Industrial Alliance Announces Its Third Quarter Results: Earnings and<br>business growth in line with pre-crisis levels
QUEBEC CITY, Nov. 3 /CNW Telbec/ - Industrial Alliance Insurance and Financial Services Inc. ("Industrial Alliance" or "the Company") announces its financial results for the third quarter ended September 30, 2010. A detailed discussion of the Company's results is provided in the Management's Discussion and Analysis at the end of this news release.
Industrial Alliance ended the third quarter of 2010 with net income to common shareholders of $65.4 million, a 9% increase over the same quarter in 2009. Excluding the impact of debt asymmetry, net income to common shareholders on regular operations increased to $64.7 million from $59.0 million in 2009, and diluted earnings per common share were $0.77 compared with $0.73 a year earlier. This is the strongest quarterly result posted by the Company since the financial crisis. The return on common shareholders' equity was 12.6% for both the quarter on an annualized basis and the last twelve months ended September 30, 2010, which is within the Company's 12-14% target range.
Top-line growth in the third quarter continued to show strong momentum. Premiums and deposits increased 15% to $1.4 billion and the value of new business rose 44% to $41.4 million. For the nine-month period, premiums and deposits were up 31% over 2009 and 7% over 2007 - the Company's record year. This growth is fuelled primarily by the Individual Wealth Management sector that continues to benefit from stock market gains and high net sales.
"The third quarter was clearly another success both in terms of top- and bottom-line growth," stated Yvon Charest, President and Chief Executive Officer. "For the fourth quarter in a row, we delivered double-digit growth in premiums and deposits, while maintaining a stream of strong earnings. Based on year-to-date results, the Company has already surpassed the same period in 2007, which was our record year."
"Despite these excellent results, we can't afford to be complacent," continued Mr. Charest. "We are continually working on new initiatives to grow our market position in all business lines, as well as to reinforce our bottom line. With regard to the interest-rate environment that has become very challenging over the course of the year, we have initiated our year-end assumption review and will be reporting on the results after the fourth quarter. So far, we are confident that our reserves are adequate to absorb the recent decline in interest rates."
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Profitability Highlights
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Third quarter Year-to-date as at
(In millions September 30
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Net income
to common
shareholders 65.4 60.1 9% 183.4 138.4 33%
Less: gain
(loss)
resulting
from the
variation in
the fair
value of debt
instruments
and underlying
assets
(after taxes) 0.7 1.1 - 1.1 (10.7) -
-------------------------------------------------------------------------
Net income
to common
shareholders
on regular
operations 64.7 59.0 10% 182.3 149.1 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
(diluted) $0.78 $0.74 $0.04 $2.19 $1.72 $0.47
Earnings per
common share
(diluted)
on regular
operations $0.77 $0.73 $0.04 $2.18 $1.85 $0.33
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Third quarter annualized Trailing twelve months
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Return on
common
shareholders'
equity 12.7% 13.7% - 12.9% 1.6% -
Return on
common
shareholders'
equity on
regular
operations 12.6% 13.5% - 12.6% 1.8% -
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Profitability
Generally speaking, earnings in the third quarter benefited from the improved economic environment. The expected profit on in-force business was $94.6 million compared with $83.1 million a year earlier. Additional sources of earnings were as follows:
- Strain in the Individual Insurance sector improved to 52% of sales,
compared with 59% and 61% in the first and second quarters,
respectively. The improvement is due to recent pricing increases for
Universal Life policies and a favourable sales mix.
- The market-related experience gain was $1.8 million after tax, or
$0.02 per share. Continuing its year-over-year upswing, the S&P/TSX
index closed the quarter at 12,369 points (8% above budget) and
averaged 11,817 points (4% below budget).
- Favourable experience in the Group Insurance sector was offset by
several contingencies including lapses in the Individual Insurance
sector, resulting in a net policy-related experience gain of
$0.5 million after tax.
- The gain realized on assets available for sale (AFS) during the third
quarter was $5.1 million pre-tax, which is higher than in previous
quarters as a result of market opportunities for profit taking. The
additional gain for the quarter represented $1.9 million after tax or
$0.02 per share.
- Debt asymmetry added $0.7 million after tax, or $0.01 per share, to
net income to common shareholders.
- The effective tax rate was 26.0%, which is within the Company's
mid-term 26% to 27% target range.
Business Growth
Top-line growth in the third quarter continued to be strong for the fourth quarter in a row. Almost all sectors contributed to this growth, with Individual Wealth Management in the lead as a result of the upswing in equity markets. For the period ended September 30th, this sector had gross sales of $686.7 million, up 29% over the previous year, and net sales of $243.3 million, up 52% over 2009. For the first nine months of 2010, Industrial Alliance ranked second in Canada for net sales of segregated funds, with a 34.1% market share, and fifth in terms of net mutual fund sales.
In Individual Insurance, sales increased 13% to $45.9 million, primarily for minimal premiums. In Group Insurance, sales of Employee Plans increased by 88% over the previous year, creditor insurance was up by 25% and special market risks increased by 7%. In the Group Pensions sector, sales in the accumulation product segment grew by 29% over last year.
At the end of September 30, 2010, assets under management and administration grew by 7% to $64.1 billion from $59.8 billion at June 30, 2010, as a result of strong net fund entries in most lines of business and the positive impact of the financial markets.
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Business Growth Highlights
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Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums and
deposits 1,440.2 1,248.6 15% 4,839.3 3,684.4 31%
Value of
new business 41.4 28.7 44% 116.0 85.2 36%
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September 30, June 30, December 31, June 30,
2010 2010 2009 2009
-------------------------------------------------------------------------
Assets under
management
and under
administration 64,051.4 59,880.8 58,406.6 56,737.6
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Solvency
At the end of the third quarter, the Company's solvency ratio was 211% compared with 224% at June 30, 2010. The decrease is explained by higher capital requirements to back the increase in the market value of stocks and debt securities during the third quarter, as well as the acquisition of American-Amicable and Golden State Mutual in the U.S.
At September 30, 2010, the Company's solvency ratio was above its target range of 175% to 200%.
On October 1, 2010, Standard & Poor's (S&P) confirmed the A+ credit rating that it grants to Industrial Alliance for its financial strength and upgraded the Company's outlook from negative to stable. At the height of the financial crisis, S&P had reduced the outlook to negative.
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Financial Strength Highlights
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(In millions
of dollars,
unless
otherwise
indicated) Sept. 30, June 30, December 31, Sept. 30,
2010 2010 2009 2009
-------------------------------------------------------------------------
Solvency ratio 211% 224% 208% 197%
Net impaired investments 16.0 9.8 13.0 15.3
Net impaired investments
as a % of total
investments 0.09% 0.06% 0.08% 0.10%
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Quality of investments
The quality of the investment portfolio remained good in the third quarter. In terms of credit, the Company took a provision on a private placement and recovered part of its position in an investment completely devalued in 2009, for a net impact of $0.5 million before tax.
Impaired investments increased from $9.8 million at June 30 to $16.0 million at September 30, related to the above mentioned private placement and a mortgage loan in the U.S. portfolio. Impaired investments represented 0.09% of all investments at the end of the third quarter compared with 0.06% at June 30, 2010.
The delinquency rate for the mortgage portfolio increased from 0.22% at June 30 to 0.30% at September 30. This increase is explained by the above mentioned mortgage loan.
Dividend
The dividend payout for the third quarter remains $0.2450 per common share. This corresponds to a payout ratio of 31% for the quarter and 33% for the year to date, which falls within the Company's guidance of 30% to 35% for 2010.
Impact of Changing Economic Environment and Preview of Year-end Changes in Valuation Assumptions
Since the beginning of 2010, the TSX has gained 5.3% while our Initial Reinvestment Rate has declined by approximately 60 basis points. Consistent with our year-end review of actuarial assumptions, we are closely examining the impact of the current low-interest-rate environment on our Initial Reinvestment and Ultimate Reinvestment Rates (IRR and URR). All year-end changes to valuation assumptions will be finalized by the end of the fourth quarter, and we are confident at this time that they will not have any significant impact on the Company's fourth quarter results.
Management has taken a number of initiatives to reduce its sensitivity to interest rate risk. These initiatives are in the process of being implemented and will include a 5% increase in the proportion of stocks backing long-term liabilities. Had these initiatives been in place at September 30, 2010, the Company expects that it would be able to absorb a 15% decline in equity markets and that provisions for future policy benefits would not have to be strengthened as long as the S&P/TSX remains above 10,500 points.
Additionally, as part of its risk management process, the Company has implemented a dynamic hedging program to manage the equity risk related to its guaranteed annuity (GMWB) product, effective October 20th, 2010. The GMWB portfolio represents approximately $1.5 billion of assets under management, including $900 million in equities. The Company also entered into a reinsurance agreement during the third quarter to share 60% of the longevity risk related to its $2.5 billion insured annuity block of business. These two initiatives reduce the risk profile of the company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THIRD QUARTER OF 2010
and for the nine-month period ended September 30, 2010
November 3, 2010
Industrial Alliance Announces its Third Quarter 2010 Results:
Earnings and business growth in line with pre-crisis levels
THIRD QUARTER OVERVIEW
Industrial Alliance continued to deliver a strong performance both in terms of business growth and profitability in the third quarter of 2010. Premiums and deposits grew by 15% during the quarter, benefiting from continued momentum in the equity markets and investor appetite for individual wealth management products, as well as the addition of sales from American-Amicable, acquired on July 20, 2010. Diluted earnings per common share from regular operations were $0.77, among the strongest quarterly results by the Company since the financial crisis. Annualized return on shareholders' equity of 12.6% was within the target range of 12% to 14%, and the solvency ratio of 211% as at September 30, 2010 was above the Company's target range of 175% to 200%.
PROFITABILITY
The Company ended the third quarter of 2010 with net income to common shareholders of $65.4 million, compared to $60.1 million for the third quarter of 2009. If the temporary impact of the asymmetric evolution between the fair value of the debt instruments and that of the underlying assets is excluded, net income to common shareholders amounted to $64.7 million on regular operations, compared with $59.0 million in the third quarter of 2009. This result translates into diluted earnings per common share of $0.77 on regular operations ($0.73 in the third quarter of 2009) and a return on common shareholders' equity of 12.6% on an annualized basis and 12.6% for the last twelve months (13.5% and 1.8% respectively in the third quarter of 2009 and for the twelve months ended September 30, 2009).
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Profitability
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Net income
to common
shareholders 65.4 60.1 9% 183.4 138.4 33%
Less: gain
(loss)
resulting from
the variation
in the fair
value of debt
instruments
and underlying
assets
(after taxes) 0.7 1.1 - 1.1 (10.7) -
-------------------------------------------------------------------------
Net income
to common
shareholders
on regular
operations 64.7 59.0 10% 182.3 149.1 22%
-------------------------------------------------------------------------
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Earnings per
common share
(diluted) $0.78 $0.74 $0.04 $2.19 $1.72 $0.47
Earnings per
common share
(diluted) on
regular
operations $0.77 $0.73 $0.04 $2.18 $1.85 $0.33
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Third quarter annualized Trailing twelve months
-------------------------------------------------------------------------
Return on
common
shareholders'
equity 12.7% 13.7% - 12.9% 1.6% -
Return on
common
shareholders'
equity on
regular
operations 12.6% 13.5% - 12.6% 1.8% -
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Profitability for the quarter is mainly explained by the overall improvement in economic conditions and the stock market recovery in the last year, as well as by the following factors:
- Expected profit on in-force business amounted to $94.6 million in the
third quarter compared to $83.1 million in 2009.
- New business strain as a percentage of sales in the Individual
Insurance sector was 52% in the third quarter, compared to 59% and 61%
in the first and second quarters respectively. This improvement is due
to the recent price increase in universal life policies and a positive
variation in the sales mix.
- Market-related experience gains amounted to $1.8 million after taxes,
or $0.02 per share.
- Experience gains in Group Insurance were offset by experience losses
in Individual Insurance, resulting in a net experience gain of
$0.5 million after taxes.
- The realized gain on assets available for sale amounted to $5.1 million
in the third quarter. This gain is higher than previous quarters as a
result of market opportunities which gave rise to profit-taking. The
additional gain for the quarter represents $1.9 million after tax or
$0.02 per share.
The Company posted a $0.7 million gain after taxes ($0.01 per common share) in the third quarter resulting from the unfavourable evolution of the difference between the fair value of the debt instruments and that of the underlying assets ($1.1 million gain after taxes in the third quarter of 2009, or $0.01 per common share). This gain is temporary and results from the favourable evolution of risk premiums during the quarter.
All lines of business except Individual Insurance obtained a higher operating profit year over year in the third quarter. Individual Wealth Management benefited from the stock market upswing in the last year and extremely strong sales of segregated funds and mutual funds. Group Insurance benefited from good experience results, and Group Pensions from the overall improvement in the economic environment. Individual Insurance was the only sector where the operating profit decreased, primarily due to poorer experience results during the quarter.
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Operating Profit by Line of Business
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance 30.5 32.0 (5%) 78.6 90.1 (13%)
Individual
Wealth
Management 23.8 15.7 52% 67.0 33.1 102%
Group Insurance 12.6 11.2 13% 36.0 24.6 46%
Group Pensions 4.1 3.6 14% 13.3 10.0 33%
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Total 71.0 62.5 14% 194.9 157.8 24%
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SOURCES OF EARNINGS
Following is an analysis of the Company's profitability for the third quarter of 2010 according to the sources of earnings.
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Sources of Earnings(1)
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating profit
Expected profit on
in-force 94.6 83.1 272.4 236.7
Experience gains
(losses) 3.0 6.9 0.8 (5.7)
Gain (strain) on sales (26.6) (27.5) (78.3) (73.2)
Changes in assumptions - - - -
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Subtotal 71.0 62.5 194.9 157.8
Income on capital
Investment income 19.5 18.7 65.5 53.0
Gains on assets
available for sale 5.0 2.8 8.7 5.3
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Subtotal 24.5 21.5 74.2 58.3
Income taxes (24.8) (22.0) (69.8) (57.4)
-------------------------------------------------------------------------
Net income to shareholders
on regular operations 70.7 62.0 199.3 158.7
Less: dividends on
preferred shares 6.0 3.0 17.0 9.6
-------------------------------------------------------------------------
Net income to common
shareholders on regular
operations 64.7 59.0 182.3 149.1
Plus: gain (loss)
resulting from the
variation in the fair
value of debt instruments
and underlying assets
(after taxes) 0.7 1.1 1.1 (10.7)
-------------------------------------------------------------------------
Net income to common
shareholders 65.4 60.1 183.4 138.4
-------------------------------------------------------------------------
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Expected profit on in-force - The expected profit on in-force, which was established for each quarter of 2010 when the budget was prepared at the end of 2009, amounted to $94.6 million for the third quarter of 2010, a year-over-year increase of 14%. The increase mainly comes from the Individual Wealth Management sector and reflects expected sales growth for this sector and the stock market upswing anticipated for 2010. The expected profit on in-force is down (compared to 2009) for the Group Insurance sector. When the budget was established at the end of 2009, the Company was expecting 2010 profitability in this sector to continue to be affected by the economic slowdown that prevailed in 2009. The increase in the expected profit on in-force for all sectors is consistent with the guidance that the Company gave to the financial markets when it published its fourth quarter 2009 results.
Experience gains (losses) - The Company recorded $3.0 million in experience gains in the third quarter of 2010. These gains come from each sector and are primarily explained by the stock market upswing during the quarter, which increased the Company's profit by $1.8 million after taxes, by favourable life insurance experience in the Group Insurance sector and by the overall improvement in the economy compared to last year.
Gain (strain) on sales - New business strain was $26.6 million in the third quarter of 2010, which is 3% ($0.9 million) lower than the same period last year. Most of the strain ($23.7 million) comes from the Individual Insurance sector (due to the long-term commitments that characterize the products) and, therefore, most of the decrease in strain comes from this sector.
If the Individual Insurance sector alone is taken into account, strain decreased by $1.4 million in the third quarter compared to last year, despite a 13% increase in sales. This decrease is primarily attributable to price changes on certain features of universal life insurance policies and a more positive sales mix during the quarter (a greater proportion of less strain-intensive products was sold). Strain, expressed as a percentage of sales (measured in terms of first-year annualized premiums), decreased to 52% in the third quarter (62% in the third quarter of 2009). Strain as a percentage of sales is within the Company's 50% to 55% mid-term target range.
Income on capital - Income on capital amounted to $24.5 million in the third quarter of 2010, a year-over-year increase of 14%. The increase is mainly explained by increased gains resulting from the sale of financial instruments matched to equity.
Income taxes - Income taxes totalled $24.8 million for the third quarter of 2010, which is $2.8 million higher than the third quarter of 2009. This increase essentially results from an increase in profit for the period. The effective tax rate amounted to 26.0% in the third quarter of 2010 (26.2% in the third quarter of 2009), which is in line with the Company's guidance of 26% to 27% in the medium term.
Dividends on preferred shares - Dividends on preferred shares were $6.0 million in the third quarter, a year over year increase of $3.0 million. This increase results from the issuance of $100 million in preferred shares by the Company in February 2010.
Other item - The Company posted a $0.7 million gain after taxes ($0.01 per common share) in the third quarter resulting from debt asymmetry, which is the evolution of the difference between the fair value of the debt instruments and that of the underlying assets ($1.1 million gain or $0.01 per common share in the third quarter of 2009). This gain is temporary and results solely from the favourable evolution of risk premiums during the quarter and is explained as follows.
The Company has three debentures classified "held for trading" which are measured at fair value at each period end. Fair value measurement of these debentures considers the Company's specific risk premium, and the variation in the fair value of these debentures is recognized in the results. When these debentures mature, the Company will pay out the nominal value of debentures and post a gain or a loss. Hence, fair value accumulation over the lifetime of these debentures will be neutral and will not affect the Company's earning power.
Moreover, the Company invested a nominal amount comparable to the proceeds of these debentures in bonds. These bonds are also classified "held for trading" and are matched to the debentures. Like the debentures, variations in the fair value of these assets are recognized in the results each quarter, but upon maturity, the Company will receive their fair value.
The asymmetric evolution of the market value of debt instrument liabilities and assets supporting them is explained by the fact that the risk premiums considered in the fair value measurement of liabilities and assets are different and evolve differently. Fair value variations that occur each quarter have no link to the Company's regular operations and have no economic impact for the Company.
The impact of the volatility related to debt asymmetry will be eliminated on January 1, 2011, when the Company expects to use the transition to the new international financial reporting standards (IFRS) to reclassify at cost its debentures currently classified as "held for trading."
SENSITIVITY ANALYSIS
The Company's sensitivity analysis varies from one quarter to another according to numerous factors, including changes in the economic and financial environment and the normal evolution of the Company's business. The results of these analyses show that the leeway the Company has to absorb potential market downturns remains very high overall. At September 30, 2010, the analysis was as follows:
- Stocks matched to the long-term liabilities - The Company believes that
it will not have to strengthen its provisions for future policy
benefits for stocks matched to long-term liabilities as long as the
S&P/TSX index remains above 9,400 points.
- Solvency ratio - The Company believes that the solvency ratio will stay
above 175% as long as the S&P/TSX index remains above 7,650 points, and
will stay above 150% as long as the S&P/TSX index remains above
6,450 points.
- Ultimate reinvestment rate ("URR") - The Company estimates that a
10 basis point decrease (or increase) in the ultimate reinvestment rate
would require the provisions for future policy benefits to be
strengthened (or would allow them to be released) by some $44 million
after taxes.
- Initial reinvestment rate ("IRR") - The Company estimates that a
10 basis point decrease (or increase) in the initial reinvestment rate
would require the provisions for future policy benefits to be
strengthened (or would allow them to be released) by some $25 million
after taxes.
-------------------------------------------------------------------------
Sensitivity Analysis
-------------------------------------------------------------------------
As at June 30, As at
2010 September 30,
(pro forma) 2010
-------------------------------------------------------------------------
Stocks matched Level of S&P/TSX index 9,400 points 9,400 points
to the requiring a strengthening
long-term of the provisions for
liabilities future policy benefits
for stocks matched to
long-term liabilities
-------------------------------------------------------------------------
Solvency ratio Level of S&P/TSX index 7,650 points 7,650 points
for the solvency ratio
to be at 175%
Level of S&P/TSX index 6,150 points 6,450 points
for the solvency ratio
to be at 150%
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Net income Impact on net income of ($18 million) ($18 million)
a sudden 10% decrease in
the stock markets (impact
for a complete year)
-------------------------------------------------------------------------
Ultimate Impact on net income of ($44 million) ($44 million)
reinvestment a 10 basis point decrease
rate (URR) in the URR
-------------------------------------------------------------------------
Initial Impact on net income of ($25 million) ($25 million)
reinvestment a 10 basis point decrease
rate (IRR) in the IRR
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Impact of Changing Economic Environment and Preview of Year-end Changes in Valuation Assumptions
Since the beginning of 2010, the TSX has gained 5.3% while our Initial Reinvestment Rate has declined by approximately 60 basis points. Consistent with our year-end review of actuarial assumptions, we are closely examining the impact of the current low-interest-rate environment on our Initial Reinvestment and Ultimate Reinvestment Rates (IRR and URR). All year-end changes to valuation assumptions will be finalized by the end of the fourth quarter, and we are confident at this time that they will not have any significant impact on the Company's fourth quarter results.
Management has taken a number of initiatives to reduce its sensitivity to interest rate risk. These initiatives are in the process of being implemented and will include a 5% increase in the proportion of stocks backing long-term liabilities. Had these initiatives been in place at September 30, 2010, the Company expects that it would be able to absorb a 15% decline in equity markets and that provisions for future policy benefits would not have to be strengthened as long as the S&P/TSX remains above 10,500 points.
Additionally, as part of its risk management process, the Company has implemented a dynamic hedging program to manage the equity risk related to its guaranteed annuity (GMWB) product, effective October 20, 2010. The GMWB portfolio represents approximately $1.5 billion of assets under management, including $900 million in equities. The Company also entered into a reinsurance agreement during the third quarter to share 60% of the longevity risk related to its $2.5 billion insured annuity block of business. These two initiatives reduce the risk profile of the company.
BUSINESS GROWTH
Top-line growth in the third quarter was once again very strong, continuing the momentum of the previous three quarters. Year over year, premiums and deposits and value of new business grew by 15% and 44% respectively. This fourth consecutive quarter of strong growth was driven primarily by the overall improvement in economic conditions and the stock market upswing over the last year. Following are the highlights of the third quarter.
Premiums and Deposits
For the fourth consecutive quarter, premiums and deposits reached a new year-over-year high, totalling $1.4 billion in the third quarter, a 15% increase over 2009. Virtually all sectors contributed to the increase for the quarter but, as with previous quarters, the highest growth came from the Individual Wealth Management sector, thanks to the stock market recovery and exceptional net sales in the last year. The Individual Insurance and General Insurance sectors also showed good growth rates.
The results for the first three quarters of 2010 are on track to surpass the Company's record year in 2007. After three quarters, premiums and deposits reached a new high of $4.8 billion in 2010, a 31% increase year over year, and 7% higher than the first three quarters of 2007.
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Premiums and Deposits
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance 287.4 238.6 20% 824.0 697.0 18%
Individual
Wealth
Management 686.7 531.0 29% 2,663.9 1,593.8 67%
Group
Insurance 275.0 247.9 11% 769.5 718.3 7%
Group
Pensions 149.3(2) 194.9 (23%) 463.2 572.4 (19%)
General
Insurance 41.8 36.2 15% 118.7 102.9 15%
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Total 1,440.2 1,248.6 15% 4,839.3 3,684.4 31%
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Sales by Line of Business
Following are the third quarter sales highlights by line of business. Sales are defined as new fund entries during the period. Refer to note 3 at the end of this release for the definition of sales for each line of business.
Individual Insurance - Continuing on the momentum from the previous two quarters, the Individual Insurance sector had another good quarter, with $45.9 million in sales, up 13% year over year. Sales of minimum premiums continued to show strong growth, with a 21% increase over last year. Sales of excess premiums were slower after two strong quarters, while the number of policies sold continued to grow steadily, which shows the stability and depth of the Company's distribution networks.
Individual Wealth Management - For the fourth consecutive quarter, sales of Individual Wealth Management products reached a new year-over-year quarterly high, reflecting the market recovery and the strength of the Company's distribution networks. Sales totalled $686.7 million, up 29% over the same period last year.
For the fourth straight quarter, net sales were much stronger than the previous year, amounting to $243.3 million in the third quarter, a 52% increase year over year. This performance enabled the Company to continue to grow its market shares. According to industry data, Industrial Alliance was ranked first in Canada in terms of net segregated fund sales in the third quarter and second for the first nine months of 2010, with a 34.1% market share (fourth in 2009, with 10.1% of the market). For mutual funds, the Company is ranked fifth in terms of net sales for the first nine months of 2010. This result is well ahead of the Company's seventeenth place industry ranking in terms of assets (as at September 30, 2010).
Group Insurance: Employee Plans - After a few disappointing quarters, third quarter sales grew 88% year over year, amounting to $23.5 million. Sales were good in Quebec and in the Prairies, and benefited from agreements that were signed with two large groups, with 800 and 1,500 employees respectively.
Group Insurance: Creditor Insurance - Creditor Insurance sales continued on the previous quarter's momentum, totalling $57.5 million, a 25% increase year over year. Sales in this sector rely on car sales, since the products are distributed primarily through car dealers. The 18% increase in sales for the year-to-date is more than double the increase in car sales, which were up 7.2%.
Group Insurance: Special Markets Group (SMG) - After a solid recovery in sales growth in the second quarter, SMG had another strong quarter, with $30.4 million in sales, a 7% year-over-year increase. As with the previous two quarters, the overall improvement of economic conditions contributed to this result. This sector specializes in certain insurance markets that are not well served by traditional insurance carriers.
Group Pensions - The Group Pensions sector ended the third quarter with sales of $207.0 million, up 6% year over year. The increase is attributable to the accumulation products segment, which recorded a 29% increase in sales. This segment benefited from an agreement signed with a group with some 2,300 employees. Sales in this sector can fluctuate considerably from one quarter to another due to the size of the mandates granted.
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Sales(3)
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Individual
Insurance
Minimum
premiums 39.6 32.6 21% 104.3 89.0 17%
Excess
premiums 6.3 8.1 (22%) 24.5 17.1 43%
-------------------------------------------------------------------------
Total 45.9 40.7 13% 128.8 106.1 21%
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Individual
Wealth
Management
General fund 107.7 88.9 21% 347.6 312.3 11%
Segregated
funds 279.4 193.2 45% 1,003.0 558.1 80%
Mutual
funds(4) 299.6 248.9 20% 1,313.3 723.4 82%
-------------------------------------------------------------------------
Total 686.7 531.0 29% 2,663.9 1,593.8 67%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Group Insurance
Employee
Plans 23.5 12.5 88% 59.0 58.0 2%
Creditor
Insurance 57.5 46.1 25% 138.6 117.8 18%
Special
Markets
(SMG) 30.4 28.5 7% 87.6 82.0 7%
Group
Pensions 207.0 194.9 6% 520.9 572.4 (9%)
-------------------------------------------------------------------------
Assets Under Management and Under Administration
Assets under management and under administration (AUM/AUA) reached a record $64.1 billion as at September 30, 2010, up 7% compared to June 30, 2010. The value of the main asset components increased during the quarter, thanks to strong growth of premiums and net fund entries in most sectors and the stock market upswing. AUM/AUA grew 10% in the first nine months of the year, compared to 5% for the TSX index for the same period.
-------------------------------------------------------------------------
Assets Under Management and Under Administration
-------------------------------------------------------------------------
(In millions September June 30, December September
of dollars) 30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Assets under management
General fund 19,993.9 18,623.6 17,626.5 16,920.4
Segregated funds 12,711.5 11,669.7 11,450.3 10,970.4
Mutual funds 7,586.7 7,019.4 6,615.7 6,224.5
Other 520.0 527.0 563.3 659.0
-------------------------------------------------------------------------
Subtotal 40,814.5 37,869.7 36,255.8 34,774.3
Assets under
administration 23,236.9 22,011.1 22,150.8 21,963.3
-------------------------------------------------------------------------
Total 64,051.4 59,880.8 58,406.6 56,737.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Value of New Business
Value of New Business (VNB) reached $41.4 million ($0.49 per common share) in the third quarter of 2010, a year-over-year increase of 44%. Several factors explain this increase, including sales growth in the Group Insurance and Individual Wealth Management sectors, increased profitability of certain products, and addition of the VNB of the recently acquired insurance company American-Amicable.
VNB is based on three components: the level of sales, profit margins and changes in the discount rate. As the following table shows, VNB grew by $9.3 million in the third quarter due to the substantial increase in sales, mainly of segregated and mutual funds, but group insurance as well. Profit margins were up $4.2 million, mainly due to a more favourable sales mix in the third quarter and increased profitability of certain products. Finally, VNB was negatively impacted by $0.8 million resulting from the increase in the discount rate, net of changes in interest rates and expected stock market returns (the discount rate was increased from 6.50% in 2009 to 7.25% in 2010).
-------------------------------------------------------------------------
Value of New Business by Component
-------------------------------------------------------------------------
(In millions of dollars) Year-to-date
Third as at
quarter September 30
-------------------------------------------------------------------------
Value of new business in 2009 28.7 85.2
Increase (decrease) in sales 9.3 35.7
Improvement (deterioration) of profit margins 4.2 (2.2)
Increase in discount rate (0.8) (2.7)
-------------------------------------------------------------------------
Value of new business in 2010 41.4 116.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FINANCIAL STRENGTH
Following are the financial strength highlights for the third quarter.
Solvency
The Company ended the third quarter with a solvency ratio of 211%, which is lower than the ratio of 215% recorded on a pro forma basis as at June 30, 2010. This pro forma basis reflected the acquisition of US insurance company American-Amicable on July 20, 2010. The 211% ratio recorded at the end of the third quarter is above the Company's 175% to 200% target range.
Downward pressure on the solvency ratio during the quarter resulted primarily from higher capital requirements related to the increase in market value of stocks and bonds (due to the reduction in long-term interest rates during the quarter). These increases in required capital were mitigated by a reduction in capital requirements for the mortality risk in the Group Pensions sector, as this sector recently signed a new reinsurance agreement to share the longevity risk for its in-force block of insured annuities.
The American-Amicable and Golden State Mutual acquisitions in the third quarter also put downward pressure on the solvency ratio.
-------------------------------------------------------------------------
Solvency
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise September June 30, June 30, December September
indicated) 30, 2010 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Available
capital (Pro forma)
Tier 1 2,276.0 2,245.9 2,260.9 1,961.9 1,842.6
Tier 2 350.4 340.0 340.0 343.1 309.5
-------------------------------------------------------------------------
Total 2,626.4 2,585.9 2,600.9 2,305.0 2,152.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Required
capital 1,243.6 1,201.7 1,159.7 1,107.2 1,090.0
Solvency
ratio 211% 215% 224% 208% 197%
-------------------------------------------------------------------------
Capitalization
The Company's capital totalled $3,082.4 million as at September 30, 2010, which is 3% ($78.8 million) higher than June 30, 2010. This growth is primarily explained by the increase in retained earnings (resulting from the income for the quarter reduced by the dividends paid to common shareholders) and the accumulation of latent gains in equity investments (attributable to the stock market upswing).
-------------------------------------------------------------------------
Capitalization
-------------------------------------------------------------------------
(In millions September June 30, December September
of dollars) 30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Equity
Common shares 647.5 647.1 545.7 541.5
Preferred shares 425.0 425.0 325.0 225.0
Retained earnings 1,375.3 1,330.4 1,254.8 1,207.3
Contributed surplus 23.3 22.7 21.6 21.6
Accumulated other
comprehensive income 54.6 25.6 10.5 20.5
-------------------------------------------------------------------------
Subtotal 2,525.7 2,450.8 2,157.6 2,015.9
Debentures 529.3 525.9 519.8 524.3
Participating
policyholders' account 27.4 26.9 25.7 27.9
-------------------------------------------------------------------------
Total 3,082.4 3,003.6 2,703.1 2,568.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Leverage
The increase in the Company's capital slightly reduced the debt ratios, from 17.5% as at June 30, 2010 to 17.2% as at September 30, 2010, if the debentures alone are considered in the debt items, and from 31.7% as at June 30, 2010 to 31.0% as at September 30, 2010, if the preferred shares are added. These ratios are in line with credit agency requirements for Industrial Alliance.
-------------------------------------------------------------------------
Debt Ratio
-------------------------------------------------------------------------
September June 30, December September
30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Debentures/capital 17.2% 17.5% 19.2% 20.4%
Debentures + preferred
shares/capital 31.0% 31.7% 31.3% 29.2%
-------------------------------------------------------------------------
Book Value per Common Share and Market Capitalization
Industrial Alliance's book value per common share continued to grow in the third quarter, reaching a new record high of $25.02 as at September 30, 2010, up 3% compared to June 30, 2010. This growth was primarily driven by the increase in retained earnings (resulting from the income for the quarter reduced by the dividends paid to common shareholders).
The Company's market capitalization amounted to $2,644.3 million as at September 30, 2010, down 9% from June 30, 2010. This change is comparable to that of Industrial Alliance's stock price, which decreased from $34.90 as at June 30, 2010 to $31.60 as at September 30, 2010.
The Company had 83,680,621 issued and outstanding common shares as at September 30, 2010, compared to 83,659,871 as at June 30, 2010. The increase during the quarter comes from the issuance of 20,750 common shares following the exercise of options under the Company's stock option plan.
-------------------------------------------------------------------------
Book Value per Common Share and Market Capitalization
-------------------------------------------------------------------------
(In millions of
dollars, unless
otherwise September June 30, December September
indicated) 30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Book value per common
share $25.02 $24.20 $22.77 $22.30
Market capitalization 2,644.3 2,919.7 2,592.5 2,355.0
-------------------------------------------------------------------------
QUALITY OF INVESTMENTS
There were few changes to the composition and quality of the Company's investments in the third quarter. The majority of the portfolio is still made up of fixed-income securities and the overall quality remains very high. Following are the highlights of the third quarter.
Composition of Investments
The Company's investment portfolio is composed of various categories of assets, the main ones being bonds, mortgage loans, stocks and real estate. The total value of the portfolio grew by $1,245.3 million in the third quarter, from $17,413.6 million as at June 30, 2010 to $18,658.9 million as at September 30, 2010, an increase of 7%. Most of this gain is attributable to growth in the fair market value of stocks and bonds (a result of the drop in interest rates during the quarter) and the addition of the portfolios of recently acquired US insurance companies (American-Amicable and Golden State Mutual) in the third quarter.
Except for a slight increase in the proportions of stocks and bonds (0.6 and 0.5 percentage points respectively), a result of the stock market upswing and the decrease in interest rates, the distribution of investments by asset category did not change significantly in the third quarter. The value of mortgage loans did not increase at the same rate as bonds and stocks, such that the proportion of mortgage loan investments decreased by 1.2 percentage points.
-------------------------------------------------------------------------
Composition of Investments
-------------------------------------------------------------------------
(In millions of
dollars, unless
otherwise September June 30, December September
indicated) 30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Book value of
investments 18,658.9 17,413,6 16,490.2 15,812.5
Distribution of
investments by asset
category
Bonds 59.9% 59.3% 57.1% 57.1%
Mortgage loans 17.8% 19.0% 20.6% 21.6%
Stocks 11.2% 10.7% 11.5% 11.3%
Real estate 3.6% 3.8% 3.9% 4.1%
Other 7.5% 7.2% 6.9% 5.9%
-------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quality of Investments
Despite the fact that the European and American economies are having trouble getting back on track and the volatility that this entails in the markets, the overall quality of the Company's investment portfolio remained very high in the third quarter.
-------------------------------------------------------------------------
Quality of Investments
-------------------------------------------------------------------------
(In millions of
dollars, unless
otherwise September June 30, December September
indicated) 30, 2010 2010 31, 2009 30, 2009
-------------------------------------------------------------------------
Net impaired
investments 16.0 9.8 13.0 15.3
Net impaired
investments as a %
of total investments 0.09% 0.06% 0.08% 0.10%
Bonds - Proportion
rated BB or lower 0.15% 0.18% 0.07% 0.12%
Mortgage loans -
Delinquency rate 0.30% 0.22% 0.36% 0.34%
Real estate -
Occupancy rate 93.6% 94.2% 94.4% 94.3%
-------------------------------------------------------------------------
- In terms of credit, no new bonds defaulted during the quarter, but the
company posted a $1.0 million provision on a private placement whose
book value was $4.9 million. This new provision was partially offset by
the receipt of $0.5 million on another investment which was fully
provisioned in 2009, such that the impact on the Company's earnings
before taxes was limited to $0.5 million ($0.4 million after taxes).
- Net impaired investments increased during the quarter, from
$9.8 million as at June 30, 2010 to $16.0 million as at September 30,
2010. This increase primarily results from two loans that were added to
the list of impaired investments, namely the previously mentioned
private placement for which a provision was taken during the quarter,
and a conventional mortgage loan in the US that was returned to the
list of impaired loans. This loan, which is the same one that was
removed from the list of impaired loans in the previous quarter
following a favourable settlement, is now in the process of being
foreclosed by the Company. The total amount of impaired loans
represents 0.09% of total investments (0.06% as at June 30, 2010).
- The delinquency rate of the mortgage loan portfolio increased from
0.22% as at June 30, 2010 to 0.30% as at September 30, 2010. This
increase essentially results from the reopening of a loan file on a
building in the US (the same loan referred to in the previous
paragraph).
- The overall quality of the bond portfolio remains very high. The
proportion of bonds rated BB or lower decreased from 0.18% as at
June 30, 2010 to 0.15% as at September 30, 2010. This decrease is
primarily attributable to the sale of a bond during the quarter.
- The real estate occupancy rate decreased slightly during the quarter,
from 94.2% as at June 30, 2010 to 93.6% as at September 30, 2010. The
market value of the real estate portfolio is still much higher than the
book value (the market to book value ratio was 124.6% as at
September 30, 2010 compared to 125.5% as at June 30, 2010).
- The nominal value of ABCP held by the Company decreased by $5.1 million
in the third quarter, from $87.4 million as at June 30, 2010 to
$82.3 million as at September 30, 2010. This decrease results from
$2.1 million in repayments of capital, the sale of notes backed by
ineligible assets with a $2.3 million nominal value, and the write-off
of a note that was already entirely devalued, whose nominal value was
$0.7 million. In total, for the year to date, Industrial Alliance's
exposure to ABCP decreased by $8.7 million. The overall devaluation due
to credit risk taken for the ABCP, including the impact of the
December 31, 2009 acquisition of the individual life insurance
portfolio of MD Life, amounted to $34.8 million as at September 30,
2010, which is equal to 42.3% of the nominal value of the ABCP held.
The Company believes that this devaluation is appropriate under the
current market conditions.
- There is nothing new to report about the Company's exposure to
securities that made headlines during the quarter. The Company has very
little direct exposure to securities issued by certain European
countries that are currently going through a crisis in their public
finances. Industrial Alliance also has very little direct exposure to
securities that have received the most media attention in the last two
years. The Company has no investments in the US subprime mortgage loan
market, no investments in US automobile manufacturers, no investments
in monolines, and its exposure to the securities of UK financial
institutions is limited to a $22.6 million investment.
Finally, still in terms of investment quality, the following two statistics on institutional fixed-income securities continued to improve during the quarter:
- Unrealized losses on corporate fixed income securities classified as
"available for sale" amounted to $5.4 million as at September 30, 2010
compared to $9.5 million as at June 30, 2010.
- The nominal value of bonds whose market value has been 20% or more
lower than the nominal value for six or more months amounted to
$21.5 million as at September 30, 2010 compared to $34.0 million as at
June 30, 2010. This figure, which increased during the 2008-2009
financial crisis, reached a high of $111.5 million as at June 30, 2009,
to subsequently decrease as the financial crisis abated. The unrealized
losses on these bonds (measured according to the difference between the
market value and the nominal value) continued to decrease in the third
quarter of 2010, from $8.7 million as at June 30, 2010 to $4.7 million
as at September 30, 2010. At the end of the quarter, only three
securities had a market value 20% or more lower than the nominal value
for six or more months and they were all classified as "held for
trading."
CREDIT RATINGS
On October 1, the Standard & Poor's (S&P) rating agency confirmed the A+ (Strong) credit rating that it grants to Industrial Alliance for its financial strength and raised the Company's outlook from negative to stable. In announcing its decision, S&P emphasized that "Industrial Alliance's profit and capitalization outlook improved with the market recovery." The agency also stated that the Company was able to maintain its strong competitive advantages despite the financial and economic crisis and that the prudence of its segregated fund guarantees made it less sensitive to stock market volatility.
The credit rating assigned to the Company by A.M. Best and DBRS were unchanged in the third quarter.
An important fact to note is that Industrial Alliance emerged from the 2008-2009 financial crisis with all of its credit ratings intact, which shows the Company's ability to absorb the effects of financial market turbulence and manage risks effectively under such circumstances.
-------------------------------------------------------------------------
Industrial Alliance Credit Ratings as at October 31, 2010
-------------------------------------------------------------------------
Agency Type of Evaluation Rating Outlook
-------------------------------------------------------------------------
Standard Financial Strength A+ (Strong) Stable
& Poor's Subordinated Debentures A -
Industrial Alliance Trust
Securities (IATS) (global scale) A- -
Preferred Shares (global scale) A- -
-------------------------------------------------------------------------
A.M. Best Financial Strength A (Excellent) Stable
Issuer Credit Rating a+ Stable
Subordinated Debentures a- -
Industrial Alliance Trust
Securities (IATS) bbb+ -
Preferred Shares bbb+ -
-------------------------------------------------------------------------
DBRS Claims Paying Ability IC-2 Stable
Subordinated Debentures A Stable
Industrial Alliance Trust
Securities (IATS) A (low)yn Stable
Preferred Shares Pfd-2 (high)n Stable
-------------------------------------------------------------------------
SUBSEQUENT EVENTS
On October 1, 2010, Industrial Alliance acquired, through its wholly-owned subsidiary Industrial Alliance Pacific, all outstanding shares of privately-owned National Warranties MRWV Limited ("National Warranty"). National Warranty sells extended warranties predominately through independent used car dealers in the province of Quebec. National Warranty has about 20 employees and approximately $6 million in annual premiums.
The agreement with National Warranty enables the Company to expand its creditor insurance business by enhancing its product portfolio and giving it access to the used car dealer market.
This acquisition should have a neutral effect on Industrial Alliance's earnings per share in the short term.
DECLARATION OF DIVIDEND
The Company's good profitability and financial strength have enabled the Board of Directors to announce the payment of a quarterly dividend of $0.2450 per common share. This dividend is the same as the one announced in the last quarter. It corresponds to a payout ratio of 31% of earnings, which is within the Company's 25% to 35% target range. The Company expects the dividend payout ratio to remain in the upper part of the target range in 2010.
Following are the amounts and dates of payment and closing of registers for the Company's common shares and the various categories of its preferred shares.
The Board of Directors has declared the payment of a quarterly dividend of $0.2450 per common share. The dividend is payable in cash on December 15, 2010, to the common shareholders of record as at November 19, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.2875 per non-cumulative class A preferred share series B. The dividend is payable in cash on December 31, 2010, to the preferred shareholders of record as at November 26, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.3875 per non-cumulative class A preferred share series C. The dividend is payable in cash on December 31, 2010, to the preferred shareholders of record as at November 26, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.3750 per non-cumulative class A preferred share series E. The dividend is payable in cash on December 31, 2010, to the preferred shareholders of record as at November 26, 2010.
The Board of Directors has declared the payment of a quarterly dividend of $0.36875 per non-cumulative class A preferred share series F. The dividend is payable in cash on December 31, 2010, to the preferred shareholders of record as at November 26, 2010.
For the purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends paid by Industrial Alliance on its common and preferred shares since January 1, 2006 are considered to be eligible dividends. Unless otherwise indicated, all dividends paid by the Company are now eligible dividends for the purposes of such rules.
ADDITIONAL COMMENTS ON THE FINANCIAL RESULTS
Following is the presentation of the Company's third quarter 2010 financial results according to the financial statements.
Revenues
Revenues are composed of three items in the financial statements: premiums (which include the amounts invested by insureds in the Company's segregated funds, but exclude those invested by clients in mutual funds), net investment income and fees and other revenues. Revenues totalled $1.9 billion for the third quarter, which represents a 10% increase compared to the same period the previous year, whereas for the nine-month period ended September 30, 2010, revenues increased by 16%. The factors that contributed to these variations are explained below.
-------------------------------------------------------------------------
Revenues
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums 1,140.6 999.7 14% 3,526.0 2,961.0 19%
Net
investment
income 604.0 597.2 1% 1,290.5 1,203.1 7%
Fees and
other
revenues 112.1 95.9 17% 325.4 267.0 22%
-------------------------------------------------------------------------
Total 1,856.7 1,692.8 10% 5,141.9 4,431.1 16%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Premiums totalled $1.1 billion in the third quarter of 2010, a 14% increase year over year, whereas for the first nine months premiums totalled $3.5 billion, a 19% increase year over year. These increases are primarily explained by strong sales growth in the Individual Wealth Management sector.
If mutual fund deposits are added to the premiums, premiums and deposits totalled $1.4 billion in the third quarter of 2010, up 15% year over year. This growth reflects a 20% increase in mutual fund deposits in the third quarter of 2010 compared to the same period last year. For the nine-month period ended September 30, 2010, premiums and deposits were up 31%, driven by strong growth of mutual fund and segregated fund sales compared to the same period in 2009.
-------------------------------------------------------------------------
Premiums and Deposits
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars,
unless
otherwise Varia- Varia-
indicated) 2010 2009 tion 2010 2009 tion
-------------------------------------------------------------------------
Premiums
General fund 683.0 667.5 2% 2,062.0 1,926.2 7%
Segregated
funds 457.6 332.2 38% 1,464.0 1,034.8 41%
-------------------------------------------------------------------------
Subtotal 1,140.6 999.7 14% 3,526.0 2,961.0 19%
Deposits -
mutual funds 299.6 248.9 20% 1,313.3 723.4 82%
-------------------------------------------------------------------------
Total 1,440.2 1,248.6 15% 4,839.3 3,684.4 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The main items that make up net investment income are: investment income as such (including interest income, dividends and net income from rental properties), the amortization of realized and unrealized gains and losses on real estate, realized gains and losses on the disposition of assets available for sale and variations in the market value of assets held for trading.
Since the adoption of the new accounting standards concerning financial instruments at the beginning of 2007, assets held for trading (other than real estate) have been accounted for at their market value. This accounting approach may lead to significant volatility of the net investment income from period to period since variations in the market value of these assets now directly influence net investment income rather than being amortized on the income statement, as was the case in the past. However, a large portion of these variations in market value are offset by corresponding variations in the provisions for future policy benefits, such that their impact on net income is largely mitigated.
Net investment income amounted to $604.0 million in the third quarter of 2010, compared to $597.2 million in the third quarter of 2009. The difference between these two amounts (a $6.8 million increase) is primarily attributable to the increase in the market value of the stock portfolio, a consequence of the stock market upswing. It is important to note that the majority of stocks and bonds are classified as held for trading and used as assets underlying the provisions for future policy benefits. For this reason, the impact of the increase in net investment income on the results is largely neutralized by a corresponding increase in the provisions for future policy benefits.
For the first nine months of 2010, net investment income was $87.4 million higher than the same period last year. This increase is primarily attributable to the good market performance in the last year.
The table below provides an overview of the composition of net investment income.
-------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Investment income 173.4 107.8 443.6 434.9
Amortization of realized
and unrealized gains
(losses) on real estate 4.5 4.8 13.8 14.8
Gains (losses) realized
on assets available for
sale 5.1 2.8 9.6 5.3
Variation in the market
value of assets held
for trading 421.6 421.7 824.0 750.2
Change in provisions
for losses (0.6) 0.1 (0.5) (2.1)
-------------------------------------------------------------------------
Total 604.0 597.2 1,290.5 1,203.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fees and other revenues represent fees earned from the management of investment funds (segregated funds and mutual funds), revenues from administrative services only (ASO) contracts and fees from the Company's brokerage subsidiaries. Year over year, fees and other revenues increased by $16.2 million in the third quarter and by $58.4 million for the first nine months. These increases were driven by the growth of average investment fund assets under management. Because of the strong growth in sales and the stock market upswing in the last year, average investment fund assets under management are up 18% over last year.
Policy Benefits and Expenses
Policy benefits and expenses totalled $1.8 billion in the third quarter of 2010, a year-over-year increase of $153.2 million, whereas for the first nine months they totalled $4.9 billion, a year-over-year increase of $640.5 million. Policy benefits and expenses are made up of the items shown in the table below.
-------------------------------------------------------------------------
Policy Benefits and Expenses
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Variation in provisions
for future policy
benefits 568.3 584.7 1,153.0 1,129.5
Payments to policyholders
and beneficiaries 492.2 458.0 1,542.9 1,431.5
Net transfer to
segregated funds 381.7 275.2 1,252.6 845.0
Commissions 162.5 133.6 459.9 382.8
General expenses 107.5 98.1 322.6 292.0
Other 48.1 57.5 137.8 147.5
-------------------------------------------------------------------------
Total 1,760.3 1,607.1 4,868.8 4,228.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Provisions for future policy benefits grew by $568.3 million in the third quarter of 2010, compared to a $584.7 million increase in the third quarter of 2009, which represents a $16.4 million expense decrease for this item on the income statement. This decrease reflects the fact that the Company signed a reinsurance agreement during the quarter to alleviate the longevity risk of annuitants in the Group Pensions sector. This reinsurance agreement reduced the amount of premiums (which are posted net of reinsurance) by an equivalent amount, such that there was no impact on the Company's net profit. For the first nine months of 2010, the expense related to the variation in the provisions for future policy benefits increased by $23.5 million compared to the same period last year.
The variation in provisions for future policy benefits evolves according to several factors, including the increase in premiums (upward impact on the provisions for future policy benefits), the return on the underlying assets (increase), claims incurred (decrease) and the net transfer to segregated funds (decrease). Since the new accounting standards concerning financial instruments took effect at the beginning of 2007, the variation in the market value of the assets underlying the provisions for future policy benefits (increase or decrease) must be added to this list of factors. The impact of the new accounting standards on the variation in provisions for future policy benefits has very little impact on net income, given that a corresponding variation in net investment income is recorded on the income statement, as explained above.
Payments to policyholders and beneficiaries in the third quarter of 2010 amounted to $492.2 million, a $34.2 million increase year over year. For the first nine months of 2010, payments to policyholders and beneficiaries increased by $111.4 million. This increase reflects the normal evolution of business and the increase in the in-force block of business. Payments to policyholders and beneficiaries include benefits paid due to death, disability, illness or contract terminations, as well as annuity payments.
Year over year, net transfers to segregated funds increased by $106.5 million in the third quarter and by $407.6 million in the first nine months. These increases are primarily explained by higher segregated fund sales in the Individual Wealth Management sector compared to last year. Net transfers to segregated funds are made up of amounts withdrawn from the general fund to be invested in segregated funds, less any amounts transferred from segregated funds to the general fund. Net transfers to segregated funds can vary from one period to another depending on the demand from clients, who at times favour general fund products, which usually offer guaranteed returns, and at other times are more attracted by segregated fund products, whose return fluctuates with the markets. Also, in a sector like Group Pensions, segregated fund deposits can fluctuate substantially from one quarter to another according to the size of the mandates granted by certain groups.
Year over year, commissions increased by $28.9 million in the third quarter and by $77.1 million in the first nine months. The increase in commissions mainly results from higher sales in most sectors, mainly Individual Wealth Management. Commissions correspond to the remuneration of financial advisors for new sales and certain in-force contracts.
Year over year, general expenses increased by $9.4 million in the third quarter and by $30.6 million in the first nine months. These increases are primarily explained by business growth, resulting from the recent addition of US companies, an increase in the retirement plan expense, and an increase in expenses for medical exams and investigations, a result of strong sales growth.
Financial Results for the Last Eight Quarters
The following table presents a summary of Industrial Alliance's financial results for the last eight quarters.
-------------------------------------------------------------------------
Selected Financial Information
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise
indicated) Q3/2010 Q2/2010 Q1/2010
-------------------------------------------------------------------------
Revenues 1,856.7 1,527.8 1,757.4
Net income
Net income
(net loss)
to common
shareholders 65.4 57.7 60.3
Less: gain
(loss)
resulting
from the
variation in
the fair
value of debt
instruments
and
underlying
assets
(after taxes) 0.7 (0.7) 1.1
-------------------------------------------------------------------------
Net income
(net loss)
to common
shareholders
on regular
operations 64.7 58.4 59.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
Basic $0.78 $0.69 $0.74
Diluted $0.78 $0.68 $0.73
Earnings per
common share
on regular
operations
Basic $0.77 $0.70 $0.73
Diluted $0.77 $0.69 $0.72
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Selected Financial Information
-------------------------------------------------------------------------
(In millions
of dollars,
unless
otherwise
indicated) Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008
-------------------------------------------------------------------------
Revenues 1,383.2 1,692.8 1,607.6 1,130.7 1,043.9
Net income
Net income
(net loss)
to common
shareholders 67.4 60.1 32.1 46.2 (110.2)
Less: gain
(loss)
resulting
from the
variation in
the fair
value of debt
instruments
and
underlying
assets
(after taxes) 5.3 1.1 (19.3) 7.5 7.8
-------------------------------------------------------------------------
Net income
(net loss)
to common
shareholders
on regular
operations 62.1 59.0 51.4 38.7 (118.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
Basic $0.84 $0.75 $0.40 $0.58 ($1.37)
Diluted $0.83 $0.74 $0.40 $0.58 ($1.37)
Earnings per
common share
on regular
operations
Basic $0.77 $0.74 $0.64 $0.48 ($1.47)
Diluted $0.77 $0.73 $0.64 $0.48 ($1.46)
-------------------------------------------------------------------------
Cash Flows
Operating activities provided cash flows of $211.5 million in the third quarter, a year-over-year decrease of $67.9 million. This decrease reflects the normal evolution of business and variations in other assets and liabilities.
Investment activities used cash flows of $54.4 million in the third quarter of 2010, compared with $330.0 million in the third quarter of 2009, a difference of $275.6 million. This difference primarily results from acquisitions in the quarter and the variation in net bond and stock purchases.
Financing activities used cash flows of $25.5 million in the third quarter of 2010, which is $3.8 million higher than the same period last year. This increase is due to the fact that dividends on common and preferred shares were up over the third quarter of 2009, primarily due to new share issues in the first quarter of 2010.
Cash flows were up $204.9 million for the first nine months of 2010, compared to a $59.1 million decrease for the same period in 2009, a $264.0 million difference. This difference essentially reflects changes in the normal course of operating, investment and financing activities during these periods.
-------------------------------------------------------------------------
Cash Flows
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
(In millions
of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows related to the
following activities:
Operating 211.5 279.4 541.6 602.4
Investment (54.4) (330.0) (446.4) (684.5)
Financing (25.5) (21.7) 119.3 30.3
Currency gain (loss) on
cash and cash
equivalents (10.6) (4.5) (9.6) (7.3)
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents 121.0 (76.8) 204.9 (59.1)
Cash and cash equivalents
at beginning of period 465.8 276.2 381.9 258.5
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period 586.8 199.4 586.8 199.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity
The Company's main source of capital is fund entries related to operations, particularly premiums, net investment income and management fees and other revenues. This capital is primarily used to pay benefits to policyholders and beneficiaries, dividends to participating policyholders, commissions, operating expenses, interest charges and dividends to shareholders. Cash flows from operating activities are generally applied to payments that will have to be made at a later date, including the payment of dividends to shareholders. In order to honour its commitments, the Company maintains a prudent level of liquidity by holding a good proportion of marketable securities and by strictly managing cash flows and matching.
Given the quality of its investment portfolio, and despite the financial market volatility, the Company expects its liquidity level to remain sufficient in the near future. Due to the nature of its operations and its matching policy, the Company regularly finds itself in a positive cash flow position. This means that fund entries are regularly higher than fund disbursements.
The Company maintains a high level of liquidity. In an extreme scenario where the Company would have to redeem all of its redeemable contracts, easily convertible assets, which represent sources of liquidity, would cover two times the liquidity needed. Hence, according to this extreme scenario, the liquidity ratio totalled 200% as at September 30, 2010 (200% as at June 30, 2010 and 190% as at December 31, 2009).
Given the difficult liquidity conditions that prevailed in the financial markets at the end of 2008 and the beginning of 2009, the Company carried out additional simulations to take into account a lower level of liquidity for certain asset categories that are normally considered very liquid. According to the most demanding scenario considered in these simulations, which assumes that it would become totally impossible to liquidate bonds other than government bonds and preferred shares, the liquidity ratio amounted to 154% as at September 30, 2010 (153% as at June 30, 2010 and 145% as at December 31, 2009).
As at September 30, 2010, the Company had operating lines of credit totalling $66.9 million (the same amount as at June 30, 2010 and December 31, 2009). As at September 30, 2010, the Company had used $0.6 million of these lines of credit. The purpose of these lines of credit is to facilitate financing of the Company's operations and meet its temporary working capital requirements.
Derivative Financial Instruments
The Company holds derivative contracts whose cash flow exchanges are calculated using a nominal reference amount of $1,091.1 million as at September 30, 2010 ($987.2 million as at June 30, 2010 and $1,091.9 million as at December 31, 2009). These contracts are used primarily to alleviate risks associated with interest rate, currency and stock market fluctuations. These contracts are primarily used for matching Universal Life policies.
The current credit risk related to derivative contracts, which corresponds to the amounts payable to the Company by the different counterparties as at September 30, 2010, is $14.6 million. This amount fluctuates from one period to another according to changes in interest rates and equity markets. It was $11.6 million as at June 30, 2010 and $12.5 million as at December 31, 2009.
The future credit risk related to these contracts, which corresponds to the amount that the counterparties could potentially owe the Company according to different market scenarios, was $35.0 million as at September 30, 2010 ($34.7 million as at June 30, 2010 and $42.4 million as at December 31, 2009).
On the nominal amount of $1,091.1 million, 97% of the Company's credit risk for derivative financial instruments as at September 30, 2010 was related to financial institutions whose lowest credit rating was AA low, the rest being related to institutions whose credit rating was A strong.
Related Party Transactions
There were no material related party transactions to report in the third quarter of 2010.
Accounting Policies and Main Accounting Estimates
The third quarter unaudited interim consolidated financial statements have been prepared according to Canadian generally accepted accounting principles (GAAP). Note 2 to the 2009 audited consolidated financial statements on pages 89 to 95 of the 2009 Annual Report contains the main accounting policies used by the Company.
These accounting policies require that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the date of the consolidated financial statements, and the reported amounts of revenues, policy benefits, and expenses during the period. Actual results could differ from management's best estimates. The most significant estimates are related to the determination of policy liabilities, employee future benefits, the fair values of invested assets and the goodwill and intangible assets depreciation test.
No changes were made to the accounting policies used by the Company for the period.
International Financial Reporting Standards (IFRS)
The Company will adopt IFRS on January 1, 2011 and will produce its first financial statements using IFRS in the first quarter of 2011. These statements will have to comply with IAS 34, "Interim Financial Reporting," which requires the presentation of corresponding comparative financial reporting in 2010. In addition, the interim financial statements will have to include an opening balance sheet as at January 1, 2010.
In order to be ready for the transition to IFRS, the Company has established a transition plan containing three phases.
Phase 1: Determination of risks
-------------------------------------------------------------------------
Activities Identification of IFRS standards that will lead to accounting
changes in the consolidated financial statements and
disclosure requirements
Classification of standards according to their impact on our
consolidated financial statements and efforts required to
implement them.
-------------------------------------------------------------------------
Status Completed
-------------------------------------------------------------------------
Phase 2: Implementation of new standards
-------------------------------------------------------------------------
Activities Analysis of differences between GAAP and IFRS
Choice of accounting policies that the Company will apply on
an ongoing basis
Decision by the Company on IFRS-1 on the transition date
Identification of impacts on various other items:
Information technology
Internal control over financial reporting
Disclosure
Training
-------------------------------------------------------------------------
Status Completed
The disclosure, training and internal control over financial
reporting is an ongoing process that covers both the 2009 and
2010 financial years.
-------------------------------------------------------------------------
Phase 3: Conversion
-------------------------------------------------------------------------
Activities Preparation of opening balance sheet on transition date
Compilation of comparative financial data
Establishment of interim consolidated financial statements
and disclosure requirements
Establishment of annual consolidated financial statements
and disclosure requirements
Application of modifications
-------------------------------------------------------------------------
Status The Company drew up its opening balance sheet and
reconciliation of retained earnings according to the choices
it made.
The Company also prepared the balance sheet, income statement
and reconciliation of retained earnings for the first and
second quarters according to the new accounting policies that
it will apply on an ongoing basis.
The Company will continue to monitor the parallel accounting
of financial data, and continue to evaluate the financial
consequences and impacts of the conversion to IFRS.
The Company is preparing and setting up its interim and
annual consolidated financial statements, including notes to
the financial statements.
-------------------------------------------------------------------------
The transition plan is on schedule, which ensures that the Company will be able to meet IFRS requirements.
The project managers regularly take stock of progress in the transition plan and convey key elements of the analyses to the project steering committee, management, the Audit Committee and the Board of Directors.
IFRS1 - "First-time Adoption of International Financial Reporting Standards"
To establish the opening balance sheet, the Company made choices based on IFRS 1, "First-time Adoption of International Financial Reporting Standards." Even though the Company has not yet made its final decisions, it currently expects to take advantage of the following exemptions.
-------------------------------------------------------------------------
Business The Company will not restate acquisitions that were
combinations made prior to the transition date due to the
complexity involved in obtaining historical values
and, consequently, will apply the standard for
business combinations prospectively. This choice will
not have any impact on the Company's data.
-------------------------------------------------------------------------
Currency The Company expects to reset the currency translation
translation gains and losses in self-sustaining foreign
account operations, net of hedging activities, to zero, which
will result in an increase of about $4 million in
accumulated other comprehensive income, and a decrease
in retained earnings for the same amount.
-------------------------------------------------------------------------
Employee Rather than apply IFRS requirements retrospectively to
benefits employee future benefits, the Company plans to
recognize the undepreciated actuarial loss of about
$104 million before taxes in the retained earnings
when the transition takes place.
-------------------------------------------------------------------------
Fair value or The Company expects to use the fair value as presumed
amortized cost cost for real estate held for investment, which will
used as lead to an increase of about $87 million in the value
presumed cost: of these assets. However, since all of this real
real estate estate is matched to the provisions for future policy
held for benefits, it will not have any impact on retained
investment earnings.
and own-use
properties For own-use properties, the Company expects to use the
amortized cost as presumed cost for some assets and
the fair value for others. This will lead to a
reduction in retained earnings of about $13 million
before taxes.
-------------------------------------------------------------------------
Reclassification The Company expects to use reclassification of
of financial financial assets and liabilities for certain
instruments debentures and their underlying assets. This choice
will lead to a reduction of $11 million before taxes
in the book value of debentures and, consequently, an
$11 million increase in retained earnings. The assets
matching these debentures will be reclassified from
"designated as held for trading" to "available for
sale." This will lead to a decrease of $9 million
before taxes in retained earnings and an increase in
the accumulated other comprehensive income for the
same amount. Use of this transition rule will
eliminate the effect of volatility created in the
Company's results by the accounting asymmetry that
currently exists between these debentures and their
underlying assets.
-------------------------------------------------------------------------
Major Differences Between IFRS and GAAP
To date, the Company has determined the following major differences between IFRS and GAAP. The differences are presented in two categories: accounting differences and reporting differences.
-------------------------------------------------------------------------
Accounting Differences
-------------------------------------------------------------------------
Classification For an insurer, one of the important aspects of the
of contracts transition plan is the classification of insurance
contracts according to the definition in IFRS 4,
"Insurance Contracts." Since the Company has
classified the majority of its contracts as insurance
contracts, the Company does not expect a material
impact on its results.
Also, according to IFRS 4, which will take effect on
the changeover date, the Company will continue to
evaluate its provisions for future policy benefits
according to the Canadian Asset-Liability Method
(CALM). According to this method, the evaluation of
provisions for future policy benefits is based on the
book value of the matched assets, which corresponds to
the current accounting method.
For the few contracts that will be classified as
investment contracts, no more premium income or
variation in the provisions for future policy benefits
will be posted on the income statement for these
contracts and, consequently, there will no longer be
an impact on the Company's net income. The amounts for
these contracts will be posted directly as amounts on
deposit under liabilities on the balance sheet. This
represents about 1% of the Company's total premium
income. Under liabilities, these contracts will either
be measured at fair value or at amortized cost, as
chosen by the Company. If they are measured at
amortized cost, the assets matching these liabilities
will be classified as available for sale according to
IFRS in order to reduce the matching spread.
A few other contracts, which are currently accounted
for as service contracts, will be classified as
insurance contracts. These contracts will continue to
generate revenue on the income statement, but this
revenue will be reported under premiums rather than
other revenues. This represents about 1% of the
premium income.
-------------------------------------------------------------------------
Real estate held According to Canadian GAAP as it applies to life and
for investment health insurance companies, the value of real estate
held for investment is carried at the moving average
market method, whereby the carrying value is adjusted
towards fair value at a rate of 3% per quarter of
unrealized gains and losses.
According to IAS 40, "Investment Property," for real
estate the Company classifies as investment property,
the Company must choose between the cost model and the
fair value model. The Company plans to use the fair
value model and report a higher value in its balance
sheet for this real estate than currently posted
according to Canadian GAAP. However, since this real
estate is used to match the provisions for future
policy benefits in the matching process, any variation
in the fair value will be offset by a corresponding
adjustment in the provisions for future policy
benefits, such that there will be no impact on the
Company's net income.
-------------------------------------------------------------------------
Own-use property According to Canadian GAAP, the value of own-use
property is carried at the moving average market
method. Under IFRS, IAS 16, "Property, Plant and
Equipment," property that a corporation holds for its
own use may be valued at cost or using a revaluation
model, and a depreciation expense for use of such
property must be posted. The Company intends to use
the cost method to evaluate its own-use property.
-------------------------------------------------------------------------
Earnings per According to GAAP, even though the Company's IATS
share (EPS) debentures can be converted into common shares, they
have no dilutive effect on the EPS calculation, since
they meet certain specific criteria. However, since
these criteria will no longer exist under IFRS, these
securities must be considered as dilutive, which will
have an additional dilutive effect on the diluted EPS.
-------------------------------------------------------------------------
Employee There are different ways to account for actuarial
benefits gains or losses on employee future benefits in IFRS.
A single method is possible under Canadian GAAP, i.e.
the corridor method. According to IAS-19 "Employee
Benefits," there are three ways to account for
actuarial gains or losses: the corridor method (10%;
identical to the current method under GAAP), the
adjusted corridor method (using a rate between 0% and
10%), or account for everything in the accumulated
other comprehensive income (AOCI). The Company plans
to use the last option, i.e. accounting in AOCI.
-------------------------------------------------------------------------
Goodwill Goodwill depreciation tests will cover more detailed
items, namely "cash generating units" according to
IFRS, rather than operating units according to GAAP.
The Company doesn't expect any write-offs in this
respect on its opening balance sheet.
-------------------------------------------------------------------------
Consolidation Additional assets and liabilities from an off-balance
sheet entity, IA Capital Trust, should be consolidated
according to IFRS. The effect of this consolidation
will lead to a decrease in the value of the entity's
debentures of about $10 million, as well as other
Company investments.
-------------------------------------------------------------------------
Depreciation of According to IFRS, an impairment loss must be
available for recognized for assets classified as available for
sale stocks sale, when the decrease in book value is major or
significant, regardless of future recovery
expectations. According to GAAP, an impairment loss is
not recognized when the decrease in fair value is
considered temporary. Eventually, impairment losses
could be more frequent.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reporting Differences
-------------------------------------------------------------------------
Segregated fund While segregated fund assets and liabilities are
assets and currently reported separately from general fund assets
liabilities and liabilities, under IFRS they will be included in
the total general fund, but presented on a separate
line. This will add about $11 billion to the general
fund assets and liabilities as at December 31, 2009.
-------------------------------------------------------------------------
Reinsurance Reinsurance amounts are currently presented on a net
basis. Under IFRS, they will have to be presented on a
gross basis. Consequently, the provision for future
policy benefits will be increased by the value of the
reinsurance assets and reinsurance assets will be
presented on the balance sheet. Certain items in the
results will be presented at gross, but will not have
an impact on the net income.
-------------------------------------------------------------------------
Pension fund According to GAAP, the pension fund is presented in
assets the financial statements at its net value (liabilities
minus assets). According to IFRS, since the Company's
pension fund assets do not meet the eligibility
criteria to continue this presentation, the Company
will have to report these assets directly in the asset
section, without offsetting the liabilities. This will
increase the general fund assets and liabilities by
about $470 million.
-------------------------------------------------------------------------
Investment income For purposes of presentation on the income statement,
and general investment expenses are currently presented as a
expenses deduction from investment income in order to determine
the net investment income. This offsetting will no
longer be allowed under IFRS, which will result in an
increase in investment income and an increase in
general expenses, but will have no impact on net
income.
-------------------------------------------------------------------------
Other income Commissions paid to fund brokers can no longer be
and commission offset against commission income, which will increase
expenses other income and automatically increase the commission
expense. It will have no impact on net income.
-------------------------------------------------------------------------
Derivatives While it was possible to offset assets and liabilities
resulting from derivative products under GAAP, under
IFRS the Company will have to present them separately.
This will have no impact on net income.
-------------------------------------------------------------------------
The analyses performed as part of the transition to IFRS also take into account the tax aspects and incidence on the Company's regulatory capital. In this respect, the regulatory authorities will allow companies to take advantage of an option to gradually amortize the impact resulting from linear conversion over a period of two years, from the January 1, 2011 conversion date to December 31, 2012. Companies that take advantage of this option will have to do so on the conversion date and the choice will be irrevocable. Companies will also have to indicate in the notes to the financial statements that they made this choice and specify what their regulatory capital would correspond to without this choice.
The Company also monitors and analyzes changes made to IFRS given that these changes could influence the preliminary decisions. Changes are expected for financial instruments, among others. Phase I of IFRS 9, "Financial Instruments," was published in November 2009 and will take effect on January 1, 2013. Early adoption is possible, but is not authorized by the regulatory authorities.
The recently published Exposure Drafts include the publication on July 30, 2010 of the Exposure Draft on phase II of IFRS 4, "Insurance Contracts," which covers the valuation and recognition of insurance contracts. The comments period ends on November 30 and it should not take effect prior to 2013. The IASB's proposed accounting method for recognizing insurance contracts separates the evaluation of insurance liabilities from the assets that they are matched to. Consequently, these proposals could lead to a strong increase in insurance liabilities and required equity on initial adoption and major volatility in the results.
Among other published Exposure Drafts, the following are also of note: "Employee Benefits" (Exposure Draft published in April, dealing more specifically with defined benefit pension plans), "Provisions, Contingent Liabilities and Contingent Assets," "Leases," "Revenue Recognition" and phase II of IFRS 9 "Financial Instruments." The Company is currently analyzing these Exposure Drafts and their impact on the Company. These Exposure Drafts should not take effect before 2013.
Reconciliation of Certain Non-GAAP Financial Measures with GAAP
The following table reconciliates the operating profit and income taxes that appear in the Sources of Earnings section with GAAP measures.
-------------------------------------------------------------------------
Reconciliation of Sources of Earnings with GAAP Measures
-------------------------------------------------------------------------
Third quarter Year-to-date as at
September 30
2010 2009 2010 2009
-------------------------------------------------------------------------
Components of the income
before taxes
Operating profit
according to the
sources of earnings 71.0 62.5 194.9 157.8
Income on capital
according to the
sources of earnings 24.5 21.5 74.2 58.3
Gain (loss) resulting
from asymmetry of
debt instruments 0.9 1.5 1.5 (14.9)
Income attributable to
participating policies
and other items 0.0 0.2 2.5 1.6
-------------------------------------------------------------------------
Income before taxes
according to financial
statements 96.4 85.7 273.1 202.8
Less income taxes:
On the operating profit
and on the income on
capital 24.8 22.0 69.8 57.4
On the gain (loss)
resulting from
asymmetry of debt
instruments 0.2 0.4 0.4 (4.2)
On the earnings
attributable to
participating policies
and other items (0.5) 0.5 1.0 0.7
-------------------------------------------------------------------------
Income taxes according
to financial statements 24.5 22.9 71.2 53.9
-------------------------------------------------------------------------
Net income according to
financial statements 71.9 62.8 201.9 148.9
-------------------------------------------------------------------------
WARNING AND GENERAL INFORMATION
Internal Control Over Financial Reporting
No changes were made in the Company's internal control over financial reporting during the interim period ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). However, it also occasionally publishes certain non-GAAP financial measures which either do not have any GAAP equivalent, including sales, value of new business, embedded value and solvency ratio, or which have a GAAP equivalent and which can be compared with GAAP measures, such as data on the operating profit and income taxes on the earnings presented in the sources of earnings table. The Company also occasionally uses certain non-GAAP financial measures - adjusted data or data on regular operations - mainly concerning the profit, earnings per share and return on equity. These non-GAAP financial measures are always clearly indicated, and are always accompanied by and reconciled with GAAP financial measures. The Company believes that these non-GAAP financial measures provide investors and analysts with useful information so that they can better understand the financial results and perform a better analysis of the Company's growth and profitability potential. These non-GAAP financial measures provide a different way of assessing various aspects of the Company's operations and may facilitate the comparison of results from one period to another. Since non-GAAP financial measures do not have a standardized definition, they may differ from the non-GAAP financial measures used by other institutions. The Company strongly encourages investors to review its financial statements and other publicly-filed reports in their entirety and not to rely on any single financial measure.
Forward-Looking Statements
This Management's Discussion and Analysis may contain statements relating to strategies used by Industrial Alliance or statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "may", "will", "could", "should", "would", "suspect", "expect", "anticipate", "intend", "plan", "believe", "estimate", and "continue" (or the negative thereof), as well as words such as "objective" or "goal" or other similar words or expressions. Such statements constitute forward-looking statements within the meaning of securities laws. Forward-looking statements include, but are not limited to, information concerning the Company's possible or assumed future operating results. These statements are not historical facts; they represent only the Company's expectations, estimates and projections regarding future events.
Although Industrial Alliance believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially from expectations include, but are not limited to: general business and economic conditions (including but not limited to performance of equity markets, interest rate fluctuations, currency rates, investment losses and defaults, movements in credit spreads, market liquidity and creditworthiness of guarantors and counterparties); level of competition and consolidation; changes in laws and regulations including tax laws; liquidity of Industrial Alliance including the availability of financing to meet existing financial commitments on their expected maturity dates when required; accuracy of information received from counterparties and the ability of counterparties to meet their obligations; accuracy of accounting policies and actuarial methods used by Industrial Alliance; insurance risks including mortality, morbidity, longevity and policyholder behaviour including the occurrence of natural or man-made disasters, pandemic diseases and acts of terrorism; failure of information systems and Internet-enabled technology; breaches of computer security and privacy; dependence on third-party relationships including outsourcing arrangements; ability to maintain Industrial Alliance's reputation; regulatory investigations and proceedings and private legal proceedings and class actions relating to practices in the mutual fund, insurance, annuity and financial product distribution industries; the ability to adapt products and services to the changing market; the ability to implement effective hedging strategies; the ability to attract and retain key executives; the ability to complete acquisitions including the availability of equity and debt financing when required for this purpose; the ability to execute strategic plans; the disruption of or changes to key elements of Industrial Alliance's or public infrastructure systems; and environmental concerns. Additional information about material factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in Industrial Alliance's most recent annual report, under the "Risk Management" section of the Management's Discussion and Analysis and in the "Management of Risks Associated with Financial Instruments" note to Industrial Alliance's consolidated financial statements, and elsewhere in Industrial Alliance's filings with Canadian securities regulators, which are available for review at www.sedar.com.
Industrial Alliance does not undertake to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Management's Discussion and Analysis or to reflect the occurrence of unanticipated events, except as required by law.
Documents Related to the Financial Results
All documents related to Industrial Alliance's financial results are available on the Company's website at www.inalco.com, in the Investor Relations section, under Financial Reports. More information about the Company can also be found on the SEDAR website at www.sedar.com, as well as in the Company's Annual Information Form, which can be found on the Company website or the SEDAR website.
Conference Call
Management will hold a conference call to present the Company's results on Wednesday, November 3, 2010 at 2:00 p.m. (ET). To listen in on the conference call, dial 1 800 755-6634 (toll-free). A replay of the conference call will also be available for a one-week period, starting at 4:30 p.m. on Wednesday, November 3, 2010. To listen to the conference call replay, dial 1 800 558-5253 (toll-free) and enter access code 21479333. A webcast of the conference call (in listen only mode) will also be available on the Industrial Alliance website at www.inalco.com, as well as at www.cnw.ca.
About Industrial Alliance
Founded in 1892, Industrial Alliance Insurance and Financial Services Inc. is a life and health insurance company that offers a wide range of life and health insurance products, savings and retirement plans, RRSPs, mutual and segregated funds, securities, auto and home insurance, mortgage loans and other financial products and services. The fourth largest life and health insurance company in Canada, Industrial Alliance is at the head of a large financial group, which has operations in all regions of Canada, as well as in the United States. Industrial Alliance contributes to the financial wellbeing of over three million Canadians, employs more than 3,500 people and manages and administers over $64 billion in assets. Industrial Alliance stock is listed on the Toronto Stock Exchange under the ticker symbol IAG. Industrial Alliance is among the 100 largest public companies in Canada.
-------------------------
(1) This table contains non-GAAP measures. A reconciliation of these
measures with GAAP is presented in the table "Reconciliation of
Sources of Earnings with GAAP Measures".
(2) Group Pensions premiums are presented net of reinsurance, following a
new agreement concluded by this sector in the third quarter on
in-force block of business. Excluding reinsurance, premiums would
have amounted to $207.0 million and year-over-year growth would have
been 6%.
(3) Sales (new business) are defined as follows for each sector:
Individual Insurance: first-year annualized premiums; Individual
Wealth Management: premiums for the general fund and segregated funds
and deposits for mutual funds; Group Insurance: first-year annualized
premiums for Employee Plans, including premium equivalents
(Administrative Services Only (ASO) contracts), gross premiums
(premiums before reinsurance) for Creditor Insurance and premiums for
Special Markets Group (SMG); Group Pensions: gross premiums, before
reinsurance.
(4) Mutual fund sales include the closed end fund issued by IA Clarington
Investments Inc. in April 2010.
CONSOLIDATED INCOME STATEMENTS
-------------------------------------------------------------------------
Quarters ended Nine months ended
(in millions of dollars,
unless otherwise
indicated) September 30 September 30
2010 2009 2010 2009
$ $ $ $
(unaudited)
Revenues
Premiums 1,141 1,000 3,526 2,961
Net investment income 604 597 1,291 1,203
Fees and other revenues 112 96 325 267
-------------------------------------------------------------------------
1,857 1,693 5,142 4,431
Policy benefits and
expenses
Payments to policyholders
and beneficiaries 492 458 1,543 1,432
Net transfer to
segregated funds 382 275 1,253 845
Dividends, experience
rating refunds and
interest on amounts on
deposit 18 24 50 40
Change in provisions for
future policy benefits 568 584 1,153 1,129
-------------------------------------------------------------------------
1,460 1,341 3,999 3,446
Commissions 162 134 459 383
Premium and other taxes 19 16 55 47
General expenses 108 98 323 292
Financing expenses 12 18 33 60
-------------------------------------------------------------------------
1,761 1,607 4,869 4,228
Income before income
taxes 96 86 273 203
Less: income taxes 25 23 72 54
-------------------------------------------------------------------------
Net income 71 63 201 149
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Less: net income
attributed to
participating
policyholders - - 1 1
-------------------------------------------------------------------------
Net income attributed to
shareholders 71 63 200 148
Less: preferred share
dividends 6 3 17 10
-------------------------------------------------------------------------
Net income available to
common shareholders 65 60 183 138
-------------------------------------------------------------------------
Earnings per common share
(in dollars)
basic 0.78 0.75 2.21 1.72
diluted 0.78 0.74 2.19 1.72
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at As at As at
September December September
30 31 30
(in millions of dollars) 2010 2009 2009
$ $ $
(unaudited) (unaudited)
Assets
Invested assets
Bonds 11,165 9,410 9,030
Mortgages 3,320 3,405 3,412
Stocks 2,088 1,896 1,785
Real estate 678 649 644
Policy loans 461 381 374
Cash and cash equivalents 587 382 199
Other invested assets 360 367 368
-------------------------------------------------------------------------
18,659 16,490 15,812
Other assets 816 658 647
Intangible assets 374 375 361
Goodwill 147 116 111
-------------------------------------------------------------------------
Total general fund assets 19,996 17,639 16,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segregated funds net assets 12,711 11,450 10,970
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Liabilities
Policy liabilities
Provisions for future policy benefits 15,192 13,392 12,923
Provisions for dividends to
policyholders and experience
rating refunds 49 60 49
Benefits payable and provision
for unreported claims 163 139 148
Policyholders' amounts on deposit 243 212 205
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15,647 13,803 13,325
Other liabilities 880 784 689
Future income tax 379 339 340
Net deferred gains 8 9 9
Debentures 529 520 524
Participating policyholders' account 27 26 28
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17,470 15,481 14,915
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Equity
Share capital 1,073 871 767
Contributed surplus 23 22 22
Retained earnings and accumulated
other comprehensive income 1,430 1,265 1,227
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2,526 2,158 2,016
-------------------------------------------------------------------------
Total general fund liabilities
and equity 19,996 17,639 16,931
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Segregated funds liabilities 12,711 11,450 10,970
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SEGMENTED INFORMATION
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The Company operates principally in one dominant industry segment, the life and health insurance industry, and offers individual and group life and health insurance products, savings and retirement plans, and segregated funds. The Company also operates mutual fund, securities brokerage and trust businesses. These businesses are principally related to the Individual Wealth Management segment and are included in that segment with the Individual Annuities. The Company operates in Canada and United States. The activities in United States represent less than 10% of the activities of the Company.
Segmented Income Statements
(in millions of dollars)
Quarters ended September 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 287 387 276 149 42 1,141
Net investment
income 440 39 31 93 1 604
Fees and other
revenues 5 96 3 7 1 112
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732 522 310 249 44 1,857
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Operating
expenses
Cost of
commitments to
policyholders 564 102 218 166 28 1,078
Net transfer to
segregated
funds - 312 - 70 - 382
Commissions,
general and
other expenses 120 83 78 8 12 301
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684 497 296 244 40 1,761
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Income before
income taxes 48 25 14 5 4 96
Less: income
taxes 11 7 3 2 2 25
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Net income
before
allocation of
other
activities 37 18 11 3 2 71
Allocation
of other
activities 2 - (1) 1 (2) -
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Net income 39 18 10 4 - 71
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Attributed to
shareholders 39 18 10 4 - 71
Attributed to
participating
policyholders - - - - - -
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-------------------------------------------------------------------------
(in millions of dollars)
Quarters ended September 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 239 282 248 195 36 1,000
Net investment
income 444 34 32 86 1 597
Fees and other
revenues 3 79 1 8 5 96
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686 395 281 289 42 1,693
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Operating
expenses
Cost of
commitments to
policyholders 541 80 195 228 22 1,066
Net transfer to
segregated
funds - 228 - 47 - 275
Commissions,
general and
other expenses 102 69 72 8 15 266
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643 377 267 283 37 1,607
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Income before
income taxes 43 18 14 6 5 86
Less: income
taxes 11 5 4 1 2 23
-------------------------------------------------------------------------
Net income
before
allocation of
other
activities 32 13 10 5 3 63
Allocation of
other
activities 3 - - - (3) -
-------------------------------------------------------------------------
Net income 35 13 10 5 - 63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 35 13 10 5 - 63
Attributed to
participating
policyholders - - - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Includes other segments and intercompany eliminations.
(in millions of dollars)
Nine months ended September 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 824 1,350 770 463 119 3,526
Net investment
income 878 102 80 226 5 1,291
Fees and other
revenues 15 276 8 25 1 325
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1,717 1,728 858 714 125 5,142
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Operating
expenses
Cost of commit-
ments to
policyholders 1,255 294 598 524 75 2,746
Net transfer
to segregated
funds - 1,107 - 146 - 1,253
Commissions,
general and
other
expenses 333 256 218 26 37 870
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1,588 1,657 816 696 112 4,869
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Income before
income taxes 129 71 42 18 13 273
Less: income
taxes 32 19 11 5 5 72
-------------------------------------------------------------------------
Net income
before
allocation of
other
activities 97 52 31 13 8 201
Allocation of
other
activities 7 - - 1 (8) -
-------------------------------------------------------------------------
Net income 104 52 31 14 - 201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 103 52 31 14 - 200
Attributed to
participating
policyholders 1 - - - - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars)
Nine months ended September 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Revenues
Premiums 697 870 718 573 103 2,961
Net investment
income 810 90 77 222 4 1,203
Fees and other
revenues 10 219 6 22 10 267
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1,517 1,179 801 817 117 4,431
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Operating
expenses
Cost of commit-
ments to
policyholders 1,100 280 563 586 72 2,601
Net transfer
to segregated
funds - 655 - 190 - 845
Commissions,
general and
other
expenses 303 206 208 27 38 782
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1,403 1,141 771 803 110 4,228
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Income before
income taxes 114 38 30 14 7 203
Less: income
taxes 28 11 9 3 3 54
-------------------------------------------------------------------------
Net income
before
allocation of
other
activities 86 27 21 11 4 149
Allocation of
other
activities 4 - - - (4) -
-------------------------------------------------------------------------
Net income 90 27 21 11 - 149
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributed to
shareholders 89 27 21 11 - 148
Attributed to
participating
policyholders 1 - - - - 1
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-------------------------------------------------------------------------
* Includes other segments and intercompany eliminations.
Segmented General Fund Assets
(in millions of dollars)
As at September 30, 2010 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 11,096 2,275 1,667 3,232 389 18,659
Other assets 343 186 99 49 139 816
Intangible
assets 53 317 2 2 - 374
Goodwill 86 41 20 - - 147
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Total 11,578 2,819 1,788 3,283 528 19,996
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-------------------------------------------------------------------------
(in millions of dollars)
As at December 31, 2009
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 9,274 2,128 1,607 3,128 353 16,490
Other assets 242 178 99 42 85 646
Intangible
assets 49 322 3 1 - 375
Goodwill 55 41 20 - - 116
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Total 9,620 2,669 1,729 3,171 438 17,627
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(in millions of dollars)
As at September 30, 2009 (unaudited)
Individual Group
Wealth Other
Life and Manage- Life and acti-
Health ment Health Pensions vities* Total
$ $ $ $ $ $
Assets
Invested
assets 8,683 1,953 1,712 3,166 298 15,812
Other assets 219 172 98 45 102 636
Intangible
assets 46 311 3 1 - 361
Goodwill 46 45 20 - - 111
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Total 8,994 2,481 1,833 3,212 400 16,920
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* Includes other segments and intercompany eliminations.
For further information: Grace Pollock, Investor Relations Director, Office: 418 780-5945, Cellular: 418 580-3350, Email: [email protected], Website: www.inalco.com
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