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Denny Morrison, Olympic silver medalist
ING CANADA INC.
2007 ANNUAL REPOR T
Driven to lead
Performance against our business goals
Historically, we have consistently exceeded the Canadian property and casualty
industry growth rate and return on equity through superior underwriting and
investment management.
Business goals
10-year performance1
(1997–2006)
2007 performance1
Return on equity
Exceed the Canadian P&C
industry by at least 500 basis
points (bps) annually
ING Canada: 18.4%
Industry: 10.2%
Superior gap: 820 bps
Organic growth
Exceed the annual growth rate
of the Canadian P&C industry
by at least 300 bps over time,
as measured by direct premiums
written
ING Canada: 13.8%
Industry: 7.6%
Superior gap: 620 bps
ING Canada’s
return on equity was
15.4 %
in 2007
ING Canada’s
direct premiums written grew
2.9 %
in 2007
1 Industry data for the full year of 2007 was not available as of the date of this report.
See Management’s Discussion and Analysis for further discussion of our financial performance.
d
ROE performance of our insurance subsidiaries
compared to Canadian P&C insurance industry
(10-year average, 1997–2006)
ING Canada premium1 growth vs. industry
(10-year CAGR, 1997–2006)
40%
30%
20%
10%
0%
18.4%
Canadian
industry1
10.2%
600%
500%
400%
300%
200%
100%
0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
1 Based on most recent industry data (2006)
Source: MSA Research Software. P&C industry statistics include reinsurers and
exclude Lloyd’s and the Insurance Corporation of British Columbia (ICBC)
1 Based on direct premiums written
2 Source: MSA Research Software. P&C industry statistics include reinsurers and
exclude Insurance Corporation of British Columbia (ICBC). Most recent industry
data available (2006)
13.8%
Canadian
industry2
7.6%
ING Canada Inc. provides automobile, property and liability insurance to more than four million
market share, we are the largest private sector provider of property and casualty (P&C) insuranc
We also manage our own investment portfolio with more than $7.2 billion in assets.
What drives
our success
Our consistently superior
performance has been
driven by several critical
advantages: scale,
underwriting discipline,
in-house claims expertise,
innovative products, a
diverse business portfolio,
proven acquisition and
integration capabilities,
and investment
management expertise.
Significant scale advantage
ING Canada is one-third larger
than the second largest P&C
insurer in Canada and almost
double the size of the number three
insurer. The key benefit of scale is a
uniquely comprehensive database
of customer data and claims
intelligence that allows us to more
accurately model the risk of each
policy. Scale also allows us to
negotiate preferred terms with
suppliers, priority service on repairs,
quality guarantees and lower
material costs.
Discipline in underwriting
and pricing
Our scale makes it possible to more
accurately assess individual risks to
create a pricing edge and continue
to increase the sophistication of
our pricing models. Whether
writing a policy for an 18-year-old
sports car driver, a florist shop, a
condominium or a commercial
building, we set premiums that are
intended to attract and retain
business without compromising
target returns in our portfolio.
In-house claims expertise
Innovativ
We handle more than 95% of
claims in-house. In-house claims
management is more cost-effective
and it allows us to process claims
faster, retain better control over
claims management, and provide
a consistent customer experience
that reflects our brand attributes.
In 2007, we had a 95% customer
claims satisfaction rate.
We are con
new produc
evolving ne
Our Respon
for example
new custom
New Brunsw
feature, but
who have b
years or mo
we have wo
expand our
Our staff of
prevention s
more than 9
and over 4,
Becoming the “first choice” partner for brokers
Direct premiums written1
($ billions)
2007 direct premiums written by
geographic region ($ millions)
“ING Insurance recognizes
the value of the
broker channel and is
a big supporter of
entrepreneurial brokers
who want to grow their
businesses. The tools and
services they provide
through QUEST, such as
financing, marketing and
technological solutions,
help us focus on what’s
important: the client.”
$4.0
$3.1
$4.0
$3.0
$2.0
$1.0
$0.0
$2.1
$1.9
$1.8
ING
Aviva
Canada
Co-operators
General
The
Economical
Insurance
Group
TD
Meloche
Monnex
Estimated
market
share
11.4%
8.7%
5.9%
5.4%
5.1%
1 Based on most recent industry data (2006)
Source: MSA Research Software. P&C industry statistics
include reinsurers and exclude Lloyd’s and the Insurance
Corporation of British Columbia (ICBC)
Yukon
$3.9
Northwest
Territories
$7.8
British
Columbia
$234.7
Alberta
$826.0
Manitoba
$54.6
Saskatchewan
$2.6
Ontario
$1,744.9
John Collaton
Independent broker, Ontario
gate2
ur million individuals and businesses across Canada. With an estimated 11%
insurance in Québec, Alberta and Nova Scotia and the second largest in Ontario.
Innovative products
Proven acquisition strategy
We are constantly developing
new products that cater to the
evolving needs of our customers.
Our Responsible Driver Guarantee,
for example, is available to
new customers in Ontario and
New Brunswick as a premium policy
feature, but is free to customers
who have been with us for five
years or more. In commercial lines,
we have worked aggressively to
expand our loss prevention services.
Our staff of more than 40 loss
prevention specialists conducted
more than 9,500 site visits in 2007
and over 4,000 building appraisals.
The Canadian P&C insurance
industry is fragmented. The top
five companies make up only
35% of the market, which creates
opportunities for consolidation.
ING Canada has been one of the
most active in the industry’s
transformation with more than
11 acquisitions in 19 years. Growth
through acquisition has enabled us
to rapidly gain a scale advantage in
the market.
Investment management
expertise
We actively manage our
investment portfolio to generate
solid after-tax returns while
balancing capital preservation and
diversification of risk. Our portfolio
is comprised primarily of Canadian
securities, including high-quality
fixed income securities, common
shares of large-cap companies
and preferred shares. We’ve
chosen to manage our portfolio
in-house to ensure commitment to
our investment philosophy and
business goals.
Diverse business portfolio
The diversity in our business
portfolio is derived from our
multi-channel distribution strategy
as well as our business mix and
geographic distribution. Our
diversity provides some insulation
from cyclical movements and
creates greater opportunities
for growth.
2007 investment
asset mix1 (%)
2007 direct premiums written by
business line (excluding pools) (%)
ING Canada’s business is entirely Canadian, which
reduces exposure to severe storms, like tornadoes and
hurricanes, and unnatural disasters. In certain regions
in Canada, climate change is having a larger impact on
the insurance industry, leading to an increase in the
frequency and severity of storms. Personal auto
regulation in certain provinces increases operational
complexity for the industry.
Newfoundland &
Labrador $1.3
($ millions)
($ millions)
Common shares
24% $ 1,709.5
Personal auto
50% $ 2,057.7
Fixed income
53% $ 3,867.8
Personal property
22% $ 904.4
Preferred shares
20% $ 1,430.8
Commercial auto
8% $ 321.2
Other
3% $ 229.7
Commercial non-auto 20% $ 825.3
oba
Ontario
$1,744.9
Québec
$1,037.2
Prince Edward Island $8.3
Nova Scotia $130.6
New
Brunswick
$49.4
1 Fair value, as at December 31, 2007
The company has a zero cash policy
Personal insurance makes up the
largest segment of ING Canada’s
underwriting business with more than
70% of direct premiums written.
Though commercial insurance
represents only 30% of our annual
premiums, we are the largest
competitor in our target segment of
small- to medium-size businesses.
Smaller commercial accounts are easier
to underwrite and less susceptible to
cyclical pricing vagaries.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
gate3
We are driven to lead the Canadian
property and casualty insurance market. As the
largest competitor, we combine the advantages
inherent in our scale with critical strengths in
pricing, underwriting, claims and distribution. This
allows us to offer competitively priced products and
outstanding service to our customers and brokers
and, in turn, achieve superior financial results.
MESSAGE FROM THE PAST CHAIRMAN 2 MESSAGE FROM THE CHAIRMAN 3 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER 4 DRIVING LEADERSHIP PERFORMANCE 6
MANAGING INDUSTRY CYCLICALITY, SEASONALITY & REGULATION 8
EXECUTIVE MANAGEMENT TEAM 12
MANAGEMENT’S DISCUSSION AND ANALYSIS 13 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 53
REVIEW 93 GLOSSARY 94
SHAREHOLDER AND CORPORATE INFORMATION INSIDE BACK COVER
FINANCIAL HIGHLIGHTS 10 CORPORATE RESPONSIBILITY 11
BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT 96
FIVE-YEAR ANNUAL REVIEW 92 TWO-YEAR QUARTERLY
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
1
Message from the Past Chairman
Yves Brouillette
As stewards of the organization, the Board continues to represent
the best interests of shareholders through a strong focus on
corporate governance.
In 2007, ING Canada employees continued to prove the
strength of our business model and strategies with industry-
leading performance.
Building our leaders As key advisors to management in the
development of the organization’s strategy, it is critical that the
Board regularly reviews and assesses its own strengths against
the organization’s evolving needs. As a result, in 2007, the Board
launched the use of our own competency grids that outline the
desired complement of directors’ skills and characteristics that
reflect ING Canada’s current and anticipated needs.
“ Renewal and succession are not only important
from a Board perspective, but ensuring we attract,
retain and develop high-performing executive
management is also a critical function of the Board.
With this in mind, I was very pleased with the
appointment of Charles Brindamour as our new
Chief Executive Officer.
”
The Board has been able to observe first-hand Charles’ excellent
track record here at ING where he has demonstrated strong
leadership abilities. He has led a wide range of our operations
here in Canada and abroad and was instrumental in the
development and execution of the vision and strategy. We have
full confidence that he will put his own successful mark on the
strategic course set by his predecessor.
A word of thanks Claude Dussault retired after a long and
distinguished career, which included 22 years of dedicated service
to ING Canada. As Chief Executive Officer for the past six of
those years, Claude has been the main architect of our growth
strategy, and under his leadership the company acquired and
integrated two large insurance companies and launched one of
the largest and most successful initial public offerings, making
ING Canada one of the top 100 companies in Canada. He has
demonstrated a great intellect and outstanding business acumen
and we are privileged to continue benefiting from his experience
and advice as our new Chairman of the Board.
In addition, I would like to take this opportunity to thank
David Wheat, who stepped down from the Board at the end of
2007, in recognition of his service to shareholders.
For the past six years, I have had the honour and privilege of
chairing the Board of Directors of ING Canada. I am proud of our
accomplishments and I want to thank both my colleagues on the
Board and the talented ING Canada staff for their hard work
and dedication. I look forward to continuing to play a role by
remaining a director of this leading organization.
Yves Brouillette
Past Chairman
Board of Directors
Charles Brindamour 4
Yves Brouillette 3,5
Paul Cantor 1,2,5
Marcel Côté 1,3,5*
Robert W. Crispin 4*
Claude Dussault 3,4
1 Independent board member
2 Audit & Risk Review Committee 3 Conduct Review and Corporate Governance Committee 4 Investment Committee
5 Human Resources Committee * Committee Chair
2
Message from the Chairman
Claude Dussault
I am honoured to continue being associated with ING Canada’s
success and serving as your Chair.
2007 was a year of great activity and considerable competition
within the Canadian property and casualty insurance industry.
Despite a challenging year, ING Canada’s organic growth remained
solid and our profitability continued to outpace the industry.
Your Board of Directors continued to make an important
contribution in its complementary role of representing
shareholders and advising and supporting the management team
on issues related to the company’s performance and strategy.
We believe the foremost purpose of the Board is to create an
environment for management that fosters integrity and promotes
long-term shareholder value.
Committed to good governance Good corporate governance
mitigates risks, fosters a performance culture and provides a solid
platform to deliver leading financial returns. For these reasons,
we are committed to continuously improving our governance.
For example, in 2007, ING Canada adopted the Insurance
Bureau of Canada’s Standards of Sound Marketplace Practice.
The primary objective of the IBC Standards is to encourage the
adoption of a more risk-based model for the insurance regulatory
environment and improve corporate governance to better
protect consumers’ interests.
“ At ING Canada, we believe that the best way to
approach compliance is not to simply see it as a
means of managing risk, but to approach it from the
same perspective as we do everything else in our
organization, from the perspective of our customers.
This customer focus can also be seen in the Board’s
commitment and ongoing support of our robust
enterprise risk management framework.
”
We also aligned the Board’s interests more closely with those of
our shareholders through increased share ownership requirements
for our directors and guidelines regarding serving on other
boards, which will help us avoid any conflicts of interest.
Many challenges await the industry in 2008, with each holding
the potential for further success. On behalf of the Board of
Directors, I would like to take this opportunity to thank all of our
employees across the country for their contribution to ING
Canada’s performance over the past year. I would also like to take
this opportunity to thank my predecessor, Yves Brouillette, for his
many years of leadership to the Board.
I am honoured to continue being associated with ING Canada’s
success and to serve as your Chair. Your Board looks forward to
continuing to provide counsel and support to ING Canada’s
outstanding management team, as they implement the next
phase of the organization’s exciting growth strategy.
Claude Dussault
Chairman
Please refer to the corporate governance section of ING Canada’s web site at www.ingcanada.com for more information on Board and committee mandates, director independence,
director compensation, executive compensation and the company’s Code of Business Conduct. Biographies of each of the directors of the Board are also available.
Ivan E.H. Duvar 1,2*,3
Eileen Mercier 1,2,3*
Kathleen Murphy 4
Robert Normand 1,2,4
Louise Roy 1,5
Carol Stephenson 1,5
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
3
Message from the Chief Executive Officer
Charles Brindamour
One of the greatest challenges for any industry leader is sustaining
the top position.
“ With $4.1 billion in annual premiums, we are the
largest property and casualty insurer in Canada by a
wide margin and the most active in the industry’s
consolidation over the last 10 years.”
But our goal is not to be the biggest P&C company in Canada;
we’re driven to be the best. We want to deliver industry-leading
rates of return and grow at a faster rate than our competition in
Canada by offering a superior suite of products and services to
our brokers and customers. We’ve set aggressive targets to keep
us on track to outperform—exceed the industry return on equity
by five percentage points per year and grow by three percentage
points more than the industry over time. This is not an easy task,
but I firmly believe that we have several key advantages to help
us get there: scale, underwriting sophistication, actuarial talent,
strong broker relationships, and a team of experienced senior
leaders and employees who are passionate about our business.
If we continue to build upon these strengths and stay focused on
meeting the evolving needs of our customers and brokers, I am
confident that we will continue to lead the market and achieve
the high performance standards that we’ve set for ourselves.
Key accomplishments in 2007 We made considerable
progress on a number of fronts to position our business for
sustainable growth and profitability. In pricing, we continued to
refine our risk selection criteria and enhanced the sophistication
of our underwriting models. These proprietary tools help us to
assess the lifetime value of a customer relationship and are used
as the basis of our pricing and product strategies. On the claims
side, we expanded our preferred supplier relationships and
looked for opportunities to negotiate national pricing contracts
for auto parts and building materials which we buy in high
volume. Beyond pricing and claims, the relationships that we
have with our brokers are critically important to our long-term
strategy so we continued to focus on ways to improve the service
that we offer to them. Major technological enhancements to
speed up data exchange, improved workflows, and better
communication through our regional representatives and
underwriters have made it easier for brokers to do business with
us. A strong focus on customer needs is the emphasis of our
strategy for belairdirect and Grey Power as well. At belairdirect,
we implemented several technology and service-based
improvements on the web and in the call centres to position
belairdirect as the leading web insurer in Canada. Grey Power
also made an impressive transformation last year in terms of
operational efficiency, setting the stage for continued profitable
growth in the future. To support all of our businesses, we made
advancements in talent management, including succession
planning and workplace diversity.
Our financial performance in 2007 Overall, we delivered solid
operating results in 2007. Premiums continued to grow at a good
pace in personal lines and we maintained our commercial pricing
discipline in the midst of stiff competition. Underwriting results
were challenged by certain industry-wide cost factors, but our
business remained very profitable, picking up speed toward the
end of the year. On the investment side, the severity of the capital
market events in 2007 resulted in lower investment results than
we expected, even though our portfolio is mainly comprised of
very high-quality Canadian securities. In total, we delivered strong
financial performance with a return on equity of 15.4%, which
is well above the industry long-term average.
Industry performance and outlook Over the past few years,
consumers have enjoyed very favourable rates across all lines of
business. At the same time, industry returns have been very
healthy, reaching peak levels in 2004–2005. Solid performance
continued into 2007, but came down from historical highs due to
an increase in claims costs and more aggressive pricing in the
commercial segment. In claims, changes in weather patterns,
higher labour rates and material costs have all put pressure on
underwriting results across the industry. In addition, medical
claims have started to creep up in Ontario, indicating potential
erosion in the provincial reforms. In Alberta, the regulatory cap
on pain and suffering awards for minor injuries was lifted in early
2008, a decision which is being appealed by the Alberta
government. To support ongoing favourable conditions for
consumers, we anticipate that industry participants will modify
their value propositions to reflect emerging trends. Regulators are
equally sensitive to these trends and will likely take steps to
ensure the product evolves to address the changing dynamic of
the marketplace.
4
Direct premiums written
($ millions)
Written insured risks
(thousands)
Net income
($ millions)
Net gains on invested assets
and other gains
Net operating income
$
5,000
$
4,000
$
3,000
$
2,000
$
1,000
$
0
$3,906
$3,994
$4,109
$3,501
2004
2005
2006
2007
5,000
4,000
3,000
2,000
1,000
0
4,418
4,565
4,680
3,858
2004
2005
2006
2007
$
800
$
600
$
400
$
200
$
0
$169.5
$612.3
$91.9
$532.3
$127.5
$530.5
$38.3
$470.0
2004
2005
2006
2007
National Speed Skating team and our multi-year sponsorships of
the Edmonton and Ottawa Marathons to promote healthy living
for Canadians.
For the coming year Our focus is to build upon the positive
momentum in our businesses while continuing to seek out
further acquisition opportunities in Canada. We also plan to
utilize some of our excess capital through a higher dividend and
a normal course issuer bid to buy back up to 6.2 million shares,
both of which we announced in February 2008. Our strong
capital base provides the flexibility to return capital to our
investors while retaining our strategic flexibility.
And finally, I would like to recognize the members of our Board
for their guidance and stewardship of our organization as we set
the course for future growth at ING Canada. Specifically, I would
like to thank my predecessor Claude Dussault for his leadership
and tremendous support over the years. We are very fortunate
to benefit from the wealth of his experience as Chairman of
our company.
I would also like to highlight the tremendous efforts of our
6,500 employees and 1,800 brokers across Canada. It is through
their unabated commitment that we are able to turn our actions
into achievements and make our mark as one of the top-
performing companies in Canada.
Charles Brindamour
Chief Executive Officer
We expect to see some rate strengthening in personal lines
across the industry reflecting an increase in costs as well as
continued price pressure on commercial accounts. In our view,
profitability and premium growth will continue moving in the
direction of industry long-term averages. If capital market
volatility persists through 2008, it could also affect total returns
over the coming year.
Increasing our performance advantage In order to accelerate
our growth and beat industry results over time, we have
developed a long-term strategy to deliver an unrivalled product
and service offering for our customers and brokers. Our strategy
is focused on four main pillars described on the following pages:
1) Invest in people; 2) Excel at the fundamentals; 3) Focus on the
customer; and 4) Strong distribution. For 2008, we will focus
on advancing these core strategies and stay sharp, disciplined
and ready to pursue acquisition opportunities that fit within our
core businesses and are priced right.
Becoming the “first choice” partner for brokers We
fundamentally believe that customers value the benefits offered
by insurance brokers, including community presence, personal
advice and advocacy. So we have made Strong distribution a
cornerstone of our strategy to ensure that we never lose sight of
the importance of a strong service proposition to our brokers.
In 2008, we will continue to invest meaningfully in our broker
channel through comprehensive training for customer service
representatives, shared marketing campaigns, best-in-class
technology and financing options to enable entrepreneurial
brokers to expand. With a large demographic segment of
Canadian consumers and businesses relying more heavily on
brokers for advice as their physical assets grow, brokers who are
committed to building on their strengths will be well-positioned
to succeed.
Leadership in our communities ING Canada is committed to
improving the quality of life in the communities in which we live
and operate. The ING Foundation, through its Chances for
Children programs, continued to support causes and charitable
organizations that inspire leadership and independence in
Canadian youth and empower them to achieve their full potential.
In addition, we provide sponsorships to organizations that best
reflect our values, such as our role as a Premier Partner of Canada’s
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
5
Driving
leadership
performance
Effective risk pricing and efficient claims management are table stakes for a top-performing P&C insurer.
Strong capital and investment management capabilities are also essential skills for sustainable results in this
industry. These are our strengths and we will continue to focus on them to maintain our high level of execution
excellence, but we never stop innovating and looking for ways to enhance our competitive edge. Our
four-pillar strategy is designed to reinforce our core strengths and reflect our hallmark performance culture:
Invest in people
Excel at the fundamentals
Focus on the customer
Strong distribution
Focus on attracting, developing
and retaining top talent, and
providing them with the tools,
environment and rewards that
inspire best-in-class performance
and customer-centricity.
Leverage our size and experience
in pricing and claims to operate
more efficiently, reduce claims
costs, identify market trends
earlier while also optimizing
our capital and investment
management skills.
Offer products and services that
reflect our brand attributes:
“easy to deal with,” “treats me
fairly,” and “delivers on
promises.” We will do this by
leveraging technology,
identifying growing consumer
segments and tailoring new
products to their evolving needs.
Support entrepreneurial brokers
in growing their businesses and
make it even easier for them to
do business with us because
we believe that in order to be
successful we need to help
our brokers to be successful.
Offer additional channels of
distribution to let our customers
decide how they would like to
do business with us.
6
Offering choices to customers
Our distribution strategy is ready to meet the challenges of an evolving marketplace and is aimed at maximizing growth while
catering to the needs of a broader consumer demographic. We market our distribution channels through the following brands:
ING Insurance In an age of
ever-changing, high-tech
communications, many customers
maintain there is no substitute for
the personal, community-based
service that brokers provide,
which puts our ING Insurance
brokers at the heart of our
distribution strategy. With over
1,800 broker relationships in
3,300 locations across the country,
ING Insurance has continued to
grow and thrive because of its
commitment to help brokers
across the country build their
businesses and deliver the
best products and services to
their customers.
ING Insurance is our largest distribution
channel and makes up roughly 77% of our
annual direct premiums written.
belairdirect For consumers who
prefer making purchases by
telephone or over the Internet,
belairdirect has been providing
complete home and auto
insurance solutions directly to
consumers in Ontario and Québec
for over 50 years. With belairdirect,
consumers have the option of
buying coverage over the phone,
via the Internet, or in person.
belairdirect is the most recognized
direct-to-consumer insurance
brand in its markets.
2007 direct premiums
written by distribution
channel (%)
($ millions)
Brokers
77% $ 3,156.3
Affiliated distribution
network brokerages 12% $ 499.0
belairdirect
11% $ 453.3
Grey Power Specializing in the insurance needs of the 50+
market since 1993, Grey Power offers carefully selected
products and services that recognize years of experience and
safe driving and operate under the belief that consumers should
reap the rewards of maturity through better rates.
Canada Brokerlink Canada Brokerlink (CBL) is the fourth
largest and fastest growing brokerage in Canada. A wholly
owned subsidiary of ING Canada, CBL offers consumers
products and services from a number of insurance companies,
including ING Insurance.
Consolidator in a fragmented market
Time and time again we have demonstrated that we can
successfully take advantage of the consolidation of the Canadian
P&C market by buying and fully integrating acquired businesses
efficiently, effectively and profitably.
Our acquisition strategy is based on buying underperforming
books of business that fit within our core business lines. To create
value, we use our scale and skills in underwriting to price each
policy fairly and reduce claims costs while retaining a high
percentage of policies on renewal. Our objective is to reduce the
loss ratio and increase the overall margin from the same book
of business.
In a marketplace that is still highly fragmented, with the top
five players making up only 35% of the market, we believe there
are many opportunities for further consolidation in Canada.
Acquisition history
Year of
acquisition
Approximate
size of
acquisition
(DPW)1
($ millions)
Allianz Canada (Personal and
small to medium commercial lines)
Zurich (Personal and small
commercial lines)
Pafco (Niche products)
Guardian
Canadian Surety
(Personal lines, selected provinces)
Wellington
St. Maurice
Constitution
Metropolitan General
Commerce Group/Belair
Western Union
1 Direct premiums written
2004
2001
1999
1998
1997
1995
1994
1992
1991
1989
1988
600
510
40
630
30
370
30
30
10
290
60
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
7
Managing industry
cyclicality,
seasonality
& regulation
Industry cyclicality, seasonality and regulation add operational complexity to the P&C industry in Canada.
However, with ING Canada’s scale and other distinctive strengths, we can more successfully manage these
external factors and differentiate ourselves as a leader in the market.
Cyclicality
Over the past 30 years, returns in the property and casualty
insurance industry have fluctuated substantially with an average
return on equity of roughly 10% over that period. Cyclicality is
driven by a combination of factors including capital management,
time lags, and industry regulation which are described in the
following table. We are able to manage the cycle pattern to
our advantage by identifying unexploited profit pockets in
the market.
Canadian P&C industry – return on equity
(1975–2006)
25%
20%
15%
10%
5%
0%
1975
30-year average – 10.3%*
Average ROE
12.3%
Average ROE
11.4%
Average ROE
11.0%
Average ROE
8.9%
10-year ROE
outperformed
industry by
820 bps
1980
1985
1990
1995
2000
2005
* Based on most recent industry data (up to 2006)
Source: IBC and MSA
8
Inefficient industry
capital management
Time lag
Regulatory/political
process
Decentralized
decision-making
– Performance in the insurance
industry is driven by supply,
not demand
– When capital in the industry is
plentiful, some companies will
under-price business to gain
market share rapidly. Inadequate
pricing squeezes underwriting
margins. Ultimately prices need
to rise again to recover the losses,
repeating the cycle pattern
– This is more prevalent in
commercial insurance than in
personal insurance
– There can be several years
– In provinces where rates are
– In some cases, individual
regulated, approvals can take
several weeks due to the
complexity of the regulatory
process
underwriters and brokers have
the ability to negotiate
premiums—particularly with
large commercial clients—in
order to capture business
between the time a policy is
priced and the full cost of a
claim is known (e.g., personal
auto claims can have a longer
duration due to medical costs
included)
– Pricing is based on actual
experience over the previous
three to five years, with
adjustments typically made
after trends develop
– Premiums are recognized over
the term of the policy
Technical
premium
pricing
strategy
Identifying industry market inefficiencies
$
Profit pockets
Market price
Time
Four-year average ING seasonal indicator1
1.1
1.0
0.9
First
quarter
Higher
combined ratio
Lower combined ratio
Second
quarter
Third
quarter
Fourth
quarter
1 The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio
to the annual combined ratio.
Even in a soft cycle, there are market segments that are priced
more attractively than others. By pursuing the most profitable
segments and not under-pricing existing business, we can
increase the superior gap between our performance and that of
the industry.
Seasonality
Underwriting performance is also subject to seasonal fluctuations,
related primarily to automobile claims patterns and winter driving
conditions. Typically, claims are higher in the first and fourth
quarters due to slippery roads and poor visibility. Severe winter
weather storms, such as the 1998 ice storm, as well as rain,
wind and hail can affect property insurance results. Areas with
inadequate sewer systems are particularly vulnerable to more
water-related property damages. As the largest P&C insurer,
we quickly identify and react to new weather trends because we
have access to the largest database of customer claims data
upon which we base our statistical modelling. Our preferred
supplier networks help speed up the cycle time of each claim
which reduces costs and increases customer satisfaction.
Industry auto regulation in Canada
Automobile insurance rates are regulated in certain provinces,
including Ontario and Alberta, which are the largest private
insurance markets in Canada. While the rate approval process and
timing varies by province, in Ontario and Alberta, insurers must file
for rate adjustments before they can be effected. In addition, several
provinces have instituted certain automobile insurance reforms to
ensure the affordability and accessibility of insurance coverage.
These reforms have been largely effective at stabilizing costs,
supporting lower annual premiums for consumers, but the reform
benefits tend to lose their effectiveness over time. To address this
issue, automobile insurance regulators are focused on responding
to the concerns of all stakeholders and are taking positive steps to
stay abreast of developments in the claims environment.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
9
Corporate responsibility
At ING Canada, we are deeply respectful of each other, our customers, our partners and the
environment in which we operate. This commitment is demonstrated by the following
activities in five key areas:
Community
(cid:2)(cid:2)
Employees
Governance
(cid:2)
– The ING Foundation supports
– Conducted our annual employee
– ING Canada employees review our Code
organizations that empower Canada’s
next generation of leaders, such as Youth
in Motion’s Top 20 Under 20 award and
the kids.now mentoring program.
– Support employee giving and
volunteerism through our Employee
Community Giving Program.
– Matched the ING Canada employee
donations to the United Way dollar for
dollar, resulting in an annual total of
almost $1 million.
– Premier Partner of Canada’s national
speed skating teams and support of local
community initiatives to help develop the
sport among youth.
satisfaction survey and communicated
results and related action items to
employees.
– Established a Diversity Council in 2006
with an initial focus on gender diversity.
To date, the council has supported
two programs, mentoring and formal
flexible work arrangements. In addition
we have increased representation of
women in our succession pool.
– Introduced our Employee Share Purchase
Plan in 2006. Employee enrolment has
reached over 35%.
– All permanent, full-time and part-time
employees have access to our short-term
incentive plan based on personal and
company performance.
of Business Conduct annually.
– Anonymous whistle-blower hotline is
available to all employees.
– Aligned the Board’s interests more closely
with those of our shareholders through
increased share ownership requirements
for our directors and guidelines regarding
serving on other boards, which will help
avoid any conflicts of interest.
Further information on ING Canada’s corporate
governance is provided in the Company’s
Management Proxy Circular which is available
on the System for Electric Document Analysis
and Retrieval at www.sedar.com, or in the
investor relations section of ING Canada’s web
site at www.ingcanada.com.
Environment
(cid:2)(cid:2)
Customers
– Report internally and participate in
ING Group’s Carbon Disclosure Project
submission and carbon neutral
commitment.
– In 2007, ING Canada began phasing out
paper pay stubs and moved to an on-line
system. Over 56% of ING Canada’s
6,500 employees are enrolled and all new
ING Canada employees are enrolled
automatically.
– Launched belairdirect’s e-docs initiative,
giving customers the ability to view, print
and save their automobile insurance
documents on-line.
– Collaborated with BASF Canada to
promote the use of waterborne auto
paint among the Rely Network of
preferred repair shops.
– Adopted the Insurance Bureau of
Canada’s Standards of Sound
Marketplace Practice to better protect
consumers’ interests.
– Conduct ongoing customer satisfaction
surveys to measure the quality of our
claims service.
– Developed a new user-friendly billing
statement that is easier for our customers
to read and understand.
– 24/7 Claims Service Guarantee ensures
when a policy holder has a claim
emergency they are transferred to an
ING adjustor immediately, or that an
ING representative will call them back
within 30 minutes of their first call.
– We’ll take your word for it – At ING
Insurance, when a customer files an auto
claim, we pay collision claims based on
their version of events.
ING’s global green
initiatives
For the second year in a row,
ING Group has been named a
“best in class” company in the
Carbon Disclosure Project’s
Climate Leadership Index.
ING Group has also committed
to becoming carbon neutral
through increased energy
efficiency, purchasing green
energy wherever possible and
compensating for all remaining
CO2 emissions through
reforestation.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T 11
Executive management team
One of the cornerstones of our long-term strategy is ”invest in people.” We place great
importance on attracting, developing and retaining talented senior leaders.
Martin Beaulieu
Senior Vice President,
Personal Lines
Charles Brindamour
President and
Chief Executive Officer
Jetse de Vries
Senior Vice President,
Western Canada
Louis Gagnon
Senior Vice President,
Québec
Denis Guertin
Senior Vice President,
belairdirect
Alan Blair
Senior Vice President,
Atlantic Canada
Debbie Coull-Cicchini
Senior Vice President,
Ontario
Claude Désilets
Chief Risk Officer
Françoise Guénette
Senior Vice President,
Corporate and Legal
Services, and Secretary
Louis Héroux
Senior Vice President,
Claims
Jack Ott
Senior Vice President
and Chief Information
Officer
Marc Provost
Senior Vice President,
Managing Director,
and Chief Investment
Officer, ING Investment
Management
Mark Tullis
Chief Financial Officer
Derek Iles
President,
ING Insurance
Marc Pontbriand
Executive
Vice President
Roger Randall
Senior Vice President,
Affiliated Distribution
Networks
Peter Weightman
Senior Vice President,
Commercial Lines
For biographies on our executive management team go to www.ingcanada.com.
12
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Management’s Discussion and Analysis
February 19, 2008
The following Management’s Discussion and Analysis (“MD&A”), which was approved by the Board of Directors for the quarter and
year ended December 31, 2007, should be read in conjunction with the company’s Audited Consolidated Financial Statements and
accompanying notes.
The company uses both generally accepted accounting principles (“GAAP”) and certain non-GAAP measures to assess performance.
Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are unlikely to be comparable to any similar
measures presented by other companies. ING Canada analyzes performance based on underwriting ratios such as combined, general
expenses and claims ratios as well as other performance measures. These measures are defined in the company’s glossary on page 94
of the 2007 Annual Report. The glossary is also posted on the ING Canada web site at www.ingcanada.com. Click on “Investor
Relations” and “Glossary” on the left navigation bar.
“ING,” “ING Canada” and “the company” are terms used throughout the document to refer to ING Canada Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
differ materially from these forward-looking statements as a result of various factors, including those discussed below or in the company’s Annual Information Form.
Please read the cautionary note in section 10.2 of this document. Certain totals, subtotals and percentages may not agree due to rounding. Additional information about
ING Canada, including the Annual Information Form, may be found online on SEDAR at www.sedar.com.
This document contains forward-looking statements that involve risks and uncertainties. The company’s actual results could
A change column has been provided for convenience showing the percentage variation between the current period and the prior period. Not applicable (“n/a”) is used to
indicate that the current and prior year figures are not comparable or if the percentage change exceeds 1,000%. Not material (“n/m”) is used when figures are not significant.
TABLE OF CONTENTS
14 Performance highlights
Section 1 – ING Canada
15 1.1 Overview of the business
16 1.2 Critical capabilities
17 1.3 Key performance indicators
Section 2 – Canadian property and casualty industry outlook
Section 3 – Overview of consolidated performance
19 3.1 Financial results
19 3.2 Explanation of financial results
21 3.3 Recent events
22 3.4 Underwriting
23 3.5
24 3.6 Net (losses) gains on invested assets and other gains
25 3.7 Net operating income
25 3.8 Selected quarterly information
26 3.9 Selected annual information
Interest and dividend income, net of expenses
Section 4 – Personal lines
26 4.1 Financial results
27 4.2 Explanation of financial results
Section 5 – Commercial lines
28 5.1 Financial results
29 5.2 Explanation of financial results
Section 6 – Corporate and distribution
30 6.1 Financial results
30 6.2 Explanation of financial results
Section 7 – Financial condition
31 7.1 Balance sheet highlights
32 7.2 Portfolio of invested assets
35 7.3 Claims liabilities
36 7.4 Reinsurance
38 7.5 Liquidity and capital resources
39 7.6 Contractual obligations
39 7.7 Off-balance sheet arrangement
Section 8 – Accounting and disclosure matters
39 8.1 Disclosure controls and procedures
39 8.2
40 8.3 Critical accounting estimates and assumptions
Impact of new accounting standards
42 8.4
Internal controls over financial reporting
Section 9 – Risk management
44 9.1 Risk management principles and responsibilities
46 9.2 Operational risk management
47 9.3 Corporate governance and compliance
47 9.4
Industry standards
Section 10 – Other matters
48 10.1 Related party transactions
48 10.2 Cautionary note regarding forward-looking statements
Section 11 – Additional information
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T 13
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
Performance highlights
Notes: All references to “direct premiums written” in this MD&A exclude pools, unless otherwise noted. All references to “investment portfolio” refer to the company’s
portfolio of invested assets.
TABLE 1
Written insured risks (thousands)
Direct premiums written (excluding pools)
Net underwriting income
Combined ratio
Net (losses) gains on invested assets
and other gains (table 8)
Effective income tax rate
Net income
EPS – basic and diluted (dollars)
ROE for the last 12 months
Book value per share
Fourth quarter 2007
Q4 2007
Q4 2006
Change
1,056.7
961.3
47.5
1,051.1
955.6
62.3
95.3%
93.6%
(3.3)
27.8%
95.8
0.77
15.4%
25.48
15.3
35.4%
109.4
0.82
20.8%
25.58
0.5%
0.6%
(23.8)%
1.7 pts
(121.6)%
(7.6) pts
(12.4)%
(6.1)%
(5.4) pts
(0.4)%
2006
Change
2007
4,679.9
4,108.6
208.9
4,565.1
3,993.6
403.8
94.7%
89.4%
73.6
24.3%
508.3
4.01
193.5
30.9%
658.1
4.92
2.5%
2.9%
(48.3)%
5.3 pts
(62.0)%
(6.6) pts
(22.8)%
(18.5)%
Underwriting income was $47.5 million in the fourth quarter, down by $14.8 million compared to the same period in 2006. Excluding the
impact of a $20.7 million market yield adjustment to claims liabilities, underwriting income increased year-over-year. Solid operating
performance reflected higher personal property and commercial non-auto underwriting results versus the fourth quarter last year. Personal auto
underwriting income decreased due to higher severity and frequency of claims.
Direct premiums written were relatively flat as personal lines growth was offset by a decrease in premiums in commercial lines, reflecting a shift
in the portfolio mix toward smaller accounts that are less price-sensitive. In the fourth quarter, written premium rates in personal lines rose
slightly for the first time since 2003. Rates are being adjusted upward in certain geographic regions in both personal auto and personal
property to take into account cost inflation.
Net income decreased in the fourth quarter due to debt and equity asset impairments which led to a small net loss on invested assets
compared to a gain in the fourth quarter of 2006 (shown in table 8). The impact of the market yield adjustment on underwriting income was
offset by gains on held-for-trading invested assets, resulting in a minimal net impact to net income.
14
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SECTION 1 – ING Canada
1.1 Overview of the business
ING Canada is the largest provider of property and casualty (“P&C”) insurance in Canada offering automobile, property and liability insurance
to more than four million individuals and small- and medium-sized businesses across Canada. Overall, the company has an approximate 11.0%
market share and is the leading private sector P&C insurer in Québec, Alberta and Nova Scotia, and the second largest in Ontario. ING Canada
distributes insurance through brokers under the ING Insurance and Grey Power brands, and direct-to-consumers through belairdirect. The
investment management subsidiary manages the invested assets of ING Canada Inc. and its insurance subsidiaries.
Personal insurance
ING Canada is the largest personal auto and property insurer in Canada. The market as a whole is very fragmented – the top five P&C insurers
represent less than 40.0% of annual premiums in Canada. In automobile, the company is 30.0% larger than the second largest insurer and
58.0% larger than the third, based on the most recently reported industry data. In property, the gap is even larger – ING Canada is
approximately 45.0% larger than the second largest insurer and 80.0% larger than the number three insurer in the market. Though the
company holds the number one position in both segments of personal insurance, its estimated market share is only 14.0% in automobile and
15.0% in property, demonstrating the potential to continue to grow this segment of the business. Over the last 10 years, ING Canada has
sustained a superior claims ratio gap of 600 basis points below the industry average in automobile insurance. In personal property, the
company incurred higher claims due to heavier seasonal storm activity than was expected and consequently has underperformed the industry
in terms of claims ratio. The company has initiated a focused strategy to better manage water loss exposures by: 1) adjusting pricing models
and insured amounts to reflect current reconstruction cost factors; and, 2) taking advantage of claims management expertise to reduce claims
costs. These actions should enable the company to gain a claims ratio advantage in that segment in the future.
Commercial insurance
ING Canada is also one of the largest players in commercial insurance with a significant share of the small- to medium-size commercial
segment, which makes up approximately 90.0% of the company’s commercial premiums. Over the last 10 years, the company’s claims ratio in
commercial lines has outperformed the industry average claims ratio by more than 500 basis points annually and the positive gap has been
widening in more recent years. Though commercial insurance can be subject to significant market pricing volatility, mainly due to excess capital
in the industry, ING Canada’s strategy is to remain disciplined in pricing and grow by targeting sub-segments of the market that are priced
attractively through the P&C cycle.
Investment management
ING Canada actively manages its portfolio of invested assets to generate superior after-tax returns while balancing capital preservation and
risk. The portfolio strategy is more heavily concentrated in equities compared to the average Canadian insurer to maximize dividend income.
ING Canada’s return on invested assets was 170 basis points higher than its benchmark of Canadian P&C insurers over the last five years of
reported industry data ending in 2006. See section 7.2 for more information on the quality, asset mix, and performance of the company’s
portfolio of invested assets.
2007 direct premiums written
by business line (excluding pools) (%)
2007 direct premiums written
by distribution channel (%)
2007 investment asset mix1 (%)
($ millions)
Personal auto
50% $ 2,057.7
Personal property
22% $ 904.4
Commercial auto
8% $ 321.2
Commercial non-auto 20% $ 825.3
($ millions)
Brokers
77% $ 3,156.3
Affiliated distribution
network brokerages 12% $ 499.0
belairdirect
11% $ 453.3
($ millions)
Common shares
24% $ 1,709.5
Fixed income
53% $ 3,867.8
Preferred shares
20% $ 1,430.8
Other
3% $ 229.7
1 Fair value, as at December 31, 2007
The company has a zero cash policy
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
15
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
1.2 Critical capabilities
ING Canada has several critical capabilities which enable it to sustain its strong performance in the Canadian P&C industry. These critical
capabilities are described in the table below.
Significant scale advantage
The key benefit of scale is a uniquely comprehensive database of customer and claims
Underwriting discipline/
pricing sophistication
information that allows the company to more accurately model the risk of each policy. The
company also uses its scale to negotiate preferred terms with suppliers, priority service on
repairs, quality guarantees on workmanship and lower material costs.
Through underwriting and pricing expertise, the company is constantly refining and
enhancing its proprietary risk scoring models. In addition, scale enables the company to
identify market opportunities that haven’t been exploited by other insurers. The company’s
objective is to establish pricing that 1) will continue to attract new business, 2) is fair for the
customer; and, 3) is profitable.
Expertise in claims management
More than 95.0% of ING’s claims are handled in-house. By managing claims in-house, claims
are settled faster and less expensively, and a more consistent service experience is created for
the customer. In 2007, the company achieved a 95.0% customer claims satisfaction rate.
Product innovation
ING Canada is constantly developing new products to attract customers and retain existing
business at renewal time. Product features such as Responsible Driver Guarantee are available
to new customers as a premium policy feature, but are provided for free to customers of five
or more years. The company also offers one Aeroplan Mile® for every $2 paid in premiums.
In the commercial lines segment, ING has worked aggressively to expand its customer loss
prevention services. With more than 40 loss prevention specialists, ING conducted more than
9,500 site visits in 2007 and more than 4,000 building appraisals.
Proven acquisition strategy
ING Canada has been the most active in the industry’s consolidation with 11 successful
acquisitions in 19 years. ING’s strategy is three-fold:
– acquire businesses that fit existing business lines
– integrate those businesses into the company’s technology infrastructure
– increase the profitability of the acquired book of business through underwriting expertise
and the use of proprietary pricing models
Solid investment returns
ING’s investment strategy is to generate solid after-tax returns while preserving capital and
diversifying risk. The company’s $7.2 billion portfolio is comprised primarily of Canadian
securities, including high-quality fixed income securities as well as common shares of large-
cap companies and preferred shares that pay dividends. Over the last five years, the
company’s portfolio of invested assets generated a market yield of 5.1%.
Diverse business portfolio
The company benefits from diversity in its geographic mix, product mix and multi-channel
distribution. The diversity of the portfolio provides some insulation from the cyclicality of
the industry.
Aeroplan® is a registered trademark of Aeroplan Limited Partnership.
16
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1.3 Key performance indicators
ING Canada’s key performance indicators are defined in the table below. The following key performance indicators are considered non-GAAP
measures. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures
used by other companies in the P&C industry.
Growth
Direct premiums written The total premiums from the primary insured in respect of
insurance underwritten by an insurer during a specified 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).
Profitability
Net underwriting income The difference between net premiums earned and the sum of
net claims incurred, commissions, premium taxes and general expenses.
Market-based yield This yield is calculated using the interest and dividend income for the
period excluding realized gains and losses divided by the average invested assets calculated
monthly including cash equivalents but excluding cash balances.
Performance and execution
Claims ratio Claims incurred, net of reinsurance, during a defined period and expressed as
a percentage of net premiums earned for the same period.
Capital management
Expense ratio Underwriting expenses including commissions, premium taxes and all
general and administrative expenses, incurred in operating the business during a defined
period and expressed as a percentage of net 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 100.0% indicates a profitable underwriting result. A combined ratio over 100.0%
indicates an unprofitable result.
Return on equity (“ROE”) Represents 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. The average
shareholders’ equity is the mean of shareholders’ equity at the beginning and end of the
period. Shareholders’ equity includes accumulated other comprehensive income (“AOCI”).
The company compares its ROE against that of the industry, when available.
Book value per share Represents the shareholders’ equity at the end of the year divided
by the number of outstanding common shares at the same date.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T 17
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
SECTION 2 – Canadian property and casualty industry outlook
Management expects that several key factors will affect the Canadian property and casualty insurance industry over the coming 12 months.
Industry growth and underwriting income
We expect underwriting ratios and industry premium growth to trend toward historical
averages.
Automobile insurance
The automobile insurance product has been favourable over the last 36 months both from
a consumer and a competitive point of view. The stable cost environment and the reforms
adopted by various provinces have been effective at containing and stabilizing claims and
making auto insurance products more affordable and available to consumers. Accident
benefit and bodily injury claims have risen in Ontario. In addition, the $4,000 cap on pain
and suffering awards on minor injuries in Alberta is being challenged. Industry participants
will need to assess the potential impact on claims costs and premiums. These developments
will likely lead to premium increases.
Personal property insurance
Increases in water-related property damages caused by seasonal storm activity as well as
Commercial insurance
construction cost inflation have contributed to higher claims ratios in the personal property
segment. Construction cost inflation and rate activity could drive increases in industry
premiums in the property segment.
Commercial insurance continues to be competitive. Rates on large commercial accounts are
under more pressure than small and medium commercial accounts. The company remains
disciplined in pricing and underwriting and committed to superior service to brokers and
commercial customers.
Material and labour cost inflation could put pressure on underwriting margins in property
lines. The company is working with brokers and customers to ensure that policies include
sufficient coverage for current replacement costs of insured properties and adjusting pricing
models accordingly, to reflect the elevated cost environment.
As discussed in section 1.2, ING Canada has several significant critical capabilities that enable the company to produce superior returns to
many other insurers in the industry.
18
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SECTION 3 – Overview of consolidated performance
3.1 Financial results
TABLE 2
(Key performance indicators are bolded
in the table below)
Written insured risks (thousands)
Direct premiums written (including pools)
Direct premiums written (excluding pools)
Underwriting:
Net premiums earned
Net claims and general expenses (table 4)
Net underwriting income
Combined ratio
Claims ratio
Expense ratio
Interest and dividend income,
net of expenses (table 6)
Market-based yield
Net (losses) gains on invested assets
and other gains (table 8)
Corporate and distribution (table 14)
Income before income taxes
Income taxes
Effective income tax rate
Net income
EPS – basic and diluted (dollars)
ROE for the last 12 months
Book value per share (dollars)
3.2 Explanation of financial results
Fourth quarter 2007
Q4 2007
Q4 2006
Change
1,056.7
959.7
961.3
1,004.7
957.2
47.5
95.3%
66.9%
28.4%
86.5
5.1%
(3.3)
1.9
132.6
36.8
27.8%
95.8
0.77
15.4%
25.48
1,051.1
963.6
955.6
979.6
917.3
62.3
93.6%
64.2%
29.4%
87.1
4.8%
15.3
4.5
169.2
59.8
35.4%
109.4
0.82
20.8%
25.58
0.5%
(0.4)%
0.6%
2.6%
4.3%
(23.8)%
1.7 pts
2.7 pts
(1.0) pts
(0.7)%
0.3 pts
(121.6)%
(57.8)%
(21.6)%
(38.5)%
(7.6) pts
(12.4)%
(6.1)%
(5.4) pts
(0.4)%
2007
4,679.9
4,100.0
4,108.6
3,932.0
3,723.1
208.9
94.7%
65.7%
29.0%
344.8
5.1%
73.6
44.3
671.6
163.3
24.3%
508.3
4.01
2006
Change
4,565.1
3,990.4
3,993.6
3,826.6
3,422.8
403.8
89.4%
59.1%
30.3%
321.3
4.8%
193.5
33.4
952.0
293.9
30.9%
658.1
4.92
2.5%
2.7%
2.9%
2.8%
8.8%
(48.3)%
5.3 pts
6.6 pts
(1.3) pts
7.3%
0.3 pts
(62.0)%
32.6%
(29.5)%
(44.4)%
(6.6) pts
(22.8)%
(18.5)%
Direct premiums written were up slightly as personal lines growth of 2.3% was partly offset by a 3.1% decrease in premiums in commercial
lines. Lower premiums in commercial lines reflect our pricing discipline which led to a shift in the portfolio mix toward smaller accounts, as well
as moderate rate decreases.
Underwriting income was down by $14.8 million in the fourth quarter, but increased year-over-year excluding the impact of a $20.7 million
market yield adjustment to net claims liabilities. The impact of the market yield adjustment on underwriting income was offset by gains on
held-for-trading invested assets, which resulted in a minimal net impact to net income. See section 7.3, Claims liabilities.
Written insured risks
(thousands)
Direct premiums written (excluding pools)
($ millions)
Net income
($ millions)
1,012.6
1,051.1
1,056.7
924.8
1,200
1,000
800
600
400
200
0
$1,000
$870.0
$913.6
$955.6
$961.3
$800
$600
$400
$200
$0
$200
$150
$100
$50
$0
Q4
2004
Q4
2005
Q4
2006
Q4
2007
Q4
2004
Q4
2005
Q4
2006
Q4
2007
Q4
2004
Q4
2005
Q4
2006
$25.3
$147.8
$50.9
$146.0
$7.6
$101.8
$102.8
($7.0)
Q4
2007
Net gains on invested assets and other gains
Net operating income
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
Increases in underwriting income in personal property and commercial non-auto offset lower underwriting income in auto lines. The main factors
that contributed to improved results in personal property and commercial non-auto included more favourable prior year claims development and
lower catastrophe claims in personal property. In personal auto, underwriting income decreased due to higher claims severity and frequency.
Net income decreased in the fourth quarter due to debt and equity asset impairments which led to a small net loss on invested assets compared to
a gain in the fourth quarter of 2006. Equity and debt impairments were partly offset by gains on derivatives and embedded derivatives (see table 8).
The following table reflects major changes in income before income taxes.
TABLE 3
As reported in 2006
Higher (lower) favourable prior year claims development
Current accident year:
Lower losses from catastrophes
Lower results from Facility Association
Lower current accident year underwriting income
Change in net underwriting income
Lower net gains on invested assets and other gains
(Lower) higher interest and dividend income, net of expenses
Corporate and distribution
As reported in 2007
Full year 2007
Q4 2007
169.2
21.1
16.8
(14.7)
(38.0)
(14.8)
(18.6)
(0.6)
(2.6)
132.6
2007
952.0
(54.0)
18.1
(17.1)
(141.4)
(195.0)
(120.0)
23.5
11.1
671.6
Direct premiums written rose 2.9% due to increases in written insured risks and amounts insured in personal lines. In commercial lines, lower
direct premiums written reflect continued pricing discipline which led to a shift in the portfolio toward smaller accounts and slower growth in
written insured risks.
Net income was down by 22.8% due to a combination of lower underwriting income and a decrease in net gains on invested assets, compared
to relatively high net gains in 2006. Net gains on invested assets were $119.9 million lower in 2007 due to a combination of investment
impairments and lower realized gains on invested assets. A lower effective tax rate, higher interest and dividend income and an increase in
corporate and distribution income positively contributed to net income in 2007. The effective income tax rate decreased mainly because non-
taxable dividend income was higher relative to underwriting income.
Higher current and prior year claims in personal auto were the largest factors that caused the decrease in underwriting income in 2007. Increases
in current year property claims also contributed significantly to the underwriting shortfall versus 2006, partly offset by lower catastrophe claims in
2007. In addition, underwriting income was positively impacted by a $19.8 million market yield adjustment.
Return on equity
Return on equity (“ROE”) for the 12-month period ending December 31, 2007 was 15.4% compared to 20.8% in 2006.
Book value per share
The book value per share was flat in the fourth quarter reflecting the impact of the share buyback in early 2007 which reduced share capital
and retained earnings.
Written insured risks
(thousands)
Direct premiums written (excluding pools)
($ millions)
Net income
($ millions)
4,417.9
4,565.1
4,679.9
3,857.6
2004
2005
2006
2007
$
5,000
$
4,000
$
3,000
$
2,000
$
1,000
$
0
$3,905.9
$3,993.6
$4,108.6
$3,501.4
2004
2005
2006
2007
$
800
$
600
$
400
$
200
$
0
$169.5
$612.3
$91.9
$532.3
$127.5
$530.5
$38.3
$470.0
2004
2005
2006
2007
Net gains on invested assets and other gains
Net operating income
5,000
4,000
3,000
2,000
1,000
0
20
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3.3 Recent events
Alberta cap on pain and suffering awards on minor injuries
In 2004, the Government of Alberta introduced auto insurance reforms to make insurance more affordable and accessible for all Albertans. The
reforms included numerous initiatives such as the introduction of a premium grid, premium rollbacks, a diagnostic and treatment process
designed to provide injured individuals prompt diagnosis and treatment and Minor Injury Regulation (“MIR”) that capped awards for pain and
suffering for minor injuries at $4,000.
On February 8, 2008, a decision was rendered by the Court of Queen’s bench in Alberta which basically results in the lifting of the $4,000 cap
on pain and suffering awards for minor injuries in the province. The decision has been appealed by the Alberta government but uncertainty
remains over the ultimate outcome of the court’s decision. The December 31, 2007 financial statements include a provision for this item.
Management continues to assess the potential impact on claims costs and premiums and as more information is available, will react
appropriately. If the changing situation results in a reassessment of the provision, any changes would be recorded in future quarters.
ING Canada normal course issuer bid
On February 19, 2008, the Board of Directors approved a recommendation by management to proceed with a normal course issuer bid to
purchase for cancellation during the next 12 months up to 6,223,638 common shares, representing 5.0% of the currently outstanding
common shares of the company. The actual number of common shares which may be purchased and the timing of any such purchases will be
determined by ING Canada. ING Groep, ING Canada’s majority shareholder, has advised ING Canada of its intention to participate on a
proportionate basis in the program to maintain its ownership in the company at 70.0%. Purchases from minority shareholders will be made on
the open market through the facilities of the Toronto Stock Exchange at market prices and in accordance with the rules of the TSX applicable
to normal course issuer bids.
The company’s strong capital base enables it to return capital to shareholders through a share buyback while retaining sufficient financial
resources to pursue its acquisition strategy. The normal course issuer bid constitutes a flexible way of distributing some excess capital to
shareholders while increasing shareholder value over the long term.
Refer to the news release posted on the company’s web site at www.ingcanada.com for more information on the normal course issuer bid.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T 21
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
3.4 Underwriting
Written insured risks
The number of written insured risks grew 0.5% during the fourth quarter and by 2.5% in 2007, driven by growth in personal lines. The rate of
unit growth in personal lines slowed in the fourth quarter reflecting the near-term effect of premium rate increases in certain geographic
regions in late 2007. In commercial lines, the number of insured risks was up slightly in the fourth quarter and flat in 2007 overall, reflecting
pricing discipline in a highly competitive marketplace.
Direct premiums written (excluding pools)
Direct premiums written increased 0.6% in the fourth quarter driven by higher premiums in personal lines. Overall in 2007, direct written
premiums rose 2.9% reflecting increases in written insured risks and average amounts insured in personal lines. In commercial lines, direct
premiums written decreased 3.1% in the fourth quarter and also for the full year, compared to the same periods in 2006.
TABLE 4
Net claims:
(Favourable) prior year claims development
Current year catastrophes
Current year claims
Total
Commissions, net
Premium taxes, net
General expenses, net
Total
Combined ratio
Q4 2007
Q4 2006
Change
2007
2006
Change
(45.4)
9.7
707.4
671.7
146.3
35.0
104.2
957.2
(24.3)
26.4
627.2
629.3
154.7
33.2
100.1
917.3
86.8%
(63.3)%
12.8%
6.7%
(5.4)%
5.4%
4.1%
4.3%
(115.9)
41.1
2,659.0
2,584.2
583.1
136.9
418.9
(169.9)
59.2
2,371.9
2,261.2
611.7
132.3
417.6
3,723.1
3,422.8
(31.8)%
(30.6)%
12.1%
14.3%
(4.7)%
3.5%
0.3%
8.8%
95.3%
93.6%
1.7 pts
94.7%
89.4%
5.3 pts
Prior year claims development
Favourable prior year claims development increased by $21.1 million in the fourth quarter. For the full year, favourable prior year claims
development decreased by $54.0 million compared to 2006. The decrease in 2007 was primarily due to higher accident benefit and bodily
injury claims in personal and commercial auto in Ontario. For the fourth quarter, the market yield adjustment had a $17.1 million negative
impact on prior year claims development and $3.6 million on current accident year results for a total of $20.7 million. For the year, the market
yield adjustment had a $13.6 million positive impact on prior year claims development. See section 7.3, Claims liabilities.
The following table shows the annualized rate of favourable prior year claims development by quarter.
TABLE 5
(Annualized rate)
Favourable prior year claims development
as a % of opening reserves
Catastrophes
2007
2006
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
5.1%
2.3%
4.2%
1.4%
2.8%
7.9%
4.5%
4.2%
Catastrophe claims were down by $16.7 million and $18.1 million in the fourth quarter and in 2007, respectively, compared to the same
periods last year. Rain and hail in Western Canada in the spring and summer were the primary causes of catastrophe claims in 2007.
Catastrophe claims are defined as a single event resulting in $5.0 million or more in aggregate claims.
Current accident year claims
Current accident year claims were up by $80.2 million in the fourth quarter and $287.1 million for the full year mainly due to higher auto and
property claims severity in both periods. Refer to sections 4 and 5 for more detailed information on current accident year claims.
22
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Commissions
Variable commissions were down in the fourth quarter and for the full year of 2007 due to lower underwriting results.
Industry pools
Industry pools consist of the “residual market” as well as risk-sharing pools (“RSP”) in Alberta, Ontario, Québec, New Brunswick and Nova
Scotia. These pools are managed by the Facility Association except the Québec RSP. In the fourth quarter and for the full year of 2007, the net
effect of transfers in and out of these pools resulted in lower year-over-year underwriting income by $3.8 million and $6.5 million, respectively.
3.5 Interest and dividend income, net of expenses
TABLE 6
Interest income
Dividend income
Interest and dividend income, before expenses
Expenses
Interest and dividend income, net of expenses
Interest and dividend income
Q4 2007
Q4 2006
Change
50.9
40.4
91.3
(4.8)
86.5
52.1
39.2
91.3
(4.2)
87.1
(2.3)%
3.1%
–
14.3%
(0.7)%
2007
197.7
166.5
364.2
(19.4)
344.8
2006
195.4
147.0
342.4
(21.1)
321.3
Change
1.2%
13.3%
6.4%
(8.1)%
7.3%
Interest and dividend income decreased slightly in the fourth quarter but increased overall in 2007 reflecting an increase in invested assets and
higher yields. The company introduced a zero cash policy in early 2007, increasing its investments in fixed income securities.
Market-based yield
The market-based yield is a non-GAAP measure that represents the total interest and dividend income (before expenses) divided by the average
fair values of equity and debt securities held during the reporting period. The market-based yield was 5.1% in the fourth quarter compared to
4.8% from the same quarter of last year.
TABLE 7
Percentage (%)
Market-based yield
Market-based yield
(%)
5
4
3
2
1
0
4.9
4.7
4.8
5.1
2004
2005
2006
2007
2007
Q4
5.1
Q3
5.1
Q2
5.1
Q1
5.0
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
3.6 Net (losses) gains on invested assets and other gains
TABLE 8
Debt securities
Realized gains (losses)
Unrealized gains (losses) on held-for-trading
debt securities
Impairments
Gains (losses) on derivatives
Net gains (losses) on debt securities
Equity securities
Realized gains
Unrealized losses on held-for-trading
equity securities
Impairments
Gains (losses) on derivatives
Gains on embedded derivatives
Net gains (losses) on equity securities
Other
Total gains (losses) before income taxes
Total gains (losses) after income taxes
Fourth quarter and full year 2007
Q4 2007
Q4 2006
Change
2007
2006
Change
0.9
17.7
(8.1)
(8.0)
2.5
7.8
(11.6)
(34.7)
14.2
19.6
(4.7)
(1.1)
(3.3)
(7.0)
6.8
–
–
(1.3)
5.5
29.1
–
(7.0)
(18.6)
–
3.5
6.3
15.3
7.6
(86.8)%
(16.5)
n/a
n/a
515.4%
(54.5)%
(6.4)
(37.3)
(4.0)
(64.2)
23.8
–
–
2.3
26.1
(169.3)%
n/a
n/a
(273.9)%
(346.0)%
(73.2)%
151.9
193.4
(21.5)%
n/a
395.7%
(176.3)%
n/a
(234.3)%
(117.5)%
(121.6)%
(192.1)%
(13.7)
(47.7)
11.5
38.1
140.1
(2.3)
73.6
38.3
–
(20.4)
(15.8)
–
157.2
10.2
193.5
127.6
n/a
133.8%
(172.8)%
n/a
(10.9)%
(122.5)%
(62.0)%
(70.0)%
In the fourth quarter, the company recorded a small pre-tax loss on invested assets due to asset impairments which were partly offset by gains
on derivatives and embedded derivatives. These factors are described in more detail below.
Capital notes and total return swaps associated with SIVs
In the fourth quarter, the company incurred losses of $6.1 million in leveraged capital notes and $3.9 million in total return swaps associated
with specific asset-backed securities (structured investment vehicles, or SIVs). The company incurred $49.8 million in losses associated with
these SIVs during the year, including $34.0 million in capital notes and $15.8 million in total return swaps. As of the end of the year, the
company had a remaining total SIV exposure of $19.8 million.
Common and preferred shares
The company recorded in the fourth quarter of 2007, impairments of $20.0 million on common shares and $14.7 million on preferred shares.
The impairments were related to factors specific to certain securities as well as the large scale impact of the credit market events. Management
generally impairs a security if the market value is unlikely to recover in the near- to mid-term future based on an assessment of information
available at the time. Furthermore, common shares are generally impaired when the security is in a significant unrealized loss position for a
period exceeding six months.
Preferred shares make up 19.8% of the company’s portfolio of invested assets as part of its objective to maximize after-tax returns while
balancing risk and capital preservation. The preferred shares in the portfolio are mainly stable, large-cap Canadian securities that pay dividends,
which are generally deductible in the calculation of taxable income. The value of the company’s preferred share portfolio generally declined
under current market conditions. As a result, some preferred shares were impaired through the company’s asset impairment process, described
above. The company generally holds the preferred shares for the long term or until maturity, so fluctuations in the market value of preferred
shares have little or no impact on the economic value of the assets as long as it continues to receive dividends from the issuers.
Overall in 2007, the company recorded $47.7 million in impairments related to common and preferred shares, most of which occurred in the
last half of the year for the reasons noted above.
24
35167 ING 07 BACK.qxd:Layout 1 3/24/08 10:30 AM Page 25
Gains on derivatives and embedded derivatives
The company also recorded gains on derivatives and call options embedded in perpetual preferred shares. The gains on embedded derivatives
were associated with the decline in market values of the preferred shares. The gains on embedded derivatives flow through the income
statement while changes in the fair values of preferred shares flow through other comprehensive income.
Under accounting rules introduced in 2007, the value of preferred shares and embedded derivatives (if any) are recorded separately. For
example, call options embedded in preferred shares are recorded as liabilities and the preferred shares are recorded as assets. If the market
value of a preferred share declines, the call option is less likely to be exercised by the issuer. The liability associated with the call option is
eliminated and an offsetting gain is recorded. In 2007, the value of certain of the company’s callable preferred shares declined in general and a
gain was recorded for the embedded call options. For more information see section 8.4, Impact of new accounting standards introduced on
January 1, 2007 as well as section 8.3, Critical accounting estimates and assumptions.
3.7 Net operating income
TABLE 9
Net income
Less: Net (losses) gains on invested assets
and other gains, after income taxes (table 8)
Net operating income
Average outstanding shares (millions)
Net operating income per share (dollars)
Q4 2007
Q4 2006
Change
95.8
(7.0)
102.8
124.5
0.83
109.4
7.6
101.8
133.7
0.76
(12.4)%
(192.1)%
1.0%
(6.9)%
9.2%
2007
508.3
38.3
470.0
126.7
2006
658.1
127.6
530.5
133.7
3.71
3.97
Change
(22.8)%
(70.0)%
(11.4)%
(5.2)%
(6.5)%
Net operating income and net operating income per share are non-GAAP measures. Net operating income is equal to net income less net gains
on invested assets and other gains, after tax. Net operating income per share is equal to net operating income for the period divided by the
average outstanding number of shares for the same period. These measures may not be comparable to similar measures used by other
companies; however, they are commonly used by investors to assess the company’s performance.
Other comprehensive income
Other comprehensive income (“OCI”) was introduced with accounting standards which became effective in January 2007. OCI includes the
changes in fair values of invested assets classified as available for sale. Available for sale assets sold during the period are reflected in income
and are no longer included in OCI. Unrealized gains on available for sale assets are tax-affected.
Unrealized losses on available for sale securities and dispositions of available for sale securities resulted in negative OCI of $227.4 million in
2007. Lower market values of the company’s fixed income assets, some of which are classified as available for sale, reflect less favourable bond
market conditions in 2007.
3.8 Selected quarterly information
TABLE 10
Written insured risks (thousands)
Direct premiums written (excluding pools)
Total revenues
Net underwriting income
Net income
Combined ratio (%)
EPS-basic/diluted (dollars)
(Favourable) prior year claims development
(45.4)
(20.7)
(37.6)
(12.2)
2007
2006
Q4
Q3
Q2
1,056.7
961.3
1,273.1
1,091.2
1,399.7
1,209.8
Q1
950.4
846.3
1,096.8
1,091.3
1,152.2
1,099.6
1,095.8
47.5
95.8
95.3
28.7
92.0
97.1
92.3
194.3
90.6
40.3
126.2
95.8
0.77
0.74
1.56
0.95
Q4
Q3
Q2
Q1
1,051.1
955.6
1,242.9
1,059.1
1,080.2
1,356.1
1,166.4
914.9
812.5
1,096.7
1,133.8
62.3
109.4
93.6
0.82
(24.3)
95.9
156.8
89.9
1.17
(69.1)
165.6
205.9
82.7
79.9
185.9
91.5
1.54
1.39
(39.5)
(37.0)
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
3.9 Selected annual information
TABLE 11
Total revenue
Net underwriting income
Net income
EPS – basic and diluted (dollars)
Annual dividends per common share
Invested assets
Total assets
Debt outstanding
Total shareholders’ equity
2007
2006
2005
4,439.9
4,406.4
4,446.1
208.9
508.3
4.01
1.08
7,237.8
10,389.7
–
403.8
658.1
4.92
1.00
7,241.9
10,377.3
–
3,172.1
3,420.8
537.7
781.8
5.85
0.65
6,721.0
9,926.5
127.0
2,892.6
Financial performance between 2007 and 2006 is analyzed in detail in this document. In 2005, net income was higher than in 2006 due to the
following factors (1) stronger underwriting income, particularly in personal automobile (2) more favourable prior year claims development; and,
(3) robust results from the company’s investment portfolio.
ING Canada has two segments: 1) P&C insurance; and, 2) Corporate and distribution. P&C insurance is divided into two lines of business,
personal and commercial lines. Corporate and distribution includes income from investments in brokerages as well as other corporate items.
SECTION 4 – Personal lines
4.1 Financial results
TABLE 12
Written insured risks (thousands)
Automobile
Property
Total
Direct premiums written (excluding pools)
Automobile
Property
Total
Net premiums earned
Automobile
Property
Total
Net underwriting income (loss)
Automobile
Property
Total
Ratios
Claims ratio
Commissions ratio
Premium taxes ratio
General expenses ratio
Combined ratio
26
Q4 2007
Q4 2006
Change
2007
2006
Change
541.5
394.6
936.1
453.1
215.3
668.4
515.2
217.6
732.8
9.1
3.7
12.8
71.7%
15.0%
3.4%
8.2%
98.3%
541.5
390.4
931.9
449.6
203.6
653.2
495.7
203.4
699.1
60.9
(18.7)
42.2
66.9%
16.1%
3.3%
7.7%
94.0%
–
1.1%
0.5%
0.8%
5.7%
2.3%
3.9%
7.0%
4.8%
(85.1)%
(119.8)%
(69.7)%
4.8 pts
(1.1) pts
0.1 pts
0.5 pts
4.3 pts
2,514.4
1,676.1
4,190.5
2,057.7
904.4
2,962.1
2,008.0
837.0
2,845.0
123.1
(17.8)
105.3
69.0%
15.0%
3.4%
8.9%
96.3%
2,440.1
1,637.5
4,077.6
1,969.2
841.5
2,810.7
1,911.2
785.4
2,696.6
242.5
(0.3)
242.2
62.5%
16.3%
3.4%
8.9%
91.1%
3.0%
2.4%
2.8%
4.5%
7.5%
5.4%
5.1%
6.6%
5.5%
(49.2)%
n/a
(56.5)%
6.5 pts
(1.3) pts
–
–
5.2 pts
35167 ING 07 BACK.qxd:Layout 1 3/24/08 10:30 AM Page 27
4.2 Explanation of financial results
Fourth quarter 2007
Direct premiums written grew by 2.3% in personal lines, driven by higher average amounts insured. Direct written premium rates in personal
lines also increased slightly for the first time since 2003.
In personal auto, direct premiums written grew by 0.8% reflecting higher average amounts insured. Overall, direct written premium rates in
personal auto were flat but increased in Ontario. Underwriting income in personal auto decreased year-over-year due to higher severity and
frequency of current year claims.
In personal property, direct premiums written were up 5.7%, reflecting higher insured amounts and a 1.1% increase in written insured risks.
Underwriting income in personal property increased due to lower catastrophe claims and more favourable prior year claims development.
Current year claims in personal property were up moderately, caused by an increase in severity. Building cost inflation factors, such as material
costs and labour rates, have put pressure on underwriting margins in 2007, particularly in Western Canada.
Full year 2007
Direct premiums written rose 5.4% in personal lines, driven by a 2.8% increase in the number of written insured risks and an increase in average
amounts insured. In personal property, insured amounts are increasing to reflect higher reconstruction costs, particularly in Western Canada. The
company’s pricing models are also being adjusted for regions that are most susceptible to seasonal storm activity and sewer back-up.
Underwriting income declined in 2007 due to a combination of higher current and prior year claims in personal auto, as well as an increase in
personal property claims. As mentioned in the fourth quarter commentary, increases in both frequency and severity in personal auto contributed
to a decline in underwriting results versus 2006. Increases in seasonal rain, wind and hail storms in certain zones, cost inflation and some larger
losses caused a meaningful increase in personal property claims severity in 2007. Overall, frequency of claims in personal property decreased.
Personal lines – written insured risks
(thousands)
Personal lines – direct premiums written
(excluding pools) ($ millions)
Personal lines – combined ratio
(%)
5,000
4,000
3,000
2,000
1,000
0
1,591.5
1,637.4
1,676.1
2,336.0
2,440.1
2,514.4
1,437.3
1,959.8
2004
2005
2006
2007
Personal auto
Personal property
$3,000
$2,500
$2,000
$700.9
$1,500
$1,638.3
$779.9
$841.5
$1,877.2
$1,969.2
$904.4
$2,057.7
$1,000
$500
$0
2004
2005
2006
2007
Personal auto
Personal property
120
100
80
60
40
20
0
92.5
82.9
78.8
104.0
100.0
87.3
102.1
93.9
2004
2005
2006
2007
Personal auto
Personal property
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
Q4 2007
Q4 2006
Change
2007
2006
Change
61.8
57.4
119.2
81.9
220.6
302.5
82.2
198.3
280.5
11.4
8.7
20.1
62.8
57.7
120.5
81.7
211.3
293.0
80.7
191.1
271.8
(1.8)
36.6
34.8
53.9%
20.2%
3.6%
9.5%
87.2%
1.6%
0.5%
1.1%
(0.2)%
(4.2)%
(3.1)%
(1.8)%
(3.6)%
(3.1)%
255.8
233.5
489.3
321.2
825.3
253.6
233.9
487.5
327.5
855.5
1,146.5
1,183.0
320.2
766.9
326.8
803.1
1,087.1
1,129.9
(115.8)%
320.7%
73.1%
22.0
81.4
103.4
57.7%
21.0%
3.5%
10.6%
92.8%
(3.8) pts
(0.8) pts
0.1 pts
(1.1) pts
(5.6) pts
57.2%
19.8%
3.6%
9.9%
90.5%
43.0
118.7
161.7
51.0%
20.9%
3.6%
10.2%
85.7%
0.9%
(0.2)%
0.4%
(1.9)%
(3.5)%
(3.1)%
(2.0)%
(4.5)%
(3.8)%
(48.8)%
(31.4)%
(36.1)%
6.2 pts
(1.1) pts
–
(0.3) pts
4.8 pts
SECTION 5 – Commercial lines
5.1 Financial results
TABLE 13
Written insured risks (thousands)
Automobile
Non-auto
Total
Direct premiums written (excluding pools)
Automobile
Non-auto
Total
Net premiums earned
Automobile
Non-auto
Total
Net underwriting income (loss)
Automobile
Non-auto
Total
Ratios
Claims ratio
Commissions ratio
Premium taxes ratio
General expenses ratio
Combined ratio
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5.2 Explanation of financial results
Fourth quarter 2007
Direct premiums written decreased by 3.1% in commercial lines. The decline reflects a shift in the mix of the portfolio to smaller commercial
accounts with lower annual premiums and moderate rate reductions. Written insured risks were up modestly, indicating the competitiveness of
the commercial market in 2007. The company’s commercial business is focused on small- to medium-sized accounts which are less price-
sensitive, providing some insulation in a more aggressive pricing environment.
Underwriting income and the combined ratio in commercial lines improved markedly in the fourth quarter due to more favourable prior year
claims development and slightly lower current year claims.
Full year 2007
Direct premiums written were down 3.1% in 2007 primarily due to price competition in the marketplace, moderate rate decreases and a
change in portfolio mix toward smaller accounts, referred to in the fourth quarter discussion. The number of written insured risks increased
slightly. Underwriting income decreased significantly during the year, principally due to an increase in current year claims severity in commercial
non-auto caused by weather-related events and an increase in large losses. In commercial auto, underwriting income declined due to less
favourable prior year claims development in 2007. Current year claims only increased slightly in commercial auto.
Commercial lines – written insured risks
(thousands)
Commercial lines – direct premiums
written ($ millions)
Commercial lines – combined ratio
(%)
500
400
300
200
100
0
228.7
231.8
236.4
233.9
233.5
254.4
253.6
255.8
2004
2005
2006
2007
Commercial auto
Commercial non-auto
$1,500
$1,200
$900
$600
$300
$0
$859.7
$917.6
$855.4
$825.3
$302.5
$331.2
$327.5
$321.2
2004
2005
2006
2007
Commercial auto
Commercial non-auto
100
80
60
40
20
0
89.6
81.2
87.0 86.4
86.9 85.2
93.1
89.4
2004
2005
2006
2007
Commercial auto
Commercial non-auto
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
SECTION 6 – Corporate and distribution
6.1 Financial results
Our corporate and distribution segment primarily includes the results of the company’s brokerage operations (Canada Brokerlink, Grey Power
and Equisure) and other activities.
TABLE 14
Distribution income
Distribution expenses
Distribution earnings
Other income (loss), net
Interest on debt
Income before income taxes
Q4 2007
Q4 2006
Change
26.9
21.4
5.5
(3.6)
–
1.9
25.0
19.7
5.3
(0.8)
–
4.5
7.6%
8.6%
3.8%
350.0%
n/a
(57.8)%
2007
102.9
85.3
17.6
26.7
–
44.3
2006
100.0
71.0
29.0
9.7
5.3
33.4
Change
2.9%
20.1%
(39.3)%
175.3%
n/m
32.6%
6.2 Explanation of financial results
Other income in 2007 included a reduction to a provision established for a prior year divestiture that became redundant. The total reduction
was $28.0 million in 2007, which was recorded in the first and second quarters.
Corporate and distribution –
income before income taxes
($ millions)
$44.3
$33.4
$22.3
$4.3
2004
2005
2006
2007
$50
$40
$30
$20
$10
$0
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SECTION 7 – Financial condition
7.1 Balance sheet highlights
The table below shows the balance sheets as reported on December 31, 2006, January 1, 2007 (after adopting the new accounting standards)
and December 31, 2007. All comparisons in this section are made to January 1, 2007 figures which were restated from December 31, 2006
in accordance with accounting standards adopted at the beginning of 2007. See section 8.4 for the impact of the adoption of the new
accounting standards.
TABLE 15
Cash and cash equivalents
Invested assets
Premiums receivables
Accrued interest and dividend income
Other receivables
Deferred acquisition costs
Reinsurance assets
Other assets
Income taxes receivable
Future income tax asset
Intangible assets and goodwill
Total assets
Claims liabilities
Unearned premiums
Other liabilities
Income taxes payable
Total liabilities
Share capital
Contributed surplus
Retained earnings
AOCI
Total shareholders’ equity
Total liabilities and shareholders’ equity
Book value per share (dollars)
Dec. 31, 2007
Jan. 1, 2007
Dec. 31, 2006
As at
8.1
7,237.8
1,440.8
46.2
264.8
379.6
273.5
280.1
168.4
68.7
221.7
126.0
7,503.9
1,366.9
51.1
282.8
372.8
290.1
246.0
54.1
55.5
228.4
126.0
7,241.9
1,366.9
51.1
282.8
372.8
288.1
246.0
54.1
119.2
228.4
10,389.7
10,577.6
10,377.3
3,989.0
2,333.5
862.6
32.5
7,217.6
1,101.9
97.2
2,091.3
(118.3)
3,172.1
3,841.4
2,264.1
922.5
24.0
7,052.0
1,183.9
93.5
2,139.1
109.1
3,525.6
3,823.5
2,264.1
844.9
24.0
6,956.5
1,183.9
93.5
2,143.4
–
3,420.8
10,389.7
10,577.6
10,377.3
25.48
26.40
25.58
Invested assets, including cash and cash equivalents, decreased by $384.0 million notwithstanding cash flows generated from operations of
$620.3 million due to the share buyback of $501.2 million in the first quarter of 2007 and to the decline in the fair values by $310.6 million
in 2007 compared to 2006 following the general decline in capital market conditions. This decline is reflected in the December 31, 2007
AOCI position.
Premium receivables, deferred acquisition costs and unearned premiums are higher consistent with increases in direct written premiums.
A portion of deferred acquisition costs related to prior acquisitions were reclassified to goodwill during the second quarter; comparative
numbers have been adjusted accordingly.
Income taxes receivable are higher due to the company’s invested assets unrealized losses in 2007, which are deductible on a fair value basis,
compared to unrealized gains in 2006.
Claims liabilities and unearned premiums are slightly higher when compared to last year due to a greater number of policies in force.
Note 6 to the Audited Consolidated Financial Statements provides a reconciliation of the changes in claims liabilities and unearned premiums.
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
Other liabilities decreased when compared to January 1, 2007 mainly because of the decrease in the fair value of the derivatives embedded in
the company’s preferred shares, which are now accounted for separately and presented with other liabilities according to the new accounting
standards introduced in January 2007.
Shareholders’ equity was reduced significantly as a result of the share buyback. The total cost of the purchase was $501.2 million, including
expenses net of income taxes. An amount of $82.0 million was deducted from share capital and the remainder from retained earnings.
7.2 Portfolio of invested assets
The company’s portfolio of invested assets is managed by ING Investment Management Inc. (“IIM”), which is a wholly owned subsidiary of
ING Canada. Each insurance subsidiary’s assets are managed by IIM in accordance with the company’s investment policy.
ING Canada has an investment policy that seeks to provide an attractive risk-return profile over the medium to long term. The investment
policy takes into account the current and expected condition of capital markets, the historical return profiles of various asset classes and the
variability of those returns over time, the availability of assets, diversification needs and benefits, regulatory capital required to support the
various asset types, security ratings and other material variables likely to affect the overall performance of the company’s portfolio of invested
assets. The overall risk profile of the portfolio is designed to balance the investment portfolio return needed to satisfy the company’s liabilities
while optimizing the investment opportunities available in the marketplace. Management monitors and enforces compliance with the
investment policy.
Mix of investment portfolio
TABLE 16
Cash and cash equivalents
Short-term notes
Fixed income securities
Preferred shares
Common shares
Commercial mortgages1
Loans to brokers
Equity investments
As at December 31, 2007
As at December 31, 2006
Fair value (“FV”)
% of FV
FV
% of FV
8.1
18.9
3,867.8
1,430.8
1,709.5
––
188.2
22.6
0.1%
0.3%
53.4%
19.7%
23.6%
2.6%
0.3%
126.0
713.5
3,281.6
1,517.1
1,700.4
59.0
156.9
14.7
1.7%
9.4%
43.3%
20.0%
22.5%
0.8%
2.1%
0.2%
Total invested assets and cash
7,245.9
100.0%
7,569.2
100.0%
1 In 2007, the commercial mortgages portfolio was sold and the proceeds were reinvested in other types of assets.
The majority of the company’s portfolio is invested in mainly high quality Canadian securities that are actively traded. The fair value for most
invested assets is based on quoted bid prices. In cases where an active market does not exist, the estimated fair values are based on recent
transactions or current market prices for similar securities. In 2007, the amount of invested assets declined reflecting the cash and short-term
notes used to buyback shares in the first quarter.
Fixed income securities
The company invests in highly-rated fixed income securities mainly including corporate bonds and government bonds, as well as asset-backed
securities (“ABS”), Canadian residential mortgage-backed securities and private placements. The fixed income portfolio is mostly Canadian with
18.7% foreign content. The ABS portfolio includes credit card loans, auto finance loans and commercial mortgage-backed securities. In addition, the
company owns a small portion of Canadian government-guaranteed residential mortgage-backed securities which make up less than 0.5% of the
fixed income portfolio. The company did not have any direct investments in asset-backed commercial paper, collateralized debt obligations, hedge
funds, monolines or U.S. mortgage loans as at the end of 2007. The company has a remaining SIV exposure of $19.8 million, including $10.7 million
in capital notes and $9.1 million in total return swaps, which represents less than 0.3% of the company’s $7.2 billion investment portfolio.
Common shares
Common equity exposure is focused primarily on high dividend-paying Canadian equities. The company seeks enhanced returns by identifying
and investing in shares that are likely to pay increased dividends or pay special dividends. Management undertakes intensive analysis of
investment opportunities to identify special dividend candidates. Similar evaluations are conducted to assess securities most likely to increase
dividends. In addition, the equity portfolios are also actively managed to achieve additional dividend payments to maximize dividend income
throughout the year.
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Preferred shares
The company’s investment portfolio includes a large percentage of preferred shares to achieve its objective of maximizing dividend income,
which is generally deductible in the calculation of taxable income. The preferred share portfolio is not actively managed and preferred shares
are generally held until they are called. Consequently, the company’s results are impacted only when preferred shares are impaired, or when the
shares are called or sold. The preferred share portfolio is 100.0% Canadian.
Derivatives
The company uses derivative financial instruments for hedging purposes and to modify the risk profile of the portfolio of invested assets as
long as the resulting exposures are within investment policy guidelines.
Cash and cash equivalents
In the first half of 2007, management adopted a zero cash strategy under which cash and short-term notes are maintained at their minimum
level and the excess assets are now invested in fixed income securities.
Credit ratings
As at December 31, 2007, the weighted average rating of the company’s fixed income portfolio was AA and the weighted average rating of
its preferred share portfolio was P2 (ratings are by Standard & Poor’s (“S&P”) or Dominion Bond Rating Services). Approximately $36.8 million
of securities with a rating below investment grade were included in the fixed income and preferred share portfolios at December 31, 2007,
compared to $35.8 million as at December 31, 2006.
Sector exposures
The following table sets forth the company’s exposure to the largest industrial sectors.
TABLE 17
Banks, insurance and diversified financial services
Government
Utilities
Other
Total invested assets
Sector exposures
(% of FV)
Banks, insurance
and diversified
financial services
Government
Utilities
Other
43.0%
42.8%
5.1%
9.1%
As at December 31, 2007
As at December 31, 2006
FV
% of FV
FV
% of FV
3,112.3
3,097.8
369.1
658.6
7,237.8
43.0%
42.8%
5.1%
9.1%
2,917.7
3,580.2
357.3
588.0
39.2%
48.1%
4.8%
7.9%
100.0%
7,443.2
100.0%
The company has higher exposure to banks, insurance companies and diversified financial services companies than
its benchmark of P&C insurers reflecting ING Canada’s strategy to maximize non-taxable dividend income through
investments in preferred shares and active management of its common share portfolio. Though the company’s
preferred share strategy continued to generate significant incremental dividend income in 2007, the widening of
credit spreads late in the year resulted in a general decline in the value of the preferred share portfolio.
I N G C A N A D A I N C . 2 0 0 7 A N N U A L R E P O R T
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Management’s Discussion and Analysis (CONT’D)
(in millions of dollars, except as noted)
Investment portfolio credit quality
The following table includes the credit quality of the fixed income portfolio as at December 31, 2007 and 2006.
TABLE 18
Fixed income securities
AAA
AA
A
BBB
BB
B