2013 Annual Report
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Stronger together
CORPORATE
Intact Financial Corporation is the largest provider of property and casualty (“P&C”) insurance in Canada with $7.3 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 $12.3 billion.
FInAnCIAl
(Excluding MYA. In millions of Canadian dollars, except as noted)
Consolidated Performance
Written insured risks (thousands)
Direct premiums written
net premiums earned
Combined ratio
Underwriting income
net investment income
net operating income
net investment gains (losses)
net income
net operating income per share ($)
Earnings per share ($)
Book value per share ($)
Operating return on equity
Adjusted return on equity
IFRS
Canadian
GAAP
2013
2012
2011
2010
2009
7,115
7,319
7,014
98.0%
142
406
500
(83)
431
3.62
3.10
33.94
11.2%
10.3%
6,729
6,868
6,571
93.1%
451
389
675
37
571
5.00
4.20
33.03
16.8%
16.1%
5,084
5,099
4,880
94.4%
273
326
460
204
465
3.91
3.96
29.73
15.3%
17.4%
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%
ONLINe ANNuAL rePOrt
To access our inaugural online annual report, including interactive graphs,
CEO’s message and other customer and broker testimonials, please scan the
QR code below or visit reports.intactfc.com.
FPO
On the cover and page 1: In July 2012, a fire completely destroyed Amy and Marc Jessome’s home in Dartmouth, nova Scotia. After being contacted by the
Jessomes’ broker, Intact claims representative Mark Wornell was on the scene. Mark worked with the Jessomes to help restore their property, rebuild their home
and get their lives back on track.
Profilehighlights
At Intact, insurance is about people – our customers, employees, brokers and
the communities in which we live. It’s about shared values, shared commitments
and knowing that when challenges come, you’re not alone. It’s about being there
when you’re needed, where you’re needed, and it’s about understanding that
people are always stronger together.
Table of contents
Performance at-a-glance
CEO’s message
Chairman’s message
Board of Directors
Together with customers...
Together with employees...
Together with brokers...
Together with communities...
Financial review
Glossary
Board and Executive Committee members
18
22
26
162
164
2
4
7
8
10
14
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
1
PERFORMAnCE AT-A-GlAnCE
Our superior operating performance and financial strength have translated
into a total shareholder return of 155% in the past five years, while allowing
us to increase our dividends per share each year since our IPO, on average by
13% per year.
2013 Direct premiums written
by business line
(excluding pools, %)
2013 Direct premiums written
by distribution channel
(excluding pools, %)
2013 Investment mix
(net of hedging positions and financial liabilities
related to investments)
•Personal auto
•Personal property
•Commercial P&C
•Commercial auto
46%
22%
24%
8%
•Intact Insurance
•Brokerlink
•belairdirect
•Grey Power
82%
6%
9%
3%
•Fixed income
•Common shares
•Preferred shares
•loans
•Cash and short-term notes
73%
12%
10%
3%
2%
Total shareholder return
20.6%
On a total shareholder return
basis (including dividends),
our 20.6% CAGr over the past
five years was higher than most
comparable indices, bolstered by
our operating results.
Dividends per share growth
7.3%
We are proud of our dividend
growth track record, including a
five-year CAGr of 7.3%, which
compares favourably versus
our peers.
Source: Toronto Stock Exchange, Standard & Poor’s
One-year
Three-year
Five-year
Intact Financial Corp.
S&P/TSX Composite
10%
13%
S&P/TSX Banks
22%
S&P/TSX Insurance
S&P U.S. P&C Insurance
49%
38%
48%
11%
44%
39%
66%
155%
159%
76%
54%
103%
One-year
Three-year
Five-year
Intact Financial Corp.
10%
S&P/TSX Composite
S&P/TSX Banks
8%
3%
29%
20%
16%
S&P/TSX Insurance
-0.1%
-0.1%
S&P U.S. P&C Insurance
46%
66%
42%
7%
23%
-22%
-35%
2
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
Direct premiums written growth
(%) (Base 100 = 2003)
•IFC
•Industry
Combined ratio1
(%)
•IFC
•Industry
250
220
190
160
130
100
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
The combination of our organic growth and accretive acquisitions
has led to a significant growth outperformance versus the industry.
Return on equity (ROE)2
(%)
•IFC
•Industry
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
110
105
100
250
95
220
90
190
85
160
130
100
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Our sophisticated pricing, underwriting discipline and in-house
claims expertise have enabled us to consistently outperform the
industry’s combined ratio.
Market share by company
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
•Market share (%)
•Direct premiums written ($ billions)
20
15
10
5
0
IFC
#2
#3
#4
#5
Our superior underwriting results, investment performance and
capital management have led to a consistent ROE outperformance
versus the industry.
With an estimated market share of 17%, we are nearly twice the size
of our next largest competitor and approximately 15 times the size of
the average company in the industry.
Industry data source: MSA Research excluding lloyd’s, ICBC, SGI, SAF, MPI, Genworth and IFC, as at Dec. 31, 2013
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 162.
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
3
CEO’S MESSAGE
The passion of our people
I was proud of the speed of our response and,
more importantly, the compassion of our
people during difficult times for thousands of
our customers.
United by shared commitment, employees at
Intact lived our value of always striving for
excellence and delivered on our promise to go
beyond our customers’ expectations. They
showed what it means to be “stronger together”.
Year in review
2013 was a year with more than its share of
“bad times”. It was challenging for Canadian
P&C insurers as the industry saw more than
$3 billion of losses from catastrophes. Here at
Intact, we incurred $530 million in pre-tax
catastrophe losses after reinsurance. Despite
this, we still generated an operating return on
equity (OrOE) of more than 11%, grew our
business by 7% and launched a number of
strategic initiatives which better position us
for the years to come.
While we continued to outperform the
industry in 2013, we know that we can do
better. Our goal is to return to our historical
levels of profitability by continuously
improving the quality of our operations and
by mitigating the impact of natural disasters
on our business.
From an operational perspective, we made
significant progress towards improving our
performance in personal property. We
remain confident that our initiatives will bring
10 points of improvement in the upcoming
18 to 24 months, with the objective of
sustainably operating at a combined ratio of
95% or better in this line of business. We
ended 2013 with a combined ratio of 104.4%
in personal property, as catastrophe losses of
$272 million added almost 18 points.
However, I am pleased to see that personal
Charles Brindamour
Chief Executive Officer
United by shared commitment, employees at Intact
lived our value of always striving for excellence
and delivered on our promise to go beyond our
customers’ expectations. They showed what it
means to be “stronger together”.
Insurance is not about things. Insurance
is about people. Last year, this belief was
brought home by the storms and flooding
in Toronto and Alberta and the tragic train
derailment in Lac-Mégantic. The impact
of these events was profound; at the same
time, the response to these events was
inspiring. Across Canada, and throughout
our Company, we saw people coming
together in times of need.
At Intact, employees from every region quickly
assembled and worked tirelessly to support
their colleagues, to reach out to communities
and to help our customers remain resilient.
4
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
property, which in recent years has lagged our
relative performance in other lines, is now
starting to show signs of outperformance,
with a 2 point loss ratio advantage versus the
industry in 2013.
In automobile insurance, we generated a solid
combined ratio of 93.2% in 2013, despite the
challenges presented by severe weather
conditions. Our appetite for growth remains,
as we expect to maintain our margins in this
market segment. In Ontario, Canada’s largest
automobile insurance market, the government
understands that further rate reductions
can only come in conjunction with meaningful
additional cost reduction measures. Since
announcing its strategy last year, the
government has shown its commitment to
reducing the cost of insurance to Ontario
consumers by introducing a number of
legislative and regulatory measures that have
and will contribute to reducing the cost of
claims in the months to come. These are steps
in the right direction and we continue to
support the government’s efforts to make
auto insurance both more affordable and
more sustainable.
Our commercial lines businesses experienced
8 points of catastrophe losses, resulting in a
full year 2013 combined ratio of 100.9%. We
continue to take the required product and
pricing actions to ensure we generate a more
acceptable combined ratio in the near term.
Furthermore, we intend to build on our
historical loss ratio advantage to accelerate our
penetration in small to mid-sized businesses
and in specialty lines.
Despite the magnitude of catastrophe losses,
the Company ended the year with a solid
balance sheet. We enter 2014 with excess
capital of $550 million and a debt-to-capital
ratio below our target level of 20%. We remain
optimistic about our prospects, and earlier this
year we announced a 9% dividend increase,
which marked the ninth consecutive year that
the dividend has been raised.
COnSISTEnT InDUSTRY
OUTPERFORMAnCE
sOphIsTICATED
pRICIng AnD
unDERwRITIng
sCALE
ADvAnTAgE
In-hOusE
CLAIMs
ExpERTIsE
MuLTI-ChAnnEL
DIsTRIBuTIOn
BROkER
RELATIOnshIps
pROvEn
ACquIsITIOn
sTRATEgY
sOLID
InvEsTMEnT
RETuRns
The events of 2013 were a reminder of the
importance of building strong and resilient
communities. During the year, we contributed
nearly $4 million to charitable organizations
with a focus on addressing the needs of youth
at risk and helping communities prepare for
climate change. We also continued to support
employee citizenship, helping our people
make a difference by providing financial
support and time off to help their communities.
Industry outlook
In the near term, we foresee low single-digit
premium growth for the industry. We
anticipate that the current hard market
conditions in personal property will accelerate
in the foreseeable future. We also expect that
the commercial P&C market will continue to
firm up, with intensity accelerating for
approximately one-quarter of the market in
the near term.
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
5
CEO’S MESSAGE
quarterly dividends per share
($)
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
$0.48
05
06
07
08
09
10
11
12
13
Q1-14
Given the unprecedented level of catastrophe
losses seen in 2013 we expect the industry’s
combined ratio to improve in 2014. Overall,
we expect the industry’s rOE to trend back
towards its long-term average of 10%. looking
specifically at Intact, we expect to outperform
the industry’s rOE by at least 500 basis points
in 2014.
A successful initial five years
We have made tremendous progress since
becoming a fully independent Canadian
company five years ago. As the largest provider
of P&C insurance in the country, we now
insure more than five million individuals and
businesses. But it is not just about being the
largest – we continuously outperform the
industry by utilizing our scale, by managing
our customers’ claims in-house, and by the
sophistication and discipline embedded in our
pricing and risk selection. Shareholders have
benefited from our progress as our shares have
generated a total return of 155% in the past
five years.
Looking ahead, together
I am proud of what we have accomplished in
such a short period of time and look forward to
the future. Our primary objectives in the near
term are ensuring the sustainability of our
operations, as discussed above, improving the
experience of our customers and better
serving our broker partners.
Delivering a customer experience that is
second to none
We will work to further enhance the customer
experience, while continuing to offer best-in-
class claims service and a broad product offering.
This year we launched Usage Based Insurance
(UBI), an auto insurance product customized to
individual driving behaviours. We also
recognized consumers’ increasing preference to
access insurance through the web, by increasing
our presence online, making our websites tablet
and mobile friendly, and broadening our direct to
consumer distribution through a partnership
with Sun life Financial. Moving forward, we will
expand and leverage existing web capabilities,
and pursue a cultural transformation to better
integrate customer feedback throughout the
decision-making process.
Supporting our broker partners
With the acquisitions of AXA Canada and
Jevco, we now have one of the broadest
product offerings in the market. Our increased
scale and financial strength make us an even
stronger ally for our broker partners. As before,
we stand ready to invest in brokers’ businesses
to help them grow and prosper. In addition, we
have invested in technologies to make brokers’
workflows more efficient and in advertising to
increase brand awareness. As always, we
maintain our commitment to providing a
customer and broker experience second
to none.
Our people
Our success is due to the combined efforts of
our 11,000 people, a group that I believe is the
best team in the country. I have already noted
that 2013 was an exceptionally demanding
year in which they helped hundreds of
thousands of our customers, continued to
demonstrate their strong customer-driven
mindset and provided industry-leading service
to our brokers. Many companies promise
excellence; our employees deliver it and I want
to thank each and every one of them.
While 2013 was a challenging year it was also
a rewarding one for our Company and our
people as it showed how, in so many ways, we
are making a positive difference in the lives of
our customers.
In closing, I would like to thank our Board of
Directors, whose insight and guidance have
helped us to make decisions critical to the
success of our organization. Finally, to our
shareholders, thank you for your continued
support – together we are stronger for it. We
will strive to maintain your confidence and
reward it in the years ahead.
Charles Brindamour
Chief Executive Officer
6
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
CHAIRMAn’S MESSAGE
Responsible governance
Throughout 2013 your Company and
its people have shown a remarkable
resilience in the wake of unprecedented
natural disasters which disrupted the lives
of thousands of our clients and caused
hundreds of millions of dollars in damage.
wherever disasters struck, our people were
there to help our customers resume their
normal life in the most compassionate way.
What is even more remarkable is the financial
performance the Company achieved during
these challenging times. Despite the scope of
the devastation caused by these disasters
and the challenges of a low interest rate
environment, we continued to create value
for shareholders and continued our
outperformance compared to the industry.
Throughout the year, your Board of Directors
devoted much of its time and energy with the
executive team to establishing the strategic
direction to further advance the development
of your Company. In this regard, we welcomed
two new members of the Board of Directors,
Dr. Janet De Silva and Mr. Frederick Singer.
Their combined international experience and
insight into the vast potential of new and
emerging technologies were a valuable
complement to our collective expertise.
Your Board of Directors also continued its
review of governance best practices among
financial institutions, which resulted in the
establishment of a new committee of the
Board of Directors devoted exclusively to the
supervision and assessment of the various risks
to which your Company may be exposed. In
addition, we approved the appointment of a
Chief Governance Officer, a newly created
executive position that will integrate the various
corporate governance functions within the
Company and reinforce their influence. Thanks
to the commitment of your Board of Directors to
ensure the quality of our governance framework,
the Company was recognized among the
10 best governed companies in Canada.1
Claude Dussault
Chairman of the Board
Throughout the year, your Board of Directors devoted
much of its time and energy with the executive
team to establishing the strategic direction to further
advance the development of your Company.
Claude Dussault
Chairman of the Board
2013 was a year of unprecedented adversity
in the wake of multiple natural disasters and
uncertain financial markets. It was also a year
when our 11,000 employees across the country
came together to honour our promise to our
customers and delivered a superb performance;
and I would like to thank them for their efforts.
A few weeks ago marked our fifth anniversary
as a widely held and independent company.
Our performance and the dedication of our
people during that period has not only
confirmed the merits of the strategic direction
established by your Board of Directors over the
years, but also the benefits of the Company’s
prudent financial practices, its discipline and
its quest for operational excellence. On behalf
of my colleagues, I want to assure you that we
remain more dedicated than ever to ensuring
the future successes of your Company.
1 Globe and Mail Board Games 2013
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
7
BOARD OF DIRECTORS
1
4
2
5
3
6
5. Janet De silva
Compliance Review and Corporate
Governance Committee
Risk Management Committee
Dr. De Silva is currently the Dean of Ivey
Asia, leading the Hong Kong Campus and
mainland China operations of Ivey
Business School at Western University.
She has more than 10 years of leadership
experience as CEO of Sun life Financial’s
business in Hong Kong and its Mainland
China joint venture and as Co-Founder and
CEO of retail China limited. She was also
the past Chair and President of the
Canadian Chamber of Commerce in Hong
Kong and Chair of the Canada China
Business Council in Beijing.
6. Eileen Mercier
Audit Committee (Chair)
Risk Management 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. In 2013,
Ms. Mercier was named to Canada’s
Top 100 Most Powerful Women in the
Accenture Corporate Directors category.
1. Claude Dussault
Chairman of the Board
3. Yves Brouillette
Audit Committee
Mr. Dussault was President and CEO of
Intact Financial (formerly InG Canada Inc.)
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.
2. Charles Brindamour
Chief Executive Officer
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.
Risk Management Committee
Mr. Brouillette has deep international and
industry experience, having been CEO of
InG Canada Inc. from 1993 to 2001 and
CEO of InG latin America from 2002 to
2005. Currently, he holds the position of
President of Placements Beluca Inc. and is
a director of White Mountains Insurance
Group, ltd. He is a Fellow of the Canadian
Institute of Actuaries and a graduate of the
Advanced Management Program of
Harvard Business School.
4. Robert w. Crispin
Audit Committee
Risk Management 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.
Mr. Crispin received an MBA from the
University of Connecticut and holds the
Chartered Financial Analyst designation.
8
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
7
8
9
10
11
The Board of Directors
assumes responsibility for the
stewardship of the Company.
It oversees the management of
the Company with the objective
of enhancing shareholder value
and ensuring the Company’s
long-term viability, profitability
and development.
7. Timothy h. penner
Compliance Review and Corporate
Governance Committee (Chair)
Risk Management Committee
9. Frederick singer
Audit Committee
Human Resources and
Compensation Committee
Mr. Penner brings extensive marketing and
operations management expertise, having
spent 33 years with Procter & Gamble,
including President of P&G Canada from
1999 to 2011. He also serves on the Board
of SickKids Hospital and the YMCA of
Greater Toronto, and is on the Ontario Task
Force on Competitiveness, Productivity
and Economic Progress.
Mr. Singer is an Internet pioneer and
currently the CEO of Echo360, a leading
education company. Previously, he was
Senior Advisor to the CEO of Softbank
Corporation in Japan and Venture Partner
with Softbank Capital in the U.S. Mr. Singer
was formerly an SVP at AOl, a founder of
the Washington Post online service and a
Board member at DoubleClick media.
8. Louise Roy
Compliance Review and Corporate
Governance Committee
Human Resources and
Compensation Committee
Ms. roy is the first woman to occupy both
the positions of 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 the International Air Transport
Association (IATA). She was named an
Officer of the national Order of Québec in
2009 and of the Order of Canada in 2012.
In 2013, Ms. roy was named as one of
Canada’s Top 100 Most Powerful Women.
10. stephen snyder
Audit Committee
Human Resources and
Compensation 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.
11. Carol stephenson
Compliance Review and Corporate
Governance Committee
Human Resources and Compensation
Committee (Chair)
Ms. Stephenson served as the Dean of the
Ivey Business School at Western University
from 2003 until her retirement in 2013.
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, and was
ranked one of Canada’s Top 25 Women of
Influence in 2011. She is the former Chair
of the Government of Canada’s Advisory
Committee on Senior level retention
and Compensation.
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
9
Together with customers...
Kathleen Boutland (left), customer, and
Tia Esber (right), Field Claims Representative
10
Intact FInancIal corporatIon / 2013 annual report
Our customers depend on us to create products that meet
their needs, to provide the service they deserve and to make
them aware of steps they can take to protect their homes, cars
and businesses. We keep our commitments not just by working
for our customers, but by working with them. Together we
are stronger.
We are proud of our people’s
efforts in responding to the
catastrophic events in 2013,
but we know that we have to
do more. Intact is taking the
lead in acknowledging today’s
changing weather patterns
and building awareness
of available prevention
measures, which can be as
simple as installing a backflow
valve, shown here by Field
Claims Representative
Mailinda Thomson. Together
with our customers, we
will help ensure that our
communities remain safe
and strong.
In the summer of 2013, a period of sustained heavy
rainfall set off the most devastating floods in Alberta’s
history. In High River, Kathleen Boutland’s basement
was flooded by almost nine feet of water and sewage
that “took out everything,” including her hot water
tank and furnace. Bringing in extra staff from across
Canada, Intact mobilized community response teams
to accelerate the process of helping customers.
Kathleen spoke with several claims representatives,
including Tia Esber, and was incredibly happy with
their compassion and knowledge, saying, “They
walked me through what to do, they listened to me
and made me feel comfortable.”
Intact FInancIal corporatIon / 2013 annual report
11
TOGETHER WITH CUSTOMERS...
2013 was a record year for catastrophic events,
with unprecedented devastation caused by
the train derailment in lac-Mégantic, floods in
Southern Alberta and storms in the Greater
Toronto Area. Aside from the emotional toll,
these events also cost the industry $3.2 billion
of insured damages, making 2013 the
fifth year in a row in which industry losses
exceeded $1 billion. With record damages
came a record number of claims, and it is with
tireless dedication and compassion that our
employees mobilized coast-to-coast to help
our customers. Throughout this time, we
maintained our industry-leading service levels
despite the high volume of calls. Together with
our customers we helped rebuild, leveraging
our rely network of repair shops and
contractors, and we continue to work to
protect our customers through loss
prevention education and discounts.
unparalleled claims experience
With over 3,000 claims professionals, we have
the scale and expertise to handle virtually all
our claims in-house, providing a seamless,
high-quality experience. Our customer care
telephony platform connects 35 sites and
12,000 phones coast-to-coast, delivering the
ability to answer customer questions 99.9% of
the time. The network sends every call to the
best location, selecting the agent with the
right skills to help deliver industry-leading
service 24/7.
Joseph Perfetto, an Associate in belairdirect’s
fast-paced call centre, is known for providing
excellent customer service. One of Joseph’s
talents is the ability to turn a negative
customer experience into a positive one.
By listening to the customer’s needs,
Joseph consistently tries to help customers
understand their coverage and get the right
product for their needs.
“As a firm, there’s a sense of urgency in
everything we do. And when disaster strikes,
especially on many fronts like that, people
got organized quickly. Others had newspaper
ads, but we had boots on the ground.”
— Charles Brindamour, Chief Executive Officer,
in Alberta, June 2013
Together with our customers we helped rebuild,
and we continue to work to protect them through
loss prevention education and discounts.
12
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
The robustness and dependability of our
claims promise is most evident during a
catastrophic event. During the Calgary floods
last summer, when even our own Calgary
office was inaccessible, we were able to handle
17,000 calls in the immediate aftermath with
a low 1% abandon rate. Within 12 hours of the
event, we had set up a Catastrophe response
Centre, with full connectivity for employees
coming from different regions to help in a
coordinated effort. Within one week, we
mobilized over 600 adjusters from across the
country, putting boots on the ground to get
families and businesses back on track as soon
as possible. In fact, over 95% of property
assessments were completed within three
weeks and all auto claims were settled within
two months, despite our receiving over
5,500 claims from this event alone.
This was only possible through the dedication
and empathy of our employees, who took time
away from their personal lives to help people in
need. When the Toronto floods followed barely
a month later, our people again mobilized
coast-to-coast to step up for our customers.
We believe that it is because of their
commitment to help people that our
businesses are highly ranked by J.D. Power.
When we survey our customers on how
satisfied they are and whether they would
recommend us to their friends and family after
a claim, we are pleased to find that we are
rated among the best in north America.
Tailoring products to customers’ needs
It has become increasingly obvious that severe
weather is here to stay. Accordingly, we are
working hard to make the protection we offer
our customers more sustainable, as well as to
help them prevent future damages. This year,
we launched our insuranceisevolving.com
website, which educates consumers on how to
protect their homes against climate change;
and we continue to roll out additional features
on this website. We are also offering discounts
to customers who adopt loss prevention
measures such as installing sewer back-up
valves or sump pumps. Together with our
customers, we are working to keep home
insurance both affordable and sustainable.
Claims Representatives Chris Patterson
and Chevone Griffith were on the frontlines
of the catastrophic events of 2013. When
the calls started coming in, it was first and
foremost about, as Chris puts it, “making
sure people stayed safe,” and then helping
customers going through the claims process.
Chevone volunteered for overtime during the
December ice storm to help with the large
volume of calls over the holidays. As she says,
“Reassuring customers and giving useful
suggestions was our first priority.”
In automobile insurance, we are lowering our
rates for good drivers and offering consumers
more options than before. For example, we are
deploying our Usage Based Insurance (UBI)
initiative, which will allow customers to save
up to 25% on their premium based on driving
behaviours. Customers who participate in the
program can log into a website to track their
estimated discount, see detailed statistics on
their driving history, and receive customized
tips based on this driving profile, giving them
control over their premiums.
Making ourselves more accessible
In 2013, we continued to broaden the options
available to consumers for researching
insurance coverage and interacting with us.
For those who prefer to do research on their
own but still want the advice of a broker, we
continued to improve in our Buy-Online
program, where a consumer can research and
obtain a quote online before being connected
to a broker.
In our direct-to-consumer channel, the
belairdirect and Grey Power brands are
engaging with consumers in real time, offering
personalized service through an average of
3,000 chat sessions a month. All our brands’
websites were redesigned last year to provide
optimized viewing across desktops, tablets
and mobile devices, bringing different
information to the forefront by predicting the
user’s needs. We’ve also launched newsletters
and blogs containing tips to keep life simple.
As we continue to evolve this year, what
doesn’t change is our unwavering focus on the
customer. While there will be greater focus on
prevention this year, our industry-leading claims
service remains solid – supported by scale,
in-house expertise and the passion of our
employees. The Intact promise is that, outside
of a catastrophic event, if a customer does not
talk to a representative within 30 minutes of
their first call, we will write a cheque for the full
amount of the customer’s yearly premium up
to a maximum of $1,000. As a testament to
how good the service is, with over five million
customers in Canada, we had to pay out on this
promise fewer than 20 times in 2013.
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
13
Together with employees...
We believe in a culture of collaboration in which everyone has the opportunity
to achieve their personal best. We support each other in serving our customers,
while respecting our colleagues’ diversity and individual needs. Insurance is
about people, and at Intact that’s a lesson we never get tired of learning.
A learning Consultant in our Calgary office,
Marie Corey has trained Intact employees
and brokers about innovations in our
personal lines products and systems since
2008. Working in classrooms and through
webinars, Marie enjoys “engaging with
people and educating our staff, as well as
brokers, about what Intact can offer them.
In every session, I try to keep it fun, but still
get the message across.”
A former underwriter, she draws on her
experience to “show people how they can
sell a new product and to help them get
even better at serving their customers’
needs.” The strong engagement scores for
Marie’s team show that both students and
peers appreciate her approach.
14
Intact FInancIal corporatIon / 2013 annual report
Together with employees...
Marie Corey, learning Consultant,
Personal Insurance
Intact FInancIal corporatIon / 2013 annual report
15
TOGETHER WITH EMPlOYEES...
But their role in society goes beyond helping
people become more resilient in challenging
times. They are also making it possible for
people, businesses and society to prosper in
good times. They are making a difference by
giving people confidence and freedom from
worry, so they can live their lives looking
forward. The dedication, respect and
compassion that our employees show towards
our customers, when getting them back on
track, proves that we have the most capable
professionals in the business. In good times, or
bad, they are making a difference.
Becoming an employer of choice
As an organization, we also want to make a
difference in the lives of our people. Becoming
a best employer, where our employees can do
their best and flourish, is an ever-important
goal toward which we continue to strive.
In many ways, we’re already there. Our
employees have told us how much they trust
and appreciate their colleagues. By respecting
each other’s differences and valuing each
other’s similarities they are constantly
demonstrating their positive attitude towards
diversity. And the excitement that surrounds
our “Diversity Day” celebrations reflects this
common opinion. The way in which our people
support one another every day tells us that they
enjoy working with their colleagues.
We truly believe that the efforts of each and
every employee are important to the overall
success of our organization. We celebrate
their commitment to bettering themselves,
furthering their careers, and capitalizing on
opportunities to take on new roles throughout
the organization.
Encouraging continuous improvement
To reinforce this belief, we provide our people
with the chance to continuously build their
skills. We encourage our employees to
continuously progress and improve by offering
learning and development opportunities, and
they were the first to tell us that we are moving
in the right direction. All employees have access
to our learning centre as one of the tools
available to help them gain knowledge, meet
their goals and expand their career options.
Every year, Intact employees and their
families are invited to participate in our
“on ice” sponsorships with their local nHl
teams and Speed Skating Canada. This
provides an opportunity to support sports
from the grassroots level and creates a
tangible link between our sponsorships
and our employees.
Our employees are making a difference every
day. last year’s events confirm that the work
that our people do really matters. When severe
weather events occur, or tragedies such as the
one in lac-Mégantic, our employees are there
to help our customers make it through difficult
times. When these situations arise, our
employees are quickly able to provide
customers with the necessary resources to
start them down the road to getting back to
normal, and offer the reassurance they need to
begin that journey.
We want to make a
difference in the lives of
our people. Becoming
a best employer, where
our employees can do
their best and flourish,
is an ever-important
goal that we continue
to strive for.
16
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
The centre provides access to numerous
training modules and courses on a variety of
career-related topics.
last year we introduced our new career
management program. The workshop and
webinars that make up the program provide
employees with the understanding of what
they themselves, their manager and the
organization can do to foster their career.
Program participants learn how to identify
their strengths, interests, values, motivators,
development needs and work environment
preferences. Ultimately, the goal is to create a
career action plan that helps them identify
their preferred career path. This plan, and
participating in other career development
activities such as job shadowing, speed
mentoring and career fairs, are invaluable
resources for employees.
Enabling our people
As we move forward, our goals are to
enable our people and build on our past
achievements. We’ve improved our
performance management practices and
continue to re-evaluate them to make sure
we’re creating the best possible program for
our employees. We’re also focusing on making
significant improvements with our technology.
We are investing heavily in the development
and implementation of new systems that will
be great resources to our employees. These
investments will make processes simpler so
our people can continue to provide an
outstanding experience for our customers.
As we continue to learn and grow, we will earn
the right to consider ourselves one of Canada’s
most respected and successful companies.
True to our values, we will be a company where
our people are engaged because they know
their work matters – and a company where our
customers are our advocates because they
know that what matters to them matters to us.
lindsay Mackenzie, a Regional Manager and
underwriter, is dedicated to both personal
and professional growth and takes every
opportunity to further herself, including
participating in internal development courses
offered by Intact. In 2013, lindsay was
presented with the Emerging leader Award
by the CIP Society after being nominated by
a broker.
We’re a company that values diversity. It’s part
of our strategy to invest in people and create
a workplace where people feel engaged and
employees can contribute their best every
day. In September, we celebrated “Diversity
Day” in several offices across the country. It
was a way to share our unique experiences
and backgrounds, which enrich us and form
the core of who we are as a company.
OUR vAlUES
wE ARE sOCIALLY
REspOnsIBLE
wE ARE
CusTOMER DRIvEn
wE BEhAvE wITh
InTEgRITY
wE sTRIvE FOR
ExCELLEnCE
wE REspECT
EACh OThER
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
17
Together with brokers...
Patricia Sagl, Manager, Business Development
(left), shown with brokers Emilio McIntyre and
natalie Haller of lMS Prolink.
18
Intact FInancIal corporatIon / 2013 annual report
Together with brokers...
We know that much of our success depends upon the success
of our broker partners. That is why we invest resources
and expertise in helping brokers grow and prosper. We are
committed to working with them and to providing products,
technology, marketing and support that they can use to build
their businesses and better serve their customers.
natalie Haller and Emilio
McIntyre are two of the
many brokers we had in
mind when designing our
Compass Training program.
At these sessions, we don’t
just teach, we also listen,
and the market insight we
receive from brokers helps
us design better products.
Of course, that also benefits
brokers; as Emilio observed,
“Knowing you have a
good product helps build
confidence in what you
have to offer.”
Patricia Sagl played an integral role in the coordination
and delivery of Compass Training seminars in Ontario,
which helped our brokers to understand how to better
tailor commercial insurance to customer needs. This
program had initially targeted 1,000 brokers in Ontario,
but demand was so great that over 2,500 brokers
participated. Patricia said that the feedback from the
training was very positive and that “even experienced
brokers thought it was really valuable.”
Intact FInancIal corporatIon / 2013 annual report
19
TOGETHER WITH BROKERS...
One of the main challenges that both insurers
and brokers will face in the coming years is to
better adapt to the ever evolving shopping and
buying behaviours of consumers and their
increased expectations in terms of access and
ease of doing business. When shopping for
insurance, price and brand recognition are top
of mind for consumers. However, customer
service and the level of trust towards an insurer
are the key factors for brokers to retain their
customer base. We are pursuing a strategy
that encompasses all of these factors.
Offering the right products
On the product side, we are confident that
we offer one of the broadest portfolios of
products, unmatched in the industry. last year,
we successfully completed the integration of
AXA Canada and Jevco, while maintaining the
same high level of service that brokers are
accustomed to from us. now that these
integrations are complete, we can devote
more energy to fostering the growth of both
Intact and our brokers.
We are taking steps to ensure the sustainability
of the personal property product in the face of
severe weather events, and are doing so by
offering product options that allow customers
to tailor protection to their specific needs. In
addition, customers will be able to mitigate
At the last RCCAQ Annual Convention in
Québec, we had a booth featuring “My Driving
Discount”, a UBI solution that will allow
eligible drivers to save up to 25% on their
auto insurance premiums based on driving
behaviours. Shown here is lisa Desgagné
(left), Business Centre Director, with two of our
broker partners.
John Baizana of Baizana Insurance Brokers
joined Brokerlink in 2013 and now serves
as the Regional Branch Manager for the
Ottawa region.
Our strategy consists of offering a complete suite
of products, providing brokers with the technology
to make their lives easier, creating a brand that
is well known and trusted, expanding the reach
of brokers in new communication channels and
providing financial support to help them succeed.
20
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
rate increases by taking loss prevention
actions. It is imperative that insurers and
brokers collaborate in promoting climate
change adaptation initiatives to increase the
resiliency of our homes, businesses and
communities.
More recently, we began rolling out our
Usage Based Insurance (UBI) solution in auto
insurance. This is a key strategic initiative for
Intact Insurance and our intention is to make it
available across the country during 2014
both to consumers and to small businesses,
allowing brokers’ customers to save up to
25% on their premium based on their driving
behaviours. UBI is a key component of our
growth strategy, both for us and for brokers,
as it should attract new customers and
increase retention.
Technology investments
We are focused on making it easy for both
brokers and customers to deal with us. Brokers
tell us that our technology solutions integrate
with their management systems better than
those of our peers, and allow them to have
smoother, more efficient workflows.
Our broker portal is a market-leading
solution for quoting new business, and more
importantly, allows policy changes in real
time, resulting in quick turnaround times for
customers. We are moving to address
brokers’ desire to go paperless by launching
an electronic policy documentation solution
that speaks to all broker management
systems. Today, more than two-thirds of our
personal lines policies are issued through this
software and most of the new business written
by brokers is done through our broker portal.
We will be making significant technology
investments in the years to come. These
investments continue to be aimed at enabling
our people and brokers to become more
efficient, and will result in eventually phasing
out our legacy underwriting systems and
revamping other customer-facing applications
such as billing.
A customer experience second to none
As consumers increasingly look online for
insurance, we launched Buy-Online in 2012
to provide a new customer acquisition tool
for brokers and an online presence for their
businesses. This year, it resulted in 280,000
additional leads to participating brokers. In
2014, our objective is to significantly increase
the amount of insurance sold by brokers
through the web. We will also enhance our own
website and deliver a mobile platform.
Intact Insurance brand awareness is growing
as we continue our marketing presence
through TV ads and sponsorship of Canadian
hockey and speed skating teams. We are
proud to say that despite the Intact brand
being only five years old, when consumers
are asked about home and auto insurance
companies, they mention Intact Insurance
first, unprompted, almost twice as often as
other more established brands in Canada.1
One of our core beliefs is that customers are
our best advocates, and to that end, we are
unwavering in our commitment to deliver an
experience that is second to none. We have
1 Ipsos Brand Tracker, Q3 – 2013
disaster recovery plans in place to make sure
that we are there for our customers and
brokers, when and where they need us,
even in the event of a catastrophe.
supporting our brokers
We continued to provide financial support to
brokers in their quest to grow and succeed. We
put our capital behind our partners because we
believe that we can be stronger together.
We conduct broker surveys every two years
to better understand what we are doing right
and what we can do better for our broker
constituency. The national broker survey,
which we conducted in 2012, showed that
broker satisfaction with Intact was at record
highs. The Ontario broker survey released this
year showed that, for the second consecutive
time, Ontario’s brokers rated Intact Insurance
number one overall. We are thankful for the
support the brokers have given us, and are
confident that we will continue to provide the
product excellence and diversity, workflow
efficiencies and financial resources necessary
to help our broker partners grow and prosper.
life is full of unexpected events. Big or small,
Intact will be there. nicole larivé, a broker at
RPB Assurances, has peace of mind referring
clients to Intact because she knows that in the
event of a claim, “Intact will take care of them,
and let me know about it right away.”
Speciality Solutions vice President, Antonio
D’Agostino, and Yves Monette of the firm
Pratte Morrissette Inc. are seen here at a
reception held for the top 50 commercial
brokers. The event was well attended and
showcased what Antonio says are the four
key competitive advantages that Intact has
in specialty lines: “strong products, strong
expertise, synergies between teams, and local
decision-making.”
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
21
Together with communities...
Intact is part of the community. Across the country, wherever our customers,
brokers and employees live and work, we show our commitment to communities
through our efforts to respect the environment, to make communities healthier
and happier and to encourage the involvement of our employees. We believe the
positive changes we help make today will lead to a better, more sustainable future.
“Helping kids is an investment in our future
that pays off for everyone,” says Rhonda
Hutchinson (below left), CSC–Unit Claims
Manager for Intact in Calgary and President of
the Raido Society. With support from Intact,
Raido House gives homeless youth a safe
place to live and helps them build the skills
needed for responsible independence.
Working with Raido House Team
leaders like Tina McMartin
(right), Rhonda (left) plays a
key role in projects like setting
up Raido House’s new games
room, which has been a big hit
with staff and residents. “I grew
up in a strong family,” observes
Hutchinson. “not everyone is so
lucky. I appreciate that, through
Intact, I have an opportunity to
help people and give back to
my community.”
22
Intact FInancIal corporatIon / 2013 annual report
Together with communities...
Rhonda Hutchinson, CSC–Unit Claims Manager,
with Raido House residents Morgan and Delaina
(above left).
Intact FInancIal corporatIon / 2013 annual report
23
TOGETHER WITH COMMUnITIES...
The Intact Foundation has a strong mandate
to make the communities in which we operate
safer, happier and healthier, and encourages our
employees to get involved in the philanthropic
endeavours of their choice.
We are a lead partner for the Youthworks
initiative at Raising the Roof – Chez Toit, a
national Canadian charity focused on long-
term solutions to homelessness. Pictured here
are several of the hundreds of our employees
who went out in their communities selling
toques and socks on Toque Tuesday.
The Intact Foundation is an integral part of our
commitment to communities. One of the ways
that the Foundation does this is by funding
endeavours that foster vibrant Canadian
communities by encouraging independence
and well-being among at-risk youth.
promoting climate change adaptation
As weather patterns change and severe storms
become more frequent, their impact on
Canadian society continues to be a significant
issue for all of us. The unprecedented weather
catastrophes of the past year reinforced our
commitment to climate change adaptation.
Through ongoing public education and raising
awareness of the issues with our clients, we
continue to help Canadians become less
vulnerable to future events.
Intact and the University of Waterloo have
been partnering for the past four years on
the Climate Change Adaptation Project which,
through a distinguished team of climate
change experts, outlined a roadmap of
priorities and recommendations for adapting
to climate change.
As a followup to the report, Intact and the
University of Waterloo are embarking on a
national initiative involving the implementation
of 12 climate change adaptation projects
24
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
designed to reduce the physical, financial and
human impacts of extreme weather events.
The projects focus on reducing the impact of
torrential precipitations, restoring urban
wetlands and water channels, and deploying
green infrastructure initiatives, such as rain
gardens and bioswales.
But our focus on the environment doesn’t end
there. We continue to look for other initiatives
to scale back our own footprint on the
environment. Over the last five years, we have
reduced the intensity of our carbon emissions
by almost 10% every year. last year we
brought our offices in Halifax, Quebec City and
Vancouver into more modern and energy
efficient buildings. Ongoing discussions with
our landlords help to generate ways in which
to increase possible energy efficiencies. We
also introduced eco-friendly hybrid cars to our
corporate fleet to reduce gas consumption.
Earlier this year, Intact was named one of the
100 most sustainable corporations in the
world by Corporate Knights, a Toronto-based
media and investment advisory company.
Additionally, we were ranked among the best
in corporate citizenship, coming in at 18 on
the Best 50 Corporate Citizens in Canada,
awarded through a separate study also done
by Corporate Knights.
Creating vibrant and resilient communities
Homelessness is a problem that costs the
Canadian economy $7 billion annually, and a
situation that as many as 1.3 million Canadians
have experienced at some point during the
past five years.
For the fourth year in a row, Intact has signed
on as raising the roof’s national partner for
its Toque Tuesday campaign, to help fund
initiatives that will find long-term solutions to
homelessness. In 2013, hundreds of Intact
employees once again hit the streets to
sell toques in subway stations and busy
intersections across the country.
Intact has also been the lead partner in
raising the roof’s Youthworks Private Sector
Engagement Initiative for the last three years.
In 2013, the Intact Foundation financially
supported the implementation of a number of
its recommendations. The funding went to
four agencies which will increase their
collaboration with the private sector to
provide work for at-risk youth.
We continue to pursue the funding of
charitable organizations across the country
that provide shelter to youth at-risk. raido
House, Eva’s Initiatives, Covenant House,
Service d’hébergement St-Denis and the
YMCA are but a few of the many deserving
charities we are happy to support.
We further help communities across the
country through our annual United Way
campaign, which works to create
opportunities for a better life for everyone
in our communities. last year, our internal
fundraising events, employee donations and
Foundation match amounted to an impressive
$1.9 million.
Employee involvement and citizenship
Encouraging the involvement and citizenship
of our employees in their philanthropic
initiatives is one of Intact’s core values.
Employees can get involved through our Team
Volunteer Day by volunteering at a charitable
event of their choice, be it at a local soup
kitchen or planting trees in a nearby park.
The Employee Giving Program supplements
financial donations made by employees to
registered charities. In 2013, Intact and our
employees generously gave to the Typhoon
Haiyan relief efforts. Similarly, the tragedies
that followed the train derailment in lac-
Mégantic and the Southern Alberta floods
were met with an immediate donation by
Intact and our staff. These are just several
examples of the many ways our employees are
proving, time and time again, their passion
and commitment to helping those in need.
Total donations
($ millions)
$4.0
$4.0
3.0
2.0
1.0
0
2009
2010
2011
2012
2013
loss Prevention Consultants Jean lefrançois and Pierre Dubeau go the extra mile not only for customers,
but also for their community – literally! 50 of our employees took part in a 135-kilometre cycling challenge
known as la Boucle du Grand défi Pierre lavoie, whose mission is to encourage young people to adopt
healthy life habits.
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
25
InTRODUCTIOn TO FInAnCIAl REvIEW
Financial review
Please note that the following “MD&A” and “Financial Statements” are provided
as distinct sections with individual pagination: MD&A – pages 1 to 59 and
Financial Statements – pages 1 to 67.
26
Intact FInancIal corporatIon / 2013 annual report
Intact Financial Corporation
Management’s Discussion and Analysis
For the year ended December 31, 2013
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Table of contents
Section 1 – Profile ................................................................................................................................ 3
Section 2 – Key performance indicators ............................................................................................... 4
Section 3 – Overview of our consolidated performance ....................................................................... 6
Section 4 – Operating results ............................................................................................................... 8
Section 5 – Non-operating results ...................................................................................................... 14
Section 6 – Non-IFRS financial measures ......................................................................................... 15
Section 7 – Business developments and operating environment ...................................................... 17
Section 8 – Strategy and outlook ....................................................................................................... 20
Section 9 – Financial condition ........................................................................................................... 22
Section 10 – Liquidity and capital resources ...................................................................................... 30
Section 11 – Capital management ..................................................................................................... 32
Section 12 – Risk management .......................................................................................................... 34
Section 13 – Off-balance sheet arrangements ................................................................................... 50
Section 14 – Accounting and disclosure matters ............................................................................... 51
Section 15 – Investor information ....................................................................................................... 57
Section 16 – Selected annual and quarterly information .................................................................... 58
Page 1 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
February 4, 2014
The following MD&A is the responsibility of management and has been reviewed and approved by the Board of Directors (or
“Board”) for the year ended December 31, 2013. 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, 2013, compared to the corresponding periods
in 2012. It should be read in conjunction with our Consolidated financial statements for our fiscal year ended December 31, 2013.
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 6 –
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, MCT, and debt-to-capital, as well as
other non-IFRS financial measures, namely AEPS, NOIPS, ROE, AROE, OROE, NOI, Non-operating results, Underlying current
year loss ratio, Cash flow available for investment activities, and Market-based yield. 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.
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; synergies arising from, and the Company’s integration plans relating to the AXA
Canada Inc. (“AXA Canada”) and Jevco Insurance Company (“Jevco”) acquisitions; management's estimates and expectations in
relation to resulting accretion, IRR and debt-to-capital ratio since closing of the AXA Canada and Jevco acquisitions; actions to be
taken or requirements to be met in connection with the AXA Canada and Jevco acquisitions and integrating the Company, Jevco
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
12 - Risk management, hereafter. 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.
Page 2 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Glossary of abbreviations
This MD&A contains abbreviations which are defined as follows:
AEPS Adjusted EPS
MCT
Minimum capital test
AFS
AMF
Available-for-sale
MD&A Management’s Discussion and Analysis
Autorité des marchés financiers
MYA
Market yield adjustment
AOCI
Accumulated OCI
AROE Adjusted ROE
NCIB
Normal course issuer bid
NOI
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
OSFI
P&C
Office of the Superintendent of Financial Institutions
Property and casualty
IASB
International Accounting Standards Board
PfAD
Provision for adverse deviation
IBNR
Incurred but not reported
IFRS
International financial reporting standards
IRR
KPI
Internal rate of return
Key performance indicators
ROE
S&P
U.S.
Return on equity
Standard & Poor’s
United States
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 meaningful (nm) is used to indicate that the current and
prior year figures are not comparable, 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, 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
outside of the P&C insurance subsidiaries, unless otherwise noted.
— All relevant comparatives have been restated for the impact of IAS 19 – Employee benefits (see Section 14 – Accounting and
disclosure matters).
Section 1 – Profile
Overview
1.1
We are the largest provider of P&C insurance in Canada with $7.3 billion in annual 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 our 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 $12.3 billion.
Page 3 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(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 6 – 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
As detailed in Table 3 – 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 a 12-month period less preferred share dividends, 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 accompanying 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.
NOI
NOIPS
ROE
AROE
OROE
EPS
AEPS
IRR
Page 4 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Performance and execution indicators
Claims ratio
Expense ratio
Combined ratio
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.
Underlying current year
loss ratio
Current year claims ratio excluding catastrophe losses and prior year claims development,
calculated using net premiums earned before the impact of reinstatement premiums.
Financial strength indicators
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 the 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 7 – Business developments and operating
environment for more details on our performance versus the industry.
Page 5 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 3 – Overview of our consolidated performance
Highlights
3.1
Operating ROE of 11.2% in 2013 despite incurring $530 million in pre-tax catastrophe losses
Net operating income per share of $1.05 in Q4-2013 with a combined ratio of 96.3%
Quarterly dividend raised 9% to $0.48 per share
AXA Canada and Jevco integration activities now complete
3.2
Consolidated financial results
Table 1 – Financial highlights
Q4-2013 Q4-2012
Change
2013
2012
Change
Selected highlights
DPW
Underwriting income (Table 5)
Combined ratio
Net investment income (Table 11)
NOI (Table 3)1
Income before income taxes (Table 2)
Income tax expense
Effective income tax rate
Net income
Preferred share dividends
Net income attributable to common shareholders
Per share measures, basic and diluted (in dollars)
NOIPS1
EPS
AEPS1
ROE for the last 12 months
AROE for the last 12 months1
OROE for the last 12 months1
Book value per share (in dollars)
MCT2
Debt-to-capital-ratio
1,702
67
96.3%
104
143
130
23
17.6%
107
(5)
102
1.05
0.77
0.88
9.3%
10.3%
11.2%
33.94
203%
18.7%
1 Refer to Section 6 – Non-IFRS financial measures.
2 Estimated aggregate MCT ratio of our P&C insurance subsidiaries.
Fourth quarter 2013
7,319
142
98.0%
406
500
465
34
7.3%
431
(21)
410
3.62
3.10
3.44
1,690
138
92.1%
102
194
223
46
1%
(51)%
4.2 pts
2%
(26)%
(42)%
(50)%
20.6% (3.0) pts
(40)%
nm
(41)%
177
(5)
172
(26)%
1.42
(40)%
1.29
(41)%
1.49
(4.2) pts
13.5%
(5.8) pts
16.1%
(5.6) pts
16.8%
33.03
3%
205% (2.0) pts
18.9% (0.2) pts
6,868
451
93.1%
389
675
712
141
7%
(69)%
4.9 pts
4%
(26)%
(35)%
(76)%
19.8% (12.5) pts
(25)%
nm
(25)%
571
(21)
550
5.00
4.20
5.02
(28)%
(26)%
(31)%
We reported a 96.3% combined ratio in Q4-2013, versus 92.1% in Q4-2012. The active winter season across much of Canada
contributed to a $39 million increase in catastrophe losses and also negatively impacted the underlying current year loss ratio. In
addition, we recorded $19 million lower favourable prior year claims development in the quarter. Partly offsetting these factors was a
2.4 point improvement in our expense ratio compared to the fourth quarter of 2012, driven by lower variable commissions resulting
from a reduced level of profitability.
DPW were negatively impacted by one point on a reported basis due to our decision to no longer offer two-year property policies in
Québec. At renewal, these policies are converted to one-year policies with corresponding lower written premium, though earned
premiums are not affected. We expect this will continue to impact DPW by 1-2 points throughout 2014 as the remaining two-year
policies roll off. DPW growth was tempered by the final phase of re-underwriting Jevco business, a process which had not yet begun
in Q4-2012.
Page 6 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Net investment income of $104 million in the fourth quarter was 2% higher than a year ago, as the improvement from migrating the
additional investments from the Jevco acquisition into our higher-yielding asset mix was largely offset by declining yields. The
market-based yield of 3.7% compares to 3.8% in Q3-2013 and 3.6% in Q4-2012. Investments amounted to $12.3 billion, down
$0.7 billion from one year ago.
We ended 2013 in a solid financial position, with an estimated MCT of 203%, $550 million in excess capital and book value per
share of $33.94. Our debt-to-capital ratio at the end of the year was 18.7%, below our internal target level of 20%. We reported an
operating ROE of 11.2% in 2013 despite incurring $530 million in pre-tax catastrophe losses, more than twice the level from 2012.
Full year 2013
Underwriting income declined by $309 million in 2013 with a combined ratio of 98.0% versus 93.1% in 2012. The decrease was
driven by a significant increase in catastrophe losses and by more seasonal weather conditions in Q1-2013 compared to the
unusually mild Q1-2012. The underlying current year loss ratio was up to 64.9% from 63.5% in 2012.
DPW growth of 7% reflects the addition of Jevco as well as organic growth. We estimate that Jevco represented approximately four
points of the DPW growth in 2013.
Net investment income was $406 million in 2013, 4% higher than 2012, primarily from the addition of Jevco’s assets into our
investment mix. We reported a market-based yield of 3.7% in 2013, up from 3.6% in 2012.
Income before income taxes
3.3
A summary of changes in income before income taxes is as follows:
Table 2 – Changes in income before income taxes (year-over-year)
Income before income taxes, as reported in 2012
Operating results
Change in pre-tax operating income (Table 4)
Non-operating results
Change in pre-tax non-operating loss (Table 12)
Income before income taxes, as reported in 2013
Q4-2013
223
(66)
(27)
130
2013
712
(294)
47
465
Page 7 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 4 – Operating results
Net operating income
4.1
The details of NOI and related indicators are as follows:
Table 3 – Components of NOI
Underwriting income (Table 5)
Net investment income (Table 11)
Finance costs
Other income (expense), net1
Pre-tax operating income (Table 4)
Tax impact
NOI 2
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 6 – Non-IFRS financial measures.
Q4-2013
Q4-2012
Change
2013
2012
Change
67
104
(16)
25
180
(37)
143
(5)
138
138
102
(16)
22
246
(52)
194
(5)
189
(51)%
2%
nm
14%
(27)%
nm
(26)%
nm
(27)%
142
406
(64)
76
560
(60)
500
(21)
479
451
389
(60)
74
854
(179)
675
(21)
654
(69)%
4%
nm
3%
(34)%
nm
(26)%
nm
(27)%
131.5
133.3
(1.8)
132.4
130.8
1.6
1.05
1.42
(26)%
3.62
5.00
(28)%
The change in pre-tax operating income for the quarter was primarily driven by the $71 million decline in underwriting income
(described in Sections 4.2 - 4.4 below). Other income of $25 million was 14% higher year-over-year due to growth in income from
the distribution network and the timing of accruals.
Changes in pre-tax operating income can be analyzed as follows:
Table 4 – Changes in pre-tax operating income (year-over-year)
Pre-tax operating income, as reported in 2012 1
Changes in underwriting income:
Change in favourable prior year claims development
Change in catastrophe losses
Other changes in underwriting income
Total change in underwriting income
Change in net investment income
Change in finance costs
Change in other income, net
Total change in pre-tax operating income
Pre-tax operating income, as reported in 2013 1
1 Refer to Section 6 – Non-IFRS financial measures.
Page 8 of 59
Q4-2013
246
(19)
(39)
(13)
(71)
2
-
3
(66)
180
2013
854
2
(241)
(70)
(309)
17
(4)
2
(294)
560
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
4.2
Underwriting results
Table 5 – Components of underwriting results
Net premiums earned, before reinstatement
premiums
Reinstatement premiums
Net premiums earned, as reported
Net claims:
Current year claims (excluding catastrophes)
Underlying current year loss ratio1
Current year catastrophes
Favourable prior year claims development
Total net claims
Claims ratio
Commissions, premium taxes and general
expenses
Expense ratio
Underwriting income
Combined ratio
Q4-2013
Q4-2012
Change
2013
2012
Change
1,805
(1)
1,804
1,220
67.6%
55
(66)
1,209
67.0%
528
29.3%
67
96.3%
1,742
-
1,742
1,121
64.4%
16
(85)
1,052
60.4%
552
31.7%
138
92.1%
4%
nm
4%
9%
3.2 pts
244%
nm
15%
6.6 pts
(4)%
(2.4) pts
(51)%
4.2 pts
7,058
(44)
7,014
4,580
64.9%
486
(374)
4,692
66.9%
2,180
31.1%
142
98.0%
6,581
(10)
6,571
4,179
63.5%
245
(372)
4,052
61.6%
2,068
31.5%
451
93.1%
7%
nm
7%
10%
1.4 pts
98%
nm
16%
5.3 pts
5%
(0.4) pts
(69)%
4.9 pts
1 Underlying current year loss ratio is calculated using the Net premiums earned, before reinstatement premiums. Refer to Section 6 – Non IFRS
financial measures.
Fourth quarter 2013
Underwriting income of $67 million in Q4-2013 was down 51% from Q4-2012. The decline was due to a 3.2 point increase in the
underlying current year loss ratio, a $39 million increase in catastrophe losses and $19 million less favourable prior year claims
development. Catastrophe losses of $55 million were attributable primarily to the December ice storm and an early-November wind
and rain storm.
Favourable prior year claims development, at 3.6% of opening reserves on an annualized basis, was below the 5.2% recorded in
Q4-2012 but in line with our historical level of 3%-4%.
The expense ratio of 29.3% improved 2.4 points in the fourth quarter of 2013 versus Q4-2012, driven by lower variable commissions
resulting from a reduced level of profitability.
Table 6 – Components of expense ratio
Commissions
Premium taxes
General expenses
Expense ratio
Full year 2013
Q4-2013
15.0%
3.5%
10.8%
29.3%
Q4-2012
17.5%
3.5%
10.7%
31.7%
Change
(2.5) pts
-
0.1 pts
(2.4) pts
2013
16.8%
3.6%
10.7%
31.1%
2012
17.5%
3.6%
10.4%
31.5%
Change
(0.7) pts
-
0.3 pts
(0.4) pts
Net premiums earned were up 7% in 2013, in line with the increase in direct premiums written. Underwriting income of $142 million
was well down from $451 million in 2012 due to significantly higher catastrophe losses and a slight weakening in the underlying
current year loss ratio.
Favourable prior year claims development, at 5.1% of opening reserves on an annualized basis, was slightly below the 5.7%
recorded in 2012 but above our historical level of 3%-4%.
The expense ratio of 31.1% for 2013 was 0.4 points improved from 2012, driven by lower variable commissions resulting from a
reduced level of profitability. Partly offsetting the decline in commissions was a 0.3 point increase in general expenses, as the
0.5 point improvement from acquisition-related synergies was offset by the timing of accruals for variable compensation related to
our industry outperformance and higher information technology expenses including non-recoverable sales tax. For 2013, the
favourable impact of synergies was evenly split between loss adjustment expense reductions, which impact the claims ratio, and
general expense related synergies.
Page 9 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
4.3
Underwriting results by line of business – personal lines
Table 7 – 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
Q4-2013
Q4-2012
Change
2013
2012
Change
734
374
722
375
1,108
1,097
836
518
783
527
1,354
1,310
861
394
825
377
1,255
1,202
2%
-
1%
7%
(2)%
3%
4%
5%
4%
14
54
68
(25)
124
99
nm
(56)%
(31)%
3,373
1,621
4,994
3,902
2,221
6,123
3,349
1,519
4,868
228
(66)
162
3,093
1,562
4,655
3,584
2,225
5,809
3,077
1,462
4,539
132
94
226
9%
4%
7%
9%
-
5%
9%
4%
7%
73%
nm
(28)%
1 Comparable periods in 2012 do not include written insured risks related to Jevco.
Table 8 – 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
Fourth quarter 2013
Q4-2013
Q4-2012
Change
2013
2012
Change
75.3%
23.1%
98.4%
52.5%
33.9%
86.4%
68.1%
26.5%
94.6%
77.4%
25.7%
(2.1) pts
(2.6) pts
103.1%
(4.7) pts
68.0%
25.2%
93.2%
70.0%
25.7%
(2.0) pts
(0.5) pts
95.7%
(2.5) pts
31.7%
35.4%
20.8 pts
(1.5) pts
69.0%
35.4%
57.8%
35.7%
11.2 pts
(0.3) pts
67.1%
19.3 pts
104.4%
93.5%
10.9 pts
63.0%
28.8%
91.8%
5.1 pts
(2.3) pts
2.8 pts
68.3%
28.4%
96.7%
66.1%
28.9%
95.0%
2.2 pts
(0.5) pts
1.7 pts
DPW growth in personal auto was 2% year-over-year in Q4-2013, reflecting the final phase of re-underwriting related to Jevco and a
timing impact related to two-year policies (which benefited Q4-2012). The combined ratio of 98.4% was 4.7 points improved from
last year’s 103.1%, largely due to $14 million of favourable prior year claims development, versus $29 million of unfavourable
development in Q4-2012. The underlying current year loss ratio was higher by 2.1 points, driven by the more severe winter driving
conditions.
Personal property DPW remained flat as a result of the conversion of two-year policies to one-year policies in Québec. This decision
reduced our reported DPW by approximately four points in the quarter. Our efforts to improve the performance in this line of
business also included meaningful rate action, which resulted in a 2% decline in units in Q4-2013. The quarter’s combined ratio was
strong at 86.4%, but above the exceptional 67.1% from a year ago which benefited from an unusual level of favourable prior year
claims development. We also experienced a $36 million increase in catastrophe losses related to an early-November wind and rain
storm and the late-December ice storm. The underlying current year loss ratio was higher by 4.4 points versus last year, reflective of
more severe winter weather and the corresponding elevated level of large losses related to fires.
Page 10 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Full year 2013
Personal auto underwriting results were solid in 2013 with a combined ratio of 93.2%, an improvement of 2.5 points versus 2012.
Higher favourable prior year claims development more than offset a decline in current year results. The underlying current year loss
ratio was higher by 1.6 points versus 2012, as claims frequency increased in Q1-2013 while claims severity increased in Q2-2013
and Q3-2013. DPW increased 9% versus 2012, reflecting the addition of Jevco and solid organic growth.
Underwriting results in personal property deteriorated 10.9 points from 2012 with a combined ratio of 104.4% as catastrophe losses
of $272 million were well above last year’s $151 million. Excluding catastrophe losses and prior year claims development, the
underlying current year loss ratio of 54.7% in 2013 was slightly weaker than the strong underwriting performance in 2012. DPW
increased 4% versus 2012 as units remained relatively constant despite rate increases.
4.4
Underwriting results by line of business – commercial lines
Table 9 – Underwriting results for commercial lines
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
Q4-2013
Q4-2012
Change
2013
2012
Change
150
444
594
124
111
235
154
395
549
(1)
-
(1)
146
447
593
120
113
233
146
394
540
23
16
39
3%
(1)%
-
3%
(2)%
1%
5%
-
2%
nm
(100)%
(103)%
612
1,713
2,325
526
466
992
603
1,543
2,146
40
(60)
(20)
552
1,661
2,213
477
443
920
536
1,496
2,032
99
126
225
11%
3%
5%
10%
5%
8%
13%
3%
6%
(60)%
nm
(109)%
1 Comparable periods in 2012 do not include written insured risks related to Jevco.
Page 11 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Table 10 – Underwriting ratios for commercial lines
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 2013
Q4-2013
Q4-2012
Change
2013
2012
Change
75.1%
25.3%
54.7%
29.5%
20.4 pts
(4.2) pts
100.4%
84.2%
16.2 pts
64.2%
29.1%
93.3%
51.6%
29.9%
12.6 pts
(0.8) pts
81.5%
11.8 pts
60.4%
39.6%
100.0%
64.5%
35.6%
100.1%
54.4%
41.5%
95.9%
54.5%
38.2%
92.7%
6.0 pts
(1.9) pts
63.6%
40.3%
51.9%
39.7%
11.7 pts
0.6 pts
4.1 pts
103.9%
91.6%
12.3 pts
10.0 pts
(2.6) pts
63.7%
37.2%
51.8%
37.1%
11.9 pts
0.1 pts
7.4 pts
100.9%
88.9%
12.0 pts
DPW growth in commercial auto was 3% versus Q4-2012, reflecting our final re-underwriting efforts related to Jevco, particularly in
taxi and trucking fleets. The combined ratio of 100.4% was up significantly from last year’s 84.2% due to weaker current year results
and a reduction in favorable prior year claims development. The underlying current year loss ratio deteriorated 14.9 points year-
over-year, as severe winter driving conditions led to an increased frequency of claims while we also recorded an elevated level of
large losses in the quarter.
Commercial P&C DPW declined 1% in Q4-2013 versus the same quarter of 2012 as our efforts to reduce the earthquake exposure
of our portfolio were successful. Though our efforts will continue into the first half of 2014, more than half of the desired reduction
has already occurred. The combined ratio of 100.0% was up 4.1 points from last year as we reported $28 million less favourable
prior year claims development largely due to an adjustment made on a file dating back several years. The underlying current year
loss ratio of 66.1% was unchanged versus Q4-2012.
Full year 2013
DPW growth in commercial auto was strong at 11% versus 2012, on a 10% increase in units, reflecting the addition of Jevco and
organic growth. The combined ratio in 2013 was 93.3% compared to 81.5% in 2012. The year-over-year change was largely driven
by a $31 million decrease in favourable prior year claims development compared to 2012. The underlying current year loss ratio
deteriorated by 6.4 points year-over-year driven by higher claims severity.
Commercial P&C DPW increased 3% versus 2012 driven by the addition of Jevco, partly offset by efforts to reduce our earthquake
exposure. The combined ratio increased from 91.6% in 2012 to 103.9% in 2013. A $117 million increase in catastrophe losses and
a $73 million reduction in favourable prior year claims development drove the 12.3 point increase in the combined ratio. The
underlying current year loss ratio improved by 1.5 points year-over-year.
Page 12 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Net investment income
4.5
As at December 31, 2013, all of our investments are managed internally by our 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 that pay dividends and in preferred
shares.
Table 11 – Net investment income
Interest income
Dividend income
Investment income, before expenses
Expenses
Net investment income
Average net investments1
Q4-2013
Q4-2012
Change
2013
2012
Change
70
43
113
(9)
104
72
40
112
(10)
102
12,036
12,179
(3)%
8%
1%
nm
2%
1%
275
168
443
(37)
406
276
144
420
(31)
389
11,962
11,487
-
17%
5%
nm
4%
4%
Market-based yield2
1 Defined as the mid-month average fair value of equity and fixed-income securities held during the reporting period.
2 Refer to Section 6 – Non-IFRS financial measures.
0.1 pts
3.6%
3.7%
3.7%
3.6%
0.1 pts
Fourth quarter 2013
Net investment income of $104 million in the fourth quarter was 2% higher than a year ago, as the improvement from migrating the
additional investments from the Jevco acquisition into our higher-yielding asset mix was largely offset by declining yields. The
market-based yield of 3.7% compares to 3.8% in Q3-2013 and 3.6% in Q4-2012.
Full year 2013
Net investment income was $406 million in 2013, 4% higher than 2012, primarily from the addition of Jevco assets into our
investment mix (see Section 9.2 – Investments for asset mix details). We reported a market-based yield of 3.7% in 2013, up from
3.6% in 2012.
Page 13 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 5 – Non-operating results
Non-operating results, a non-IFRS financial measure, include elements that are not representative of our operating performance
because they relate to special items, bear significant volatility from one period to another, or because they are not part of our normal
activities. As a result, these elements are excluded from the calculation of NOI and related non-IFRS financial measures.
The details of non-operating results are as follows:
Table 12 – Non-operating results
Net investment gains (losses) (Table 13)
Positive (negative) impact of MYA on underwriting
(Section 5.2)
Integration and restructuring costs (Section 5.4)
Difference between expected return and discount
rate on pension assets (Section 5.3)
Amortization of intangible assets recognized in
business combinations
Change in fair value of contingent consideration
Non-operating loss
5.1
Net investment gains (losses)
Table 13 – Net investment gains (losses)
Fixed-income strategies
Gains on AFS securities
Losses on FVTPL fixed-income securities
Impairment recovery
Losses on derivatives
Losses on fixed-income strategies and
related derivatives
Equity strategies
Gains, net of derivatives
Impairment losses
Gains (losses) on embedded derivatives
Gains (losses) on equity strategies and
related derivatives
Net investment gains (losses)
Net investment gains (losses) excluding FVTPL
fixed-income securities
Fourth quarter 2013
Q4-2013
Q4-2012
Change
2013
2012
Change
(29)
5
(12)
(7)
(7)
-
(50)
6
11
(29)
(5)
(6)
-
(35)
(6)
17
(2)
(1)
-
(23)
(27)
(83)
75
(35)
(27)
(25)
-
(95)
37
(120)
(17)
(108)
(22)
(21)
(11)
(142)
92
73
(5)
(4)
11
47
Q4-2013
Q4-2012
Change
2013
2012
Change
11
(9)
7
(26)
(17)
12
(27)
3
(12)
(29)
(20)
13
(24)
-
(2)
(13)
33
(12)
(2)
19
6
30
(2)
15
7
(24)
10
(115)
7
(34)
(4)
(132)
(21)
(15)
5
(31)
(35)
(50)
115
(79)
13
49
(83)
32
25
(35)
-
(2)
(12)
102
(42)
(11)
49
37
72
(15)
(80)
7
(32)
(120)
13
(37)
24
-
(120)
(40)
Our $20 million net investment loss excluding FVTPL fixed-income securities in Q4-2013 compared to a gain of $30 million in Q4-
2012. The decline is due to lower realized gains on our equity portfolios, including higher impairment charges, as well as losses on
our fixed-income portfolios resulting from rising rates.
Full year 2013
The $40 million decrease year-over-year in net investment gains excluding FVTPL fixed-income securities is the result of higher
losses on our fixed-income portfolio, as gains on our equity strategies and related derivatives were offset by impairment charges.
Page 14 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Impact of MYA on underwriting
5.2
Claims liabilities are discounted at 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 should be evaluated with gains and losses on FVTPL fixed-income securities with the
expectation that these items offset each other with a minimal overall impact to income.
Difference between expected return and discount rate on pension assets
5.3
We continue to manage our pension asset investment portfolio with a target asset return based on a target asset allocation. We
continue to measure NOI using a pension expense based on our expected return on the plan assets to better reflect our
management of the portfolio.
Integration and restructuring costs
5.4
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 $12 million of such expenses in the fourth quarter of 2013 ($6 million
related to Jevco and $6 million related to AXA Canada) and $35 million for the full year 2013, in line with our expectations.
Section 6 – 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. Further, they provide users with an enhanced understanding of our results and related trends
and increase transparency and clarity into the core results of the business.
— 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). We believe that these excluded items are not appropriate in assessing our underlying performance.
— NOI, NOIPS and OROE exclude the impact of net investment gains (losses), the positive (negative) effect of MYA on underwriting,
the difference between expected return and discount rate on pension assets, the amortization of intangible assets recognized in
business combinations, integration and restructuring costs, as well as the change in fair value of contingent consideration.
Investment gains and losses as well as the effect of MYA on underwriting arise mostly from changes in market conditions, which
can be volatile to earnings. We also exclude the difference between expected return and discount rate on pension assets, as we
believe the gap in these measures is not reflective of our internal investment management expertise and management of our
pension investment asset portfolio (see Section 14.1 – New accounting standards effective January 1, 2013 for further details).
— 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. This calculation provides users with a consistent
measure of our relative investment performance.
— The underlying current year loss ratio is our current year claims ratio excluding catastrophe losses, reinstatement premiums, and
prior year claims development. Catastrophe events are beyond our control, and as such, excluding them provides clearer insight
into our analysis of current year performance. See Section 4.2 – Underwriting results for a reconciliation of this non-IFRS financial
measure.
Page 15 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Table 14 – Reconciliation of AEPS to net income
Net income
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
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)
Average common shareholders’ equity
AROE for the last 12 months
Table 15 – Reconciliation of NOIPS to net income
Q4-2013
Q4-2012
107
177
6
8
-
121
(5)
116
131.5
0.88
4,435
10.3%
4
22
-
203
(5)
198
133.3
1.49
4,087
16.1%
2013
431
19
26
-
476
(21)
455
132.4
3.44
2012
571
16
80
11
678
(21)
657
130.8
5.02
Q4-2013
Q4-2012
2013
2012
Net income
Add income taxes
Deduct net investment gains/ add net investment losses (Table 13)
Deduct positive (add negative) impact of MYA on underwriting (Section 5.2)
Add difference between expected return and discount rate on pension assets
(Section 5.3)
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)
Average common shareholders’ equity, excluding AOCI
OROE for the last 12 months
107
23
29
(5)
7
7
12
-
180
(37)
143
(5)
138
131.5
1.05
4,287
11.2%
177
46
(6)
(11)
5
6
29
-
246
(52)
194
(5)
189
133.3
1.42
3,892
16.8%
431
34
83
(75)
27
25
35
-
560
(60)
500
(21)
479
132.4
3.62
571
141
(37)
17
22
21
108
11
854
(179)
675
(21)
654
130.8
5.00
Page 16 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 7 – Business developments and operating environment
AXA Canada and Jevco integration update
7.1
The integration activities for both AXA Canada and Jevco are now complete. During 2013, we converted all remaining AXA Canada
policies into IFC systems and are on track to reach our after-tax synergies target of $100 million for AXA Canada in early 2014 as
we continue to make progress on decommissioning the AXA Canada systems. Our after-tax synergies run-rate as at December 31,
2013 was estimated to be $94 million.
Formal integration of Jevco began in the fall of 2012 and the process of converting policies into IFC systems is mostly completed,
meeting targeted broker service and customer retention levels. During 2013, we reviewed rates and segmentation and worked to re-
underwrite portions of the Jevco portfolio, where required. We remain on track to decommission the Jevco systems throughout
2014. Our after-tax synergies run-rate estimate at the end of 2013 was $17 million, surpassing our initial estimate of $15 million by
the end of 2014.
Canadian P&C insurance industry results – YTD Q3-2013 comparison
7.2
The Canadian P&C insurance results for YTD Q3-2013 are available. Highlights are as follows:
Table 16 – Canadian P&C insurance results
P&C industry1
DPW growth
Combined ratio3
Return on equity4
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).
2.0%
102.8%
4.1%
Industry
Benchmark2
2.4%
102.8%
3.3%
IFC
7.1%
97.2%
10.1%
We outperformed our P&C insurance industry benchmark in the first three quarters of 2013. Our acquisition of Jevco provided
meaningful DPW growth, while we delivered a combined ratio 5.6 points better than our industry benchmark. The combination of
superior underwriting, investment results and capital management led to an ROE outperformance in the first nine months of 2013 of
6.8 points versus our industry benchmark and 6.0 points versus the P&C industry.
Ontario personal auto environment
7.3
In September 2010, the Ontario government implemented auto reforms, 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 increased costs
and led to higher premiums.
Our positive view of the effectiveness of the 2010 Ontario auto reforms has not changed. We continue to see the benefits of the
reforms and our actions; however, we remain prudent in our approach to the business, as uncertainty remains in the system.
Total FSCO pending arbitrations essentially doubled in the first ten months of 2013, while IFC pending arbitrations have increased
only 17%, given our proactive approach to managing our files in dispute. The growing number of files rolling over to arbitration
results in a fair level of uncertainty with respect to the interpretation of the regulations implemented through the 2010 reforms.
FSCO is taking measures to increase arbitration capacity by outsourcing arbitration to private Dispute Resolution Services firms.
The volume is expected to normalize by the second quarter of 2014. In addition, the government is expected to release its review of
the Alternative Dispute Resolution System in February of 2014.
Page 17 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Separately, in August 2013, the Ontario government introduced a rate and cost reduction mandate to lower personal auto insurance
rates by 15% on average after 2 years, while also reducing costs to insurers. Insurers will be asked to file for new rates, reflecting
new cost reduction measures in the system. This process has begun with an average 4% industry reduction approved in Q4-2013,
effective on new business and renewals through the first half of 2014. We expect most companies that have not yet taken a rate
reduction will do so in the coming months, to largely meet the government’s mid-term target of a cumulative average 8% reduction
by August 2014. IFC will be reducing rates by 5% on average, targeting discounts to safe drivers. One strategy to identify safer
drivers will be our launch of usage based insurance in Ontario in April 2014. We continue to believe we can protect our profitability
in the Ontario auto book of business, but the implementation of additional cost reduction measures is important.
Home insurance
7.4
Table 17 illustrates that prior initiatives to improve the combined ratio from the 2008 level by our stated objective of 10-15 points
were successful. 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 higher levels of favourable prior year claims
development, without which, reported results would be less favourable.
Table 17 – Composition of combined ratios - personal property
Combined ratio excluding catastrophe losses and PYD
(defined below)
Impact of catastrophe losses
Impact of prior year claims development (PYD)
2013
2012
2011
2010
2009
2008
90.8%
89.2%
17.9% 10.3%
(4.3)% (6.0)%
93.6%
13.3%
(3.4)%
94.6% 101.2% 104.3%
8.7%
8.6%
0.6%
(0.8)%
5.9%
(4.0)%
Reported combined ratio
104.4% 93.5% 103.5%
96.5% 109.0% 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 the elevated levels experienced since 2011. To attain this objective, we are taking action by implementing the following
initiatives with ultimate benefits generated over the next 18-24 months:
Ongoing:
—
—
—
renewing at the higher rates;
increasing education and awareness campaigns, including the launch of “insuranceisevolving.com”; and
reducing earthquake exposure and increasing rates to reflect the rise in earthquake reinsurance costs.
Targeted for 2014:
—
revise product wordings to present specific weather and water-related perils – including hail, wind and sewer back-up, increased
base deductibles and deductibles associated with weather and water-related perils, and display premium per peril to provide
customers with more transparent pricing;
reduce maximum coverage available for some specific perils in higher risk areas;
claims management initiatives: reduce reliance on external field adjusters and improve field technology to better enable us to deal
with catastrophes by improving our service and reducing leakage; and
tie prevention to pricing.
—
—
—
Page 18 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Capital markets
7.5
The Canadian equity market continued to climb in the fourth quarter of 2013, as the S&P/TSX Index rose 6.5%, with particular
strength in industrials and financials, while slightly higher bond yields pressured the preferred share index 1.5% lower. Movements
in our equity investment values are generally in line with the equity markets' performance, although our exposures to individual
sectors may be different. Our pre-tax unrealized gain of $70 million in the quarter was largely due to higher equity prices on
common shares. Tables 13, 28 and 29 provide detailed information on the net investment gains (losses) and unrealized gains
(losses) of our investment portfolio.
Industry pools
7.6
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 2013, the net impact of industry pools on personal auto
underwriting income was relatively unchanged versus Q4-2012, excluding MYA. Results for industry risk sharing pools tend to
fluctuate between periods.
7.7 Weather conditions
Q4-2013 experienced weather conditions that were generally colder with below-average levels of precipitation. The average daily
temperatures in Canada’s seven largest cities were approximately two degrees Celsius below historical levels and one degree
colder than Q4-2012, while precipitation was 20% lower than levels experienced over the past 10 years, and declined by more than
23% when compared with Q4-2012. Catastrophe losses were elevated, however, as a result of an ice storm in late-December that
left hundreds of thousands without power in Toronto and parts of Eastern Canada, in addition to severe wind and rain events in
Ontario and Québec during the month of November.
Seasonality of the business
7.8
The P&C insurance business is seasonal in nature. While net premiums earned are generally stable from quarter to quarter,
underwriting results are driven mainly by weather conditions which may vary significantly between quarters. The underlying
seasonality in our combined ratio is best illustrated by excluding the impact of catastrophe losses (see Table 19).
Table 18 – Seasonal indicator, including catastrophe losses
2013
2012
2011
2010
2009
2008
2007
2006
Eight-year
average
Q1
Q2
Q3
Q4
0.97
1.00
1.05
0.98
0.99
0.99
1.03
0.99
1.00
1.03
0.99
0.98
0.98
0.98
1.01
1.03
1.00
0.97
1.07
0.96
1.03
0.98
0.97
1.02
1.01
0.99
1.02
0.98
1.02
0.92
1.01
1.05
1.00
0.98
1.02
1.00
Table 19 – Seasonal indicator, excluding catastrophe losses
2013
2012
2011
2010
2009
2008
2007
2006
Eight-year
average
Q1
Q2
Q3
Q4
1.04
0.97
0.97
1.02
1.02
0.98
0.97
1.03
1.04
0.96
0.99
1.01
1.00
0.99
0.98
1.03
1.02
0.99
1.00
0.99
1.03
0.97
0.97
1.03
1.02
0.98
1.01
0.99
1.03
0.93
0.99
1.05
1.03
0.97
0.99
1.01
Normal course issuer bid
7.9
On May 13, 2013 we commenced an NCIB to repurchase for cancellation up to 6,666,683 common shares during the next
12 months, ending May 12, 2014, representing approximately 5% of our issued and outstanding common shares. We repurchased
a total of 1,790,531 common shares in 2013. See Section 15.4 – NCIB program for further details.
Page 19 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 8 – Strategy and outlook
Canadian P&C insurance industry 12-month outlook
8.1
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.
Our strategy and outlook
We maintain our disciplined strategy while
to grow
capitalizing on our strong position
organically in the prevailing market conditions.
Our growth efforts in the Ontario auto market are
taking effect, particularly in our direct business.
Given the trend of increases in severe weather,
we intend to build on the actions previously taken
to ensure adequate profitability and create a
sustainable competitive advantage
in home
insurance.
In commercial lines, we intend to build on our
historical loss ratio advantage 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
meaningfully grow in the mid-sized segment and
in specialty lines.
We maintain a solid
financial position with
$550 million in excess capital and a debt-to-capital
ratio of 18.7% as at the end of Q4-2013.
Our $12.3 billion investment portfolio is largely
Canadian dollar-denominated.
We do not expect growth in our net investment
income over the next 12 months.
We expect our MCT to remain in the 195%-205%
range in the next 12 months.
We believe we will outperform the industry’s ROE
by at least 500 basis points in the next 12 months.
Market
environment
(12-month
outlook)
Canadian P&C insurance industry
Industry premiums are likely to increase at a low
single digit rate, with low single digit growth in
personal auto and commercial lines and upper
single digit growth in personal property.
We expect premium reductions in Ontario auto to
largely be commensurate with additional cost
reduction measures and, as such, we do not
foresee a material deterioration in profitability.
We expect the current hard market conditions in
personal property to accelerate meaningfully as the
magnitude of 2013 catastrophe losses negatively
impacts industry results.
We believe continued low interest rates and the
impact on commercial
from
elevated catastrophe losses in 2013 could translate
into firmer conditions over time, following several
years of soft market conditions.
loss ratios
lines
Capital
markets
Recent economic data and comments from the
Bank of Canada lead us to believe that the
overnight lending rate is likely to remain low for the
foreseeable future. We estimate that the industry’s
pre-tax investment yield will remain relatively flat,
given its asset mix and duration.
Capital markets remain volatile, as economic data
suggest that more time is required for the global
recovery to take hold. Industry capital levels could
be negatively
in
downward pressure on market values.
Global capital requirements are continuing to
if volatility
impacted
results
influence the asset decisions of many companies.
The level of catastrophe losses is likely to diminish
in 2014 versus a record high in 2013 of more than
$3 billion. This should lead to combined ratio
improvement in 2014 at the industry level. The level
of
improve
materially versus 2013. Overall, we expect the
industry’s ROE to trend back toward its long-term
average of 10% in 2014.
is unlikely
investment
income
to
Overall
Page 20 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Critical capabilities
8.2
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
Sophisticated pricing
and underwriting
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.
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 claims
expertise
Substantially all of our claims are handled in-house. This translates to claims being settled faster and
at a lower cost, and a more consistent service experience created for the customer.
Broker relationships
Multi-channel
distribution
Proven acquisition
strategy
Strong expertise in
investment portfolio
management
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.
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 an 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 a 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 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.
Page 21 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 9 – Financial condition
Condensed balance sheets
9.1
The table below shows the significant Consolidated balance sheets captions.
Table 20 – Condensed balance sheets
As at
Assets
Investments
Premium receivables
Reinsurance assets
Deferred acquisition costs
Other assets
Intangible assets and goodwill
Total assets
Liabilities
Claims liabilities
Unearned premiums
Financial liabilities related to investments
Other liabilities
Debt outstanding
Total liabilities
Shareholders’ equity
Common shares
Preferred shares
Contributed surplus
Retained earnings
AOCI
Shareholders’ equity
Book value per common share (in dollars)
Reference
December 31,
2013
December 31,
2012
Section 9.2
Section 9.3
Section 10.1
Section 10.1
Section 15
12,261
2,764
505
718
1,409
2,117
19,774
7,996
4,125
234
1,322
1,143
12,959
2,670
320
705
1,083
2,076
19,813
7,656
4,046
486
1,589
1,143
14,820
14,920
2,090
489
116
2,147
112
4,954
33.94
2,118
489
121
1,982
183
4,893
33.03
Page 22 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Investments
9.2
As at December 31, 2013, our total investments declined to $12.3 billion from $13.0 billion a year ago. The decrease is mainly
attributable to operational cash requirements, driven by the settlement of claims related to significant catastrophe events as well as
an increase in income taxes paid and a voluntary cash contribution to our pension plans. Our investment portfolio is mainly
comprised of Canadian securities and includes a mix of cash and short-term notes, fixed-income securities, preferred and common
shares. Most of our 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.
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, 2013, we have $193 million ($276 million at December 31, 2012) in asset-backed securities mostly comprised of Canadian
credit card and auto loan receivables ($151 million as at December 31, 2013, $217 million as at December 31, 2012) and mortgage-
backed securities ($42 million as at December 31, 2013, $59 million as at December 31, 2012). All of these are rated ‘AAA’ as at
December 31, 2013 and 2012.
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,
called, or sold to take advantage of market opportunities. The preferred share portfolio is comprised entirely of Canadian issuers
with over 90% 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 21 – Investment mix
As at
Short-term notes, including cash and cash equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
Total investments
December 31,
2013
As a % of
total
December 31,
2012
As a % of
total
141
7,867
1,190
2,644
11,842
419
12,261
1%
64%
10%
22%
97%
3%
100%
386
8,543
1,263
2,376
12,568
391
12,959
3%
66%
10%
18%
97%
3%
100%
As part of our investment strategies, from time to time we may take long/short equity positions in order to maximize the value added
from active equity portfolio management, or to mitigate overall equity market volatility. We also use strategies where long equity
positions are economically hedged using swap agreements or other hedging instruments.
Page 23 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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 22 – 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,
2013
As a % of
total
December 31,
2012
As a % of
total
291
8,759
1,142
1,440
11,632
419
2%
73%
10%
12%
97%
3%
386
9,214
1,195
1,299
12,094
391
3%
74%
10%
10%
97%
3%
Total investments net of hedging positions and financial
liabilities related to investments
12,051
100%
12,485
100%
The investment mix as at December 31, 2013 is essentially unchanged compared to December 31, 2012.
The following table reconciles the total investments before and after reflecting hedging strategies and financial liabilities related to
investments.
Table 23 – Reconciliation between total investments and total investments net of hedging positions and financial liabilities related to investments
As at
Total investments (Table 21)
Deduct equities sold short positions
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 22)
December 31,
2013
December 31,
2012
12,261
-
(59)
(151)
12,959
(301)
(68)
(105)
12,051
12,485
Net asset value attributable to third party unit holders represents third party interests in a closed mutual fund for which we hold the
majority of the units and for which we act as investment manager.
Page 24 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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, 2013.
Table 24 – Sector mix by asset class (net of hedging positions and financial liabilities related to investments)
Common shares
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
56%
37%
1%
-
1%
1%
1%
-
1%
1%
1%
100%
8,801
-
78%
15%
-
-
7%
-
-
-
-
-
100%
1,142
IFC
-
13%
37%
13%
6%
5%
10%
12%
4%
-
-
100%
1,440
S&P/TSX
Weighting
IFC Total
-
35%
25%
5%
8%
2%
5%
12%
3%
2%
3%
100%
nm
43%
37%
7%
2%
2%
2%
2%
2%
1%
1%
1%
100%
11,383
Our fixed-income investment portfolio is concentrated mainly in the government and financial sectors in order to provide liquidity and
stability to our balance sheet and our equity portfolio has a focus on dividend-paying Canadian companies.
Portfolio credit quality
The following table highlights the credit quality of our fixed-income securities portfolio.
Table 25 – Credit quality of the fixed-income securities
Fixed-income securities1
AAA
AA
A
BBB
Non-rated
Total
1 Source: S&P or DBRS.
December 31, 2013
December 31, 2012
Fair value As a % of total
Fair value As a % of total
3,705
3,031
1,052
70
9
7,867
47%
39%
13%
1%
-
100%
3,701
3,467
1,268
93
14
8,543
43%
41%
15%
1%
-
100%
As at December 31, 2013 the weighted-average rating of our fixed-income portfolio was ‘AA+’, unchanged since December 31,
2012. The average duration of our bond portfolio was 3.91 (4.40 including the impact of derivatives used to increase overall interest
rate exposure).
Page 25 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
The following table shows the credit quality of our preferred share portfolio.
Table 26 – Credit quality of the preferred share portfolio
Preferred shares1
P1
P2
P3
Non-rated
Total
1 Source: S&P or DBRS.
December 31, 2013
December 31, 2012
Fair value As a % of total
Fair value As a % of total
100
1,042
47
1
1,190
8%
88%
4%
-
100%
369
797
89
8
1,263
29%
63%
7%
1%
100%
The weighted-average rating of our preferred share portfolio was ‘P2’ as at December 31, 2013, unchanged since
December 31, 2012. The increase in the proportion of ‘P2’, relative to ‘P1’ preferred shares, is due to a reduction by DBRS of the
credit rating of preferred shares issued by certain large financial institutions.
The following table provides our investment portfolio breakdown by region of issuer.
Table 27 – Portfolio breakdown by region of issuer
As at
Canada
U.S.
Europe1
Other
Total
1 European Government debt represents less than 3% of our total portfolio as at December 31, 2013 and 2012.
December 31,
2013
December 31,
2012
93%
3%
3%
1%
100%
97%
-
2%
1%
100%
Our investment portfolio is mainly comprised of Canadian securities. We do not invest in leveraged securities and our exposure to
the U.S. market remains minimal, with principally non-financial corporate U.S. bonds.
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 28 – 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,
2013
September 30,
2013
June 30,
2013
March 31,
2013
December 31,
2012
10
38
120
168
17
43
38
98
20
61
(4)
77
95
110
89
294
81
121
63
265
During Q4-2013, our pre-tax unrealized gain position increased by $70 million. This increase is mainly due to higher equity prices on
common shares.
The $97 million decrease year-over-year in our pre-tax unrealized gain position stems principally from the impact of higher rates on
the prices of our fixed-income securities and preferred shares, partially offset by strong equity markets contributing to positive
development on our common shares.
Page 26 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(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 if there are reasons to
believe that the decline in the market value is temporary. Based on our assessment, we recorded impairment losses on AFS
common shares amounting to $23 million and $57 million in Q4-2013 and full year 2013, respectively.
Table 29 – 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,
2013
September 30,
2013
June 30,
2013
March 31,
2013
December
31, 2012
30
2
1
33
40
4
20
64
32
21
27
80
27
6
-
33
17
1
9
27
Claims liabilities
9.3
Claims liabilities amounted to $8.0 billion as at December 31, 2013, up $0.3 billion from the December 31, 2012 level, reflecting
growth and the additional claims provision for the catastrophe events of 2013.
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 5.2 – Impact of MYA on
underwriting). 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.
Page 27 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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.
Table 30 – Prior year claims development (excluding MYA)
Total
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003 &
earlier
2,470
2,411
2,120
1,835
1,652
1,458
1,300
1,190
1,161
2,643
Accident year
Original reserve
Favourable development
during Q4-2013
Favourable development
during 2013
(374)
(108)
(94)
(66)
(12)
(22)
(13)
(48)
(10)
(44)
(16)
(43)
(12)
(25)
(6)
(5)
(8)
(21)
(15)
(11)
38
35
Cumulative development
as a % of original
reserve
(4.4)% (10.1)% (10.3)% (8.4)% (8.3)% (7.4)% (9.7)% (16.6)% (27.1)% (16.9)%
Table 31 – Annualized rate of favourable prior year claims development
(annualized rate)
Q4-2013
Q4-2012
Favourable prior year claims development (as a % of opening reserves)
3.6%
5.2%
2013
5.1%
2012
5.7%
Favourable prior year claims development for the quarter, at 3.6% of opening reserves on an annualized basis, was below the 5.2%
recorded in Q4-2012, but in line with our historical level of 3% to 4%. The favourable development, amounting to $66 million, was
composed of $32 million in commercial P&C, $17 million in personal property, $14 million in personal auto, and $3 million in our
commercial auto line of business.
Favourable prior year claims development for the year, at 5.1%, was also below 2012, but above our historical level of 3% to 4%.
Page 28 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Employee future benefit programs
9.4
We sponsor a number of funded (registered) and unfunded defined benefit pension plans that provide benefits to members in the
form of a guaranteed level of pension payable for life based on final average earnings and contingent upon certain age and service
requirements.
Because of the long-term nature of our pension obligations, movements in discount rates and investment returns could bring
volatility in our balance sheet. In recent years, we have taken a multi-faceted approach to ensure the sustainability of our pension
plans and gradually reduce the risk and volatility that stems from our pension liabilities and assets, including:
increasing the target allocation of fixed-income securities to reduce our exposure to market volatility;
—
improving our pension asset-liability matching to reduce our interest-rate exposure;
—
— making voluntary contributions to improve the funding status of our pension plans (we made a voluntary contribution of
$114 million in December 2012); and
amending pension plan benefits and conditions.
—
As at December 31, 2013, 62% of our pension plan assets were invested in fixed-income securities and our hedge ratio stood at
73%. We calculate the hedge ratio of our pension plans by dividing the dollar-duration of the pension asset portfolio by the dollar-
duration of the funded pension plans’ obligation.
Plan assets are highly dependent on the level of contributions and on the pension fund’s asset performance. In 2012 and 2013, we
contributed over $330 million in our pension plans, including a discretionary contribution of $114 million. As at December 31, 2013,
the fair value of our pension plan assets amounted to $1.4 billion. Based on the latest projections, our total cash contributions to
pension plans are expected to be approximately $60 million in 2014. The level of contributions will vary depending on funding relief
measures, if any, and decisions taken to use or not letters of credit as permitted by legislation.
The following table presents the movement in the accounting funding status of our funded pension plans during the 2013 year.
Table 32 – Change in surplus (deficit) – funded pension plans
Deficit, as at January 1, 20131
Employer contributions
Impact of change in discount rates2
Impact of change in mortality assumptions2
Current service cost
Interest expense on defined benefit obligation
Negative return on plan assets3
Other
(54)
117
216
(50)
(66)
(58)
(4)
(13)
Surplus, as at December 31, 20131
1 Excludes the unfunded pension plans’ obligation amounting to $60 million as at December 31, 2013 ($61 million as at December 31, 2012).
2 Recognized in OCI.
3 Comprised of the interest income credited on pension assets ($55 million) recognized in income and of re-measurement (return on plan assets)
88
(negative $59 million) recognized in OCI.
As at December 31, 2013, we have a net surplus of $88 million, or 107%, for funded pension plans, compared to a net deficit of
$54 million, or 96%, as at December 31, 2012. The improvement in the funded status is mainly driven by the impact of change in
discount rates and by employer contributions, partially offset by the impact of change in mortality assumptions.
Beginning in 2014, all employees have a choice between a defined benefit or a defined contribution pension plan.
We also offer employer-paid post-retirement benefit plans providing life insurance and health and dental benefits to a limited
number of active employees and retirees that are now closed to new entrants, as well as post-employment benefit plans that
provide health and dental coverage to employees on disability. As at December 31, 2013 our net benefit liability in respect of those
plans amounted to $32 million (December 31, 2012 - $34 million). The post-retirement and post-employment benefit plans are
unfunded.
Page 29 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Benefit obligations arising from our defined benefit plans are dependent on assumptions, such as the discount rate, life expectancy
of pensioners, inflation and 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. Mortality rates
have been established in accordance with the draft private sector table and improvement scale published in 2013 by the Canadian
Institute of Actuaries following its Canadian pensioner mortality study.
Table 33 – Impact of changes in key assumptions
As at December 31, 2013
Discount rate:
1% increase
1% decrease
Rate of compensation increase:
1% increase
1% decrease
Rate of inflation:
1% increase
1% decrease
Life expectancy of pensioners:
One-year increase
Impact on net
benefit liability
(248)
302
64
(61)
54
(51)
35
Refer to Note 22 – Employee future benefits to the accompanying Consolidated financial statements for more details on our pension
plans, post-retirement and post-employment benefit plans.
Section 10 – Liquidity and capital resources
10.1 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 with a goal to return to our target within a reasonable time frame.
As at December 31, 2013, we had a debt-to-capital ratio of 18.7%, compared to 18.9% as at December 31, 2012.
Credit Facilities
We have a $300-million four-year unsecured revolving term credit facility maturing on October 26, 2016. This credit facility may be
drawn as a prime loan at the prime rate plus a margin or as bankers’ acceptances at the bankers’ acceptance rate plus a margin.
This facility was undrawn as at December 31, 2013 and 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, 2013 and 2012.
Page 30 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
10.2 Credit ratings
On November 27, 2013, DBRS reaffirmed its ratings of Intact Financial Corporation and maintained the outlook as stable.
During 2013 A.M Best and Moody’s also reaffirmed their respective ratings for financial strength and long-term issuer credit for IFC
and its principal operating subsidiaries.
Table 34 – Credit ratings
Long-term issuer credit ratings of IFC
Financial strength ratings of IFC’s principal insurance subsidiaries
1 Jevco and companies previously owned by AXA Canada are not rated by Moody’s.
A. M. Best
Moody’s1
a-
A+
Baa1
A1
DBRS
A (low)
n/a
10.3 Base shelf prospectus and medium-term note supplement
On August 13, 2013, 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 $3.0 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 a medium-term note program that would allow us to issue up to $850 million in
unsecured medium-term notes. As at December 31, 2013, the amounts available under the respective prospectuses were $3.0
billion and $850 million.
10.4 Cash flows
Table 35 – Selected cash inflows (outflows)
Operating activities
Net cash flows provided by (used in) operating
activities
Financing activities
Proceeds from the issuance of debt
Repayment of term loan facilities
Proceeds from issuance of common shares
Dividends paid on common shares and preferred
shares
Common shares repurchased for cancellation
Common shares repurchased for share-based
payments
Other activities
Business combination, net of cash acquired
Proceeds from sale of AXA Canada’s life insurance
business
Purchases of brokerages, books of business,
intangibles, property and equipment, net of sales
Cash flow available for investment activities1
Purchase of investments, net of proceeds from sales
Net decrease in cash and cash equivalents
Q4-2013
Q4-2012
Change
2013
2012
Change
(27)
204
(231)
185
723
-
-
-
(63)
-
(6)
-
-
(62)
(158)
50
(108)
-
-
-
(58)
-
2
-
-
(17)
131
(241)
(110)
(5)
-
(8)
-
-
(45)
(289)
291
2
-
-
-
(254)
(106)
249
(400)
227
(231)
-
(37)
(26)
-
-
(159)
(371)
298
(73)
(507)
300
(134)
201
(235)
(34)
(538)
(249)
400
(227)
(23)
(106)
(11)
507
(300)
(25)
(572)
533
(39)
1 A non-IFRS financial measure which includes net cash flows from cash and cash equivalents and the investment portfolio.
Page 31 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Fourth quarter 2013
Cash flow available for investment activities decreased by $289 million versus Q4-2012. This is mainly due to the settlement of
claims from the catastrophes of the second and third quarter.
Full year 2013
The full year Cash flow available for investment activities decreased by $572 million over last year. This is mostly due to a
decrease in operating cash flows reflecting the settlement of claims related to significant catastrophe events as well as an increase
of income taxes paid of $192 million and a voluntary cash contribution of $114 million to our pension plans.
10.5 Contractual obligations
Table 36 – Contractual obligations
Debt outstanding1
Interest payments on debt
Claims liabilities2
Operating leases on premises and
equipment
Pension obligations3
Total contractual obligations
Total Less than 1 year
1 - 3 years
4 - 5 years After 5 years
Payments due by period
1,143
1,244
4,704
798
141
8,030
-
63
1,886
105
46
2,100
-
188
1,157
190
71
1,606
-
121
715
165
11
1,012
1,143
872
946
338
13
3,312
1 Principal 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.
Section 11 – Capital management
11.1 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;
—
— maintain our strong position in the Canadian P&C insurance industry.
provide adequate returns for our shareholders; and
Our capital is managed on an aggregate 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 of the AMF and the Act respecting insurance. OSFI and
the 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 there is minimal risk of breaching the supervisory target MCT, we have
established a minimum internal threshold of 170%, in our principal insurance subsidiaries, in excess of which, under normal
circumstances, we will maintain our capital.
Page 32 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Our goal is to maintain adequate excess capital levels to ensure 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 intend to maintain capital levels well above our minimum internal threshold to
absorb fluctuations in equity markets or interest rates. Our intent is also to keep higher levels of excess capital if we foresee growth
or actionable opportunities in the near term. Finally, we intend to return excess capital to shareholders first through annual dividend
increases and then through share buy-backs when excess capital levels permit. Consistent with this, we believe that an NCIB
program provides a flexible means to return capital to shareholders allowing us to manage our excess capital while benefiting from
market conditions. For further details on our progress to date under the current NCIB program, please refer to section 15.4 – NCIB
program hereafter.
2015 MCT Guidelines
MCT guidelines change from time to time and may impact our capital levels. We therefore monitor all changes, actual or planned,
very carefully. On December 20, 2013, OSFI released a draft MCT guideline proposing changes to the MCT framework beginning in
2015. The comment period for public consultation on the proposed guideline closes on March 15, 2014 and a final guideline is
expected in fall 2014. Based on our initial assessment of the proposals contained in the draft guideline, our MCT would improve but
impacts are proposed to be phased in over eight quarters beginning Q1-2015.
11.2 Capital position
The following table presents the estimated aggregate MCT ratio of our P&C insurance subsidiaries.
Table 37 – Aggregate MCT
As at
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%
December 31,
2013
December 31,
2012
3,750
1,849
203%
1,901
977
607
3,764
1,840
205%
1,924
1,004
636
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, 2013, 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 aggregate MCT level as at December 31, 2013 remained solid at an estimated 203%. The decrease from 205% at
December 31, 2012 mainly reflects elevated catastrophe losses, the decline in our investment portfolio due to rising yields and weak
equity markets, and capital returned to shareholders through the NCIB program. These were partly offset by the positive impact
arising from pension accounting changes and operating profit.
Including net liquid assets outside of the P&C insurance subsidiaries, we had an estimated total of $550 million in excess capital at
an MCT of 170% as at December 31, 2013, compared to total excess capital of $599 million as at December 31, 2012. The
decrease in total excess capital position mainly reflects the variance from the aggregate MCT described above.
Page 33 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
11.3 MCT sensitivity
The MCT is impacted by many factors including changes in equity market performance, interest rates and underwriting profitability.
Based on our estimated aggregate MCT of 203% as at December 31, 2013, 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 38 – Sensitivity to interest rates and equity markets
Interest rates
1% increase1
Equity markets
decline2
MCT3
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
(4) pts
(4) pts
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 2013 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 12 – Risk management
Introduction
12.1
We have 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 material risks we are 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 our management has put appropriate risk management programs in place. The Board of Directors, directly and in
particular through its Risk Management Committee oversees our 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 our 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 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 we employ 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.
Page 34 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
12.2 Risk management structure
The Board of Directors is responsible for the oversight of risk management to ensure that risks are properly measured, monitored
and reported. In this regard, the Board is supported by its Risk Management Committee that covers enterprise wide risks. In
addition, we have an internal Enterprise Risk Committee composed of senior executives.
In 2013, the Board and Committee structures were reviewed to be aligned with best practices, the applicable laws and the new
OSFI Corporate Governance Guideline. The following structure is in place:
— Board of Directors: The main responsibility of the Board is to oversee our management of business and affairs, including our
pension funds. In this regard, the Board establishes policies, reporting mechanisms and procedures in view of safeguarding our
assets and ensuring its long-term viability, profitability and development.
— Audit Committee: The Audit Committee is a committee that is responsible for reviewing our Financial Statements and financial
information including our pension funds. The Audit Committee is responsible for overseeing our accounting and financial reporting
process and, in this regard, reviews, evaluates and oversees such processes; it is also responsible for evaluating the integrity of
our Financial Statements and for overseeing the quality and integrity of internal controls.
— Human Resources and Compensation Committee: The Human Resources and Compensation Committee is a committee of the
Board of the Company the primary function of which is to assist the Board in fulfilling its supervisory responsibilities for strategic
oversight of our human capital, including organization effectiveness, succession planning and compensation, and the alignment of
compensation with our philosophy and programs.
— Compliance Review and Corporate Governance Committee: The Compliance Review and Corporate Governance Committee
(“CRCG Committee”) is responsible for ensuring a high standard of governance, compliance and ethics in our company, including
our pension funds. In this regard, the CRCG Committee is responsible for overseeing our governance framework, it is also
responsible for overseeing our compliance framework as well as our compliance programs including Related Party Transactions
(“RPT”), our market conduct programs and policies, as well as the governance framework of our pension plans and the
implementation of corporate compliance initiatives.
— Risk Management Committee: The Risk Management Committee is a committee of the Board of Directors whose primary
function is to assist the Board with its oversight role with respect to our management in order to build a sustainable competitive
advantage, by fully integrating the Enterprise Risk Management Strategy into all our business activities and strategic planning and
our subsidiaries and operations, including our pension funds.
— Enterprise Risk Committee (refer to figure 1): This committee is composed of senior officers and is chaired by the Chief Risk
Officer designated by the Board of Directors. It meets regularly and oversees 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 Risk Management Committee. The Enterprise Risk Committee evaluates our overall risk profile, aiming for a balance
between risk, return, and capital, and approves risk policies. The Enterprise Risk 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) manages risk in accordance with the risk tolerance level determined by the 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 Enterprise Risk Committee to access the expertise throughout our company and to operate
more efficiently in addressing key risks.
In addition, we have 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.
Page 35 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Figure 1: Committees involved in risk management
Board of Directors
Risk Management
Committee
Compliance Review and
Corporate Governance
Committee
Human Resources
and Compensation
Committee
Audit
Committee
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, 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
12.3 Corporate governance ensuring compliance with laws and regulatory requirements
We believe that sound corporate governance and compliance monitoring related to legal and regulatory requirements are
paramount for maintaining the confidence of different stakeholders including our investors. Legal and regulatory compliance risk
arises from non-compliance with the laws, regulations or guidelines applicable to us as well as the risk of loss resulting from non-
fulfilment of a contract. We are subject to strict regulatory requirements and detailed monitoring of our operations in all provinces
and territories where we conduct business, either directly or through our subsidiaries. Our 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 our operations to enable them to effectively oversee our 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 we meet our 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. We have 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 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, we have 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. We also use third party legal experts and take provisions when deemed necessary or appropriate.
Page 36 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
While senior management has ultimate responsibility for compliance, it is a responsibility that each individual employee shares. This
is clearly set out in our core Business Values and Code of Conduct and employees sign a confirmation that they have reviewed and
complied with them annually.
12.4 Mandate of Enterprise Risk Management
Our business strategies and capital management decisions are tied to the risks we are 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 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).
Figure 2: Risk Management Model
Page 37 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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;
Our Enterprise Risk Management objectives consist of:
—
—
— monitoring of identified risks, major incidents and controls 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 with 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.
Figure 3: Risk Management functions – the 3 lines of defence
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.
Page 38 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
12.5 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 management culture; and
— we maintain our ability to access capital markets at reasonable costs.
12.6 Main risk factors and mitigating actions
Our main risk factors together with our risk management practices used to mitigate these risks are explained below.
Insurance risk
Catastrophe 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, wind storms, earthquakes, hailstorms, rainstorms, ice storms, floods, explosions, severe winter weather and
fires. Unnatural catastrophes events include but are not limited to 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 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 Alberta Flood in June 2013 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 or Québec could
have a significant impact on our profitability and financial condition. Depending on the magnitude of the earthquake, its epicentre,
and on 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.
Our 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 us. See Section 12.7 – Reinsurance for more details on our 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.
—
Page 39 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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
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 9.3 – Claims liabilities for more details on the claims reserve and prior year claims
development.
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, our 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 our home insurance claims.
Over the last few years, we have witnessed a continued increase in the number and severity of weather events. Heavy wind and
rain in various parts of the country during 2013 resulted in significant claims, particularly in our property insurance portfolio. The
trend in climate change poses a meaningful risk to our ability to meet our business objectives.
To address this issue, we have 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. These
initiatives accelerated in 2013, however, there is no guarantee that they will succeed.
Page 40 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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.
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 us. Although worldwide catastrophe losses were lower in 2013 than in the
previous year, the cost of catastrophes in Canada increased which has resulted in some pressure on reinsurance pricing locally.
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 12.7 – 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 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. We invest significantly in promoting our brands with an
increasing focus on using web and mobile technology to reach consumers.
Consolidation in the Canadian P&C industry continued in 2013. As competitors gain scale, it may erode our competitive advantage.
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.
We have adopted policies which specify our retention limits and risk tolerance and our application depends on training and the
discipline of our underwriting teams. Once the retention limits have been reached, we turn 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 our profitability objectives. This risk may be due to an inadequate assessment of market needs, new
business context, 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
our 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.
Page 41 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Financial risk
Market risk
Movements in interest rates, credit spreads, foreign exchange rates and equity prices cause changes in realized and unrealized
gains and losses. Generally, our 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 we continue 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 our existing fixed-income securities will
generally decrease and our realized gains on fixed-income securities will likely be reduced or result in realized losses. Changes in
credit spreads would have similar impacts as 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. Recently, in 2013, interest rates rose considerably. A
continued and significant increase in interest rates could materially affect the value of our investments.
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 we own 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 our 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 our investments were negatively impacted by these events resulting in losses.
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, we employ several risk mitigation measures such as changes
to its strategic asset mix, hedging of interest rate, foreign exchange, 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 our
risk tolerance level. Sensitivity analysis involves varying a single factor to assess the impact that this would have on our results and
financial condition.
For example, a 100 basis point variation in interest rates would normally impact Net income and OCI as follows:
Table 39 - Sensitivity analysis for interest rate risk
For the years ended December 31,
100 basis-point increase
100 basis-point decrease
2013
2012
Net income
OCI
Net income
(21)
21
(127)
127
-
-
OCI
(138)
138
The above sensitivity analysis was prepared using the following key assumptions:
The 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.
−
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
−
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 market-yield
adjustment.
− AFS fixed income securities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be
realized through a sale or impairment.
Page 42 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Shocks of 10% and 25% applied to the price of all common shares, net of any equity hedges, combined respectively with shocks of
5% and 10% applied to the price of all preferred shares and related imbedded derivatives, including the impact of any impairment,
would impact Net income and OCI as follows:
Table 40 - Sensitivity analysis for equity price risk
For the years ended December 31,
Price of all common shares:
10% increase
10% decrease
2013
Net income1
OCI
Net income1
2012
(16)
3
152
(140)
(14)
12
OCI
141
(138)
25% increase
325
(309)
25% decrease
1 Declines in the price of AFS perpetual preferred shares is recorded in OCI and would normally lead to a lower valuation for associated embedded
derivative liabilities which are recorded as gains in Net income. Conversely, an increase in the price of these preferred shares is also recorded in
OCI and would normally lead to a higher valuation for associated embedded derivative liabilities which are recorded as losses in Net income.
361
(329)
(30)
14
(42)
10
The above sensitivity analysis was prepared using the following key assumptions:
Interest rates and equity prices move independently.
−
− Credit and liquidity risks have not been considered.
−
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
− AFS equities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be realized through a
Impact on our pension plans is not included.
sale.
We also use stress tests to determine the impact of various market scenarios on our financial and capital position. See MCT
monitoring discussion in Section 11 – Capital management.
To mitigate these risks, our investment policies set forth limits for each type of investment and compliance with the policies is
closely monitored by the Investment Risk Management Committee. We manage market risk through asset class and economic
sector diversification and, in some cases, the use of derivatives. We also monitor and review the duration of our fixed-income
securities and our 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 we are exposed to some foreign exchange risks arising from fixed-income securities denominated in U.S. dollars, the
general policy is to minimize foreign currency exposure. We mitigate foreign exchange price risk or cash flow risk by buying or
selling successive monthly foreign currency forward contracts.
Credit risk
Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. A counterparty
is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. Our
credit risk exposure is concentrated primarily in our debt portfolios, preferred share portfolios, over the counter derivatives and, to a
lesser extent, in our premium receivables, reinsurance recoverables and structured settlements agreements entered into with
various life insurance companies.
Our 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 25 and 26 for
more details on the breakdown of credit quality of fixed-income securities and preferred shares. In addition, we set 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. Our investments could be sensitive to changing conditions in specific
geographic regions or specific industries. We have a significant concentration of investments in the financial sector and in Canada.
We closely monitor this risk concentration and we hedge some of the risk as we deem necessary. See Table 24 for more details on
the breakdown of investments by economic sector. See Table 27 for more details on the breakdown of investments by geographic
region.
Page 43 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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 us. 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, we 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.
We subject our derivative-related credit risk to the same credit approval, limit and monitoring standards that we use 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 monthly review by the Operational 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 our
financial obligations toward the counterparty to such an agreement can be set off against obligations such counterparty has toward
us. We use 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 our agreements with some counterparties provide us 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.
We enter into annuity agreements with various Canadian life insurance companies, which have credit ratings of at least ‘A-‘ or
higher, to provide for fixed and recurring payments to claimants. Under such arrangements, we no longer record the liability in our
Consolidated balance sheet as the liability to the claimants is substantially discharged, although we remain exposed to the credit
risk that life insurers may fail to fulfill their obligations.
Use of derivatives
We use derivatives principally to mitigate certain of the above mentioned risks.Our use of derivatives exposes us 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. We monitor the effectiveness of our
hedges on a regular basis.
Credit downgrade risk
Independent third party rating agencies assess our ability to honour our financial obligations (the “issuer credit rating”) and our
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 our ability to raise capital or may result in an increase in the cost of raising capital with negative
implications for shareholders and other stakeholders.
Page 44 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty in raising funds to meet obligations associated with financial liabilities. To
manage our cash flow requirements, we maintain a portion of our investments in liquid securities.
Our 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 our operational
requirements. A large portion of the investments are held in highly liquid federal and provincial government debt to protect against
any unanticipated large cash requirements. We also have an unsecured committed credit facility.
We have issued term notes to finance acquisitions and for general corporate purposes. To manage liquidity risk, we have 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 we have issued.
Strategic risk
Distribution risk
Distribution risk is the risk related to the distribution of our 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 our 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 our 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 we issue loans or take equity participation in certain brokers and by doing so, we expose ourselves 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 we generally receive guarantees and use
standard agreements which 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.
We have established and maintain close relationships with our independent distributors by providing technology and training to help
strengthen their market position. We closely monitor pricing gaps between our various channels and manage the different channels
under different brand names including BrokerLink, our wholly owned broker network.
Page 45 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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:
—
—
—
— 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.
personal auto insurance rate setting;
risk-based capital and solvency standards;
restrictions on types of investments;
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 taxing 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 us. Current and future court decisions and legislative activity
may increase our exposure to these types of claims. Multiparty 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 our common shares.
Page 46 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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 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 our defined benefit pension plans. Consequently, this could impact our 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. We are required to submit regular reports to the regulatory authorities regarding our solvency, and
publish our solvency ratio every quarter. The minimum solvency ratio that we targeted is 170%, which is higher than the regulatory
MCT requirement of 150%. The appointed actuary must present an annual report to the Risk Management Committee and the
Enterprise Risk Committee on our current and future solvency and mitigating measures. In 2011, we adopted a capital
management policy. The policy contains guidelines to help ensure that we maintain adequate capital to withstand adverse event
scenarios and has documented procedures to take corrective actions 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 our disclosure practices and procedures, its role includes maintaining
awareness and understanding of corporate disclosure rules and guidelines, educating and informing employees about our
disclosure practices, determining whether corporate developments constitute material information and reviewing and approving all
our material disclosure releases or statements. In addition, the Enterprise Risk Committee monitors our operations to identify
situations that can negatively affect our reputation. If necessary, the Enterprise Risk Committee approves policies and implements
procedures to mitigate reputation risk.
Page 47 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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 our 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, we follow a specific framework that is composed of different steps including identification, assessment, response, and
monitoring.
For early detection of and clear insight into our 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 assessments of our critical functions. It also
monitors and measures our risks on an ongoing basis through key risk indicators which enable management to proactively initiate
effective actions. We have 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.
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. In 2013, we created an Operational Risk Committee to support the Enterprise Risk Committee in
the oversight and management of operational risk.
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 we 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.
Information security risks for financial institutions have increased in recent years. Criminal organizations, hackers, and other
external actors have become more active and better equipped to attack even robust systems and networks. We and the third
parties that provide services to us may be the subject of information security breaches. Such incidents could result in financial loss,
government and regulatory action, and reputational damage.
To ensure the security and the resilience of our systems, the safeguard of our confidential information and the integrity of our
information and databases, various dedicated teams plan, test and execute our continuity and security plans, including threat and
vulnerability assessments and appropriate mitigation actions. 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, 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 our 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 organization and to
the type of events we may have to manage.
Page 48 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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.
We have 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.
12.7 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.
The placement of ceded reinsurance is done almost exclusively on an excess-of-loss basis (per event or per risk) as per typical
practice and 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.
In addition, we have minimum rating requirements for our 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 financial analysis
performed by our specialized reinsurance brokers and other qualitative information are also considered in the selection of our
reinsurers. The treaties have special termination clauses and a security review clause allowing us 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 our 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 us.
In line with industry practice, our reinsurance recoverable with licensed Canadian reinsurers ($357 million as at December 31, 2013,
$240 million as at December 31, 2012) 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 unregistered reinsurers ($149 million as at December 31, 2013,
$80 million as at December 31, 2012) are secured with cash, letters of credit and/or assets held in trust accounts or under security
agreements of $238 million as at December 31, 2013 ($173 million as at December 31, 2012).
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.
Page 49 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Table 41 - Reinsurance net retention and coverage limits by nature of risk
Single risk events1
Retentions:
On property policies
On liability policies
January 1,
December 31,
2014
2013
7.5
2 - 10
5
2 - 10
Multi-risk events and catastrophes2
1003
Retention
Coverage limits
3,300
1 For certain special classes of business or types of risks, the retentions may be lower through specific treaties or the use of facultative reinsurance.
2 Excludes a reinsurance treaty in place for a specific portfolio in British Columbia.
3 We retain participations averaging 8% as at January 1, 2014 (December 31, 2013 - 4%) on reinsurance layers between the retention and the
coverage limits.
1003
3,250
Section 13 – Off-balance sheet arrangements
13.1 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 Consolidated financial statements,
with a fair value of $1.6 billion as at December 31, 2013 ($2.2 billion as at December 31, 2012). 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 $1.7 billion as
at December 31, 2013 ($2.3 billion as at December 31, 2012).
Page 50 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 14 – Accounting and disclosure matters
14.1 New accounting standards effective January 1, 2013
Effective January 1, 2013, we adopted the following new accounting standards:
Employee benefits
Under the amended version of IAS 19 – Employee benefits (“IAS 19”), the asset return component of the pension expense is
computed using the discount rate used to measure the defined benefit obligation at year-end rather than the expected return on
plan assets, and actuarial gains and losses are recognized in OCI as the option to defer the recognition of actuarial gains and
losses, formerly known as the “corridor method,” is no longer available. We applied the amendments retrospectively, in accordance
with IAS 19.
The use of the discount rate in calculating the asset return results in an increase in employee future benefit expense recognized in
Net income and a corresponding decrease in OCI, with no overall change in Total comprehensive income. We continue to manage
our pension asset investment portfolio with a target asset return based on a target asset allocation. The discount rate-based
computation of the asset return component is not reflective of our internal investment management expertise and management of
our pension investment asset portfolio. We continue to measure NOI using a pension expense based on the expected return on
plan assets to better reflect our operating performance. As a result, the adoption of the new standard has no impact on NOI and
related measures. Any difference between the expected return on pension assets and the return based on the discount rate is
treated as a non-operating item. Comparative figures have been restated accordingly.
As actuarial gains and losses were already recognized in OCI, the adoption of the amended version of IAS 19 did not result in any
change on our opening Consolidated balance sheet as at January 1, 2012, which is therefore not presented.
2012 impact
Retroactive adjustments to the Consolidated statements of comprehensive income, as well as the impact on our key performance
measures for the quarter and year ended December 31, 2012 are as follows:
Table 42 - Impact of the adoption of IAS 19
Net income
OCI
Total comprehensive income
NOI
Per share measures, basic
and diluted (in dollars)
EPS
AEPS
NOIPS
ROE for the last 12 months
AROE for the last 12 months
OROE for the last 12 months
Book value per share
Published
Impact
181
41
222
194
1.32
1.51
1.42
13.8%
16.5%
16.8%
33.03
(4)
4
-
-
(0.03)
(0.02)
-
(0.03) pts
(0.04) pts
-
-
Q4-2012
Revised
177
45
222
194
1.29
1.49
1.42
13.5%
16.1%
16.8%
33.03
Published
Impact
Full year 2012
Revised
587
(26)
561
675
4.33
5.15
5.00
(16)
16
-
-
(0.13)
(0.13)
-
571
(10)
561
675
4.20
5.02
5.00
2013 impact
For the three- and twelve-month periods ended December 31, 2013, the use of the discount rate in calculating the asset return
resulted in an increase of $7 million ($5 million after tax) and $27 million ($20 million after tax), respectively, in employee future
benefit expense recognized in Net income and a corresponding decrease in OCI, with no overall change in Total comprehensive
income.
Page 51 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Consolidated financial statements
IFRS 10 – Consolidated financial statements (“IFRS 10”) replaces IAS 27 – Consolidated and separate financial statements and
SIC-12 – Consolidation – special purpose entities. IFRS 10 establishes principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more entities. The adoption of IFRS 10 did not result in any change
in our scope of consolidation and on our consolidated financial statements.
Joint arrangements
IFRS 11 – Joint arrangements (“IFRS 11”) replaces IAS 31 – Interest in joint ventures and SIC-13 – Jointly controlled entities –
non-monetary contributions by venturers. IFRS 11 is to be applied when the entity is party to a joint arrangement, whereby two or
more parties have joint control. As per IFRS 11, a joint arrangement is either a joint operation (line-by-line accounting of underlying
assets and liabilities) or a joint venture (equity method of accounting). The adoption of IFRS 11 did not result in any change in the
status and accounting method of our joint arrangements.
Disclosure of interests in other entities
IFRS 12 – Disclosure of interests in other entities (“IFRS 12”), 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. Disclosure can mainly be found in Note 2 – Basis of
presentation and Note 12 - Investments in associates and joint ventures to our accompanying Consolidated financial statements,
and is similar to prior years.
Fair value measurement
IFRS 13 – Fair value measurement (“IFRS 13”) regroups all the guidance related to fair value measurement of assets and liabilities.
Fair value is defined 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. In adopting IFRS 13, we reviewed our fair value measurement methods,
which remained unchanged. See Note 7 – Fair value measurement to the accompanying Consolidated financial statements for
further details.
14.2 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.
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 number of claims 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 the uncertainties involved.
Page 52 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Valuation of pension benefit obligation
The cost of defined benefit plans and the present value of the defined benefit obligation are determined using actuarial valuations.
The actuarial valuation involves making assumptions about discount rates, 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, the 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 22.6 – Assumptions used to the
accompanying 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 14 – Goodwill and intangible
assets to the accompanying Consolidated financial statements.
Financial assets
We determine, at each balance sheet date, whether there is objective evidence that financial assets, other than those classified or
designated as at FVTPL, are impaired. Considerations which form the basis of these objective evidence judgments include a
significant or prolonged decline in fair value, a loss event that has occurred which has impaired the expected cash flows, as well as
other considerations such as liquidity risk and credit risk.
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. The
value of the option liability has 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 the 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.
Business combinations
Upon initial recognition, the acquiree’s assets and liabilities have been included in the 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
recognized in income. The detail on assets acquired and liabilities assumed is presented in Note 23 – Business combination to the
accompanying Consolidated financial statements.
Page 53 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
14.3 Financial instruments
An important portion of our 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 premium 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 12.6 – 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 primarily used 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;
— Options are used to modify our exposure to interest rate risk; and
—
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 fair value
or amortized cost depending on the classification of the financial instruments. Financial instruments classified as 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 7 – Fair value measurement to the accompanying Consolidated financial
statements.
Where the fair values of financial assets and financial liabilities reported on the 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 4 – Summary of significant accounting policies, Note 6 – Derivative financial instruments and Note 7 – Fair value
measurement to the accompanying Consolidated financial statements for details on the classification and measurement of financial
instruments.
Page 54 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
14.4 Standards issued but not yet effective
Financial instruments
IFRS 9 – Financial instruments (“IFRS 9”) is a three-part standard that will replace IAS 39 – Financial instruments: Recognition and
measurement (“IAS 39”). The new standard will reduce complexity by replacing the many different rules in IAS 39. Two out of the
three parts of this standard have been issued, namely Classification and measurement and Hedge accounting described hereafter.
The effective date of the standard is to be determined when the entire IFRS 9 will be closer to completion. We are currently
evaluating the impact that this standard will have on our Consolidated financial statements.
Classification and measurement
In November 2009, the IASB issued the Classification and measurement part of IFRS 9. 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 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 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.
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.
—
Hedge accounting
In November 2013, the IASB issued the Hedge accounting part of IFRS 9. The new model more closely aligns hedge accounting
with risk management activities undertaken by companies when hedging their financial and non-financial risk exposures (IAS 39
allows components of financial items to be hedged, but not components of non-financial items). It will enable more entities to apply
hedge accounting to reflect their actual risk management activities. The new IFRS 9 model also enables an entity to use information
produced internally for risk management purposes as a basis for hedge accounting, compared to IAS 39 which imposes eligibility
and compliance based on metrics that are designed solely for accounting purposes.
Investment entities
In January 2013, IFRS 10 – Consolidated Financial Statements was amended to include criteria for determining whether an entity is
an investment entity and to introduce an exception to the consolidation of subsidiaries for investment entities. IFRS 12 – Disclosure
of Interests in Other Entities and IAS 27 – Separate Financial Statements were also amended accordingly. These amendments are
effective for annual periods beginning on or after January 1st, 2014 and are not expected to have an impact on our financial
statements.
14.5 Related-party transactions
We enter into transactions with associates and joint ventures in the normal course of business. All of these related-party
transactions are with entities associated with our distribution channel. These transactions mostly comprise commissions for
insurance policies, as well as interest and principal payments on loans. These transactions are measured at the amount of the
consideration paid or received, as established and agreed by the related parties. Management believes that such exchange
amounts approximate fair value.
Page 55 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
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 our insurance products offered in the normal course of business. The terms and conditions of such transactions are
essentially the same as those available to our clients and employees. Transactions with post-employment plans comprise the
contributions paid to these plans.
Note 25 – Related-party transactions to the accompanying Consolidated financial statements provides additional information on
related-party transactions.
14.6 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, 2013. 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.
Internal controls over financial reporting
14.7
Management has designed and is responsible for maintaining adequate internal control over financial reporting (“ICFR”) to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with IFRS.
Management has evaluated the design and operating effectiveness of its ICFR (as defined in Regulation 52-109 – Certification of
Disclosure in Issuer's Annual and Interim Filings). The evaluation was based on the criteria established in the "Internal Control-
Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). This
evaluation was performed by the Chief Executive Officer and the Chief Financial Officer of the Company with the assistance of other
Company Management and staff to the extent deemed necessary. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the ICFR were appropriately designed and operating effectively, as at December 31, 2013.
In spite of its evaluation, Management does recognize that any controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives.
No significant changes were made to our ongoing internal controls over financial reporting during 2013 that have materially affected,
or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
Page 56 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
Section 15 – Investor information
15.1 Authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
15.2 Outstanding share data
The following table presents the outstanding share data as at February 4, 2014.
Table 43 – Outstanding share data
(number of shares)
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
131,543,134
10,000,000
10,000,000
Refer to our Annual Information Form for more detailed information on the rights of shareholders and to Note 16 – Common shares
and preferred shares to the accompanying Consolidated financial statements for additional information.
15.3 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, 2013.
Table 44 – Dividends declared per share
(in dollars)
Common shares
Class A
Series 1 Preferred shares
Series 3 Preferred shares
1.76
1.05
1.05
On February 4, 2014, the Board of Directors increased the quarterly dividend by 9%, or four cents, to 48 cents per common share
on our outstanding common shares. The decision reflected the strength of our financial position, the quality of our ongoing operating
earnings, and our objective to continue to create value for shareholders. This is the ninth consecutive year we have increased our
dividend.
15.4 NCIB program
During the year ended December 31, 2013, 1.8 million common shares had been repurchased for cancellation under the NCIB at an
average price of $59.37 per common share for a total consideration of $106 million. No common shares were repurchased for
cancellation under the NCIB during the year ended December 31, 2012. For further details, please see Note 16 – Common shares
and preferred shares of the accompanying Consolidated financial statements.
Shareholders may obtain a copy of the notice submitted to the Toronto Stock Exchange (TSX) with respect to the NCIB, at no cost,
by contacting the Investor Relations Department of the Company by telephone toll-free at 1-866-778-0774 ((416) 941-5336 outside
North America) or by email at ir@intact.net.
Page 57 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
15.5 Long-term incentive plans
The following table shows the outstanding units and fair value for each of the performance cycles as at December 31, 2013.
Table 45 – Outstanding units and fair value by performance cycle
Performance cycles
2011-2013
2012-2014
2013-2015
Total
Number of
units
Weighted-average
fair value at grant
date (in $)
Amount
(in millions of $)
275,770
255,829
208,190
739,789
48.06
57.75
62.08
55.36
13
15
13
Refer to Note 18 – Share-based payments to the accompanying Consolidated financial statements for additional details.
15.6 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, 2014
Second quarter results, for the period ending June 30, 2014
Third quarter results, for the period ending September 30, 2014
Year-end results, for the period ending December 31, 2014
May 7, 2014
July 30, 2014
November 5, 2014
February 4, 2015
Section 16 – Selected annual and quarterly information
16.1 Selected annual information
The following table presents selected annual information for the years ended December 31.
Table 46 – 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
2013
7,434
142
431
431
3.10
3.10
1.76
1.05
1.05
2012
7,127
451
571
571
4.20
4.20
1.60
1.05
1.05
2011
5,532
273
457
465
3.89
3.96
1.48
0.49
0.39
Page 58 of 59
Intact Financial Corporation
Management’s Discussion and Analysis for the year ended December 31, 2013
(in millions of dollars, except as otherwise noted)
The following table presents selected annual information at the dates shown.
Table 47 – Selected annual information
As at December 31
Investments
Total assets
Debt outstanding
Shareholders' equity
16.2 Selected quarterly information
Table 48 – Selected quarterly information
2013
12,261
19,774
1,143
4,954
2012
12,959
19,813
1,143
4,893
2011
11,828
19,753
1,293
4,341
Written insured risks (in thousands)
DPW
Total revenues
Net premiums earned
Current year catastrophes
Favourable prior year claims
development
Underwriting income
Combined ratio
Net investment income
NOI
Net income attributable to
shareholders
Per share measures, basic and
diluted (in dollars)
NOIPS
EPS
Q4
Q3
Q2
1,589
1,702
1,897
1,804
71
1,899
1,911
1,908
1,784
261
(66)
67
96.3%
104
143
(103)
(50)
102.8%
104
59
2,165
2,182
1,769
1,723
136
(95)
42
97.5%
102
123
2013
Q1
1,462
1,524
1,860
1,703
18
(110)
83
95.1%
96
175
Q4
Q3
Q2
1,543
1,690
1,877
1,742
16
(85)
138
92.1%
102
194
1,794
1,798
1,791
1,640
150
(70)
67
95.9%
92
122
2,018
1,977
1,723
1,599
62
(83)
123
92.3%
95
180
2012
Q1
1,374
1,403
1,736
1,590
17
(134)
123
92.3%
100
179
107
47
103
174
177
92
129
173
1.05
0.77
0.41
0.32
0.89
0.73
1.27
1.27
1.42
1.29
0.89
0.67
1.35
0.95
1.34
1.30
See also the discussion on seasonality of the business in Section 7 – Business developments and operating environment.
Page 59 of 59
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2013
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 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, as well as the preparation and presentation of financial information.
The Audit 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 Committee, with and without the presence of management.
Pursuant to the Insurance Companies Act of Canada or to the Insurance Act (“Québec”) (“the Acts”), the Actuary, who is a member
of management, is appointed by the Board of Directors. The Actuary is responsible for discharging the various actuarial
responsibilities required by the Acts and conducts a valuation of policy liabilities, in accordance with Canadian generally accepted
actuarial standards, reporting his results to management and the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada for the federally regulated property and casualty (“P&C”)
subsidiaries and l’Autorité des marchés financiers for the Québec regulated P&C subsidiaries 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 Committee to discuss
the results of their audit, financial reporting and related matters. The Independent Auditors’ Report to shareholders appears on the
following page.
February 4, 2014
Charles Brindamour
Chief Executive Officer
Mark A. Tullis
Executive Vice President Governance and
Capital Management
Louis Marcotte
Senior Vice President and
Chief Financial Officer
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2013
Table of contents
Consolidated balance sheets…………………………………………………………………………………………….. 2
Consolidated statements of comprehensive income……………………………………..……………………………. 3
Consolidated statements of changes in shareholders’ equity………………………………………………………… 4
Consolidated statements of cash flows………………………………………………………………………………… 5
Notes to the consolidated financial statements
Note 1 – Status of the Company .......................................................................................................................... 6
Note 2 – Basis of presentation ............................................................................................................................. 6
Note 3 – Adoption of new accounting standards ................................................................................................. 7
Note 4 – Summary of significant accounting policies ........................................................................................... 8
Note 5 – Financial instruments .......................................................................................................................... 20
Note 6 – Derivative financial instruments .......................................................................................................... 24
Note 7 – Fair value measurement ..................................................................................................................... 26
Note 8 – Financial risk ....................................................................................................................................... 30
Note 9 – Insurance risk ...................................................................................................................................... 37
Note 10 – Claims liabilities and unearned premiums ......................................................................................... 41
Note 11 – Other assets and other liabilities ....................................................................................................... 45
Note 12 – Investments in associates and joint ventures .................................................................................... 46
Note 13 – Property and equipment .................................................................................................................... 47
Note 14 – Goodwill and intangible assets .......................................................................................................... 48
Note 15 – Debt outstanding ............................................................................................................................... 49
Note 16 – Common shares and preferred shares .............................................................................................. 51
Note 17 – Capital management ......................................................................................................................... 52
Note 18 – Share-based payments ..................................................................................................................... 53
Note 19 – Earnings per share ............................................................................................................................ 54
Note 20 – Revenue ............................................................................................................................................ 55
Note 21 – Income taxes ..................................................................................................................................... 55
Note 22 – Employee future benefits .................................................................................................................. 57
Note 23 – Business combination ....................................................................................................................... 63
Note 24 – Integration and restructuring costs .................................................................................................... 64
Note 25 – Related-party transactions ................................................................................................................ 64
Note 26 – Additional information on the Consolidated statements of cash flows ............................................... 66
Note 27 – Contingencies and commitments ...................................................................................................... 66
Note 28 – Disclosures on rate regulation ........................................................................................................... 67
Page 1 of 67
Intact Financial Corporation
Consolidated balance sheets
(in millions of Canadian dollars, except as otherwise noted)
As at December 31,
Assets
Investments
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Investments
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
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
2013
2012
5
$
$
$
10
21
11
12
13
14
14
10
10
5
21
11
15
16
16
99 $
7,909
1,190
2,644
419
12,261
64
2,764
505
343
56
718
581
255
110
1,164
953
172
8,757
1,263
2,376
391
12,959
66
2,670
320
105
129
705
412
266
105
1,153
923
19,774 $
19,813
7,996 $
4,125
234
8
60
1,254
1,143
14,820
2,090
489
116
2,147
112
4,954
7,656
4,046
486
35
140
1,414
1,143
14,920
2,118
489
121
1,982
183
4,893
Total liabilities and shareholders’ equity
See accompanying notes to the Consolidated financial statements.
$
19,774 $
19,813
On behalf of the Board:
Charles Brindamour
Director
Eileen Mercier
Director
Page 2 of 67
Intact Financial Corporation
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
Underwriting results
Net investment income
Net investment gains (losses)
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 attributable to shareholders
Weighted-average number of common shares, basic and diluted (in millions)
Earnings per common share, basic and diluted (in dollars)
Dividends paid per common share (in dollars)
Net income attributable to shareholders
Other comprehensive income (loss)
Available-for-sale securities:
Net changes in unrealized gains (losses)
Reclassification to income of net gains
Derivatives designated as cash flow hedges:
Net changes in unrealized gains
Income tax benefit
Share of other comprehensive loss from
investments in associates and joint ventures
Items that may be reclassified subsequently to net income
attributable to shareholders
Net actuarial gains on employee future benefits
Income tax expense
Items that will not be reclassified subsequently to
net income attributable to shareholders
Other comprehensive income (loss)
Total comprehensive income attributable to shareholders
See accompanying notes to the Consolidated financial statements.
1 Restated (see Note 3 – Adoption of new accounting standards for details).
Note
2013
20 $
7,305
$
20
10
5
5
12
24
21
19
19
21
12
22
21
$
$
$
$
$
$
$
$
6,972
(4,604)
(2,183)
185
405
(83)
26
77
(46)
(64)
(35)
-
465
(34)
431
132.4
3.10
1.76
431
(13)
(85)
1
27
(1)
(71)
104
(28)
76
5
$
436
$
20121
6,854
6,561
(4,070)
(2,085)
406
388
37
22
88
(50)
(60)
(108)
(11)
712
(141)
571
130.8
4.20
1.60
571
52
(87)
1
11
-
(23)
17
(4)
13
(10)
561
Page 3 of 67
Intact Financial Corporation
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)
Balance as at January 1, 2013
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income
(loss)
Common shares repurchased for
cancellation
Dividends declared on
common shares
Dividends declared on
preferred shares
Share-based payments
Balance as at December 31, 2013
Balance as at January 1, 2012
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Common shares issued
Dividends declared on
common shares
Dividends declared on
preferred shares
Share-based payments
16
16
16
18
16
16
16
18
$
2,118 $
489 $
121 $
1,982
$
183 $
-
-
-
-
(28)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5)
431
76
507
(78)
(233)
(21)
(10)
-
(71)
(71)
-
-
-
-
Total
4,893
431
5
436
(106)
(233)
(21)
(15)
$
$
2,090 $
489 $
116 $
2,147
1,889 $
489 $
115 $
1,642
$
$
112 $
4,954
206 $
4,341
-
-
-
229
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6
571
13
584
-
(210)
(21)
(13)
-
(23)
(23)
-
-
-
-
571
(10)
561
229
(210)
(21)
(7)
Balance as at December 31, 2012
See accompanying notes to the Consolidated financial statements.
2,118 $
$
489 $
121 $
1,982
$
183 $
4,893
Page 4 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Consolidated statements of cash flows
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Operating activities
Income before income taxes
Income tax paid, net
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 combination, 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
Net cash flows provided by (used in) investing activities
Financing activities
Proceeds from issuance of debt
Repayment of debt
Proceeds from issuance of common 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 used in financing activities
Net 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 Consolidated financial statements.
26
$
99
$
Note
2013
2012
26
26
10
23
15
15
16
18
16
16
16
$
$
465
(309)
228
(352)
153
185
-
11,260
(10,962)
-
(61)
(98)
139
-
-
-
(37)
(106)
(233)
(21)
(397)
(73)
172
712
(117)
105
(116)
139
723
(507)
12,303
(12,538)
300
(61)
(73)
(576)
249
(400)
227
(26)
-
(210)
(21)
(181)
(34)
206
172
Page 5 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(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’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., Jevco Insurance Company (“Jevco”) and IB Reinsurance Inc.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
Note 2 – Basis of presentation
Statement of compliance
2.1
These Consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), as
issued by the International Accounting Standards Board (“IASB”). These Consolidated financial statements and the accompanying
notes were authorized for issue in accordance with a resolution of the Board of Directors on February 4, 2014.
Preparation and presentation of financial statements
2.2
The Company presents its Consolidated balance sheets broadly in order of liquidity.
Subsidiaries are entities over which the Company has the power over the relevant activities of the investee and is exposed, or has
rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the
investee. This generally involves a shareholding of more than 50% of the voting rights. Associates are entities over which the
Company has the power to participate in the decisions over the relevant activities of the investee, but does not have control. Joint
ventures are joint arrangements whereby the parties that have joint control of the arrangements have the rights to the net assets of
the arrangements. Associates generally involve a shareholding of 20% to 50% of the voting rights, while joint ventures generally
involve an equal percentage of participation from each party to the joint arrangement. In some cases, voting rights in themselves
are not sufficient to assess power or significant influence over the relevant activities of the investee or the sharing of control in a joint
arrangement. In such cases, judgment is applied though the analysis of management agreements, the effectiveness of voting rights,
the significance of the benefits to which the Company is exposed and the degree to which the Company can use its power to affect
its returns from investees.
All subsidiaries 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. See
Note 4.1c) – Investments in associates and joint ventures for accounting policy details.
Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.
Page 6 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 3 – Adoption of new accounting standards
Effective January 1, 2013, the Company adopted the following new accounting standards:
Employee benefits
3.1
Under the amended version of IAS 19 – Employee benefits (“IAS 19”), the asset return component of the pension expense is
computed using the discount rate used to measure the defined benefit obligation at year end rather than the expected return on plan
assets, and actuarial gains and losses are recognized in other comprehensive income (“OCI”) as the option to defer the recognition
of actuarial gains and losses, formerly known as the “corridor method” is no longer available.
The amendments were applied retrospectively by the Company, in accordance with IAS 19. The use of the discount rate in
calculating the asset return results in an increase in employee future benefit expense recognized in Net income and a
corresponding decrease in OCI, with no overall change in Total comprehensive income. As actuarial gains and losses were already
recognized in OCI by the Company, the adoption of the amended version of IAS 19 did not result in any change on the Company’s
opening balance sheet as at January 1, 2012, which is therefore not presented.
2012 Impact
Retroactive adjustments to the Consolidated statements of comprehensive income are as follows:
Table 3.1 – Retroactive adjustments
For the year ended December 31, 2012
Net income
OCI
Total comprehensive income
Earnings per common share, basic and diluted (in dollars)
As published
IAS 19
adjustments
Restated
587
(26)
561
4.33
(16)
16
-
(0.13)
571
(10)
561
4.20
2013 Impact
For the year ended December 31, 2013, the use of the discount rate in calculating the asset return resulted in an increase of
$27 million ($20 million after tax) in employee future benefit expense recognized in Net income and a corresponding decrease in
OCI, with no overall change in Total comprehensive income.
Consolidated financial statements
3.2
IFRS 10 – Consolidated financial statements (“IFRS 10”) replaces IAS 27 – Consolidated and separate financial statements and
SIC-12 – Consolidation – special purpose entities. IFRS 10 establishes principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more entities. The adoption of IFRS 10 did not result in any change
in the Company’s scope of consolidation and on the Company’s Consolidated financial statements.
Joint arrangements
3.3
IFRS 11 – Joint arrangements (“IFRS 11”) replaces IAS 31 – Interest in joint ventures and SIC-13 – Jointly controlled entities – non-
monetary contributions by venturers. IFRS 11 is to be applied when the entity is party to a joint arrangement, whereby two or more
parties have joint control. As per IFRS 11, a joint arrangement is either a joint operation (line-by-line accounting of underlying assets
and liabilities) or a joint venture (equity method of accounting). The adoption of IFRS 11 did not result in any change in the status
and accounting method of the Company’s arrangements.
Disclosure of interests in other entities
3.4
IFRS 12 – Disclosure of interests in other entities (“IFRS 12”), 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. Disclosure can mainly be found in Note 2 – Basis of
presentation and Note 12 – Investments in associates and joint ventures, and is similar to prior years.
Page 7 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Fair value measurement
3.5
IFRS 13 – Fair value measurement (“IFRS 13”) regroups all the guidance related to fair value measurement of assets and liabilities.
Fair value is defined 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. In adopting IFRS 13, the Company reviewed its fair value measurement
methods, which remained unchanged. IFRS 13 also requires new disclosure for both financial and non-financial assets and
liabilities, which were integrated in Note 7 – Fair value measurement.
Note 4 – Summary of significant accounting policies
4.1
Significant accounting policies
Insurance contracts
a)
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. They are deferred as Unearned premiums and recognized in Underwriting results 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 recognized on the date 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. The unearned reinsurance commissions are recorded in Other liabilities.
Other commission revenue is recorded on an accrual basis and included in Other revenues.
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 by policyholders (“IBNR”), 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 are
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 aggregate of these margins is referred to as the provision for adverse deviations (PfAD).
Page 8 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
On the Consolidated balance sheets, claims liabilities are reported gross of the reinsurers’ share and the reinsurers’ share is
reported in Reinsurance assets. Changes in claims liabilities and the impact of change in the discount rate are recognized in Net
claims incurred. The claims liabilities are considered to be settled when the contract expires, is discharged or 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.
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 for 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 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 FA and RSP insurance it assumes as it does to insurance policies issued by the Company
directly to policyholders. In accordance with the Office of the 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.
Reinsurance
Reinsurance assets include reinsurers’ share of claims liabilities and unearned premiums. The Company reports third party
reinsurance balances on the 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 to provide for fixed and recurring
payments to claimants. When the annuity agreements are non-commutable, non-assignable and non-transferable, the Company is
released by the claimant for the settlement of the claim amount. As a result, the liability to its claimants is substantially discharged
and the Company removes that liability from its Consolidated balance sheets. However, the Company remains exposed to the credit
risk that life insurers may fail to fulfill their obligations. When the annuity agreements are commutable, assignable and transferable,
the Company keeps the liability and the corresponding asset on its financial statements. Refer to Note 8 – Financial risk for further
details about credit risk for structured settlements.
Page 9 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Financial instruments contracts
b)
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 Consolidated statements of comprehensive income based on the classification
category.
Table 4.1 – Financial instruments measurement basis and classification of related changes in fair value
Classification category
Initial measurement
Financial assets
Subsequent
measurement
Changes in fair value
AFS
FVTPL
Fair value using bid prices at
the trade date
Fair value using bid prices
at end of period
Reported in OCI when unrealized or in
Net investment gains (losses) when
realized or impaired
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
Fair value at the issuance
date
Amortized cost using the
effective interest method
excluding for cash
Reported in Net investment gains
(losses) when realized or impaired
(except for cash and cash equivalents
where no impairment exists)
Financial liabilities
FVTPL
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 securities lending operations remain on the balance sheets because the Company has not substantially
transferred the risks and rewards related to the lent assets.
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 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.
Page 10 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Financial instruments
AFS
Instruments classified as AFS include debt and equity securities. Debt securities classified as AFS 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 changes in market conditions. Equity
investments classified as AFS are those that 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 so designated 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 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 daily 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 futures, forwards, swaps and options.
Derivative financial instruments are recognized on the 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 in Net investment gains (losses)
during the period in which they arise. See Note 6 – 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 financial liabilities classified as at FVTPL.
Page 11 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
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 7 – Fair value measurement.
Where the fair values of financial assets and financial liabilities reported on the 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 Net investment gains (losses).
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 twelve-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 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, for an amount equal to the unrealized loss. The impairment loss is
reported in Net investment gains (losses). Impairments on equity instruments are not reversed.
Page 12 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 to the higher of 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 when applicable. 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 4.2 – Measurement and recognition of financial asset impairment
Instrument category Loss measurement
Reported loss
Subsequent fair value increases
AFS debt instrument Difference between amortized
AFS equity
instrument
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)
Impairment loss removed from OCI
and recognized in Net investment
gains (losses)
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.
Impairment losses are not reversed.
Financial assets
carried at amortized
cost
Difference between the
asset’s carrying value and the
present value of the estimated
future cash flows
Impairment loss is recognized in Net
investment gains (losses)
Financial assets
carried at cost
Difference between the
asset’s carrying value and the
present value of the estimated
future cash flows
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.
Impairment losses are not reversed.
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 are
recognized on an accrual basis. Premiums and discounts on fixed income instruments classified as AFS are amortized using the
effective interest method. Dividends received, dividends paid and interest income are reported in Net investment income.
Transaction costs associated with financial instruments classified or designated as at FVTPL are recognized in net 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.
Page 13 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates in effect at the balance
sheet date. Non-financial, as well as non-monetary assets and liabilities are translated using the exchange rates in effect on the
transaction dates. Revenue and expenses are translated using the exchange rates in effect on the transaction dates. Exchange
differences on translation are included in Net investment gains (losses) or OCI in accordance with IFRS.
Investments in associates and joint ventures
c)
The Company’s investments in associates and joint ventures are initially recorded at the amount of consideration paid, which
includes the fair value of tangible assets, intangible assets and goodwill identified on acquisition, plus post-acquisition changes in
the Company’s share of their net assets. They are subsequently measured using the equity method. The Company’s profit from
such investments is shown in Share of profit from investments in associates and joint ventures and reflects the after-tax share of the
results of operations of the associates and joint ventures. Profits or losses resulting from transactions between the Company and its
associates and joint ventures are eliminated to the extent of its interest in the associate and joint venture. The Company determines
at each reporting date whether there is any objective evidence that 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.
Business combinations
d)
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 in Integration and restructuring costs as incurred.
When the Company acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate
classification and designation in accordance with the contractual term, economic circumstances and relevant 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 recognized in income.
Goodwill and intangible assets
e)
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 14 – 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.
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 intangible assets 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.
Page 14 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Company’s intangible assets consist of distribution networks, customer relationships and internally developed software. The
useful life of each distribution network acquired is assessed as finite or indefinite depending on the nature of the distribution network
acquired. The distribution network for which the related cash flows are expected to continue indefinitely is assessed as having an
indefinite useful life. The amortization methods and terms of the intangible assets assessed as having finite useful lives are shown
below.
Table 4.3 – Amortization of intangible assets
Distribution network (finite useful life)
Customer relationships
Internally developed software
Method
Straight-line
Straight-line
Straight-line
Term
25 years
10 years
3 to 7 years
Property and equipment
f)
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 4.4 – Depreciation of property and equipment
Computer equipment
Furniture and equipment
Leasehold improvements
Method
Straight-line
Declining balance and straight-line
Straight-line
Rate or term
2 to 3 years
20% and 5 years, respectively
Over the terms of related leases
Leases
g)
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
reported in Underwriting expenses.
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 term.
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 recognized on a straight-line basis over the lease term and reported
in Underwriting expenses.
Integration and restructuring costs
h)
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 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 expensed when incurred.
Income taxes
i)
Income tax expense (benefit) comprises current and deferred tax. Income tax is recognized in Net income, except to the extent that
it relates to items recognized in OCI or directly to equity, where it is recognized in OCI or equity.
Current income tax is based on current year’s results of operations, 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.
Page 15 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
j)
Employee future benefits
Pension and post-retirement plans
For the defined benefit pension and other retirement plans, the present value of the defined benefit obligation, net of the fair value of
plan assets, is recognized on the balance sheets as an asset, if positive, or as a liability, if negative. The actuarial determination of
the defined benefit obligation for pension and other retirement benefits uses the projected unit credit method and management’s
best estimate assumptions.
Cost recognized in Net income for employee future benefit plans includes:
−
−
service costs, which encompasses current and past service costs (the cost of pension benefits provided in exchange for
employees’ services rendered during the year or prior years), as well as gains or losses on non-routine settlements; and
net interest expense, which represents the change in the defined benefit obligation and the plan assets as a result of the
passage of time, determined by multiplying the net defined benefit liability (asset) by the discount rate reference to market
yields on high quality corporate bonds determined at the beginning of the year.
Re-measurements, comprising the return on plan assets (excluding interest arising from the passage of time), the effect of the asset
ceiling, as well as 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 re-measurements are also immediately reclassified to Retained
earnings as they will not be reclassified to Net income in subsequent periods.
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 recognized in Net income in
the period the absence commences.
Share-based payments
k)
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.
Page 16 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 over the vesting
period, with a corresponding entry in Contributed surplus. 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 twelve 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 retirement or termination
and are settled for cash or shares at that time. 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. When directors
elect to receive shares, the Company makes instalments to the plan administrator for the purchase of shares of the Company on
behalf of the directors.
Current vs non-current
l)
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. 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.
Operating segments
m)
The Company’s business activities are directed towards P&C insurance operations. These activities are captured within a sole
reporting and 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.
4.2
Standards issued but not yet effective
Financial instruments
a)
IFRS 9 – Financial instruments (“IFRS 9”) is a three-part standard that will replace IAS 39 – Financial instruments: Recognition and
measurement (“IAS 39”). The new standard will reduce complexity by replacing the many different rules in IAS 39. Two out of the
three parts of this standard have been issued, namely Classification and measurement and Hedge accounting described hereafter.
The effective date of the standard is to be determined when the entire IFRS 9 will be closer to completion. The Company is currently
evaluating the impact that this standard will have on its Consolidated financial statements.
Page 17 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
i) Classification and measurement
In November 2009, the IASB issued the Classification and measurement part of IFRS 9. 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 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 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.
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.
−
ii) Hedge accounting
In November 2013, the IASB issued the Hedge accounting part of IFRS 9. The new model more closely aligns hedge
accounting with risk management activities undertaken by companies when hedging their financial and non-financial risk
exposures (IAS 39 allows components of financial items to be hedged, but not components of non-financial items). It will
enable more entities to apply hedge accounting to reflect their actual risk management activities. The new IFRS 9 model
also enables an entity to use information produced internally for risk management purposes as a basis for hedge
accounting, compared to IAS 39 which imposes eligibility and compliance based on metrics that are designed solely for
accounting purposes.
Investment entities
b)
In January 2013, IFRS 10 – Consolidated Financial Statements was amended to include criteria for determining whether an entity is
an investment entity and to introduce an exception to the consolidation of subsidiaries for investment entities. IFRS 12 – Disclosure
of Interests in Other Entities and IAS 27 – Separate Financial Statements were amended accordingly. These amendments are
effective for annual periods beginning on or after January 1st, 2014 and are not expected to have an impact on the Company’s
financial statements.
Significant accounting judgments, estimates and assumptions
4.3
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
a)
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 number of claims 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 the uncertainties involved.
Page 18 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Valuation of pension benefit obligation
b)
The cost of the defined benefit plans and the present value of the defined benefit obligation are determined using actuarial
valuations. The actuarial valuation involves making assumptions about discount rates, 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, the defined benefit obligation is highly sensitive to changes in the assumptions. Assumptions are reviewed
at each reporting date. Details of the key assumptions used in the estimates are contained in Note 22.6 – 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 CGUs to which the assets are allocated.
The assumptions used in this estimation of the recoverable amount are discussed in Note 14 – Goodwill and intangible assets.
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. Considerations which form the basis of these objective evidence judgments
include a significant or prolonged decline in fair value, a loss event that has occurred which has impaired the expected cash flows,
as well as other considerations such as liquidity and credit risk.
Measurement of embedded derivatives
d)
The Company owns perpetual preferred shares with call options which give the issuer the right to redeem the shares at a particular
price. The value of the option liability has 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
e)
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.
Business combination
f)
Upon initial recognition, the acquiree’s assets and liabilities have been included in the 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
recognized in income. The detail on assets acquired and liabilities assumed is presented in Note 23 – Business combination.
Page 19 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 5 – Financial instruments
Investments
5.1
The following tables summarize the Company’s investments.
Table 5.1 – Investments by classification
AFS
Classified
as at FVTPL
Designated
as at FVTPL
Cash and
cash
equivalents,
loans and
receivables
-
42
1,690
1,229
154
8
3,123
102
285
802
1
1,190
1,588
-
5,901
-
214
2,716
1,173
198
8
4,309
117
296
842
8
1,263
1,301
-
6,873
-
-
-
-
-
-
-
-
-
-
-
-
153
-
153
-
-
-
-
-
-
-
-
-
-
-
-
405
-
405
-
-
3,172
1,575
38
1
4,786
-
-
-
-
-
903
-
5,689
-
-
2,917
1,447
78
6
4,448
-
-
-
-
-
670
-
5,118
99
-
-
-
-
-
-
-
-
-
-
-
-
419
518
172
-
-
-
-
-
-
-
-
-
-
-
-
391
563
Total
99
42
4,862
2,804
192
9
7,909
102
285
802
1
1,190
2,644
419
12,261
172
214
5,633
2,620
276
14
8,757
117
296
842
8
1,263
2,376
391
12,959
As at December 31, 2013
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Preferred shares
Common shares
Loans
As at December 31, 2012
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Preferred shares
Common shares
Loans
Page 20 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 5.2 – Carrying value of investments
FVTPL
instruments
At fair
value
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
Net unrealized
gains (losses)
Total
investments
At carrying
value
As at December 31, 2013
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Preferred shares
Common shares
Loans
As at December 31, 2012
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Non-rated
Preferred shares
Common shares
Loans
-
-
3,172
1,575
38
1
4,786
-
-
-
-
-
1,056
-
5,842
-
-
2,917
1,447
78
6
4,448
-
-
-
-
-
1,075
-
5,523
99
42
1,694
1,218
151
8
3,113
100
250
801
1
1,152
1,468
419
6,251
172
214
2,653
1,158
195
8
4,228
114
219
802
7
1,142
1,238
391
7,171
-
-
21
12
3
-
36
2
38
21
-
61
153
-
250
-
-
64
15
3
-
82
3
77
52
1
133
90
-
305
-
-
(25)
(1)
-
-
(26)
-
(3)
(20)
-
(23)
(33)
-
(82)
-
-
(1)
-
-
-
(1)
-
-
(12)
-
(12)
(27)
-
(40)
-
-
(4)
11
3
-
10
2
35
1
-
38
120
-
168
-
-
63
15
3
-
81
3
77
40
1
121
63
-
265
99
42
4,862
2,804
192
9
7,909
102
285
802
1
1,190
2,644
419
12,261
172
214
5,633
2,620
276
14
8,757
117
296
842
8
1,263
2,376
391
12,959
Page 21 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
As of December 31, 2013, asset-backed securities consist of mortgage-backed securities, auto loan receivables and credit card
receivables. These asset-backed securities are 'AAA' rated as at December 31, 2013 and 2012.
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 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.
The following table shows the terms to maturity of the Company’s investment portfolio.
Table 5.3 – Maturity of investment portfolio
As at December 31, 2013
Cash and cash equivalents
Short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
As at December 31, 2012
Cash and cash equivalents
Short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
Less than
1 year
From 1 to 5
years
Over 5
years
No specific
maturity
99
42
782
14
-
5
942
172
214
776
20
-
4
1,186
-
-
4,128
70
-
128
4,326
-
-
4,529
89
-
108
4,726
-
-
2,957
19
-
281
3,257
-
-
3,238
16
-
273
3,527
-
-
-
1,087
2,644
5
3,736
-
-
-
1,138
2,376
6
3,520
Total
99
42
7,867
1,190
2,644
419
12,261
172
214
8,543
1,263
2,376
391
12,959
Securities lending
5.2
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. The Company has loaned securities with a fair value of $1,617 million as at December 31, 2013
(December 31, 2012 – $2,176 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 amounts to $1,698 million as at December 31, 2013 (December 31, 2012 –
$2,285 million).
Page 22 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Equities sold short
5.3
Among the Company’s various investment strategies is a market neutral equity investment strategy, which consists of having both
long and short equity positions.
2013
2012
Fair
value
-
-
Debt securities
pledged as
collateral
-
-
Fair
value
300
(301)
Debt securities
pledged as
collateral
-
308
Table 5.4 – Long and short positions
As at December 31,
Long positions
Short positions
5.4
Financial liabilities related to investments
Table 5.5 – Financial liabilities related to investments
As at December 31,
Net asset value attributable to third party unit holders
Embedded derivatives (Note 6.3)
Accounts payable to investment brokers on unsettled trades
Derivative financial liabilities (Table 6.1)
Equities sold short positions (Table 5.4)
Investment results
5.5
The following table provides additional details about the items reported in Net investment income.
Table 5.6 – Net investment income
For the years ended December 31,
Interest income from:
Financial instruments at FVTPL
AFS financial instruments
Loans and receivables
Interest income
Dividend income (expense) from:
AFS financial instruments
Financial instruments at FVTPL, net
Equities sold short
Long-term investments, at cost
Dividend income
Expenses
2013
2012
151
48
18
17
-
234
105
68
5
7
301
486
2013
2012
158
94
22
274
120
54
(9)
3
168
(37)
405
147
106
22
275
111
41
(10)
2
144
(31)
388
Page 23 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The following table provides additional details about the items reported in Net investment gains (losses).
Table 5.7 – Net investment gains (losses)
For the years ended December 31,
Net realized gains (losses) from:
Derivative financial instruments
AFS financial instruments
Financial instruments designated as at FVTPL
Financial instruments classified as at FVTPL
Embedded derivatives
Impairment losses from:
Common shares
Preferred shares
Impairment reversal – debt securities
Other net gains
Note 6 – Derivative financial instruments
2013
2012
(211)
164
11
11
13
(57)
(22)
7
1
(83)
(20)
127
(48)
21
(11)
(40)
(2)
-
10
37
Types of derivatives
6.1
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.
Forwards and futures
a)
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 futures 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.
Swaps
b)
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.
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.
Options
c)
Options are 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) 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.
Page 24 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Fair value and notional amounts of derivatives
6.2
The following table shows the fair values and the notional amounts of derivatives by term to maturity and nature of risk. Positive fair
values are reported in Financial assets related to investments and negative fair values are reported in Financial liabilities related to
investments.
Table 6.1 – Fair values and notional amounts of derivatives (held for non-trading purposes) by term to maturity and nature of risk
As at December 31, 2013
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Swaps
Equity contracts
Total return swaps
Futures
Options
Inflation contracts
Options
As at December 31, 2012
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Swaps
Equity contracts
Total return swaps
Options
Credit contracts
Credit default swaps
Inflation contracts
Options
Fair value
Positive
Negative
Notional amount
Less than
1 year
From 1 to
5 years
Over 5
years
-
-
1
-
-
-
-
1
-
-
2
-
-
-
-
2
508
1,370
-
617
150
4
69
31
117
-
671
2
-
36
-
-
-
17
-
-
-
17
-
-
-
6
-
1
-
7
-
-
130
286
-
4
144
-
-
130
-
7
249
164
-
-
-
-
-
-
24
-
-
-
-
-
-
53
Total
508
1,370
130
903
150
8
237
31
117
130
671
9
249
253
Embedded derivatives
6.3
An embedded derivative is a component of an 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 embedded derivatives amounted to $48 million as at December 31, 2013 (December 31, 2012 –
$68 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 fair value of these perpetual
preferred shares which amounted to $1,040 million as at December 31, 2013 (December 31, 2012 – $1,069 million). Embedded
derivatives are reported in Financial liabilities related to investments.
Page 25 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 7 – Fair value measurement
Determination of fair value and fair value hierarchy
7.1
In accordance with IFRS 13, 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 fair value are observable, either
directly or indirectly; and
Level 3: valuation techniques which use inputs which have a significant effect on the fair value that are not based on
observable market data.
Level 1
a)
A financial instrument is regarded as quoted in an active market 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 an 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. This is the case for most
equity instruments and exchange-traded derivative instruments, unless they have stale prices, have ceased trading, are delisted, or
are subjected to any other similar event. Investments in mutual funds are categorized as Level 1 instruments as their underlying
assets are all traded on active markets. Debt securities for which the prices reflect recent transactions (unadjusted prices) are
categorized as Level 1 or Level 2 instruments depending on the market trading volume statistics of the last month for each reporting
period.
Level 2
b)
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 financial instruments comprise some debt securities such as government bonds, corporate bonds and asset-backed
securities which are not considered as actively traded or for which fair values are based on valuation techniques. Inputs used in
their valuation include:
−
−
−
prevailing market rates for bonds 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.
Over-the-counter derivatives are categorized as Level 2 instruments as their valuations are based on models with significant
observable inputs, such as equity prices, interest rates, or foreign exchange rates, and reflect the estimated amounts that the
Company would receive or might have to pay to terminate the contracts as at the reporting date. For greater certainty, the Company
compares the values of its over-the-counter derivatives with those of its counterparties on a systematic basis.
For the Term notes issued by the Company, the valuation data from a benchmark firm is used.
Level 3
c)
In limited circumstances, the Company uses input parameters that are not based on observable market data. 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 for the same instrument nor based on available market
data.
Level 3 instruments include 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. To determine the fair value of
embedded derivatives, the Company uses a valuation technique that relies predominantly on the implied volatility of the underlying
preferred shares, which is an unobservable parameter that is calculated using an internally developed valuation model.
Page 26 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Loans are also categorized as Level 3 instruments. They are measured using a valuation technique based on the income approach.
The future inflows of principal and interest are discounted using a pre-tax risk-free rate from the Government of Canada bonds
curve plus a risk premium that is based on the credit risk to which the Company would be exposed from the borrowers. The
Company ensures that the discount rate is consistent with borrowing rates on similar loans issued by financial institutions.
Categorization of fair values
7.2
The distribution of the Company’s financial instruments between each of the previously-mentioned levels is presented below.
Table 7.1 – Fair value hierarchy of financial assets and financial liabilities measured at fair value
Level 1
Level 2
Level 3
Total
As at December 31, 2013
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Preferred shares
Common shares
Derivative financial assets
Financial assets measured at fair value
Derivative financial liabilities
Net asset value attributable to third party unit holders
Financial liabilities measured at fair value
As at December 31, 2012
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Preferred shares
Common shares
Derivative financial assets
Financial assets measured at fair value
Derivative financial liabilities
Net asset value attributable to third party unit holders
Equities sold short positions
Financial liabilities measured at fair value
42
-
3,472
710
-
-
4,224
1,142
2,644
-
8,010
-
151
151
214
4,224
371
32
-
4,841
1,195
2,376
-
8,412
-
105
301
406
1,390
2,094
192
9
3,685
-
-
1
3,686
17
-
17
-
1,409
2,249
244
14
3,916
-
-
2
3,918
7
-
-
7
-
-
-
-
-
-
48
-
-
48
48
-
48
-
-
-
-
-
-
68
-
-
68
68
-
-
68
42
4,862
2,804
192
9
7,909
1,190
2,644
1
11,744
65
151
216
214
5,633
2,620
276
14
8,757
1,263
2,376
2
12,398
75
105
301
481
Page 27 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
In 2013, the Company elected to increase the market trading volume threshold for categorizing debt securities traded in an active
market as Level 1 instruments. December 31, 2012 figures have been revised to conform to the change in the threshold and
resulted in a reclassification of $2,305 million of debt securities from Level 1 to Level 2.
As at the end of each reporting period, the Company determines if reclassifications have occurred between levels in the hierarchy
based on the application of the classification criteria.
Table 7.2 – Reclassifications between Level 1 and Level 2
As at December 31, 2013
Reclassification of debt securities from Level 1 to Level 2
Reclassification of debt securities from Level 2 to Level 1
605
471
The fair value of financial assets and financial liabilities measured at cost, for which fair value is disclosed, is presented below.
Table 7.3 – Fair value hierarchy of financial assets and financial liabilities measured at cost, for which fair value is disclosed
Level 1
Level 2
Level 3
Total
99
-
-
-
-
418
99
418
-
1,267
-
1,267
172
-
-
-
-
396
172
396
-
1,324
-
1,324
As at December 31, 2013
Financial assets
Cash and cash equivalents
Loans
Financial liabilities
Debt outstanding – Term notes
As at December 31, 2012
Financial assets
Cash and cash equivalents
Loans
Financial liabilities
Debt outstanding – Term notes
Page 28 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
7.3
Level 3 financial instruments
The following table shows a reconciliation of the opening and closing carrying values of the Company’s embedded derivatives and
their asset components.
Table 7.4 – Reconciliation of Level 3 financial instruments
Carrying value as at January 1, 2013
Gains reported in Net investment gains (losses)
Losses reported in OCI
Purchases
Sales
Carrying value as at December 31, 2013
Carrying value as at January 1, 2012
Gains (losses) reported in Net investment gains (losses)
Losses reported in OCI
Purchases
Sales
Carrying value as at December 31, 2012
Asset component
(preferred shares)
Embedded
derivatives
(financial liabilities)
68
6
(19)
13
(20)
48
67
14
(3)
7
(17)
68
(68)
13
-
(13)
20
(48)
(67)
(11)
-
(7)
17
(68)
Changes in the fair value of embedded derivatives are reported in Net investment gains (losses). Changes in fair value of the asset
components are reported in OCI when they are unrealized and in Net investment gains (losses) when they are realized.
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 OCI and Net investment gains (losses) would be impacted in the event of a significant change in this non-observable
valuation parameter.
Table 7.5 – Sensitivity analysis for embedded derivatives
Increase (decrease)
As at December 31, 2013
Asset component
Preferred shares
OCI
Embedded derivatives
Financial liabilities related to investments
Net investment gains (losses)
As at December 31, 2012
Asset component
Preferred shares
OCI
Embedded derivatives
Financial liabilities related to investments
Net investment gains (losses)
10% increase
in volatility
10% decrease
in volatility
8
8
8
(8)
11
11
11
(11)
(8)
(8)
(8)
8
(10)
(10)
(10)
10
Page 29 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 8 – 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 material 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 Risk Management 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 7 – Fair value
measurement for information on how the Company categorizes its fair value measurements according to a three-level hierarchy.
Market risk
8.1
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 Operational
Investment Committee and the Risk Management Committee regularly monitor compliance with these investment policies.
Equity price risk
a)
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 analysis involves varying a single factor to assess the impact that this would have on the
Company’s results and financial condition.
Shocks of 10% and 25% applied to the price of all common shares, net of any equity hedges, combined respectively with shocks of
5% and 10% applied to the price of all preferred shares and related embedded derivatives, including the impact of any impairment,
would impact Net income and OCI as follows:
Table 8.1 – Sensitivity analysis for equity price risk
For the years ended December 31,
Price of all common shares:
10% increase
10% decrease
2013
2012
Net income1
OCI
Net income1
(16)
3
152
(140)
(14)
12
OCI
141
(138)
25% increase
325
(309)
25% decrease
1 Declines in the price of available for sale perpetual preferred shares is recorded in OCI and would normally lead to a lower valuation for associated
embedded derivative liabilities which are recorded as gains in Net income. Conversely, an increase in the price of these preferred shares is also
recorded in OCI and would normally lead to a higher valuation for associated embedded derivative liabilities which are recorded as losses in Net
income.
361
(329)
(30)
14
(42)
10
Page 30 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The above sensitivity analysis was prepared using the following key assumptions:
Interest rates and equity prices move independently.
−
− Credit and liquidity risks have not been considered.
−
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
− AFS equities in an unrealized loss position, as reflected in Accumulated other comprehensive income (“AOCI”) may, at
Impact on the Company’s pension plans is not included.
some point in the future, be realized through a sale.
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 Risk Management Committee. The Company manages market risk through asset class and
economic sector diversification and, in some cases, the use of derivatives.
Interest rate risk
b)
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 may use derivatives.
A 100 basis-point variation in interest rates would normally impact Net income and OCI as follows:
Table 8.2 – Sensitivity analysis for interest rate risk
For the years ended December 31,
100 basis-point increase
100 basis-point decrease
2013
2012
Net income
OCI
Net income
(21)
21
(127)
127
-
-
OCI
(138)
138
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.
−
− 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
Impact on the Company’s pension plans is not included.
market-yield adjustment.
− AFS fixed income securities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be
realized through a sale or 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 8.3.
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 in Table 8.3 where applicable. The effective rates shown in the table hereafter
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.
Page 31 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 8.3 – Contractual repricing and maturity schedule
Floating
rates
Less than
1 year
Fixed rates
From 1 to 5
years
Over 5
years
Non-rate
sensitive
As at December 31, 2013
Assets
Cash and cash equivalents
Effective interest rate
Short-term notes
Effective interest rate
Fixed-income securities
Effective interest rate
Preferred shares
Effective interest rate
Common shares
Loans
Effective interest rate
Reinsurance assets
Effective interest rate
Other 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
Net long (short) exposure
As at December 31, 2012
Assets
Cash and cash equivalents
Effective interest rate
Short-term notes
Effective interest rate
Fixed-income securities
Effective interest rate
Preferred shares
Effective interest rate
Common shares
Loans
Effective interest rate
Reinsurance assets
Effective interest rate
Other 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
98
-
14
65
-
69
-
1
247
-
-
24
-
-
24
1
0.91%
42
0.41%
780
1.42%
14
5.14%
-
5
4.04%
202
2.57%
-
1,044
3,207
2.57%
-
-
-
-
3,207
223
(2,163)
161
-
11
54
-
49
-
2
277
-
-
14
-
-
14
11
0.96%
214
0.95%
773
1.38%
21
5.62%
-
4
5.33%
130
2.10%
-
1,153
3,101
2.10%
-
-
-
-
3,101
Net long (short) exposure
263
(1,948)
Page 32 of 67
-
-
4,116
1.82%
807
5.07%
-
106
5.76%
201
2.57%
-
5,230
3,182
2.57%
-
25
5.09%
-
-
3,207
2,023
-
-
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
-
-
2,957
2.87%
304
5.23%
-
239
5.19%
102
2.57%
-
3,602
1,607
2.57%
1,143
5.45%
16
5.27%
-
-
2,766
836
-
-
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
-
-
-
-
2,644
-
-
7,007
9,651
-
-
169
5,447
4,954
10,570
(919)
-
-
-
-
2,376
-
-
6,532
8,908
-
-
411
5,635
4,893
10,939
(2,031)
Total
99
42
7,867
1,190
2,644
419
505
7,008
19,774
7,996
1,143
234
5,447
4,954
19,774
-
172
214
8,543
1,263
2,376
391
320
6,534
19,813
7,656
1,143
486
5,635
4,893
19,813
-
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Currency risk
c)
Currency risk is the risk that the fair value or 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 fixed-income securities denominated in U.S. dollars; however, the general policy is to minimize
foreign currency exposure. The Company mitigates foreign exchange price risk or cash flow risk by buying or selling successive
monthly foreign currency forward contracts.
The following table illustrates the foreign-denominated investments and derivative financial instruments used to reduce the currency
risk:
Table 8.4 – Exposure to currency risk
As at December 31,
Net fixed-income securities denominated in U.S. dollars
Less: U.S. dollar foreign currency forward contracts, notional amount
Net currency exposure – U.S. dollar
Currency exposure – other currencies
Net currency exposure on foreign-denominated investments
2013
509
(508)
1
-
1
2012
13
(13)
-
-
-
Basis risk
8.2
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 risk
8.3
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, in its premium receivables, reinsurance recoverables and structured settlements agreements
entered into with various life insurance companies.
Page 33 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Maximum exposure to credit risk
a)
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. Details on these credit risk exposures, including information on how the Company
mitigates these are given in the remaining part of the note.
Table 8.5 – Maximum exposure to credit risk
As at December 31,
Cash equivalents
Debt securities
Preferred shares
Loans
Derivative financial assets (Table 6.1)
Premium receivables
Reinsurance assets
Other financial assets1
On-balance sheet credit risk exposure
Structured settlements
2013
99
7,909
1,190
419
1
2,764
505
794
2012
172
8,757
1,263
391
2
2,670
320
511
13,681
14,086
905
676
Off-balance sheet credit risk exposure
1 Other financial assets comprise Industry pools receivable, Other receivables and recoverables, Accrued investment income, and Income taxes
905
676
receivable.
Structured settlements
b)
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 with credit rating of at least ‘A-’ at the inception of the contract, this credit risk is minimal.
Investments
c)
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 issuer and by
industry (see Table 8.6 hereafter).
The Company receives guarantees for loans.
Page 34 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Counterparty credit risk
d)
Counterparty credit risk arises from over-the-counter derivative and stock borrowing transactions. 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 an
over-the-counter 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. On the other hand, credit risk from stock borrowing arises if the
counterparty is allowed to re-hypothecate or re-pledge the collateral externally. Credit risk from stock borrowing is the potential for
the counterparty to default when the value of the collateral posted is higher than the value of the stock borrowed.
The Company subjects its derivative-related and stock borrowing 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 monthly review by the Operational 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 Company’s rigorous collateral management process is another significant credit mitigation tool used to manage counterparty
credit risk arising from over-the-counter derivative and stock borrowing transactions. Most of the Company’s legal agreements allow
for daily collateral movement. Consequently, the Company regularly validate that the collateral that it pledges is not too high and
that mark-to-market provisions for derivatives are sufficient. Mark-to-market provisions 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 credit risk exposure was $96 million as at December 31, 2013 (December 31, 2012 – $103 million) and is the sum of the
replacement cost plus an add-on amount for potential future credit exposure. The risk-weighted amount represents the credit risk
equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.
Reinsurance
e)
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.
Page 35 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Company is the assigned beneficiary of collateral consisting of cash, security agreements and letters of credit totalling
$238 million as at December 31, 2013 (December 31, 2012 – $173 million) as guarantees from unregistered reinsurers. This
collateral is held in support of policy liabilities of $149 million as at December 31, 2013 (December 31, 2012 – $80 million) and could
be used should these reinsurers be unable to meet their obligations.
Concentration of credit risk
f)
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 and in Canada. This risk concentration is closely monitored by the Company and it hedges some of the risk as it deems
necessary.
Table 8.6 – Concentrations of credit risk for investments
As at December 31,
By country of issuer
Canada
U.S.
Other
By industry
Government
Banks, insurance and diversified financial services
Energy
Other
2013
93%
3%
4%
100%
42%
35%
9%
14%
100%
2012
97%
-
3%
100%
48%
34%
8%
10%
100%
Liquidity risk
8.4
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 for cash
inflows and outflows. The Company invests in various types of assets in order to match them to its liabilities. This method maps the
obligations towards insured clients to asset life and performance. The Company reviews the status of the matching on a quarterly
basis.
To manage its cash flows 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 unencumbered and 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 15.3 – Credit facilities.
Page 36 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The following table presents the undiscounted value of financial liabilities by expected maturity. The expected maturities of claims
liabilities are determined by estimating when claims liabilities will settle. Unearned premiums have been excluded because they do
not constitute actual obligations.
Table 8.7 – Expected maturity of financial liabilities
As at December 31, 2013
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
As at December 31, 2012
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
Note 9 – Insurance risk
Less than
1 year
From 1 to 5
years
Over 5
years
No specific
maturity
3,207
35
-
-
829
4,071
3,101
12
27
-
933
4,073
3,182
-
8
-
19
3,209
3,123
-
8
-
286
3,417
1,607
-
-
1,143
-
2,750
1,432
-
-
1,143
4
2,579
-
199
-
-
301
500
-
474
-
-
25
499
Total
7,996
234
8
1,143
1,149
10,530
7,656
486
35
1,143
1,248
10,568
Insurance risk and management
9.1
The Company principally underwrites automobile, home, as well as commercial P&C 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 twelve-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 approximately 2.4 years as at December 31, 2013 and 2012.
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.
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.
The composition of the Company’s insurance risk, as well as the methods employed to mitigate the risks, are described hereafter.
Page 37 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Underwriting and pricing risks
a)
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 P&C 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 9.1 – Concentrations of insurance contracts on the basis of direct premiums written
For the years ended December 31,
By line of business
Personal Automobile
Personal Property
Commercial P&C
Commercial Automobile
By province
Ontario
Quebec
Alberta
British Columbia
Other
2013
46%
22%
24%
8%
100%
42%
29%
17%
6%
6%
100%
2012
45%
23%
24%
8%
100%
40%
30%
17%
7%
6%
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 Entreprise Risk 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.
Page 38 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Risk related to frequency and severity of claims
b)
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.
Reinsurance risk
c)
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 policyholders 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 unregistered reinsurers.
Catastrophe risk
d)
Catastrophe risk is the risk of occurrence of a catastrophe defined as any one claim, or group of claims related to a single event
such as large fires, hurricanes, earthquakes and hail or wind storms. 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. The placement of ceded reinsurance is almost exclusively on an excess-of-loss basis (per event
or per risk) as per typical practice. Ceded reinsurance complies with regulatory guidelines. Retention limits for the excess-of-loss
reinsurance vary by product line and territory. The following table shows the Company’s reinsurance net retention and coverage
limits by nature of risk.
Table 9.2 – Reinsurance net retention and coverage limits by nature of risk
Single risk events1
Retentions:
On property policies
On liability policies
2013
2012
5
2 - 10
5
2 - 10
Multi-risk events and catastrophes2
Retention
Coverage limits
1 For certain special classes of business or types of risks, the retentions may be lower through specific treaties or the use of facultative reinsurance.
2 Excludes a reinsurance treaty in place for a specific portfolio in British Columbia.
3 The Company retains participations averaging 4% on reinsurance layers between the retention and the coverage limits.
1003
3,300
50
3,300
Page 39 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Sensitivity to insurance risk
e)
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;
discount 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.
The claims liabilities’ sensitivity to certain key assumptions is 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. Movements in
these assumptions may be non-linear and may be correlated with one another.
Change in
assumptions
Impact on
Net income
+5%
+5%
+1%
+5%
+5%
+1%
(52)
(259)
127
(50)
(253)
129
Table 9.3 – Sensitivity analysis
Sensitivity factors
As at December 31, 2013
Average number of claims (frequency)
Average claim cost (severity)
Discount rate
As at December 31, 2012
Average number of claims (frequency)
Average claim cost (severity)
Discount rate
Page 40 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 10 – Claims liabilities and unearned premiums
Summary of claims liabilities
10.1
Claims liabilities are established to reflect the estimate of the full amount of all liabilities associated with insurance contracts earned
at the balance sheet date, including insurance claims incurred but not reported by policyholders. The ultimate amount of these
liabilities will vary from the best estimate made for a variety of reasons, including additional information with respect to facts and
circumstances of the insurance claims incurred.
The following table presents movements in the Company’s claims liabilities during the year.
Table 10.1 – Movements in claims liabilities
As at December 31, 2013
Balance, beginning of year
Current year claims
Unfavourable (favourable) prior year claims development
Decrease due to changes in discount rate
Total claims incurred
Claims paid
Balance, end of year
As at December 31, 2012
Balance, beginning of year
Current year claims
Favourable prior year claims development
Increase due to changes in discount rate
Total claims incurred
Claims paid
Business combination (Note 23)
Balance, end of year
The following table presents claims liabilities by line of business.
Table 10.2 – Claims liabilities by line of business
As at December 31, 2013
Automobile
Property
Personal lines
Automobile
P&C
Commercial lines
As at December 31, 2012
Automobile
Property
Personal lines
Automobile
P&C
Commercial lines
Direct
Ceded
Net
7,656
5,395
(371)
(77)
4,947
(4,607)
7,996
6,886
4,511
(472)
18
4,057
(4,018)
731
7,656
297
340
5
(2)
343
(156)
484
368
79
(93)
1
(13)
(87)
29
297
7,359
5,055
(376)
(75)
4,604
(4,451)
7,512
6,518
4,432
(379)
17
4,070
(3,931)
702
7,359
Direct
Ceded
Net
4,353
698
5,051
655
2,290
2,945
7,996
4,301
594
4,895
649
2,112
2,761
7,656
56
119
175
12
297
309
484
44
42
86
18
193
211
297
4,297
579
4,876
643
1,993
2,636
7,512
4,257
552
4,809
631
1,919
2,550
7,359
Page 41 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
10.2
Summary of unearned premiums
The following table presents movements in the Company’s unearned premiums during the year.
Table 10.3 – Movements in unearned premiums
Direct
Ceded
Net
4,046
7,305
(7,226)
4,125
3,790
6,854
(6,802)
204
4,046
23
252
(254)
21
41
221
(241)
2
23
4,023
7,053
(6,972)
4,104
3,749
6,633
(6,561)
202
4,023
Direct
Ceded
Net
1,972
979
2,951
300
874
1,174
4,125
1,928
961
2,889
294
863
1,157
4,046
-
-
-
1
20
21
21
1
-
1
1
21
22
23
1,972
979
2,951
299
854
1,153
4,104
1,927
961
2,888
293
842
1,135
4,023
As at December 31, 2013
Balance, beginning of year
Premiums written
Premiums earned
Balance, end of year
As at December 31, 2012
Balance, beginning of year
Premiums written
Premiums earned
Business combination (Note 23)
Balance, end of year
The following table presents unearned premiums by line of business.
Table 10.4 – Unearned premiums by line of business
As at December 31, 2013
Automobile
Property
Personal lines
Automobile
P&C
Commercial lines
As at December 31, 2012
Automobile
Property
Personal lines
Automobile
P&C
Commercial lines
Page 42 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Fair value of claims liabilities
10.3
The Company estimates that the fair value of its net claims liabilities approximate their carrying values. There was no premium
deficiency as at December 31, 2013 and 2012.
Direct
Ceded
Net
Table 10.5 – Carrying value of claims liabilities
As at December 31, 2013
Undiscounted value
Effect of time value of money using a discount rate of 2.57%
Provision for adverse deviations (PfAD)
As at December 31, 2012
Undiscounted value
Effect of time value of money using a discount rate of 2.10%
Provision for adverse deviations (PfAD)
7,756
(447)
687
7,996
7,308
(373)
721
7,656
Net gain (loss) from reinsurance
10.4
The net gain (loss) arising from reinsurance ceded included in Underwriting results is detailed as follows:
Table 10.6 – Net gain (loss) from reinsurance
For the years ended December 31,
Ceded earned premiums
Ceded claims incurred
Commission earned on ceded reinsurance
468
(15)
31
484
284
(18)
31
297
2013
(254)
343
21
110
7,288
(432)
656
7,512
7,024
(355)
690
7,359
2012
(241)
(13)
27
(227)
Page 43 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Prior-year claims development
10.5
The following tables show the estimates of cumulative incurred claims, including IBNR, for the seven 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 in 2011. The claims development information disclosed is being increased from five years to ten years over the period 2012 –
2016.
Table 10.7 – Prior-year claims development – Direct
Total
2013
2012
2011
2010
2009
2008
Accident year
2,758
2,419
2,399
2,067
1,864
1,639
2,400
-
-
-
-
-
2,400
(918)
-
-
-
-
-
2,290
2,207
-
-
-
-
2,207
(876)
(280)
-
-
-
-
1,961
1,939
1,901
-
-
-
1,901
(584)
(297)
(241)
-
-
-
1,800
1,801
1,774
1,737
-
-
1,737
(599)
(184)
(214)
(206)
-
-
1,643
1,614
1,604
1,584
1,548
-
1,548
(619)
(157)
(145)
(170)
(99)
-
-
-
-
-
-
-
2,758
-
-
-
-
-
-
-
2007 &
earlier
4,619
4,443
4,370
4,291
4,214
4,044
4,046
4,046
(1,175)
(570)
(481)
(343)
(328)
(355)
(918)
(1,156)
(1,122)
(1,203)
(1,190)
(3,252)
2,758
1,482
1,051
779
534
358
794
7,756
240
7,996
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
Six years later
Current estimate
Paid claims in subsequent
periods
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Cumulative payment to
date
Direct undiscounted
claims liabilities
Discounting and PfAD
Claims liabilities - Direct
Page 44 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 10.8 – 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
Six years later
Current estimate
Paid claims in subsequent
periods
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Cumulative payments to
date
Net undiscounted claims
liabilities
Discounting and PfAD
Claims liabilities - Net
Total
2013
2012
2011
2010
2009
2008
2,499
2,357
2,299
2,031
1,796
1,624
2,325
-
-
-
-
-
2,325
(885)
-
-
-
-
-
2,201
2,130
-
-
-
-
2,130
(827)
(269)
-
-
-
-
1,916
1,888
1,853
-
-
-
1,853
(554)
(292)
(239)
-
-
-
1,737
1,736
1,712
1,676
-
-
1,676
(568)
(177)
(211)
(199)
-
-
1,623
1,594
1,584
1,560
1,523
-
1,523
(607)
(155)
(144)
(169)
(94)
-
-
-
-
-
-
-
2,499
-
-
-
-
-
-
-
2007 &
earlier
4,291
4,134
4,066
3,983
3,908
3,819
3,803
3,803
(1,137)
(559)
(462)
(334)
(317)
(322)
(885)
(1,096)
(1,085)
(1,155)
(1,169)
(3,131)
2,499
1,440
1,034
768
521
354
672
7,288
224
7,512
Note 11 – Other assets and other liabilities
11.1
Table 11.1 – Components of other assets
Components of other assets
As at December 31,
Industry pools receivable
Other receivables and recoverables
Employee future benefit assets (Note 22)
Long-term investments, at cost
Prepaids
Financial assets related to investments
Other
2013
2012
221
166
96
44
18
9
27
581
202
138
11
19
21
3
18
412
During 2013, there were no events or changes in circumstances that indicated that the carrying values of long-term investments
may not be recoverable.
Page 45 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
11.2
Table 11.2 – Components of other liabilities
Components of other liabilities
As at December 31,
Commissions payable
Industry pools payable
Premium and sale taxes payable
Employee future benefit liabilities (Note 22)
Restructuring provision (Note 24)
Contingent consideration
Other payables
2013
2012
249
231
176
100
13
-
485
290
222
190
160
30
11
511
1,254
1,414
Note 12 – Investments in associates and joint ventures
Investments in associates and joint ventures are investments in private entities. The following table presents aggregate financial
information related to the Corporation’s interest in associates and joint ventures, which are not individually material for the
Company.
Table 12.1 – Financial information related to interests in associates and joint ventures
As at December 31, 2013
Share of profit (loss) from investments in associates and joint ventures
Net income
OCI
Total comprehensive income
Carrying amount of investments in associates and joint ventures
As at December 31, 2012
Share of profit from investments in associates and joint ventures
Net income
OCI
Total comprehensive income
Carrying amount of investments in associates and joint ventures
Associates
Joint
ventures
Total
21
-
21
203
17
-
17
204
5
(1)
4
52
5
-
5
62
26
(1)
25
255
22
-
22
266
During 2013, there were no events or changes in circumstances that indicated that the carrying values of these investments may
not be recoverable.
Page 46 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 13 – Property and equipment
Table 13.1 – Reconciliation of the carrying value of property and equipment
As at December 31, 2013
Computer equipment
Furniture and equipment
Leasehold improvements
As at December 31, 2012
Land and buildings
Computer equipment
Furniture and equipment
Leasehold improvements
Cost
Accumulated
depreciation
Carrying
value
61
129
77
267
20
53
106
57
236
47
78
32
157
2
37
67
25
131
14
51
45
110
18
16
39
32
105
Table 13.2 – Reconciliation of movements in property and equipment
Land and
buildings
Computer
equipment
Furniture and
equipment
Leasehold
improvements
Total
As at December 31, 2013
Carrying value, beginning of year
Acquisitions
Transfer to Asset held for sale
(Other assets)
Depreciation expense
Business combination (Note 23)
Carrying value, end of year
As at December 31, 2012
Carrying value, beginning of year
Acquisitions
Disposals
Depreciation expense
Business combination (Note 23)
Carrying value, end of year
18
-
(10)
(3)
(5)
-
-
-
-
-
18
18
16
8
-
(10)
-
14
15
9
-
(9)
1
16
39
23
-
(11)
-
51
27
18
-
(8)
2
39
32
20
-
(7)
-
45
25
15
(3)
(8)
3
32
105
51
(10)
(31)
(5)
110
67
42
(3)
(25)
24
105
Page 47 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 14 – Goodwill and intangible assets
Summary of goodwill and intangible assets
14.1
Table 14.1 – Reconciliation of the carrying value of goodwill and intangible assets
As at December 31, 2013
Goodwill
Distribution network – indefinite useful life
Distribution network – finite useful life
Distribution networks - Total
Customer relationships
Internally developed software
Intangible assets
As at December 31, 2012
Goodwill
Distribution network – indefinite useful life
Distribution network – finite useful life
Distribution networks
Customer relationships
Internally developed software
Intangible assets
Table 14.2 – Reconciliation of movements in goodwill and intangible assets
Cost
Accumulated
amortization
Carrying
value
953
820
85
905
228
300
1,433
923
820
85
905
205
270
1,380
-
-
4
4
96
169
269
-
-
1
1
74
152
227
953
820
81
901
132
131
1,164
923
820
84
904
131
118
1,153
Distribution
networks
Total
Customer
relationships
Internally
developed
software
Total
intangible
assets
Goodwill
Intangible assets
923
25
5
-
953
794
26
(2)
105
-
923
904
-
-
(3)
901
820
-
-
85
(1)
904
131
23
-
(22)
132
134
20
(3)
-
(20)
131
118
47
-
(34)
131
114
34
-
-
(30)
118
1,153
70
-
(59)
1,164
1,068
54
(3)
85
(51)
1,153
As at December 31, 2013
Carrying value, beginning of year
Acquisitions and costs capitalized
Business combination (Note 23)
Amortization expense
Carrying value, end of year
As at December 31, 2012
Carrying value, beginning of year
Acquisitions and costs capitalized
Dispositions
Business combination (Note 23)
Amortization expense
Carrying value, end of year
Page 48 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Goodwill
a)
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.
Intangible assets
b)
Management has determined that intangible assets with finite useful lives are not impaired. Intangible assets with indefinite useful
lives and intangible assets 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.
Impairment test and assumptions
14.2
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, 2013. 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% as at June 30, 2013 and
2012, 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 13.0% was used (June 30, 2012 – 13.4%).
The test results indicate that the recoverable amount of the P&C insurance operations CGU exceeds its carrying value. No
impairment loss for goodwill or intangible assets has been recognized for the year ended December 31, 2013 or prior.
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 15 – Debt outstanding
15.1
Table 15.1 – Term notes outstanding terms
Unsecured medium term notes (“term notes”)
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 August 18, 2011
July 8, 2061 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
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 term notes. On September 10, 2012, the Company issued an additional
$50 million principal amount, bringing the total offering to $250 million.
Page 49 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Summary of debt outstanding
15.2
The following table presents the summary of debt outstanding.
Table 15.2 – Fair value and carrying value of debt outstanding
As at December 31,
Carrying value
Fair value Carrying value
Fair value
2013
2012
Series 1
Series 2
Series 3
Series 4
Series 5
249
248
99
298
249
279
301
117
320
250
249
248
99
298
249
289
310
125
335
265
1,143
1,267
1,143
1,324
The term notes are accounted for at amortized cost which equals their carrying value. They 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.
Interest expense on term notes is presented as Finance costs.
Credit facilities
15.3
The Company has a $300-million four-year unsecured revolving term credit facility maturing on October 26, 2016. This credit facility
may be drawn as a prime loan at the prime rate plus a margin or as bankers’ acceptances at the bankers’ acceptance rate plus a
margin. This facility was undrawn as at December 31, 2013 and 2012.
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, 2013 and 2012.
During the year ended December 31, 2012, the Company repaid in full the $100 million two-year term loan facility, as well as the full
$300 million on the three-year term loan facility. This completed the full repayment of the short-term financing related to the AXA
Canada Inc. (“AXA Canada”) acquisition.
Page 50 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 16 – Common shares and preferred shares
Authorized
16.1
Authorized share capital consists of an unlimited number of common shares and Class A shares.
16.2
Table 16.1 – Issued and outstanding shares, by classes
Issued and outstanding shares
As at December 31, 2013
Common
Series 1 Preferred
Series 3 Preferred
Class A
As at December 31, 2012
Common
Series 1 Preferred
Series 3 Preferred
Class A
Common shares
Table 16.2 – Reconciliation of number of common shares outstanding
As at December 31,
Balance, beginning of year
Shares issued
Shares repurchased for cancellation
Balance, end of year
Number of
shares
Amount
(in millions $)
Dividends
declared per
share
(amount in $)
131,543,134
10,000,000
10,000,000
20,000,000
133,333,665
10,000,000
10,000,000
20,000,000
2 090
244
245
489
2,118
244
245
489
1.76
1.05
1.05
1.60
1.05
1.05
2013
(in shares)
2012
(in shares)
133,333,665
-
(1,790,531)
129,553,665
3,780,000
-
131,543,134
133,333,665
On September 4, 2012, on the date of the closing of the acquisition of Jevco, 3,780,000 subscription 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 subscription 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.
Class A shares
Issued and outstanding Class A shares would rank both with regards to dividends and return of capital in priority to the common
shares.
Series 1 Preferred
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
5-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.
Page 51 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Series 3 Preferred
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
5-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.
Normal course issuer bid
16.3
On May 13, 2013, the Company commenced a normal course issuer bid (“NCIB”) to purchase during the next 12 months ending
May 12, 2014 up to 6,666,683 common shares, representing approximately 5% of its issued and outstanding common shares.
During the year ended December 31, 2013, 1,790,531 common shares, at an average price of $59.37 per common share, were
repurchased for cancellation for a total consideration of $106 million (none during the year ended December 31, 2012). Total cost
paid, including fees, was first charged to Share capital to the extent of the average carrying value of the common shares
repurchased for cancellation and the excess of $78 million was charged to Retained earnings.
Note 17 – 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 its strong position in the Canadian P&C insurance industry.
The capital is managed on an aggregate 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. Quebec 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 Minimum Capital Test (“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 it attains its objectives, the Company has established a minimum internal threshold of 170% in its principal
subsidiaries, in excess of which, under normal circumstances, the Company will maintain its capital.
The following table presents the capital position of the Company’s P&C insurance subsidiaries.
Table 17.1 – Capital position
As at December 31,
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%
2013
3,750
1,849
203%
1,901
977
607
2012
3,764
1,840
205%
1,924
1,004
636
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, 2013, 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 thresholds.
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 2013 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.
Page 52 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 18 – Share-based payments
Long-term incentive plans
18.1
The following table shows the outstanding units and fair value for each of the Company’s performance cycles.
Table 18.1 – Outstanding units and fair value by performance cycle
Performance cycles
As at December 31, 2013
2011–2013
2012–2014
2013–2015
As at December 31, 2012
2010–2012
2011–2013
2012–2014
The following table shows the movements in the LTIP share units during the year.
Table 18.2 – Movements in LTIP share units
As at December 31,
Outstanding, beginning of year
Awarded
Net change in estimate of units outstanding
Units settled
Outstanding, end of year
Weighted-
average fair
value at grant
date (in $)
Number of
units
Amount
(in millions
of $)
275,770
255,829
208,190
739,789
447,829
396,820
244,124
1,088,773
48.06
57.75
62.08
55.36
35.06
50.84
57.76
45.90
13
15
13
16
20
14
2013
(in units)
1,088,773
201,188
18,618
(568,790)
739,789
2012
(in units)
1,015,691
323,490
162,693
(413,101)
1,088,773
The amount charged to Underwriting expenses for LTIP was $18 million for the year ended December 31, 2013 (December 31,
2012 – $16 million).
During the year ended December 31, 2013, the Company settled LTIP units granted in 2010 that vested through the plan
administrator by purchasing common shares on the market and remitting them to the participants. The cumulative cost of the vested
units, amounting to $23 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 $10 million, net of $4 million of income taxes, was recorded
in Retained earnings.
Page 53 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
During the year ended December 31, 2012, the Company settled LTIP units granted in 2009 that vested through the plan
administrator by purchasing common shares on 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.
Employee share purchase plan
18.2
The following table shows the movements in the restricted common shares under the ESPP during the year.
Table 18.3 – Movements in restricted common shares
As at December 31,
Outstanding, beginning of year
Awarded
Vested or forfeited
Outstanding, end of year
2013
(in units)
141,814
153,322
(127,253)
167,883
2012
(in units)
120,317
126,242
(104,745)
141,814
The amount charged to Underwriting expenses for the ESPP was $9 million for the year ended December 31, 2013 (December 31,
2012 – $7 million).
Deferred share unit plan
18.3
The deferred share units are cash-settled awards for which the provision recorded as at December 31, 2013 is $5 million
(December 31, 2012 – $4 million). The amount charged to Underwriting expenses was $1 million for the years ended December 31,
2013 and 2012.
Note 19 – Earnings per share
Earnings per common share were calculated by dividing the net income attributable to common shareholders 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 basic earnings per common share. The net income attributable to common shareholders and the
weighted-average number of common shares outstanding at the end of the year are calculated as follows:
Table 19.1 – Earnings per share
For the years ended December 31,
Net income attributable to shareholders
Less: Dividends declared on preferred shares, net of tax
Net income attributable to common shareholders
Number of common shares outstanding at the beginning of the year
Adjustment to weighted-average number of common shares for:
Issued at the date of acquisition of Jevco (3,780,000 shares)
Repurchased under the NCIB program (1,790,531 shares)
2013
431
21
410
20121
571
21
550
133,333,365
129,553,665
-
(965,327)
1,218,689
-
Weighted-average number of common shares outstanding during the year
132,368,038
130,772,354
Earnings per common share – basic and diluted (in dollars)
1 Restated (see Note 3 – Adoption of new accounting standards for details).
3.10
4.20
Page 54 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 20 – Revenue
Table 20.1 – Total revenue
For the years ended December 31,
Net premiums earned
Interest income (Table 5.6)
Dividend income (Table 5.6)
Net investment gains (losses) (Table 5.7)
Share of profit from investments in associates and joint ventures (Table 12.1)
Other revenues
Table 20.2 – Premiums written and earned
For the years ended December 31,
Premiums written
Direct
Ceded
Net
Changes in unearned premiums
Net premiums earned
Note 21 – Income taxes
2013
6,972
274
168
(83)
26
77
7,434
2012
6,561
275
144
37
22
88
7,127
2013
2012
7,305
(252)
7,053
(81)
6,972
6,854
(221)
6,633
(72)
6,561
Income tax expense (benefit) recorded in Net income
21.1
The following table shows the major components of income tax expense (benefit) recorded in Net income.
Table 21.1 – Composition of income tax expense (benefit) recorded in Net income
For the years ended December 31,
2013
2012
Current year
Prior year adjustment
Benefit arising from a previously unrecognized tax loss or temporary difference
Current tax expense
Origination and reversal of temporary differences
Deferred tax expense (benefit)
65
(3)
-
62
(28)
(28)
34
118
(5)
(5)
108
33
33
141
Income tax expense (benefit) recorded in OCI
21.2
The following table shows the major components of income tax expense (benefit) recorded in OCI.
Table 21.2 – Composition of income tax expense (benefit) recorded in OCI
For the years ended December 31,
2013
2012
Reclassification to income of net gains on AFS instruments
Current tax benefit
Net changes in unrealized gains (losses) on AFS instruments
Net actuarial gains on employee future benefits
Deferred tax expense (benefit)
(21)
(21)
(6)
28
22
1
(24)
(24)
13
4
17
(7)
Page 55 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Effective income tax rate
21.3
The effective income tax rates are different from the combined Canadian federal and provincial income tax rates. The 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 21.3 – Effective income 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
Tax losses carried back to prior years
Non-taxable income
Non-deductible expenses
Non-taxable portion of capital gains
Recovery of tax asset not previously recognized
Other
Effective income tax rate
21.4
Table 21.4 – Components of deferred tax assets and liabilities
Components of deferred tax assets and liabilities
2013
26.5%
(10.0)%
(6.7)%
(2.4)%
0.9%
(0.6)%
-
(0.4)%
7.3%
2012
26.4%
(5.5)%
-
(1.5)%
1.6%
(0.1)%
(0.5)%
(0.6)%
19.8%
As at December 31,
Net claims liabilities
Deferred expenses for tax purposes
Losses available for carry forward
Post-employment benefit plans
Other
Deferred tax assets
Intangible assets
Deferred income for tax purposes
Deferred gains and losses on specified debt obligations
Property and equipment
Investments
Deferred tax liabilities
Reported in:
Deferred tax assets
Deferred tax liabilities
Net income
OCI
Shareholders’ equity
Business combination
Consolidated
balance sheets
Consolidated statements of
comprehensive income
2013
2012
2013
94
72
51
2
5
224
156
39
18
13
2
228
56
60
(4)
-
91
74
29
40
3
237
154
59
20
15
-
248
129
140
(6)
3
(3)
(2)
(22)
38
(2)
9
2
(20)
(2)
(2)
2
(20)
(28)
17
2012
(11)
12
(14)
39
-
26
16
4
(2)
6
-
24
33
17
The Company had allowable capital losses of $34 million as at December 31, 2013 (December 31, 2012 – $37 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.
The Company had not recognized a deferred tax asset of $2 million as at December 31, 2013 (December 31, 2012 – $1 million) for
unused non-capital losses. The Company has recognized a deferred tax asset for all other unused non-capital losses as at
December 31, 2013 and 2012.
Page 56 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 22 – Employee future benefits
The Company has a number of funded and unfunded defined benefit pension plans that provide benefits to members in the form of
a guaranteed level of pension payable for life based on final average earnings and contingent upon certain age and service
requirements. As at the date of the latest actuarial valuation, the defined benefit obligation for the pension plans comprises 66% in
respect of active members, 28% in respect of pensioners and beneficiaries and 6% in respect of deferred members.
Subject to applicable pension legislation, plans are administered either by the Company or by a pension committee, with assets
held in a pension fund that is legally separate from the Company. The assets cannot be used for any purpose other than payment of
pension benefits and related administrative fees.
Provincial minimum funding regulations require special payments from the Company to amortize any shortfall of registered plans’
assets relative to the cost of settling all accrued benefit entitlements through the purchase of annuities or payment of an equivalent
lump sum value. Security in the form of letters of credit is permitted in lieu of those special payments, up to a limit of 15% of defined
benefit assets.
Subject to applicable legal requirements, any balance of assets remaining after providing for the accrued benefits of the plan
members may be returned to the Company. Pension legislation may require that the Company submit a proposal to the members
and beneficiaries regarding the allocation of surplus assets. However, on an ongoing basis, a portion of such surplus may be
recoverable by the Company through a reduction in future contributions or through payment of eligible administrative expenses.
The Company also offers employer-paid post-retirement benefit plans providing life insurance and health and dental benefits to a
limited number of active employees and retirees and are now closed to new entrants, as well as post-employment benefit plans that
provide health and dental coverage to employees on disability. These 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
(“defined benefit plans”) is December 31. The latest actuarial valuations for defined benefit plans were performed as at
December 31, 2012 or 2011 depending on the plan.
Funded status
22.1
The following table shows the aggregate funded status of the Company’s defined benefit plans as well as the net deficit amount
reported in Other assets and Other liabilities.
Table 22.1 – Funded status
As at December 31,
Present value of defined benefit obligation
Fair value of plan assets (net of reserve against asset)
Net defined benefit liability
Defined benefit plans
2013
(1,423)
1,419
(4)
2012
(1,506)
1,357
(149)
Reported on the Consolidated balance sheets in:
11
Other assets
Other liabilities1
(160)
1 As at December 31, 2013, the amount reported in Other liabilities is composed of $68 million relating to pension plans (December 31, 2012 –
96
(100)
$126 million) and $32 million relating to post-retirement and post-employment benefit plans (December 31, 2012 – $34 million).
The Company makes contributions to the defined benefit pension plans to secure the benefits. The amount and timing of the
Company’s contributions are made in accordance with applicable pension and tax legislation and on the advice of an actuary. Under
the provisions of the pension plans, members may annually select between three different benefit levels and may be required,
depending on the benefit level selected, to make contributions to their plans. The Company must fund the excess of the required
funding over the members’ contributions.
Page 57 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Employer contributions to its defined benefit plans amounted to $121 million for the year ended December 31, 2013
(December 31, 2012 – $210 million, including discretionary pension contributions of $114 million). Based on the latest projections of
the financial position of all its plans, total cash contributions by the Company are expected to be approximately $60 million in 2014.
The contributions will vary depending on the results of the December 31, 2013 actuarial valuations, use of funding relief measures,
if any, and decisions taken by the Company to use or not use letters of credit as permitted by legislation. The Company is also
expected to meet the cost of eligible administrative expenses through the pension funds.
The present value of the defined benefit obligation is based on the current value of expected benefit payment cash flows to plan
members over 60 to 70 years.
Present value of defined benefit obligation
22.2
The movement of the present value of defined benefit obligation is as follows:
Table 22.2 – Movement of the present value of defined benefit obligation
As at December 31,
Balance, beginning of year
Current service cost
Past service cost
Interest expense on defined benefit obligation
Re-measurements recognized in OCI arising from actuarial gains and losses from changes in:
demographic assumptions
financial assumptions
Employee contributions
Benefit payments
Balance, end of year
Fair value of plan assets
22.3
The movement of the fair value of plan assets is as follows:
Table 22.3 – Movement of the fair value of plan assets
As at December 31,
Balance, beginning of year
Employer contributions
Employee contributions
Interest income on plan assets
Re-measurements recognized in OCI – return on plan assets
Benefit payments
Other
Balance, end of year
Defined benefit plans
2013
1,506
68
-
62
57
(226)
14
(58)
1,423
2012
1,406
60
(14)
63
(17)
45
12
(49)
1,506
Defined benefit plans
2013
1,357
121
14
55
(59)
(58)
(5)
1,425
2012
1,093
210
12
49
46
(49)
(4)
1,357
Re-measurements on the fair value of plan assets represent the difference between the actual return on plan assets and the interest
income credited on plan assets at the rate used to discount the defined benefit obligation. The actual return on pension plan assets
for the year ended December 31, 2013 was negative $4 million (December 31, 2012 – positive $95 million).
Page 58 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The following table shows the composition of the Company’s pension plan assets, at fair value.
Table 22.4 – Composition of pension plan assets
As at December 31,
Cash and short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Debt securities
Common shares
Derivative financial instruments
2013
2012
Fair value
% of total
Fair value
% of total
18
697
184
3
884
510
7
1%
49%
13%
-
62%
36%
1%
134
572
136
4
712
484
21
10%
42%
11%
-
53%
36%
1%
1,419
100%
1,351
100%
Plan assets are essentially all quoted on an active market.
Employee future benefit expense recognized in Net income
22.4
The following table details the components of the employee future benefits expense for defined benefit plans recognized in Net
income.
Table 22.5 – Employee future benefit expense recognized in Net income
For the years ended December 31,
Current service cost
Net interest expense on the net defined benefit obligation
Other
Defined benefit plans
2013
2012
68
7
5
80
60
14
3
77
There were no plan amendments, curtailments or settlements during the year that affect the results presented herein.
Page 59 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
22.5
Actuarial gains (losses) recognized in OCI
Table 22.6 – Actuarial gains (losses) recognized in OCI
For the years ended December 31,
Balance, beginning of year1
Re-measurements related to:
actuarial gains (losses) from changes in demographic assumptions
actuarial gains (losses) from changes in financial assumptions
return on plan assets
increase in asset reserve
Actuarial gains recognized in OCI
Defined benefit plans
2013
(163)
(57)
226
(59)
(6)
104
2012
(180)
17
(46) 2
46
-
17
(163)
Balance, end of year1
1 Net actuarial losses on employee future benefits recognized in OCI are immediately reclassified to Retained earnings as they will not be
(59)
reclassified subsequently to Net income in future periods.
2 Net actuarial gains on employee future benefits recognized in OCI also include $1 million loss from share of associates and joint ventures.
22.6
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 22.7 – Assumptions
As at December 31,
To determine benefit obligation at end of period
Discount rate
Rate of increase in future compensation
Rate of inflation
Life expectancy for pensioners at the age of 65 – male
Life expectancy for pensioners at the age of 65 – female
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
Life expectancy for pensioners at the age of 65 – male
Life expectancy for pensioners at the age of 65 – female
Health care cost trend rate
Dental care cost trend rate
Pension plans
Post-retirement and post-
employment benefit plans
2013
4.8%
3.0%
2.0%
21.3
23.5
n/a
n/a
4.0%
3.0%
19.8
22.1
n/a
n/a
2012
4.0%
3.0%
2.0%
19.8
22.1
n/a
n/a
4.4%
3.5%
19.8
22.1
n/a
n/a
2013
4.4%
3.0%
2.0%
21.3
23.5
7.5%
4.5%
3.7%
3.0%
19.8
22.1
8.0%
4.5%
2012
3.7%
3.0%
2.0%
19.8
22.1
8.0%
4.5%
4.2%
3.5%
19.8
22.1
8.5%
4.5%
Mortality rates have been established in accordance with the draft private sector table and improvement scale published in 2013 by
the Canadian Institute of Actuaries following its Canadian pensioner mortality study.
Page 60 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Description of risks and sensitivity analysis
22.7
Employee defined benefit provisions expose the Company to actuarial risks, such as longevity risk, interest rate risk, inflation risk
and market investment risk.
The ultimate cost of the defined benefit provisions to the Company will depend upon future events rather than on the assumptions
made. In general, the risk to the Company is that the assumptions underlying the disclosures or the calculation of contribution
requirements are not borne out in practice and the cost to the Company is higher than expected. This could result in higher
contributions required from the Company and a higher deficit disclosed.
Assumptions which may vary significantly include:
−
−
−
the return on plan assets;
decrease in asset values not being matched by a similar decrease in the value of liabilities; and
unanticipated future changes in mortality patterns leading to an increase in the defined benefit liabilities.
The defined benefit obligation and the service cost are sensitive to the assumptions made about salary growth levels and inflation,
as well as the assumptions made about life expectation. It is also sensitive to the discount rate, which depends on market yields on
‘AA’ corporate bonds.
The following table presents the sensitivity of the defined benefit obligation to key assumptions:
Table 22.8 – Impact of changes in key assumptions
As at December 31,
Discount rate
1% increase
1% decrease
Rate of compensation increase
1% increase
1% decrease
Rate of inflation
1% increase
1% decrease
Life expectancy of pensioners
One-year increase
2013
(248)
302
64
(61)
54
(51)
35
2012
(256)
312
74
(70)
61
(58)
41
A 1% increase or decrease in the health care and dental care cost trend rate would not have a significant impact on the Company’s
results or financial position as at the balance sheet date.
The effect on the defined benefit obligation at the end of the year has been calculated by changing one assumption for the
sensitivity but without changing any other assumptions.
The impact of a one-year increase in life expectancy of pensioners has been calculated by determining the adjustment to be made
to the mortality rates of a pensioner aged 65 in order to increase the life expectancy by one year and then applying this adjustment
to all mortality rates.
Page 61 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
22.8
Risk management and investment strategy
The Management Pension Committee is responsible for the oversight of the pension plans, including the review of the funding
policy and investment performance, and compliance with the Investment policy of the pension plan assets (the “Policy”). The Policy
formulates investments principles, guidelines and monitoring procedures to meet the funds needs and objectives, in conformity with
applicable rules. It also establishes principles and limits pertaining to fixed-income and equity market risks. Any deviation from the
Policy is reviewed by the Operational Investment Committee. The Risk Management Committee, which is a committee of the
Company’s Board of Directors, is responsible for the approval of the Policy and the review of the pension plans investment
performance.
Intact Investment Management Inc., a subsidiary of the Company, is responsible for the determination of the investment strategy
and the administration of the plan assets. The pension plans investment portfolio is managed in accordance with investment policies
that focus on asset diversification and asset-liability matching.
The goal of asset diversification is to limit the potential to have material capital losses. The fixed-income securities in the pension
plans are significantly exposed to changes in interest rates and movements in credit spreads. Investment policies seek a balanced
target investment allocation between fixed-income and equity securities, within credit concentration limit. The pension plans’ risk
management strategy is to invest in fixed-income instruments 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 adopted investment policy generally requires
minimum credit ratings of ‘BBB’ for investments in fixed income securities and limits its concentration in any one investee or related
group of investees to 5% of the cost of its total assets for fixed income securities (except for those that are issued or guaranteed by
the Government of Canada or by a province of Canada having at least an ‘A’ rating). The Company has overall limits on credit
exposure that include fixed income and equity securities, as well as off-balance sheet exposure.
The Company also establishes asset allocation limits to ensure sufficient diversification. Sensitivity analysis is one risk management
technique that assists management in ensuring that equity risks assumed remain within the pension plans’ risk tolerance level. The
Company’s pension plans have a significant concentration of their investments in Canada as well as in the Government sector. This
risk concentration is closely monitored.
Table 22.9 – Concentration of credit risk by countries and industries
As at December 31,
By country of issuer
Canada
U.S.
Other
By industry
Government
Banks, insurance and diversified financial services
Energy
Other
2013
84%
8%
8%
100%
51%
19%
7%
23%
100%
2012
86%
2%
12%
100%
53%
20%
7%
20%
100%
One objective established in the Policy is to maintain an appropriate balance between the interest rate exposure of the Company’s
invested assets and the duration of its contractual liabilities. The Company calculates a hedge ratio as the dollar-duration of the
pension asset portfolio divided by the dollar-duration of the funded pension plans’ obligation. A lower hedge ratio increases the
Company’s exposure to changes in interest rates. The hedge ratio was 73% as at December 31, 2013.
Liquidity risk is the risk that the pension plans will encounter difficulty in raising funds to meet obligations associated with the
pension obligation arising from their defined benefit plans. The Company’s liquidity risk with regards to pension plans is not
significant, as the inflows from the contributions receivable generally outweigh the outflows for benefit payments. A large portion of
the investments are held in short-term notes and highly liquid federal and provincial government debt to protect against any
unanticipated large cash requirements.
The Company regularly monitors compliance with investment policies.
Page 62 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 23 – Business combination
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 a 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 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 23.1 – Business combination – Jevco
As at
Purchase price – cash consideration paid
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 $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,
2013
December 31,
2012
530
530
1,041
100
31
27
33
19
62
83
(731)
(204)
(3)
(31)
427
103
1,041
100
31
26
33
24
62
84
(731)
(204)
(3)
(31)
432
98
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 is complete.
Page 63 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 24 – Integration and restructuring costs
Following the announcements of the acquisitions of Jevco in September 2012 and AXA Canada in September 2011, the Company
established integration plans directed at integrating the acquired businesses 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.
Table 24.1 – Integration and restructuring costs
For the years ended December 31,
AXA Canada
Jevco
2013
14
21
35
2012
79
29
108
The restructuring provision has been established in relation to the acquisitions of AXA Canada and Jevco, based on the decisions
communicated as at December 31, 2013 and 2012. The restructuring provision is recorded in Other liabilities.
Table 24.2 – Movement of the restructuring provision
As at December 31,
Balance, beginning of the year
Additional provision
Payments
Reversals for unused amounts
Balance, end of year
Note 25 – Related-party transactions
2013
2012
30
4
(17)
(4)
13
27
26
(19)
(4)
30
The Company enters into transactions with associates and joint ventures in the normal course of business, as well as with 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.
Transactions with associates and joint ventures
25.1
Income and expenses with associates and joint ventures are as follows:
Table 25.1 – Income and expenses with associates and joint ventures
For the years ended December 31,
2013
2012
Reported in:
Income
Net investment income
Expenses
Underwriting expenses
Assets and liabilities with associates and joint ventures are as follows:
Table 25.2 – Assets and liabilities with associates and joint ventures
As at December 31,
Reported in:
Assets
Loans
Liabilities
Other liabilities
Page 64 of 67
5
172
7
151
2013
2012
94
53
115
68
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Compensation of key management personnel
25.2
Key management personnel comprise 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 25.3 – Compensation of key management personnel
For the years ended December 31,
Salaries
Share-based awards
Annual incentive plans
Pension value
20131
2012
3
4
4
2
3
3
3
2
11
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 2014. The Company’s Management Proxy Circular will reflect the final figures. 2012 comparatives have been restated to reflect the final figures.
13
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.
Pension plans
25.3
Intact Investment Management Inc., a subsidiary of the Company, manages the investment portfolio of the pension plans’ Master
Trust in return for investment advisory fees charged to the pension plans, for a total of $4 million for the year ended
December 31, 2013 (December 31, 2012 - $3 million).
The Company made contributions to pension plans of $121 million for the year ended December 31, 2013 (December 31, 2012 –
$210 million, including discretionary pension contributions of $114 million).
Page 65 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 26 – Additional information on the Consolidated statements of cash flows
The following table provides additional details on the items included in net cash flows provided by (used in) operating activities.
Table 26.1 – Additional information on the Consolidated statements of cash flows
For the years ended December 31,
Net investment losses (gains)
Depreciation of property and equipment
Amortization of intangible assets
Net premiums on debt securities classified as AFS
Share-based payments
Other
Adjustments for non-cash items
Unearned premiums, net
Deferred acquisition costs, net
Premium and other receivables
Contributions to the pension plans
Other operating assets
Other operating liabilities
Changes in other operating assets and liabilities
Composition of cash and cash equivalents
Cash
Cash equivalents
Cash and cash equivalents, end of year
Other relevant cash flow disclosures
Interest paid
Interest received
Dividends received
2013
2012
83
31
59
28
18
9
228
81
(13)
(94)
(235)
(134)
43
(352)
98
1
99
64
276
168
(37)
25
51
35
16
15
105
72
(20)
(83)
(96)
(32)
43
(116)
161
11
172
59
277
142
Note 27 – Contingencies and commitments
Contingencies
27.1
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.
Page 66 of 67
Intact Financial Corporation
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Operating lease commitments
27.2
The Company has entered into commercial operating leases on certain property and equipment. These leases have a life ranging
from one
rental payments under
in
non-cancellable operating leases as at the end of the year are as follows:
the contracts. Future minimum
to 13 years with
renewal options
included
Table 27.1 – Operating lease rental payments
As at December 31,
Less than 1 year
From 1 to 5 years
Over 5 years
2013
105
355
338
798
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 $3,952 million as at December 31, 2013 (December 31, 2012 – $3,539 million) and represented
approximately 99.3% as at December 31, 2013 (December 31, 2012 – 97.1%) of automobile direct premiums written.
Table 28.1 – Provincial authorities and rate filings
Province
Rate filing
Regulatory authority
Alberta
Ontario
Quebec
Nova Scotia
New Brunswick
Prince Edward Island
Newfoundland and Labrador
File and approve or file and use
File and approve
Use and file
File and approve
File and approve
File and approve
File and approve
Alberta Automobile Insurance Rate Board
Financial Services Commission of Ontario
Autorité des marchés financiers
Nova Scotia Utility and Review Board
New Brunswick Insurance Board
Island Regulatory Appeals Commission
Board of Commissioners of Public Utilities
Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory
asset or liability. As at December 31, 2013 and 2012, the Company had no significant regulatory asset or liability.
Page 67 of 67
FIvE-yEAR FINANCIAL hISTORy
(Excluding MYA. In millions of Canadian dollars, except as noted)
IFRS
2013
2012
2011
2010
Canadian
GAAP
2009
Consolidated performance
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Favourable prior year claims development
Underwriting income (loss)
Combined ratio
Net investment income
Net investment gains (losses)
Income before income taxes
Effective tax rate
Net operating income
Net income attributable to shareholders
Net operating income per share ($)
Earnings per share ($)
Weighted-average number of common shares outstanding (millions)
Operating return on equity
Return on equity
Personal lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal property
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial P&C
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Financial condition
Total excess capital (over 170% MCT)
MCT %
Cash provided by (used in) operating activities
Debt-to-capital ratio
Book value per share ($)
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
160
Intact FInancIal corporatIon / 2013 annual report
7,115
7,319
7,014
(374)
142
98.0%
406
(83)
465
7.3%
500
431
3.62
3.10
132.4
11.2%
9.3%
6,123
4,994
4,868
96.7%
162
3,902
3,373
3,349
93.2%
228
2,221
1,621
1,519
104.4%
(66)
992
2,325
2,146
100.9%
(20)
526
612
603
93.3%
40
466
1,713
1,543
103.9%
(60)
550
203%
185
18.7%
33.94
3.7%
12,261
2%
73%
10%
12%
3%
6,729
6,868
6,571
(372)
451
93.1%
389
37
712
19.8%
675
571
5.00
4.20
130.8
16.8%
13.5%
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
3.6%
12,959
3%
74%
10%
10%
3%
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
4.0%
11,828
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%
TWO-yEAR qUARTERLy REvIEW
(Excluding MYA. In millions of Canadian dollars, except as noted)
IFRS
2013
IFRS
2012
Q4
Q3
Q2
Q1
q4
q3
q2
q1
Consolidated performance
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Favourable prior year claims development
Underwriting income (loss)
Combined ratio
Net investment income
Net investment gains (losses)
Income before income taxes
Effective tax rate
Net operating income
Net income attributable to shareholders
Net operating income per share ($)
Earnings per share ($)
Weighted-average number of
common shares outstanding (millions)
Operating return on equity
Return on equity
Personal lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal property
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial P&C
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Financial condition
Total excess capital (over 170% MCT)
MCT %
Cash provided by (used in) operating activities
Debt-to-capital ratio
Book value per share ($)
Investments
Performance
Market-based investment yield
Total investments
1,589
1,702
1,804
(66)
67
96.3%
104
(29)
130
17.6%
143
107
1.05
0.77
131.5
11.2%
9.3%
1,354
1,108
1,255
94.6%
68
836
734
861
98.4%
14
518
374
394
86.4%
54
235
594
549
100.1%
(1)
124
150
154
100.4%
(1)
111
444
395
100.0%
–
550
203%
(27)
18.7%
33.94
1,899
1,911
1,784
(103)
(50)
102.8%
104
(3)
41
(14.6)%
59
47
0.41
0.32
131.6
12.7%
11.2%
1,656
1,367
1,237
102.9%
(35)
1,035
911
849
93.0%
60
621
456
388
124.7%
(95)
243
544
547
102.5%
(15)
127
144
155
86.0%
21
116
400
392
109.0%
(36)
515
199%
413
19.0%
33.25
2,165
2,182
1,723
(95)
42
97.5%
102
(94)
121
14.9%
123
103
0.89
0.73
133.0
14.4%
12.4%
1,870
1,516
1,196
95.2%
57
1,226
1,037
831
87.2%
106
644
479
365
113.3%
(49)
295
666
527
102.9%
(15)
165
186
149
89.6%
16
130
480
378
108.2%
(31)
486
197%
275
19.0%
33.15
1,462
1,524
1,703
(110)
83
95.1%
96
43
173
(0.6)%
175
174
1.27
1.27
133.3
16.0%
12.9%
1,243
1,003
1,180
93.9%
72
805
691
808
94.1%
48
438
312
372
93.5%
24
219
521
523
98.0%
11
110
132
145
97.3%
4
109
389
378
98.2%
7
744
214%
(476)
18.5%
34.15
1,543
1,690
1,742
(85)
138
92.1%
102
6
223
20.6%
194
177
1.42
1.29
133.3
16.8%
13.5%
1,310
1,097
1,202
91.8%
99
783
722
825
103.1%
(25)
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
1,794
1,798
1,640
(70)
67
95.9%
92
16
111
17.1%
122
92
0.89
0.67
130.6
16.4%
11.7%
1,573
1,277
1,132
103.0%
(34)
954
843
765
94.9%
39
619
434
367
119.8%
(73)
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
2,018
1,977
1,599
(83)
123
92.3%
95
3
161
19.9%
180
129
1.35
0.95
129.6
17.3%
12.7%
1,747
1,362
1,104
94.1%
66
1,102
907
744
89.0%
82
645
455
360
104.5%
(16)
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
217
20.3%
179
173
1.34
1.30
129.6
16.2%
13.5%
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
3.7%
12,261
3.8%
12,285
3.8%
12,283
3.4%
12,532
3.6%
12,959
3.6%
12,844
3.7%
11,668
3.7%
11,513
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
2%
73%
10%
12%
3%
5%
71%
9%
11%
4%
3%
73%
10%
11%
3%
1%
74%
10%
12%
3%
3%
74%
10%
10%
3%
5%
72%
10%
10%
3%
5%
72%
10%
9%
4%
3%
73%
11%
10%
3%
Intact FInancIal corporatIon / 2013 annual report 161
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”) A non-
IFrS financial measure calculated as 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”) A non-IFrS
financial measure calculated as 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 Basis 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 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.
162
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
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.
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 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 same 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 same 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 futures 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, Québec, new
Brunswick and nova Scotia. These pools are
managed by the Facility Association, except for
the Québec rSP.
Interest rate forwards and futures
contracts Contractual obligations to buy or sell
interest-rate-sensitive financial instruments 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.
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”) A non-IFrS
financial measure calculated as 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), difference between expected return and
discount rate on pension assets, and MYA.
net operating income per share (“nOIps”)
A non-IFrS financial measure calculated as
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 during the same 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”) A
non-IFrS financial measure calculated as 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.
Reinstatement premium Premium payable
to restore the original reinsurance policy limit as
a result of a reinsurance loss payment under a
catastrophe cover. reinstatement premiums are
reported in net premiums earned.
Reinsurer An insurance company that agrees
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.
underlying current year loss ratio A non-
IFrS financial measure calculated as current
year claims ratio excluding catastrophe losses,
reinstatement premiums and prior year claims
development.
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).
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT 163
BOARD OF DIRECTORS
ExECUTIvE COMMITTEE MEMBERS
Charles Brindamour 4
Chief Executive Officer
Charles Brindamour
Chief Executive Officer
Alain Lessard
Senior Vice President, Commercial lines
Yves Brouillette 1,5
President, Placements Beluca Inc.
patrick Barbeau
Senior Vice President, Personal lines
Louis Marcotte
Senior Vice President and Chief Financial Officer
Robert w. Crispin 1,4,5
Corporate Director
Dr. Janet De silva 2,5
Dean of Ivey Asia, Ivey Business School
at Western University
Claude Dussault
Chairman of the Board and President,
ACVA Investing Corporation
Eileen Mercier 1,4,5
Chair of the Board, Ontario Teachers’
Pension Plan
Timothy h. penner 2,5
Corporate Director
Louise Roy 2,3
Chancellor and Chair of the Board, Université
de Montréal, and Invited Fellow, Center for
Interuniversity research and Analysis on
Organizations
Frederick singer 1,3
Chief Executive Officer of Echo360
stephen snyder 1,3
Corporate Director
Carol stephenson 2,3
Corporate Director
Martin Beaulieu
Senior Vice President and Chief Operating Officer,
Direct to Consumer Distribution
Lucie Martel
Senior Vice President and Chief Human
resources Officer
Alan Blair
Senior Vice President, Atlantic Canada
Benoit Morissette
Senior Vice President and Chief Internal Auditor
Jean-François Blais
President, Intact Insurance
Debbie Coull-Cicchini
Senior Vice President, Ontario
Jean-François Desautels
Senior Vice President, Québec
Jennie Moushos
Senior Vice President, Western Canada
Jack Ott
Senior Vice President and Chief Information Officer
Marc provost
Senior Vice President and Chief Investment Officer
Claude Désilets
Senior Vice President and Chief risk Officer
Lilia sham
Senior Vice President, Corporate Development
Mark A. Tullis
Executive Vice President, Governance and Capital
Management
peter weightman
President, Brokerlink
Monika Federau
Senior Vice President and Chief Strategy Officer
Anne Fortin
Senior Vice President, Marketing and Strategic
relationships, Direct to Consumer Distribution
Louis gagnon
President, Service and Distribution
Françoise guénette
Senior Vice President, Corporate and legal Services,
and Secretary
Byron hindle
Senior Vice President, International Development
Mathieu Lamy
Senior Vice President, Claims
notes:
1 Denotes member of the Audit Committee
2 Denotes member of the Compliance review and Corporate Governance Committee
3 Denotes member of the Human resources and Compensation Committee
4 Denotes member of the Investment Committee (until May 8, 2013)
5 Denotes member of the risk Management Committee (as of May 8, 2013)
For complete biographies of the members of the Board of Directors, please see the
Management Proxy Circular which may be found on the SEDAr website at www.sedar.com.
164
InTACT FInAnCIAl COrPOrATIOn / 2013 AnnUAl rEPOrT
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SHAREHOlDER
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
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 and 3 (the “Series 1 and 3
Preferred Shares”) issued on July 12, 2011 and
August 18, 2011, respectively.
toronto Stock exchange (tSX) listings
Common Shares Ticker Symbol: IFC
Class A Series 1 Preferred Shares Ticker Symbol:
IFC.PR.A
Class A Series 3 Preferred Shares Ticker Symbol:
IFC.PR.C
Annual and Special Meeting of Shareholders
Date: Wednesday, May 7, 2014
Time: 2 pm PT
location/venue: Pan Pacific Hotel vancouver,
Crystal Pavilion A, 999 Canada Place, Suite 300,
vancouver, British Columbia v6C 3B5
Version française
Il existe une version française du présent rapport
annuel à la section Relations investisseurs de notre
site Web www.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, north Tower
Toronto, Ontario M5J 2Y1
1 800 564 6253
Auditors
Ernst & Young llP
earnings release dates
Q1 – Wednesday, May 7, 2014
Q2 – Wednesday, July 30, 2014
Q3 – Wednesday, november 5, 2014
Q4 – Wednesday, February 4, 2015
Investor inquiries
Dennis Westfall
vice President, Investor Relations
416 344 8004
dennis.westfall@intact.net
Toll-free: 1 866 778 0774
Media inquiries
Gilles Gratton
vice President, Corporate Communications
416 217 7206
gilles.gratton@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
Year 2013
Q1
Q2
Q3
Q4
Year 2012
Q1
Q2
Q3
Q4
Year 2011
Source: Toronto Stock Exchange
High
66.82
64.27
63.36
69.74
69.74
61.69
65.00
64.69
65.13
65.13
51.58
55.57
57.77
59.82
59.82
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
low
Close
volume
$ 61.65
$ 56.44
$ 56.53
$ 61.48
$ 62.25
$ 59.25
$ 61.78
$ 69.37
16,033,974
31,134,095
17,048,486
14,762,433
$ 56.44
$ 69.37
78,978,988
$ 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
$ 55.65
$ 64.77
57,460,605
$ 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
$ 46.49
$ 58.53
70,784,764
and corporate information
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Intact Financial Corporation
700 University Ave.
Toronto, Ontario
M5G 0A1
www.intactfc.com
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