Intact Financial Corporation Annual Report 2006

Plain-text annual report

Helping people ING Insurance and ING Direct teamed up in 2006 to become a Premier Partner of Canada’s National Speed Skating team, which brought home no fewer than 12 Olympic medals from Turin that year. ING’s $2 million, six-year sponsorship is helping elite Canadian skaters like Denny Morrison, a 2006 World Championship medallist, make Canada the top speed skating nation in the world. With a track record of excellent customer service and high-value products, ING is committed to matching the outstanding dedication, high level of performance and great achievements of our skaters. Turning promises into t r o p e r l a u n n a 6 0 0 2 . c n I a d a n a C G N I ING Canada Inc. 700 University Avenue, Toronto, Ontario M5G 0A1 www.ingcanada.com ING Canada Inc. 2006 annual report ActionsSucceed ING Canada Inc. 81 Shareholder Information 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 Annual Meeting The Annual Meeting will be held on: Date: May 16, 2007 2:00 p.m. ET Time: Juliette-Lassonde Arts Center Place: 1705 Saint-Antoine Street Saint-Hyacinthe, Québec J2S 9E2 Institutional investors, security analysts and others who may want additional financial 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: Gilles Gratton Director, Corporate Communications 416-217-7206 gilles.gratton@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 intéressés 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 15, 2007 May 16, 2007 August 8, 2007 November 7, 2007 Dividend Payment Dates (Subject to approval by the Board of Directors) March 30, 2007 June 29, 2007 September 28, 2007 December 31, 2007 Dividend Record Dates (Subject to approval by the Board of Directors) March 15, 2007 June 15, 2007 September 14, 2007 December 14, 2007 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 visiting the Investor Relations section of the www.ingcanada.com web site. Auditors Ernst & Young LLP Corporate Profile Our Strategy ING Canada is the largest provider of property and casualty We intend to leverage the advantages of scale to achieve insurance in Canada, through the ING Novex, Nordic, sophisticated pricing, consistently profitable underwriting Trafalgar, Belair and ING Insurance companies. We provide and cost-effective and timely claims management. automobile, property and liability insurance to individuals Fundamental to our strategy is a customer-centric and small to medium-sized businesses across Canada. An commitment to product innovation, multi-channel access and investment management subsidiary manages the invested ease of doing business for policyholders and brokers alike. assets of our insurance subsidiaries. Asset management will continue as an internal core We enjoy leading positions in all markets where we operate competency focused on achieving superior after-tax returns. including Ontario, Québec and Alberta, our three largest markets. Personal automobile insurance accounts for approximately 50% of our business while personal property comprises Our Priorities Our priorities are to: roughly 20% and commercial insurance about 30%. • introduce improved technologies and services to make Our Goals 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%) and to achieve annual organic growth on average 300 basis points (3%) higher-than-market over the long term. doing business easier and less costly; • reduce claims costs and improve the quality of our service 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. Contents 1 Financial Highlights 2 Chairman’s Message 3 President and CEO’s Message 6 Accelerating the Pace of Organic Growth 13 Management’s Discussion and Analysis 48 Financial Statements Front Cover 51 Notes to Financial Statements 78 Board of Directors 79 Senior Management 80 Corporate Information 81 Shareholder Information Madeleine Daigneault, owner and founder of Andrée Chocolats, master chocolatiers since 1940 and a long term ING commercial insurance client. Except as otherwise indicated, all trademarks referred to herein are owned or licensed by the ING Canada companies. ING Canada Inc. 1 On October 18, 2006, ING Canada celebrated its head ofﬁ ce consolidation and relocation to 700 University Avenue in downtown Toronto, bringing together over 1,300 employees from across the city. Our new premises comprise more than six ﬂ oors totalling over 380,000 square feet. Financial Highlights Combined Ratio* % 4 . 9 8 % 0 . 6 8 % 0 . 6 8 Direct Premiums Written ($ millions) 0 9 9 , 3 5 0 9 , 3 6 7 5 , 3 Return on Equity % 9 . 0 4 % 6 . 1 3 % 8 . 0 2 Net Income ($ millions) 2 8 7 8 5 6 4 2 6 04 05 06 04 05 06 04 05 06 04 05 06 (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 2006 $ 3,990 $ 3,827 $ 4,406 $ 658 $ 3,421 0 $ 0.0% 59.1% 30.3% 89.4% 20.8% 2005 $ 3,905 $ 3,840 $ 4,446 $ 782 $ 2,893 127 $ 4.2% 56.3% 29.7% 86.0% 31.6% 2004 $ 3,576 $ 3,365 $ 3,781 $ 624 $ 2,060 256 $ 11.1% 56.6% 29.4% 86.0% 40.9% * 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. 16mar07_Annual2_EN_AA15.indd A1 16mar07_Annual2_EN_AA15.indd A1 3/17/07 11:20:46 AM 3/17/07 11:20:46 AM 22 Reputation Chairman’s Message Chairman’s Message overall customer experience, as evidenced by the launch of a new loyalty program, several major new service initiatives In 2006, a year of great activity and considerable and the introduction of unique value-added insurance competition within the Canadian property and casualty products. Although the year was not without its challenges, insurance industry, ING Canada once again delivered solid as Chairman of the Board, I am pleased to report that the ﬁ nancial results. The Board of Directors continued to play company again generated strong earnings and delivered an active and signiﬁ cant part in their complementary roles outstanding value for its shareholders. of representing shareholders and advising and supporting A lot has happened in the two short years since ING the management team on issues related to the company’s Canada became a public company. The business environment performance and long term growth strategy. is much more complex as a result of emerging trends and The company’s overall success, however, is a direct continually evolving rules and regulatory issues. Insurance reﬂ ection of the excellent job that the management team did markets have become more heavily regulated as a result in effectively executing the business strategy. They were of increased government intervention. At the same time, instrumental in proactively fostering the conditions necessary investors have become more sophisticated and expect much for growth and further enhancing the ING brand. Key to our more from corporate leaders in their role as overseers of results this year was our continued focus on improving the company performance. And shareholders have progressively become more active and vocal in their demands to boards for increased levels of accountability, responsibility, compliance and corporate governance. Directly, and through effective use of its committees, the Board began incorporating best practices of good corporate governance long before it became fashionable or necessary for companies to do so. The Board has been equally vigilant of its ability to assess risk and deal with conﬂ ict of interest and product suitability issues to maintain shareholder conﬁ dence. We take a great deal of pride not only in creating and overseeing rules and policies regarding disclosure, openness and transparency but also in establishing a culture of honesty, fairness and ethical business practices that resonates through senior management to the entire organization. In essence, good corporate governance is the fabric that holds the company together and provides a framework for the Board in our guidance of management and our responsibility to create value for our shareholders. The Board’s strict adherence at all times to principles of good corporate governance is also at the very foundation 16mar07_Annual2_EN_AA15.indd A2 16mar07_Annual2_EN_AA15.indd A2 3/17/07 11:20:47 AM 3/17/07 11:20:47 AM ING Canada Inc. ING Canada Inc. 33 of the company. As a member of ING Group, one of the world’s largest and most respected public ﬁ nancial services President and CEO’s Message President and CEO’s Message companies, ING Canada has a long history of meeting best ING Canada experienced another solid year of growth practices in corporate governance that were in force long and proﬁ tability in 2006 thanks to our ongoing emphasis before we became a public company, including compliance, on meeting customers’ needs and leveraging our core risk management and disclosure. As a result of ING Groep’s competencies of disciplined underwriting and pricing. The current 70% ownership of ING Canada, we have inherited company continued to demonstrate its ability to provide and expanded upon many of the principles that best guide the outstanding value to shareholders, achieving net income of Board in its principal role of enhancing shareholder value. $658.1 million and a return on equity (ROE) of 20.8%. At the heart of our approach to corporate governance Our solid growth in a competitive market is a reﬂ ection of and strong oversight is the independence and composition our strong brand attributes and the enhanced value proposition of the outstanding group of distinguished professionals provided by a number of innovative new products and that make up the Board. Equally important are the rich and services. Our insurance businesses continue to perform well, diverse backgrounds and experience they bring from senior beneﬁ ting from our scale advantage in claims management management positions within and outside the ﬁ nancial and strong investment performance. We believe our ongoing services industry. Their different perspectives have proven efforts to make ING Canada a bottom-up company driven invaluable throughout the year in evaluating every decision by client needs will continue to deliver superior results and based on helping the company grow and the best long term further solidify our position as Canada’s leading property and interests of all our shareholders. casualty (P&C) insurance provider. I would like to thank my fellow Board members for their Both the pricing and regulatory environment remained dedication, hard work and outstanding service to shareholders relatively stable in 2006. We achieved organic growth throughout the year. Their contributions have been inestimable evidenced by an increase in the number of written insured and I look forward to their guidance and expert advice risks in personal lines, both in auto and property. Personal throughout 2007. On behalf of all Board members, I want lines were also positively inﬂ uenced by stable claims costs. to thank the management team at ING Canada and all 6,500 Commercial lines continued to perform well despite a more employees across Canada for their outstanding work and competitive market, as volumes declined by only 1% while extend our sincere appreciation for their contribution to our our combined ratio improved and remained at historically solid ﬁ nancial results and commitment to outperformance. low levels. Yves Brouillette Chairman Creating a sustainable, superior ROE gap relative to the industry is one of our key goals; it provides the means to reinvest in the growth of our customer base and, by extension, maximize value for our shareholders. A second major objective is the strengthening of our market position by exceeding the annual organic growth rate of the Canadian P&C insurance industry by at least 300 basis points (3%) over 16mar07_Annual2_EN_AA15.indd A3 16mar07_Annual2_EN_AA15.indd A3 3/18/07 11:41:34 PM 3/18/07 11:41:34 PM 44 Relationships the long term. Furthermore, we intend to generate additional of our business. Not only does this make good business growth by leveraging our expertise in making and integrating sense but it is also a prerequisite to generating higher earnings value-creating acquisitions. and increased returns for our shareholders. We believe that the In 2006, we completed the relocation of over 1,300 ING interests of shareholders and customers are closely aligned, and Canada employees to our new head ofﬁ ce in downtown that shareholders’ interests are best served when customers are Toronto. As a result of this consolidation, we now have the at the core of a company’s culture. space to acquire the talent necessary to support our growth Our intent is to provide customers with a unique value- objectives and secure the future of our company. We have also added experience that sets us apart from our competitors, created an exciting and dynamic environment that makes it which can be seen in the innovative products and services we easier for our staff to work together, exchange ideas and build launched during the year. Each new offering such as “Zero on one another’s successes to meet or exceed the expectations Deductible,” “We’ll Take Your Word For It,” identity theft of our customers. protection and our new client statement have at their core one 2007 will see a continuation of our efforts to make or more of our key brand attributes of treating customers fairly, customer-centricity not just a way of doing business but a delivering on our promises, and making it easier to do business deeply rooted, long term mindset that permeates every aspect with us. They are an integral part of building meaningful long term relationships and promoting greater loyalty among our customers. It was in this spirit that we launched our Aeroplan program in September, rewarding customers for their loyalty. ING Canada continues to invest heavily in the broker channel to help brokers grow their business and better serve their customers. In 2007, we will further develop our partnership through the continued rollout of QUEST, an enhanced package of value-added services including technology, marketing, sales training and ﬁ nancing that can be customized to help brokers get more out of their relationship with us. We believe that providing this additional value to brokers will be instrumental in helping us to achieve our growth objectives while also reﬂ ecting our continued commitment to their success and the development of this important distribution channel. Focusing on customers also means providing them with choices as to how they deal with us. In addition to those who seek the advice of a trusted independent insurance broker, our direct insurance distributor belairdirect provides a self- serve option to customers who prefer the convenience of making purchases directly by telephone or over the Internet. 16mar07_Annual2_EN_AA15.indd A4 16mar07_Annual2_EN_AA15.indd A4 3/18/07 11:50:10 PM 3/18/07 11:50:10 PM ING Canada Inc. ING Canada Inc. 55 We also offer personal and commercial insurance products managing the sale of insurance products and services through and services to individuals and businesses through our own independent brokers across the country. Afﬁ liated Distribution Network, which includes Canada We expect industry top-line growth in 2007 will continue Brokerlink, Grey Power and Equisure. to remain below historical levels, but that underwriting Our continued success has provided us with the opportunity results should continue to exceed historical returns. to improve the quality of life in the communities in which Existing automobile insurance systems have been effective we operate. The ING Foundation, through its Chances for at containing and stabilizing claims costs, and current low Children programs, continued to support causes and charitable claims frequency will either increase or lead to premium organizations throughout 2006 that inspire inventiveness and reductions. Sustainability of the cost containment measures independence in Canada’s youth, and empower young people as well as potential rate reductions will continue to be critical to achieve their full potential. ING Canada also supports to our performance. Commercial insurance markets remain communities through sponsorship of events and organizations competitive and, although prices are continuing to soften, that we feel best reﬂ ect our culture, values and spirit of innovation returns are expected to be above historical levels. such as the ING Canada Ottawa Marathon and our role as a We continue to work closely with governments to adopt Premier Partner of Canada’s National Speed Skating team. a more risk-based approach to insurance regulation and to To be successful, it is essential to have a corporate culture promote a more open, market-driven environment, which we that promotes our shared vision. Once again ING Canada believe will encourage more competition, greater innovation employees have risen to the challenge and demonstrated and result in better outcomes for customers. the ability and desire to offer our customers a unique and Our ongoing commitment to disciplined underwriting exceptional experience. I would like to thank all our employees and pricing together with signiﬁ cant scale advantages and for their dedication and contributions throughout the year. I a track record of growth, proﬁ tability and outperformance would also like to acknowledge the outstanding work of our enhances our ability to withstand industry cycles and achieve broker-partners and thank them for their continued support. our targeted returns. On behalf of ING Canada, I would like to offer a special To our shareholders, we appreciate your conﬁ dence and thanks and warm wishes to Don Lough and Jacques Valotaire, will continue with our efforts to provide you with superior who are retiring after many years of outstanding service and industry returns year after year. Our strong ﬁ nancial condition huge contributions to the development of the company. I and history of proﬁ table growth position us well for continued would also like to congratulate Charles Brindamour and success in 2007. Derek Iles on their recent appointments, Charles to the newly created position of Chief Operating Ofﬁ cer and Derek as President, ING Insurance. Charles will be responsible for our insurance operations across the country, and will use his considerable talents and knowledge of the industry to execute our core strategy. Derek brings a successful track record in broker relations to his expanded responsibilities in Claude Dussault President & CEO 16mar07_Annual2_EN_AA15.indd A5 16mar07_Annual2_EN_AA15.indd A5 3/17/07 11:21:02 AM 3/17/07 11:21:02 AM 66 Growth Accelerating the Pace of Organic Growth Accelerating the Pace of Organic Growth Integral to our goal of achieving superior growth through ING Canada has grown almost twice as fast as the Canadian property and casualty (P&C) industry over the past 10 years in the course of extending a successful track record of acquiring and integrating companies. multiple distribution channels is a commitment to ﬁ nding new and innovative means of providing clients greater value for products and services they want and a superior claims experience in the event of misfortune. And while acquisitions are expected to play a signiﬁ cant Innovation = Customer Value Innovation = Customer Value role in generating growth in the years ahead, as the fragmented P&C industry further consolidates, we also continue to recognize the ongoing importance of having a sustainable platform for growth independent of acquisitions. We are more focused than ever on serving new and Consumers insure their cars and homes to protect their assets and for the peace of mind protection brings. Businesses do the same to protect themselves from the risks they face. But all products – and insurance companies, aren’t existing customers and providing clients with value-added the same. and innovative products. In fact, we have set out to exceed the Canadian P&C industry’s annual organic growth rate in direct premiums written by at least 300 basis points (3%) on average, per year, over the long term. We say “over the long term” given the vagaries and pressures of the market from year to year and the need to continually exercise ﬁ nancial discipline even if doing so limits growth in the short term. We continually ask customers what they want and actively listen to what they have to say. In response, we regularly seek to create new products and services designed to address both identiﬁ ed concerns as well as opportunities to give clients greater value for their money. For example, many direct insurance buyers shop around for coverage, and more would likely do so if the job was a bit easier. We heard you. Shoppers can now, upon obtaining a car insurance quote online from belairdirect at belairdirect.com, choose to compare it with up to ﬁ ve quotes of the competition, within seconds. But wait, there’s more! We’ve highlighted on the following pages some additional new products and services that give customers what they actually want and are prepared to pay for. 16mar07_Annual2_EN_AA15.indd A6 16mar07_Annual2_EN_AA15.indd A6 3/17/07 11:21:07 AM 3/17/07 11:21:07 AM ING Canada Inc. ING Canada Inc. 77 Maurice Pagé is a good driver who had a bad day, and an at-fault car accident. Lucky for him, he was covered under belairdirect’s Maurice Pagé is a good driver who had a bad day, and an at-fault car accident. Lucky for him, he was covered under Crash-Proof Policy and belairdirect’s Crash-Proof Policy and not his wallet, as a deductible $0 Deductible Offer so his good driver insurance rates and driving record will remain intact. And he just picked up his car and not his wallet, as a deductible $0 Deductible Offer so his good driver insurance rates and driving record will remain intact. And he just picked up his car and able to get back on the payment wasn’t required. By having his vehicle repaired at Garage M & E Richard Inc., an Auto Rely Network member, Mr. Pagé was able to get back on the payment wasn’t required. By having his vehicle repaired at Garage M & E Richard Inc., an Auto Rely Network member, Mr. Pagé was rd (left) and David’s father, road quickly with the added satisfaction of knowing we stand behind and guarantee his repairs. He’s shown here with David Richard (left) and David’s father, road quickly with the added satisfaction of knowing we stand behind and guarantee his repairs. He’s shown here with David Richa Marcel Richard (right). Marcel and David are the second and third generation members of the family business, established in 1950.0. Marcel Richard (right). Marcel and David are the second and third generation members of the family business, established in 195 16mar07_Annual2_EN_AA15.indd A7 16mar07_Annual2_EN_AA15.indd A7 3/17/07 11:21:08 AM 3/17/07 11:21:08 AM 88 Advantages For Drivers For Drivers For Individuals For Individuals For good drivers who have a bad day, coverage under our A proliferation of credit cards, PINS and passwords together Responsible Driver Guarantee or Crash-Proof Policy will with widespread use of increasingly sophisticated technology preserve their good driving record. The ﬁ rst at-fault accident puts many of us at greater risk of identity theft. Our myname has no impact on any claims-free discount in effect; should Identity Theft Assistance Plus product provides a total a client of ours have a second accident, it’s the ﬁ rst in our solution to the problem, including 24/7 assistance, access to eyes. And, best of all, this coverage comes at no cost for experienced lawyers and up to $25,000 in reimbursement of accident-free customers who have been with us for ﬁ ve years expenses incurred in setting things right, with no deductible. or longer. For drivers who don’t want to dip into their pockets to For Aeroplan Members For Aeroplan Members “pay again” on top of their premium when having to ﬁ le a claim, we now offer a no deductible policy. And for those fortunate customers who may have received nothing more in return for their premium than a good night’s sleep, and for practically everyone who pays a personal insurance premium, we now offer Aeroplan Miles on home and auto policy purchases and renewals. ®Aeroplan is a Registered Trademark of Aeroplan Limited Partnership. 16mar07_Annual2_EN_AA15.indd A8 16mar07_Annual2_EN_AA15.indd A8 3/17/07 11:21:12 AM 3/17/07 11:21:12 AM ING Canada Inc. ING Canada Inc. 99 s been in Mr. Bellerose’s family Alain Bellerose and Carole Robitaille had just about completed meticulous renovations to their circa 1870 heritage home that has been in Mr. Bellerose’s family Alain Bellerose and Carole Robitaille had just about completed meticulous renovations to their circa 1870 heritage home that ha re and subsequent water damage. ING promptly dispatched Property Rely Network member Construction since 1920, when it was substantially damaged by ﬁre and subsequent water damage. ING promptly dispatched Property Rely Network member Construction since 1920, when it was substantially damaged by ﬁ ve our contractor carry out Mario Rainville Inc. to the site to make emergency repairs. This initial work went so well, the homeowners readily agreed to have our contractor carry out Mario Rainville Inc. to the site to make emergency repairs. This initial work went so well, the homeowners readily agreed to ha the extensive and complete restoration of their property. Ms. Robitaille and Mr. Bellerose are shown here in their new kitchen with ING ﬁ the extensive and complete restoration of their property. Ms. Robitaille and Mr. Bellerose are shown here in their new kitchen eld claims adjuster with ING ﬁeld claims adjuster André Moquin (left) and Mr. Rainville (right). André Moquin (left) and Mr. Rainville (right). 16mar07_Annual2_EN_AA15.indd A9 16mar07_Annual2_EN_AA15.indd A9 3/17/07 11:21:13 AM 3/17/07 11:21:13 AM 1010 Value Serving Customers Better Serving Customers Better For Commercial Insurance Customers For Commercial Insurance Customers In reality, we are ultimately in the business of getting things We are one of the country’s largest underwriters of ﬁ xed and back to normal in the event our customers need commercial insurance with an emphasis on serving small to to make a claim. We believe that the timeliness, ease and medium-sized businesses across Canada. fairness with which this takes place are what truly deﬁ ne the We offer a full suite of ING Edge product solutions for insurance promise and set companies apart. businesses across a variety of industries, and importantly, we Our 24/7 Claims Service Guarantee means we will get have stepped up our efforts to help clients prevent and mitigate started on a claim right away. If a claimant isn’t speaking to losses. More than 30 ING Canada loss control representatives a representative who can immediately help them within 30 made approximately 9,500 client visits during 2006, helping minutes of calling us to report a new claim, we will write a to keep costs and premiums down. cheque for the policyholder’s annual premium, up to $1,000. Our claims advantage is enjoyed as well by commercial Canada’s largest claims team of over 1,750 individuals customers who also have access to Duoline and our across the country allows us to offer this Guarantee and Rely Network of auto body and property professionals. provide faster service to our insureds. We understand convenience and speed are important to our customers. That’s why we launched our Duoline service. It provides for a smooth three-way conference between the customer, the ING Canada adjuster and the broker when dealing with a claim. And we believe our customers, no hassles, no kidding. With We’ll Take Your Word For It, we’ll pay collision claims based on the client’s version of events with deductibles and claim details conﬁ rmed on the spot. Use of our Rely Network of carefully selected auto collision shops and property restoration contractors means fast, priority service and ING Canada guarantees the repairs! ®® 16mar07_Annual2_EN_AA15.indd A10 16mar07_Annual2_EN_AA15.indd A10 3/18/07 11:53:18 PM 3/18/07 11:53:18 PM ING Canada Inc. ING Canada Inc. 1111 ne handmade chocolates Madeleine Daigneault or “Madame Andrée” as she’s known locally, is the owner and founder of Andrée Chocolats, a purveyor of ﬁne handmade chocolates Madeleine Daigneault or “Madame Andrée” as she’s known locally, is the owner and founder of Andrée Chocolats, a purveyor of ﬁ since 1940. She’s shown here with Michel Hadd, the conﬁ since 1940. She’s shown here with Michel Hadd, the conﬁseur seur who prepares the various chocolate ﬁ llings for hand dipping. Andrée Chocolats is one of many who prepares the various chocolate ﬁllings for hand dipping. Andrée Chocolats is one of many ecting our emphasis on small to medium-sized commercial insurance clients. small businesses across Canada that we insure reﬂecting our emphasis on small to medium-sized commercial insurance clients. small businesses across Canada that we insure reﬂ 16mar07_Annual2_EN_AA15.indd A11 16mar07_Annual2_EN_AA15.indd A11 3/19/07 12:00:07 AM 3/19/07 12:00:07 AM 1212 Promises A Virtuous Cycle A Virtuous Cycle ING Canada in the Community ING Canada in the Community We believe a commitment to innovative, value-added products Our business of caring about and for customers extends to the represents an important link in a virtuous cycle by which greater community at large in which we conduct business. proﬁ table companies create the means to invest in product Through the ING Foundation, we continued in 2006 to innovation, driving superior organic growth in satisﬁ ed support sustainable programs and activities that improve the customers, generating increased earnings and shareholder quality of life and unlock the potential of Canadian youth. value in turn, which results in the continuing ability to invest We contributed ﬁ nancially to the organizations that our in the value proposition. employees support or in which they volunteer their time. driving superior organic growth driving superior organic growth with the help of the ING Foundation, once again celebrated Youth in Motion’s “Top 20 Under 20”, which was launched and rewarded the inspirational leadership and achievements of 20 individuals aged 10 to 19. Our support of this program enhances the personal and professional development of these young people through a leadership summit and a unique invest in value proposition invest in value proposition mentoring program. generates increased earnings generates increased earnings increasing shareholder value increasing shareholder value We continued to support innovative, therapeutic programs for sick children such as Dr. Clown. Our annual United Way efforts paid off again in 2006, enabling us to make a donation of $1 million to their network of agencies and programs thanks to the generosity of our employees and corporate contributions. We also partnered with UNICEF Canada to support the ING Chances for Children initiative and contribute to achieving the goal of giving 50,000 children in developing countries access to education by the end of 2007. Our main sponsorship activity, the ING Ottawa Marathon, continued to grow this year. Nearly 30,000 participants took part in a variety of events, a 50% increase since we became a partner in this event three years ago. Thanks to the ING Run for Something Better, running clubs across Canada were able to open their doors to underprivileged kids. And we became a proud Premier Partner of Canada’s National Speed Skating team in 2006, a team which won a dozen Olympic medals in Turin, Italy that year. 16mar07_Annual2_EN_AA15.indd A12 16mar07_Annual2_EN_AA15.indd A12 3/17/07 11:21:23 AM 3/17/07 11:21:23 AM ING Canada Inc. 13 Management’s Discussion and Analysis March 2, 2007 The following Management’s 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 at the end of this document. 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 claims ratios. These terms are deﬁ ned in section 1.4 of this document and in the Annual Information Form. This document contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from these forward-looking statements as a result of various factors, including those discussed Charles Brindamour Chief Operating below or in our Annual Information Form. Please read the cautionary note in section 6.2 of this document. Certain totals, subtotals and percentages may not agree due to rounding. Additional information about ING Canada, Ofﬁ cer including the Annual Information Form, may be found online on SEDAR at www.sedar.com. Table of Contents Overview Recent Developments Section 1 – Corporate Information 1.1 Who is ING Canada? 1.2 Goals and Strategies 1.3 Industry Outlook 1.4 Key Performance Indicators Section 2 – 2006 Performance Review 2.1 Results from Operations 2.2 Performance by Operating Groups 2.3 Summary of Quarterly Results 2.4 Selected Annual Information 2.5 Fourth Quarter 2006 Overview Section 3 – Financial Condition 3.1 Balance Sheet Analysis 3.2 Liquidity and Capital Resources 3.3 Contractual Obligations 3.4 Off Balance Sheet Arrangements 14 15 15 15 16 17 18 21 23 24 24 25 31 34 34 Section 4 – Accounting and Disclosure Matters 4.1 Disclosure Controls and Procedures 4.2 Internal Control over Financial Reporting 4.3 Critical Accounting Estimates and Assumptions 4.4 Impact of New Accounting Standards 35 35 35 38 Section 5 – Risk Management 5.1 Risk Management Principles and Responsibilities 40 5.2 Operational Risk Management 5.3 Corporate Governance and Compliance 5.4 Industry Standards Section 6 – Other Matters 6.1 Related Party Transactions 6.2 Cautionary Note Regarding Forward-Looking Statements 42 42 43 44 45 16mar07_Annual2_EN_AA15.indd A13 16mar07_Annual2_EN_AA15.indd A13 3/19/07 12:01:22 AM 3/19/07 12:01:22 AM 14 Overview Return on equity Net income for the year ended December 31, 2006 was $658.1 million, down 15.8% from the exceptional for the year was performance of 2005. The drop in net income was driven by lower underwriting income and lower realized 20.8% and the book value per share increased 18.3% to $25.58 from $21.63 Personal lines, both auto and property, ﬁ nished the year strongly with direct investment gains. Return on equity for the year was 20.8% and the book value per share increased 18.3% to $25.58 from $21.63 a year ago. Direct premiums written gained momentum in the second half of the year, resulting in 2.7% growth year over year after excluding pools and AGR (deﬁ ned in Section 2.1). • The 2.7% increase in direct premiums written was driven by a 3.3% increase in the number of written insured risks. Personal lines, both auto and property, ﬁ nished the year strongly with direct premiums written growing 5.8% versus 2005 after excluding pools. • Underwriting results were driven by a combined ratio of 89.4% for the year, 3.4 points higher than in 2005, due primarily to lower favourable prior year claims development. Also impacting underwriting results were lower losses from catastrophes in 2006, in both commercial and personal lines. Current accident year results were lower due partly to the impact of lower automobile rates on earned premiums and higher premiums written general expenses. growing 5.8% versus 2005 after excluding pools • Pre-tax realized investment and other gains totalled $193.5 million, down from $223.5 million in 2005 due primarily to lower net gains on bonds caused by lower turnover levels and market conditions during much of the year. The following table presents the major changes in income before income taxes. Table 1 (in millions of dollars) 2005 Income before income taxes Favourable prior year claims development Current accident year: Catastrophes Facility Association Other Net underwriting income Net realized investment and other gains Other 2006 Income before income taxes (107.7 ) 20.5 (4.5 ) (42.2 ) 1,090.9 (133.9 ) (30.0 ) 25.0 952.0 16mar07_Annual2_EN_AA15.indd A14 16mar07_Annual2_EN_AA15.indd A14 3/19/07 12:02:24 AM 3/19/07 12:02:24 AM Recent Developments The Company • On February 15, 2007, the Company announced its intention to repurchase for cancellation up to $500 million of ING Canada Inc. 15 announced its intention to repurchase up to $500 million of its common shares its common shares through a substantial issuer bid, by way of a modiﬁ ed Dutch auction (the Offer). ING Groep, N.V. (ING Groep), ING Canada’s majority shareholder, has informed ING Canada of its intent to submit common shares sufﬁ cient to maintain its holding at 70%. Under a modiﬁ ed Dutch auction, shareholders who choose to accept the bid will have an opportunity to tender their shares at a price they select within a price range established by the Company. This range has been set at a share price not less than $51.00 and not more than $59.00. Alternatively, shareholders may submit a proportionate tender enabling them to maintain their current proportionate share ownership following completion of the auction. The purchase price payable by ING Canada for shares purchased will be the lowest price within the range that will allow it to purchase shares up to the auction limit determined in accordance with the terms of the bid. A circular containing the full details of the issuer bid and procedures for tendering shares has been ﬁ led with the appropriate Canadian securities regulators on SEDAR at www.sedar.com. • On February 15, 2007, the Company also announced an increase in its quarterly dividend of 2.0 cents to 27.0 cents per share on its outstanding common shares. • On February 16, 2007, the Autorité des marchés ﬁ nanciers (“AMF”), the regulatory and oversight body for Québec’s ﬁ nancial sector, announced that Equisure Financial Network Inc. (“Equisure”), a subsidiary of the Company, has complied with all commitments undertaken by the Company under an agreement reached in December 2005. The AMF and Equisure have further agreed on the improvements that need to be made to the corporate structures of the property and casualty (P&C) brokerages covered by the agreement; these structures meet the AMF’s requirement and comply with current legislation. Section 1 – Corporate Information 1.1 Who is ING Canada? ING Canada is the country’s leading provider of property and casualty insurance. We offer automobile, property and liability insurance to individuals and businesses through a number of insurance subsidiaries. Consumers may purchase our products through a national network of independent brokers, afﬁ liated brokers and directly, over the Internet or through call centres. ING Canada’s common shares are listed on the Toronto Stock Exchange (TSX: IIC). ING Canada’s main subsidiaries include ING Insurance Company of Canada, Belair Insurance Company Inc., The Nordic Insurance Company of Canada, ING Novex Insurance Company of Canada, Trafalgar Insurance Company of Canada (hereinafter P&C companies or subsidiaries), ING Investment Management, Inc., Equisure Financial Network Inc., Canada Brokerlink Inc. and Grey Power Insurance Brokers Inc. 1.2 Goals and Strategies Our strategy continues to be to leverage our scale and core competencies in underwriting, pricing and claims and to provide our distributors and policyholders with a superior service and product proposition, leading to sustainable industry outperformance in organic growth and return on equity. Acquisitions enabling us to increase our market share in existing product lines within existing geographies are an important aspect of our strategy. Asset management will continue as a core competency focused on achieving superior after-tax returns. 16mar07_Annual2_EN_AA15.indd A15 16mar07_Annual2_EN_AA15.indd A15 3/17/07 11:21:26 AM 3/17/07 11:21:26 AM 16 Long-term goals 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%). To exceed the annual organic growth rate in direct premiums written of the Canadian property and casualty industry by at least 300 basis points (3%) over the long term. Key strategies Leverage our size and scale: Pricing and underwriting Strengthen our market position through organic growth: • Enhance sophisticated pricing strategies based on a large proprietary experience database Strengthen our relationship with brokers • Make it easier to do business with us • Focus on economic value drivers and proprietary tools to exploit market inefﬁ ciencies • Assist brokers in growing their business through marketing, training and acquisitions support • Maintain a disciplined risk selection process Offer increased value to customers • Provide improved data access and training to • underwriting staff Introduce new, innovative products that improve our value proposition Expense management Expand multi-channel distribution network • • Implement world class management and technology in claims management increase supply chain the use of Improve through efﬁ ciencies processes throughout the Company common • Independent brokers • Afﬁ liated Distribution Network • Direct sales in Ontario and Québec • Maintain strong in-house claims expertise to deliver efﬁ ciency and cost savings • Increase use of preferred provider networks Achievement of our strategy is not feasible without the active participation of our employees. To be successful, it is essential to have a winning performance culture that promotes our shared vision. In this respect, ING Canada’s strategy includes the attraction, retention and development of employees who are able to rise to the challenge and demonstrate an ability and desire to offer our customers a unique and exceptional experience. The Company’s past and future success is dependent on their dedication and contributions throughout the years. 1.3 Industry Outlook Several key factors will affect the P&C insurance industry over the coming 12 months. Underwriting • Industry growth and underwriting income: We expect the industry’s top-line growth rate to be below results should exceed historical returns historical levels, and underwriting results should exceed historical returns. • Claims costs in automobile insurance: The existing automobile insurance systems have been effective at containing and stabilizing claims costs. Furthermore, automobile claims frequency remains low and we believe frequency will either increase or continued low frequency will lead to premium reductions. Sustainability of the cost containment measures, as well as potential rate reductions, will continue to be key performance drivers. • 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. 16mar07_Annual2_EN_AA15.indd A16 16mar07_Annual2_EN_AA15.indd A16 3/17/07 11:21:26 AM 3/17/07 11:21:26 AM ING Canada Inc. 17 • Non-residential construction cost: Non-residential construction cost increases are putting pressure on commercial insurance underwriting margins. We continue to work with our brokers to ensure our commercial customers retain sufﬁ cient coverage. 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. 1.4 Key Performance Indicators The ﬁ nancial numbers used to determine the indicators below are determined in accordance with GAAP but the ratios are considered non-GAAP measures. 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. Technical terms are deﬁ ned below and in the Annual Information Form. Growth Proﬁ tability Direct premiums written: The total premiums from the primary insured in respect of insurance underwritten by an insurer during a speciﬁ ed period. Written insured risks: 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). Net underwriting income: The difference between net premiums earned and the sum of net claims incurred, commissions, premium taxes and general expenses; a key proﬁ tability measure. Average pre-tax yield: This yield is calculated using the investment income of the P&C companies for the period excluding realized gains and losses divided by the average invested assets of the P&C companies calculated monthly including cash equivalents but excluding cash balances. Performance and execution Capital management Claims ratio: Claims and loss adjustment expenses incurred, net of reinsurance, during a deﬁ ned period and expressed as a percentage of net premiums earned for the same period. including Expense ratio: Underwriting expenses 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 premiums earned for the same period. Components of the expense ratio (commissions, premium taxes and general expenses) are individual ratios expressed as a percentage of net premiums earned. Combined ratio: 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. Return on equity (ROE): Represents our net income for the 12 months ended on the date indicated divided by the average shareholders’ equity over the same 12 month period. Net income and shareholders’ equity are determined in accordance with GAAP. We compare our ROE against that of the industry, when available, as reported by the Ofﬁ ce of the Superintendent of Financial Institutions. Book value per share: Represents shareholders’ equity at the end of the year divided by the number of outstanding common shares at the same date. 16mar07_Annual2_EN_AA15.indd A17 16mar07_Annual2_EN_AA15.indd A17 3/17/07 11:21:26 AM 3/17/07 11:21:26 AM 18 Written insured risks (thousands) + 3.3% 1 . 5 6 5 , 4 9 . 7 1 4 , 4 05 06 The number of written insured risks grew, driven by solid growth in the second half of the year Section 2 – 2006 Performance Review 2.1 Results from Operations Table 2 (in millions of dollars, except as otherwise noted) Written insured risks (thousands) Direct premiums written Underwriting: Net premiums earned Net incurred losses and general expenses Net underwriting income Combined ratio Investment income Net realized investment and other gains Corporate and distribution Income before income taxes Income taxes Effective income tax rate Net income EPS – basic and diluted (dollars) Return on equity Book value per share (dollars) Year ending December 31 Increase 2005 (decrease) 2006 4,565.1 3,990.4 4,417.9 3,904.9 3.3 % 2.2 % 3,826.6 3,422.8 3,840.2 3,302.5 403.8 89.4 % 294.8 193.5 59.9 952.0 293.9 30.9 % 658.1 4.92 20.8 % 25.58 537.7 86.0 % 300.7 223.5 29.0 1,090.9 309.1 28.3 % 781.8 5.85 31.6 % 21.63 (0.4 ) % 3.6 % (24.9 ) % 3.4 pts (2.0 ) % (13.4 ) % 106.6 % (12.7 ) % (4.9 ) % 2.6 pts (15.8 ) % (15.9 ) % (10.8 )pts 18.3 % The number of written insured risks grew 3.3% during the year, driven by solid growth in the second half of the year. Personal lines, particularly auto insurance, drove this growth while the number of commercial lines risks was slightly down year over year. Direct premiums written after excluding pools, increased 2.2% compared to 2005, and 2.7% if we also exclude premiums related to the AGR business, which initially formed part of the Allianz acquisition and was re-transferred to the vendor effective September 30, 2005. Written premium rate reductions averaged 2.4% for the year. Net premiums earned lagged the growth in direct premiums written as the recent growth in written premiums has not yet fully impacted net premiums earned. Net premium rate reductions averaged 2.9% for the year. Net Incurred Losses and General Expenses Table 3 (in millions of dollars, except as otherwise noted) Net incurred losses: Favourable prior year claims development Catastrophes Current year claims Total Commissions, net Premium taxes, net General expenses, net Total Combined ratio Year ending December 31 Increase 2005 (decrease) 2006 (169.9 ) 59.2 2,371.9 2,261.2 674.5 132.3 354.8 (277.6 ) 79.7 2,359.6 2,161.7 674.2 133.7 332.9 3,422.8 89.4 % 3,302.5 86.0 % (38.8 ) % (25.7 ) % 0.5 % 4.6 % – (1.0 ) % 6.6 % 3.6 % 3.4 pts 16mar07_Annual2_EN_AA15.indd A18 16mar07_Annual2_EN_AA15.indd A18 3/17/07 11:21:26 AM 3/17/07 11:21:26 AM ING Canada Inc. 19 Net Incurred Losses Prior year claims development for the year remained favourable by $169.9 million (4.9% of opening reserves) compared to $277.6 million (7.9% of opening reserves) in 2005. The 2006 favourable development came mainly from automobile in the amount of $167.8 million (including $19.8 million from pools) which is $90.6 million less favourable than the prior year. The remaining favourable development came from commercial other in the amount of $25.9 million, which is $11.9 million less favourable than 2005. Conversely, we experienced $23.8 million of unfavourable development in personal property, compared to $18.6 million in 2005. Table 4 Losses from catastrophes (in millions of dollars) Personal line of business Commercial line of business Total direct claims Ceded, net of reinstatement premium Total Year ending December 31 Increase 2005 (decrease) 2006 49.5 9.7 59.2 – 59.2 131.8 40.9 172.7 (93.0 ) 79.7 (82.3 ) (31.2 ) (113.5 ) 93.0 (20.5 ) Catastrophes are deﬁ ned as individual events resulting in net claims incurred which are expected to be Losses from catastrophes were $5 million or more. In 2006, catastrophes consisted mainly of personal property damage due to ice and wind storms which hit most of the country. There were no reinsurance claims made for catastrophes incurred in 2006 $20.5 million as all losses were within our retention limits. In 2005, the Company incurred several storm-related catastrophe lower in 2006 as compared to 2005 claims that were ceded to reinsurers and a large commercial loss was incurred in Québec which resulted in a substantial reinsurance claim. Notwithstanding, losses from catastrophes were $20.5 million lower in 2006 as compared to 2005. Current year claims for the year were reasonably stable compared to 2005. Although weather conditions were generally mild in our main markets, there were several ice and wind storms which did not qualify as catastrophes but still caused signiﬁ cant damage. General Expenses Commissions and premium taxes were stable. General expenses increased during the year due to higher marketing expenses and lower fees from the service carrier operated on behalf of the Facility Association. Industry pools consist of the so-called residual market as well as risk-sharing pools (RSP) in Alberta, Ontario, Québec and New Brunswick. These pools are managed by the Facility Association except the Québec RSP. Transfers in and out of these pools on balance had no signiﬁ cant impact on underwriting income for the current accident year. Investment Income Table 5 (in millions of dollars, except as otherwise noted) Year ending December 31 Increase 2005 (decrease) 2006 Interest income Dividend income Investment expenses and other Total 170.4 147.0 (22.6 ) 294.8 203.6 117.0 (19.9 ) 300.7 (16.3 ) % 25.6 % 13.6 % (2.0 ) % 16mar07_Annual2_EN_AA15.indd A19 16mar07_Annual2_EN_AA15.indd A19 3/19/07 12:03:08 AM 3/19/07 12:03:08 AM 20 The main source of interest income is bonds. While there was no signiﬁ cant change in the yield year over year, a portion of the portfolio was sold and reinvested in equities. As a result, interest income on bonds decreased for the year. Also, the Company received a non-recurring interest payment in 2005 of $14.5 million. Dividend income increased in 2006 consistent with the higher level of equity investments. Average pre-tax yield on invested assets was 4.9% for 2006 and 4.8% in 2005. Net Realized Investment and Other Gains Table 6 (in millions of dollars, except as otherwise noted) Realized gains on the sale of: Fixed income securities Equities Impairments Losses on derivatives Realized gains on the sale of other assets Total before income taxes After income taxes Unrealized gains at end of period Change in unrealized gains in the year Year ending December 31 Increase 2005 (decrease) 2006 23.8 193.4 (20.4 ) (14.5 ) 11.2 193.5 127.5 201.3 (102.9 ) 87.9 137.2 (10.5 ) – 8.9 223.5 169.4 304.2 62.0 (72.9 ) % 41.0 % 94.3 % n/a 25.8 % (13.4 ) % (25.0 ) % n/a n/a During the year, total net realized investment and other gains decreased due to the following developments: • Net gains on bonds were lower due to lower turnover levels and market conditions during much of the year. • Gains on the sale of common shares were higher because of favourable market conditions and an increased amount of equity investments. • Impairments increased as the Company wrote down a higher number of investments in 2006 due to market performance. • Derivative ﬁ nancial instruments are marked to market for accounting purposes whereas investments are generally carried at cost, including the investments that are related to some derivatives (“related investments”). For the year, the related investments generated gains of $4.2 million and unrealized gains increased by $11.3 million, whereas the derivatives associated with these investments had losses of $16.3 million included in the $14.5 million loss on derivatives shown in the table above. • Other assets sold in the year include various properties which generated most of the gain in 2006. In 2005, the Company transferred and sold its mutual fund business for a gain of $2.5 million in a non-recurring transaction. Interest Expense The Company fully repaid its debt in 2006 Interest expense substantially decreased in 2006 as the Company fully repaid its debt during Q3 06. Income Taxes The tax rate was higher in 2006 than in 2005 primarily because of the impact of future tax rate changes, and a 2005 tax recovery from losses not previously recorded. 16mar07_Annual2_EN_AA15.indd A20 16mar07_Annual2_EN_AA15.indd A20 3/17/07 11:21:27 AM 3/17/07 11:21:27 AM Net Income and Earnings per Share These items are down primarily due to lower underwriting income, which is mostly attributable to lower ING Canada Inc. 21 favourable prior year claims development. Return on Equity Return on equity was 20.8% in 2006 compared to 31.6% in 2005 due to a combination of lower earnings and an increasing equity base. 2.2 Performance by Operating Groups The Company’s core business activity is P&C insurance underwriting which is further divided in two lines of business: personal and commercial lines. Investment income is generated on the investment portfolio held by the Company’s P&C subsidiaries and has been reviewed earlier. Net realized investment and other gains have also been reviewed earlier. Finally, the corporate and distribution group includes the results of the Company’s distribution operations, investment income at the holding company as well as other items not allocated to any other group. Underwriting – Personal Insurance Direct premiums written + 5.7% 5 . 7 0 8 , 2 9 . 6 5 6 , 2 Underwriting – Personal Insurance Table 7 (in millions of dollars, except as otherwise noted) Written insured risks (thousands): Automobile Property Total Direct premiums written: Automobile Property Total Net premiums earned: Automobile Property Total Net underwriting income (loss): Automobile Property 05 06 Total Ratios Claims ratio Commissions ratio Premium taxes ratio General expense ratio Combined ratio Year ending December 31 Increase 2005 (decrease) 2006 2,440.1 1,637.5 2,335.9 1,591.5 4,077.6 3,927.4 1,966.0 841.5 1,877.0 779.9 2,807.5 2,656.9 1,911.2 785.4 1,946.9 733.8 2,696.6 2,680.7 242.5 (0.3 ) 242.2 411.5 (29.4 ) 382.1 62.5 % 16.3 % 3.4 % 8.9 % 91.1 % 57.8 % 16.2 % 3.4 % 8.3 % 85.7 % 4.5 % 2.9 % 3.8 % 4.7 % 7.9 % 5.7 % (1.8 ) % 7.0 % 0.6 % (41.1 ) % (99.0 ) % (36.6 ) % 4.7 pts 0.1 pt – 0.6 pt 5.3 pts Direct premiums written in both automobile and personal property showed solid growth for the year, driven by increases in the number of written insured risks and the average amount insured. Rates on average increased slightly in personal property while they decreased in automobile. Pools had no signiﬁ cant impact on annual growth rates. 16mar07_Annual2_EN_AA15.indd A21 16mar07_Annual2_EN_AA15.indd A21 3/17/07 11:21:27 AM 3/17/07 11:21:27 AM 22 Net premiums earned in total were unchanged from 2005, despite overall growth in written premiums. In The net automobile, this is due to lower rates as well as assumed premiums from pools which were well below those of underwriting loss in personal 2005, while in personal property the difference is due to lower reinsurance premiums. property was The net underwriting loss in personal property was substantially eliminated through an increase in insured amounts and other corrective measures. Lower loss frequency and higher net premiums earned resulted in diminished losses. In personal auto, net underwriting income was down from 2005 due to lower favourable prior year claims development and the effect of rate decreases. substantially eliminated through an increase in insured amounts and other corrective measures Underwriting – Commercial Insurance Table 8 (in millions of dollars, except as otherwise noted) Written insured risks (thousands): Automobile Other Underwriting – Commercial Insurance Combined ratio Total Direct premiums written: Automobile Other % 6 . 6 8 % 7 . 5 8 Total Net premiums earned: Automobile Other Total Net underwriting income: Automobile Other Total Ratios Claims ratio Commissions ratio Premium taxes ratio General expense ratio 05 06 Combined ratio Year ending December 31 Increase 2005 (decrease) 2006 253.6 233.9 487.5 254.1 236.5 490.6 327.5 855.5 330.4 917.6 1,183.0 1,248.0 326.8 803.1 334.4 825.1 1,129.9 1,159.5 43.0 118.7 161.7 43.6 112.0 155.6 51.0 % 20.9 % 3.6 % 10.2 % 85.7 % 52.7 % 20.8 % 3.6 % 9.5 % 86.6 % (0.2 ) % (1.1 ) % (0.6 ) % (0.9 ) % (6.7 ) % (5.2 ) % (2.3 ) % (2.7 ) % (2.6 ) % (1.4 ) % 6.0 % 3.9 % (1.7 ) pts 0.1 pt – 0.7 pt (0.9 ) pt For commercial lines, written insured risks were slightly down from 2005 because of a very competitive market. Direct premiums written after adjusting for AGR business declined by 3.7% in both lines of business and 4.7% in commercial other. A shift to smaller accounts has negatively impacted average premium amounts, more so in commercial other. Net premiums earned showed declines consistent with those of written premiums in non-auto but increased in auto. The combined ratio in commercial Net underwriting income was stable in commercial auto, while in commercial non-auto, net underwriting lines improved income increased due to lower net incurred losses. slightly because of lower overall net Overall, the combined ratio in commercial lines improved slightly because of lower overall net incurred losses incurred losses in the year. 16mar07_Annual2_EN_AA15.indd A22 16mar07_Annual2_EN_AA15.indd A22 3/17/07 11:21:27 AM 3/17/07 11:21:27 AM ING Canada Inc. 23 Corporate and Distribution Our corporate and distribution group primarily includes the results of our brokerage operations (Canada Brokerlink, Grey Power and Equisure) and other expenses. Table 9 (in millions of dollars, except as otherwise noted) Year ending December 31 Increase 2005 (decrease) 2006 Investment income Distribution income Advisory fees and other income Total revenues Distribution expenses Interest on debt Other Income before income taxes 28.3 100.0 7.5 135.8 71.1 5.3 (0.5 ) 59.9 6.8 74.3 11.0 92.1 54.7 8.0 0.4 29.0 316.2 % 34.6 % (31.8 ) % 47.4 % 30.0 % (33.8 ) % n/a 106.6 % Investment income increased primarily from higher interest income on larger cash balances in the holding company. Advisory fees are lower as the Company sold its mutual fund business in 2005. Distribution income and expenses have increased along with growth in the distribution network. 2.3 Summary of Quarterly Results Table 10 (in millions of dollars, 2006 2005 except as otherwise noted) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Written insured risks (thousands) 1,051.1 1,242.9 1,356.1 Direct premiums written 963.6 1,038.1 1,176.2 Total revenue Underwriting income Net income Combined ratio (%) EPS – basic/ 897.9 821.9 1,095.8 1,080.2 1,096.7 1,133.8 1,111.6 1,123.3 1,112.3 1,098.8 114.9 158.5 88.1 914.9 1,012.7 1,195.2 1,312.1 905.0 1,006.5 1,171.4 812.5 179.8 223.6 81.2 126.3 196.9 86.9 165.6 205.9 82.7 116.7 202.8 87.7 62.3 109.4 93.6 95.9 156.8 89.9 79.9 185.9 91.5 diluted (dollars) Favourable prior year claims development 0.82 1.17 1.54 1.39 1.47 1.52 1.67 1.19 (24.3 ) (69.1 ) (39.5 ) (37.0 ) (49.0 ) (93.6 ) (66.6 ) (68.4 ) In general, the Company’s underwriting revenues are stable quarter to quarter but net incurred losses tend to be higher in the ﬁ rst and last quarters of the year, consistent with Canadian weather conditions. Consequently, underwriting income will normally be higher in Q2 and Q3 and lower in the other quarters. Table 11 Seasonal Indicator Q1 Q2 Q3 Q4 2006 2005 2004 Four-year average 2003 1.02 0.93 1.01 1.05 1.02 0.94 1.02 1.01 1.10 0.92 0.98 1.01 1.06 0.95 0.96 1.04 1.05 0.93 0.99 1.03 The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio to the annual combined ratio. 16mar07_Annual2_EN_AA15.indd A23 16mar07_Annual2_EN_AA15.indd A23 3/17/07 11:21:28 AM 3/17/07 11:21:28 AM 24 2.4 Selected Annual Information Table 12 (in millions of dollars, except as otherwise noted) Year ending December 31 2006 2005 2004 Total revenue Net underwriting income Net income EPS – basic (dollars) diluted (dollars) Annual dividends per common share (dollars) Investments Total assets Debt outstanding Total shareholders’ equity 4,406.4 403.8 658.1 4.92 4.92 1.00 7,241.9 10,377.3 – 3,420.8 4,446.1 537.7 781.8 5.85 5.85 0.65 6,721.0 9,926.5 127.0 2,892.6 3,780.9 470.0 624.2 6.51 6.49 – 6,285.1 9,663.1 256.2 2,059.6 Variances between 2006 and 2005 are analyzed in detail in this document. Variances between 2005 and 2004 were driven by: (1) strong underwriting income, particularly in personal automobile, despite the impact of increased catastrophe claims, most notably in personal property, (2) actual claims experience less than previously reserved for, creating redundant reserves to the beneﬁ t of earnings and (3) robust investment results. 2.5 Fourth Quarter 2006 Overview Net income for the fourth quarter of 2006 was $109.4 million, down 44.4% from Q4 05’s exceptional performance. The drop in net income was driven by lower underwriting income, lower realized investment gains and higher income taxes. Direct premiums written totalled $963.6 million in the quarter, an increase of 4.6% over Q4 05 after excluding industry pools. • The 4.6% increase in direct premiums was driven by a 3.8% increase in the number of written insured risks. Personal lines experienced very strong direct premiums written growth of 9.2% for Q4 06 over Q4 05, excluding pools, with good growth in both automobile and property lines. • Underwriting results were driven by a combined ratio of 93.6% for the quarter, 6.7 points higher than the same quarter of 2005. Catastrophe losses of $26.4 million compare to no catastrophes in Q4 05. Personal property experienced higher non-catastrophe severity, particularly in Ontario. Lower favourable prior year claims development from automobile pools resulted in lower underwriting results for personal auto. Despite an average rate reduction of 4.6%, the current year loss ratio for personal auto improved slightly, driven by a slight improvement in frequency. Commercial lines performed well in a softening market with an improved combined ratio of 92.8%, 2.6 points below the previous year. • Pre-tax realized investment and other gains totalled $15.3 million in the quarter, down from $67.2 million in Q4 05 due mostly to lower trading volumes. Unrealized gains on investments increased $65.7 million in the quarter to $201.3 million. • The Q4 06 tax expense includes a number of adjustments that had the effect of increasing the effective tax rate by 3.0%, or $5.1 million; Q4 06 to Q4 05 comparisons are also affected by $8.4 million of adjustments that improved results in Q4 05. A complete analysis of the fourth quarter results is available in the press release issued on February 15, 2007 in the section Review of Q4 Performance. 16mar07_Annual2_EN_AA15.indd A24 16mar07_Annual2_EN_AA15.indd A24 3/19/07 10:03:13 AM 3/19/07 10:03:13 AM Section 3 – Financial Condition 3.1 Balance Sheet Analysis Table 13 As at December 31 2005 (in millions of dollars) 2006 Book values Cash and cash equivalents Investments 125.9 7,241.9 341.1 6,720.9 Premiums and other receivables Reinsurers’ share of claims liabilities and unearned premiums Deferred acquisition costs Income taxes receivable 1,643.9 1,518.5 288.1 393.1 54.1 347.8 382.0 55.7 Other assets 302.9 274.2 Future income tax asset 112.2 141.1 Intangible assets and goodwill 215.2 145.2 Total assets 10,377.3 9,926.5 Payables and other liabilities Unpaid claims and loss adjustment expenses Unearned premiums Other liabilities Debt outstanding 840.4 815.7 3,823.6 2,264.1 28.4 – 3,821.6 2,194.8 74.8 127.0 Total liabilities 6,956.5 7,033.9 ING Canada Inc. 25 Comments on change Cash was invested in securities with terms exceeding 90 days to improve returns See below Premiums written are either billed to brokers or billed to policyholders directly. The increase was due to volume increases during Q4 06 Lower amount of claims ceded to reinsurers in 2006 Increased revenues in Q4 06 No signiﬁ cant changes The increase was mostly related to pension plan related assets Lower future tax rates have reduced the value of tax assets Acquisitions of brokers during 2006 generated an increase in goodwill and intangible assets Generally due to timing and increased volume in Q4 06 See below Due to increased volume in Q4 06 Debt was fully repaid during Q3 06 Shareholders’ equity Total liabilities and 3,420.8 2,892.6 The increase was due primarily to net earnings less dividends paid shareholders’ equity 10,377.3 9,926.5 16mar07_Annual2_EN_AA15.indd A25 16mar07_Annual2_EN_AA15.indd A25 3/20/07 8:06:26 PM 3/20/07 8:06:26 PM 26 Cash and Cash and Investments Investments 3.1% 11.4% Table 14 (in millions of dollars, As at December 31, 2006 As at December 31, 2005 Book value Fair value 21.5% 19.8% 44.2% % of Book Value Cash, cash equivalents, short-term notes over 90 days Fixed income securities Preferred Shares Common shares Miscellaneous except as otherwise noted) (BV) % of BV (FV) BV % of BV FV Cash and cash equivalents 125.9 Short-term notes over 90 days 713.5 3,258.8 Fixed income securities 57.2 Commercial mortgages 1,460.1 Preferred shares Common shares 1,580.7 Other investments: Loans to brokers Equity investments 156.9 14.7 1.7 % 9.7 % 44.2 % 0.8 % 19.8 % 21.5 % 125.9 713.5 3,281.6 59.0 1,517.1 1,700.4 341.1 440.4 3,520.8 70.4 1,257.3 1,266.5 4.8 % 6.2 % 49.9 % 1.0 % 17.8 % 17.9 % 341.1 440.4 3,595.8 73.1 1,319.9 1,430.4 2.1 % 0.2 % 156.9 14.7 151.4 14.2 2.2 % 0.2 % 151.4 14.2 Total investments and cash 7,367.8 100.0 % 7,569.1 7,062.1 100.0 % 7,366.3 Unrealized gains (FV - BV) 201.3 304.2 The increase in total investments and cash resulted from cash provided by operating activities of $431 million less dividend payments, debt repayment and acquisitions of brokerages and equipment. During the year, the Company transferred approximately $200 million from its ﬁ xed income portfolio to common and preferred share portfolios in accordance with changes in investment policy. Increases in loans to brokers and The Company equity investments are related to expansion of the Company’s distribution network. transferred approximately We have an investment policy that seeks to provide an attractive risk-return proﬁ le over the medium to long term. $200 million In developing our investment policy, we take into account the current and expected condition of capital markets, from its ﬁ xed income portfolio to common and preferred share portfolios in accordance with changes in 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 support the various asset types, security ratings and other material variables likely to affect 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, investment policy 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 Our investment portfolio is managed on a total return basis. As such, realized gains and losses are important portfolio is managed on a total return basis and recurring components of the return on investments and of income but the timing of their realization is 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 speciﬁ c business sector are dampened. 16mar07_Annual2_EN_AA15.indd A26 16mar07_Annual2_EN_AA15.indd A26 3/17/07 11:21:28 AM 3/17/07 11:21:28 AM Speciﬁ c focus is The following table sets forth our exposure to the ten largest industrial sectors for our combined ﬁ xed income ING Canada Inc. 27 placed on the management of the portfolio to optimize after-tax total return securities and preferred and common share portfolios as at December 31, 2006 and 2005. Speciﬁ c focus is placed on the management of the portfolio to optimize after-tax total return. Table 15 (in millions of dollars, As at December 31, 2006 As at December 31, 2005 except as otherwise noted) BV % of BV BV % of BV FV FV Banks Diversiﬁ ed ﬁ nancial services Insurance Utilities Oil and gas Telecommunication services Special purpose Real estate Media Metals and mining Total top ten sectors Government Other 1,563.9 765.2 458.7 428.9 345.8 313.1 231.8 225.3 136.2 95.2 4,564.1 1,999.6 678.2 21.6 % 1,643.1 789.3 10.6 % 492.1 6.3 % 454.5 5.9 % 331.7 4.8 % 313.8 4.3 % 232.6 3.2 % 244.3 3.1 % 141.4 1.9 % 94.1 1.3 % 63.0 % 27.6 % 9.4 % 4,736.9 2,011.3 695.0 827.8 701.2 361.2 449.7 274.1 286.9 252.3 248.8 121.6 70.1 3,593.7 2,043.5 1,083.8 12.3 % 10.4 % 5.4 % 6.7 % 4.1 % 4.3 % 3.8 % 3.7 % 1.8 % 1.0 % 53.5 % 30.4 % 16.1 % 895.2 734.3 392.3 482.1 300.4 284.7 257.8 274.2 121.3 79.2 3,821.4 2,091.5 1,112.3 Total investment assets 7,241.9 100.0 % 7,443.2 6,721.0 100.0 % 7,025.2 The Company uses derivative ﬁ nancial instruments for hedging purposes and to modify the risk proﬁ le of the investment portfolio as long as the resulting exposures are within investment policy guidelines. Beginning in 2006, we expanded our investment Beginning in 2006, we expanded our 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 of the options to include bond portfolio moved from 6.3 years at December 31, 2005 to 4.5 years at December 31, 2006. This reduction investment grade international more closely aligns our investment duration with the duration of our liabilities. bonds As at December 31, 2006, 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 $35.8 million of securities with a rating below investment grade were included in the ﬁ xed income and preferred share portfolios at December 31, 2006, compared to $16.1 million as at December 31, 2005. 16mar07_Annual2_EN_AA15.indd A27 16mar07_Annual2_EN_AA15.indd A27 3/17/07 11:21:29 AM 3/17/07 11:21:29 AM 28 Fixed Income The following table sets forth our ﬁ xed income portfolio by credit quality as at December 31, 2006 and 2005. Securities 0.1% 5.7% 24.6% 14.0% 55.6% % of Book Value AAA AA A BBB B Exposure to preferred shares contributes positively to the overall after-tax return of the investment Table 16 (in millions of dollars, As at December 31, 2006 As at December 31, 2005 except as otherwise noted) BV % of BV BV % of BV FV FV Fixed income securities AAA AA A BBB B 1,812.9 457.0 801.0 184.5 3.4 55.6 % 14.0 % 24.6 % 5.7 % 0.1 % 1,815.7 466.1 811.2 186.1 2.5 1,588.6 788.7 988.7 150.8 4.0 45.1 % 22.4 % 28.1 % 4.3 % 0.1 % 1,595.2 820.0 1,027.4 150.3 2.9 Total 3,258.8 100.0 % 3,281.6 3,520.8 100.0 % 3,595.8 Exposure to preferred shares contributes positively to the overall after-tax return of the investment portfolio. Our continuing proﬁ tability allows for material exposure to preferred shares in our investment portfolio and enables us to realize the beneﬁ t of receiving preferred share dividends on a tax-free basis. The following table sets forth our preferred share portfolio by credit quality as at December 31, 2006 and 2005. Table 17 (in millions of dollars As at December 31, 2006 As at December 31, 2005 except as otherwise noted) BV % of BV BV % of BV FV FV Preferred shares P1 P2 P3 P4 P5 portfolio Total 719.4 566.0 142.2 21.4 11.1 49.3 % 38.8 % 9.7 % 1.4 % 0.8 % 749.5 584.5 149.2 19.9 14.0 574.8 508.6 161.8 0.4 11.7 45.7 % 40.5 % 12.9 % – 0.9 % 604.7 528.2 172.1 0.4 14.5 1,460.1 100.0 % 1,517.1 1,257.3 100.0 % 1,319.9 Common equity exposure focuses primarily on high-dividend equities. We seek enhanced returns by identifying and investing in shares likely to pay increased dividends or special dividends. We undertake extensive analysis of investment opportunities to identify special dividend candidates. Similar evaluations are conducted to assess investments most likely to increase dividends. We also manage the equity portfolios to achieve additional dividend payments. Through active management, we seek incremental dividend income versus a static portfolio. The results of our common equity strategies generally depend on overall equity market trends. Accordingly, many factors outside of our control affect the aggregate increases or decreases in the equity portfolios. We seek to select investments that will provide incremental value in excess of our benchmarks. Unforeseen events affecting speciﬁ c companies, industries or sectors can have signiﬁ cant detrimental impact on the return proﬁ le of the equity investments. 16mar07_Annual2_EN_AA15.indd A28 16mar07_Annual2_EN_AA15.indd A28 3/17/07 11:21:29 AM 3/17/07 11:21:29 AM ING Canada Inc. 29 Unpaid Claims and Loss Adjustment Expenses Claims liabilities, which are measured using accepted actuarial practice, take into account the time value of money and provisions for adverse deviation. Changes in these estimates will affect the valuation of the claims liabilities. Discount rates were consistent with those used at year-end 2005 (2006: 4.64%; 2005: 4.63%). The provisions for adverse deviation were also set on a consistent basis with those used at year-end 2005. The claims liabilities used in the table below are taken from the ﬁ nancial statements, are discounted and include a provision for adverse deviation. The cumulative payments are not discounted and do not include a provision for adverse deviation. The net effect of the discount rates and the provisions for adverse deviation is that booked claims liabilities are slightly higher than undiscounted best estimates (by approximately 2.4% at year-end 2006 and 2.0% at year-end 2005). We have taken the positive claims development for both the current and prior accident years into account in arriving at our best estimate of claims liabilities. The following table shows the development of the claims liabilities for the 10 most recent accident years, with subsequent development during the periods. The original reserve estimates are re-evaluated quarterly for redundancy or deﬁ ciency. This re-evaluation is based on actual payments in full or partial settlement of claims as well as on current estimates of claims liabilities for claims still open or claims still unreported. Table 18 (in millions of dollars, except as otherwise noted) Original reserve Development Accident Year 1996 Total 2005 2004 2003 2002 2001 2000 1999 1998 1997 & – 1,118.8 1,117.7 973.2 838.6 729.0 655.5 587.0 548.1 557.2 1,121.2 during Q4 06 (24.3 ) (10.0 ) (2.9 ) (3.2 ) (6.0 ) (4.3 ) 1.5 0.1 1.0 (0.8 ) 0.1 As a % of original reserve (0.9 ) % (0.3 ) % (0.3 ) % (0.7 ) % (0.6 ) % 0.2 % 0.0 % 0.2 % (0.1 ) % 0.0 % Development during 2006 (169.9 ) (57.9 ) (50.5 ) (19.6 ) (14.4 ) (13.5 ) (2.8 ) (3.6 ) (1.5 ) (4.6 ) (1.5 ) As a % of original reserve (5.2 ) % (4.5 ) % (2.0 ) % (1.7 ) % (1.9 ) % (0.4 ) % (0.6 ) % (0.3 ) % (0.8 ) % (0.1 ) % Cumulative development (546.9 ) (57.9 ) (191.1 ) (174.6 ) (18.3 ) 49.0 36.4 39.6 (8.4 ) (128.4 ) (93.2 ) As a % of original reserve (5.2 ) % (17.1 ) % (17.9 ) % (2.2 ) % 6.7 % 5.6 % 6.7 % (1.5 ) % (23.0 )% (8.3 ) % In general, the Company has experienced favourable claims development for most accident years. In the years in which unfavourable claims development occurred, the overall P&C insurance industry had poor claims development due to unexpected changes in automobile claim patterns, particularly in Ontario. 16mar07_Annual2_EN_AA15.indd A29 16mar07_Annual2_EN_AA15.indd A29 3/17/07 11:21:29 AM 3/17/07 11:21:29 AM 30 Reinsurance ING Canada’s goals related to ceded reinsurance are: 1. capital protection; 2. reduction in the volatility of results; 3. increase in underwriting capacity; 4. access to expertise of reinsurers. At December 31, 2006, 13.2% (2005: 17.7%) of the reinsured claims liabilities were ceded to ING Re, an afﬁ liate. We also have reinsurance treaties with a number of unafﬁ liated reinsurers of which substantially all meet our ﬁ nancial strength rating requirements. The reinsurers chosen to participate in our program have a minimum rating of A- from A.M. Best. The Standard & Poor’s rating and the ﬁ nancial analysis performed by our specialized reinsurance brokers are also considered. The treaties have a security review clause allowing ING Canada to change a reinsurer during the term of the agreement if its rating falls below the minimum required. Diversiﬁ cation of reinsurers is analyzed and implemented to avoid too much concentration in a speciﬁ c reinsurance group. The placement of ceded reinsurance is done almost exclusively on an excess of loss basis (per event or per risk) as per practice, actuarial norms and regulatory guidelines. Under such programs, we consider that in order for a contract to reduce exposure to risk, it must be structured to ensure that the reinsurer assumes signiﬁ cant insurance risk related to the underlying reinsured policies and it is reasonably possible that the reinsurer may realize a signiﬁ cant loss from the reinsurance. A measure of transfer of risk is the variability of the potential negative impact of the reinsured losses on the reinsurer’s underwriting results. Further, our reinsurance treaties call for timely reimbursement of ceded losses. In 2006, for multi- In 2006, for multi-risk events or catastrophes, our retention was $25 million plus an average of 10% retention risk events or catastrophes, our retention was $25 million plus an average of 10% retention of the exposure between $25 million and $600 million with a reinsurance coverage limit of $1.25 billion of the exposure between $25 million and $600 million with a reinsurance coverage limit of $1.25 billion. The retention of all our treaties (including co-insurance and reinstatement premiums) is chosen such that a single loss or event could not signiﬁ cantly impact our annual loss ratio. Although we attempt to limit the likelihood of a very large loss to a single reinsurer by spreading coverage across many reinsurers, a single catastrophic event could generate a large loss for them. An earthquake, for example, which reached our $1.25 billion reinsurance limit would result in a collective loss net of reinstatement premiums of $1.1 billion to our reinsurers. Following industry practice, our reinsurance recoverables with licensed Canadian reinsurers (December 31, 2006: $229.3 million; December 31, 2005: $264.5 million) are generally unsecured because Canadian regulations require these reinsurers to maintain minimum asset and capital balances in Canada to meet their Canadian obligations, and claims liabilities take priority over the reinsurer’s subordinated creditors. Reinsurance recoverables with non-licensed reinsurers are secured with cash, letters of credit and/or assets held in trust accounts. 16mar07_Annual2_EN_AA15.indd A30 16mar07_Annual2_EN_AA15.indd A30 3/19/07 12:07:40 AM 3/19/07 12:07:40 AM ING Canada Inc. 31 Share Capital As of March 2, 2007, there were 133.7 million common shares and one Special Share issued and outstanding. The Special Share is convertible into one common share. ING Groep holds 70% of the issued and outstanding common shares and the Special Share. Under the Company’s long-term incentive plan, certain employees were awarded performance units (one performance unit equals one common share) as part of their compensation. The number of performance units that will eventually vest at the end of the three-year performance cycle depends on the Company’s three-year average return on equity compared with that of the Canadian P&C insurance industry. At the time of payout, the Company intends to purchase shares in the market in an amount equal to the number of vested shares. The Company re-estimates the number of performance units that are expected to vest at each reporting period. The estimated total number of performance units was 545,274 units as at December 31, 2006. 3.2 Liquidity and Capital Resources Liquidity Management The purpose of liquidity management is to ensure there is sufﬁ cient cash to meet all of our ﬁ nancial commitments and obligations as they fall due. We believe we have the ﬂ exibility to obtain, from internal sources, the funds needed to fulﬁ ll our cash requirements during the current ﬁ nancial year and to satisfy regulatory capital requirements. The liquidity requirements of our P&C insurance subsidiaries have historically been met primarily by funds generated from operations, asset maturities and income and other returns received on investments. Cash provided from these sources is used primarily for claims and loss adjustment expense payments and operating expenses. Catastrophe claims, the timing and amount of which are inherently unpredictable, may create increased liquidity requirements. Additional sources of cash ﬂ ow include the sale of invested assets and ﬁ nancing activities. As long as we continue to grow and remain proﬁ table, cash ﬂ ows should continue to be available for investment. We believe that our future liquidity needs will be met from all of the above sources. Net cash ﬂ ows are generally invested in marketable securities. We closely monitor the duration of these investments, and investment purchases and sales may be executed with the objective of having adequate funds available to satisfy our maturing liabilities if needed. As our investment strategy focuses on asset and liability durations, and not speciﬁ c cash ﬂ ows, asset sales may be required to satisfy obligations and/or rebalance asset portfolios. 16mar07_Annual2_EN_AA15.indd A31 16mar07_Annual2_EN_AA15.indd A31 3/17/07 11:21:29 AM 3/17/07 11:21:29 AM 32 Cash Flows and Liquidities Table 19 (in millions of dollars, except as otherwise noted) Inﬂ ows (Outﬂ ows) Cash provided by operating activities Investing activities: Business acquisitions Purchases of equipment Investments Financing activities: Dividends paid Debt repayment Capital issuance Cash at the beginning of the year Cash at the end of the year Year ending December 31 Increase 2005 (decrease) 2006 430.9 637.4 (32.4 ) % (65.2 ) (40.4 ) (279.8 ) (133.7 ) (127.0 ) – 341.1 125.9 (14.6 ) (45.7 ) (231.6 ) (86.9 ) (129.2 ) 129.2 82.5 341.1 346.6 % (11.6 ) % 20.8 % 53.9 % (1.7 ) % n/a n/a (63.1 ) % The Company has the ability to generate signiﬁ cant cash ﬂ ows from its operations based on its high level of proﬁ tability and low capital expenditure requirements. Cash provided by operating activities was lower in 2006 as a result of lower net income. Business acquisitions consumed more cash as the Company expanded its distribution network through the acquisition of brokerages and books of business. The increased cash outﬂ ow related to other investments reﬂ ects the increase in invested assets between 2005 and 2006. Dividends paid in 2006 were higher than in 2005 resulting in a higher cash outﬂ ow in 2006. In 2007, cash ﬂ ows will be impacted by the repurchase of shares described earlier and the increased dividend rate. Capital Management The Company has The Company has ample capital to support business growth with our insurance subsidiaries having capital of ample capital to support business growth with our insurance subsidiaries having capital of $695.5 million in excess of the minimum supervisory target of 150%, as calculated under the Minimum Capital Test (MCT) at December 31, 2006 (2005: $718.0 million). Because we manage our companies as a group, we report our combined capital position although we also ensure that each insurance company meets all regulatory requirements including the MCT. Our insurance companies are parties to a participation agreement which combines the underwriting results of all the companies with the outcome that each company has a proportion of $695.5 million underwriting results and the claims ratio and expense ratio are the same for each company. in excess of the minimum supervisory target 16mar07_Annual2_EN_AA15.indd A32 16mar07_Annual2_EN_AA15.indd A32 3/19/07 12:10:28 AM 3/19/07 12:10:28 AM The following table presents the minimum capital test of our insurance subsidiaries with a total for ING Canada Inc. 33 all companies. Table 20 MCT – P&C Companies (in millions of dollars except as otherwise noted) At December 31, 2006 Total capital available Total capital required Excess capital MCT % ING ING Nordic Novex Insurance Insurance Belair Allianz Trafalgar Ins Insurance Insurance Insurance Total 282.0 [a] 1,073.7 104.8 554.5 [b] 519.2 [a] – [b] 177.2 193.6 % 207.1 % 341.2 % 269.0 % [a] / [b] 966.8 466.8 500.0 49.3 14.4 34.9 – – – – – 61.7 2,433.5 18.2 1,158.7 43.5 1,274.8 338.8 % 210.0 % 34.4 695.5 Excess at 150% 242.0 266.7 27.6 124.8 At December 31, 2005 Total capital available Total capital required Excess capital MCT % 233.4 [a] 1,028.7 82.6 546.6 [b] 482.1 [a] – [b] 150.8 188.2 % 263.9 % 302.2 % 282.6 % 188.4 % 298.5 % 215.8 % [a] / [b] 51.9 2,354.0 17.4 1,090.6 34.5 1,263.3 342.1 181.6 160.5 654.9 248.2 406.7 43.0 14.2 28.7 Excess at 150% 208.8 282.6 21.6 109.5 69.7 25.8 718.0 At December 31, 2004 Total capital available Total capital required Excess capital MCT % 168.1 [a] 1,054.5 74.7 595.6 [b] 458.9 [a] – [b] 93.4 177.1 % 208.6 % 230.1 % 224.9 % 184.6 % 190.2 % 188.8 % [a] / [b] 33.7 2,006.1 17.7 1,062.7 943.4 16.0 267.5 144.9 122.6 449.1 215.3 233.8 33.1 14.4 18.7 Excess at 150% 161.1 126.1 11.5 56.0 50.2 7.1 412.1 The total amount of dividends available for payment from our subsidiaries during 2007 is $272.7 million plus any 2007 earnings. This amount is calculated based on dividend restrictions under applicable insurance laws but is subject to MCT limitations. The Company In 2006, the Board of Directors of the Company declared quarterly cash dividends of 25.0 cents per common increased its share for a total annual amount of $133.7 million. These dividends were paid on March 31, June 30, quarterly dividend by 2 cents September 29, and December 29, 2006. On February 13, 2007, the Board of Directors increased the Company’s quarterly dividend by 2.0 cents to 27.0 cents, an 8.0% increase. A quarterly cash dividend of 27.0 cents per common share has been declared payable on March 30, 2007 to shareholders of record on March 15, 2007. 16mar07_Annual2_EN_AA15.indd A33 16mar07_Annual2_EN_AA15.indd A33 3/17/07 11:21:30 AM 3/17/07 11:21:30 AM 34 As previously mentioned, the Company announced its intention to repurchase for cancellation up to $500 million of its common shares through a substantial issuer bid. The Company plans to use existing liquid assets to pay for the shares, without affecting its ability to meet other cash requirements. ING Canada is offering to purchase shares because we believe that the purchase of shares represents an appropriate use of available cash on hand. The Offer represents an opportunity for us to return up to $500 million of capital to shareholders who elect to tender, while at the same time increasing the proportionate share ownership of shareholders who elect not to tender. Readers should read the issue bid circular for more details on the reasons supporting the Company’s decision. On September 20, 2005, ING Canada ﬁ led a short-form base shelf prospectus and received ﬁ nal receipt from Canadian securities regulators the following day. This ﬁ ling allows the Company to offer a total of up to $1 billion in any combination of debt, preferred or common shares securities over a 25-month period. Financing The nature, size and timing of any ﬁ nancings will depend on ING Canada’s assessment of its credit requirements and general market conditions. If any securities covered by the base shelf prospectus are offered for sale, a prospectus supplement containing speciﬁ c information about the terms of these securities will be provided. S&P afﬁ rmed the ﬁ nancial strength and long term counterparty credit rating of A+ for our P&C subsidiaries in 2006, while A.M. Best similarly afﬁ rmed our ﬁ nancial strength rating of A+. Dominion Bond Rating Service assigned an A (low) rating to the long term senior unsecured debt of the Company in 2006. We have an uncommitted revolving credit facility of $50 million with The Royal Bank of Canada, which was undrawn at December 31, 2006. 3.3 Contractual Obligations Table 21 Payments due by period (in millions of dollars) Operating leases Other long-term obligations Total contractual obligations Less than 1 year 63.2 32.8 96.0 Total 308.0 100.4 408.4 1-3 years 88.4 30.7 119.1 4-5 years After 5 years 55.7 16.9 72.6 100.7 20.0 120.7 3.4 Off Balance Sheet Arrangements The Company does not have any signiﬁ cant off balance sheet arrangements not otherwise reported. 16mar07_Annual2_EN_AA15.indd A34 16mar07_Annual2_EN_AA15.indd A34 3/19/07 12:13:41 AM 3/19/07 12:13:41 AM ING Canada Inc. 35 Section 4 – Accounting and Disclosure Matters 4.1 Disclosure Controls and Procedures ING Canada is committed to providing timely, accurate and balanced disclosure of all material information about the Company and to providing fair and equal access to such information. The Company’s management is responsible for establishing and maintaining the Company’s disclosure controls and procedures to ensure that information used internally and disclosed externally is complete and reliable. Due to the inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute assurance, that all control issues and instances of fraud or error, if any, within the Company have been detected. The Company continues to evolve and enhance its system of controls and procedures. Management at the direction and under the supervision of the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures. The evaluation was conducted in accordance with the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators. This evaluation conﬁ rmed, subject to the inherent limitations noted above, the effectiveness of the design and operation of disclosure controls and procedures as at December 31, 2006. The Company’s management can therefore provide reasonable assurance that material information relating to the Company and its subsidiaries is reported to it on a timely basis so that it may provide investors with complete and reliable information. 4.2 Internal Control over Financial Reporting Management has designed and is responsible for maintaining adequate internal control over ﬁ nancial reporting to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with Canadian GAAP. No changes were made or occurred in the Company’s internal control over ﬁ nancial reporting during the year ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over ﬁ nancial reporting. 4.3 Critical Accounting Estimates and Assumptions Our signiﬁ cant accounting policies are disclosed in Note 2 to our audited consolidated ﬁ nancial statements. The preparation of our ﬁ nancial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in our ﬁ nancial statements. These estimates and assumptions principally relate to the establishment of reserves for policy liabilities, impairment of investment securities, goodwill, income taxes and pensions and other post-employment beneﬁ ts. As more information becomes known, these estimates and assumptions could change and impact future results. The above noted estimates and assumptions regarding reserves for policy liabilities will impact our underwriting results; goodwill will impact our underwriting and corporate and distribution groups; impairment of securities will impact our net realized investment and other gains. The most signiﬁ cant estimates and assumptions we make in preparing our ﬁ nancial statements are described below. There were no signiﬁ cant changes made to our assumptions over the past two years. 16mar07_Annual2_EN_AA15.indd A35 16mar07_Annual2_EN_AA15.indd A35 3/17/07 11:21:30 AM 3/17/07 11:21:30 AM 36 Policy Liabilities Policy liabilities consist of provisions for claims liabilities and premium liabilities, net of reinsurance. The provision for policy liabilities is discounted to take into account the time value of money. It also includes a provision for adverse deviation, as required by Canadian accepted actuarial practice. The appointed actuary of our P&C insurance subsidiaries, using appropriate actuarial techniques, evaluates the adequacy of our policy liabilities. Claims liabilities are maintained to cover our estimated ultimate amount to settle i) insured losses with respect to reported and unreported claims incurred as of the end of each accounting period and ii) claims expenses. The provision for claims liabilities is ﬁ rst determined on a case-by-case basis as claims are reported and then reassessed as additional information becomes known. The provision also considers future possible development of claims. Such reserves do not represent an exact calculation of liability, but instead represent estimates developed using projection techniques in accordance with Canadian accepted actuarial practice. The estimates used are related to 1) expectations of the ultimate cost of settlement and administration of claims based on our assessment of facts and circumstances then known, 2) our review of historical settlement patterns, 3) estimates of trends in claims severity and frequency and 4) legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inﬂ ation, legal trends and legislative changes. Many of these items are not directly quantiﬁ able, particularly on a prospective basis. Additionally, there may be signiﬁ cant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer. Reserve estimates are reﬁ ned in a systematic ongoing process as historical loss experience develops and additional claims are reported and settled. Because the establishment of reserves is an inherently uncertain process involving estimates, current provisions may not be sufﬁ cient. Adjustments to reserves, both positive and negative, are reﬂ ected in the statement of income of the period in which such estimates are updated. Premium liabilities are considered adequate when the unearned premiums reserve (after deducting any deferred acquisition cost asset) is at least equal to the present value, at the balance sheet date, of cash ﬂ ows of the claims, expenses and taxes to be incurred after that date on account of the policies in force at that date or at an earlier date. Deferred acquisition costs comprise commissions, premium taxes and expenses directly related to the acquisition of premiums. They are deferred to the extent that they are recoverable from unearned premiums, after considering the related anticipated claims, expenses and investment income in respect of these premiums. Deferred acquisition costs are amortized on the same basis as the premiums are recognized in income. A premium deﬁ ciency would be recognized immediately by a charge to the statement of income as a reduction of deferred acquisition costs to the extent that the unearned premiums reserve, plus anticipated investment income, is not adequate to recover all deferred acquisition costs and related claims and expenses. If the premium deﬁ ciency was greater than unamortized deferred acquisition costs, a liability would be accrued for the excess deﬁ ciency. Reinsurance recoverables include amounts for expected recoveries related to claims liabilities as well as the portion of the reinsurance premium which has not yet been earned. The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claims and loss adjustment expense reserves and are reported in our audited consolidated balance sheet. The ceding of insurance does not discharge our primary liability to our insureds. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management’s experience and current economic conditions. 16mar07_Annual2_EN_AA15.indd A36 16mar07_Annual2_EN_AA15.indd A36 3/19/07 12:14:52 AM 3/19/07 12:14:52 AM ING Canada Inc. 37 Impairment of Invested Assets We obtain values for actively traded securities from external pricing services. For private placements, commercial mortgages and a small number of infrequently traded securities, quotes from brokers are obtained or values are estimated using internally developed pricing models. These models are based on common valuation techniques and require us to make assumptions regarding credit quality, liquidity and other factors that affect estimated values. Impairment of investment securities results in a charge to earnings when a market decline in the value of an investment to below cost is other-than-temporary. Our methodology to identify potential impairments requires professional judgment and places particular emphasis on those securities with unrealized losses of 25% or greater of the book value where that unrealized loss has been outstanding for more than six months. Members of our investment and accounting departments meet quarterly to assess impairments and report quarterly to the Investment Committee on important investments that are included on a “watch list”. Management assesses which of these securities are other-than-temporarily impaired. Assessment factors include, but are not limited to, the ﬁ nancial condition and rating of the issuer of the security, any collateral held and the length of time the market value of the security has been below cost. Any impairment is recognized when the assessment concludes that there is objective evidence of impairment. Each quarter, any security with an unrealized loss that is determined to have been other-than-temporarily impaired is written down to its expected recoverable amount, with the amount of the write-down reﬂ ected in our statement of income for that quarter. Previously impaired securities continue to be monitored quarterly, with additional write-downs taken quarterly, if necessary. In 2006, we recorded $20.4 million of impairments to recognize other-than-temporary declines in value. There are inherent risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a weak economy, a pronounced economic downturn or unforeseen events which affect one or more companies or industry sectors could result in additional write-downs in future periods for impairments that are deemed to be other-than-temporary. Goodwill Under GAAP, goodwill is not amortized but is tested annually for impairment of value on a reporting unit basis. Management’s judgment is required to identify reporting units with similar economic characteristics and to select an appropriate valuation model. In the P&C insurance industry and the P&C insurance brokerage industry, it is common for companies to be acquired at a multiple of revenue or book value, adjusted for net assets other than intangibles. A range of values used to evaluate the multiple is developed using discounted cash ﬂ ow valuation techniques. When the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. When the carrying value of the reporting unit exceeds its fair value, the fair value of the goodwill is compared with its carrying value to determine the amount of impairment, if any. When the carrying value of goodwill exceeds the fair value of the goodwill, an impairment loss is recognized in the consolidated statements of income in an amount equal to the excess. 16mar07_Annual2_EN_AA15.indd A37 16mar07_Annual2_EN_AA15.indd A37 3/17/07 11:21:30 AM 3/17/07 11:21:30 AM 38 Income Taxes Management exercises judgment in estimating the provision for income taxes. The Company is subject to income tax laws in various jurisdictions where it operates. Various tax laws are potentially subject to different interpretations by the taxpayer and the relevant tax authority. The provision for income taxes represents management’s interpretation of the relevant tax laws and its estimate of current and future tax implications of the transactions and events during the period. A future income tax asset or liability is determined for each timing difference based on the future tax rates that are expected to be in effect and management’s assumptions regarding the expected timing of the reversal of such temporary differences. Pensions and Other Post-Employment Beneﬁ ts We sponsor a number of deﬁ ned beneﬁ ts and deﬁ ned contribution plans providing pension and other beneﬁ ts to eligible employees after retirement. The pension plans provide beneﬁ ts based on years of service, contributions and average earnings at retirement. Due to the long-term nature of these plans, the calculation of beneﬁ t expenses and obligations depends on various assumptions such as discount rates, expected rates of return on assets, projected salary increases, retirement age, mortality and termination rates. All assumptions are determined by management and are reviewed annually by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of beneﬁ t obligation and expense. The weighted average assumptions used and the sensitivity of key assumptions are presented in Note 12 to our consolidated ﬁ nancial statements. 4.4 Impact of New Accounting Standards Initial Adoption The Company expanded the usage of derivatives in 2006 and consequently it now applies hedge accounting for certain new hedging instruments as described in Note 2 to the consolidated ﬁ nancial statements. Financial Instruments, Comprehensive Income and Hedges Effective January 1, 2007, we will apply the new provisions of the CICA handbook on accounting for ﬁ nancial instruments, including sections 3855 “Financial Instruments – Recognition and Measurement”, 3865 “Hedges” and 1530 “Comprehensive income”. The new provisions will affect our accounting for ﬁ nancial instruments and hedges and will introduce a new statement of comprehensive income and a new component of accumulated other comprehensive income within shareholders’ equity. The comprehensive income will be composed of net income and the unrealized gains and losses on available for sale securities, net of income taxes. The standards require that all our ﬁ nancial assets and liabilities be classiﬁ ed as trading, available for sale, held to maturity, or loans and receivables. • For assets classiﬁ ed as available for sale, the unrealized changes in market value will be reﬂ ected in other comprehensive income until the ﬁ nancial asset is disposed of, or becomes impaired. A portion of unrealized net gains as at January 1, 2007 will be accounted for as an opening adjustment to accumulated other comprehensive income. 16mar07_Annual2_EN_AA15.indd A38 16mar07_Annual2_EN_AA15.indd A38 3/19/07 12:16:06 AM 3/19/07 12:16:06 AM ING Canada Inc. 39 • We will classify a portion of our investments that is supporting net claims liabilities, as held for trading, under which the unrealized gains and losses are recognized in income. Such classiﬁ cation will reduce income statement volatility related to the changes in fair value of claims liabilities as described below. Other ﬁ nancial assets and liabilities, including all derivatives and embedded derivatives, will also be classiﬁ ed as held for trading according to the new standards. Unrealized net gains related to investments designated as held for trading as at January 1, 2007 will be accounted for as an adjustment to retained earnings. • The net claims liabilities will be discounted using a market rate instead of a book rate and an adjustement to the amount of net claims liabilities as at January 1, 2007 will be recorded to retained earnings following the change. • Certain instruments will be classiﬁ ed as loans and receivables or as held to maturity. We do not expect that these classiﬁ cations will have any signiﬁ cant impact since these investments will continue to be carried at amortized cost. • For our insurance subsidiaries, the Ofﬁ ce of the Superintendent of Financial Institutions has imposed certain restrictions under guideline D-10, on the classiﬁ cation of assets as held for trading and we will meet these requirements. Accounting Changes Effective January 1, 2007, we will apply the revised provisions of the CICA handbook section 1506 “Accounting changes”. Accordingly, voluntary changes in accounting policies will be made only if they result in reliable and more relevant information. Variability in Variable Interest Entities Effective January 1, 2007, we will apply the Emerging Issues Committee (EIC) Abstract No. 163, “Determining the Variability to be Considered in Applying AcG15”. This EIC provides additional clariﬁ cation on how to analyze and consolidate variable interest entities. The impact is not expected to be signiﬁ cant on our consolidated ﬁ nancial statements. Harmonization of Canadian GAAP to International Financial Reporting Standards In 2005, the Accounting Standards Board ﬁ nalized its strategic plan for ﬁ nancial reporting in Canada whereby Canadian GAAP will converge with International Financial Reporting Standards over a ﬁ ve-year period. After this transitional period, Canadian GAAP will cease to exist as a separate, distinct basis of ﬁ nancial reporting. The Company will continue to monitor the changes resulting from this transition. 16mar07_Annual2_EN_AA15.indd A39 16mar07_Annual2_EN_AA15.indd A39 3/19/07 12:19:03 AM 3/19/07 12:19:03 AM 40 Section 5 – Risk Management 5.1 Risk Management Principles and Responsibilities Effective risk management rests on identifying, understanding and communicating all risks the Company is exposed to in the course of its operations. In order to make sound decisions, both strategically and operationally, management must have continual, direct access to the most timely and accurate information possible. Either directly or through its committees, the Board of Directors ensures that Company management has put appropriate risk management programs in place. The Board, directly and in particular through the Audit and Risk Review Committee (“Audit Commitee”), oversees such risk management programs, procedures and controls and in this regard, receives periodic reports from among others, the Risk Management Department, the Chief Actuary, the internal auditors and the independent auditors. A summary of the risks the Company is exposed to and the process for managing them is outlined below. Product Design and Pricing Risk Product design and pricing risk is the risk that the established price is or becomes insufﬁ cient to ensure an adequate return for shareholders as compared to the Company’s proﬁ tability objectives. This risk may be due to an inadequate assessment of market needs, a poor estimate of the future experience of several factors, as well as the introduction of new products that could adversely impact the future behaviour of policyholders. The risk is primarily managed by regularly analyzing the pricing adequacy of company products as compared to recent experience. The pricing assumptions are revised as needed and/or the various options offered by the reinsurance market are utilized. Underwriting Risk Underwriting risk is the risk of ﬁ nancial loss resulting from the selection of risks to be insured and management of contract clauses. Unfavourable results in these areas can lead to deviations from the estimates based on the actuarial assumptions. The Company has adopted policies which specify the Company’s retention limits. Once the retention limits have been reached, the Company turns to reinsurance to cover the excess risk. Insolvency Risk Insolvency risk is the risk that the Company will not be able to meet the demands of future claims as they arise. The regulatory authorities closely monitor the solvency of insurance companies by requiring them to comply with strict solvency standards based on the risk assumed by each company with respect to asset composition, liability composition, and the matching between these two components. The Company is required to submit regular reports to the regulatory authorities regarding its solvency, and publish its solvency ratio every quarter. The minimum solvency ratio targeted by the Company is 175%, which is much higher than the regulatory authorities’ requirement. To measure the degree to which the Company is able to meet regulatory solvency requirements, the appointed actuary must present an annual report to the Audit Committee and management on the Company’s current and future solvency. Reinsurance Risk Even though the Company relies on reinsurance to manage the underwriting risk, reinsurance does not release the Company from its primary commitments to its policyholders. Therefore, the Company is exposed to the credit risk associated with the amounts ceded to reinsurers. The Company assesses the ﬁ nancial soundness of the reinsurers before signing any reinsurance treaties and monitors their situation on a regular basis. 16mar07_Annual2_EN_AA15.indd A40 16mar07_Annual2_EN_AA15.indd A40 3/17/07 11:21:31 AM 3/17/07 11:21:31 AM ING Canada Inc. 41 Interest Rate and Equity Market Fluctuations Movements in short-term and long-term interest rates, as well as ﬂ uctuations in the value of equity securities, affect the level and timing of recognition of gains and losses on securities we hold, and cause changes in realized and unrealized gains and losses. Generally, our investment income will be reduced during sustained periods of lower interest rates and will likely result in unrealized gains in the value of ﬁ xed income securities we continue to hold, as well as realized gains to the extent the relevant securities are sold. During periods of rising interest rates, the market value of our existing ﬁ xed income securities will generally decrease and our realized gains on ﬁ xed income securities will likely be reduced or result in realized losses. General economic conditions, political conditions and many other factors can also adversely affect the stock markets and, consequently, the value of the equity securities we own. Credit Risk Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. A counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. Our credit risk exposure is concentrated primarily in our ﬁ xed income and preferred share investment portfolios and, to a lesser extent, in our reinsurance recoverables. Our risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to any one issuer by imposing ﬁ xed income portfolio limits on individual corporate issuers based upon credit quality. Foreign Exchange Risk Foreign exchange risk is the possibility that changes in exchange rates produce an unintended effect on earnings and equity when measured in domestic currency. This risk is largest when assets backing liabilities are payable in one currency and are invested in ﬁ nancial instruments of another currency. Although we are exposed to some foreign exchange risk arising from investment in some U.S. dollar denominated assets, our general policy is to minimize foreign currency exposure. We mitigate foreign exchange rate risk by buying or selling successive monthly foreign exchange forward contracts. Derivatives We use certain derivatives to mitigate certain of the above mentioned risks and we use other derivatives for trading purposes. Our use of derivatives exposes us to a number of risks, including replacement cost (credit) risk and interest rate and equity market ﬂ uctuations. The replacement cost risk for any derivative transaction is generated by the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to us. Therefore, replacement cost risk related to derivatives is represented by the positive fair value of the instruments and is normally a small fraction of the contract’s notional amount. Trading derivatives exposes us to additional interest rate and equity market ﬂ uctuations. We manage replacement cost risk and interest rate and equity market ﬂ uctuation related to derivatives in accordance with our risk management policies speciﬁ ed above. 16mar07_Annual2_EN_AA15.indd A41 16mar07_Annual2_EN_AA15.indd A41 3/17/07 11:23:06 AM 3/17/07 11:23:06 AM 42 5.2 Operational Risk Management We believe that managing operational risks related to our business activities signiﬁ cantly reduces losses resulting from failed processes, procedures or controls, inadequate systems, human errors, fraud or external events such as natural disasters. To manage this risk, we follow a speciﬁ c framework that is composed of four major steps: identiﬁ cation, measurement, monitoring and mitigation. The scope of operational risk management covers the security of people, assets and information as well as the continuity of our operations and recovery of our technology during a crisis. For early detection For early detection and clear insight of our key operational risks, we periodically perform Risk & Control Self- and clear insight of our key operational risks, we periodically perform Risk & Control Self- Assessments of our critical functions with the collaboration of management. We also monitor and measure our risks on an ongoing basis through key risk indicators which enable management to proactively initiate effective actions. ING Canada has also developed clear incident reporting channels within the organization to systematically report, manage and monitor operational incidents leading to ﬁ nancial losses or reputation damage. Ongoing training and exercises provided to all employees also contribute to increase the operational risk awareness culture Assessments of our within the organization and minimize the occurrence of incidents. critical functions In order to maintain the integrity and continuity of our operations in the event of a crisis, ING Canada has developed personalized alert and mobilization procedures as well as communication protocols. For example, emergency action plans, business continuity plans, business recovery plans, major health crisis plans, building evacuation plans and crisis communication plans have all been deﬁ ned and are tested on an ongoing basis. The implementation of the overall operational risk management program relies on management. In addition, the Operational Risk Management department assists in monitoring the operational risk processes and ensuring that appropriate actions are taken when necessary. The Operational Risk Management department reports to the Risk Management Committee which is composed of executive members appointed by the Board of Directors. It is the Committee that has the oversight responsibility for operational risk management and governance within the organization. Finally, to ensure transparency, the Committee provides regular updates of its operations to the Senior Management Committee, the Audit Committee and the Board of Directors. 5.3 Corporate Governance and Compliance ING Canada ING Canada believes that good corporate governance and compliance with all legal and regulatory requirements believes that good corporate governance and compliance with all legal and regulatory requirements are essential for maintaining investor conﬁ dence are essential for maintaining investor conﬁ dence. Legal and regulatory compliance risk arises from non-compliance with the laws, regulations or guidelines applicable to the Company as well as the risk of loss resulting from non- fulﬁ lment of a contract. ING Canada is subject to strict regulatory requirements and detailed monitoring of its operations in all provinces or territories where it conducts business, either directly or through its subsidiaries. ING Canada’s corporate governance and compliance program is built on the following foundations: a) ING Canada’s Board of Directors and its Committees are structured in accordance with sound corporate governance standards. Directors are presented with signiﬁ cant information in all areas of the Company’s operations to enable them to effectively supervise the Company’s management, business objectives and risks. b) Disclosure controls and processes have been put into place so that relevant information is obtained and communicated to senior management and directors of the Board to ensure that the Company meets its disclosure obligations and to protect the conﬁ dentiality of information. A decision making process is also in place to facilitate timely and accurate public disclosure. 16mar07_Annual2_EN_AA15.indd A42 16mar07_Annual2_EN_AA15.indd A42 3/19/07 12:26:51 AM 3/19/07 12:26:51 AM ING Canada Inc. 43 c) Effective corporate governance is dependent on strong corporate compliance structures and processes. To this end, ING Canada has established an enterprise-wide Compliance Policy and framework including procedures and policies necessary to ensure adherence to laws, regulations and related obligations. Compliance activities include identiﬁ cation, mitigation and monitoring of compliance/reputation risks, as well as communication, education, and activities to promote a culture of compliance and ethical business conduct. d) The Board of Directors and the Audit Committee of ING Canada, as well as that of its subsidiaries, periodically receives reports on all lawsuits, whether they be in the normal course of business, where the contesting of certain claims appears normal, or outside the normal course of business. To manage this risk, the Company has specialized resources in its Legal Department as well as experts outside the Company, and provisions are taken when deemed necessary. While senior management has ultimate responsibility for compliance, compliance is a responsibility that each individual employee shares. This responsibility is clearly set out in ING Canada’s Business Principles and Code of Conduct. 5.4 Industry Standards ING Canada is committed to maintaining its reputation as a corporation with integrity and ethical business conduct that extends to how we treat our customers. In this regard, ING Canada is currently working with the Insurance Bureau of Canada (IBC) in reviewing the principles set out in IBC’s Standards of Sound Marketplace Practice (Standards), which includes concepts such as information disclosure, timely and fair settlement of claims, adequate systems of complaint handling, and knowledgeable intermediaries. ING Canada has subscribed to the underlying principles of the Standards for many years and already has practices in place to ensure appropriate levels of consumer service. Operational and compliance teams are reviewing the Standards to see what gaps, if any, exist and how ING Canada can enhance its practices. This self-regulation effort is in addition to the Code of Consumer Rights and Responsibilities already adopted by ING Canada. An additional best practices initiative is the CCIR/CISRO’s (our regulators) three principle-based recommendations designed to promote customer conﬁ dence in the insurance industry (i.e. priority of client’s interest, disclosure of conﬂ icts or potential conﬂ icts of interest, and product suitability). ING Canada is working with the insurance industry to determine best practices. 16mar07_Annual2_EN_AA15.indd A43 16mar07_Annual2_EN_AA15.indd A43 3/19/07 12:27:41 AM 3/19/07 12:27:41 AM 44 Section 6 – Other Matters 6.1 Related Party Transactions We have ongoing transactions with related parties, consisting mostly of: (1) management and advisory services; (2) ING Groep and afﬁ liated companies; (3) reinsurance by an afﬁ liated company; and (4) ﬁ nancing. These transactions are carried out in the normal course of operations and are measured at the amount of consideration paid or received as established and agreed by the related parties. We believe that such exchange amounts approximate fair value. In addition, we have related party transactions with investees accounted for as long-term investments. These transactions consist primarily of loans and commission expenses. Notes 1 and 8 to the accompanying consolidated ﬁ nancial statements provide additional information on related party transactions. 16mar07_Annual2_EN_AA15.indd A44 16mar07_Annual2_EN_AA15.indd A44 3/17/07 11:23:07 AM 3/17/07 11:23:07 AM ING Canada Inc. 45 6.2 Cautionary Note Regarding Forward-Looking Statements Certain statements in this report about our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments are 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 similar words or phrases identify such forward-looking statements. Forward-looking statements are based on estimates and assumptions made by us based on our experience and view 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 the forward-looking statements. These factors include, without limitation, the following: our ability to implement our strategy or operate our business as we expect; our ability to accurately assess the risks associated with the insurance policies that we write; unfavourable capital market developments or other factors which could affect our investments; the cyclical nature of the P&C insurance industry; our ability to accurately predict future claims frequency; 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; the signiﬁ cant inﬂ uence 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 ﬁ nancial 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, ﬁ nancial and political conditions; our dependence on the results of operations of our subsidiaries; the limited trading history of our common shares; the accuracy of analyst earnings estimates or the consensus ﬁ gure based upon such estimates; 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 accept no responsibility to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. 16mar07_Annual2_EN_AA15.indd A45 16mar07_Annual2_EN_AA15.indd A45 3/17/07 11:23:07 AM 3/17/07 11:23:07 AM 46 Management’s Responsibility for Financial Reporting Management is responsible for the preparation and presentation of the consolidated ﬁ nancial statements of ING Canada Inc. and its subsidiaries, collectively known as “the Company”. This responsibility includes selecting appropriate accounting policies and making estimates and informed judgments based on the anticipated impact of current transactions, events and trends, consistent with Canadian generally accepted accounting principles. In meeting its responsibility for the reliability of consolidated ﬁ nancial statements, the Company maintains and relies on a comprehensive system of internal control comprising organizational procedural controls and internal accounting controls. The Company’s system of internal control includes the communication of policies and of the Company’s Code of Conduct, comprehensive business planning, proper segregation of duties, delegation of authority for transactions and personal accountability, selection and training of personnel, safeguarding of assets and maintenance of records. The Company’s internal auditors review and evaluate the system of internal control. The Company’s Board of Directors, acting through the Audit and Risk Review Committee, which is composed entirely of Directors, who are neither ofﬁ cers nor employees of the Company, oversees management’s responsibility for the design and operation of effective ﬁ nancial reporting and internal control systems, the preparation and presentation of ﬁ nancial information and the management of risk areas. The Audit and Risk Review Committee conducts such review and inquiry of management and the internal and external auditors as it deems necessary to establish that the Company employs an appropriate system of internal control, adheres to legislative and regulatory requirements and applies the Company’s Code of Conduct. The internal and external auditors, as well as the Actuary, have full and unrestricted access to the Audit and Risk Review Committee, with and without the presence of management. Pursuant to the Insurance Companies Act of Canada or to the Insurance Act (“Québec”) (“the Acts”), the Actuary, who is a member of management, is appointed by the Board of Directors. The Actuary is responsible for discharging the various actuarial responsibilities required by the Acts and conducts a valuation of policy liabilities, in accordance with Canadian generally accepted actuarial standards, reporting his results to management and the Audit and Risk Review Committee. The Ofﬁ ce of the Superintendent of Financial Institutions Canada for the federally regulated property and casualty (“P&C”) subsidiaries and l’Autorité des marchés ﬁ nanciers for the Québec regulated P&C subsidiary make such examinations and inquiries into the affairs of the P&C subsidiaries as deemed necessary. The Company’s external auditors, Ernst & Young LLP, Chartered Accountants, are appointed by the shareholders to conduct an independent audit of the consolidated ﬁ nancial statements of the Company and meet separately with both management and the Audit and Risk Review Committee to discuss the results of their audit, ﬁ nancial reporting and related matters. The auditors’ report to shareholders appears on page 47. February 13, 2007 Claude Dussault Mark A. Tullis President and Chief Executive Ofﬁ cer Chief Financial Ofﬁ cer 16mar07_Annual2_EN_AA15.indd A46 16mar07_Annual2_EN_AA15.indd A46 3/17/07 11:23:07 AM 3/17/07 11:23:07 AM ING Canada Inc. 47 Auditors’ Report To: the Shareholders of ING Canada Inc. We have audited the consolidated balance sheets of ING Canada Inc. (the “Company”) as at December 31, 2006 and 2005 and the consolidated statements of income, changes in shareholders’ equity and cash ﬂ ows for the years then ended. These ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. In our opinion, these consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Company as at December 31, 2006 and 2005 and the results of its operations and its cash ﬂ ows for the years then ended in accordance with Canadian generally accepted accounting principles. Toronto, Canada February 13, 2007 Ernst & Young LLP Chartered Accountants 16mar07_Annual2_EN_AA15.indd A47 16mar07_Annual2_EN_AA15.indd A47 3/20/07 9:16:37 PM 3/20/07 9:16:37 PM 48 Consolidated Balance Sheets (in thousands of dollars) As at December 31 2006 2005 125,954 $ Assets Cash and cash equivalents (note 3) Investments (note 4) Accrued investment income Premium and other receivables Due from afﬁ liated companies (note 8) Reinsurers’ share of unpaid claims and loss adjustment expenses (notes 6 and 7 ) Reinsurers’ share of unearned premiums (notes 6 and 7) Deferred acquisition costs Income taxes receivable Other assets (note 11) Long-term investments (note 13) Future income tax asset (note 9) Intangible assets (note 10) Goodwill (note 10) $ 341,138 7,241,938 6,720,965 50,100 1,643,933 1,518,511 230 4,252 330,519 270,369 17,279 17,683 381,992 393,137 55,684 54,134 182,119 203,176 41,587 44,401 141,101 112,187 36,948 66,294 108,362 148,743 51,068 $ 10,377,269 $ 9,926,535 $ 840,410 $ – 23,984 815,674 2,968 67,705 3,823,539 3,821,609 2,264,118 2,194,837 4,129 4,463 127,000 – 6,956,514 7,033,922 1,183,846 1,183,846 89,713 2,143,375 1,619,054 93,534 3,420,755 2,892,613 $ 10,377,269 $ 9,926,535 Liabilities Payables and other liabilities Due to afﬁ liated companies (note 8) Income taxes payable Unpaid claims and loss adjustment expenses (note 6) Unearned premiums (note 6) Unearned reinsurance commissions Debt outstanding (note 14) Shareholders’ equity Share capital (note 15) Contributed surplus Retained earnings See accompanying notes to consolidated ﬁ nancial statements On behalf of the Board: Claude Dussault Director Ivan Duvar Director 16mar07_Annual2_EN_AA15.indd A48 16mar07_Annual2_EN_AA15.indd A48 3/17/07 11:23:08 AM 3/17/07 11:23:08 AM Consolidated Statements of Income For the years ended December 31 ING Canada Inc. 49 (in thousands of dollars except for per share amounts) Direct premiums written Net premiums written Revenue Net premiums earned Investment income (note 13) Net realized investment and other gains Commissions and advisory fees Expenses Claims and loss adjustment expenses Commissions (note 8) Premium taxes General expenses Interest Income before income taxes Income taxes (note 9) Net income Earnings per share, basic and diluted 2006 2005 $ 3,990,419 $ 3,904,901 $ 3,895,493 $ 3,754,937 $ 3,826,614 $ 3,840,176 338,493 223,471 43,928 351,186 193,532 35,044 4,406,376 4,446,068 2,261,169 2,161,755 646,344 133,704 405,349 612,331 132,335 443,225 3,449,060 3,347,152 5,309 7,963 952,007 1,090,953 293,954 309,170 $ 658,053 $ 781,783 $ 4.92 $ 5.85 Basic and diluted average number of common shares (in thousands) 133,732 133,546 See accompanying notes to consolidated ﬁ nancial statements Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31 (in thousands of dollars) Share capital Balance, beginning of year Common shares issued (note 15) Share issuance costs, net of income taxes Balance, end of year Contributed surplus Balance, beginning of year Stock-based compensation (note 15) Balance, end of year Retained earnings Balance, beginning of year Net income Dividends paid Other Balance, end of year Total shareholders’ equity See accompanying notes to consolidated ﬁ nancial statements 2006 2005 $ 1,183,846 $ 1,052,290 136,032 (4,476 ) – – 1,183,846 1,183,846 89,713 3,821 93,534 83,336 6,377 89,713 1,619,054 658,053 (133,732 ) – 923,983 781,783 (86,926 ) 214 2,143,375 1,619,054 $ 3,420,755 $ 2,892,613 16mar07_Annual2_EN_AA15.indd A49 16mar07_Annual2_EN_AA15.indd A49 3/17/07 11:23:08 AM 3/17/07 11:23:08 AM 50 Consolidated Statements of Cash Flows (in thousands of dollars) For the years ended December 31 2005 2006 Operating activities Net income Adjustments to determine cash provided by operating activities: Unearned premiums and unpaid claims and loss adjustment expenses, net Net realized investment and other gains Deferred acquisition costs, net Future income taxes Amortization Decrease in loan provision Other Changes in other operating assets and liabilities Cash provided by operating activities (note 16) Investing activities Proceeds from sale of investments Purchase of investments Purchase of brokerages and books of business, net (note 17) Proceeds from sale and leaseback of properties Purchase of property and equipment and other Cash used in investing activities Financing activities Dividends paid Proceeds from common shares issuance Debt repayment (note 14) Share issuance costs Cash used in ﬁ nancing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year $ 658,053 $ 781,783 130,957 (193,532 ) (10,811 ) 19,869 8,577 (457 ) 1,455 (183,173 ) (129,910 ) (223,471 ) (669 ) 9,572 38,249 (5,660 ) 4,659 162,893 430,938 637,446 16,581,242 12,509,278 (16,891,010 ) (12,740,836 ) (14,646 ) – (45,651 ) (65,152 ) 29,977 (40,447 ) (385,390 ) (291,855 ) (133,732 ) – (127,000 ) – (86,926 ) 136,032 (129,230 ) (6,802 ) (260,732 ) (86,926 ) (215,184 ) 341,138 258,665 82,473 Cash and cash equivalents, end of year $ 125,954 $ 341,138 See accompanying notes to consolidated ﬁ nancial statements 16mar07_Annual2_EN_AA15.indd A50 16mar07_Annual2_EN_AA15.indd A50 3/17/07 11:23:08 AM 3/17/07 11:23:08 AM ING Canada Inc. 51 Notes to Consolidated Financial Statements (in thousands of dollars) 1. Status of the Company ING Canada Inc. (the “Company’’) was incorporated under the Canada Business Corporations Act. The Company has investments in wholly-owned subsidiaries which operate principally in the Canadian property and casualty (“P&C”) insurance market. The Company’s signiﬁ cant subsidiaries are ING Insurance Company of Canada, Belair Insurance Company Inc., The Nordic Insurance Company of Canada (as amalgamated with Allianz Insurance Company of Canada on April 1, 2006), ING Novex Insurance Company of Canada, Trafalgar Insurance Company of Canada, Equisure Financial Network Inc., Canada Brokerlink Inc. and Grey Power Insurance Inc. ING Groep N.V. (“ING Groep”) both as the owner of 70% of the Company’s outstanding common shares and the Special Share (note 15) and as a party to the Co-Operation Agreement (the “Agreement”) has substantial inﬂ uence over the ongoing business and operation of the Company. The Agreement provides, among other things, that for so long as ING Groep holds not less than one-third of the Company’s outstanding common shares, the Company may not carry out certain corporate acts, including entering into business combinations with unafﬁ liated third parties or making acquisitions or dispositions above certain monetary thresholds or changing the dividend policy without the prior written approval of ING Groep. 2. Summary of signiﬁ cant accounting policies These consolidated ﬁ nancial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The preparation of consolidated ﬁ nancial statements in accordance with Canadian GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities at the dates of the consolidated ﬁ nancial statements, the reported amounts of revenue and expenses for the years presented, as well as the disclosure of contingent assets and liabilities. These estimates are subject to uncertainty. Signiﬁ cant estimates include the determination of impairment losses (notes 10 and 16), policy liabilities (note 6), income taxes (note 9), employee future beneﬁ ts (note 12), stock-based compensation (note 15), the allocation of the purchase price (note 17) and contingencies (note 19). Changes in estimates are recorded in the accounting period in which these changes are determined. Further, the accounting policies used to prepare the ﬁ nancial statements of the Company’s regulated insurance subsidiaries must also comply with the accounting requirements of their respective regulators. The signiﬁ cant accounting policies used in preparing these consolidated ﬁ nancial statements, including those speciﬁ ed by the insurance regulators, are, in all material respects, in accordance with Canadian GAAP and are summarized below. These policies have been consistently applied. (a) Signiﬁ cant accounting changes Stock-based compensation In 2005, as a result of the adoption of a long-term incentive plan for certain employees and a deferred share unit plan for independent directors (note 15), the Company adopted the recommendations of the Canadian Institute of Chartered Accountants’ (“CICA”) Handbook Section 3870, “Stock-Based Compensation and Other Stock-Based 16mar07_Annual2_EN_AA15.indd A51 16mar07_Annual2_EN_AA15.indd A51 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM 52 Payments”, which requires that stock-based compensation awards to non-employees, direct awards of stock, awards that call for settlement in cash or other assets or stock appreciation right awards to employees be recognized on a fair value basis as an expense. Under this policy, the fair value of the earned or awarded amounts is estimated on the grant date and such amount is recorded as a compensation expense over the related vesting period, or the period between the grant date to the date the employee becomes eligible to retire if shorter, with a corresponding increase to contributed surplus for those awards granted to employees and to liabilities for directors. Rate regulation In 2005, the Company implemented the disclosure and presentation requirements contained in the CICA’s Accounting Guideline 19 “Disclosures by Entities Subject to Rate Regulation”. The objective of this guideline is to ensure that users of the ﬁ nancial statements of entities providing services or products for which customer rates are established, or subject to approval, by a regulator or a governing body empowered by statute or contract to set rates, are better informed about the existence, nature and effects of all forms of rate regulation. The guideline requires companies to disclose general information useful to an understanding of the nature and economic effects of rate regulation (note 18) and, if applicable, speciﬁ c information when rate regulation has affected the accounting for a transaction or event. Cash and cash equivalents In 2005, the Company changed its deﬁ nition of cash equivalents in order to align itself with prevailing disclosure practices. The Company now deﬁ nes cash equivalents as highly liquid investments that are readily convertible into a known amount of cash, are subject to an insigniﬁ cant risk of changes in value and have a maturity date of three months or less from the date of acquisition. Previously, cash equivalents were deﬁ ned in reference to a maturity date of three months or less from the consolidated balance sheet dates. The change had no impact on the Company’s consolidated statements of income but resulted in a reclassiﬁ cation of $274,740 between cash equivalents and investments in the 2005 opening balances. Cash equivalents are carried at amortized cost, which approximates fair value. (b) Basis of consolidation The Company consolidates the ﬁ nancial statements of all subsidiary companies and eliminates on consolidation all signiﬁ cant inter-company balances and transactions. The equity method is used to account for investments over which the Company exerts signiﬁ cant inﬂ uence. Gains and losses on sales of these investments are included in income when recognized, while expected losses on “other-than-temporary” impairments are recognized immediately. (c) Investments and investment income Short-term notes with a maturity of more than three months from the date of acquisition are carried at amortized cost which approximates fair value and are amortized on an effective yield basis. Fixed income securities are recorded at amortized cost, providing for the amortization of premiums and discounts in the consolidated statements of income on an effective yield basis. Shares and trust units are recorded at cost. Loans are presented net of an allowance for loan losses. The book value of an investment is written down and the write down is reﬂ ected in the consolidated statements of income when there is evidence of an “other-than-temporary” decline in the value of an investment. To assess impairments, management reviews available current information for investments with fair values below their book values to ascertain whether the book values are expected to be recovered. For investments in equity and 16mar07_Annual2_EN_AA15.indd A52 16mar07_Annual2_EN_AA15.indd A52 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM ING Canada Inc. 53 ﬁ xed income securities, management evaluates whether the decline in fair value of these securities is other than temporary. For mortgage loans and other loans, management assesses expected future cash ﬂ ows and, where necessary, the net realizable amounts of assets provided as collateral. Interest income is recognized as earned and dividends are recognized on the ex-dividend date. Gains and losses on disposition are recorded in the consolidated statements of income when investments are sold and are calculated based on average cost. (d) Derivative ﬁ nancial instruments Derivative ﬁ nancial instruments are used for risk management (“non-trading”) purposes and for trading purposes. Currency swaps and forwards, and certain total return swaps are held for non-trading purposes to mitigate foreign exchange and market risks. Interest rate futures, options and swaps and certain total return swaps are held for trading purposes. The Company applies hedge accounting, for certain new hedging instruments, when requirements of the CICA Handbook Accounting Guideline AcG–13 “Hedging Relationship” are met. For derivative ﬁ nancial instruments held for non-trading purposes where hedge accounting is applied, the accounting policy is as follows: (i) The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking its hedge transactions. The Company also formally assesses, both at inception and on an ongoing basis, whether the derivative ﬁ nancial instruments that are used in hedging transactions are effective in offsetting changes in fair values of hedged items. (ii) Hedge accounting is discontinued prospectively when the derivative ﬁ nancial instrument no longer qualiﬁ es as an effective hedge or the derivative is terminated or sold. The fair value of the derivative ﬁ nancial instrument is then accounted for and the related gain or loss is deferred to be included in the consolidated statements of income during the periods in which the hedged item affects earnings. Should the hedged item cease to exist, the gains or losses deferred until then are immediately charged to income. (iii) Currency swaps used to manage exchange risk related to certain investments in U.S. dollars are accounted for using hedge accounting. These derivative ﬁ nancial instruments are recognized at cost and foreign exchange gains and losses related to the hedged items are not recognized until they are settled. For derivative ﬁ nancial instruments held for non-trading purposes where hedge accounting is not applied and for derivative ﬁ nancial instruments held for trading purposes, the instruments are recognized at their fair value, with changes in the fair value reﬂ ected in the consolidated statements of income during the period in which they arise. The fair value of derivative ﬁ nancial instruments is based on the quoted market value at the consolidated balance sheet closing dates. In the absence of this information for a given instrument, different valuation models recognized by ﬁ nancial markets are used to estimate such fair value. 16mar07_Annual2_EN_AA15.indd A53 16mar07_Annual2_EN_AA15.indd A53 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM 54 (e) Revenue recognition Premiums written are deferred as unearned premiums and recognized as revenue, net of reinsurance, on a pro rata basis over the terms of the underlying policies, usually twelve months and no longer than twenty-four months. Commissions and advisory fees are recorded on an accrued basis. (f) Foreign currency translation Assets, liabilities, revenue and expenses arising from a foreign currency transaction are translated into Canadian dollars using the exchange rate prevailing at the date of the transaction. Monetary items denominated in a foreign currency are adjusted to reﬂ ect the exchange rate at December 31 and the foreign currency adjustments are reﬂ ected in the consolidated statements of income. Realized gains and losses on foreign currency transactions are recognized in the consolidated statements of income at the transaction date. (g) Policy liabilities Policy liabilities consist of unearned premiums and unpaid claims and loss adjustment expenses. The appointed actuary, using appropriate actuarial techniques, evaluates the adequacy of policy liabilities. Unpaid claims and loss adjustment expenses are ﬁ rst determined on a case-by-case basis as claims are reported and then reassessed as additional information becomes known. Included in unpaid claims and loss adjustment expenses is a provision to account for the future development of these claims, including claims incurred but not reported, as well as a provision for adverse deviations, as required by accepted actuarial practice in Canada. Unpaid claims and loss adjustment expenses are discounted to take into account the time value of money. In estimating unpaid claims and loss adjustment expenses, standard actuarial techniques are used. These techniques are based on historical loss development factors and payment patterns. They require the use of assumptions such as loss and payment development factors, future rates of claims frequency and severity, inﬂ ation, reinsurance recoveries, expenses, changes in the legal environment, changes in the regulatory environment and other matters, taking into consideration the circumstances of the Company and the nature of the insurance policies. Unearned premiums are calculated on a pro rata basis, from the unexpired portion of the premiums written. The unearned premiums estimate is validated through standard actuarial techniques to ensure that these premiums are sufﬁ cient to cover the estimated future costs of servicing these policies and related claims. (h) Deferred acquisition costs Deferred acquisition costs comprise commissions, premium taxes and expenses directly related to the acquisition of premiums. They are deferred to the extent that they are recoverable from unearned premiums, after considering the related anticipated claims, expenses and investment income in respect of these premiums. They are amortized on the same basis as the premiums are recognized in the consolidated statements of income. (i) Reinsurance The Company presents third party reinsurance balances in the consolidated balance sheets on a gross basis to indicate the extent of credit risk related to third party reinsurance and its obligations to policyholders and on a net basis in the consolidated statements of income. The estimates for the reinsurers’ share of unpaid claims and loss adjustment expenses are presented as an asset and are determined on a basis consistent with the related unpaid claims and loss adjustment expenses. 16mar07_Annual2_EN_AA15.indd A54 16mar07_Annual2_EN_AA15.indd A54 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM (j) Property and equipment Property and equipment are carried at cost less accumulated amortization. Amortization rates are established to depreciate the cost of the assets over their estimated useful lives. Amortization methods and rates are ING Canada Inc. 55 shown below. Buildings Computer equipment Furniture and equipment Leasehold improvements (k) Employee future beneﬁ ts Method Rate or term Declining balance Straight-line Declining balance and straight-line Straight-line 3% – 8% 30 – 36 months 20% 60 months Terms of related leases For deﬁ ned beneﬁ t pension and other retirement plans, the accrued beneﬁ t obligations, net of the fair value of plan assets and unamortized items, are accrued. The unamortized items are the past service costs, the transitional asset/obligation, the transitional valuation allowance and the net actuarial gains or losses. To match costs and services, these items are amortized on a straight-line basis over the expected average remaining service lifetime (“EARSL”) of active members expected to receive beneﬁ ts under the plans. Changes in the valuation allowance are not deferred. For each plan, the Company has adopted the following policies: (i) The actuarial determination of the accrued obligations for pensions and other retirement beneﬁ ts uses the projected beneﬁ t method based on services provided by employees and management’s best estimate assumptions. (ii) For the purpose of calculating the expected return on plan assets, plan assets are valued at fair value. (iii) Only gains or losses in excess of 10% of the greater of the accrued beneﬁ t obligations or the fair value of plan assets are amortized over the EARSL. (iv) Past service costs arising from plan amendments are amortized on a straight-line basis over the EARSL. (v) The Company amortizes the transitional asset/obligation arising from the adoption on January 1, 2000 of the CICA Handbook Section 3461 using the prospective application method on a straight-line basis over the EARSL as of January 1, 2000. (vi) When the restructuring of a beneﬁ t plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. 16mar07_Annual2_EN_AA15.indd A55 16mar07_Annual2_EN_AA15.indd A55 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM 56 (l) Income taxes The Company provides for income taxes using the liability method of tax allocation. Under this method, the income tax expense is calculated based on income tax laws and rates substantively enacted as at the consolidated balance sheet dates. The income tax expense is comprised of two components: current income taxes and future income taxes. Current income taxes are amounts expected to be payable or recoverable as a result of operations in the current year. Future income taxes arise from changes during the year in cumulative temporary differences between the accounting book values of assets and liabilities and their respective tax bases. A future income tax asset is recognized to the extent that future realization of the tax beneﬁ t is more likely than not. (m) Goodwill and intangible assets The excess of the purchase price over the fair value of the underlying net tangible assets is initially allocated to intangible assets, as appropriate, and the residual to goodwill. An intangible asset is recognized apart from goodwill when it results from contractual or other legal rights or when it is capable of being separated or divided from the acquired enterprise and sold, transferred, licensed, rented, or exchanged. Finite life intangible assets are amortized to the consolidated statements of income over their useful lives whereas inﬁ nite life intangible assets and goodwill are not subject to amortization. Goodwill is tested annually for impairment of value on a reporting unit basis. Judgment is required to identify reporting units with similar economic characteristics and to select a valuation model. Accordingly, the Company assesses the book value of its net assets on this basis. Impairment, if any, identiﬁ ed through this assessment is charged to the consolidated statements of income as a result of a reduction in the book value of the goodwill. (n) Earnings per share Earnings per share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reﬂ ect the potential dilution that could occur if the holders of securities or contracts entitling them to obtain common shares in exchange for their securities or contracts exercised their right to obtain common shares. (o) Future accounting changes i) Financial instruments, comprehensive income and hedges Effective January 1, 2007, the Company will apply, on a retrospective basis without restatement, the new provisions of the CICA handbook on accounting for ﬁ nancial instruments, including sections 3855 “Financial Instruments – Recognition and Measurement”, 3865 “Hedges” and 1530 “Comprehensive income”. The new provisions will affect the accounting for ﬁ nancial instruments and hedges and will introduce a new consolidated statement of comprehensive income and a new component of accumulated other comprehensive income within shareholders’ equity. The comprehensive income will be composed of the net income and the unrealized gains and losses on available for sale securities, net of income taxes. The standards require that all the ﬁ nancial assets and liabilities be classiﬁ ed as available for sale, held for trading, held to maturity or loans and receivables. • For assets classiﬁ ed as available for sale, the unrealized changes in market value will be reﬂ ected in other comprehensive income until the ﬁ nancial asset is disposed of, or has become impaired. Unrealized net gains related to assets designated as available for sale as at January 1, 2007, will be accounted for as an adjustment in accumulated other comprehensive income. 16mar07_Annual2_EN_AA15.indd A56 16mar07_Annual2_EN_AA15.indd A56 3/17/07 11:23:09 AM 3/17/07 11:23:09 AM ING Canada Inc. 57 • To reduce consolidated income statements volatility, the Company intends to classify a portion of its investments that is supporting net claims liabilities, as held for trading, under which the unrealized gains and losses are recognized in income. Other ﬁ nancial assets and liabilities, including all derivatives and embedded derivatives, will also be classiﬁ ed as held for trading according to the new standards. Unrealized net gains related to assets and liabilities designated as held for trading as at January 1, 2007, will be accounted for as an adjustment to retained earnings. For the Company’s insurance subsidiaries, the Superintendent of Financial Institutions, Canada (“OSFI”) has imposed certain restrictions, as per OSFI guideline D-10, on the classiﬁ cation of assets and liabilities as held for trading. The classiﬁ cation as held for trading for the insurance subsidiaries’ assets and liabilities will meet OSFI requirements. • Most of the ﬁ nancial assets will be classiﬁ ed as available for sale or held for trading. These ﬁ nancial assets were previously recorded at cost. Consequently, the net claims liabilities will be discounted using a market rate instead of a book rate. An amount of net claims liabilities as at January 1, 2007, will be accounted for as an adjustment to retained earnings following the change in discounting rate. • Certain investments will be classiﬁ ed as loans and receivables or as held to maturity. The Company does not expect that these classiﬁ cations will have any signiﬁ cant impact on the consolidated ﬁ nancial statements since the assets will continue to be carried at amortized cost. The Company is determining the tax consequences, if any, and the impact on the consolidated ﬁ nancial statements once these changes are adopted. ii) Accounting changes Effective January 1, 2007, the Company will apply the revised provisions of the CICA handbook section 1506 “Accounting changes”. Accordingly, voluntary changes in accounting policies will be made only if they result in reliable and more relevant information. iii) Variability in variable interest entities Effective January 1, 2007, the Company will apply the Emerging Issues Committee (“EIC”) Abstract. No. 163, “Determining the Variability to be Considered in Applying AcG-15”. This EIC provides additional clariﬁ cation on how to analyze and consolidate variable interest entities. The impact is not expected to be signiﬁ cant on the Company’s consolidated ﬁ nancial statements. 3. Cash and cash equivalents At December 31, 2006, a portion of cash and cash equivalents was cash equivalents for an amount of $145,419 (2005 – $492,207). Cash and cash equivalents are presented net of bank overdrafts in the consolidated balance sheets. 4. Investments The Company has an investment policy and applies the prudent person approach to investment management. Management monitors compliance with that policy. The majority of the investment portfolio is invested in well- established, active and liquid markets. For most investments, fair value 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. 16mar07_Annual2_EN_AA15.indd A57 16mar07_Annual2_EN_AA15.indd A57 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM 58 Tables 4.1 and 4.2 summarize the Company’s investments. Fixed income securities and preferred shares are classiﬁ ed by investment grade and type of issuer. Table 4.1 2006 Short-term notes Fixed income securities (a) Investment grade (b) Government and government-guaranteed Corporate Asset-backed Below investment grade (b) Total ﬁ xed income securities Mortgage loans Preferred shares (c) Investment grade Below investment grade Total preferred shares Common shares (d) Other investments (e) Book value Fair value Gross Gross unrealized unrealized losses gains $ 713,475 $ 713,475 $ – $ – 1,953,220 1,964,995 993,104 1,004,933 309,190 309,054 2,517 3,390 3,258,768 3,281,635 58,956 57,218 32,454 1,427,654 1,483,127 34,005 1,460,108 1,517,132 1,580,740 1,700,438 171,629 171,629 15,837 13,812 990 – 30,639 1,738 64,671 2,996 67,667 170,629 – Table 4.2 2005 $ 7,241,938 $ 7,443,265 $ 270,673 $ Book value Fair value Gross Gross unrealized unrealized losses gains – $ – $ 440,435 $ 440,435 $ Short-term notes Fixed income securities (a) Investment grade (b) Government and government-guaranteed 2,043,548 2,091,519 1,147,059 1,173,535 Corporate 327,780 Asset-backed 2,950 3,520,764 3,595,784 73,108 326,174 3,983 70,347 Below investment grade (b) Total ﬁ xed income securities Mortgage loans Preferred shares (c) Investment grade Below investment grade Total preferred shares Common shares (d) Other investments (e) 12,149 1,245,117 1,304,977 14,905 1,257,266 1,319,882 1,266,550 1,430,440 165,603 165,603 52,545 29,565 2,910 – 85,020 2,761 65,306 2,796 68,102 183,641 – $ 6,720,965 $ 7,025,252 $ 339,524 $ 4,062 1,983 854 873 7,772 – 9,198 1,445 10,643 50,931 – 69,346 4,574 3,089 1,304 1,033 10,000 – 5,446 40 5,486 19,751 – 35,237 (a) Fixed income securities include private placements. The book value of the private placements was $92,194 at December 31, 2006 (2005 – $31,618) and their fair value was $92,818 at December 31, 2006 (2005 - $30,081). (b) The Company uses Dominion Bond Rating Services (“DBRS”) and Standard & Poor’s (“S&P”) to rate ﬁ xed income securities. Fixed income securities with a rating equal to or above BBB- are classiﬁ ed as investment grade and other rated ﬁ xed income securities are classiﬁ ed as below investment grade. 16mar07_Annual2_EN_AA15.indd A58 16mar07_Annual2_EN_AA15.indd A58 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM ING Canada Inc. 59 (c) The Company uses DBRS and S&P to rate preferred shares. Preferred shares with a rating equal to or above P3 low are classiﬁ ed as investment grade and other rated preferred shares are classiﬁ ed as below investment grade. (d) The common shares category includes common shares as well as mutual fund and income trust units. (e) Other investments include loans and strategic investments. The Company has investments in certain common shares and income trust units pursuant to a market neutral strategy. The objective of this strategy, which consists of having both long and short equity positions, is to maximize the value added from active portfolio management. Long and short positions are accounted for at cost. Long positions are included in investments. Short positions are presented as other liabilities. Table 4.3 summarizes the Company’s long and short positions pursuant to the market neutral strategy. Table 4.3 Long positions Short positions 2006 2005 Book value Fair value Book value Fair value $ 55,254 $ 57,093 62,332 $ 62,289 30,401 $ 30,233 34,180 34,220 The Company provides collateral for securities borrowed and delivered pursuant to the sale of short securities. At December 31, 2006, the book value of the collateral was $60,878 (2005 – $32,041). Tables 4.4 and 4.5 have been prepared on the basis of the scheduled maturities of the underlying instruments. Table 4.4 2006 One year One year Over No speciﬁ c or less to ﬁ ve years ﬁ ve years maturity Total $ Short-term notes Fixed income securities Mortgage loans Preferred shares Common shares Other investments – $ – $ 713,475 $ 371,943 1,485,490 1,401,335 53,208 4,010 164,576 – 80,453 713,475 – $ – 3,258,768 57,218 – 262,199 1,017,492 1,460,108 – 1,580,740 1,580,740 171,629 31,028 – 15,841 – 17,858 42,290 Table 4.5 2005 $ 1,119,117 $ 1,783,727 $ 1,709,834 $ 2,629,260 $ 7,241,938 One year One year Over No speciﬁ c or less to ﬁ ve years ﬁ ve years maturity Total $ Short-term notes Fixed income securities Mortgage loans Preferred shares Common shares Other investments – $ 440,435 $ – $ 164,476 1,161,040 2,195,248 4,209 63,465 136,032 265,068 – 76,508 2,673 11,672 – 17,147 – $ 440,435 – 3,520,764 70,347 – 844,494 1,257,266 – 1,266,550 1,266,550 165,603 22,605 49,343 $ 636,403 $ 1,437,045 $ 2,513,868 $ 2,133,649 $ 6,720,965 Credit risk Credit risk is the risk that one party to a ﬁ nancial instrument will fail to discharge an obligation and cause the Company to incur a ﬁ nancial loss. Credit risk mostly arises from investments in ﬁ xed income securities and preferred shares. 16mar07_Annual2_EN_AA15.indd A59 16mar07_Annual2_EN_AA15.indd A59 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM 60 The Company’s investment policy requires that, at the time of the investment, ﬁ xed income securities have a minimum credit rating of BBB and preferred shares have a minimum credit rating of P3. Management monitors subsequent credit rating changes on a regular basis. Investments in any entity or group of related entities are limited to 5% of the Company’s assets. Liquidity risk Liquidity risk is the risk that an entity will encounter difﬁ culty in raising funds to meet cash ﬂ ow commitments associated with ﬁ nancial instruments. To manage its cash ﬂ ow requirements, the Company maintains a portion of its invested assets in liquid securities. Interest rate risk Interest rate risk is the risk that a movement in interest rates will have an adverse effect on the ﬁ nancial condition of the Company, which happens when interest rates increase on the market. The weighted average interest rate based on book values as at December 31, 2006 was 4.62% (2005 – 4.87%) for ﬁ xed income securities, 7.41% (2005 – 7.28%) for mortgage loans and 5.19% (2005 – 5.08%) for preferred shares with a maturity date. Securities lending The Company participates in a securities lending program managed by the Company’s custodian, a major Canadian ﬁ nancial institution, whereby the Company lends securities it owns to other ﬁ nancial institutions to allow them to meet delivery commitments. Government securities with an estimated fair value of 105% of the fair value of the securities loaned are received as collateral from the Canadian ﬁ nancial institution. 16mar07_Annual2_EN_AA15.indd A60 16mar07_Annual2_EN_AA15.indd A60 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM ING Canada Inc. 61 5. Derivative ﬁ nancial instruments Table 5.1 summarizes the fair value of the derivative ﬁ nancial instruments used by the Company. Positive fair values are recorded as other assets (note 11) and negative fair values are recorded as other liabilities. Table 5.1 2006 2005 Positive Negative fair value fair value Net fair value fair value Net Positive Negative Held for non-trading purposes Where hedge accounting is applied Currency swaps Where hedge accounting is not applied Foreign exchange contracts $ – $ 824 $ (824 ) $ – $ – $ – Currency forwards purchased Currency forwards sold Currency swaps 11 – 1,057 – 33 – 11 (33 ) 86 – 1,057 3,003 – – 2,964 (2,964 ) (18 ) 18 – 86 – 3,003 – – Total return swaps Held for trading purposes Interest rate contracts Options purchased Options written Swaps Total return swaps 284 – – 284 (69 ) 69 116 456 (340 ) 117 – 117 – – – – – – – – – – – – $ 1,585 $ 4,346 $ (2,761 ) $ 3,089 $ 18 $ 3,071 16mar07_Annual2_EN_AA15.indd A61 16mar07_Annual2_EN_AA15.indd A61 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM 62 Tables 5.2 and 5.3 summarize the notional amounts of the derivative ﬁ nancial instruments used by the Company by term of maturity. Table 5.2 Held for non-trading purposes Where hedge accounting is applied Currency swaps Where hedge accounting is not applied Foreign exchange contracts Currency forwards purchased Currency forwards sold Currency swaps Total return swaps Held for trading purposes Interest rate contracts Options purchased Options written Swaps Futures bought Futures sold Total return swaps 2006 One year One year to Over ﬁ ve or less ﬁ ve years years Total $ – $ – $ 51,391 $ 51,391 8,837 25,348 – 422,936 – – 1,289 – – – 3,771 – 8,837 25,348 5,060 422,936 442,280 360,081 58,295 43,517 219,087 23,318 – – 159,500 – – 60,044 – – – – – – 442,280 360,081 217,795 43,517 219,087 83,362 $ 1,603,699 $ 220,833 $ 55,162 $ 1,879,694 Table 5.3 2005 Held for non-trading purposes Where hedge accounting is applied Currency swaps Where hedge accounting is not applied Foreign exchange contracts Currency forwards purchased Currency forwards sold Currency swaps Total return swaps Held for trading purposes Interest rate contracts Options purchased Options written Swaps Futures bought Futures sold Total return swaps One year One year to Over ﬁ ve or less ﬁ ve years years Total $ – $ – $ – $ – 5,922 28,605 4,320 – – – 1,718 – – – 8,504 – 5,922 28,605 14,542 – – – – – – – – – – – – – – – – – – – – – – – – – $ 38,847 $ 1,718 $ 8,504 $ 49,069 16mar07_Annual2_EN_AA15.indd A62 16mar07_Annual2_EN_AA15.indd A62 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM ING Canada Inc. 63 Foreign exchange rate risk Foreign exchange rate risk is the risk that the value of a foreign-denominated ﬁ nancial instrument will ﬂ uctuate as a result of changes in foreign exchange rates. The Company mitigates foreign exchange rate risk by buying or selling successive monthly foreign exchange forward contracts. Foreign exchange forward contracts are commitments to buy or sell foreign currencies for delivery at a speciﬁ ed date in the future at a ﬁ xed rate. Forwards are transacted in over-the-counter markets. Cash ﬂ ow risk Cash ﬂ ow risk is the risk that future cash ﬂ ows associated with a monetary ﬁ nancial instrument will ﬂ uctuate in amount. The Company mitigates cash ﬂ ow risk by entering into foreign exchange swaps, whereby foreign- denominated principal and ﬁ xed interest receipts are sold in exchange for Canadian dollars. These swaps are transacted in over-the-counter markets. Credit risk The credit risk for derivative ﬁ nancial instruments is limited to their positive fair value, which is substantially lower than their notional amount. The Company mitigates credit risk by diversifying exposure to any single counterparty. Market risk Market risk is the risk of losses arising from movements in market prices. The Company mitigates market risk by entering into total return swaps, whereby the return of a basket of securities is sold in exchange for interest receipts. These total return swaps are transacted in over-the-counter markets. 6. Policy liabilities Policy liabilities are established to reﬂ ect the estimate of the full amount of all liabilities associated with the insurance policies at the consolidated balance sheet dates, including claims incurred but not reported. The ultimate cost of these liabilities will vary from the best estimate made for a variety of reasons, including additional information with respect to the facts and circumstances of the claims incurred. Table 6.1 presents the unpaid claims and loss adjustment expenses. Table 6.1 Unpaid claims and loss adjustment expenses Auto: liability Auto: personal accident Auto: other Property Liability Other 2006 Direct (a) Ceded (b) 2005 Direct (a) Ceded (b) $ 1,638,439 $ 703,729 107,669 582,583 786,325 4,794 29,579 $ 1,754,126 $ 717,743 21,334 86,594 208 504,521 87,710 754,257 130,344 4,368 1,194 42,401 29,557 1,124 136,948 119,636 853 $ 3,823,539 $ 270,369 $ 3,821,609 $ 330,519 (a) Direct unpaid claims and loss adjustment expenses is shown as unpaid claims and loss adjustment expenses in the consolidated balance sheets. (b) Ceded unpaid claims are referred to as reinsurers’ share of unpaid claims and loss adjustment expenses in the consolidated balance sheets. 16mar07_Annual2_EN_AA15.indd A63 16mar07_Annual2_EN_AA15.indd A63 3/17/07 11:23:10 AM 3/17/07 11:23:10 AM 64 Unpaid claims and loss adjustment expenses were reduced, on a net basis, by $341,981 at December 31, 2006 (2005 – $336,760) to take into account the time value of money using a rate of 4.64% (2005 – 4.63%) on underlying claims settlement patterns. The provision for adverse deviations increased unpaid claims and loss adjustment expenses, on a net basis, by $426,286 at December 31, 2006 (2005 – $407,933). Table 6.2 presents the unearned premiums. Table 6.2 Unearned premiums Auto: liability Auto: personal accident Auto: other Property Liability Other 2006 2005 Direct (c) Ceded (d) Direct (c) Ceded (d) $ 597,583 $ 194,266 538,738 757,825 152,861 22,845 713 $ 59 35 3,631 3,024 10,221 572,700 $ 186,665 520,354 730,386 158,876 25,856 647 60 7 3,680 3,238 9,647 $ 2,264,118 $ 17,683 $ 2,194,837 $ 17,279 (c) Direct unearned premiums is shown as unearned premiums in the consolidated balance sheets. (d) Ceded unearned premiums are referred to as reinsurers’ share of unearned premiums in the consolidated balance sheets. There was no premium deﬁ ciency at the consolidated balance sheet dates. The Company estimates that the fair value of unpaid claims and loss adjustment expenses, as well as the fair value of unearned premiums, approximate their book values. Interest rate sensitivity Since the time value of money is considered when determining the unpaid claims and loss adjustment expenses estimate, an increase or decrease in the discount rate would result in a decrease or increase in unpaid claims and loss adjustment expenses, respectively. Consequently, a 1% change in the discount rate would have an impact of $77,750 on the fair value of unpaid claims and loss adjustment expenses at December 31, 2006 (2005 – $67,535). Structured settlements The Company enters into annuity agreements with various Canadian life insurance companies to provide for ﬁ xed and recurring payments to claimants. Under such arrangements, the Company’s liability to its claimants is substantially transferred, although the Company remains exposed to credit risk to the extent to which the life insurers fail to fulﬁ l their obligations. This risk is managed by acquiring annuities from highly rated Canadian life insurance companies. At December 31, 2006, none of the life insurers from which the Company had purchased annuities was in default and no provision for credit risk was required. A measure of the credit risk exposure is the unrecorded original purchase price of $323,909 (2005 – $290,966) for the annuities. 16mar07_Annual2_EN_AA15.indd A64 16mar07_Annual2_EN_AA15.indd A64 3/17/07 11:23:11 AM 3/17/07 11:23:11 AM ING Canada Inc. 65 7. Reinsurance In the ordinary course of business, the Company reinsures certain risks with other reinsurers to limit its maximum loss in the event of catastrophes or other major losses. For single risk events, net retention for property and liability in 2006 was generally $5,000 (2005 – $2,500) and $7,000 (2005 – $2,500), respectively; in a number of cases, like special classes of business or types of risks, the retention would be lower through speciﬁ c treaties or the use of facultative reinsurance. In 2006, for multi-risk events or catastrophes, retention is $25,000 with a reinsurance coverage limit of $1,250,000. The Company retains overall 10% of the exposure between $25,000 and $600,000. For 2005, retention was $17,500 with a coverage limit of $1,200,000 and an average of 10% retention of the exposure between $25,000 and $600,000. Reinsurance contracts do not relieve the Company from its obligations towards policyholders. Failure of reinsurers to honour their obligations could result in losses to the Company. Thus, the Company evaluates the ﬁ nancial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to signiﬁ cant losses from reinsurers’ insolvencies. Substantially, all reinsurers are required to have a minimum credit rating of A- at inception of the treaty. Rating agencies used are A.M. Best and S&P. The Company also requires that most of its treaties have a security review clause allowing the Company to replace a reinsurer during the treaty period should the reinsurer’s credit rating fall below the level acceptable to the Company. Management concluded that the Company was not exposed to signiﬁ cant loss from reinsurers for potentially uncollectible reinsurance as at the consolidated balance sheet dates. Furthermore, the Company is the assigned beneﬁ ciary of collateral consisting of cash, trust accounts and letters of credit totaling $79,163 at December 31, 2006 (2005 – $98,376) as guarantee from unlicensed reinsurers. These amounts include $54,103 (2005 – $74,252) from an afﬁ liated reinsurer. This collateral is held in support of policy liabilities of $58,768 at December 31, 2006 (2005 – $83,289) and could be used should these reinsurers be unable to meet their obligations. Table 7.1 presents the impact of reinsurance on the consolidated statements of income. Table 7.1 2006 2005 Ceded To afﬁ liates Total To afﬁ liates Premiums earned Claims and loss adjustment expenses Commissions expense $ 17,654 $ 7,384 – 94,521 $ 15,037 13,492 48,707 $ 80,641 – Ceded Total 210,962 264,926 24,169 Loss (income) before income taxes $ 10,270 $ 65,992 $ (31,934 ) $ (78,133 ) 8. Related party transactions The Company enters into related party transactions with the controlling shareholder, ING Groep, and with entities that are subject to common control or are the managed parties of a common managing party (“common management”). These transactions consist of reinsurance, management and advisory expenses, ﬁ nancing charges, as well as advisory fees income. These transactions are carried out in the normal course of operations. Accordingly, they are measured at the amount of consideration paid or received, as established and agreed to by the related parties and are settled on a regular basis. The impact of reinsurance ceded to entities that are subject to common control or management on the consolidated statements of income is shown in table 7.1 above. 16mar07_Annual2_EN_AA15.indd A65 16mar07_Annual2_EN_AA15.indd A65 3/17/07 11:23:11 AM 3/17/07 11:23:11 AM 66 Table 8.1 summarizes the other types of transactions with entities that are subject to common control or management for the years ended December 31, 2006 and 2005. Table 8.1 Advisory fees income Management and advisory expenses Interest expense $ 2006 629 $ 16,557 5,309 2005 5,992 17,885 7,963 Table 8.2 summarizes the Company’s balances with entities that are subject to common control or management. Table 8.2 Reinsurance receivable Interest and other payables $ 2006 4,252 $ – 2005 230 2,968 The Company enters into transactions with investees presented as long-term investments. Signiﬁ cant balances and transactions with these investees consist of loans, which are classiﬁ ed as investments, of $62,985 as at December 31, 2006 (2005 – $63,386) and commissions expense of $31,594 for the year ended December 31, 2006 (2005 – $27,860). 9. Income taxes Table 9.1 presents the income tax expense. Table 9.1 Current Future Income tax expense 2006 2005 $ 274,085 $ 19,869 300,883 8,287 $ 293,954 $ 309,170 Table 9.2 explains the difference, expressed in percentage terms, between the income tax expense and the amount that would have been computed if the federal and provincial statutory tax rates had been applied to income before income taxes. Table 9.2 Income tax expense calculated at statutory tax rates Increase (decrease) in income tax rates resulting from: Non-taxable dividend income Non-deductible expenses Non-taxable portion of capital gains Impact of tax rate changes Other Effective income tax rate 2006 % 34.5 (4.3 ) 0.3 (0.2 ) 0.6 – 30.9 2005 % 34.5 (3.6 ) 0.4 (1.1 ) (0.2 ) (1.7 ) 28.3 The consolidated statements of income contain items that are non-taxable or non-deductible for income tax purposes, which cause the income tax expense to differ from what it would have been if based on statutory tax rates. 16mar07_Annual2_EN_AA15.indd A66 16mar07_Annual2_EN_AA15.indd A66 3/17/07 11:23:11 AM 3/17/07 11:23:11 AM ING Canada Inc. 67 The most signiﬁ cant components of the future income tax balances are the following: Table 9.3 Future income tax asset Difference between accounting loss reserves and tax loss reserves Difference between the market value and book value of investments Losses available for carryforward Property and equipment Deferred expenses for tax purposes $ 2006 2005 58,593 $ 68,082 5,502 8,164 60,352 61,043 71,641 7,520 13,988 70,047 Total future income tax asset $ 200,693 $ 224,239 Future income tax liability Deferred gains and losses on speciﬁ ed debt obligations Pension and other retirement beneﬁ ts Other Total future income tax liability Net future income tax asset 57,159 16,438 14,909 88,506 63,745 11,291 8,102 83,138 $ 112,187 $ 141,101 In 2005, the Company fully recognized a tax recovery on losses realized from the sale of investments in ING mutual fund units. The Company recognized a future tax asset for all of its unused non-capital losses as at December 31, 2006 and 2005. At December 31, 2006, the Company had allowable capital losses of $33,018 (2005 – $33,510), which had not been recognized when computing the future tax asset. These losses, which have no expiry date, can be used to reduce future taxable capital gains. 10. Goodwill and intangible assets Table 10.1 shows the change in goodwill during the year. Table 10.1 Goodwill arising from former long-term investments now consolidated (note 13) Goodwill purchased (note 17) Goodwill disposed (note 17) Increase in goodwill during the year Table 10.2 shows the components of intangible assets. Table 10.2 Cost Accumulated amortization Book value 2006 2005 $ – $ 41,122 741 $ 40,381 $ 5,471 12,023 248 17,246 2006 2005 $ 76,493 $ (10,199 ) 41,107 (4,159 ) $ 66,294 $ 36,948 The Company performs an annual impairment testing of goodwill. No impairment was identiﬁ ed in either 2006 or 2005. Impairments are non-cash in nature and they do not affect the Company’s liquidity or ability to discharge its liabilities. The intangible assets represent customer relationships and the rights to offer renewals. They are amortized on a straight-line basis over ten years. 16mar07_Annual2_EN_AA15.indd A67 16mar07_Annual2_EN_AA15.indd A67 3/17/07 11:23:11 AM 3/17/07 11:23:11 AM 68 11. Other assets Table 11.1 summarizes the major components of other assets. Table 11.1 Property and equipment (table 11.2) Prepaid pension asset (note 12) Prepaids Other $ 2006 94,268 $ 92,966 11,321 4,621 2005 92,847 80,801 3,352 5,119 $ 203,176 $ 182,119 Table 11.2 shows the major categories of the Company’s property and equipment. Table 11.2 2006 2005 Land Buildings Computer equipment Furniture and equipment Leasehold improvements 12. Employee future beneﬁ ts Accumulated Book Accumulated Book Cost amortization value Cost amortization value $ 316 $ – $ 4,940 – $ 316 $ 4,940 $ 699 (352 ) 347 37,183 (13,357 ) 23,826 109,257 (57,941 ) 51,316 86,417 (51,493 ) 34,924 50,524 (27,854 ) 22,670 43,380 (24,647 ) 18,733 28,258 (8,639 ) 19,619 18,228 (7,804 ) 10,424 $ 189,054 $ (94,786 ) $ 94,268 $ 190,148 $ (97,301 ) $ 92,847 The Company has several deﬁ ned beneﬁ t pension plans, as well as a number of deﬁ ned contribution pension plans resulting from the acquisition of Allianz. For the deﬁ ned beneﬁ t plans, the measurement date is December 31 and the latest actuarial valuations were performed as of December 31, 2005. The next actuarial valuations will be performed as of December 31, 2008. The Company has several other retirement plans offering life insurance and health beneﬁ ts to retirees, which are closed to active employees. 16mar07_Annual2_EN_AA15.indd A68 16mar07_Annual2_EN_AA15.indd A68 3/19/07 2:08:37 AM 3/19/07 2:08:37 AM ING Canada Inc. 69 Table 12.1 presents the changes in the beneﬁ t obligation and the fair values of plan assets and reconciles the plans’ funded status with the net prepaid asset (accrued liability). Table 12.1 2006 2005 2006 2005 Pension plans Other plans Change in beneﬁ t obligation Beneﬁ t obligation at beginning of year Current service cost $ Interest cost on beneﬁ t obligation Past service cost Employee contributions Actuarial losses Beneﬁ ts paid Transfer (435,674 ) $ (20,856 ) (22,655 ) – (4,785 ) (49,836 ) 18,667 – (352,523 ) $ (16,060 ) (21,993 ) (273 ) (4,290 ) (54,750 ) 16,190 (1,975 ) (15,967 ) $ – (761 ) – – (94 ) 973 – (22,408 ) – (814 ) 6,370 – (1,798 ) 708 1,975 Beneﬁ t obligation at end of year $ (515,139 ) $ (435,674 ) $ (15,849 ) $ (15,967 ) Change in fair value of plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Employee contributions Beneﬁ ts paid $ 496,058 $ 63,941 11,794 4,785 (18,667 ) 440,496 $ 60,604 6,858 4,290 (16,190 ) Fair value of plan assets at end of year $ 557,911 $ 496,058 $ – $ – 973 – (973 ) – $ – – 708 – (708 ) – Funded status Excess (deﬁ cit) of fair value of plan assets over beneﬁ t obligation at end of year $ Unrecognized transitional (asset) obligation Unrecognized past service costs Unrecognized net actuarial losses Valuation allowance 42,772 $ (52,632 ) 1,732 83,387 (1,568 ) 60,384 $ (63,157 ) 1,983 63,807 (1,879 ) (15,849 ) $ 901 (5,520 ) 4,130 – (15,967 ) 1,009 (5,945 ) 4,303 – Net prepaid asset (accrued liability) at end of year Presented as Other assets (note 11) Other liabilities Net prepaid asset (accrued liability) at end of year $ 73,691 $ 61,138 $ (16,338 ) $ (16,600 ) $ 92,966 $ (19,275 ) 80,801 $ (19,663 ) – $ (16,338 ) – (16,600 ) $ 73,691 $ 61,138 $ (16,338 ) $ (16,600 ) Included in the beneﬁ t obligation and fair value of plan assets are the following amounts in respect of plans that are not fully funded. Table 12.2 Beneﬁ t obligation Fair value of plan assets Deﬁ cit 2006 2005 2006 2005 Pension plans Other plans $ (189,875 ) $ 138,900 (149,855 ) $ 107,406 (15,849 ) $ – (15,967 ) – $ (50,975 ) $ (42,449 ) $ (15,849 ) $ (15,967 ) At December 31, 2006, 40.6% (2005 – 53%) of the deﬁ ned beneﬁ t pension plans’ assets were held in equity securities, 57.9% (2005 – 45%) in ﬁ xed income securities and 1.5% (2005 – 2%) in other investments. 16mar07_Annual2_EN_AA15.indd A69 16mar07_Annual2_EN_AA15.indd A69 3/19/07 2:09:16 AM 3/19/07 2:09:16 AM 70 Table 12.3 provides details of the components of the accrued beneﬁ t expense (income) before adjustments to recognize the long-term nature of employee future beneﬁ t costs, as well as reconciliation with the accrued beneﬁ t expense (income). Table 12.3 Accrued beneﬁ t (income) expense Current service cost Interest cost on beneﬁ t obligation Past service costs Actual return on plan assets Net actuarial losses Accrued beneﬁ t (income) expense before adjustments to recognize the long-term nature of employee future beneﬁ t costs Excess of actual return over expected return on plan assets for the year 2006 2005 2006 2005 Pension plans Other plans $ 20,856 $ 22,655 – (63,941 ) 49,836 16,060 $ 21,993 273 (60,604 ) 54,750 – $ 761 – – 94 – 814 (6,370 ) – 1,798 $ 29,406 $ 32,472 $ 855 $ (3,758 ) Amortization of past service cost Amortization of transitional (asset) obligation Amortization of net actuarial losses Past service costs arising during the year Net actuarial losses arising during the year (table 12.4) Amortization of valuation allowance Change in valuation allowance 28,016 251 (10,525 ) 2,240 – 28,846 251 (10,525 ) 824 (273 ) (49,836 ) (279 ) (32 ) (54,750 ) (279 ) 200 Accrued beneﬁ t (income) expense $ (759 ) $ (3,234 ) $ – (425 ) 108 267 – (94 ) – – 711 $ – (425 ) 108 161 6,370 (1,798 ) – – 658 Table 12.4 lists the components of the net actuarial losses arising from pension and other plans. Table 12.4 2006 2005 Pension plans Other plans Pension plans Other plans Actuarial gains (losses) arising from the: Decrease in the discount rate used to measure the beneﬁ t obligation $ Experience Decrease in the rate of compensation increase used to measure the beneﬁ t obligation – $ (30,236 ) – $ – (64,735 ) $ – (1,460 ) – – – 9,985 – Increase in the health care cost trend rate used to measure the beneﬁ t obligation Change in mortality table Change in withdrawal/retirement – (8,600 ) (11,000 ) $ (49,836) $ (94 ) – – (94 ) $ – – – (338 ) – – (54,750 ) $ (1,798 ) 16mar07_Annual2_EN_AA15.indd A70 16mar07_Annual2_EN_AA15.indd A70 3/17/07 11:23:12 AM 3/17/07 11:23:12 AM ING Canada Inc. 71 The cost recognized for the deﬁ ned contribution plans, as well as the employer contributions, were $1,600 in 2006 (2005 – $2,202). Table 12.5 summarizes the key weighted average assumptions used for the measurement of the beneﬁ t obligations and beneﬁ t expense (income). Table 12.5 2006 2005 2006 2005 Deﬁ ned beneﬁ t plans Other plans To determine beneﬁ t obligations at end of year Discount rate Rate of increase in future compensation To determine beneﬁ t expense (income) for the year Discount rate Rate of increase in future compensation Expected long-term rate of return on plan assets 5.0 % 3.5 % 5.0 % 3.5 % 7.25 % 5.0 % 3.5 % 6.0 % 4.0 % 7.25 % 5.0 % n/a 5.0 % n/a n/a 5.0 % n/a 6.0 % n/a n/a The weighted average of the assumed health care cost trend rate for 2007 used to measure the expected cost of beneﬁ ts covered by the plans is 9%, declining by 1% per year for each of the next four years. Table 12.6 shows the impact of a 1% increase and decrease in the health care cost trend rate on the other plans’ beneﬁ t obligation and on the service and interest cost. Table 12.6 2006 2005 Increase (decrease) in beneﬁ t obligation Increase (decrease) in the service and interest cost 13. Long-term investments 1% increase 1% decrease 1% increase 1% decrease $ 1,411 $ (1,628 ) $ 1,391 $ (1,606 ) 66 (78 ) 71 (82 ) The Company has investments in companies in which it has signiﬁ cant inﬂ uence. These investments are referred to as long-term investments and are recorded using the equity method. Under this method, the Company records its share in the net income of long-term investments, computed by the consolidation method. Net income from long-term investments is included in investment income in the consolidated statements of income. Table 13.1 2006 Opening balance Increase (decrease ) Income Dividends Closing balance P&C insurance brokerages $ 41,587 $ 357 $ 8,831 $ (6,374 ) $ 44,401 Table 13.2 Opening balance P&C insurance brokerages $ 48,108 $ 2005 Increase (decrease )(a) (8,239 ) $ Income Dividends Closing balance 8,428 $ (6,710 ) $ 41,587 (a) In 2005, the Company acquired a controlling interest in several P&C insurance brokerages in which it previously had signiﬁ cant inﬂ uence. As a result of these acquisitions, the investments in P&C insurance brokerages, which were previously classiﬁ ed as long-term investments, are now consolidated. 16mar07_Annual2_EN_AA15.indd A71 16mar07_Annual2_EN_AA15.indd A71 3/17/07 11:23:12 AM 3/17/07 11:23:12 AM 72 14. Debt outstanding The Company has an uncommitted revolving credit facility in the amount of $50,000, which may be drawn as primary loans at the prime rate or as bankers’ acceptances at the bankers’ acceptance rate. In 2005, the Company had an outstanding loan of $127,000 with ING Verzekeringen, N.V., which was bearing interest at a rate of 6.27%. This loan was repaid fully in 2006. 15. Share capital Table 15.1 summarizes the Company’s share capital. Table 15.1 Classes of shares Common Class A (a) Special (b) Authorized (shares ) Unlimited Unlimited One 2006 Issued and outstanding 2005 Issued and Authorized outstanding (shares) Amount (shares) (shares) Amount 133,732,000 $ 1,183,846 Unlimited 133,732,000 $ 1,183,846 – – Unlimited – One – – 1 – 1 $ 1,183,846 $ 1,183,846 (a) Issued and outstanding Class A shares would rank both with regards to dividends and return on capital in priority to the common shares. (b) The Special Share is convertible into one common share. The beneﬁ cial owner of the Special Share is entitled to nominate and elect a certain number of directors to the Board and request the Board to appoint the Chief Executive Ofﬁ cer, as determined by the number of common shares that the holder of the Special Share beneﬁ cially owns. In January 2005, pursuant to the underwriters’ agreement in relation to the initial public offering, the underwriters exercised the over-allotment option granted to them. The option called for the purchase of up to 5,232,000 additional common shares at the offering price within thirty days from the date of the IPO and was exercised in full in January 2005, generating net proceeds of $129,230 and increasing share capital by $131,556 after tax. Stock-based compensation A long-term incentive plan (LTIP) was implemented for certain employees commencing in 2005. Under this plan, these employees are awarded performance units as a portion of their compensation. Each award vests and pays out at the end of a three-year performance cycle. The actual award varies based on a performance target by comparing the Company’s three-year average return on equity relative to that of the Canadian property and casualty insurance industry. The actual award may only be in common shares restricted for transfer. Accordingly, this type of compensation is recognized as an expense with a corresponding increase to contributed surplus. The Company re-estimates the number of performance units that are expected to vest at each reporting period. As at December 31, 2006, the estimate is 181,574 units for the 2006-2008 performance cycle with a per unit fair value at grant date of 36 dollars and 79 cents and 363,700 units for the 2005-2007 performance cycle with a per unit fair value at grant date of 26 dollars and 30 cents. At the time of the payout, the Company intends to purchase common shares in the market in an amount equal to the number of vested units. 16mar07_Annual2_EN_AA15.indd A72 16mar07_Annual2_EN_AA15.indd A72 3/17/07 11:23:12 AM 3/17/07 11:23:12 AM ING Canada Inc. 73 Since July 1, 2006, employees who are not eligible for the LTIP are entitled to make contributions in accordance with a voluntary employee share purchase plan (ESPP). Under the ESPP, eligible employees can contribute up to 10% of their base earnings through payroll deduction. As an incentive for participation in the plan, the Company will contribute an amount corresponding to 50% of the employee contribution. The common shares are bought on the market by an independent broker each month and are held by a custodian on behalf of the employees. The common shares bought with the Company’s contributions vest upon continued employment for a period of twelve months. During the year, 68,405 common shares were purchased by the independent broker on behalf of the employees under the ESPP. From those shares, 22,892 are unvested on December 31, 2006. Members of the Company’s Board of Directors who are not ofﬁ cers or employees of the Company or its afﬁ liates receive part of their annual retainer in the form of deferred share units (“DSU”) and may elect to receive the balance of their retainer in the form of DSU or cash. A DSU represents an amount owed by the Company to the directors and has the same value as one share of the Company at the date of the grant. These DSU may not be paid out until such time that the director leaves the Board. Payment may be in cash or common shares of the Company, at the option of the directors. Accordingly, director compensation is recognized both as an expense and a liability. The amount charged to compensation expense for these plans was $4,146 for the year ended December 31, 2006, (2005 – $6,447). The expense for the LTIP and DSU is based on the fair value of the awards at the dates of the grants and represents management’s estimate of the payout by reference to the achievement of an expected performance target. The Company’s contributions under the ESPP are accrued when payable and are expensed over the vesting period of the unvested common shares. 16. Supplemental cash ﬂ ow information Table 16.1 presents supplemental cash ﬂ ow information. Table 16.1 Income taxes paid Interest paid on debt outstanding Amortization of: Property and equipment Intangible assets Net premiums on ﬁ xed income securities Investment impairment Increase (decrease) in cash and cash equivalents due to changes in other operating assets and liabilities: Premium and other receivables Income taxes Other assets Payables and other liabilities 2006 2005 $ 316,369 $ 7,963 385,956 7,963 19,556 6,039 (17,018 ) 20,437 18,121 3,854 16,274 10,470 (129,040 ) (42,284 ) (19,607 ) 7,758 100,513 (86,160 ) 3,514 145,026 16mar07_Annual2_EN_AA15.indd A73 16mar07_Annual2_EN_AA15.indd A73 3/17/07 11:23:12 AM 3/17/07 11:23:12 AM 74 17. Acquisitions and divestitures Acquisitions of businesses are accounted for using the purchase method. This involves allocating the purchase price paid for a business to the assets acquired, including identiﬁ able intangible assets and the liabilities assumed, based on their fair values at the date of acquisition. Any excess is then recorded as goodwill. On April 1, 2006 and October 31, 2006, respectively, the Company acquired 100% of the outstanding shares of Grey Power Insurance Brokers Inc. (GPIB) and West & Associates Insurance Group Ltd. (West). These enterprises operate in the corporate and distribution segment. The Company’s subsidiaries by way of share or asset purchases, acquired or increased the ownership and disposed of certain other businesses. The results of the acquired companies since their respective acquisition date are included in the Company’s consolidated statements of income. The allocation of the purchase price was established as follows: Table 17.1 GPIB West Other Total 2006 2005 $ Goodwill Intangible assets Future income taxes Net tangible assets (liabilities) 20,288 $ 18,320 (6,007 ) 85 8,378 $ 3,981 (1,279 ) (923 ) 11,715 $ 13,073 (1,759 ) (720 ) 40,381 $ 35,374 (9,045 ) (1,558 ) 11,775 3,858 (1,285 ) 298 Net cash consideration paid $ 32,686 $ 10,157 $ 22,309 $ 65,152 $ 14,646 The goodwill acquired is non deductible for tax purposes. In 2006, the Company paid $14,884 (2005 – $13,962) of accrued integration cost primarily related to discontinuance of information systems, redundant lease space and involuntary employee terminations. Furthermore, the provision for redundant lease space was increased by $5,100 (2005 – nil) with a corresponding charge in the current income. 18. Disclosures on rate regulation The Company’s insurance subsidiaries are licensed under insurance legislation in each of the provinces and territories in which they conduct business. Automobile insurance is a compulsory product and is subject to different regulations across the provinces and territories in Canada, including those with respect to rate setting. Rate setting mechanisms vary across the provinces and territories in Canada, but they generally fall under three categories: “use and ﬁ le”, “ﬁ le and use” and “ﬁ le and approve”. Under “use and ﬁ le”, rates are ﬁ led following use. Under “ﬁ le and use”, insurers ﬁ le their rates with the relevant authorities and wait for a prescribed period of time and then implement the proposed rates. Under “ﬁ le and approve”, insurers must wait for speciﬁ c approval of ﬁ led rates before they may be used. 16mar07_Annual2_EN_AA15.indd A74 16mar07_Annual2_EN_AA15.indd A74 3/19/07 8:18:17 PM 3/19/07 8:18:17 PM ING Canada Inc. 75 Table 18.1 lists the provincial authorities which regulate automobile insurance rates. Automobile direct written premiums in these provinces totaled $2,253,362 in 2006 (2005 – $2,166,541) and represented approximately 98.3% (2005 – 98.2%) of direct automobile premiums written. Table 18.1 Province Rate ﬁ ling Regulatory authority File and approve or ﬁ le and use Alberta File and approve Ontario Use and ﬁ le Québec File and approve Nova Scotia New Brunswick File and approve Prince Edward Island File and approve File and approve Newfoundland Alberta Automobile Insurance Rate Board Financial Services Commission of Ontario L’Autorité des marchés ﬁ nanciers Nova Scotia Insurance Review Board New Brunswick Insurance Board Island Regulatory Appeals Commission Board of Commissioners of Public Utilities Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory asset or liability. At December 31, 2006 and 2005, the Company had no signiﬁ cant regulatory asset or liability. 19. Contingencies In the normal course of operations, various claims and legal proceedings are instituted against the Company. Legal proceedings are often subject to numerous uncertainties and it is not possible to predict the outcome of individual cases. In management’s opinion, the Company has made adequate provision for, or has adequate insurance to cover all claims and legal proceedings. Consequently, any settlements reached should not have a material adverse effect on the Company’s consolidated future operating results and ﬁ nancial position. 20. Commitments and guarantees Table 20.1 presents future minimum payments under long-term leases for premises and equipment. Table 20.1 Year 2007 2008 2009 2010 2011 Thereafter Amount $ 63,232 50,550 37,817 29,561 26,191 100,696 $ 308,047 In the normal course of operations, the Company provides indemniﬁ cation agreements to directors and ofﬁ cers, to the extent permitted by law, against certain claims made against them as a result of their services to the Company. The Company has insurance coverage for these agreements. 16mar07_Annual2_EN_AA15.indd A75 16mar07_Annual2_EN_AA15.indd A75 3/17/07 11:23:13 AM 3/17/07 11:23:13 AM 76 21. Segmented information The Company’s core business activity is P&C insurance. P&C insurance segment includes two lines of business: personal lines and commercial lines. Classes in personal lines include automobile and property. Classes in commercial lines encompass primarily property, liability and automobile. The investment income consists of managing the investment portfolio for the Company’s P&C insurance subsidiaries. Investment income is shown net of investment expenses. Corporate and distribution segment includes the results of the Company’s broker operations and long-term investments, non P&C investment income, intercompany eliminations consisting primarily of commissions and general expenses with the Company’s P&C operations, as well as non-recurring items, such as acquisitions, whose effects are not allocated to any other segment. Table 21.1 Revenue Net premiums earned Personal insurance Commercial insurance Investment income Total P&C insurance Realized investment and other gains Corporate and distribution Total revenue Income before income taxes Underwriting income Personal insurance Commercial insurance Investment income Total P&C insurance Net realized investment and other gains Corporate and distribution Total income before income taxes Assets P&C insurance (a) Corporate and distribution (b) Total assets Increase of goodwill P&C insurance Corporate and distribution Total increase in goodwill (a) Includes goodwill of $74,411 at December 31, 2006 and 2005. (b) Includes goodwill of $74,332 at December 31, 2006 (2005 – $33,951). 2006 2005 $ 2,696,709 $ 2,680,698 1,129,905 1,159,478 323,255 314,111 4,140,725 4,163,431 223,471 59,166 193,532 72,119 $ 4,406,376 $ 4,446,068 242,155 161,678 294,806 698,639 193,532 59,836 382,120 155,592 300,732 838,444 223,471 29,038 952,007 1,090,953 As at December 31 2005 2006 9,265,754 9,066,267 860,268 1,111,515 $ 10,377,269 $ 9,926,535 $ 2006 – $ 40,381 $ 40,381 $ 2005 – 17,246 17,246 16mar07_Annual2_EN_AA15.indd A76 16mar07_Annual2_EN_AA15.indd A76 3/17/07 11:23:13 AM 3/17/07 11:23:13 AM ING Canada Inc. 77 22. Fair value disclosure The fair value of investments and short securities, derivative ﬁ nancial instruments, policy liabilities and debt outstanding are disclosed in notes 4, 5, 6 and 14, respectively. The fair value of other ﬁ nancial assets and liabilities approximates their book value due to their short-term nature. 23. Comparative ﬁ gures Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the presentation adopted in the current year. 24. Subsequent event On February 13, 2007, the Board of Directors approved a plan to repurchase for cancellation up to $500,000 of the Company’s common shares. The repurchase will be through a substantial issuer bid, by way of a modiﬁ ed Dutch auction. ING Groep, the Company’s majority shareholder, has informed the Company of its intent to submit common shares sufﬁ cient to maintain its holding at 70%. 16mar07_Annual2_EN_AA15.indd A77 16mar07_Annual2_EN_AA15.indd A77 3/17/07 11:23:13 AM 3/17/07 11:23:13 AM 7878 Leadership ING Canada Board of Directors 16mar07_Annual2_EN_AA15.indd A78 16mar07_Annual2_EN_AA15.indd A78 3/17/07 11:23:13 AM 3/17/07 11:23:13 AM ING Canada Inc. ING Canada Inc. 7979 Board of Directors Board of Directors 1. Yves Brouillette (2), (3) Chairman of the Board 5. Marcel Côté (2), (3) President, SECOR Conseil 8. Eileen Mercier (1), (2) Management Consultant 2. Claude Dussault (4) President and Chief Executive Ofﬁ cer of ING Canada 3. Carol Stephenson (3) Dean, Richard Ivey School of Business 4. Robert Normand (1) Professional Director 6. Kathleen Murphy (4) Chief Executive Ofﬁ cer of US Wealth Management ING Insurance Americas 7. Ivan E.H. Duvar (1), (2) President and Chief Executive Ofﬁ cer of MIJAC Inc. (1) Audit and Risk Review Committee (2) Conduct Review and Corporate Governance Committee (3) Human Resources Committee (4) Investment Committee 9. Paul Cantor (1), (3) Chairman of Public Sector Pension Investment Board 10. Louise Roy (3) International Consultant 5 4 6 3 Robert W. Crispin (4) Chairman and Chief Executive Ofﬁ cer of ING Investment Management LLC David A. Wheat (4) Executive Vice-President and Chief Financial Ofﬁ cer of ING Americas 7 9 2 8 10 1 Senior Management Senior Management Messrs. Crispin and Wheat not pictured Claude Dussault President and Chief Executive Ofﬁ cer Charles Brindamour Chief Operating Ofﬁ cer Claude Désilets Chief Risk Ofﬁ cer Mark Tullis Chief Financial Ofﬁ cer Françoise Guénette Sr. Vice President Corporate and Legal Services, and Secretary Derek Iles President ING Insurance Debbie Coull-Cicchini Sr. Vice President Ontario Jetse de Vries Sr. Vice President Western Canada Louis Gagnon Sr. Vice President Québec Alan Blair Sr. Vice President Atlantic Canada Martin Beaulieu Sr. Vice President Personal Lines Peter Weightman Sr. Vice President Commercial Lines Denis Guertin Sr. Vice President belairdirect For biographies of our Board of Directors and Executive Ofﬁ cers, please visit the Investor Relations section of the www.ingcanada.com web site. Roger Randall Sr. Vice President Afﬁ liated Distribution Networks Louis Héroux Sr. Vice President Claims Marc Pontbriand Sr. Vice President and Chief Information Ofﬁ cer Rhonda Lawson Sr. Vice President Corporate Human Resources Alister Campbell Sr. Vice President Planning and Communications Gilles Roy Sr. Vice President Risk Management and Surety Lilia Sham Sr. Vice President and Treasurer Marc Provost Sr. Vice President, Managing Director and Chief Investment Ofﬁ cer ING Investment Management David Lincoln Sr. Vice President Corporate Audit Services 16mar07_Annual2_EN_AA15.indd A79 16mar07_Annual2_EN_AA15.indd A79 3/17/07 11:23:18 AM 3/17/07 11:23:18 AM 80 Corporate Information ING Canada Inc. A holding company ING Insurance Company of Canada Provides personal and commercial insurance products across Canada Trafalgar Insurance Company of Canada Specializes in serving the personal insurance needs of those aged 50 plus in Alberta, Ontario and the Atlantic provinces under the Grey Power banner Equisure Financial Network Inc. A holding company having an interest in a network of independent brokers ING Novex Insurance Company of Canada Provides personal auto and property protection to employee groups, associations and afﬁ nity groups The Nordic Insurance Company of Canada Provides personal auto and home insurance in Ontario and services clients of the Alberta and Ontario Facility Associations 700 University Avenue Toronto, Ontario M5G 0A1 Tel: 416-341-1464 Belair Insurance Company Inc. A direct distributor of personal auto and home insurance 300-7101 Jean Talon Street East Anjou, Québec H1M 3T6 Tel: 514-270-1700 Canada Brokerlink Inc. A wholly-owned insurance broker serving Ontario and Alberta 1300-321 6th Avenue SW Calgary, Alberta T2P 4W7 Tel: 403-269-7961 ING Investment Management, Inc. An investment counsel and portfolio management company 700 University Avenue Toronto, Ontario M5G 0A1 Tel: 416-341-1464 ING Wealth Management Inc. A mutual fund dealer 700 University Avenue Toronto, Ontario M5G 0A1 Tel: 416-217-7217 . m o k ﬁ a r g : g n i t n i r P y h p a r g o t o h P n e t s n e r O i l u a P : y h p a r g o t o h P s e t a i c o s s A n g i s e D u a e z a r B n o t h g u a H : n g i s e D 16mar07_Annual2_EN_AA15.indd A80 16mar07_Annual2_EN_AA15.indd A80 3/19/07 1:14:54 AM 3/19/07 1:14:54 AM ING Canada Inc. 81 Shareholder Information 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 Annual Meeting The Annual Meeting will be held on: Date: May 16, 2007 2:00 p.m. ET Time: Juliette-Lassonde Arts Center Place: 1705 Saint-Antoine Street Saint-Hyacinthe, Québec J2S 9E2 Institutional investors, security analysts and others who may want additional financial 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: Gilles Gratton Director, Corporate Communications 416-217-7206 gilles.gratton@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 intéressés 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 15, 2007 May 16, 2007 August 8, 2007 November 7, 2007 Dividend Payment Dates (Subject to approval by the Board of Directors) March 30, 2007 June 29, 2007 September 28, 2007 December 31, 2007 Dividend Record Dates (Subject to approval by the Board of Directors) March 15, 2007 June 15, 2007 September 14, 2007 December 14, 2007 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 visiting the Investor Relations section of the www.ingcanada.com web site. Auditors Ernst & Young LLP Corporate Profile Our Strategy ING Canada is the largest provider of property and casualty We intend to leverage the advantages of scale to achieve insurance in Canada, through the ING Novex, Nordic, sophisticated pricing, consistently profitable underwriting Trafalgar, Belair and ING Insurance companies. We provide and cost-effective and timely claims management. automobile, property and liability insurance to individuals Fundamental to our strategy is a customer-centric and small to medium-sized businesses across Canada. An commitment to product innovation, multi-channel access and investment management subsidiary manages the invested ease of doing business for policyholders and brokers alike. assets of our insurance subsidiaries. Asset management will continue as an internal core We enjoy leading positions in all markets where we operate competency focused on achieving superior after-tax returns. including Ontario, Québec and Alberta, our three largest markets. Personal automobile insurance accounts for approximately 50% of our business while personal property comprises Our Priorities Our priorities are to: roughly 20% and commercial insurance about 30%. • introduce improved technologies and services to make Our Goals 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%) and to achieve annual organic growth on average 300 basis points (3%) higher-than-market over the long term. doing business easier and less costly; • reduce claims costs and improve the quality of our service 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. Contents 1 Financial Highlights 2 Chairman’s Message 3 President and CEO’s Message 6 Accelerating the Pace of Organic Growth 13 Management’s Discussion and Analysis 48 Financial Statements Front Cover 51 Notes to Financial Statements 78 Board of Directors 79 Senior Management 80 Corporate Information 81 Shareholder Information Madeleine Daigneault, owner and founder of Andrée Chocolats, master chocolatiers since 1940 and a long term ING commercial insurance client. Except as otherwise indicated, all trademarks referred to herein are owned or licensed by the ING Canada companies. Helping people ING Insurance and ING Direct teamed up in 2006 to become a Premier Partner of Canada’s National Speed Skating team, which brought home no fewer than 12 Olympic medals from Turin that year. ING’s $2 million, six-year sponsorship is helping elite Canadian skaters like Denny Morrison, a 2006 World Championship medallist, make Canada the top speed skating nation in the world. With a track record of excellent customer service and high-value products, ING is committed to matching the outstanding dedication, high level of performance and great achievements of our skaters. Turning promises into t r o p e r l a u n n a 6 0 0 2 . c n I a d a n a C G N I ING Canada Inc. 700 University Avenue, Toronto, Ontario M5G 0A1 www.ingcanada.com ING Canada Inc. 2006 annual report ActionsSucceed

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