3.6% increase in net operating income per share driven
by improved underwriting results
Risk reduction initiative led to a non-recurring investment
loss of $83 million
Strong financial position with $389 million in excess
capital and no debtTORONTO, May 13 /CNW/ - ING Canada Inc. (TSX: IIC) reported a net loss of
$36.3 million or $0.30 per share for the quarter ended March 31, 2009 compared
to a gain of $23.0 million or $0.19 per share last year. Net operating income
for the quarter was $69.1 million, up 3.6% per share to $0.58 from the
corresponding quarter of last year, reflecting improved underwriting results
with a 99.2% combined ratio, and a lower number of outstanding shares.
The decline in net income was driven by an $82.9 million pre-tax
non-recurring investment loss resulting from the implementation of a hedging
program aimed at reducing market risk and maintaining the company's financial
strength and flexibility.
CEO's comments
Charles Brindamour, President and CEO, commented:
"Our operating performance continued to be healthy during the quarter
driven by good underwriting results. All our business lines performed well in
the current environment except our home insurance business. We are focused on
improving our home insurance results through a robust action plan."
"During the quarter, we continued our efforts to protect our strong
excess capital position by launching a hedging program that significantly
reduced our exposure to the fluctuations of the market values of common shares
of financial institutions. Our portfolio has been repositioned over the last
nine months to better weather the capital market weaknesses and we have
maintained our financial strength and flexibility in the current volatile
environment."
Dividend
The Board of Directors of ING Canada declared a quarterly dividend of 32
cents per share on its outstanding common shares. The dividend will be payable
on June 30, 2009 to shareholders of record on June 15, 2009.
Current Outlook
Home and auto insurance premiums are likely to rise over the next 12
months across the industry. The increase in claims costs in auto insurance in
Ontario, the uncertainty associated with the minor injury cap in Alberta as
well as the water-related damages in home insurance are leading to premium
increases in personal insurance. In business insurance, current market
indications suggest that the pricing environment may begin to firm up. While
the results of the P&C industry are not significantly correlated with the
fluctuations in economic cycles, lower investment yield and lower capital
levels could also contribute to increased premiums during the year.
ING Canada is well-positioned to continue to outperform the property and
casualty industry in the current environment due to its significant scale,
pricing and underwriting discipline, prudent investment management and its
strong financial position.Consolidated Highlights
-------------------------------------------------------------------------
(in millions of dollars, except
as otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Direct Premiums Written 868.8 860.3 1.0%
-------------------------------------------------------------------------
Underwriting Income(1) 7.9 0.8 7.1
-------------------------------------------------------------------------
Net Operating Income(2) 69.1 70.2 (1.6)%
-------------------------------------------------------------------------
Net income (loss) (36.3) 23.0 (59.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net operating income per share (dollars) 0.58 0.56 3.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Basic and diluted (dollars) (0.30) 0.19 (0.49)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on equity ("ROE") for the
last 12 months 2.4% 13.0% (10.6) pts
-------------------------------------------------------------------------
Combined ratio 99.2% 99.9% (0.7) 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 income after tax
Operating Highlights
- Net operating income amounted to $69.1 million and increased 3.6% on
a per share basis. The improvement was driven by a good underwriting
performance which was partly offset by lower investment income,
resulting from a more conservative portfolio.
- Direct premiums written increased 1% in the first quarter and reached
$868.8 million in the quarter driven by higher premium rates and
insured amounts in personal lines.
- Underwriting income improved during the quarter as a result of a 70
basis point reduction in the combined ratio to 99.2%. A solid
performance in all lines of business except home insurance led to an
underwriting income of $7.9 million.
Personal auto insurance results improved significantly increasing by
$24.2 million. Current year accident results remain stable while more
favourable prior year claims development contributed to bring the
combined ratio to 96.1%, a 4.8 percentage point improvement. However,
the home insurance business sustained a loss of $26.9 million with a
combined ratio of 112% due to higher claims frequency related to the
rapid snow melt. Several initiatives are underway to improve personal
property results.
The performance of our commercial insurance portfolio was healthy
during the quarter with an underwriting income of $15.4 million and a
combined ratio of 94.1%. The combined ratio in commercial auto
improved by 4.6 percentage points to 88.1% reflecting stable current
year results and more favourable prior year claims development.
Despite large fire-related property losses, the combined ratio in
commercial non-auto was solid at 96.6%.
- Interest and dividend income, net of expenses decreased by more than
15% during the quarter to $72.5 million. The $13.1 million decline
reflects mainly the impact of initiatives taken over the past year to
reduce the risks associated with our investment portfolio. Primarily,
as a result of a more conservative asset mix, the market-based yield
declined to 4.7%.
Investments
- Net losses on invested assets, excluding held-for-trading debt
securities, totalled $135.3 million, compared to $60.9 million last
year. The increase is the result of the implementation of a hedging
program aimed at reducing the market risk associated with our
holding of financial institutions' common equity stocks. The launch
of the program led to a non-recurring loss of $82.9 million. Our
total common shares exposure, net of hedges, has declined
significantly and now represents only 7% of our total investment
portfolio.
Capital and cash managementOverall, the company finished the quarter in a strong financial position
with $388.9 million in excess capital, no debt and a minimum capital test of
208.2%, 3.2 percentage points higher than at the end of 2008.
Analyst Estimates
The average estimate of earnings per share and operating earnings per
share for the first quarter among the analysts who follow the company were
$0.42 and $0.56 respectively.
Conference Call
ING Canada will host a conference call to review its earnings results
later this morning at 10:00 a.m. ET. To listen to the call via live audio
webcast and to view the presentation slides, the statistical supplement and
other information not included in this press release, visit our website at
www.ingcanada.com and click on "Investor Relations".
The conference call is also available by dialling 416-644-3418 or
1-800-732-9307 (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 today through
11:59 p.m. ET on Wednesday, May 20th. To listen to the replay, call
416-640-1917 or 1-877-289-8525 (toll-free in North America). The passcode is
21303213 followed by the number sign. A transcript of the call will also be
available on ING Canada's website.
Annual and Special Meeting of Shareholders
ING Canada will hold an Annual and Special Meeting of Shareholders at
2:00 pm ET at the Art Gallery of Ontario, 317 Dundas Street West, Toronto, ON.
At the meeting, shareholders will be asked to approve among other things a
resolution authorizing the change of the name of the company to Intact
Financial Corporation. The meeting will be webcast on ING Canada's website at
www.ingcanada.com
About ING Canada
ING Canada is the largest provider of property and casualty insurance in
the country with over $4 billion in premiums. Its 7000 employees offer home,
auto and business insurance under the Intact Insurance, Novex Group Insurance,
belairdirect and Grey Power brands. On February 19, ING Canada became a widely
held Canadian company following the completion of a private placement and a
secondary offering whereby institutional and retail investors acquire ING
Groep's shares in the company.ING Canada Inc.
Management's Discussion and Analysis
For the first quarter ended March 31, 2009
Table of contents
Section 1 - ING Canada ................................................3
Section 2 - Canadian property and casualty insurance
industry 12-month outlook .................................4
Section 3 - Overview of consolidated performance ......................5
Section 4 - Personal lines ...........................................15
Section 5 - Commercial lines .........................................17
Section 6 - Corporate and distribution ...............................18
Section 7 - Financial condition ......................................19
Section 8 - Accounting and disclosure matters ........................23
Section 9 - Risk management ..........................................25
Section 10 - Other matters ...........................................26
May 12, 2009The following Management's Discussion and Analysis ("MD&A"), which was
approved by the Board of Directors for the quarter ended March 31, 2009, is
intended to enable the reader to assess the company's results of operations
and financial conditions for the three-month period ended March 31, 2009,
compared to the corresponding period 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. ING Canada
analyzes performance based on underwriting ratios such as combined, general
expenses and claims ratios as well as other performance measures including and
excluding the market yield adjustment ("MYA") to claims liabilities. These
measures are defined in the company's glossary which is posted on the ING
Canada web site at www.ingcanada.com. Click on "Investor Relations" and
"Glossary" on the left navigation bar.
Forward-looking statements
This document contains forward-looking statements that involve risks and
uncertainties. The company's actual results could differ materially from these
forward-looking statements as a result of various factors, including those
discussed hereinafter or in the company's 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 ING Canada, including the Annual Information
Form, may be found online on SEDAR at www.sedar.com. A change column has been
provided for convenience showing the variation between the current period and
the prior period. Not applicable (n/a) is used to indicate that the current
and prior year figures are not comparable or if the percentage change exceeds
1,000%.Notes:
- All references to direct premiums written in this MD&A exclude pools,
unless otherwise noted.
- "ING", "ING Canada" ,"the company", "IIC" and "we" are terms used
throughout the document to refer to ING Canada Inc. and its
subsidiaries.
Section 1 - ING Canada
1.1 Overview of the businessING Canada 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 private sector property and casualty ("P&C") insurer
in Ontario, Quebec, Alberta and Nova Scotia. IIC distributes insurance through
brokers under Intact Insurance and Grey Power, and direct-to-consumers through
belairdirect. As at March 31, 2009, IIC and its insurance subsidiaries had a
$6.5 billion portfolio of cash and invested assets, managed by the company's
investment management subsidiary.Section 2 - Canadian property and casualty insurance industry 12-month
outlookIIC is well-positioned to continue to outperform the P&C insurance
industry in the current environment due to its significant scale, pricing and
underwriting discipline, prudent investment and capital management practices,
and strong financial position.-------------------------------------------------------------------------
P&C insurance industry IIC's response
-------------------------------------------------------------------------
Pricing - Personal auto premiums - Pricing discipline and
and claims will likely rise due to commitment to maintaining
environment cost pressures in Ontario adequate margins:
(12-month and Alberta - IIC's personal auto
outlook) - In Ontario, personal auto rates in Ontario have
rates are rising in response increased 9.5% since
to higher accident benefit the fall of 2007 to
and bodily injury (AB/BI) address cost pressures
claims (see section 3.1, - IIC has been increasing
Recent events) personal property
- In Alberta, The Alberta premiums to more
Insurance Rate Board closely match claims
approved a 5.0% rate experience
increase on mandatory - Implementation of Home
personal auto insurance Insurance Improvement
effective November 2008 to Plan to address rising
reflect the uncertainty water-related property
associated with the minor losses through:
injury cap which is being - Rate adjustments and
challenged in the province enhanced segmentation
- Personal property premiums - Greater efficiency in
are increasing due to claims management
increases in water-related - Redesign of the product
losses offering (see section
- Signs have emerged indicating 4.2)
the commercial price - Strong combined ratios
environment may begin to firm over the last few years
up in commercial insurance
have positioned IIC to
take advantage of organic
growth opportunities as
the commercial pricing
environment begins to
firm up
- Continue to pursue both
organic and acquisition
growth strategies
with a prudent and
disciplined approach
-------------------------------------------------------------------------
Economic - Overall, P&C insurance - IIC's underwriting and
conditions industry results are not pricing segmentation
significantly correlated with strategies include
economic cycles several variables that
- Demand for P&C insurance is enable the company to
relatively inelastic; home, better identify and
auto and business insurance price risks that are
is generally considered a more likely to be
non-discretionary purchase affected by adverse
- Expenses are largely variable economic conditions
- broker commissions and - Strong capital base and
premium taxes fluctuate with financial flexibility
premium growth and claims are also significant
ratio experience advantages in a weak
- Lower expected investment economic environment
yield could increase premiums - Focus on identifying
across the industry opportunities to
maximize quality growth
-------------------------------------------------------------------------
Capital - Prolonged capital market - Financial position is
Markets weakness over the last year strong with $388.9 (1)
have resulted in investment million in excess
losses, higher borrowing capital, no debt and
costs and diminished excess an MCT ratio of 208.2%
capital levels across the - $6.5 billion cash and
industry investment portfolio
- Pressure on the industry's is largely Canadian
capital will likely continue with minimal US
through 2009 exposure and includes
- Lower capital levels could no leveraged investments
influence higher premiums - Over the last nine
across the industry months, strategic
changes in the asset
mix and new financials
hedging program have
reduced our common
share exposure and MCT
sensitivity, and
increased our cash
position
- A 10% change in the
market value of IIC's
common shares would
increase or decrease
the MCT ratio by 1.3
percentage points
respectively, compared
to 2.8 percentage
points at the end of
2008
- With a more conservative
portfolio, the book yield
of our investment
portfolio decreased by 65
basis points year-over-
year to 4.32% in the
first quarter but we have
achieved our objective to
maintain our financial
and strategic agility
- Lower excess capital
levels in the industry
could create
opportunities for IIC to
consolidate in the
Canadian market
-------------------------------------------------------------------------
(1) Assumes a Minimal Capital Test ("MCT") of 170%.
Section 3 - Overview of consolidated performance
First quarter highlights
- Increase in operating income per share reflects higher underwriting
income and share repurchases in 2008
- De-risking of financial common equity investments to protect our
strategic flexibility resulted in non-recurring, realized investment
losses in the first quarter
- Strong capital base and financial flexibility with an MCT ratio of
208.2%, $388.9 million of excess capital and no debt
Consolidated financial results
Table 1 - Components of net income
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Direct premiums written (excluding pools) 868.8 860.3 1.0%
Underwriting income (excluding MYA) (table 4) 7.9 0.8 887.5%
Combined ratio (excluding MYA) 99.2% 99.9% (0.7)pts
Interest and dividend income, net of
expenses (table 7) 72.5 85.6 (15.3)%
Losses on invested assets and other
gains (table 8) (135.8) (25.8) 426.4%
Income (loss) before income taxes (66.9) 22.2 (401.4)%
Income tax benefit (30.6) (0.8) n/a
Effective income tax rate (45.8)% (3.8)% (42.0)pts
Net income (loss) (36.3) 23.0 (257.8)%
Net operating income (table 12) 69.1 70.2 (1.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share ("EPS") - basic and
diluted (dollars) (0.30) 0.19 (257.9)%
Net operating income per share (dollars) 0.58 0.56 3.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on equity ("ROE") for the last
12 months 2.4% 13.0% (10.6)pts
Book value per share (dollars) 21.56 25.19 (14.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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) Quarter
ending
March 31
-------------------------------------------------------------------------
Pre-tax operating income, as reported in 2008 89.5
Change in favourable prior year claims development 38.1
Changes in current accident year from:
Underwriting income (52.5)
Losses from catastrophes 14.2
Results from Facility Association 7.3
Change in underwriting income excluding MYA 7.1
Change in interest and dividend income, net of expenses (13.1)
Change in corporate and distribution (1.3)
Pre-tax operating income, as reported in 2009 82.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pre-tax operating income is a non-GAAP measure. Catastrophe claims are
defined as a single event resulting in $5.0 million or more in aggregate
claims.
Table 3 - Changes in income before income taxes (year-over-year)
(in millions of dollars, except as otherwise noted) Quarter
ending
March 31
-------------------------------------------------------------------------
Income before income taxes, as reported in Q1-2008 22.2
Change in net gains and losses on invested assets and
other gains excluding held for trading ("HFT") debt
securities (table 8) (74.4)
Change in pre-tax operating income (table 2) (7.1)
Change in market yield effect (table 10) (7.6)
Loss before income taxes, as reported in Q1-2009 (66.9)
Income tax 30.6
Loss reported in Q1-2009 (36.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------First quarter 2009
Net operating income per share increased year-over-year reflecting higher
underwriting income in the first quarter and share repurchases under the
normal course issuer bid in 2008. Underwriting profitability increased by $7.1
million reflecting solid results in personal auto and commercial insurance,
which were partly offset by challenges in the personal property business.
Overall, the combined ratio improved by 70 basis points to 99.2%
year-over-year, which is a healthy result for the January-March period. The
seasonality of our business and the Canadian climate typically results in
lower underwriting results in the first and fourth quarters of the year (see
seasonality indicator in section 3.7).
In personal auto, the combined ratio improved by 4.8 percentage points to
96.1% as we experienced favourable prior year development and stable current
year results. Combined ratios in commercial auto and non-auto were also solid
at 88.1% and 96.6%, respectively. Despite the competitive environment in
commercial lines, our combined ratios have been strong and consistent in the
eighties and nineties over the last eight quarters. In our personal property
business, we recorded a first quarter loss with a combined ratio of 112.0% due
to higher claims frequency related to the rapid snow melt this winter. Several
initiatives are already underway to improve personal property performance
through pricing segmentation, by leveraging our scale in claims and better
management of water exposures. See section 4.2 for more information on our
Home Insurance Improvement Plan.
On the investment side, we have been de-risking our investment portfolio
over the last nine months to protect our excess capital position from capital
market volatility, providing greater strategic flexibility. Our results
reflect these actions which include lowering our common share exposure and
increasing our investments in guaranteed government bonds and treasuries. With
a more conservative portfolio mix, dividend and interest income before
expenses decreased by $13.5 million pre-tax to $76.3 million in the first
quarter. In addition, in February, we also established a hedging program to
significantly reduce our market risk exposure to Canadian financial common
equities. The implementation of the hedging program led to a non-recurring
loss of $82.9 million in the first quarter which drove our overall net loss of
$36.3 million. This is explained in greater detail under Table 8. Though our
de-risking actions over the last three quarters have had a short-term negative
effect on our results, we are now significantly less exposed to equity market
fluctuations than in the past and our cash and short-term guaranteed
investments have increased meaningfully.
Overall, our operating businesses are strong and well-positioned, and we
are addressing the challenges in personal property insurance through a robust
action plan. Premiums in personal lines are rising to reflect new cost and
climate realities, and we continue to see indications that the commercial
pricing environment may begin to firm up in 2009. On the investment side, our
quality portfolio has been repositioned to weather the capital market weakness
and help provide a stable excess capital base to support our business growth.
We ended the quarter with $388.9 million in excess capital, no debt and
an MCT ratio of 208.2%; 3.2 percentage points higher than at the end of 2008.
The implementation of the financial hedging program has significantly reduced
the sensitivity of our MCT ratio to changes in the market value of our common
shares. A 10% change in the market value of our common shares would have a 1.3
percentage point impact on our MCT ratio, compared to 2.8 percentage points at
the end of 2008.
Return on equity and operating return on equity
For the 12-months ended March 31, 2009, IIC's return on equity was 2.4%
and the operating return on equity (excluding other comprehensive income or
OCI) was 11.5%. The difference between return on equity and operating return
on equity (excluding OCI) reflects net investment losses associated with
general capital market weakness over the last year, strategic de-risking of
the investment portfolio, and the implementation of IIC's financials hedging
program in the first quarter of 2009. These factors are explained in the
previous paragraphs.
Book value
Book value per share decreased to $21.56 in the first quarter from $25.19
in the same quarter last year. The change reflects the lower market value of
our investment portfolio as capital markets declined sharply over the last
year as well as share repurchases made under the normal course issuer bid
announced on February 20, 2008.
Recent events
In April 2009, the Financial Services Commission of Ontario ("FSCO")
completed its five-year review of the Insurance Act and released its
recommendations to the provincial government for changes to the personal auto
regime in Ontario. The report contains many recommendations to better control
costs associated with accident benefits coverage, while enhancing bodily
injury coverage for consumers. With further input from FSCO, private insurers
and other stakeholders in Ontario, the provincial government will review the
recommendations from FSCO and determine what changes should be made to the
Insurance Act. The consultation process is scheduled to end in mid-May and we
expect the provincial government to announce its reform package in June 2009.3.2 Underwriting income
Table 4 - Net premiums earned, claims and general expenses
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Net premiums earned 988.7 991.8 (0.3)%
Net claims:
Current year claims (excluding MYA) 724.4 666.2 8.7%
Current year catastrophes 11.8 26.0 (54.6)%
(Favourable) prior year claims
development (excluding MYA) (37.2) 0.9 n/a
Total net claims (excluding MYA) 699.0 693.1 0.9%
Commissions, net 140.1 148.6 (5.7)%
Premium taxes, net 33.4 34.7 (3.7)%
General expenses, net 108.3 114.6 (5.5)%
Total underwriting expenses 281.8 297.9 (5.4)%
Total underwriting income (excluding MYA) 7.9 0.8 887.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 5 - Underwriting ratios (excluding MYA)
Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Claims ratio 70.7% 69.9% 0.8 pts
Expense ratio 28.5% 30.0% (1.5) pts
Combined ratio 99.2% 99.9% (0.7) pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 6 - Annualized rate of favourable prior year claims development
Full year
(annualized rate, excluding MYA) Q1-2009 Q1-2008 2008
-------------------------------------------------------------------------
(Favourable) unfavourable prior year claims
development as a % of opening reserves (3.9)% 0.1% (4.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Favourable prior year claims development
Excluding MYA, favourable prior year claims development was $37.2 million
in the first quarter, 3.9% of opening reserves on an annualized basis. The
rate of development in the first quarter is in line with our long-term
historical annual average.
Prior year claims development can fluctuate from quarter to quarter and
therefore, should be evaluated over longer periods of time. The historical
rate of favourable prior year claims development as a percentage of opening
claims has been approximately 3%-4% per year over the long term, but has
varied from year to year and between quarters.
Industry pools
Industry pools consist of the "residual market" (or Facility Association)
as well as risk-sharing pools ("RSP") in Alberta, Ontario, Quebec, New
Brunswick and Nova Scotia. In the first quarter, the net impact of industry
pools negatively impacted personal auto underwriting income by $6.4 million
year-over-year, excluding MYA. This reflects a reduced level of risk ceding
and other prior year reserve adjustments.3.3 Interest and dividend income, net of expenses
Table 7
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Interest income 44.6 48.6 (8.2)%
Dividend income 31.7 41.2 (23.1)%
Interest and dividend income, before expenses 76.3 89.8 (15.0)%
Expenses (3.8) (4.2) 0.4
Interest and dividend income, net of expenses 72.5 85.6 (15.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Market-based yield 4.7% 5.1% (0.4)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------The decline in interest and dividend income (before expenses) in the
first quarter reflects strategic actions to de-risk the investment portfolio
including the reduction of the common share portfolio, the sale of certain
higher-yielding corporate bonds and increased investments in government bonds
and treasuries. These actions led to a decrease in dividend and interest
income of $7.0 million pre-tax and $6.3 million after-tax. The lower asset
base also contributed to the decline in dividend and interest income in the
first quarter.
These actions have reduced our common equity exposure and increased our
cash position during a period of capital market volatility; however, the more
conservative asset mix has resulted in a lower return on the invested assets.
The market-based yield is a non-GAAP measure defined as total pre-tax
dividend and interest income (before expenses) divided by the average fair
values of equity and debt securities held during the reporting period. The
market-based yield was 4.7% in the first quarter, down from 5.1% in the same
quarter of last year. The decrease reflects the change in mix of our portfolio
to include more government bonds and treasuries and a significant decline in
the risk-free interest rate. The market-based yield is a measure that may not
be comparable to other companies since it is a non-GAAP measure.3.4 Gains and losses on invested assets and other gains
Table 8
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Debt securities
Gains on AFS securities 0.7 2.3 (1.6)
Losses on derivatives - (5.6) 5.6
Impairments (8.4) (6.1) (2.3)
Losses on debt securities and related
derivatives (7.7) (9.4) 1.7
-------------------------------------------------------------------------
Equity securities
Losses, net of stand-alone derivatives (103.7) (21.9) (81.8)
Impairments (18.6) (41.8) 23.2
Gains (losses) on embedded derivatives (5.3) 12.2 (17.5)
Losses on equity securities and related
derivatives (127.6) (51.5) (76.1)
-------------------------------------------------------------------------
Total Losses excluding HFT debt securities (135.3) (60.9) (74.4)
Gains (losses) on HFT debt securities(1) (0.5) 35.1 (35.6)
Total Losses, before income taxes (135.8) (25.8) (110.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.First quarter
Reduced exposure to Canadian financial sector
During the first quarter, the company implemented a hedging program to
significantly reduce the market risk associated with our Canadian financial
common shares through the use of total return swaps. In doing so, we have
removed our common share exposure to a sector that has been quite volatile
over the last year. With the new hedging program in place, our total common
share exposure, net of total return swaps, has decreased from 11% at year-end,
to 7% of the investment portfolio at the end of March 2009. The implementation
of the hedging program led to a non-recurring loss of $82.9 million in the
first quarter reflected in the loss on equity securities in table 8.
The financial stocks associated with the hedging program are now
classified as held-for-trading. In future quarters, changes in the market
price of these securities will be marked-to-market and are expected to be
fully offset by gains and losses on the associated derivatives (total return
swaps).
Losses associated with capital market conditions
In the first quarter, the Canadian stock market remained volatile,
declining a further 3.1%, which contributed to $18.6 million of impairments on
common shares and an additional $26.1 million of realized equity losses net of
derivatives, excluding the common shares associated with the financials
hedging program. We also recorded $8.4 million of debt impairments in the
quarter.
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% of our bonds are rated 'A' or
better and 81% of our preferred shares are highly-rated P1 or P2. Also, we do
not invest in leveraged securities and our exposure to the U.S. market is
minimal. We manage our investments prudently to protect our capital and
generate superior after-tax returns.Portfolio asset mix
The following table shows the mix of the $6.5 billion investment
portfolio.
Table 9 - Portfolio asset mix (GAAP)
(in millions of dollars, except as March 31, December
otherwise noted) 2009 31, 2008 Change
-------------------------------------------------------------------------
Short-term notes, including cash and
cash equivalents 11.8% 12.2% (0.4)%
Fixed income securities 53.5% 53.6% (0.1)%
Preferred shares 19.1% 18.5% 0.6%
Common shares 11.2% 12.1% (0.9)%
Loans 4.4% 3.6% 0.8%
Total invested assets including cash and
cash equivalent 100.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------The investment portfolio is well-positioned with substantially lower
common share market exposure and a higher cash position. Through the
financials hedging program, our common share exposure net of total return
swaps, decreased from 11.0% at year-end to 7.0% on March 31, 2009 (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 noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Positive (negative) impact of MYA on
underwriting (13.5) (41.5) 28.0
Net gains (losses) on HFT debt securities (0.5) 35.1 (35.6)
Market yield effect (14.0) (6.4) (7.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------Claims liabilities are discounted at the estimated market yield of the
assets backing these liabilities. Held-for-trading 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.
In the first quarter, we had a $14.0 million negative market yield
effect. The majority of the mismatch was caused by the de-risking of our bond
portfolio which included the sale of corporate bonds which were replaced with
lower-yielding government bonds. 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 our 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 unrealized gains and losses on available-for-sale securities
Table 11
(in millions
of dollars, As at
except as -----------------------------------------------------------
otherwise March December September June March December
noted) 31, 2009 31, 2008 30, 2008 30, 2008 31, 2008 31, 2007
-------------------------------------------------------------------------
Debt securities 37.3 30.4 (16.3) 3.2 40.7 2.6
Common shares (134.4) (140.7) (129.1) (46.7) (73.7) (37.8)
Preferred
shares (492.1) (522.5) (272.1) (215.5) (175.8) (141.0)
-------------------------------------------------------------------------
Total net
unrealized
loss position
at March 31,
2009 (589.2) (632.8) (417.5) (259.0) (208.8) (176.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------At March 31, 2009, the company had $589.2 million in unrealized losses on
invested assets compared to $632.8 million at the end of 2008. The improvement
in the unrealized loss position from December 31, 2008 to March 31, 2009
reflects the improvement of preferred share values in the quarter and realized
losses on common shares associated with the implementation of the financials
hedging program.
Over the last 12 months, the unrealized loss position has increased
substantially due to the sharp decline in common share market values, lower
portfolio turnover, and the widening of credit spreads which adversely
impacted the market value of preferred shares. Since the preferred shares are
typically held long term, unrealized gains and losses are generally not
realized. Gains and losses in the common share portfolio are likely to be
realized on an ongoing basis reflecting the trading strategy in the
high-dividend yield common share portfolio.
The market value of the debt portfolio remained relatively stable. The
debt portfolio includes $679.6 million of Canadian Treasury Bills with
maturities greater than 90 days. The net unrealized gain in the debt portfolio
increased to $37.3 million at March 31, 2009 due to the overall reduction of
risk-free interest rates and the significant weight of government bonds in the
portfolio. During the quarter, the company reduced its position in BBB-rated
bonds by approximately $22 million. The quality of the debt securities in our
portfolio remains strong with 98% rated 'A' or better. There have been no
reported defaults on any of the bonds in the portfolio.
In determining the fair values of invested assets, we rely 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 very limited
amount of fixed income private placements that we hold.
Recognition of an unrealized loss
Common shares classified as available-for-sale 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 evidence that suggests the issuer will fail to make the contractual
interest or principal payments due under the terms of the instrument.
Other comprehensive income, net of taxes
Unrealized losses on AFS securities and dispositions of AFS securities
resulted in positive other comprehensive income ("OCI") of $29.9 million in
the first quarter. The decrease in the unrealized loss position mainly
reflects the realization of $82.9 million in losses in the first quarter
associated with the implementation of a hedging program to reduce our market
price exposure to Canadian financial common shares.3.5 Net operating income
Table 12 - Components of net operating income
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Net underwriting income (excluding MYA) 7.9 0.8 887.5%
Interest and dividend income (table 7) 72.5 85.6 (15.3)%
Corporate and distribution income (loss)
(table 20) 1.8 3.1 (41.9)%
Tax impact (13.1) (19.3) (32.1)%
Net operating income (excluding MYA) 69.1 70.2 (1.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Net operating income decreased slightly in the first quarter as stronger
underwriting income was partly offset by lower dividend and interest income
mainly reflecting a decrease in the book yield associated with a more
conservative asset mix. Net operating income per share increased 3.6%
year-over-year reflecting the share buyback program in 2008.Table 13 - Reconciliation to net income
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Net (loss) income (36.3) 23.0 (257.8)%
Add losses before HFT debt securities
(table 8) 135.3 60.9 74.4
Add market yield effect (table 10) 14.0 6.4 7.6
Tax impact (43.9) (20.1) (23.8)
Net operating income (excluding MYA) 69.1 70.2 (1.6)%
Average outstanding shares (millions) 119.9 124.4 (4.5)
Net operating income per share (dollars) 0.58 0.56 3.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 14
(in millions of dollars,
except as otherwise
noted) Q1-2009 Q4-2008 Q3-2008 Q2-2008 Q1-2008
-------------------------------------------------------------------------
Written insured risks
(thousands) 937.2 1,034.3 1,240.7 1,380.6 945.8
Direct premiums written
(excluding pools) 868.8 968.2 1,100.3 1,216.7 860.3
Total revenues 936.5 956.0 1,045.8 1,065.4 1,064.5
Net premiums earned 988.7 1,019.2 1,032.3 996.1 991.8
(Favourable) unfavourable
prior year claims
development (1) (37.2) (52.2) (56.4) (41.2) 0.9
Net underwriting
income (1) 7.9 11.0 61.9 43.4 0.8
Combined ratio (%) (1) 99.2% 98.9% 94.0% 95.6% 99.9%
Net operating income (1) 69.1 75.1 106.4 109.5 70.2
Net (loss) income (36.3) (64.1) 57.3 112.0 23.0
EPS-basic/diluted
(dollars) (0.30) (0.53) 0.47 0.91 0.19
Net operating income
per share (dollars) (1) 0.58 0.63 0.88 0.89 0.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding MYA
Table 14
(in millions of dollars,
except as otherwise
noted) Q4-2007 Q3-2007 Q2-2007 Q1-2007
---------------------------------------------------------------
Written insured risks
(thousands) 1,056.7 1,273.1 1,399.7 950.4
Direct premiums written
(excluding pools) 961.3 1,091.2 1,209.8 846.3
Total revenues 1,096.8 1,091.3 1,152.2 1,099.6
Net premiums earned 1,004.7 994.0 976.7 956.7
(Favourable)
unfavourable prior
year claims
development (1) (62.4) (24.0) (5.2) (10.7)
Net underwriting
income (1) 68.2 29.0 53.1 38.7
Combined ratio (%) (1) 93.2% 97.1% 94.6% 96.0%
Net operating income (1) 116.4 95.5 132.5 112.8
Net (loss) income 95.8 92.0 194.3 126.2
EPS-basic/diluted
(dollars) 0.77 0.74 1.56 0.95
Net operating income
per share (dollars) (1) 0.93 0.77 1.06 0.84
---------------------------------------------------------------
---------------------------------------------------------------
(1) Excluding MYASeasonality of property and casualty insurance
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 15 - Seasonal indicator
2008 2007 2006 2005 2004 2003 Six-year 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
-------------------------------------------------------------------------ING Canada has two segments: 1) Underwriting and, 2) Corporate and
distribution. P&C insurance is divided into two lines of business, personal
and commercial lines. Corporate and distribution includes income from the
company's affiliated distribution network, as well as other corporate items.Section 4 - Personal lines
4.1 Financial results
Table 16
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Direct premiums written (excluding pools)
Automobile 426.9 425.0 0.4%
Property 186.5 179.5 3.9%
Total 613.4 604.5 1.5%
Written insured risks (thousands)
Automobile 504.9 509.8 (1.0)%
Property 321.3 325.4 (1.3)%
Total 826.2 835.2 (1.1)%
Net premiums earned
Automobile 502.0 506.5 (0.9)%
Property 225.4 217.7 3.5%
Total 727.4 724.2 0.4%
Net underwriting income (loss) (excluding MYA)
Automobile 19.6 (4.6) (526.1)%
Property (26.9) (15.3) 75.8%
Total (excluding MYA) (7.3) (19.9) (63.3)%
Market yield adjustment (8.7) (26.5) 17.8
Net underwriting income (loss)
(including MYA) (16.0) (46.4) 30.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 17 - Underwriting ratios
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Personal auto
Claims ratio (excluding MYA) 71.9% 75.2% (3.3) pts
Expense ratio 24.2% 25.7% (1.5) pts
Combined ratio (excluding MYA) 96.1% 100.9% (4.8) pts
Personal property
Claims ratio (excluding MYA) 78.6% 72.8% 5.8 pts
Expense ratio 33.4% 34.3% (0.9) pts
Combined ratio (excluding MYA) 112.0% 107.1% 4.9 pts
Personal lines - total
Claims ratio (excluding MYA) 74.0% 74.5% (0.5) pts
Expense ratio 27.0% 28.3% (1.3) pts
Combined ratio (excluding MYA) 101.0% 102.8% (1.8) pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4.2 Explanation of financial resultsFirst quarter 2009
In personal auto, direct premiums written were flat in the first quarter
as rate increases were offset by a decline in written insured risks and change
in the types of vehicles insured. We have been raising personal auto rates in
Ontario over the last 18 months in response to higher accident benefit and
bodily injury claims in the province, negatively impacting our unit growth in
the near term. Net underwriting results in personal auto increased $24.2
million with a 4.8 percentage point improvement in the combined ratio
reflecting more favourable prior year claims development and stable current
year results.
In personal property, direct premiums written were up 3.9%, due to
increases in insured amounts and higher rates. However, personal property
sustained an underwriting loss of $26.9 million in the first quarter
reflecting higher claims frequency associated with the rapid snow melt this
winter.
Home insurance improvement 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. We are addressing these issues in our own business through a robust
home insurance improvement action plan outlined below.- Rate adjustments and price segmentation. Certain regions are more
prone to water-related losses due to aging city infrastructure and/or
changing weather patterns. Through enhanced pricing segmentation, we
are implementing rate adjustments in higher-risk zones and caps on
certain types of coverage in these geographic areas. On average, our
policy renewals are currently being processed with double-digit
premium increases.
- Adjusting insured amounts. In general, the industry has been affected
by under-insurance in personal property due to higher material and
building cost inflation. Across Canada, we have been reassessing the
value of properties to ensure that: 1) customers retain adequate
coverage; and, 2) premiums match prospective reconstruction costs.
- Review of claims process. We are continuing to review the consistency,
quality, cost and management of our claims. This includes the review
of routine claims, appraisal processes, workflow design and
enhancement of our Property Rely Network. The review of the appraisal
process will include evaluating the scope of all claims, price
assessments for a larger sample of routine claims, and the re-
inspection of repairs after the work is completed. In addition, many
of our claims with an estimated value as low as $10,000 will be
subject to a bidding process to reduce our overall indemnity costs. We
are also providing continuous training to our dedicated field staff
and taking other measures to reduce the cycle time of each claim,
lowering the average claim severity. In total, these initiatives are
expected to reduce indemnity costs by approximately 5%.
- Review of product design. Our home insurance products were developed
based on historical climate patterns and claims experience, which are
now changing. As a result, we are reviewing the design and coverage of
our home insurance products to ensure that our product offering fits
the evolving needs of customers and current risk exposures.
- Customer education and incentives on loss control and prevention. We
can help customers to reduce their risk of loss by providing
information and education on loss control and prevention. In the
future, we will encourage customers to take measures to protect their
homes against water losses.
Section 5 - Commercial lines
5.1 Financial results
Table 18
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Direct premiums written (excluding pools)
Automobile 70.7 70.1 0.9%
Non-auto 184.7 185.7 (0.5)%
Total 255.4 255.8 (0.2)%
Written insured risks (thousands)
Automobile 57.9 57.3 1.0%
Non-auto 53.0 53.3 (0.6)%
Total 110.9 110.6 0.3%
Net premiums earned
Automobile 77.2 78.7 (1.9)%
Non-auto 183.9 188.9 (2.6)%
Total 261.1 267.6 (2.4)%
Net underwriting income (excluding MYA)
Automobile 9.2 5.7 61.4%
Non-auto 6.2 14.9 (58.4)%
Total (excluding MYA) 15.4 20.6 (25.2)%
Market yield adjustment (4.8) (15.0) 10.2
Net underwriting income (including MYA) 10.6 5.6 5.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Table 19 - Underwriting ratios
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Commercial auto
Claims ratio (excluding MYA) 60.7% 64.3% (3.6) pts
Expense ratio 27.4% 28.4% (1.0) pts
Combined ratio (excluding MYA) 88.1% 92.7% (4.6) pts
Commercial non-auto
Claims ratio (excluding MYA) 61.8% 54.7% 7.1 pts
Expense ratio 34.8% 37.4% (2.6) pts
Combined ratio (excluding MYA) 96.6% 92.1% 4.5 pts
Commercial lines - total
Claims ratio (excluding MYA) 61.5% 57.5% 4.0 pts
Expense ratio 32.6% 34.7% (2.1) pts
Combined ratio (excluding MYA) 94.1% 92.2% 1.9 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5.2 Explanation of financial resultsFirst quarter 2009
Direct premiums written in commercial lines were relatively flat
reflecting our pricing discipline which has resulted in more modest top-line
growth over the last year. We have started to see indications that the
commercial pricing environment will begin to firm up in 2009 due to higher
industry loss ratios and lower levels of excess capital, moderating the trend
of rate decreases across the industry over the last three years.
Commercial underwriting profitability remained healthy with an overall
combined ratio of 94.1%. Despite large fire-related property losses, the
combined ratio in commercial non-auto was a solid 96.6%. In commercial auto,
the combined ratio improved by 4.6 percentage points to 88.1% reflecting
stable current year results and more favourable prior year claims development.
Despite the competitive environment over the last few years, we have had
solid combined ratios in our commercial business in the eighty- and
ninety-percent range in every quarter over the last two years demonstrating
strong overall execution of our targeted strategy and commitment to
maintaining a high quality portfolio.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 20 - Corporate and distribution income
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Distribution income 21.0 21.6 (2.8)%
Distribution expenses 18.9 18.9 -
Distribution earnings 2.1 2.7 (22.2)%
Corporate income (loss), net (0.3) 0.4 (175.0)%
Corporate and distribution income before
income taxes 1.8 3.1 (41.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6.2 Explanation of financial resultsThe decrease in corporate and distribution income reflects the impact of
various corporate internal adjustments, none of which are material in value.
Section 7 - Financial condition7.1 Balance sheet highlightsThe table below shows the significant balance sheet items as reported on
December 31, 2008 and March 31, 2009.Table 21
As at
(in millions of dollars --------------------------------------
except as otherwise noted) March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Cash and cash equivalents 89.0 510.4
Invested assets
Debt securities 4,153.0 3,832.5
Equity securities 1,970.6 2,019.5
Loans 283.3 242.3
Total invested assets 6,406.9 6,094.3
Premiums receivable 1,368.2 1,469.4
Deferred acquisition costs 357.6 382.4
Reinsurance assets 215.0 224.2
Intangible assets and goodwill 304.4 297.2
Other assets 805.6 795.5
Total assets 9,546.7 9,773.4
Claims liabilities 4,092.5 4,064.9
Unearned premiums 2,227.5 2,366.8
Other liabilities 641.2 709.1
Total liabilities 6,961.2 7,140.8
Share capital and contributed surplus 1,147.5 1,149.8
Retained earnings 1,854.2 1,928.9
Accumulated other comprehensive loss (416.2) (446.1)
Shareholders' equity 2,585.5 2,632.6
Book value per share (dollars) 21.56 21.96
-------------------------------------------------------------------------Invested assets and cash and cash equivalents, decreased by $108.8
million mainly reflecting the continued decline in capital markets and net
cash outflows consistent with the seasonality of the business during the first
quarter. The large reduction in cash and cash equivalents reflects the sale or
maturity of Canadian treasury bills with a maturity less than 90 days the
proceeds of which were reinvested in Canadian treasury bills classified as
debt securities. At March 31, 2009 the portfolio included $705.0 million of
Canadian treasury bills compared to $777.0 million at December 31, 2008.
Premiums receivable, unearned premiums and deferred acquisition costs
decreased due to a lower amount of direct written premiums in the first
quarter of 2009 compared to the fourth quarter of 2008, consistent with the
seasonality of the business. See section 3.7.
Reinsurance assets have decreased which is consistent with lower levels
of reinsurance as the company's retention increased.
Claims liabilities were higher compared to last year mainly due to cost
inflation, an increase in claims incurred consistent with seasonality in the
first quarter, and a reduction in the market yield used to discount claims
liabilities.
The following table shows the development of claims liabilities for the
10 most recent accident years, with subsequent developments during the
periods. The original reserve estimates are evaluated quarterly for redundancy
or deficiency. The evaluation is based on actual payments in full or partial
settlement of claims as well as on current estimates of claims liabilities for
claims still open or claims still unreported.Table 22
(in millions of Accident year
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 Q1 2009
Including MYA (23.7) (0.3) 0.5 (4.6) (3.3) (5.8)
Excluding MYA (37.2) (1.5) (3.1) (7.3) (5.3) (7.1)
Cumulative
development
Excluding MYA (1.5) (2.8) (48.7) (128.2) (256.5)
As a % of
original reserve (0.1)% (0.2)% (4.1)% (11.5)% (22.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of Accident year
dollars, except as --------------------------------------------
otherwise noted) 2003 2002 2001 2000 1999 &
earlier
----------------------------------------------------------------
Original reserve 973.2 838.6 729.0 655.5 1,512.9
(Favourable)
unfavourable
development
during Q1 2009
Including MYA (5.1) (4.7) (1.1) (1.4) 2.2
Excluding MYA (6.2) (5.2) (1.5) (1.6) 1.6
Cumulative
development
Excluding MYA (208.4) (33.9) 30.6 29.5 (7.1)
As a % of
original reserve (21.4)% (4.0)% 4.2% 4.5% (0.5)%
----------------------------------------------------------------
----------------------------------------------------------------
7.2 Shareholders' equityAs of April 30, 2009, the 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 IIC's 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 determined by the company's
three-year average return on equity compared to the Canadian P&C industry
average. For the current ongoing cycles, the total estimate of units accrued
by employees is 323,102 as at March 31, 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 23
March 31, 2009
----------------------------
(in millions of dollars, except as After-
otherwise noted) Pre-tax Taxes tax
-------------------------------------------------------------------------
Opening AOCI balance on January 1, 2009 (632.8) 186.7 (446.1)
Decrease in fair values during the period (83.6) 23.2 (60.4)
Realized losses (gains) reclassified to
income during the period 127.2 (36.9) 90.3
AOCI as at March 31, 2009 (589.2) 173.0 (416.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------Unrealized losses on available for sale assets were $632.8 million on
January 1, 2009. During the period, the company sold available-for-sale assets
resulting in pre-tax realized net losses of $127.2 million. These were
transferred to net losses on invested assets and other gains in the income
statement. The fair value of available-for-sale assets decreased during the
period due to unfavourable capital market conditions, representing a pre-tax
reduction of $83.6 million in AOCI.7.3 Liquidity and capital resources
Table 24 - Cash flow and liquidity
(in millions of dollars, except as
otherwise noted) Q1-2009 Q1-2008 Change
-------------------------------------------------------------------------
Selected inflows and (outflows)
Operating activities:
Cash provided by (used in) operating
activities 17.0 (42.3) (140.2)%
Investing activities:
Purchases of invested assets, net of sales (369.8) 86.0 (530.0)%
Financing activities:
Dividends paid (38.4) (38.6) (0.5)%
Common shares repurchased for cancellation - (16.7) n/a
Decrease in cash and cash equivalents
during the period (421.4) (26.4) n/a
-------------------------------------------------------------------------
-------------------------------------------------------------------------Cash from operations for the period is consistent with the seasonality of
the Canadian property and casualty insurance business where premium revenue is
lower and claims and expense payouts are usually higher in the first quarter.
Investing activities in the period reflect the purchase of Canadian
treasuries with maturities less than 90 days from the date of purchase, as
mentioned in section 7.1.
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 MCT level at March 31, 2009 was very strong at 208.2%
representing a 3.2 percentage point increase from December 31, 2008. Seasonal
reductions in deferred acquisition costs and unearned premium levels reduced
the required regulatory capital levels during the period.
Based on an MCT of 170%, on March 31, 2009 the company had approximately
$388.9 million of total excess capital. Although the minimum MCT ratio
required by OSFI is 150%, the company has an internal operating target of
170%.
The company's excess capital could be used to support growth through
acquisitions as part of ING Canada's market consolidation strategy, buy back
shares in the future or further increase dividends.
The following table presents the MCT ratio of the company's insurance
subsidiaries with a total for all companies.Table 25
MCT - P&C Insurance Companies
(in millions
of dollars,
except as
otherwise Intact(*) Belair Nordic Novex Trafalgar
noted) Insurance Insurance Insurance Insurance Insurance Total
-------------------------------------------------------------------------
At March 31,
2009
Total
capital
available 897.3 200.2 639.1 193.3 168.9 2,098.8
Total
capital
required 450.5 81.4 354.3 64.5 57.2 1,007.9
Excess
capital 446.8 118.8 284.8 128.8 111.7 1,090.9
MCT % 199.2% 245.9% 180.4% 299.7% 295.3% 208.2%
Excess
at 150% 221.5 78.1 107.7 96.6 83.1 587.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(*)formerly ING Insurance Company of CanadaOn 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.Estimated MCT impact of changes in the market value of IIC's common
sharesThe MCT is impacted by many factors including changes in the 1) market
value of IIC's invested assets; 2) mix of invested assets; and 3) combined
ratio.
Based on IIC's MCT of 208.2% on March 31, 2009, a 10% increase or
decrease in the market value of IIC's portfolio of common shares would result
in an approximate 1.3 percentage point increase or decrease in the MCT,
respectively, all else being equal. Similarly, a 10% increase or decrease in
the market value of IIC's preferred share portfolio would have approximately a
6.6 percentage point increase or decrease in the MCT, respectively, all else
being equal.
The implementation of the financials hedging program in the first quarter
has reduced the sensitivity of IIC's MCT ratio to a 10% change in the market
value of its common shares from 2.8 percentage points at the end of 2008 to
1.3 percentage points at the end of the first quarter of 2009.
Rating agencies
ING Canada Inc. has a long-term issuer rating with Moody's Investors
Services of A3 and the company's five principal operating insurance
subsidiaries are rated Aa3 for insurance financial strength (IFS). These
ratings were affirmed on February 6, 2009. ING Canada Group has an A+
(Superior) rating from A.M. Best, which was commented on by A.M. Best on
February 4, 2009 and has remained unchanged following the sale of ING Groep's
shareholding in ING Canada Inc. Although the company does not have any senior
unsecured debt, DBRS has assigned a rating of A (low).
Financing
Effective December 31, 2008, the company has an unsecured, committed
credit facility of $150 million in replacement of the previous uncommitted
credit facility of $100 million. To date, no amounts have been drawn under the
facility.
Section 8 - Accounting and disclosure matters8.1 Internal controls over financial reportingManagement 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 March 31, 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 assumptionsThe 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 standardsThe 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 fixed
assets from Other assets to Intangible assets on the unaudited consolidated
balance sheets. The amount reclassified net of amortization was $84.0 million
as at March 31, 2009, (December 31, 2008 - $79.4 million). This
reclassification had no impact on the company's net income (loss) for the
quarter.
International financial reporting standards
The Canadian Accounting Standards Board ("AcSB") has confirmed January 1,
2011 as the date IFRS will replace current Canadian standards and
interpretations as Canadian generally accepted accounting principles (Canadian
GAAP) for publicly accountable enterprises.
In order to prepare for the conversion to IFRS, the company has developed
an IFRS changeover plan. This plan addresses key elements of the company's
conversion to IFRS including:- Accounting policy changes
- Information technology and data systems impacts
- Education and training requirements
- Internal control over financial reporting
- Financial reporting requirements
- Impacts on business activities, and
- Actuarial and regulatory implicationsThe company has established a cross-functional IFRS team that is
providing training to key employees. The plan highlights the need to identify
key accounting policy changes as the first step in the conversion process, in
addition to other elements of the transition plan. To facilitate the
identification process, the plan also includes education and training to be
provided to selected employees involved in the transition. The impact of the
IFRS transition on information technology and data systems and other business
activities will also be assessed as part of the plan.8.4 Future accounting changes
Business combinations, consolidated financial statements and
non-controlling interestIn January 2009, the Canadian Institute of Chartered Accountants'
("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 International
financial reporting standards (IFRS).
Effective January 1, 2011, the company will apply the recommendations of
Section 1582, Business Combinations, which replaces Section 1581, Business
Combinations, and establishes new guidance on the recognition and measurement
at fair value of all assets and all liabilities of the acquired business.
Also effective January 1, 2011, the company will apply Section 1601,
Consolidated Financial Statements, and Section 1602, Non-Controlling
Interests, which together replace Section 1600, Consolidated Financial
Statements, and establish new guidance on the accounting for non-controlling
interests and for transactions with non-controlling interest.
The company is currently assessing the impact the adoption of these
Sections will have on its consolidated financial statements.
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 pricesImpact of changes in interest rates
For our available-for-sale debt or preferred securities a 100 basis point
increase in interest rates would increase income before income taxes by
approximately $5.7 million as a result of gains of marking to market the
written call option liabilities embedded in our redeemable preferred shares. A
100 basis point increase would also decrease OCI by approximately $158.9
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 March 31, 2009, management estimates that a 10.0% increase in
equity markets would have no impact on income before income taxes and increase
OCI by $33.7 million. Excluding the impact of any impairment, a 10.0% 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 available-for-sale. For our
HFT debt securities, which are marked-to-market through the P&L, the estimated
impact on income before income taxes of a 100 basis point increase or decrease
in interest rates is assumed to be offset by the MYA. In addition, it is
important to note that AFS securities in an unrealized loss position, as
reflected in OCI, may at some point in the future be realized either through a
sale or impairment. See section 3.4, "Gains and losses on invested assets and
other gains".
Section 10 - Other matters10.1 Related-party transactionsRelated-party transactions, also including services provided to or
received by IIC's subsidiaries, are carried out in the normal course of
operations and are measured at the amount of consideration paid or received as
established and agreed by the related parties. Management believes that
consideration paid for such services approximate fair value.
On February 19, 2009, the Company and ING Groep entered into an Amended
and Restated Co-Operation and Transition Services Agreement which governs
among other things the transition of reinsurance and advisory and management
services, including risk management, human resources, internal audit and
information technology, over a period of up to twenty-four months. Transition
and re-branding costs are expected to be offset by reimbursement of management
fees and other savings.10.2 Cautionary note regarding forward-looking statementsCertain 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.Unaudited Interim Consolidated Financial Statements
For the first quarter ended March 31, 2009
Unaudited interim consolidated balance sheets
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
As at As at
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 89.0 $ 510.4
Invested assets (note 3)
Debt securities 4,153.0 3,832.5
Equity securities 1,970.6 2,019.5
Loans 283.3 242.3
---------------------------------
6,406.9 6,094.3
Premium receivables 1,368.2 1,469.4
Accrued interest and dividend income 53.2 34.7
Other receivables 229.1 247.0
Deferred acquisition costs 357.6 382.4
Reinsurance assets 215.0 224.2
Other assets 254.8 238.6
Income taxes receivable 211.8 221.0
Future income tax asset 56.7 54.2
Intangible assets 139.7 136.4
Goodwill 164.7 160.8
-------------------------------------------------------------------------
$ 9,546.7 $ 9,773.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Claims liabilities (note 4) $ 4,092.5 $ 4,064.9
Unearned premiums 2,227.5 2,366.8
Other liabilities 639.4 701.7
Income taxes payable 1.8 7.4
---------------------------------
6,961.2 7,140.8
Shareholders' equity
Share capital (note 5) 1,061.5 1,061.5
Contributed surplus 86.0 88.3
Retained earnings 1,854.2 1,928.9
Accumulated other comprehensive loss (416.2) (446.1)
---------------------------------
2,585.5 2,632.6
-------------------------------------------------------------------------
$ 9,546.7 $ 9,773.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of income (loss)
For the periods ended March 31
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Revenues
Premiums written
Direct $ 873.4 $ 862.3
Ceded 23.6 22.5
----------------------
Net 849.8 839.8
Changes in net unearned premiums 138.8 152.0
----------------------
Net premiums earned 988.6 991.8
Interest and dividend income 76.3 89.8
Net losses on invested assets and other gains (135.8) (25.8)
Distribution and other 7.4 8.7
-------------------------------------------------------------------------
936.5 1,064.5
Expenses
Underwriting
Claims 712.4 734.6
Commissions, premium taxes and general expenses 281.8 297.9
----------------------
994.2 1,032.5
Distribution and other 9.2 9.8
----------------------
1,003.4 1,042.3
-------------------------------------------------------------------------
(Loss) income before income taxes (66.9) 22.2
Income tax benefit (30.6) (0.8)
-------------------------------------------------------------------------
Net (loss) income $ (36.3) $ 23.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share, basic and diluted (dollars) $ (0.30) $ 0.19
Dividends per share (dollars) $ 0.32 $ 0.31
Basic and diluted average number
of common shares (in millions) 119.9 124.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of comprehensive (loss) income
For the periods ended March 31
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Net (loss) income $ (36.3) $ 23.0
Unrealized losses on available for sale securities
Increase during the period (83.6) (101.8)
Income taxes 23.2 33.9
----------------------
(60.4) (67.9)
Reclassified to income
From available for sale securities 127.2 69.2
Income taxes (36.9) (19.0)
----------------------
90.3 50.2
-------------------------------------------------------------------------
Other comprehensive income (loss) 29.9 (17.7)
Comprehensive (loss) income $ (6.4) $ 5.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of changes in shareholders'
equity
For the periods ended March 31
(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
Comprehensive
(loss) income - - (36.3) 29.9 (6.4)
Common shares
repurchased for
cancellation
(note 5) - - - - -
Dividends paid - - (38.4) - (38.4)
Stock-based
compensation - (2.3) - - (2.3)
-------------------------------------------------------------------------
Balance as at
March 31, 2009 $ 1,061.5 $ 86.0 $ 1,854.2 $ (416.2) $ 2,585.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance as at
December 31, 2007 $ 1,101.9 $ 97.2 $ 2,091.3 $ (118.3) $ 3,172.1
Comprehensive
(loss) income - - 23.0 (17.7) 5.3
Common shares
repurchased for
cancellation
(note 5) (4.1) - (12.6) - (16.7)
Dividends paid - - (38.6) - (38.6)
Stock-based
compensation - 1.4 - - 1.4
-------------------------------------------------------------------------
Balance as at
March 31, 2008 $ 1,097.8 $ 98.6 $ 2,063.1 $ (136.0) $ 3,123.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unaudited interim consolidated statements of cash flows
For the periods ended March 31
(in millions of Canadian dollars, except as noted)
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) income $ (36.3) $ 23.0
Adjustments for non-cash items 14.8 (69.3)
Changes in net claims liabilities 36.4 94.0
Changes in other operating assets and liabilities 2.1 (90.0)
----------------------
Cash provided by (used in)
operating activities (note 8) 17.0 (42.3)
Cash flows from (used in) investing activities
Proceeds from sale of invested assets 673.0 1,401.2
Purchase of invested assets (1,042.8) (1,315.2)
Purchase of property and equipment and other (30.2) (14.8)
----------------------
Cash (used in) provided by investing activities (400.0) 71.2
Cash flows from (used in) financing activities
Common shares repurchased for cancellation - (16.7)
Dividends paid (38.4) (38.6)
----------------------
Cash used in financing activities (38.4) (55.3)
-------------------------------------------------------------------------
Net decrease in cash and cash equivalents (421.4) (26.4)
Cash and cash equivalents, beginning of period 510.4 8.1
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 89.0 $ (18.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ING Canada Inc.
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 ING Canada
Inc. ("ING" or the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") for interim
financial statements and do not include all the information required for
annual financial statements. Except as described below, these unaudited
interim consolidated financial statements use the same accounting
policies as were used for the Company's audited consolidated financial
statements for the fiscal year ended December 31, 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
period.
Note 2 - Accounting policy changes
a) Applied during the period
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 fixed
assets from Other assets to Intangible assets on the unaudited
consolidated balance sheets. The amount reclassified net of amortization
was $84.0 as at March 31, 2009, (December 31, 2008 - $79.4). This
reclassification had no impact on the Company's net income (loss) for the
quarter.
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 International financial reporting standards
(IFRS).
Effective January 1, 2011, the Company will apply the recommendations of
Section 1582, Business Combinations, which replaces Section 1581,
Business Combinations, and establishes new guidance on the recognition
and measurement at fair value of all assets and all liabilities of the
acquired business.
Also effective January 1, 2011, the Company will apply Section 1601,
Consolidated Financial Statements, and Section 1602, Non-Controlling
Interests, which together replace Section 1600, Consolidated Financial
Statements, and establish new guidance on the accounting for
non-controlling interests and for transactions with non-controlling
interest.
The Company is currently assessing the impact the adoption of these
Sections will have on its consolidated financial statements.
Note 3 - Invested assets and other financial instruments
a) Invested assets
The Company's invested assets are separated into three categories:
available for sale ("AFS"), held-for-trading ("HFT") and loans.
Designated
AFS as HFT Loans Total
-------------------------------------------------------------------------
As at March 31, 2009
Debt securities
Short-term notes 679.6 - - 679.6
Fixed income 1,748.2 1,725.2 - 3,473.4
Equity securities
Preferred shares 1,243.6 - - 1,243.6
Common shares 464.6 262.4 - 727.0
Loans - - 283.3 283.3
-------------------------------------------------------------------------
4,136.0 1,987.6 283.3 6,406.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company reclassified $13.5 (December 31, 2008 -
$14.6) of investments in affiliates carried at cost from Loans to Other
assets.
Investments in publicly traded affiliates of $4.1 (December 31, 2008 -
$4.4) have also been reclassified from Loans to Common shares.
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 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 related to these financial
statements.
During the quarter the Company implemented a hedging program to
significantly reduce the market risk associated with approximately $155.8
of common shares. For further details refer to Section 3.4, Reduced
exposure to Canadian financial sector, of the Management Discussion and
Analysis related to these financial statements.
b) Unrealized gains and losses
HFT Total
invested invested
assets Other invested assets assets
-----------------------------------------------------
At
At fair Unamortized Unrealized Unrealized carrying
value cost gains losses value
-------------------------------------------------------------------------
As at March 31, 2009
Debt securities
Short-term notes - 679.6 - - 679.6
Fixed income 1,725.2 1,710.9 59.3 (22.0) 3,473.4
Equity securities
Preferred shares - 1,735.7 7.0 (499.1) 1,243.6
Common shares 262.4 599.0 12.6 (147.0) 727.0
Loans - 283.3 - - 283.3
-------------------------------------------------------------------------
1,987.6 5,008.5 78.9 (668.1) 6,406.9
Net unrealized losses (589.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 March 31, 2009, these loans had a fair
value of $310.4 (December 31, 2008 - $268.8).
c) Positive and negative fair values of derivative financial instruments
Fair values
---------------------
Positive Negative
-------------------------------------------------------------------------
As at March 31, 2009
Where hedge accounting is applied - 2.6
Where hedge accounting is not applied 6.5 37.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
Where hedge accounting is applied - 1.9
Where hedge accounting is not applied 9.0 2.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 4 - Net claims liabilities
Direct Net
claims Reinsurers' claims
liabilities share liabilities
-------------------------------------------------------------------------
For the three months
ended March 31, 2009
Balance, beginning of period 4,064.9 207.0 3,857.9
Claims incurred 723.4 0.8 722.6
Prior year (favourable)
unfavourable claims development (25.8) (2.1) (23.7)
Increase due to changes in discount rate 14.4 0.9 13.5
Claims paid (684.4) (8.3) (676.1)
-------------------------------------------------------------------------
Balance, end of period 4,092.5 198.3 3,894.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months
ended March 31, 2008
Balance, beginning of period 3,989.0 256.9 3,732.1
Claims incurred 694.0 1.9 692.1
Prior year (favourable)
unfavourable claims development 9.2 8.3 0.9
Increase due to changes in discount rate 45.9 4.4 41.5
Claims paid (656.7) (16.2) (640.5)
-------------------------------------------------------------------------
Balance, end of period 4,081.4 255.3 3,826.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5 - Share capital
a) Issued and outstanding
As at March 31, 2009 As at December 31, 2008
-------------------------------- --------------------------------
Issued and Issued and
Authorized outstanding Authorized outstanding
(shares) (shares) Amount (shares) (shares) Amount
-------------------------------------------------------------------------
Common Unlimited 119,906,567 $ 1,061.5 Unlimited 119,906,566 $ 1,061.5
Class A Unlimited - - Unlimited - -
Special One - - 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 quarter of 2008, the Company repurchased 465,422 common
shares under its normal course issuer bid at an average price of $35.94
per share for a total consideration of $16.7. 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 $12.6 was charged to retained earnings.
c) Stock-based compensation
The following table reconciles the beginning and ending balances of the
share units outstanding for both the Company's long-term incentive plan
("LTIP") and employee share purchase plan ("ESPP").
For the three months ended March 31 2009 2008
-------------------------------------------------------------------------
LTIP (share equivalents)
Outstanding, beginning of period 306,864 616,115
Net change in estimate during the period 16,238 (208,852)
-------------------------------------------------------------------------
Outstanding, end of period 323,102 407,263
-------------------------------------------------------------------------
LTIP (restricted common shares)
Outstanding, end of period 289,236 -
-------------------------------------------------------------------------
ESPP (restricted common shares)
Outstanding, beginning of period 89,906 66,228
Awarded during the period 22,506 21,176
Vested or forfeited during the period (13,678) (14,377)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding, end of period 98,734 73,027
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 6 - Related-party transactions
a) Revenues and expenses
For the three months ended March 31 2009 2008
-------------------------------------------------------------------------
Reinsurance ceded to related entities
Ceded premiums earned - 3.5
Ceded claims - 0.7
Expenses
Commissions 9.0 9.6
Other expenses 3.0 4.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Balance sheet amounts
March 31, December
As at 2009 31, 2008
-------------------------------------------------------------------------
Reinsurance payable - (0.4)
Loans 192.6 127.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 7 - Debt outstanding
The Company has an unsecured committed credit facility of $150.0
(December 31, 2008 - committed $150.0), which 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 March 31, 2009 the Company
had not drawn down under the facility.
Note 8 - Additional information
a) Consolidated statements of income (loss)
For the three months ended March 31 2009 2008
-------------------------------------------------------------------------
Amounts included in net (losses)
gains on invested assets:
Related to HFT financial instruments
Gains 24.0 13.8
(Loss) gains on derivative financial instruments (33.6) 27.1
Impairments of fixed income securities (8.4) (6.1)
Impairments of common shares (18.6) (41.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Consolidated statements of cash flows
For the three months ended March 31 2009 2008
-------------------------------------------------------------------------
Expense (revenue) amounts included in non-cash items:
Amortization 10.4 8.9
Stock-based compensation (2.3) 1.4
Employee future benefits 2.9 2.9
Income taxes recovered (paid) 17.9 (18.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 9 - Segmented information
The Company has two reportable segments, the underwriting segment and the
corporate and distribution segment.
The Company's core business activity is property and casualty ("P&C")
insurance underwriting. 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
operations and the results of other operations.
a) Results of the Company's reportable segments
Corporate and Inter-segment
Underwriting distribution eliminations Total
-------------------------------------------------------------------------
For the three months
ended March 31, 2009
Revenues 988.6 20.9 (13.4) 996.1
Expenses 994.2 19.3 (13.8) 999.7
-------------------------------------------------------------------------
Subtotal (5.6) 1.6 0.4 (3.6)
Interest and dividend
income, net of expenses 72.5
Net losses on invested
assets and other gains (135.8)
-------------------------------------------------------------------------
Total income (loss)
before income taxes (66.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months
ended March 31, 2008
Revenues 991.8 21.0 (12.3) 1,000.5
Expenses 1,032.5 18.9 (13.3) 1,038.1
-------------------------------------------------------------------------
Subtotal (40.7) 2.1 1.0 (37.6)
Interest and dividend
income, net of expenses 85.6
Net losses on invested
assets and other gains (25.8)
-------------------------------------------------------------------------
Total income (loss)
before income taxes 22.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Underwriting expenses include $13.5 (March 31, 2008 - $41.5) related to
changes in discount rate. See note 4.
b) Assets of the Company's reportable segments
Corporate and Inter-segment
Underwriting distribution eliminations Total
-------------------------------------------------------------------------
As at March 31, 2009
Goodwill 74.4 90.3 - 164.7
Invested assets 6,357.1 49.8 - 6,406.9
Other 2,658.5 319.3 (2.7) 2,975.1
-------------------------------------------------------------------------
Total assets 9,090.0 459.4 (2.7) 9,546.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2008
Goodwill 74.4 84.4 - 158.8
Invested assets 6,701.9 375.5 - 7,077.4
Other 2,665.0 247.7 (3.5) 2,909.2
-------------------------------------------------------------------------
Total assets 9,441.3 707.6 (3.5) 10,145.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
c) Results by line of business
For the three months ended March 31 2009 2008
-------------------------------------------------------------------------
Direct premiums written
Personal 617.9 606.4
Commercial 255.5 255.9
Underwriting (loss) income
Personal (16.1) (46.4)
Commercial 10.6 5.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For further information: Media Enquiries: Gilles Gratton, Vice President
- Corporate Communications, (416) 217-7206, Email:
gilles.gratton@ingcanada.com; Investor Enquiries: Michelle Dodokin, Vice
President - Investor Relations, (416) 344-8044, Email:
michelle.dodokin@ingcanada.com
