CONTINUING THE JOURNEY CONTINUING THE JOURNEY
ANNUAL REPORT 2012
CONTINUING OUR JOURNEY
A disciplined, experienced team delivering consistent industry outperformance
A local presence from coast to coast
Proven consolidator in a fragmented industry
TO BECOMING A WORLD CLASS P&G INSURER
TO BUILD A WORLD-CLASS P&C INSURER
Delivering an outstanding customer experience
Solid financial position to capitalize on growth opportunities
Fostering vibrant and resilient communities for all our stakeholders
A disciplined, experienced team delivering consistent industry outperformance
A local presence from coast to coast
Proven consolidator in a fragmented industry
ANNUAL REPORT 2012
CONTINUING OUR JOURNEY
TO BUILD A WORLD-CLASS P&C INSURER
Delivering an outstanding customer experience
Solid financial position to capitalize on growth opportunities
Fostering vibrant and resilient communities for all our stakeholders
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
1
who we are
Intact Financial Corporation is the largest provider of property
and casualty (“P&C”) insurance in Canada with $7 billion in
direct premiums written and an estimated market share
of 17%. | We insure more than five million individuals and
businesses through our insurance subsidiaries and are the
largest private sector provider of P&C insurance in British
Columbia, Alberta, Ontario, Québec and Nova Scotia. We
distribute insurance under the Intact Insurance brand through
a wide network of brokers and our wholly owned subsidiary,
BrokerLink. We also distribute insurance directly to consumers
through belairdirect and Grey Power. We internally manage
our investments totalling approximately $13 billion.
Continuing our journey
to build a world-Class P&C insurer
we are continuing on a journey that began many years ago. a journey guided by
our values, the success of which is made possible through leveraging our scale,
sophistication, service and discipline. recent acquisitions have accelerated
our journey, but through it all, we remain true to our strategy to build a world-
class company which our employees can be proud to work for, our brokers and
customers proud to affiliate with, and our shareholders proud to own.
Financial highlights
(in millions of canadian dollars, except as noted)
Consolidated performance
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income
Net investment income
Net operating income
Net investment gains (losses)
Net income
Net operating income per share ($)
Earnings per share ($)
Book value per share ($)
Operating return on equity
Adjusted return on equity
2012
6,729
6,868
6,571
93.1%
451
389
675
37
587
5.00
4.33
33.03
16.8%
16.5%
IFRS
2011
5,084
5,099
4,880
94.4%
273
326
460
204
465
3.91
3.96
29.73
15.3%
17.4%
Canadian GAAP
2010
2009
2008
4,614
4,498
4,231
95.4%
193
294
402
182
498
3.49
4.32
26.47
15.1%
17.1%
4,604
4,275
4,055
98.7%
54
293
282
(173)
127
2.35
1.06
24.88
9.2%
4.8%
4,601
4,146
4,040
97.1%
117
329
361
(288)
128
2.96
1.05
21.96
11.3%
4.6%
superior performance and financial strength have
translated into a total shareholder return of 91%
over the past five years.
2012 Direct premiums written
2012 Direct premiums written
by business line
by business line
(excluding pools, %)
(excluding pools, %)
2012 Direct premiums written
by business line
(excluding pools, %)
2012 Direct premiums written
2012 Direct premiums written
2012 Direct premiums written
by distribution channel
by distribution channel
by distribution channel
(excluding pools, %)
(excluding pools, %)
(excluding pools, %)
2012 Investment mix
(net of hedging positions,
% of fair value)
2012 Investment mix
2012 Investment mix
(net of hedging positions,
(net of hedging positions,
% of fair value)
% of fair value)
Direct
12%
Direct
12%
Direct
12%
Broker
88%
Broker
88%
Broker
88%
Personal auto
Personal auto
Personal auto
Personal property
Personal property
Personal property
Commercial P&C
Commercial P&C
Commercial P&C
Commercial auto
Commercial auto
Commercial auto
45%
23%
24%
8%
45%
23%
24%
8%
45%
23%
24%
8%
Intact Insurance
Intact Insurance
Intact Insurance
BrokerLink
BrokerLink
BrokerLink
belairdirect
belairdirect
belairdirect
Grey Power
Grey Power
Grey Power
83%
5%
9%
3%
83%
5%
9%
3%
83%
5%
9%
3%
74%
Fixed income
10%
Common shares
Preferred shares
10%
Cash and short-term notes 3%
3%
Loans
74%
Fixed income
10%
Common shares
Preferred shares
10%
Cash and short-term notes 3%
3%
Loans
74%
Fixed income
10%
Common shares
Preferred shares
10%
Cash and short-term notes 3%
3%
Loans
Commercial auto
Commercial auto
Commercial auto
Commercial P&C
Commercial P&C
Commercial P&C
Personal property
Personal property
Personal property
Personal auto
Personal auto
Personal auto
Grey Power
Grey Power
Grey Power
belairdirect
belairdirect
belairdirect
BrokerLink
BrokerLink
BrokerLink
Intact Insurance
Intact Insurance
Intact Insurance
Loans
Loans
Loans
Cash and short-term notes
Cash and short-term notes
Cash and short-term notes
Common shares
Common shares
Common shares
Preferred shares
Preferred shares
Preferred shares
Fixed income
Fixed income
Fixed income
Total return to shareholders (%)
Personal auto
Personal property
Commercial P&C
Commercial auto
Personal auto
Personal property
Commercial P&C
Commercial auto
Personal auto
Personal property
Commercial P&C
Commercial auto
45
23
24
8
Total returns to shareholders
45
Total returns to shareholders
(%)
23
(%)
24
8
Intact Insurance
Intact Insurance
Intact Insurance
belairdirect
belairdirect
belairdirect
BrokerLink
BrokerLink
BrokerLink
Grey Power
Grey Power
Grey Power
45
23
24
8
One-year
One-year
83
9
5
3
83
9
5
3
83
9
5
3
74
10
10
Fixed income
Fixed income
Fixed income
Preferred shares
Preferred shares
Preferred shares
Common shares
Common shares
Common shares
Cash and short-term notes 3
Cash and short-term notes 3
Cash and short-term notes 3
Five-year
3
Loans
3
Loans
3
Loans
Five-year
74
10
10
74
10
10
Three-year
Three-year
Our five-year total
shareholder return
(including dividends)
of 91.1% was higher
than the comparable
indices, bolstered by
our operating results.
Intact Financial Corp.
Intact Financial Corp.
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
S&P U.S. P&C Insurance
7.2%
7.2%
13.6%
13.6%
16.2%
16.2%
28.4%
28.4%
20.4%
20.4%
89.6%
89.6%
15.1%
15.1%
29.7%
29.7%
-8.1%
-8.1%
31.1%
31.1%
91.1%
91.1%
44.5%
44.5%
4.1%
4.1%
-43.8%
-43.8%
4.0%
4.0%
Dividends per share growth (%)
Dividend per share growth
Dividend per share growth
(%)
(%)
Intact AR front pies2012.eps
Intact AR front pies2012.eps
Intact AR front pies2012.eps
One-year
One-year
Since becoming
a publicly traded
company in 2004,
we have grown our
dividends per share
every year, on average
by 13.3% annually.
Intact Financial Corp.
Intact Financial Corp.
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
8.1%
8.1%
8.7%
8.7%
7.5%
7.5%
0.0%
0.0%
Three-year
Three-year
Five-year
Five-year
25.0%
25.0%
11.2%
11.2%
7.8%
7.8%
-8.1%
-8.1%
48.1%
48.1%
8.6%
8.6%
23.3%
23.3%
-11.4%
-11.4%
Source: toronto Stock exchange, Standard & poor’s
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
1
One-year
One-year
Three-years
Three-years
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
S&P U.S. P&C Insurance
10 15 20 25 30
S&P U.S. P&C Insurance
-20 0
20 40 60 80 100
S&P U.S. P&C Insurance
-60-40-20 0 20 40 60 80 100
One-year
Intact Financial Corp
One-year
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P U.S. P&C Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
One-year
Intact Financial Corp
One-year
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
xxx
S&P/TSX Insurance
xxx
13.6
7.2
13.6
16.2
7.2
28.4
16.2
20.4
28.4
20.4
8.1
8.7
8.1
7.5
8.7
7.5
0
0
0
0
0
0
5
5
10 15 20 25 30
-20 0
20 40 60 80 100
Five-year
-60-40-20 0 20 40 60 80 100
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
Three-years
Intact Financial Corp
Three-years
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P U.S. P&C Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
xxx
xxx
Three-year
Intact Financial Corp
Three-year
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P/TSX Insurance
xxx
xxx
89.6
15.1
89.6
29.7
15.1
-8.1
29.7
31.1
-8.1
31.1
25.0
11.2
25.0
7.8
11.2
-8.1
7.8
0
-8.1
0
Five-year
Five-year
91.1
4.1
91.1
44.5
4.1
-43.8
44.5
4.0
-43.8
4.0
Five-year
Five-year
Intact Financial Corp
Five-year
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P U.S. P&C Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
Intact Financial Corp
Intact Financial Corp
S&P/TSX Composite
S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Banks
S&P/TSX Insurance
S&P/TSX Insurance
xxx
xxx
Five-year
Intact Financial Corp
Five-year
S&P/TSX Composite
Intact Financial Corp
S&P/TSX Banks
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P/TSX Insurance
xxx
xxx
48.1
-8.6
48.1
23.3
-8.6
-11.4
23.3
-11.4
0
0
One-year
One-year
Three-year
Three-year
xxx
0
xxx
0
2
2
4
4
6
6
8
8
10
10
-10 -5 0
5 10 15 20 25
-10 -5 0
5 10 15 20 25
-20 -10 0 10 20 30 40 50
-20 -10 0 10 20 30 40 50
Ceo’s letter to shareholders
our people can be proud of their accomplishments this
year. by continuing to live our values and hold ourselves
to the highest standard, i am confident our journey will
be successful.
Charles Brindamour
Chief Executive Officer
year in review | 2012 was a remarkable year for the Company in a number of ways. We began the year with the integration of
AXA Canada’s people, products and processes – the largest acquisition in the history of the Canadian P&C industry. In virtually every
aspect of the integration, the outcome was better than planned. Thanks to the tireless efforts of our dedicated employees, we maintained
world-class service to our brokers and customers. This resulted in a retention rate similar to what we would expect in a normal year.
| The integration progressed swiftly, which enabled us to take advantage of another strategic opportunity: Jevco. The Jevco acquisition
broadened our product offering to brokers and customers. The integration has gotten off to a strong start, as we began to renew policies
on our platform in November, within weeks of closing. | By broadening our product offering and bringing on board people from both of
these organizations, we are embarking on the next phase of our journey in a much stronger strategic and operational position. This bodes
well for our development in the months and years to come. | Thanks to these initiatives, in addition to organic growth, we substantially
grew our top line by 35% to reach almost $7 billion. Our strategies and action plans also helped improve our combined ratio to 93.1% and
increased our net operating income per share by 28%. Our $13 billion investment portfolio generated healthy returns, with $389 million
of net investment income. | From a capital perspective, we ended the year with a solid balance sheet despite making significant
acquisitions in the past 18 months. We entered 2013 with a solid capital cushion of nearly $600 million and a debt-to-capital ratio slightly
below our long-term target. Consistent with our capital management philosophy, we announced a 10% dividend increase earlier this year,
marking the eighth consecutive year of dividend increases. | While our strategic and financial progress was significant, we also remained
committed to making a meaningful and lasting difference in communities where we operate. In 2012, we contributed $3.5 million to
charitable organizations with a focus on addressing the needs of youth at risk and helping communities prepare for climate change.
At Intact, we promote employee citizenship by offering financial support and time off to those who aspire to help make a difference.
well positioned for profitable growth in auto | We reported a 95.7% combined ratio in personal auto in 2012, as elevated losses
from catastrophes and less favourable prior year claims development negatively impacted results. However, our underlying loss ratio
was unchanged year over year. Effective auto reforms in Ontario, combined with the adoption of fraud prevention measures and prudent
reserving actions taken in late 2012, position our personal auto business for profitable growth in the years ahead. Our confidence in
2
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
personal auto is bolstered by a 5-point loss ratio
advantage versus the industry in Canada last year.
| We will strive to further grow our earnings in
this segment by leveraging our broad distribution
platform. Building on strong relationships with
brokers across the country and leveraging our new
web solution will be key ingredients of growth at
Intact Insurance. Both belairdirect and Grey Power are
also poised for growth as they will benefit from two
key trends in the Canadian marketplace – the speed
at which consumers embrace technology and the
changing demographics of the Canadian population.
achieving sustainability in home insurance |
Home insurance results improved 10 points in 2012,
in part from an unusually high level of favourable prior
year claims development. Despite the improvement,
we continue to experience elevated losses from severe
weather across the country, with Alberta facing the
most severe situation. As such, we remain diligent in
our efforts to sustainably improve results. With the
industry facing similar challenges, we expect hard
market conditions to continue for the foreseeable
future. | We are committed to operating our home
insurance business at a combined ratio of 95% or
better, even if catastrophe losses remain at elevated
levels, as observed in recent years. To attain this
objective, we are taking actions that will generate
gradual benefits over the next 24 to 36 months. These
actions include continued tailoring of our offering
by type of peril with differentiation in pricing, coverage,
claims management initiatives and intensified
prevention and loss mitigation incentives. |
While these actions will help in the mid-term, we
want to make a meaningful long-term contribution as
well. Since 2010, we have supported the University of
Waterloo’s Climate Change Adaptation Project.
A comprehensive report was published in the summer
of 2012 which outlined 20 practical recommendations
that will go a long way to help communities better
prepare for the new climate reality.
a transformational year in commercial lines |
The acquisition of AXA Canada greatly enhanced our
commercial lines offer, which now exhibits a much
broader suite of products and industry expertise.
The addition of AXA Canada also increased our
market presence in commercial insurance by adding
8
6
8
,
6
%
7
.
8
9
%
1
.
7
9
%
4
.
5
9
%
4
.
4
9
%
1
.
3
9
9
9
0
5
,
8
9
4
4
,
5
7
2
4
,
6
4
1
4
,
08
09
10
11
12
08
09
10
11
12
Direct premiums written
(excluding pools, $ millions)
Combined ratio
(excluding MYA, %)
$7000
approximately $1 billion of premiums, resulting
$95
$6000
in premium growth of 50% in 2012. Importantly,
$100
this rapid growth did not come at the expense of
$90
$5000
profitability, as we reported a full year combined
$85
$4000
ratio of 88.9%. | Conditions in commercial lines
$3000
have been quite soft in recent years, though we have
2012
2008
2011
2009
2010
$80
'2008
$7000
$6000
$5000
$4000
$3000
$100
$95
$90
$85
$80
2008
2009
2010
2011
2012
'2008
'2009
'2010
'2011
'2012
'2009
'2010
'2011
'2012
been successful in achieving low single-digit rate
Direct premiums written
increases while maintaining retention levels. We now
Combined ratio
see broader signs of hardening in approximately 25%
"2008
"2009
"2010
"2011
"2012
4146
4275
4498
5099
6868
of the commercial P&C market. With more than a
thousand underwriters at Intact across Canada, we
'2008
'2009
'2010
'2011
'2012
97.1
98.7
95.4
94.4
93.1
believe we are well positioned in the market.
outlook for 2013 | We do not expect the industry’s
return on equity (“ROE”) to improve materially in
the near term from the 10% level reported in 2012,
as underwriting improvements will likely be offset
by the negative impact of the low-yield environment
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
3
on investment income. | Looking specifically at Intact
Financial, we believe we will continue to outperform the
industry’s ROE by at least 500 basis points (our stated
objective) in 2013, given our combined ratio advantage,
our yield advantage and our capital management flexibility.
leveraging our organic growth potential | We believe
our multi-channel distribution model puts us in a position
to prosper from long-term trends that affect our industry,
as the model is designed with specific success factors in
mind. It keeps the customer at the centre of our business,
highlights the strengths of brokers and their ability to
offer consumers choice, and allows us to fully leverage
the benefits of our scale. We are committed to continually
enhancing our customer-driven efforts, an important part
of which is the unique experience and choice we offer
consumers in how they can shop for our products.
supporting our broker partners | As entrepreneurs
committed to growing their businesses, our broker
partners now have an even stronger ally to champion
their cause and help their businesses prosper. Our scale
and financial stability enable us to support brokers by
investing in technology and advertising to help them
improve their growth and their productivity. A highlight
of 2012 was our success at rolling out our innovative
customer web solution, which combines the convenience
of buying car insurance online with the support of a broker.
Surveys conducted in 2012 illustrate that broker support
of Intact is at an all-time high. We are extremely proud of
this accomplishment. I want to thank our brokers for their
continuous support throughout the integrations, and
assure them that we will work to maintain that support in
the years ahead.
one team with common values | Our success
this past year was due to the combined efforts of our
11,000 employees, a group that I believe represents
the best team in the country. It goes without saying that
2012 was another demanding year as they continued
to demonstrate our strong customer-driven mindset
and provided industry-leading service to our brokers,
despite two fast-paced integrations. Our employees truly
3
0
.
3
3
$
3
7
.
9
2
$
7
4
.
6
2
$
.
8
8
4
2
$
.
6
9
1
2
$
4
4
.
0
0 $
4
.
0
7 $
3
.
0
$
4
3
.
0
$
2
3
.
0
$
1
3
.
0
$
7
2
0
$
.
5
2
0
$
.
5
2
6
1
0
$
.
08
09
10
11
12
05
06
07
08
09
10
11
12
Q1–13
Book value per share
($)
Quarterly dividend per share
($)
the journey forward | Looking ahead, we are excited
$35
0.4
$35
$30
$25
$20
$15
2008
2009
2010
2011
2012
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
Q1-2013
about our prospects for 2013 and beyond, and believe the
$30
importance we place on underwriting results continues to
$25
serve us well in the current low interest rate environment.
0.2
0.3
Given the quality of our operations, the flexibility provided
$20
0.1
by our financial position, and the additions of AXA Canada
$15
2011
and Jevco, we firmly believe that we will continue to
'2006
'2005
2009
2010
2008
2012
0.0
'2007
'2008
'2009
'2010
'2011
'2012
Q1-2013
outperform the industry and strengthen our leadership
Book value over share
position. |
In closing, I believe 2012 was another
Quarterly dividend per share
extraordinary year for our Company, made possible by the
"2008
"2009
"2010
"2011
"2012
21.96
24.88
26.47
29.73
33.03
efforts of many parties. I would like to thank our Board of
Directors, whose insight and guidance have, once again,
helped steer us in the right direction as we continue on
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
Q1-2013
0.1625
0.25
0.27
0.31
0.32
0.34
0.37
0.40
0.44
exemplify our quest for excellence, and I want to thank
our journey. Finally, to our shareholders, thank you for
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
Q1-2013
each and every one of them.
your continued support. We will strive to maintain your
confidence and reward it in the years ahead.
4
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Charles Brindamour
Chief Executive Officer
0.5
0.4
0.3
0.2
0.1
0.0
0.5
0.4
0.3
0.2
0.1
0.0
Chairman’s message
2012 marked another milestone in the implementation
of the well honed strategy that your board of directors
has shaped, as your Company continued on its journey to
build a world-class P&C insurer.
Claude Dussault
Chairman of the Board
Despite the tepid growth of the Canadian economy and the industry’s profitability challenges, Intact continued to deliver strong financial
results as its growth accelerated and its profitability improved. These results affirm the merits of the sound strategic direction pursued
by your Company and the significant efforts devoted to ensuring the successful integration of people, products and processes following
the AXA Canada and Jevco acquisitions. Your Board has and will continue to spend a lot of time with your executive team reviewing and
adapting their strategy as new opportunities and challenges emerge. |
Intact has built a reputation for prudent management and for its
integrated corporate risk management structure. In 2012, your Board built upon these foundations and adopted a risk appetite statement
that clearly identifies the nature and extent of risks that your Company is prepared to assume in its operations and strategies. This statement
will provide executives and Directors with a rigorous analytical framework to guide them in their decisions. During the year, your Board also
paid special attention to Intact’s reinsurance, natural disasters and earthquake insurance plans and programs. | Once again in 2012, your
Board identified best practices in terms of governance, and as a result, we became a signatory of the Catalyst Accord and, in early 2013,
we decided to create a dedicated risk committee. Moving forward, we will also evaluate the advantages of adopting policies regarding
the length of your Directors’ tenure and the interrelated or interlocking relationships of your Directors. We also continued to review
both executive and Board compensation, expanded on the disclosure of our practices and recommended a shareholder advisory vote
on our approach to executive compensation for the third consecutive year. |
In the coming weeks, we will bid farewell to two valued
Board members, Marcel Côté and Paul Cantor, who will be retiring from your Board in May. Mr. Côté has brought unconventional thinking
and a fresh perspective to our discussions, while we all benefited from Mr. Cantor’s wise counsel and sound judgement, notably in the
governance area. I would like to thank them for their immense contribution; they served you with distinction. | Our track record, since
we became a widely held Canadian public company four years ago, is an impressive one. Our numerous accomplishments are a testament
to the hard work and dedication of our remarkable team of 11,000 employees, the strength of your executive team and the guidance
provided by your Board. Looking ahead, I am confident that our future is full of promise, and your Board will ensure that Intact continues on
its journey to build a world-class organization.
Claude Dussault
Chairman of the Board
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
5
board of direCtors
the Board of Directors assumes responsibility for the stewardship of the company.
It is responsible for the supervision of the management of the business and
affairs of the company with the objective of enhancing value for shareholders
and with a view to ensuring the long-term viability of the company.
Claude Dussault
Chairman of the Board
Mr. Dussault was formerly President
and CEO of Intact Financial from 2001
through 2007 and has been Chairman
since 2008. He is currently President
of ACVA Investing Corp., a Fellow of the
Canadian Institute of Actuaries, and
has completed the Advanced Executive
Education Program at the Wharton
School of Business.
Carol Stephenson
CRCG Committee
Human Resources Committee
(Chair)
Ms. Stephenson is currently the
Dean of the Richard Ivey School
of Business at Western University.
She has over 30 years of experience
in telecommunications and
technology, formerly as CEO of
Lucent Technologies Canada. She
was appointed an Officer of
the Order of Canada in 2009.
She is the former Chair of the
Government of Canada’s Advisory
Committee on Senior Level
Retention and Compensation.
Yves Brouillette
Audit and Risk Review
Committee
CRCG Committee
Mr. Brouillette has deep international
and industry experience, having been
the CEO of ING Latin America from
2002 to 2005, CEO of Intact Financial
from 1993 to 2001 and Chairman
from 2003 to 2007. He is a Fellow of
the Canadian Institute of Actuaries
and a graduate of the Advanced
Management Program of Harvard
Business School.
Timothy H. Penner
CRCG Committee
Human Resources Committee
Mr. Penner brings extensive
marketing and operations
management expertise, having
spent 33 years with Procter &
Gamble, including as President of
P&G Canada from 1999 to 2011.
He also serves on the Board of the
Hospital for Sick Children and
the YMCA of Greater Toronto.
Robert W. Crispin
Audit and Risk Review
Committee
Investment Committee (Chair)
Before retirement, Mr. Crispin
was Chairman and CEO of ING
Investment Management Americas,
and was responsible for ING Mutual
Funds, ING Institutional Markets, and
ING Group’s insurance operations
in Brazil, Chile, and Peru. He was
previously Vice Chairman of Travelers
Companies and Chief Investment
Officer of Lincoln National Corp.
6
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
a Skills Matrix has been developed to ensure that all skills and strengths
needed by the company, its mission, and future development are met
by the Board as a whole as they continue to steer us on our journey to
build a world-class p&c insurer.
Eileen Mercier
Audit and Risk Review
Committee (Chair)
Investment Committee
Ms. Mercier is currently the
Chair of the Board of the
Ontario Teachers’ Pension
Plan. She is a professional
director with strong strategic
and risk management skills
built over a career that spans
more than 40 years in general
management. From 1995 to
2003, she headed her own
management consulting
firm specializing in financial
strategy, restructuring, and
corporate governance issues.
Marcel Côté
CRCG Committee (Chair)
Human Resources
Committee
Mr. Côté, the founder of
Secor Consulting, a consulting
firm specializing in business
strategy, is now a strategic
advisor to KPMG-Secor.
In 1989 and 1990, he was
Director of Strategic Planning
and Communication for the
Office of the Prime Minister of
Canada. He is also a Fellow of
the Center for International
Affairs of Harvard University.
Charles Brindamour
Chief Executive Officer
Investment Committee
Mr. Brindamour joined Intact
in 1992 as an actuary and held
progressive management positions
before becoming CEO in 2008.
Under his leadership, the Company
became an independent and
widely held Canadian company in
2009, and in 2011, engineered the
acquisition of AXA Canada. He is on
the board of the C.D. Howe Institute
and is Chair of the Board of the
Insurance Bureau of Canada.
Paul Cantor
Human Resources Committee
Investment Committee
Mr. Cantor is Senior Advisor at
Bennett Jones LLP, and Board
Chair of the Global Risk Institute
in Financial Services and of
Revera Inc. He held previous
positions as the Chair of the Public
Sector Pension Investment Board
and other senior executive positions
in the financial services sector.
Stephen Snyder
Audit and Risk Review Committee
CRCG Committee
Mr. Snyder was previously President
and CEO of TransAlta Corp., Noma
Industries Ltd., GE Canada Inc., and
Camco Inc. He is currently a director
of the Canadian Stem Cell Foundation,
and past Chair of organizations such
as the Alberta Secretariat for Action
on Homelessness, and the Calgary
Committee to End Homelessness.
He was awarded the Conference
Board of Canada Honorary Associate
Award in 2008.
Louise Roy
CRCG Committee
Human Resources Committee
Ms. Roy is the first woman to be
both Chancellor and Chair of the
Université de Montréal. She has
strong labour and government
relations skills developed over
a career that includes roles
as President and CEO of the
Montreal Urban Community
Transport Commission and SVP
of International Air Transport
Association (“IATA”). She was
named an Officer of the National
Order of Québec in 2009 and
the Order of Canada in 2012.
Note: CRCG denotes Conduct Review and Corporate Governance Committee.
For complete biographies of the members of the Board of Directors, please see the Management Proxy Circular which may be found online at www.sedar.com.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
7
beComing one of Canada’s best emPloyers
intact has a long and
proud Canadian history;
our journey began more
than 200 years ago
1809 | After a major fire,
a group of Halifax businessmen
formed the Halifax Fire Insurance
Association, later renamed the
Halifax Insurance Company.
1950s | In the late 1950s,
Halifax Insurance Company
was purchased by Nationale-
Nederlanden, one of the largest
Dutch insurance companies at
the time.
1980s | In the 1980s, we
continued to grow as Nationale-
Nederlanden acquired three well-
known regional insurers – Commerce
Group, Belair and Western Union.
2002 | Now operating as
ING Canada, we surpassed $3 billion
of premiums after acquiring Zurich
Canada’s home, auto and small
and medium-sized business lines,
becoming the largest P&C insurance
provider in the country.
8
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Throughout the year, we continued our efforts
towards becoming one of the best employers in the
country by providing a workplace where our people
feel welcome, respected, and appreciated; and
where they can contribute their best every day. |
And we had many accomplishments in 2012.
Despite the incredible challenges of integrating
the people, products and processes of AXA Canada
and Jevco within the Intact team, our employees
also worked hard to ensure that we delivered on
our promise to offer an outstanding experience to
our customers and the best service to our brokers.
our values
We behave with integrity.
We respect each other.
We are customer driven.
We strive for excellence.
We are socially responsible.
Their efforts and achievement were recognized by
a number of industry affiliates, including World
Finance, the Insurance Brokers Association of Ontario
and J.D. Power and Associates. Our employees’
dedication to our customers and brokers is a
reflection of their commitment to the success of our
organization. | Throughout 2012, we focused on
better managing the performance of our employees
and providing them with greater recognition for their
achievements. These efforts resulted in a significant
PRE-IPO benefits that can come from working for the largest
P&C insurance provider in Canada. There are ample
opportunities for employees to grow and to work
with innovative tools, systems and strategies. |
Although we trust that ours is the best team in the
industry, it’s not simply about working hard to get to
the next level, it’s about excellence. “Insurance is
about people, not about things,” is not just something
we say; it’s something in which we truly believe.
We know that our purpose is to help people and
businesses, and that’s what we do, day in and day
out. We know that how we do it can really make a
difference in the lives of our customers. | The values
we introduced when we became Intact in 2009 –
integrity, respect, excellence, social responsibility and
being customer driven – reinforce this understanding
and permeate the everyday actions of all of us. These
11,000 employees
190
actuaries
115
offices
increase in the engagement of our employees as
values guide us, allow us to remain disciplined, drive
we continue our journey toward becoming one of
us to contribute our best and ensure that we deliver
Canada’s best employers. Accomplishing this in a
on our promises. | As we progress through
transformative year is something of which we are
another year, our collective efforts will contribute to
all very proud. Such results, along with our highest-
our success as a whole, and our team will become
ever survey response rate, clearly demonstrate
even stronger.
that our people are eager to tell us what makes our
organization a great place to work, what we can do
to make it even better, and that we’re headed in the
right direction. | Our employees recognize the
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
9
what sustainable advantages has intaCt built thus far
on its journey to build a world-Class P&C insurer?
Louis Gagnon
President and Chief Operating
Officer
Proven consolidator
Intact has a track record of
successfully carrying out 12 accretive
acquisitions since 1988. Our most
recent acquisition, Jevco, has gotten
off to a strong start. Through the
dedicated efforts of our people, the
AXA Canada integration has had
better-than-expected customer
retention and broker satisfaction.
We believe we are well positioned
to benefit from continued industry
consolidation. Our business
development team focuses on finding
the right opportunities at the right
price, in order to grow strategically
important segments through
leveraging our core strengths.
Jean-François Blais
President, Intact Insurance
Broker relationships
We remain committed to ensuring
brokers are successful. Our scale and
financial stability enable us to support
brokers and to invest in technology
and advertising to help them improve
their growth and their productivity.
I am very proud that in 2012 we
received our highest score ever in a
nationwide survey of 6,000 brokers,
as we maintained our world-class
service despite the challenge of a
large integration. We are honoured
to have our suite of products
offered at over 2,000 brokerages
across Canada, where customers
can receive highly personalized,
community-based service.
Marc Pontbriand
President,
Direct to Consumers Distribution
Strong organic growth potential
As the largest P&C insurance provider
in Canada, we are well positioned to
respond to changes in customers’
needs. This year, we made dealing with
us easier than ever by adding web
functionalities across our platforms,
and added recreational vehicles to
our product offering. For example,
at belairdirect, a customer is now
able to quote, buy, and track claims
online, all from the convenience of
a computer or tablet. We see strong
organic growth potential in continuing
to offer customers the products they
want, when and how they want them.
2004 | We announce the
acquisition of Allianz Insurance
Company of Canada, including
Trafalgar Insurance Company of
Canada and Canada Brokerlink.
The Allianz acquisition, with its
portfolio of personal and small to
medium-sized commercial lines
business, helps to reinforce our
core business position and further
expand our national presence. At
this point, we insure 1.4 million
properties and 2.2 million vehicles
in our personal lines segment.
2004 | To help finance
the acquisition of Allianz, our former
parent, ING Group, decides to sell
an initial 30% stake to the public.
On December 10, 2004, we begin
trading as a publicly listed company
on the Toronto Stock Exchange.
10
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
20 04 Marc Provost
Senior Vice-President,
Managing Director and Chief
Investment Officer, Intact
Investment Management Inc.
Solid investment returns
The team at Intact Investment
Management has consistently
delivered solid returns by managing
investments conservatively and
having the discipline to not reach
for returns at the expense of undue
risk. Through an unparalleled
relationship with senior executives,
every aspect of the investment
strategy and asset class mandates
is custom-made to meet Intact
Financial’s objectives. We manage
the investments on an after-tax basis
and hold a predominantly Canadian
portfolio where 99% of fixed income
is rated ‘A’ or better.
Lucie Martel
Senior Vice-President and
Chief Human Resources Officer
In-house expertise
As we move into the second year
of the AXA Canada integration, I am
particularly pleased with the talent
retention and cultural fit between
the two organizations. An employee
survey conducted in autumn 2012
shows that employee engagement
has increased since last surveyed,
even after such a large integration.
I feel strongly that our people are
our greatest strength, and our in-
house expertise plays a substantial
role in setting us apart from the
competition in terms of turnaround
time, cost control and customer
satisfaction.
Françoise Guénette
Senior Vice-President, Corporate
and Legal Services and Secretary
Sound corporate governance
We believe that sound corporate
governance and compliance
monitoring related to legal and
regulatory requirements and
best practices are paramount for
maintaining the confidence of our
various stakeholders, including
investors. We have specialized legal
resources in-house as well as access
to third party legal experts. Reporting
directly to the CEO and the Board
of Directors and its Committees on
matters of compliance, regulatory,
legal and litigation issues provides an
important element of independent
oversight.
Claude Désilets
Senior Vice-President and
Chief Risk Officer
Sophisticated pricing and
underwriting discipline
Proactive risk management and
strict underwriting discipline are
essential for consistent long-term
underwriting outperformance,
as shown by Intact’s three-point
outperformance on combined
ratio over the past 10 years. Our
scale provides us the data to build
a world-class pricing model, while
prudent reserving practices ensure
that we are reflecting changes in
the claims environment in a timely
manner and mitigating potential
losses through a rapid response in
education, coverage and pricing.
Mark A. Tullis
Senior Vice-President and
Chief Financial Officer
Strong capital base
Our solid balance sheet and
conservative capital approach
have allowed us to increase
dividends each year since our IPO,
while also investing in growth
opportunities. In fact, our capital
position remains solid despite
completing two acquisitions in the
past 18 months. Our investment
mix and the short-tail nature of
our business help shield us from
capital markets volatility. We are
proud that our shareholders have
the highest confidence in our
financial reporting.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
11
four distinCt avenues for growth
our journey has various potential avenues, all of
which lead to profitable growth.
2009 | ING Group sells
its remaining 70% majority
ownership to the public. We
complete our transformation
from a Canadian subsidiary of a
Dutch banking and insurance
giant into an independent
Canadian-listed and widely
held company. ING Insurance
Company of Canada becomes
Intact Insurance Company,
and we rebrand the financial
holding company Intact Financial
Corporation, with over
7,500 employees.
2009 | Our employees
continue to show their
commitment to making the
communities where we live and
work safer, healthier and
happier places. Together with
the Company, we donate more
than $1 million to the United Way
in the year.
1 Firming
markeT
ConDiTions
(0–2 yearS)
PErSONAl lINES
• Build on outperformance
in automobile to
accelerate growth
• Industry premiums likely
to be bolstered by hard
market conditions in
personal property
COmmErCIAl lINES
• Leverage acquired expertise
and products, and our
industry outperformance
to gain share in a firming
environment
2 Develop exisTing
plaTForms
(0–3 yearS)
Continue to expand
support to our
broker partners
leverage addition of
aXa Canada and
jevco products
expand and grow
belairdirect and
grey Power
build a broker
offer better able
to compete with
direct writers
3 ConsoliDaTe
CanaDian
markeT
(0–5 yearS)
CAPITAl
4 expanD
beyonD
exisTing
markeTs
(0–5+ yearS)
• Solid financial position
PrINCIPlE
STrATEGy
• Grow areas where IFC has a
competitive advantage
OPPOrTUNITIES
• Canadian P&C industry remains
fragmented
• Global capital requirements
becoming more stringent
• Continued difficulties in global
capital markets
• Build organic growth pipeline
with meaningful impact
within 5+ years
STrATEGy
• Enter new market by leveraging
our world-class strengths:
1) pricing and segmentation,
2) claims management, and
3) online expertise
12
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
20 09
industry outPerformanCe
Consistent, industry-leading performance
is a hallmark of our journey.
Direct premiums written growth
(%) (Base 100 = 2002)
IFC
Industry
Combined ratio1
(%)
IFC
Industry
240
200
160
120
80
40
30
20
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Return on equity2
(%)
IFC
Industry
110
100
90
80
70
20
15
10
5
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
IFC
#2
#3
#4
#5
Market share by company
DPW ($ billions)
Market share (%)
outperformance
industry
benchmark3
iFC
2012
5-year
average4
DpW growth
34.3%
2.7% 3,158 bps 881 bps
Combined ratio1
93.4%
98.1%
464 bps 537 bps
return on equity2
16.5%
10.3%
618 bps 508 bps
the combination of superior underwriting
results and the productive deployment of our
capital led to an roe outperformance of more
than 6 percentage points in 2012.
Industry data source: MSa research excluding lloyd’s, IcBc, SGI, SaF, MpI, Genworth and IFc, as at Dec. 31, 2012.
1 combined ratio includes the market yield adjustment (“Mya”).
2 roes reflect IFrS beginning in 2010. Since 2011, IFc’s roe is adjusted return on common shareholders’ equity
(“aroe”), as defined on page 26.
3 Generally consists of the 20 largest companies, excluding lloyd’s, Genworth, FM Global and IFc.
4 5-year period ending Dec. 31, 2012.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
13
240
200
160
120
80
40
35
30
25
20
15
10
5
0
'2003
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
IFC
112
114
128
130
134
136
139
146
167
224
Industry
114
118
119
122
125
129
133
141
146
151
'2003
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
IFC
98.2
86.2
86
89.4
94.7
98.3
99.7
96.28
96.1
93.44
Industry
99.1
91.6
92.8
91.8
93.8
101.9
101.7
101.04
100
96.88
'2003
Market Share
Market Share
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
'2003
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
Direct written premium growth
DPW
DPW
Combined ratio %
Industry
IFC
Market Share
DPW
'2003
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
IFC
#2
#3
#4
#5
Return on Equity
Marke t Share
IFC
#2
#3
#4
#5
DPW
7
3.55
2.76
2.71
2.39
Market Share
16.6
8.4
6.5
6.4
5.7
'2003
'2004
'2005
'2006
'2007
'2008
'2009
'2010
'2011
'2012
IFC
15.4
39.8
35
27
19.7
4.4
4.3
16.7
17.4
16.5
Industry
11.1
18.1
17.2
16.6
14.4
5.1
6.4
6
6.3
10.29
110
Industry
IFC
100
90
80
70
20
Industry
IFC
15
10
5
0
Customer driven brands offer ChoiCe
Committed to our customers
At BrokerLink, we deliver an excellent customer
experience on the phone, online or in person.
We make it easy for our customers to connect with
us by offering extended calling hours, online
chat and our friendly, in-branch local service. |
BrokerLink insurance advisors are ready to serve. We
use feedback from our customer surveys to build an
even better service experience. We’re dedicated
to providing the right advice, recommending the most
appropriate coverage and finding the best value for
each customer. |
BrokerLink is one of the largest P&C insurance
brokerages in Canada with over 60 offices and more
than 750 employees across Ontario and Alberta –
writing more than $550 million in premiums for our
225,000 customers.
2011 | more than 7,000
people are evacuated from the
Northern Alberta region due
to the Slave lake wildfires. We
are one of the first insurance
companies on the scene to help
get our customers back on track.
In less than 24 hours, we establish
three mobile claims centres and,
in less than two weeks, help over
1,000 families, in some cases
providing emergency funding.
2011 | We acquire
AXA Canada for $2.6 billion,
increasing our direct premiums
written by $2.0 billion to more
than $6.5 billion. This acquisition
strengthens our offerings,
notably in business insurance.
It also improves our capacity
to support brokers, expands
our distribution platform and
deepens the quality of our
management team. We employ
over 10,000 people in Canada for
the first time, and grow our rely
network of auto repair shops to
over 600 from 450 in 2004.
14
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
20 11
Products provided with the advice of a
broker conveniently accessible via web,
mobile, telephone and in person
Intact Insurance is Canada’s largest provider of home,
auto and business insurance, chosen by more than
four million customers. We focus on what matters
most to customers – getting them back on track as
quickly as possible after an unexpected event. |
Our coast to coast presence and strong relationships
with more than 2,000 insurance brokerages mean
the company can provide the outstanding service,
comfort and continuity customers deserve.
| We continue to invest in easy and convenient
access to our products by adapting to customers’ and
consumers’ needs. In 2012, our Buy Online platform
enabled consumers in Ontario, Québec and Alberta
to use the convenience of the web to access car
insurance with brokers completely integrated into the
process. In addition, we made our website content
accessible on mobile devices.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
15
Customer driven brands offer ChoiCe
2012 | less than a year
after announcing the AXA Canada
acquisition, we announced the
purchase of Jevco Insurance
Company, expanding our product
suite to include recreational
vehicles and commercial specialty
lines. We now have over 5 million
customers, and insure 2.2 million
properties and 3.6 million
vehicles in the personal lines
segment alone. Over 3,000 claims
professionals work to resolve
more than 500,000 claims this
year. We replace 5,650,000 sq. ft.
of flooring in 2012, an area equal
to 333 NHl hockey rinks.
2012 | At year end, our
five-year total shareholder
return of 91.1% is significantly
ahead of the broader S&P/TSX
Composite Index return of 4.1%
and the U.S. P&C Insurance
Index return of 4.0%.
16
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
savings for good drivers
50 or over
Grey Power rewards experienced drivers with great value
for money and service tailored for Canadians 50 or over.
In the last 20 years, we have built a strong brand and
emerged as a leader and top choice for this demographic.
we reCogniZe good drivers and
good drivers reCogniZe us
“Highest in Customer satisfaction among auto insurers in the
ontario/atlantic region”* 2012 J.D. power and associates
| Grey Power is highly customer driven and believes
in providing friendly, expert advice both online and
by phone. In 2012, Grey Power was awarded “Highest
in Customer Satisfaction among Auto Insurers in
the Ontario/Atlantic Region” by J.D. Power and
Associates. | Convenience is key to our customers
and their busy lifestyles. We continue to build a
stronger online presence. With simple navigation
and rich content, customers have ready access to
the information required to make sound insurance
decisions. This, coupled with extended hours in the
call centre, puts customers in the driver’s seat when it
comes to deciding when and how they buy insurance.
20 12 savings for good drivers
50 or over
Keeping it simple to better serve
our customers
For nearly 60 years now, belairdirect has been
devising comprehensive and innovative home and
auto insurance solutions to meet the specific needs of
Canadians. Today, belairdirect has even more to offer:
personalized services provided any time, with auto
insurance quotes available online, by mobile phone,
electronic tablet or telephone, and even in person
at our local branches. To give customers greater
control and make their insurance experience more
convenient, they can purchase a car insurance policy
online, manage their own file and follow up on their
claims, all the while chatting with a representative,
should they so desire. | Recently, belairdirect
added an easy-to-use online home insurance quote
to its wide range of services. And with a new website
in the works, as well as a new approach to online auto
insurance transactions, the Company is positioning
itself as a world-class direct insurer. | 2012 was
a winning year for belairdirect, ranking “Highest in
Customer Satisfaction among Home Insurers in the
Ontario/Atlantic region,” according to J.D. Power
and Associates.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
17
we are on the journey with our Customers every steP of the way
2013–15 | Outperforming
from an rOE perspective is
important to outgrow the industry
over time – our objective is to beat
the industry’s rOE by at least 5 points
every year. We outperformed by
an average of 9 points over the past
three years and 6 points in 2012.
| Over the next three years,
we expect our outperformance
to come from pricing and
segmentation, claims management,
and investments and capital
management. We also intend to
reinvest in improving
our customers’ experience.
2013–15 | We also
have an objective to grow our
net operating income per share
(“NOIPS”) by 10% per year
over time. We believe this is the
best way to express our growth
ambition. NOIPS growth
averaged 29% over the past
three years and was 28% in 2012.
| Over the next three years, we
expect annual growth in NOIPS
to come from organic growth,
margin improvement and capital
management/deployment.
“ I have talked to many of
the thousands of flooded
people and many with other
companies are upset/not
happy with their companies –
all with Intact had very
positive comments.”
– Bernard K., Thunder Bay, ON
“ So very pleased with the
workers – always easy to
deal with. Thank you.”
– Marlene B., Thunder Bay, ON
“ I have nothing but good
things to say about Intact
Insurance and the members
of the Rely Network. I did
not have to wait long; that
afternoon, a contractor came
to the house to temporarily
stop the leak and prevent
any further damage.”
– Pierre S., Dollard-des-
Ormeaux, QC
“ In my opinion she has gone
far above and beyond what
I expected from an insurance
claim agent.”
– Melanie C., Calgary, AB
18
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
From offering the insurance products customers want,
when and how they want them, to answering over
two million claims calls within seconds, any time of
day, 365 days a year, we aim to keep things quick
and easy for the customer every step of the way. |
At Intact, we recognize that customers are diverse
individuals, and we strive to deliver a tailored product,
in a manner that is most convenient to them. For those
who prefer the guidance of a broker, we are available
through a network of over 2,000 brokerages, coast to
coast, including our own BrokerLink with more than
700 employees. New in 2012, customers are now
able to quickly obtain an auto quote and purchase
insurance online, with the option to connect with a
broker at any point. Furthermore, in listening to our
customers’ needs, we broadened our product offering
this past year to include recreational vehicles such as
motorcycles and ATVs, while continuing to grow and
fine tune our direct channel products. We continue
to recognize experienced drivers with good driving
records through Grey Power, while belairdirect now
provides customers with nearly the full experience,
20152013–
from quote to claim, from the convenience of a laptop
Mother Nature unleashes tremendous stress on
or tablet. | Last year, over five million Canadians
the operation. |
In mid-August, the city of Calgary
chose to renew their policies with us. We now insure
suffered a hailstorm that impacted thousands of
one in six cars and over 1.7 million homes in Canada.
customers. An after-hours call centre went to work
With that comes the responsibility to continue our
the same day, and within a week, we had set up a
commitment to put customers first and get them
50,000 sq. ft. auto facility to assess damages, remove
dents and provide rentals on site. | In late May, the
city of Thunder Bay declared a state of emergency
after a rainstorm unleashed 91 millimetres of rain,
flooding the city’s sewage facility and impacting over
1,000 customers. Within 24 hours, additional staff was
mobilized, bringing over 20 additional field adjusters
and 100 contracting crews to the local community.
We were the only insurance company to set up a
drive-in centre right in town. | These are some
of the many ways we commit to getting customers
back on track and back to their normal lives. It is a
commitment on which we can deliver through our
coast to coast presence, the quality control possible
through in-house expertise and our interconnectivity
~500,000
claims resolved
3,000
claims professionals
2 million+
calls answered
back on track after an adverse event. We believe
in terms of telephony and technology. When we asked
what makes us unique is our speed of response,
our customers how satisfied they were and whether
unparalleled customer service and local presence
they would recommend us to their friends and family
coast to coast. | By picking up the phone in
after a claim, we were pleased to hear that we are
seconds and handling almost all claims in-house, we
rated among the best in North America. We strive to
can provide a seamless experience while mitigating
do even better each year and, to this end, are investing
damages and helping customers recover promptly.
in modernizing our claims technology to increase
Working jointly with providers selected individually
efficiencies, and reduce fraud and abuse in the system,
based on their own merits, we are able to maintain a
which costs customers and insurers alike.
service that goes beyond expectations, even when
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
19
soCial resPonsibility
our commitment to helping people goes beyond our
promise to provide an outstanding experience to consumers
who choose to place their trust and confidence in us.
Our commitment extends to helping build strong
and resilient communities where we live and work.
| Throughout the year, we continued to strengthen,
intensify and deepen our philanthropic giving and
social responsibility endeavours as we supported more
than 200 charitable organizations across the country
and helped deliver two significant initiatives aimed at
helping Canadians adapt to climate change and source
solutions to youth homelessness.
fostering safe and vibrant communities |
The impact of youth homelessness is widespread
and it extends well beyond the 65,000 Canadian
youth who do not have a place to call home; it affects
us all – socially and economically. As a result, it is
imperative to find sustainable solutions to help enable
homeless youth to become active, independent and
contributing members of society. | That’s why we’re
focused on helping alleviate youth homelessness and
encouraging independence and strength-of-mind
among at-risk youth in Canada. We believe that every
youth deserves a safe, adequate and affordable place
that they can call home and the hope, encouragement
to help prospective employers and community
and opportunity to develop to their full potential. |
agencies give disadvantaged youth opportunities
We actively participate in Raising the Roof’s Youthworks
in today’s workforce. In 2012, approximately 500 of
initiative by providing employment opportunities to
our employees also participated in Raising the Roof’s
at-risk youth and by sharing the successes and lessons
Toque Campaign to help raise awareness about youth
from our experience. Released in November 2012,
homelessness and funding for local shelters. |
Raising the Roof’s comprehensive report records
In 2012, we continued to support and expand the
the experiences of business, agencies and youth
network of shelters and community agencies in large
in a series of interviews and a national roundtable
urban centres across Canada that provide homeless
discussion. It focuses on understanding how to
youth with a place to stay, counselling and vocational
motivate and support Canadian business to provide
support. For example, we helped the YMCA of Greater
innovative employment, mentorship and skills training
Toronto extend their services, increase the number
opportunities to disadvantaged youth. Along with
of staff and offer youth transition programs at one of
the report, Raising the Roof launched resources
their shelters and drop-in centres.
20
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
adapting to changing weather patterns |
must adapt to climate change. | That’s why we have
Climate change is one of the most significant issues
been collaborating with the University of Waterloo on
facing Canadian society today. As the largest provider
the Climate Change Adaptation Project, an initiative
of property and casualty insurance in Canada, we know
designed to identify and operationalize practical,
that climate change is a reality as we witness the
meaningful and cost-effective adaptation solutions to
impact of rising temperatures, heavier precipitation
the most challenging impacts of climate change facing
and more frequent and severe storms firsthand. |
Canada. Working with a diverse and distinguished
Extreme weather leaves behind an emotional and
community of Canadian climate change experts, the
economic burden on communities and society at
project’s team identified the most vulnerable areas
large. In 2012 alone, we witnessed Mother Nature’s
where adaptive solutions to climate change are most
fury with rainstorms in Montreal and Thunder Bay
urgently required. These include: city infrastructure,
and hailstorms in Calgary and Ottawa. The frequency
biodiversity, freshwater resources, Aboriginal
and severity of these events remind us that our
communities and agriculture. |
environment is vulnerable and Canadian society
In June 2012, Intact and the University of Waterloo
released Canada’s most comprehensive roadmap for
climate change adaptation in Canada, which outlined
20 practical and cost-effective recommendations that
can be implemented on a priority basis in the short
term. We believe that this roadmap is an opportunity
for Canada to implement effective climate change
adaptation solutions that will build strong and
resilient communities for generations to come. |
The acquisitions of AXA Canada and Jevco and the
integration of more than 2,000 people are providing
us with the opportunity to move to modern buildings
and improve our existing facilities. During the year,
our employees in Mississauga moved to a Leadership
in Energy and Environmental Design-designated office
and, later this year, our people in Halifax and Québec
City will be moving to new, modern offices and we will
be renovating and improving the energy efficiency of
our 2020 University St., Montreal office. A number
of our facilities are also making improvements by
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
21
$4000000
$3500000
$3000000
$2500000
$2000000
$1500000
$1000000
$500000
$0
2009
2010
2011
2012
2012
"2009
"2010
"2011
"2012
"2012
2.51977e+06
2.69165e+06
2.80344e+06
3.53965e+06
0
soCial resPonsibility
installing more efficient heating and cooling systems
and water saving mechanisms. We also encourage
our environmentally minded people to come together
in green teams to help promote sustainability in their
workplace and inspire colleagues to make sound
environmental choices.
encouraging the involvement and citizenship
of our people | We encourage and support
the charitable initiatives and involvement of our
employees in their communities by providing financial
support and time off through our community and
volunteer matching gift programs, our Team Volunteer
Day and our annual United Way campaign. | During
2012, more than 800 of our employees participated
in our donation and volunteer matching gift programs
that can provide up to $1,000 per employee to
charitable organizations. Furthermore, more than
1,300 of our people participated in our Team Volunteer
Day program and spent close to 11,000 hours helping
the non-profit organization of their choice deliver
5
.
3
$
8
.
2
$
7
.
2
5 $
.
2
$
09
10
11
12
Total donations
(in millions)
their services. | We also recognize the important
role that social agencies play in their respective
communities. That’s why we support the United Way
as they identify and tackle the root causes of social
issues for the betterment of our communities. In 2012,
our people generously increased their United Way
contributions to approximately $920,000, and we
enthusiastically matched their donations, bringing
our collective giving to the campaign to more than
$1.8 million.
SOCIAl rESPONSIBIlITy
STATEmENT
At Intact, we respect the
environment and its finite
resources and we believe
in making the communities
where we live and work safer,
healthier and happier. We
demonstrate this by being
environmentally responsible
in our operations, supporting
our people in their citizenship
endeavours, encouraging
climate change adaptation and
fostering vibrant and resilient
communities for all of our
stakeholders.
22
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Intact Financial Corporation
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Table of ConTenTs
section 1 – Profile ........................................................................................................... 25
section 2 – Key performance indicators........................................................................ 26
section 3 – overview of our consolidated performance .............................................. 27
section 4 – operating results ......................................................................................... 29
section 5 – non-operating results ................................................................................. 34
section 6 – business developments and operating environment ............................... 36
section 7 – strategy and outlook ................................................................................... 40
section 8 – financial condition ...................................................................................... 42
section 9 – liquidity and capital resources ................................................................... 48
section 10 – Capital management ................................................................................... 51
section 11 – Risk management ........................................................................................ 52
section 12 – off-balance sheet arrangements ................................................................ 66
section 13 – accounting and disclosure matters ............................................................ 66
section 14 – Investor information ................................................................................... 71
section 15 – selected annual and quarterly information ............................................... 73
section 16 – non-IfRs financial measures ...................................................................... 74
section 17 – Cautionary note regarding forward-looking statements .......................... 75
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
23
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
February 5, 2013
The following MD&A is the responsibility of management and has been reviewed and approved by the Board of Directors for
the year ended December 31, 2012. This MD&A is intended to enable the reader to assess our results of operations and financial
condition for the three- and twelve-month periods ended December 31, 2012, compared to the corresponding periods in 2011. It
should be read in conjunction with our audited Consolidated financial statements for our fiscal year ended December 31, 2012. All
amounts herein are expressed in Canadian dollars.
We use both IFRS and non-IFRS measures to assess performance. Non-IFRS measures do not have any standardized meaning
prescribed by IFRS and are unlikely to be comparable to any similar measures presented by other companies. See Section 16 –
Non-IFRS financial measures for the definition and reconciliation to the most comparable IFRS measures. Management
analyzes performance based on underwriting ratios such as combined, expense, loss and claims ratios, as well as other performance
measures such as AEPS, NOIPS, ROE, AROE, OROE, MCT and debt-to-capital ratio. These measures and other insurance-
related terms used in this MD&A are defined in the glossary available in the “Investor Relations” section of our web site at
www.intactfc.com. Further information about Intact Financial Corporation, including the Annual Information Form, may be found
online on SEDAR at www.sedar.com.
forward-looking statements
This document contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially
from these forward looking statements as a result of various factors, including those discussed hereafter or in our 2012 Annual
Information Form. Please read the cautionary note in Section 17 – Cautionary note regarding forward-looking statements.
Certain totals, subtotals and percentages may not agree due to rounding. 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 not meaningful, or if the percentage change exceeds 1,000%. “Intact”, the “Company”,
“IFC”, “we” and “our” are terms used throughout the document to refer to Intact Financial Corporation and its subsidiaries.
Important notes:
− All references to DPW in this MD&A exclude industry pools, unless otherwise noted.
− All underwriting results and related ratios exclude the MYA, but include our share of the results of jointly held insurance
operations, unless otherwise noted.
− Net investment income includes our share of the results of jointly held insurance operations, unless otherwise noted.
− Catastrophe claims are any one claim, or group of claims, equal to or greater than $7.5 million ($5 million in 2011), related to a
single event.
− All references to “excess capital” in this MD&A include excess capital in the P&C subsidiaries at 170% MCT plus net liquid
assets of the non-regulated entities, unless otherwise noted.
24
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Glossary of abbreviations
This MD&A contains abbreviations which are defined as follows:
aePs
Adjusted EPS
MCT
Minimum capital test
Available-for-sale
MD&a
Management’s Discussion and Analysis
afs
aMf
Autorité des marchés financiers
aoCI
Accumulated OCI
aRoe
Adjusted ROE
MYa
nCIb
noI
Market yield adjustment
Normal course issuer bid
Net operating income
DbRs
Dominion Bond Rating Services
noIPs
NOI per share
DPW
Direct premiums written
oCI
Other comprehensive income
ePs
Earnings per share to common shareholders
oRoe
Operating ROE
fsCo
Financial Services Commission of Ontario
fVTPl
Fair value through profit and loss
Iasb
IbnR
IfRs
IRR
KPI
International Accounting Standards Board
Incurred but not reported
International Financial Reporting Standards
Internal rate of return
Key performance indicators
seCTIon 1 – Profile
osfI
P&C
PfaD
Roe
s&P
U.s.
Office of the Superintendent of Financial Institutions
Property and casualty
Provision for adverse deviation
Return on equity
Standard & Poor’s
United States
1.1 overview
We are the largest provider of P&C insurance in Canada with $6.9 billion in DPW and an estimated market share of 17%. We
insure more than five million individuals and businesses through our insurance subsidiaries and are the largest private sector
provider of P&C insurance in British Columbia, Alberta, Ontario, Québec and Nova Scotia. We distribute insurance under the
Intact Insurance brand through a wide network of brokers and our wholly owned subsidiary, BrokerLink, while non-standard auto
insurance in Ontario is distributed under the Jevco brand. We also distribute insurance directly to consumers through belairdirect
and Grey Power. We internally manage our investments totalling approximately $13.0 billion.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
25
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
seCTIon 2 – Key performance indicators
Our most relevant KPI are defined in the tables below. NOI, NOIPS, AROE, OROE and AEPS are considered non-IFRS financial
measures. See Section 16 – Non-IFRS financial measures for the reconciliation to the most comparable IFRS measures.
Growth indicators
DPW growth
Total amount of premiums written during a specified period compared to the same period last year
(in percentage).
Written insured risks growth
Number of vehicles in automobile insurance, number of premises in personal property insurance
and number of policies in commercial insurance (excluding commercial auto insurance) compared to
the same period last year (in percentage).
Profitability indicators
noI
noIPs
Roe
aRoe
oRoe
ePs
aePs
IRR
As detailed in Table 2 – Components of NOI.
NOI for a specific period less preferred share dividends, divided by the weighted-average number of
common shares outstanding during the same period.
Net income for a 12-month period less preferred share dividends, divided by the average
shareholders’ equity (excluding preferred shares) over the same 12-month period. Net income and
shareholders’ equity are determined in accordance with IFRS. The average shareholders’ equity is
the mean of shareholders’ equity at the beginning and the end of the period, adjusted for significant
capital transactions, if appropriate.
Net income from continuing operations for a 12-month period less preferred share dividends, plus
the after-tax impact of amortization of intangible assets recognized in business combinations,
integration and restructuring costs and change in fair value of contingent consideration, divided by
the average shareholders’ equity (excluding preferred shares) over the same 12-month period. Net
income from continuing operations and shareholders’ equity are determined in accordance with
IFRS. The average shareholders’ equity is the mean of shareholders’ equity at the beginning and end
of the period, adjusted for significant capital transactions, if appropriate.
NOI for the last 12 months divided by the average shareholders’ equity (excluding preferred
shares and AOCI) over the same 12-month period. The average shareholders’ equity is the mean
of shareholders’ equity at the beginning and the end of the period, adjusted for significant capital
transactions, if appropriate.
As reported in the audited Consolidated statements of comprehensive income.
Net income from continuing operations for a specific period less preferred share dividends plus
the after-tax impact of amortization of intangible assets recognized in business combinations,
integration and restructuring costs and change in fair value of contingent consideration, divided by
the weighted-average number of common shares outstanding during the same period.
The rate of return expected to be produced on the shareholders’ capital deployed over the life of a
project or acquisition.
26
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Performance and execution indicators
Claims ratio
expense ratio
Combined ratio
financial strength indicators
Claims incurred, net of reinsurance, during a specific period and expressed as a percentage of net
premiums earned for the same period.
Underwriting expenses including commissions, premium taxes and general expenses incurred in
connection with underwriting activities during a specific period and expressed as a percentage of
net premiums earned for the same period.
The sum of the claims ratio and the expense ratio. A combined ratio below 100% indicates a profitable
underwriting result. A combined ratio over 100% indicates an unprofitable underwriting result.
book value per share
Shareholders’ equity (excluding preferred shares) divided by the number of common shares
outstanding at the same date. Shareholders’ equity is determined in accordance with IFRS.
MCT
Minimum capital test, as defined by OSFI and AMF.
Debt-to-capital ratio
Total debt outstanding divided by the sum of total shareholders’ equity and total debt outstanding,
at the same date.
Incentive compensation is based on the comparison of results for DPW growth, combined ratio, NOIPS and AROE as defined
above, against those of our Canadian P&C insurance industry benchmark. See Section 6 – Business developments and operating
environment for more details on our performance versus the industry.
seCTIon 3 – overview of our consolidated performance
3.1 fourth quarter highlights
– Net operating income per share up 25% to $1.42, reflecting a combined ratio of 92.1%
– Premium growth of 7%, bolstered by the addition of Jevco
– Operating ROE of 16.8%, with an 11% increase in book value per share in 2012
– Quarterly dividend raised 10% to $0.44 per share
– AXA Canada and Jevco integrations on track
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
27
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
3.2 Consolidated financial results
Table 1 – fInanCIal hIGhlIGhTs
selected highlights
DPW
Underwriting income (table 4)
Combined ratio
Net investment income (table 9)
Integration and restructuring costs
Change in fair value of contingent
consideration
Finance costs
Income before income taxes (table 10)
Income taxes
Effective income tax rate
Net income from continuing operations
Net income from discontinued operations
net income attributable to shareholders
Preferred share dividends
net income attributable to
common shareholders
EPS, basic and diluted (in dollars)
AEPS, basic and diluted (in dollars)1
NOI (table 2)1
NOIPS, basic and diluted (in dollars)1
ROE for the last 12 months2
AROE for the last 12 months1,2
OROE for the last 12 months1,2
Book value per share (in dollars)
Q4-2012
Q4-2011
Change
2012
2011
Change
1,690
138
92.1%
102
29
–
16
228
47
20.6%
181
–
181
(5)
176
1.32
1.51
194
1.42
13.8%
16.5%
16.8%
33.03
1,576
118
92.7%
103
42
41
15
116
40
34.5%
76
8
84
(5)
79
0.62
1.14
152
1.14
14.3%
17.4%
15.3%
29.73
7%
17%
(0.6) pts
(1)%
(31)%
(100)%
7%
97%
18%
(13.9) pts
138%
(100)%
115%
–
123%
113%
32%
28%
25%
(0.5) pts
(0.9) pts
1.5 pts
11%
6,868
451
93.1%
389
108
11
60
734
147
20.0%
587
–
587
(21)
566
4.33
5.15
675
5.00
5,099
273
94.4%
326
71
41
41
594
137
23.1%
457
8
465
(8)
457
3.96
4.82
460
3.91
35%
65%
(1.3) pts
19%
52%
(73)%
46%
24%
7%
(3.1) pts
28%
(100)%
26%
163%
24%
9%
7%
47%
28%
1 refer to Section 16 – Non-IFRS financial measures.
2 In 2012, the average shareholders’ equity calculation was adjusted on a pro rata basis to account for the $229 million of common shares issued as at September 4, 2012 (2011 calculation
was adjusted for the $921 million issued as at September 23, 2011).
fourth quarter 2012
We reported a 92.1% combined ratio in Q4-2012, representing a 0.6 point improvement versus Q4-2011. A number of positive
elements bolstered the results, including a high level of favourable prior year claims development, a low amount of catastrophe
losses and benign weather. Offsetting these positives were an elevated level of large losses in commercial P&C and the impact of our
actions taken to protect against early signs of deterioration in bodily injury claims in Alberta and uncertainty in Ontario. Although
there were large year-over-year movements in the reported results of our personal lines businesses, overall we believe the 92.1%
combined ratio is indicative of our underlying performance in the quarter.
Net investment income of $102 million in the fourth quarter was relatively flat from a year ago, as additional investments obtained
from the Jevco Insurance Company (“Jevco”) acquisition were offset by declining yields. The market-based yield of 3.6% was down
from 3.9% in Q4-2011. Investments amounted to $13.0 billion, up $1.1 billion from one year ago.
28
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
DPW growth of 7% reflects the addition of Jevco and low single-digit organic growth, driven by our direct businesses. As we remain
in the early stages of the integration, growth in the quarter was not impacted by any loss of premiums from re-underwriting the
Jevco business.
We ended Q4-2012 in a solid financial position, with an estimated MCT of 205%, $599 million in excess capital, and book value
per share of $33.03, 11% higher than a year ago. Our debt-to-capital ratio at the end of the year was 18.9%, below our internal
target level of 20%. We reported an operating ROE of 16.8% for 2012, slightly above our adjusted ROE of 16.5%.
full year 2012
DPW growth of 35% in 2012 reflects the additions of AXA Canada Inc. (“AXA Canada”) and four months of Jevco. Underwriting
income increased $178 million in 2012, with a combined ratio of 93.1%, compared to 94.4% in 2011. The increase in underwriting
income reflects the addition of AXA Canada and was the result of improved current year results and higher favourable prior year
claims development, which more than offset higher catastrophe losses. The underlying current year loss ratio (excluding the impact
of catastrophes and prior year claims development) improved 0.6 points versus 2011. Overall, three of our four lines of business
reported improved underwriting results – the exception was personal auto, which recorded a combined ratio of 95.7%, less strong
than the 90.9% in 2011.
Net investment income of $389 million in 2012 was up 19% from a year ago as a result of the additional investments obtained as
part of the AXA Canada and Jevco acquisitions, partially offset by declining yields.
The increase in underwriting income combined with higher investment income more than offset the $68 million decline in net
investment gains excluding FVTPL fixed-income securities, resulting in adjusted EPS of $5.15 in 2012, 7% higher than last year.
seCTIon 4 – operating results
4.1 net operating income
The details of NOI and related indicators are as follows:
Table 2 – CoMPonenTs of noI
Underwriting income (table 4)
Net investment income (table 9)
Other income (expense), net1
Pre-tax operating income (table 3)
Tax impact
noI2
Preferred share dividends
noI to common shareholders
Weighted-average number of common
shares (in millions)
noIPs, basic and diluted (in dollars)2
1 Includes corporate expenses and distribution results.
2 refer to Section 16 – Non-IFRS financial measures.
Q4-2012
Q4-2011
138
102
6
246
(52)
194
(5)
189
118
103
(11)
210
(58)
152
(5)
147
133.3
1.42
129.6
1.14
Change
17%
(1)%
(155)%
17%
(10)%
28%
–
29%
3.7
25%
2012
451
389
14
854
(179)
675
(21)
654
130.8
5.00
2011
273
326
(3)
596
(136)
460
(8)
452
115.3
3.91
Change
65%
19%
(567)%
43%
32%
47%
163%
45%
15.5
28%
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
29
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Changes in pre-tax operating income can be analyzed as follows:
Table 3 – ChanGes In PRe- Tax oPeRaTInG InCoMe ( YeaR -oVeR -YeaR )
Pre-tax operating income, as reported in 20111
Changes in underwriting income:
Change in favourable prior year claims development
Other changes in underwriting income
Change in catastrophe losses
Total change in underwriting income
Change in net investment income
Change in other income, net
Total change in pre-tax operating income
Pre-tax operating income, as reported in 20121
1 refer to Section 16 – Non-IFRS financial measures.
4.2 Underwriting results
Table 4 – CoMPonenTs of UnDeRWRITInG ResUlTs
net premiums earned
Net claims:
Current year claims (excluding catastrophes)
Current year loss ratio
Current year catastrophes
Favourable prior year claims development
Total net claims
Claims ratio
Commissions, premium taxes,
general expenses
Expense ratio
net underwriting income
Combined ratio
fourth quarter 2012
Q4-2012
Q4-2011
Change
1,742
1,616
8%
1,121
64.4%
16
(85)
1,052
60.4%
552
31.7%
138
92.1%
1,009
62.5%
32
(38)
1,003
62.0%
495
30.7%
118
92.7%
11%
1.9 pts
(50)%
124%
5%
(1.6) pts
12%
1.0 pts
17%
(0.6) pts
2012
6,571
4,179
63.6%
245
(372)
4,052
61.6%
2,068
31.5%
451
93.1%
Q4-2012
210
47
(43)
16
20
(1)
17
36
246
2011
4,880
3,133
64.2%
208
(223)
3,118
63.9%
1,489
30.5%
273
94.4%
2012
596
149
66
(37)
178
63
17
258
854
Change
35%
33%
(0.6) pts
18%
67%
30%
(2.3) pts
39%
1.0 pts
65%
(1.3) pts
Underwriting income of $138 million in Q4-2012 was up 17% from Q4-2011. A $47 million increase in favourable prior year claims
development and a $16 million reduction in catastrophe losses more than offset the 1.9 point increase in the current year loss ratio
due to an elevated level of large losses in commercial P&C.
Favourable prior year claims development, at 5.2% of opening reserves on an annualized basis, was above the 2.8% recorded
in Q4-2011 and our historical level of 3%–4%. The favourable development, amounting to $85 million, was composed of
$60 million in commercial P&C, $43 million in personal property and $11 million in commercial auto, partially offset by
unfavourable development of $29 million in our personal auto line of business.
The expense ratio increased by one point in the fourth quarter versus Q4-2011, driven by increased variable commissions resulting
from improved profitability.
30
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
full year 2012
Underwriting income of $451 million in 2012 was up $178 million from 2011, largely reflecting the addition of AXA Canada. The
improvement was due to a 0.6 point reduction in the current year loss ratio and a $149 million increase in favourable prior year
claims development, partially offset by a $37 million increase in catastrophe losses.
Favourable prior year claims development, at 5.7% of opening reserves on an annualized basis, was above the 4.9% recorded in
2011 and our historical level.
The expense ratio was one point higher in 2012 versus 2011, as higher commissions related to the shift in our business mix
following the acquisition of AXA Canada and increased variable commissions resulting from improved profitability more than
offset improvements in the general expense ratio, driven by synergies.
4.3 Underwriting results by lines of business – personal lines
Table 5 – UnDeRWRITInG ResUlTs foR PeRsonal lInes
DPW
Automobile
Property
Total
Written insured risks (in thousands)1
Automobile
Property
Total
net premiums earned
Automobile
Property
Total
Underwriting income (loss)
Automobile
Property
Total
Q4-2012
Q4-2011
Change
2012
2011
Change
722
375
1,097
783
527
1,310
825
377
1,202
(25)
124
99
664
363
1,027
778
522
1,300
754
364
1,118
52
41
93
9%
3%
7%
1%
1%
1%
9%
4%
8%
(148)%
202%
6%
3,093
1,562
4,655
3,584
2,225
5,809
3,077
1,462
4,539
132
94
226
2,419
1,208
3,627
2,723
1,742
4,465
2,406
1,129
3,535
28%
29%
28%
32%
28%
30%
28%
29%
28%
219
(40)
179
(40)%
(335)%
26%
1 Written insured risks do not include Jevco.
Table 6 – UnDeRWRITInG RaTIos foR PeRsonal lInes
Personal auto
Claims ratio
Expense ratio
Combined ratio
Personal property
Claims ratio
Expense ratio
Combined ratio
Personal lines – total
Claims ratio
Expense ratio
Combined ratio
Q4-2012
Q4-2011
Change
2012
2011
Change
77.4%
25.7%
103.1%
31.7%
35.4%
67.1%
63.0%
28.8%
91.8%
68.2%
25.1%
93.3%
53.6%
35.0%
88.6%
63.4%
28.3%
91.7%
9.2 pts
0.6 pts
9.8 pts
(21.9) pts
0.4 pts
(21.5) pts
(0.4) pts
0.5 pts
0.1 pts
70.0%
25.7%
95.7%
57.8%
35.7%
93.5%
66.1%
28.9%
95.0%
65.8%
25.1%
90.9%
4.2 pts
0.6 pts
4.8 pts
68.4%
35.1%
(10.6) pts
0.6 pts
103.5%
(10.0) pts
66.6%
28.4%
95.0%
(0.5) pts
0.5 pts
0.0 pts
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
31
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
fourth quarter 2012
DPW growth in personal auto was 9% year-over-year in Q4-2012, reflecting the addition of Jevco and low single-digit organic
growth, primarily from our direct businesses. The combined ratio of 103.1% was 9.8 points weaker than last year’s solid 93.3%,
largely due to $29 million of unfavourable prior year claims development, versus $27 million of favourable development in
Q4-2011. This quarter’s unfavourable development resulted from our actions taken to protect against early signs of deterioration in
bodily injury claims in Alberta and uncertainty in Ontario (see Section 6.5 – Personal auto environment for further details). Some
of the actions impacted the 2012 accident year, resulting in a 2.9 point year-over-year increase in the underlying current year loss
ratio (excluding catastrophes and prior year claims development).
DPW growth in personal property was 3% year-over-year in Q4-2012, driven by higher rates. The Q4-2012 combined ratio of
67.1% was 21.5 points better than last year’s very strong 88.6%. This exceptionally strong performance was the result of an
unusually high level of favourable prior year claims development, our continued actions to improve profitability and benign
weather. A portion of the favourable development relates to the resolution of certain files that we consider “one-time” in nature,
which improved the combined ratio by approximately 6 points. Excluding catastrophes and prior year development, the underlying
current year loss ratio improved 5.8 points from last year.
full year 2012
Personal auto underwriting results deteriorated 4.8 points versus last year’s 90.9%, driven by higher catastrophe losses from a
severe August hail storm in Calgary, and a lower level of favourable prior year claims development, particularly in the fourth
quarter. Excluding catastrophes and prior year claims development, the underlying current year loss ratio was unchanged from
2011. DPW increased 28% from 2011, reflecting the additions of AXA Canada and four months of Jevco.
Underwriting results in personal property improved a substantial 10 points to 93.5% in 2012, aided by higher favourable prior
year claims development, benign weather in the first and fourth quarters of the year and continued actions to improve profitability.
Catastrophe losses for the year, while higher than historical levels, were not substantially different from 2011. We are committed
to achieving a combined ratio of 95% or better in this line of business, even if losses from catastrophes remain elevated. Excluding
catastrophes and prior year claims development, the underlying loss ratio improved 4.4 points versus 2011. DPW increased 29%
from 2011, reflecting the addition of AXA Canada.
4.4 Underwriting results by lines of business – commercial lines
Table 7 – UnDeRWRITInG ResUlTs foR CoMMeRCIal lInes
Q4-2012
Q4-2011
Change
2012
2011
Change
DPW
Automobile
P&C
Total
Written insured risks (in thousands)1
Automobile
P&C
Total
net premiums earned
Automobile
P&C
Total
Underwriting income
Automobile
P&C
Total
1 Written insured risks do not include Jevco.
146
447
593
120
113
233
146
394
540
23
16
39
130
419
549
101
107
208
130
368
498
10
15
25
12%
7%
8%
19%
6%
12%
12%
7%
8%
130%
7%
56%
552
1,661
2,213
477
443
920
536
1,496
2,032
99
126
225
396
1,076
1,472
325
294
619
384
961
1,345
52
42
94
39%
54%
50%
47%
51%
49%
40%
56%
51%
90%
200%
139%
32
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 8 – UnDeRWRITInG RaTIos foR CoMMeRCIal lInes
Q4-2012
Q4-2011
Change
2012
2011
Change
Commercial auto
Claims ratio
Expense ratio
Combined ratio
Commercial P&C
Claims ratio
Expense ratio
Combined ratio
Commercial lines – total
Claims ratio
Expense ratio
Combined ratio
fourth quarter 2012
54.7%
29.5%
84.2%
54.4%
41.5%
95.9%
54.5%
38.2%
92.7%
63.2%
29.8%
93.0%
57.5%
38.2%
95.7%
59.0%
36.0%
95.0%
(8.5) pts
(0.3) pts
(8.8) pts
(3.1) pts
3.3 pts
0.2 pts
(4.5) pts
2.2 pts
(2.3) pts
51.6%
29.9%
81.5%
51.9%
39.7%
91.6%
51.8%
37.1%
88.9%
56.7%
29.8%
86.5%
56.7%
38.9%
95.6%
56.7%
36.3%
93.0%
(5.1) pts
0.1 pts
(5.0) pts
(4.8) pts
0.8 pts
(4.0) pts
(4.9) pts
0.8 pts
(4.1) pts
DPW growth in commercial auto was 12% versus Q4-2011, reflecting the addition of Jevco and low single-digit organic growth. The
combined ratio of 84.2% was 8.8 points improved from last year’s 93.0%, reflecting higher favourable prior year claims development. The
underlying current year loss ratio (excluding catastrophes and prior year claims development) improved 1.8 points year-over-year.
Commercial P&C DPW increased by 7% in Q4-2012 versus the same quarter last year, reflecting the addition of Jevco and low
single-digit organic growth. The combined ratio of 95.9% was largely unchanged from 95.7% last year. The claims ratio improved
3.1 points, as higher favourable prior year claims development was partially offset by an elevated level of large losses, while the
expense ratio was 3.3 points higher due to an increase in variable commissions related to improved profitability and timing. The
underlying current year loss ratio, excluding catastrophes and prior year claims development, deteriorated 7.6 points versus Q4-2011.
full year 2012
DPW in commercial auto grew by 39% in 2012, reflecting the additions of AXA Canada and four months of Jevco. The combined
ratio was 81.5% in 2012 compared to 86.5% in 2011, with the improvement driven by higher favourable prior year claims
development and improved current year results. The underlying current year loss ratio (excluding catastrophes and prior year
claims development) improved 1.8 points year-over-year.
DPW growth in commercial P&C was 54% in 2012, reflecting the additions of AXA Canada and four months of Jevco. The
combined ratio improved 4.0 points from 95.6% to 91.6% as higher favourable prior year claims development more than offset
weaker current year results (including a high level of large losses in Q1 and Q4 of 2012). The underlying current year loss ratio
(excluding catastrophes and prior year claims development) deteriorated 3.6 points year-over-year.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
33
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
4.5
Investment income
As at December 31, 2012, all investments of the Company, including the additional investments from the Jevco acquisition, are
managed internally by IFC’s subsidiary, Intact Investment Management Inc. (“IIM”). The asset mix is designed to generate interest
and dividend income while ensuring an optimal mix of risk and total return. Assets are managed according to an investment policy
and a significant portion of our portfolio is invested in fixed-income securities. In order to generate dividend income, we also
actively invest in common shares of large-cap companies that pay dividends and in preferred shares.
Table 9 – neT InVesTMenT InCoMe
Interest income
Dividend income
Investment income, before expenses
Expenses
net investment income
average investments1
Market-based yield 2
Q4-2012
Q4-2011
Change
2012
2011
Change
72
40
112
(10)
102
12,179
3.6%
75
36
111
(8)
103
11,090
(4)%
11%
1%
25%
(1)%
10%
3.9%
(0.3) pts
276
144
420
(31)
389
11,487
3.6%
221
131
352
(26)
326
8,903
4.0%
25%
10%
19%
19%
19%
29%
(0.4) pts
1 Defined as the mid-month average fair value of equity and fixed-income securities held during the reporting period.
2 refer to Section 16 – Non-IFRS financial measures.
fourth quarter 2012
Net investment income of $102 million in the fourth quarter was relatively flat from a year ago, as additional investments obtained
from the Jevco acquisition were offset by declining yields. The market-based yield of 3.6% was down from 3.9% in Q4-2011.
full year 2012
Net investment income was $389 million in 2012, 19% higher than 2011 primarily from the additional investments related to
our acquisitions of AXA Canada and Jevco. The market-based yield declined 40 basis points versus 2011 to 3.6% as a result of
declining interest rates and a higher proportion of fixed-income securities after including the AXA Canada and Jevco portfolios.
seCTIon 5 – non-operating results
Non-operating results include net investment gains and losses excluding FVTPL fixed-income securities, market yield effect,
amortization of intangible assets recognized in business combinations and non-recurring charges (i.e., integration and restructuring
costs and change in fair value of contingent consideration). These elements are not representative of our operating performance
because they relate to special items or bear significant volatility from one period to the other, or because they are not part of our
normal activities. As a result, these elements are excluded from the measurement of NOI and related measures.
5.1
Income before income taxes
A summary of changes in income before income taxes is as follows:
Table 10 – ChanGes In InCoMe befoRe InCoMe Taxes (
YeaR -oVeR -YeaR )
Income before income taxes, as reported in 2011
operating results
Change in pre-tax operating income (table 3)
non-operating results
Change in net investment gains or losses excluding FVTPL fixed-income securities (table 11)
Change in market yield effect (table 12)
Change in amortization of intangible assets recognized in business combinations
Change in integration and restructuring costs
Change in fair value of contingent consideration
Income before income taxes, as reported in 2012
Q4-2012
116
36
37
(13)
(2)
13
41
228
2012
594
258
(68)
(35)
(8)
(37)
30
734
34
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
fourth quarter 2012
Increases in underwriting income and other income led to a $36 million improvement in pre-tax operating income in Q4-2012.
Income before income taxes also improved versus Q4-2011 by $41 million as Q4-2012 did not include a change in fair value of
contingent consideration. A $37 million increase in net investment gains and a $13 million decline in integration and restructuring
costs further added to income before income taxes. These were partially offset by a $13 million change in market yield effect.
full year 2012
Income before income taxes increased by $140 million in 2012 versus 2011, as substantially higher pre-tax operating income
and a $30 million change in fair value of contingent consideration were offset by a $68 million decline in net investment gains,
$37 million higher integration and restructuring costs and a $35 million change in market yield effect.
5.2 net investment gains (losses)
Table 11– neT InVesTMenT GaIns (losses)
fixed-income securities
Gains on AFS securities
Losses on derivatives
Gains on fixed-income securities
and related derivatives
equity securities
Gains, net of derivatives
Impairment losses
Losses on embedded derivatives
Gains (losses) on equity securities
and related derivatives
net investment gains (losses) excluding
fVTPl fixed-income securities
Net investment gains (losses) on FVTPL
fixed-income securities
net investment gains (losses)
fourth quarter 2012
Q4-2012
Q4-2011
Change
2012
2011
Change
13
(2)
11
33
(12)
(2)
19
30
(24)
6
12
(11)
1
28
(30)
(6)
(8)
(7)
–
(7)
1
9
10
5
18
4
27
37
(24)
13
25
(2)
23
102
(42)
(11)
49
72
(35)
37
26
(26)
–
207
(65)
(2)
140
140
64
204
(1)
24
23
(105)
23
(9)
(91)
(68)
(99)
(167)
Our $30 million net investment gains excluding FVTPL fixed-income securities in Q4-2012 compare to losses of $7 million in
Q4-2011. The improvement is principally due to lower impairment losses on equity securities.
full year 2012
The $68 million decrease year-over-year on net investment gains excluding FVTPL fixed-income securities is the result of fewer
gains on our equity portfolio ($105 million decrease), mostly preferred shares which we repositioned in 2011, triggering gains. This
decline was partially offset by higher gains on fixed-income securities and related derivatives ($23 million), and by a $23 million
decrease in impairment losses compared to 2011.
5.3 Market yield effect
Claims liabilities are discounted using the estimated market yield of the assets backing these liabilities. The impact of changes in the
discount rate used to discount claims liabilities based on the change in the market-based yield of the underlying assets is referred to
as MYA. The MYA to claims liabilities is offset by gains and losses on FVTPL fixed-income 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
FVTPL fixed-income securities is referred to as the “market yield effect” in this MD&A.
The process of matching the weighted-dollar duration of the claims liabilities to assets classified as FVTPL works well under
normal conditions. However, market fluctuations, changes in yield curve, trading and changes in asset mix can result in a positive
or negative market yield effect.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
35
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Table 12 – MaRKeT YIelD effeCT
Positive (negative) impact of MYA
on underwriting
Net investment gains (losses) on FVTPL
fixed-income securities (table 11)
Market yield effect
Q4-2012
Q4-2011
Change
2012
2011
Change
11
(24)
(13)
–
–
–
11
(24)
(13)
(17)
(35)
(52)
(81)
64
(17)
64
(99)
(35)
5.4
Integration and restructuring costs
In connection with the acquisitions of AXA Canada and Jevco, we established integration plans directed at integrating the acquired
businesses with our own business and capturing cost synergies across the combined entities, including shared services and
corporate functions.
Integration and restructuring costs are comprised of amounts related to system conversions, occupancy, severance and other employee-
related charges as well as other integration amounts, such as consulting fees and marketing costs related to customer communications
and rebranding activities. We recorded $29 million of such expenses in the fourth quarter of 2012 – $21 million related to
AXA Canada and $8 million related to Jevco. For the full year 2012, the total recorded was $108 million – $79 million related
to AXA Canada and $29 million related to Jevco.
seCTIon 6 – business developments and operating environment
6.1 acquisition of axa Canada Inc.
We have completed the renewal cycle processing for all one-year term policies in personal lines and non-specialty commercial
lines, while conversion of commercial specialty lines and two-year policies are being carried out on IFC systems. As customer
retention on the AXA Canada portfolio remains quite robust, we are now able to shift more of our focus to growth as we enter year
two of the integration. From a growth perspective, our results reflect our improved value proposition, which includes a broader
product suite, maintaining the outer boundary of Intact and AXA Canada risk appetite, managing rate dislocation at renewal and a
continued focus on small and medium-sized businesses in commercial lines.
We are focused on decommissioning AXA systems with the objective of completing the system shutdown in the first part of 2014,
once all policies have been converted. As such, we maintain our $100 million after-tax synergies target and expect to largely reach
this run-rate by the end of 2013. As at December 31, 2012, we estimate our run-rate at $52 million. In addition, we continue
to believe further opportunities for benefits exist in the mid-term related to segmentation and additional supply chain benefits.
Separately, we generated claims indemnity synergies (short-term supply chain benefits) in 2012, which offset the negative impact of
higher reinsurance costs related to AXA Canada.
Integration and restructuring costs typically occur earlier in the integration process than synergies, as they are often required to
generate synergies. We recorded $71 million of pre-tax expenses in 2011 and a further $79 million in 2012.
6.2 acquisition of Jevco Insurance Company
On September 4, 2012, we completed the $530 million acquisition of Jevco. The completion of this transaction represents another
important step on our journey to build a world-class P&C insurer. The addition of Jevco enables us to strengthen our offer to
brokers and customers by broadening our product offering into areas where we were under-represented – primarily recreational
vehicles, commercial specialty lines and non-standard auto insurance.
We estimate an IRR from the acquisition – our primary metric when measuring potential targets – of 20% or higher. We also expect
the acquisition to be accretive to net operating income per share in 2013. Annual expense synergies amounting to $15 million
after-tax are expected from a combination of external loss adjustment expense reductions, shared services savings, reinsurance and
systems-related cost savings. We expect our run-rate to be close to this level by the end of 2014.
Integration and restructuring costs are included in net income and include amounts related to system conversions, severance
and other employee-related charges as well as other integration amounts, such as consulting fees and marketing costs related to
customer communications and rebranding activities. We recorded $29 million of pre-tax expenses during the year.
Formal integration has begun, and the process of converting Jevco policies into IFC systems is underway in all lines of business. We
continue our employee integration activities, are reviewing the rates and segmentation for non-standard auto and motorcycles, and
will work to re-underwrite portions of the Jevco portfolio, where required.
36
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
6.3 sale of axa life Insurance Inc.
On January 1, 2012, we completed the sale of AXA Canada’s life insurance business to SSQ, Life Insurance Company Inc. for
proceeds of $300 million. There was no gain or loss on the transaction as the sale proceeds correspond to the net value recorded
on the Company’s Consolidated balance sheet as at December 31, 2011 for this business. Most of the proceeds from the sale were
applied to reduce debt outstanding.
6.4 Canadian P&C insurance industry results – YTD Q3-2012 comparison
The Canadian P&C insurance results for YTD Q3-2012 are available. Highlights are as follows:
Table 13 – CanaDIan P&C InsURanCe ResUlTs
DPW growth
Combined ratio3
Return on equity (YTD annualized)4
Industry data source: MSa research Inc.
1 excludes lloyd’s, IcBc, SGI, SaF, MpI, Genworth and IFc.
2 Generally consists of the 20 largest companies, excluding lloyd’s, Genworth and IFc.
3 combined ratio includes MYa.
4 IFc’s roe corresponds to the adjusted return on equity (aroe).
P&C industry1
Industry1
benchmark2
3.2%
96.8%
9.0%
3.1%
97.8%
9.9%
IfC
47.0%
94.1%
15.9%
We continued to outperform our P&C insurance industry benchmark in the first three quarters of 2012. Our acquisition of AXA
Canada provided substantial DPW growth, while we delivered a combined ratio 3.7 percentage points better than our industry
benchmark YTD Q3-2012. The combination of superior underwriting results, investment results and capital management led to an
ROE outperformance of 6.0 percentage points versus our industry benchmark.
6.5 Personal auto environment
ontario
In September of 2010, the Ontario government’s auto reforms were implemented, offering greater choice for consumers while
creating a more stable cost environment. The reforms also directly targeted abuse and fraud in the auto insurance system, which
increase costs and lead to higher premiums.
Our view of the effectiveness of the Ontario auto reforms has not changed. We continue to see the benefits of the reforms and our
actions; however, we remain prudent and disciplined in our approach to the business, particularly given the level of uncertainty
remaining in the system.
– Although we are not seeing material signs of deterioration in bodily injury claims, we believe there is sufficient uncertainty to
warrant a more conservative reserving position. This reduced the level of favourable prior year claims development in Q4-2012.
– The industry still has over 30,000 mediation cases in backlog. Some improvement was seen during 2012 as the industry backlog
declined 16% from January 2012. FSCO finalized an outsourcing agreement that provides access to additional mediators and
arbitrators. Beginning in the fourth quarter of 2012, an additional 2,000 mediations and 500 arbitrations were assigned monthly
in order to address the backlog. The size of the industry backlog and the delay for cases to be heard maintain a fair level of
uncertainty with respect to the interpretation of the new regulations implemented through the reforms. Specifically, for IFC, we
continue to actively manage our files in dispute and, as a result, our mediation backlog has been reduced by over 30% since the
peak in 2011. Thus far, no mediation outcomes point to deterioration in the environment.
– On September 27, 2012, a court decision further expanded the current definition of catastrophic impairment to include
persons with a single functional impairment due to a mental or behavioural disorder. Current year results, and a portion of the
unfavourable prior year claims development recorded in the quarter, reflect this expanded definition.
– In recent weeks, the Ontario government has continued to demonstrate its intention to target fraud and abuse by announcing
the following measures, which originated from the Anti-Fraud Task Force’s recommendations:
– requiring insurers to provide claimants with all reasons for denying a claim;
– giving claimants the right to receive a bi-monthly, detailed statement of benefits paid out on their behalf;
– increasing the role of claimants in fraud prevention (e.g., require them to confirm attendance at a health clinic); and
– making providers subject to sanctions for overcharging insurers for goods and services and banning them from asking
consumers to sign blank claim forms.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
37
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
According to industry results, the loss ratio in Ontario auto for year-to-date Q3-2012, excluding IFC, was 75.9%, improved from
102.5% in 2010 and 83.6% in 2011, aided by favourable prior year claims development, continued rate increases and the benefits
from auto reforms. Industry results have improved significantly since 2010, but still reflect a combined ratio slightly above 100%,
indicating that a number of industry players continue to be in a loss position in that jurisdiction. We continue to outperform the
industry in Ontario auto, with a 9 point loss ratio advantage in the first nine months of 2012.
In the fourth quarter of 2012, FSCO approved rate increases of 0.02%. For the full year 2012, rate decreases of 0.26% were
approved, which compares to rate increases of 4.92% in 2011, 6.20% in 2010 and 9.05% in 2009.
alberta
A number of recent developments risk changing the dynamics of a system that has been quite stable since the 2004 reforms.
– The level of activity on bodily injury files that are in litigation has begun to increase in recent months.
– A court decision from January 2012 to exclude certain injuries involving the jaw or teeth from the minor injury cap is beginning
to impact results. The decision also led many to consider chronic pain to be outside of the minor injury cap.
– Due to the age of older minor injury claims and the changing environment, plaintiff lawyers are aggressively working files in
order to build the case for their clients.
– Given these observations, we prudently moved to stay ahead of this potential trend by increasing reserves for all accident years
since the reforms, further contributing to the unfavourable development in our personal auto underwriting results in Q4-2012.
6.6 home insurance
In 2008, we began working on a home insurance action plan aimed at combating the rising costs of water-related claims, changing
weather patterns and higher reconstruction costs. Our objective was to bring 10 to 15 points of improvement to the personal
property line of business with a plan that included:
– increasing rates and insured amounts;
– implementing perils-based pricing in several regions of the country;
– redesigning our products, including rolling out a higher deductible for water claims in certain areas; and
– improving our claims processing and sourcing.
Table 14 illustrates that the initiative was successful at improving the combined ratio in this line of business by the stated objective.
More recently, however, the impact from catastrophes has been higher than in the past, resulting in reported combined ratios that
are higher than acceptable. Results in 2012 benefited from an unusual level of favourable prior year claims development, without
which reported results would appear less strong. Although we have experienced elevated losses from severe weather across the
country, the situation continues to be most severe in Alberta.
Table 14 – CoMPosITIon of CoMbIneD RaTIos – PeRsonal PRoPeRTY
Combined ratio excluding catastrophe losses and PYD
Impact of catastrophe losses
Impact of prior year claims development (PYD)
Reported combined ratio
2012
89.2%
10.3%
(6.0)%
93.5%
2011
93.6%
13.3%
(3.4)%
103.5%
2010
94.6%
5.9%
(4.0)%
96.5%
2009
101.2%
8.6%
(0.8)%
109.0%
2008
104.3%
8.7%
0.6%
113.6%
We are committed to operating our personal property business at a combined ratio of 95% or better, even if catastrophe losses
remain at elevated levels. To attain this objective we are considering the following actions, to be implemented starting in the first
half of 2013, with ultimate benefits generated over the next 24 to 36 months:
– continued rate increases;
– increased base deductibles on policies;
– options to buy sub-limits on hail, wind and sewer back-up coverage to reduce costs for customers;
– claims management initiatives; and
– intensified education and loss-mitigation incentives.
38
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
6.7 Capital markets
The Canadian equity market improved marginally in the fourth quarter of 2012, as the S&P/TSX Index increased 0.9% and the
preferred share index was relatively flat, up 0.1%. For the full year, the S&P/TSX Index rose 4.0%, while the preferred share index
ticked up 0.4%. Movements in our equity investment values are generally in line with the equity markets’ performance, although
our exposures to individual sectors may be different. Lower interest rates compared to fourth quarter 2011 resulted in lower interest
income, which was offset by higher dividends and investment income from Jevco assets. Our pre-tax unrealized gain position
decreased by $13 million from the third quarter of 2012, from the realization of gains and from higher yields, offset in part by the
improved equity market performance. Tables 11, 24 and 25 provide detailed information on the net investment gains (losses) and
unrealized gains (losses) of our investment portfolio.
6.8
Industry pools
Industry pools consist of the “residual market” (or Facility Association) as well as risk-sharing pools (“RSP”) in Alberta, Ontario,
Québec, New Brunswick and Nova Scotia. In the fourth quarter of 2012, the net impact of industry pools positively impacted
personal auto underwriting income by $29.3 million year-over-year, excluding MYA. The variance was the result of an increase in
favourable prior year claims development which resulted from a more positive view of Ontario auto reforms. Results for industry
risk sharing pools tend to fluctuate between periods.
6.9 Weather conditions
Q4-2012 experienced precipitation that was largely in line with historical averages, with lower levels in Central Canada offset by
higher levels of precipitation in the West. Temperatures were cooler than last year and the ten-year average, driven mainly by lower
temperatures in Alberta. The relatively benign weather conditions led to reduced claims frequency and bolstered underwriting
results in our personal property line of business. The only weather-related catastrophe event resulted from the remnants of
Hurricane Sandy that impacted parts of Ontario and Québec in late October.
6.10 seasonality of the business
The P&C insurance business is seasonal in nature. While net premiums earned are generally stable from quarter to quarter, net
underwriting income is affected by weather conditions, which may vary significantly between quarters.
Table 15 – seasonal InDICaToR
Q1
Q2
Q3
Q4
2012
0.99
0.99
1.03
0.99
2011
1.00
1.03
0.99
0.98
2010
0.98
0.98
1.01
1.03
2009
1.00
0.97
1.07
0.96
2008
1.03
0.98
0.97
1.02
2007
1.01
0.99
1.02
0.98
Six-year
average
1.00
0.99
1.02
0.99
6.11 Ice storm 1998
On October 23, 2012, we announced an agreement in principle for the out-of-court settlement of the class action lawsuit in relation
to the 1998 Québec ice storm. The amount of the settlement agreement is $12.5 million. This settlement agreement was approved by
the Québec Superior Court in December of 2012. The cost of this settlement will be covered by reinsurance and existing accruals.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
39
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
seCTIon 7 – strategy and outlook
7.1 Canadian P&C insurance industry 12-month outlook
Our two primary objectives are to outperform the industry ROE by at least 500 basis points every year and to grow our NOIPS by
10% per year over time. We are well-positioned to continue outperforming the P&C insurance industry in the current environment
due to our pricing and underwriting discipline, claims management capabilities, as well as our prudent investment and capital
management practices.
Market environment
(12-month outlook)
Canadian P&C insurance industry
our strategy
•Industrypremiumgrowthislikelytoevolveata
•Wemaintainourdisciplinedstrategywhilecapitalizing
similar pace to that of the last 12 months.
•Wedonotforeseesignificantlossratioimprovement
in personal auto, as Ontario reforms have largely
brought the anticipated cost savings.
on our strong position to grow organically in the
prevailing market conditions.
•OurgrowtheffortsintheOntarioautomarkethave
begun to take effect, particularly in our direct business.
•Personalpropertyresultsareexpectedtobenefit
from continued hard market conditions and potential
actions companies take to mitigate losses from
future catastrophes.
•Giventhetrendofincreasesinsevereweather,we
intend to build on the actions previously taken to
ensure adequate profitability and create a sustainable
competitive advantage in home insurance.
•Wedonotanticipatelossratioimprovementin
•Incommerciallines,weintendtobuildonour
Capital markets
overall
commercial lines, but expect conditions to improve
at a moderate pace over time, following several years
of a soft market environment.
•Recenteconomicdataleadustobelievethatinterest
rates, which are currently very low, might remain
low for the foreseeable future. As a result, we
estimate that the industry’s pre-tax investment yield
will decline approximately 25 basis points, given its
asset mix and duration, which could support firmer
market conditions.
•Capitalmarketsremainvolatile,aseconomicdata
raise questions about the strength of the global
recovery. Industry capital levels could be negatively
impacted if volatility results in downward pressure
on market values.
•Globalcapitalrequirementsarecontinuingto
influence asset decisions of many companies.
•InCanada,OSFI’s2013MCTproposalscouldreduce
industry excess capital levels.
•Theindustry’sROEwasapproximately6%in2011.
We expect combined ratio improvement in 2012,
but expect it to be partially offset by a reduction in
the level of investment income. The resulting ROE is
likely to improve to the upper single-digit range, as
it was through the first nine months of the year. We
expect the industry’s ROE in 2013 to remain slightly
below its long-term average of 10%.
historical loss ratio advantage and to accelerate our
penetration in small to mid-sized businesses. The
additions of AXA Canada and Jevco have bolstered our
product offering and enable us to grow meaningfully
in the mid-sized segment and in specialty lines.
•Wemaintainasolidfinancialposition,with
$599 million in excess capital and a debt-to-capital
ratio of 18.9% as at the end of 2012.
•Our$13.0billioninvestmentportfolioislargely
Canadian dollar-denominated. European government
debt and U.S. debt markets represent 2% of the total
portfolio.
•Weexpectourmarket-basedyieldtocontinue
to decline, partially offsetting the growth in our
investment portfolio. Investment income will be
affected accordingly.
•NewMCTguidelineswerecapitalneutralin2012,
while we expect them to slightly reduce excess capital
levels in 2013, based on the current composition of
our investment portfolio.
•Webelievewewilloutperformtheindustry’sROEbyat
least 500 basis points in the next 12 months.
40
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
7.2 Critical capabilities
We have several critical capabilities which have enabled us to sustain a performance advantage over other P&C insurers in Canada.
These critical capabilities are described in the table below.
scale
The key benefit of scale is our large database of customer and claims information that enables us to identify trends
in claims and more accurately model the risk of each policy. We also use our scale to negotiate preferred terms with
suppliers, priority service on repairs, quality guarantees on workmanship and lower material costs.
sophisticated pricing
and underwriting
We have superior underwriting expertise and proprietary segmentation models used to price risks. These models are
continuously being refined to create an advantage over competitors and identify certain segments of the market
that are more profitable than others. Our objective is to establish a model that will both attract new clients and maintain
existing clients with profitable profiles.
In-house claim
expertise
Substantially all of our 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.
broker relationships
The broker channel represents approximately 88% of annual DPW. We have more than 2,000 broker relationships
across Canada for customers that prefer the highly personalized, community-based service that insurance brokers
provide. We provide a variety of services including technology, sales training and financing to brokers to enable them
to continue to grow and expand their businesses.
Multi-channel
distribution
Proven industry
consolidator
strong expertise in
investment portfolio
management
We have a multi-channel distribution strategy including broker and direct-to-consumer brands. This strategy maximizes
growth in the market and enables us to appeal to different customer preferences and to be more responsive to
consumer trends.
We are a proven industry consolidator, with 13 successful acquisitions since 1988, the most recent being Jevco. Our
primary strategy is to target large-scale acquisitions of $500 million or more in DPW and to pursue acquisitions in lines
of business where we have expertise. Our acquisition targets are to achieve an internal rate of return of at least
15%, to bring the loss ratio of the acquired book of business to our average loss ratio and to bring the expense ratio to
two points below our ratio, within 18 to 24 months.
Over the years, we have built strong expertise in investment management. In-house management provides greater
flexibility in support of our insurance operations at competitive costs. In establishing our asset allocation, we consider
a variety of factors including the prospective risk and return of various asset classes, the duration of claim obligations, the
risk of underwriting activities and the capital supporting our business. Our primary investment objective is to generate
consistent after-tax income while minimizing the potential for extremely large losses. We focus mostly on Canadian
income products while preserving capital, diversifying risk and considering capital requirements in evaluating the
attractiveness of different investment alternatives.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
41
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
seCTIon 8 – financial condition
8.1 Condensed balance sheets
The table below shows the significant audited Consolidated balance sheets captions as well as the amounts recognized for the assets
acquired and liabilities assumed at the acquisition date of Jevco.
Table 16 – ConDenseD balanCe sheeTs
As at
assets
Investments
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Assets classified as held for sale1
Premium receivables
Reinsurance assets
Deferred acquisition costs
Other assets
Intangible assets and goodwill
Total assets
Liabilities directly associated with assets classified as held for sale1
Claims liabilities
Unearned premiums
Financial liabilities related to investments
Other liabilities
Debt outstanding
Total liabilities
Common shares
Preferred shares
Contributed surplus
Retained earnings
AOCI
shareholders’ equity
book value per common share (in dollars)
Jevco
23
890
16
110
2
1,041
–
100
31
33
134
183
1,522
–
731
204
–
57
–
992
Reference
December 31,
2012
December 31,
2011
172
8,757
1,263
2,376
391
12,959
–
2,670
320
705
1,083
2,076
19,813
–
7,656
4,046
486
1,589
1,143
206
7,887
1,281
2,051
403
11,828
1,631
2,487
409
652
884
1,862
19,753
1,330
6,886
3,790
532
1,581
1,293
14,920
15,412
2,118
489
121
1,982
183
4,893
33.03
1,889
489
115
1,642
206
4,341
29.73
Section 8.2
Section 8.3
Section 9.1
Section 9.1
Section 14
1 on January 1, 2012, we completed the sale of aXa life Insurance Inc., aXa canada’s life insurance business, to SSQ, life Insurance company Inc. for proceeds of $300 million.
8.2
Investments
As at December 31, 2012, our total investments reached $13.0 billion, an increase of $1.1 billion from 2011 driven by the acquisition
of Jevco. Our investment portfolio is mainly comprised of Canadian securities and includes a mix of cash and short-term notes,
fixed-income securities and preferred and common shares. Nearly all investments are denominated in Canadian dollars and currency
exposure is economically hedged.
Our portfolio is managed in accordance with our investment policy. The overall risk profile of the portfolio is designed to balance
the investment return required to satisfy our liabilities while optimizing the investment opportunities available in the marketplace.
Management monitors and enforces compliance with our investment policy.
42
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
fixed-income securities We invest in corporate and government bonds and approximately 99% of our fixed-income portfolio is
rated ‘A’ or better. We have no exposure to leveraged capital notes in structured investment vehicles, directly or through the use
of derivatives. As at December 31, 2012, we have $276 million ($236 million at December 31, 2011) in asset-backed securities,
mostly comprised of Canadian credit card and auto loan receivables ($217 million as at December 31, 2012, $158 million as at
December 31, 2011) and mortgage-backed securities ($59 million as at December 31, 2012, $78 million as at December 31, 2011).
All of these are rated ‘AAA’ as at December 31, 2012 and 2011.
Common shares Common equity exposure is focused primarily on dividend-paying Canadian equities. In addition, our equity
portfolios are also actively managed to enhance dividend income throughout the year.
Preferred shares We invest in preferred shares to achieve our objective of generating dividend income, as such income is not
taxable under Canadian laws, provided certain conditions are met. Generally, our preferred share portfolio is not traded and our
shares are held until they are called. Consequently, our non-operating results are generally impacted only when preferred shares are
impaired, when the shares are called, or when the shares are sold to take advantage of market opportunities. The preferred share
portfolio is comprised entirely of Canadian issuers, with a high proportion of the portfolio invested in securities that are at least ‘P2’
in their credit rating.
Derivatives We use derivative financial instruments for hedging purposes and for the purpose of modifying the risk profile of our
investment portfolio, as long as the resulting exposures are within investment policy guidelines.
Investment mix
The following table provides an overview of the investment mix.
Table 17 – InVesTMenT MIx
As at
Short-term notes, including cash and cash equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
Total investments
December 31,
2012
as a % of
total
December 31,
2011
As a % of
total
386
8,543
1,263
2,376
12,568
391
12,959
3%
66%
10%
18%
97%
3%
100%
450
7,643
1,281
2,051
11,425
403
11,828
4%
65%
11%
17%
97%
3%
100%
As part of our investment strategies, we have both long and short equity positions in order to maximize the value added from
active equity portfolio management, while at the same time using short positions to mitigate overall equity market volatility. Long
positions are reported in Common shares and short positions are reported in Financial liabilities related to investments on the
audited Consolidated balance sheets. We also use strategies where a long equity position is economically hedged using swap
agreements or other hedging instruments.
The following table illustrates our total investments and asset mix after reflecting the impact of hedging strategies and financial
liabilities related to investments. This table represents our economic exposure by class of assets.
Table 18 – InVesTMenT MIx neT of heDGInG PosITIons anD fInanCIal lIabIlITIes RelaTeD To InVesTMenTs
As at
Short-term notes, including cash and cash equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
December 31,
2012
as a % of
total
December 31,
2011
As a % of
total
386
9,212
1,195
1,299
12,092
391
3%
74%
10%
10%
97%
3%
450
8,185
1,214
1,013
10,862
403
4%
73%
11%
9%
97%
3%
Total investments net of hedging positions and financial liabilities
related to investments
12,483
100%
11,265
100%
The investment mix as at December 31, 2012 is essentially unchanged compared to December 31, 2011.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
43
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
The following table reconciles the total investments before and after reflecting hedging strategies and financial liabilities related to
investments.
Table 19 – ReConCIlIaTIon beTWeen ToTal InVesTMenTs anD
ToTal InVesTMenTs
neT of heDGInG PosITIons anD fInanCIal lIabIlITIes RelaTeD To InVesTMenTs
As at
Total investments (table 17)
Deduct equities sold short positions
Deduct equity exposure reduction
Deduct swap agreements and other derivatives
Deduct net asset value attributable to third party unit holders
Total investments net of hedging positions and financial liabilities related to investments (table 18)
December 31,
2012
December 31,
2011
12,959
(301)
–
(70)
(105)
12,483
11,828
(368)
(49)
(76)
(70)
11,265
sector mix by asset class
The following table shows sector exposures by asset class, after reflecting the impact of hedging strategies and financial liabilities
related to investments, as a percentage of total investments (excluding cash and cash equivalents and loans). This table represents
our economic exposure by class sector as at December 31, 2012.
Table 20 – seCToR MIx bY asseT Class (neT of heDGInG PosITIons anD fInanCIal lIabIlITIes RelaTeD To InVesTMenTs)
Government
Financials
Energy
Telecommunication
Industrials
Utilities
Consumer discretionary
Materials
Consumer staples
Information technology
Health care
Total
Total
short-term
notes and
fixed-income
securities
Preferred
shares
63%
34%
1%
–
1%
1%
–
–
–
–
–
100%
9,426
–
78%
13%
3%
–
5%
1%
–
–
–
–
100%
1,195
Common shares
IfC
–
14%
31%
16%
8%
6%
11%
8%
4%
2%
–
100%
1,299
s&P/Tsx
weighting
IfC total
–
32%
25%
5%
6%
2%
5%
19%
3%
1%
2%
100%
n/a
50%
36%
5%
2%
2%
2%
1%
1%
1%
–
–
100%
11,920
Our investment portfolio is concentrated mainly in the government and financial sectors in order to provide liquidity and stability
to our balance sheet and to focus on dividend-paying Canadian equities.
Portfolio credit quality
The following table highlights the credit quality of our fixed-income securities portfolio.
Table 21 – CReDIT QUalITY of The fIxeD -InCoMe seCURITIes
fixed-income securities1
AAA
AA
A
BBB
Non-rated
Total
1 Source: S&p or DBrS.
44
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
December 31, 2012
December 31, 2011
fair value
as a % of total
Fair value
As a % of total
3,701
3,467
1,268
93
14
8,543
43%
41%
15%
1%
–
100%
2,534
2,955
2,008
128
18
7,643
33%
39%
26%
2%
–
100%
As at December 31, 2012, the weighted-average rating of our fixed-income portfolio was ‘AA+’, unchanged since December 31, 2011. The
average duration of our bond portfolio was 4.07 (3.92 net of the impact of derivatives used to reduce overall interest rate exposure).
The following table shows the credit quality of our preferred share portfolio.
Table 22 – CReDIT QUalITY of The PRefeRReD shaRe PoRTfolIo
Preferred shares1
P1
P2
P3
Non-rated
Total
1 Source: S&p or DBrS.
December 31, 2012
December 31, 2011
fair value
as a % of total
Fair value
As a % of total
369
797
89
8
29%
63%
7%
1%
691
393
196
1
1,263
100%
1,281
54%
31%
15%
–
100%
The weighted-average rating of our preferred share portfolio was ‘P2’ as at December 31, 2012, unchanged since December 31,
2011.
The following table provides our investment portfolio breakdown by region of issuer.
Table 23 – PoRTfolIo bReaKDoWn bY ReGIon of IssUeR
As at
Canada
U.S.
Europe1
Other
Total
December 31,
2012
December 31,
2011
97%
–
2%
1%
100%
92%
2%
4%
2%
100%
1 european government debt represented 1.95% of our total portfolio as at December 31, 2012 (2.24% as at December 31, 2011). We have no exposure to the nations of Greece, Ireland,
Italy, portugal or Spain.
Our investment portfolio is mainly comprised of Canadian securities. We do not invest in leveraged securities and our exposure to
the U.S. market is minimal. Despite the difficulties in Europe, our portfolio remains strong as we have only minimal exposure.
net pre-tax unrealized gains (losses) on afs securities
In determining the fair value of investments, we rely mainly on quoted market 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.
The following table presents the net pre-tax unrealized gains (losses) on AFS securities.
Table 24 – neT PRe- Tax UnRealIzeD GaIns (losses) on afs seCURITIes
As at
Fixed-income securities
Preferred shares
Common shares
net pre-tax unrealized gain position
December 31,
2012
September 30,
2012
June 30,
2012
March 31,
2012
December 31,
2011
81
121
63
265
105
136
37
278
98
134
(7)
225
64
154
36
254
101
156
44
301
During Q4-2012, our pre-tax unrealized gain position decreased by $13 million. This decrease is mostly due to fixed-income
securities ($24 million) and preferred shares ($15 million) as bond prices inched lower and gains were realized. However, common
shares partially offset this decrease with a $26 million positive contribution.
The $36 million decrease year-over-year in our pre-tax unrealized gain position stems from fixed-income securities ($20 million)
and preferred shares ($35 million) as gains were realized, partially offset by a $19 million increase in the unrealized gain position
on our common shares, due to stronger markets.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
45
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Gains and losses in the common share portfolio are generally realized on an ongoing basis under normal capital market conditions,
reflecting the investment strategy in the high-dividend common share portfolio.
Impairment recognition
Common shares classified as AFS are assessed for impairment if the current market value drops significantly below the book value
or if there has been a prolonged decline in the fair value below book value. Management also assesses whether there are reasons
to believe that the decline in the market value is permanent. Based on our assessment, we recorded impairment losses on AFS
common shares amounting to $10 million and $40 million in Q4-2012 and full year 2012, respectively.
Table 25 – aGInG of UnRealIzeD losses on afs CoMMon shaRes
As at
Less than 25% below book value
More than 25% below book value for less than
6 consecutive months
More than 25% below book value for
6 consecutive months or more
Unrealized losses on afs common shares
December 31,
2012
September 30,
2012
June 30,
2012
March 31,
2012
December 31,
2011
17
1
9
27
26
4
3
33
40
10
4
54
25
1
12
38
36
4
5
45
8.3 Claims liabilities
Claims liabilities amounted to $7.7 billion as at December 31, 2012, up $0.8 billion from the December 31, 2011 level, reflecting the
acquisition of Jevco.
assessing claims reserve adequacy
Effectively assessing claims reserve adequacy is a critical skill required to effectively manage any P&C insurance business and is a
strong determinant of the long-term viability of the organization. The total claims reserve is made up of two main elements:
1) reported claim case reserves, and 2) claims that are IBNR. IBNR reserves supplement the case reserves by taking into account:
– possible claims that have been incurred but not yet reported to us by policyholders;
– expected over/under estimation in case reserves based on historical patterns; and
– other claim adjustment expenses not included in the initial case reserve.
Case reserves and IBNR should be sufficient to cover all expected claims liabilities for events that have already occurred, whether
reported or not, taking into account a PfAD and a discount for the time value of money (see Section 5.3 – Market yield effect).
The discount is applied to the total claims reserve and adjusted on a regular basis for changes in market yields. If market yields rise, the
discount would increase and reduce total claims liabilities and, therefore, positively impact underwriting income in that period, all else
being equal. If market yields decline, it would have the opposite effect. IBNR and PfAD are reviewed and adjusted at least quarterly.
Prior year claims development (excluding MYa)
The following table shows the development of claims liabilities for the nine most recent accident years and earlier. The reserve
estimates are evaluated quarterly for redundancy or deficiency. The evaluation is based on actual payments in full or partial
settlement of insurance contracts and current estimates of claims liabilities for claims still open or claims still unreported. Prior year
claims development can fluctuate from quarter to quarter and year to year 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% to 4% per year over the long term.
46
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 26 – PRIoR YeaR ClaIMs DeVeloPMenT (exClUDInG MYa )
Total
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002 &
earlier
2,411
2,120
1,835
1,652
1,458
1,300
1,190
1,161
1,014
2,268
Accident year
(85)
(1)
(6)
(13)
(18)
(10)
(7)
(3)
(1)
(2)
(24)
(372)
(149)
(35)
(34)
(34)
(18)
(20)
(14)
(7)
(6)
(55)
(6.6)%
(8.5)%
(6.3)%
(5.9)%
(5.9)%
(8.2)%
(15.6)%
(26.4)%
(22.8)%
(8.9)%
Original reserve1
Favourable
development
during
Q4-20122
Favourable
development
during 20122
Cumulative
development as
a % of original
reserve3
1 comprises Intact original reserve, as well as aXa canada reserve as of September 23, 2011 and Jevco reserve as of September 4, 2012.
2 Including Jevco starting october 1, 2012.
3 calculated on a pro rata basis to account for Jevco reserve as of September 4, 2012.
Table 27 – annUalIzeD RaTe of faVoURable PRIoR YeaR ClaIMs DeVeloPMenT
(annualized rate)
Q4-2012
Q4-2011
2012
2011
Favourable prior year claims development
(as a % of opening reserves)
5.2%
2.8%
5.7%
4.9%
Favourable prior year claims development, at 5.2% of opening reserves on an annualized basis, was above the 2.8% recorded in
Q4-2011 and above our historical level. The favourable development, amounting to $85 million, was composed of $60 million
in commercial P&C, $43 million in personal property and $11 million in commercial auto, partially offset by unfavourable
development of $29 million in our personal auto line of business.
Favourable prior year claims development in 2012, at 5.7%, was also above 2011 and our historical level of 3% to 4%.
8.4 employee future benefit programs
We have a number of defined benefit pension plans. We also offer employer-paid post-retirement benefit plans providing life
insurance and health and dental benefits to certain active employees and retirees that are now closed to new entrants, as well as
post-employment benefit plans that provide health and dental coverage. The post-retirement and post-employment benefit plans
are unfunded.
The following table presents the movement of the net benefit liability for the year ended December 31, 2012.
Table 28 – ChanGe In neT benefIT lIabIlITY
balance, beginning of year
Employer contributions
Negative impact of variations in discount rate assumptions1
Actual return on plan assets2
Positive impact of variation in salary increase and inflation1
Interest costs on defined benefit obligation
Current service cost
Other actuarial losses1
balance, end of year
1 recognized in ocI.
2 comprised of expected return on plan assets ($68 million) recognized in income and of actuarial gains on pension plan assets ($23 million) recognized in ocI.
2012
299
(210)
113
(91)
(68)
64
60
(18)
149
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
47
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Net benefit liability decreased during 2012, mainly due to higher employer contributions partially offset by a negative variation in
discount rate.
Benefit obligations are dependent on assumptions, such as the discount rate and the rate of compensation increase. The discount
rate, which is used to determine the present value of estimated future benefit payments at the measurement date, is one of the key
assumptions of the calculation. We have little discretion in selecting the discount rate, as it must represent the market rate for high-
quality corporate fixed-income investments available for the period to maturity of the benefits. As a result, discount rate changes are
based on market conditions.
The fair value of our pension plan assets amounted to $1.4 billion as at December 31, 2012, of which 58.5% is invested in fixed-
income securities. The remaining portion is essentially invested in equity securities. Plan assets are highly dependent on the level
of contributions and on the pension fund’s asset performance. During 2012, we made pension contributions totalling $210 million
(including discretionary pension contributions of $114 million) and we achieved a good return on plan assets of 8.9%. Based on
the latest projections of all our plans, our total cash contributions to the pension plans are expected to be within $60 million to
$105 million in 2013. The contributions will vary depending on funding relief measures, if any, and decisions taken to use or not
letters of credit as permitted by legislation.
Table 29 – IMPaCT of ChanGes In KeY assUMPTIons
as at December 31, 2012
Impact of a change of 1% in key assumptions:
Discount rate
Increase
Decrease
Rate of compensation increase
Increase
Decrease
Impact on net
benefit liability
(256)
312
74
(70)
Refer to Note 19 – Employee future benefits to the accompanying audited Consolidated financial statements for more details on
our pension plans, post-retirement and post-employment benefit plans.
seCTIon 9 – liquidity and capital resources
9.1 financing and capital structure
We do not generally require financing to support our ongoing operations. We use financing instruments, with a preference for long
tenures, to optimize our balance sheet or to support growth initiatives. We believe our optimal capital structure is one where the
debt-to-capital ratio is up to 20%, and we intend to operate at this level on an ongoing basis. We may exceed this level from time to
time to capture market opportunities, but we will strive to return to our target within a reasonable time frame.
In connection with the acquisition of Jevco, we secured long-term financing at attractive rates, despite a volatile capital market
environment. The $530 million acquisition was financed with the proceeds from the issuance of common shares, as well as from a
portion of the issuance of medium-term notes (“MTN”) and from our excess capital.
subscription receipts offering
On May 11, 2012, to partially fund the acquisition of Jevco, we completed an offering of 3,780,000 subscription receipts (“receipts”)
at $62.75 per receipt for gross proceeds of $237 million. On the date of the closing of the acquisition of Jevco, our 3,780,000
receipts were converted into 3,780,000 common shares. For this offering, we incurred $8 million in share issuance costs, net of
$2 million of taxes, which were accounted for as a reduction in Common shares on the audited Consolidated balance sheets.
48
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Medium-term notes
On June 15, 2012, to reduce term-loan indebtedness and to fund a portion of the Jevco acquisition, we completed an offering of
$200 million principal amount of Series 5 unsecured MTN. On September 10, 2012, we issued an additional $50 million principal
amount, bringing the total offering to $250 million. These notes bear interest at a fixed annual rate of 5.16% until maturity on
June 16, 2042, payable in semi-annual instalments commencing on December 16, 2012. The net proceeds of the additional issuance
are being used for general corporate purposes.
Credit facilities
During the first quarter of 2012, following the sale of AXA Life Insurance Inc., we repaid the two-year term-loan facility (the “Tranche
A Facility”) in full, as well as $150 million on the three-year term-loan facility (the “Tranche B Facility”), for total cash consideration of
$250 million. On June 18, 2012, we repaid the remaining $150 million on the Tranche B Facility by using a portion of the proceeds from
the MTN issuance. This completed the full repayment of the short-term financing related to the AXA Canada acquisition.
On October 26, 2012, we increased our committed amount by $50 million to $300 million on our four-year unsecured revolving
term credit facility. We also extended the term from September 23, 2015 to October 26, 2016. This credit facility is available for
temporary funding purposes that may occur from time to time. It may be drawn as a prime loan at the prime rate plus a margin or
as bankers’ acceptance at the bankers’ acceptance rate plus a margin. This facility was undrawn as at December 31, 2012.
As part of the covenants of the loans under the credit facilities, we are required to maintain certain financial ratios, which were
fully met as at December 31, 2012 and 2011.
As a net result of the notes issuance and the term-loan repayment, as well as the conversion of the subscription receipts into common
shares, we ended the year 2012 with a debt-to-capital ratio of 18.9%, a decrease of 4.0 points compared to December 31, 2011.
9.2 Credit ratings
Following the announcement of the acquisition of AXA Canada in 2011, A.M. Best had placed IFC and its principal operating
subsidiaries under review. In April 2012, A.M. Best removed IFC and its principal operating subsidiaries from under review and
affirmed the ratings for IFC and its principal operating subsidiaries. Concurrently, A.M. Best upgraded the insurance financial
strength ratings from ‘A’ to ‘A+’ for AXA Insurance Inc., AXA Insurance (Canada), AXA Pacific Insurance Company and Intact
Farm Insurance Inc.
Following the announcement of the acquisition of Jevco and its underlying financing, A.M. Best, Moody’s and DBRS affirmed
their respective ratings for financial strength and long-term issuer credit for IFC and its subsidiaries. In November 2012, A.M. Best
upgraded the insurance financial strength rating of Jevco from ‘B++’ to ‘A’, with a positive outlook.
Table 30 – CReDIT RaTInGs
Long-term issuer credit ratings of IFC
Financial strength ratings of IFC’s principal insurance subsidiaries2
1 Jevco and companies previously held by aXa canada are not rated by Moody’s.
2 Jevco has been assigned a rating of a with a positive outlook.
a.M. best
Moody’s1
a-
a+
baa1
a1
DbRs
a (low)
n/a
9.3 base shelf prospectus and medium-term note supplement
On July 5, 2011, we filed a final short form base shelf prospectus with the securities regulatory authorities in each of the provinces
and territories of Canada that will allow us to offer up to $2.5 billion in any combination of debt, preferred or common share
securities, subscription receipts, warrants, share purchase contracts and units over the following 25 months. We also filed a
supplement to our base shelf prospectus to establish an MTN program that would allow us to issue up to $750 million in unsecured
MTN. As at December 31, 2011, the amounts available under the respective prospectuses were $1.95 billion and $450 million.
In 2012, the subscription receipts that were converted into common shares as well as the Series 5 MTN offerings were completed
under the base shelf prospectus and the MTN supplement. As a result, the amounts available were $1.46 billion under the base
shelf prospectus, which includes $200 million under the MTN supplement, as at December 31, 2012.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
49
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
9.4 Cash flows
Table 31 – seleCTeD InfloWs (oUTfloWs)
operating activities
Net cash flows provided by
operating activities
Investing activities
Business combination, net of cash acquired
Net proceeds from sale (purchases)
of investments
Proceeds from sale of AXA Canada’s
life insurance business
Purchases of brokerages, books of business,
intangibles, property and equipment,
net of sales
financing activities
Net proceeds from issuance of debt
Repayment of debt
Proceeds from issuance of common shares
Proceeds from issuance of preferred shares
Common shares repurchased for
share-based payments
Common shares repurchased for
cancellation
Dividends paid on common shares and
preferred shares
net increase (decrease) in cash
and cash equivalents
Q4-2012
Q4-2011
Change
2012
2011
Change
204
–
(241)
–
94
–
4
–
(17)
(12)
–
–
–
–
2
–
(58)
(110)
–
–
–
–
–
–
(53)
33
110
–
(245)
–
(5)
–
–
–
–
2
–
723
(507)
(235)
300
(134)
249
(400)
227
–
(26)
–
(5)
(231)
532
191
(2,546)
2,039
266
–
(66)
797
–
910
485
(3)
(129)
(178)
(501)
300
(68)
(548)
(400)
(683)
(485)
(23)
129
(53)
(143)
(34)
68
(102)
During 2012, cash provided by operating activities, as well as the proceeds from the sale of AXA Canada’s life insurance business
and from the issuance of MTN Series 5 and common shares were mainly used to acquire Jevco, to repay term loans and to
pay dividends.
9.5 Contractual obligations
Table 32 – ConTRaCTUal oblIGaTIons
Debt outstanding1
Claims liabilities2
Operating leases on premises and equipment
Pension obligations3
Total contractual obligations
Less than
1 year
–
1,806
106
59
1,971
Payments due by period
1–3 years
4–5 years
–
1,097
181
96
1,374
–
722
154
41
917
Total
1,143
4,459
842
222
6,666
After
5 years
1,143
834
401
26
2,404
1 capital only.
2 reported claims case reserves.
3 these amounts represent the annual mandatory funding required by oSFI, based on the latest actuarial valuations.
We consider that we have sufficient capital resources, cash flows from operating activities and borrowing capacity to support our
current and anticipated activities, scheduled principal and interest payments on our outstanding debt, the payment of dividends
and other expected financial requirements in the near term.
50
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
seCTIon 10 – Capital management
10.1 Capital management objectives
Our objectives when managing capital consist of balancing the need to:
– support claims liabilities and ensure the confidence of policyholders;
– support competitive pricing strategies;
– meet regulatory capital requirements;
– provide adequate returns for our shareholders; and
– maintain our strong position in the Canadian P&C insurance industry.
Our capital is managed on a consolidated basis, as well as individually for each regulated subsidiary. Our federally chartered
P&C insurance subsidiaries are subject to the regulatory capital requirements defined by OSFI and the Insurance Companies
Act. Québec provincially chartered subsidiaries are subject to the requirements set by the AMF and the Act respecting insurance.
OSFI and AMF have established MCT guidelines, which set out 100% as the minimum and 150% as the supervisory target MCT
standard for Canadian P&C insurance companies. To ensure that we attain our objectives, we have established a minimum internal
threshold of 170%, in excess of which, under normal circumstances, we will maintain our capital.
MCT guidelines change from time to time and may impact our capital levels. We therefore monitor all changes, actual or planned,
very carefully. At this point in time, we do not foresee any significant impact to our capital levels from the implementation of new
MCT guidelines recently published.
The following table presents the estimated aggregate MCT ratio of our P&C insurance subsidiaries.
Table 33 – aGGReGaTe MCT
As at
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%1
December 31,
2012
December 31,
2011
3,764
1,840
205%
1,924
1,004
636
3,285
1,668
197%
1,617
783
449
1 Includes Jevco excess capital over 170%. Jevco minimum internal threshold is currently under review.
Total capital available and total capital required represent amounts applicable to our P&C insurance subsidiaries and are
determined in accordance with prescribed OSFI and AMF rules. Total capital available mostly represents total shareholders’
equity less specific deductions for disallowed assets including goodwill and intangible assets. Total capital required is calculated by
classifying assets and liabilities into categories and applying prescribed risk factors to each category. As at December 31, 2012, our
P&C insurance subsidiaries remained well capitalized on an individual basis and were in compliance with regulatory requirements,
as well as above internal thresholds.
Our MCT level as at December 31, 2012 remained solid at an estimated 205%. The increase from December 31, 2011 mainly
reflects the operating profit and also a slight temporary positive impact from the 2012 MCT guidelines changes, which will reverse
in 2013. These were partially offset by usage of a portion of excess capital as a source of funding for the acquisition of Jevco.
Including net liquid assets of the non-regulated entities, we had an estimated total of $599 million in excess capital at an MCT of
170% as at December 31, 2012, compared to total excess capital of $435 million as at December 31, 2011. The increase in excess
capital position mainly reflects the operational profit of the insurance subsidiaries.
We maintain adequate excess capital levels to ensure that the probability of breaching the regulatory minimum requirements is
very low. Such levels may vary over time depending on our evaluation of risks and the potential impact on capital. For example,
during periods of high volatility in capital markets, we will maintain higher capital levels to absorb fluctuations in equity markets
or interest rates. We will also keep higher levels of excess capital if we foresee growth or acquisition opportunities in the mid-term.
Finally, we will return excess capital to shareholders firstly through annual dividend increases and then through buy-backs. We
intend to increase our dividends annually, albeit at a conservative pace to respect the volatility of the insurance business. We prefer
to use buy-backs to return larger amounts of capital since they allow us to control the pace of execution.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
51
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
10.2 MCT sensitivity
The MCT is impacted by many factors including changes in equity market performance, interest rates and underwriting
profitability. Based on our estimated MCT of 205% as at December 31, 2012, the following table sets out the estimated
immediate impact or sensitivity of our MCT ratio to certain sudden but independent changes in interest rates and equity
markets. Actual results can differ materially from these estimates for a variety of reasons and, therefore, these sensitivities should
be considered as directional estimates.
Table 34 – sensITIVITY To InTeResT RaTes anD eQUITY MaRKeTs
MCT3
Interest rates
1% increase1
equity markets
decline2
(4) pts
(3) pts
1 the yield curve experiences an instantaneous parallel shift.
2 a shock of 10% is applied to all common shareholdings, net of any equity hedges that we may have. In addition, a shock of approximately 5% is applied to all preferred shares.
3 capital sensitivities are calculated independently for each risk factor and assume that all other risk variables remain constant. no management action is considered.
Annually, we perform Dynamic Capital Adequacy Testing on the MCT to ensure that we have sufficient capital to withstand
significant adverse event scenarios. We review these scenarios each year to ensure appropriate risks are included in the testing
process. The 2012 results indicated that our capital position is strong. In addition, our target, actual and forecasted capital position
is subject to ongoing monitoring by management using stress tests and scenario analysis to ensure its adequacy.
seCTIon 11 – Risk management
11.1 Introduction
The Company has a comprehensive risk management framework and internal control procedures designed to manage and monitor
various risks in order to protect our business, clients, shareholders and employees. Our risk management programs aim at avoiding
risks that could materially impair our financial position, accepting risks that contribute to sustainable earnings and growth and
disclosing these risks in a full and complete manner.
Effective risk management rests on identifying, understanding and communicating all risks the Company is exposed to in the
course of its operations. In order to make sound business decisions, both strategically and operationally, management must have
continual direct access to the most timely and accurate information possible. Either directly or through its committees, the Board
of Directors ensures that the Company’s management has put appropriate risk management programs in place. The Board of
Directors, directly and in particular through its Audit and Risk Review Committee, oversees the Company’s risk management
programs, procedures and controls and, in this regard, receives periodic reports from, among others, the risk management
department through the Chief Risk Officer, internal auditors and the independent auditors. A summary of the Company’s key risks
and the processes for managing and mitigating them is outlined below.
The risks described below and all other information contained in our public documents, including our audited Consolidated
financial statements, should be considered carefully. The risks and uncertainties described below are those we currently believe to
be material, but they are not the only risks and uncertainties we face. If any of these risks, or any other risks and uncertainties that
we have not yet identified, or that we currently consider to be not material, actually occur or become material risks, our business
prospects, financial condition, results of operations and cash flows could be materially adversely affected.
While the Company employs a broad and diversified set of risk mitigation techniques, those techniques and the judgments that
accompany their application cannot anticipate every economic and financial outcome in all market environments or the specifics
and timing of such outcomes.
11.2 Risk management structure
The Board of Directors is ultimately responsible for overseeing the Company’s risk-taking activities and risk management programs
and is supported by the following committees to ensure that risks are being properly measured, monitored and reported:
– Audit and Risk Review Committee: this committee is composed exclusively of independent members of our Board of Directors
and is chaired by an independent director. In addition to its audit committee functions, which include the review of financial
information and the monitoring of internal controls, this committee reviews trends and key risk positions and exposures, risk
management programs, practices and internal controls and compliance with key risk policies and limits.
52
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
–
–
–
–
Conduct Review and Corporate Governance Committee: this committee is composed exclusively of independent members of our
Board of Directors and is chaired by an independent director. This committee reviews, approves or makes recommendations
to our Board of Directors with respect to related-party transactions, compliance and market conduct programs and policies,
including the resolution of conflicts of interests, and restrictions on the use of confidential information.
Human Resources Committee: this committee is composed exclusively of independent members of our Board of Directors and is
chaired by an independent director. This committee oversees the management of the Company in relation to human resources
matters, including compensation of employees, management and executives as well as assessment of the Chief Executive Officer
and senior executives and succession plan. This committee also assesses the compensation practices of the Company against the
compensation practices itemized in the Financial Stability Board program and the best practices recommended by governance
associations and regulatory requirements, and, in this regard, assesses the risks of the Company’s practices after receiving the
Chief Risk Officer’s report and recommendations.
Investment Committee: this committee is composed of a majority of independent members of our Board of Directors with
expertise in capital markets and related areas and is chaired by an independent director. The role of this committee is to advise
the Company on the investment strategies that are appropriate in the context of the Company and its subsidiaries’ activities as
well as for the pension plans. The main functions of this committee are to recommend to the Board of Directors the adoption of
investment policies aimed at supporting the Company and its subsidiaries in meeting their financial obligations while optimizing
risk and return, and minimizing the potential for large losses.
Enterprise Risk Committee (refer to figure 1): this committee is composed of senior officers and is chaired by the Chief
Risk Officer designated by our Board of Directors. It meets at least on a quarterly basis and oversees and endorses our risk
management priorities, assesses the effectiveness of risk management programs, policies and actions of each key function of
our business and reports on a quarterly basis to the Audit and Risk Review committee, and semi-annually to our Board of
Directors. The committee evaluates our overall risk profile, aiming for a balance between risk, return, and capital, and approves
risk policies. The committee is mandated to: (i) identify risks that could materially affect our business; (ii) measure risks from
a financial or other impact standpoint, such as reputation; (iii) monitor risks; and (iv) manage risk in accordance with the risk
tolerance level determined by our Board of Directors. Periodically, this committee may establish sub-committees to review
specific subjects in greater detail and report back on its findings and recommendations. This allows the committee to access the
expertise throughout the Company and to operate more efficiently in addressing key risks.
In addition, the Company has other committees responsible for managing, monitoring and reviewing specific aspects of risk related
to our operations, investments, profitability, insurance operations, security and business continuity. Further details follow on how
these committees operate, ensure compliance with laws and regulations and report to the Enterprise Risk Committee.
fIGURe 1 – CoMMITTees InVolVeD In RIsK ManaGeMenT
Conduct Review and Corporate
Governance Committee
Audit and Risk
Review Committee
Human Resources Committee
Investment Committee
Board of Directors
Enterprise Risk Committee
Operational Committee
Review all aspects related to operations
Executive Committee
Discuss organization structure, objectives and plans
Operational Investment Committee
Review investment strategies and performance and discuss investment risks
Profitability Committee
Review results and performance
Reserve Review Committee
Review the adequacy of our financial reserves and the variation of our losses
Large Loss Committee
Discuss claims related to large losses and potential class actions
Disclosure Committee
Ensure all disclosures are complete, accurate and timely
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
53
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
11.3 Corporate governance ensuring compliance with laws and regulatory requirements
The Company believes that sound corporate governance and compliance monitoring related to legal and regulatory requirements
are paramount for maintaining the confidence of different stakeholders including its investors. Legal and regulatory compliance
risk arises from non-compliance with the laws, regulations or guidelines applicable to the Company as well as the risk of loss
resulting from non-fulfilment of a contract. The Company is subject to strict regulatory requirements and detailed monitoring of
its operations in all provinces and territories where it conducts business, either directly or through its subsidiaries. The Company’s
corporate governance and compliance program is built on the following foundations:
– The Board of Directors and its committees are structured in accordance with sound corporate governance standards. Directors
are presented with relevant information in all areas of the Company’s operations to enable them to effectively oversee the
Company’s management, business objectives and risks.
– Disclosure controls and processes have been put into place so that relevant information is obtained and communicated to
senior management and the Board of Directors to ensure that the Company meets its disclosure obligations while protecting the
confidentiality of information. A decision-making process through the Disclosure Committee is also in place to facilitate timely
and accurate public disclosure.
– Effective corporate governance depends on sound corporate compliance structures and processes. The Company has
established an enterprise-wide Compliance Policy and framework including procedures and policies necessary to ensure
adherence to laws, regulations and related obligations. Compliance activities include identification, mitigation and monitoring of
compliance/reputation risks, as well as communication, education, and activities to promote a culture of compliance and ethical
business conduct.
– The Board of Directors and the Audit and Risk Review Committee periodically receive reports on all important litigation,
whether in the ordinary course of business where such litigation may have a material adverse effect or outside the ordinary
course of business.
– To manage the risks associated with compliance, regulatory, legal and litigation issues, the Company has specialized resources,
reporting to the Chief Legal Officer, that remain independent of operations. The Chief Legal Officer reports directly to the
Chief Executive Officer and to the Board of Directors and its Committees on such matters, including with respect to privacy
and Ombudsman complaints. The Company also uses third party legal experts and takes provisions when deemed necessary or
appropriate.
While senior management has ultimate responsibility for compliance, it is a responsibility that each individual employee shares.
This is clearly set out in the Company’s core Business Values and Code of Conduct and employees sign a confirmation that they
have reviewed and complied with them annually.
11.4 Mandate of enterprise Risk Management
Our business strategies and capital management decisions are tied to the risks the Company is prepared to accept, manage,
mitigate or avoid. The Enterprise Risk Management function reports to the Board on capital level sufficiency to support planned
business operations in line with our risk appetite. Based on the alignment and governance provided by the development of our
own expertise in risk management, and by the best practices and governance models, we develop risk management policies and
processes to manage and minimize systemic risks in the organization and receive early warnings of high-risk incidents.
The Enterprise Risk Management strategy is designed to provide an overview of our risks and ensure that appropriate actions are
taken to protect our clients, employees, shareholders and other stakeholders. Our risk model is based on four main categories:
Strategic Risk, Insurance Risk, Financial Risk and Operational Risk (see Figure 2).
54
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
fIGURe 2 – RIsK ManaGeMenT MoDel
Enterprise Risk Management
Strategic Risk
Competition/Regulatory and political trends
Reputation/Distribution
Insurance Risk
Underwriting
Claims
Pricing/Products
Reserve adequacy
Financial Risk
Investment risk
Liquidity risk
Credit risk
Capital management
Operational Risk
Process
People
IT systems and infrastructure
External events
Risk Management Culture
Our Enterprise Risk Management objectives consist of:
– overseeing and objectively challenging the execution of risk management activities;
– identifying, as completely as possible, the most important risks and issues that may affect us;
– monitoring of identified risks, major incidents and controls for weaknesses and reviewing adopted strategies;
– allocating risk ownership and responsibilities;
– gathering early warning information;
– escalating risk management issues and vetoing high-risk business activities;
– enforcing compliance to the risk policies;
– disclosing key risks completely and transparently; and
– supporting management in raising risk awareness and insight.
A shared responsibility:
– Heads of departments have primary responsibility and accountability for effective control of risks/challenges affecting their
business. They are responsible for the execution of risk management policies set by Enterprise Risk Management-related
functions (see Figure 3).
– Enterprise Risk Management functions partner with and support heads of departments in the execution of risk management
activities. Risk management functions are “independent” of the management that can be affected by the risk exposures.
– Corporate Audit Services as well as external auditors play an independent role in ensuring objective assurance on the
effectiveness of the risk management program and of the internal control framework.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
55
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
fIGURe 3 – RIsK ManaGeMenT fUnCTIons – The ThRee lInes of DefenCe
1st lIne of DefenCe
Business Lines
Senior Management
Management
Employees
2nd lIne of DefenCe
3rd lIne of DefenCe
Enterprise Risk Management
Strategic risk
Insurance risk
Financial risk
Operational risk
Compliance
>
>
Audit
Corporate Audit Services
External auditors
– Comply with risk management
requirements
– Manage day-to-day risks
– Implement mitigating actions
– Review and report risks and
incidents
– Establish policies and processes
– Provide guidance and coordination
– Monitor and review within certain
risk areas
– Report to Senior Management and
the Board
– Audit processes and controls
– Review NI 52-109 requirements
– Report to Senior Management and
the Board
We have an integrated risk-based approach to significantly increase the effectiveness of the program, ensuring that delegated authorities’
actions are consistent with the overall strategy and risk appetite. Overall the risk profile and communication must be transparent
with the objective of minimizing “surprises” to internal and external stakeholders on risk management and value creation.
11.5 Risk appetite
how do we manage corporate risk?
From a risk management perspective, our objective is to protect the sustainability of our activities while delivering on our promises
to our stakeholders. To do so, we strive to maintain our financial strength, even in unpredictable environments or under extreme
stress. We take a prudent approach to managing risk, and the following principles help us establish the nature and scope of risks
we are willing to assume:
– we focus on our core competencies;
– we keep our overall risk profile in check;
– we protect ourselves against extreme events;
– we promote a strong risk culture; and
– we maintain our ability to access capital markets at reasonable costs.
11.6 Main risk factors and mitigating actions
The Company’s main risk factors together with the Company’s risk management practices used to mitigate these risks are
explained below.
Insurance risk
Catastrophic events risk
The occurrence and severity of natural disasters may be affected by climate change and may take different forms, including but
not limited to hurricanes, windstorms, earthquakes, hailstorms, rainstorms, ice storms, floods, explosions, severe winter weather
and fires. Unnatural catastrophic events include hostilities, terrorist acts, riots, explosions, crashes and derailments. Despite the
use of “models”, the incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe
is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most
56
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
catastrophes are restricted to small geographic areas; however, hurricanes, windstorms and earthquakes may produce significant
damage in large, heavily populated areas. Catastrophes can cause losses in a variety of P&C insurance lines. For example, the ice
storm in Eastern Canada in 1998 or more recently the wildfires in Slave Lake in May 2011 caused P&C insurance losses in several
lines of business, including business interruption, personal property, automobile and commercial property. Based on our property
insurance exposures, the occurrence of a major earthquake in British Columbia could have a significant impact on our profitability
and financial condition. Depending on the magnitude of the earthquake, its epicentre, and the extent of the damages, the losses
could be substantial even after significant reinsurance recoveries. There could also be significant additional costs to find the
required reinsurance capacity upon further renewals.
Claims resulting from natural or unnatural catastrophic events could cause substantial volatility in our financial results and could
materially reduce our profitability or harm our financial condition.
The Company’s risk management strategy involves monitoring insured value accumulation and concentration of risks, catastrophe
scenario modeling, and the use of reinsurance. Consequently, the diversification of risk among an appropriate number of reinsurers
is vital for the Company. See Section 11.7 – Reinsurance for more details on the Company’s reinsurance program.
Reserve adequacy risk
Our success depends upon our ability to accurately assess the risks associated with the insurance policies that we write. We
establish reserves to cover our estimated liability for the payment of all losses and loss adjustment expenses incurred with respect
to premiums collected or due on the insurance policies that we write. Reserves do not represent an exact calculation of liability.
Rather, reserves are our estimates of what we expect to be the ultimate cost of resolution and administration of claims. These
estimates are based upon various factors, including:
– actuarial projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
– estimates of trends in claims severity and frequency;
– judicial theories of liability;
– variables in claims handling procedures;
– economic factors (such as inflation);
– judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverage or policy
exclusions; and
– the level of insurance fraud.
Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen
factors could negatively impact our ability to accurately assess the risks of the policies that we write. In addition, there may
be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer and
additional lags between the time of reporting and final settlement of claims.
We continually refine our reserve estimates in an ongoing process as claims are reported and settled. Establishing an appropriate
level of reserves is an inherently uncertain process. The following factors may have a substantial impact on our future actual losses
and loss adjustment expenses experience:
– amounts of claims payments;
– expenses that we incur in resolving claims;
– legislative and judicial developments; and
– changes in economic conditions, including inflation.
To the extent that actual losses and loss adjustment expenses exceed our expectations and the reserves reflected in our audited
Consolidated financial statements, we will be required to reflect those changes by increasing our reserves. In addition, government
regulators could require that we increase our reserves if they determine that our reserves were understated in the past. When we
increase reserves, our income before income taxes for the period in which we do so will decrease by a corresponding amount.
In addition, increasing or “strengthening” reserves causes a reduction in our insurance subsidiaries’ capital and could cause a
downgrading of the financial strength ratings of our insurance subsidiaries. Any such downgrade could, in turn, adversely affect
our ability to sell insurance policies. See Section 8.3 – Claims liabilities for more details on the claims reserve and prior year
claims development.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
57
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
Business cycle risk
The P&C insurance industry is cyclical, and we may witness changes in the appetite and underwriting capacity of our competitors,
depending on their own loss experience and results. This would have different impacts on pricing and our ability to write new
business. The industry’s profitability can be affected significantly by:
– competition;
– availability of capital to support the assumption of new business;
– rising levels of actual costs that are unforeseen by companies at the time they price their products;
– volatile and unpredictable developments, including unnatural, weather-related and other natural catastrophes or terrorists’ attacks;
– changes in loss reserves resulting from the general claims and legal environments as different types of claims arise and judicial
interpretations relating to the scope of insurers’ liability develop;
– changes in insurance and tax laws and regulations as well as new legislative initiatives;
– general economic conditions, such as fluctuations in interest rates, inflation and other changes in the investment environment,
which affect returns on invested capital and may impact the ultimate payout of loss amounts; and
– general industry practices.
The financial performance of the P&C insurance industry has historically tended to fluctuate in cyclical patterns of “soft” markets,
generally characterized by increased competition resulting in lower premium rates and underwriting standards, followed by “hard”
markets, generally characterized by lessening competition, stricter underwriting standards and increasing premiums rates. Our
profitability tends to follow this cyclical market pattern, with profitability generally increasing in hard markets and decreasing in
soft markets. These fluctuations in demand and competition could produce underwriting results that would have a negative impact
on our results of operations and financial condition.
Climate change risk
Climate change is a challenge faced by the entire P&C insurance industry. In particular, the Company’s home insurance business
has been affected due to changing climate patterns and an increase in the number and cost of claims associated with severe storms.
Water damages now make up more than half of the Company’s home insurance claims.
To address this issue, the Company has launched several initiatives including pricing and product changes to reflect new climate
realities, a home insurance action plan, a review of claims processes and a greater focus on consumer loss prevention and education.
Since 2010, the Company has supported the University of Waterloo’s Climate Change Adaptation Project in order to learn from
climate change studies and promote strategies for loss prevention. A comprehensive report was published in the summer of 2012
that outlined 20 practical and cost-effective recommendations to mitigate the impact of climate change in Canada.
Reinsurance risk
We use reinsurance to help manage our exposure to insurance risk. The availability and cost of reinsurance are subject to prevailing
market conditions, both in terms of price and available capacity, which can affect our premium volume and profitability. The year
of 2011 was particularly difficult for reinsurers, who faced many catastrophes around the world. It began with two earthquakes
in New Zealand and another one in Japan followed by a tsunami, but they were also heavily impacted by other events such as
wind storms in the U.S. and floods in Thailand. Consequently, there was an upward shift in reinsurance market conditions for
earthquake exposure in Canada in 2012. This clearly shows the impact worldwide catastrophe events can have on the reinsurers’
situation and therefore on the conditions and support provided to the Company.
Reinsurance companies may exclude some coverage from the policies that we purchase from them or may alter the terms of such
policies from time to time. For example, following the terrorist attacks of September 11, 2001, some reinsurers excluded coverage
for terrorist acts or priced such coverage at prohibitively high rates. These gaps in reinsurance protection expose us to greater
risks and greater potential losses and could adversely affect our ability to write future business. We may not be able to successfully
mitigate risks through reinsurance arrangements, which could cause us to reduce our premiums written in certain lines or could
result in losses. We align the insurance and reinsurance terms and conditions as closely as possible to minimize these gaps. Other
details regarding reinsurance are also included at Section 11.7 – Reinsurance.
Competition risk
The P&C insurance industry is highly competitive and intense competition for our insurance products could harm our ability to
maintain or increase our profitability, premium levels and written insured risk volume. We believe that the industry will remain
highly competitive in the foreseeable future. We also believe that competition in our business lines is based on price, service,
commission structure, product features, financial strength and scale, ability to pay claims, ratings, reputation and name or brand
58
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
recognition. We compete with a large number of domestic and foreign insurers as well as with several Canadian banks that are
selling insurance products. These firms may use business models different than ours and sell products through various distribution
channels, including brokers and agents who sell products exclusively for one insurer and directly to the consumer. We compete
not only for business and individual customers, employers and other group customers but also for brokers and other distributors of
investment and insurance products.
Our multi-channel distribution strategy, including the broker channel, direct to consumer brands and web platforms, enhances our
ability to adapt to evolving conditions in the insurance market. To secure strong relationships with our brokers, we provide them
with advanced technology and support their growth with innovative financing. The Company invests significantly in promoting its
brands with an increasing focus on using web and mobile technology to reach consumers.
Underwriting ability risk
Our performance depends on our ability to reduce financial loss resulting from the selection of risks to be insured and management
of contract clauses. Unfavourable results in these areas can lead to deviations from the estimates based on actuarial assumptions.
The Company has adopted policies which specify the Company’s retention limits and risk tolerance and its application depends
on training and the discipline of our underwriting teams. Once the retention limits have been reached, the Company turns
to reinsurance to cover the excess risk. Moreover, our profitability and ability to grow may also be adversely affected by our
mandatory participation in the Facility Association in Canada’s automobile insurance markets.
Product and pricing risk
Product design and pricing risk is the risk that the established price is or becomes insufficient to ensure an adequate return for
shareholders as compared to the Company’s profitability objectives. This risk may be due to an inadequate assessment of market
needs, new business context and a poor estimate of the future experience of several factors, as well as the introduction of new
products that could adversely impact the future behaviour of policyholders.
New products are reviewed by Senior Management and the risk is primarily managed by regularly analyzing the pricing adequacy
of the Company’s products as compared to recent experience. The pricing assumptions are revised as needed and/or the various
options offered by the reinsurance market are utilized.
financial risk
Market risk
Movements in short-term and long-term interest rates, credit spreads, foreign exchange rates and equity prices cause changes in
realized and unrealized gains and losses. Generally, the Company’s interest and dividend income will be reduced during sustained
periods of lower interest rates and will likely result in unrealized gains in the value of fixed-income securities the Company continues
to hold, as well as realized gains to the extent the relevant securities are sold. During periods of rising interest rates, the fair value of
the Company’s existing fixed-income securities will generally decrease and its realized gains on fixed-income securities will likely be
reduced or result in realized losses. Changes in credit spreads would have similar impacts to those described above for changes in
interest rates. Currently, interest rates are at the low end of the range over the last half century. In this context, purchases of fixed-
income securities will likely be at lower yields than several years ago, putting downward pressure on investment income.
General economic conditions, political conditions and many other factors can also adversely affect the equity markets and,
consequently, the fair value of the equity securities the Company owns, and ultimately affect the timing and level of realized gains
or losses. The financial crisis of 2008 provides an example of an event with a significant adverse impact on the Company’s financial
condition. During the crisis, several financial institutions failed or received government assistance and many others experienced
significant distress. Most equity investments and some corporate fixed-income securities declined significantly in value while
sovereign government bond yields fell. Some of the Company’s investments were negatively impacted by these events, resulting in
losses. The potential contagion of the European Sovereign Debt crisis is another example of an event that could materially affect
the value of the Company’s investments.
While our strategy is long-term in nature, it is reviewed periodically to adapt to the investment environment when necessary,
especially in times of turbulence and increased volatility. Periodically, the Company employs several risk mitigation measures such
as changes to its strategic asset mix, hedging of interest rate or equity risk and increased holdings in cash. These actions serve to
reduce exposures in the investment portfolio and decrease the sensitivity of the MCT ratio to financial market volatility.
Sensitivity analysis is one risk management technique that assists management in ensuring that risks assumed remain within the
Company’s risk tolerance level. Sensitivity analysis involves varying a single factor to assess the impact that this would have on
the Company’s results and financial condition.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
59
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
For example, a 100-basis-point increase in interest rates would have no impact on net income for the Company’s AFS fixed-income
securities or preferred securities, as a result of marking to market the written call option liabilities embedded in the Company’s
redeemable preferred shares and the marking to market of derivatives positions. A 100-basis-point increase would decrease OCI by
approximately $138 million. Conversely, a 100-basis-point decrease in interest rates would increase OCI by the same amount and
would have no impact on net income. The impacts described here are approximately linearly related to the change in interest rates.
Furthermore, a 10% increase in common shares and a 5% increase in preferred shares would decrease net income by $16 million, as
a result of marking to market the written call option liabilities embedded in the Company’s redeemable preferred shares. However,
it would result in a linear increase of OCI by $143 million. Conversely, a 10% decrease in equity prices and a 5% decrease in
preferred shares would increase net income and decrease OCI by the same amounts, respectively. The impacts described here are
approximately linearly related to the change in the equity market.
The above sensitivity analyses were prepared using key assumptions as described below:
– securities in our portfolio are not impaired;
– interest rates and equity prices move independently;
– shifts in the yield curve are parallel;
– credit, liquidity and basis risks have not been considered;
– impact on our pension plans is not included;
– for our FVTPL fixed-income securities, the estimated impact on net income is assumed to be offset by the MYA. In addition, it
is important to note that AFS securities in an unrealized loss position, as reflected in AOCI, may at some point in the future be
realized through either a sale or an impairment; and
– risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
The Company also uses stress tests to determine the impact of various market scenarios on its financial and capital position. See
MCT monitoring discussion in Section 10 – Capital management.
To mitigate these risks, the Company’s investment policies set forth limits for each type of investment and compliance with the
policies is closely monitored by the Investment Committee. The Company manages market risk through asset class and economic
sector diversification and, in some cases, the use of derivatives. The Company also monitors and reviews the duration of its fixed-
income securities and its policy liabilities to ensure any duration mismatch is within acceptable tolerances.
The rate of currency exchange may also have an unintended effect on earnings and equity when measured in domestic currency.
Although the Company is exposed to some foreign exchange risks arising from securities in some of its U.S. dollar denominated
assets, the general policy is to minimize foreign currency exposure. The Company mitigates foreign exchange rate risks by buying or
selling successive monthly foreign exchange forward contracts or entering into foreign exchange swaps.
Credit risk
Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. A
counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or
obligation to us. The Company’s credit risk exposure is concentrated primarily in its debt portfolios, preferred share portfolios,
over-the-counter derivatives and, to a lesser extent, reinsurance recoverables and structured settlements agreements entered into
with various life insurance companies.
The Company’s risk management strategy is to invest in debt instruments and preferred shares of high credit quality issuers and to
limit the amount of credit exposure with respect to any one issuer by imposing limits based upon credit quality. See Tables 21 and
22 for more details on the breakdown of credit quality of fixed-income securities and preferred shares. In addition, the Company
sets limits on the total credit exposure across all asset classes including both on- and off-balance sheet exposures.
Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located
in the same geographic area or have comparable economic characteristics. Their ability to meet contractual obligations may be
similarly affected by changing economic, political or other conditions. The Company’s investments could be sensitive to changing
conditions in specific geographic regions or specific industries. The Company has a significant concentration of its investments
in the financial sector. This risk concentration is closely monitored by the Company and it hedges some of the risk as it deems
necessary. See Table 20 for more details on the breakdown of investments by economic sector.
60
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Credit risk from derivative transactions reflects the potential for the counterparty to default on its contractual obligations when
one or more transactions have a positive market value to the Company. Therefore, derivative-related credit risk is represented
by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount. In addition, the
Company may be subject to wrong-way risk arising from certain derivative transactions. Wrong-way risk occurs when exposure to a
counterparty is adversely correlated with the credit quality of that counterparty.
The Company subjects its derivative-related credit risk to the same credit approval, limit and monitoring standards that it uses
for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties and
managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with
established limits on a continual basis and is subject to a quarterly review by the Investment Committee.
Netting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of netting clauses
in master derivative agreements. The netting clauses in a master derivative agreement provide for a single net settlement of all
financial instruments covered by the agreement in the event of default. However, credit risk is reduced only to the extent that the
Company’s financial obligations toward the counterparty to such an agreement can be set off against obligations such counterparty
has toward us. The Company uses netting clauses in master derivative agreements to reduce derivative-related credit exposure. The
overall exposure to credit risk that is reduced through the netting clauses may change substantially following the reporting date as
the exposure is affected by each transaction subject to the agreement as well as by changes in underlying market rates and values.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk.
Mark-to-market provisions in the Company’s agreements with some counterparties provide the Company with the right to request
that the counterparty pay down or collateralize the current market value of its derivatives positions when the value passes a
specified threshold amount.
The Company enters into annuity agreements with various Canadian life insurance companies that have credit ratings of at least ‘A-’
or higher to provide for fixed and recurring payments to claimants. Under such arrangements, the Company no longer records the
liability in its audited Consolidated balance sheet as the liability to its claimants is substantially discharged, although the Company
remains exposed to the credit risk that life insurers may fail to fulfill their obligations.
Use of derivatives
The Company uses derivatives principally to mitigate certain of the above-mentioned risks. The Company’s use of derivatives
exposes it to a number of risks, including credit risk, as well as interest rate, equity market and currency fluctuations. The hedging
of certain risks with derivatives results in basis risk. Basis risk is the risk that offsetting investments in a hedging strategy will not
experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments
creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position. The Company monitors the
effectiveness of its hedges on a regular basis.
Credit downgrade risk
Independent third party rating agencies assess the Company’s ability to honour its financial obligations (the “issuer credit rating”)
and the insurance subsidiaries’ ability to meet their ongoing policyholder obligations (the “financial strength rating”).
The rating agencies periodically evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us.
We may not be in a position to maintain either the issuer credit ratings or the financial strength ratings we have received from the
rating agencies. An issuer credit rating downgrade could result in materially higher borrowing costs. A financial strength rating
downgrade could result in a reduction in the number of insurance contracts we write and in a significant loss of business, as such
business could move to other competitors with higher ratings, thus causing premiums and earnings to decrease.
Credit downgrades may affect the Company’s ability to raise capital or may result in an increase in the cost of raising capital with
negative implications for shareholders and other stakeholders.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet obligations associated with financial
liabilities. To manage its cash flow requirements, the Company maintains a portion of its investments in liquid securities.
The Company’s liquidity management is governed by establishing a prudent policy that identifies oversight responsibilities as well
as by setting limits and implementing effective techniques to monitor, measure and control exposure to liquidity risk. A portion
of investments is maintained in short-term (less than one year) highly liquid money market securities, which are used to manage
the operational requirements of the Company. A large portion of the investments are held in highly liquid federal and provincial
government debt to protect against any unanticipated large cash requirements. The Company also has an unsecured committed
credit facility.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
61
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
The Company has issued MTN to finance acquisitions and for general corporate purposes. To manage liquidity risk, the Company
has issued longer-term maturities and has staggered the maturities accordingly.
Limit on dividend and capital distribution risk
As a holding company, IFC is a legal entity and is separate and distinct from its operating subsidiaries, most of which are regulated
insurance companies. Canadian insurance regulations limit the ability of our insurance subsidiaries to pay dividends and require
our insurance subsidiaries to maintain specified levels of statutory capital and surplus. In addition, for competitive reasons, our
insurance subsidiaries need to maintain financial strength ratings which require us to sustain minimum capital levels in our
insurance subsidiaries. These restrictions affect the ability of our insurance subsidiaries to pay dividends and use their capital
in other ways. The inability of our subsidiaries to pay dividends to us could have a material adverse effect on our business and
financial condition, our ability to pay dividends and the price of securities issued by the Company.
strategic risk
Distribution risk
Distribution risk is the risk related to the distribution of the Company’s P&C insurance products. It includes the inherent risk of
dealing with independent distributors, the risk related to new market entrants and the risk associated with the Company’s multiple
distribution channel strategy. We may also face the risk that one of our channels or business models would not be sustainable in a
specific market or context.
We distribute our products primarily through a network of brokers and a great part of our success depends on the capacity of this
network to be competitive against other distributors, including “direct” insurers, as well as our ability to maintain our business
relationships with them while developing our distribution network strategy. The evolution of customer preferences for different
distribution channels could lead to a material decline in the Company’s market share.
These brokers sell our competitors’ insurance products and may stop selling our insurance products altogether. Strong competition
exists among insurers for brokers with demonstrated ability to sell insurance products. Premium volume and profitability could be
materially adversely affected if there is a material decrease in the number of brokers that choose to sell our insurance products. In
addition, our strategy of distributing through the direct channel may adversely impact our relationship with brokers who distribute
our products.
From time to time the Company issues loans or takes equity participation in certain brokers and, by doing so, the Company
exposes itself to financial risk and to potential relationship issues. In order to maintain strong relationships with brokers, each
relationship is managed by officers in each of the main regions in which we operate. To mitigate the financial risk, the Company
generally receives guarantees and uses standard agreements that contain general security and oversight clauses. The Board of
Directors participates in this oversight process by reviewing these loan and equity arrangements annually. For different reasons, the
broker channel has been in a consolidation mode for the last few years and we believe that this situation will continue for the next
few years. The acquisition of brokers by others or even by insurers may impact our relationship with some of them and jeopardize
our ability to grow our business.
The Company has established and maintains close relationships with its independent distributors by providing technology and
training to help strengthen their market position. It closely monitors pricing gaps between its various channels and manages the
different channels under different brand names including BrokerLink, its wholly owned broker network.
Regulation and legal risk
Our insurance subsidiaries are subject to regulation and supervision by insurance regulatory authorities of the jurisdictions in
which they are incorporated and licensed to conduct business. These laws and regulations delegate regulatory, supervisory and
administrative powers to federal, provincial and territorial insurance commissioners and agencies. Such laws and regulations are
generally designed to protect policyholders and creditors rather than shareholders, and are related to matters including:
– personal auto insurance rate setting;
– risk-based capital and solvency standards;
– restrictions on types of investments;
– maintenance of adequate reserves for unearned premiums and unpaid claims;
– examination of insurance companies by regulatory authorities, including periodic financial and market conduct examinations;
– licensing of insurers, agents and brokers;
– limitations on dividends and transactions with affiliates; and
– regulatory actions.
62
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
We believe that our insurance subsidiaries are in material compliance with all applicable regulatory requirements. It is not possible
to predict the future impact of changing federal, provincial and territorial regulations on our operations, and we cannot be sure that
laws and regulations enacted in the future will not be more restrictive than current laws. Overall, our business is heavily regulated
and changes in regulation may reduce our profitability and limit our growth.
In addition, these laws and regulations typically require us to periodically file financial statements and annual reports, prepared
on a statutory accounting basis, and other information with insurance regulatory authorities, including information concerning
our capital structure, ownership and financial condition including, on an annual basis, the aggregate amount of contingent
commissions paid and general business operations. We could be subject to regulatory actions, sanctions and fines if a regulatory
authority believed we had failed to comply with any applicable law or regulation. Any such failure to comply with applicable laws
could result in the imposition of significant restrictions on our ability to do business or significant penalties, which could adversely
affect our reputation, results of operations and financial condition. In addition, any changes in laws and regulations, including
the adoption of consumer or other initiatives regarding contingent and other commissions, rates charged for automobile or claims
handling procedures, could materially adversely affect our business, results of operations and financial condition.
In addition to the occasional employment-related litigation, we are a defendant in a number of claims relating to our insurance and
other related business operations. We may from time to time be subject to a variety of legal and regulatory actions relating to our
current and past business operations, including, but not limited to:
– disputes over coverage or claims adjudication;
– disputes regarding sales practices, disclosures, premium refunds, licensing, regulatory compliance and compensation arrangements;
– disputes with our agents, brokers or network providers over compensation and termination of contracts and related claims;
– regulatory actions relating to consumer pressure in relation to benefits realized by insurers;
– disputes with tax authorities regarding our tax liabilities and tax assets; and
– disputes relating to certain businesses acquired or disposed of by us.
Plaintiffs may also continue to bring new types of legal claims against the Company. Current and future court decisions and
legislative activity may increase our exposure to these types of claims. Multi-party or class action claims may present additional
exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it resulted in
a significant damage award or a judicial ruling that was otherwise detrimental, could have a material adverse effect on our results
of operations and financial condition. Unfavourable claim rulings may render fair settlements more difficult to reach. We cannot
determine with any certainty what new theories of recovery may evolve or what their impact may be on our businesses.
We may be subject to governmental or administrative investigations and proceedings in the context of our highly regulated
sectors of activity. We cannot predict the outcome of these investigations, proceedings and reviews, and cannot be sure that such
investigations, proceedings or reviews or related litigation or changes in operating policies and practices would not materially
adversely affect our results of operations and financial condition. In addition, if we were to experience difficulties with our
relationship with a regulatory body in a given jurisdiction, it could have a material adverse effect on our ability to do business in
that jurisdiction and the price of the Company’s common shares.
We are supported by an in-house team of lawyers and staff, and by outside counsel when deemed necessary or appropriate, in
handling general regulation and litigation issues and are an active member of the major industry associations. Additionally, our
government relations team ensures contact with the governments of the various jurisdictions in which we operate, and can be
proactive in situations that could affect our business.
In addition, the profitability of automobile insurers can be significantly affected by many factors, including:
– regulatory regimes which limit their ability to detect and defend against fraudulent claims and fraud rings;
– developing trends in tort and class action litigation;
– changes in other laws or regulations, including the adoption of consumer initiatives regarding rates charged for automobile or
other insurance coverage or claims handling procedures; and
– privacy and consumer protection laws that prevent insurers from assessing risks or factors that have a high correlation with
risks considered, such as credit scoring.
General economic, financial market and political conditions
Our businesses and profitability may be materially adversely affected from time to time by general economic, financial market
and political conditions. In periods of economic downturn characterized by higher unemployment, lower family income, lower
corporate earnings, lower business investment and lower consumer spending, individuals and businesses may choose not to
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
63
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
purchase insurance products, may allow existing policies to lapse, or may choose to reduce the amount of coverage purchased. In
addition to the demand for our insurance products being adversely affected, frequency or severity of claims could increase, resulting
in lower earnings. General inflationary pressures may affect the costs of medical care, automobile parts and repair, construction
and other items, and may increase the costs of paying claims.
In addition to the risk related to investments discussed previously, an economic downturn could have a significant impact on
the financial condition of the Company’s defined benefit pension plans. Consequently, this could impact the Company’s
financial condition.
Solvency risk
Regulatory authorities closely monitor the solvency of insurance companies by requiring them to comply with strict solvency
standards based on the risk assumed by each company with respect to asset composition, liability composition, and the matching
between these two components. The Company is required to submit regular reports to the regulatory authorities regarding its
solvency, and publish its solvency ratio every quarter. The minimum solvency ratio targeted by the Company is 170%, which is
higher than the regulatory MCT requirement of 150%. The appointed actuary must present an annual report to the Audit and Risk
Review Committee and the Enterprise Risk Committee on the Company’s current and future solvency and mitigating measures.
In 2011, the Company adopted a capital management policy. The policy contains guidelines to help ensure that the Company
maintains adequate capital to withstand adverse event scenarios and has documented procedures to take corrective action should
any unanticipated conditions arise.
Reputation risk
Our insurance products and services are ultimately distributed to individual consumers and businesses. From time to time,
consumer advocacy groups or the media may focus attention on our products and services, thereby subjecting us or our subsidiaries
to periodic negative publicity. We also may be negatively impacted in relation to our information systems, security and technology,
or if one of our subsidiaries engages in practices resulting in increased public attention to our businesses. Negative publicity may
also result in increased regulation and legislative scrutiny of practices in the P&C insurance industry as well as increased litigation.
Such increase may further increase our costs of doing business and adversely affect our profitability by impeding our ability to
market our products and services, requiring us to change our products or services or increasing the regulatory burdens under which
we operate. The periodic negative publicity of insurance and related businesses may negatively impact our financial results and
financial condition. To mitigate these risks, the Board of Directors has created the Disclosure Committee, which is composed of
senior officers and chaired by the Chief Legal Officer. This committee oversees the Company’s disclosure practices and procedures;
its role includes maintaining awareness and understanding of corporate disclosure rules and guidelines, educating and informing
employees about the Company’s disclosure practices, determining whether corporate developments constitute material information
and reviewing and approving all material disclosure releases or statements of Intact Financial Corporation. In addition, the
Enterprise Risk Committee monitors the Company’s operations to identify situations that can negatively affect the Company’s
reputation. If necessary, the committee approves policies and implements procedures to mitigate reputation risk.
Operational risk
These risks are essentially resulting from inadequate or failed processes, people and systems or from external events. These include
events such as unauthorized activity, internal and external criminal activity, and information security failure, among others.
We believe that managing the risks related to the Company’s business activities significantly reduces losses resulting from failed
processes, procedures or controls, inadequate systems, human errors, fraud or external events such as natural disasters. To manage
these risks, the Company follows a specific framework that is composed of different steps including identification, measurement,
monitoring and mitigation.
For early detection of and clear insight into the Company’s key operational risks or any other related type of risks, the Risk
Management team uses many tools including periodic risk review interviews with management and risk and control self-
assessments of the Company’s critical functions. It also monitors and measures the Company’s risks on an ongoing basis through
key risk indicators which enable management to proactively initiate effective actions. The Company has also developed clear
incident reporting channels within the organization to systematically report, manage and monitor operational incidents which
could lead to potential financial losses or reputation damage. Ongoing training and exercises provided to all employees also
contribute to increasing the operational risk awareness culture within the organization and minimizing the severity and occurrence
of incidents.
64
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
The effective implementation of the overall operational risk management program depends on management. Management is
supported by the Risk Management department, which assists in monitoring the risk processes and ensuring that appropriate actions
are taken when necessary. The operational risk management department reports to the Enterprise Risk Committee. The committee
has the oversight responsibility for all enterprise risks and risk governance within the organization. Finally, to ensure transparency,
the committee provides regular updates of its operations to the Audit and Risk Review Committee and the Board of Directors.
Information technology risk
The use of information technology enables us to increase our productivity, to offer attractive products and interfaces to existing
and potential customers, and to distinguish ourselves from the competition by benefiting from a competitive advantage. However,
our dependency on technology, network, telephony and critical applications makes our ability to operate and our profitability
vulnerable to service interruption, third party agreement failure and security breaches. Massive denial of service attacks and system
intrusion attempts could compromise our ability to operate and Intact could be unable to safeguard confidential information from
public disclosure. To maintain our performance levels, we are required to periodically modernize our systems and to constantly
seek to renew. Time required for accomplishing projects, unplanned delay or cost, or not being successful in executing such
projects could lead to a significant decline in service levels, impact retention negatively and jeopardize our competitive advantage.
To ensure the security and the resilience of our systems, the safeguarding of our confidential information and the integrity of our
information and databases, various dedicated teams plan, test and execute our continuity and security plans. Their efforts are
supported by teams constantly monitoring our systems and ready to intervene if an incident occurs. To ensure the expected levels of
service are delivered by our critical third party service providers, service level agreements are signed and added to relevant contracts.
Business interruption risk
We may also experience an abrupt interruption of activities caused by unforeseeable and/or catastrophic events, an example of
which being a global flu pandemic (e.g., H1N1). Our operations may be subject to losses resulting from such disruptions. Losses
can relate to property, financial assets and trading positions and also to key personnel. If our business continuity plans cannot be
put into action or do not take such events into account, losses may increase further.
In order to maintain the integrity and continuity of the Company’s operations in the event of a crisis, we have developed
personalized alert and mobilization procedures as well as communication protocols. For example, emergency action plans,
business continuity plans, business recovery plans, major health crisis plans, building evacuation plans and crisis communication
plans have all been defined and are tested on an ongoing basis. This process is supported by a crisis management structure adapted
to our Company’s organization and to the type of events we may have to manage.
Dependency on key employees risk
Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key employees and to
attract and retain additional qualified personnel in the future. The loss of the services of any of our key employees, or the inability
to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our
business operations.
The Company has developed a focused recruiting strategy to aggressively market careers and opportunities at Intact. The strategy
includes an updated web site, focused external recruiting, campaigns, rebranding and targeted advertising. It also includes
partnering with four universities on graduate recruiting as well as commercial and personal lines trainee program recruiting. Talent
identification and development programs have been implemented to retain and grow existing talent and ingrain succession planning.
11.7 Reinsurance
In the ordinary course of business, we reinsure certain risks with other reinsurers to limit our maximum loss in the event of
catastrophic events or other significant losses.
Our objectives related to ceded reinsurance are:
– capital protection;
– reduction in the volatility of results;
– increase in underwriting capacity; and
– access to the expertise of reinsurers.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
65
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
The placement of ceded reinsurance is done almost exclusively on an excess of loss basis (per event or per risk) as is typically the
practice. The Company’s ceded reinsurance programs comply with regulatory guidelines. Under such programs, management
considers that in order for a contract to reduce exposure to risk, it must be structured to ensure that the reinsurer assumes
significant insurance risk related to the underlying reinsured policies and it is reasonably possible that the reinsurer may realize a
significant loss from the reinsurance. Furthermore, the reinsurance treaties call for timely reimbursement of ceded losses.
Amongst other criteria, all reinsurers chosen to participate in the reinsurance program have a minimum rating of ‘A-’ from A.M. Best
and/or S&P at the time of entering into reinsurance arrangements with us. The financial analysis performed by the Company’s
specialized reinsurance brokers and other qualitative information are also considered in the selection of the Company’s reinsurers.
The treaties have special termination clauses and a security review clause allowing the Company to change a reinsurer during
the term of the treaties if its rating falls below the minimum required or for other reasons that might jeopardize the Company’s
ability to continue doing business with a reinsurer as intended at the time of entering into the reinsurance arrangement. Because
of the importance of the Catastrophe program in place, a certain level of concentration exists with high-quality reinsurers, but
diversification of reinsurers remains a key element and is analyzed and implemented to avoid excessive concentration in a specific
reinsurance group. A single catastrophic event such as an earthquake could financially weaken a reinsurer, so distribution of risk is
an important reinsurance strategy for the Company.
At December 31, 2012, all of our reinsurance treaties are with unaffiliated reinsurance companies, substantially all of which meet
our financial strength rating requirements.
In line with industry practice, our reinsurance recoverable with licensed Canadian reinsurers ($240 million as at December 31,
2012, $276 million as at December 31, 2011) are generally unsecured as Canadian regulations require these reinsurers to maintain
minimum asset and capital balances in Canada to meet their Canadian obligations, and claims liabilities take priority over the
reinsurer’s subordinated creditors. Reinsurance recoverable with non-licensed reinsurers ($80 million as at December 31, 2012,
$130 million as at December 31, 2011) are secured with cash, letters of credit and/or assets held in trust accounts or under security
agreements of $173 million as at December 31, 2012 ($183 million as at December 31, 2011).
Annually, we review and adjust accordingly our reinsurance coverage as well as our net retention of risks in order to reflect our
current exposures and our capital base.
seCTIon 12 – off-balance sheet arrangements
12.1 securities lending
We participate in a securities lending program to generate fee income. This program is managed by our custodian, a major
Canadian financial institution, whereby we lend securities we own to other financial institutions to allow them to meet their
delivery commitments. We loaned securities, which are reported as Investments in the accompanying audited Consolidated
financial statements, with a fair value of $2.2 billion as at December 31, 2012 ($1.6 billion as at December 31, 2011). Collateral is
provided by the counterparty and is held in trust by the custodian for our benefit until the underlying security has been returned
to us. The collateral cannot be sold or re-pledged externally by us, unless the counterparty defaults on its financial obligations.
Additional collateral is obtained or refunded on a daily basis as the market value of the underlying loaned securities fluctuates.
The collateral consists of government securities with an estimated fair value of 105% of the fair value of the loaned securities and
amounts to $2.3 billion as at December 31, 2012 ($1.6 billion as at December 31, 2011).
seCTIon 13 – accounting and disclosure matters
13.1 significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from these estimates.
The key estimates and assumptions that have a risk of causing a material adjustment to the carrying value of certain assets and
liabilities within the next financial year are as follows:
Valuation of claims liabilities
The ultimate cost of claims liabilities is estimated by using a range of standard actuarial claims projection techniques in accordance
with Canadian accepted actuarial practice.
66
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
The main assumption underlying these techniques is that a company’s past claims development experience can be used to project
future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and
incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss
ratios. Historical claims development is mainly analyzed by accident years, but can also be further analyzed by geographical area,
as well as by significant business line and claim type. Large claims are usually separately addressed, either by being reserved at the
face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit
assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in
the historical claims development data on which the projections are based. Additional qualitative judgment is used to assess the
extent to which past trends may not apply in future, in order to arrive at the estimated ultimate cost of claims that present the likely
outcome from the range of possible outcomes, taking into account all of the uncertainties involved.
Valuation of pension benefit obligation
The cost of defined benefit pension plans and other post-employment medical benefits and the present value of the pension
obligation are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount
rates, expected rates of return on assets, future salary increases, the employees’ age upon retirement, mortality rates and future
pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit
obligation is highly sensitive to changes in the assumptions. All assumptions are reviewed at each reporting date. Details of the
key assumptions used in the estimates are contained in Note 19.5 – Assumptions used to the accompanying audited Consolidated
financial statements.
Impairment
Goodwill and intangible assets
We determine whether goodwill and intangible assets with indefinite useful lives are impaired at least on an annual basis. Also,
intangible assets under development are not subject to amortization but are tested for impairment on an annual basis. Impairment
testing of these assets requires an estimation of the recoverable amount of the cash generating units to which the assets are
allocated. The assumptions used in this estimation of the recoverable amount are discussed in Note 18 – Goodwill and intangible
assets to the accompanying audited Consolidated financial statements.
Financial assets
We determine whether financial assets, other than those classified or designated as at FVTPL, are impaired at each audited
Consolidated balance sheet date. These financial assets are impaired when there is objective evidence of a decline in fair value
below cost. Considerations that form the basis of these objective evidence judgments include a significant or prolonged decline
in fair value of an AFS equity instrument and a loss event that has occurred impairing the expected cash flows of an AFS debt
instrument. For asset-backed securities, considerations include liquidity risk, credit risk, volatility, discount rates, prepayment rates
and default rate assumptions.
Measurement of embedded derivatives
We own perpetual preferred shares with call options which give the issuer the right to redeem the shares at a particular price.
Accounting standards require the value of the option liability to be measured separately from the preferred shares. The value of
the option liability for embedded derivatives is determined using a valuation which relies predominantly on the price volatility
of the underlying preferred shares, which can be significantly affected by market conditions. Judgment is also required to determine
the time period over which the volatility is measured.
Measurement of income taxes
Management exercises judgment in estimating the provision for income taxes. We are subject to federal income tax law and
provincial income tax laws in the various jurisdictions where we operate. Various tax laws are potentially subject to different
interpretations by the taxpayer and the relevant tax authority. To the extent that our interpretations of tax laws differ from those of
tax authorities or that the timing of realization of deferred tax assets is not as expected, the provision for income taxes may increase
or decrease in future periods to reflect actual experience.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
67
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
business combinations
Upon initial recognition, the acquiree’s assets and liabilities have been included in the audited Consolidated balance sheets at fair
value. Management estimated the fair values using estimates on future cash flows and discount rates. However, actual results can be
different from those estimates. The changes in the estimates that relate to new information obtained about facts and circumstances
that existed as of the acquisition date, made at initial recognition with regard to items for which the valuation was incomplete,
would have an impact on the amount of goodwill recognized. Any other changes in the estimates made at initial recognition would
be reported in the audited Consolidated statements of comprehensive income. The detail on assets acquired and liabilities assumed
is presented in Note 4 – Business combinations to the accompanying audited Consolidated financial statements.
13.2 financial instruments
An important portion of our audited Consolidated balance sheets is composed of financial instruments. Our financial assets include
investments (cash and cash equivalents, debt securities, preferred shares, common shares and loans) and receivables. Our financial
liabilities include claims liabilities, financial liabilities related to investments and debt outstanding. Derivative financial instruments
are used for risk management purposes and are generally held for non-trading purposes to mitigate foreign exchange and market
risks (see Section 11.6 – Main risk factors and mitigating actions). They consist mostly of forwards, futures, swaps and options.
– Forwards are used to mitigate the risk arising from foreign currency fluctuations and futures are used to modify exposure to
interest rate fluctuations.
– Swaps are used mainly in conjunction with other financial instruments to synthetically alter the cash flows of certain
investments and credit exposure to specific bond issuers.
– Options are used to modify our exposure to interest rate risk.
– Inflation caps, which are a type of option, are used to manage inflation risk.
Financial instruments are required to be recognized at their fair value on initial recognition. Subsequent measurement is at
amortized cost or fair value depending on the classification of the financial instruments. Financial instruments classified as at
FVTPL or AFS are carried at fair value, while all others are carried at amortized cost.
The fair value of financial instruments on initial recognition is normally the transaction price, being the fair value of the
consideration given or received. Subsequent to initial recognition, the fair value of financial instruments is determined based on
available information and categorized according to a three-level fair value hierarchy. The distribution of our financial instruments
between each of the fair value hierarchy levels is described in Note 8 – Fair value measurement to the accompanying audited
Consolidated financial statements.
Where the fair values of financial assets and financial liabilities reported on the audited Consolidated balance sheets cannot be
derived from active markets, they are determined using a variety of valuation techniques that include the use of discounted cash
flow models and/or mathematical models. The inputs to these models are derived from observable market data where possible,
but where observable market data is not available, judgment is required to establish fair values.
For discounted cash flow analyses, estimated future cash flows and discount rates are based on current market information and
rates applicable to financial instruments with similar yields, credit quality and maturity characteristics. Estimated future cash flows
are influenced by factors such as economic conditions (including country-specific risks), concentrations in specific industries,
types of instruments, currencies, market liquidity and financial conditions of counterparties. Discount rates are influenced by
risk-free interest rates and credit risk. Changes in assumptions about these factors could affect the reported fair value of financial
instruments.
Refer to Note 3 – Summary of significant accounting policies, Note 7 – Derivative financial instruments and Note 8 – Fair
value measurement to the accompanying audited Consolidated financial statements for details on the classification and
measurement of financial instruments.
68
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
13.3 standards issued but not yet effective
Consolidated financial statements
IFRS 10 – Consolidated financial statements replaces IAS 27 – Consolidated and separate financial statements and SIC-12 –
Consolidation – special purpose entities and establishes principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more entities. The main features are as follows:
– the principle of control sets out the three elements of control: (1) power over the investee; (2) exposure, or rights, to variable
returns from involvement with the investee; and (3) the ability to use power over the investee to affect the amount of the
investor’s returns; and
– when preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions
and other events in similar circumstances. Intragroup balances and transactions must be eliminated.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on our financial statements.
Joint arrangements
IFRS 11 – Joint arrangements replaces IAS 31 – Interest in joint ventures and SIC-13 – Jointly controlled entities – non-monetary
contributions by venturers and is to be applied by all entities that are a party to a joint arrangement, whereby two or more parties
have joint control. The main features of this new standard are as follows:
– joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control;
– joint arrangements are classified into two types – joint operations and joint ventures;
– an entity determines the type of arrangement in which it is involved by considering its rights and obligations;
– a joint operator will recognize and measure the assets, liabilities, revenues and expenses in relation to its interest in the
arrangement; and
– a joint venturer will recognize an investment and measure it using the equity method.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on our financial statements.
Disclosure of interests in other entities
IFRS 12 – Disclosure of interests in other entities replaces the disclosure requirements of IAS 27 – Consolidated and separate
financial statements, IAS 28 – Investments in associates, and IAS 31 – Interests in joint ventures. IFRS 12 establishes disclosure
objectives according to which an entity discloses information regarding consolidated entities, associates, joint arrangements,
unconsolidated structured entities and non-controlling interests.
The standard is effective for years beginning on or after January 1, 2013 and is not expected to have a significant impact on our
financial statements.
fair value measurement
In May 2011, the IASB issued IFRS 13 – Fair value measurement with a view to setting out a single IFRS framework for defining,
measuring and disclosing fair value. The main features are as follows:
– defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date;
– the fair value measurement requires an entity to determine the following:
– the particular asset or liability being measured;
– for a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets
or on a stand-alone basis;
– the market in which an orderly transaction would take place for the asset or liability; and
– the appropriate valuation technique(s) to use when measuring fair value. The technique(s) should maximize the use of
relevant observable inputs and minimize unobservable inputs. Those inputs should be consistent with the inputs a market
participant would use when pricing the asset or liability; and
– the entity is to disclose those valuation techniques and inputs used to develop the fair value measurements.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on our financial statements.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
69
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
employee benefits
In June 2011, the IASB completed its project to improve the accounting for pension and other post-employment benefits by issuing
an amended version of IAS 19 – Employee benefits. The main features are as follows:
– eliminate an option to defer the recognition of gains and losses, known as the “corridor method”;
– require entities to compute the asset return component using the discount rate used to measure the defined benefit obligations
rather than the expected return on assets; and
– enhance the disclosure requirements for defined benefit plans, providing better information about the characteristics of defined
benefit plans and the risks that entities are exposed to through participation in those plans.
The standard is effective for years beginning on or after January 1, 2013 and is generally to be applied retrospectively. The use
of the discount rate in calculating the asset returns will generally result in an increase in employee future benefit expense and a
corresponding offset in OCI with no overall change in Total comprehensive income attributable to shareholders.
financial statement presentation
In June 2011, the IASB amended IAS 1 – Presentation of Financial Statements. The principal change resulting from the
amendments to IAS 1 is a requirement within the Statement of Other comprehensive income to distinguish between items within
OCI that may be reclassified to the statement of income and items that will not.
The standard is effective for years beginning on or after July 1, 2012 and will not have an impact on our financial statements as the
items within OCI that may be reclassified to the Consolidated statements of income are already disclosed together.
financial instruments: classification and measurement
In November 2009, the IASB issued IFRS 9 – Financial Instruments. This standard represents the completion of the first part
of a three-part project to replace IAS 39 – Financial Instruments: Recognition and Measurement. The new standard reduces
complexity by replacing the many different rules in IAS 39. The key features of the new standard are as follows:
– a business model test is applied first in determining whether a financial asset is eligible for measurement at amortized cost. The
business model objective is based on holding financial assets in order to collect contractual cash flows rather than realizing
cash flows from the sale of the financial assets;
– in order to be eligible for amortized cost measurement, an asset must have contractual cash flow characteristics representing the
principal and interest;
– all other financial assets are measured at fair value on the balance sheet;
– an entity can elect on initial recognition to present the fair value changes on an equity investment that is not held for trading
directly in OCI. The dividends on investments for which this election is made must be recognized in profit or loss, but gains or
losses are not removed from OCI when the equity investment is disposed of; and
– if a financial asset is eligible for amortized cost measurement, an entity can elect to measure it at fair value if it eliminates or
significantly reduces an accounting mismatch.
The standard is effective for years beginning on or after January 1, 2015. We will analyze the impact that this standard will have on
our audited Consolidated financial statements in conjunction with the other phases of the standard when issued.
13.4 Related-party transactions
We enter into transactions with associates and joint ventures in the normal course of business. All related-party transactions are
with entities associated with our distribution channel. These transactions mostly comprise commissions for insurance policies
and interest and principal payments on loans. These transactions are measured at the amount of consideration paid or received
as established and agreed to by the related parties. Management believes that such exchange amounts approximate fair value.
We also enter into transactions with key management personnel and post-employment plans. Our key management personnel
include all members of the Board of Directors and certain members of the Executive Committee. Key management personnel
can purchase insurance products offered by the Company in the normal course of business. The terms and conditions of such
transactions are essentially the same as those available for our clients and employees. Transactions with post-employment plans
comprise the contributions paid to these plans.
Note 26 – Related-party transactions to the accompanying audited Consolidated financial statements provides additional
information on related-party transactions.
70
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
13.5 Disclosure controls and procedures
We are committed to providing timely, accurate and balanced disclosure of all material information about the Company and to
providing fair and equal access to such information. Management is responsible for establishing and maintaining our disclosure
controls and procedures to ensure that information used internally and disclosed externally is complete and reliable. Due to the
inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute, assurance that all
control issues and instances of fraud or error, if any, within the Company have been detected. We continue to evolve and enhance
our system of controls and procedures.
Management, at the direction and under the supervision of the Chief Executive Officer and the Chief Financial Officer of the
Company, has evaluated the effectiveness of our disclosure controls and procedures. The evaluation was conducted in accordance
with the requirements of National Instrument 52-109 of the Canadian Securities Administrators. This evaluation confirmed, subject
to the inherent limitations noted above, the effectiveness of the design and operation of disclosure controls and procedures as at
December 31, 2012. Management can therefore provide reasonable assurance that material information relating to the Company
and its subsidiaries is reported to it on a timely basis so that it may provide investors with complete and reliable information.
13.6 Internal controls over financial reporting
Management has designed and is responsible for maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS.
Following the acquisition of Jevco on September 4, 2012, management has limited the scope of design of the Company’s
disclosure controls and procedures and internal control over financial reporting to exclude the controls, policies and procedures
of Jevco. Jevco’s contribution to our audited Consolidated financial statements for the year ended December 31, 2012 was 2%
of consolidated revenue. Additionally, at December 31, 2012, Jevco’s total assets and total liabilities were approximately 7% and
6% of consolidated total assets and total liabilities, respectively. Management is committed to removing this limitation within the
timeframe permitted by regulation.
No significant changes were made to our ongoing internal controls over financial reporting during 2012 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
seCTIon 14 – Investor information
14.1 authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
14.2 outstanding share data
The following table presents the outstanding share data as at February 5, 2013.
Table 35 – oUTsTanDInG shaRe DaTa
(number of shares)
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
133,333,665
10,000,000
10,000,000
Refer to our Annual Information Form for more detailed information on the rights of shareholders and to Note 21 – Common
shares and preferred shares to the accompanying audited Consolidated financial statements for additional information.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
71
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
14.3 Dividends declared on common shares and on preferred shares
The following table presents the total dividends declared on each class of shares for the year ended December 31, 2012.
Table 36 – DIVIDenDs DeClaReD PeR shaRe
(in dollars)
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
1.60
1.05
1.05
On February 5, 2013, the Board of Directors increased the quarterly dividend by 10%, or four cents, to 44 cents per share on our
outstanding common shares. The decision reflected our objective to create value for shareholders, the strength of our financial
position and the quality of our operating earnings. This is the eighth consecutive year we have increased our dividend.
14.4 nCIb program
The NCIB program expired on February 22, 2012 and was not renewed. No common shares were repurchased for cancellation under
the NCIB program in 2012. As at December 31, 2011, 2,750,900 common shares at an average price of $47.03 were repurchased for
cancellation for a total cash consideration of $129 million.
14.5 long-term incentive plans
The following table shows the outstanding units and fair value for each of the Company’s performance cycles as at December 31, 2012.
Table 37 – oUTsTanDInG UnITs anD faIR ValUe bY PeRfoRManCe CYCle
2010–2012 performance cycle
2011–2013 performance cycle
2012–2014 performance cycle
Total
Weighted-
average
grant date
fair value (in $)
amount
(in millions
of $)
35.06
50.84
57.96
45.90
16
20
14
number of
units
447,829
396,820
244,124
1,088,773
Refer to Note 23 – Share-based payments to the audited Consolidated financial statements for additional details.
14.6 expected issuance dates of our financial results
The expected issuance dates of our financial results for the next 12 months are as follows:
First quarter results, for the period ending March 31, 2013
Second quarter results, for the period ending June 30, 2013
Third quarter results, for the period ending September 30, 2013
Year-end results, for the period ending December 31, 2013
May 8, 2013
July 31, 2013
November 6, 2013
February 5, 2014
72
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
seCTIon 15 – selected annual and quarterly information
15.1 selected annual information
The following table presents selected annual information for the years shown.
Table 38 – seleCTeD annUal InfoRMaTIon
Total revenues
Underwriting income
Net income from continuing operations
Net income attributable to shareholders
EPS from continuing operations, basic and diluted (in dollars)
EPS, basic and diluted (in dollars)
Cash dividends declared per share (in dollars)
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
The following table presents selected annual information as at the dates shown.
Table 39 – seleCTeD annUal InfoRMaTIon
2012
7,127
451
587
587
4.33
4.33
1.60
1.05
1.05
2011
5,532
273
457
465
3.89
3.96
1.48
0.49
0.39
2010
4,788
193
498
498
4.32
4.32
1.36
–
–
December 31,
2012
December 31,
2011
12,959
19,813
1,143
4,893
11,828
19,753
1,293
4,341
December 31,
2010
8,653
12,075
496
2,969
As at
Investments
Total assets
Debt outstanding
Shareholders’ equity
15.2 selected quarterly information
Table 40 – seleCTeD QUaRTeRlY InfoRMaTIon
Written insured risks (in thousands)
DPW
Total revenues
Net premiums earned
Current year catastrophes
Favourable prior year claims development
Underwriting income
Combined ratio
NOI
Net income from continuing operations
Net income attributable to shareholders
NOIPS, basic and diluted (in dollars)
EPS from continuing operations,
basic and diluted (in dollars)
EPS, basic and diluted (in dollars)
Q4-2012
Q3-2012
Q2-2012
Q1-2012
Q4-2011
Q3-2011
Q2-2011
Q1-2011
1,543
1,690
1,877
1,742
16
(85)
138
92.1%
194
181
181
1.42
1,794
1,798
1,791
1,640
150
(70)
67
95.9%
122
96
96
0.89
2,018
1,977
1,723
1,599
62
(83)
123
92.3%
180
133
133
1.35
1,374
1,403
1,736
1,590
17
(134)
123
92.3%
179
177
177
1.34
1,508
1,576
1,730
1,616
32
(38)
118
92.7%
152
76
84
1.14
1,251
1,226
1,329
1,121
58
(31)
65
94.2%
111
101
101
0.97
1,379
1,354
1,248
1,075
104
(73)
33
97.0%
95
123
123
0.87
946
943
1,225
1,068
14
(81)
58
94.6%
102
157
157
0.91
1.32
1.32
0.70
0.70
0.98
0.98
1.33
1.33
0.55
0.62
0.87
0.87
1.12
1.12
1.42
1.42
Our results reflect the acquisition of Jevco since September 4, 2012 and the acquisition of AXA Canada since September 23, 2011.
See also discussion on seasonality of the business in Section 6 – Business developments and operating environment.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
73
Management’s Discussion and Analysis
For the year ended December 31, 2012 (in millions of dollars, except as otherwise noted)
seCTIon 16 – non-IfRs financial measures
Non-IFRS financial measures do not have standardized meanings prescribed by IFRS and may not be comparable to similar
measures used by other companies in our industry. These non-IFRS financial measures are used by management and financial
analysts to assess our performance.
– AEPS and AROE exclude the impact of amortization of intangible assets recognized in business combinations, integration and
restructuring costs, all on an after-tax basis, as well as the change in fair value of contingent consideration (not deductible for
tax purposes).
– NOI, NOIPS and OROE exclude net income from discontinued operations, net investment gains and losses excluding FVTPL
fixed-income securities, market yield effect, amortization of intangible assets recognized in business combinations, integration
and restructuring costs and change in fair value of contingent consideration, as well as the related tax impact.
– The market-based yield represents the annualized total pre-tax investment income (before expenses), divided by the average fair
values of net equity and fixed-income securities held during the reporting period.
We believe that these metrics reflect more accurately our underlying business performance.
Table 41 – ReConCIlIaTIon beTWeen neT InCoMe aTTRIbUTable To shaReholDeRs anD aePs
net income attributable to shareholders
Less net income from discontinued operations
Add amortization of intangible assets recognized
in business combinations, net of tax
Add integration and restructuring costs, net of tax
Add change in fair value of contingent consideration
adjusted net income attributable to shareholders
Less preferred share dividends
adjusted net income attributable to common shareholders
Divided by weighted-average number of common shares (in millions)
aePs, basic and diluted (in dollars)
Q4-2012
Q4-2011
181
–
4
22
–
207
(5)
202
133.3
1.51
84
(8)
4
32
41
153
(5)
148
129.6
1.14
Table 42 – ReConCIlIaTIon beTWeen neT InCoMe aTTRIbUTable To shaReholDeRs anD noIPs
Q4-2012
Q4-2011
net income attributable to shareholders
Less net income from discontinued operations
Add income taxes
Add net investment losses (deduct net investment gains) excluding
FVTPL fixed-income securities (table 11)
Add market yield effect (table 12)
Add amortization of intangible assets recognized in business combinations
Add integration and restructuring costs
Add change in fair value of contingent consideration
Pre-tax operating income
Tax impact on operating income
noI
Less preferred share dividends
noI to common shareholders
Divided by weighted-average number of common shares (in millions)
noIPs, basic and diluted (in dollars)
181
–
47
(30)
13
6
29
–
246
(52)
194
(5)
189
133.3
1.42
84
(8)
40
7
–
4
42
41
210
(58)
152
(5)
147
129.6
1.14
2012
587
–
16
80
11
694
(21)
673
130.8
5.15
2012
587
–
147
(72)
52
21
108
11
854
(179)
675
(21)
654
130.8
5.00
2011
465
(8)
10
56
41
564
(8)
556
115.3
4.82
2011
465
(8)
137
(140)
17
13
71
41
596
(136)
460
(8)
452
115.3
3.91
74
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
seCTIon 17 – Cautionary note regarding forward-looking statements
Certain of the statements included in this MD&A about the Company’s current and future plans, expectations and intentions,
results, levels of activity, performance, goals or achievements or any other future events or developments constitute forward-
looking statements. The words “may”, “will”, “would”, “should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”,
“anticipates”, “believes”, “estimates”, “predicts”, “likely”, “potential” or the negative or other variations of these words or other
similar or comparable words or phrases, are intended to identify forward-looking statements.
Forward-looking statements are based on estimates and assumptions made by management based on management’s experience
and perception of historical trends, current conditions and expected future developments, as well as other factors that
management believes are appropriate in the circumstances. Many factors could cause the Company’s actual results, performance
or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking
statements, including, without limitation, the following factors: the Company’s ability to implement its strategy or operate its
business as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the
Company writes; unfavourable capital market developments or other factors which may affect the Company’s investments and
funding obligations under its pension plans; the cyclical nature of the P&C insurance industry; management’s ability to accurately
predict future claims frequency; government regulations designed to protect policyholders and creditors rather than investors;
litigation and regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; the Company’s
reliance on brokers and third parties to sell its products to clients; the Company’s ability to successfully pursue its acquisition
strategy; the Company’s ability to execute its business strategy; the terms and conditions of, and regulatory approvals relating to,
the integration of Jevco; various other actions to be taken or requirements to be met in connection with the Jevco acquisition and
integrating the Company and Jevco; synergies arising from, and the Company’s integration plans relating to, the AXA Canada
acquisition; management’s estimates and expectations in relation to resulting accretion, IRR and debt-to-capital ratio after closing
of the AXA Canada and Jevco acquisitions; various other actions to be taken or requirements to be met in connection with the
AXA Canada acquisition and integrating the Company and AXA Canada; the Company’s participation in the Facility Association
(a mandatory pooling arrangement among all industry participants) and similar mandated risk-sharing pools; terrorist attacks and
ensuing events; the occurrence of catastrophic events; the Company’s ability to maintain its financial strength and issuer credit
ratings; access to debt financing and the Company’s ability to compete for large commercial business; the Company’s ability to
alleviate risk through reinsurance; the Company’s ability to successfully manage credit risk (including credit risk related to the
financial health of reinsurers); the Company’s reliance on information technology and telecommunications systems; the Company’s
dependence on key employees; changes in laws or regulations; general economic, financial and political conditions; the Company’s
dependence on the results of operations of its subsidiaries; the volatility of the stock market and other factors affecting the
Company’s share price; and future sales of a substantial number of its common shares.
All of the forward-looking statements included in this MD&A are qualified by these cautionary statements and those made
in Section 11 – Risk management herein. These factors are not intended to represent a complete list of the factors that could
affect the Company. These factors should, however, be considered carefully. Although the forward-looking statements are based
upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be
consistent with these forward-looking statements. When relying on forward-looking statements to make decisions, investors should
ensure the preceding information is carefully considered. Undue reliance should not be placed on forward-looking statements
made herein. The Company and management have no intention and undertake no obligation to update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise, except as required by law.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
75
Management’s responsibility for financial reporting
Management is responsible for the preparation and presentation of the consolidated financial statements of Intact Financial
Corporation and its subsidiaries, collectively known as “the Company”. This responsibility includes selecting appropriate
accounting policies and making estimates and informed judgments based on the anticipated impact of current transactions, events
and trends, consistent with International Financial Reporting Standards.
In meeting its responsibility for the reliability of consolidated financial statements, the Company maintains and relies on a
comprehensive system of internal control comprising organizational procedural controls and internal accounting controls.
The Company’s system of internal control includes the communication of policies and of the Company’s Code of Conduct,
comprehensive business planning, proper segregation of duties, delegation of authority for transactions and personal
accountability, selection and training of personnel, safeguarding of assets and maintenance of records. The Company’s internal
auditors review and evaluate the system of internal control.
The Company’s Board of Directors, acting through the Audit and Risk Review Committee, which is composed entirely of Directors,
who are neither officers nor employees of the Company, oversees management’s responsibility for the design and operation
of effective financial reporting and internal control systems, the preparation and presentation of financial information and the
management of risk areas.
The Audit and Risk Review Committee conducts such review and inquiry of management and the internal and external auditors
as it deems necessary to establish that the Company employs an appropriate system of internal control, adheres to legislative and
regulatory requirements and applies the Company’s Code of Conduct. The internal and external auditors, as well as the Actuary,
have full and unrestricted access to the Audit and Risk Review Committee, with and without the presence of management.
Pursuant to the Insurance Companies Act of Canada or to the Insurance Act (“Québec”) (“the Acts”), the Actuary, who is a
member of management, is appointed by the Board of Directors. The Actuary is responsible for discharging the various actuarial
responsibilities required by the Acts and conducts a valuation of policy liabilities, in accordance with Canadian generally accepted
actuarial standards, reporting these results to management and the Audit and Risk Review Committee.
The Office of the Superintendent of Financial Institutions Canada for the federally regulated property and casualty (“P&C”)
subsidiaries and the Autorité des marchés financiers for the Québec regulated P&C subsidiary make such examinations and
inquiries into the affairs of the P&C subsidiaries as deemed necessary.
The Company’s external auditors, Ernst & Young LLP, are appointed by the shareholders to conduct an independent audit of the
consolidated financial statements of the Company and meet separately with both management and the Audit and Risk Review
Committee to discuss the results of their audit, financial reporting and related matters. The auditors’ report to shareholders appears
on the following page.
February 5, 2013
Charles Brindamour
Chief Executive Officer
Mark A. Tullis
Senior Vice President and Chief Financial Officer
76
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Independent auditors’ report
To the shareholders of Intact financial Corporation
We have audited the accompanying consolidated financial statements of Intact Financial Corporation which comprise the
consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of comprehensive income,
changes in shareholders’ equity and cash flows for the years ended December 31, 2012 and 2011, and a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Intact Financial
Corporation as at December 31, 2012 and 2011 and its financial performance and its cash flows for the years ended December 31,
2012 and 2011 in accordance with International Financial Reporting Standards.
1
Montréal, Canada
February 5, 2013
1 cpa auditor, ca, public accountancy permit no. a114960
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
77
Audited Consolidated financial statements
For the year ended December 31, 2012
Table of ConTenTs
audited Consolidated financial statements
Audited Consolidated balance sheets ................................................................................................ 79
Audited Consolidated statements of comprehensive income ......................................................... 80
Audited Consolidated statements of changes in shareholders’ equity ........................................... 81
Audited Consolidated statements of cash flows ................................................................................ 82
notes to the audited Consolidated financial statements
Note 1 – Status of the Company ........................................................................................................ 83
Note 2 – Basis of presentation ........................................................................................................... 83
Note 3 – Summary of significant accounting policies ..................................................................... 83
Note 4 – Business combinations ....................................................................................................... 96
Note 5 – Assets classified as held for sale and directly associated liabilities................................. 97
Note 6 – Financial instruments .......................................................................................................... 98
Note 7 – Derivative financial instruments ......................................................................................102
Note 8 – Fair value measurement ....................................................................................................104
Note 9 – Financial risk .......................................................................................................................108
Note 10 – Insurance risk .....................................................................................................................115
Note 11 – Claims liabilities and unearned premiums ......................................................................118
Note 12 – Revenue ..............................................................................................................................122
Note 13 – Integration and restructuring costs .................................................................................123
Note 14 – Income taxes ......................................................................................................................123
Note 15 – Investments in associates and joint ventures .................................................................125
Note 16 – Property and equipment ...................................................................................................125
Note 17 – Other assets and other liabilities ......................................................................................126
Note 18 – Goodwill and intangible assets ........................................................................................127
Note 19 – Employee future benefits ..................................................................................................128
Note 20 – Debt outstanding ...............................................................................................................132
Note 21 – Common shares and preferred shares ............................................................................133
Note 22 – Earnings per share .............................................................................................................135
Note 23 – Share-based payments .....................................................................................................135
Note 24 – Additional information on the audited Consolidated statements of cash flows .........137
Note 25 – Contingencies and commitments ....................................................................................138
Note 26 – Related-party transactions ...............................................................................................138
Note 27 – Capital management .........................................................................................................140
Note 28 – Disclosures on rate regulation ..........................................................................................141
78
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Audited Consolidated balance sheets
(in millions of canadian dollars, except as otherwise noted)
As at
assets
Investments
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Assets classified as held for sale
Accrued investment income
Premium receivables
Reinsurance assets
Income taxes receivable
Deferred tax assets
Deferred acquisition costs
Other assets
Investments in associates and joint ventures
Property and equipment
Intangible assets
Goodwill
Total assets
liabilities
Liabilities directly associated with assets classified as held for sale
Claims liabilities
Unearned premiums
Financial liabilities related to investments
Income taxes payable
Deferred tax liabilities
Other liabilities
Debt outstanding
shareholders’ equity
Common shares
Preferred shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Note
December 31,
2012
December 31,
2011
6
5
14
17
15
16
18
18
5
11
11
6
14
17
20
21
21
$
172
8,757
1,263
2,376
391
$
206
7,887
1,281
2,051
403
12,959
11,828
–
66
2,670
320
105
129
705
412
266
105
1,153
923
1,631
66
2,487
409
58
158
652
294
241
67
1,068
794
$ 19,813
$ 19,753
$
–
7,656
4,046
486
35
140
1,414
1,143
$
1,330
6,886
3,790
532
17
123
1,441
1,293
14,920
15,412
2,118
489
121
1,982
183
4,893
1,889
489
115
1,642
206
4,341
Total liabilities and shareholders’ equity
$ 19,813
$ 19,753
See accompanying notes to the audited consolidated financial statements.
On behalf of the Board:
Charles Brindamour
Director
Eileen Mercier
Director
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
79
Audited Consolidated statements of comprehensive income
(in millions of canadian dollars, except as otherwise noted)
For the years ended December 31,
Direct premiums written
Net premiums earned
Net claims incurred
Underwriting expenses
Impact of change in net claims discount rate
Underwriting income
Net investment income
Net investment gains
Share of profit from investments in associates and joint ventures
Other revenues
Other expenses
Finance costs
Integration and restructuring costs
Change in fair value of contingent consideration
Income before income taxes
Income tax expense
net income from continuing operations attributable to shareholders
net income from discontinued operations attributable to shareholders
net income attributable to shareholders
Weighted-average number of common shares, basic and diluted (in millions)
earnings per common share, basic and diluted (in dollars)
From continuing operations
From discontinued operations
Dividends paid per common share (in dollars)
net income attributable to shareholders
other comprehensive income (loss)
Items that may be reclassified subsequently to net income attributable to shareholders
Derivatives designated as cash flow hedges:
Net changes in unrealized gains (losses)
Reclassification to income of net losses
Available-for-sale securities:
Net changes in unrealized gains
Reclassification to income of net gains
Income tax benefit
Items that will not be reclassified subsequently to net income attributable to shareholders
Net actuarial losses on employee future benefits
Income tax benefit
Other comprehensive loss
Note
2012
2011
12
12
11
11
6
6
15
13
17
14
22
22
14
19
14
$
6,854
$
5,126
6,561
(4,053)
(2,063)
4,907
(3,133)
(1,501)
$
$
$
$
445
(17)
428
388
37
22
88
(50)
(60)
(108)
(11)
734
147
587
–
587
130.8
4.33
4.33
–
1.60
587
1
–
52
(87)
11
(23)
(5)
2
(3)
(26)
$
$
$
$
273
(81)
192
326
204
16
50
(41)
(41)
(71)
(41)
594
137
457
8
465
115.3
3.96
3.89
0.07
1.48
465
(15)
7
42
(179)
36
(109)
(139)
34
(105)
(214)
Total comprehensive income attributable to shareholders
$
561
$
251
See accompanying notes to the audited consolidated financial statements.
80
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Audited Consolidated statements of changes in shareholders’ equity
(in millions of canadian dollars, except as otherwise noted)
Note
Common
shares
Preferred
shares
Contributed
surplus
Retained
earnings
accumulated
other
comprehensive
income (loss)
Total
balance as at January 1, 2012
Net income attributable
to shareholders
Other comprehensive loss
Total comprehensive income (loss)
Common shares issued
Dividends declared on
common shares
Dividends declared on
preferred shares
Share-based payments
balance as at December 31, 2012
Balance as at January 1, 2011
Net income attributable
to shareholders
Other comprehensive income
Total comprehensive income (loss)
Common shares repurchased
for cancellation
Common shares issued
Preferred shares issued
Dividends declared on
common shares
Dividends declared on
preferred shares
Share-based payments
21
21
21
23
21
21
21
21
21
23
$
1,889
$
489
$
115
$
1,642
$
206
$
4,341
–
–
–
229
–
–
–
$
$
2,118
993
$
$
–
–
–
(24)
920
–
–
–
–
–
–
–
–
–
–
–
489
–
–
–
–
–
–
489
–
–
–
–
–
–
–
–
–
6
587
(3)
584
–
(210)
(21)
(13)
$
$
121
96
$
$
1,982
1,565
$
$
–
–
–
–
–
–
–
–
19
465
(105)
360
(105)
–
–
(170)
(8)
–
–
(23)
(23)
–
–
–
–
183
315
–
(109)
(109)
–
–
–
–
–
–
587
(26)
561
229
(210)
(21)
(7)
$
$
4,893
2,969
465
(214)
251
(129)
920
489
(170)
(8)
19
Balance as at December 31, 2011
$
1,889
$
489
$
115
$
1,642
$
206
$
4,341
See accompanying notes to the audited consolidated financial statements.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
81
Note
2012
2011
24
24
11
4
5
20
21
21
23
21
21
21
$
$
587
144
(147)
139
723
(507)
12,303
(12,538)
300
(61)
(73)
(576)
249
(400)
227
–
(26)
–
(210)
(21)
(181)
(34)
206
172
$
465
(109)
(94)
270
532
(2,546)
9,070
(8,804)
–
(10)
(56)
(2,346)
797
–
910
485
(3)
(129)
(170)
(8)
1,882
68
138
206
24
$
Audited Consolidated statements of cash flows
(in millions of canadian dollars, except as otherwise noted)
For the years ended December 31,
operating activities
Net income attributable to shareholders
Adjustments for non-cash items
Changes in other operating assets and liabilities
Changes in net claims liabilities
Net cash flows provided by operating activities
Investing activities
Business combinations, net of cash acquired
Proceeds from sale of investments
Purchases of investments
Proceeds from sale of discontinued operations
Purchases of brokerages and books of business, net of sales
Purchases of intangibles and property and equipment
Net cash flows used in investing activities
financing activities
Net proceeds from issuance of debt
Repayment of debt
Proceeds from issuance of common shares
Proceeds from issuance of preferred shares
Common shares repurchased for share-based payments
Common shares repurchased for cancellation
Dividends paid on common shares
Dividends paid on preferred shares
Net cash flows provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the audited consolidated financial statements.
82
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 1 – status of the Company
Intact Financial Corporation (the “Company”), incorporated under the Canada Business Corporations Act, is domiciled in
Canada and its shares are publicly traded on the Toronto Stock Exchange (TSX: IFC). The Company has investments in wholly
owned subsidiaries which operate principally in the Canadian property and casualty (“P&C”) insurance market. The Company
acquired all of the issued and outstanding shares of Jevco Insurance Company (“Jevco”) on September 4, 2012 and of AXA Canada
Inc. (“AXA Canada”) on September 23, 2011. Further details of the acquisitions are provided in Note 4 – Business combinations.
The Company’s significant operating subsidiaries are: Intact Insurance Company, Belair Insurance Company Inc., The Nordic
Insurance Company of Canada, Novex Insurance Company, Trafalgar Insurance Company of Canada, Equisure Financial Network
Inc., Canada Brokerlink Inc., Grey Power Insurance Brokers Inc., Intact Farm Insurance Inc. and Jevco Insurance Company.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
noTe 2 – basis of presentation
2.1 statement of compliance
These audited Consolidated financial statements are prepared in accordance with International Financial Reporting Standards
(“IFRS”), as issued by the International Accounting Standards Board (“IASB”). These audited Consolidated financial statements and
the accompanying notes were authorized for issue in accordance with a resolution of the Board of Directors on February 5, 2013.
2.2 Preparation and presentation of financial statements
The Company presents its audited Consolidated balance sheets broadly in order of liquidity.
Subsidiaries are entities over which the Company has the power to govern the financial and operating policies so as to obtain
benefits from their activities, generally involving a shareholding of more than one-half of the voting shares. The financial statements
of all subsidiary companies are fully consolidated from the date control is transferred to the Company. They are deconsolidated
from the date control ceases. All balances, transactions, income and expenses, and profits and losses resulting from intercompany
transactions and dividends are eliminated in full on consolidation.
Associates and joint ventures are accounted for using the equity method. As defined under IFRS, associates are entities over which
the Company exerts significant influence and joint ventures are entities over which the Company exerts joint control. See Note 3.1c) –
Investments in associates and joint ventures for accounting policy details.
Certain comparative figures have been reclassified to conform with the presentation adopted in the current year.
noTe 3 – summary of significant accounting policies
3.1 significant accounting policies
a) Insurance contracts
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is
transferred when the Company agrees to compensate a policyholder on the occurrence of an adverse specified uncertain future
event. As a general guideline, the Company determines whether it has significant insurance risks by comparing the benefits that
could become payable under various possible scenarios relative to the premium received from the policyholder for insuring the risk.
Premium and commission revenue recognition
Premiums written are net of cancellations, promotional returns and sale taxes. Premiums written are recognized on the date
coverage begins and are deferred as Unearned premiums and recognized as premiums earned, net of reinsurance, on a pro rata
basis over the terms of the underlying policies, usually 12 months and generally no longer than 24 months.
Commission revenues from reinsurance contracts are recorded on the date on which the insurance contracts are ceded. They
are deferred as unearned commissions and recognized on a pro rata basis over the length of the ceded contracts and included
as a deduction from Underwriting expenses on the audited Consolidated statements of comprehensive income. The unearned
reinsurance commissions are recorded in Other liabilities on the audited Consolidated balance sheets.
Other commission revenue is recorded on an accrual basis and included in Other revenues on the audited Consolidated statements
of comprehensive income.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
83
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Claims liabilities
Claims liabilities represent the amounts required to provide for the estimated ultimate expected cost of settling claims related
to insured events, both reported and unreported, that have occurred on or before the balance sheet date. They also include a
provision for adjustment expenses representing the estimated ultimate expected costs of investigating, resolving and processing
these claims.
Claims liabilities are first determined on a case-by-case basis as insurance claims are reported and are then reassessed as additional
information becomes known. Also included in claims liabilities is a provision to account for the future development of these
insurance claims, including insurance claims incurred but not reported (“IBNR”) by policyholders, as required by the Canadian
Institute of Actuaries (“CIA”).
Claims liabilities are estimated by the appointed actuary using generally accepted Canadian actuarial standard techniques and
based on assumptions that represent best estimates of possible outcomes, such as historical loss development factors and payment
patterns, future rates of insurance, claims frequency and severity, inflation, reinsurance recoveries, expenses, changes in the
legal environment, changes in the regulatory environment and other matters, taking into consideration the circumstances of the
Company and the nature of the insurance policies.
Claims liabilities are discounted to take into account the time value of money, using a rate that reflects the estimated market yield
of the underlying assets backing these claims liabilities. Several actuarial assumptions are used to calculate this discount rate. These
may change from period to period in order to arrive at the most accurate and representative market yield based discount rate.
To recognize the uncertainty in establishing these best estimates, to allow for possible deterioration in experience and to provide
greater comfort that the actuarial liabilities are sufficient to pay future benefits, actuaries are required to include margins in some
assumptions. A range of allowable margins is prescribed by the CIA relating to claims development, reinsurance recoveries and
investment income variables. The impact of the margins is referred to as the provision for adverse deviation (“PfAD”).
Claims liabilities are reported gross of the reinsurers’ share on the audited Consolidated balance sheets and the reinsurers’ share is
reported as an asset in Reinsurance assets on the audited Consolidated balance sheets. Changes in claims liabilities are recognized
in Net claims incurred on the audited Consolidated statements of comprehensive income. The claims liabilities are no longer
recorded when the contract expires, is discharged or is cancelled.
Deferred acquisition costs
Policy acquisition costs incurred in acquiring insurance premiums comprise commissions, premium taxes and expenses directly
related to the writing or renewal of insurance policies. These acquisition costs are deferred and amortized on the same basis as the
unearned premiums and are reported in Underwriting expenses on the audited Consolidated statements of comprehensive income.
Deferred acquisition costs are no longer recorded when the corresponding contracts are settled or cancelled.
Liability adequacy test
At the end of each reporting period, a liability adequacy test is performed, in accordance with IFRS, to validate the adequacy
of unearned premiums and deferred acquisition costs. A premium deficiency would exist if unearned premiums were deemed
insufficient to cover the estimated future costs associated with the unexpired portion of written insurance policies. A premium
deficiency would be recognized immediately as a reduction of deferred acquisition costs to the extent that unearned premiums
plus anticipated investment income are not considered adequate to cover all deferred acquisition costs and related insurance
claims and expenses. If the premium deficiency is greater than the unamortized deferred acquisition costs, a liability is accrued for
the excess deficiency.
Industry pools
When certain automobile owners are unable to obtain insurance via the voluntary insurance market, they are insured via the
Facility Association (“FA”). In addition, entities can choose to cede certain risks to the FA-administered risk-sharing pools (“RSP”).
The related risks associated with FA insurance policies and policies ceded to the RSP are aggregated and shared by the entities
in the Canadian P&C insurance industry, generally in proportion to market share and volume of business ceded to the RSP. The
Company applies the same accounting policies to any FA and RSP insurance it assumes as it does to insurance polices issued by
the Company directly to policyholders. In accordance with Office of Superintendent of Financial Institutions Canada (“OSFI”)
guidelines, assumed and ceded RSP premiums are reported in Direct premiums written.
The Company acts as a “facility carrier” responsible for the administration of a portion of the FA policies. In exchange for providing
these services, the Company receives fees. Policy issuance fees are earned immediately while claims handling fees are deferred and
earned over the servicing life of the claims.
84
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Reinsurance
Reinsurance assets include reinsurers’ share of claims liabilities and unearned premiums. The Company reports third party
reinsurance balances on the audited Consolidated balance sheets on a gross basis to indicate the extent of credit risk related to
third party reinsurance. The estimates for the reinsurers’ share of claims liabilities are presented as an asset and are determined on
a basis consistent with the related claims liabilities. Reinsurance assets are reviewed for impairment at each reporting date or more
frequently when an indication of impairment arises during the reporting period.
Structured settlements
The Company enters into annuity agreements with various Canadian life insurance companies that have credit ratings of at least
‘A-’ or higher at the inception date of the contract to provide for fixed and recurring payments to claimants. As a result, the liability
to its claimants is substantially discharged and the Company removes that liability from its audited Consolidated balance sheets.
However, the Company remains exposed to the credit risk that life insurers may fail to fulfill their obligations. Refer to Note 9 –
Financial risk for further details about credit risk for structured settlements.
b) financial instruments contracts
The Company has classified or designated its financial assets and liabilities in the following categories:
– Available-for-sale (“AFS”);
− Financial assets and liabilities at fair value through profit and loss (“FVTPL”);
− Cash and cash equivalents, loans and receivables; or
− Other financial liabilities.
The table below summarizes the Company’s initial and subsequent measurement basis of financial instruments, as well as the
reporting of related changes in fair value on the audited Consolidated statements of comprehensive income based on classification
category.
Table 3.1 – fInanCIal InsTRUMenTs MeasUReMenT
basIs anD ClassIfICaTIon of RelaTeD ChanGes In faIR ValUe
Classification category
Initial measurement
Subsequent measurement
Changes in fair value
financial assets
AFS
Fair value using bid prices
at the trade date
Fair value using bid prices
at end of period
Reported in Other comprehensive income (loss) when
unrealized or in Net investment gains (losses) when
realized or impaired
FVTPL
Fair value using bid prices
at the trade date
Fair value using bid prices
at end of period
Reported in Net investment gains (losses)
Cash and cash
equivalents, loans
and receivables
financial liabilities
FVTPL
Fair value at the issuance
date
Amortized cost using the
effective interest method
Reported in Net investment gains (losses) when realized
or impaired (except for cash and cash equivalent where
no impairment exists)
Fair value using ask prices
at the trade date
Fair value using ask prices
at end of period
Reported in Net investment gains (losses)
Other financial
liabilities
Fair value at the issuance
date
Amortized cost using the
effective interest method
Reported in Net investment gains (losses) when the
liability is extinguished
Financial assets are no longer recorded when the rights to receive cash flows from the investments have expired or have been
transferred and the Company has transferred substantially all the risks and rewards of ownership. Financial assets lent by
the Company in the course of the securities lending operations remain on the balance sheets because the Company has not
substantially transferred the risks and rewards related to the assets lent.
Financial liabilities are no longer recorded when they have expired or have been cancelled.
Financial assets and liabilities are offset and the net amount is reported on the audited Consolidated balance sheets only when
there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the
assets and settle the liabilities simultaneously.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
85
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Financial instruments
AFS
Instruments classified as AFS include debt and equity securities. Debt securities in this category are those that are intended to
be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the
market conditions. Equity investments classified as AFS are those which are neither classified nor designated as at FVTPL. Gains
and losses on the sale of AFS debt and equity securities are calculated on a first in, first out basis and on an average cost basis,
respectively.
FVTPL
Non-derivative financial assets and liabilities at FVTPL are purchased or incurred with the intention of generating profits in the
near term (“classified as at FVTPL”) or are voluntarily designated as such by the Company (“designated as at FVTPL”).
A portion of the Company’s debt securities backing its claims liabilities has been designated as at FVTPL. This designation aims to
reduce the volatility caused by the fluctuations in fair values of the underlying claims liabilities due to changes in discount rates. To
comply with regulatory guidelines, the Company ensures that the weighted dollar duration of the debt securities designated as at
FVTPL is approximately equal to the weighted dollar duration of the claims liabilities.
Cash and cash equivalents
Cash and cash equivalents consist of cash as well as highly liquid investments that are readily convertible into a known amount of
cash, are subject to insignificant risk of changes in value and have an original maturity of three months or less.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
Debt outstanding
The Company’s medium-term notes net of associated issuance costs, as well as the drawn amount under credit facilities, are
classified as Debt outstanding and accounted for at amortized cost using the effective interest method.
Mutual fund investments
The Company invests in mutual funds offered by a third party. These funds invest mainly in equities and distribute most of their
income. The Company’s participation in these investment vehicles can fluctuate from day to day based on the amount invested by
the Company and third parties. When the Company is deemed to control such vehicles, they are consolidated and the third party
liability is recorded as a liability at fair value and disclosed as Net asset value attributable to third party unit holders.
Derivative financial instruments
Derivative financial instruments are used for hedging purposes and for the purpose of modifying the risk profile of the Company’s
investment portfolio, as long as the resulting exposures are within the investment policy guidelines. The Company uses various
types of derivative financial instruments, including forwards, futures, swaps and options.
Derivative financial instruments are recognized on the audited Consolidated balance sheets at their fair value as assets when
their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value are reported on the audited
Consolidated statements of comprehensive income in Net investment gains (losses) during the period in which they arise. See
Note 7 – Derivative financial instruments for further details.
Embedded derivatives
A derivative instrument may be embedded in another financial instrument (the “host instrument”). Embedded derivatives are
treated as separate derivative financial instruments when their economic characteristics and risks are not clearly and closely
related to those of the host instrument. The terms of the embedded derivatives are the same as those of a stand-alone derivative
financial instrument and, therefore, embedded derivatives are designated or classified separately from the host contract. Embedded
derivatives are financial assets and liabilities classified as at FVTPL.
Hedge accounting
The Company uses derivatives in its hedging strategies to manage its exposure to risk arising from financial instruments. Where
hedge accounting can be applied, a hedge relationship is designated and documented at inception to detail the particular risk
management objective and the strategy for undertaking the hedge transaction. The documentation identifies the specific asset,
liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how
86
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
effectiveness will be assessed. The hedging instrument must be highly effective in accomplishing the objective of offsetting changes
in either the fair value or the anticipated cash flows attributable to the risk being hedged both at inception and throughout the
life of the hedge. Hedge accounting is discontinued prospectively when it is determined that the hedging instrument is no longer
effective as a hedge, the hedging instrument is terminated or sold, or upon the sale or early termination of the hedged item.
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is
recognized in Other comprehensive income (“OCI”) while the ineffective portion is recognized in Net investment gains (losses).
When hedge accounting is discontinued, the amounts accumulated in Accumulated other comprehensive income (“AOCI”)
are reclassified to Net income attributable to shareholders on the same basis as these costs are incurred. Gains and losses
on derivatives are reclassified immediately to Net income (loss) attributable to shareholders when the hedged item is sold or
terminated early.
Long-term investments
Long-term investments are unquoted investments for which the Company has no significant influence. These investments are not
traded and as such are carried at cost less any accumulated impairment losses, which approximates fair value. The investments are
included in Other assets on the audited Consolidated balance sheets.
Fair value measurement
The fair value of financial instruments on initial recognition is normally the transaction price, being the fair value of the
consideration given or received.
Subsequent to initial recognition, the fair value of financial instruments is determined based on available information and
categorized according to a three-level fair value hierarchy. The distribution of the Company’s financial instruments between each
of the fair value hierarchy levels is described in Note 8 – Fair value measurement.
Where the fair values of financial assets and financial liabilities reported on the audited Consolidated balance sheets cannot be
derived from active markets, they are determined using a variety of valuation techniques that include the use of discounted cash
flow models and/or mathematical models. The inputs to these models are derived from observable market data where possible, but
where observable market data is not available, judgment is required to establish fair values.
For discounted cash flow analyses, estimated future cash flows and discount rates are based on current market information and
rates applicable to financial instruments with similar yields, credit quality and maturity characteristics. Estimated future cash flows
are influenced by factors such as economic conditions (including country-specific risks), concentrations in specific industries, types
of instruments, currencies, market liquidity and financial conditions of counterparties. Discount rates are influenced by risk-free
interest rates and credit risk.
Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Impairment of financial assets
The Company determines, at each balance sheet date, whether there is objective evidence that financial assets, other than those
classified or designated as at FVTPL, are impaired. A financial asset or a group of financial assets is impaired when there is
objective evidence of impairment as a result of one or more events that has an impact on the estimated future cash flows of the
financial asset or group of financial assets. An AFS debt instrument is impaired if there is objective evidence that a loss event has
occurred which has impaired the expected cash flows. Objective evidence for an AFS equity instrument would include a significant
or prolonged decline in fair value of the instrument below its cost. The table hereafter demonstrates the measurement and
recognition of impairment losses for each type of financial asset.
For debt securities classified as AFS, impairment is recorded for the difference between amortized cost and fair value when it
is probable that the future cash flows will not be fully recovered following a credit event that affected the issuer of those debt
securities. However, a credit event is not sufficient to constitute, in itself, evidence of impairment. Other factors are considered to
conclude that the debt security is impaired, such as payment default. If the risk diminishes or disappears, the impairment provision
can be reversed. Impairment reversals are recognized as gains in the audited Consolidated statements of comprehensive income.
For equity instruments classified as AFS, a significant and/or prolonged decline of the fair value below the cost is evidence of
impairment. The Company determined that common shares with an unrealized loss of at least 25% for a nine-month period and
perpetual preferred shares with an unrealized loss of at least 25% for a 12-month period are generally impaired. Common shares in
an unrealized loss position for 15 or more consecutive months and perpetual preferred shares in an unrealized loss position
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
87
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
for 18 or more consecutive months are generally impaired. For all equity instruments, a decline below cost of more than 50% at the
end of any reporting period are generally impaired. When there is objective evidence that impairment exists, the equity instrument
is written down, regardless of the unrealized loss, in the audited Consolidated statements of comprehensive income, for an amount
equal to the unrealized loss. Impairments on equity instruments are not reversible.
For assets classified as loans and receivables, the instruments that are individually significant are tested for impairment when
there is a payment default or when there are objective indications that the counterparty will not honour its obligations. When an
instrument in that category is determined to be impaired, its carrying amount is reduced either to its estimated realizable value,
which is obtained by discounting estimated future cash flows from the investment concerned using the effective interest rate, or the
fair value of collateral. The provision can be reversed when the event that gave rise to its recognition subsequently disappears. The
loans and receivables which have not been individually impaired are grouped by similar characteristics to be tested for impairment.
Table 3.2 – MeasUReMenT anD ReCoGnITIon of fInanCIal asseT IMPaIRMenT
Instrument category
Loss measurement
Reported loss
Subsequent fair value increases
AFS debt instrument
AFS equity instrument
Difference between
amortized cost and
current fair value less any
unrealized loss on that
instrument previously
recognized
Difference between
acquisition cost and
current fair value less any
impairment loss on that
instrument previously
recognized
Impairment loss removed
from OCI and recognized
in Net investment gains
(losses) on the audited
Consolidated statements
of comprehensive income
Unrealized loss removed
from OCI and recognized
in Net investment gains
(losses) on the audited
Consolidated statements
of comprehensive income
Recognized in Net investment gains (losses) when there
is observable positive development on the original
impairment loss event. Otherwise, recognized in OCI
Recognized directly in OCI
Financial assets
carried at
amortized cost
Difference between the
asset’s carrying value and
the present value of the
estimated future cash flows on the audited Consolidated
Impairment loss is
recognized in Net
investment gains (losses)
Recognized in Net investment gains (losses) when there
has been a change in the estimates used to determine the
asset’s recoverable amount since the last impairment
loss was recognized
statements of
comprehensive income
Financial assets
carried at cost
Difference between the
asset’s carrying value and
the present value of the
estimated future cash flows on the audited Consolidated
Impairment loss is
recognized in Net
investment gains (losses)
Impairment losses are not reversed
statements of
comprehensive income
Revenue and expense recognition
Dividends are recognized when the shareholders’ right to receive payment is established, which is the ex-dividend date. Dividends
paid on instruments sold short are recorded as a reduction of dividend income. Interest income from debt securities and loans is
recognized on an accrual basis. Premiums and discounts on fixed income instruments classified as AFS are amortized using the
effective interest rate method. Dividends received, dividends paid and interest income are reported in Net investment income on
the audited Consolidated statements of comprehensive income.
Transaction costs associated with financial instruments classified or designated as at FVTPL are recognized on the audited
Consolidated statements of comprehensive income as incurred. For other financial instruments, transaction costs are capitalized
on initial recognition and amortized using the effective interest method. Premiums earned or discounts incurred for loans and AFS
securities are also amortized using the effective interest method.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at the balance sheet
date, and non-monetary assets and liabilities are translated at the exchange rates in effect on the transaction dates. Revenue and
expenses are translated at the exchange rates in effect on the transaction dates. Exchange differences on translation are included in
Net investment gains (losses) on the audited Consolidated statements of comprehensive income.
88
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
However, exchange differences on translation of non-monetary financial assets classified as AFS are recognized in OCI until
settlement of the corresponding asset, at which time they are transferred in Net investment gains (losses) on the audited
Consolidated statements of comprehensive income.
c) Investments in associates and joint ventures
The Company’s investments in associates and joint ventures are accounted for using the equity method. They are reported on the
audited Consolidated balance sheets at cost plus post-acquisition changes in the Company’s share of net assets of the associates. The
Company’s profit from such investments is shown on the audited Consolidated statements of comprehensive income and reflects
the after-tax share of the results of operations of the associates. Profits or losses resulting from transactions between the Company
and its associates and joint ventures are eliminated to the extent of the interest in the associate. The Company determines at each
reporting date whether there is any objective evidence that the investments in associates and joint ventures are impaired. The
financial statements of associates and joint ventures are prepared for the same reporting period as the Company. Where necessary,
adjustments are made to bring the accounting policies of associates and joint ventures into line with those of the Company.
d) business combinations
Business combinations are accounted for using the acquisition method. At the acquisition date, the identifiable assets acquired and
liabilities assumed of the acquiree are estimated at their fair value. Goodwill is initially measured at cost, being the excess of the fair
value of the consideration transferred over the Company’s share in the net identifiable assets acquired and liabilities assumed.
The cost of the acquisition (purchase price) is measured at the fair value of the consideration at acquisition date. Acquisition-
related costs are recognized directly in Net income attributable to shareholders on the audited Consolidated statements of
comprehensive income in the period they are incurred.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual term, economic circumstances and pertinent conditions at the acquisition date. This
includes the separation of embedded derivatives in host contracts by the acquiree.
Any contingent consideration to be assumed by the acquirer is recognized at fair value at the acquisition date. Subsequent
changes to the fair value of the contingent consideration resulting from additional information obtained after the acquisition date
about facts and circumstances that existed at the acquisition date are considered measurement period adjustments and reflected
in the provisional fair value of assets acquired and liabilities assumed. Subsequent changes in the fair value of the contingent
consideration relating to events that occurred after the acquisition date are not considered measurement period adjustments and
are recorded in the audited Consolidated statements of comprehensive income.
e) Goodwill and intangible assets
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested at least annually
for impairment. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to the cash
generating unit (“CGU”) that is expected to benefit from the combination (see Note 18 – Goodwill and intangible assets). Gains
and losses calculated on the disposal of a business include the carrying value of goodwill relating to the business sold. The
Company performs its annual test for goodwill impairment at June 30. The Company currently has one CGU (see Note 3.1n) –
Operating segments for details). The recoverable amount of the CGU was determined based on the present value of expected
future cash flows.
Intangible assets acquired separately are measured initially at cost. Intangible assets acquired in a business combination are
recorded at fair value as at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortized over their useful lives and assessed for impairment whenever there is an indication
that the intangible asset may be impaired. Intangible assets with indefinite lives, as well as those intangibles that are under
development, are not subject to amortization, but are tested for impairment on an annual basis. Gains and losses arising from
the disposition or impairment of an intangible asset are measured as the difference between the net disposal proceeds and the
carrying value of the asset and are reported in Other revenues or Other expenses on the audited Consolidated statements of
comprehensive income.
The Company’s intangible assets consist of distribution networks, customer relationships and internally developed software. The
useful life of the distribution network acquired as part of the acquisition of AXA Canada has been assessed to be indefinite and,
therefore, it is not subject to amortization, but is tested for impairment on an annual basis. The life of this asset is assessed to
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
89
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
be indefinite as the related cash flows are expected to continue indefinitely. The distribution network acquired as part of the
acquisition of Jevco, customer relationships and internally developed software have all been assessed as having finite useful lives
and amortization methods and terms are shown below.
Table 3.3 – DePReCIaTIon MeThoDs of InTanGIble asseTs
Distribution network (Jevco)
Customer relationships
Internally developed software
f) Property and equipment
Method
Straight-line
Straight-line
Straight-line
Term
25 years
10 years
3 to 7 years
Property and equipment are carried at cost less accumulated depreciation. Depreciation rates are established to depreciate the cost
of the assets over their estimated useful lives. Depreciation methods as well as rates or terms are shown below.
Table 3.4 – DePReCIaTIon MeThoDs of PRoPeRTY , PlanT anD eQUIPMenT
Buildings
Computer equipment
Furniture and equipment
Leasehold improvements
g) leases
Method
Rate or term
Straight-line
Straight-line
Declining balance and straight-line
Straight-line
19 to 43 years
2 to 3 years
20% and 5 years, respectively
Over the terms of related leases
Finance leases that transfer to the Company substantially all the risks and benefits incidental to ownership of the leased items are
capitalized at the commencement of the lease at the fair value of the leased item or, if lower, at the present value of the minimum
lease payments. Lease payments are apportioned between interest charges and reduction of the lease liability. Interest charges are
charged to Underwriting expenses on the audited Consolidated statements of comprehensive income.
There is no certainty that the Company will obtain ownership of the leased assets by the end of the lease term. Therefore, the assets
are depreciated over the shorter of the estimated useful life of the assets and the lease terms.
Leases which do not transfer to the Company substantially all the risks and benefits incidental to ownership of the leased items
are operating leases. Payments made under operating leases are charged to Underwriting expenses on the audited Consolidated
statements of comprehensive income on a straight-line basis over the period of the lease.
h) assets classified as held for sale and discontinued operations
Assets are classified as held for sale when the carrying amount is to be recovered principally through a sale transaction rather than
through continued use and such sale is considered highly probable. Assets held for sale are measured at the lower of their carrying
amount or fair value less costs to sell.
Assets classified as held for sale by the Company are considered as discontinued operations if the operations and cash flows can
be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company and they: represent a
separate major line of business or geographical area of operations; are part of a single coordinated plan to dispose of a separate
major line of business or geographical area of operations; or are a subsidiary acquired exclusively with a view to resell.
Liabilities directly associated with assets classified as held for sale are measured at the lower of their carrying value or fair value.
Interest and other expenses related to these liabilities continue to be recorded and the liabilities are presented net of intragroup
transactions.
Revenues and expenses from discontinued operations comprise the revenues and expenses of the subsidiary held for sale, adjusted
with the revaluations at fair value of the related assets classified as held for sale and corresponding liabilities. Revenues and
expenses from discontinued operations are presented on a net basis, as Net income from discontinued operations in the audited
Consolidated statements of comprehensive income.
90
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
i) Integration and restructuring costs
A provision for restructuring costs is recognized when: the Company has a present legal or constructive obligation as a result of
past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognized for future operating losses.
The provision for restructuring costs is measured at the present value of the expenditures expected to be required to settle the
obligation.
Integration costs mainly include technology-related expenses, occupancy, employee-related costs, branding and consulting
expenses incurred as a direct result of the acquisition process. Integration costs are recognized on the audited Consolidated
statements of comprehensive income when incurred.
j) Income taxes
Income tax expense (benefit) comprises current and deferred tax. Income tax is recognized in Net income from continuing
operations attributable to shareholders on the audited Consolidated statements of comprehensive income, except to the extent that
it relates to discontinued operations, where it is recognized directly in Net income from discontinued operations, or to the extent
that it relates to items recognized in OCI or directly to equity, where it is recognized directly in OCI or equity.
Current income tax is based on the results of operations in the current year, adjusted for items that are not taxable or not
deductible. Current income tax is calculated based on income tax laws and rates enacted or substantively enacted as at the balance
sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulations are subject to interpretation and provisions are established where appropriate on the basis of amounts expected to be
paid to the tax authorities.
Deferred income tax is provided using the liability method on temporary differences between the carrying value of assets and
liabilities and their respective tax values. Deferred tax is calculated using income tax laws and rates enacted or substantively
enacted as at the balance sheet date, which are expected to apply when the related deferred tax asset is realized or the deferred tax
liability is settled.
Deferred tax assets are recognized for all deductible temporary differences as well as unused tax losses and tax credits to the extent
that it is probable that taxable profit will be available against which the losses can be utilized.
For each legal entity consolidated, current tax assets and liabilities are offset when they relate to the same taxation authority, which
allows the legal entity to receive or make one single net payment, and when it intends to settle the outstanding balances on a net
basis. Upon consolidation, a current tax asset of one entity is offset against a current tax liability of another entity, if and only if
the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or
receive such net payment or to recover the asset or settle the liability simultaneously.
k) employee future benefits
Pension and post-retirement plans
For the defined benefit pension and other retirement plans, the present value of the accrued benefit obligations, net of the fair
value of plan assets, adjusted for deferred past service cost, is recognized on the audited Consolidated balance sheets as an asset,
if positive or as a liability if negative. The actuarial determination of the accrued benefit obligations for pensions and other
retirement benefits uses the projected unit credit method and management’s best estimate assumptions. See Note 19 – Employee
future benefits. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
recognized directly in OCI in the period in which they occur. Such actuarial gains and losses are also immediately recognized
in Retained earnings on the audited Consolidated balance sheets as they will not be reclassified to Net income attributable to
shareholders in subsequent periods.
Cost, recognized on the audited Consolidated statements of comprehensive income, for employee future benefit plans includes:
− the cost of pension benefits provided in exchange for employees’ services rendered during the year;
− the interest cost of pension obligations, determined by reference to market yields on high-quality corporate bonds; and
− the asset return calculated using the expected long-term return on the fair value of the plan assets.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
91
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Post-employment benefits
Health and dental benefits continue to be provided to eligible employees who are absent from work due to long-term disability
(or other approved leave) for the duration of their leave. The estimated present value of these benefits is charged to Net income
attributable to shareholders on the audited Consolidated statements of comprehensive income in the period the absence
commences.
l) share-based payments
The Company has three types of shared-based payment plans:
Long-term incentive plan
Certain key employees are entitled to a long-term incentive plan (“LTIP”). Under this program, participants are awarded notional
share units referred to as performance stock units (“PSUs”) and restricted stock units (“RSUs”). The payout for the PSUs is based
on a specific target composed of the difference between the three-year average return on equity of the Company and that of the
Canadian P&C industry. Most RSUs automatically vest three years from the year of the grant. Vesting for RSUs is not linked to the
Company’s performance.
The awards are valued at fair value at grant date, which corresponds to the average share price of the Company over the last quarter
of the preceding year. The value of each award is not revalued subsequently, but the Company re-estimates the number of awards
that are expected to vest at each reporting period. The cost of the awards is recognized as an expense on the audited Consolidated
statements of comprehensive income over the vesting period, with a corresponding entry in Contributed surplus on the audited
Consolidated balance sheets. At the time of the payout, the Company purchases in the market the amount of common shares based
upon the performance targets achieved, with respect to the vesting of the PSUs, and an amount of common shares equal to the
amount of RSUs, with respect to the vesting of RSUs.
Employee share purchase plan
Employees who are not eligible for the LTIP are entitled to make contributions to a voluntary employee share purchase plan
(“ESPP”). Under the ESPP, eligible employees can contribute up to 10% of their annual base salary through a payroll deduction. As
an incentive to participate in the plan, the Company contributes to the plan an amount equal to 50% of the employee contribution.
The common shares are purchased in the market by an independent broker at the end of each month and are held by a custodian
on behalf of the employees. The common shares purchased with the Company’s contributions vest upon continued employment for
a period of 12 months. The Company’s contributions under the ESPP are cash-settled awards which are accrued and expensed over
the vesting period.
Deferred share unit plan
Non-employee directors of the Company are eligible to participate in the Company’s deferred share unit (“DSU”) plan. A portion
of the remuneration of non-employee directors of the Company must be received in DSUs or shares of the Company. For the
remainder of their compensation, the directors are given the choice of cash, shares of the Company, DSUs or a combination of
the three. Both the shares and the DSUs vest at the time of the grant. The DSUs are redeemed upon director termination and are
settled for cash at that time. When directors elect to receive shares, the Company makes instalments to the plan administration for
the purchase of shares of the Company on behalf of the directors. The DSUs are cash-settled awards which are accounted for as
an expense at the time of granting with a corresponding financial liability reported in Other liabilities. This liability is re-measured
at each reporting date based on the current share price, with any fluctuations in the liability also recorded as an expense until it is
settled in cash.
m) Current versus non-current
In line with industry practice for insurance companies, the Company’s balance sheets are not presented using current and
non-current classifications, but are rather presented broadly in order of liquidity. Most of the Company’s assets and liabilities are
considered current given they are expected to be realized or settled within the Company’s normal operating cycle respectively.
All other assets and liabilities are considered as non-current and generally include: Investments in associates and joint ventures,
Deferred tax assets, Property and equipment, Intangible assets, Goodwill, Deferred tax liabilities and Debt outstanding.
n) operating segments
The Company’s business activities comprise P&C insurance operations. These activities are captured within a sole operating
segment, P&C insurance operations. Internal reports on the performance of the segment are regularly reviewed by senior
management, the Company’s Chief Executive Officer and the Board of Directors.
92
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
3.2 standards issued but not yet effective
a) Consolidated financial statements
IFRS 10 – Consolidated financial statements replaces IAS 27 – Consolidated and separate financial statements and SIC-12 –
Consolidation – special purpose entities and establishes principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more entities. The main features are as follows:
− The principle of control sets out the three elements of control: (1) power over the investee; (2) exposure, or rights, to
variable returns from involvement with the investee; and (3) the ability to use power over the investee to affect the amount of
the investor’s returns; and
− When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions
and other events in similar circumstances. Intragroup balances and transactions must be eliminated.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on the Company’s financial statements.
b) Joint arrangements
IFRS 11 – Joint arrangements replaces IAS 31 – Interest in joint ventures and SIC-13 – Jointly controlled entities – non-monetary
contributions by venturers and is to be applied by all entities that are a party to a joint arrangement, whereby two or more parties
have joint control. The main features are as follows:
− Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control;
− Joint arrangements are classified into two types – joint operations and joint ventures;
− An entity determines the type of arrangement in which it is involved by considering its rights and obligations;
− A joint operator will recognize and measure the assets, liabilities, revenues and expenses in relation to its interest in the
arrangement; and
− A joint venturer will recognize an investment and measure it using the equity method.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on the Company’s financial statements.
c) Disclosure of interests in other entities
IFRS 12 – Disclosure of interests in other entities, replaces the disclosure requirements of IAS 27 – Consolidated and separate
financial statements, IAS 28 – Investments in associates, and IAS 31 – Interests in joint ventures. IFRS 12 establishes disclosure
objectives according to which an entity discloses information regarding consolidated entities, associates, joint arrangements,
unconsolidated structured entities and non-controlling interests.
The standard is effective for years beginning on or after January 1, 2013 and is not expected to have a significant impact on the
Company’s financial statements.
d) fair value measurement
In May 2011, the IASB issued IFRS 13 – Fair value measurement with a view to setting out a single IFRS framework for defining,
measuring and disclosing fair value. The main features are as follows:
− Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date;
− The fair value measurement requires an entity to determine the following:
− The particular asset or liability being measured;
− For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets
or on a stand-alone basis;
− The market in which an orderly transaction would take place for the asset or liability;
− The appropriate valuation technique(s) to use when measuring fair value. The technique(s) should maximize the use of
relevant observable inputs and minimize unobservable inputs. Those inputs should be consistent with the inputs a market
participant would use when pricing the asset or liability; and
− The entity is to disclose those valuation techniques and inputs used to develop the fair value measurements.
The standard is effective for years beginning on or after January 1, 2013 and, other than additional disclosure requirements, is not
expected to have a significant impact on the Company’s financial statements.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
93
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
e) employee benefits
In June 2011, the IASB completed its project to improve the accounting for pension and other post-employment benefits by issuing
an amended version of IAS 19 – Employee benefits. The main features are as follows:
− Eliminates an option to defer the recognition of gains and losses, known as the “corridor method”;
− Requires entities to compute the asset return component using the discount rate used to measure the defined benefit obligations
rather than the expected return on assets; and
− Enhances the disclosure requirements for defined benefit plans, providing better information about the characteristics of
defined benefit plans and the risks that entities are exposed to through participation in those plans.
The standard is effective for years beginning on or after January 1, 2013 and is generally to be applied retrospectively. The use
of the discount rate in calculating the asset returns will generally result in an increase in employee future benefit expense and a
corresponding offset in OCI with no overall change in Total comprehensive income attributable to shareholders.
f) financial statement presentation
In June 2011, the IASB amended IAS 1 – Presentation of Financial Statements. The principal change resulting from the
amendments to IAS 1 is a requirement within the Statement of Other comprehensive income to distinguish between items within OCI
that may be reclassified to the statement of income and items that will not.
The standard is effective for years beginning on or after July 1, 2012 and will not have an impact on the Company’s financial
statements as the items within OCI that may be reclassified subsequently to net income are already disclosed together.
g) financial instruments: classification and measurement
In November 2009, the IASB issued IFRS 9 – Financial Instruments. This standard represents the completion of the first part
of a three-part project to replace IAS 39 – Financial Instruments: Recognition and Measurement. The new standard reduces
complexity by replacing the many different rules in IAS 39. The main features are as follows:
− A business model test is applied first in determining whether a financial asset is eligible for measurement at amortized cost. The
business model objective is based on holding financial assets in order to collect contractual cash flows rather than realizing
cash flows from the sale of the financial assets;
− In order to be eligible for amortized cost measurement, an asset must have contractual cash flow characteristics representing
the principal and interest;
− All other financial assets are measured at fair value on the balance sheet;
− An entity can elect on initial recognition to present the fair value changes on an equity investment that is not held for trading
directly in OCI. The dividends on investments for which this election is made must be recognized in profit or loss, but gains or
losses are not removed from OCI when the equity investment is disposed of; and
− If a financial asset is eligible for amortized cost measurement, an entity can elect to measure it at fair value if it eliminates or
significantly reduces an accounting mismatch.
The standard is effective for years beginning on or after January 1, 2015. The Company will analyze the impact that this standard
will have on its audited Consolidated financial statements in conjunction with the other phases of the standard when issued.
3.3 significant accounting judgments, estimates and assumptions
The carrying values of certain assets and liabilities are often determined based on estimates and assumptions of future events. The
key estimates, changes to which could cause a material adjustment to the carrying value of certain assets and liabilities within the
next financial year, are as follows:
a) Valuation of claims liabilities
The ultimate cost of claims liabilities is estimated by using a range of standard actuarial claims projection techniques in accordance
with Canadian accepted actuarial practice.
The main assumption underlying these techniques is that a company’s past claims development experience can be used to project
future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and
incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss
ratios. Historical claims development is mainly analyzed by accident years, but can also be further analyzed by geographical area,
as well as by significant business line and claim type. Large claims are usually separately addressed, either by being reserved at the
94
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit
assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in
the historical claims development data on which the projections are based. Additional qualitative judgment is used to assess the
extent to which past trends may not apply in future, in order to arrive at the estimated ultimate cost of claims that present the likely
outcome from the range of possible outcomes, taking account of all the uncertainties involved.
b) Valuation of pension benefit obligation
The cost of defined benefit pension plans and other post-employment medical benefits and the present value of the pension
obligation are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates,
expected rates of return on assets, future salary increases, the employees’ age upon retirement, mortality rates and future pension
increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation
is highly sensitive to changes in the assumptions. All assumptions are reviewed at each reporting date. Details of the key
assumptions used in the estimates are contained in Note 19.5 – Assumptions used.
c) Impairment
Goodwill and intangible assets
The Company determines whether goodwill and intangible assets with indefinite useful lives are impaired at least on an annual
basis. Also, intangible assets under development are not subject to amortization but are tested for impairment on an annual basis.
Impairment testing of these assets requires an estimation of the recoverable amount of the cash generating units to which the
assets are allocated. The assumptions used in this estimation of the recoverable amount are discussed in Note 18 – Goodwill and
intangible assets.
Financial assets
The Company determines whether financial assets, other than those classified or designated as at FVTPL, are impaired at each
audited Consolidated balance sheet date. These financial assets are impaired when there is objective evidence of a decline in fair
value below cost. Considerations which form the basis of these objective evidence judgments include a significant or prolonged
decline in fair value of an AFS equity instrument and a loss event that has occurred impairing the expected cash flows of an AFS
debt instrument. For asset-backed securities, considerations include liquidity risk, credit risk, volatility, discount rates, prepayment
rates and default rate assumptions.
d) Measurement of embedded derivatives
The Company owns perpetual preferred shares with call options which give the issuer the right to redeem the shares at a particular
price. Accounting standards require the value of the option liability to be measured separately from the preferred shares. The
value of the option liability for embedded derivatives is determined using a valuation which relies predominantly on the price
volatility of the underlying preferred shares, which can be significantly affected by market conditions. Judgment is also required to
determine the time period over which the volatility is measured.
e) Measurement of income taxes
Management exercises judgment in estimating the provision for income taxes. The Company is subject to federal income tax law
and provincial income tax laws in the various jurisdictions where it operates. Various tax laws are potentially subject to different
interpretations by the taxpayer and the relevant tax authority. To the extent that the Company’s interpretations of tax laws differ
from those of tax authorities or that the timing of realization of deferred tax assets is not as expected, the provision for income taxes
may increase or decrease in future periods to reflect actual experience.
f) business combinations
Upon initial recognition, the acquiree’s assets and liabilities have been included in the audited Consolidated balance sheets at fair
value. Management estimated the fair values using estimates on future cash flows and discount rates. However, actual results can be
different from those estimates. The changes in the estimates that relate to new information obtained about facts and circumstances
that existed as of the acquisition date, made at initial recognition with regard to items for which the valuation was incomplete,
would have an impact on the amount of goodwill recognized. Any other changes in the estimates made at initial recognition would
be reported in the audited Consolidated statements of comprehensive income. The detail on assets acquired and liabilities assumed
is presented in Note 4 – Business combinations.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
95
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 4 – business combinations
4.1
Jevco Insurance Company
On May 2, 2012, the Company announced that it had signed a definitive agreement with The Westaim Corporation for the
acquisition of all of the issued and outstanding shares of its subsidiary Jevco for cash consideration of $530 million. Following
receipt of all required approvals, the acquisition closed and Jevco became a wholly owned subsidiary on September 4, 2012. The
acquisition enhances the Company’s product offering to include additional specialty and niche insurance products in Canada.
The results of operations of Jevco are included in the audited Consolidated financial statements beginning on the date of
acquisition. On the audited Consolidated statement of comprehensive income for the year ended December 31, 2012, Jevco
contributed $125 million to net premiums earned and $15 million to net income before restructuring costs. Had Jevco been
consolidated from January 1, 2012, the additional net premiums earned would have been $374 million and the additional net
income attributable to shareholders would have been $41 million.
The following table summarizes the consideration paid for Jevco, and the amounts recognized for the assets acquired and liabilities
assumed at September 4, 2012 (the acquisition date).
Table 4.1 – bUsIness CoMbInaTIon – JeVCo
As at
Purchase price – cash consideration paid
Provisional fair value of assets acquired and liabilities assumed
Investments (including cash and cash equivalents of $23 million)
Premium receivables
Reinsurance assets
Deferred tax assets
Deferred acquisition costs
Property and equipment
Intangible asset – distribution network (net of deferred tax liabilities of $23 million)
Other assets
Claims liabilities
Unearned premiums
Deferred tax liabilities (excluding deferred tax liabilities related to intangible assets of $23 million)
Other liabilities
Total identifiable net assets
Goodwill
December 31,
2012
september 4,
2012
530
530
1,041
100
31
26
33
24
62
84
(731)
(204)
(3)
(31)
432
98
1,041
100
31
23
29
24
62
84
(716)
(204)
(3)
(31)
440
90
The fair value of the acquired identifiable distribution network is based on a preliminary discounted cash flow analysis. The useful
life of the distribution network has been assessed as 25 years and will be amortized on a straight-line basis over that period.
Goodwill reflects the quality of the acquired business and the synergies expected following the integration of Jevco. The goodwill is
not expected to be deductible for tax purposes.
The determination of the fair value of identifiable assets and liabilities acquired will be completed within the prescribed period of one
year following the acquisition.
4.2 axa Canada Inc.
On May 31, 2011, the Company announced that it had signed a definitive agreement with AXA SA for the acquisition of all of the
issued and outstanding shares of its subsidiary AXA Canada for a cash consideration of $2,621 million and contingent consideration
of up to $100 million. Following receipt of all required regulatory approvals, the acquisition closed and AXA Canada became a
wholly owned subsidiary on September 23, 2011.
AXA Canada provided P&C insurance in Canada, principally through a network of independent brokers. It carried out its activities
primarily through its wholly owned insurance subsidiaries. On January 1, 2012, the Company completed the sale of AXA Life
Insurance Inc. (“AXA Life Insurance”) (see Note 5 – Assets classified as held for sale and directly associated liabilities).
96
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
The following table summarizes the consideration paid for AXA Canada, and the amounts recognized for the assets acquired and
liabilities assumed at September 23, 2011 (the acquisition date).
Table 4.2 – bUsIness CoMbInaTIon – axa CanaDa
As at
Cash consideration paid
Fair value of contingent consideration
Purchase price
fair value of assets acquired and liabilities assumed
Investments (including cash and cash equivalents of $75 million)
Assets classified as held for sale
Investments in associates and joint ventures
Premium receivables
Reinsurance assets
Deferred tax assets
Deferred acquisition costs
Property and equipment
Intangible assets
Other assets
Claims liabilities
Unearned premiums
Liabilities directly associated with assets classified as held for sale
Deferred tax liabilities
Other liabilities
Total identifiable net assets
Goodwill
December 31,
2012
December 31,
2011
2,621
48
2,669
3,565
1,459
100
679
131
88
211
13
897
64
(2,193)
(1,148)
(1,178)
(128)
(471)
2,089
580
2,621
48
2,669
3,565
1,459
100
679
131
89
211
13
897
64
(2,193)
(1,148)
(1,170)
(128)
(473)
2,096
573
The fair value of the acquired identifiable intangible assets is based on a discounted cash flow analysis of the distribution network
and the customer relationships acquired. The useful life of the distribution network, reflecting the strength of the relationships,
has been assessed as indefinite and is therefore not subject to amortization, and it is tested for impairment on an annual basis. The
customer relationships, accessed through consolidated distribution entities, are amortized over a period of 10 years.
Goodwill reflects the quality of the acquired business and the synergies expected following the integration of AXA Canada. The
goodwill is not expected to be deductible for tax purposes.
A contingent consideration contract clause requires the Company to pay up to an additional $100 million to AXA SA based on the
development of the consolidated reserves of AXA Canada, excluding the life and health business, as at December 31, 2010. As of
March 31, 2012, the $100 million of contingent consideration had been recognized, of which $11 million was recognized in the first
quarter of 2012.
The determination of the fair value of the identifiable assets and liabilities acquired is complete.
noTe 5 – assets classified as held for sale and directly associated liabilities
As part of the acquisition of AXA Canada, the Company acquired AXA Life Insurance. On September 26, 2011, the Company
announced that it had entered into a definitive share purchase agreement to sell this subsidiary to a third party. The transaction
closed on January 1, 2012, following receipt of all regulatory approvals, for an amount of $300 million. There was no gain or loss
from this transaction.
Prior to its disposal, AXA Life Insurance was measured at fair value less costs to sell and classified as a disposal group held for sale.
All its assets are grouped together in Assets classified as held for sale and all its liabilities are grouped together in Liabilities directly
associated with assets classified as held for sale on the audited Consolidated balance sheets.
AXA Life Insurance qualified as a discontinued operation, given its classification as a disposal group acquired for resale purposes.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
97
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 6 – financial instruments
6.1
Investments summary
The following tables summarize the Company’s investments.
Table 6.1 – InVesTMenTs bY ClassIfICaTIon
Classified
as at fVTPl
Designated
as at fVTPl
–
–
–
–
–
–
–
–
–
–
–
–
405
–
405
–
–
–
3
–
–
3
–
–
–
–
–
435
–
438
–
–
2,917
1,447
78
6
4,448
–
–
–
–
–
670
–
5,118
–
–
2,315
1,583
117
9
4,024
–
–
–
–
–
553
–
4,577
Cash and cash
equivalents,
loans and
receivables
172
–
–
–
–
–
–
–
–
–
–
–
–
391
563
206
–
–
–
–
–
–
–
–
–
–
–
–
403
609
Total
172
214
5,633
2,620
276
14
8,757
117
296
842
8
1,263
2,376
391
12,959
206
244
4,633
2,756
236
18
7,887
165
323
792
1
1,281
2,051
403
11,828
afs
–
214
2,716
1,173
198
8
4,309
117
296
842
8
1,263
1,301
–
6,873
–
244
2,318
1,170
119
9
3,860
165
323
792
1
1,281
1,063
–
6,204
as at December 31, 2012
Cash and cash equivalents
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
loans
Total investments
As at December 31, 2011
Cash and cash equivalents
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
Loans
Total investments
98
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 6.2 – CaRRYInG ValUe of InVesTMenTs
fVTPl
instruments
other investments
at fair
value
Unamortized
cost
Unrealized
gains
Unrealized
losses
net unrealized
gains
Total
investments
at carrying
value
as at December 31, 2012
Cash and cash equivalents
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
loans
Total investments
As at December 31, 2011
Cash and cash equivalents
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
Loans
Total investments
–
–
2,917
1,447
78
6
4,448
–
–
–
–
–
1,075
–
5,523
–
–
2,315
1,586
117
9
4,027
–
–
–
–
–
988
–
5,015
172
214
2,653
1,158
195
8
4,228
114
219
802
7
1,142
1,238
391
7,171
206
244
2,237
1,153
116
9
3,759
164
245
715
1
1,125
1,019
403
6,512
–
–
64
15
3
–
82
3
77
52
1
133
90
–
305
–
–
81
18
3
–
102
3
78
83
–
164
89
–
355
–
–
(1)
–
–
–
(1)
–
–
(12)
–
(12)
(27)
–
(40)
–
–
–
(1)
–
–
(1)
(2)
–
(6)
–
(8)
(45)
–
(54)
–
–
63
15
3
–
81
3
77
40
1
121
63
–
265
–
–
81
17
3
–
101
1
78
77
–
156
44
–
301
172
214
5,633
2,620
276
14
8,757
117
296
842
8
1,263
2,376
391
12,959
206
244
4,633
2,756
236
18
7,887
165
323
792
1
1,281
2,051
403
11,828
As of December 31, 2012, asset-backed securities consist of mortgage-backed securities, auto loan receivables, credit card
receivables and asset-backed commercial paper. These asset-backed securities are AAA rated as at December 31, 2012 and 2011.
The Company uses data from various rating agencies to rate debt securities and preferred shares. When there are two ratings for the
same instrument, the Company uses the lower of the two. When there are three ratings for the same instrument, the Company uses
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
99
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
the median. Debt securities with a rating equal to or above BBB- are classified as investment grade. Preferred shares with a rating
equal to or above P3 low are classified as investment grade.
As at December 31, 2012, the fair value of the loans was $396 million (December 31, 2011 – $436 million). The fair value was
established using valuation techniques that used both input parameters based on observable market data and input parameters not
based on observable market data.
The following table shows the terms to maturity of the Company’s investment portfolio.
Table 6.3 – MaTURITY of InVesTMenTs
as at December 31, 2012
Cash and cash equivalents
Short-term notes
Fixed income
Preferred shares
Common shares
Loans
Total investments
As at December 31, 2011
Cash and cash equivalents
Short-term notes
Fixed income
Preferred shares
Common shares
Loans
Total investments
less than
1 year
from 1 to
5 years
over
5 years
no specific
maturity
172
214
776
20
–
4
1,186
206
244
741
22
1
42
1,256
–
–
4,529
89
–
108
4,726
–
–
4,136
115
–
171
4,422
–
–
3,238
16
–
273
3,527
–
–
2,766
29
–
183
2,978
–
–
–
1,138
2,376
6
3,520
–
–
–
1,115
2,050
7
3,172
Total
172
214
8,543
1,263
2,376
391
12,959
206
244
7,643
1,281
2,051
403
11,828
6.2 securities lending
The Company participates in a securities lending program to generate fee income. This program is managed by the Company’s
custodian, a major Canadian financial institution. The Company lends securities it owns to other financial institutions to allow
them to meet their delivery commitments. As at December 31, 2012, the Company has loaned securities with a fair value of
$2,176 million (December 31, 2011 – $1,550 million), which are reported in Investments.
Collateral is provided by the counterparty and is held in trust by the custodian for the benefit of the Company until the underlying
security has been returned to the Company. The collateral cannot be sold or re-pledged externally by the Company, unless the
counterparty defaults on its financial obligations. Additional collateral is obtained or refunded on a daily basis as the market value
of the underlying loaned securities fluctuates. The collateral consists of government securities with an estimated fair value of
105% of the fair value of the securities loaned and amounted to $2,285 million as at December 31, 2012 (December 31, 2011 –
$1,628 million).
6.3 equities sold short
Among the Company’s various investment strategies is a market-neutral equity investment strategy. The objective of this strategy,
which consists of having both long and short equity positions, is to maximize the value added from active equity portfolio
management while at the same time using short positions to mitigate overall equity market volatility. Long positions are reported in
Common shares and short positions are reported in Financial liabilities related to investments on the audited Consolidated balance
sheets. The Company has secured its short positions by pledging government debt securities as collateral.
100
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 6.4 – lonG anD shoRT PosITIons
Long positions
Short positions
as at December 31, 2012
As at December 31, 2011
Debt securities
pledged as
collateral
–
308
fair value
300
(301)
Debt securities
pledged as
collateral
–
377
Fair value
369
(368)
6.4 financial liabilities related to investments
Table 6.5 – DeTaIls of The CoMPanY ’s fInanCIal lIabIlITIes RelaTeD To InVesTMenTs
As at
Equities sold short positions (table 6.4)
Net asset value attributable to third party unit holders
Embedded derivatives (note 7.3)
Payable to investment brokers on unsettled trades
Derivative financial liabilities (table 7.1)
Total financial liabilities related to investments
6.5
Investment results
December 31,
2012
December 31,
2011
301
105
68
5
7
486
368
70
67
4
23
532
The following table provides additional details about the items reported in Net investment income and Net investment gains.
Table 6.6 – DeTaIls of The CoMPanY ’s neT InVesTMenT InCoMe anD neT InVesTMenT GaIns
For the years ended December 31,
amounts reported in net investment income
Interest income from:
Financial instruments at FVTPL
AFS financial instruments
Loans and receivables
Total interest income
Dividend income (expense) from:
AFS financial instruments
Financial instruments at FVTPL, net
Dividends paid on equities sold short
Dividends from long-term investments, at cost
Total dividend income
Expenses
net investment income
amounts reported in net investment gains
Net realized gains (losses) from:
AFS financial instruments
Financial instruments designated as at FVTPL
Financial instruments classified as at FVTPL
Derivative financial instruments
Embedded derivatives
Impairment losses from:
Common shares
Preferred shares
Other net gains
net investment gains
2012
2011
147
106
22
275
111
41
(10)
2
144
(31)
388
127
(48)
21
(20)
(11)
(40)
(2)
10
37
116
84
21
221
109
33
(11)
–
131
(26)
326
265
46
(16)
(34)
(2)
(52)
(13)
10
204
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
101
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 7 – Derivative financial instruments
7.1 Types of derivatives
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange
rate, equity or commodity instrument or index.
Derivative financial instruments are used for hedging purposes and for the purpose of modifying the risk profile of the Company’s
investment portfolio, as long as the resulting exposures are within the investment policy guidelines.
a) forwards and futures
Forward contracts are tailor-made agreements that are transacted between counterparties in the over-the-counter market. Futures
are standardized contracts with respect to amounts and settlement dates, and are traded on regular future exchanges.
Interest-rate forwards and futures are contractual obligations to buy or sell an interest rate sensitive financial instrument on a
predetermined future date at a specified price.
Currency forwards and futures are contractual obligations to exchange one currency for another on a predetermined future date.
The Company uses forwards to mitigate the risk arising from foreign currency fluctuations and futures to alter exposure to interest
rate fluctuations.
b) swaps
Total return swaps are over-the-counter contracts in which two counterparties exchange a series of cash flows based on agreed-
upon rates or value of an index, a basket of stocks or a single stock, applied to a notional amount.
Currency swaps include single-currency, cross-currency and cross-currency interest-rate swaps. Single-currency swaps are
agreements where two counterparties exchange a series of payments based on different interest rates (such as fixed rates for
floating rates) applied to a notional amount in a single currency. Cross-currency swaps involve the exchange of fixed payments
in one currency for the receipt of fixed payments in another currency. Cross-currency interest-rate swaps involve the exchange of
both interest and principal amounts in two different currencies.
Credit default swaps are over-the-counter contracts that transfer credit risk related to an underlying financial instrument from one
counterparty to another.
The Company uses swaps primarily for risk management purposes, mainly in conjunction with other financial instruments to
synthetically alter the cash flows of certain investments and credit exposure to specific bond issuers.
c) options
Options are contractual agreements under which the seller grants to the buyer the right, but not the obligation, to either buy (call
option) or sell (put option) a security, index, interest rate, exchange rate or other financial instrument at a predetermined price, at
or by a specified future date. The seller (writer) of the option receives a premium from the purchase for this right and can also settle
the contract by paying the cash settlement value of the purchaser’s right.
The Company uses options to modify its exposure to interest rate risk.
The Company also uses inflation caps, which are a type of option, to manage inflation risk.
7.2 fair value and notional amounts of derivatives
The following table shows the fair values and the notional amounts of derivatives by terms of maturity. Positive fair values
are reported in Other assets and negative fair values are reported in Financial liabilities related to investments on the audited
Consolidated balance sheets.
102
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 7.1 – faIR ValUes anD noTIonal aMoUnTs of DeRIVaTIVes bY TeRM To MaTURITY anD naTURe of RIsK
fair value
notional amount
Positive
negative
less than
1 year
from 1 to
5 years
over
5 years
Total
as at December 31, 2012
held for non-trading purposes
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Swaps
Options
Equity contracts
Total return swaps
Credit contracts
Credit default swaps
Inflation contracts
Options
Total
As at December 31, 2011
Held for non-trading purposes
Foreign currency contracts
Forwards
Swaps
Interest rate contracts
Futures
Swaps
Options
Equity contracts
Total return swaps
Options
Credit contracts
Credit default swaps
Inflation contracts
Options
Total
–
–
2
–
–
–
–
2
–
3
–
3
–
–
8
–
–
14
–
–
–
–
6
1
–
7
4
–
–
–
–
15
4
–
–
23
31
117
–
2
671
–
36
285
23
291
–
223
554
780
10
–
–
–
130
7
–
249
164
–
–
–
130
–
–
7
–
–
–
–
–
–
–
53
–
–
–
–
–
–
–
–
180
77
31
117
130
9
671
249
253
285
23
291
130
223
554
787
10
257
7.3 embedded derivatives
An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract. Some
of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some
or all of the cash flows that otherwise would be required by the contract to be modified according to a specified financial variable.
The fair value of the embedded derivatives amounted to $68 million as at December 31, 2012 (December 31, 2011 – $67 million) and
is linked entirely to the Company’s investment in perpetual preferred shares. The Company did not attempt to establish a notional
amount for these embedded derivatives but a proxy for that amount could be the original cost of these perpetual preferred shares,
which amounted to $979 million as at December 31, 2012 (December 31, 2011 – $921 million). Embedded derivatives are reported
in Financial liabilities related to investments on the audited Consolidated balance sheets.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
103
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 8 – fair value measurement
8.1 Determination of fair value and fair value hierarchy
In accordance with IFRS 7 for financial instruments measured at fair value on the audited Consolidated balance sheets, the
Company categorizes its fair value measurements according to a three-level hierarchy as described below:
− Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
− Level 2: valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable,
either directly or indirectly; and
− Level 3: valuation techniques which use inputs which have a significant effect on the recorded fair value that are not based on
observable market data.
A financial instrument is regarded as quoted in an active market (Level 1) if quoted prices for that financial instrument are readily
and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices
represent actual and regularly occurring market transactions on an arm’s length basis. When a quoted active market exists, the fair
values of financial assets are based on bid prices and the fair values of financial liabilities are based on ask prices.
In the absence of an active market, fair values are based on inputs other than quoted prices that are observable for the asset or
liability directly or indirectly (Level 2). Such inputs include prevailing market rates for instruments with similar characteristics and
risk profiles, the closing price of the most recent trade date subject to liquidity adjustments or average brokers’ quotes when trades
are too sparse to constitute an active market. The Company determines the fair values of some instruments by using valuation
techniques commonly used by the market participants, which refer to observable market data, like discounted cash flow analyses
and option pricing models. For some other financial instruments, the Company relies on the valuation services of third parties
that developed the structure of these instruments. The third parties measure the fair values of the financial instruments using the
following valuation techniques:
− When the financial instrument is a derivative, the fair value is calculated on the basis of observable market data and reflects the
estimated amount that the Company would receive or might have to pay to terminate the contracts as at December 31;
− When the financial instrument is made up of underlying securities quoted on an active market, the third party uses bid prices
for financial assets and ask prices for financial liabilities at the valuation date; and
− When the financial instrument is made up of underlying funds, investments in the underlying mutual funds are valued at the net
asset value of the shares held, as determined by the manager of the underlying funds at the valuation date.
In limited circumstances, the Company uses input parameters that are not based on observable market data (Level 3). Non-market
observable inputs use fair values determined in whole or in part using a valuation technique or model based on assumptions that are
neither supported by prices from observable current market transactions in the same instrument nor based on available market data.
Level 3 financial instruments represent embedded derivatives related to the Company’s perpetual preferred shares, which are
reported as a derivative liability in Financial liabilities related to investments and also reported in Preferred shares on the audited
Consolidated balance sheets.
To determine the fair value of embedded derivatives, the Company uses several input parameters, the majority of which are based
on observable market data. One significant parameter, the implied volatility, is unobservable and is calculated using an internally
developed valuation model.
104
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
The distribution of the Company’s financial instruments between each of the previously mentioned levels is presented below.
Table 8.1 – faIR ValUe hIeRaRChY of fInanCIal asseTs anD fInanCIal lIabIlITIes
level 1
level 2
level 3
Total
as at December 31, 2012
Investments
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
Total investments
Derivative financial assets
Total financial assets measured at fair value
Derivative financial liabilities
Derivative financial liabilities
Embedded derivatives
Total derivative financial liabilities
net asset value attributable to third party unit holders
equities sold short positions
Total financial liabilities measured at fair value
214
–
4,659
2,109
164
–
7,146
117
272
798
8
1,195
2,376
10,717
–
10,717
–
–
–
105
301
406
974
511
112
14
1,611
–
–
–
–
–
–
1,611
2
1,613
7
–
7
–
–
7
–
–
–
–
–
–
–
24
44
–
68
–
68
–
68
–
68
68
–
–
68
214
5,633
2,620
276
14
8,757
117
296
842
8
1,263
2,376
12,396
2
12,398
7
68
75
105
301
481
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
105
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Table 8.1 – faIR ValUe hIeRaRChY of fInanCIal asseTs anD fInanCIal lIabIlITIes (continued)
Level 1
Level 2
Level 3
Total
As at December 31, 2011
Investments
Debt securities
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Total debt securities
Preferred shares
Investment grade
Retractable
Fixed rate perpetual
Other perpetual
Non-rated
Total preferred shares
Common shares
Total investments
Derivative financial assets
Total financial assets measured at fair value
Derivative financial liabilities
Derivative financial liabilities
Embedded derivatives
Total derivative financial liabilities
Net asset value attributable to third party unit holders
Equities sold short positions
Total financial liabilities measured at fair value
244
–
3,770
1,551
125
–
5,690
165
300
748
1
1,214
2,043
8,947
8
8,955
4
–
4
70
368
442
863
1,205
111
18
2,197
–
–
–
–
–
–
2,197
6
2,203
19
–
19
–
–
19
–
–
–
–
–
–
–
23
44
–
67
8
75
–
75
–
67
67
–
–
67
244
4,633
2,756
236
18
7,887
165
323
792
1
1,281
2,051
11,219
14
11,233
23
67
90
70
368
528
106
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
8.2 level 3 financial instruments
Changes in the embedded derivatives are reported in Net investment gains on the audited Consolidated statements of
comprehensive income. An equal change in the asset component is reported in OCI.
The following table shows a reconciliation of the opening and closing carrying values of the Company’s embedded derivatives and
their asset components.
Table 8.2 – ReConCIlIaTIon of leVel 3 fInanCIal InsTRUMenTs
Carrying value as at January 1, 2012
Gains (losses) reported in Net investment gains
Losses reported in OCI
Purchases
Sales
Carrying value as at December 31, 2012
Carrying value as at January 1, 2011
Gains (losses) reported in Net investment gains
Losses reported in OCI
Purchases
Sales
Business combination (note 4)
Carrying value as at December 31, 2011
asset
component
(preferred
shares)
embedded
derivatives
(financial
liabilities)
67
14
(3)
7
(17)
68
67
24
(22)
24
(37)
11
67
(67)
(11)
–
(7)
17
(68)
(67)
(2)
–
(24)
37
(11)
(67)
Net gains reported in Net investment gains for the embedded derivatives and their asset components still held as at December 31,
2012 amounted to $3 million for 2012 (December 31, 2011 – $22 million).
The following table shows the impact of changing the implied volatility by 10% on the carrying value of the Company’s embedded
derivatives and the resulting gains (losses). The Company believes that this percentage change provides a fair indication of how the
Company’s Net income attributable to shareholders would be impacted in the event of a significant change in this non-observable
valuation parameter.
Table 8.3 – sensITIVITY analYsIs foR leVel 3 fInanCIal InsTRUMenTs
10% increase
in volatility
10% decrease
in volatility
as at December 31, 2012
asset component
Increase (decrease) in preferred shares
Increase (decrease) in OCI
embedded derivatives
Increase (decrease) in financial liabilities
Increase (decrease) in net investment gains (losses)
As at December 31, 2011
Asset component
Increase (decrease) in preferred shares
Increase (decrease) in OCI
Embedded derivatives
Increase (decrease) in financial liabilities
Increase (decrease) in net investment gains (losses)
11
11
11
(11)
10
10
10
(10)
(10)
(10)
(10)
10
(10)
(10)
(10)
10
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
107
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 9 – financial risk
The Company has a comprehensive risk management framework and internal control procedures designed to manage and monitor
various risks in order to protect the Company’s business, clients, shareholders and employees. The risk management programs aim
to manage risks that could materially impair the Company’s financial position, accept risks that contribute to sustainable earnings
and growth and disclose these risks in a full and complete manner.
Effective risk management consists in identifying, understanding and communicating all risks that the Company is exposed to in
the course of its operations. In order to make sound business decisions, both strategically and operationally, management must
have continual direct access to the most timely and accurate information possible. Either directly or through its committees, the
Board of Directors ensures that the Company’s management has put appropriate risk management programs in place. The Board of
Directors, directly and in particular through its Audit and Risk Review Committee (“Audit Committee”), oversees the Company’s
risk management programs, procedures and controls and, in this regard, receives periodic reports from, among others, the Risk
Management Department through the Chief Risk Officer, internal auditors and the independent auditors. A summary of the
Company’s key risks arising from its financial instruments and the processes for managing and mitigating them is outlined below.
The majority of the investment portfolio is invested in well-established, active and liquid markets. See Note 8 – Fair value
measurement for information about how the Company categorizes its fair value measurements according to a three-level hierarchy.
9.1 Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises three types of risk: currency risk, interest rate risk and other market price risk, such as equity price
risk. The Company’s exposures to market risk together with the Company’s risk management practices used to mitigate these risks
are explained below. The Company’s investment policies establish principles and limits pertaining to these risks. The Investment
Committee regularly monitors compliance with these investment policies.
a) equity price risk
Equity price risk is the risk of losses arising from movements in equity market prices. The Company is significantly exposed to
changes in equity market prices.
Sensitivity analysis is one risk management technique that assists management in ensuring that risks assumed remain within
the Company’s risk tolerance level. Sensitivity involves varying a single factor to assess the impact that this would have on the
Company’s results and financial condition.
A 10% variation in equity markets and a 5% variation in the price of preferred shares, excluding the impact of any impairment,
would impact Net income and OCI as follows:
Table 9.1 – sensITIVITY analYsIs foR eQUITY PRICe RIsK
as at December 31, 2012
Net income
OCI
As at December 31, 2011
Net income
OCI
equity
markets1
increase
equity
markets1
decrease
(16)
143
(14)
134
16
(143)
14
(134)
1 a shock of 10% is applied to all common shares, net of any equity hedges, and a shock of 5% is applied to all preferred shares.
The impact resulting from changes in equity markets, described above, is generally a linear relationship to the change in the equity
markets. Therefore, the impact will increase or decrease in linear proportion to the changes in equity markets.
The above sensitivity analysis was prepared using the following key assumptions:
− The securities in the Company’s portfolio are not impaired;
− Interest rates and equity prices move independently;
− Shifts in the yield curve are parallel;
108
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
− Credit and liquidity risks have not been considered;
− Impact on the Company’s pension plans is not included;
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults; and
− AFS equities in an unrealized loss position, as reflected in AOCI, may, at some point in the future, be realized either through a
sale or an impairment.
To mitigate these risks, the Company’s investment policies set forth limits for each type of investment and compliance with the
policies is closely monitored by the Investment Committee. The Company manages market risk through asset class and economic
sector diversification and, in some cases, the use of derivatives.
b) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates. The Company is significantly exposed to changes in interest rates. Movements in short-term and long-term
interest rates, including changes in credit spreads, cause changes in realized and unrealized gains and losses. To mitigate interest
rate risk, the Company uses interest rate futures and bond forwards to hedge the variability in cash flows related to the issuance of
its debt.
A 100-basis-point variation in interest rates would normally impact Net income as a result of marking to market the written call
option liabilities embedded in the Company’s redeemable preferred shares. A 100-basis-point variation would also impact OCI. The
impacts would be as follows:
Table 9.2 – sensITIVITY analYsIs foR InTeResT RaTe RIsK
as at December 31, 2012
Net income
OCI
As at December 31, 2011
Net income
OCI
Interest
rates
100-basis-
point
increase
Interest
rates
100-basis-
point
decrease
–
(138)
5
(135)
–
138
(5)
135
The above sensitivity analysis was prepared using the following key assumptions:
− The securities in the Company’s portfolio are not impaired;
− Interest rates and equity prices move independently;
− Shifts in the yield curve are parallel;
− Credit, liquidity and basis risks have not been considered;
− Impact on the Company’s pension plans is not included;
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults;
− For the Company’s FVTPL fixed-income securities, the estimated impact on net income is assumed to be offset by the market-
yield adjustment; and
− AFS fixed-income securities in an unrealized loss position, as reflected in AOCI, may, at some point in the future, be realized
either through a sale or an impairment.
The Company’s exposure to the risk that the future cash flows of a financial instrument will fluctuate because of changes in market
interest rates is detailed in Table 9.3.
Interest rate risk exposures are reported based on the earlier of financial instruments contractual repricing date or maturity date.
Effective interest rates have been disclosed where applicable. The effective rates shown in the table below represent historical rates
for fixed-rate instruments carried at amortized cost and current market rates for floating-rate instruments or instruments carried
at fair value. The following table does not incorporate management’s expectation of future events where expected repricing or
maturity dates differ significantly from the contractual dates.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
109
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Table 9.3 – exPosURe To InTeResT RaTe RIsK
floating
rates
less than
1 year
from 1 to
5 years
over
5 years
non-rate
sensitive
Total
fixed rates
as at December 31, 2012
assets
Cash and cash equivalents
Effective interest rate
Short-term notes
Effective interest rate
Fixed income
Effective interest rate
Preferred shares
Effective interest rate
Common shares
Loans
Effective interest rate
Reinsurance assets
Effective interest rate
Other assets
Total assets
liabilities and shareholders’ equity
Claims liabilities
Effective interest rate
Debt outstanding
Effective interest rate
Financial liabilities related to investments
Effective interest rate
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
162
–
11
54
–
49
–
2
278
–
–
8
–
–
8
net long (short) exposure
270
10
0.96%
214
0.95%
773
1.38%
21
5.62%
–
4
5.33%
130
2.10%
–
1,152
3,101
2.10%
–
6
–
–
3,107
(1,955)
–
–
4,521
1.78%
876
5.08%
–
85
5.82%
130
2.10%
–
5,612
3,123
2.10%
–
37
5.11%
–
–
3,160
2,452
–
–
3,238
2.20%
312
4.90%
–
253
5.46%
60
2.10%
–
3,863
1,432
2.10%
1,143
5.45%
24
4.92%
–
–
2,599
1,264
–
–
–
–
2,376
–
172
214
8,543
1,263
2,376
391
–
320
6,532
8,908
6,534
19,813
–
–
7,656
1,143
411
486
5,635
4,893
10,939
(2,031)
5,635
4,893
19,813
–
110
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Floating
rates
Less than
1 year
From 1 to
5 years
Over
5 years
Non-rate
sensitive
Total
Fixed rates
76
–
88
70
–
–
–
3
237
–
400
23
–
–
42
0.86%
244
0.87%
724
1.60%
21
5.48%
–
42
5.85%
111
2.30%
3
1,187
2,741
2.30%
–
3
–
–
423
(186)
2,744
(1,557)
–
–
4,070
1.80%
838
5.01%
–
164
5.90%
116
2.30%
–
5,188
2,858
2.30%
–
31
4.95%
–
–
2,889
2,299
–
–
2,761
2.55%
352
4.78%
–
117
5.86%
52
2.30%
–
3,282
1,287
2.30%
893
5.53%
20
4.76%
–
–
2,200
1,082
88
–
–
–
2,051
80
130
7,510
9,859
–
–
455
6,701
4,341
11,497
(1,638)
206
244
7,643
1,281
2,051
403
409
7,516
19,753
6,886
1,293
532
6,701
4,341
19,753
–
As at December 31, 2011
Assets
Cash and cash equivalents
Effective interest rate
Short-term notes
Effective interest rate
Fixed income
Effective interest rate
Preferred shares
Effective interest rate
Common shares
Loans
Effective interest rate
Reinsurance assets
Effective interest rate
Other assets
Total assets
Liabilities and shareholders’ equity
Claims liabilities
Effective interest rate
Debt outstanding
Effective interest rate
Financial liabilities related to investments
Effective interest rate
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net long (short) exposure
c) Currency risk
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. The Company is not significantly exposed to changes in foreign exchange rates. The Company is exposed to some
foreign exchange risks arising from securities in some of its U.S. dollar denominated assets; however, the general policy is to
minimize foreign currency exposure. The Company mitigates foreign exchange rate risks by buying or selling successive monthly
foreign exchange forward contracts or entering into foreign exchange swaps.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
111
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
The following table illustrates the foreign-denominated financial assets and derivative financial instruments used to reduce the
currency risk:
Table 9.4 – exPosURe To CURRenCY RIsK
As at
Currency exposure – U.s. dollar
Net investments
Less: U.S. dollar forward exchange contracts and currency swaps, notional amount
Net currency risk – U.S. dollar
Currency exposure – other currencies
Total net currency exposure on financial assets
9.2 basis risk
December 31,
2012
December 31,
2011
13
(13)
–
–
–
276
(276)
–
–
–
The Company’s use of derivatives exposes it to a number of risks, including credit risk as well as interest rate, equity market
and currency fluctuations. The hedging of certain risks with derivatives results in basis risk. Basis risk is the risk that offsetting
investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect
correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the
position. The Company monitors the effectiveness of its hedges on a regular basis.
9.3 Credit risk
Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. A
counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or
obligation to us. The Company’s credit risk exposure is concentrated primarily in its debt portfolios, preferred share portfolios and,
over-the-counter derivatives and, to a lesser extent, in its reinsurance recoverable and structured settlements agreements entered
into with various life insurance companies.
a) Maximum exposure to credit risk
The table below details the Company’s maximum exposure to credit risk without taking into account any collateral held or other
credit enhancements available to the Company to mitigate this risk. For on-balance sheet exposures, maximum credit exposure
is defined as the carrying value of the asset. Detail on these credit risk exposures, including information on how the Company
mitigates these, is given in the remaining part of the note.
Table 9.5 – MaxIMUM exPosURe To CReDIT RIsK
As at
on-balance sheet credit risk exposure
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Derivative financial assets (table 7.1)
Premium receivables
Reinsurance assets
Other financial assets1
December 31,
2012
December 31,
2011
172
8,757
1,263
2,376
391
2
2,670
320
530
206
7,887
1,281
2,051
403
14
2,487
409
356
Total on-balance sheet credit risk exposure
16,481
15,094
off-balance sheet credit risk exposure
Original price of structured settlements purchased
Total off-balance sheet credit risk exposure
676
676
598
598
1 other financial assets comprise the following amounts as reported on the audited consolidated balance sheets: other receivables and recoverables, accrued investment income, Income
taxes receivable and long-term investments at cost.
112
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
b) structured settlements
The Company has obligations to pay certain fixed amounts to claimants on a recurring basis and has purchased annuities from
life insurers to provide for those payments. In the event that the life insurers are in default, the Company may have to assume
a financial guarantee obligation. Therefore, the net risk to the Company is any credit risk related to the life insurers. Since the
Company deals with registered life insurers, this credit risk is minimal.
As at December 31, 2012, none of the life insurers from which the Company had purchased annuities were in default. The original
purchase price of the annuities totalled $676 million (December 31, 2011 – $598 million). The risk-adjusted balance is determined
by applying the standard OSFI-defined measures of counterparty risk to the credit equivalent amount and was $2 million as at
December 31, 2012 (December 31, 2011 – $1 million).
c) Investments
The Company’s risk management strategy is to invest in debt instruments and preferred shares of high credit quality issuers and to
limit the amount of credit exposure with respect to any one issuer by imposing limits based upon credit quality. The Company’s
investment policy requires that, at the time of the investment, substantially all debt securities have a minimum credit rating of BBB
and preferred shares have a minimum credit rating of ‘P3’. Management monitors subsequent credit rating changes on a regular basis.
For the Company’s OSFI-regulated subsidiaries, the assets invested in any entity or group of related entities are limited by OSFI to
5% of the subsidiaries’ assets. The Company also monitors aggregate concentrations of credit risk by country of issuance and by
industry (see Table 9.6 hereafter).
The Company receives guarantees for loans.
d) Derivative-related risk
Credit risk from derivative transactions reflects the potential for the counterparty to default on its contractual obligations when one
or more transactions have a positive market value to the Company. Therefore, derivative-related credit risk is represented by the
positive fair value of the instrument and is normally a small fraction of the contract’s notional amount.
The Company subjects its derivative-related credit risk to the same credit approval, limit and monitoring standards that it uses
for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and
managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with
established limits on a continual basis and is subject to a quarterly review by the Investment Committee. The Company has adopted
a policy whereby, upon signing the derivative contract, the counterparty is required to have a minimum credit rating of “A-” and an
issuer credit spread below established thresholds.
Netting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of netting clauses
in master derivative agreements. The netting clauses in a master derivative agreement provide for a single net settlement of all
financial instruments covered by the agreement in the event of default. However, credit risk is reduced only to the extent that the
Company’s financial obligations toward the counterparty to such an agreement can be set off against obligations such counterparty
has toward the Company. The Company uses netting clauses in master derivative agreements to reduce derivative-related credit
exposure. The overall exposure to credit risk that is reduced through the netting clauses may change substantially following the
reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in underlying market
rates and values.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk.
Mark-to-market provisions in the Company’s agreements with some counterparties provide the Company with the right to request
that the counterparty pay down or collateralize the current market value of its derivatives positions when the value passes a
specified threshold amount.
The replacement cost of $2 million as at December 31, 2012 (December 31, 2011 – $6 million) represents the total fair value of all
outstanding contracts in a gain position before factoring in the master netting agreements of nil (December 31, 2011 – $1 million)
and excludes fair values relating to exchange-traded instruments as they are subject to daily margining and are deemed to have no
credit risk.
The credit equivalent amount of $103 million as at December 31, 2012 (December 31, 2011 – $45 million) is the sum of the
replacement cost plus an add-on amount for potential future credit exposure as defined by OSFI. The risk-adjusted balance is
determined by applying the standard OSFI-defined measures of counterparty risk to the credit equivalent amount.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
113
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
e) Reinsurance
The Company relies on reinsurance to manage underwriting risk. Although reinsurance makes the assuming reinsurer liable to
the Company to the extent of the risk ceded, the Company is not relieved of its primary liability to its policyholders as the direct
insurer. As a result, the Company bears credit risk with respect to its reinsurers. There is no certainty that its reinsurers will pay all
reinsurance claims on a timely basis or at all.
The Company assesses the financial soundness of the reinsurers before signing any reinsurance treaties and monitors their situation
on a regular basis. In addition, the Company has minimum rating requirements for its reinsurers. Substantially all reinsurers are
required to have a minimum credit rating of ‘A-’ at inception of the treaty. Rating agencies used are A.M. Best and Standard &
Poor’s. The Company also requires that most of its treaties have a security review clause allowing the Company to replace a
reinsurer during the treaty period should the reinsurer’s credit rating fall below the level acceptable to the Company. Management
concluded that the Company was not exposed to significant loss from reinsurers for potentially uncollectible reinsurance as at the
year-end date.
The Company is the assigned beneficiary of collateral consisting of cash, trust accounts and letters of credit totalling $173 million
as at December 31, 2012 (December 31, 2011 – $183 million) as guarantees from unlicensed reinsurers. This collateral is held in
support of policy liabilities of $80 million as at December 31, 2012 (December 31, 2011 – $130 million) and could be used should
these reinsurers be unable to meet their obligations.
f) Concentration of credit risk
Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located
in the same geographic area or have comparable economic characteristics. Their ability to meet contractual obligations may
be similarly affected by changing economic, political or other conditions. The Company’s investments could be sensitive to
changing conditions in specific geographic regions or specific industries. The Company has a significant concentration of its
investments in the financial sector. This risk concentration is closely monitored by the Company and it hedges some of the risk
as it deems necessary.
Table 9.6 – ConCenTRaTIons of CReDIT RIsK foR InVesTMenTs
As at
by country of issuer
Canada
U.S.
Other
Total
by industry
Government
Banks, insurance and diversified financial services
Energy
Other
Total
December 31,
2012
December 31,
2011
97%
–
3%
100%
48%
34%
8%
10%
100%
92%
2%
6%
100%
42%
35%
9%
14%
100%
9.4 liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet obligations associated with
financial liabilities. The Company’s liquidity management is governed by establishing a prudent policy that identifies oversight
responsibilities as well as by setting limits and implementing effective techniques to monitor, measure and control exposure to
liquidity risk.
As a result of the nature of its property and casualty insurance activities, cash flows may be highly volatile and unpredictable.
The Company’s liquidity needs are rigorously managed by matching asset and liability cash flows and by establishing forecasts
respecting returns obtained and required. The Company invests in various types of assets in order to match them to its liabilities.
This method maps the obligations toward insured clients to asset life and performance. The Company reviews the status of the
matching on a quarterly basis.
114
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
To manage its cash flow requirements, a portion of the Company’s investments is maintained in short-term (less than one
year), highly liquid money-market securities. A large portion of the investments are held in highly liquid federal and provincial
government debt to protect against any unanticipated large cash requirements. In addition, the Company also has an unsecured
committed credit facility, see Note 20.3 – Credit facilities.
The following table presents the undiscounted value of financial liabilities by expected maturity. The expected maturities of claims
liabilities are determined by estimating the moment at which the claims liabilities will effectively be settled. Unearned premiums
have been excluded because they do not constitute actual obligations.
Table 9.7 – exPeCTeD MaTURITY of fInanCIal lIabIlITIes
as at December 31, 2012
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
Total financial liabilities
As at December 31, 2011
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
Total financial liabilities
noTe 10 – Insurance risk
less than
1 year
from 1 to
5 years
over
5 years
no specific
maturity
3,101
12
27
–
933
4,073
2,741
27
5
–
788
3,561
3,123
–
8
–
286
3,417
2,858
–
12
400
280
3,550
1,432
–
–
1,143
4
2,579
1,287
–
–
893
–
2,180
–
474
–
–
25
499
–
505
–
–
43
548
Total
7,656
486
35
1,143
1,248
10,568
6,886
532
17
1,293
1,111
9,839
10.1 Insurance risk and management
The Company principally underwrites automobile, home and commercial property and liability contracts to individuals and small
to medium-size businesses. The majority of the insurance risk to which the Company is exposed is of a short-tail nature. Policies
generally cover a 12-month period, with the exception of a portion of the personal line insurance contracts where coverage is for a
two-year period. The average duration of claims liabilities is 2.4 years as at December 31, 2012 and 2011.
Insurance contract risk is the risk that a loss arises from the following reasons:
− Underwriting and pricing;
− Fluctuation in the timing, frequency and severity of claims relative to expectations;
− Inadequate reinsurance protection; and
− Large unexpected losses arising from a single event such as a catastrophe event.
Insured events can occur at any time during the coverage period and can generate losses of variable amounts. An objective of the
Company is to ensure that sufficient claims liabilities are established to cover future insurance claim payments. The Company’s
success depends upon its ability to accurately assess the risk associated with the insurance contracts underwritten by the Company.
The Company establishes claims liabilities to cover the estimated liability for the payment of all losses, including loss adjustment
expenses incurred with respect to insurance contracts underwritten by the Company. Claims liabilities do not represent an exact
calculation of the liability. Rather, claims liabilities are the Company’s best estimates of its expected ultimate cost of resolution and
administration of claims. Expected inflation is taken into account when estimating claims liabilities, thereby mitigating inflation risk.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
115
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
The composition of the Company’s insurance risk, as well as the methods employed to mitigate the risks, are described below.
a) Underwriting and pricing risks
The insurance business is cyclical in nature whereby the industry generally reduces insurance rates following periods of increased
profitability, while it generally increases rates following periods of sustained loss. The Company’s profitability tends to follow this
cyclical market pattern and can also be affected by demand and competition. In addition, the Company is at risk from changes in
automobile insurance legislation, the economic environment and climate patterns.
In order to properly monitor the Company’s risk appetite, pricing targets are set by the Insurance Risk Department and distributed
to each region. Pricing targets are established using an internal return on equity model and a risk-based capital model.
Risks associated with commercial and personal property may vary in relation to the geographical area of the risk insured by the
Company. The Company’s exposure to concentrations of insurance risk, in terms of type of risk and level of insured benefits,
is mitigated by careful selection and implementation of underwriting strategies, which is in turn largely achieved through
diversification across industry sectors and geographical areas. For automobile insurance, legislation is in place at a provincial level
and this creates differences in the benefits provided among the provinces.
The following table illustrates the concentration of insurance contracts on the basis of direct premiums written:
Table 10.1 – ConCenTRaTIons of InsURanCe ConTRaCTs on The basIs of DIReCT
PReMIUMs WRITTen
For the years ended December 31,
Direct premiums written by line of business
Personal Automobile
Personal Property
Commercial Automobile
Commercial P&C
Total
Direct premiums written by province
Ontario
Québec
Alberta
British Columbia
Other
Total
2012
2011
45%
23%
8%
24%
100%
40%
30%
17%
7%
6%
47%
24%
8%
21%
100%
45%
26%
18%
5%
6%
100%
100%
The Enterprise Risk Committee monitors the Company’s overall risk profile, aiming for a balance between risk, return and
capital and determines policies concerning the Company’s risk management framework. The committee’s mandate is to identify,
measure and monitor risks and avoid risks that are outside of the Company’s risk tolerance level. Further, in order to minimize
unforeseen risks, new products are subject to an internal product and approval review process. The Company also uses reinsurance
under its strategy for managing the underwriting risk. The availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity, which can affect the Company’s ceded premium volume and profitability.
Reinsurance companies exclude some types of coverage from the contracts that the Company purchases from them or may alter
the terms of such contracts from time to time. These gaps in reinsurance protection expose the Company to greater risk and greater
potential loss and could adversely affect its ability to underwrite future business. Where the Company cannot successfully mitigate
risk through reinsurance arrangements, consideration is given to reducing premiums written in order to lower its risk.
b) Risk related to frequency and severity of claims
The occurrence of claims being unforeseeable, the Company is exposed to the risk that the number and the severity of claims would
exceed the estimates.
Strict claim review policies are in place to assess all new and ongoing claims. Regular detailed reviews of claims handling
procedures and frequent investigations of possible fraudulent claims reduce the Company’s risk exposure. Further, the Company
enforces a policy of actively managing and promptly pursuing claims, in order to reduce its exposure to unpredictable future
developments that could negatively impact the business. The Company has established a Large Loss Committee responsible for
analyzing large losses and contentious matters to ensure that appropriate claims liabilities are established and approved.
116
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
c) Reinsurance risk
Under reinsurance programs, management considers that in order for a contract to reduce exposure to risk, it must be structured
to ensure that the reinsurer assumes the significant insurance risk related to the underlying reinsured contracts and it is
reasonably possible that the reinsurer may realize a significant loss from the reinsurance. Although the Company has reinsurance
arrangements, it is not relieved of its direct obligations to its contract holders and thus a credit exposure exists with respect to ceded
insurance, to the extent that any reinsurer is unable to meet the obligations that are assumed under such reinsurance agreements.
The Company evaluates reinsurance recoverables and receivables at each balance sheet date and provides for reinsurance amounts
deemed uncollectible. The Company’s placement of reinsurance is diversified such that it is not dependent on a single reinsurer and
the Company’s operations are not substantially dependent upon any single reinsurance contract. The Company has collateral in
place to support amounts receivable and recoverable from non-registered reinsurers.
d) Catastrophe risk
Catastrophe risk is the risk of occurrence of a catastrophic event (e.g., hurricanes, earthquakes and hail or windstorms) that
affects a large number of policyholders simultaneously. Catastrophes can have a significant impact on the underwriting income of
an insurer.
The Company has limited its exposure to catastrophe risk by imposing maximum claim amounts on certain contracts as well as by
using reinsurance arrangements in order to limit exposure to catastrophic events. The placement of ceded reinsurance is almost
exclusively on an excess-of-loss basis (per event or per risk) as per practice, actuarial norms and regulatory guidelines. Retention
limits for the excess-of-loss reinsurance vary by product line and territory. The following table shows the Company’s net retention
and reinsurance coverage limits by nature of risk.
Table 10.2 – ReInsURanCe neT ReTenTIon anD CoVeRaGe lIMITs bY naTURe of RIsK
single risk events2
Net retentions:
On property policies
On liability policies
Multi-risk events and catastrophes3
Net retentions
Coverage limit
2012
20111
5
2–10
2–5
5–10
50
3,300
15–25
1,430–1,500
1 as at December 31, 2011, when most of the reinsurance programs were renewed, the company and aXa canada maintained separate reinsurance programs and the numbers above
reflect the retentions and limits of each program.
2 For certain special classes of business or types of risks as well as for Jevco, the retention may be lower through specific treaties or the use of facultative reinsurance.
3 Includes a reinsurance treaty in place for a specific portfolio in British columbia.
e) sensitivity to insurance risk
The principal assumption underlying the claims liability estimates is that the Company’s future claims development will follow a
similar pattern to past claims development experience.
Claims liabilities estimates are also based on various quantitative and qualitative factors, including:
− average claim costs, including claim handling costs;
− average number of claims by accident year;
− trends in claims severity and frequency;
− other factors such as inflation, expected or in-force government pricing and coverage reforms, and the level of insurance fraud;
− discounted rate; and
− provision for adverse developments (“PfAD”).
Most or all of the qualitative factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and
unforeseen factors could negatively impact the Company’s ability to accurately assess the risk of the insurance contracts that the
Company underwrites. In addition, there may be significant lags between the occurrence of the insured event and the time it is
actually reported to the Company and additional lags between the time of reporting and final settlement of claims.
The Company refines its claims liabilities estimates on an ongoing basis as claims are reported and settled. Establishing an
appropriate level of claims liabilities is an inherently uncertain process and the policies surrounding this are overseen by the
Company’s Reserve Review Committee.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
117
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
The claim liabilities’ sensitivity to certain key assumptions are outlined below. It has not been possible to quantify the sensitivity to
certain assumptions such as legislative changes or uncertainty in the estimation process. The analysis below is performed for possible
movements in the assumptions with all other assumptions held constant, showing the impact on Net income and on Shareholders’
equity. Movements in these assumptions may be non-linear and may be correlated with one another.
Table 10.3 – sensITIVITY analYsIs
sensitivity factors
as at December 31, 2012
Average number of claims (frequency)
Average claim cost (severity)
Discount rate
As at December 31, 2011
Average number of claims (frequency)
Average claim cost (severity)
Discount rate
Change in
assumptions
Impact on
net income
Impact on
shareholders’
equity
+5%
+5%
+1%
+5%
+5%
+1%
(68)
(343)
175
(52)
(305)
164
(50)
(253)
129
(38)
(225)
118
noTe 11 – Claims liabilities and unearned premiums
11.1 summary of claims liabilities and unearned premiums
Claims liabilities are established to reflect the estimate of the full amount of all liabilities associated with the insurance contracts
earned at the balance sheet date, including insurance claims incurred but not reported. The ultimate amount of these liabilities
will vary from the best estimate made for a variety of reasons, including additional information with respect to the facts and
circumstances of the insurance claims incurred.
The following table presents movements in the Company’s claims liabilities during the year.
Table 11.1 – MoVeMenT of The ClaIMs lIabIlITIes
Direct
Ceded
net
as at December 31, 2012
Balance, beginning of year
Current year claims
Prior year favourable claims development
Total claims incurred
Increase due to changes in discount rate
Claims paid
Business combinations (note 4)
balance, end of year
As at December 31, 2011
Balance, beginning of year
Current year claims
Prior year unfavourable (favourable) claims development
Total claims incurred
Increase due to changes in discount rate
Claims paid
Business combinations (note 4)
Balance, end of year
118
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
6,886
4,511
(472)
4,039
18
(4,018)
731
7,656
4,379
3,464
(212)
3,252
84
(3,022)
2,193
6,886
368
79
(93)
(14)
1
(87)
29
297
216
108
11
119
3
(76)
106
368
6,518
4,432
(379)
4,053
17
(3,931)
702
7,359
4,163
3,356
(223)
3,133
81
(2,946)
2,087
6,518
The following table presents movements in the Company’s unearned premiums during the year.
Table 11.2 – MoVeMenT of UneaRneD PReMIUMs
as at December 31, 2012
Balance, beginning of year
Premiums written
Premiums earned
Business combinations (note 4)
balance, end of year
As at December 31, 2011
Balance, beginning of year
Premiums written
Premiums earned
Business combinations (note 4)
Balance, end of year
The following tables present claims liabilities and unearned premiums by line of business.
Table 11.3 – ClaIMs lIabIlITIes
as at December 31, 2012
Personal lines
Automobile
Property
Total personal lines
Commercial lines
Automobile
P&C
Total commercial lines
Total
As at December 31, 2011
Personal lines
Automobile
Property
Total personal lines
Commercial lines
Automobile
P&C
Total commercial lines
Total
Direct
Ceded
net
3,790
6,854
(6,802)
204
4,046
2,586
5,126
(5,070)
1,148
3,790
41
221
(241)
2
23
19
160
(163)
25
41
3,749
6,633
(6,561)
202
4,023
2,567
4,966
(4,907)
1,123
3,749
Direct
Ceded
net
4,301
594
4,895
649
2,112
2,761
7,656
3,546
761
4,307
543
2,036
2,579
6,886
44
42
86
18
193
211
297
24
154
178
6
184
190
368
4,257
552
4,809
631
1,919
2,550
7,359
3,522
607
4,129
537
1,852
2,389
6,518
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
119
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Table 11.4 – UneaRneD PReMIUMs
as at December 31, 2012
Personal lines
Automobile
Property
Total personal lines
Commercial lines
Automobile
P&C
Total commercial lines
Total
As at December 31, 2011
Personal lines
Automobile
Property
Total personal lines
Commercial lines
Automobile
P&C
Total commercial lines
Total
Direct
Ceded
net
1,928
961
2,889
294
863
1,157
4,046
1,782
935
2,717
259
814
1,073
3,790
1
–
1
1
21
22
23
1
1
2
2
37
39
41
1,927
961
2,888
293
842
1,135
4,023
1,781
934
2,715
257
777
1,034
3,749
11.2 fair value of claims liabilities
The Company estimates that the fair value of net claims liabilities approximates their carrying values. There was no premium
deficiency at the audited Consolidated balance sheet dates.
Table 11.5 – CaRRYInG ValUe of ClaIMs lIabIlITIes
as at December 31, 2012
Undiscounted value
Effect of time value of money using a discount rate of 2.10%
Provision for adverse deviation
Carrying value
As at December 31, 2011
Undiscounted value
Effect of time value of money using a discount rate of 2.30%
Provision for adverse deviation
Carrying value
Direct
Ceded
net
7,308
(373)
721
7,656
6,587
(370)
669
6,886
284
(18)
31
297
356
(17)
29
368
7,024
(355)
690
7,359
6,231
(353)
640
6,518
120
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
11.3 net loss from reinsurance
The net loss arising from reinsurance ceded included in Underwriting income on the audited Consolidated statements of
comprehensive income is detailed as follows:
Table 11.6 – neT loss fRoM ReInsURanCe
For the years ended December 31,
Reduction in:
Net premiums earned
Net claims incurred
Underwriting expenses
net loss from reinsurance
2012
2011
(241)
(13)
27
(227)
(163)
122
21
(20)
11.4 Prior year claims development
The following tables show the estimates of cumulative incurred claims, including IBNR, for the six most recent accident years, with
subsequent developments during the periods and together with cumulative payments to date. The original reserve estimates are
evaluated quarterly for redundancy or deficiency. The evaluation is based on actual payments in full or partial settlement of claims
and current estimates of claims liabilities for claims still open or claims still unreported.
The Company applied the transitional rules of IFRS 4 that permit only five years of information to be disclosed upon adoption of
IFRS. The claims development information disclosed is being increased from five years to ten years over the period 2012 to 2016.
Table 11.7 – PRIoR YeaR ClaIMs DeVeloPMenT – DIReCT
accident year
Total
2012
2011
2010
2009
2008
2,419
2,399
2,067
1,864
1,639
Undiscounted claims
liabilities outstanding
at end of accident year
Revised estimates
One year later
Two years later
Three years later
Four years later
Five years later
Current estimate
Paid claims in
subsequent periods
One year later
Two years later
Three years later
Four years later
Five years later
Cumulative payment
to date
Direct undiscounted
claims liabilities
Discounting and
provision for adverse
deviation
Direct claims liabilities
2007 &
earlier
4,619
4,443
4,370
4,291
4,214
4,044
4,044
(1,175)
(570)
(481)
(343)
(328)
–
–
–
–
–
2,419
–
–
–
–
–
–
2,290
–
–
–
–
2,290
(876)
–
–
–
–
(876)
1,961
1,939
–
–
–
1,939
(584)
(297)
–
–
–
(881)
1,800
1,801
1,774
–
–
1,774
(599)
(184)
(214)
–
–
1,643
1,614
1,604
1,584
–
1,584
(619)
(157)
(145)
(170)
–
(997)
(1,091)
(2,897)
7,308
2,419
1,414
1,058
777
493
1,147
348
7,656
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
121
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Table 11.8 – PRIoR YeaR ClaIMs DeVeloPMenT – neT
accident year
Undiscounted claims
liabilities outstanding
at end of accident year
Revised estimates
One year later
Two years later
Three years later
Four years later
Five years later
Current estimate
Paid claims in
subsequent periods
One year later
Two years later
Three years later
Four years later
Five years later
Cumulative payment
to date
net undiscounted
claims liabilities
Discounting and
provision for adverse
deviation
net claims liabilities
Total
2012
2011
2010
2009
2008
2,357
2,299
2,031
1,796
1,624
–
–
–
–
–
2,357
–
–
–
–
–
–
2,201
–
–
–
–
2,201
(827)
–
–
–
–
(827)
1,916
1,888
–
–
–
1,888
(554)
(292)
–
–
–
(846)
1,737
1,736
1,712
–
–
1,712
(568)
(177)
(211)
–
–
1,623
1,594
1,584
1,560
–
1,560
(607)
(155)
(144)
(169)
–
2007 &
earlier
4,291
4,134
4,066
3,983
3,908
3,819
3,819
(1,137)
(559)
(462)
(334)
(317)
(956)
(1,075)
(2,809)
7,024
2,357
1,374
1,042
756
485
1,010
335
7,359
noTe 12 – Revenue
Table 12.1 – ToTal ReVenUe
For the years ended December 31,
Net premiums earned
Interest income (table 6.6)
Dividend income (table 6.6)
Net investment gains (table 6.6)
Share of profit from investments in associates and joint ventures (table 15.2)
Other revenues
Total revenue
Table 12.2 – PReMIUMs WRITTen anD eaRneD
For the years ended December 31,
Premiums written
Direct
Ceded
Net
Changes in unearned premiums
net premiums earned
122
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
2012
6,561
275
144
37
22
88
7,127
2011
4,907
221
131
204
16
50
5,529
2012
2011
6,854
(221)
6,633
(72)
6,561
5,126
(160)
4,966
(59)
4,907
noTe 13 – Integration and restructuring costs
Following the announcements of the acquisitions of Jevco and AXA Canada, the Company established integration plans directed at
integrating the acquired business with its own business and capturing cost synergies across the combined entities, including shared
services and corporate functions. Integration and restructuring costs primarily include technology-related expenses, occupancy,
employee-related costs, branding and consulting expenses. These costs are included in Integration and restructuring costs on the
audited Consolidated statements of comprehensive income.
Table 13.1 – InTeGRaTIon anD ResTRUCTURInG CosTs
For the years ended December 31,
AXA Canada
Jevco
Total integration and restructuring costs
2012
79
29
108
2011
71
–
71
The restructuring provision has been established in relation to the acquisitions of Jevco and AXA Canada, based on the decisions
communicated as at December 31, 2012 and 2011. The restructuring provision is recorded in Other liabilities on the audited
Consolidated balance sheets.
Table 13.2 – MoVeMenT of The ResTRUCTURInG PRoVIsIon
As at
Balance, beginning of the year
Additional provision
Payments
Reversals for unused amounts
balance, end of year
noTe 14 – Income taxes
December 31,
2012
December 31,
2011
27
26
(19)
(4)
30
–
29
(2)
–
27
14.1 Income tax expense (benefit)
The following table shows the major components of income tax expense (benefit) on the audited Consolidated statements of
comprehensive income for the years ended December 31, 2012 and 2011.
Table 14.1 – CoMPosITIon of InCoMe Tax exPense (benefIT )
For the years ended December 31,
Current tax expense (recovery)
Current year
Prior year adjustment
Benefit arising from a previously unrecognized tax loss or temporary difference
Deferred tax expense
Origination and reversal of temporary differences
Income tax expense recorded in net income from continuing operations
Income tax recorded in oCI
Net actuarial losses on employee future benefits
Net changes in unrealized losses on derivatives designated as cash flow hedges
Net changes in unrealized gains on AFS instruments
Reclassification to income of net gains on AFS instruments
Total income tax benefit recorded in oCI
2012
2011
118
(5)
(5)
108
39
39
147
(2)
–
13
(24)
(13)
129
(5)
(4)
120
17
17
137
(34)
(2)
15
(49)
(70)
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
123
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
14.2 effective income tax rate
The effective income tax rates are different from the combined Canadian federal and provincial income tax rates. The audited
Consolidated statements of comprehensive income contain items that are non-taxable or non-deductible for income tax purposes,
which cause the income tax expense to differ from what it would have been if based on statutory tax rates. The difference is broken
down as follows:
Table 14.2 – effeCTIVe Tax RaTe ReConCIlIaTIon
For the years ended December 31,
Income tax expense calculated at statutory tax rates
Increase (decrease) in income tax rates resulting from:
Non-taxable dividend income
Non-deductible expenses
Non-taxable income
Recovery of tax asset not previously recognized
Non-taxable portion of capital gains
Other
effective income tax rate
14.3 Components of deferred tax assets and liabilities
Table 14.3 – CoMPonenTs of DefeRReD InCoMe Tax asseTs anD lIabIlITIes
Deferred tax assets
Net claims liabilities
Deferred expenses for tax purposes
Losses available for carry forward
Post-employment benefit plans
Other
Total deferred tax assets
Deferred tax liabilities
Deferred income for tax purposes
Deferred gains and losses on specified debt obligations
Investments
Property and equipment
Intangible assets
Total deferred tax liabilities
Reported in:
Deferred tax assets
Deferred tax liabilities
Income tax expense reported in Net income attributable to shareholders
Income tax expense (benefit) reported in OCI
Income tax benefit reported in equity
Increase in deferred tax assets (net) resulting from
business combinations (note 4)
2012
26.4%
(5.5)%
1.6%
(1.5)%
(0.5)%
(0.1)%
(0.4)%
20.0%
2011
28.0%
(6.7)%
3.9%
(0.7)%
(2.0)%
(0.4)%
1.0%
23.1%
audited Consolidated
balance sheets
audited Consolidated
statements of
comprehensive income
December 31,
2012
December 31,
2011
December 31,
2012
December 31,
2011
91
74
29
40
3
237
59
20
–
15
154
248
129
140
(7)
3
80
79
15
79
3
256
55
22
–
9
135
221
158
123
(11)
39
11
(12)
14
(39)
–
(26)
4
(2)
–
6
16
24
39
11
(1)
15
–
37
1
52
(21)
(3)
6
6
2
(10)
17
(79)
As at December 31, 2012, the Company had allowable capital losses of $37 million (December 31, 2011 – $38 million), which had
not been recognized when computing the deferred tax asset. These losses, which have no expiry date, can be used to reduce future
taxable capital gains.
As at December 31, 2012, the Company had not recognized a deferred tax asset of $1 million (December 31, 2011 – $4 million)
of unused non-capital losses. The Company has recognized a deferred tax asset for all other unused non-capital losses as at
December 31, 2012 and 2011.
124
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
noTe 15 – Investments in associates and joint ventures
The investments in associates and joint ventures are investments in private entities. They are initially recorded at the amount of
consideration paid, which includes the fair value of tangible assets, intangible assets and goodwill identified on acquisition.
Table 15.1 – sUMMaRIzeD aGGReGaTe balanCe sheeT fInanCIal InfoRMaTIon of assoCIaTes anD JoInT VenTURes
As at
assets
Current
Non-current
Total assets
liabilities
Current
Non-current
Total liabilities
net assets
Investments in associates and joint ventures
Table 15.2 – shaRe of PRofIT fRoM InVesTMenTs In assoCIaTes anD JoInT VenTURes
For the years ended December 31,
Revenue
Net income
Share profit from investments in associates and joint ventures
December 31,
2012
December 31,
2011
328
468
796
219
316
535
261
266
2012
385
46
22
309
428
737
211
290
501
236
241
2011
259
37
16
During the reporting period, there were no events or changes in circumstances that indicated that the carrying values of these
investments may not be recoverable.
noTe 16 – Property and equipment
Table 16.1 – ReConCIlIaTIon of CaRRYInG ValUe of PRoPeRTY anD eQUIPMenT
as at December 31, 2012
Land and buildings
Computer equipment
Furniture and equipment
Leasehold improvements
Total property and equipment
As at December 31, 2011
Computer equipment
Furniture and equipment
Leasehold improvements
Total property and equipment
accumulated
depreciation
Cost
Carrying
value
20
53
106
57
236
41
76
42
159
2
37
67
25
131
26
49
17
92
18
16
39
32
105
15
27
25
67
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
125
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Table 16.2 – ReConCIlIaTIon of MoVeMenT In PRoPeRTY anD eQUIPMenT
as at December 31, 2012
Carrying value, beginning of year
Acquisitions
Disposals
Depreciation expense
Business combinations (note 4)
Carrying value, end of year
As at December 31, 2011
Carrying value, beginning of year
Acquisitions
Disposals
Depreciation expense
Business combinations (note 4)
Carrying value, end of year
noTe 17 – other assets and other liabilities
17.1 Components of other assets
Table 17.1 – CoMPonenTs of oTheR asseTs
As at
Other receivables and recoverables
Prepaids
Long-term investments, at cost
Employee future benefit assets (note 19)
Financial assets related to investments
Other
Total other assets
land and
buildings
Computer
equipment
furniture and
equipment
leasehold
improvements
–
–
–
–
18
18
–
–
–
–
–
–
15
9
–
(9)
1
16
7
12
–
(5)
1
15
27
18
–
(8)
2
39
20
8
(1)
(5)
5
27
25
15
(3)
(8)
3
32
19
2
–
(4)
8
25
Total
67
42
(3)
(25)
24
105
46
22
(1)
(14)
14
67
December 31,
2012
December 31,
2011
340
21
19
11
3
18
412
216
14
16
21
15
12
294
During the reporting period, there were no events or changes in circumstances that indicated that the carrying values of the
long-term investments may not be recoverable.
17.2 Components of other liabilities
Table 17.2 – CoMPonenTs of oTheR lIabIlITIes
As at
Commissions payable
Industry pools payable
Premium and sale taxes payable
Employee future benefit liabilities (note 19)
Restructuring provision (note 13)
Contingent consideration (note 4)
Other payables
Total other liabilities
December 31,
2012
December 31,
2011
307
222
190
160
30
11
494
277
202
132
320
27
90
393
1,414
1,441
As at December 31, 2012, the fair value of the contingent consideration on the purchase of AXA Canada was reassessed from
$89 million to $100 million. The $11 million increase in value is recorded in Change in fair value of contingent consideration
on the audited Consolidated statements of comprehensive income. The contingent consideration liability will be paid in the first
quarter of 2013.
126
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
noTe 18 – Goodwill and intangible assets
18.1 summary of goodwill and intangible assets
Table 18.1 – ReConCIlIaTIon of CaRRYInG ValUe of GooDWIll anD InTanGIble asseTs
as at December 31, 2012
Goodwill
Intangible assets
Distribution network – indefinite useful life
Distribution network – finite useful life
Total distribution network
Internally developed software
Customer relationships
Total intangible assets
As at December 31, 2011
Goodwill
Intangible assets
Distribution network – indefinite useful life
Internally developed software
Customer relationships
Total intangible assets
Cost
accumulated
amortization
Carrying
value
923
820
85
905
270
209
1,384
794
820
206
192
–
–
1
1
152
78
231
–
–
92
58
923
820
84
904
118
131
1,153
794
820
114
134
1,218
150
1,068
Table 18.2 – ReConCIlIaTIon of MoVeMenTs of GooDWIll anD
InTanGIble asseTs
as at December 31, 2012
Carrying value, beginning of year
Acquisitions and costs capitalized
Dispositions
Business combinations (note 4)
Amortization expense
Carrying value, end of year
As at December 31, 2011
Carrying value, beginning of year
Acquisitions and costs capitalized
Dispositions
Business combinations (note 4)
Amortization expense
Carrying value, end of year
Intangible assets
Total
distribution
network
Customer
relationships
Internally
developed
software
Total
intangible
assets
Goodwill
820
–
–
85
(1)
904
–
–
–
820
–
820
134
20
(3)
–
(20)
131
65
5
–
77
(13)
134
114
34
–
–
(30)
118
105
35
–
–
(26)
114
1,068
54
(3)
85
(51)
1,153
170
40
–
897
(39)
1,068
794
26
(2)
105
–
923
211
10
–
573
–
794
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
127
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
a) Goodwill
The carrying value of goodwill is allocated to a single CGU, which is the Company’s sole operating segment, P&C insurance
operations. It is the lowest level at which there are separately identifiable cash flows.
b) Intangible assets
Management has determined that intangible assets with finite useful lives are not impaired. Intangible assets with indefinite useful
lives and intangible assets which are under development are subject to annual impairment testing. The carrying values of these
intangible assets have been allocated to the P&C insurance operations CGU, being the lowest level at which there are separately
identifiable cash flows.
18.2 Impairment test and assumptions
The Company performs an annual goodwill impairment test, as well as an impairment test for intangible assets with indefinite
useful lives and for intangible assets under development. The most recent test was performed as at June 30, 2012. As at this date,
the P&C insurance operations CGU was tested for impairment, calculating both the fair value less costs to sell and the value in use.
The value-in-use calculation was based on the following key estimates and assumptions:
− Cash flow projections for the next three years are based on financial budgets approved by management and are determined by
budgeted margins based on past performance and management expectations for the Company and the industry;
− Cash flows beyond the three-year period were extrapolated using estimated growth rates of 3.2% (June 30, 2011 – 3.0%), which
do not exceed the long-term average past growth rate for the insurance business in which the Company operates; and
− A company-specific risk-adjusted discount rate of 13.4% was used (June 30, 2011 – 11.5%).
The test results indicate that the recoverable amount of the P&C insurance operations CGU exceeds its carrying value and no
impairment loss for goodwill or intangible assets has been recognized for the year ended December 31, 2012 or in prior periods.
The Company is not aware of any reasonably possible change in any of the above key assumptions that would cause the carrying
value of the CGU to exceed its recoverable amount.
noTe 19 – employee future benefits
The Company has a number of defined benefit pension plans. The Company also offers employer-paid post-retirement benefit
plans, providing life insurance and health and dental benefits to certain active employees and retirees that are now closed to new
entrants, as well as post-employment benefit plans that provide health and dental coverage. The post-retirement and post-
employment benefit plans are unfunded.
The measurement date for the defined benefit pension plans, as well as for the post-retirement and post-employment benefit plans,
is December 31. The latest actuarial valuations for defined benefit pension plans were performed as at December 31, 2011 or 2010
depending on the plan.
19.1 funded status
The following table shows the aggregate funded status of the Company’s defined benefit pension, post-retirement and post-
employment benefit plans as well as the net deficit amounts reported in Other assets and Other liabilities.
Table 19.1 – fUnDeD sTaTUs
As at
Present value of defined benefit obligation
Fair value of plan assets
Deficit
Unamortized past service costs
net benefit liability
Reported on the audited Consolidated balance sheets in:
Other assets
Other liabilities1
employee future benefits
December 31,
2012
December 31,
2011
(1,506)
1,357
(149)
–
(149)
(1,406)
1,093
(313)
14
(299)
11
(160)
21
(320)
1 the amount reported in other liabilities is composed of $126 million relating to pension plans (December 31, 2011 – $285 million) and $34 million relating to post-retirement and post-
employment benefit plans (December 31, 2011 – $35 million).
128
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 19.2 – eMPloYee fUTURe benefITs sTaTUs anD exPeRIenCe aDJUsTMenTs on Plan lIabIlITIes
anD Plan asseTs foR The CURRenT anD PReVIoUs foUR PeRIoDs
As at December 31,
Present value of defined benefit obligation
Fair value of plan assets
Deficit
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2012
(1,506)
1,357
(149)
3
23
2011
(1,406)
1,093
(313)
(15)
30
2010
(722)
682
(40)
(7)
52
2009
(581)
570
(11)
(27)
67
2008
(464)
460
(4)
–
(154)
19.2 Present value of defined benefit obligation
The movement of the present value of the defined benefit obligation for the years ended December 31, 2012 and 2011 is as follows:
Table 19.3 – MoVeMenT of The PResenT ValUe of DefIneD benefIT oblIGaTIon
As at
Balance, beginning of year
Current service cost
Interest costs on defined benefit obligation
Past service cost
Settlement/curtailment/termination benefits
Net actuarial losses recognized in OCI
Employee contributions
Benefit payments
Business combinations (note 4)
balance, end of year
Of which:
Obligations of funded plans
Plans partially funded
Plans fully funded
Obligations of unfunded plans
employee future benefits
December 31,
2012
December 31,
2011
1,406
60
64
(14)
–
27
12
(49)
–
1,506
1,002
409
95
1,506
722
38
45
21
(12)
169
8
(43)
458
1,406
1,068
245
93
1,406
19.3 fair value of plan assets
The movement of the fair value of plan assets for the years ended December 31, 2012 and 2011 is as follows:
Table 19.4 – MoVeMenT of The faIR ValUe of Plan asseTs
As at
Balance, beginning of year
Expected return on assets
Net actuarial gains recognized in OCI
Employee contributions
Employer contributions
Benefit payments
Business combinations (note 4)
balance, end of year
employee future benefits
December 31,
2012
December 31,
2011
1,093
68
23
12
210
(49)
–
1,357
682
48
30
8
64
(43)
304
1,093
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
129
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
Actuarial gains and losses on fair value of plan assets represent the difference between the actual return and the expected return on
plan assets. The actual return on pension plan assets for the year ended December 31, 2012 was $91 million (December 31, 2011 –
$78 million).
Employer contributions for the year ended December 31, 2012 include discretionary pension contributions of $114 million.
Based on the latest projections of all its plans, total cash contributions by the Company are expected to be within $60 million
to $105 million in 2013. The contributions will vary depending on funding relief measures, if any, and decisions taken by the
Company to use or not letters of credit as permitted by legislation.
The following table shows the composition of the Company’s pension plan assets, at fair value.
Table 19.5 – CoMPosITIon of PensIon Plan asseTs
As at
Equity securities
Debt securities
Cash and cash equivalents
December 31,
2012
December 31,
2011
39.9%
58.5%
1.6%
44.3%
55.4%
0.3%
19.4 employee future benefit expense and oCI
The following table details the components of the employee benefits expense for defined benefit plans, recognized on the audited
Consolidated statements of comprehensive income.
Table 19.6 – eMPloYee fUTURe benefITs exPense
For the years ended December 31,
Current service cost – defined benefit plans
Interest costs on defined benefit obligation
Expected return on assets
Amortization of past service cost
Settlement/curtailment/termination benefits
Net actuarial losses recognized in OCI
Total employee benefits expense
Table 19.7 – aCTUaRIal GaIns anD losses In oCI
For the years ended December 31,
Balance, beginning of year
Gains (losses) in OCI related to:
Changes in assumptions on present value of defined benefit obligation and experience
Difference between actual return and expected return on plan assets
Total losses recognized in OCI
balance, end of year
employee future benefits
2012
2011
60
64
(68)
–
–
4
60
38
45
(48)
7
(12)
139
169
employee future benefits
2012
(180)
(27)
23
(4)1
(184)
2011
(41)
(169)
30
(139)
(180)
1 net actuarial losses on employee future benefits in the audited consolidated statements of comprehensive income also include $1 million from the share of associates and joint ventures.
130
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
19.5 assumptions used
The following table summarizes the key weighted-average assumptions used in measuring the Company’s pension and post-
retirement and post-employment benefit plans.
Table 19.8 – assUMPTIons
To determine benefit obligation at end of period
Discount rate
Rate of increase in future compensation
Health care cost trend rate
Dental care cost trend rate
To determine benefit expense for the period
Discount rate
Rate of increase in future compensation
Expected long-term rate of return on plan assets
Health care cost trend rate
Dental care cost trend rate
Pension plans
Post-retirement
and post-employment
benefit plans
December 31,
2012
December 31,
2011
December 31,
2012
December 31,
2011
4.0%
3.0%
n/a
n/a
4.4%
3.5%
6.0%
n/a
n/a
4.4%
3.5%
n/a
n/a
5.3%
3.5%
6.3%
n/a
n/a
3.7%
3.0%
8.0%
4.5%
4.2%
3.5%
n/a
8.5%
4.5%
4.2%
3.5%
8.5%
4.5%
4.9%
3.5%
n/a
9.0%
4.5%
The overall expected rate of return on assets is determined based on market expectations prevailing on that date, applicable to the
period over which the obligation is to be settled. The expected long-term rate of return is determined based on the expected future
performance for each asset class and is weighted based on the current and expected asset portfolio mix. Consideration is given to
historical performance, the premium return generated from an actively managed portfolio, economic developments, inflation rates
and administrative expenses.
The following table presents the sensitivity of the net employee benefits liability to key assumptions:
Table 19.9 – IMPaCT of ChanGes In KeY assUMPTIons
As at
Discount rate:
1% increase
1% decrease
Rate of compensation increase:
1% increase
1% decrease
December 31,
2012
December 31,
2011
(256)
312
74
(70)
(216)
268
65
(60)
A 1% increase or decrease in the health care and dental care cost trend rate would not significantly affect the Company’s results or
financial position as at the balance sheet date.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
131
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 20 – Debt outstanding
20.1 summary of debt outstanding
The following table presents the summary of debt outstanding:
Table 20.1 – faIR ValUe anD CaRRYInG ValUe of DebT oUTsTanDInG
As at
Term notes, series 1
Term notes, series 2
Term notes, series 3
Term notes, series 4
Term notes, series 5
Tranche A Facility
Tranche B Facility
Total debt outstanding
December 31, 2012
December 31, 2011
Carrying value
fair value
Carrying value
Fair value
249
248
99
298
249
–
–
289
310
125
335
265
–
–
249
247
99
298
–
100
300
275
282
110
307
–
100
300
1,143
1,324
1,293
1,374
The term notes and loans under the credit facilities are accounted for at amortized cost which equals their carrying value. The term
notes may be redeemed at the option of the issuer, in whole or in part at any time, at a redemption price equal to the greater of
Government of Canada Yield at the date of redemption plus a margin or their par value. The loans under the credit facilities may be
repaid and cancelled by the Company at any time.
Interest expenses on term notes and credit facilities are presented as Finance costs on the audited Consolidated statements of
comprehensive income.
20.2 Term notes
On June 15, 2012, to reduce term-loan indebtedness and to fund a portion of the Jevco acquisition, the Company completed an
offering of $200 million principal amount of Series 5 unsecured medium-term notes. On September 10, 2012, the Company issued
an additional $50 million principal amount, bringing the total offering to $250 million.
Table 20.2 – TeRM noTes oUTsTanDInG TeRMs
series 1
series 2
series 3
series 4
series 5
Date issued
Date of supplemental issue
Maturity date
Principal amount outstanding
(in millions of dollars)
Fixed annual rate
Semi-annual coupon payment
due each year on:
august 31, 2009 november 23, 2009
March 23, 2010
september 3, 2019 november 23, 2039
July 8, 2011
July 8, 2061
august 18, 2011
august 18, 2021
June 15, 2012
september 10, 2012
June 16, 2042
250
5.41%
250
6.40%
100
6.20%
300
4.70%
250
5.16%
March 3
september 3
May 23
november 23
January 8
July 8
february 18
august 18
June 16
December 16
20.3 Credit facilities
On September 23, 2011, to fund a portion of the purchase price for the acquisition of AXA Canada, the Company obtained a loan
of $100 million from a two-year term-loan facility (the “Tranche A Facility”) and obtained a loan of $300 million from a three-year
term-loan facility (the “Tranche B Facility”). Both loans bear interest at the prime rate plus a margin or at the bankers’ acceptance
rate plus a margin. In 2012, the Company repaid in full the $400 million loan.
132
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Effective September 23, 2011, the Company obtained a four-year unsecured revolving term credit facility of $250 million, which
was to mature on September 23, 2015 in replacement of a previous revolving term credit facility. On October 26, 2012, the
committed amount was increased by $50 million to $300 million and the term was extended to October 26, 2016. This credit facility
may be drawn as a prime loan at the prime rate plus a margin or as bankers’ acceptance at the bankers’ acceptance rate plus a
margin. As at December 31, 2012, this facility was undrawn.
As part of the covenants of the loans under the credit facilities, the Company is required to maintain certain financial ratios which
were fully met as at December 31, 2012 and 2011.
noTe 21 – Common shares and preferred shares
21.1 authorized
Authorized share capital consists of an unlimited number of common shares and Class A shares.
21.2 Issued and outstanding
Table 21.1 – IssUeD anD oUTsTanDInG shaRes
Classes of shares
as at December 31, 2012
Common
Class A
Series 1 Preferred
Series 3 Preferred
Total Class A
As at December 31, 2011
Common
Class A
Series 1 Preferred
Series 3 Preferred
Total Class A
Common
Table 21.2 – ReConCIlIaTIon of nUMbeR of CoMMon shaRes oUTsTanDInG
As at
Balance, beginning of the year
Common shares issued
Common shares repurchased for cancellation
balance, end of the year
number of
shares
amount
(in millions of $)
Dividends
declared per
share
(amount in $)
133,333,665
2,118
10,000,000
10,000,000
20,000,000
244
245
489
129,553,665
1,889
10,000,000
10,000,000
20,000,000
244
245
489
1.60
1.05
1.05
1.48
0.49
0.39
December 31,
2012
(in shares)
December 31,
2011
(in shares)
129,553,665
3,780,000
–
112,179,565
20,125,000
(2,750,900)
133,333,665
129,553,665
On September 4, 2012, on the date of the closing of the acquisition of Jevco, 3,780,000 subscription receipts (“receipts”) were
converted into 3,780,000 common shares. The Company had completed its offering of the 3,780,000 subscription receipts on
May 11, 2012 at $62.75 per receipt for gross proceeds of $237 million. Shares issuance costs of $8 million, net of $2 million of
taxes, were accounted for as a reduction in Common shares on the audited Consolidated balance sheets.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
133
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
On September 23, 2011, subsequent to the acquisition of AXA Canada, the Company converted its 20,125,000 subscription receipts
into 20,125,000 common shares. The Company had completed its offering of the 20,125,000 receipts on June 9, 2011 at $47.80
per receipt for gross proceeds of $962 million. For this offering, the Company incurred $41 million in share issuance costs, net of
$10 million of taxes, which were accounted for as a reduction in Common shares on the audited Consolidated balance sheets.
Class a
Issued and outstanding Class A shares would rank, both with regards to dividends and return of capital, in priority to the common
shares.
Table 21.3 – ReConCIlIaTIon of nUMbeR of Class a shaRes oUTsTanDInG
As at
Balance, beginning of the year
Series 1 Preferred Shares issued
Series 3 Preferred Shares issued
balance, end of the year
Series 1 Preferred
December 31,
2012
(in shares)
December 31,
2011
(in shares)
20,000,000
–
–
–
10,000,000
10,000,000
20,000,000
20,000,000
On July 12, 2011, the Company issued and sold 10,000,000 non-cumulative rate reset Class A shares Series 1 (the “Series 1
Preferred Shares”), at a price of $25.00 per share, for aggregate gross proceeds of $250 million. For this offering, the Company
incurred $6 million in share issuance costs, net of $2 million in taxes, which were accounted for as a reduction in preferred shares
on the audited Consolidated balance sheets.
The holders of these shares are entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the
Board of Directors of the Company, on a quarterly basis for the initial fixed-rate period ending on December 31, 2017, based on an
annual rate of 4.20%. The dividend rate will be reset on December 31, 2017 and every five years thereafter at a rate equal to the
five-year Government of Canada bond yield plus 1.72%. Subject to certain conditions, on December 31, 2017 and on December 31
every five years thereafter, the holders of Series 1 Preferred Shares will have the right to convert their shares into Non-cumulative
Floating Rate Class A Shares Series 2 (the “Series 2 Preferred Shares”). In addition, the Company has the option to redeem the
Series 1 and Series 2 Preferred Shares on the same dates.
Series 3 Preferred
On August 18, 2011, the Company completed a Series 3 offering of preferred shares by issuing and selling 10,000,000 non-
cumulative rate reset Class A shares Series 3 (the “Series 3 Preferred Shares”), at a price of $25.00 per share, for aggregate gross
proceeds of $250 million. For this offering, the Company incurred $5 million in share issuance costs, net of $2 million of taxes,
which were accounted for as a reduction in preferred shares on the audited Consolidated balance sheets.
The holders of these shares are entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the
Board of Directors of the Company, on a quarterly basis, for the initial fixed-rate period ending on September 30, 2016, based on
an annual rate of 4.20%. The dividend rate will be reset on September 30, 2016 and every five years thereafter at a rate equal to the
five-year Government of Canada bond yield plus 2.66%. Subject to certain conditions, on September 30, 2016 and on September
30 every five years thereafter, holders of Series 3 Preferred Shares will have the right to convert their shares into Non-cumulative
Floating Rate Class A Shares Series 4 (the “Series 4 Preferred Shares”). In addition, the Company has the option to redeem the
Series 3 Preferred Shares and Series 4 Preferred Shares on the same dates.
21.3 normal course issuer bid
The NCIB program expired on February 22, 2012 and was not renewed. No common shares were repurchased for cancellation
under the NCIB program in 2012. As at December 31, 2011, 2,750,900 common shares at an average price of $47.03 were
repurchased for cancellation for a total consideration of $129 million. Total cost paid, including fees, was first charged to share
capital to the extent of the average carrying value of the common shares purchased for cancellation and the excess of $105 million
was charged to retained earnings on the audited Consolidated balance sheets.
134
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
noTe 22 – earnings per share
Earnings per common share were calculated by dividing the net income attributable to the common shares of the Company by
the weighted-average number of common shares outstanding during the year. Dilution is not applicable and, therefore, diluted
earnings per common share are the same as earnings per common share. The net income attributable to the common shares and
the weighted-average number of common shares outstanding during the year are calculated as follows:
Table 22.1 – eaRnInGs PeR shaRe
For the years ended December 31,
net income attributable to common shares
Net income from continuing operations
Less: Dividends declared on preferred shares, net of tax
Adjusted net income from continuing operations attributable to common shares
Net income from discontinued operations
Total net income attributable to common shares
Weighted-average number of common shares outstanding
Number of common shares outstanding at beginning of the year
Adjustment for weighted-average common shares:
Issued at the date of acquisition of AXA Canada
Issued at the date of acquisition of Jevco
Repurchased under the NCIB program
2012
2011
587
21
566
–
566
457
8
449
8
457
129,553,665
112,179,565
–
1,218,689
–
5,513,699
–
(2,384,771)
Weighted-average number of common shares outstanding during the year
130,772,354
115,308,493
ePs – basic and diluted (in dollars)
4.33
3.96
noTe 23 – share-based payments
23.1 long-term incentive plans
The following table shows the outstanding units and fair value for each of the Company’s performance cycles.
Table 23.1 – oUTsTanDInG UnITs anD faIR ValUe bY PeRfoRManCe CYCle
as at December 31, 2012
2010–2012 performance cycle
2011–2013 performance cycle
2012 –2014 performance cycle
Total
As at December 31, 2011
2009–2011 performance cycle
2010–2012 performance cycle
2011 –2013 performance cycle
Total
Weighted-
average
grant date
fair value
(in $)
amount
(in millions
of $)
35.06
50.84
57.76
45.90
23.06
35.06
48.06
33.63
16
20
14
8
15
11
number
of units
447,829
396,820
244,124
1,088,773
368,242
419,617
227,832
1,015,691
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
135
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
The following table shows the movements in the long-term incentive plans (“LTIP”) share units during the years.
Table 23.2 – MoVeMenTs In lTIP
As at
LTIP (share equivalents)
Outstanding, beginning of year
Awarded
Net change in estimate of units outstanding
Units settled
lTIP share units outstanding, end of year
December 31,
2012
(in units)
December 31,
2011
(in units)
1,015,691
323,490
162,693
(413,101)
629,637
283,402
150,215
(47,563)
1,088,773
1,015,691
The amount charged to Underwriting expenses in the audited Consolidated statements of comprehensive income for LTIP was
$16 million for the year ended December 31, 2012 (December 31, 2011 – $19 million).
During 2012, the Company settled LTIP units granted in 2009 that vested through the plan administrator by purchasing shares in
the market and remitting them to the participants. The cumulative cost of the vested units, amounting to $10 million, was removed
from Contributed surplus. The difference between the market price of the shares and the cumulative cost for the Company of the
vested units, amounting to $13 million, net of $4 million of income taxes, was recorded in Retained earnings.
23.2 employee share purchase plan
The following table shows the movements in employee share purchase plan (“ESPP”) restricted common shares during the years.
Table 23.3 – MoVeMenTs In esPP
As at
ESPP (restricted common shares)
Outstanding, beginning of year
Awarded
Vested or forfeited
esPP units outstanding, end of year
December 31,
2012
(in units)
December 31,
2011
(in units)
120,317
126,242
(104,745)
141,814
107,562
112,250
(99,495)
120,317
The amount charged to Other expenses in the audited Consolidated statements of comprehensive income for the ESPP was
$7 million for the year ended December 31, 2012 (December 31, 2011 – $5 million).
23.3 Deferred share unit plan
The deferred share units are cash-settled awards for which the provision recorded as at December 31, 2012 is $4 million
(December 31, 2011 – $3 million). The amount charged to Other expenses on the audited Consolidated statements of comprehensive
income was $1 million for the years ended December 31, 2012 and 2011.
136
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
noTe 24 – additional information on the audited Consolidated statements of cash flows
The following table provides additional details on the items included in net cash flows provided by operating activities.
Table 24.1 – aDDITIonal InfoRMaTIon on The aUDITeD ConsolIDaTeD sTaTeMenTs of Cash floWs
For the years ended December 31,
adjustments for non-cash items
Net investment gains
Deferred income tax expense
Depreciation of property and equipment
Amortization of intangible assets
Net premiums on debt securities classified as AFS
Share-based payments
Other
Total
Changes in other operating assets and liabilities
Assets classified as held for sale
Liabilities directly associated with assets classified as held for sale
Unearned premiums, net
Deferred acquisition costs, net
Premium and other receivables
Income taxes receivable, net
Other operating assets
Other operating liabilities
Total
Composition of cash and cash equivalents
Cash
Cash equivalents
Total cash and cash equivalents, end of year
other relevant cash flow disclosures
Interest paid
Interest received
Dividends received
Income taxes paid, net
2012
(37)
39
25
51
35
16
15
144
–
–
72
(20)
(83)
(34)
(32)
(50)
(147)
161
11
172
59
277
142
117
2011
(204)
17
14
39
18
19
(12)
(109)
(172)
160
56
(21)
(29)
(84)
63
(67)
(94)
164
42
206
33
233
131
208
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
137
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 25 – Contingencies and commitments
25.1 Contingencies
In the normal course of operations, various insurance claims and legal proceedings are instituted against the Company. Legal
proceedings are often subject to numerous uncertainties and it is not possible to predict the outcome of individual cases. In
management’s opinion, the Company has made adequate provision for, or has adequate insurance to cover, all insurance claims
and legal proceedings. Consequently, any settlements reached should not have a material adverse effect on the Company’s
consolidated future operating results and financial position.
The Company provides indemnification agreements to directors and officers, to the extent permitted by law, against certain claims
made against them as a result of their services to the Company. The Company has insurance coverage for these agreements.
25.2 Commitments
The Company has entered into commercial operating leases on certain property and equipment. These leases have a life ranging
from one to fourteen years with renewal options included in the contracts. Future minimum rental payments under non-cancellable
operating leases as at the end of the reporting period are as follows:
Table 25.1 – oPeRaTInG lease CoMMITMenTs
as at
Within one year
After one year but not more than five years
More than five years
Total operating lease rental payments
noTe 26 – Related-party transactions
December 31,
2012
106
335
401
842
The Company enters into transactions with associates and joint ventures in the normal course of business, as well as key
management personnel and post-employment plans. Transactions with related parties are at normal market prices and mostly
comprise commissions for insurance policies and interest and principal payments on loans.
26.1 Transactions with associates and joint ventures
Table 26.1 – InCoMe anD exPenses WITh assoCIaTes anD JoInT VenTURes
For the years ended December 31,
Reported in:
Income
Net investment income
expenses
Underwriting expenses
2012
2011
7
159
7
131
138
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
Table 26.2 – asseTs anD lIabIlITIes aMoUnTs WITh assoCIaTes anD JoInT VenTURes
As at
Reported in:
assets
Loans
liabilities
Other liabilities
December 31,
2012
December 31,
2011
115
68
138
44
26.2 Compensation of key management personnel
Key management personnel are comprised of all members of the Board of Directors and certain members of the Executive
Committee. The summary of compensation of key management personnel is as follows:
Table 26.3 – CoMPensaTIon of KeY ManaGeMenT PeRsonnel
For the years ended December 31,
Salaries
Share-based awards
Annual incentive plans1
Pension value
Total compensation of key management personnel
2012
2011
3
3
3
1
10
2
6
3
1
12
1 annual incentive plans are based on the company’s performance versus the industry. Figures are preliminary as industry data will only be available in March 2013. the company’s
Management proxy circular will reflect the final figures.
Key management personnel can purchase insurance products offered by the Company in the normal course of business. The
terms and conditions of such transactions are essentially the same as those available to clients and employees of the Company.
26.3 Post-employment plans
The Company made contributions to post-employment plans of $210 million for the year ended December 31, 2012
(December 31, 2011 – $64 million).
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
139
Notes to the audited Consolidated financial statements
For the year ended December 31, 2012 (in millions of canadian dollars, except as otherwise noted)
noTe 27 – Capital management
The Company’s objectives when managing capital consist of balancing the need to support claims liabilities and ensure the
confidence of policyholders, support competitive pricing strategies, meet regulatory capital requirements, provide adequate returns
for its shareholders and maintain a leadership position in the Canadian P&C insurance industry.
The capital is managed on a consolidated basis, as well as individually for each regulated subsidiary. The federally chartered
P&C insurance subsidiaries of the Company are subject to regulatory capital requirements defined by OSFI and the Insurance
Companies Act (“ICA”). Québec provincially chartered subsidiaries are subject to the requirements set by the Autorité des
marchés financiers (“AMF”) and the Act respecting insurance. OSFI and AMF have established a Minimum Capital Test (“MCT”)
guideline, which sets out 100% as the minimum and 150% as the supervisory target MCT standard for Canadian P&C insurance
companies. To ensure that it attains its objectives, the Company has established a minimum internal threshold of 170%, in excess
of which, under normal circumstances, the Company will maintain its capital.
The following table presents the estimated aggregate MCT ratio for the Company’s P&C insurance subsidiaries.
Table 27.1 – aGGReGaTe MCT
As at
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%1
December 31,
2012
December 31,
2011
3,764
1,840
205%
1,924
1,004
636
3,285
1,668
197%
1,617
783
449
1 Includes Jevco excess capital over 170%. Jevco minimum internal threshold is currently under review.
Total capital available and total capital required represent amounts applicable to the Company’s P&C insurance subsidiaries and
are determined in accordance with prescribed OSFI and AMF rules. Total capital available mostly represents total shareholders’
equity less specific deductions for disallowed assets including goodwill and intangible assets. Total capital required is calculated by
classifying assets and liabilities into categories and applying prescribed risk factors to each category. As at December 31, 2012, the
Company’s P&C insurance subsidiaries remained well capitalized on an individual basis and were in compliance with regulatory
requirements, as well as above internal threshold.
Annually, the Company performs Dynamic Capital Adequacy Testing on the MCT to ensure that the Company has sufficient capital
to withstand significant adverse event scenarios. These scenarios are reviewed each year to ensure appropriate risks are included
in the testing process. The 2012 results indicated that the Company’s capital position is strong. In addition, the target, actual and
forecasted capital position of the Company is subject to ongoing monitoring by management using stress and scenario analysis to
ensure its adequacy.
140
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
noTe 28 – Disclosures on rate regulation
The Company’s insurance subsidiaries are licensed under insurance legislation in each of the provinces and territories in which they
conduct business. Automobile insurance is a compulsory product and is subject to different regulations across the provinces and
territories in Canada, including those with respect to rate setting. Rate-setting mechanisms generally fall under three categories:
Category
File and use
File and approve
Use and file
Description
Insurers file their rates with the relevant authorities and wait for a prescribed period of time and then implement the
proposed rates.
Insurers must wait for specific approval of filed rates before they may be used.
Rates are filed following use.
The following table lists the provincial authorities which regulate automobile insurance rates. Automobile direct premiums
written in these provinces totalled $3,539 million as at December 31, 2012 (December 31, 2011 – $2,707 million) and represented
approximately 97.1% as at December 31, 2012 (December 31, 2011 – 96.5%) of direct automobile premiums written.
Table 28.1 – PRoVInCIal aUThoRITIes anD RaTe fIlInGs
Province
Rate filing
Regulatory authority
Alberta
Ontario
Québec
Nova Scotia
New Brunswick
Prince Edward Island
Newfoundland and Labrador
File and approve or file and use
File and approve
Use and file
File and approve
File and approve
File and approve
File and approve
Alberta Automobile Insurance Rate Board
Financial Services Commission of Ontario
Autorité des marchés financiers
Nova Scotia Utility and Review Board
New Brunswick Insurance Board
Island Regulatory Appeals Commission
Board of Commissioners of Public Utilities
Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory
asset or liability. As at December 31, 2012 and 2011, the Company had no significant regulatory asset or liability.
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
141
Five-year financial history
(excluding MYa. In millions of canadian dollars, except as noted)
Consolidated performance
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Favourable prior year claims development
Underwriting income
Combined ratio
Net investment income
Net investment gains (losses)
Income before income taxes
Effective tax rate
Net operating income
Net income
Net operating income per share ($)
Earnings per share ($)
Average number of shares outstanding (millions)
Operating return on equity
Return on equity
Personal lines – total
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal auto
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
Personal property
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial lines – total
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
Commercial auto
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
Commercial P&C
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
financial condition
Excess capital (over 170% MCT)
Aggregate MCT
Cash provided by operating activities
Debt-to-capital ratio
Book value per share ($)
Investments
Performance
Market-based investment yield
Total investments
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash equivalents
Fixed income securities
Preferred shares
Common shares
Loans
1 excluding pools
142
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
IFRS
2011
Canadian GAAP
2010
2009
2008
2012
6,729
6,868
6,571
(372)
451
93.1%
389
37
734
20.0%
675
587
5.00
4.33
130.8
16.8%
13.8%
5,809
4,655
4,539
95.0%
226
3,584
3,093
3,077
95.7%
132
2,225
1,562
1,462
93.5%
94
920
2,213
2,032
88.9%
225
477
552
536
81.5%
99
443
1,661
1,496
91.6%
126
599
205%
723
18.9%
33.03
5,084
5,099
4,880
(223)
273
94.4%
326
204
594
23.1%
460
465
3.91
3.96
115.3
15.3%
14.3%
4,465
3,627
3,535
95.0%
179
2,723
2,419
2,406
90.9%
219
1,742
1,208
1,129
103.5%
(40)
619
1,472
1,345
93.0%
94
325
396
384
86.5%
52
294
1,076
961
95.6%
42
435
197%
532
22.9%
29.73
3.6%
12,959
4.0%
11,828
3%
74%
10%
10%
3%
4%
73%
11%
9%
3%
4,614
4,498
4,231
(193)
193
95.4%
294
182
637
22.0%
402
498
3.49
4.32
115.1
15.1%
16.9%
4,089
3,308
3,139
97.5%
76
2,475
2,236
2,157
98.1%
41
1,614
1,072
982
96.5%
35
525
1,190
1,092
89.3%
117
282
336
326
86.0%
46
243
854
766
90.7%
71
809
233%
360
14.3%
26.47
4.2%
8,653
6%
61%
16%
13%
4%
4,604
4,275
4,055
(94)
54
98.7%
293
(173)
140
9.4%
282
127
2.35
1.06
119.9
9.2%
4.5%
4,098
3,121
2,993
99.3%
21
2,455
2,127
2,067
94.9%
105
1,643
994
926
109.0%
(84)
506
1,154
1,062
96.9%
33
269
322
315
79.8%
64
237
832
747
104.1%
(31)
859
232%
538
11.8%
24.88
4.5%
8,057
3%
64%
19%
10%
4%
4,601
4,146
4,040
(114)
117
97.1%
329
(288)
124
(3.8)%
361
128
2.96
1.05
122.0
11.3%
4.4%
4,103
3,010
2,959
101.2%
(36)
2,449
2,057
2,068
95.9%
85
1,654
953
891
113.6%
(121)
498
1,136
1,081
85.9%
153
264
318
319
87.2%
41
234
818
762
85.3%
112
428
205%
620
0.0%
21.96
5.0%
6,605
12%
55%
18%
11%
4%
Two-year quarterly review
(excluding MYa. In millions of canadian dollars, except as noted)
Consolidated performance
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Favourable prior year claims development
Underwriting income
Combined ratio
Net investment income
Net investment gains (losses)
Income before income taxes
Effective tax rate
Net operating income
Net income
Net operating income per share ($)
Earnings per share ($)
Average number of shares outstanding (millions)
Operating return on equity
Return on equity
Personal lines – total
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal auto
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal property
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial lines – total
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
Commercial auto
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
Commercial P&C
Written insured risks (thousands)
Direct premiums written1
Net premiums earned
Combined ratio
Underwriting income
financial condition
Excess capital (over 170% MCT)
Aggregate MCT
Cash provided by (used by)operating activities
Debt-to-capital ratio
Book value per share ($)
Investments
Performance
Market-based investment yield
Total investments
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash equivalents
Fixed income securities
Preferred shares
Common shares
Loans
1 excluding pools
IfRs
2012
IFRS
2011
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
1,543
1,690
1,742
(85)
138
92.1%
102
6
228
20.6%
194
181
1.42
1.32
133.3
16.8%
13.8%
1,310
1,097
1,202
91.8%
99
1,794
1,798
1,640
(70)
67
95.9%
92
16
117
17.9%
122
96
0.89
0.70
130.6
16.4%
12.1%
1,573
1,277
1,132
103.0%
(34)
783
722
825
103.1%
(25)
954
843
765
94.9%
39
2,018
1,977
1,599
(83)
123
92.3%
95
3
166
19.9%
180
133
1.35
0.98
129.6
17.3%
12.9%
1,747
1,362
1,104
94.1%
66
1,102
907
744
89.0%
82
527
375
377
67.1%
124
233
593
540
92.7%
39
120
146
146
84.2%
23
113
447
394
95.9%
16
599
205%
204
18.9%
33.03
619
434
367
119.8%
(73)
645
455
360
104.5%
(16)
221
521
508
80.3%
101
114
132
133
77.0%
31
107
389
375
81.4%
70
598
201%
367
19.5%
31.81
271
615
495
88.2%
57
146
159
129
79.6%
26
125
456
366
91.3%
31
649
205%
279
19.8%
30.30
1,374
1,403
1,590
(134)
123
92.3%
100
12
223
20.5%
179
177
1.34
1.33
129.6
16.2%
13.6%
1,179
919
1,101
91.4%
95
745
621
743
95.2%
36
434
298
358
83.5%
59
195
484
489
94.4%
28
97
115
128
85.2%
19
98
369
361
97.6%
9
595
205%
(127)
19.1%
30.40
1,508
1,576
1,616
(38)
118
92.7%
103
(7)
116
34.5%
152
84
1.14
0.62
129.6
15.3%
14.3%
1,300
1,027
1,118
91.7%
93
778
664
754
93.3%
52
522
363
364
88.6%
41
208
549
498
95.0%
25
101
130
130
93.0%
10
107
419
368
95.7%
15
435
197%
94
22.9%
29.73
1,251
1,226
1,121
(31)
64
94.2%
74
78
118
14.4%
111
101
0.97
0.87
111.2
14.0%
16.8%
1,122
934
826
94.0%
49
676
622
563
86.4%
76
1,379
1,354
1,075
(72)
33
97.0%
76
71
153
19.6%
95
123
0.87
1.12
109.5
13.6%
17.3%
1,216
995
799
99.4%
5
756
674
549
85.7%
79
446
312
263
110.3%
(27)
460
321
250
129.5%
(74)
129
292
295
94.9%
15
68
83
88
82.8%
15
61
209
207
100.0%
0
534
202%
359
23.4%
28.97
163
359
276
90.0%
28
92
108
84
75.4%
21
71
251
192
96.2%
7
758
228%
95
14.4%
26.89
946
943
1,068
(82)
58
94.6%
73
62
207
24.3%
102
157
0.91
1.42
110.9
14.8%
17.8%
827
671
792
96.0%
32
513
459
540
97.7%
12
314
212
252
92.3%
20
119
272
276
90.4%
26
64
75
82
91.7%
6
55
197
194
89.9%
20
784
236%
(16)
14.4%
26.91
3.6%
12,959
3.6%
12,844
3.7%
11,668
3.7%
11,513
3.9%
11,828
3.8%
11,827
4.2%
8,625
4.0%
8,593
3%
74%
10%
10%
3%
5%
72%
10%
10%
3%
5%
72%
10%
9%
4%
3%
73%
11%
10%
3%
4%
73%
11%
9%
3%
2%
73%
12%
9%
4%
1%
66%
16%
13%
4%
4%
62%
16%
14%
4%
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
143
Glossary
actuarial gains (losses) Effect of changes in actuarial assumptions
and experience adjustments (the effects of differences between the
previous actuarial assumptions and what has actually occurred).
adjusted earnings per share (“aePs”) Net income from continuing
operations for a specific period less preferred share dividends plus
the after-tax impact of amortization of intangible assets recognized
in business combinations, integration and restructuring costs and
change in fair value of contingent consideration, divided by the
weighted-average number of common shares outstanding during the
same period.
adjusted return on equity (“aRoe”) Net income from continuing
operations for a 12-month period less preferred share dividends plus
the after-tax impact of amortization of intangible assets recognized
in business combinations, integration and restructuring costs and
change in fair value of contingent consideration, divided by the
average shareholders’ equity (excluding preferred shares) over the
same 12-month period. Net income from continuing operations and
shareholders’ equity are determined in accordance with IFRS. The
average shareholders’ equity is the mean of shareholders’ equity at
the beginning and end of the period, adjusted for significant capital
transactions, if appropriate.
asset-backed security A financial security whose value and
income payments are derived from and collateralized (or backed)
by a specified pool of underlying assets such as mortgage-backed
securities, auto loan receivables, credit card receivables and asset-
backed commercial paper.
basis risk Basic risk is the risk that offsetting investments in a
hedging strategy will not experience price changes in entirely
opposite directions from each other.
book value per share Shareholders’ equity (excluding preferred
shares) divided by the number of common shares outstanding at
the same date. Shareholders’ equity is determined in accordance
with IFRS.
Case reserves The liability established to reflect the estimated cost
of unpaid claims that have been reported and claims expenses that the
insurer will ultimately be required to pay.
Catastrophe Any one claim, or group of claims, equal to or greater
than $7.5 million ($5 million in 2011) related to a single event.
Claims expenses The direct and indirect expenses of settling claims.
Claims liabilities Technical accounting provisions comprised of
the following: (1) case reserves, (2) claims that are incurred but not
reported (“IBNR”), and (3) provision for adverse development as
required by accepted actuarial practice in Canada. Claims liabilities are
discounted to take into account the time value of money.
Claims ratio Claims incurred, net of reinsurance, during a specific
period and expressed as a percentage of net premiums earned for the
same period.
Collateral Assets pledged as security for a loan or other obligation.
Collateral can take many forms, such as cash, highly rated securities,
receivables, etc.
Combined ratio The sum of the claims ratio and the expense ratio.
A combined ratio below 100% indicates a profitable underwriting
result. A combined ratio over 100% indicates an unprofitable
underwriting result.
Corridor method Systematic method for recognizing in the
statement of income the net cumulative unrecognized actuarial
gains and losses. Under this method, the portion of actuarial gains
and losses to be recognized for a specific pension plan is the excess
of the greater of: (a) 10% of the present value of the defined benefit
obligation and (b) 10% of the fair value of the plan assets, both
established at the same date, divided by the expected average
remaining working lives of the employees participating in the plan.
Counterparty Any person or entity from which cash or other forms
of consideration are expected to extinguish a liability or obligation to
the Company.
Credit derivatives Credit derivatives, such as credit default swaps,
are over-the-counter contracts that transfer credit risk related to
144
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
an underlying financial instrument (referenced asset) from one
counterparty to another.
Credit risk Possibility that counterparties may not be able to meet
payment obligations when they become due.
Currency forwards and futures contracts Contractual obligations
to exchange one currency for another at a specified price for
settlement at a predetermined future date.
Currency risk Risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates.
Debt-to-capital ratio Total debt outstanding divided by the sum
of total shareholders’ equity and total debt outstanding, at the
same date.
Derivative A contract between two parties that requires little or
no initial investment and where payments between the parties are
dependent upon the movements in price of an underlying instrument,
index or financial rate. The notional amount of the derivative is the
contract amount used as a reference point to calculate the payments
to be exchanged between the two parties, and the notional amount
itself is generally not exchanged by the parties.
Derivative-related credit risk Credit risk from derivative transactions
reflects the potential for the counterparty to default on its contractual
obligations when one or more transactions have a positive market value
to the company. Therefore, derivative-related credit risk is represented
by the positive fair value of the instrument and is normally a small
fraction of the contract’s notional amount.
Direct premiums written (“DPW”) The total amount of premiums
for new and renewal policies billed (written) during a specific
reporting period from the primary insured.
earnings per share to common shareholders (“ePs”), basic
Calculated as net income attributable to common shareholders divided
by the weighted-average number of common shares outstanding
during the period.
earnings per share to common shareholders (“ePs”), diluted
Calculated as net income attributable to common shareholders
divided by the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of stock
options and other convertible securities.
equities sold short A transaction in which the seller sells equities
and then borrows the equities in order to deliver them to the
purchaser upon settlement. At a later date, the seller buys identical
equities in the market to replace the borrowed securities.
equity price risk Equity price risk is the risk of losses arising from
movements in equity market prices.
excess capital Excess capital in the P&C insurance subsidiaries at
170% minimum capital test (“MCT”) plus net liquid assets of the non-
regulated entities.
expense ratio Underwriting expenses including commissions,
premium taxes and general expenses incurred in connection with
underwriting activities during a specific period and expressed as a
percentage of net premiums earned for the same period.
facility association The Facility Association is an entity established
by the automobile insurance industry to ensure that automobile
insurance is available to all owners and licensed drivers of motor
vehicles where such owners or drivers are unable to obtain automobile
insurance through the private insurance market. The Facility
Association serves the following provinces and territories: Alberta,
New Brunswick, Newfoundland and Labrador, Northwest Territories,
Nova Scotia, Nunavut, Ontario, Prince Edward Island and Yukon.
fair value The amount of consideration that would be agreed upon
in an arm’s length transaction between knowledgeable, willing parties
who are under no compulsion to act.
forwards Forward contracts are effectively tailor-made agreements
that are transacted between counterparties in the over-the-counter
market.
frequency (of claims) Total number of claims reported in a specific
period.
futures Standardized contracts with respect to amounts and
settlement dates, and traded on regular future exchanges.
hedge A risk management technique used to insulate financial
results from market, interest rate or foreign currency exchange risk
(exposure) arising from normal investing operations. The elimination
or reduction of such exposure is accomplished by establishing
offsetting or “hedging” positions.
Incurred but not reported (“IbnR”) claims reserve Reserves
(accounting provisions) for estimated claims that have been incurred
but not yet reported by policyholders including a reserve for future
developments on claims which have been reported.
Industry pools Industry pools consist of the “residual market” as
well as risk-sharing pools (“RSP”) in Alberta, Ontario, Quebec, New
Brunswick and Nova Scotia. These pools are managed by the Facility
Association, except for the Quebec RSP.
Interest rate forwards and futures contracts Contractual
obligations to buy or sell an interest-rate-sensitive financial
instrument at a predetermined future date at a specified price.
Interest rate risk Interest rate risk is the risk that the fair value or
future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
Internal rate of return (“IRR”) The rate of return expected to be
produced on the shareholders’ capital deployed over the life of a
project or acquisition.
International financial Reporting standards (“IfRs”) as issued
by the International Accounting Standards Board (“IASB”). The
term “IFRS” includes IFRS and interpretations developed by the
International Financial Reporting Interpretations Committee (“IFRIC”).
Investments or investment portfolio Financial assets owned by
the Company including debt and equity securities and loans.
liquidity risk Liquidity risk is the risk that an entity will encounter
difficulty in raising funds to meet obligations associated with financial
liabilities.
Market-based yield Non-IFRS financial measure defined as the
annualized total pre-tax investment income (before expenses) divided
by the average fair values of net equity and fixed income securities
held during the reporting period.
Market yield adjustment (“MYa”) The impact of changes in the
discount rate used to discount claims liabilities based on the change in
the market-based yield of the underlying assets.
Market yield effect (“MYe”) The difference between the MYA and
the gains and losses on fair value through profit and loss (“FVTPL”)
fixed-income securities (the objective is that these two items offset
each other with a minimal overall impact to income).
Master netting agreement An agreement between the Company
and a counterparty designed to reduce the credit risk of derivative
transactions through the creation of a legal right to offset the
exposure in the event of a default.
Minimum capital test (“MCT”) Ratio of available capital to required
capital. Federally regulated property and casualty insurers, including
our Canadian insurance subsidiaries, must meet a minimum capital
test that assesses the insurer’s available capital in relation to its
required capital and requires that available capital equal at least the
minimum capital requirement. OSFI expects insurers to establish a
target capital level above the minimum requirement, and maintain
ongoing capital, at no less than the supervisory target of 150% of
required capital under MCT. The Company has an internal operating
target of 170%.
net operating income (“noI”) Net income from continuing
operations for a specific period less preferred share dividends, plus
the after-tax impact of amortization of intangible assets recognized in
business combinations, integration and restructuring costs, change
in fair value of contingent consideration, net investment gains (losses)
excluding FVTPL fixed-income securities and MYE.
net operating income per share (“noIPs”) Net operating income
for a specific period less preferred share dividends, divided by the
weighted-average number of common shares outstanding during the
same period.
net premiums earned Premiums written that are recognized for
accounting purposes as revenue earned during a period.
net premiums written Direct premiums written for a given period
less premiums ceded to reinsurers and retrocessionaires during
such period.
normal course issuer bid (“nCIb”) A program for the repurchase
of the Company’s own common shares, for cancellation through a
stock exchange that is subject to the various rules of the relevant stock
exchange and securities commission.
notional amount The contract amount used as a reference point to
calculate cash payments for derivatives.
operating return on equity (“oRoe”) Net operating income for the
last 12-months divided by the average shareholders’ equity (excluding
preferred shares and accumulated other comprehensive income)
over the same 12-month period. The average shareholders’ equity is
the mean of shareholders’ equity at the beginning and the end of the
period, adjusted for significant capital transactions, if appropriate.
options Contractual agreements under which the seller grants to
the buyer the right, but not the obligation, either to buy (call option)
or sell (put option) an asset (underlying asset) at a predetermined
price, at or by a specified future date.
Prior year claims development Change in total prior year claims
liabilities in a given period. A reduction to claims liabilities is called
favourable prior year claims development. An increase in claims
liabilities is called unfavourable prior year claims development.
Provision for adverse deviation (“PfaD”) An amount added to
undiscounted case reserves and IBNR to account for adverse deviation
from claims reserve estimates.
Reinsurer An insurance company that agreed to indemnify another
insurance or reinsurance company, the ceding company, against all
or a portion of the insurance or reinsurance risks underwritten by the
ceding company, under one or more policies.
Return on equity (“Roe”) Net income for a 12-month period less
preferred share dividends, divided by the average shareholders’
equity (excluding preferred shares) over the same 12-month
period. Net income and shareholders’ equity are determined in
accordance with IFRS. The average shareholders’ equity is the mean
of shareholders’ equity at the beginning and the end of the period,
adjusted for significant capital transactions, if appropriate.
securities lending Transactions in which the owner of a security
agrees to lend it under the terms of a prearranged contract to a
borrower for a fee. The borrower must collateralize the security loan at
all times.
severity (of claims) Average cost of a claim calculated by dividing
the total cost of claims by the total number of claims.
shareholders’ equity Capital invested by the shareholders via
share capital and contributed surplus, plus retained earnings and
accumulated other comprehensive income (loss).
structured settlements Periodic payments to claimants for a
determined number of years for life, typically in settlement for a claim
under a liability policy, usually funded through the purchase of an
annuity.
swaps, including currency and total return swaps Over-the-
counter contracts in which two counterparties exchange a series of
cash flows based on agreed upon rates such as exchange rates or
value of an equity index applied to a contract notional amount.
Underwriting income Net premiums earned less net claims
incurred, commissions, premium taxes and general expenses
(excluding MYA).
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).
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
145
Board of Directors
Executive Committee members
Charles brindamour (4)
Chief Executive Officer
Charles brindamour
Chief Executive Officer
Yves brouillette (1),(2)
Corporate Director and President, Placements Beluca Inc.
Martin beaulieu
Senior Vice-President, Personal Lines
Paul Cantor (3),(4)
Senior Advisor, Bennett Jones LLP
Marcel Côté (2),(3)
Strategic Advisor, KPMG-Secor
Robert W. Crispin (1),(4)
Corporate Director
Claude Dussault
Chairman of the Board, Intact Financial Corp.
and President, ACVA Investing Corp.
eileen Mercier (1),(4)
Chair and Board Member, Ontario Teachers’ Pension Plan
Timothy h. Penner (2),(3)
Corporate Director
louise Roy (2),(3)
Chancellor and Chair of the Board of Université de Montréal
and Invited Fellow, Center for Interuniversity Research and
Analysis on Organizations
stephen snyder (1),(2)
Corporate Director
alan blair
Senior Vice-President, Atlantic Canada
Jean-françois blais
President, Intact Insurance
Debbie Coull-Cicchini
Senior Vice-President, Ontario
Claude Désilets
Senior Vice-President and Chief Risk Officer
Monika federau
Senior Vice-President, Marketing
louis Gagnon
President and Chief Operating Officer
Denis Garneau
Senior Vice-President, Québec
françoise Guénette
Senior Vice-President, Corporate and Legal Services and Secretary
byron hindle
Senior Vice-President, International Business Development
Carol stephenson (2),(3)
Dean, Richard Ivey School of Business, Western University
Mathieu lamy
Senior Vice-President, Claims
alain lessard
Senior Vice-President, Commercial Lines
louis Marcotte
Senior Vice-President, Strategic Distribution
lucie Martel
Senior Vice-President and Chief Human Resources Officer
Jennie Moushos
Senior Vice-President, Western Canada
Jack ott
Senior Vice-President and Chief Information Technology Officer
Marc Pontbriand
President, Direct to Consumers Distribution
Marc Provost
Senior Vice-President, Managing Director and
Chief Investment Officer, Intact Investment Management Inc.
Mark Tullis
Senior Vice-President and Chief Financial Officer
notes:
(1) Denotes member of the audit and risk review committee
(2) Denotes member of the conduct review and corporate Governance committee
(3) Denotes member of the Human resources committee
(4) Denotes member of the Investment committee
For complete biographies of the members of the Board of Directors, please see the
Management proxy circular which may be found online at www.sedar.com.
Pete Weightman
President, BrokerLink
146
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
m
o
c
.
r
i
m
b
.
w
w
w
o
s
s
e
d
a
r
I
s
l
l
i
M
n
a
y
r
B
r
i
m
b
y
b
d
e
n
g
i
s
e
D
Shareholder and corporate information
Credit rating
IFC’s long-term issuer rating with Moody’s
Investors Services is ‘Baa1’ and the
Company’s principal operating insurance
subsidiaries are rated ‘A1’ for insurance
financial strength (“IFS”). IFC’s long-term
issuer rating with A.M. Best is ‘a-’ and its
principal operating subsidiaries have an IFS
rating of ‘A+’ with a stable outlook. IFC’s
long-term issuer rating with DBRS is ‘A (low)’.
DBRS has assigned a rating of ‘Pfd-2(low)’
with a stable trend for the Non-cumulative
Rate Reset Class A Shares Series 1 (the
“Series 1 Preferred Shares”) issued on July 12,
2011 and for the Non-cumulative Rate Reset
Class A Shares Series 3 (the “Series 3 Preferred
Shares”) issued on August 18, 2011.
Toronto stock exchange (Tsx) listings
Common Shares Ticker Symbol: IFC
Series 1 Preferred Shares Ticker Symbol:
IFC.PR.A
Series 3 Preferred Shares Ticker Symbol:
IFC.PR.C
annual Meeting of shareholders
Date: Wednesday, May 8, 2013
Time: 2:00 pm ET
Art Gallery of Ontario
317 Dundas Street West
Toronto, Ontario M5T 1G4
Version française
Il existe une version française du présent
rapport annuel à la section Relations
investisseurs de notre site Web intactcf.com.
Les intéressés peuvent obtenir une version
imprimée en appelant au 1 866 778 0774 ou
en envoyant un courriel à ir@intact.net.
Transfer agent and registrar
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
1 800 564 6253
auditors
Ernst & Young LLP
earnings release dates
Q1 – Wednesday, May 8, 2013
Q2 – Wednesday, July 31, 2013
Q3 – Wednesday, November 6, 2013
Q4 – Wednesday, February 5, 2014
Investor inquiries
Dennis Westfall
Vice-President, Investor Relations
416 341 1464, ext 45122
dennis.westfall@intact.net
Toll-free: 1 866 778 0774
Media inquiries
Sandra Nunes
Manager, External Communications
416 341 1464, ext 43127
sandra.nunes@intact.net
Dividend reinvestment
Shareholders can reinvest their cash
dividends in common shares of
Intact Financial Corporation on a
commission-free basis either through a
broker, subject to eligibility as determined
by the broker, or through Canadian
ShareOwner Investments Inc. Full details
can be obtained by visiting the Investor
Relations section of the Company’s
website at www.intactfc.com.
eligible dividend designation
For purposes of the enhanced dividend tax
credit rules contained in the Income Tax Act
(Canada) and any corresponding
provincial and territorial tax legislation,
all dividends (and deemed dividends)
paid by Intact Financial Corporation to
Canadian residents on our common and
preferred shares after December 31, 2005,
are designated as eligible dividends.
Unless stated otherwise, all dividends
(and deemed dividends) paid by the
Company hereafter are designated as eligible
dividends for the purposes of such rules.
Information for shareholders
outside of Canada
Dividends paid to residents of countries
with which Canada has bilateral tax treaties
are generally subject to the 15% Canadian
non-resident withholding tax. There is no
Canadian tax on gains from the sale of shares
(assuming ownership of less than 25%) or
debt instruments of the Company owned
by non-residents not carrying on business
in Canada. No government in Canada levies
estate taxes or succession duties.
Common share prices and volume
Q1
Q2
Q3
Q4
High
Low
Close
Volume
$ 61.69
$ 65.00
64.69
$
65.13
$
$ 55.65
$ 59.58
$ 57.61
58.25
$
$
60.03
$ 63.39
$ 59.80
$ 64.77
13,056,282
17,767,530
13,760,058
12,876,735
Year 2012
$ 65.13
$ 55.65
$ 64.77
57,460,605
Q1
Q2
Q3
Q4
$
51.58
$ 55.57
$ 57.77
$ 59.82
$ 46.49
47.79
$
$
51.41
$ 53.37
$ 55.40
50.25
$
$ 57.53
$ 58.53
12,935,794
19,966,321
19,783,681
18,098,968
Year 2011
$ 59.82
$ 46.49
$ 58.53
70,784,764
Q1
Q2
Q3
Q4
Year 2010
Source: Toronto Stock Exchange.
$
$
$
$
$
44.90
47.19
48.05
51.73
51.73
36.37
$
42.98
$
$
40.51
$ 44.54
44.81
$
$ 44.90
$ 45.61
50.86
$
24,228,119
16,616,122
13,796,808
13,181,308
$
36.37
$
50.86
67,822,357
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t
147
Intact Financial Corporation
700 University Ave.
Toronto, Ontario
M5G 0A1
www.intactfc.com
We are customer drIven
We listen to customers, understand
their needs, offer the best solutions
and deliver on our promises. We
make it easy for customers to deal
with us. We go beyond expectations
and always deliver an outstanding
experience.
We behave WIth IntegrIty
We demonstrate the highest ethical
standards of personal conduct.
We behave with honesty, integrity,
openness and fairness when dealing
with each other, customers, partners
and governments.
We are socIally responsIble
We respect the environment and its finite
resources. We believe in making the
communities where we live and work
safer, healthier and happier. We encourage
the involvement and citizenship of all our
employees.
lIvIng our values
IntegrIty
customer drIven
socIally responsIble
respect
excellence
We strIve for excellence
We are disciplined in our approaches
and our actions, which is why we
excel in all aspects of our business.
We embrace change and the
opportunities it creates, encourage
innovative thinking and always seek
to improve. We value and reward
high performance and success.
We provide high value to our
shareholders.
We respect each other
We value the diversity of our
people and their dreams. We
foster an environment conducive
to personal growth, development
and new opportunities. We
recognize and value the
contribution that each of us and
our teams are making to our
success.
23
I n t a c t FIn a n cIa l co r p o r a tIo n –
2 0 1 2 an n u a l re p o r t