interest

In January 2009, the CICA issued three new accounting standards: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non controlling interests, to converge the accounting for business combinations and the reporting of non-controlling interest to IFRS.

The recommendations of Section 1582, Business Combinations, which replaces Section 1581, Business Combinations, become effective January 1, 2011 and should be applied prospectively with earlier adoption permitted. This section establishes new guidance on the recognition and measurement basis of assets and liabilities acquired through a business combination.

The recommendations of Section 1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Interests, which together replace Section 1600, Consolidated Financial Statements, also become effective on January 1, 2011 and should also be applied prospectively with earlier adoption permitted. These standards establish new guidance on the accounting and presentation for non-controlling interests and for transactions affecting non-controlling interest. These two new standards must be adopted concurrently with Section 1582.

Impairment of Financial Assets - Amendments to: Financial Instruments - Recognition and Measurement

On August 20, 2009, the CICA issued various amendments to Section 3855 which further reduced differences with IFRS. As a result of these amendments, debt instruments not quoted in an active market may be classified as loans and receivables, and impairment will be assessed using the same model for impaired loans. In addition, the new guidance requires reversing an impairment loss relating to an available-for-sale debt instrument when, in a subsequent period, the fair value of the instrument increases and the increase can be objectively related to an event occurring after the loss was recognized.

The Company will adopt these amendments, which require retroactive application to January 1, 2009, in the fourth quarter of fiscal year 2009. The Company is currently assessing the impact that adopting these amendments will have on debt securities impairment losses recorded in the first quarter of 2009.

8.5 Related-party transactions

Subsequent to the disposal by ING Groep of its shareholding in the company, all related-party transactions are with entities associated with the Company's distribution segment.

Section 9 - Risk management

The company has not significantly changed its risk management strategy as compared to the information presented in the annual MD&A.

9.1 Estimated impact of changes in interest rates and equity prices

Impact of changes in interest rates

For our AFS debt or preferred securities a 100 basis point increase in interest rates would increase income before income taxes by approximately $20.3 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 $212.3 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, 2009, management estimates that a 10% increase in equity markets would have no impact on income before income taxes and increase OCI by $50.3 million. Excluding the impact of any impairment, a 10% decrease in equity prices would have the corresponding opposite effect, lowering OCI by the same amount.

Key assumptions

The analysis in this section is based on the following assumptions: 1) the securities in the company's portfolio are not impaired; 2) interest rates and equity prices move independently; 3) shifts in the yield curve are parallel; 4) credit and liquidity risks have not been considered, and, 5) all of our debt securities and preferred shares are AFS. For our HFT debt securities, which are marked-to-market, the estimated impact on income before income taxes of a 100 basis point increase or decrease in interest rates is assumed to be offset by the MYA. In addition, it is important to note that AFS securities in an unrealized loss position, as reflected in OCI, may at some point in the future be realized either through a sale or impairment. See section 3.4, "Net investment gains (losses)".

Section 10 - Other matters

10.1 Cautionary note regarding forward-looking statements

Certain statements in this report or included by reference about the company's current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments are forward-looking statements. The words "may", "will", "would", "should", "could", "expects", "plans", "intends", "trends", "indications", "anticipates", "believes", "estimates", "predicts", "likely" or "potential" or the negative or other variations of these words or other similar or comparable words or phrases identify such forward-looking statements.

Forward-looking statements are based on estimates and assumptions made by management based on management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Many factors could cause the company's actual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements. These factors include, without limitation, the following: the company's ability to implement its strategy or operate its business as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the company writes; unfavourable capital market developments or other factors which may affect the company's invested assets and its pension plans funding obligations; the cyclical nature of the P&C insurance industry; management's ability to accurately predict future claims frequency; government regulations; litigation and regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; the company's reliance on brokers and third parties to sell its products; the company's ability to successfully pursue its acquisition and business strategies; the company's participation in the Facility Association (a mandatory pooling arrangement among all industry participants); terrorist attacks and ensuing events; the occurrence of catastrophic events; the company's ability to maintain its financial strength ratings; the company's ability to alleviate risk through reinsurance; the company's ability to successfully manage credit risk; the company's reliance on information technology and telecommunications systems; the company's dependence on key employees; general economic, financial and political conditions; the company's dependence on the results of operations of its subsidiaries; the accuracy of analyst earnings estimates or the consensus figure based upon such estimates; the volatility of the stock market and other factors affecting the company's share price; the limited trading history of its common shares; and future sales of a substantial number of its common shares. These factors are not intended to represent a complete list of the factors that could affect the Company and should be considered carefully by readers who should not place undue reliance on the company's forward-looking statements.

The company and management have no intention and accept no responsibility to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Intact Financial Corporation
    Unaudited interim consolidated balance sheets
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

                                                          As at        As at
                                                   September 30, December 31,
                                                           2009         2008
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents                        $    258.0   $    510.4
    Invested assets (note 3)
      Debt securities                                   4,397.8      3,832.5
      Equity securities                                 2,870.9      2,019.5
      Loans                                               313.2        242.3
                                                    -------------------------
                                                        7,581.9      6,094.3

    Accrued interest and dividend income                   58.2         34.7
    Premium receivables                                 1,664.5      1,469.4
    Other receivables                                     285.9        247.0
    Deferred acquisition costs                            401.8        382.4
    Reinsurance assets                                    273.6        224.2
    Other assets                                          277.4        238.6
    Income taxes receivable                                29.9        221.0
    Future income tax asset                                21.2         54.2
    Intangibles                                           148.5        136.4
    Goodwill                                              167.3        160.8
    -------------------------------------------------------------------------
    Total assets                                     $ 11,168.2   $  9,773.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities
    Claims liabilities (note 4)                      $  4,367.6   $  4,064.9
    Unearned premiums                                   2,517.2      2,366.8
    Debt outstanding (note 5)                             249.9            -
    Other liabilities                                   1,074.5        701.7
    Income taxes payable                                   66.0          7.4
                                                    -------------------------
                                                        8,275.2      7,140.8
    Shareholders' equity
    Share capital (note 6)                              1,061.5      1,061.5
    Contributed surplus                                    83.3         88.3
    Retained earnings                                   1,843.9      1,928.9
    Accumulated other comprehensive loss                  (95.7)      (446.1)
                                                    -------------------------
                                                        2,893.0      2,632.6
    -------------------------------------------------------------------------
    Total liabilities and equity                     $ 11,168.2   $  9,773.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Intact Financial Corporation
    Unaudited interim consolidated statements of income (loss)
    For the periods ended September 30
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

                                         Three months          Nine months
                                       ---------------       ---------------
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Revenues
    Gross premiums written
      Direct                      $ 1,133.4  $ 1,119.8  $ 3,255.2  $ 3,200.0
      Ceded                           (36.5)     (23.7)     (86.3)     (73.0)
                                  -------------------------------------------
      Net                           1,096.9    1,096.1    3,168.9    3,127.0
    Changes in net unearned
     premiums                         (77.9)     (63.8)    (150.0)    (106.8)
                                  -------------------------------------------
    Net premiums earned             1,019.0    1,032.3    3,018.9    3,020.2
    Interest and dividend income       77.0       87.2      227.1      262.9
    Net investment gains
     (losses) (note 9)                 11.7      (81.3)    (159.2)    (135.8)
    Distribution income and other       8.7        7.6       29.8       28.4
    -------------------------------------------------------------------------
                                    1,116.4    1,045.8    3,116.6    3,175.7
    Expenses
    Underwriting
      Claims                          841.2      674.5    2,216.5    2,045.8
      Commissions, premium taxes
       and general expenses           282.0      288.7      858.9      871.1
                                  -------------------------------------------
                                    1,123.2      963.2    3,075.4    2,916.9
    Interest on debt outstanding        1.1          -        1.1          -
    Distribution expenses and
     other                              8.1       13.9       25.7       27.1
                                  -------------------------------------------
                                    1,132.4      977.1    3,102.2    2,944.0
    -------------------------------------------------------------------------
    (Loss) income before
     income taxes                     (16.0)      68.7       14.4      231.7
    Income tax (benefit) expense       (8.0)      11.4      (15.6)      39.4
    -------------------------------------------------------------------------
    Net (loss) income             $    (8.0) $    57.3  $    30.0  $   192.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per share, basic
     and diluted (in dollars)     $   (0.07) $    0.47  $    0.25  $    1.57
    Dividends per share
     (in dollars)                 $    0.32  $    0.31  $    0.96  $    0.93
    Basic and diluted average
     number of common shares
     (in millions)                    119.9      120.8      119.9      122.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Unaudited interim consolidated statements of comprehensive income (loss)
    For the periods ended September 30
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

                                         Three months          Nine months
                                       ---------------       ---------------
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Net (loss) income             $    (8.0) $    57.3  $    30.0  $   192.3

    Net decrease (increase) in
     unrealized losses on
     available for sale
     securities, net of income
     taxes                            147.0     (159.1)     276.4     (252.1)
                                  -------------------------------------------
    Reclassification of net
     (gains) losses to income,
     net of income taxes               (9.1)      41.9       74.0       86.3
                                  -------------------------------------------
    Other comprehensive income
     (loss)                           137.9     (117.2)     350.4     (165.8)
    -------------------------------------------------------------------------
    Total comprehensive income
     (loss)                       $   129.9  $   (59.9) $   380.4  $    26.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Intact Financial Corporation
    Unaudited interim consolidated statements of changes in shareholders'
    equity
    For the periods ended September 30
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

                                                         Accumulated
                                                            other
                          Share  Contributed  Retained  comprehensive
                         capital    surplus   earnings       loss      Total
    -------------------------------------------------------------------------
    Balance as at
     December 31,
     2008              $ 1,061.5  $    88.3  $ 1,928.9  $  (446.1) $ 2,632.6
    Net income                 -          -       30.0          -       30.0
    Other comprehensive
     income (loss)             -          -          -      350.4      350.4
    Common shares
     repurchased for
     cancellation              -          -          -          -          -
    Dividends paid             -          -     (115.1)         -     (115.1)
    Long-term incentive
     plan ("LTIP")             -       (5.0)       0.1          -       (4.9)
    -------------------------------------------------------------------------
    Balance as at
     September 30,
     2009              $ 1,061.5  $    83.3  $ 1,843.9  $   (95.7) $ 2,893.0
    -------------------------------------------------------------------------

    Balance as at
     December 31,
     2007              $ 1,101.9  $    97.2  $ 2,091.3  $  (118.3) $ 3,172.1
    Net income                 -          -      192.3          -      192.3
    Other comprehensive
     income (loss)             -          -          -     (165.8)    (165.8)
    Common shares
     repurchased for
     cancellation          (40.4)         -     (135.6)         -     (176.0)
    Dividends paid             -          -     (113.8)         -     (113.8)
    LTIP                       -       (8.7)      (4.0)         -      (12.7)
    -------------------------------------------------------------------------
    Balance as at
     September 30,
     2008              $ 1,061.5  $    88.5  $ 2,030.2  $  (284.1) $ 2,896.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Unaudited interim consolidated statements of cash flows
    For the periods ended September 30
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

                                         Three months          Nine months
                                       ---------------       ---------------
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Cash flows from (used in)
     operating activities
    Net (loss) income             $    (8.0) $    57.3  $    30.0  $   192.3
    Adjustments for
     non-cash items                    24.7      200.7      210.7      340.8
    Changes in net claims
     liabilities                      212.4       23.2      253.6       82.0
    Changes in other operating
     assets and liabilities           (13.4)     (90.2)     (33.6)    (225.9)
                                  -------------------------------------------
    Net cash flows from
     operating activities (note 9)    215.7      191.0      460.7      389.2

    Cash flows from (used in)
     investing activities
    Proceeds from sale of
     invested assets                2,088.4    1,676.9    4,262.9    4,286.8
    Purchases of invested assets   (2,345.0)  (1,718.9)  (5,035.0)  (4,284.6)
    Purchase of brokerages and
     books of business, net
     of sales                          (9.8)       2.6      (40.8)      (4.5)
    Purchases of property and
     equipment                        (12.5)     (10.6)     (33.9)     (36.5)
                                  -------------------------------------------
    Net cash flows used in
     investing activities            (278.9)     (50.0)    (846.8)     (38.8)

    Cash flows from (used in)
     financing activities
    Common shares repurchased
     for cancellation                     -      (77.3)         -     (176.0)
    Net proceeds from debt issuance   248.8          -      248.8          -
    Dividends paid                    (38.3)     (37.3)    (115.1)    (113.8)
                                  -------------------------------------------
    Net cash flows from (used in)
     financing activities             210.5     (114.6)     133.7     (289.8)
    -------------------------------------------------------------------------
    Net increase (decrease) in
     cash and cash equivalents        147.3       26.4     (252.4)      60.6
    Cash and cash equivalents,
     beginning of period              110.7       42.3      510.4        8.1
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                $   258.0  $    68.7  $   258.0  $    68.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Intact Financial Corporation
    Notes to unaudited interim consolidated financial statements
    (in millions of Canadian dollars, except as noted)
    -------------------------------------------------------------------------

    Note 1 - Basis of presentation

    These unaudited interim consolidated financial statements of Intact
    Financial Corporation (formerly ING Canada Inc.) ("Intact" or the
    "Company") have been prepared in accordance with Canadian generally
    accepted accounting principles ("GAAP") for interim financial statements
    and do not include all the information required for annual financial
    statements. Except as described below, these unaudited interim
    consolidated financial statements use the same accounting policies as the
    Company's audited consolidated financial statements for the fiscal year
    ended December 31, 2008 and should be read in conjunction with the
    Company's annual consolidated financial statements for the year then
    ended. Certain comparative figures have been reclassified to conform to
    the presentation adopted in the current periods.


    Note 2 - Accounting policy changes

    a) Applied during the current periods

    Goodwill and intangible assets

    Effective January 1, 2009, the Company applied the new Canadian Institute
    of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and
    Intangible Assets. This Section replaces Section 3062, Goodwill and Other
    Intangible Assets, and Section 3450, Research and Development Costs, and
    establishes standards for the recognition, measurement and disclosure of
    goodwill and intangible assets. The provisions relating to the definition
    and initial recognition of intangible assets, including internally
    generated intangible assets, are equivalent to the corresponding
    provisions of IAS 38, Intangible Assets, of International Financial
    Reporting Standards ("IFRS").

    In applying Section 3064, the Company has reclassified certain assets
    from Other assets to Intangibles on the unaudited consolidated balance
    sheets. The amount reclassified as at December 31, 2008 was $79.4. This
    reclassification had no impact on the Company's net income for 2009.

    Credit risk and the fair value of financial assets and financial
    liabilities

    Effective January 20, 2009, the Company applied the Emerging Issues
    Committee ("EIC") abstract 173, Credit Risk and the Fair Value of
    Financial Assets and Financial Liabilities, EIC-173 requires an entity to
    take into account its own credit risk and that of the relevant
    counterparties when determining the fair value of financial assets and
    financial liabilities, including derivative instruments. The adoption of
    this new CICA abstract has not had a significant impact on the Company's
    results or financial condition as credit risks associated with the
    Company's financial assets and liabilities are incorporated into the
    Company's valuation methodology.

    Debt outstanding

    On August 31, 2009, the Company completed an offering of $250.0 principal
    amount of unsecured medium term notes (the "Notes"). The Notes together
    with the cost of issuing debt are classified as Debt outstanding and
    accounted for at amortized cost using the effective interest method.

    b) Future accounting changes

    Business combinations, consolidated financial statements and
    non-controlling interest

    In January 2009, the CICA issued three new accounting standards: Section
    1582, Business Combinations, Section 1601, Consolidated Financial
    Statements, and Section 1602, Non-controlling Interests, to converge the
    accounting for business combinations and the reporting of non-controlling
    interest to IFRS.

    The recommendations of Section 1582, Business Combinations, which
    replaces Section 1581, Business Combinations, become effective January 1,
    2011 and should be applied prospectively with earlier adoption permitted.
    This section establishes new guidance on the recognition and measurement
    basis of all assets and all liabilities acquired through a business
    combination.

    The recommendations of Section 1601, Consolidated Financial Statements,
    and Section 1602, Non-Controlling Interests, which together replace
    Section 1600, Consolidated Financial Statements, also become effective on
    January 1, 2011 and should also be applied prospectively with earlier
    adoption permitted. These standards establish new guidance on the
    accounting and presentation for non-controlling interests and for
    transactions affecting non-controlling interests. These two new standards
    must be adopted concurrently with Section 1582.

    The Company is currently assessing the impact the adoption of these
    Sections will have on its consolidated financial statements.

    Impairment of Financial Assets - Amendments to: Financial Instruments -
    Recognition and Measurement

    On August 20, 2009, the CICA issued various amendments to Section 3855
    which further reduced differences with IFRS. As a result of these
    amendments debt instruments not quoted in an active market may be
    classified as loans and receivables, and impairment will be assessed
    using the same model for impaired loans. In addition, the new guidance
    requires reversing an impairment loss relating to an available-for-sale
    debt instrument when, in a subsequent period, the fair value of the
    instrument increases and the increase can be objectively related to an
    event occurring after the loss was recognized.

    The Company will adopt these amendments, which require retroactive
    application to January 1, 2009, in the fourth quarter of fiscal year
    2009. The Company is currently assessing the impact that adopting these
    amendments will have on its consolidated financial statements.


    Note 3 - Invested assets and other financial instruments

    a) Carrying value of invested assets

    The Company's invested assets are classified into four categories as
    defined by the CICA guidance on financial instruments: available for sale
    ("AFS"), classified or designated as held-for-trading ("HFT") and loans
    and receivables.

                                 Classified Designated   Loans and
                             AFS     as HFT     as HFT receivables     Total
    -------------------------------------------------------------------------
    As at September 30,
     2009

    Debt securities
      Short-term notes     169.6          -          -          -      169.6
      Fixed income       1,973.5          -    2,254.7          -    4,228.2
    Equity securities
      Preferred shares   1,614.6          -          -          -    1,614.6
      Common shares        694.1      176.6      385.6          -    1,256.3
    Loans                      -          -          -      313.2      313.2
    -------------------------------------------------------------------------
                         4,451.8      176.6    2,640.3      313.2    7,581.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31,
     2008

    Debt securities
      Short-term notes     293.8          -          -          -      293.8
      Fixed income       1,781.2          -    1,757.5          -    3,538.7
    Equity securities
      Preferred shares   1,220.1          -          -          -    1,220.1
      Common shares        727.7          -       71.7          -      799.4
    Loans                      -          -          -      242.3      242.3
    -------------------------------------------------------------------------
                         4,022.9          -    1,829.2      242.3    6,094.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company reclassified investments carried at cost from Loans to Other
    assets. The amount reclassified at December 31, 2008 is $14.6. The
    equivalent amount at September 30, 2009 is $20.3.

    The risk management policies and procedures of the Company as well as
    certain disclosures required by Sections 3862 and 1535 were provided in
    the 2008 annual Management Discussion and Analysis under Section 9 and in
    notes 3, 4, 5 and 13 of the 2008 annual audited consolidated financial
    statements. The impact of changes in risk variables such as market prices
    and interest rates is described in the Risk Management section of the
    quarterly Management Discussion and Analysis which accompanies these
    financial statements.

    b) Unrealized gains and losses

                             HFT                                       Total
                        invested                                    invested
                          assets      Other invested assets           assets
                        -----------------------------------------------------
                                                                          At
                         At fair  Amortized Unrealized Unrealized   carrying
                           value       cost      gains     losses      value
    -------------------------------------------------------------------------
    As at September 30,
     2009

    Debt securities
      Short-term notes         -      169.6          -          -      169.6
      Fixed income       2,254.7    1,929.5       48.0       (4.0)   4,228.2
    Equity securities
      Preferred shares         -    1,776.8       45.9     (208.1)   1,614.6
      Common shares        562.2      718.4       32.8      (57.1)   1,256.3
    Loans                      -      313.2          -          -      313.2
    -------------------------------------------------------------------------
                         2,816.9    4,907.5      126.7     (269.2)   7,581.9
    Net unrealized losses                            (142.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31,
     2008

    Debt securities
      Short-term notes         -      293.8          -          -      293.8
      Fixed income       1,757.5    1,750.8       57.1      (26.7)   3,538.7
    Equity securities
      Preferred shares         -    1,742.6        1.8     (524.3)   1,220.1
      Common shares         71.7      868.4       10.5     (151.2)     799.4
    Loans                      -      242.3          -          -      242.3
    -------------------------------------------------------------------------
                         1,829.2    4,897.9       69.4     (702.2)   6,094.3
    Net unrealized losses                            (632.8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Loans are carried at amortized cost. Their fair value is determined using
    internal valuation models. As at September 30, 2009, these loans had a
    fair value of $329.9 (December 31, 2008 - $268.8).

    c) Positive and negative fair values of derivative financial instruments

                                                             Fair values
                                                          -------------------
                                                          Positive  Negative
    -------------------------------------------------------------------------
    As at September 30, 2009

    Where hedge accounting is applied                          1.1         -
    Where hedge accounting is not applied                      2.8      10.5
    Embedded derivatives                                         -      76.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31, 2008

    Where hedge accounting is applied                            -       1.9
    Where hedge accounting is not applied                      9.0       2.3
    Embedded derivatives                                         -       4.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Note 4 - Net claims liabilities

                                            Direct                       Net
                                            claims  Reinsurers'       claims
                                       liabilities       share   liabilities
    -------------------------------------------------------------------------
    For the three months ended
     September 30, 2009

    Balance, beginning of period           4,104.7       205.6       3,899.1
    Claims incurred                          862.4        58.1         804.3
    Prior year (favourable) claims
     development                             (19.9)       (5.9)        (14.0)
    Increase due to changes in discount
     rate                                     54.4         3.5          50.9
    Claims paid                             (634.0)       (5.3)       (628.7)
    -------------------------------------------------------------------------
    Balance, end of period                 4,367.6       256.0       4,111.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended
     September 30, 2008

    Balance, beginning of period           4,033.7       242.8       3,790.9
    Claims incurred                          744.5         3.2         741.3
    Prior year (favourable) claims
     development                             (49.6)       (3.7)        (45.9)
    Decrease due to changes in discount
     rate                                    (22.6)       (1.7)        (20.9)
    Claims paid                             (661.7)      (10.4)       (651.3)
    -------------------------------------------------------------------------
    Balance, end of period                 4,044.3       230.2       3,814.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the nine months ended
     September 30, 2009

    Balance, beginning of period           4,064.9       207.0       3,857.9
    Claims incurred                        2,283.4        63.6       2,219.8
    Prior year (favourable) claims
     development                             (52.1)        5.6         (57.7)
    Increase due to changes in discount
     rate                                     58.1         3.7          54.4
    Claims paid                           (1,986.7)      (23.9)     (1,962.8)
    -------------------------------------------------------------------------
    Balance, end of period                 4,367.6       256.0       4,111.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the nine months ended
     September 30, 2008

    Balance, beginning of period           3,989.0       256.9       3,732.1
    Claims incurred                        2,158.9        16.0       2,142.9
    Prior year (favourable) claims
     development                             (91.0)       (4.8)        (86.2)
    Decrease due to changes in discount
     rate                                    (11.8)       (0.9)        (10.9)
    Claims paid                           (2,000.8)      (37.0)     (1,963.8)
    -------------------------------------------------------------------------
    Balance, end of period                 4,044.3       230.2       3,814.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 5 - Debt outstanding

    On August 31, 2009, the Company completed an offering of $250.0 principal
    amount of unsecured medium term notes (the "Notes"). The Notes bear
    interest at a fixed annual rate of 5.41% until maturity on September 3,
    2019, payable in equal semi-annual instalments commencing on March 3,
    2010.

    The fair value of the Notes as at September 30, 2009 is $255.2.

    Effective December 31, 2008, the Company entered into an unsecured
    committed credit facility of $150.0 which replaces the previous credit
    facility of $100.0. This credit facility may be drawn as prime loans at
    the prime rate plus a margin or as bankers' acceptances at the bankers'
    acceptance rate plus a margin. As at September 30, 2009 the Company had
    not drawn down under the facility.

    Note 6 - Share capital

    a) Issued and outstanding

                                          As at September 30, 2009
                                ---------------------------------------------
                                                  Issued and
                                  Authorized     outstanding
                                  (number of      (number of           Share
                                      shares)         shares)        Capital
    -------------------------------------------------------------------------
    Common shares                  Unlimited     119,906,567       $ 1,061.5
    Class A shares                 Unlimited               -               -
    Special share                          -               -               -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           As at December 31, 2008
                                ---------------------------------------------
                                                  Issued and
                                  Authorized     outstanding
                                  (number of      (number of           Share
                                      shares)         shares)        Capital
    -------------------------------------------------------------------------
    Common shares                  Unlimited     119,906,566       $ 1,061.5
    Class A shares                 Unlimited               -               -
    Special share                        One               1               -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On February 19, 2009, ING Groep completed the disposal of its entire 70%
    shareholding in the Company via the sale of 36,183,480 of the Company's
    common shares to a number of institutional investors on a private
    placement basis and the sale of 47,757,920 common shares pursuant to a
    "bought deal" secondary public offering. The Special share owned by ING
    Groep was immediately converted into one common share and was also
    disposed of through the secondary offering.

    b) Normal course issuer bid

    During the first nine months of 2008, the Company repurchased 4,566,195
    common shares under its normal course issuer bid at an average price of
    $38.53 per share for a total consideration of $176.0. Total cost paid,
    including fees, was first charged to share capital to the extent of the
    average carrying value of the common shares purchased for cancellation
    and the excess of $135.6 was charged to retained earnings.

    Note 7 - Stock-based compensation

    The following table reconciles the beginning and ending balances of the
    share units outstanding for both the Company's LTIP  and employee share
    purchase plan ("ESPP").

                                         Three months          Nine months
    For the periods ended              ---------------       ---------------
     September 30                      2009       2008       2009       2008
    -------------------------------------------------------------------------
    LTIP (share equivalents)
      Outstanding, beginning of
       period                       287,498    355,130    306,864    616,115
      Net change in estimate during
       the period                   (20,635)     8,703    (40,001)  (252,282)
    -------------------------------------------------------------------------
      Outstanding, end of period    266,863    363,833    266,863    363,833
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LTIP (restricted common shares)
      Outstanding, end of period    342,731    289,236    342,731    289,236
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    ESPP (restricted common shares)
      Outstanding, beginning of
       period                       101,567     77,371     89,906     66,228
      Awarded during the period      31,325     22,126     77,323     62,289
      Vested or forfeited during
       the period                   (22,172)   (17,030)   (56,509)   (46,050)
    -------------------------------------------------------------------------
      Outstanding, end of period    110,720     82,467    110,720     82,467
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 8 - Related-party transactions

    Subsequent to the disposal by ING Groep of its shareholding in the
    Company (see note 6 a)), all related-party transactions are with entities
    associated with the Company's distribution segment.

    a) Revenues and expenses

                                         Three months          Nine months
    For the periods ended              ---------------       ---------------
     September 30                      2009       2008       2009       2008
    -------------------------------------------------------------------------
    Reinsurance ceded to related
     entities
      Ceded premiums earned               -        3.7          -       11.1
      Ceded claims                        -       (0.2)         -       (0.1)
    Expenses
      Commissions                      10.6        9.9       29.2       29.2
      Other expenses                      -        4.5        3.0       13.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Balance sheet amounts

                                                   September 30, December 31,
    As at                                                  2009         2008
    -------------------------------------------------------------------------
    Reinsurance payable                                       -         (0.4)
    Loans                                                 217.2        127.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 9 - Additional information

    a) Consolidated statements of income

                                         Three months          Nine months
    For the periods ended              ---------------       ---------------
     September 30                      2009       2008       2009       2008
    -------------------------------------------------------------------------
    Amounts included in net investment
     gains (losses):
      Related to HFT financial
       instruments
        Gains (losses) on HFT
         securities                    66.7      (40.6)     163.2      (61.9)
        (Losses) gains on derivatives (41.4)       6.1     (150.1)      26.4
      Related to AFS financial
       instruments
        Realized gains (losses) on AFS
         securities                    24.3      (38.5)     (64.2)     (41.2)
        (Losses) gains on embedded
         derivatives                  (30.4)       5.9      (72.3)      15.9
        Impairments of fixed income
         debt securities                  -       (4.0)      (8.4)     (10.9)
        Impairments of common share
         equity securities             (7.5)     (11.1)     (27.1)     (64.7)
      Other                               -        0.9       (0.3)       0.6
    -------------------------------------------------------------------------
    Net investment gains (losses)      11.7      (81.3)    (159.2)    (135.8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Consolidated statements of cash flows

                                         Three months          Nine months
    For the periods ended              ---------------       ---------------
     September 30                      2009       2008       2009       2008
    -------------------------------------------------------------------------
    Expense (revenue) amounts included
     in non-cash items:
      Amortization                     12.0       10.9       32.9       30.3
      LTIP                                -       10.4       (5.0)      (0.2)
      Employee future benefits          2.8        3.8        8.5        9.7
    Income taxes recovered             22.9       30.6      162.8       55.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 10 - Segmented information

    The Company has two reporting segments, the underwriting segment and the
    corporate and distribution segment.

    The Company's core business activity is property and casualty ("P&C")
    insurance underwriting. The underwriting segment includes two lines of
    business: personal lines and commercial lines. Personal lines include
    automobile and property while commercial lines include automobile and
    property and liability.

    Corporate and distribution segment includes the results of the Company's
    participation in broker and other operations.

    a) Results of the Company's reportable segments

                                             Corporate     Inter-
                                                   and    segment
                                     Under-    distri-   elimina-
                                    writing     bution      tions      Total
    -------------------------------------------------------------------------
    For the three months ended
     September 30, 2009

    Revenues                        1,019.0       30.0      (21.3)   1,027.7
    Expenses                        1,123.2       23.7      (19.7)   1,127.2
    -------------------------------------------------------------------------
    Subtotal                         (104.2)       6.3       (1.6)     (99.5)
    Interest and dividend income,
     net of expenses                   71.9        1.0          -       72.9
    Interest on debt outstanding          -       (1.1)         -       (1.1)
    Net investment gains (losses)      11.1        0.6          -       11.7
    -------------------------------------------------------------------------
    Total (loss) income before
     income taxes                     (21.2)       6.8       (1.6)     (16.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended
     September 30, 2008

    Revenues                        1,032.3       27.6      (20.0)   1,039.9
    Expenses                          963.2       30.1      (20.3)     973.0
    -------------------------------------------------------------------------
    Subtotal                           69.1       (2.5)       0.3       66.9
    Interest and dividend income,
     net of expenses                   80.6        2.5          -       83.1
    Interest on debt outstanding          -          -          -          -
    Net investment gains (losses)     (85.5)       4.2          -      (81.3)
    -------------------------------------------------------------------------
    Total (loss) income before
     income taxes                      64.2        4.2        0.3       68.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the nine months ended
     September 30, 2009

    Revenues                        3,018.9       89.6      (59.8)   3,048.7
    Expenses                        3,075.4       69.4      (55.4)   3,089.4
    -------------------------------------------------------------------------
    Subtotal                          (56.5)      20.2       (4.4)     (40.7)
    Interest and dividend income,
     net of expenses                  212.4        3.0          -      215.4
    Interest on debt outstanding          -       (1.1)         -       (1.1)
    Net investment gains (losses)    (158.8)      (0.4)         -     (159.2)
    -------------------------------------------------------------------------
    Total (loss) income before
     income taxes                      (2.9)      21.7       (4.4)      14.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the nine months ended
     September 30, 2008

    Revenues                        3,020.2       86.1      (57.7)   3,048.6
    Expenses                        2,916.9       71.2      (56.6)   2,931.5
    -------------------------------------------------------------------------
    Subtotal                          103.3       14.9       (1.1)     117.1
    Interest and dividend income,
     net of expenses                  239.6       10.8          -      250.4
    Interest on debt outstanding          -          -          -          -
    Net investment gains (losses)    (137.1)       1.3          -     (135.8)
    -------------------------------------------------------------------------
    Total (loss) income before
     income taxes                     205.8       27.0       (1.1)     231.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Assets of the Company's reportable segments

                                             Corporate     Inter-
                                                   and    segment
                                     Under-    distri-   elimina-
                                    writing     bution      tions      Total
    -------------------------------------------------------------------------

    As at September 30, 2009

    Invested assets                7,528.9        53.0          -    7,581.9
    Other assets                   3,029.5       395.7       (6.2)   3,419.0
    Goodwill                          74.4        92.9          -      167.3
    -------------------------------------------------------------------------
    Total assets                  10,632.8       541.6       (6.2)  11,168.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31, 2008

    Invested assets                6,048.8        49.9          -    6,094.3
    Other assets                   3,217.6       303.4       (7.1)   3,518.3
    Goodwill                          74.4        86.4          -      160.8
    -------------------------------------------------------------------------
    Total assets                   9,340.8       439.7       (7.1)   9,773.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    c) Results by line of business

                                         Three months          Nine months
    For the periods ended              ---------------       ---------------
     September 30                      2009       2008       2009       2008
    -------------------------------------------------------------------------
    Gross premiums written
      Personal                        860.5      854.5    2,398.0    2,353.2
      Commercial                      272.9      265.3      857.2      846.8
    Underwriting (loss) income
      Personal                        (79.2)      26.0      (53.5)       9.1
      Commercial                      (25.0)      43.1       (3.0)      94.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

For further information: Media inquiries: Ian Blair, Director, External Communications, (416) 341-1464 ext. 45251, Email: ian.blair@intact.net; Investor inquiries: Michelle Dodokin, Vice President, Investor Relations, (416) 344-8044, Email: michelle.dodokin@intact.net