Industrial Alliance Continues to Grow its Net Income in the First Quarter of 2008

Transcription

1 Industrial Alliance Continues to Grow its Net Income in the First Quarter of 2008 Quebec City, May 7, 2008 Industrial Alliance Insurance and Financial Services Inc. ("Industrial Alliance" or "the Company") ended the first quarter of 2008 with net income available to common shareholders of $61,7 million, a 7% increase compared to the corresponding income the previous year. This income translates into diluted earnings per common share of $0.76 ($0.72 in the first quarter of 2007) and a return on equity to common shareholders of 14.4% (on an annualized basis), which is in the middle of the Company's 13% to 15% target range. The income for the quarter takes into account a temporary accounting loss of $1.6 million ($0.02 per common share) resulting from the asymmetric evolution of the market value of debt instruments and the underlying assets. This shortfall will be recovered by the time the debt instruments mature and does not affect the quality of the Company's results. Excluding this item, net income for the quarter totalled $63.3 million, which is 9% higher than the same period the previous year. Earnings per common share amounted to $0.78 and the return on equity to common shareholders was 14.8%. In terms of business growth, the three insurance product sectors (Individual Insurance, Group Insurance and General Insurance) continued to grow during the quarter, while growth in the savings and investment product sectors was impeded by the stock market decline and volatility. All in all, after a long period of uninterrupted growth, the Company recorded its first decrease in premiums and deposits in four years, with premiums and deposits totalling $1.4 billion in the first quarter of 2008, down 16% compared to the same period last year. "We are pleased that we can continue to grow income close to our low double-digit guidance, despite an uncertain economic environment," stated Yvon Charest, President and Chief Executive Officer. "We also maintained strict management of profit margins and sales in the Individual Insurance sector and the quality of our investments remains high. In these uncertain times, we continue to focus on what we do best: work to grow our distribution networks in order to profit from growth when the markets recover." Highlights First quarter (Millions of dollars, unless otherwise indicated) Variation Net income to common shareholders % Net effect of the variation in the fair value of the debt instruments and the underlying assets Net income to common shareholders, adjusted % Earnings per common share (diluted) $0.76 $0.72 $0.04 Earnings per common share (diluted), adjusted $0.78 $0.72 $0.06 Return on common shareholders equity % 15.2% (80 bps) Return on common shareholders equity 1, adjusted 14.8% 15.2% (40 bps) Premiums and deposits 1, ,694.0 (16%) March 31, 2008 December 31, 2007 March 31, 2007 Assets under management and under administration 50, , ,995.3

2 Profitability Following are the main highlights of the first quarter in terms of profitability. 2 Main factors that affected the income Income for the quarter was affected by several non-recurring items, some favourable, others not, but which, in total, cancel each other out. The three main unfavourable items are:! The profit in the Individual Wealth Management sector was $1.8 million lower than expected (before tax), primarily due to the stock market decline.! The Group Insurance sector suffered a $3.0 million experience loss (before tax) due to poor long-term disability results.! The auto and home insurance subsidiary ended the quarter with a $2.1 million loss (before tax), due to poor climatic conditions this winter. These items were offset by the following two favourable items:! A $2.9 million recovery of GST (before tax), following an in-depth review of the Company's practices.! A $4.0 million tax gain following two favourable rulings by the court against the tax authorities. These proceedings arose during the audit, by the tax authorities, of the 2001 and 2002 financial years. Impact of the new accounting standards on debt instruments The asymmetric evolution of the market value of debt instruments and the assets matching them created a temporary accounting loss of $1.6 million ($0.02 per common share) in the first quarter. This is the third consecutive quarter where this item has had a significant impact on the Company's results ($0.03 increase in earnings per share in the third quarter of 2007 and $0.02 decrease in earnings per share in the fourth quarter of 2007). Debt instruments were classified as "held-for-trading" when the new accounting standards took effect. Any difference between the variation in the market value of debt instruments and the corresponding assets will be recovered by the time the debt instruments mature. The residual balance of the latent net income was $3.3 million as at March 31, New business strain Good strain management continued in the Individual Insurance sector, with strain totalling 56% of sales in the first quarter of 2008 compared to 55% in the first quarter of This rate is in line with the Company's expectations of a 50% to 55% strain rate in the medium term. Asset-backed commercial paper (ABCP) After analyzing the documentation sent by the Crawford committee on the composition of non-bank ABCP assets in the various conduits covered by the Montreal Agreement, the Company is confident that the 15% writedown on the fair value posted in the third quarter of 2007 is still adequate. Effective tax rate Excluding the $4.0 million tax gain mentioned above, the effective tax rate was 28.0% in the first quarter, which is in line with the Company's expectations. Contribution of Excellence Excellence helped to improve the Company's earnings by $0.01 per common share in the first quarter. This result is in keeping with the Company's expectations that Excellence will help to increase the Company's earnings per share by $0.04 in The acquisition of Excellence was completed on January 31, 2008.

3 Business Growth Following are the main highlights of the first quarter in terms of business growth. 3 Premiums and deposits In terms of business growth, the three insurance product sectors (Individual Insurance, Group Insurance and General Insurance) continued to grow during the quarter, while growth in the savings and investment product sectors was impeded by the stock market decline and volatility. All in all, after a long period of uninterrupted growth, the Company recorded its first decrease in premiums and deposits in four years, with premiums and deposits totalling $1.4 billion in the first quarter of 2008, down 16% compared to the same period last year. Premiums and Deposits First quarter (Millions of dollars, unless otherwise indicated) Variation Individual Insurance % Individual Wealth Management (20%) Group Insurance % Group Pensions (41%) General Insurance % Total 1, ,694.0 (16%) Sales Following are the main highlights of sales growth by line of business.! Sales in the Individual Insurance sector continued their momentum of the last two quarters, recording a 6% increase compared to the same period last year. Sales were particularly good in the Career and general agent networks. Universal Life policy sales were up 2% during the quarter, with a significant increase in level cost insurance policies (14% increase), but a decrease for yearly renewable term policies (YRT; 12% decline). The improvements made to level cost Universal Life policies in the last year continued to pay off, as the weakness and volatility of the stock markets affected YRT policies, which generally contain a substantial savings component. However, the number of policies sold during the quarter is up more than 8%, a reflection of the sector's vitality.! Individual Wealth Management sales were affected by the weak markets, suffering the first decline (20%) after several consecutive quarters of increases. Only sales of guaranteed products have grown, since segregated and mutual fund sales are both down compared to last year. Net investment fund sales remain positive ($220 million for the first quarter). The Company's wide range of funds, their good performance in the last few months and the size of the Company's distribution networks should contribute to getting sales back on track once the markets are more stable.! Group Insurance Employee Plan sales reached a new high of $27.8 million in the first quarter, a 15% increase compared to the same period last year. Sales were good in almost all regions, thanks to the underwriting of several groups in our target market of medium sized groups. The Company was ranked fourth in Canada in the first quarter for groups with 50 to 999 employees, with a 10.0% market share.! Growth continued in the Group Creditor Insurance sector, with a 3% increase in sales compared to the same quarter last year. This is the fourteenth consecutive quarter of increased sales in this sector (year over year). The sector's success relies on expansion of the client dealer base (the product's primary distributors) and increased penetration among the dealers' clientele.! Special Markets Group continues to grow steadily, with a 4% increase in sales compared to the same period the previous year. This result is even more satisfactory since sales were very strong in the first quarter of 2007.

4 4! Even though the Group Pensions sector signed several good contracts in the first quarter, the Company will only receive the funds later in the year, which forces the sector for the time being to record a 41% decrease in sales in the first quarter compared to the same period last year. Sales are down in both the accumulation products segment and insured annuities. Sales in the Group Pensions sector are subject to volatility, given the size of the mandates it is sometimes granted. Sales 2 First quarter (Millions of dollars, unless otherwise indicated) Variation Individual Insurance % Individual Wealth Management General fund % Segregated funds (23%) Mutual funds (23%) Total (20%) Group Insurance Employee Plans % Creditor Insurance % Special Markets Group (SMG) % Group Pensions (41%) Assets under management and under administration Premium growth in the insurance sectors and positive net segregated fund and mutual fund sales were sufficient to erase the impact of the stock market downturn in the first quarter, so that assets under management amounted to $32.8 billion as at March 31, 2008, exactly the same amount as at December 31, Assets under administration also remained relatively stable during the quarter, totalling $17.5 billion as at March 31, Net sales and positive net transfers erased a good portion of the negative variations in the market value of assets in the mutual fund and securities brokerage subsidiaries. Assets under management and under administration totalled $50.3 billion as at March 31, 2008, which is $85.1 million less than December 31, 2007, but $331.2 million higher than at March 31, Assets Under Management and Under Administration (Millions of dollars) March 31, 2008 December 31, 2007 March 31, 2007 Assets under management 32, , ,432.5 Assets under administration 17, , ,562.8 Total 50, , ,995.3 Value of new business The value of new business decreased by 8% (or $2.7 million) in the first quarter, compared to the same period last year, amounting to $32.2 million ($0.40 per common share). This is the first decline in the value of new business in five years. The decline in sales resulted in a $4.4 million decrease in the value of new business, primarily due to weak segregated fund and mutual fund sales. This decrease was partially offset by improved profit margins in almost all lines of business, which increased the value of new business by $1.7 million. Financial Solidity Following are the main highlights of the first quarter in terms of financial solidity. Capitalization The Company's capital totalled $2.2 billion as at March 31, This represents an $85.3 million (or 4%) increase compared to December 31, This increase comes primarily from the increase in retained earnings for the period, the contribution of a $12.0 million debenture belonging to Excellence and the net issuance of 399,908 common shares during the quarter.

5 5 Share issues and buy-backs The Company issued 597,158 common shares during the quarter. These shares were issued following the acquisition of Excellence and the exercise of options under the Company's stock option plan. The Company also bought back 197,250 common shares in the first quarter, after buying back 391,000 at the end of The dilutive effect created by the issue of common shares as part of the acquisition of Excellence, as well as a portion of the dilutive effect created by those issued under the stock option plan, has thus been eliminated. Financial leverage The Company still has a great deal of flexibility in terms of financial leverage, since the debt ratio amounted to 14.8% as at March 31, 2008 (14.5% as at December 31, 2007), if the debentures alone are included in the debt items, and 20.4% (20.4% as at December 31, 2007) if the preferred shares are added. Solvency The solvency ratio decreased by five percentage points during the quarter, totalling 188% as at March 31, 2008, compared to 193% as at December 31, This ratio is in the middle of the Company's 175% to 200% target range. The decrease in the ratio is primarily explained by the acquisition of Excellence, which led to a decrease in the available capital and an increase in the required capital, and by the gradual recognition over two years of the impact of the new accounting standards that took effect at the beginning of These two items were partially offset by the usual contribution of the net income to the available capital (net of the normal increase in the required capital related to business growth) and by the net issuance of common shares. Excess capital The excess capital decreased in the first quarter, from $171 million as at December 31, 2007 to $130 million as at March 31, This decrease is primarily due to the acquisition of Excellence, which led to the posting of goodwill and an increase in the required capital, and the impact of the new accounting standards, which will continue to slow the normal growth of excess capital until the fourth quarter of Quality of investments The quality of investments remained excellent in the first quarter. Only the mortgage portfolio's quality index declined somewhat, due to three small conventional loans that defaulted in the U.S. These loans total $5.8 million and the Company doesn't expect to incur any losses on them. These defaults, which affect two multiresidential buildings, are not related to the current subprime mortgage loan crisis in the U.S. (which mainly affects the residential market). The addition of these loans to the list of amounts in default increased the mortgage loan delinquency rate from 0.16% as at December 31, 2007 to 0.33% as at March 31, However, the quality of the mortgage portfolio remains excellent, with delinquent loans representing just $10.0 million of a $3.0 billion portfolio. Net impaired investments totalled $17.1 million as at March 31, 2008 ($11.7 million as at December 31, 2007), which represents just 0.12% of total investments (0.08% as at December 31, 2007). No bonds defaulted during the quarter and the portfolio does not contain any new bonds rated BB and lower. Industrial Alliance does not have any investments in the U.S. subprime mortgage loans market. Acquisition of a U.S. Shell Company: United Family Life Insurance Company Industrial Alliance has concluded an agreement with Assurant, Inc., to acquire its wholly-owned subsidiary, United Family Life Insurance Company, a corporation closed to new business. This acquisition allows Industrial Alliance to obtain licenses to operate from a U.S. subsidiary in 49 of the 50 states in the United States. The acquisition closed on May 1, Once regulatory approval is received, United Family Life will be rebranded IA American Life Insurance Company, which will become a wholly-owned subsidiary of Industrial Alliance. The purchase price for the United Family Life licences totals US$3 million. An additional amount of US$30 million was paid for United Family Life s capital and surplus. United Family Life s in-force business (about US$565 million in reserves) is being, and will continue to be, reinsured and administered by Union Security Insurance Company, another wholly-owned subsidiary of Assurant. Founded in 1940, United Family Life manufactured and distributed pre-funded funeral insurance. Assurant is a specialized U.S. life and health insurance provider. It had $27 billion in assets as at December 31, 2007.

6 6 Industrial Alliance operates a U.S. branch from its Vancouver-based wholly-owned subsidiary, Industrial Alliance Pacific Insurance and Financial Services Inc. Industrial Alliance Pacific distributes individual life and annuity products in the Western United States, mainly in California, Texas and Arizona. Industrial Alliance Pacific s U.S. operations account for some 1% of Industrial Alliance s premiums and deposits. After carefully reviewing its strategy, Industrial Alliance decided to grow its U.S. operations by establishing a solid U.S. local presence. In 2007, the Company opened an office in Phoenix, Arizona. The office has some 15 employees, following the relocation of high touch functions involving high agent interaction, such as underwriting and marketing. New products were also recently launched and new distribution partners were added. Dividend The Board of Directors has announced the payment of a quarterly dividend of $0.225 per common share. This dividend corresponds to a payout ratio of 29% of the adjusted net income for the quarter. This ratio is in line with the objective the Company set at the end of 2006, to increase its dividend in order to carry the payout ratio to 28% of the sustainable net earnings. The Company s policy provides for the payment of a dividend between 20% and 30% of the sustainable net earnings. Non-GAAP Financial Measures The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). It also occasionally uses certain non-gaap financial measures adjusted data 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. The data related to the solvency ratio, embedded value and the value of new business, as well as adjusted data, as indicated above, are not subject to GAAP. Forward-Looking Statements This news release may contain forward-looking statements about the operations, objectives and strategies of Industrial Alliance, as well as its financial situation and performance. The forward-looking nature of these statements can generally, though not always, be identified by the use of words such as "may," "expect," "anticipate," "intend," "believe," "estimate," "feel," "continue," or other similar expressions, in the affirmative, negative or conditional. Unless otherwise indicated, any forward-looking information that presents prospective results of operations, financial position or cash flows was approved by management on the date of this news release. Forward-looking statements entail risks and uncertainties that may cause the actual results, performance or achievements of Industrial Alliance to differ materially from the future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause the Company s actual results to differ from expected results include changes in government regulations or tax laws, competition, technological changes, global capital market activity, interest rates, changes in demographic data, changes in consumer behaviour and demand for the Company s products and services, catastrophic events, and general economic conditions in Canada or elsewhere in the world. A description of significant factors that could affect forward-looking statements is contained in the Management s Discussion and Analysis section of the Company s most recent annual report. This list is not exhaustive of the factors that may affect any of Industrial Alliance s forward-looking statements. These and other factors must be examined carefully and readers should not place undue reliance on Industrial Alliance s forward-looking statements. Where the forward-looking statements are presented as guidance regarding the future financial results of Industrial Alliance, they are provided to help investors understand the impact on earnings of the

7 7 Company s current plans and objectives. The Company may also provide objectives from time to time. An objective should be taken as a statement of management s goals in managing the Company, and not necessarily as a forecast that the objective will be met. Industrial Alliance is not obligated to revise or update these forward-looking statements to reflect events, circumstances or situations that occur after the date of this news release, whether foreseeable or not, except as required by applicable securities legislation. Conference Call Management will hold a conference call to present its results on Wednesday, May 7, 2008, at 11:30 a.m. (ET). To listen in on the conference call, dial (toll-free). A replay of the conference call will also be available for a oneweek period, starting at 2:00 p.m. on Wednesday, May 7, To listen to the conference call replay, dial (toll-free) and enter access code A webcast of the conference call (in listen only mode) will also be available on the Industrial Alliance website at as well as on the CNW website at Investor Day Industrial Alliance will hold an investor day on Tuesday, June 17, 2008, in Toronto, from 8:30 a.m. to 1:30 p.m. (ET). The details of this investor day will be provided over the next few weeks. 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 fifth largest life and health insurance company in Canada, Industrial Alliance is at the head of a large financial group, which has operations across Canada as well as in the Western United States. Industrial Alliance contributes to the financial well-being of over three million Canadians, employs more than 3,100 people and manages and administers over $50 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. Notes 1) The calculation of the return on common shareholders equity excludes accumulated other comprehensive income. 2) 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 (before reinsurance) for Creditor Insurance and premiums for Special Markets Group (SMG); Group Pensions: premiums Information Jacques Carrière, Vice-President, Investor Relations Office: ; cell: jacques.carriere@inalco.com; Website: