Intact Financial Corporation
Annual Report 2008

Plain-text annual report

2008 Financial Report Who we are We are the leading provider of property and casualty (P&C) insurance in Canada, insuring more than four million individuals and businesses through our insurance subsidiaries. With an estimated 11% market share, we are the largest private sector provider of P&C insurance in Ontario, Québec, Alberta and Nova Scotia. We distribute insurance through brokers under the Intact Insurance, Grey Power and Canada Brokerlink brands, and direct-to-consumers through belairdirect. We also manage our own investment portfolio with approximately $6.6 billion in invested assets. Financial highlights (in millions of Canadian dollars, except as noted) 2008 2007 2006 2005 2004 Consolidated performance Written insured risks (thousands) Direct premiums written (excluding pools) Net premiums earned Net claims and general expenses Combined ratio (excluding MYA) Interest and dividend income, net of expenses Net gains on invested assets and other gains Corporate and distribution income Income before income taxes Eff ective tax rate Net operating income Net income Earnings per share ($) Average number of shares outstanding Book value per share ($) Return on equity 4,601.5 4,145.5 4,039.4 3,972.4 97.1% 328.8 (288.0) 15.6 123.6 (3.8)% 360.7 128.2 1.05 122.0 21.96 4.4% 4,679.9 4,108.6 3,932.0 3,723.2 95.2% 344.8 73.6 44.3 671.6 24.3% 457.0 508.3 4.01 126.7 25.48 15.4% 4,565.1 3,993.6 3,826.6 3,422.8 89.4% 321.3 193.5 33.4 952.0 30.9% 530.5 658.1 4.92 133.7 25.58 20.8% 4,417.9 3,905.9 3,840.2 3,302.5 86.0% 307.5 223.5 22.3 1,091.0 28.3% 612.3 781.8 5.85 133.5 21.63 31.6% 3,857.6 3,501.4 3,364.6 2,894.6 86.0% 249.1 132.4 4.3 855.8 27.1% 532.3 624.2 6.51 95.8 15.40 40.9% Direct premiums written by business line (exluding pools) Direct premiums written by distribution channel (excluding pools) Investment asset mix (% of fair value) Personal auto Personal property Commercial non-auto Commercial auto 49.6% 23.0% 19.7% 7.7% Brokers belairdirect Affiliated distribution network brokerages 79.0% 12.1% 8.9% Fixed income securities Preferred shares Common shares Cash and cash equivalents Short-term notes Other 53.2% 18.4% 12.0% 7.7% 4.4% 4.3% Management’s discussion and analysis tAble OF CONteNtS 2 Introduction Section 1 – ING Canada 3 1.1 Overview of the business 4 1.2 Critical capabilities 5 1.3 Key performance indicators Section 2 – Outlook 6 2.1 Canadian property and casualty insurance industry outlook – next 12 months Section 3 – Overview of consolidated performance 7 3.1 Consolidated financial results 8 3.2 Explanation of consolidated financial results 11 3.3 Subsequent events 11 3.4 Underwriting income 12 3.5 13 3.6 Interest and dividend income, net of expenses Gains and losses on invested assets and other gains 15 3.7 Net operating income 16 3.8 Selected quarterly information 17 3.9 Seasonality of the business 17 3.10 Selected annual information Section 4 – Personal lines 18 4.1 Financial results 19 4.2 Explanation of financial results Section 5 – Commercial lines 20 5.1 Financial results 21 5.2 Explanation of financial results Section 6 – Corporate and distribution 22 6.1 Financial results 22 6.2 Explanation of financial results Section 7 – Financial condition 23 7.1 Balance sheet highlights 24 7.2 Portfolio of invested assets 28 7.3 Claims liabilities 29 7.4 Reinsurance 30 7.5 Shareholders’ equity 30 7.6 Liquidity and capital resources 32 7.7 Contractual obligations 32 7.8 Off-balance sheet arrangement Section 8 – Accounting and disclosure matters Internal controls over financial reporting 33 8.1 Disclosure controls and procedures 33 8.2 33 8.3 Critical accounting estimates and assumptions 37 8.4 Impact of new accounting standards 37 8.5 Future accounting changes not yet applied Section 9 – Risk management 38 9.1 Risk management principles and responsibilities 41 9.2 Operational risk management 42 9.3 Corporate governance and compliance 42 9.4 Industry standards Section 10 – Other matters 10.1 Related-party transactions 43 43 10.2 Cautionary note regarding forward-looking statements Section 11 – Additional information ING C ANA DA I NC. 2008 A NN U AL REPORT 1 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) Introduction March 27, 2009 The following Management’s Discussion and Analysis (“MD&A”), which was approved by the Board of Directors for the year ended December 31, 2008, is intended to enable the reader to assess the Company’s results of operations and financial conditions for the three- and 12-month periods ended December 31, 2008, compared to the corresponding periods in 2007. It should be read in conjunction with the Company’s Audited Consolidated Annual Financial Statements and accompanying notes for the full year ended December 31, 2008. 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 including and excluding the market yield adjustment (“MYA”) to claims liabilities. These measures are defined in the Company’s glossary which is posted on the ING Canada web site at www.ingcanada.com. Click on “Investor Relations” and “Glossary” on the left navigation bar. Forward-looking statements This document contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from these forward-looking statements as a result of various factors, including those discussed hereinafter or in the Company’s 2008 Annual Information Form. Please read the cautionary note at the end 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. A change column has been provided for convenience showing the 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%. Notes • All references to direct premiums written in this MD&A exclude pools, unless otherwise noted. • All references to “excess capital” in this MD&A include excess capital in the P&C insurance subsidiaries at 170% minimum capital test (“MCT”) plus liquid assets in the holding company, unless otherwise indicated. • “IIC”, “ING Canada”, “the Company,” “we” and “our” are terms used throughout the document to refer to ING Canada Inc. and its subsidiaries. 2 SeCtION 1 – ING Canada 1.1 Overview of the business ING Canada (“IIC”) is the largest provider of automobile, home and business insurance in Canada insuring approximately four million individuals and businesses across Canada. Overall, the Company has an approximate 11% market share and is the leading private sector property and casualty (“P&C”) insurer in Ontario, Québec, Alberta and Nova Scotia. IIC distributes insurance through brokers under Intact Insurance (formerly known as ING Insurance) and Grey Power, and direct-to-consumers through belairdirect. As at December 31, 2008, IIC and its insurance subsidiaries had a $6.6 billion portfolio of invested assets, managed by the Company’s investment management subsidiary. Personal insurance IIC 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% of annual direct premiums written (“DPW”) in Canada. In automobile, the Company is more than 30% larger than the second largest P&C insurer in Canada and about 60% larger than the third ranking P&C insurer, based on the most recently reported industry data for 2007 which includes both personal and commercial auto. In personal property, the gap is even larger – IIC is approximately 45% larger than the second largest insurer and about 90% larger than the number three insurer in the Canadian market. Though the Company holds the number one position in both segments of personal insurance, its estimated market share is only 14% in automobile and 15% in property, demonstrating the growth potential of this segment of the business. Commercial insurance IIC is also one of the largest players in commercial insurance in Canada with a significant share of the small- to medium-size commercial segment. These two segments make up approximately 90% of the Company’s commercial premiums. Small and medium- sized commercial accounts are generally more profitable over time and market pricing is less competitive. 2008 Direct premiums written by province tAble 1 Province Ontario % Alberta % Québec British % Columbia Nova Scotia % % Other % total % Automobile* Personal property Commercial non-auto 1,149.5 64.4% 561.5 67.7% 543.9 52.3% 14.6 6.2% 68.3 55.1% 37.0 28.0% 2,374.8 57.3% 310.9 17.4% 133.8 16.1% 294.4 28.3% 135.2 57.1% 33.9 27.4% 44.7 33.8% 952.9 23.0% 323.6 18.1% 134.3 16.2% 200.7 19.3% 87.1 36.8% 21.7 17.5% 50.4 38.2% 817.8 19.7% Total 1,784.0 100.0% 829.6 100.0% 1,039.0 100.0% 236.9 100.0% 123.9 100.0% 132.1 100.0% 4,145.5 100.0% % of Total DPW 43% 20% 25% 6% 3% 3% 100% * Includes personal and commercial automobile Investment management IIC actively manages its $6.6 billion portfolio of cash and invested assets to generate superior after-tax returns while balancing capital preservation and risk. The mix of invested assets is as follows: 53% fixed income; 12% common shares; 19% preferred shares; 12% Canadian Treasury Bills and 4% in secured broker loans. The Company’s portfolio is more heavily concentrated in equities compared to the average Canadian property and casualty insurer to maximize dividend income, which is non-taxable for financial institutions in Canada. See section 7.2 for more information on the quality, asset mix, and performance of the Company’s portfolio of invested assets. ING C ANA DA I NC. 2008 A NN U AL REPORT 3 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) 1.2 Critical capabilities IIC has several critical capabilities which enable it to sustain a performance advantage over other P&C insurers in Canada. These critical capabilities are described in the table below. Significant scale advantage The key benefit of scale is IIC’s uniquely comprehensive database of customer and claims information that allows early identification of trends in claims and enables the Company to more accurately model the risk of each policy. IIC also uses its scale to negotiate preferred terms with suppliers, priority service on repairs, quality guarantees on workmanship and lower material costs. Underwriting discipline/ pricing sophistication The Company has superior underwriting expertise and proprietary scoring models used to price risks. These models are continuously refined to create a substantial advantage in the market. Scale, underwriting and pricing sophistication also allow the Company to identify certain segments of the market which are more profitable than others. 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 Product innovation More than 97% of IIC’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. IIC is continuously developing new products to attract and retain customers. IIC has a history of product innovations such as its Claims Service Guarantee and Responsible Driver Guarantee which reflect the Company’s customer-driven strategy. IIC has also worked aggressively to expand its customer loss prevention services in commercial lines. The Company conducted more than 10,500 site visits in 2008 and more than 4,000 building appraisals. Proven acquisition strategy IIC has been the most active in the industry’s consolidation with 11 successful acquisitions in 20 years. The Company’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 pricing, underwriting expertise and claims. Solid investment returns IIC’s investment strategy is to generate solid after-tax returns while preserving capital and diversifying risk. The Company’s $6.6 billion portfolio (including cash) is comprised primarily of Canadian securities, including high-quality fixed income securities and Canadian Treasury Bills, as well as common shares of large-cap companies and preferred shares that pay dividends. 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. broker relationships The broker channel represents nearly 80% of annual direct premiums written. IIC has more than 1,800 broker relationships in 3,300 locations across Canada for customers that prefer the highly-personalized, community-based service that insurance brokers provide. IIC provides a variety of services including technology, sales training and financing to brokers to enable them to continue to grow and expand their businesses. 4 1.3 Key performance indicators IIC’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 our 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 underwriting result. Return on equity (ROe): Represents our net income for the 12 months ended on the date indicated divided by the average shareholders’ equity over the same 12-month period. Net income and shareholders’ equity are determined in accordance with GAAP. 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). We compare our 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. Minimum Capital test (MCt): Represents the ratio of available capital to required capital. The regulatory minimum required capital is 150%. ING C ANA DA I NC. 2008 A NN U AL REPORT 5 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) SeCtION 2 – Outlook 2.1 Canadian property and casualty insurance industry outlook – next 12 months IIC is well-positioned to continue to outperform the P&C insurance industry in the current environment due to its significant scale, pricing and underwriting discipline, prudent investment and capital management practices, and strong financial position. Pricing and claims environment (12-month outlook) economic conditions P&C insurance industry IIC’s response • Premiums in personal lines will likely rise in 2009 due to cost pressures in Ontario and Alberta and increases in water-related property losses • In Ontario, industry personal auto rates are rising in response to higher accident benefit and bodily injury (AB/BI) claims • Cost pressures in Ontario will likely be addressed as part of the ongoing five-year review of the Insurance Act • The Alberta Insurance Rate Board approved a 5.0% rate increase on mandatory personal auto insurance effective in November 2008 • Signs have emerged that suggest prices may firm up for commercial insurance in 2009 • Pricing strategies demonstrate commitment to sustaining appropriate underwriting margins • Proactive in addressing claims trends • Focusing on innovation, supply chain management and efficiency in claims • Taking robust actions in home insurance in pricing, segmentation and claims to build a sustainable competitive advantage • Differentiating ‘AcceL’, our small business commercial offering from others on the market • Ready to exploit growth opportunities • Overall, P&C insurance industry results are not significantly correlated with economic cycles • Demand for P&C insurance is relatively inelastic; home, auto and business insurance are generally considered a non-discretionary purchase • Expenses are largely variable – broker commissions and premium taxes fluctuate with premium growth and claims ratio experience • Lower expected investment yield could increase premiums across the industry • IIC’s underwriting and pricing segmentation strategies include several variables that enable the Company to better identify and price risks that are more likely to be affected by adverse economic conditions • Strong capital base and financial flexibility are also significant advantages in a weak economic environment • Focus on identifying opportunities to maximize quality growth Capital markets • Prolonged capital market weakness in 2008 • Financial position is strong with $427.5 million resulted in investment losses, higher borrowing costs and diminished excess capital levels across the industry • Pressure on the industry’s capital will likely continue through 2009 in excess capital and no debt • MCT of 205%, 5.1 points higher than at the end of the third quarter of 2008 • $6.6 billion cash and investment portfolio is largely Canadian with minimal US exposure and includes no leveraged investments • Changes in the asset mix and cautious approach towards reinvestment resulted in a strengthening of the balance sheet • Lower excess capital levels in the industry could create opportunities for IIC to consolidate in the Canadian market and points to higher premiums in 2009 6 SeCtION 3 – Overview of consolidated performance Fourth quarter highlights • Strong financial position with MCT of 205%; a 5.1 point improvement over the third quarter • Overall combined ratio of 98.9% versus 93.2% in the fourth quarter of 2007 reflects higher claims associated with severe storms and a decrease in favourable prior year claims development in personal lines, which offset strong commercial underwriting results • Net loss in the fourth quarter reflects common equity impairments caused by prolonged capital market weakness 2008 Full year highlights • Strong balance sheet with $427.5 million of excess capital at year end and no debt • Overall combined ratio of 97.1% with healthy combined ratios in all lines of business, except personal property which was impacted by severe storms • Excluding catastrophe claims, underwriting income improved slightly • Lower net earnings reflect realized investment losses and impairments related to global capital market decline 3.1 Consolidated financial results tAble 2 – COmPONENTS OF NET INCOmE Direct premiums written Underwriting income (excluding mYA) Combined ratio (excluding mYA) Interest and dividend income, net of expenses (table 8) (Losses) gains on invested assets and other gains (table 9) Income (loss) before income taxes Income tax (benefit) expense Effective income tax rate Net income (loss) Net operating income (table 12) Earnings per share (“EPS”) – basic and diluted (dollars) Net operating income per share (dollars) Return on equity (“ROE”) for the last 12 months Book value per share (dollars) Q4 2008 Q4 2007 Change 2008 2007 Change 968.2 11.0 98.9% 961.3 68.2 93.2% 0.7% (83.9)% 5.7 pts 4,145.5 117.0 97.1% 4,108.6 189.1 95.2% 0.9% (38.1)% 1.9 pts 78.3 86.5 (9.5)% 328.8 344.8 (4.6)% (152.2) (108.2) (44.1) 40.7% (64.1) 75.1 (0.53) 0.63 4.4% 21.96 (3.3) 132.6 36.8 27.8% 95.8 116.4 n/a (181.6)% (219.8)% 12.9 pts (166.9)% (35.5)% (288.0) 123.6 (4.6) (3.8)% 128.2 360.7 73.6 671.6 163.3 24.3% 508.3 457.0 (491.3)% (81.6)% (102.8)% (28.1) pts (74.8)% (21.1)% 0.77 0.93 (168.8)% (32.3)% 1.05 2.96 4.01 3.61 (73.8)% (18.0)% 15.4% 25.48 (11.0) pts (13.8)% ING C ANA DA I NC. 2008 A NN U AL REPORT 7 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) 3.2 explanation of consolidated financial results tAble 3 – ChANGES IN PRE-TAx OPERATING INCOmE (YEAR-OvER -YEAR) Pre-tax operating income, as reported in 2007 Change in favourable prior year claims development Changes in current accident year from: Underwriting income Losses from catastrophes Results from Facility Association Change in underwriting income excluding MYA Change in interest and dividend income, net of expenses Change in corporate and distribution Pre-tax operating income, as reported in 2008 Q4 2008 156.6 (10.2) (34.4) (11.9) (0.7) (57.2) (8.2) 0.1 91.3 Pre-tax operating income is a non-GAAP measure. Catastrophe claims are defined as a single event resulting in $5.0 million or more in aggregate claims. tAble 4 – ChANGES IN INCOmE BEFORE INCOmE TAxES (YEAR-OvER -YEAR) Income before income taxes, as reported in 2007 Change in net gains on invested assets and other gains excluding held for trading (“HFT”) debt securities (table 9) Change in pre-tax operating income (table 3) Change in market yield effect (table 10) Income (loss) before income taxes, as reported in 2008 Income tax Net income (loss) as reported in 2008 Q4 2008 132.6 (175.2) (65.3) (0.3) (108.2) 44.1 (64.1) 2008 578.2 46.6 (36.6) (73.7) (8.4) (72.1) (16.0) (28.7) 461.4 2008 671.6 (410.9) (116.7) (20.4) 123.6 4.6 128.2 Fourth quarter 2008 The significant decline of the stock market in 2008 resulted in $185.8 million of common equity impairments in the fourth quarter, leading to a net loss. The magnitude of the impairments reflects management’s assessment of the impact of the deep and prolonged decline of the Canadian stock market on the value of the Company’s common equity portfolio. See table 9 for a discussion of net gains and losses on invested assets. In light of current capital market conditions, management also took further actions which resulted in a strengthening of the balance sheet including a reduction of the common share portfolio of $249 million. The proceeds of the asset dispositions as well as dividend and interest income received in the fourth quarter were reinvested in Canada Treasury Bills. Canada Treasury Bills now represent approximately 12% of the $6.6 billion cash and investment portfolio. These actions benefited our MCT capital ratio as equity and debt markets continued to deteriorate in late 2008. Despite turbulent capital market conditions, our financial position is strong with no debt, $427.5 million in excess capital and an MCT ratio of 205%, 5.1 points higher than at the end of the third quarter. IIC also has an untapped committed $150 million credit line. We continue to manage our $6.6 billion cash and investment portfolio prudently and have no leveraged investments. The equity portfolio is 100% Canadian, including common and preferred shares of high-quality, dividend-paying Canadian companies. Approximately 89% of the preferred share portfolio is top-rated at either P1 or P2 and more than 97% of the fixed income portfolio is rated ‘A’ or better. 8 Lower net operating income and an increase in the combined ratio to 98.9% reflect the impact of severe storms and lower favourable prior year development in personal lines. Severe wind, rain and snow storms in late 2008 had an adverse effect on personal property underwriting performance in the quarter, resulting in a combined ratio of 114.1% in that line of business. The combined ratio in personal auto was 102.9% in the fourth quarter reflecting a decrease in favourable prior year development, which normally fluctuates from quarter to quarter, and higher claims severity. Commercial underwriting income increased year-over-year for the third quarter in a row with combined ratios of 91.6% in commercial auto and 73.2% in commercial non-auto. Higher underwriting income was driven by a lower overall current year loss ratio and more favourable prior year claims development. Pricing discipline, strong operational execution and the high quality of the book of business are reflected in consistent year-over-year increases in commercial underwriting results in 2008. In total, direct premiums written were up slightly in the fourth quarter, reflecting our disciplined pricing strategy and commitment to maintaining adequate margins, though it has resulted in a slower pace of premium growth in the short-term. The effectiveness of our strategy is demonstrated through our combined ratio performance compared to the Canadian P&C insurance industry. For the first nine months of 2008, our combined ratio of 96.5% was trending 2.7 points lower than the industry average of 99.2%. During the same time period, we outperformed industry loss ratios in every line of business except personal property. Personal and commercial insurance premiums are likely to rise over the next 12 months across the industry. Cost pressures in personal property and auto insurance as well as increases in water-related property losses will likely lead to higher premiums this year. With lower excess capital levels and higher loss ratios across the industry, some signs have emerged that suggest the commercial pricing environment will become less aggressive in 2009 and premiums may start to rise, reversing the trend over the last couple of years. With industry returns and capital levels at a low point in the cycle, conditions are more conducive to industry consolidation and point to higher premiums overall. Direct premiums written (in millions) Combined ratio (excluding MYA, %) Net income (loss) (in millions) $1,200 $1,000 $800 $600 $400 $200 $0 $913.6 $955.6 $961.3 $968.2 Q4 2005 Q4 2006 Q4 2007 Q4 2008 120% 100% 80% 60% 40% 20% 0% 93.6% 93.2% 98.9% 86.9% Q4 2005 Q4 2006 Q4 2007 Q4 2008 $250 $200 $150 $100 $50 $0 $-50 $-100 $-150 $-200 $196.9 $146.0 $50.9 $109.4 $101.8 $7.6 $95.8 $116.4 ($20.6) ($64.1) $75.1 ($139.2) Q4 2005 Q4 2006 Q4 2007 Q4 2008 Net operating income (excluding MYA) Net gains on invested assets, other gains and market yield adjustment (after tax) 250 200 150 100 50 0 -50 -100 -150 -200 250 200 150 100 50 0 -50 -100 -150 -200 ING C ANA DA I NC. 2008 A NN U AL REPORT 9 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) Full year 2008 Direct premiums written increased by 0.9% overall as we maintained pricing discipline in both personal and commercial lines in a competitive environment. Rates in personal lines are being adjusted to reflect higher material and labour costs and higher water-related property claims. Commercial underwriting results remained very healthy with combined ratios below 90% due to our pricing discipline and portfolio shift toward smaller accounts that are more profitable than larger accounts. The decrease in net operating income mainly reflects lower underwriting income due to severe storms. Overall, underwriting income decreased to $117.0 million compared to $189.1 million in 2007, reflecting a $73.7 million year-over-year increase in catastrophe claims in 2008 which affected both personal property and personal auto results. Notwithstanding significantly higher weather-related claims in 2008, the overall combined ratio was 97.1%, a moderate increase of 1.9 points. In Central Canada, we experienced near-record snowfall and severe hail, rain and wind storms in 2008. Despite the storms, personal auto underwriting income was $84.7 million with a healthy combined ratio of 95.9%, a slight increase of 1.4 points compared to 2007. Overall, personal auto current accident year results were relatively stable in 2008. Personal property underwriting performance was most impacted by seasonal storms, resulting in a loss of $120.7 million with a combined ratio of 113.6%, largely reflecting catastrophe claims. Commercial underwriting income was strong in 2008, increasing 58.9% year-over-year due to more favourable prior year claims development. The combined ratio in commercial auto was 87.2% and commercial non-auto was 85.3%. Overall, net income decreased to $128.2 million, down from $508.3 million in 2007. The decrease reflects lower operating income, as well as realized common equity investment losses and impairments associated with the weak capital market environment. Refer to table 11 for more information on unrealized gains and losses on available-for-sale (“AFS”) securities. Return on equity (“ROe”) ROE for the 12-month period ended December 31, 2008 was 4.4%, compared to 15.4% at December 31, 2007. The decrease reflects lower operating income in 2008, as well as a net loss on invested assets compared to a gain in 2007. See section 3.6 for a discussion of net gains and losses on invested assets. book value Book value per share decreased to $21.96 in the fourth quarter from $25.48 in the same quarter last year. The change reflects an increase in the accumulated other comprehensive loss as capital market valuations declined sharply in 2008, as well as the impact of share repurchases made under the normal course issuer bid announced on February 20, 2008. Normal course issuer bid (“NCIb”) IIC announced its NCIB in February 2008 to buy back up to 6.2 million shares over the following 12 months. At year end, the NCIB was 73.4% complete with approximately 4.6 million shares repurchased at an average price of $38.53. ING Groep N.V. (“ING Groep”) participated in the NCIB to maintain its proportionate share ownership at 70%. The NCIB was suspended in September 2008 and no further shares were repurchased in 2008 or in January or February of 2009. Direct premiums written (in millions) Combined ratio (excluding MYA, %) Net income (loss) (in millions) $3,905.9 $3,993.6 $4,108.6 $4,145.5 2005 2006 2007 2008 100% 80% 60% 40% 20% 0% 86.0% 89.4% 95.2% 97.1% $1,000 $750 $500 $250 $0 $-250 $781.8 $612.3 $658.1 $530.5 $169.5 $127.6 $508.3 $457.0 $51.3 $128.2 $360.7 ($232.5) 2005 2006 2007 2008 2005 2006 2007 2008 Net operating income (excluding MYA) Net gains on invested assets, other gains and market yield adjustment (after tax) 1000 750 500 250 0 -250 1000 750 500 250 0 -250 $5,000 $4,000 $3,000 $2,000 $1,000 $0 10 3.3 Subsequent events ING Canada shares become widely held On February 19, 2009, ING Groep completed the sale of its entire 70% ownership of IIC via the sale of 36,183,480 of the Company’s common shares to a number of institutional investors through a private placement and the sale of 47,757,920 common shares pursuant to a “bought deal” secondary public offering. The special share owned by ING Groep was immediately converted into one common share that was also disposed of through the secondary offering. On the same date, the Company and ING Groep entered into an Amended and Restated Co-operation and Transition Services Agreement which governs among other things the transition of reinsurance and advisory and management services, including risk management, human resources, internal audit and information technology, over a period of up to twenty-four months. IIC management has already begun to transfer these services to other providers and does not expect a material financial impact as a result. transition to new brand IIC announced on February 23, 2009 that ING Insurance Company of Canada will be renamed Intact Insurance Company. The holding company will be renamed Intact Financial Corporation upon approval by the Company’s shareholders at the Annual and Special Meeting of Shareholders on May 13, 2009. The holding company will continue to operate as ING Canada Inc. until the new name is approved. Dividend increase On February 23, 2009, the Company announced that its Board of Directors increased the quarterly dividend by 3.2%, or one cent, to 32 cents per share on its outstanding common shares. The dividend will be payable on March 31 to shareholders of record on March 16. The decision reflects IIC’s objective of returning value to shareholders, the strength of the Company’s financial position and quality of operating earnings. 3.4 Underwriting income tAble 5 – NET PREmIUmS EARNED, CLAImS AND GENERAL ExPENSES Net premiums earned Net claims Current year claims Current year catastrophes (Favourable) prior year claims development Total net claims Commissions, net Premium taxes, net General expenses, net Total underwriting expenses Total underwriting income (excluding mYA) tAble 6 – UNDERwRITING RATIOS (Ex CLUDING mYA) Q4 2008 Q4 2007 Change 2008 2007 Change 1,019.2 1,004.7 1.4% 4,039.4 3,932.0 2.7% 743.8 21.6 (52.2) 713.2 150.2 35.4 109.5 295.1 11.0 703.7 9.7 (62.4) 651.0 146.3 35.0 104.2 285.5 68.2 5.7% 122.7% (16.3)% 9.6% 2.7% 1.1% 5.1% 3.4% (83.9)% 2,790.4 114.8 (148.9) 2,756.3 577.3 140.4 448.4 1,166.1 117.0 2,665.2 41.1 (102.3) 2,604.0 583.1 136.9 418.9 1,138.9 189.1 4.7% 179.3% 45.6% 5.8% (1.0)% 2.6% 7.0% 2.4% (38.1)% Claims ratio Expense ratio Combined ratio Q4 2008 Q4 2007 Change 2008 2007 Change 70.0% 28.9% 98.9% 64.8% 28.4% 93.2% 5.2 pts 0.5 pts 5.7 pts 68.2% 28.9% 97.1% 66.2% 29.0% 95.2% 2.0 pts (0.1) pts 1.9 pts ING C ANA DA I NC. 2008 A NN U AL REPORT 11 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) tAble 7 – ANNUALIzED RATE OF FAvOURABLE PRIOR YEAR CLAImS DEvELOPmENT (annualized rate, excluding MYA) Q4 2008 Q4 2007 2008 2007 (Favourable) unfavourable prior year claims development as a % of opening reserves (5.6)% (7.0)% (4.0)% (2.9)% Favourable prior year claims development (as a % of opening reserves) Favourable prior year claims development Excluding MYA, favourable prior year claims development was $52.2 million in the fourth quarter, 5.6% of opening reserves on an annualized basis, and $148.9 million or 4.0% of opening reserves in 2008. 7.9% 4.9% 4.0% 2.9% Prior year claims development can fluctuate from quarter to quarter and therefore, should be evaluated over longer periods of time. The historical rate of favourable prior year claims development as a percentage of opening claims has been approximately 3% – 4% per year over the long term, but has varied from year to year and between quarters. 2005 2006 2007 2008 Industry pools In the fourth quarter, transfers in and out of industry pools, including the Facility Association, increased pre-tax underwriting income in personal auto by $18.4 million year-over-year, excluding MYA. 10% 8% 6% 4% 2% 0% 3.5 Interest and dividend income, net of expenses tAble 8 Q4 2008 Q4 2007 Change 2008 2007 Change Interest income Dividend income Interest and dividend income, before expenses Expenses Interest and dividend income, net of expenses 46.9 35.3 82.2 (3.9) 78.3 50.9 40.4 91.3 (4.8) 86.5 (7.9)% (12.6)% (10.0)% 0.9 (9.5)% Market-based yield 5.1% 5.1% (0.0) pts 187.9 157.3 345.2 (16.4) 328.8 5.0% 197.7 166.5 364.2 (19.4) 344.8 (5.0)% (5.5)% (5.2)% 3.0 (4.6)% 5.1% (0.1) pts The decline in interest income (before expenses) in the fourth quarter and in 2008 reflects capital management initiatives, including the share buyback program (“NCIB”) announced in February 2008, as well as an increase in investments in Canada Treasury Bills. The decline in dividend income in the fourth quarter and in 2008 principally reflects the reduction of our common share portfolios in the last half of 2008, lower trading activities in these portfolios and the impact of capital management initiatives. The market-based yield is a non-GAAP measure defined as total pre-tax dividend and interest 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 unchanged from 5.1% in the same quarter of last year. This measure may not be comparable to other companies since it is a non-GAAP measure. Market-based yield (%) 4.7% 4.8% 5.1% 5.0% 2005 2006 2007 2008 6% 5% 4% 3% 2% 1% 0% 12 3.6 Gains and losses on invested assets and other gains tAble 9 Debt securities Gains (losses) on AFS securities Losses on derivatives Impairments Losses on debt securities and related derivatives Equity securities (Losses) gains, net of derivatives Impairments Gains on embedded derivatives Q4 2008 Q4 2007 Change 2008 2007 Change 1.8 (6.6) – 2.9 (8.0) (8.1) (1.1) 1.4 8.1 0.2 (17.4) (10.9) (1.9) (4.0) (37.3) 2.1 (13.4) 26.4 (4.8) (13.2) 8.4 (28.1) (43.2) 15.1 (24.4) (185.8) 20.8 9.2 (34.6) 19.6 (33.6) (151.2) 1.2 (74.6) (250.5) 36.8 147.4 (47.7) 38.1 (222.0) (202.8) (1.3) (Losses) gains on equity securities and related derivatives (189.4) (5.8) (183.6) (288.3) 137.8 (426.1) Total (losses) gains excluding HFT debt securities Gains (losses) on HFT debt securities (1) Total (losses) gains, before income taxes (194.2) 42.0 (152.2) (19.0) 15.7 (3.3) (175.2) 26.3 (148.9) (316.4) 28.4 (288.0) 94.6 (21.0) 73.6 (411.0) 49.4 (361.6) (1) The gains (losses) on hFT debt securities are offset by a mYA to claims liabilities, with an objective of a minimal impact to net income. The difference between the mYA and the gains and losses on hFT debt securities is referred to as the “market yield effect” in this mD&A. See table 10. Fourth quarter 2008 The loss on invested assets in the fourth quarter was largely due to $185.8 million of common share impairments reflecting the deep and prolonged decline of the stock market, particularly in the fourth quarter of 2008. The impairment process for common equities includes a review of all common shares, particularly focusing on those trading below book value for six months or more and more than 25% below book value at year end. Management applies judgment based upon a review of each issuer’s financial condition, considering various factors including latest financial results and cash flows, changes in credit ratings, capital structure or dividend payouts as well as security analysts’ recommendations. Management also takes into account the length of time the security has been below book and the significance of the unrealized loss. The stock market decline in late 2008 and the level of uncertainty around the timing of a market recovery, led management to give significant weight to the general market downturn in the judgment process. If such weighting had not been given to the capital market environment, it is estimated that common share impairments would have been approximately $60 million. Impairments do not impact excess capital or the MCT ratio. Preferred shares and debt securities were not impaired. Preferred shares are generally only impaired if the issuer is significantly downgraded, stops paying dividends, or declares bankruptcy. Despite a decline in the value of these securities, after careful review, management determined that there was no objective evidence at the time of assessment which suggested the Company would not receive the contractual cash flows from these securities, which include either dividends or interest payments. Management uses third party credit ratings as well as other public information in its analysis of the quality of debt securities and preferred shares. Gains on embedded derivatives are similar to last year at $20.8 million. These gains are driven by the decline in value of perpetual preferred shares. Full year 2008 The decline of common share market values made up the majority of the $316.4 million pre-tax loss on invested assets, excluding held-for-trading bonds. In the last half of the year, management also took certain actions which effectively strengthened the balance sheet, including a significant reduction of the common share portfolio. The proceeds from these transactions were reinvested in Canada Treasury Bills, which now represent approximately 12% of the $6.6 billion cash and investment portfolio. ING C ANA DA I NC. 2008 A NN U AL REPORT 13 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) Held-for-trading debt securities and market yield adjustment tAble 10 – mARKET YIELD EFFECT (Negative) positive impact of MYA Net gains (losses) on HFT debt securities Market yield effect Q4 2008 Q4 2007 Change (47.3) 42.0 (5.3) (20.7) 15.7 (5.0) (26.6) 26.3 (0.3) 2008 (50.0) 28.4 (21.6) 2007 Change 19.8 (21.0) (1.2) (69.8) 49.4 (20.4) Claims liabilities are discounted at the estimated market yield of the assets backing these liabilities. The MYA to claims liabilities is offset by gains and losses on HFT debt securities with the objective that these items offset each other with a minimal overall impact to income. The difference between the MYA and the gains and losses on HFT debt securities is referred to as the “market yield effect” in this MD&A. The interest rate fluctuations during the year, particularly the increasing gap between short-term and long-term rates, as well as significant capital market fluctuations have been challenging in terms of matching the gains and losses on HFT debt securities and the MYA. During the fourth quarter, the Company improved the calculation of the market yield estimate, in particular to better match the scattered duration of liabilities. The calculation previously used a blended rate for all durations which proved inappropriate under current economic conditions. Without this improvement, the unfavourable market yield effect in the fourth quarter would have been greater by $24.4 million. Unrealized gains and losses on available-for-sale securities tAble 11 Debt securities Common shares Preferred shares Loans and equity investments Total net unrealized loss position Dec. 31, 2008 Sept. 30, 2008 June 30, 2008 March 31, 2008 Dec. 31, 2007 30.4 (133.8) (522.5) (6.9) (632.8) (16.3) (125.3) (272.1) (3.8) (417.5) 3.2 (43.1) (215.5) (3.6) (259.0) 40.7 (71.2) (175.8) (2.5) (208.8) 2.6 (36.9) (141.0) (0.9) (176.2) As at Sept. 30, 2007 (13.8) 47.8 (64.5) – (30.5) At the end of December 2008, the Company had $632.8 million in unrealized losses on invested assets compared to $417.5 million at the end of the third quarter. The increase in the unrealized loss position reflects a sharp decline in common and preferred share market values. To illustrate the market decline, the S&P/TSX Composite Index was down 24% in the quarter and the preferred share index was down 14%. In 2008, the S&P/TSX Composite Index was down 35% and the preferred share index was down 22% compared to the same periods in 2007. The market values of preferred shares were impacted by the widening of credit spreads as well as the recent number of new preferred shares issues in late 2008 which increased market supply of preferred shares at higher rates. Since preferred shares are typically held long term, unrealized gains and losses are generally not realized, unless they need to be impaired. Gains and losses in the common share portfolio are likely to be realized on an ongoing basis reflecting the active trading strategy in the high-dividend yield common share portfolio. In determining the fair values of invested assets, we rely mainly on quoted market prices. There are no invested assets in the AFS or HFT categories which are not quoted on an active market, except for a very limited amount of fixed income private placements that we hold. Some of these assets, particularly preferred shares and BBB bonds have less trading liquidity, but their fair values are readily available from public market sources. The debt security portfolios are relatively unchanged and they include approximately $293.8 million of Treasury Bills with maturities greater than 90 days, purchased with proceeds from the sale of equities. The portfolios have net unrealized gains of $30.4 million at December 31, 2008 due to the overall reduction of risk-free interest rates and the significant weight of government bonds in the portfolio. During the fourth quarter, the Company reduced its position in BBB rated bonds by 20% approximately, leaving only $102.4 million of bonds rated lower than A (low). The quality of the debt securities in our portfolio remains strong with 97.1% rated A or better. There have been no defaults on any of the bonds in the portfolio. 14 Other comprehensive loss The change in unrealized losses on AFS securities and dispositions of AFS securities resulted in another comprehensive loss (“OCI”) of $162.0 million (after-tax) in the fourth quarter. Most of the unrealized losses incurred during the year are tax deductible and will allow the Company to claim a significant tax reimbursement in its tax return. 3.7 Net operating income tAble 12 – COmPONENTS OF NET OPERATING INCOmE Net underwriting income (excluding mYA) Interest and dividend income (table 8) Corporate and distribution income (table 21) Tax impact Net operating income (excluding mYA) Q4 2008 Q4 2007 Change 2008 2007 Change 11.0 78.3 2.0 (16.2) 75.1 68.2 86.5 1.9 (40.2) 116.4 (83.9)% (9.5)% 5.3% (59.7)% (35.5)% 117.0 328.8 15.6 (100.7) 360.7 189.1 344.8 44.3 (121.2) 457.0 (38.1)% (4.6)% (64.8)% (16.9)% (21.1)% Net operating income for the fourth quarter and full year decreased due to lower underwriting results and a decrease in dividend and interest income. The decline in underwriting income was mainly due to higher catastrophe claims and other claims associated with severe seasonal storms in 2008. tAble 13 – RECONCILIATION TO NET INCOmE Net income (loss) Add losses (deduct gains) before HFT debt securities (table 9) Add market yield effect (table 10) Tax impact Net operating income (excluding mYA) Average outstanding shares (millions) Net operating income per share (dollars) Q4 2008 Q4 2007 Change (64.1) 95.8 (166.9)% 194.2 1 5.3 (60.3) 75.1 119.9 0.63 9.0 5.0 (3.4) 116.4 124.5 0.93 175.2 0.3 (56.9) (35.5)% (4.6) (0.31) 2008 128.2 316.4 21.6 (105.5) 360.7 122.0 2.96 2007 Change 508.3 (74.8)% (94.6) 1.2 42.1 457.0 126.7 3.61 411.0 20.4 (147.6) (21.1)% (4.7) (0.65) Operating income (net and pre-tax) and net operating income per share are non-GAAP measures. Net operating income is defined as net income excluding the MYA and net gains on invested assets and other gains, after tax. Pre-tax operating income is defined as net operating income before income taxes. 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 are used by management and financial analysts to assess the Company’s performance; however, they may not be comparable to similar metrics published by other companies. Changes in the definition of net operating income and underwriting measures Since the first quarter of 2008, the MYA to claims liabilities is excluded from net operating income and underwriting measures discussed in this MD&A. The MYA reflects the impact of changes in the discount rate applied to the Company’s claims liabilities based on the market-based yield of the underlying assets. The MYA can fluctuate substantially from quarter to quarter as market yields vary. Therefore the MYA has been excluded from net operating income and underwriting measures which focus on core operating performance. The MYA is matched with gains and losses on HFT debt securities, which are also excluded from net operating income. The objective is that these two items offset each other with a minimal overall impact to income (see table 10). The difference between the MYA and the gains and losses on HFT debt securities is referred to as the “market yield effect” in this MD&A. ING C ANA DA I NC. 2008 A NN U AL REPORT 15 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) 3.8 Selected quarterly information tAble 14 Written insured risks (thousands) Direct premiums written Total revenues Net premiums earned (Favourable) unfavourable prior year Q4 2008 Q3 2008 Q2 2008 Q1 2008 Q4 2007 Q3 2007 Q2 2007 Q1 2007 Q4 2006 1,034.3 1,240.7 968.2 1,100.3 956.0 1,045.8 1,019.2 1,032.3 1,380.6 1,216.7 1,065.4 996.1 945.8 860.3 1,064.5 991.8 1,056.7 961.3 1,096.8 1,004.7 1,273.1 1,091.2 1,091.3 994.0 1,399.7 1,209.8 1,152.2 976.7 950.4 846.3 1,099.6 956.7 1,051.1 955.6 1,095.8 979.6 claims development (19.3) (62.7) (70.3) 38.4 (45.4) (20.7) (37.6) (12.2) (24.3) (Favourable) unfavourable prior year claims development (excluding mYA) Net underwriting income (loss) (including mYA) Net underwriting income (excluding mYA) Combined ratio (%) (including mYA) Combined ratio (%) (excluding mYA) Net operating income (excluding mYA) Net (loss) income EPS – basic/diluted (dollars) (52.2) (56.4) (41.2) 0.9 (62.4) (24.0) (5.2) (10.7) (24.3) (36.3) 69.1 74.9 (40.7) 47.5 28.7 92.3 40.3 62.3 11.0 61.9 43.4 0.7 68.2 29.0 53.1 38.7 62.3 103.6% 93.3% 92.5% 104.1% 95.3% 97.1% 90.6% 95.8% 93.6% 98.9% 94.0% 95.6% 99.9% 93.2% 97.1% 94.6% 96.0% 93.6% 75.1 (64.1) (0.53) 106.3 57.3 0.47 109.3 112.0 0.91 70.2 23.0 0.19 116.4 95.8 0.77 95.5 92.0 0.74 132.5 194.3 1.56 112.8 126.2 0.95 101.8 109.4 0.82 16 3.9 Seasonality of the business The property and casualty insurance business is seasonal in nature. While underwriting revenues are generally stable from quarter to quarter, underwriting income is typically higher in the second and third quarters of each year. This is driven by lower combined ratios in those periods, which is reflected in the seasonal index below. The seasonal indicator is a non-GAAP measure which represents the ratio of the quarterly combined ratio to the annual combined ratio, excluding the MYA. tAble 15 – SEASONAL INDICATOR Q1 Q2 Q3 Q4 3.10 Selected annual information tAble 16 Total revenue Net underwriting income (excluding mYA) Net income EPS – basic and diluted (dollars) Annual dividends per common share Invested assets Total assets Total shareholders’ equity 2008 1.03 0.98 0.97 1.02 2007 1.01 0.99 1.02 0.98 2006 1.02 0.93 1.01 1.05 2005 1.02 0.94 1.02 1.01 Four-year average 1.02 0.96 1.00 1.02 2008 2007 2006 4,131.7 117.0 128.2 1.05 1.24 6,108.9 9,773.4 2,632.6 4,439.9 189.1 508.3 4.01 1.08 7,237.8 10,389.7 3,172.1 4,406.4 403.8 658.1 4.92 1.00 7,241.9 10,377.3 3,420.8 Financial performance between 2008 and 2007 is analyzed in detail in this document. In 2007, net income was higher than in 2008 due to the following main factors: 1) higher underwriting income and 2) robust results from the Company’s investment portfolio. IIC has two segments: 1) Underwriting 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 the Company’s affiliated distribution network, as well as other corporate items. ING C ANA DA I NC. 2008 A NN U AL REPORT 17 Q4 2008 Q4 2007 Change 2008 2007 Change 528.7 385.6 914.3 452.5 226.6 679.1 520.6 227.9 748.5 (14.8) (32.0) (46.8) (30.7) (77.5) 541.5 394.6 936.1 453.1 215.3 668.4 515.2 217.6 732.8 21.1 4.7 25.8 (13.1) 12.7 (2.4)% (2.3)% (2.3)% (0.1)% 5.2% 1.6% 1.0% 4.7% 2.1% (170.1)% (780.9)% (281.4)% (17.6) (90.2) 2,449.3 1,654.4 4,103.7 2,057.0 952.9 3,009.9 2,067.5 891.3 2,958.8 84.7 (120.7) (36.0) (32.4) (68.4) 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 (2.6)% (1.3)% (2.1)% 0.0% 5.4% 1.6% 3.0% 6.5% 4.0% 111.4 (18.7) 92.7 12.6 105.3 (24.0)% (545.5)% (138.8)% (45.0) (173.7) Q4 2008 Q4 2007 Change 2008 2007 Change 78.5% 24.4% 102.9% 80.7% 33.4% 114.1% 79.2% 27.1% 106.3% 72.1% 23.8% 95.9% 64.7% 33.2% 97.9% 69.9% 26.6% 96.5% 6.4 pts 0.6 pts 7.0 pts 16.0 pts 0.2 pts 16.2 pts 9.3 pts 0.5 pts 9.8 pts 71.2% 24.7% 95.9% 80.2% 33.4% 113.6% 73.9% 27.3% 101.2% 69.8% 24.7% 94.5% 68.6% 33.6% 102.2% 69.4% 27.3% 96.7% 1.4 pts 0.0 pts 1.4 pts 11.6 pts (0.2) pts 11.4 pts 4.5 pts 0.0 pts 4.5 pts Management’s discussion and analysis (in millions of Canadian dollars, except as noted) SeCtION 4 – Personal lines 4.1 Financial results tAble 17 Written insured risks (thousands) Automobile Property Total Direct premiums written Automobile Property Total Net premiums earned Automobile Property Total Net underwriting income (loss) (excluding mYA) Automobile Property Total Market yield adjustment Net underwriting income (loss) (including mYA) tAble 18 – UNDERwRITING RATIOS Personal auto Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) Personal property Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) Personal lines – total Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) 18 4.2 explanation of financial results Fourth quarter 2008 In personal auto, direct premiums written were down slightly in the fourth quarter as rate increases resulted in a decrease in written insured risks. Underwriting results in personal auto decreased year-over-year due to lower favourable prior year claims development, which normally fluctuates from quarter to quarter, and higher claims severity. Rates in personal auto have been increasing particularly in certain geographic regions to reflect an increase in claims experience. In personal property, direct premiums written were up 5.2% due to increases in insured amounts and higher rates. Overall, personal property sustained an underwriting loss of $32.0 million reflecting higher current year claims associated with severe storms in Ontario and Québec in the fourth quarter. We have been increasing direct written rates and enhancing our pricing segmentation to reflect an increase in water-related property claims. In addition, we are adjusting insured values to ensure that higher material costs and labour rates are factored into our premiums and our customers retain adequate coverage. Full year 2008 In personal auto, direct premiums written were flat in 2008 reflecting the competitive impact of raising rates on unit growth in the near-term, as well as the run-off of a large group agreement in the first half of 2008. The group agreement was large in terms of the number of policies but had a low average premium and margin. In 2008, current accident year results in personal auto were relatively stable, despite severe snow, hail and excessive rain in Central Canada. Personal auto generated underwriting income of $84.7 million in 2008 versus $111.4 million in 2007 with a healthy combined ratio of 95.9%. In personal property, higher average insured amounts and higher rates resulted in a 5.4% increase in direct premiums written. Overall, personal property sustained an underwriting loss of $120.7 million compared to a loss of $18.7 million in 2007. 2008 results were negatively affected by higher claims associated with severe snow, hail, rain and wind storms in Central Canada, compared to significantly lower levels of precipitation in the same region over the comparable period of 2007. Actions are being taken to build strength and sustainable advantage in home insurance through claims innovation, segmentation and better management of water losses, which now make up approximately 40% of personal property claims. Personal lines – written insured risks (in thousands) Personal lines – direct premiums written (in millions) Personal lines – combined ratio (excluding MYA, %) 5,000 4,000 3,000 2,000 1,000 0 3,927.5 1,591.5 4,077.5 1,637.4 4,190.5 1,676.1 4,103.7 1,654.4 2,336.0 2,440.1 2,514.4 2,449.3 2005 2006 2007 2008 Personal property Personal auto $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $2,962.1 $904.4 $3,009.9 $952.9 $2,057.7 $2,057.0 5000 $2,657.1 $779.9 4000 $2,810.7 $841.5 3000 $1,877.2 $1,969.2 2000 1000 0 2005 2006 2007 2008 Personal property Personal auto 120% 100% 80% 60% 40% 20% 0% 3500 104.0% 3000 100.0% 87.3% 78.8% 2500 113.6% 102.2% 95.9% 94.5% 2000 1500 1000 500 0 2005 2006 2007 2008 Personal property Personal auto 120 100 80 60 40 20 0 120 100 80 60 40 20 0 ING C ANA DA I NC. 2008 A NN U AL REPORT 19 Q4 2008 Q4 2007 Change 2008 2007 Change 63.0 57.0 120.0 77.2 211.9 289.1 80.1 190.7 270.8 6.8 51.0 57.8 (16.6) 41.2 62.8 57.7 120.5 81.7 211.3 293.0 80.7 191.1 271.8 0.1 42.2 42.3 (7.6) 34.7 0.3% (1.2)% (0.4)% (5.5)% 0.3% (1.3)% (0.7)% (0.2)% (0.4)% n/a 20.9% 36.6% (9.0) 6.5 263.8 234.0 497.8 317.8 817.8 1,135.6 318.9 761.8 1,080.7 40.8 112.2 153.0 (17.6) 135.4 255.8 233.5 489.3 321.2 825.3 1,146.5 320.2 766.9 1,087.1 20.1 76.2 96.3 7.2 103.5 3.1% 0.2% 1.7% (1.1)% (0.9)% (1.0)% (0.4)% (0.7)% (0.6)% 103.0% 47.2% 58.9% (24.8) 31.9 Q4 2008 Q4 2007 Change 2008 2007 Change 63.9% 27.7% 91.6% 36.4% 36.8% 73.2% 44.5% 34.2% 78.7% 72.7% 27.2% 99.9% 42.0% 35.9% 77.9% 51.1% 33.3% 84.4% (8.8) pts 0.5 pts (8.3) pts (5.6) pts 0.9 pts (4.7) pts (6.6) pts 0.9 pts (5.7) pts 59.9% 27.3% 87.2% 49.7% 35.6% 85.3% 52.7% 33.2% 85.9% 66.0% 27.7% 93.7% 54.5% 35.6% 90.1% 57.9% 33.2% 91.1% (6.1) pts (0.4) pts (6.5) pts (4.8) pts 0.0 pts (4.8) pts (5.2) pts 0.0 pts (5.2) pts Management’s discussion and analysis (in millions of Canadian dollars, except as noted) SeCtION 5 – Commercial lines 5.1 Financial results tAble 19 Written insured risks (thousands) Automobile Non-auto Total Direct premiums written Automobile Non-auto Total Net premiums earned Automobile Non-auto Total Net underwriting income (excluding mYA) Automobile Non-auto Total Market yield adjustment Net underwriting income (including mYA) tAble 20 – UNDERwRITING RATIOS Commercial auto Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) Commercial non-auto Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) Commercial lines – total Claims ratio (excluding mYA) Expense ratio Combined ratio (excluding mYA) 20 5.2 explanation of financial results Fourth quarter 2008 Direct premiums written in commercial lines were down slightly year-over-year reflecting lower average premiums and a small decrease in units. The portfolio continues to shift toward small- and medium-sized commercial accounts which are more profitable. Though the commercial market remained competitive in 2008, our commercial units remained stable as we maintained pricing discipline with only low single-digit rate decreases. Commercial underwriting income increased by 36.6% year-over-year, with a combined ratio of 78.7% in the fourth quarter. The combined ratio for commercial auto was 91.6% and commercial non-auto was 73.2%, demonstrating strong execution of our targeted strategy in both commercial lines and commitment to maintaining a high-quality portfolio. 2008 results improved slightly year-over-year overall and favourable prior year claims development increased compared to the same quarter last year. Full year 2008 Direct premiums written in commercial lines were down 1.0% reflecting the dynamics discussed above. In all lines of business, our priority is to price policies appropriately to maintain adequate margins. Underwriting income in commercial lines improved by $56.7 million in 2008 with an overall combined ratio of 85.9%, notwithstanding $18.5 million in catastrophe claims associated with seasonal storms in 2008. The increase in commercial underwriting income mainly reflects more favourable prior year claims development. Commercial lines – written insured risks (in thousands) Commercial lines – direct premiums written (in millions) Commercial lines – combined ratio (excluding MYA, %) 600 500 400 300 200 100 0 490.8 236.4 487.5 233.9 489.3 233.5 497.8 234.0 254.4 253.6 255.8 263.8 2005 2006 2007 2008 Commercial non-auto Commercial auto $1,500 $1,250 $1,000 $750 $500 $250 $0 $1,182.9 $855.4 $1,146.5 $825.3 $1,135.6 $817.8 600 $1,248.8 $917.6 500 400 300 200 $331.2 100 $327.5 $321.2 $317.8 0 2005 2006 2007 2008 Commercial non-auto Commercial auto 100% 1500 87.0% 86.4% 86.9% 85.2% 93.7% 90.1% 87.2%85.3% 80% 60% 40% 20% 0% 1250 1000 750 500 250 0 2005 2006 2007 2008 Commercial non-auto Commercial auto 100 80 60 40 20 0 ING C ANA DA I NC. 2008 A NN U AL REPORT 21 Management’s discussion and analysis (in millions of Canadian 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 affiliated distribution network (Canada Brokerlink, Grey Power and Equisure), and other activities. tAble 21 – CORPORATE AND DISTRIBUTION INCOmE Distribution income Distribution expenses Distribution earnings Corporate income (loss), net Corporate and distribution income before income taxes 6.2 explanation of financial results Q4 2008 Q4 2007 Change 26.9 21.4 5.5 (3.6) (23.8)% (8.9)% (81.8)% (127.8)% 2008 92.4 79.1 13.3 2.3 2007 Change 102.9 85.3 17.6 26.7 (10.2)% (7.3)% (24.4)% (91.4)% 1.9 5.3% 15.6 44.3 (64.8)% 20.5 19.5 1.0 1.0 2.0 2008 full year corporate and distribution income decreased by $28.7 million due to the release of a $28 million provision in 2007 that was related to a prior year divestiture which became redundant. Distribution results were lower as higher combined ratios negatively impacted the profitability of the distribution network. Corporate and distribution – income before income taxes (in millions) $50 $40 $30 $20 $10 $0 $44.3 $33.4 $22.3 $15.6 2005 2006 2007 2008 22 SeCtION 7 – Financial condition 7.1 balance sheet highlights The table below shows the significant balance sheet items as reported on December 31, 2008 and December 31, 2007. tAble 22 Cash and cash equivalents Invested assets Debt securities Equity securities Loans and equity investments Total invested assets Premiums receivable Deferred acquisition costs and reinsurance assets Income tax receivable Future income tax asset Intangible assets and goodwill Other assets Total assets Claims liabilities Unearned premiums Other liabilities Income taxes payable Total liabilities Shareholders’ equity Book value per share (dollars) As at December 31, 2008 December 31, 2007 510.4 3,832.5 2,015.1 261.3 6,108.9 1,469.4 606.6 221.0 54.2 217.8 585.1 9,773.4 4,064.9 2,366.8 701.7 7.4 7,140.8 2,632.6 21.96 8.1 3,886.7 3,140.3 210.8 7,237.8 1,440.8 653.1 168.4 68.7 221.7 591.1 10,389.7 3,989.0 2,333.5 862.6 32.5 7,217.6 3,172.1 25.48 Invested assets and cash and cash equivalents, decreased by $626.6 million notwithstanding cash flows generated from operations of $619.7 million. This was mostly due to the decline in common and preferred share values in 2008 compared to 2007 in line with the general market declines in 2008. In addition, the Company paid $176.0 million toward the NCIB in the first nine months of 2008. Premiums receivables were higher than prior year, consistent with higher direct premiums written. Deferred acquisition costs and reinsurance assets were lower in 2008 due to reinsurance assets which decreased due to higher treaty retention which reduced recoverable case reserves. Income taxes receivable were higher due to the impact of lower investment market values which generated tax loss carry-backs to prior tax years. Claims liabilities and unearned premiums were slightly higher when compared to 2007 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. Other liabilities decreased compared to December 31, 2007 mainly due to the decrease in the fair value of the derivatives embedded in the Company’s preferred shares, and the decrease in the accruals related to contingent profit commission. Shareholders’ equity was reduced as a result of the increased unrealized loss position included in AOCI as at December 31, 2008 as well as the NCIB that occurred during the year. ING C ANA DA I NC. 2008 A NN U AL REPORT 23 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) 7.2 Portfolio of invested assets The Company’s portfolio of invested assets is managed by Intact Investment Management Inc. (formerly known as ING Investment Management, Inc.), which is a wholly-owned subsidiary of the Company. The assets are managed by Intact Investment Management Inc. in accordance with the IIC investment policy. IIC 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 historic return profiles of various asset classes and the variability of those returns over time, the availability of assets, diversification needs and benefits, regulatory capital required to support the various asset types, security ratings and other material variables likely to affect the overall performance of 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 23 Cash and cash equivalents Short-term notes Fixed income securities Preferred shares Common shares Loans to brokers Equity investments As at December 31, 2008 As at December 31, 2007 FV % of FV FV % of FV 510.4 293.8 3,538.7 1,220.1 795.0 271.5 19.0 7.7% 4.4% 53.2% 18.4% 12.0% 4.1% 0.2% 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% Total invested assets and cash 6,648.5 100.0% 7,245.9 100.0% The majority of the Company’s portfolio is invested in 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 2008, the value of invested assets declined reflecting the significant declines in capital markets during the year. Fixed income securities The Company invests in highly-rated fixed income securities mainly including corporate bonds and government bonds. The fixed income portfolio is mostly Canadian with 18.4% foreign content. Approximately 97% of the fixed income portfolio is rated ‘A’ or better. 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 2008. The Company had no exposure to leveraged capital notes in structured investment vehicles, directly or through the use of derivatives as at December 31, 2008 (December 2007 – $19.8 million). The Company has $285.0 million in asset-backed securities including mostly Canadian credit card loans and commercial mortgage-backed securities. 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 actively managed to achieve additional dividend payments to maximize dividend income throughout the year. 24 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 net income is impacted only when preferred shares are impaired, or when the shares are called or sold. The preferred share portfolio is comprised entirely of Canadian securities with a significant portion of the portfolio invested in securities top-rated at either P1 or P2. 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 latter half of 2008, to reduce exposure to volatile capital markets, the Company altered its asset-mix and strengthened the balance sheet by reinvesting the proceeds from the sale of common shares and interest and dividend income in Canada Treasury bills which by year end totalled $776.9 million, of which $483.1 million mature in less than 90 days and are included in cash and cash equivalents. Credit ratings As at December 31, 2008, 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, equivalent to a rating of BBB+ (ratings are by Standard & Poor’s (“S&P”) or Dominion Bond Rating Services). Approximately $1.0 million of securities with a rating below investment grade were included in the fixed income and preferred share portfolios at December 31, 2008, compared to $38.3 million as at December 31, 2007. Sector exposures The following shows the Company’s total exposure to the largest industrial sectors. tAble 24 Banks, insurance and diversified financial services Government Utilities Other Total invested assets Sector exposures (% of fair value) Banks, insurance and diversified financial services Government Utilities Other 42.8% 40.0% 3.4% 13.8% As at December 31, 2008 As at December 31, 2007 FV % of FV FV % of FV 2,631.4 2,452.5 206.9 847.3 6,138.1 42.8% 40.0% 3.4% 13.8% 100.0% 2,873.4 1,727.6 472.8 2,164.0 7,237.8 39.7% 23.9% 6.5% 29.9% 100.0% ING C ANA DA I NC. 2008 A NN U AL REPORT 25 Management’s discussion and analysis (in millions of Canadian dollars, except as noted) The Company has higher exposure to banks, insurance companies and diversified financial services companies than its benchmark of P&C insurers reflecting IIC’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 2008, the continued widening of credit spreads in the year and the significant increase in the number of preferred issues towards the end of 2008 resulted in declines in the fair value of the preferred share portfolio. Sector exposures by asset class The following table shows sector exposures by asset class as a percentage of total cash and invested assets as at December 31, 2008. tAble 25 Energy Materials Industrials Technology Telecom Consumer Disc. Staples Healthcare Financial Utilities Government Total Bonds and short positions Preferred shares Common shares 2% – 2% – 1% 1% – – 23% 3% 68% 3% – – – 7% 2% 2% – 80% 6% n/a 21% 4% 5% – 11% 10% 4% 3% 36% 6% n/a total 5% – 2% – 3% 2% 1% 0% 36% 4% 47% 100% 100% 100% 100% S&P/TSX Weighting 27.4% 17.6% 6.1% 3.3% 6.0% 4.7% 3.4% 0.4% 29.2% 1.9% n/a 100% Investment portfolio credit quality The following table includes the credit quality of the fixed income portfolio as at December 31, 2008 and 2007. As at December 31, 2008 As at December 31, 2007 FV % of FV FV % of FV 2,101.9 583.3 751.1 102.4 – – – 3,538.7 59.4% 16.5% 21.2% 8 2.9% – – – 100.0% 2,025.8 821.7 51.9 148.7 5.8 10.9 3.0 3,867.8 52.4% 21.2% 22.0% 3.8% 0.2% 0.3% 0.1% 100.0% tAble 26 Fixed income securities AAA AA A BBB BB

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