Sound operating performance despite the impact of severe spring storms
TORONTO, Aug. 13 /CNW/ - ING Canada Inc. (TSX: IIC) reported net
operating income of $109.5 million or $0.89 per share for the quarter ended
June 30, 2008 down from $132.5 million or $1.06 per share recorded in the same
quarter of last year as the severe June storms and the effects of an extended
winter impacted the underwriting results. Direct premiums written increased
marginally in the quarter to $1,216.7 million, excluding industry pools, as
the company remains committed to its disciplined approach to risk selection
and pricing.
Net income declined to $112.0 million or $0.91 per share down from
$194.3 million or $1.56 per share last year due mainly to the equity markets
weakness over the last year, which resulted in a significant reduction in
investment gains.
CEO's comments
Charles Brindamour, President and CEO, commented:
"Despite the impact of the weather conditions, our operating performance
during the quarter was sound with three of our four lines of business
achieving combined ratios below 90%. Excluding the effects of the severe
storms, operating profitability before taxes improved year-over-year.
"The June 10th hail storm that hit the Montreal South Shore alone
resulted in $26 million in damages bringing total claims losses for the three
most severe storms during the quarter to more than $40 million. Our home
insurance operation incurred a significant loss in the quarter as it continued
to be seriously impacted by the severe weather conditions, including hail,
rain, heavier precipitation and more intense windstorms. We continue to adapt
our pricing strategy to these new realities and continue to improve our
capabilities to better respond to the needs of our clients.
"Our investment activities continued to generate substantial interest and
dividend income but equity markets conditions resulted in minimal realized
investment gains. Our capital position remains strong and we are actively
proceeding with our share buyback program."
Dividend and share buyback
ING Canada declared a quarterly dividend of 31 cents per share on its
outstanding common shares. The dividend will be payable on September 30 to
shareholders of record on September 15. Since announcing its normal course
issuer bid earlier this year, the company has acquired for cancellation as of
July 31, 3.2 million shares for $120.0 million. These purchases are equivalent
to more than half of the planned buyback of 6.2 million shares.
Recent event
During the quarter, Moody's Investors Services initiated coverage of the
company and on July 16, it assigned a long-term issuer rating of A3 to
ING Canada and an insurance financial strength rating of Aa3 to its insurance
subsidiaries.
Current Outlook
Management's outlook for the industry for the next twelve months remains
unchanged.
- Both top-line growth and underwriting profitability of the property
and casualty insurance industry will move towards historical levels.
- The automobile insurance environment has been favourable for more
than three years both from a consumer and a competitive point of
view. The stable cost environment and the reforms adopted over the
years have been effective in making auto insurance more affordable
and available to consumers. However, accident benefit and bodily
injury claims in Ontario have risen and the cap on pain and suffering
awards for minor automobile accident injuries has been challenged in
Alberta. These developments will likely lead to premium increases.
- Increases in water-related damages caused by weather conditions and
construction costs inflation will likely drive increases in industry
premiums in personal property insurance.
- Commercial insurance continues to be very competitive and increases
in construction costs could put additional pressure on underwriting
margins. We remain disciplined in pricing and underwriting and
committed to superior service.
Consolidated Highlights
-------------------------------------------------------------------------
In millions of 2008 2007 Change 2008 2007 Change
dollars, except ---- ---- ------ ---- ---- ------
as otherwise noted Q2 Q2 YTD YTD
-- -- --- ---
Direct Premiums
Written 1,216.7 1,209.8 0.6% 2,077.0 2,056.1 1.0%
Underwriting
Income(1) 43.4 53.2 (18.4)% 44.2 91.8 (51.9)%
Net Operating
Income(2) 109.5 132.5 (17.4)% 179.6 245.2 (26.8)%
Net Income 112.0 194.3 (42.4)% 135.0 320.5 (57.9)%
Earnings Per
Share ($)
Basic and Diluted 0.91 1.56 (41.7)% 1.09 2.49 (56.2)%
Return on Equity -
last 12 months 10.3% 18.3% (8.0)pts
Combined Ratio
(excluding MYA) 95.6% 94.6% 1.0 pt 97.8% 95.3% 2.5 pts
-------------------------------------------------------------------------
(1) Underwriting income is defined as underwriting income excluding
market yield adjustment (MYA)
(2) Net operating income is defined as the sum of underwriting income,
interest and dividend income and corporate income after tax
Operating Highlights
- Direct premiums written reached $1,216.7 million during the quarter,
a 0.6% increase over the same quarter of last year. In home and auto
insurance, higher average amounts insured and higher rates for home
and auto insurance largely compensated the decline in the number of
risks insured. Competitive pressures in commercial insurance resulted
in a 1.5% decline in premiums despite a 3.0% increase in the number
of risks insured.
For the first six months of the year, direct premium written
increased by 1.0% as a result of rate increases to reflect the
increased cost of claims in auto and home insurance.
- Underwriting income, excluding MYA, for the quarter amounted to
$43.4 million down from $53.2 million from the corresponding quarter
of last year. The decline is the direct result of three severe storms
that resulted in $40.9 million in claims. The weather conditions were
also the major contributor to an underwriting loss of $45.7 million
in personal property. Auto insurance results improved slightly during
the quarter as well as those in commercial insurance with combined
ratios below 90%. Overall the combined ratio increased by
1.0 percentage point during the quarter to reach 95.6%.
Underwriting income does not include a positive market yield
adjustment of $31.5 million resulting from lower interest rates used
to discount claims liabilities. This adjustment, which reflects the
market yield during the quarter, was largely offset by losses on debt
securities held for trading.
For the first six months of the year, underwriting income declined to
$44.2 million due to the major storms that took place both during the
winter and spring months. Overall, there were five storms during the
first six months that resulted in claims expenses of more than
$5 million each for a total of $66.9 million compared to two storms
during 2007 for a total of $14.9 million.
- Interest and dividend income, net of expenses decreased slightly to
$81.7 million as a result of the share buyback program. For the first
six months of the year, interest and dividend income amounted to
$167.2 million compared to $173.6 million the year before.
- Net operating income, which is defined as the sum of underwriting
income, interest and dividend income and corporate income after tax,
decreased to $109.5 million during the quarter and to $179.6 for the
first six months mainly as a result of the impact of the severe
winter and spring storms.
Investments
- Net gains on invested assets declined significantly during the
quarter and the first six months of the year as a result of the
equity market conditions. Net gains for the quarter, excluding
held-for-trading debt securities, totalled to $0.6 million during the
quarter, down from $95.1 million last year. For the year to date, we
recorded a loss of $60.2 million compared to a gain of $123 million
during the corresponding period of last year.
Analyst Estimates
The average estimate of earnings per share and operating earnings per
share for the second quarter among the analysts that follow the company were
$1.05 and $0.92 respectively.
Conference Call
ING Canada will host a conference call to review its earnings results
later this morning at 10:00 am ET. To listen to the call via live audio
webcast and to view the presentation slides and supplementary financial
information, visit our website at www.ingcanada.com and click on "Investor
Relations".
The conference call is also available by dialling 416 644-3424 or
1-800-594-3615 (toll-free in North America). Please call ten minutes before
the start of the call.
A replay of the call will be available at 12:30 p.m. ET today through
11:59 p.m. ET on August 20. To listen to the replay, call 416 640-1917 or
1-877-289-8525 (toll-free in North America). The passcode is 21279004 followed
by the number sign. A transcript of the call will also be available on
ING Canada's website.
About ING Canada
ING Canada is the largest provider of property and casualty insurance in
the country with more than $4 billion in direct written premiums. ING Canada
offers automobile, property and liability insurance to individuals and
businesses through its insurance subsidiaries. The company's investment
subsidiary manages a portfolio of more than $7 billion, comprised mainly of
high quality Canadian securities.
ING
Management's Discussion and Analysis
For the second quarter ended June 30, 2008
Table of contents
Section 1 - ING Canada
Section 2 - Canadian property and casualty insurance industry outlook
Section 3 - Overview of consolidated performance
Section 4 - Personal lines
Section 5 - Commercial lines
Section 6 - Corporate and distribution
Section 7 - Financial condition
Section 8 - Accounting and disclosure matters
Section 9 - Risk management
Section 10 - Other matters
August 12, 2008
The following Management's Discussion and Analysis ("MD&A"), which was
approved by the Board of Directors for the quarter ended June 30, 2008, is
intended to enable the reader to assess the company's results of operations
and financial conditions for the three- and six-month periods ended June 30,
2008, compared to the corresponding periods. It should be read in conjunction
with the company's Unaudited Interim Consolidated Financial Statements and
accompanying notes, as well as the MD&A and the Consolidated Financial
Statements in the company's 2007 Annual Report.
The company uses both generally accepted accounting principles ("GAAP")
and certain non-GAAP measures to assess performance. Non-GAAP measures do not
have any standardized meaning prescribed by GAAP and are unlikely to be
comparable to any similar measures presented by other companies. ING Canada
analyzes performance based on underwriting ratios such as combined, general
expenses and claims ratios as well as other performance measures including and
excluding the market yield adjustment ("MYA") to claims liabilities. These
measures are defined in the company's glossary which is posted on the ING
Canada web site at www.ingcanada.com. Click on "Investor Relations" and
"Glossary" on the left navigation bar.
Forward-looking statements
This document contains forward-looking statements that involve risks and
uncertainties. The company's actual results could differ materially from these
forward-looking statements as a result of various factors, including those
discussed hereinafter or in the company's 2007 Annual Information Form. Please
read the cautionary note in section 10.2 of this document.
Certain totals, subtotals and percentages may not agree due to rounding.
Additional information about ING Canada, including the Annual Information
Form, may be found online on SEDAR at www.sedar.com. A change column has been
provided for convenience showing the variation between the current period and
the prior period. Not applicable (n/a) is used to indicate that the current
and prior year figures are not comparable or if the percentage change exceeds
1,000%.
Notes:
- All references to direct premiums written in this MD&A exclude pools,
unless otherwise noted.
- "ING", "ING Canada" and "the company" are terms used throughout the
document to refer to ING Canada Inc. and its subsidiaries.
Section 1 - ING Canada
1.1 Overview of the business
ING Canada is the largest provider of property and casualty ("P&C")
insurance in Canada offering automobile, property and liability insurance to
approximately four million individuals and businesses across Canada. Overall,
the company has an approximate 11% market share and is the leading private
sector P&C insurer in Ontario, Quebec, Alberta and Nova Scotia. ING Canada
distributes insurance through brokers under the ING Insurance and Grey Power
brands, and direct-to-consumers through belairdirect. ING Canada's investment
management subsidiary manages the invested assets of the company and its
insurance subsidiaries.
Section 2 - Canadian property and casualty insurance industry outlook
Management expects that several key factors will affect the Canadian P&C
insurance industry over the coming 12 months.
ING Canada, with its scale advantage, underwriting discipline and pricing
sophistication, is well positioned to capitalize on the above conditions and
continue to outperform the industry's return on equity for the foreseeable
future. Our distinct product and service proposition delivered through a
multi-channel distribution network will be a key driver in fuelling organic
growth.
Industry growth and underwriting income
We anticipate that industry underwriting profitability and premium growth
will move towards long-term historical averages.
-------------------------------------------------------------------------
Automobile insurance
The automobile insurance environment has been favourable for more than
three years from both a consumer and a competitive point of view. The reforms
adopted over the years have been effective at helping to contain and stabilize
claims costs. As a result, auto insurance products have become more affordable
and available to consumers. However, certain developments, such as the
following, will likely lead to premium increases:
Ontario
Accident benefit and bodily injury ("AB/BI") claims have risen recently.
This issue will be addressed as part of the five-year review of the Insurance
Act, which is expected to conclude in late 2008.
Alberta
The Alberta government is appealing an Alberta Court decision in
February 2008 to lift the $4,000 cap on pain and suffering claims for minor
injuries (Minor Injury Regulation or "MIR"). The appeal hearing is scheduled
for September 2008. Industry participants need to assess the potential impact
on claims costs and premiums.
-------------------------------------------------------------------------
Personal property insurance
Increases in water-related property damages caused by seasonal storm
activity as well as material and labour cost inflation have contributed to
higher claims ratios in the personal property segment. Construction cost
inflation and rate activity will likely drive increases in industry premiums
in personal property insurance.
-------------------------------------------------------------------------
Commercial insurance
Commercial insurance continues to be highly competitive. Rates on large
commercial accounts are under more pressure than small and medium commercial
accounts. Higher material and labour costs could also put pressure on
underwriting margins in commercial property insurance.
Section 3 - Overview of consolidated performance
Second quarter highlights
- Sound underwriting performance despite severe seasonal storms in
Central Canada
- Combined ratios below 90% in all lines of business except personal
property
- Higher underwriting income excluding catastrophes, reflecting strong
execution and continued pricing discipline
- Significantly lower equity gains compared to the second quarter of
2007
Consolidated financial results
Table 1 - Components of net income
(in millions of
dollars, except as YTD YTD
otherwise noted) Q2-2008 Q2-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Written insured
risks (thousands) 1,380.6 1,399.7 (1.4)% 2,326.4 2,350.1 (1.0)%
Direct premiums
written
(excluding pools) 1,216.7 1,209.8 0.6% 2,077.0 2,056.1 1.0%
Underwriting income
(excluding MYA) 43.4 53.2 (18.4)% 44.2 91.8 (51.9)%
Combined ratio
(excluding MYA) 95.6% 94.6% 1.0 pts 97.8% 95.3% 2.5 pts
Interest and
dividend income,
net of expenses
(table 7) 81.7 86.9 (6.0)% 167.2 173.6 (3.7)%
(Losses) gains on
invested assets
and other gains
(table 8) (28.7) 53.6 (153.5)% (54.5) 79.7 (168.4)%
Income before
income taxes 140.8 250.8 (43.9)% 163.0 422.2 (61.4)%
Income tax expense 28.8 56.5 (49.0)% 28.0 101.7 (72.5)%
Effective income
tax rate 20.5% 22.5% (2.0)pts 17.1% 24.1% (7.0)pts
Net income 112.0 194.3 (42.4)% 135.0 320.5 (57.9)%
Net operating income
(table 17) 109.5 132.5 (17.4)% 179.6 245.2 (26.8)%
-------------------------------------------------------------------------
Earnings per share
("EPS") - basic and
diluted (dollars) 0.91 1.56 (41.7)% 1.09 2.49 (56.2)%
Net operating income
per share (dollars) 0.89 1.06 (16.0)% 1.45 1.90 (23.7)%
-------------------------------------------------------------------------
Return on equity
("ROE") for the
last 12 months 10.3% 18.3% (8.0)pts
Book value per
share (dollars) 25.19 25.55 (0.36)
-------------------------------------------------------------------------
3.1 Explanation of consolidated financial results
Table 2 - Changes in pre-tax operating income (year-over-year)
(in millions of dollars,
except as otherwise noted) Q2-2008 YTD 2008
-------------------------------------------------------------------------
Pre-tax operating income, as reported in 2007 158.0 301.6
Higher favourable prior year claims
development 35.7 24.3
Current accident year:
Lower current accident year
underwriting income (22.7) (17.4)
Higher losses from catastrophes (26.0) (52.0)
Higher (lower) results from Facility
Association 3.1 (2.5)
Change in underwriting income excluding MYA (9.9) (47.6)
Lower interest and dividend income,
net of expenses (5.2) (6.4)
Corporate and distribution (5.0) (20.2)
Pre-tax operating income, as reported in 2008 137.9 227.4
-------------------------------------------------------------------------
Pre-tax operating income is a non-GAAP measure.
Table 3 - Changes in income before income taxes (year-over-year)
(in millions of dollars, except as otherwise noted) Q2-2008 YTD 2008
-------------------------------------------------------------------------
Income before income taxes, as reported in 2007 250.8 422.2
Change in net gains on invested assets and
other gains excluding held for trading ("HFT")
debt securities (table 8) (94.5) (183.2)
Change in pre-tax operating income (table 2) (20.1) (74.2)
Market yield effect (table 9) 4.6 (1.8)
Income before income taxes, as reported in 2008 140.8 163.0
Income tax (28.8) (28.0)
Net income as reported in 2008 112.0 135.0
-------------------------------------------------------------------------
Second quarter 2008
Continued pricing discipline across all lines of business is reflected in
direct premium written growth of 0.6%. In personal lines, unit growth slowed
as we raised premiums in response to cost inflation both in personal auto and
personal property, and an increase in water-related property claims in certain
geographic areas. In commercial lines, our portfolio has shifted toward small
and medium-sized commercial accounts that tend to be less price-sensitive in
the current, highly-competitive environment. In addition, we have been
adjusting our commercial premiums for building cost inflation which has risen
significantly in certain regions, affecting property reconstruction costs.
These actions demonstrate our commitment to sustaining appropriate margins in
our underwriting business, even if it results in a slower pace of growth in
the near-term.
Second quarter underwriting performance was sound despite severe hail,
wind and rain storms in Central Canada and the late spring runoff of heavy
snow accumulated in the first quarter in the same region. These storms
resulted in significantly higher claims, including $40.9 million in
catastrophe claims alone. Combined ratios were below 90% in all lines of
business except personal property, notwithstanding the harsh weather
conditions. Excluding current year catastrophes, underwriting income increased
year-over-year by $16.2 million.
Personal auto results remained stable with a combined ratio of 89.2%.
Underwriting income improved slightly over the same quarter last year as
favourable prior year claims development increased. Current accident year
results were unchanged year-over-year despite the severe seasonal storms.
Personal property results in the second quarter were most affected by the
melting of snow accumulated earlier in the year and severe seasonal storms in
the second quarter, contributing to the underwriting loss in the quarter.
Commercial underwriting income increased year-over-year with a combined
ratio of 87.3%, demonstrating strong execution of our strategy and commitment
to maintaining a high quality portfolio. Though competition remains aggressive
in this segment, our commercial units have continued to grow. At the same
time, we have maintained our pricing discipline with only low single-digit
rate decreases over the last 18 months.
On the investment side, interest and dividend income was $81.7 million,
slightly lower than in the second quarter of 2007. The decrease was due to a
decline in market yields as well as a lower asset base reflecting ongoing
capital management initiatives, including the normal course issuer bid
announced in February 2008. Continued weakness in Canadian equity markets over
the last year, specifically in the financial sector, resulted in lower equity
gains net of derivatives, compared to the same quarter last year. In total, we
had a minimal gain on invested assets including derivatives, of $0.6 million,
excluding losses on held-for-trading bonds which were more than offset by the
market yield adjustment to claims liabilities. Gains and losses on invested
assets are discussed in section 3.4.
Overall, net operating income decreased year-over-year by $23.0 million
to $109.5 million, mainly due to a $26.0 million increase in catastrophe
claims. Net income decreased to $112.0 million in the second quarter, compared
to $194.3 million in the same quarter last year. The drop reflects lower
operating income and a decrease in recognized gains on invested assets, mainly
in the common stock portfolio.
Year-to-date 2008
Direct premiums written increased by 1.0% overall, driven mainly by
higher average premiums in personal insurance. As mentioned in the second
quarter discussion above, rates in personal lines are being adjusted to
reflect cost inflation and higher water-related property claims. The
commercial business has remained robust due to our pricing discipline and
portfolio shift toward smaller accounts that tend to be less price-sensitive
in the current market compared to larger commercial accounts.
Year-to-date, underwriting income declined to $44.2 million compared to
$91.8 million in the first half of 2007 mainly due to seasonal storms in the
first and second quarters. The storms led to higher overall claims, including
$66.9 million in catastrophe claims compared to $14.9 million in catastrophe
claims over the same period in 2007. In Central Canada, we experienced
near-record snowfall in the first quarter and severe hail, rain and wind
storms in the second quarter.
Current year results in personal auto were stable year-over-year despite
the storms. Prior year claims development was slightly more favourable in
personal auto in the first half of 2008 despite an increase in a provision for
Alberta auto claims in the first quarter. Personal property underwriting
results were most impacted by the seasonal storms, resulting in a loss of
$61.1 million year-to-date, a large portion of which was related to
catastrophe claims. In commercial lines, underwriting income increased
markedly year-over-year due to more favourable prior year claims development.
Overall, net income decreased to $135.0 million, down from $320.5 million
in the first six months of last year. The drop reflects lower operating income
and recognized investment losses, mainly in the common stock portfolio.
Unfavourable financial market conditions over the last year, particularly in
the financial sector contributed to the losses in the equity portfolio,
compared to large gains in the same period of 2007. In addition, we had an
unrealized loss position in the available for sale ("AFS") common share
portfolio at the beginning of 2008 versus an unrealized gain position at the
start of 2007. Refer to table 10 for more information on unrealized gains and
losses on AFS securities.
The company's cash flow and capital position remain strong, and
management remains confident that the investment strategy of managing for
total return provides superior long-term value.
Return on equity
ROE for the 12-month period ending June 30, 2008 was 10.3% compared to
18.3% at June 30, 2007, reflecting lower net income explained above.
Book value
Book value per share decreased to $25.19 in the second quarter from
$25.55 in the same quarter last year as shares were repurchased for
cancellation under the normal course issuer bid announced on February 20,
2008.
Progress on normal course issuer bid ("NCIB")
The NCIB was announced on February 20, 2008. As at July 31, 2008, the
company had acquired for cancellation 3,165,934 shares for $120.0 million,
which is equivalent to 50.9% of the planned buyback of 6.2 million shares. The
reduction in the number of outstanding shares positively impacts earnings per
share.
ING Groep has participated proportionately in the share buyback to
maintain its ownership at 70%.
Recent events
On July 31, 2008, the Alberta Insurance Rate Board ("AIRB") approved a
5.0% rate increase on mandatory automobile insurance coverages as part of its
annual rate review. The increase will be effective on November 1, 2008.
On July 16, 2008, Moody's Investors Services initiated coverage of
ING Canada, assigning a long-term issuer rating of A3 and an insurance
financial strength rating of Aa3 to its insurance subsidiaries.
3.2 Underwriting income
Table 4 - Net premiums earned, claims and general expenses
(in millions of
dollars, except as YTD YTD
otherwise noted) Q2-2008 Q2-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Net premiums earned 996.1 976.7 2.0% 1,987.9 1,933.3 2.8%
Net claims:
Current year claims
(excluding MYA) 668.5 630.7 6.0% 1,334.7 1,268.7 5.2%
Current year
catastrophes 40.9 14.9 26.0 66.9 14.9 52.0
(Favourable) prior
year claims
development
(excluding MYA) (41.2) (5.2) (36.0) (40.3) (15.9) (24.4)
Total net claims
(excluding MYA) 668.2 640.4 4.3% 1,361.3 1,267.7 7.4%
Commissions, net 135.9 147.6 (7.9)% 284.5 301.2 (5.5)%
Premium taxes, net 34.6 34.0 1.8% 69.3 67.6 2.5%
General expenses,
net 114.0 101.5 12.3% 228.6 205.0 11.5%
Total underwriting
expenses 284.5 283.1 0.5% 582.4 573.8 1.5%
Total underwriting
income (excluding
MYA) 43.4 53.2 18.4% 44.2 91.8 (51.8)%
-------------------------------------------------------------------------
Table 5 - Underwriting ratios (excluding MYA)
YTD YTD
Q2-2008 Q2-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Claims ratio 67.1% 65.6% 1.5 pts 68.5% 65.6% 2.9 pts
Expense ratio 28.5% 29.0% (0.5)pts 29.3% 29.7% (0.4)pts
Combined ratio 95.6% 94.6% 1.0 pts 97.8% 95.3% 2.5 pts
-------------------------------------------------------------------------
Table 6 - Annualized rate of favourable prior year claims development
YTD YTD YTD
(annualized rate, excluding MYA) Q2-2008 2008 2007 2006
-------------------------------------------------------------------------
(Favourable) unfavourable prior
year claims development as a %
of opening reserves (4.4)% (2.2)% (2.9)% (4.9)%
-------------------------------------------------------------------------
Second quarter and year-to-date 2008
Current year claims (excluding MYA) were negatively impacted by severe
seasonal storms in the second quarter, including $40.9 million in catastrophe
claims. Year-to-date, total catastrophe claims were $66.9 million which
includes $26.0 million related to harsh winter storms in the first quarter. A
catastrophe is defined as a single event resulting in $5.0 million or more in
aggregate claims.
Underwriting results fluctuate due to the normal seasonality of the
business and therefore combined ratios are typically highest in the first and
fourth quarters of each year. However, winter and spring seasonal storms in
the first half of the year were worse than normal with near-record snowfall in
Central Canada in the first quarter and severe hail storms and rain in the
second quarter. A very severe hail storm on the south shore of Montreal
accounted for more than half of the catastrophe claims recorded in the
quarter. Overall, in the first half of 2008, precipitation levels increased
from 20%-70% in major cities across Central Canada compared to the same period
in 2007. The winter storms primarily affected property insurance results and
the hail storms impacted both personal property and personal auto results. We
are continuously monitoring changes in weather trends and claims experience
and enhancing our pricing strategies and claims management capabilities to
adapt to climate change.
Favourable prior year claims development (excluding MYA) was
$41.2 million in the second quarter, 4.4% of opening reserves on an annualized
basis, and $40.3 million year-to-date, or 2.2% of opening reserves,
annualized. Prior year claims development can fluctuate from quarter to
quarter and therefore should be evaluated over longer periods of time. The
historical rate of favourable prior year claims development as a percentage of
opening claims has been approximately 3%-4% per year, but has varied from year
to year.
Variable commissions were down in the second quarter as a result of lower
underwriting income.
The expense ratio improved year-over-year reflecting a decrease in
variable commissions and increased general expenses as our direct channel
experienced relatively higher growth.
Industry pools
Industry pools consist of the "residual market" as well as risk-sharing
pools ("RSP") in Alberta, Ontario, Quebec, New Brunswick and Nova Scotia.
These pools are managed by the Facility Association except the Quebec RSP. In
the second quarter, the net effect of transfers in and out of these pools,
including the Facility Association, lowered year-over-year personal auto
underwriting income by $13.2 million, excluding the market yield adjustment.
3.3 Interest and dividend income, net of expenses
Table 7
(in millions of
dollars, except as YTD YTD
otherwise noted) Q2-2008 Q2-2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Interest income 45.4 47.3 (4.0)% 93.9 97.9 (4.1)%
Dividend income 40.5 44.6 (9.2)% 81.7 85.5 (4.4)%
Interest and
dividend income,
before expenses 85.9 91.9 (6.5)% 175.6 183.4 (4.3)%
Expenses (4.2) (5.0) 0.8 (8.4) (9.8) 1.4
Interest and
dividend income,
net of expenses 81.7 86.9 (6.0)% 167.2 173.6 (3.7)%
-------------------------------------------------------------------------
Market-based yield 4.9% 5.1% (0.2)pts
-------------------------------------------------------------------------
The decline in interest and dividend income (before expenses) in the
second quarter of 2008 and year-to-date reflects a lower invested asset base
as ongoing capital management initiatives are executed, including the ongoing
share buyback program (NCIB) announced in February 2008.
The market-based yield is a non-GAAP measure defined as total pre-tax
dividend and interest income (before expenses) divided by the average fair
values of equity and debt securities held during the reporting period. The
market-based yield was 4.9% in the second quarter, down from 5.1% in the same
quarter of last year. This measure may not be comparable to other companies
since it is a non-GAAP measure.
3.4 Gains and losses on invested assets and other gains
Table 8
(in millions of
dollars, except as YTD YTD
otherwise noted) Q2-2008 Q2-2007 Change 2008 2007 Change
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Debt securities
Gains (losses) on
AFS securities 0.8 (5.8) 6.6 3.2 (1.2) 4.4
Gains on derivatives 1.7 15.1 (13.4) 1.0 14.8 (13.8)
Impairments (1.0) (1.3) 0.3 (12.0) (1.3) (10.7)
Gains (losses) on
debt securities and
related derivatives 1.5 8.0 (6.5) (7.8) 12.3 (20.1)
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Equity securities
Gains (losses), net
of derivatives 13.1 87.1 (74.0) (8.8) 123.3 (132.1)
Impairments (11.8) - (11.8) (53.6) (12.6) (41.0)
(Losses) gains
on embedded
derivatives (2.2) - (2.2) 10.0 - 10.0
(Losses) gains on
equity securities
and related
derivatives (0.9) 87.1 (88.0) (52.4) 110.7 (163.1)
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Total gains (losses)
excluding HFT debt
securities 0.6 95.1 (94.5) (60.2) 123.0 (183.2)
(Losses) gains on HFT
debt securities(1) (29.3) (41.5) 12.2 5.7 (43.3) 49.0
Total (losses) gains,
before income taxes (28.7) 53.6 (82.3) (54.5) 79.7 (134.2)
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(1) The (losses) gains on HFT debt securities are offset by a MYA to
claims liabilities, with an objective of a minimal impact to net
income. The difference between the MYA and the gains and losses on
HFT debt securities is referred to as the "market yield effect" in
this MD&A. See table 9.
Second quarter and year-to-date 2008
In the second quarter, we recorded a pre-tax gain of $0.6 million on
invested assets net of derivatives, excluding held for trading debt
securities, a decrease of $94.5 million compared to the same quarter last
year. Year-to-date, we had a loss of $60.2 million versus a gain of
$123.0 million in the comparable period in 2007. The declines were largely due
to generally weak equity market conditions, mainly in the financial sector,
that have persisted over the last year. These factors are described in more
detail below.
Debt securities
In the second quarter, we recorded $1.5 million in gains on AFS debt
securities compared to $8.0 million in the same quarter last year.
The decrease reflects significantly lower trading activity in the
fixed income portfolio and higher interest rates. Year-to-date, we
incurred total losses of $7.8 million on AFS debt securities,
reflecting $12.0 million in impairments on structured investment
vehicles ("SIV") as a result of unfavourable credit market
conditions. As of June 30, 2008, we had a remaining total exposure to
SIVs of $7.8 million.
Equity securities
We recorded a loss on equity securities of $0.9 million compared to
gains of $87.1 million in the same quarter last year. On a
year-to-date basis, we recorded losses of $52.4 million in the equity
portfolio, compared to a gain of $110.7 million in the same period of
2007. The declines reflect equity market weakness over the last year,
particularly in the financial sector where we have higher exposure.
The AFS common share portfolio also had a significant unrealized loss
position at the beginning of 2008 versus a large unrealized gain
position at the start of 2007.
Held-for-trading debt securities and market yield adjustment
Table 9 - Market yield effect
(in millions of
dollars, except as YTD YTD
otherwise noted) Q2-2008 Q2-2007 Change 2008 2007 Change
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Positive (negative)
impact of MYA 31.5 39.1 (7.6) (10.0) 40.8 (50.8)
Net (losses) gains on
HFT debt securities (29.3) (41.5) 12.2 5.7 (43.3) 49.0
Market yield effect 2.2 (2.4) 4.6 (4.3) (2.5) (1.8)
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The MYA to claims liabilities is offset by gains and losses on HFT debt
securities with the objective that these items offset each other with a
minimal overall impact to income. The difference between the MYA and the gains
and losses on HFT debt securities is referred to as the "market yield effect"
in this MD&A. Claims liabilities are discounted at market interest rates which
are determined monthly, following the adoption of accounting standards
introduced in January 2007.
We recorded a $29.3 million loss on HFT debt securities caused by a
decline in the bond market in the second quarter.
