Intact Financial Corporation Annual Report 2005

Plain-text annual report

t r o p e r l a u n n a 5 0 0 2 . c n I a d a n a C G N I The ING Ottawa Marathon The National Capital Race Weekend featuring the 2005 ING Ottawa Marathon took place May 28 – 29 and attracted over 26,000 runners, walkers, inline skaters and their families who ran, walked and skated through distances ranging from 2 km to 42.2 km. For 2006 event details, go to www.ingottawamarathon.ca. www.ingcanada.com ING Canada Inc. 181 University Avenue, 7th Floor Toronto, Ontario M5H 3M7 ING Canada Inc. 2005 annual report People Passion Performance CORPORATE PROFILE OUR STRATEGY SHAREHOLDER INFORMATION front cover left to right: Markens Delince belairdirect Workforce Coordinator, Quebec Nathalie Thériault Commercial Underwriter, Quebec David Gale Manager, Internal Communications, Ontario Punam Makwana Claims Representative, Alberta ING Canada is the largest provider of property We intend to leverage the advantages of scale and casualty insurance in Canada, through the to achieve sophisticated pricing, consistently ING Novex, Nordic, Trafalgar, Belair and ING proﬁ table underwriting and cost-effective and Insurance companies. We provide automobile, timely claims management. property and liability insurance to individuals and small to medium-sized businesses across Canada. Fundamental to our strategy is a customer-centric An investment management subsidiary manages commitment to product innovation, multi- the invested assets of our insurance subsidiaries. channel access and ease of doing business for We enjoy leading positions in all markets where policyholders and brokers alike. we operate including Ontario, Quebec and Asset management will continue as an internal Alberta, our three largest markets. core competency focused on achieving superior Personal automobile insurance accounts for approximately 50% of our business while after-tax returns. personal property comprises roughly 20% OUR PRIORITIES and commercial insurance about 30%. OUR GOAL To create a sustainable, superior performance gap, as measured by return on equity, relative to the Canadian property and casualty industry of not less than 500 basis points (5%). Our priorities are to: • introduce improved technologies to make doing business easier and less costly, particularly regarding our direct, Internet-based products; • reduce claims costs through greater use of preferred providers in settling auto, property and health care claims; • make accretive domestic acquisitions, as opportunity permits, where our operating strengths can be applied quickly to familiar product lines and geographies. Financial Strength Rating (Insurance subsidiaries) A.M. Best A+ Standard & Poor’s A+ Long-term Senior Debt (ING Canada Inc.) Dominion Bond Rating Service A (low) Toronto Stock Exchange Listing Ticker Symbol: IIC.LV (Effective June 12, 2006 our symbol will be “IIC”) 2005 Annual Meeting The Annual Meeting will be held on: Date: May 1, 2006 Time: 10:00 a.m. EST Place: Design Exchange 234 Bay Street Toronto, Ontario M5K 1B2 Institutional investors, security analysts and others who may want additional ﬁ nancial information can visit the Investor Relations section of the www.ingcanada.com web site, call 1-866-778-0774 or contact: Brian Lynch Director, Investor Relations 416-941-5181 brian.lynch@ingcanada.com For media inquiries, please contact: Shawn Murray Manager, External Communications 416-941-5151 ext. 2930 shawn.murray@ingcanada.com Version française Il existe une version française du présent rapport annuel à la section Relations investisseurs de notre site Web ingcanada.com. Les parties intéressées peuvent obtenir une version imprimée en appelant au 1 866 778-0774 ou en envoyant un courriel à ir@ingcanada.com. Transfer Agent and Registrar Computershare Investor Services Inc. 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 1-800-564-6253 Earnings Release Dates February 16, 2006 May 11, 2006 August 10, 2006 November 9, 2006 Dividend Payment Dates (Subject to approval by the Board of Directors) March 31, 2006 June 30, 2006 September 29, 2006 December 29, 2006 Dividend Record Dates (Subject to approval by the Board of Directors) March 15, 2006 June 15, 2006 September 15, 2006 December 15, 2006 Dividend Reinvestment Shareholders can reinvest their cash dividends in common shares of ING Canada Inc. on a commission- free basis either through their broker, subject to eligibility as determined by the broker, or through Canadian ShareOwner Investments Inc. Full details can be obtained by contacting Investor Relations or at www.investor.ingcanada.com under “Share Information”. Auditors Ernst & Young LLP 1 Financial Highlights 2 Chairman’s Message 4 President and CEO’s Message 7 Off to a Great Start 49 Notes to Financial Statements 78 Board of Directors 79 Executive Ofﬁ cers 80 Corporate Information 13 Management’s Discussion & Analysis 81 Shareholder Information 45 Financial Statements Design: Haughton Brazeau Design Associates Photography: Paul Orenstein Photography Printing: graﬁ kom. FINANCIAL HIGHLIGHTS Combined Ratio* 3,444 3,576 3,905 2003 2004 2005 Return on Equity 782 624 151 2003 2004 2005 (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 98.1% 86.0% 86.0% 2003 2004 2005 Direct Premiums Written ($ millions) 40.9% 31.6% 16.5% 2003 2004 2005 Net Income ($ millions) 2005 2004 2003 $ 3,905 $ 3,576 $ 3,444 $ 3,840 $ 3,365 $ 2,761 $ 4,446 $ 3,781 $ 3,015 $ 782 $ 624 $ 2,893 $ 2,060 $ 127 $ 256 4.2% 11.1% 56.3% 56.6% 29.7% 29.4% 86.0% 86.0% $ $ $ 151 989 483 32.8% 68.1% 30.0% 98.1% 31.6% 40.9% 16.5% * For Property and Casualty insurance subsidiaries. The combined ratio is the sum of claims, claims expenses, commissions, premium taxes and general expenses divided by net premiums earned. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 1 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 1 3/17/06 10:43:26 AM 3/17/06 10:43:26 AM 2 Chairman’s Message Our Strategy Is Working ING Canada proved its proﬁ ciency at implementing its growth strategy in 2005, leading to another year of record results. The Company’s growth strategy, overseen by the Board of Directors, has remained consistent over several years. It is to acquire and build upon ING Canada’s scale advantage as the country’s leading provider of property and casualty insurance, through both organic growth and acquisitions. This size advantage is in turn applied in several key ways to enhance the quality of the Company’s operations and the value it extends to customers. By virtue of the growth in the scale of its operations, ING Canada has developed high levels of skill and expertise in risk assessment and management across the country. This knowledge translates into sophisticated application of pricing and underwriting, which helps ensure that products are priced fairly for consumers as well as proﬁ tably for ING Canada and its shareholders. Scale is also used to advantage in the timely management of claims and the optimal utilization of capital and investments. Size alone, however, does not guarantee success. In 2005, ING Canada also furthered its customer- centric strategic focus with the introduction of innovative new products and investments to grow its main distribution channels. Results Are Exceeding Expectations Through the successful execution of its strategy in 2005, ING Canada continued to reach its goal of outperforming its industry peers, delivering excellent value to shareholders. The Company continued to grow despite a softer premium environment, achieving exceptional earnings while implementing new measures and platforms for future growth. ING Canada has a lengthy history of successful acquisitions and integrations and demonstrated this yet again last year with Allianz Canada, which was acquired in December of 2004. “ By virtue of the growth in the scale of its operations, ING Canada has developed high levels of skill and expertise in risk assessment and management across the country.” Yves Brouillette Chairman 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 2 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 2 3/19/06 12:59:51 AM 3/19/06 12:59:51 AM ING Canada Inc. 3 The successful integration of Allianz was compliance, risk assessment and management, an excellent example of ING Canada’s ability as well as human resources and succession to grow through strategic, well-managed planning. We introduced new guiding principles acquisitions. Allianz contributed greatly in 2005 for governance, especially in the context of to ING Canada’s overall results and to positioning our relationship with our majority shareholder, it for further organic growth in the future. and continued to independently assess Shareholders Have Been Rewarded our obligations to shareholders. We continued We attracted tremendous support from investors to implement procedures to further our in our ﬁ rst full year as a public company. commitment to fully meet our expanded public Directors’ performance to ensure we fully meet This constitutes a strong vote of conﬁ dence disclosure requirements. for the Company and the strategic direction of management and the Board of Directors. The An Exciting Year Board is responsible for the supervision and It was a busy and exciting year for ING Canada’s guidance of management, with the objective of Directors, senior management and staff. On behalf enhancing value for shareholders and ensuring of the Board and the shareholders we represent, the Company’s long-term growth and viability. I would like to extend our thanks and appreciation In 2005, ING Canada clearly demonstrated to to the entire ING Canada team for another shareholders its commitment to creating excellent year. I would also like to offer our thanks measurable, sustainable value. and warm wishes to Michael Mackenzie, who is retiring from the Board of Directors after ten years With its new status as a publicly of distinguished service. Mr. Mackenzie’s insight traded company, the structure and responsibilities of ING Canada’s Board and committees expanded. Active Oversight Remains a Priority The Board of Directors is actively involved, directly and through its committees, in overseeing all aspects of ING Canada’s operations. As a member of one of the world’s largest and best- known public ﬁ nancial services companies, ING Canada already maintained before its initial public offering in 2004 a long history of meeting and exceeding best practices in corporate governance. With its new status as a publicly traded company, the structure and responsibilities of ING Canada’s Board and committees expanded. Over the past year, the Board was actively involved in guiding the overall strategic plans and breadth of experience have been of great beneﬁ t to ING Canada, and his wise counsel will be missed. I would also like to offer thanks and congratulations to Mark Tullis, who has joined the senior management team and will leave the Board of Directors at the year’s annual general meeting. Mr. Tullis is succeeding Senior Vice-President and Chief Financial Ofﬁ cer Mike Cunningham, who has elected to retire. To Mr. Cunningham we also offer our sincere thanks and best wishes. We look forward to continuing to work closely with the management team as ING Canada furthers its commitment to provide shareholders and customers alike with the best possible value in Canada’s property and casualty industry. of the Company while also continuing to bring Yves Brouillette independent oversight to key corporate functions Chairman such as ﬁ nancial analysis and reporting, 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 3 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 3 3/17/06 10:43:42 AM 3/17/06 10:43:42 AM 4 President and CEO’s Message Outperformance Builds a Solid Foundation for Growth 2005 was another strong year for ING Canada, one in which the Company achieved excellent results and positioned itself for continued growth in the Canadian property and casualty insurance industry. Once again, ING Canada attained levels of performance above the industry average, with a return on equity in 2005 of 31.6%, a 9.2% growth in direct premiums written and a 25.2% increase in net income over 2004 to $781.8 million. Our strong results in 2005 stemmed from another successful acquisition and our superior skills in pricing, underwriting, claims and asset management. We continue to capitalize and build upon our position as the largest provider of property and casualty insurance in Canada. The single greatest contributor to our growth in 2005 was Allianz Canada, which we acquired late in 2004. The contribution of Allianz to our earnings was even better than expected, and is reﬂ ected throughout the results detailed on the following pages. With eleven acquisitions over seventeen years, we have proven that we can successfully integrate strategic acquisitions. Through these acquisitions we have gained experience and knowledge and become better at the integration process, making it another of our core competencies. We have also built our internal strengths and our ability to achieve solid growth into the future. Proﬁ tability in 2005 was driven by our investment and underwriting performance. Proﬁ tability in 2005 was driven by our investment and underwriting performance. In automobile insurance, cost containment measures introduced by provincial governments over the past two to three years have been successful. In home insurance, our results were impacted by signiﬁ cant weather-related losses in Alberta, Ontario, and Quebec. Meanwhile, results in commercial lines were affected by a move toward lower premiums while at the same time costs associated with settling claims continued to rise. Our underwriting expertise allows us to adapt to such changes in the marketplace while continuing to deliver superior results and value. With a large network of underwriting and claims staff across the country, our scale provides us with a better understanding of local market conditions and the particular needs of individual clients. We have the skills and expertise to offer a better value proposition to our clients, with the appropriate products at the right price backed by “customer- centric” service. We understand that our success is linked with that of our broker partners. Distribution Is Key In 2005, we continued to launch new initiatives to strengthen our relationships with brokers and improve their ability to serve customers. We understand that our success is linked with that of our broker partners. Last year we implemented new technology to make brokers’ operations more efﬁ cient and increase their ease of doing business with us. We expanded our already extensive broker training offerings with new products and small business training programs. And we increased our efforts to conduct joint marketing with brokers, helping them leverage our internationally recognized brand. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 4 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 4 3/17/06 10:43:42 AM 3/17/06 10:43:42 AM ING Canada Inc. 5 The Allianz acquisition brought to our organization As with underwriting, our size and scale advantage a wealth of talented insurance professionals who is extended to clients in claims management. Our have further improved the extent of our market presence throughout Canada allowed us to make knowledge and expertise. We also gained from further improvements to claims handling last Allianz’s two broker networks, Canada Brokerlink year, building on one of the best service levels of and Grey Power. Added to our existing Equisure our industry offered through our Client Service Financial Network, these new channels will be Guarantee. With this Guarantee, we commit to major drivers of future growth. make meaningful contact with a customer within 30 minutes of them calling us so as to provide assistance and advice in case of emergency. If not, we will issue a cheque to the customer in an amount equal to their annual premium up to a maximum of $1000. We ask customers what they like about us and how we can do better, and we act on their feedback with innovative new products and services. At the same time, through belairdirect, we continued to make substantial investments in technology to better serve those customers who choose to do business with us over the Internet. Our goal is to grow belairdirect into “the” web insurer in Canada. We’re Customer-centric Being customer-centric means working hard to anticipate and understand customers’ needs and ﬁ nding new ways to exceed their expectations. Through research of our customers and brokers, we track our performance and seek new ways to grow and improve. We ask customers what they like about us and how we can do better, and we act on their feedback with innovative new products and services. An example last year was the introduction in Ontario of our Responsible Driver Guarantee, which allows automobile insurance customers one at-fault accident, with no impact on their insurance premiums or driving record with us. “ Our history of growth and proﬁ tability above the industry average demonstrates our ability to withstand industry cycles.” Claude Dussault President & CEO 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 5 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 5 3/19/06 1:01:06 AM 3/19/06 1:01:06 AM 6 Our claims management proﬁ ciency, customer In 2006 our scale, skill at core focus and ﬁ nancial strength mean we are there competencies and ﬁ nancial strength for Canadians during major disasters, such as last summer’s violent storms. In these cases of multiple, serious losses we are able to call in extra claims staff, emergency specialists and outside adjusters to address damage immediately and help customers recover as quickly as possible. Our success has in turn allowed us to increase our commitment to Canadian communities, through sponsorship of major events like the ING Ottawa Marathon and the work of the ING Foundation, which focuses on youth initiatives. We are making our presence in Canadian communities better known, while simultaneously growing our reputation and stature in the insurance marketplace. On the Horizon Looking ahead to the challenges and opportunities in 2006 and beyond, we are committed to continue to grow at a rate greater than the industry average and to exceed average industry return on equity levels by at least 500 basis points (5%). Our history of growth and proﬁ tability above the industry average demonstrates our ability to withstand industry cycles. And our ﬂ exibility as a public company and increased access to capital position us well for additional acquisitions, should appropriate opportunities arise. In automobile insurance, our industry has made signiﬁ cant improvements in recent years by working collaboratively with regulators and other stakeholders to curb factors contributing to claims inﬂ ation while also ensuring customers have adequate coverage. With the success of these will continue to be what allow ING Canada to outperform our industry. Home insurance has historically been counted on mainly for ﬁ re and theft protection, and has been priced accordingly. More and more now, however, home insurance is used for protection against the elements. Stringent health and environmental standards have made water damage repairs more costly, while at the same time many people invest more in the contents and structure of their home. Similar changes in risks and values have appeared in commercial insurance. Our broker partners play a key role in advising customers on how to make sure they have appropriate coverage. In 2006 our scale, skill at core competencies and ﬁ nancial strength will continue to be what allow ING Canada to outperform our industry. We continue to grow, as a leader in our industry and as an organization. In keeping with our recent growth and future plans, 2006 will see 1,700 of our staff brought together at a new head ofﬁ ce facility in Toronto and another 800 employees consolidated at our location in St. Hyacinthe, Quebec. I would like to thank all of our staff for their dedication and commitment to achieving our ambitious goals. I also wish to thank our customers, brokers and shareholders for their continued conﬁ dence in our ability to meet their needs. reforms, automobile insurance premiums have been reduced. We must now encourage regulators Claude Dussault President & CEO and governments to remain diligent, so that improvements which have stabilized costs remain in place. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 6 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 6 3/17/06 10:43:59 AM 3/17/06 10:43:59 AM ING Canada Inc. 7 Off to a Great Start Our First Year 2005 was our ﬁ rst full year as a public company following our initial public offering and listing on the Toronto Stock Exchange on December 15, 2004. The year was highlighted by excellent ﬁ nancial results, attributable in part to the smooth integration of Allianz Canada and a signiﬁ cant ﬁ nancial contribution from this recent acquisition. We also continued our efforts to extend a track record of industry outperformance across all stages of the business cycle. Allianz immediately became an important contributor to our results. These efforts put the customer ﬁ rst and include enhancement and expansion of distribution, creation of a differentiated product and service offering and increasing use of technology to make doing business easier for policyholders and distributors. The Allianz Acquisition Has Been a Winner Allianz of Canada was purchased in December 2004 and immediately became an important contributor to our results, generating underwriting income of $49 million in 2005. This company was quickly integrated into our existing operations, business retention levels tracked our assumptions and healthy market conditions generally resulted in better than expected earnings. We welcomed over 1,000 new employees to ING and our subsidiaries from Allianz, and beginning in March, we renewed more than 347,000 Allianz policies on our systems in 2005. The policy renewal and integration process has been substantially completed. As well as bringing new talent and clients to ING, Allianz brought additional distribution, including the Canada Brokerlink and Grey Power networks. These channels are now part of a new Afﬁ liated Distribution Network comprising 141 ofﬁ ces and approximately 1,700 staff located throughout Canada. centre: Jim Stone Broker, Canada Brokerlink, with CBL customers Lloyd & Amy Sabas “ The My Home product puts ING on the cutting edge. No other company offers such a unique service. What a great way to protect our clients! Once again, ING leads the way.” Jim Stone Broker, Canada Brokerlink, Alberta 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 7 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 7 3/19/06 1:17:10 AM 3/19/06 1:17:10 AM 8 The Customer Is King As we’ve done many times before in the Leveraging our core competencies of pricing, face of nature’s fury, we assembled staff from underwriting and claims management, we will across Canada in the case of the Alberta continue in 2006 to differentiate our value storms, to respond immediately to the many proposition. people impacted. This will include expanded Internet capabilities Despite occasionally calling on others, we handled at direct distributor belairdirect and enhanced 97% of all claims in 2005 through our in-house customer service to homeowners through roll- team of over 1,750 claims personnel. Many of out of Property Rely, a network of preferred these claims involved our preferred provider contractors and suppliers similar to our Auto Rely network, enabling us to resolve things quickly and network of preferred auto body shops. cost-effectively. Approximately one-half of our automobile policy claimants took advantage of our Auto Rely network of preferred body shops resulting in expedited service and reduced costs. 94% of our claimants were satisﬁ ed with the claims process and the payments they received. Our focus on the customer extended to our commercial clients with expansion in 2005 of our small business “AcceL” offering and an improved service proposition to brokers. Results in Ontario were particularly encouraging with insured risks up more than 10%. left to right: Jeff Martens Claims Representative, Alberta Doug Lepan Commercial Account Executive, Canada Brokerlink, Alberta As always, customer centricity means being there when we’re needed most. We paid out over $2 billion in total auto, property and commercial claims in 2005 including settlement of more than 12,700 claims following torrential rain in the Greater Toronto Area and punishing hail and rain in Alberta last summer. “ ING is about helping people. We sell a promise, and work hard to keep that promise.” Jeff Martens Claims Representative, Alberta 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 8 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 8 3/19/06 1:17:15 AM 3/19/06 1:17:15 AM ING Canada Inc. 9 We know the little things count too, like having Leveraging statistics is a key to success the tow truck bring a rental car on weekends and in our business. evenings when an accident leaves a client without wheels, a service we began piloting in Montreal and Ottawa during the year. Customer satisfaction surveys during the year indicated that 94% of our claimants were satisﬁ ed with the claims process and the payments they received. Technology Is Our Friend We spent $109 million or 2.8% of direct written premiums on information technology last year including $64 million on new initiatives. Signiﬁ cant developments in 2005 included: Taming the Business Cycle Property and casualty (P&C) insurance is a cyclical business, ﬂ uctuating between “hard” markets characterized by higher premium rates and “soft” markets reﬂ ecting aggressive pricing and inadequate returns on capital. For example, a hard auto market was in effect during 1998-2002 pushed by claims inﬂ ation resulting from rising health care costs and systemic fraud. This gave rise beginning in 2003 to regulatory reforms in Atlantic Canada, Ontario and Alberta that took costs out of the • Adoption of Allianz’ claims management system. system and choked inﬂ ation. Meaningful This was an added beneﬁ t of the acquisition as premium rate reductions and a softening of we were already looking at alternatives to our the market have followed, although competition existing system. The new system is improving has remained rational. workﬂ ows, increasing productivity and ensuring consistency in claims handling. This is of no small consequence considering the costs of settling and adjusting claims totalled $2.2 billion The resulting premium swings tend to cause concern to policyholders, shareholders, regulators and legislators and to us as well. or roughly 65% of our total expenses in 2005. While cycles tend to play out over ﬁ ve to seven • Leveraging statistics is a key to success in our years creating volatility in the medium term, the business. Enhancements to our Data Warehouse industry has actually tended toward stability over made it easier for our claims people and under- longer periods. During the past thirty years, for writers in the ﬁ eld to access and make practical example, the industry’s return on equity averaged use of the industry’s largest proprietary database. roughly 10% over this entire period as well as • A commitment to making belairdirect the Internet insurer of choice through an improved value proposition, expanded functionality and closer integration of our web site and call centre. during each decade within this timeframe. Why do cycles occur and what is ING doing to manage within them? Cycles take place principally as a result of: • supply-driven pricing and inefﬁ cient capital management; • the time lag between pricing and conﬁ rmation of costs; • legislative and regulatory processes that tend to increase cycle amplitude. Paul Martin Broker, KRG Insurance Brokers Inc. Member, ING Ontario Broker Advisory Council 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 9 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 9 3/19/06 1:17:20 AM 3/19/06 1:17:20 AM 10 left to right: Geneviève Cyrenne belairdirect Call Centre Team Leader, Quebec Caroline Turgeon belairdirect Call Centre, Quebec Rita Roy belairdirect Call Centre, Quebec Supply-driven Pricing Efﬁ cient capital management is a priority at The Canadian P&C industry has historically had ING Canada. And this priority is closely aligned few opportunities to deploy capital outside its with the discipline we must demonstrate as a ongoing activities, capital which has tended to public company. The issuance of publicly traded grow primarily through earnings. shares additionally provides an acquisition As a result, excess capital generated in hard markets tends to end up increasing competition for business, leading to inadequate pricing and creating soft markets. currency which can be used to facilitate industry consolidation and market stabilization. Finally, as a well capitalized company, we are better able to weather cyclical swings in the market. “ A stimulating environment with a young and dynamic team.” Caroline Turgeon belairdirect Call Centre, Quebec belairdirect 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 10 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 10 3/19/06 1:17:23 AM 3/19/06 1:17:23 AM ING Canada Inc. 11 Lag Between Pricing and Cost Conﬁ rmation ING has made a commitment of time and While policies issued are typically for a one-year resources to actively engage governments term, the basis on which pricing is determined, the and regulators in a dialogue. time involved in designing and selling a product and the prolonged periods involved in settling a claim can span ﬁ ve years or more. Pricing is based on actual experience over the preceding three to ﬁ ve years. Automobile insurance rates need to be ﬁ led, the product has to be sold, premiums earned and claims made. Bodily injury claims in particular, can take prolonged periods of time to fully settle. This can result in inadequate pricing that doesn’t fully consider the longer term costs of doing business. ING leverages the industry’s largest proprietary client database and Regulatory and Legislative Intervention We believe free, open markets that foster competition, product innovation and efﬁ cient capital management work best in making insurance coverage affordable and accessible for consumers. Automobile insurance is a compulsory product, the costs and pricing of which are not always fully or widely understood. Regulatory and legislative intervention has a tendency to amplify cyclical swings by occasionally overreacting to consumer concerns that can be better dealt with by competitive market forces. actuarial staff to “stay ahead of the ING has made a commitment of time and curve” and avoid major pricing swings resources to actively engage governments and regulators in a dialogue and collaborate to achieve a more effective regulatory model that: • addresses product availability and affordability at the macro level; • maintains a competitive environment driven by efﬁ cient capital management and effective risk management. and inadequate reserve levels. ING leverages the industry’s largest proprietary client database and actuarial staff to “stay ahead of the curve” and avoid major pricing swings and inadequate reserve levels. Although we’re not immune to rapid changes in claims inﬂ ation, increased fraud and other negative trends, we have often been able to mitigate the impact relative to the industry’s overall experience. For example, over the past 11 years, which includes the difﬁ cult 1998 – 2002 period when the industry suffered heavy underwriting losses in Ontario, ING was able to generate a return on equity that was some 750 basis points (7.5%) greater than the industry result. Lisette Dagher IT, Helpdesk Coordinator, Quebec Gary Lemaire IT, Systems Analyst, Quebec 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 11 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 11 3/19/06 1:17:28 AM 3/19/06 1:17:28 AM 12 Caring by Sharing We also support the communities in which At ING Canada we believe success is something our employees live and work. Our United Way that’s shared, that investments in our youth and employee matching program was once again communities yield high returns and that there are a great success. Thanks to the generous initiatives worth sponsoring by one of the world’s contributions of our employees, we were able strongest brands. to present this charity with a gift of $955,000. At ING Canada we believe success is something that’s shared. Through the ING Foundation, we continued to establish partnerships with community-based organizations that deliver meaningful and sustainable programs aimed at improving the quality of life for Canadian youth. Our two main sponsorships, the Montreal Bike Fest and the ING Ottawa Marathon were big hits, attracting some 30,000 cyclists and more than 26,000 participants respectively. The Women in Insurance Cancer Crusade was just one of many beneﬁ ciaries of the ING Ottawa Marathon, using the event to raise more than $16,000. And we expect to do more in 2006. Our signature program, Youth in Motion’s “Top 20 Under 20” celebrated the inspirational achievements and leadership of twenty individuals aged 10 to 19. The program supports the personal and professional development of these youth through a leadership summit and a unique mentoring program. We have become a Premier Partner of Canada’s national speed skating teams, and we will actively participate in the ING Chances for Children program, a global initiative in partnership with UNICEF aimed at raising funds to help give 50,000 children in developing countries access to education by the end of 2007. left to right: Louise Fournier Consultant, Communications, Quebec Stephanie Dotto Top 20 Under 20 Recipient, Quebec “ING’s support of the Youth in Motion’s Top 20 Under 20 program has helped me and the other winners experience an extraordinary opportunity to broaden our horizons, have the beneﬁ ts of a mentor in our area of interest and help maximize our potential.” Stephanie Dotto Top 20 Under 20 Recipient, Quebec 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 12 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 12 3/20/06 6:01:10 PM 3/20/06 6:01:10 PM ING Canada Inc. 13 MANAGEMENT’S DISCUSSION AND ANALYSIS March 3, 2006 The following discussion and analysis of our ﬁ nancial condition and results of operations should be read in conjunction with our audited consolidated ﬁ nancial statements and accompanying notes thereto in our Annual Report and our Annual Information Form available at www.sedar.com. The Company uses both generally accepted accounting principles (GAAP) and certain non-GAAP measures to assess performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are unlikely to be comparable to any similar measures presented by other companies. ING Canada analyzes performance based on underwriting ratios such as combined, expense and loss ratios. These terms are de ﬁ ned in the glossary of terms found on the Investor Relations section of our web site at www.ingcanada.com and appear with a footnote description whenever the term ﬁ rst appears in the management’s discussion and analysis. Certain totals, subtotals and percentages may not agree due to rounding. Current Outlook Several key factors will affect the property and casualty (“P&C”) insurance industry in 2006. • Stable claims costs in automobile insurance: Automobile insurance reforms adopted by various provinces over the last two years continued to be effective in 2005 at containing and stabilizing claims costs. Product availability and affordability have accordingly been restored. Sustainability of these cost containment measures as well as potential rate reductions will continue to be the key performance drivers in 2006. Industry returns • Low frequency of automobile claims: Automobile claims frequency remains low and we believe in automobile insurance in 2006 are likely to exceed historical levels. frequency will either increase or continued low frequency will lead to premium reductions in 2006. Nevertheless, barring unexpected developments, industry returns in automobile insurance in 2006 are likely to exceed historical levels. • Commercial insurance competition: Commercial insurance continues to be competitive; prices are softening but continue to yield returns above historical levels. We remain disciplined in pricing and underwriting and committed to superior service to our brokers and commercial customers. • Non-residential construction cost increases: Non-residential construction cost increases are putting pressure on commercial insurance underwriting margins. We are working with our brokers to ensure that our commercial customers retain sufﬁ cient coverage. • Lower industry growth rates but still strong underwriting proﬁ ts: We expect the industry’s top-line growth rate for the next 12 months to be below historical levels, and for the industry, underwriting results to fall short of the favourable level experienced in 2005. That said, underwriting results in 2006 should exceed historical returns. ING Canada, with its scale advantage, underwriting discipline and pricing sophistication is well positioned to capitalize on the above conditions and continue to outperform the industry’s return on equity for the foreseeable future. Our distinct product and service proposition delivered through a multi-channel distribution network will be a key driver in fuelling organic growth. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 13 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 13 3/19/06 1:17:37 AM 3/19/06 1:17:37 AM 14 Challenges and Strategy Our strategy continues to be to leverage our scale and core competencies in underwriting, pricing and claims in providing our distributors and policyholders with a superior service and product proposition, leading to sustainable organic growth and industry outperformance. Longer-term, domestic acquisitions enabling us to increase our market share in existing product lines within existing geographies is an important, complementary aspect of our strategy. While 2005 extended the strong ﬁ nancial performance we and the industry enjoyed in 2004, key factors in determining future performance will include the ability of provincial reforms to continue to keep costs in check and continuation of historically low levels of claims frequency. Top-line growth will be a challenge in 2006 as premium rate reductions implemented in prior years continue to work their way through the portfolio. Legal and constitutional challenges to the caps on compensation for minor injuries enacted by various provinces will be closely monitored. While claims frequency has remained at benign levels, we have seen increased severity of claims in recent quarters, as water and wind damage seem to take a larger toll than in the past. Also, non-residential construction costs are rising faster than premium rates, creating some pressure on margins. While premium growth will likely be constrained in 2006, we believe that we can continue to generate meaningful increases in the number of risks insured during the year, an important measure of organic growth. We expect organic growth will result from initiatives focused on improved technology, making it easier to do business with us, and by increasing the value of our offerings through service enhancements and product innovation. We will also continue to use our sophisticated pricing and underwriting approach, together with our strong in-house claims capability, to closely monitor the nature of losses incurred to ensure our products provide for appropriate levels and types of coverage priced in accordance with the risks assumed. Creating Value for Shareholders As we did in 2004, we exceeded by a wide margin in 2005 our objective of outperforming the industry’s return on equity (ROE) by at least 500 basis points (5%). The 35.2% ROE achieved by our insurance subsidiaries in 2005 compared to a Canadian property and casualty industry return of 17.0% for federally regulated P&C companies. During the period 1995 through 2005, the ROE of our insurance subsidiaries averaged 17.4%, exceeding the corresponding industry average of 9.9% by 7.5 percentage points. We believe this track record of consistent outperformance and value creation fundamentally speaks to the advantages of scale and the importance of an underwriting culture and capability. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 14 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 14 3/19/06 1:17:38 AM 3/19/06 1:17:38 AM ING Canada Inc. 15 ROE* Performance of our Insurance Subsidiaries Compared to the P&C Insurance Industry ING Canada P&C Insurance Industry ROE % 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 * Excludes ROE of our non-insurance companies. Source: Insurance Bureau of Canada; Ofﬁ ce of the Superintendent of Financial Institutions for 2005 industry ROE. Company reports for ING Canada ROEs. Overall Performance Net Income Net income for the year ended December 31, 2005 was $781.8 million, an increase of $157.6 million, or 25.2%, from $624.2 million for the year ended December 31, 2004. These results are driven by: (1) continued strong underwriting income, particularly in personal Net income for the year ended Dec. 31, 2005 was $781.8 million an increase of 25.2% from $624.2 million for the year ended automobile, despite the impact of increased catastrophe claims, most notably in personal property, Dec. 31, 2004. (2) actual claims experience being less than previously reserved for, creating redundant reserves to the beneﬁ t of earnings and (3) robust investment results. The following table presents the major changes in net income for the year ended December 31, 2005 from the prior year. Year ended December 31 (in millions of dollars) 2004 Net income Prior year claims development (excluding pools)* Allianz Current accident year* Industry pools* Catastrophes* Underwriting income Investment income Realized investment and other gains Other 2005 Net income * excluding Allianz Jetse de Vries Chief Operating Ofﬁ cer, Western Region 113.6 25.8 (54.0) (8.0) (33.1) 2005 $ 624.2 44.3 32.9 77.5 2.9 $ 781.8 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 15 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 15 3/20/06 6:01:13 PM 3/20/06 6:01:13 PM 16 Shareholders’ Equity Shareholders’ equity increased by $833.0 million, or 40.4%, to $2,892.6 million in 2005 compared to $2,059.6 million at December 31, 2004. This increase reﬂ ects net income of $781.8 million plus $131.6 million in additional proceeds from our December 2004 initial public offering received in January 2005 less $86.9 million in dividends ($0.65 per share) paid during the year. The ﬁ nancial data in the following tables was prepared using Canadian generally accepted accounting principles (GAAP) and is taken from our consolidated ﬁ nancial statements for the years ended December 31, 2005, 2004 and 2003. Year ended December 31 (in millions of dollars, except per share data) Underwriting Income $537.7 $470.0 Direct premiums written Total revenue Underwriting income Net income Dividends per common share Earnings per share (in dollars): 2004 2005 Basic Diluted As at December 31 Investments Total assets Debt outstanding Total shareholders’ equity 2005 2004 2003 $ 3,904.9 $ 3,575.9 $ 3,443.8 4,446.1 3,780.9 3,015.4 537.7 781.8 0.65 5.85 5.85 470.0 624.2 0.0 6.51 6.49 51.7 150.5 0.0 1.61 1.61 2005 2004 $ 6,721.0 $ 6,285.1 9,926.5 9,663.1 127.0 256.2 2,892.6 2,059.6 Shareholders’ The following table shows selected non-GAAP ﬁ nancial ratios and return on equity (ROE) data. equity increased by $833.0 million or 40.4%, to $2,892.6 million in 2005. Year ended December 31 Claims ratio (1) Expense ratio (2) Combined ratio (3) ROE (4) ROE of our P&C insurance subsidiaries (5) 2005 2004 2003 56.3% 56.6% 29.7% 29.4% 86.0% 86.0% 31.6% 40.9% 35.2% 39.6% 68.1% 30.0% 98.1% 16.5% 15.5% (1) Claims and claims expenses incurred, net of reinsurance during a deﬁ ned period and expressed as a percentage of net premium earned for the same period. The ﬁ nancial numbers used to determine these ratios are determined in accordance with GAAP but the ratio is a non-GAAP measure. (2) Expense including commissions, premium taxes and all general and administrative expenses, incurred in operating the business during a deﬁ ned period and expressed as a percentage of net earned premiums for the same period. Components of the expense ratio - commissions, premium taxes and general expenses are individual ratios expressed as a percentage of net earned premiums. The ﬁ nancial numbers used to determine these ratios are determined in accordance with GAAP but the ratio is a non-GAAP measure. (3) The sum of the claims ratio and the expense ratio. A combined ratio below 100% indicates a proﬁ table underwriting result. A combined ratio over 100% indicates an unproﬁ table result. The ﬁ nancial numbers that comprise the ratio are determined in accordance with GAAP but the ratio is a non-GAAP measure. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 16 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 16 3/17/06 10:44:31 AM 3/17/06 10:44:31 AM ING Canada Inc. 17 (4) Return on equity (ROE) is a non-GAAP measure which 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. Net income and shareholders’ equity are determined in accordance with GAAP. (5) Return on equity of our P&C insurance subsidiaries is a non-GAAP measure which represents net income of our P&C insurance subsidiaries for the twelve months ended on the date indicated divided by the average shareholders’ equity of our P&C insurance subsidiaries over the same twelve-month period. Net income and shareholders’ equity are determined in accordance with GAAP. 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, along with our warranty company, Wellington Warranty Company Inc. After November 30, 2004, the results of our P&C insurance subsidiaries consist of those results of the above-mentioned subsidiaries, as well as those of the subsidiaries of Allianz: Allianz Insurance Company of Canada and Trafalgar Insurance Company of Canada. Direct Premiums Written Direct premiums written increased $329.0 million, or 9.2%, in 2005. Allianz contributed $423.5 million more in direct premiums than last year. Results in 2004 included one month only of Allianz. Premium growth was lower due to reduced premiums from industry pools of $104.2 million. A key non-GAAP measure of our growth is written insured risks deﬁ ned as the number of vehicles in automobile insurance, the number of premises in personal property insurance and the number of policies in commercial insurance (excluding commercial auto insurance). The number of written insured risks increased 14.6% in 2005 over 2004. The increase excluding Allianz, representing organic growth, was 3.4% in 2005. Premium growth excluding Allianz was unable to keep pace with the growth in insured risks given lower average premiums, largely due to rate reductions in personal automobile insurance averaging 7.5% for 2005. A key non-GAAP measure of our growth is written insured risks deﬁ ned as the number of vehicles in automobile insurance, the number of premises in personal property insurance and the number of policies in commercial insurance (excluding Revenue commercial auto insurance). Revenue increased by $665.2 million, or 17.6%, to $4,446.1 million in 2005 compared to $3,780.9 million in 2004. The following table presents the major changes between 2004 and 2005. Year ended December 31 (in millions of dollars) Net premiums earned Investment income Realized investment and other gains Commission and advisory fees Increase in revenue $ 475.6 71.5 91.1 27.0 $ 665.2 Net premiums earned increased by $475.6 million, or 14.1%, to $3,840.2 million in 2005 from $3,364.6 million in 2004. Allianz accounted for practically all of this increase, or $461.2 million in 2005. Lower earned premiums from industry pools (3.6%) and earned premium rate reductions averaging 6.9% in personal automobile insurance reduced earned premium growth in 2005. Debbie Coull-Cicchini Chief Operating Ofﬁ cer, Ontario Region 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 17 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 17 3/17/06 10:44:32 AM 3/17/06 10:44:32 AM 18 Investment income was $338.5 million in 2005, an increase of $71.5 million, or 26.8%, from the $267.0 million reported in 2004. Growth in invested assets from the Allianz acquisition of $1,061.5 million and retained proﬁ ts of $694.9 million in the last year were the main contributing factors to higher investment income. Net unrealized Realized investment gains in the equity and ﬁ xed income portfolios increased revenue by $91.1 million gains of $304.3 million at year-end 2005, however, were $62.1 million greater than last year. for 2005. Net unrealized gains of $304.3 million at year-end 2005, however, were $62.1 million greater than last year. The growth in realized gains comes primarily from $53.3 million in ﬁ xed income securities resulting from a repositioning of the portfolio to improve the efﬁ ciency of managing ﬁ xed income securities. The increase in our gains on common stock of $31.4 million reﬂ ects $19.0 million of gains from the sale of seed capital in ING mutual funds. Commission and advisory fees increased by $27.0 million in 2005. The increase is related entirely to the addition of Canada Brokerlink, part of the Allianz acquisition. Underwriting Income Underwriting income (the difference between net premiums earned and the sum of net claims incurred, commissions, premium taxes and general expenses) increased by $67.7 million to $537.7 million in 2005 yielding a claims ratio of 56.3% which is 0.3 percentage point lower than last year. The improvement in the claims ratio was offset by an equal increase in the expense ratio, resulting in a combined ratio of 86.0% for both 2005 and 2004. The increase in underwriting income was due to: Year ended December 31 (in millions of dollars) Prior year claims development excluding items below: $ Allianz acquisition Catastrophes* Industry pools* Current accident year* Total * excludes Allianz 173.5 39.4 (50.5) (12.2) (82.5) $ 67.7 Personal automobile continued to be the biggest contributor to underwriting income, accounting for $411.5 million in income in 2005 (2004: $292.0 million). The combined ratio for personal automobile decreased from 82.9% in 2004 to 78.8% in 2005. The personal automobile portfolio, including Allianz but excluding pools, beneﬁ ted from favourable claims development of $161.2 million in 2005, primarily the result of automobile reforms and continued low frequency, which offset the decrease in underwriting results from industry pools. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 18 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 18 3/17/06 10:44:32 AM 3/17/06 10:44:32 AM ING Canada Inc. 19 Personal Industry pools consist of the so-called “residual market” as well as risk-sharing pools (RSP) in Alberta, automobile Ontario, Quebec and New Brunswick. These pools are managed by the Facility Association except for continued to be the biggest contributor to underwriting income, accounting for $411.5 million in income the Quebec RSP. During 2005, the premiums transferred to us decreased in the residual market and transfers both to and from the RSP increased, primarily in Alberta. Transfers in and out of these pools including Allianz during the year, on balance, resulted in $8.1 million less underwriting income from pools in 2005 than we had in 2004. These transfers also reduced the amount of our reported net written premiums and eventually the net earned premiums. Signiﬁ cant Transactions Initial Public Offering in 2005. The Company completed an IPO on December 15, 2004, pursuant to the ﬁ ling 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 upon which 5.2 million additional common shares were issued and net proceeds were received of $129.2 million. ING Groep remains the controlling shareholder with 70% of the shares issued and outstanding. Acquisition of Allianz 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 as well as 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 acquired operations have been integrated as planned (see note 19 of the accompanying audited consolidated ﬁ nancial statements). 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 statements of income for the year ended December 31, 2004. In 2005 Allianz contributed direct premiums written of $483.3 million (2004: $59.8 million), net premiums earned of $511.3 million (2004: $50.1 million) and underwriting income of $49.4 million (2004: $10.0 million). The “AGR Business”, related to insurance coverage of industrial risks for large Canadian companies and multi-national clients of Allianz AG, was not part of the acquisition as it was subject to a 100% quota share agreement with Allianz Global Risks Rüchversicherungs AG pending the re-transfer of this business to the Canadian branch of Allianz Global Risks US Insurance Company (“AGR”) in September 2005. Consequently, the AGR business had no net impact on the consolidated statement of income of the Company. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 19 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 19 3/19/06 1:18:40 AM 3/19/06 1:18:40 AM 20 Summary of Quarterly Results (in millions of dollars, except per share data) Direct premiums 2005 2004 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 written $ 905.0 $ 1,006.5 $ 1,171.4 $ 821.9 $ 883.0 $ 921.6 $ 1,043.4 $ 727.8 Total revenues 1,111.6 1,123.3 1,112.3 1,098.8 1,004.7 919.7 900.9 955.6 Underwriting income 126.3 116.7 179.8 114.9 118.4 133.7 174.5 43.4 Income before income taxes 269.3 269.3 323.6 228.6 229.7 217.1 238.6 170.4 Net income 196.9 202.8 223.6 158.5 173.1 163.6 172.3 115.1 Combined ratio Seasonal indicator (1) Earnings per share Basic Diluted Earnings per adjusted share (2) Basic pro-forma Diluted pro-forma 86.9 1.01 1.47 1.47 87.7 1.02 1.52 1.52 81.2 0.94 1.67 1.67 88.1 1.02 1.19 1.19 86.7 1.01 1.69 1.67 83.9 0.98 1.75 1.75 78.9 0.92 1.84 1.84 94.7 1.10 1.23 1.23 1.47 1.47 1.52 1.52 1.67 1.67 1.19 1.19 1.35 1.29 1.27 1.22 1.34 1.29 0.90 0.86 (1) The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio to the annual combined ratio. Historically, the seasonal indicator pattern shows that Q2 is the lowest loss quarter and Q1 is the highest loss quarter. (2) To facilitate comparison between performance in 2004 and 2005, management calculated basic earnings per adjusted share, a non-GAAP measure, on a pro-forma basis as if the 128.5 million common shares outstanding after our reorganization and completion of the initial public offering were outstanding at the beginning of each of the quarters prior to 2005, and calculates diluted earnings per adjusted share as if the 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 each of the quarters prior to 2005. 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. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 20 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 20 3/17/06 10:44:33 AM 3/17/06 10:44:33 AM ING Canada Inc. 21 Segmented Information We report our results on the basis of ﬁ ve segments consisting of the three segments of our property and casualty (P&C) insurance business (personal insurance, commercial insurance and the investment results of our P&C insurance subsidiaries), corporate and other, and realized investment and other gains. The following table presents selected information on our business segments. Year ended December 31 (in millions of dollars) Underwriting Income Personal insurance Revenue Net premiums earned Personal insurance $382.1 Commercial insurance $339.2 Total net premiums earned Investments Total P&C insurance 2004 2005 Corporate and other Realized investment and other gains Commercial insurance Total revenue $155.6 Income before income taxes $130.8 Underwriting income Personal insurance Commercial insurance 2004 2005 Total underwriting income Investments Total P&C insurance Corporate and other Realized investment and other gains 2005 2004 2003 $ 2,680.7 $ 2,343.5 $ 1,828.7 1,159.5 1,021.1 932.2 3,840.2 3,364.6 2,760.9 323.2 256.7 208.8 $ 4,163.4 $ 3,621.3 $ 2,969.7 59.2 223.5 27.2 132.4 13.6 32.1 $ 4,446.1 $ 3,780.9 $ 3,015.4 $ 382.1 $ 339.2 $ (35.5) 155.6 537.7 300.7 130.8 470.0 247.0 87.2 51.7 200.5 $ 838.4 $ 717.0 $ 252.2 29.0 223.5 6.4 132.4 (57.3) 32.1 Total income before income taxes $ 1,090.9 $ 855.8 $ 227.0 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 21 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 21 3/19/06 1:19:22 AM 3/19/06 1:19:22 AM 22 Personal Insurance The following table presents the direct premiums written and underwriting income of our personal insurance segment. Year ended December 31 (in millions of dollars) Direct premiums written: Personal automobile Personal property Total direct premiums written Net premiums earned Expenses: 2005 2004 2003 $ 1,877.0 $ 1,714.2 $ 1,724.0 779.9 701.0 624.1 $ 2,656.9 $ 2,415.2 $ 2,348.1 $ 2,680.7 $ 2,343.5 $ 1,828.7 Claims and loss adjustment expenses 1,550.5 1,375.5 1,342.8 Commissions Premium taxes General expenses Total expenses Underwriting income Direct premiums Ratios: written in Claims ratio personal automobile Commissions ratio insurance reﬂ ect an average rate reduction of approximately 7.5% in 2005. Premium taxes ratio General expense ratio Combined ratio Direct Premiums Written 433.2 91.8 223.0 380.0 80.1 168.7 299.8 69.2 152.4 2,298.5 2,004.3 1,864.2 $ 382.1 $ 339.2 $ (35.5) 57.8% 58.7% 16.2% 16.2% 73.4% 16.4% 3.4% 8.3% 3.4% 7.2% 3.8% 8.3% 85.7% 85.5% 101.9% Direct premiums written increased by $241.7 million, or 10.0%, in 2005. Allianz accounted for a 13.5% increase in 2005. Lower year-over-year premiums from industry automobile pools, excluding Allianz, reduced premium growth by 4.3% in 2005. The number of written insured risks for personal property increased by 10.7% in 2005. The growth in insured risks, excluding Allianz, representing organic growth was 2.7% in 2005. The number of written insured risks for personal auto increased by 19.2% in 2005. The growth in insured risks, excluding Allianz, representing organic growth was 4.8% in 2005. Direct premiums written in personal automobile insurance reﬂ ect an average rate reduction of approximately 7.5% in 2005. For the personal insurance segment the number of written insured risks increased by 15.6% in 2005. The growth in insured risks, excluding Allianz, representing organic growth, was 3.9% in 2005. Net Premiums Earned Net premiums earned increased by $337.2 million, or 14.4%, in 2005. Allianz accounted for a 15.0% increase, or all of the improvement in 2005. Lower year-over-year earned premiums from industry automobile pools reduced premium growth by 3.6% in 2005 while premium rate reductions in personal automobile further reduced premium growth by 6.9% during the year. Alan Blair Chief Operating Ofﬁ cer, Atlantic Region 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 22 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 22 3/20/06 6:01:14 PM 3/20/06 6:01:14 PM ING Canada Inc. 23 Underwriting Income Underwriting income from the personal insurance segment increased by $43.0 million in 2005 despite an increase in the combined ratio of 0.2 percentage points compared to 2004. The personal insurance segment increased by $374.8 million in 2004 compared to 2003 due to an improvement in the combined ratio of personal automobile from 105.9% to 82.9% arising from the impact of rate increases, automobile reforms and reduced frequency. Underwriting income from the personal property decreased by $76.6 million in 2005 on an increase in the combined ratio of 11.5 percentage points. Catastrophes occurring in Q2 05 and Q3 05 reduced underwriting income by $36.3 million and class actions reduced underwriting income by $14.7 million in Q4 05. These events increased the combined ratio by 6.3 percentage points. We saw increased storm activity in 2005 and an increase in our retention of individual catastrophe exposure from $5.0 million in 2004 to $17.5 million in 2005 which negatively impacted results. Underwriting income from personal automobile increased by $119.5 million in 2005 along with a reduction in the combined ratio of 4.1 percentage points. Frequency in 2005 was lower than in 2004. The current accident year loss ratio, deﬁ ned as claims and claims expenses incurred during the current year excluding all other claims and claims expenses related to prior years incurred during the calendar year expressed as a percentage of net premium earned, is very similar in 2005 to that of 2004 even though the earned premium has decreased. Favourable claims development contributed $161.2 million of the annual increase in personal automobile underwriting income. Our personal insurance expense ratio was 27.9% for 2005 compared to 26.8% in 2004. The commission ratio was 16.2% for both 2005 and 2004. Lower proﬁ t-sharing commissions led to a 0.2 percentage point decrease which offset an increase in regular and pool commissions. Proﬁ t-sharing commissions were $83.9 million for 2005 (2004: $78.0 million). The general expense ratio increased by 1.1 percentage points from 7.2% in 2004 to 8.3% in 2005 due to lower fees from the service carrier operated on behalf of the Facility Association of $20.0 million, Allianz transition expenses of $6.3 million, and increased expenses, primarily marketing and incentive compensation of $3.7 million. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 23 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 23 3/17/06 10:44:34 AM 3/17/06 10:44:34 AM 24 Commercial Insurance The following table presents the direct premiums written and underwriting income of our commercial insurance segment. Year ended December 31 (in millions of dollars) Direct premiums written: Commercial automobile Commercial other Total direct premiums written Net premiums earned Expenses: Claims and loss adjustment expenses Commissions Premium taxes General expenses Total expenses Underwriting income Ratios: Claims ratio Commissions ratio Premium taxes ratio General expense ratio Combined ratio Direct Premiums Written 2005 2004 2003 $ 330.4 $ 301.0 $ 291.0 917.6 859.7 804.7 $ 1,248.0 $ 1,160.7 $ 1,095.7 $ 1,159.5 $ 1,021.1 $ 932.2 611.2 241.0 41.9 109.8 1,003.9 530.0 232.6 36.7 91.0 890.3 538.1 182.5 34.0 90.4 845.0 $ 155.6 $ 130.8 $ 87.2 52.7% 51.9% 20.8% 22.8% 57.7% 19.6% 3.6% 9.5% 3.6% 8.9% 3.6% 9.7% 86.6% 87.2% 90.6% Direct premiums written increased by $84.9 million, or 7.4%, in 2005 excluding the AGR business (see note 6 to the audited consolidated ﬁ nancial statements). Allianz accounted for growth of 8.2%. The number of insured risks remained the same as in 2004 after excluding Allianz and the sale of books of business. Underwriting income Net Premiums Earned from commercial Net premiums earned increased by $138.4 million, or 13.6%, in 2005. Allianz accounted for the insurance increased $24.8 million in 2005. majority (12.1%) of this increase. Underwriting Income Underwriting income from commercial insurance increased $24.8 million in 2005 on a decrease in the combined ratio of 0.6 percentage points. Favourable claims development of $66.5 million more than offset the impact from catastrophes of $17.4 million and higher severity in the current accident year. Our commercial insurance expense ratio was 33.9% in 2005 compared to 35.3% in 2004. A decrease of 2.0 percentage points in the commission ratio was due to lower proﬁ t-sharing commissions of 1.5 percentage points and higher ceded commissions of 0.5 percentage points. The general expense ratio increased by 0.6 percentage points from 8.9% in 2004 to 9.5% in 2005 due to increased expenses of $3.4 million and Allianz’s transition expenses of $3.1 million. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 24 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 24 3/17/06 10:44:34 AM 3/17/06 10:44:34 AM ING Canada Inc. 25 Investment Income The following table presents the results of our investment segment. Year ended December 31 (in millions of dollars) Interest income Dividend income Other 2005 2004 2003 $ 203.6 $ 154.9 $ 109.1 117.0 2.7 98.7 3.1 94.5 5.2 Investment income from P&C subsidiaries $ 323.3 $ 256.7 $ 208.8 Investment expenses Investment income from P&C subsidiaries (22.5) (9.7) (8.3) before income taxes $ 300.8 $ 247.0 $ 200.5 Investment income increased by $66.6 million, or 25.9%, to $323.3 million in 2005. Interest income of $14.5 million related to the 2001 Portfolio Purchase is included in the 2005 results. (The 2001 Portfolio Purchase refers to an agreement entered into with Zurich Insurance Company to acquire its personal and small and medium-size commercial business and, in turn, sell our large size commercial lines business.) Investment income in 2004 is higher than in 2003 due to the transfer of investments of $665.0 million from reinsurers related to a 100% quota-share treaty commuted as at January 1, 2004. Average pre-tax yield was 5.1% for 2005 compared to 5.3% in 2004. These yields exclude realized investment gains and losses and interest income related to the 2001 Portfolio Purchase. Investment expenses totalled $22.5 million in 2005 compared to $9.7 million in 2004. This growth is due to increased assets from the Allianz acquisition and an increase in asset management charges as of January 1, 2005 to better reﬂ ect current market costs. These charges of $18.8 million are paid to our in-house investment operations. An equivalent amount is reported as a negative expense in the corporate and other segment with both entries eliminated on consolidation of the ﬁ nancial statements. Corporate and Other The following table presents the results of our corporate and other segment including the results of our brokerage operations (Canada Brokerlink and Equisure), our investment management company and inter-company eliminations, primarily commissions and general expenses. Year ended December 31 (in millions of dollars) Investment income Commission and advisory fees Revenue Commissions General expenses Interest on debt Expenses $ $ 2005 15.3 43.9 59.2 (27.9) 50.0 8.0 30.1 2004 10.3 16.9 27.2 1.8 7.3 11.7 20.8 $ 2003 5.1 8.4 13.5 27.9 30.5 12.6 70.9 Income before income taxes $ 29.1 $ 6.4 $ (57.4) 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 25 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 25 3/20/06 6:01:15 PM 3/20/06 6:01:15 PM 26 Corporate and other revenue increased $32.0 million in 2005. The increase in 2005 was due largely to commission income from Canada Brokerlink (part of the Allianz acquisition) of $25.7 million, increased revenue from Equisure of $1.8 million and increased interest income of $4.6 million. Commission expenses were lower, however, due to non-recurring commissions of ($4.3) million in 2004. Higher brokerage commissions earned from our insurance companies of $26.0 million in 2005 were offset in the commission expenses of this segment. Commission in 2003 included $25.8 million related to the 2001 Portfolio Purchase. Higher general expenses of $42.7 million in 2005 were due mostly to Canada Brokerlink expenses. General expenses in 2003 included $16.0 million related to the 2001 Portfolio Purchase. Realized Investment and Other Gains The following table presents realized investment and other gains (losses). Realized investment and other gains $223.5 $132.4 Year ended December 31 (in millions of dollars) Realized investment and other gains (losses) Fixed income Preferred shares Common shares Other Total 2004 2005 After-tax total 2005 2004 2003 $ 87.9 $ 34.6 $ (4.8) 131.5 8.9 (6.3) 100.1 4.0 36.2 24.4 (3.2) (25.3) $ 223.5 $ 132.4 $ 169.4 $ 91.9 $ $ 32.1 6.5 After-tax Total Realized investment and other gains increased by $91.1 million in 2005 on the strength of $53.3 million $169.4 in ﬁ xed income portfolio gains. Share gains include gains from the sale of seed capital in ING mutual funds in 2005 of $19.0 million, which offset higher impairment charges of $3.6 million. Other includes $91.9 gains of $8.9 million in 2005 on the sale of books of business aggregating $6.4 million and a gain of $2.5 million on the transfer and sale of mutual funds. 2004 2005 Balance Sheet Analysis Premiums and Other Receivables Premiums written are either billed to brokers or billed to policyholders directly. As at December 31, 2005, premium receivables from brokers stood at $129.0 million and $1,120.0 million from policyholders. As at December 31, 2004, premium receivables from brokers stood at $163.8 million and $1,076.0 million from policyholders. Other receivables comprised $195.0 million (2004: $202.8 million) from the Facility Association and other industry pools, $31.3 million (2004: $137.3 million) from other insurers and $43.2 million (2004: $62.5 million) from other. Investments We have an investment policy that seeks to provide an attractive risk-return proﬁ le 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 proﬁ les of various asset classes and the variability of those returns over time, the availability of assets, diversiﬁ cation needs and beneﬁ ts, regulatory capital required to 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 26 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 26 3/17/06 10:44:35 AM 3/17/06 10:44:35 AM ING Canada Inc. 27 support the various asset types, security ratings and other material variables likely to effect the overall performance of our investment portfolio. The overall risk proﬁ le 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 investments 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 diversiﬁ cation across industries. We believe this diversiﬁ cation of exposure across a range of business sectors provides positive investment beneﬁ ts. At the same time, economic difﬁ culties concentrated in a select business sector are dampened. Due to potential tax ramiﬁ cations of these strategies, speciﬁ c focus is placed on the management of the portfolio to optimize the after-tax total return. Our investment objectives remain consistent with those in 2004. Beginning in 2006, we are expanding the investment options to include investment grade international bonds and the use of derivatives to support the management of the duration of our ﬁ xed income portfolio. The duration has moved from 6.3 years at December 31, 2005 to 4.3 years at January 31, 2006. This more closely aligns our investment duration with the duration of our liabilities. We do not intend to match exactly but will target duration of 4.0 to 4.5 years. We have lowered the duration by trading the portfolio and through limited use of derivatives. The relatively ﬂ at yield curve has allowed us to reposition the portfolio with only a modest drop in yield. The following table presents our cash and invested assets as at December 31, 2005 and December 31, 2004. (in millions of dollars) Book value (BV) % of BV Fair value BV % of BV Fair value As at December 31, 2005 As at December 31, 2004 Cash and cash equivalents $ 341.1 4.8% $ 341.1 $ 82.5 1.3% $ 82.5 Short-term notes Fixed income securities(1) Commercial mortgages 440.4 3,520.8 6.2% 49.9% 440.4 3,595.8 274.7 3,685.1 4.3% 57.9% 274.7 3,776.5 70.4 1.0% 73.1 78.7 1.2% 83.3 Preferred shares Common shares(1) Other investments 1,257.3 17.8% 1,319.9 1,069.6 16.8% 1,136.3 1,266.5 17.9% 1,430.4 165.6 2.4% 165.6 997.7 179.3 15.7% 1,077.2 2.8% 179.3 Total investments and cash $ 7,062.1 100.0% $ 7,366.3 $ 6,367.6 100.0% $ 6,609.8 (1) Fixed income securities and common shares include our seed capital investment in ING mutual funds, with a book value of $155.0 million as at December 31, 2004. Due to the sale of our mutual fund operations, there were no such investments as at December 31, 2005. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 27 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 27 3/17/06 10:44:35 AM 3/17/06 10:44:35 AM 28 Cash and cash equivalents and investments increased by $694.5 million, or 10.9%, to $7.06 billion in 2005. This increase results from higher income from operations, an interim settlement of $116.9 million As at December 31, from the 2001 Portfolio Purchase and the receipt of $173.5 million of investment funds transferred from 2005, the weighted average rating of our ﬁ xed income the Facility Association. These transferred funds are not needed by the association in the short term; however, they will eventually be returned to the association to pay claims related to the funds. portfolio was AA, Other investments consisted of loans to brokers with a book value of $151.4 million as at December 31, and the weighted average rating of our preferred share portfolio was P2. 2005 ($156.3 million as at December 31, 2004), investments in brokerages with a book value of $14.2 million as at December 31, 2005 ($13.4 million as at December 31, 2004) and other commercial loans with a book value of nil as at December 31, 2005 ($9.6 million as at December 31, 2004). The following table sets forth our exposure to the ten largest industrial sectors for our combined ﬁ xed income securities and preferred and common share portfolios as at December 31, 2005 and 2004. (in millions of dollars) As at December 31, 2005 As at December 31, 2004 BV % of BV Fair value BV % of BV Fair value Banks $ 827.8 12.3% $ 895.2 $ 636.2 10.1% $ 674.1 Diversiﬁ ed ﬁ nancial services Utilities Insurance Telecommunication services Oil and gas Special purpose Real estate Media Food & drug retail 701.2 449.7 361.2 286.9 274.1 252.3 248.8 121.6 76.8 10.4% 734.3 1,326.3 21.1% 1,384.5 6.7% 5.4% 4.3% 4.1% 3.8% 3.7% 1.8% 1.1% 482.1 392.3 284.7 300.4 257.8 274.2 121.3 80.0 435.3 246.3 292.8 184.3 152.0 124.7 106.8 52.2 6.9% 3.9% 4.7% 2.9% 2.4% 2.0% 1.7% 0.8% 461.9 266.7 299.2 188.7 155.5 132.3 109.6 54.7 Total top ten sectors $ 3,600.4 53.6% $ 3,822.2 $ 3,556.9 56.6% $ 3,727.2 Government Other 2,043.5 30.4% 2,091.5 2,075.5 33.0% 2,124.7 1,077.1 16.0% 1,111.6 652.7 10.4% 675.4 Total investment assets $ 6,721.0 100.0% $ 7,025.3 $ 6,285.1 100.0% $ 6,527.3 As at December 31, 2005, the weighted average rating of our ﬁ xed income portfolio was AA and the weighted average rating of our preferred share portfolio was P2 (ratings are by Standard & Poor’s (“S&P”) or Dominion Bond Rating Services). Approximately $16.1 million of securities with a rating below investment grade or not rated were included in the ﬁ xed income and preferred share portfolios at December 31, 2005, compared to $42.9 million as at December 31, 2004. 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 28 16MAR_ING05_ED_MD&A_EN_ƒ2.indd 28 3/17/06 10:44:35 AM 3/17/06 10:44:35 AM ING Canada Inc. 29 The following graphs set forth our ﬁ xed income portfolio by credit quality as at December 31, 2005 and 2004. Fixed Income by Credit Quality as at December 31, 2005 Fixed Income by Credit Quality as at December 31, 2004 Carrying Value BB 0.0% BBB 4.3% B 0.1%

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