I N G C A N A D A I N C .
200 4 ANNUAL REPORT
Here for You
ING Canada is the largest provider of property and casualty insurance in Canada, operating through
the ING Novex, Nordic, Trafalgar, BELAIRdirect and ING Insurance companies. We provide
automobile, property and liability insurance to individuals and small- to medium-sized businesses
across Canada. We enjoy leading positions in all markets where we operate.
In addition, our investment management operation provides investment management services with
respect to the invested assets of our insurance subsidiaries.
Personal automobile insurance accounts for approximately one half of our business, followed by
commercial insurance, non-auto, personal property and commercial automobile coverage.
ING has a proud history in Canada: we trace our roots back to 1809 when The Halifax Insurance
Company was established. 2005 represents ING Canada’s first full year as a public company following
listing on the Toronto Stock Exchange in December, 2004 concurrent with completing a $1.04 billion
Initial Public Offering.
C O N T E N T S
Financial Highlights
Chairman’s Message
President and CEO’s Message
The ING Difference
1
2
4
8
12
Initial Public Offering
13 Glossary of Selected Terms
15 Management’s Discussion & Analysis
46
Financial Statements
50 Notes to Financial Statements
76
77
78
79
Board of Directors
Executive Officers
Corporate Information
Shareholder Information
1
Financial Highlights
(in millions of dollars)
Direct premiums written
Net premiums earned
Total revenue
Net income
Total shareholders’ equity
Debt outstanding
Debt to capital
Claims ratio
Expense ratio
Combined ratio
Return on equity
2004
2003
2002
$ 3,576
$ 3,365
$ 3,781
$
624
$ 2,060
$
256
11.1%
56.6%
29.4%
86.0%
40.9%
$ 3,444
$
$
$
$
$
2,761
3,015
151
989
483
32.8%
68.1%
30.0%
98.1%
16.5%
$ 3,107
$ 2,337
$ 2,559
$
$
$
29
839
503
37.5%
73.8%
27.4%
101.2%
3.0%
Combined Ratio*
Direct Premiums
Written ($ millions)
Return on Equity
Net Income
($ millions)
* For P&C insurance subsidiaries. The combined ratio is the sum of claims, claims expenses,
commissions, premium taxes and general expenses divided by net premiums earned.
2004200320022001200420032002200120042003200220012004200320022001102.7%98.1%101.2%86.0%2,1923,1073,4443,5767.9%3.0%16.5%40.9%8729151624 2
Chairman’s Message
2004 was an outstanding year for ING Canada – a milestone year in which we broke new ground on
our journey to further establish the company as Canada’s leader in the property and casualty insurance
industry. Our financial performance was unprecedented. Our growth gained momentum following the
acquisition of Allianz Canada and the launch of our Initial Public Offering, one of the most successful
IPOs this country has seen in many years.
On behalf of your Board, I would like to welcome our new shareholders and thank you for your
confidence. In recognition of that trust, ING Canada is committed to continuing to offer our customers
one of the best value propositions in the industry, and to outperforming our competitors. Last year’s
achievements speak volumes about this commitment.
The cornerstone of our strategy is to increase the scale of our activities and to leverage this scale to
develop sustainable competitive advantages. To that end, we deepened our knowledge of the various
regional markets and developed unmatched core competencies in pricing, underwriting and claims
management. We have also made many acquisitions over the past several years, and developed efficient
integration models that expanded our business in a stable and mature industry at an annual average rate
of 18% over the past 10 years.
One of the boldest initiatives we embarked upon in 2004 was our decision to offer investors the
opportunity to share in our success. An IPO represents an historic moment in the life of an organization
and ours is no exception. For ING Canada, this Initial Public Offering constitutes an unprecedented
opportunity to continue aggressively pursuing our growth strategy, backed by the support of ING Group.
The Canadian property and casualty insurance industry is the most fragmented in the financial services
sector. The five largest insurers account for just 37% of the total market. While consolidation activities
have slowed somewhat over the last few years due to the lack of capital available for financing growth
initiatives, we firmly believe that most – if not all – industry participants will re-evaluate their current
strategies in light of the evolving industry structure. It is our firm belief that new acquisition
opportunities will arise from these developments.
Being a public company gives ING Canada several key advantages. It gives the organization more flexibility
to pursue new acquisitions and to leverage our current scale and expertise to benefit all stakeholders.
We have also made many acquisitions over the past several years, and developed efficient
integration models that expanded our business in a stable and mature industry at an annual
average rate of 18% over the past 10 years.
3
As we pursue these initiatives, we are creating a more competitive environment in which consolidators
will accelerate their growth, and consumers will benefit from greater efficiencies. Our shareholders enjoy
the opportunity to participate in one of the fastest growing and most efficient operators in the industry.
As a public company, ING Canada will continue to reap the benefits of being associated with one of
the largest and most respected global financial institutions. By maintaining our relationship with
ING Group, ING Canada will continue to take advantage of its brand recognition and reputation
among Canadian consumers. Furthermore, ING Canada will benefit from global resources and expertise
in the development of best practices in corporate governance and accountability, human resources and
information technology.
Being a public company also demands increased levels of accountability. Over the years, we have had
the privilege of assembling numerous Boards of Directors for our operating companies as well as an
Advisory Board for ING Canada. The independent members of these boards – well-qualified individuals
with an intimate knowledge of our organization – have shown a strong bias towards accountability and
governance issues.
We deeply appreciate their contributions and are delighted that they will continue their involvement
with ING Canada as members of your Board of Directors. My colleagues will continue to rely on their
expert advice to further solidify ING Canada’s position as one of the most respected organizations.
I would like to acknowledge the dedicated service of one of our Directors, Gordon Wicijowski, who will
not stand for re-election at the annual meeting in April 2005. Gordon served ING Canada and the Board
with distinction and I thank him for his invaluable contributions. ING Canada benefited from his wise
counsel and we are grateful for the guidance he provided.
I would also like to recognize the overwhelming contribution of our management team and our 6,800
employees. Day in, day out, they steered the organization through one of the most challenging and
eventful years in our history. Not only did they contribute to our financial performance and our
growth, they also strived to provide, in collaboration with our distribution partners, a high level of
service to our customers. Thanks to their efforts and your confidence, ING Canada is poised to
continue outperforming the industry in both growth and profitability, and to continue creating value for
all our shareholders, distribution partners and clients.
Yves Brouillette
Chairman
4
President and CEO’s Message
AN EXCEPTIONAL YEAR FOR ING CANADA AND OUR CLIENTS
2004 was an exceptional year both for the property and casualty insurance industry and for our
customers. The industry’s financial performance reached historic highs after rebounding from very
difficult market conditions in 2001 and 2002. At the same time, consumers, for the first time in many
years, benefited from reduced premiums, thanks to new initiatives to better control automobile
insurance costs in many provinces.
During 2004, ING Canada continued to outperform the industry. Our net income reached an all-time
record of $624.2 million. This solid performance was achieved in every region and across all product
lines as well as in our investment activities.
Our increased profitability is chiefly the result of lower than expected claims costs, which generated
increased underwriting profits for our insurance operations. Furthermore, as a result of Canada’s robust
financial market conditions and our investment strategy, we realized strong investment performance and
unusually high capital gains.
While we are proud of our achievements and performance in the last year, we remain committed to
continue building our scale to provide strong results and improve our value proposition to our
customers.
OUR UNDERWRITING PERFORMANCE REACHED NEW LEVELS
Combined ratio is the key indicator of the increased profitability of our insurance operations. A
combined ratio represents the amount paid in claims as well as the operating costs of insuring our clients
as a percentage of premiums. A ratio of less than 100% indicates that premiums more than cover the cost
of claims and operating expenses: therefore the lower the ratio, the better the performance. In 2004, our
combined ratio improved across all business lines, decreasing to an historic best of 86%. The
improvement was most apparent in personal lines, which include home and auto insurance, where it
decreased by 16.4 percentage points over the previous year. In commercial lines, our ratio dropped by
3.4 percentage points over 2003.
The key factor that contributed to our improved underwriting results was a marked reduction in claims
frequency. This trend, which we have been observing for the last few years, accelerated in 2003 and 2004
as consumers and businesses submitted fewer claims than in the past.
We believe that reduced precipitation (including snow and rain) experienced during the year 2004,
increases in the price of gasoline and a change in consumer behavior regarding smaller claims, were
important contributors to the decrease in claim frequencies. Other long term favourable trends
contribute to explaining the reduction in frequencies, such as favourable economic conditions and
ageing of the driving population.
5
THE REFORMS ARE WORKING
Numerous initiatives adopted in late 2003 and in 2004 as a result of consultations between the industry,
consumer groups and provincial governments have stabilized automobile insurance in most provinces.
These initiatives focused on better controlling the costs of automobile claims, reducing premiums and
improving the availability of insurance to consumers.
For example, the New Brunswick and Nova Scotia governments adopted measures to cap the amount
paid for minor injuries. In Ontario, measures aimed at better controlling the cost of accident benefits
were also adopted. In these provinces our claims experience improved greatly, which in turn translated
into lower rates for our customers. In Ontario, our overall automobile rates have decreased by nearly
17% since the beginning of 2004, while our rates have fallen by nearly 25% in New Brunswick and Nova
Scotia since the middle of 2003. More recently, the reforms adopted by the Alberta government resulted
in an average reduction of 7.7% in our automobile rates.
OUR SCALE IS DELIVERING RESULTS
The strength of ING Canada’s underwriting results in 2004 and in previous years is a direct result of our
efforts to leverage the scale of our activities into sustainable competitive advantages. By consistently
increasing our market share over the years we have built a strong presence in the markets in which we
operate through decentralized, highly knowledgeable regional management teams. These teams, well
aware of the market conditions in their regions and very supportive of our distribution partners, are
backed by corporate teams focused on developing disciplined risk selection processes, sophisticated
pricing strategies and strong in-house claims capabilities.
This advantage of scale permits us to continue to offer our clients competitive rates that accurately
reflect their risk profiles, while simultaneously improving efficiencies and outperforming the industry.
WE ARE CREATING VALUE FOR OUR DISTRIBUTION PARTNERS AND CLIENTS
In 2004, we continued to foster closer relationships with our 2,800 distribution partners and the three
million clients whom we protect. Our success relies on our ability to provide high-quality products
and services at attractive and competitive rates to our clients, while delivering high-quality services
to our brokers.
We have always strived to provide brokers with the tools they need to allocate fewer resources to
managing transaction processes, and more to understanding and servicing their clients’ needs. Over the
last year, we delivered on this mandate by continuing to offer our distribution partners sophisticated
e-commerce solutions that improve their efficiency and their clients’ experience.
6
In 2004, we built on the momentum of previous years by launching a broker extranet, which has quickly
become the main gateway to product information and to the numerous point-of-sale applications we
have developed over the years.
We also enhanced our customers’ experience with the introduction of innovative products. We launched
a number of new home and auto insurance products known as My Home, My Home Complete and
My Home and Auto. In Quebec, similar products were introduced under the brand Orange Signature.
Our direct insurance provider, BELAIRdirect, continued to offer innovative insurance solutions,
launching a number of initiatives aimed at enhancing clients’ claims experience. Another important
initiative was the launch of a new concept of retail outlets, which showcase our product offering and
enhance interaction between consumers and agents.
However, our greatest success last year in enhancing customer satisfaction and strengthening customer
relationships was our Client Service Guarantee, launched in late 2003. Under this program, we promise
to provide our customers with 24/7 emergency claims service. In fact, we guarantee that a customer in
need can reach an insurance professional within 30 minutes. If we are unable to deliver on our promise,
we will refund the customer’s annual premium up to a maximum of $1,000.
We also worked hard to improve our relationships with clients facing disaster situations by increasing
our response to emergencies, such as those that occurred in Peterborough, Ontario and Edmonton,
Alberta last summer.
WE ARE COMMITTED TO BUILDING ON OUR SUCCESSES
As we move forward in 2005, we will pursue our strategy of building our scale to deliver solid results
and a more advantageous value proposition to our distribution partners and clients. This will become
even more important this year and in the years to come, as the industry grows more competitive
through improved financial performance.
While the recent acquisition of Allianz Canada will contribute to sustaining our track record of growth
and strong underwriting performance, we intend to continue delivering higher value to our distribution
partners and clients. The goal, as always, is to provide all current and future customers with a rewarding
ING experience and to foster our organic growth.
During 2004, ING Canada continued to outperform the industry. Our net income
reached an all-time record of $624.2 million. This solid performance was achieved in
every region and across all product lines as well as in our investment activities.
7
The key to our success is safely in the hands of the front lines – our employees. Thanks to their dedication,
we have been able to better serve our distribution partners and clients. Our clients – notably those who
relied on us for fast and fair claims settlements – can also attest to our employees’ commitment and
knowledge. I have no doubt that our staff will continue enhancing its level of service in 2005.
This year, we will continue to improve programs aimed at retaining and attracting the very best
employees, including those we recently welcomed from Allianz. Our efforts will be supported by
community involvement initiatives aimed at leveraging the ING brand among our people, our brokers
and their clients. ING Canada benefits from its association with one of the strongest financial services
brands in the world, and our goal is to foster awareness of our insurance operations in the communities
in which our clients live and work.
OUR OBJECTIVES ARE STEADFAST: GROWTH AND SHAREHOLDER VALUE
All these initiatives are integral to the growth strategy we will pursue in the current year. Together with
the integration of the activities of Allianz Canada, which is currently happening at an accelerated pace,
and continuous consultations with governments and consumer organizations, our strategic focus will
continue to deliver value to all our shareholders.
Claude Dussault
President & CEO
8
With three million clients from coast to coast, ING Canada protects more Canadians from loss or
damage to their automobiles, homes and businesses than any other insurer. We provide this protection
through personal, group and commercial insurance policies distributed by a national network of more
than 2,800 brokers, as well as directly over the Internet and through our call centres via BELAIRdirect.
A broad product line enables us to provide a full spectrum of insurance solutions for drivers, property
owners and a wide variety of small- and medium-sized businesses including retailers, landlords, light
manufacturers and contractors.
In 2004, approximately 68% of direct premiums written came from our personal insurance business
while 32% was generated by commercial insurance business. Personal automobile coverage accounted
for 48% of total direct premiums written during the year and 71% of our personal insurance business.
We enjoy leading positions in all markets where we operate.
The ING Difference
Our success – in growing the business, in serving our customers, in producing superior financial
returns – is the direct result of the disciplined application and execution of our core competencies in
pricing, underwriting and claims.
PRICING
The key to success in our business is the ability to assess risk and price appropriately for it. Getting this
right is largely a result of leveraging statistics. By putting together the country’s largest proprietary client
database with the industry’s largest actuarial team, we gain superior insight into the number and size of
expected losses.
UNDERWRITING
Selecting the right risks is the underwriter’s challenge.
Our ability to identify and segment risk using a greater number of variables than the industry is integral
to our underwriting strength. Discipline in the risk selection process is maintained by a strong commitment
to technology in the field and application of standardized and sophisticated underwriting criteria.
Did you know?
We processed 2,800 claims, paying out more than
$47 million, in response to the major floods that
occurred in Peterborough, Ontario and Edmonton,
Alberta in 2004.
9
CLAIMS
Bad stuff happens. We’ll be there to help.
We settled 97% of all claims in-house in 2004 using our national team of more than 1,700 claims
adjusters located in 31 offices throughout Canada. This capability enables quicker settlements, increases
client satisfaction and keeps costs down. As Canada’s largest property and casualty insurer, we have
established a network of preferred suppliers throughout our markets. These suppliers, which are selected
on the basis of professionalism, reputation, speed and quality of service, ensure policyholders are dealt
with expeditiously, courteously and professionally, while keeping costs down.
A BRIEF PRIMER ON AUTO INSURANCE REGULATION
All of our insurance subsidiaries, with the exception of Quebec-based Belair Insurance Company Inc.,
are federally incorporated and subject to supervision by the Office of the Superintendent of Financial
Institutions. OSFI primarily focuses on ensuring and monitoring the financial health of institutions
under its supervision.
Additionally, all of our insurance subsidiaries are licensed under insurance legislation in each of the
provinces and territories in which they conduct business. The provincial authorities tend to concentrate
their efforts on business practices, including policy terms and distribution.
Automobile insurance is a compulsory product and is regulated by provincial authorities. Several
provinces have instituted major automobile insurance reforms in the recent past, following an explosion
in costs that led to dramatic rate increases in 2002 and 2003.
Automobile insurance is provided by provincially owned insurers in Saskatchewan, Manitoba and
British Columbia, although private insurers can compete for optional coverage such as collision,
comprehensive and excess liability in these provinces.
In Quebec, while the province alone offers coverage for bodily injury, ING Canada and other private
insurers provide protection against physical damage.
Did you know?
Through our Grey Power network, drivers aged 50
and over can enjoy coverage and rates designed
specifically for them.
10
Automobile Insurance Regulatory Profile
Province/Territory
Public
Rate
Filings
Facility
Association
Risk Sharing
Pool
No Fault –
Auto Physical
Damage
“Take All
Comers”
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
Nova Scotia
New Brunswick
Prince Edward Island
Newfoundland
Yukon
Northwest Territories
Nunavut
l
l
l
(2)
File & use
(2)
(2)
File & approve
(1)
Use & file
File & approve
File & use
File & approve
File & approve
None required
None required
None required
(3)
l
l
l
l
l
l
l
l
l
l
l
l
(6)
l
l
l
l
(4)
l
(4)
(4)
(5)
(5)
(5)
(5)
(5)
(1) Bodily injury only.
(2) None required for private insurers.
(3) Exists, but with a tight definition for eligibility.
(4) Take all comers for public insurer.
(5) As per insurer filed rules.
(6) Can be selected or not.
RATE SETTING
In various provinces, insurers file their rates with the relevant authority, wait for a prescribed period of
time and then implement the proposed rates. In other jurisdictions, the insurer must wait for specific
approval of filed rates before they may be used. In Quebec, rates are filed following use.
RISK SELECTION
Based on filed underwriting rules, certain higher risk clients are covered by the Facility Association, a
mandatory pooling arrangement amongst all industry participants, whose results are shared by the
participants on the basis of market share.
Facility associations exist in all provinces with the exception of Quebec and those provinces where
insurance is offered by government-owned insurers.
In addition, insurers in Quebec, Ontario, Alberta and New Brunswick may place a limited number of
their clients in a risk-sharing pool, a voluntary pooling arrangement amongst select industry
participants, the results of which are shared by the participants on the basis of market share. This
mechanism serves to ensure availability of coverage in the marketplace.
Did you know?
Our Client Service Guarantee will pay you your annual
premium up to $1,000 if you call us with an emergency
claim and you’re not put in touch with an insurance
claims representative within 30 minutes.
11
NO-FAULT
Ontario, Quebec, Manitoba, Saskatchewan and New Brunswick are no-fault provinces. No-fault
pertaining to physical damage to automobiles means that a claimant deals with his or her insurer in
settling financial compensation for the damage incurred, regardless of which driver is at fault.
The right to sue for damages in excess of accident benefits received and pain and suffering differs
amongst the provinces. While there is “pure no-fault” legislation in Quebec and Manitoba, “threshold
no-fault” prevails in Ontario, while Saskatchewan practices “modified pure no-fault”.
Generally speaking, the higher the legislated no-fault threshold, the less the judicial system is involved.
Thresholds can be based on a dollar amount of insured medical expenses or based upon specific injury
descriptions, such as a “serious and permanent impairment” in Ontario.
At this threshold, claimants can sue for pain and suffering. The largely non-adversarial approach
reflected by no-fault provinces tends to result in reduced legal costs.
RECENT REFORMS
Nova Scotia and New Brunswick recently capped awards for pain and suffering from minor injuries,
resulting in more stable, healthier markets and rate reductions of nearly 25% since 2003. Legislative
action taken in Ontario and Alberta, two of our major markets, is particularly noteworthy for the
impact it has had on rates.
Ontario
In the late 1990s, automobile insurance fraud and related runaway health care costs emerged as a major
problem, which resulted in increased insurance premiums in 2001, 2002 and 2003. Subsequent legislative
changes contained in Bill 198 took hold November, 2003: these changes required paralegals to register
with the Financial Services Commission of Ontario and obtain errors and omissions insurance,
prohibited referral fees, capped payment for certain treatments and created a one-year moratorium on
cash settlements for accident benefit claims, amongst other actions.
These changes have had an immediate and positive impact, allowing insurers to pass the savings on to
consumers by reducing rates by at least 10% as expected by the provincial government. ING Canada has
filed and obtained approval for rate reductions approximating 17% since the beginning of 2004.
Did you know?
Our Personal Insurance Protector allows
clients to cover both their home and auto
using a single policy.
12
12
Alberta
Alberta froze rates at 95% of then-current levels and introduced various reforms effective October, 2004.
Rate levels will increase over a three-year period, in line with increases in costs only. Insurers can reduce
rates, however, commencing October, 2005.
This freeze in rates was imposed concurrent with the implementation of important reforms, including
introduction of a pricing grid and a $4,000 cap on awards for pain and suffering resulting from minor
injuries.
Some of the associated cost savings are intended by the government to accrue to younger drivers,
effectively reducing the net benefit to other drivers. ING Canada reduced its rates by 7.7% in 2004.
Initial Public Offering
ING Canada successfully listed its common shares on the Toronto Stock Exchange on December 15, 2004,
raising $906,880,000 through the country’s largest Initial Public Offering in recent years.
Market acceptance was swift. Our shares, issued at $26.00 per share, rose more than 11% to close at
$28.88 on the first day of trading and closed the year at $29.31 per share. Subsequent exercise of the
over-allotment option on January 14, 2005 increased the total capital raised to more than $1 billion
($1,042,860,000).
ING Groep N.V., one of the world’s largest and best-known financial services companies, remains a
70% owner, giving ING Canada the best of both worlds – a strong, supportive majority owner as well as
the financial flexibility afforded a public company.
Our highly successful IPO signified the beginning of a new era in our continuing journey to cement
ING Canada’s position as the country’s leading property and casualty insurance provider.
Our shareholders will benefit from the same commitment to return on equity, growth, financial strength
and risk management that clients, employees and other ING Canada stakeholders have long experienced.
Did you know?
Client satisfaction surveys in 2004 revealed that over 90% of our claimants
were satisfied with the claims process and the payments they received.
Over 46% of our clients requiring auto repairs went
to one of our preferred provider facilities in 2004.
13
Glossar y of Selected Terms
Adverse development
Losses for which estimations of ultimate incurred
losses and allocated LAE are proven inadequate.
Increases in incurred losses as a result of adverse
development are recognized in financial statements
in the period of the change.
Case reserves
The liability established to reflect the estimated
cost of reported but unpaid claims and claims
expenses that the insurer will ultimately be
required to pay.
Claim expenses
The expenses of settling claims, including allocated
loss adjustment expenses and unallocated
loss adjustment expenses. Claim expenses are also
referred to as loss adjustment expenses (LAE).
Claim reserves
The total of case reserves and IBNR.
Claims ratio
Claims and claim expenses incurred, net of
reinsurance, expressed as a percentage of net
premiums earned. Loss ratio is also referred to
as claims ratio.
Combined ratio
The sum of the claims ratio and the expense ratio,
determined in accordance with GAAP.
A combined ratio below 100% indicates a profitable
underwriting result. A combined ratio over 100%
indicates an unprofitable underwriting result.
Direct premiums written
The total premiums from the primary insured in
respect of insurance underwritten by an insurer
during a specified period.
Expense ratio
Expenses including commissions, premium taxes
and all general and administrative expenses,
incurred in operating the business during a defined
period and expressed as a percentage of net earned
premiums for the same period.
Gross premiums written
Total premiums for insurance written, including
assumed reinsurance, during a given period.
Incurred but not reported (IBNR) reserve
A combination of reserves for estimated losses
that have been incurred but not yet reported and
a reserve for future developments on losses which
have been reported.
Net premiums earned
The portion of premiums written that is recognized
for accounting purposes as revenue during a period,
i.e., the portion of premiums written allocable to
the expired portion of policies after the assumption
and cession of reinsurance.
Net premiums written
Gross premiums written for a given period
less premiums ceded to reinsurers and
retrocessionaires during such period.
Provision for adverse deviation
An amount added to loss reserves to provide for
adverse deviation from loss reserve estimates
including a provision covering the claim
development variability, the risk associated with
reinsurance recoveries and the interest rate risk.
Redundancy (deficiency)
Claims reserves are re-evaluated at different
points in time. An increase from the initial
estimate indicates a deficiency and a decrease
indicates a redundancy.
Reinsurance
An arrangement in which an insurance company,
the reinsurer, agrees to indemnify another
insurance or reinsurance company, the ceding
company, against all or a portion of the insurance
or reinsurance risks underwritten by the ceding
company under one or more policies.
Underwriting profit
The difference between net premiums earned
and the sum of net claims incurred,
commissions, premium taxes and all general
and administrative expenses.
14
Cautionar y Note Regarding Forward-looking Statements
Certain of the statements contained herein about our current and future plans, expectations and
intentions, results, levels of activity, performance, goals or achievements or any other future events or
developments constitute forward looking statements. The words "may", "will", "would", "should",
"could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "likely" or
"potential" or the negative or other variations of these words or other comparable words or phrases, are
intended to identify forward looking statements. Forward looking statements are based on estimates and
assumptions made by us in light of our experience and perception of historical trends, current
conditions and expected future developments, as well as other factors that we believe are appropriate in
the circumstances. Many factors could cause our actual results, performance or achievements or future
events or developments to differ materially from those expressed or implied by the forward looking
statements, including, without limitation, the following factors: our ability to implement our strategy or
operate our business as we currently expect; our ability to accurately assess the risks associated with the
insurance policies that we write; adverse capital market developments or other factors which may affect
our investments; the cyclical nature of the P&C insurance industry; government regulations; litigation
and regulatory actions; periodic negative publicity regarding the insurance industry; intense
competition; our reliance on brokers and third parties to sell our products; our ability to successfully
pursue our acquisition strategy; our ability to integrate the business of Allianz Canada; our ability to
achieve cost savings anticipated from the acquisition of Allianz Canada; uncertainties associated with
our acquisition of Allianz Canada; the substantial influence of ING Groep; our participation in the
Facility Association (a mandatory pooling arrangement among all industry participants); terrorist
attacks and ensuing events; the occurrence of catastrophic events; our ability to maintain our financial
strength ratings; our ability to alleviate risk through reinsurance; our ability to successfully manage
credit risk; our reliance on information technology and telecommunications systems; our dependence
on key employees; general economic, financial and political conditions; our dependency on the results of
operations of our subsidiaries; the lack of a trading history of, and the current absence of a liquid
market for, our common shares; the volatility of the stock market and other factors affecting our share
price; and future sales of a substantial number of our common shares. These factors should be
considered carefully, and readers should not place undue reliance on our forward looking statements.
We have no intention and undertake no obligation to update or revise any forward looking statements,
whether as a result of new information, future events or otherwise, except as required by law.
15
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
February 15, 2005
The following discussion and analysis of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and accompanying notes thereto in our Annual
Report and our Annual Information Form available at www.sedar.com. Certain totals, subtotals and
percentages may not reconcile due to rounding.
CURRENT OUTLOOK
We believe that several key factors will affect the property and casualty (P&C) insurance industry in
the next 12 to 24 months.
Given the large contribution of automobile insurance to the premium volume of the P&C insurance
industry, regulatory changes to automobile insurance are expected to continue to impact the
performance of the P&C insurance industry. Furthermore, the lower automobile claim frequencies
observed in 2004 will either return to historical levels or due to the competitive nature of the market
lead to premium reductions in the coming 24 months.
Favourable experience in commercial insurance in the last three years and the strengthening of the P&C
insurance industry’s capital position will likely accelerate competition in commercial insurance.
Consequently, the industry’s growth rates for the next 12 to 24 months are likely to be below historical
levels. We also expect that the underwriting results will not remain at such favourable levels.
CHALLENGES AND STRATEGY
Our strategy remains focused on industry outperformance and profitable growth, organically and
through acquisition.
Notwithstanding the exceptional progress made in 2004, some headwinds began to take shape last
year that will pose challenges for us in 2005. Automobile insurance rate freezes, rollbacks and
reductions introduced in various provinces over the last two years caused our top line organic growth
to slow significantly in 2004 and will continue to dampen growth in 2005. The decline in claims
frequency witnessed in recent years and most notably in 2004 may not be sustainable and will likely
return to historical levels, ultimately leading to lower underwriting profits. And finally, competition in
commercial lines intensified in 2004 as a result of higher profitability and an improved capital
position for the industry.
We plan to respond thoughtfully and aggressively to each of these challenges.
Top line growth is driven not only by rate levels but also through the attraction of new customers and
the retention of existing customers. Our strategy for growth is therefore focused on doing that. We
have begun implementation of an aggressive growth plan for our fast growing direct distribution
channel, BELAIRdirect. We have additionally introduced various initiatives to further improve our
service levels to customers and broker partners. Our Client Service Guarantee for customers and
rollout of point-of-sale applications with brokers are examples of these initiatives aimed at increasing
satisfaction levels of our customers and broker partners and their ease of doing business with us.
16
We believe that our sophisticated risk segmentation approach to pricing and underwriting will
enable us to deliver underwriting profits even if the trends are less favourable than in recent years.
We will continue to sharpen our risk based pricing models by continually assessing the effectiveness
of the rating variables.
To address increased competition in commercial lines in 2005, we will launch marketing and client
service initiatives designed to increase unit count growth and improve policy retention. In addition,
we will enhance and expand our small business model for brokers. The combination of improved
service, better technology and ease-of-doing-business should improve our penetration in the small
business segment.
CREATING VALUE FOR SHAREHOLDERS
We continued to outperform the industry in 2004, this time by a wider margin than usual.
The return on equity (ROE) for our insurance subsidiaries in 2004 was 39.6% compared to an
estimated 20.6% for the property and casualty industry. Over the last twelve years from 1993 to 2004,
the average ROE of our insurance subsidiaries (15.0%) exceeded that of the industry (9.2%) by 5.8
percentage points. This consistent track record of outperformance demonstrates our commitment
and our ability to deliver strong shareholder returns.
ROE* PERFORMANCE OF OUR INSURANCE SUBSIDIARIES
COMPARED TO THE P&C INSURANCE INDUSTRY
* Excludes ROE of our non-insurance companies.
Source: IBC for estimated industry ROEs. Company reports for ING Canada ROEs.
051015202530354045199319941995ING CanadaPC Insurance Industry1996ROE(%)19971998199920002001200220032004 17
OVERALL PERFORMANCE
Net income for the year ended December 31, 2004 of $624.2 million represents an increase of
$473.7 million, or 314.8%, compared to net income of $150.5 million for the comparative period in
2003. These results were driven by improved underwriting results, including historically low claims
ratios in most lines of business, plus significant increases in realized investment and other gains and
investment income.
Investments increased by $2,148.9 million or 55.6% to $6,010.4 million at December 31, 2004 compared
to 2003. The significant growth was primarily due to the acquisition of Allianz of Canada, Inc.
(“Allianz”) which contributed $1,061.5 million of investments. The Allianz contribution to investment
income in the month of December was $3.2 million. The commutation of a quota share reinsurance
treaty on January 1, 2004 increased investments by $665.0 million and generated a full year of
investment income. In addition, profits were generally earned evenly throughout the year and were
invested and contributed to investment income.
Shareholders’ equity increased by $1,070.5 million or 108.2% to $2,059.6 million at December 31, 2004.
In addition to the net income of $624.2 million, the completion of an initial public offering (“IPO”) in
December increased equity by $875.1 million. We used a portion of the total proceeds to repay existing
debt plus some additional debt established as part of a corporate restructuring undertaken prior to the
IPO. Just prior to this restructuring, $428.7 million of shareholders’ equity was converted, through
reduction of stated capital, into promissory notes and ultimately repaid to the controlling shareholder.
The summary financial data set forth in the following tables have been prepared in accordance with
Canadian generally accepted accounting principles (“GAAP”) and have been derived from our
consolidated financial statements as at and for the years ended December 31, 2004, 2003 and 2002.
Years ended December 31
(in millions of dollars except for per share data)
Direct premiums written
Total revenue
Underwriting income (loss)
Net income
Earnings per share
Basic
Diluted
As at December 31
(in millions of dollars)
Investments
Total assets
Debt outstanding
Total shareholders' equity
2004
2003
2002
$ 3,575.9 $ 3,443.8 $ 3,107.0
3,780.9
3,015.4
2,559.1
470.0
624.2
51.7
150.5
(27.3)
29.3
$
$
6.51 $
6.49 $
1.61 $
1.61 $
0.31
0.31
2004
2003
$ 6,010.4 $ 3,861.5
6,906.8
483.1
9,663.1
256.2
2,059.6
989.1
18
The following table shows our selected financial ratios and ROE data.
Years ended December 31
Claims ratio
Expense ratio
Combined ratio
ROE(1)
ROE of our P&C insurance subsidiaries(2)
2004
56.6%
29.4%
86.0%
40.9%
39.6%
2003
68.1%
30.0%
98.1%
16.5%
15.5%
2002
73.8%
27.4%
101.2%
3.0%
4.5%
(1) Represents our net income for the twelve months ended on the date indicated divided by the average shareholders' equity over
the same twelve month period.
(2) Represents net income for the twelve months ended on the date indicated of our P&C insurance subsidiaries divided by the
average shareholders' equity for our P&C insurance subsidiaries over the same twelve month period. Our P&C insurance
subsidiaries consist of Belair Insurance Company Inc., ING Insurance Company of Canada, ING Novex Insurance Company of
Canada, The Nordic Insurance Company of Canada and Wellington Warranty Company Inc. After November 30, 2004 the results
of our P&C insurance subsidiaries consist of the results of the above-mentioned subsidiaries as well as the subsidiaries of Allianz:
Allianz Insurance Company of Canada and Trafalgar Insurance Company of Canada.
Underwriting income for the twelve months ending December 31, 2004 of $470.0 million represents an
increase of $418.3 million over 2003. While all lines of business performed strongly in 2004, a significant
portion of the underwriting results was driven by our personal automobile portfolio contributing $291.9
million to the underwriting income for the year.
The performance of the automobile portfolio in 2004 was driven by an unexpected reduction in claim
frequencies, by claims cost stabilization resulting from product reforms in most markets as well as
improvement in the assumed underwriting results from the Facility Association (the statutory residual
market insurance pools in which we are required to participate).
We have observed an unexpected reduction in automobile claim frequencies in key markets in 2004,
most evident in physical damage to vehicles. We believe that reduced precipitation (including snow and
rain) experienced during the year 2004, increases in the price of gasoline and a change in consumer
behaviour regarding smaller claims, were important contributors to the decrease in frequencies. Other
long term favourable trends contribute to explaining the reduction in frequencies such as favourable
economic conditions and aging of the driving population.
The reforms implemented throughout 2003 and primarily 2004 in Alberta, New Brunswick, Nova Scotia
and Ontario appear to have reduced the cost as well as stabilized claims inflation to the extent
anticipated. This has led to significant reductions in rate levels and has increased availability of
automobile insurance in these markets. As many of the factors driving the unexpected decreases in
collision frequency would also impact on bodily injury and accident benefit claims however, we remain
cautious in our assessment of the lasting impact of these reforms.
19
The Facility Association results improved in 2004 from significant loss positions for the years 2001, 2002
and 2003 contributing $101.5 million to the overall improvement in the underwriting income in 2004
compared to 2003. The improvement in the Facility Association underwriting income results from
significant rate increases implemented throughout 2003 and 2004, from an unexpected drop in claim
frequencies and favourable development on prior accident years’ claims. The impact of the reforms in
addition to the adjusted rate levels, has caused the number of drivers insured through the Facility
Association to decrease significantly in 2004.
SIGNIFICANT TRANSACTIONS
Initial Public Offering
The Company completed an IPO on December 15, 2004, pursuant to the filing of a prospectus dated
December 9, 2004. As a result of the offering, 34.9 million common shares were issued at $26.00 per
share for proceeds of $858.5 million net of underwriters’ fees and other expenses. Pursuant to the
underwriter’s agreement for the prospectus, an over-allotment option was granted and then exercised
subsequent to December 31, 2004 for which 5.2 million additional common shares were issued and net
proceeds were received of $129.2 million. ING Groep N.V. remains the controlling shareholder with 70%
of the shares issued and outstanding.
Acquisition of Allianz
Consistent with our growth strategy, the Company entered into a share and loan purchase agreement
dated October 7, 2004 with Allianz AG and Allianz of America Inc. to acquire most of Allianz’
operations in Canada. Included in the acquisition were two insurance companies, Allianz Insurance
Company of Canada and Trafalgar Insurance Company of Canada which together were the thirteenth
largest P&C insurance group in Canada with a 2.7% market share based on its 2004 direct written
premiums of $797.6 million. Part of this ($193.5 million), referred to as the ”AGR Business”, related to
insurance coverage of industrial risks for large Canadian companies and multi-national clients of
Allianz AG. As described below, this business is not part of the acquisition. The acquired business is
distributed exclusively through brokers including a network of brokers branded “Grey Power” which
targets individual customers over the age of 50. We are integrating the acquired business into our
operations over the next 12 to 18 months. Also part of the acquisition was a network of insurance
brokerages, Canada Brokerlink, which sells the products of P&C insurance companies to individuals
and small- to medium-sized businesses. The transaction was recorded with an effective date of
November 30, 2004 and was completed December 8, 2004. The results of Allianz for the month of
December 2004 have been included in the Company’s consolidated statement of income for the year
ended December 31, 2004, contributing direct premiums written for the month of $59.8 million, net
premiums earned of $50.1 million and net income of $10.1 million.
20
As a result of the acquisition, the Company acquired all of the issued and outstanding shares of Allianz
for cash consideration of $279.0 million and purchased certain debt of $91.0 million. The total purchase
price for the shares of $283.4 million including transaction costs has been allocated on a purchase
accounting basis, measured at fair value, to net tangible assets of $199.4 million, net intangible assets of
$37.2 million and goodwill of $46.8 million (see note 18 of the accompanying consolidated financial
statements).
The transaction excludes the AGR Business which is expected to be transferred, pursuant to a
restructuring transaction, to the Canadian branch of Allianz Global Risks US Insurance Company
(“AGR”) in 2005. Until regulatory approval is obtained for the restructuring transaction, the AGR
business is subject to a quota share agreement (a form of pro rata reinsurance) in which Allianz Global
Risks Rückversicherungs AG has all of the risk. In addition, we have a corporate guarantee against any
loss on the AGR business. Consequently, the AGR business has no net impact on the consolidated
statement of income of the Company.
The fair value of the goodwill and intangible assets recorded at the effective acquisition date of
November 30, 2004 is $32.9 million less than the estimate that had been disclosed at September 30, 2004
in our prospectus. This is the result of a $20.0 million higher book value at closing due to more net
income from the business to be retained as well as the business to be excluded after closing, $11.1
million lower estimated integration costs than originally anticipated and $8.1 million lower fair value
adjustments due to a higher market value adjustment on investments minus $6.3 million tax effect for
these changes. Integration costs represent amounts to be incurred related to the integration of the
operations of Allianz over the next 12 to 18 months and consist of provisions for involuntary employee
terminations, redundant lease space, discontinuance of information systems and regulatory policyholder
notification requirements. These estimates represent management’s best judgement based on
information known at this time and further adjustments may be identified.
The Company anticipates that it will also incur other transition costs of $11.6 million in 2005 and the
first quarter of 2006 relating to the acquisition of Allianz. These costs will be charged to expense in the
consolidated statements of income in the period that they are incurred as they do not qualify under
purchase accounting rules for recognition as integration costs for the Allianz acquisition.
Intercompany Quota Share Retrocession Treaty
As at January 1, 2004, we commuted the inter-company quota share retrocession treaty related to the
2001 purchase of a portfolio from Zurich Insurance Company. Consequently, net policy liabilities
previously ceded of $665.0 million were reassumed by us and investment assets in approximately an
equivalent amount were received from the reinsurers. There was no significant impact on our current
year's results from commuting the treaty.
21
SUMMARY OF QUARTERLY RESULTS
(in millions of dollars
except for per share data)
2004
2003
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Direct Premium Written
$ 883.0 $ 921.6 $1,043.4 $ 727.8 $ 851.6 $ 918.7 $ 990.2 $ 683.3
Total Revenues
1,004.7
118.4
Underwriting Income (loss)
Income (loss) before income taxes 229.7
173.1
Net Income
919.7
133.7
217.1
163.6
900.7
174.5
238.6
172.4
955.8
43.4
170.4
115.1
808.0
777.6
735.3
694.5
(13.3)
47.8
24.7
44.4
95.4
66.7
44.6
85.6
58.2
(24.0)
(1.9)
0.9
Earnings per Share
Basic
Diluted
Earnings per adjusted share (1)
Basic Pro Forma
Diluted Pro Forma
$ 1.69 $ 1.75 $ 1.84 $ 1.23 $ 0.26 $ 0.71 $ 0.62 $ 0.01
1.67
1.75
1.84
1.23
0.26
0.71
0.62
0.01
$ 1.35 $ 1.27 $ 1.34 $ 0.90 $ 0.19 $ 0.52 $ 0.45 $ 0.01
0.01
1.29
1.22
1.29
0.86
0.50
0.44
0.18
Note (1) Financial information included in earnings per adjusted share is not derived from the Company’s financial statements
and includes non-GAAP financial measures that do not have any standardized meaning prescribed by GAAP. They are therefore
unlikely to be comparable to any similar measures presented by other companies. To facilitate comparison between historical and
future performance, basic and diluted earnings per adjusted share is calculated on a pro forma basis as if the 128.5 million
common shares outstanding after our reorganization and completion of the IPO were outstanding at the beginning of each of the
eight quarters, and as if 133.7 million common shares, the difference being the shares issued in January 2005 as part of the over-
allotment granted to the underwriters, had been outstanding during the past eight quarters. The calculation includes non-GAAP
financial measures, and net income used for the pro forma earnings per adjusted share calculations has not been adjusted for
interest income and expense that would have been realized by the Company from investing the net proceeds of the initial public
offering and reducing the debt outstanding. By adding the respective quarters, the basic and diluted pro forma earnings per
adjusted share for 2004 would have been $4.86 and $4.67, respectively, an increase of 315.4% and 313.3% over $1.17 and $1.13 for
2003, respectively.
Net income for the fourth quarter of 2004 of $173.1 million was significantly better than the $24.7
million for the comparative period in 2003. Direct written premiums were up $31.4 million or 3.7% in
2004 compared to 2003. The strong underwriting results experienced in the first nine months continued
during the fourth quarter plus the addition of Allianz in December added $10.1 million of net income
and $59.8 million of direct premiums written and net earned premiums of $50.1 million.
On a segmented basis, both personal and commercial insurance revenues were higher in 2004 than 2003.
Both benefited from the addition of Allianz in December as well as the commutation of the quota share
treaty increased the net premiums written and earned premiums for 2004. Income before income taxes
increased significantly for personal insurance while commercial insurance reported a pre-tax loss of $3.4
million compared to a profit of $28.5 million for 2003.
Corporate and other pre-tax income of $4.0 million was a strong improvement over an $8.4 million
2003 loss.
22
RESULTS OF OPERATIONS
Segmented Information
We report our underwriting results through two operating segments of our P&C insurance business:
personal insurance and commercial insurance plus the investment results of our P&C insurance
subsidiaries is a third operating segment. In addition to these operating segments, our results include
our non-operating segments, namely corporate and other activities, and realized investment and other
gains (losses).
The following table presents selected information on our three operating segments, as well as corporate
and other and realized investment and other gains.
Years ended December 31
(in millions of dollars)
Revenue
P&C insurance
Net premiums earned
Personal insurance
Commercial insurance
Total net premiums earned
Investments
Total P&C insurance
Corporate and other
Realized investment and other gains
Total Revenue
Years ended December 31
(in millions of dollars)
Income (loss) before income taxes
P&C insurance
Underwriting income (loss)
Personal insurance
Commercial insurance
Total underwriting income (loss)
Investments
Total P&C insurance
Corporate and other
Realized investment and other gains
Total income (loss) before income taxes
2004
2003
2002
$ 2,343.5 $ 1,828.7 $ 1,563.9
1,021.1
932.2
773.2
$ 3,364.6 $ 2,760.9 $ 2,337.1
256.7
208.8
181.7
$ 3,621.3 $ 2,969.7 $ 2,518.8
27.2
132.4
13.6
32.1
37.8
2.5
$ 3,780.9 $ 3,015.4 $ 2,559.1
2004
2003
2002
$
339.2 $
(35.5) $
(63.5)
130.8
470.0
247.0
717.0
6.4
132.4
87.2
51.7
200.5
252.2
(57.3)
32.1
$
855.8 $
227.0 $
36.2
(27.3)
173.9
146.6
(117.9)
2.5
31.2
The following tables set forth the direct premiums written and underwriting results for our P&C
23
insurance operating segments.
Years ended December 31
(in millions of dollars)
Personal Insurance
Direct premiums written
Personal automobile
Personal property
Total
Net premiums earned
Expenses:
Claims
Commissions
Premium taxes
General expenses
Total expenses
Underwriting income (loss)
Ratios:
Claims ratio
Commissions
Premium taxes
General expenses
Expense ratio
Combined Ratio
Years ended December 31
(in millions of dollars)
Commercial Insurance
Direct premiums written
Commercial automobile
Commercial other
Total
Net premiums earned
Expenses:
Claims
Commissions
Premium taxes
General expenses
Total expenses
Underwriting income (loss)
2004
2003
2002
$ 1,714.3 $ 1,724.0 $ 1,568.4
700.9
624.1
604.6
$ 2,415.2 $ 2,348.1 $ 2,173.0
2,343.4
1,828.7
1,563.9
1,375.5
1,342.8
1,229.2
379.9
80.1
168.7
299.8
69.2
152.4
198.2
55.4
144.6
$ 2,004.2 $ 1,864.2 $ 1,627.4
$
339.2 $
(35.5) $
(63.5)
58.7%
16.2%
3.4%
7.2%
26.8%
85.5%
73.4%
16.4%
3.8%
8.3%
28.5%
101.9%
78.6%
12.7%
3.5%
9.2%
25.4%
104.1%
2004
2003
2002
$
301.0 $
859.7
291.0 $
804.7
$ 1,160.7 $ 1,095.7 $
$ 1,021.1 $
932.2 $
530.0
232.6
36.7
91.0
890.3 $
130.8 $
538.1
182.5
34.0
90.4
845.0 $
$
87.2
$
$
248.1
685.8
933.9
773.2
496.4
155.8
28.5
56.3
737.0
36.2
24
Years ended December 31
Ratios:
Claims ratio
Commissions
Premium taxes
General expenses
Expense ratio
Combined Ratio
2004
2003
2002
51.9%
22.8%
3.6%
8.9%
35.3%
87.2%
57.7%
19.6%
3.6%
9.7%
32.9%
90.6%
64.2%
20.2%
3.7%
7.3%
31.2%
95.3%
The following tables show revenues and income (loss) before income taxes for our investments
segment and our corporate and other segment.
Years ended December 31
(in millions of dollars)
Investments
Revenue
Interest
Dividends
Other
Total
Expenses
Income (loss) before income taxes
Years ended December 31
(in millions of dollars)
Corporate and other
Revenue
Commissions and advisory fees
Equity earnings
Interest
Other
Total
Expenses
Commissions
General expenses
Interest on debt
Total
Income (loss) before income taxes
2004
2003
2002
$
154.9 $
109.1 $
98.7
3.0
94.5
5.2
98.0
86.0
(2.3)
$
$
$
$
$
$
$
256.7 $
208.8 $
181.7
9.7
8.3
7.8
247.0 $
200.5
$
173.9
2004
2003
2002
16.9 $
8.1
3.1
(0.9)
8.4 $
3.5
1.5
0.1
27.2 $
13.5 $
35.8
1.1
1.2
(0.3)
37.8
1.8 $
7.3
11.7
20.9 $
27.9 $
30.5
12.6
70.9 $
83.4
58.1
14.2
155.7
6.4 $
(57.4) $ (117.9)
25
Realized investment and other gains (losses) include gains in fixed income securities, preferred shares,
common shares and the sale of subsidiaries as shown in the following table:
Years ended December 31
(in millions of dollars)
Realized investment and other gains (losses)
Fixed income securities
Preferred shares
Common shares
Sale of subsidiaries
Total
After-tax total
2004
2003
2002
$
34.6 $
36.2 $
18.0
(6.3)
100.1
4.0
24.4
(3.2)
(25.3)
$
$
132.4 $
32.1 $
91.9 $
6.5 $
(13.4)
10.2
(12.4)
2.5
(8.4)
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Premiums written
Direct premiums written increased by 4.2% after the exclusion of Facility Association and Allianz
written premiums which differs from the 3.8% increase in premiums of $3,575.9 million for the year
ended December 31, 2004 compared to $3,443.8 million for 2003. The acquisition of Allianz accounted
for $59.8 million of the increase in direct written premiums or 1.7%. Net premiums written increased
by $642.4 million, or 21.7%, to $3,609.0 million in 2004 compared to $2,966.6 million in 2003.
Excluding the impact of the quota share treaty related to a 2001 portfolio purchase which was
commuted as of January 1, 2004, net written premiums increased by $72.2 million or 2.2% to $3,423.7
from $3,351.5 million. Net premium written by Allianz for the month of December 2004 accounted for
$34.3 million of the increase or 1.1%.
Personal Insurance
Personal insurance direct premiums written increased by $67.1 million or 2.9% to $2,415.2 million in
2004 compared to $2,348.1 million in 2003.
Personal automobile insurance direct premiums experienced a small decrease (0.6%) in 2004 compared
to 2003 but excluding the impact of Facility Association the growth was 3.5% while the policy count for
personal automobile grew by 1.8%. The reforms in automobile insurance in Ontario, Alberta and the
Atlantic provinces have resulted in reductions of average premiums by 7.3% in 2004 compared to 2003.
The reforms in 2004 led to us taking rate decreases on policy renewals in Ontario of 12.4% in April, in
Nova Scotia of 3% in November, in New Brunswick of 7.7% in October and in Alberta of approximately
8% in October. Belair initiated rate decreases of 10.1% in April and 0.9% in December in Ontario.
Growth in personal property insurance was favourable at 12.3% in 2004 compared to 2003 while the
policy count grew by 2.9%. Our rates are still increasing in Ontario, Nova Scotia and New Brunswick in
personal property. Our Insurance to Value program is also bringing additional premiums.
26
Commercial Insurance
Commercial insurance direct premiums written increased by $65.0 million, or 5.9%, to $1,160.7 million in
2004 compared to $1,095.7 million in 2003. Commercial, non-auto direct premiums written increased by
$55.0 million, or 6.8%, in 2004 compared to 2003. This change is largely driven by rate increases on
renewals averaging 6.8% throughout 2004 in addition to expansion of insured values. The policies in-force
dropped by 2.5% as a result of a combination of corrective actions as well as increased competition.
Commercial automobile insurance direct premiums written increased by $10.0 million, or 3.4%, in 2004
compared to 2003 largely driven by a 3.5% growth in policies in-force.
Revenue
Revenue increased by $765.5 million, or 25.4%, to $3,780.9 million for the year ended December 31, 2004
compared to $3,015.4 million for the comparative period in 2003 due to an increase in net premiums
earned, realized investments and other gains and investment income.
Net premiums earned increased by $603.7 million, or 21.9%, to $3,364.6 million in 2004 compared to
$2,760.9 million in 2003. The 2003 non-recurring ceded premiums of $352.5 million related to a 2001
portfolio purchase quota share treaty, if excluded, would reduce the growth in net premiums earned to
8.1%. The net premium earned for Allianz for the month of December 2004 represents $50.1 million or
1.8% of the growth.
Investment income increased by $53.0 million, or 24.8%, to $267.0 million in 2004 compared to $214.0
million in 2003, which was largely due to the growth in invested assets that resulted from increased
profits due to favourable underwriting results and the growth in our premium base. Most of our
investment income is earned by the investment portfolios of our insurance subsidiaries. Investment
income for those subsidiaries increased by $47.9 million, or 22.9%, to $256.7 million in 2004 from
$208.8 million in 2003 due to growth in invested assets. Investment expenses were $9.7 million for 2004
compared to $8.3 million for 2003. The amount of interest and dividends earned during 2004 reflected
a $2,148.9 million increase in the investment portfolio in 2004, due to positive cash flows from our
insurance subsidiaries, Allianz investments of $1,061.5 million (which produced income for December)
plus the transfer of investments of $665.0 million from reinsurers related to the quota-share treaty
commuted as at January 1, 2004.
The average pre-tax yield of our investment segment, excluding realized investment gains and losses,
was 5.7% and 5.9% for the year ended December 31, 2004 and 2003, respectively.
Realized investment and other gains increased by $100.3 million to $132.4 million in 2004 compared to
$32.1 million in 2003. Included in these realized investment and other gains (losses) for the year ended
December 31, 2004 was $6.9 million (2003 – $29.7 million) of losses on the other than temporary
writedown of certain equities, including the writedown of mutual fund seed capital invested in our
own mutual funds of $1.3 million in 2004 (2003 – $18.0 million).
27
The following table presents realized investment and other gains (losses) for the years ended
December 31:
(in millions of dollars)
Fixed income
Preferred shares
Common shares
Sale of subsidiaries
Total realized investment and other gains
2004
$
34.6 $
(6.3)
100.1
4.0
2003
36.2
24.4
(3.2)
(25.3)
$
132.4 $
32.1
Commissions and advisory fees, which are commissions earned by our wholly-owned P&C insurance
brokers and our broker/dealers, together with fees earned by our mutual fund manager, increased by
$8.6 million to $16.9 million in 2004 compared to $8.4 million in 2003.
The income from investments in our P&C insurance brokerage subsidiaries (accounted for using the
equity method) is included in investment income and was $8.1 million (2003 – $3.5 million).
Income (Loss) Before Income Taxes
For our P&C insurance operations, income (loss) before income taxes is driven by our investment
income, described previously, and our underwriting income (loss).
Underwriting Income
Underwriting results reflect the revenues from net premiums earned discussed above, claims and claims
adjustment expenses (the claims ratio) and commissions, premium taxes and general expenses (the
expense ratio). Commissions and premium taxes are incurred as a percentage of earned premiums and
commissions are adjusted by broker to reflect profit sharing commissions driven by underwriting
profits. Underwriting profitability reached record levels in 2004, reflecting strong market conditions
and a favourable claims environment and particularly reduced frequency.
Personal Insurance
Underwriting income (loss) from personal insurance in 2004 was $339.2 million, an improvement of
$374.8 million compared to a loss of $35.5 million in 2003. This improvement was attributable to a
decrease in the claims ratio to 58.7% in 2004 from 73.4% in 2003 due to improved claim costs which
benefit from reduced frequency.
As previously noted, we benefited significantly from an unexpected reduction in claims frequency as
well as improvement in the assumed underwriting results from the Facility Association. In addition,
early indications are that the automobile reforms appear to be working. Our personal automobile
business experienced the most significant improvement with its claims ratio decreasing to 59.8% in
2004 compared to 80.4% in 2003.
28
During 2004, direct premiums written assigned to us from the Facility Association totalled $81.8 million
compared to $146.6 million in 2003, but generated higher net premiums earned of $109.2 million
compared to $101.0 million in 2003 and a swing in underwriting results of $101.5 million to an
underwriting income of $35.4 million compared to an underwriting loss of $66.1 million in 2003.
Accordingly, the Facility Association combined ratio significantly improved from 165.4% in 2003 to
67.6% in 2004.
Although we had a number of catastrophic events during the year, the personal property frequency has
also been dropping.
In addition to the pro rata share of the underwriting result of the Facility Association as noted above,
our personal insurance operations act as one of the servicing carriers for the Facility Association and
receive fees to offset expenses of administering policies on behalf of the Facility Association. The
expenses of administering these policies are included in the loss adjustment and general expenses of our
personal insurance operations. These fees increased by $27.1 million to $69.6 million in 2004 compared
to 2003 due to increased premiums processed and a change in methodology by the association, which
accelerated the payment of fees.
Our personal insurance expense ratio decreased to 26.8% for 2004 compared to 28.5% for 2003 due to
decreases of 0.2% in the commission ratio, 0.4% in the premium taxes ratio and 1.1% in the general
expense ratio.
Commissions increased by $80.1 million, or 26.7%, to $379.9 million in 2004 compared to $299.8
million in 2003. Regular commissions grew by approximately 21% while our Facility Association
business decreased by 50.1% in 2004 compared to 2003. The remainder of the increase reflects higher
profit sharing commissions paid to brokers of $77.9 million for 2004 compared to $45.8 million for 2003
as a result of the positive underwriting performance.
Premium taxes increased $10.9 million, or 15.6%, to $80.1 million in 2004 compared to $69.2 million in
2003 primarily due to the increase in net premiums earned during the period.
The general expense ratio to net earned premium decreased by 1.1 percentage points to 7.2% for 2004
compared to 8.3% in 2003. In absolute terms, general expenses increased by $16.3 million, or 10.7%, to
$168.7 million in 2004 compared to $152.4 million in 2003. Excluding the impact of commuting the
quota share treaty and the one month of Allianz expenses, general expenses had essentially no growth.
Our workforce was stable in size, partly the result of holding vacant positions open for the transition of
Allianz employees.
Commercial Insurance
Underwriting income from commercial insurance in 2004 was $130.8 million, an increase of $43.6
million compared to $87.2 million in 2003. This increase was primarily due to an improvement in the
claims ratio to 51.9% in 2004 from 57.7% in 2003, which was largely attributable to an increase in rates
on earned premium and favourable claims frequency. Indeed, the earned premium for commercial non-
auto in 2004 reflects a combination of important rate increases in 2003 in excess of 15% as well as an
average rate increase of 6.8% in 2004. The claims frequency in both commercial auto and non-auto
dropped by roughly 15%.
29
In addition, claims and loss adjustment expenses decreased by $8.1 million, or 1.5%, to $530.0 million in
2004 compared to $538.1 million in 2003.
Our commercial insurance expense ratio increased to 35.3% for 2004 compared to 32.9% for 2003 due
to an increase of 3.2% in the commission ratio, no change in the premium taxes ratio and a decrease of
0.8% in the general expense ratio.
Commissions increased by $50.1 million, or 27.5%, to $232.6 million in 2004 compared to $182.5
million in 2003 and net premiums earned grew by 9.5% which generated increased commissions. The
remainder of the increase reflects higher profit sharing commissions of $49.3 million for 2004 compared
to $24.3 million for 2003 as a result of the strong underwriting profits.
Premium taxes increased $2.7 million, or 8.0%, to $36.7 million in 2004 compared to $34.0 million in
2003 due to the increase in net premiums earned during the period.
The general expense ratio to net earned premium decreased by (0.8) percentage points to 8.9% for 2004
compared to 9.7% in 2003. In absolute terms general expenses increased by $0.6 million, or 0.6%, to
$91.0 million in 2004 compared to $90.4 million in 2003. This was primarily the result of a minor
reduction in policies in force.
Expenses
The majority of expenses, $2,894.5 million or 99.4% of the total expenses of $2,913.4 million for the year
ended December 31, 2004, were part of our P&C insurance operations with the remainder comprising
our P&C insurance brokers, investment operations, mutual funds and non-recurring charges related to
a 2001 portfolio purchase. For the year ended December 31, 2003, $2,709.2 million or 97.6% of the total
expenses of $2,775.8 million were part of the P&C insurance operations.
For our non-P&C insurance operations, losses from corporate and other were lower in 2004 than
2003 due mainly to a reduction in expenses related to a 2001 portfolio purchase which totalled
$4.3 million in 2004 (2003 – $41.8 million) and consisted of commission expenses of $4.3 million
for 2004 (2003 – $25.8 million) and general expenses of nil for 2004 (2003 – $16.0 million).
General expenses of our non-P&C insurance operations other than a 2001 portfolio purchase for
2004 were lower by $5.7 million primarily due to lower expenses in our P&C insurance brokers.
Income Taxes
Income tax expense for 2004 was $231.6 million compared to $76.5 million for 2003. This increase was
primarily due to higher pre-tax income as a result of increased underwriting profits for the P&C
insurance subsidiaries. The significant difference between the statutory rate and the effective rate came
from non-taxable investment income, which lowered the tax expense by $42.3 million (2003 – $32.2
million). Although the amount of non-taxable investment income remained substantially the same
between 2003 and 2004, the percentage impact of these non-taxable items on the effective tax rate is
lower in 2004 because of higher overall underwriting income. Amounts of taxes related to non-
deductible expenses and losses for which no tax recovery was recognized has a relatively significant
impact on the effective rate in 2003, but did not materially impact the effective rate in 2004 for the same
reasons. Note 9 to our consolidated financial statements summarizes the income tax rate reconciliation.
30
BALANCE SHEET ANALYSIS
Premiums and Other Receivables
Premiums written are either billed to brokers or directly to policyholders. For 2004, 37% of billing
distribution was attributable to brokers and 63% was attributable to policyholders. Brokers' accounts for
a particular month are due two months later. Policyholders' accounts are either due on receipt or in
installments over the policy term. Premium receivables from brokers and policyholders were $163.8
million and $1,076.0 million, respectively, as of December 31, 2004 and $130.8 million and $920.1
million, respectively, for December 31, 2003.
Other receivables consist of amounts due from the Facility Association and other pools, other insurers
and other which were $202.8 million, $137.3 million and $62.5 million, respectively, as of December 31,
2004 and $139.0 million, $238.4 million and $19.2 million, respectively, as of December 31, 2003.
Investments
We have an investment policy that seeks to provide an attractive risk-return profile over the medium to
long-term. In developing our investment policy, we take into account the current and expected
condition of capital markets, the historic return profiles of various asset classes and the variability of
those returns over time, the availability of assets, diversification needs and benefits, regulatory capital
required to support the various asset types, security ratings and other material variables likely to affect
the overall performance of our investment portfolio. The overall risk profile of our investment portfolio
is designed to balance the investment return needs of our liabilities while optimizing the investment
opportunities available in the marketplace. Management monitors and enforces compliance with our
investment policy. The majority of our investment portfolio is invested in well-established, active and
liquid markets. Fair value for most investments is determined by reference to quoted market prices. In
cases where an active market does not exist, fair value is estimated by reference to recent transactions or
current market prices for similar investments.
Our investment portfolio is managed on a total return basis which views realized gains and losses as
important and recurring components of the return on investment and consequently of income,
although the timing of realizing gains or losses may be unpredictable. Our portfolio construction
methodology takes into account the availability and liquidity of potential investments. We also set
constraints by economic sector and by investment strategy to provide diversification across industries.
We believe this diversification of exposure across a range of business sectors provides positive investment
benefits. At the same time, economic difficulties concentrated in a select business sector are dampened.
Due to potential tax ramifications of these strategies, specific focus is placed on the management of the
portfolio to optimize the after-tax total return.
31
The following table sets forth our cash and invested assets as at December 31, 2004 and 2003.
As at December 31
(in millions of dollars)
2004
Carrying % of CV
Value
(“CV”)
Fair
Value
2003
CV % of CV
Fair
Value
Cash and cash equivalents
$
357.2
5.6% $
357.2 $
104.6
2.6% $
104.6
Fixed income securities(1)
Commercial mortgages
Preferred shares
Common shares(1)
Other investments
3,685.1
78.7
1,069.6
997.7
179.3
57.9%
1.2%
16.8%
15.7%
2.8%
3,776.5
1,660.4
83.3
1,136.3
1,077.2
179.3
113.1
1,096.8
782.4
208.9
41.9%
2.8%
27.7%
19.7%
5.3%
1,690.3
118.0
1,152.1
846.1
208.9
Total cash and invested assets
$ 6,367.6
100.0% $ 6,609.8 $ 3,966.2
100.0% $ 4,120.0
(1) Includes seed capital investment in affiliated mutual funds, carrying value as at December 31, 2004 – $155.0 million
(December 31, 2003 – $157.1 million).
Cash and cash equivalents and investments increased by $2.4 billion or 60.5% to $6.4 billion at
December 31, 2004 compared to 2003. The Allianz acquisition added $1,061.5 million and the
commutation of a quota share also added $665.0 million. In addition, organic business growth and
positive investment returns contributed to portfolio growth.
Included in the fixed income and preferred share portfolio at December 31, 2004 were approximately
$26.7 million of securities with a rating below investment grade. The average duration of our publicly
traded fixed income portfolio was 6.2 years on December 31, 2004. Our exposure to debt private
placements and secured commercial mortgages remains relatively minor.
Other investments consist of loans to brokers with carrying value of $156.3 million as of December 31,
2004 (December 31, 2003 – $165.5 million), equity investments in brokers with carrying value of $13.4
million as of December 31, 2004 (December 31, 2003 – $14.3 million) and other commercial loans with
carrying value of $9.6 million as of December 31, 2004 (December 31, 2003 – $29.1 million).
32
The following table sets forth our exposure to the ten largest industrial sectors for our combined fixed
income securities and preferred and common share portfolios as at December 31, 3004 and 2003.
As at December 31
(in millions of dollars)
2004
Carrying % of CV
Value
(“CV”)
Fair
Value
Diversified financial services
$ 1,321.4
22.0% $ 1,379.6 $
Banks
Utilities
Telecommunication services
Insurance
Oil and gas
Special purpose
Real estate
Media
Food & Drug Retail
636.2
435.3
292.8
246.3
184.3
152.0
124.7
106.8
52.2
10.6%
7.2%
4.9%
4.1%
3.1%
2.5%
2.1%
1.8%
0.9%
674.1
461.9
299.2
266.7
188.7
155.5
132.3
109.6
54.7
2003
CV % of CV
746.5
530.2
268.4
213.2
169.7
108.3
46.8
127.7
75.2
47.0
19.3% $
13.7%
6.9%
5.5%
4.4%
2.8%
1.2%
3.3%
1.9%
1.2%
Fair
Value
780.5
559.2
284.7
216.7
178.7
110.0
48.7
133.3
77.6
49.4
Total top ten sectors
$ 3,551.9
59.1% $ 3,722.3 $ 2,332.9
60.4% $ 2,438.8
Government
Other
1,805.7
652.7
30.0%
10.9%
1,854.9
675.4
960.7
568.0
24.9%
14.7%
974.8
601.8
Total investment assets
$ 6,010.4
100.0% $ 6,252.6 $ 3,861.6
100.0% $ 4,015.4
The aggregate rating of our fixed income portfolio is maintained at “A+” or higher based on S&P
ratings. Additional constraints by rating category govern the issuer specific exposure. The weighted
average quality ratings of our fixed income and preferred share portfolios as at December 31, 2004 was
“AA–” by S&P. In mapping the preferred share ratings, a “P1” is considered to be a single A rating. Our
relative exposure to fixed income securities has increased recently as the availability of economically
attractive alternative investments has slightly diminished. At year end, the aggregate credit quality of the
fixed income portfolio reflected the addition of the Allianz fixed income assets which had a lower
proportional exposure to AAA rated securities. In addition, the year end fixed income portfolio credit
rating distribution showed the results of tactical credit positioning in the portfolio.
33
The following graphs set forth our fixed income portfolio by credit quality according to S&P as at
December 31, 2004 and 2003.
FIXED INCOME BY CREDIT QUALITY
AS AT DECEMBER 31, 2004
CARRYING VALUE
FIXED INCOME BY CREDIT QUALITY
AS AT DECEMBER 31, 2003
CARRYING VALUE
Exposure to the preferred share asset class contributes positively to the overall after-tax return of the
investment portfolio. Our positive earnings position facilitates material exposure to preferred shares in
our investment portfolio. With an emphasis on after-tax earnings, we are able to capture the incremental
value offered by these securities. The following charts set forth our preferred share portfolio by credit
quality according to S&P as at December 31, 2004 and 2003.
PREFERRED SHARES BY CREDIT QUALITY
AS AT DECEMBER 31, 2004
CARRYING VALUE
PREFERRED SHARES BY CREDIT QUALITY
AS AT DECEMBER 31, 2003
CARRYING VALUE
B0.0%BB 0.2%BBB4.7%A33.9%A29.2%AA 22.5%AA12.9%AAA 38.5%AAA 54.2%