I
I
I
I
L
T
L
F
1
0
2
5
E
T
T
T
P
R
R
A
A
P
C
C
C
R
R
A
A
A
A
U
N
N
N
N
N
N
O
O
O
O
OFFER A CUSTOMER
EXPERIENCE
THAT’S SECOND TO NONE
A TOP EMPLOYER
ATTRACTS THE BEST
EMPLOYEES
BE ONE OF THE
MOST RESPECTED
COMPANIES IN CANADA
BIG IDEAS DISCIPLINED APPROACH
2015 ANNUAL REPORT
We are the largest provider of property and casualty (“P&C”)
insurance in Canada with almost $8 billion in annual direct premiums
written (“DPW”) and an estimated market share of 17%. We
insure more than 5 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, and directly to consumers through belairdirect.
We internally manage our investments totalling $13.5 billion.
FINANCIAL HIGHLIGHTS
(excluding MYA, in millions of Canadian dollars, except as noted)
Consolidated performance
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income
Net investment income
Net operating income
Net investment gains (losses)
Net income
Net operating income per share ($)
Earnings per share ($)
Book value per share ($)
Operating return on equity
Adjusted return on equity
2015
2014
2013
2012
2011
7,419
7,907
7,535
7,062
7,349
7,207
7,115
7,319
7,014
6,729
6,868
6,571
5,084
5,099
4,880
91.7%
92.8%
98.0%
93.1%
94.4%
628
424
860
(64)
706
6.38
5.20
519
427
767
174
782
5.67
5.79
142
406
500
(83)
431
3.62
3.10
451
389
675
37
571
5.00
4.20
273
326
460
204
465
3.91
3.96
39.83
16.6%
14.3%
37.75
16.3%
16.8%
33.94
11.2%
10.3%
33.03
16.8%
16.1%
29.73
15.3%
17.4%
ONLINE
ANNUAL REPORT
Please visit our online annual report to
view videos, interactive features and
additional information on our “big ideas,
disciplined approach”.
It can be accessed by scanning this QR code
or visiting reports.intactfc.com/2015
Financial highlights
Big ideas, disciplined approach
CEO’s letter
Chairman’s letter
MD&A and Financial Statements
2
4
6
9
10
BIG IDEAS
DISCIPLINED
APPROACH
We are inspired by an idea – to be Canada’s most
respected auto, home and business insurance provider.
A company where we are true to our values, where our
people are engaged because they know their work
matters and where our customers are our advocates
because they know what matters to them matters to us.
We are Intact Financial Corporation.
This annual report contains forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, as a number of 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.
Additional information about our forward-looking statements and risk factors can be found under the cautionary note regarding forward-looking statements and the Risk Management
sections of our Management’s Discussion and Analysis.
2
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
FINANCIAL
HIGHLIGHTS
Our superior operating performance and
financial strength have translated into 13%
compound annual growth in dividends per
share, and 14% compound annual total return
since our IPO.
2015 DIRECT PREMIUMS WRITTEN
BY BUSINESS LINE
(excluding pools, %)
2015 DIRECT PREMIUMS WRITTEN
BY DISTRIBUTION CHANNEL
(excluding pools, %)
2015 INVESTMENT MIX
(net of hedging positions and financial
liabilities related to investments)
•Personal auto
•Personal property
•Commercial P&C
•Commercial auto
45%
24%
23%
8%
•Intact Insurance
•BrokerLink
•Direct-to-consumer
78%
8%
14%
•Fixed income
•Common shares
•Preferred shares
•Cash and short-term notes
•Loans
71%
13%
9%
4%
3%
TOTAL SHAREHOLDER RETURN
Intact Financial Corp.
8%
48%
ONE-YEAR
THREE-YEAR
FIVE-YEAR
15%
On a total shareholder return
basis (including dividends),
our 15% CAGR over the past
five years was higher than most
comparable indices, bolstered
by our operating results.
Source: Bloomberg
S&P/TSX Composite
-8%
ONE-YEAR
14%
THREE-YEAR
FIVE-YEAR
12%
Intact Financial Corp.
S&P/TSX Banks
-4%
8%
33%
48%
S&P/TSX Composite
S&P/TSX Insurance
-8%
1%
14%
63%
12%
S&P/TSX Banks
S&P U.S. P&C Insurance
-4%
10%
33%
75%
S&P/TSX Insurance
1%
S&P U.S. P&C Insurance
10%
63%
75%
99%
99%
110%
110%
56%
56%
56%
56%
DIVIDENDS PER SHARE GROWTH
9%
We are proud of our dividend
growth track record, including
a five-year CAGR of 9%,
which compares favourably
versus our peers.
Source: Bloomberg
ONE-YEAR
THREE-YEAR
FIVE-YEAR
Intact Financial Corp.
10%
33%
56%
S&P/TSX Composite
3%
ONE-YEAR
17%
THREE-YEAR
FIVE-YEAR
30%
Intact Financial Corp.
S&P/TSX Banks
10%
8%
S&P/TSX Composite
S&P/TSX Insurance
S&P/TSX Banks
S&P U.S. P&C Insurance
S&P/TSX Insurance
S&P U.S. P&C Insurance
3%
9%
8%
-3%
9%
-3%
33%
28%
17%
14%
28%
14%
45%
56%
15%
30%
197%
45%
224%
15%
197%
224%
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
3
DIRECT PREMIUMS WRITTEN GROWTH
(%) (base 100 = 2005)
•IFC •Industry
220
220
COMBINED RATIO1
(%)
•IFC •Industry
110
110
196
196
172
172
148
148
124
124
100
100
105
105
100
100
95
95
90
90
85
85
40
40
30
30
20
20
10
10
0
0
20
20
15
15
10
10
5
5
0
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IFC
IFC
#2
#2
#3
#3
#4
#4
#5
#5
220
220
196
196
172
172
148
148
124
124
100
100
110
110
105
105
100
100
95
95
90
90
85
85
The combination of our organic growth and accretive
acquisitions has led to a significant growth outperformance
versus the industry.
Our sophisticated pricing, underwriting discipline and in-house
claims expertise have enabled us to outperform the industry’s
combined ratio.
RETURN ON EQUITY2
(%)
•IFC •Industry
40
40
MARKET SHARE BY COMPANY
•Market share (%) •Direct premiums written ($ billions)
20
20
30
30
20
20
10
10
0
0
15
15
10
10
5
5
0
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IFC
IFC
#2
#2
#3
#3
#4
#4
#5
#5
Our superior underwriting results, investment performance
and capital management have led to a better ROE than the
industry.
With an estimated market share of 17%, we are approximately
15 times the size of the average company in the industry.
Industry data: IFC estimate based on MSA Research Inc. data, excluding Lloyd’s, ICBC, SGI, SAF, MPI, Genworth and IFC, as at December 31, 2015.
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 in our Glossary.
4
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
BIG IDEAS
DISCIPLINED
APPROACH
We believe that insurance is not about things. It’s about
people. This belief is the foundation of three big goals
at the company – deliver the best customer experience,
be a top employer and become one of Canada’s most
respected companies. To do so, we live our values,
embrace change as an opportunity, and carry out our
plans with our usual disciplined approach.
VIEW OUR
REPORT ONLINE
Please visit our online annual report
(reports.intactfc.com/2015) to view
videos, interactive features and additional
information on how “big ideas, disciplined
approach” shaped our business in 2015.
A LEADING CUSTOMER
EXPERIENCE
We take our responsibility to customers very
seriously and appreciate that good service is
good business. We believe in going beyond
expectations and delivering an experience
that is second to none. Our scale and in-house
expertise mean that we can deliver a claims
experience that is not easily replicated by
our peers. We continue to make investments
in technology and data analytics to “make
insurance simple” and offer innovative
insurance solutions. As customers’ needs
evolve, our dedication to a leading customer
experience remains unchanged. Through our
disciplined approach to continuous innovation,
we will ensure that we remain an insurance
provider of choice in the years ahead.
More than
3,000 CLAIMS
PROFESSIONALS
providing a seamless,
high-quality experience 24/7
ONE OF CANADA’S
BEST EMPLOYERS
It’s easy to be one of Canada’s best employers
when you have the best employees. Employees
are at the heart of what we do best: helping
people in good times and bad. Our people are at
the centre of what makes Intact successful as an
organization. That’s why employee engagement
is one of our top priorities. This year, Intact was
recognized for the first time as an Aon Hewitt
Best Employer, Platinum Level, which shows
that our employees are engaged, live our values
and, most importantly, are proud to be part of
Intact. Intact was also recognized by Mediacorp
as one of Canada’s top 100 employers in 2016 for
creating exceptional workplaces for employees.
Our promise to our employees rests on four
pillars: we will support their career and growth,
surround them with inspiring teams, offer a
financial rewards program that recognizes their
success and we won’t compromise on our values
of integrity and respect – because they matter as
much as results.
TOP 100 EMPLOYER,
as recognized by Mediacorp
Canada Inc. for 2016
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
5
OUR
VALUES:
integrity, respect,
customer driven,
excellence, social
responsibility
ONE OF CANADA’S MOST
RESPECTED COMPANIES
We want to earn the right to be one of
Canada’s most respected companies.
We know that to do so, we need to anchor
our actions to a firm foundation of values.
These values – integrity, respect, customer
driven, excellence and social responsibility –
are the key to meeting and exceeding
customer and employee needs and
expectations. These values speak to our
transparency in how we work with all of our
stakeholders, strive to grow by exceeding
expectations and maintain a track record
of doing what we say we will do. Intact had
a strong finish to 2015, and we are well
positioned to continue outperforming the
industry due to our pricing and underwriting
discipline, claims management
capabilities, prudent investment and
capital management practices, and strong
financial position. We are energized by the
opportunities that the future brings. By
responding to change with agility, excelling
at fundamentals and staying true to our
values, we aim to be one of Canada’s most
respected companies.
6
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
CEO’S LETTER
A DISCIPLINED
APPROACH TO OUR
BIG GOALS
At Intact, we firmly believe that we are here to help
people, businesses and society prosper in good
times and be resilient in bad times. Again in 2015, our
employees and brokers worked very hard to provide
our customers with an experience that is second
to none. It is becoming increasingly clear that our
customers truly value that what matters to them also
matters to us. That’s why so many recommend us to
their friends and family, one of our key ambitions.
Charles Brindamour
Chief Executive Officer
CEO’S VIDEO MESSAGE
reports.intactfc.com/2015
Being intensely driven by our customers is critical
to maintaining our position in the marketplace.
Because we believe that insurance is about
people (not things), our employees’ engagement
is key. More and more, our people understand
that they make a real difference and are proud
of what they do. My colleagues and I feel quite
lucky to have the best people in the industry. In
return, we have to be one of the best employers
in Canada, another important ambition.
Ultimately, we are trying to make Intact Financial
Corporation one of the most respected
companies in Canada. One driven by strong
values and moral character, but also one that
outperforms its peers every year and grows its
operating earnings over time.
Year in review
In 2015, we progressed on all of our ambitions.
In our quest for customers to be our advocates,
we made significant strides by improving the
digital experience we provide, raising the bar
in claims, building strategic partnerships and
adding products to our offer. In automobile
insurance, Intact Insurance scored “highest in
customer satisfaction with the auto insurance
claims experience” in a J.D. Power study.1
To stay ahead of the curve, we launched the
Intact Lab. This group aims to advance our core
competencies in data, risk selection and
digital experience. While still young, the team
made meaningful contributions to our growth
and outperformance in 2015. This bodes well
for 2016.
1 Intact Insurance received the highest numerical score in the proprietary
J.D. Power 2015 Canadian Auto Claims StudySM, based on 2,583 total
responses, ranking 11 providers. Excludes those with claims only for glass/
windshield, theft/stolen or roadside assistance. Proprietary results based on
experiences and perceptions of consumers surveyed February–April 2015.
Your experiences may vary. Visit jdpower.com
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
7
“ Ultimately, we are trying to make
Intact Financial Corporation one of the
most respected companies in Canada.
One driven by strong values and
moral character, but also one that
outperforms its peers every year and
grows its operating earnings over time.”
As for the industry trend in profitability, we expect the
combined ratio should continue to improve in 2016 from the
recent peak above 100% in 2013 and the ROE should trend
back toward its long-term average of 10% over time. From
our perspective, we remain confident that the strength of our
operational discipline and initiatives will continue to help us
outperform the industry’s ROE by at least 500 basis points in
2016 and grow net operating income per share by 10% per
year over time.
2016 and beyond
Our customers’ expectations are evolving quickly and new
players are entering the market. It’s an exciting time to be
a part of the property and casualty insurance industry as
opportunities abound. Our strategy in the years to come is
centred on four pillars:
Customer Driven – Build our brands by making Intact
Insurance and belairdirect household names. Improve our
customer experience through world-class claims service and
digital interactions. Simplify our products and how we make
them available.
Excel at Fundamentals – Enhance our strengths in pricing
and risk selection by leveraging new sources of data.
Leverage our size in claims to improve our supply chain.
Transform our technology platforms to enhance our agility.
16.6% operating
return on equity
When it comes to our employees, we were pleased to be
recognized as an Aon Hewitt Platinum Level Best Employer
and as one of Canada’s Top 100 Employers by Mediacorp
Canada Inc. for 2016. While those accolades are appreciated,
we have much work to do on that front.
When employees are engaged, customers are happy.
If all goes well, this should translate into strong financial
performance. This was the case in 2015. Direct premiums
written grew by 8% to reach $7.9 billion in direct premiums
written and increased net operating income by 12% to
$860 million. Overall, we delivered a solid operating return
on equity of 16.6%.
From a capital perspective, we ended the year with a strong
balance sheet and $625 million in excess capital, despite
having returned almost $300 million to our shareholders
in dividends and funding the acquisition of Canadian
Direct Insurance Inc. (“CDI”). This move was strategically
important, as it helped strengthen our distribution platform
by expanding our direct-to-consumer experience from coast
to coast.
We also announced a 9% dividend increase, our 11th
consecutive annual increase since we became a public
company. Our financial results enabled us to deliver excellent
value to our shareholders with a total return of more than 8%
in 2015, or almost 15% compound annual total return over
the last five years, better than the S&P/TSX and Canadian
financial peers.
We remain committed to addressing climate change, one
of the most significant issues facing Canadians and our
industry. In November, we announced the launch of the
Intact Centre on Climate Adaptation (“ICCA”) with the
University of Waterloo, a continuation of our partnership
on the Climate Change Adaptation Project (“CCAP”), which
we began in 2009. We believe this partnership will help
foster innovative solutions aimed at reducing the physical,
financial and social impacts of extreme weather on
Canadian communities.
Industry outlook
Overall, we believe the property and casualty insurance
environment remains favourable. In the near term, we
anticipate low single digit growth in premiums in personal
auto. More specifically, we believe mild rate reductions
in Ontario will be offset by increases in other regions. For
personal property, we expect the current hard market
conditions to continue given the impact of changing weather
patterns. In commercial lines, we believe the continued low
interest rate environment, combined with elevated loss ratios
driven in part by weather events, have translated into firmer
market conditions.
8,000
6,400
4,800
3,200
1,600
0
100
80
60
40
20
0
2009 2010 2011 2012 2013 2014
2009 2010 2011 2012 2013 2014
40
32
24
16
8
0
8
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
CEO’S LETTER
Strengthen Distribution – Support brokers in consolidating distribution
as well as through great technology, people and products. Expand our
BrokerLink platform as well as our direct-to-consumer operation. Continue
to participate in the consolidation in the Canadian marketplace.
40
Invest in People – Build and develop the best team to succeed now and in
the future. Create a workplace where our employees are engaged and where
we value people as our biggest strength. Continue to reinforce that living
our values matters as much as results.
32
24
In the same way that we are looking at evolving customer needs and
building on our capabilities, we continue to look for new growth streams
and opportunities to accelerate our learning through international markets
and adjacent business ventures. Our recent investment in Metromile Inc.,
an innovative distributor of pay-per-mile insurance, is a concrete step in
that direction.
16
2009 2010 2011 2012 2013 2014
8
Supporting brokers
Our relationships with brokers across the country are important to our
success and enable us to meet rapidly evolving customer needs. To help
these entrepreneurs be the best they can be, we are committed to continue
2009 2010 2011 2012 2013 2014
to significantly invest in our brand and our products while maintaining a very
strong local presence, second-to-none claims service and great technology.
We intend to continue to offer one of the best broker experiences in
the industry.
0
In closing
We are excited about the opportunities in 2016 and beyond. We believe
that our disciplined underwriting, robust capital levels and passionate
employees place us in a very strong position to benefit from the environment
in which we compete.
I would like to thank our Board of Directors, whose insight and guidance
continue to steer us in the right direction. Finally, to our customers,
shareholders and brokers, we appreciate your continued support. We will
strive to maintain your confidence and reward it in the years ahead.
Charles Brindamour
Chief Executive Officer
QUARTERLY DIVIDENDS PER SHARE
$0.60
$0.48
$0.36
$0.24
$0.12
$0
05 06 07 08 09 10 11 12 13 14 15 Q1-16
CHAIRMAN’S LETTER
2015 – A YEAR OF
GROWTH AND
ACHIEVEMENTS
Intact had a very strong year in 2015. Your
company continued to improve in profitability,
delivered strong organic growth and once again
outperformed the industry. These results attest
to the strong strategic direction of your company
with its demonstrated success from growth
initiatives and capability in commercial lines to
improve performance.
Following the acquisition of CDI, your company continued
to integrate its people and processes, enhancing its presence
from coast to coast. Aligned with its customer driven focus,
and its focus on meeting the evolving needs and expectations
of customers, Intact renewed its commitment to raise the bar
on the customer experience – through a host of innovative
initiatives, growing its brand awareness and accelerating its
digital leadership.
Besides providing strategic stewardship on customer-facing
initiatives, your Board invested significant time and effort on
Intact’s people strategy, specifically relating to robust succession
planning and diversity. Intact respects and celebrates diversity.
This was confirmed at a Catalyst event of 2015, where
Charles Brindamour was the recipient of an award for his inclusive
leadership and support for the professional advancement
of women.
In the year, your Board continued to strengthen your company’s
risk management. This effort was devoted to looking at IT
practices and cyber-security, as well as potential threats. Further,
we reviewed our asset-management strategy, paying specific
attention to the protection and mix of assets, balanced against
our liabilities. As well, your Board continued to review and apply
governance best practices.
We also welcomed a new member to your Board of Directors,
Mr. Robert G. Leary. Mr. Leary has vast knowledge of asset and
investment management. He also has a demonstrated history
of delivering innovation and customer-focused strategies and
initiatives across diverse distribution channels. These strengths
make him a highly respected complement to the collective
expertise of your Board.
We know investors value transparency and communication.
Your company’s efforts paid off, as Intact was recognized in the
Brendan Wood Investor Intelligence Report for Q4 2015 – ranking
#1 in Canada across Banks, Financial Services and Insurance in
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
9
Claude Dussault
Chairman of the Board
“ Besides providing strategic stewardship
on customer-facing initiatives, your Board
invested significant time and effort on Intact’s
people strategy, specifically relating to robust
succession planning and diversity.”
shareholder confidence, corporate strategy, short-
term and long-term growth, CEO, Senior Management
and Board.
Internally, on the employee engagement front, Intact
received Aon Hewitt’s 2016 Best Employer Platinum
award. We were also recognized as one of Canada’s
top 100 employers by Mediacorp Canada Inc. for
2016. Both awards were a first for your company, and
are outstanding achievements, reflective of the efforts
of all employees at Intact. Congratulations to your
team on these milestones.
Together, with the leadership team, your Board
continues to hone the strategic direction of your
company. On behalf of my colleagues, I thank you for
another rewarding year. Your unwavering commitment
and disciplined execution to delivering a customer
experience that is second to none provides substantial
value to all our stakeholders and ensures a successful
future for your company.
Claude Dussault
Chairman of the Board
MD&A and Financial
Statements
Please note that the following MD&A and Financial
Statements are provided as distinct sections with
individual pagination: MD&A – pages 1 to 64;
Financial Statements – pages 1 to 63.
Intact Financial Corporation
Management’s Discussion and Analysis
For the year ended December 31, 2015
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
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, 2015. 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, 2015 compared to the corresponding periods
in 2014. It should be read in conjunction with our Consolidated financial statements for our fiscal year ended December 31, 2015.
All amounts herein are expressed in Canadian dollars. This MD&A is dated February 9, 2016.
“Intact”, the “Company”, “IFC”, “we” and “our” are terms used throughout the document to refer to Intact Financial Corporation and
its subsidiaries. Further information about Intact Financial Corporation, including the Annual Information Form, may be found online
on SEDAR at www.sedar.com.
Table of contents
OVERVIEW ....................................................................................................................................................................... 4
Section 1 – About Intact Financial Corporation .................................................................................................................................... 4
Section 2 – Critical capabilities............................................................................................................................................................. 5
PERFORMANCE............................................................................................................................................................... 6
Section 3 – Our performance at a glance............................................................................................................................................. 6
Section 4 – Consolidated performance ................................................................................................................................................ 7
Section 5 – Underwriting performance ................................................................................................................................................. 9
Section 6 – Investment performance.................................................................................................................................................. 14
Section 7 – Distribution channels ....................................................................................................................................................... 16
STRATEGY AND OUTLOOK ......................................................................................................................................... 17
Section 8 – What we are aiming to achieve ....................................................................................................................................... 17
Section 9 – Outlook and strategy ....................................................................................................................................................... 18
Section 10 – Canadian P&C insurance industry................................................................................................................................. 19
Section 11 – Operating environment .................................................................................................................................................. 20
Section 12 – Recent developments.................................................................................................................................................... 22
FINANCIAL CONDITION ................................................................................................................................................ 24
Section 13 – Financial position........................................................................................................................................................... 24
Section 14 – Liquidity and capital resources ...................................................................................................................................... 33
Section 15 – Capital management ..................................................................................................................................................... 35
RISK MANAGEMENT ..................................................................................................................................................... 37
Section 16 – Overview ....................................................................................................................................................................... 37
Section 17 – Risk management structure........................................................................................................................................... 37
Section 18 – Corporate governance and compliance program .......................................................................................................... 39
Section 19 – Enterprise Risk Management ........................................................................................................................................ 40
ADDITIONAL INFORMATION ........................................................................................................................................ 54
Section 20 – Key performance indicators........................................................................................................................................... 54
Section 21 – Definitions of our key performance indicators................................................................................................................ 55
Section 22 – Non-IFRS financial measures........................................................................................................................................ 57
Section 23 – Non-operating results .................................................................................................................................................... 59
Section 24 – Accounting and disclosure matters................................................................................................................................ 60
Section 25 – Off-balance sheet arrangements ................................................................................................................................... 62
Section 26 – Share capital and LTIP information ............................................................................................................................... 62
Section 27 – Selected annual and quarterly information .................................................................................................................... 63
INTACT FINANCIAL CORPORATION
1
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Non-IFRS financial measures
We use both IFRS and non-IFRS financial measures to assess our performance. Non-IFRS financial 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 22 – 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 DPW (underlying), Underlying current year loss
ratio, Underwriting income, NOI, NOIPS, OROE, ROE, AROE, Non-operating results, AEPS, 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.
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”,
these words or other similar or
“believes”, “estimates”, “predicts”, “likely”, “potential” or the negative or other variations of
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
results, performance or
believes are appropriate in the circumstances. Many factors could cause the Company’s actual
achievements or future events or developments to differ materially from those expressed or implied by the forward-looking
statements, including, without limitation, the following factors: the Company’s ability to implement its strategy or operate its business
as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the Company
writes; unfavourable capital market developments or other factors which may affect the Company’s investments and funding
obligations under its pension plans; the cyclical nature of the P&C insurance industry; management’s ability to accurately predict
future claims frequency; government regulations designed to protect policyholders and creditors rather than investors; litigation and
regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; the Company’s reliance on
brokers and third parties to sell its products to clients; the Company’s ability to successfully pursue its acquisition strategy; the
Company’s ability to execute its business strategy; the Company’s ability to achieve synergies arising from successful integration
plans relating to acquisitions, including its acquisition of Canadian Direct Insurance Inc. (“CDI”), as well as management's estimates
and expectations in relation to resulting accretion, internal rate of return and debt-to-capital ratio; 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 catastrophe 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
and potential disruption to those systems, including evolving cyber-attack risk; 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 the
section entitled Risk management (Sections 16-19) 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.
2
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Glossary of abbreviations
Abbreviation Description
AEPS
Adjusted EPS
Abbreviation
MCT
Description
Minimum capital test
AFS
AMF
AOCI
AROE
BVPS
CAD
CAGR
CAT
DBRS
DPW
EPS
FVTPL
IFRS
LTIP
Available for sale
Autorité des marchés financiers
Accumulated OCI
Adjusted ROE
Book value per share
Canadian Dollar
Compound annual growth rate
Catastrophe
Dominion Bond Rating Services
Direct premiums written
Earnings per share to common
shareholders
Fair value through profit and loss
MD&A
MYA
NCIB
NEP
NOI
NOIPS
OCI
OROE
OSFI
PYD
ROE
S&P
International Financial Reporting Standards U.S.
Long-term incentive plans
USD
Management’s Discussion and Analysis
Market yield adjustment
Normal course issuer bid
Net earned premiums
Net operating income
NOI per share
Other comprehensive income
Operating ROE
Office of the Superintendent of Financial Institutions
Prior year claims development
Return on equity
Standard & Poor’s
United States
U.S. Dollar
Important notes
Unless otherwise noted, DPW refers to DPW as reported under IFRS, excluding industry pools (referred to as “DPW” or
“reported DPW” in this MD&A).
All underwriting results and related ratios exclude the MYA, but include our share of the results of jointly held insurance
operations, unless otherwise noted.
The expense and general expense ratios are presented herein net of other underwriting revenues. As a result, total revenues
exclude other underwriting revenues.
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.
A large loss is defined as a single claim larger than $0.25 million but smaller than the CAT threshold of $7.5 million.
A non-catastrophe weather event
smaller than the CAT threshold of $7.5 million, related to a single weather event.
(“non-CAT weather event”) is a group of claims which is considered significant but that is
All references to “total excess capital” in this MD&A include excess capital in the P&C insurance subsidiaries at 170% MCT plus
excess capital outside of the P&C insurance subsidiaries, unless otherwise noted.
Unless otherwise noted, market share and market related data are based on the latest available annual data (2014) from MSA
Research Inc. and exclude LIoyd’s Underwriters Canada (“LIoyd’s”), Insurance Corporation of British Columbia (“ICBC”),
Saskatchewan Government Insurance (“SGI”), Saskatchewan Auto Fund (“SAF”), Manitoba Public Insurance (“MPI”) and
Genworth Financial Mortgage Insurance Company Canada (“Genworth”). Market share and market positioning reflect the
impact of acquisitions and are therefore presented on a proforma basis.
In an effort to maximize disclosure effectiveness, we aim to reduce duplication in our disclosures. As such, we have made a
cross reference to the Consolidated financial statements in our MD&A in situations where the information that would have been
provided as part of the MD&A would have been substantially the same.
Certain totals, subtotals and percentages may not agree due to rounding. 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 FINANCIAL CORPORATION
3
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
OVERVIEW
Section 1 – About Intact Financial Corporation
1.1 Our family of brands – the power of choice
Who we are:
Largest provider of P&C insurance in Canada with close to $8 billion in annual DPW and an approximate market share
of 17%.
We distribute insurance under the Intact Insurance brand through a wide network of brokers, including our wholly-owned
subsidiary BrokerLink, and directly to consumers through belairdirect.
Trusted by more than five million individuals and businesses who are insured through our multi-channel distribution
strategy.
Proven industry consolidator with a track record of 15 successful acquisitions since 1988.
Largest private sector provider of P&C insurance in British Columbia, Alberta, Ontario, Québec and Nova Scotia.
Canada’s largest provider of commercial insurance, with an approximate market share of 13% and a leading provider for
specialized coverages such as Surety, Long Haul Trucking and Farm.
Close to 12,000 employees from coast to coast.
1.2 What we offer
With our comprehensive and broad range of car, home and business insurance products, we offer customers protection tailored to
meet their unique needs. Across Intact, we may have different jobs but we share the same goal. We are here to help people,
businesses and society prosper in good times and be resilient in bad times. Making a difference is important to us; it is our purpose.
Personal auto
We offer various levels of coverage to our
customers for their liability, personal injury, and
damage to their vehicles. Our coverage is also
available for motor homes, recreational vehicles,
snowmobiles, antique and classic cars.
2015 DPW by
line of business
Personal property
We cover individuals for fire, theft, vandalism, water
damage and other damages to both their residences
and its contents, as well as personal liability
coverage. Our home market includes coverage for
tenants, condominium owners, non-owner occupied
residences and seasonal residences.
Commercial P&C
We offer our coverage to a diversified group of
small and medium-sized businesses including
commercial landlords, manufacturers,
contractors, wholesalers, retailers, transportation
businesses, agriculture businesses and service
providers. We also offer specialized products for
businesses with uncommon needs.
4
INTACT FINANCIAL CORPORATION
Commercial auto
We provide the same type of coverage as our
personal auto category but for different types of
risks. Our coverage applies to commercial vehicles,
public vehicles, garage risks, fleets of private
passengers vehicles and light trucks.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 2 – Critical capabilities
We have several critical capabilities which have enabled us to sustainably ourperform other P&C insurers in Canada. These critical
capabilities are described in the table below.
Critical capabilities
Outperformance
Scale advantage
Our large database of customer and claims information enables us to identify trends in claims and more
accurately model the risk of each policy.
We can negotiate preferred terms with suppliers, including service and quality guarantees for repairs and
workmanship, and lower material costs.
Sophisticated
pricing and underwriting
In-house
claims expertise
Broker
relationships
Multi-channel
distribution
Proven
acquisition strategy
Tailored
investment management
Our superior underwriting expertise and proprietary segmentation models are used to price risks which
allow us to identify certain segments of the market that are more profitable than others and in turn
establish a model that will both attract new clients and maintain existing clients with profitable profiles.
Substantially all of our claims are handled in house, which translates to claims settled faster and at a
lower cost, and a more consistent service experience created for the customer.
We have more than 2,000 relationships across Canada for customers that prefer the highly-personalized,
community-based service that an insurance broker provides.
We provide our brokers with a variety of services including technology, sales training and financing to
enable them to continue to grow and expand their businesses.
Our multi-channel distribution strategy includes 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 15 successful acquisitions since 1988, the most recent being
CDI, completed in 2015.
Our primary strategy is to pursue consolidation in the Canadian market and expansion in foreign markets
where we can deploy our expertise in pricing, underwriting, claims management and multi-channel
management. With these acquisitions, we look to expand our product offering and improve customer
experience.
Our outperformance is driven by three key factors: thorough due diligence to assess all the risks and
opportunities; swift and effective integration with seamless impact to our customers; and financial benefit
from significant synergies due to our scale.
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 maximize after-tax total return via appropriate asset allocation and
active management of investment strategies.
INTACT FINANCIAL CORPORATION
5
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
PERFORMANCE
Section 3 – Our performance at a glance
2015 Highlights
Growth
Combined ratio
NOIPS
+6%
91.7%
+13%
OROE
16.6%
MCT
203%
Q4-2015 Highlights
Net operating income per share of $1.97 and a solid combined ratio of 88.6%
Strong underlying DPW growth of 7%, driven by 6 points of organic growth
Operating ROE of 16.6% for the last 12 months with total excess capital of $625 million
Book value per share up 6% this year to $39.83
Quarterly dividend increased 9% to $0.58 per share
DPW (underlying)
2013
2014
2015
Combined ratio
NOIPS (in dollars)
2013
2014
2015
2013
2014
2015
2
2
9
,
7
5
4
3
7
,
1
6
4
7
,
8
0
9
1
,
9
2
7
,
1
5
7
7
,
1
Q4
Annual
AEPS (in dollars)
2013
2014
2015
1
0
.
6
4
5
.
5
4
4
.
3
8
8
.
0
8
5
.
1
4
5
.
1
%
3
.
6
9
%
6
.
8
8
%
2
.
8
8
Q4
%
0
.
8
9
%
8
.
2
9
%
7
.
1
9
Annual
8
3
.
6
7
6
.
5
2
6
.
3
Annual
7
9
.
1
5
0
1
.
4
8
1
.
Q4
Operating ROE
MCT ratio
2013
2014
2015
2013
2014
2015
%
3
.
6
1
%
6
.
6
1
%
2
.
1
1
%
9
0
2
%
3
0
2
%
3
0
2
Q4
Annual
Annual
Annual
6
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 4 – Consolidated performance
4.1
Consolidated performance
Table 1 – Consolidated performance
DPW1
DPW (underlying)1
Personal auto
Personal property
Commercial P&C
Commercial auto
NEP1
Operating income1
Underwriting income1
Net investment income
Finance costs
Distribution income, net
Corporate and other income (expense)2
Pre-tax operating income1
NOI1
Effective income tax rate
Net income
Combined ratio
Per share measures, basic and diluted (in dollars)
NOIPS1
EPS
AEPS1
Return on equity for the last 12 months
OROE1
ROE1
AROE1
BVPS (in dollars)
Total excess capital
MCT
Debt-to-capital ratio
Q4-2015
Q4-2014
Change
1,897
1,908
808
452
480
168
1,948
221
110
(16)
22
3
340
265
17.8%
198
88.6%
1.97
1.46
1.54
16.6%
13.4%
14.3%
39.83
625
203%
16.6%
1,760
1,775
739
407
466
163
1,830
216
111
(16)
14
(5)
320
247
8%
7%
9%
11%
3%
3%
6%
5
(1)
-
8
8
20
7%
22.6%
205
88.2%
(4.8) pts
(3)%
0.4 pts
1.84
1.52
1.58
16.3%
16.1%
16.8%
37.75
681
209%
17.3%
7%
(4)%
(3)%
0.3 pts
(2.7) pts
(2.5) pts
6%
(56)
(6.0) pts
(0.7) pts
1 Refer to Section 22 – Non-IFRS financial measures.
2 Tend to fluctuate from quarter to quarter and include adjustments that occur from time to time.
Table 2 – Combined ratio by line of business
2015
7,907
7,922
3,591
1,864
1,796
671
7,535
628
424
(64)
104
(1)
1,091
860
19.3%
706
91.7%
6.38
5.20
5.54
2014
Change
7,349
7,461
3,374
1,715
1,740
632
7,207
519
427
(64)
75
(10)
947
767
8%
6%
6%
9%
3%
6%
5%
109
(3)
-
29
9
144
12%
18.3%
782
1.0 pts
(10)%
92.8%
(1.1) pts
5.67
5.79
6.01
13%
(10)%
(8)%
Personal lines
Personal auto
Personal property
Commercial lines
Commercial P&C
Commercial auto
Q4-2015
Q4-2014
Change
88.9%
96.9%
72.7%
88.0%
80.1%
107.9%
87.1%
93.7%
73.6%
90.5%
87.1%
99.5%
1.8 pts
3.2 pts
(0.9) pts
(2.5) pts
(7.0) pts
8.4 pts
2015
92.3%
95.4%
85.9%
90.3%
86.8%
99.0%
2014
Change
92.7%
94.5%
89.0%
92.9%
94.2%
89.6%
(0.4) pts
0.9 pts
(3.1) pts
(2.6) pts
(7.4) pts
9.4 pts
INTACT FINANCIAL CORPORATION
7
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Q4-2015 vs Q4-2014
2015 vs 2014
Underlying
DPW growth
Our
organic
initiatives,
including
growth
branding, digital
leadership, product innovation,
customer experience and distribution, combined
with favourable market conditions led to strong
organic growth of 5.8%. The acquisition of
CDI, which closed on May 1, 2015, contributed
another 1.7 points of growth, for total premium
growth of 7.5%.
Underwriting
performance
Our 88.6% combined ratio reflects a solid
underwriting performance driven by our
property lines.
Our profitability initiatives in personal property
and commercial P&C, combined with mild
weather conditions, have paid off with both lines
reporting lower combined ratios.
In personal auto, our combined ratio of 96.9%
was 3.2 points worse, primarily due to lower
favourable PYD and slightly higher expenses.
In commercial auto, which represents less than
remains
10% of
unsatisfactory and we are taking corrective
measures.
our DPW,
profitability
Our organic growth initiatives,
combined with
favourable market conditions, positively impacted
both our units and premiums, resulting in organic
growth of 5.0%. When including CDI, total premium
growth rose to 6.2%.
Our 91.7% combined ratio is 1.1 points better than
the prior year’s driven by our results in property lines.
In personal auto, our combined ratio of 95.4%
deteriorated 0.9 points on mildly higher frequency
and difficult winter conditions in Q1-2015, offset by
higher favourable PYD and favourable pool results.
In personal property, our combined ratio of 85.9%
improved by 3.1 points as low CAT losses and the
success of profitability initiatives were offset by
severe winter storms in Atlantic Canada.
In commercial lines, our combined ratio of 90.3%
improvement of 2.6 points
reflects an overall
primarily due to the success of our commercial P&C
action plan. In commercial auto, results have been
unsatisfactory and are subject to corrective actions.
Net
investment
income
Net
distribution
income
NOIPS
Net income
On a quarterly and annual basis, largely unchanged, as the benefit of incremental investments was offset by
lower yields.
Increased $8 million from last year’s low level,
due to growth in our broker network and
improved profitability.
Up 7%, primarily driven by an increase of 2.3%
in underwriting income and strong distribution
income. Corporate and other income was up
from favourable non-recurring items.
Down 3%, as higher NOI was offset by
investment losses related to challenging capital
market conditions.
Increased 39% to $104 million, as we’ve grown our
investments in the broker network and improved its
profitability.
Up 13%, driven by an increase of 21% in
underwriting income and $29 million in additional
distribution income.
Down 10%, as higher NOI was offset by investment
losses
capital market
conditions, including higher equity impairments.
challenging
related
to
Our 12-month OROE remains very healthy at 16.6% with excess capital of $625 million. Our MCT rose to 203% in the
quarter and BVPS increased 6% from a year ago to $39.83, despite absorbing unrealized losses from weaker capital markets
amounting to $1.26, or 3%, in 2015. Our debt-to-capital ratio at December 31, 2015 was 16.6%, which was lower than our
internal target level of 20%.
8
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 5 – Underwriting performance
Table 3 – Consolidated underwriting results
NEP1
Net claims:
Current year claims (excluding CAT losses)
Current year CAT losses
Favourable PYD
Total net claims1
Commissions, premium taxes and general expenses
Underwriting income1
Underwriting ratios
Underlying current year loss ratio1
CAT losses2
Favourable PYD
Claims ratio
Expense ratio
Combined ratio
1 Refer to Section 22 – Non-IFRS financial measures.
2 CAT losses include reinstatement premiums.
Table 4 – Components of expense ratio
Commissions
General expenses
Premium taxes
Expense ratio
Q4-2015
Q4-2014
Change
1,948
1,830
6%
1,196
2
(75)
1,123
604
221
61.4%
-
(3.8)%
57.6%
31.0%
88.6%
1,134
10
(78)
1,066
548
216
62
(8)
3
57
56
5
62.0% (0.6) pts
0.5% (0.5) pts
(4.2%)
0.4 pts
58.3% (0.7) pts
29.9%
1.1 pts
88.2%
0.4 pts
Q4-2015
Q4-2014
Change
16.3%
11.2%
3.5%
31.0%
16.2%
10.3%
3.4%
29.9%
0.1 pts
0.9 pts
0.1 pts
1.1 pts
2015
7,535
4,976
116
(477)
4,615
2,292
628
66.1%
1.5%
(6.3)%
61.3%
30.4%
91.7%
2015
16.3%
10.6%
3.5%
30.4%
2014 Change
7,207
5%
4,636
243
(364)
4,515
2,173
519
340
(127)
(113)
100
119
109
64.3%
1.8 pts
3.3% (1.8) pts
(5.0%)
(1.3) pts
62.6% (1.3) pts
30.2%
0.2 pts
92.8% (1.1) pts
2014 Change
16.7% (0.4) pts
0.5 pts
10.1%
0.1 pts
3.4%
30.2%
0.2 pts
Q4-2015 vs Q4-2014
2015 vs 2014
Underwriting income increased marginally from the
strong results reported last year.
Our ongoing organic growth initiatives combined with the
acquisition of CDI led to a 6% increase in NEP.
Underlying current year loss ratio improved 0.6 points,
as our commercial
improvements in
the quarter.
lines saw substantial
As with last year, weather was not a factor given the
absence of CAT losses and insignificant non-CAT weather
events.
Favourable PYD remains a strong contributor to our
underwriting results but the decline from last year can be
attributed to an unfavourable PYD in commercial auto.
Expense ratio is up 1.1 points to 31.0%, which is mostly
due to investments in our organic growth initiatives over the
year. The same explanation applies to all lines of business
discussed hereafter.
Underwriting income rose $109 million, or 21%, on higher
NEP combined with improved margins.
Robust organic growth in our DPW was progressively earned
during the year, which combined with the acquisition of CDI, led
to a 5% increase in NEP.
Underlying current year loss ratio deteriorated 1.8 points on
higher non-CAT weather events,
including the severe winter
storms in Atlantic Canada earlier in the year, large losses and
higher severity in commercial auto.
Although CAT losses were well below those of 2014,
the
impact of severe weather events negatively influenced the
underlying current year loss ratio.
Favourable PYD contributed 6.3 points to the combined ratio,
or 1.3 points more, on positive PYD mainly in personal auto and
commercial P&C, as well as in prior year CAT reserves.
Expense ratio of 30.4% was relatively unchanged as higher
variable compensation and organic growth initiatives were offset
by lower variable commissions.
INTACT FINANCIAL CORPORATION
9
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
5.1
Personal auto
Table 5 – Underwriting results for personal auto
DPW
DPW (underlying)
Written insured risks (in thousands)
NEP
Underwriting income
Underlying current year loss ratio
CAT losses
Favourable PYD
Claims ratio
Expense ratio
Combined ratio
Q4-2015
Q4-2014
Change
801
808
899
909
28
73.9%
0.4%
(3.3)%
71.0%
25.9%
96.9%
739
739
840
847
53
73.5%
(0.1)%
(4.5)%
68.9%
24.8%
93.7%
8%
9%
7%
7%
(47)%
0.4 pts
0.5 pts
1.2 pts
2.1 pts
1.1 pts
3.2 pts
2015
3,584
3,591
4,159
3,508
161
75.4%
1.1%
(6.1)%
70.4%
25.0%
95.4%
2014
Change
3,376
3,374
3,900
3,387
186
72.7%
1.2%
(4.2)%
69.7%
24.8%
94.5%
6%
6%
7%
4%
(13)%
2.7 pts
(0.1) pts
(1.9) pts
0.7 pts
0.2 pts
0.9 pts
Q4-2015 vs Q4-2014
2015 vs 2014
Solid organic growth of 6.9% was mainly driven by our
organic growth initiatives and rational market dynamics.
CDI added another 2.5 points of DPW growth, and
helped drive total unit growth of 7%.
loss
current
Underlying
slightly
year
deteriorated to 73.9%, as we are tackling headwinds
from bodily injury trends in Alberta. We are taking claims
and pricing actions, and engaging with the government
in finding a solution.
ratio
Favourable PYD remains healthy at 3.3% but lower
than last year due to the trends observed in Alberta.
Underlying DPW grew 6.5%, with 1.8 points of contribution
from CDI, and the remainder from organic growth. Most of
the organic growth was unit driven, as rate decreases in
Ontario were largely offset by increases in other markets.
year
Underlying current
ratio deteriorated
2.7 points, driven by mild frequency increases, non-CAT
weather events earlier in the year and the bodily injury
trends in Alberta.
loss
Favourable PYD contributed 6.1 points to the combined
ratio, well above last year. The improvement
reflects
increased confidence in the Ontario reforms and better
results in the assumed industry pools.
Expense ratio is fairly stable at 25%.
DPW (underlying)
Underlying current year loss ratio
Combined ratio
2013
2014
2015
2013
2014
2015
2013
2014
2015
3
8
3
,
3
4
7
3
,
3
1
9
5
,
3
%
6
.
6
7
%
5
.
3
7
%
9
.
3
7
%
4
.
5
7
%
2
.
2
7
%
7
.
2
7
%
4
.
8
9
%
9
.
6
9
%
7
.
3
9
%
4
.
5
9
%
5
.
4
9
%
2
.
3
9
3
4
7
9
3
7
8
0
8
Q4
Annual
Q4
Annual
Q4
Annual
10
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
5.2
Personal property
Table 6 – Underwriting results for personal property
DPW
DPW (underlying)
Written insured risks (in thousands)
NEP
Underwriting income
Underlying current year loss ratio
CAT losses
Favourable PYD
Claims ratio
Expense ratio
Combined ratio
Q4-2015
Q4-2014
Change
452
452
547
453
123
41.6%
-
(2.8)%
38.8%
33.9%
72.7%
390
407
514
415
109
40.3%
0.9%
(1.2)%
40.0%
33.6%
16%
11%
6%
9%
13%
1.3 pts
(0.9) pts
(1.6) pts
(1.2) pts
0.3 pts
73.6%
(0.9) pts
2015
1,864
1,864
2,294
1,736
244
53.5%
2.3%
(4.0)%
51.8%
34.1%
85.9%
2014
Change
1,597
1,715
2,192
1,617
177
51.0%
8.6%
(4.4)%
55.2%
33.8%
17%
9%
5%
7%
38%
2.5 pts
(6.3) pts
0.4 pts
(3.4) pts
0.3 pts
89.0%
(3.1) pts
Q4-2015 vs Q4-2014
2015 vs 2014
Underlying DPW grew 11.1%, 8.4 points from
organic growth initiatives supported by hard
market conditions, and 2.7 points from CDI. Units
increased by 6%.
Underlying current year loss ratio of 41.6% was
again strong in Q4, despite being slightly higher
than last year.
Weather was not a factor in the quarter as
evidenced by the absence of CAT losses and
insignificant non-CAT weather events.
Favourable PYD was higher than last year’s low
level, but in line with our expectations.
Strong combined ratio of
an
environment where there were no CAT losses,
weather was benign and our profitability initiatives
have been effective.
72.7% in
On an annual basis, we grew 6.6% organically, thanks to hard
market conditions combined with the deployment of our organic
growth initiatives. We took advantage of our competitive position
and product innovation to grow our unit base by 3%. CDI added
another 2.0 points of inorganic growth.
Underlying current year loss ratio was healthy at 53.5%
although above the 51.0% reported last year. Non-CAT weather
events, including the severe winter storms in Atlantic Canada, as
well as higher fire-related losses negatively impacted our results
but were partly offset by the impact of our profitability measures.
CAT losses were well below last year and lower than
expected, positively impacting our combined ratio by 6.3 points.
Favourable PYD contributed 4 points to the combined ratio,
similar to last year and consistent with historical levels.
Combined ratio of 85.9% is consistent with our expectation,
given the low level of CAT activity.
DPW (underlying)
Underlying current year loss ratio
Combined ratio
2013
2014
2015
2013
2014
2015
2013
2014
2015
4
6
8
,
1
5
1
7
,
1
5
3
6
,
1
0
9
3
7
0
4
2
5
4
Q4
Annual
%
7
.
4
5
%
5
.
3
5
%
0
.
1
5
Annual
%
7
.
5
4
%
6
.
1
4
%
3
.
0
4
Q4
%
4
.
4
0
1
%
0
.
9
8
%
9
.
5
8
Annual
%
4
.
6
8
%
7
.
2
7
%
6
.
3
7
Q4
INTACT FINANCIAL CORPORATION
11
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
5.3
Commercial P&C
Table 7 – Underwriting results for commercial P&C
DPW
DPW (underlying)
Written insured risks (in thousands)
NEP
Underwriting income
Underlying current year loss ratio
CAT losses
Favourable PYD
Claims ratio
Expense ratio
Combined ratio
Q4-2015 Q4-2014
Change
477
480
109
418
83
49.5%
(0.7)%
(8.1)%
40.7%
39.4%
80.1%
468
466
113
409
53
52.7%
1.7%
(5.0)%
49.4%
37.7%
2%
3%
(4)%
2%
57%
(3.2) pts
(2.4) pts
(3.1) pts
(8.7) pts
1.7 pts
87.1%
(7.0) pts
2015
1,789
1,796
443
1,640
216
58.1%
2.0%
(12.2)%
47.9%
38.9%
86.8%
2014
Change
1,744
1,740
450
1,588
92
60.2%
3.6%
(8.2)%
55.6%
38.6%
3%
3%
(2)%
3%
135%
(2.1) pts
(1.6) pts
(4.0) pts
(7.7) pts
0.3 pts
94.2%
(7.4) pts
Q4-2015 vs Q4-2014
2015 vs 2014
Underlying DPW grew 2.9%, all organic, buoyed by
increasing rates and solid retention levels. The commercial
P&C market remains firmer than last year in most market
segments and most regions.
Our commercial P&C action plan,
launched two years
ago, continued to pay off which, combined with lower large
losses and benign weather, helped improve our underlying
current year loss ratio by 3.2 points to a very strong 49.5%.
There were no CAT losses in the quarter. We recorded
favourable development of prior quarter’s CAT losses in Q4
leading to a 0.7 point positive impact on the combined ratio.
PYD was 3.1 points better, mainly due to favourable PYD on
certain large files.
Underlying DPW grew by 3.2%, mainly driven by
higher rates in firmer market conditions.
The benefits of the commercial P&C action plan
are nearly fully earned, and explain most of the
2.1 point improvement in the underlying current year
there remains one
loss ratio. We estimate that
additional point of
to be earned in
2016.
improvement
CAT losses were below last year, positively
impacting our combined ratio by 1.6 points.
PYD was 4 points better, due to positive PYD on
prior year files and CAT losses.
Expense ratio is 0.3 points higher on increased
investments in organic growth initiatives.
DPW (underlying)
Underlying current year loss ratio
Combined ratio
2013
2014
2015
2013
2014
2015
2013
2014
2015
5
1
7
,
1
0
4
7
,
1
6
9
7
,
1
%
1
.
6
6
6
4
4
6
6
4
0
8
4
Q4
Annual
%
4
.
9
5
%
2
.
0
6
%
1
.
8
5
Annual
%
5
.
9
4
%
7
.
2
5
Q4
%
0
.
0
0
1
%
1
.
0
8
%
1
.
7
8
Q4
%
9
.
3
0
1
%
2
.
4
9
%
8
.
6
8
Annual
12
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
5.4
Commercial auto
Table 8 – Underwriting results for commercial auto
DPW
DPW (underlying)
Written insured risks (in thousands)
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT losses
Unfavourable (favourable) PYD
Claims ratio
Expense ratio
Combined ratio
Q4-2015 Q4-2014
Change
2015
2014
Change
167
168
125
168
(13)
77.4%
0.1%
1.1%
78.6%
29.3%
107.9%
163
163
128
159
1
80.9%
-
(9.0)%
71.9%
27.6%
99.5%
2%
3%
(2)%
6%
nm
(3.5) pts
0.1 pts
10.1 pts
6.7 pts
1.7 pts
8.4 pts
670
671
523
651
7
69.5%
0.6%
0.7%
70.8%
28.2%
99.0%
632
632
520
615
64
64.1%
0.8%
(3.6)%
61.3%
28.3%
89.6%
6%
6%
1%
6%
(89)%
5.4 pts
(0.2) pts
4.3 pts
9.5 pts
(0.1) pts
9.4 pts
Q4-2015 vs Q4-2014
2015 vs 2014
led by strength from its
Underlying DPW grew 2.7%,
regular, trucking and fleet businesses. Growth in this line
of business tends to fluctuate quarter to quarter.
Underlying current year loss ratio improved 3.5 points
to 77.4%, essentially from higher rates, partially offset by
large losses.
Underlying DPW grew by 6.1% mainly from strength in
trucking.
Underlying current year loss ratio rose 5.4 points
driven by multiple factors, including higher severity, large
losses, foreign exchange rates and challenging winter
conditions.
PYD deteriorated by 10.1 points, as we increased
reserves to match our experience in this line of business.
The underperformance of this line of business has led to
corrective measures starting in Q4-2015 for policies
renewing in 2016, with the target of bringing this line of
business back to a low 90s combined ratio.
We initiated corrective measures in Q4-2015, including
higher rates on underperforming classes and improved
segmentation and underwriting.
PYD deteriorated by 4.3 points, mainly
from
unfavourable development of prior year claims files
which led to reserve increases.
DPW (underlying)
Underlying current year loss ratio
Combined ratio
2013
2014
2015
2013
2014
2015
2013
2014
2015
1
7
6
2
1
6
2
3
6
%
9
.
0
8
%
4
.
7
7
%
8
.
6
7
%
9
.
7
0
1
%
4
.
0
0
1
%
5
.
9
9
%
0
.
9
9
%
3
.
3
9
%
6
.
9
8
%
5
.
9
6
%
4
.
4
6
%
1
.
4
6
0
5
1
3
6
1
8
6
1
Q4
Annual
Q4
Annual
Q4
Annual
INTACT FINANCIAL CORPORATION
13
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 6 – Investment performance
Investment policy
6.1
Our investments are managed internally by our subsidiary, Intact Investment Management Inc. (“IIM”) according to our investment
policy. The asset mix is designed to generate interest and dividend income, while ensuring an optimal mix of risk and total return.
The overall risk profile of the portfolio is designed to balance the investment return required to back our liabilities, while optimizing
the investment opportunities available in the marketplace. Our primary investment objective is to maximize after-tax total return via
appropriate asset allocation and active management of investment strategies. In order to generate dividend income, we also actively
invest in dividend-paying common shares and preferred shares. We use derivative financial
instruments for economic 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. Management monitors and enforces compliance with our investment policy.
6.2
Net investment income
Table 9 – Net investment income
Interest income
Dividend income
Investment income, before expenses
Expenses
Net investment income
Average net investments1
Q4-2015
Q4-2014
Change
2015
2014
Change
70
48
118
(8)
110
74
43
117
(6)
111
(4)
5
1
(2)
(1)
281
179
460
(36)
424
288
174
462
(35)
427
13,067
12,882
1%
12,974
12,270
(7)
5
(2)
(1)
(3)
6%
Market-based yield2
3.55%
1 Defined as the mid-month average fair value of net equity and fixed-income securities held during the reporting period.
2 Refer to Section 22 – Non-IFRS financial measures.
0.01 pts
3.62%
3.61%
3.65% (0.10) pts
Q4-2015 vs Q4-2014
2015 vs 2014
investment
income of $110 million was
Net
incremental
largely unchanged. The benefit of
operating cash flows was offset by the impact of
lower bond yields on interest income.
Average net investments were up 1%, mainly due
income received, partially offset by
to investment
negative mark-to-market on our investment portfolio
from lower equity markets and bond prices.
investment
income of $424 million was largely
Net
investments was offset
unchanged. The benefit of incremental
by the impact on income of the replacement of maturing fixed-
income securities, as well as the purchase of new debt securities
and preferred shares, at lower yields.
Average net investments were up 6% due to the investment
and timing of cash generated from insurance operations and
investment income received.
14
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Net investment gains (losses)
6.3
Net investment gains (losses) are reported in non-operating results and include the following items.
Table 10 – Net investment gains (losses)
Fixed-income strategies
Realized and unrealized gains (losses) on:
FVTPL debt securities1
Other derivatives
Realized gains (losses) on:
AFS debt securities1
Equity strategies
Realized and unrealized gains (losses) on:
FVTPL common shares, net of related derivatives
Embedded and other derivatives
Realized gains (losses) on:
AFS common shares and preferred shares1
Foreign currency related to AFS U.S.
common shares
Impairment losses on:
Common shares
Preferred shares
Investments in associates and joint ventures
Net investment gains (losses)
1 Excluding foreign currency impact.
Q4-2015
Q4-2014
Change
2015
2014
Change
(17)
1
(1)
(17)
(5)
(5)
(5)
4
(44)
-
(55)
-
(72)
26
(1)
13
38
(8)
2
16
-
(46)
(5)
(41)
-
(3)
(43)
2
(14)
(55)
3
(7)
(21)
4
2
5
(14)
-
(69)
(16)
(6)
15
(7)
(13)
50
5
19
(124)
(38)
(101)
44
(64)
57
6
21
84
(23)
(11)
(73)
(12)
(6)
(91)
10
61
180
(175)
-
19
(68)
(9)
69
21
174
(56)
(29)
(170)
23
(238)
Our U.S. fixed-income portfolio is hedged using foreign-currency forward contracts, resulting in no currency gain or loss on the U.S.
fixed-income portfolio.
Unrealized gains and losses on AFS investments are recognized in OCI during the year and reported in AOCI until the securities are
sold or impaired (see Table 19 – Net pre-tax unrealized gains (loss) on AFS securities).
The mark-to-market of our investments is fully refleted in our BVPS. As a result, impairment losses have no impact on BVPS.
Q4-2015 vs Q4-2014
2015 vs 2014
investment
Net
$69 million.
losses were
up
by
In Q4-2015, lower equity markets resulted in
net investment losses of $72 million.
In Q4-2014, higher bond prices helped offset
from lower equity markets,
some losses
losses of $3 million.
resulting in net investment
Impairment losses were mainly driven by stocks
in the energy and material sectors.
Net investment losses were up by $238 million.
In 2015, lower equity markets resulted in net investment losses of
$64 million. In 2014, higher equity markets overall and higher bond
prices resulted in net investment gains of $174 million.
Throughout 2015, we recorded impairment losses due to the continued
decline in stocks in the energy and materials sectors.
In 2014,
impairment losses mainly arose in the fourth quarter.
In 2015, gains resulting from the lower valuations of written call option
derivative liability embedded in our perpetual preferred shares helped
mitigate investment losses.
INTACT FINANCIAL CORPORATION
15
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 7 – Distribution channels
7.1 Overview of our distribution strategy
Our multi-channel distribution strategy includes 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. Business with
brokers continues to represent a large part of our DPW and is expected to support our long-term growth and generate distribution
income. Our broker channel represented 86% of our DPW in 2015, while our direct-to-consumer channel represented 14%.
DPW by distribution channel
Brokers
Direct to consumers
14%
86%
Our direct-to consumer channel
Our direct-to-consumer strategy is to have a cost-efficient national platform, be the
digital leader and provide a simplified customer experience that is second to none.
We continue to seek opportunities to expand our reach and find innovative solutions to
make it easy for our customers to protect the things they care about, with the objective
of doubling our direct-to-consumer business in the mid-term.
Our broker channel
Our scale and financial strength makes us a strong ally for our broker partners in
terms of brand, technology, products and expertise, business opportunities, as well as
financial solutions.
We continue to invest in our broker network (through equity investment or financing) to
develop broker relationships. Through these relationships, we are able to contribute to
their ongoing growth, participate in the consolidation within the broker network, and
enhance our product distribution.
Our objective is to capture a share of distribution income in the market.
Distribution income, net
83
75
75
104
42
2011
2012
2013
2014
2015
7.2
Distribution income
Net distribution income represents income from our wholly-owned
broker, BrokerLink, as well as broker affiliates.
Given our continued focus on this channel, distribution income
has increased sharply since 2011, bolstered by the acquisition of
AXA Canada Inc. in late 2011.
Distribution income increased by 39% to $104 million in 2015 from
continued growth and improved profitability.
In 2015, our brokers generated an earnings before interest, taxes,
depreciation and amortization (EBITDA) margin close to 30%.
We expect distribution income to continue to grow in the future.
16
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
STRATEGY AND OUTLOOK
Section 8 – What we are aiming to achieve
We are committed to offering our customers an outstanding experience that goes beyond their
expectations and providing best-in-class service to our brokers. We are customer driven, invest in our
people and strive to be one of the most respected companies in Canada.
Our customers
are our advocates
Our employees
are engaged
Be one of Canada’s best
employers
Our company
is the most respected
insurance provider in Canada
Outperform industry ROE by at
least 500 basis points every
year
Grow NOIPS at a yearly rate of
10% over time
s One million advocates
e
v
i
t
c
e
j
b
o
r
u
O
Be easy to deal with and go
beyond expectations to deliver a
customer experience that is
second to none
Be the recognized leader in small
and mid-sized businesses and
specialty lines through service,
expertise and product
Build best in class digital
distribution and service platforms
Enhance distribution capabilities by
leveraging scale in sales and
technology
Intact Insurance scored highest
among Canada's insurance
companies in J.D Power’s 2015
Canadian Auto Claims Satisfaction
Study. For J.D. Power award
information, visit jdpower.com
880,000 advocates, up 9% from
last year
y
g
e
t
a
r
t
s
r
u
O
5
1
0
2
r
u
O
s
t
n
e
m
e
v
e
i
h
c
a
Build the best insurance team to
succeed now and in the future
Create a workplace where we
live our values
Invest in the professional
development of our people and
surround them with inspiring
teams
Deepen our fundamental
strengths in pricing, risk selection,
claims and investments
Use our scale to bring efficiencies
in distribution and claims
Manage capital opportunistically
Consolidate Canadian industry in
manufacturing and distribution
Recognized as an Aon Best
Employer- Canada 2016,
Platinum Level.
Outperformed industry’s ROE by
6.2 points in the first nine months
of 2015
Recognized as one of Canada's
Top 100 Employers by
Mediacorp Canada Inc. for 2016
Grew NOIPS by 13% in 2015
when compared to 2014. Our
2015 NOIPS of $6.38 represents
a five-year CAGR of 13% since
2010
INTACT FINANCIAL CORPORATION
17
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 9 – Outlook and strategy
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.
Canadian P&C insurance industry
12-month outlook
Our strategy
We expect to see cost pressures outside Ontario
We expect our branding and digital actions in this line of
and improved market dynamics.
business to help grow our market position.
In Ontario, we continue to expect symmetry
between future rate reductions and government
cost reduction measures.
We have a robust action plan to tackle trends in bodily
injury claims in Alberta, including taking pricing actions
and engaging with the government to find a solution.
We believe that mild rate reductions in Ontario will
be offset by increases in other markets.
We expect growth at a low single digit rate.
Personal
auto
t
n
e
m
n
o
r
i
v
n
e
t
e
k
r
a
M
s
t
e
k
r
a
m
l
a
t
i
p
a
C
l
l
a
r
e
v
O
18
Personal
property
We expect the current hard market conditions to
continue, as changing weather patterns have
negatively impacted industry results.
Industry growth rate should stay at the upper single
digit level.
As our home improvement plan is fully implemented, we
are monitoring its effectiveness to ensure the results are
sustainable even in harsh weather conditions.
We are focusing on growing our business by introducing
innovative products such as Lifestyle advantage and the
new Enhanced water damage package.
Commercial
lines
Investments
Financial
strength
We believe that the continued low interest rates and
elevated loss ratio of the past years, driven in part
by weather events, have translated into firmer
conditions.
We expect to see some impact from the slowing
Alberta economy leading to pressure on the
industry premium growth.
We expect growth at a mid-single digit rate.
We
in
engage
innovative
continuously
product
development
to address customer needs such as
coverage for cyber risk, fleet telematics, drones, and the
sharing economy. At the same time, we continue our
focus on training and service excellence.
We are targeting a combined ratio sustainably in the low
rate increases and
90s through better segmentation,
product changes.
Corrective measures
Commercial auto.
are
being
implemented
in
In the current interest rate environment, we
estimate that the industry’s pre-tax investment yield
will decline slightly, given its asset mix and duration.
We expect a mild erosion in our net investment income
over the next 12 months as the low yield environment
continues to be challenging.
We maintain a strong financial position to capture growth
opportunities as they arise or withstand headwinds from
volatile capital markets or natural disasters.
We expect our MCT ratio to be positively impacted by the
2016 changes to the MCT guidelines.
Economic data suggests that more time is required
for the global recovery to take hold. Industry capital
levels could be negatively impacted if volatility
results in continued downward pressure on market
values.
The preferred share market has been negatively
impacted by the latest
interest rate outlook. The
valuation of preferred shares depends on the timing
and magnitude of interest rate movements.
Global capital requirements are continuing to
influence the asset decisions of many companies.
Overall
We expect growth at a low single digit rate.
We expect the industry’s combined ratio to continue
to improve in 2016 from the recent peak above
100% in 2013.
Overall, we expect the industry’s ROE to trend back
toward its long-term average of 10%.
We continue to invest in brand, digital strategies,
customer experience and distribution networks to
generate growth.
We expect that our pricing and underwriting discipline, as
well as our claims management capabilities will help
position us to outperform the industry.
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 10 – Canadian P&C insurance industry
The P&C insurance market in Canada is relatively mature and highly competitive. It is:
Large and
highly
fragmented
Evolving
and growing
over time
Regulated
A $45 billion market representing approximately 3% of GDP, according to MSA Research Inc. data for 2014.
The top five insurers represent 47% of the market, and the top 20 have a combined market share of 83%. Intact is
the largest player with approximately 17% market share.
Over the last 30 years, the industry has grown at a 6% CAGR and delivered an ROE of approximately 10%.
Brokers continue to control commercial lines and a large share of personal lines in Canada. However, direct-to-
consumer channel is growing. Distribution in the industry is currently about 65% through brokers and 35% through
the direct/agency channel.
There has been consolidation in recent years and we expect more to come.
Insurance companies are licensed under insurance legislation in each of the provinces and territories in which they
conduct business.
Home and commercial insurance rates are unregulated, while personal auto rates are regulated in many provinces.
Capital for federal insurance companies is regulated by OSFI and by provincial authorities in the case of provincial
insurance companies.
The most recent Canadian P&C insurance results for YTD Q3-2015 are as follows:
Table 11 – Estimated Canadian P&C insurance results
IFC
P&C
industry1
Out
performance
Industry
Benchmark2
Out
performance
DPW growth
Combined ratio (including MYA)
ROE (annualized)3
1 Based on MSA Research Inc., excluding LIoyd’s, ICBC, SGI, SAF, MPI, Genworth and IFC.
2 Consists of the 19 largest companies of the P&C industry, as defined above.
3 IFC’s ROE corresponds to the AROE, which excludes the after-tax impact of acquisition-related items.
3.4%
97.5%
8.8%
5.7%
94.1%
15.0%
2.3 pts
3.4 pts
6.2 pts
2.7%
98.7%
9.2%
3.0 pts
4.6 pts
5.8 pts
YTD Q3-2015
Our growth outperformance against our industry benchmark reached 3.0 points, driven by our strong growth in 2015 as our
competitive position improved and we invested in organic growth initiatives. In 2014, our growth had been hampered by our
profitability measures, which are now largely complete, as well as rate reductions.
Our combined ratio outperformance against our industry benchmark remains healthy at 4.6 points.
Our ROE outperformance of 6.2 points versus the P&C insurance industry is above our objective of 5 points but shrank
from 8.2 points in 2014 mainly due to the impact of weaker capital markets.
IFC’s ROE versus the P&C insurance industry over time
IFC
P&C insurance industry
%
9
.
3
1
%
7
.
6
%
4
.
7
1
%
3
.
6
%
5
.
6
1
%
6
.
0
1
2010
2011
2012
%
3
.
0
1
%
2
.
6
2013
%
8
.
6
1
%
6
.
8
%
0
.
5
1
%
8
.
8
2014
YTD Q3-2015
INTACT FINANCIAL CORPORATION
19
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 11 – Operating environment
Our financial results are influenced to some degree by economic factors such as interest rates and equity markets, industry factors,
government policy and regulatory changes, and weather conditions.
11.1 Capital markets
The following section presents a high level overview of the capital markets in 2015.
Table 12 – Selected economic indicators
S&P/TSX
Composite
Q1-2015
Q2-2015
Q3-2015
Q4-2015
2015
Index Financials Materials
2%
(2)%
(9)%
(2)%
(11)%
(1)%
(1)%
(4)%
1%
(6)%
3%
(3)%
(25)%
3%
(23)%
Small
Cap
-
1%
(15)%
1%
(13)%
Energy
(2)%
(5)%
(18)%
(3)%
(26)%
S&P/TSX
Preferred
share Index
Dow Jones
U.S. Dividend
100 Index
Strengthening
of USD vs CAD
(6)%
(5)%
(14)%
5%
(19)%
(1)%
(3)%
(6)%
7%
(3)%
9%
(2)%
7%
4%
19%
The S&P/TSX Composite Index declined for a third consecutive quarter driven by weakness in the energy and materials sectors,
which led to impairment losses.
Interest rates and credit spreads behaved as follows:
Five-year Canadian sovereign rates were down slightly during Q4-2015, but declined by approximately 50 basis points in
2015.
Five-year U.S. sovereign rates rose significantly, by approximately 40 basis points in Q4-2015 and were essentially
unchanged in 2015.
Five-year AA corporate spreads were essentially unchanged in Q4-2015, but widened by approximately 30 basis points in
2015.
The valuation of preferred shares with fixed-reset features was hit especially hard in 2015 by the continued low interest rate
environment in Canada, leading to unrealized losses recorded in OCI on some AFS securities.
The valuation of the U.S. investment portfolio was negatively impacted by the underperformance of the Dow Jones U.S. Dividend
100 Index overall. However, after giving consideration to the USD appreciation relative to the CAD in 2015, the index was up 11 %
in Q4-2015 and 15% in 2015. This results in a large unrealized gain in OCI on the AFS USD common shares that we continue to
hold as at December 31, 2015.
Our net exposure, after reflecting the impact of hedging strategies and financial liabilities related to investments, is outlined below.
Investment mix
(as at December 31, 2015)
Fixed-income
Common shares
Preferred shares
Cash, short-term notes and loans
7%
9%
13%
71%
Sector mix
(as at December 31, 2015)
Currency
(as at December 31, 2015)
Government
Financials
Energy
Other (3% or less)
18%
5%
40%
CAD
USD
5%
37%
95%
20
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
11.2 Ontario personal auto environment
August
2013
December
2014
April
2015
Ontario government introduced a rate and cost reduction mandate to improve the affordability of auto insurance in
the province, while also reducing costs in the system.
Government cost reduction measures to date include tightening of the Minor Injury Guideline (MIG) back towards its
original intent and licensing of health care clinics to reduce fraud.
Ontario Bill 15, Fighting Fraud and Reducing Automobile Insurance Rates Act, 2014 (“Bill 15”) was passed and
elements such as a reduction in the pre-judgement interest (PJI) rate and streamlining the dispute resolution system,
are becoming effective as regulations are defined.
Ontario government released a budget outlining additional actions to reduce costs, which became Bill 91. It updates
the catastrophic impairment definition and reduces the standard duration of medical and rehabilitation benefits to be
more in line with that of other provinces. Bill 91 also prescribed some measures through which the insurance
industry is to reduce costs for customers.
Companies were asked to file rates by October 2015 to reflect the benefits of the reforms included in Bill 91, as well as those coming
from Bill 15 if not already reflected, with an effective date of June 2016. A portion of these filings were approved in Q4-2015, with the
bulk expected to be approved in Q1-2016.
Since the rate and cost reduction mandate was introduced in August 2013, we have taken a cumulative average rate reductions of
10.6%, recognizing the benefits of Bill 15 and the winter tire portion of Bill 91. In comparison, the industry has reduced rates on
average by approximately 6.9%, as many players have yet to reflect the impact of Bill 15. In addition, a number of companies
received rate increases in the same period, as some players were in an underwriting loss position.
According to industry results, the claims ratio in Ontario personal auto for the first nine months of 2015 was 73.3%, improved from
2010, but still reflective of an industry combined ratio around 100%. This indicates that rate reductions in excess of reforms would
likely lead to availability issues for drivers. We believe the government understands these issues and that we are currently in a
rational operating environment.
11.3 Weather conditions
The first half of 2015 was marked by a deep jet stream, which caused warmer than average temperatures in the West and colder
than average temperatures in the East. Due to the cold weather, snow accumulated until April in Atlantic Canada, and when the
spring brought warmer weather and rain, the snow melted in a short amount of time. In the West, the warm Pacific ocean
temperatures combined with the already warm air initiated the fire season earlier than normal and burned almost twice as much land
as the 10-year average. Fortunately, no cities were affected. As the year progressed, the strongest El Niño pattern since 1997-1998
caused anomalously warm temperatures and dry conditions across major Canadian cities. Furthermore, due to El Niño, hurricane
season was below average in both frequency and severity of storms, leaving the Maritimes relatively unharmed in this respect for
2015. Again in part because of El Niño, winter had a late start throughout the country, resulting in better Q4 results than last year,
which also experienced benign weather. Our CAT losses were low for all of 2015, and overall were at their lowest level in the past
five years. Also see Section 27.3 – Seasonality of the P&C insurance business for more details on seasonality.
11.4 Industry pools
Industry pools consist of the “residual market” (or Facility Association) as well as risk-sharing pools (“RSP”) in Alberta, Ontario,
Québec, New Brunswick and Nova Scotia. Insurers can choose to cede risks to the RSP. The risks ceded are aggregated and
assumed by the entities in the Canadian P&C insurance industry, generally in proportion to market share and volume of business
ceded to the RSP. Results for industry pools tend to fluctuate between periods. The impact of assumed industry pools on personal
auto underwriting income was a loss of $6 million in Q4-2015, compared to a gain of $13 million in Q4-2014. On a full year basis,
the impact was a loss of $6 million in 2015, compared to a loss of $23 million in 2014.
INTACT FINANCIAL CORPORATION
21
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 12 – Recent developments
At a glance
We acquired CDI from Canadian Western Bank, which extends our direct-to-consumer operations from
coast to coast. The transaction closed on May 1, 2015 and integration is proceeding as planned. We
started the conversion of the insurance policies to our belairdirect platform on January 1, 2016. We
expect the acquisition to be accretive to NOIPS in 2016. We continue to target annual expense synergies
of $10 million after tax, and expect our run rate to reach this level by mid-2017
Business
developments
We entered into a cooperative agreement to develop tailored insurance products with the ride-sharing
service provider, Uber, as part of our broader product development strategy that addresses consumer
needs within the growing sharing economy.
We launched Intact Lab, our center for digital excellence, which will
focus on world-class digital
solutions to provide our customers with an unrivaled service experience, and brokers with industry-
leading business solutions.
We launched Quick Quote, an ultrafast quote tool that will transform the personal auto insurance market
in Québec and Ontario. This tool creates an outstanding customer experience and provides an accurate
auto quote in less than three minutes. The simplified interface is easy to use and intuitive.
We launched our new commercial solution to address privacy breaches, which can include the loss,
theft or unauthorized access or use of personal, customer or employee information.
Innovation
We unveiled ‘Lifestyle advantage’, a new type of home insurance coverage that gives experienced
homeowners the flexibility to rebuild their lives the way that they want in the event of a total loss to their
home or any loss to their personal property.
We announced the creation of the Intact Centre on Climate Adaptation in collaboration with the
University of Waterloo. The centre will
focus on research and building awareness for innovative
adaptation solutions to climate change risks facing Canadian homeowners, communities, industries and
governments.
We announced the national
launch of my Fleet Solution, which leverages an existing GPS Fleet
tracking and management solution from two industry leaders, Fleet Complete and TELUS.
We recently introduced our new commercial solution for Unmanned Air Vehicles (UAVs),
typically
referred to as drones.
22
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
At a glance
On September 11, 2015, We filed a final short form base shelf prospectus that will allow IFC to offer
up to $5.0 billion of debt securities, class A shares, common shares, subscription receipts, warrants,
share purchase contracts, units or any combination of such securities, over the next 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 $1.2 billion in unsecured medium term notes. This will provide us with the
flexibility to take advantage of new opportunities.
During the third quarter of 2015, Fitch initiated a rating coverage on IFC and its P&C insurance
subsidiaries and assigned a long-term issuer credit rating of ‘A-’ to IFC and an insurance financial
strength rating of ‘AA-’ to its principal P&C insurance subsidiaries with a stable outlook.
In December 2015, DBRS upgraded the long-term issuer credit rating of IFC to ‘A’ from ‘A(low)’ and
assigned an insurance financial strength ratings of ‘AA(low)’ to its principal P&C insurance subsidiaries
with a stable outlook.
The Board of Directors has authorized a NCIB to purchase, for cancellation, up to 6,577,156 common
shares during the next 12 months, representing approximately 5% of
IFC issued and outstanding
common shares. We expect that this NCIB will begin on or about February 12, 2016 and will expire on
the earlier of February 11, 2017, or the date on which we have either acquired the maximum number of
common shares allowable or otherwise decided not to make any further repurchases.
Recognized as an Aon Best Employer – Canada 2016, Platinum level, recognizing IFC for its strong
level of employee engagement, leadership, performance culture and employment brand.
Recognized as one of Canada's Top 100 Employers by Mediacorp Canada Inc.
recognizing IFC for its exceptional human resources programs and forward-thinking workplace policies.
for 2016,
Intact Insurance scored highest among Canada's insurance companies in J.D Power’s 2015 Canadian
Auto Claims Satisfaction Study. For J.D. Power award information, visit jdpower.com.
Recognized as one of the best governed companies in Canada, tying for fifth place out of 234
companies in the Globe and Mail’s 2015 Board Games corporate governance ranking. The Board
Games report measures the quality of governance practices of all S&P/TSX composite index companies.
Ranked one of the 100 Most Sustainable Corporations in the World in 2015 by Corporate Knights,
one of the leading publications in Corporate Social Responsibility.
Liquidity
and capital
resources
Awards and
recognitions
INTACT FINANCIAL CORPORATION
23
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
FINANCIAL CONDITION
Section 13 – Financial position
2015 Highlights
BVPS
+6%
Debt-to-capital ratio
Total excess capital
16.6%
$625 million
MCT
203%
13.1 Balance sheets
Table 13 – Balance sheets
As at December 31,
Assets
Investments
Cash, cash equivalents and short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
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 share (in dollars)
24
INTACT FINANCIAL CORPORATION
2015
2014
351
8,499
1,235
2,971
448
213
8,560
1,268
2,992
407
13,504
13,440
2,868
274
720
1,417
2,453
2,711
335
669
1,121
2,304
21,236
20,580
8,094
4,390
378
1,503
1,143
8,021
4,110
432
1,419
1,143
15,508
15,125
2,090
489
119
3,051
(21)
5,728
39.83
2,090
489
115
2,616
145
5,455
37.75
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
13.2 Book value per share
Table 14 – Components of BVPS
As at December 31,
BVPS, beginning of year
EPS
Dividends on common shares
Impact of market movements on AFS securities
Net actuarial gains (losses) on employee future benefits
NCIB
LTIP and other
BVPS, end of year
Year-over-year increase
Our BVPS improved by 34% since 2011. Our
accretive acquisitions, combined with our
profitable organic growth have driven BVPS
up, while consistently returning capital
to
shareholders through dividends and/or share
buy backs.
With over $13 billion of investments, we are
exposed to market volatility.
In 2015, our
BVPS was impacted by unrealized losses
from weaker capital markets, amounting to
$1.26 per share.
We remained committed to our
financial
objectives in terms of ROE and NOIPS to
enhance value to shareholders.
13.3 Dividends per share
The decision to pay dividends to our
shareholders is part of our overall capital
management framework.
While we don’t
target a specific dividend
payout ratio, our ratio has been close to 40%,
both in terms of NOIPS and EPS, over the
last five years.
On February 9, 2016, the Board of Directors
increased the quarterly dividend by 9%, or
5 cents, to 58 cents per common share on
our
shares.The
decision reflected the strength of our financial
position, the quality of our ongoing operating
earnings, and our objective to create value
for shareholders.
outstanding
common
We have increased our dividend every year
since our initial public offering in 2004.
2015
37.75
5.20
(2.12)
(1.26)
0.27
-
(0.01)
39.83
6%
2014
33.94
5.79
(1.92)
0.25
(0.23)
-
(0.08)
37.75
11%
2013
33.03
3.10
(1.76)
(0.54)
0.57
(0.35)
(0.11)
33.94
3%
Book value per share
(in dollars)
39.83
37.75
33.03
33.94
29.73
2011
2012
2013
2014
2015
Quarterly dividend per share for common shares
(in dollars)
0.58
0.53
0.48
0.44
0.40
0.37
0.31
0.32
0.34
0.25
0.27
0.16
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Q1-
2016
INTACT FINANCIAL CORPORATION
25
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
13.4 Investments
Our investments totalled $13.5 billion as at December 31, 2015, a level similar to December 31, 2014. Our investment portfolio is
mainly composed of Canadian securities and includes a mix of cash and short-term notes, fixed-income securities, preferred shares
and common shares.
We invest in corporate and government bonds and approximately 99% of our fixed-income portfolio is rated ‘A-’ or better as at
December 31, 2015.
We have no exposure to leveraged securities.
Our asset-backed securities, all
totalled $250 million as at December 31, 2015 ($215 million as at
December 31, 2014) and comprised Canadian credit card and auto loan receivables ($230 million as at December 31, 2015,
$192 million as at December 31, 2014) and mortgage-backed securities.
rated ‘AAA’,
Our preferred shares portfolio is mainly comprised of Canadian issuers with 82% of our portfolio invested in securities that are
highly rated, with at least a ‘P2L’ credit rating.
Our common equity exposure is focused on dividend-paying Canadian equities, and is complemented by $584 million in
dividend-paying U.S. equities. We actively manage to enhance dividend income throughout the year.
Net exposure: investment mix by asset class
As part of our investment strategies, from time to time we 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 market risk from
long equity positions is reduced through the use of swap agreements or other hedging instruments.
The following table shows our investment mix by asset class after reflecting the impact of hedging strategies and financial liabilities
related to investments.
Table 15 – Investment mix by asset class (net exposure)
As at December 31,
Cash, cash equivalents, and short-term notes
Fixed-income strategies
Preferred shares
Common equity strategies
Loans
2015
4%
71%
9%
13%
97%
3%
100%
2014
3%
72%
9%
13%
97%
3%
100%
The investment mix as at December 31, 2015 is comparable to last year.
Net exposure: by currency
As a means to provide geographic and sector diversification to our portfolio, we invest in high quality USD corporate bonds and
USD equities. Approximately 12% of our fixed-income and 20% of our common share asset portfolios were comprised of USD
securities as at December 31, 2015. Foreign currency exposure in USD denominated fixed-income securities is hedged using
foreign-currency forward contracts.
The following table shows our exposure by currency, after reflecting the impact of hedging strategies and financial liabilities related
to investments.
Table 16 – Currency (net exposure)
As at December 31,
CAD
USD
26
INTACT FINANCIAL CORPORATION
2015
95%
5%
100%
2014
96%
4%
100%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Net exposure: sector mix by asset class
The following table shows our sector mix by asset class, after reflecting the impact of hedging strategies and financial liabilities
related to investments, as a percentage of total investments (excluding cash, short-term notes and loans).
Table 17 – Sector mix by asset class (net exposure)
As at December 31,
Government
Financials
Energy
Industrials
Consumer staples
Telecommunication
Utilities
Consumer discretionary
Materials
Information technology
Health care
Fixed-income
securities
Preferred
shares
58%
30%
2%
2%
3%
-
1%
1%
-
2%
1%
-
73%
15%
-
-
-
12%
-
-
-
-
Common shares
IFC
-
15%
19%
12%
10%
8%
8%
9%
8%
7%
4%
S&P/TSX
Weighting
IFC Total
2015
IFC Total
2014
-
38%
19%
8%
5%
5%
2%
7%
10%
3%
3%
40%
37%
5%
3%
3%
1%
3%
2%
1%
3%
2%
41%
35%
6%
3%
3%
2%
2%
2%
2%
2%
2%
100%
100%
100%
100%
100%
100%
Our fixed-income investment portfolio is mainly concentrated 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
Our investment portfolio includes high quality government and corporate bonds, as well as equity securities of large, publicly-traded,
dividend-paying companies.
The following table highlights the credit quality of our fixed-income securities and preferred shares.
Table 18 – Credit quality of the fixed-income securities and preferred shares
As at December 31,
Fixed-income securities1
AAA
AA
A
BBB
Preferred shares1
P1
P2
P3
1 Source: S&P, DBRS and Moody’s.
2015
50%
31%
18%
1%
100%
1%
81%
18%
100%
2014
49%
35%
16%
-
100%
9%
78%
13%
100%
As at December 31, 2015,
fixed-income portfolio was ‘AA+’, unchanged since
December 31, 2014, and the average duration of our fixed-income portfolio was 4.03 years (4.00 years including the impact of
derivatives used to decrease overall interest rate exposure). The weighted-average rating of our preferred share portfolio was ‘P2’
as at December 31, 2015 and 2014.
the weighted-average rating of our
INTACT FINANCIAL CORPORATION
27
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Net pre-tax unrealized gain (loss) on AFS securities
In determining the fair value of investments, we rely 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.
Table 19 – Net pre-tax unrealized gain (loss) on AFS securities
As at
Fixed-income securities
Preferred shares
Common shares
Net pre-tax unrealized gain (loss) position
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
December 31,
2014
121
(111)
(12)
(2)
118
(165)
(74)
(121)
127
(13)
36
150
183
20
88
291
94
66
54
214
Dec. 31, 2015 vs Sept. 30, 2015
Dec. 31, 2015 vs 2014
The favourable development of $119 million
was driven by higher preferred share values,
losses of $44 million which were
impairment
recognized in net
income in Q4, and the
performance of our USD equities which was
further enhanced by the appreciation of the USD.
The unfavourable development of $216 million was due to the
weakness in Canadian equity markets (including preferred shares). Some
of these unrealized losses were recognized in net income in 2015 through
impairment losses amounting to $162 million.
There was also a favourable impact from the USD appreciation on our
USD common shares.
See section 11.1 – Capital markets for more details. Gains and losses in the common share portfolio are generally realized on an
ongoing basis under normal capital market conditions, reflecting our investment strategy which is focused primarily on dividend-
paying Canadian common equities.
Impairment recognition
Common shares classified as AFS are assessed for impairment if there has been:
a significant decline in the fair value below the book value (normally an unrealized loss of 50% or more);
a prolonged decline in the fair value below the book value (normally an unrealized loss for 15 consecutive months or more); or
a significant and prolonged decline in the fair value below the book value (normally an unrealized loss for nine consecutive
months or more combined with a current unrealized loss of 25% or more).
Table 20 – 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, but
less than 9 consecutive months
Unrealized losses on AFS common shares
Dec 31,
2015
Sept 30,
2015
June 30,
2015
Mar 31,
2015
Dec 31,
2014
96
31
44
171
113
52
19
184
62
8
17
87
47
7
23
77
36
57
2
95
The current valuation of preferred shares, particularly those with reset features, reflects, to a large extent, the impact of low interest
rates. Accordingly, we have refined our impairment model for preferred shares as at December 31, 2015 such that any impairment
is based on credit considerations, not interest rate levels. This is consistent with the treatment of debt securities. As a result, almost
all of our preferred shares are now assessed for impairment using a debt impairment model given that our business model is to
purchase these shares for the purpose of earning dividend income, with the intent of holding them for the long-term.
Under a debt impairment model, debt securities and preferred shares are impaired only if there is objective evidence of impairment,
as a result of one of more loss events (such as bankruptcy or large financial reorganization, reduction or cessation of dividends),
occurring after initial recognition, and that loss event has an impact on the estimated future cash flows of the financial asset.
Based on our assessment, we recorded impairment losses on AFS common shares amounting to $44 million in Q4-2015 and
$124 million in 2015 (nil and $38 million respectively for preferred shares). Refer to Note 2 – Summary of significant accounting
policies to the accompanying Consolidated financial statements for additional details on the impairment of financial assets.
28
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
13.5 Claims liabilities
Claims liabilities amounted to $8.1 billion as at December 31, 2015, essentially
unchanged since December 31, 2014.
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 principal assumption underlying the claims liability estimates is that our future
follow a similar pattern to past claims development
claims development will
experience. Claims liability estimates are also based on various quantitative and
qualitative factors, including:
Direct claims liabilities
(as at December 31, 2015)
Personal lines
Commercial lines
36%
64%
average claim costs, including claim handling costs (severity);
average number of claims by accident year (frequency);
trends in claims severity and frequency;
payment patterns;
other factors such as inflation, expected or in-force government pricing and coverage reforms, and level of insurance fraud;
discount rate; and
provision for adverse deviations (“PfAD”).
The total claims reserve is made up of two main elements:
1)
2)
reported claims case reserves, and
incurred but not reported (“IBNR”) reserves.
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 claims adjustment expenses or subrogation amounts 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 the time value of money, using a rate that reflects the estimated market yield of the underlying
assets backing these claims liabilities. IBNR and PfAD are reviewed and adjusted at least quarterly.
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.
See Section 23 – Non-operating results for more details on the impact of MYA on underwriting.
INTACT FINANCIAL CORPORATION
29
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Prior year claims development
for
Reserve estimates are evaluated quarterly
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.
PYD 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 PYD as a percentage
of opening reserves has been approximately 3% to
5% per year over the long term.
Annualized rate of favourable PYD
(as a % of opening reserves)
5.7%
6.2%
4.8%
4.9%
5.1%
4.9%
4.0%
3.2%
2008
2009
2010
2011
2012
2013
2014
2015
The following table shows the PYD by line of business, as well as the annualized rate of favourable PYD (as a % of opening
reserves).
Table 21 – PYD by line of business
By line of business
Personal auto
Personal property
Commercial P&C
Commercial auto
Total favourable development
Annualized rate of favourable PYD1
1 As a % of opening reserves.
Q4-2015
Q4-2014
Change
2015
2014 Change
(29)
(13)
(34)
1
(75)
(38)
(5)
(21)
(14)
(78)
9
(8)
(13)
15
3
3.9%
4.2%
(0.3) pts
(212)
(70)
(199)
4
(477)
6.2%
(141)
(71)
(130)
(22)
(364)
(71)
1
(69)
26
(113)
4.9%
1.3 pts
Q4-2015 vs Q4-2014
2015 vs 2014
Favourable PYD of $75 million, or 3.9% of opening
reserves on an annualized basis, was below the 4.2%
recorded in Q4-2014, but in line with recent history.
Compared to last year, there was higher favourable PYD
in commercial P&C, helped by the resolution of certain
large files, offset by deteriorating bodily injury trends in
Alberta affecting the auto lines of business.
Favourable PYD of $477 million, or 6.2% of opening
reserves, was higher by $113 million.
The elevated level of favourable PYD includes favourable
development from industry pools, prior year CAT losses,
and increasing comfort around the effectiveness of Ontario
auto reforms.
30
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
13.6 Reinsurance
In the ordinary course of business, we reinsure certain risks with other reinsurers to limit our maximum loss in the event of
catastrophe 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). Ceded
reinsurance complies with regulatory guidelines. Furthermore, the reinsurance treaties call for timely reimbursement of ceded
losses.
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 catastrophe 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 ($198 million as at December 31, 2015,
$241 million as at December 31, 2014) 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. We have collateral in place to support amounts receivable and recoverable from unregistered
reinsurers.
Reference to our Consolidated financial statements for details on the counterparty risk arising from reinsurance
Note 8.3 d)
Annually, we review and adjust our reinsurance coverage as well as our net retention of risks in order to reflect our current
exposures and our capital base. For multi-risk events and catastrophes, the coverage limits are well in excess of the regulatory
requirements with respect to the earthquake risk as per our conservative approach.
The following table shows our reinsurance net retention and coverage limits by nature of risk.
Table 22 – Reinsurance net retention and coverage limits by nature of risk
As at
Single risk events
Retentions:
On property policies
On liability policies
Multi-risk events and catastrophes
Retention
Coverage limits
January 1, 2016
December 31, 2015
7.5
2 - 10
100
3,475
7.5
2 - 10
100
3,450
Single risk events
For certain special classes of business or types of risks, the retention may be lower through specific treaties or the use of facultative
reinsurance.
Multi-risk events and catastrophes
Following the integration of the CDI exposure in our reinsurance program, the coverage limit was increased to $3,450 million on
August 1, 2015. We retain a participation averaging 5.4% as at January 1, 2016 (December 31, 2015 – 5.5%) on reinsurance layers
between the retention and coverage limits. The 2016 coverage limit will gradually move from $3,475 million to $3,575 million during
the year. In addition, we entered into an aggregate reinsurance treaty to protect for frequency of multi-risk events and catastrophes
of $30 million or more. The above retention and coverage limits exclude this aggregate reinsurance treaty.
The net after-tax impact of a catastrophe that would exhaust our coverage limits as at January 1, 2016 is estimated at 3.6% of our
NEP for 2015 (December 31, 2015 – 3.7%).
INTACT FINANCIAL CORPORATION
31
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
13.7 Employee future benefit programs
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. All employees have a choice between a defined benefit and a
defined contribution pension plan.
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.
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:
making voluntary contributions to improve the funding status of our pension plans; and
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;
adding inflation sensitive assets;
amending pension plan benefits and conditions.
Defined benefit obligation
(as at the date of the latest actuarial valuation)
Active members
Pensioners and beneficiaries
Deferred members
7%
29%
64%
We realized a positive return on plan assets in 2015. As at December 31, 2015, we have a net surplus of $93 million, or 105%, for
funded pension plans, compared to a net surplus of $65 million, or 104%, as at December 31, 2014.
Our actions to reduce interest rate exposure in previous years significantly mitigated the impact of declining interest rates in 2014
and 2015. We regularly monitor the risks inherent in our defined benefit pension plans on an asset-liability basis. We continue to
evaluate various alternatives to better manage the risk related to these plans.
Reference to our Consolidated financial statements
Actuarial gains and losses
recognized in OCI
Assumptions used
and sensitivity analysis
Risk management
and investment strategy
Note 21.5
Note 21.6
Note 21.7
Funding ratio
(as at December 31)
Hedge ratio
(as at December 31)
Pension plan asset mix
(as at December 31, 2015)
%
7
0
1
%
4
0
1
%
5
0
1
%
3
7
%
0
7
%
8
6
34%
Debt securities
Common shares
Other
4%
62%
2013
2014
2015
2013
2014
2015
Funding ratio: plan assets as a percentage of funded plan obligations.
Hedge ratio: dollar-duration of the pension asset portfolio divided by the dollar-duration of the funded pension plans’ obligation. Our objective is
to remain in a modest range around our policy target of 70%.
32
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 14 – Liquidity and capital resources
14.1 Financing and capital structure
We generate liquidity by collecting and investing premiums in advance of paying claims. 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.
We had a debt-to-capital ratio of 16.6% as at December 31, 2015 (17.3% as at December 31, 2014).
Base shelf prospectus and medium-term note supplement
On September 11, 2015, 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 $5.0 billion in any combination of debt, preferred shares 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
$1.2 billion in unsecured medium-term notes. As at December 31, 2015, the amounts available under the respective prospectuses
were $5.0 billion and $1.2 billion, respectively.
Credit facility
We have a $300-million five-year unsecured revolving term credit facility, which matures on December 5, 2020. This credit facility
may be drawn as prime loans or base rate (Canada) advances at the prime or base rate plus a margin, as well as bankers’
acceptances or Libor advances at
the bankers’ acceptance or Libor rate plus a margin. This facility was undrawn as at
December 31, 2015 and 2014.
As part of the covenants of the loans under the credit facility, we are required to maintain certain financial ratios, which were fully
met as at December 31, 2015 and 2014.
Sale and repurchase agreements
We may, from time to time, enter into sale and repurchase agreements consisting of the sale of securities together with an
agreement to repurchase them in the short term, at a set price and date, up to a maximum of 1.5% of invested assets. We did not
have any securities sold under repurchase agreements as at December 31, 2015 and 2014.
14.2 Ratings
Independent third party rating agencies assess our insurance subsidiaries’ ability to meet their ongoing policyholder obligation
(“financial strength rating”) and our ability to honour our financial obligations (“issuer credit rating”). Ratings are an important factor
in establishing our competitive position in the insurance market, mainly in commercial insurance, and accessing capital markets at
competitive pricing levels.
Table 23 – Ratings
Financial strength ratings of IFC’s principal P&C insurance subsidiaries
Long-term issuer credit ratings of IFC
A+
a-
AA(low)
A
A1
Baa1
A. M. Best
DBRS
Moody’s
Fitch
AA-
A-
During the third quarter of 2015, Fitch initiated a rating coverage on IFC and its P&C insurance subsidiaries and assigned a
long-term issuer credit rating of ‘A-’ to IFC and an insurance financial strength rating of ‘AA-’ to its principal P&C insurance
subsidiaries with a stable outlook.
On September 27, 2015, Moody’s reaffirmed the long-term issuer credit rating of IFC and the insurance financial strength
ratings of its principal P&C insurance subsidiaries. The outlook was upgraded from stable to positive.
On December 17, 2015, DBRS upgraded the long-term issuer credit rating of IFC to ‘A’ from ‘A (low)’ and assigned an
insurance financial strength rating of ‘AA (low)’ to its principal P&C insurance subsidiaries with a stable outlook.
A.M. Best has maintained its rating for long-term issuer and insurance financial strength.
INTACT FINANCIAL CORPORATION
33
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
14.3 Understanding our cash flows
Cash inflows from operating activities mainly consist of insurance premiums and investment income. Cash inflows in excess of cash
flows deployed on operating, investing and financing activities can be used to build up our investment portfolio with the expectation
of generating additional investment income in the future.
Table 24 – Cash flows
Q4-2015
Q4-2014
Change
Cash flows from operating activities
240
300
Cash flows deployed on:
Business combinations, net of cash acquired
Equity investments in brokerages, net of sales
Purchases of intangibles and P&E, net
Dividends
Share-based payments
Cash flow available for investment activities1
Purchase of investments net of proceeds from sales
Net increase (decrease) in cash and cash equivalents
-
(7)
(32)
(75)
-
(114)
126
(170)
(44)
-
(17)
(26)
(70)
-
(113)
187
(150)
37
(60)
-
10
(6)
(5)
-
(1)
(61)
(20)
(81)
2015
889
(187)
(77)
(89)
(300)
(17)
(670)
219
(167)
52
2014
Change
1,412
(523)
(13)
(178)
(97)
(276)
(23)
(587)
825
(835)
(10)
(174)
101
8
(24)
6
(83)
(606)
668
62
1 A non-IFRS financial measure which includes net cash flows from cash and cash equivalents and the investment portfolio.
The decrease in cash flows from operating activities of $523 million reflects income taxes paid of $265 million in 2015, compared to
income taxes received of $293 million in 2014.
14.4 Contractual obligations
The table below presents the expected timing of contractual liquidity requirements as at December 31, 2015.
Table 25 – Contractual obligations
Total Less than 1 year
1 - 3 years
3 - 5 years
Thereafter
Payments due by period
Principal repayment on debt outstanding
Interest payments on debt
Reported claims case reserves
Operating leases on premises and
equipment
Pension obligations1
Total contractual obligations
1,143
1,121
4,717
813
50
7,844
-
63
1,901
157
7
2,128
-
125
1,160
269
15
1,569
249
108
717
157
14
894
825
939
230
14
1,245
2,902
1 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.
34
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 15 – Capital management
15.1 Capital management objectives
Our objectives when managing capital consist of:
ensuring policyholders are well protected, while maintaining strong regulatory capital
below); and
levels (see Regulatory capital section
maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
We seek 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 their potential impact on capital.
We also keep higher levels of excess capital when we foresee growth or actionable opportunities in the near term. Furthermore, we
intend to return excess capital to shareholders through annual dividend increases and, when excess capital levels permit, through
share buybacks.
Regulatory capital
We manage regulatory capital on an aggregate basis, as well as individually for each regulated entity. Our federally chartered P&C
insurance subsidiaries are subject to the regulatory capital requirements defined by OSFI and the Insurance Companies Act, while
our Québec provincially chartered subsidiaries are subject to the requirements of the AMF and the Act respecting insurance.
Federal and Québec regulated P&C insurers are required, at a minimum, to maintain a MCT ratio of 100%. OSFI and the AMF have
also established an industry-wide supervisory target capital ratio of 150%, which provides a cushion above the minimum
requirement. To ensure that there is minimal risk of breaching the supervisory target, we have established a higher internal
threshold in our principal insurance subsidiaries in excess of which, under normal circumstances, we will maintain our capital.
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, net of related deferred tax liabilities. Total
capital required is calculated by classifying assets and liabilities into categories and applying prescribed risk factors to each
category. It is further increased by an operational risk margin, based on the overall riskiness of a P&C insurer (its capital required)
and its premium volume. Capital required is then reduced by a credit for diversification between investment risk and insurance risk.
MCT Guidelines
MCT guidelines change from time to time and may impact our capital levels. We carefully monitor all changes, actual or proposed.
On November 30, 2015, OSFI issued a final 2016 MCT Guideline, which amends regulatory capital requirements, beginning
January 1, 2016. The most significant changes are the addition of capital requirements for equity derivatives and equity instruments
sold short, as well as the recognition of equity hedging strategies. Based on our initial assessement of the guideline, the impact on
our MCT ratios will be positive, with the benefit phasing in over a two-year period.
15.2 Own risk and solvency Assessment
Since 2014, we have conducted our Own Risk and Solvency Assessments (“ORSA”) at least annually. ORSA encompasses
processes to identify, assess, monitor, and manage the risks we take in conducting our business. ORSA also covers the
determination of our capital needs and solvency position. ORSA is an integral part of the implementation of our Enterprise Risk
Management strategy. This exercise was conducted over and above the Dynamic Capital Adequacy Testing (DCAT) performed
annually by the Appointed Actuary (refer to Note 17 – Capital management to the accompanying Consolidated financial statements
for details).
Our ORSA revealed that the financial resources of our insurance subsidiaries are sufficient to meet policyholder obligations after
adverse situations at a confidence level of 99% conditional tail expectation (CTE) over a one-year time horizon. We considered all
our material risk exposures in making this determination. We concluded that our overall risk is well balanced primarily between
insurance risk and financial risk, while operational risk contributes a modest additional amount. Diversification and other
adjustments modestly reduce our overall risk assessment.
INTACT FINANCIAL CORPORATION
35
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
We also compared our assessment of our own capital requirements with that of regulatory bodies. Our overall assessment
continues to be materially lower than current regulatory requirements given the same confidence level and time horizon. Our 2015
assessment was comparable to that of 2014 in terms of our overall risk profile and capital sufficiency.
The revisions to the MCT Guidelines in 2015 and again in 2016 have resulted in lower capital requirements for IFC and are
converging directionally with our assessment for the main categories of risk. We believe the convergence of the regulatory view of
risk with our own risk assessment is a positive development for IFC and the Canadian P&C industry.
15.3 Capital position
The following table presents the estimated aggregate capital position of our P&C insurance subsidiaries.
Table 26 – Estimated aggregated capital position of our P&C insurance subsidiaries
As at December 31,
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%
December 31,
2015
September 30,
2015
December 31,
20141
3,840
1,889
203%
1,951
1,007
629
3,687
1,893
195%
1,794
848
469
3,933
1,878
209%
2,055
1,116
740
1 Comparative figures are presented under the MCT guidelines in effect as at December 31, 2014.
Our estimated aggregate MCT level as at December 31, 2015 was strong at 203%, up by 8 points from September 30, 2015,
reflecting our operating profit. The six-point decline from December 31, 2014 was mainly due to the funding of the acquisition of CDI
exclusively with excess capital and the volatility in capital markets, partially offset by the positive impact of the 2015 MCT Guideline
phase-in which, as expected, benefited MCT by approximately 8 points in 2015.
As at December 31, 2015, our P&C insurance subsidiaries remained well capitalized on an individual basis and were in compliance
with regulatory requirements.
Total excess capital includes excess capital in the P&C insurance subsidiaries at 170% MCT plus excess capital outside of the P&C
insurance subsidiaries. As at December 31, 2015,
total excess capital stood at $625 million, down $56 million from
December 31, 2014, reflecting the funding of the CDI acquisition exclusively with excess capital and a higher balance of excess
capital outside of the P&C insurance subsidiaries.
15.4 MCT sensitivity
The MCT is impacted by many factors including changes in interest rates, equity market performance, USD and underwriting
profitability. Based on our estimated aggregate MCT of 203% as at December 31, 2015, the following table sets out the estimated
immediate impact or sensitivity of our MCT ratio to certain sudden but independent changes in interest rates, equity markets, USD
and combined ratio. Actual results can differ materially from these estimates for a variety of reasons and therefore,
these
sensitivities should be considered as directional estimates.
Table 27 – MCT sensitivity
Interest
rates
1% increase1
Common
share prices
10% decline2
Preferred
share prices
5% decline
USD
10% decline
Combined ratio
3-point
increase3
MCT4
(3) pts
1 The yield curve experiences an instantaneous parallel shift.
2 A shock of 10% is applied to all common shareholdings, net of any equity hedges that we may have.
3 The combined ratio deteriorates by 3 points across all lines of business. All resulting claims are outstanding (no payments) and no reinsurance is
(2) pts
(1) pts
(1) pts
(10) pts
triggered.
4 Capital sensitivities are calculated independently for each risk factor and assume that all other risk variables remain constant. No management
action is considered.
36
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
RISK MANAGEMENT
Section 16 – Overview
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, employees, shareholders, and other stakeholders. Our risk management programs
aim at mitigating 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 our 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 and risk transfer 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.
Section 17 – Risk management structure
INTACT FINANCIAL CORPORATION
37
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
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.
The Board and Committee structures are reviewed periodically to be aligned with best practices, the applicable laws and regulatory
guidelines on corporate governance. The following structure is in place and remains largely unchanged from 2014.
Board of Directors
Main responsibility 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 our long-term viability, profitability and development.
Risk Management
Committee
Primary function is to assist the Board of Directors 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.
Compliance Review
and Corporate
Governance (CRCG)
Committee
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.
Human Resources
and Compensation
Committee
Primary function is to assist the Board of Directors 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.
Audit Committee
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.
Enterprise Risk
Committee
It meets regularly and oversees our
risk management priorities, assesses the effectiveness of
This committee is composed of senior officers and is chaired by the Chief Risk Officer designated by the Board of
Directors.
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 both in terms of the impact on financial resources and
reputation; (iii) monitor risks; and (iv) manage risk in accordance with the risk appetite statement 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.
Other committees
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.
38
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 18 – Corporate governance and compliance program
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:
Corporate governance ensuring compliance with laws and regulatory requirements
Sound corporate
governance standards
Effective disclosure
controls and
processes
Sound corporate
compliance structures
and processes
Specialized resources
independent from
operations
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. 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.
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.
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 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.
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.
INTACT FINANCIAL CORPORATION
39
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 19 – Enterprise Risk Management
19.1 Mandate
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.
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.
Our major risks are separated into four main categories: Strategic Risk, Insurance Risk, Financial Risk and Operational Risk.
19.2 Objectives
overseeing and objectively challenging the execution of risk management activities;
identifying, as completely as possible, the most important risks and issues that may affect us;
monitoring identified risks, major incidents and control 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.
19.3 A shared responsibility
Managing risk is a shared responsibility at Intact. The three lines of defence model is employed to clearly the identify the roles and
responsibilities of those involved in the risk management process.
40
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
19.4 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.
Please consult our website for a more detailed discussion on our Risk Appetite under the Corporate Governance section.
19.5 Main risk factors and mitigating actions
Our practice is to regularly identify our top risks, assess the likelihood of occurrence and evaluate the potential impacts should they
materialize both in terms of financial resources and reputation. We also consider potential emerging risks that are newly developing
or changing risks which are inherently more difficult to quantify.
We then determine mitigation plans and assign accountability for each risk if deemed appropriate given our overall assessment, our
risk appetite, and our business objectives.
INTACT FINANCIAL CORPORATION
41
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
19.6 Top and emerging risks that may affect future results
Each year the Enterprise Risk Management identifies the top risks that the Company faces. The following section presents the top
and emerging risks identified with the most severe potential impact. In assessing the potential impact for each of the top risks, the
presence and effectiveness of risk mitigation activities are taken into consideration. Our main risk factors together with our practices
used to mitigate these risks are explained below.
Major earthquake in Canada
Risk we are facing
Insurance risk
The occurrence of a major earthquake in Canada may produce significant damage in large, heavily populated areas.
Potential impact
How we manage this risk
The occurrence of a major earthquake in Canada could have a
significant impact on our profitability and financial condition and that of
the entire P&C insurance industry in Canada. 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.
In
addition, we could be subject to increased assessments from the P&C
Insurance Compensation Corporation (PACICC) leading to further costs
if other insurers are unable to meet their contractual obligations with
their clients. With the acquisition of CDI in 2015, our gross exposure to
an unlikely but possible earthquake in Western Canada has increased
by approximately 14%.
Our risk management strategy consists of regular monitoring of insured
value accumulation and concentration of risks. We use earthquake
models to help assess our possible losses at various return periods and
use reinsurance to transfer a material amount of risk. Consequently, the
diversification of risk among an appropriate number of reinsurers is vital
for us. See Section 13.6 – Reinsurance for more details on our
reinsurance program.
Prior to 2015, our gross exposure to an earthquake in Western Canada
had decreased materially over several years. Although the acquisition
of CDI has increased our gross exposure to an earthquake in Western
Canada, we have increased our reinsurance program levels accordingly
to maintain a similar level of protection at the 1-in-500 year return
period.
42
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Catastrophe events risk
Risk we are facing
Insurance risk
Climate change is a challenge faced by the entire P&C insurance industry. In particular, our property insurance business has been affected due to
changing climate patterns and an increase in the number and cost of claims associated with severe storms and other natural disasters. Water
damages now make up more than half of our home insurance claims.
Catastrophe events include natural disasters and unnatural events.
There are a wide variety of natural disasters including but not limited to hurricanes, wind storms, hailstorms, rainstorms, ice storms, floods,
severe winter weather and forest fires.
Unnatural catastrophe events include but are not limited to hostilities, terrorist acts, riots, explosions, crashes and derailments, and wide scale
cyber-attacks.
Despite the use of sophisticated models, the incidence and severity of catastrophe events are inherently unpredictable. The extent of losses from a
catastrophe event 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
catastrophe events are restricted to small geographic areas; however, hurricanes and other storms may produce significant damage in large,
heavily populated areas. Catastrophe events can cause losses in a variety of P&C insurance lines.
Potential impact
How we manage this risk
Claims resulting from natural or unnatural catastrophe
events could cause substantial volatility in our
results and could materially reduce our
financial
profitability or harm our financial condition.
the last
Over
few years, we have witnessed a
continued increase in the number and severity of
weather events. Heavy wind, hail, and rain in various
parts of the country during 2013 and 2014 resulted in
significant
property
particularly
insurance portfolio. The trend in climate change poses
a meaningful risk to our ability to meet our business
objectives.
claims,
our
in
In addition, we began offering cyber risk insurance to
our commercial customers in 2015. Although it
is
unlikely, we may be adversely affected by a large
scale cyber-attack that simultaneously compromises
the systems of many of our insureds.
To address this issue, we have ongoing initiatives including pricing and product changes
to reflect new climate realities, regular reviews of claims processes and a greater focus
on consumer loss prevention. One example is the Insurance is Evolving website that
focuses on educating consumers. Many initiatives have been implemented over the last
several years including the expanded use of deductibles and sub-limits, and the
introduction of depreciation schedules in personal property insurance across Canada.
These initiatives should help mitigate, to some extent, P&C insurance losses resulting
from water damage and harsh weather.
The Intact Centre on Climate Adaptation at the University of Waterloo will focus on
research and building awareness for innovative adaptation solutions to climate change
risks facing Canadian homeowners, communities, industries and governments. This is
one of several initiatives that may help mitigate the impact of climate change on society
as a whole.
In addition, our reinsurance program offers protection against many multi-risk events and
catastrophes. We have also put in place an aggregate reinsurance treaty to protect for
more frequent catastrophe events above $30 million. See Section 13.6 – Reinsurance for
more details on our reinsurance program.
To help mitigate the risks associated with our cyber risk insurance product, we focus on
small to medium size companies with relatively modest policy limits.
In addition, we
purchase reinsurance specifically to transfer some of the risk in the event a large scale
cyber-attack occurs that triggers a high volume of claims.
INTACT FINANCIAL CORPORATION
43
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Increased competition and disruption
Strategic risk
Risk we are facing
The P&C insurance industry is highly competitive and we believe that it will remain so for the foreseeable future.
We 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 aggregators, 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.
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 and web aggregators, as well as our ability to maintain our business relationships
with them. 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.
Potential impact
How we manage this risk
Intense competition for our insurance products could harm our ability to
maintain or increase our profitability, premium levels and written insured
risk volume.
The entrance of a new player in the market or a shift in methods to
purchase insurance could challenge our distribution model. The use of
information technology in the distribution and pricing of
insurance
products (e.g. telematics, the use of Big Data, etc.) has increased over
the last several years and this trend is expected to continue in the near
future. Competitors may use these technologies more effectively than us
or there may be negative reputational consequences arising from our
initiatives.
Demutualization and further consolidation in the Canadian P&C industry
remains likely which may result
in an erosion of our competitive
advantage.
The rise of the sharing economy may have a material impact on overall
premium volumes in the P&C insurance industry, particularly if there are
fewer automobiles in circulation.
The evolution of customer preferences for different distribution channels
could lead to a material decline in our market share. 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.
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. We have
established close relationships with our independent distributors by
providing them with advanced technology, as well as 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.
We also have a number of initiatives that we are pursuing to help
mitigate the risk of competition and disruption including:
Investing significantly in promoting our brands with an increasing
focus on using web and mobile technology to reach consumers;
Launching our own usage-based insurance (UBI) product to better
meet customer needs;
The acquisition of CDI to further strengthen our direct insurance
distribution channel; and
Entering into a cooperative agreement with Uber to help position
ourselves strategically in the evolving transportation industry.
We also constantly seek to develop innovative and competitive
products. We launched the Intact Lab, our center for digital excellence,
in 2015 to accelerate innovation and explore advanced technology
solutions.
44
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Turbulence in financial markets
Risk we are facing
Financial 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. 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. Interest
rates continued to be persistently low. In this context, purchases of fixed-income securities will likely be at lower yields than several years ago
putting downward pressure on investment income. The significant and prolonged decline in oil prices may have an impact on the value of some of
our securities or on the level of investment income we are able to generate given that our investment portfolio contains a material amount of
securities issued by companies in the energy sector. In 2015, our preferred share portfolio suffered declines in market value as a result of changes
in interest rates and credit spreads.
Potential impact
How we manage this risk
Changes in the market variables mentioned
investment
above could adversely affect our
value of our
income and/or
securities.
the market
In addition to the risk related to investments
discussed previously, an economic downturn
could have a significant impact on the funded
status of our defined benefit pension plans.
Consequently,
this could impact our financial
condition.
economic
conditions,
General
conditions and many other
adversely affect
consequently,
securities we own and ultimately affect
timing and level of realized gains or losses.
political
factors can also
the equity markets and,
the equity
the
the fair value of
While our strategy is long-term in nature, it is regularly reviewed 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 our 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.
Regular stress testing of our investment risk exposures assists management in assessing the
overall level of financial risk and helps to ensure that exposures remain within established risk
tolerances.
The Company’s exposure to financial risk arising from its financial instruments together with the
Company’s risk management policies and practices used to mitigate it are explained in our
Consolidated financial statements. Consult the following sections for more information.
Reference to our Consolidated financial statements
Our preferred share portfolio may continue to
further
depreciate in value as a result of
negative developments in interest rate and/or
credit markets.
Market risk
Note 8.1
Basis risk
Note 8.2
Credit risk
Note 8.3
Liquidity risk
Note 8.5
INTACT FINANCIAL CORPORATION
45
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Reserve and pricing inadequacy
Risk we are facing
Insurance 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 (“LAE”) incurred with respect to premiums collected or due
on the insurance policies that we write. Reserves do not represent an exact calculation of a 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.
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.
Potential impact
How we manage this risk
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.
Establishing an appropriate level of reserves is an inherently
uncertain process. We continually refine our reserve estimates in
an ongoing process as claims are reported and settled.
Our reserve review committee scrutinizes reserves by business
segment, and analyzes trends and variations in losses to ensure
that we maintain a sufficient level of claims reserve.
The following factors may have a substantial
losses and LAE experience:
amounts of claims payments;
expenses that we incur in resolving claims;
legislative and judicial developments; and
changes in economic variables such as interest rates and/or inflation.
impact on our future actual
those changes by increasing our reserves.
To the extent that actual
losses and LAE exceed our expectations and the
reserves reflected in our Consolidated financial statements, we will be
In addition,
required to reflect
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 will decrease by a
corresponding amount.
increasing or strengthening reserves
causes a reduction in our P&C insurance subsidiaries’ capital and could cause
a downgrading of
the financial strength ratings of our P&C insurance
subsidiaries. Any such downgrade could, in turn, adversely affect our ability to
sell insurance policies. See Section 13.5 – Claims liabilities for more details on
the claims reserve and prior year claims development.
In addition,
Inadequate pricing may lead to material declines in underwriting income
and/or deficient reserves.
46
INTACT FINANCIAL CORPORATION
Our profitability committees review the results of each business
line and determine if appropriate action is required in terms of
product design or pricing to remediate poor underwriting
performance.
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 use 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
several
and
automobile insurance markets
including Ontario, Québec,
Alberta, and the Maritimes.
risk-sharing
assumed
pools
in
In addition, on an annual basis, our external auditor provides an
independent review of our reserves in the context of the audit of
the Consolidated financial statements. This review includes
establishing their own view of a reasonable range for
the
estimate.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Governmental and/or regulatory intervention
Strategic Risk
Risk we are facing
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;
are generally designed to protect policyholders and creditors, and are related to matters including:
requirements on privacy and the protection of personal information;
personal auto insurance rate setting;
risk-based capital and solvency standards;
restrictions on types of investments;
maintenance of adequate reserves for unearned premiums and unpaid claims;
examination of insurance companies by regulatory authorities, including periodic financial and market conduct examinations;
licensing of insurers, agents and brokers;
limitations on upstream dividends from operating companies; and
transactions with affiliates.
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.
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. Solvency
requirements are amended from time to time.
INTACT FINANCIAL CORPORATION
47
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Governmental and/or regulatory intervention (cont’d)
Strategic risk
Potential impact
How we manage this risk
We are supported by an in-house team of lawyers and
staff, and by outside counsel when deemed necessary
regulation and
in handling general
or appropriate,
litigation issues and are an active member of the major
industry associations.
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.
We regularly monitor trends and make adjustments to
our strategy and products, when deemed appropriate,
to ensure the sustainability of insurance products and
to avoid the potential for additional regulation that may
negatively impact our
reputation, profitability, and
financial condition.
To reduce the risk of breaching the regulatory capital
requirements, we have established an internal target
capital ratio in excess of the supervisory target of 150%
in our principal
insurance subsidiaries. We operate
above our internal target under normal circumstances
to reduce the likelihood of regulatory intervention. Our
Enterprise Risk Committee regularly review risks
related to solvency and conducts stress testing to
identify
for
and
remediation. Our capital management 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.
vulnerabilities
possibly
areas
In addition, we conducted a full
internal solvency
assessment as described below in Section 15.2 – Own
Risk and Solvency Assessment (ORSA).
We believe that our insurance subsidiaries are in material compliance with all applicable
regulatory requirements. However,
it is not possible to predict the future impact of
changing federal, provincial and territorial regulations on our operations. Laws and
regulations enacted in the future may be more restrictive than current laws. Overall, our
business is heavily regulated and changes in regulation may reduce our profitability and
limit our growth prospects.
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 could materially adversely affect our business, results of operations and
financial condition.
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.
In addition, our written premiums and profitability can be significantly affected by many
factors, including:
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;
forced reductions in premiums or additional costs imposed by governments that limit
our ability to properly price our insurance products;
modification of tax laws or a change in interpretation to existing tax laws, either
retroactively or prospectively; and
nationalization of one or more of our business lines.
Furthermore, a significant increase in solvency requirements would increase the possibility
of regulatory intervention and may reduce our ability to generate attractive returns for
shareholders. This may also negatively impact our ability to execute our growth strategy
and attain our financial objectives.
48
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Failure of a major technology initiative
Operational risk
Risk we are facing
To maintain our performance levels we are required to regularly modernize our systems. Often significant time and investment is required for
accomplishing these projects. Any unplanned delays, unforeseen costs, or unsuccessful execution of such projects could lead to a significant
decline in service levels, impact employee morale negatively and reduce our competitiveness. There is no assurance that we will succeed in
meeting our objectives for these projects.
Potential impact
How we manage this risk
Our technology strategy may take too long to execute or may not be adequate to
maintain a competitive advantage. The complexity and interdependence of our
infrastructure and applications may lead to higher costs and more errors.
Implementation of new technology may introduce more complexity in the interim prior to
simplification after decommissioning older systems.
We could decide to abandon one or more of our technology initiatives resulting in a
material write down.
Senior management provides careful oversight and
ensures that proper
funding and resources are
allocated to our key projects. Risk assessments are
conducted to identify potential areas for remediation or
the necessity for additional controls. A dedicated
committee was created to ensure proper
focus is
devoted to major technology projects.
Information technology security failure
Operational risk
Risk we are facing
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 information security breaches.
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. In recent years, we witnessed an increase in the number of
high profile information security breaches in well-established and sophisticated organizations including financial institutions, government agencies,
and other established companies. Our systems and the third parties that provide services to us may be subject to information security breaches.
Potential impact
How we manage this risk
Despite our ongoing efforts to secure our
systems, cyber risk remains a material risk and
we may be the subject of a cyber-attack
system unavailability,
resulting
data
in
corruption, or
the disclosure of confidential
information. Massive denial of service attacks
and
could
compromise our ability to operate or we may be
unable to safeguard confidential
information
from public disclosure. Other types of potential
attacks we may face include ransomware, data
theft or manipulation, and cyber-espionage.
system intrusion
attempts
To ensure the security and resilience of our systems,
the safeguard of our confidential
information and the integrity of our information and databases, dedicated teams plan, test and
execute our continuity and security plans. This includes threat and vulnerability assessments
and the implementation of appropriate mitigation actions. Our security teams constantly monitor
our systems and are 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.
We continuously upgrade our applications to better protect our systems and information. We
regularly monitor trends in cyber risk to ensure we are able to rapidly mitigate known
vulnerabilities.
These events may lead to financial
regulatory action, and reputational damage.
loss,
Our Information Technology Security Committee oversees our security initiatives and ensures
effective collaboration across teams.
In 2015, we have increased our focus on employee
information security awareness and training to enhance our ability to resist cyber-attacks.
INTACT FINANCIAL CORPORATION
49
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Inability to contain fraud and/or abuse
Operational risk
Risk we are facing
As a property and casualty insurer, we may be subject to internal or external fraud. Our insureds may exaggerate claims for personal gain. Despite
our efforts to control fraud and abuse, our staff, systems, and processes may be unable to accurately detect and prevent internal or external fraud.
Potential impact
How we manage this risk
Fraud may result in unanticipated losses and a
negative impact on our reputation. Our written
premiums and profitability can be significantly
affected by regulatory regimes which limit our
ability to detect and defend against fraudulent
claims and fraud rings.
We have strong internal controls in place to prevent and detect potential internal fraud. Internal
and external audits are performed to verify that the controls are followed.
Fraud detection software is used by our claims teams to detect potential external fraud and flag
cases for further investigation.
Government authorities also have an incentive to help reduce fraud in the system and maintain
affordable insurance for consumers. Ontario Bill 15 is one example of government action that
aims to reduce auto insurance fraud.
Reputation risk
Risk we are facing
Strategic 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 claims handling or underwriting practices, thereby subjecting us or our subsidiaries to 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.
Potential impact
How we manage this risk
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.
Social media could amplify the impact of a
in further
reputational
damage to our reputation and impair our future
growth prospects.
It could result
issue.
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.
We have established escalation procedures within our claims operations to identify potential
issues and ensure that management has had the opportunity to perform an additional review of
potential problematic cases. In addition, our insurance policy wordings are reviewed periodically
by management to detect and remediate potential issues before they arise.
New products and significant changes in existing products undergo a rigorous product
development life-cycle including an independent review by the risk management function prior
to launch. Potential reputational
issues can be identified in the early stages of product
development and, if required, changes are implemented prior to launch.
50
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
The emergence of autonomous vehicles
Emerging risk
Risk we are facing
Commercialisation of autonomous vehicles could profoundly change the transportation and auto insurance industries. The speed at which
autonomous vehicles are adopted will depend on a number of factors including, but not limited to, the success of the new technology, the legal and
regulatory environment, and customer preferences. These vehicles may have a dramatically different risk profile than current modes of
transportation.
Potential impact
How we manage this risk
If the potential of autonomous vehicles is fully realized, a number of
changes may occur
reduction in accident
including a significant
frequency and the emergence of new ways to provide automobile
insurance coverage. This could cause a material decline in our written
premiums.
We recognize the potential
impact of this emerging technology and
have been closely monitoring developments on this topic for some time.
We devote part of our research agenda to include items such as the
future of mobility insurance and autonomous vehicles. We believe it is
crucial
to understand this emerging technology and the possible
implications to be able to adjust our corporate strategy accordingly.
19.7 Other risk factors that may affect future results
Legal Risk
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 actions relating to our current and past
business operations. 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.
Reinsurance risk
We use reinsurance to help manage our exposure to insurance risk, including major catastrophe events. The availability and cost of
reinsurance is subject to prevailing market conditions, both in terms of price and available capacity, which can affect our premium
volume, profitability and regulatory capital position. Both worldwide and Canadian catastrophe losses have an impact on the
reinsurance market in Canada. In recent years, the availability of alternative capital in the reinsurance market has helped maintain
the supply of capital and added downward pressure on rates. However, 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. 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. In addition, the cost of reinsurance could increase significantly year over year
impacting our profitability if we are unable to pass on these costs to consumers. Furthermore, a significant decline in the availability
of reinsurance could impact our premium volume, our profitability and our regulatory capital position.
INTACT FINANCIAL CORPORATION
51
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
People Risk
Our success has been, and will continue to be, dependent on our ability to retain the services of key employees and to attract
In addition, a significant decline in employee morale could materially affect our
additional qualified personnel
operations including an increase in the risk of human error or deliberate acts that harm the company. 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.
in the future.
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. We also have a comprehensive succession
planning program at various levels within the organization to ensure we are prepared for unplanned departures and retirements.
Furthermore, our recent employee engagement survey reveals a high level of engagement among employees. IFC was recognized
by multiple organizations as one of Canada’s best employers. We believe that a high level of employee engagement helps mitigate
some of the operational risks associated with people. However, there is no assurance that the Company will be successful
in
retaining and motivating our key talent across the organization.
Business interruption risk
We may experience an abrupt interruption of activities caused by unforeseeable and/or catastrophe events, an example of which
being a global pandemic (e.g. the Ebola virus) or a large scale cyber-attack. Our service levels may decline materially resulting in
negative financial and reputational consequences. 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.
We continuously monitor world events, such as the Ebola virus outbreak in 2014, to enable us to pro-actively adapt our response
plan. 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.
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”). See Section 14.2 –
Credit ratings for more details.
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. This is more
applicable to our commercial insurance where clients place a higher emphasis on such ratings. 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.
52
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
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. While no regulatory approval is required for dividend payments from the regulated insurance companies,
OSFI notice is required together with pro forma capital calculations showing internal target capital levels are maintained both before
and after such dividends are paid out. In addition, for competitive reasons, our insurance subsidiaries maintain financial strength
ratings which require us to maintain minimum capital levels in our insurance subsidiaries. These regulations and ratings targets limit
the ability of our insurance subsidiaries to pay unlimited dividends or invest all of their capital
in other ways. In certain stress
scenarios limitations on our subsidiaries’ ability to pay dividends to IFC could have a material adverse effect on our ability to pay
shareholder dividends and may result in a material decline in the price of securities we have issued.
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. From time to time we issue loans or take equity participation in certain brokers and consequently, we expose ourselves to
other risks including financial risk and regulatory risk. For various reasons, the broker channel has been in a consolidation mode for
the last few years and we believe that this situation will continue. The acquisition of brokers by others or even by other insurers may
impact our relationship with some of them and harm our ability to grow our business. 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
arising from loans to brokers 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 activities periodically.
INTACT FINANCIAL CORPORATION
53
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
ADDITIONAL INFORMATION
Section 20 – Key performance indicators
Our most relevant key performance indicators are outlined in the table below. DPW (underlying), Underlying current year loss ratio,
NOI, NOIPS, OROE, ROE, AROE and AEPS are considered non-IFRS financial measures. See Section 22 – Non-IFRS financial
measures for the reconciliation to the most comparable IFRS measures.
Growth
DPW (underlying) growth
Written insured risks growth
Underlying current year loss ratio
Underwriting
performance
Claims ratio
Expense ratio
Combined ratio
Net investment income
NOI
NOIPS (in dollars)
Consolidated
performance
OROE
ROE
AROE
EPS (in dollars)
AEPS (in dollars)
BVPS (in dollars)
MCT
Total excess capital
Financial
strength
2015
2014
2013
2012
2011
6.2%
5.1%
66.1%
61.3%
1.6%
(0.7)%
64.3%
62.6%
30.4%
30.2%
7.2%
5.7%
64.9%
66.9%
31.1%
34.3%
14.0%
32.3%
10.2%
63.5%
61.6%
31.5%
64.2%
63.9%
30.5%
91.7%
92.8%
98.0%
93.1%
94.4%
424
860
6.38
16.6%
13.4%
14.3%
5.20
5.54
39.83
203%
625
427
767
5.67
16.3%
16.1%
16.8%
5.79
6.01
37.75
209%
681
406
500
3.62
11.2%
9.3%
10.3%
3.10
3.44
33.94
203%
550
389
675
5.00
16.8%
13.5%
16.1%
4.20
5.02
33.03
205%
599
326
460
3.91
15.3%
14.3%
17.4%
3.96
4.82
29.73
197%
435
Debt-to-capital ratio
16.6%
17.3%
18.7%
18.9%
22.9%
54
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 21 – Definitions of our key performance indicators
Our most relevant key performance indicators are defined below. Underlying current year loss ratio, NOI, NOIPS, ROE, OROE,
AROE and AEPS are considered non-IFRS financial measures. See Section 22 - Non-IFRS financial measures for the reconciliation
to the most comparable IFRS measures.
AEPS and AROE are Adjusted measures, meaning that they exclude the after-tax impact of acquisition related items, such as
amortization of intangible assets recognized in business combinations, and integration and restructuring costs.
NOI, NOIPS and OROE are operating measures, meaning that they exclude non-operating items detailed in Section 23.
EPS and ROE are IFRS measures, meaning that their definition is determined in accordance with IFRS.
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 10 – Canadian P&C insurance industry for
more details on our performance versus the industry.
DPW growth
Growth
for a specific period
DPW for a specified period
–
DPW for the same period
the previous year
Written insured
risks growth
for a specific period
DPW for the same period
the previous year
# of vehicles in automobile
insurance
+
# of premises in personal property
insurance
+
# of policies in commercial P&C
insurance
-
Total #
for same period the previous year
Total #
for same period the previous year
Underlying current
year loss ratio
for a specific period
Current year claims ratio
excluding CAT losses and
PYD
Expense ratio
for a specific period
Underwriting expenses (including
commissions, premium taxes and
general expenses related to
underwriting activities)
Underwriting
results
NEP before the impact of
reinstatement premiums
Claims ratio
for a specific period
Claims incurred
(net of reinsurance)
Combined ratio
for a specific period
NEP
NEP
Claims ratio
+
Expense ratio
A combined ratio under 100% indicates a profitable underwriting result.
A combined ratio over 100% indicates an unprofitable underwriting result.
INTACT FINANCIAL CORPORATION
55
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Consolidated
performance
Net investment
income
for a specific period
As detailed in Table 9 –
Net investment income
ROE
for a 12-month
period
Net income attributable to
common shareholders1
Average common shareholders'
equity2
NOI
for a specific period
As detailed in Table 1 –
Consolidated performance
AROE
for a 12-month
period
Adjusted net income attributable
to common shareholders
Average common shareholders'
equity2
NOIPS
for a specific period
NOI attributable to common
shareholders
WANSO3
EPS
for a specific period
As reported in the accompanying
Consolidated statements of
comprehensive income
OROE
for a 12-month
period
NOI attributable to common
shareholders
Average common shareholders’
equity2 (excluding AOCI)
AEPS
for a specific period
Adjusted net income attributable
to common shareholders
WANSO3
BVPS
as at the end of a
specific period
Common shareholders’ equity4
Number of common shares
outstanding at the same date
Total excess
capital
as at the end of a
specific period
Excess capital in the P&C
insurance subsidiaries at 170%
MCT plus excess capital outside of
the P&C insurance subsidiaries.
Financial
Strength
MCT
as at the end of a
specific period
Minimum capital test, as defined by
OSFI and AMF
Debt-to-capital
ratio
as at the end of a
specific period
Total debt outstanding
Sum of the total shareholders’
equity4 and total debt outstanding
as at the same date
1 Net income is determined in accordance with IFRS.
2 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. Shareholder’s equity is determined in accordance with IFRS.
3 Weighted-average number of common shares outstanding during the same period.
4 Shareholder’s equity is determined in accordance with IFRS.
56
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 22 – 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.
DPW (underlying) represents the total amount of premiums for new and renewal policies billed (written) during the reporting
period, excluding industry pools and normalized for the effect of multi-year policies. This measure matches DPW to the year in
which coverage is provided, whereas under IFRS, the full value of multi-year policies is recognized in the year the policy is
written.
Underlying current year loss ratio represents our current year claims ratio excluding catastrophe losses, reinstatement
premiums, and PYD. Catastrophe events are beyond our control, and as such, excluding them provides clearer insight into our
analysis of current year 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, and integration and restructuring costs. 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.
ROE excludes the dividends declared on preferred shares.
AEPS and AROE exclude the impact of amortization of intangible assets recognized in business combinations and integration
and restructuring costs, all on an after tax basis. We believe that these excluded items are not appropriate in assessing our
underlying performance.
Cash flow available for investment activities includes net cash flows from cash and cash equivalents and the investment
portfolio. See Section 14.3 – Understanding our cash flows for a reconciliation of this non-IFRS financial measure.
Market-based yield represents the annualized total pre-tax investment income (before expenses), divided by the mid-month
average fair value of net equity and fixed-income securities held during the reporting period (average net investments). This
calculation provides users with a consistent measure of our relative investment performance.
Table 28 – Reconciliation of DPW (underlying) and underlying DPW growth to DPW, as reported under IFRS
DPW, as reported under IFRS
Less impact of industry pools
Add share of the results of jointly held insurance operations
DPW
Add impact of the normalization for multi-year policies
DPW (underlying)
Underlying DPW growth
Q4-2015
Q4-2014
1,890
(3)
10
1,897
11
1,908
7.5%
1,758
(7)
9
1,760
15
1,775
2.7%
2015
7,893
(34)
48
7,907
15
7,922
6.2%
2014
7,329
(26)
46
7,349
112
7,461
1.6%
INTACT FINANCIAL CORPORATION
57
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Table 29 – Reconciliation of NEP before reinstatement premiums to NEP and of current year claims to net claims incurred, as reported under IFRS
Q4-2015
Q4-2014
NEP, as reported under IFRS
Add share of the results of jointly held insurance operations
NEP
Less recovery of reinstatement premiums
NEP, before reinstatement premiums
Net claims incurred, as reported under IFRS
Less impact of MYA on underwriting results
Less difference between expected return and discount rate on pension
assets allocated to net claims incurred
Add share of the results of jointly held insurance operations
Total net claims
Less current year catastrophes
Less favourable PYD
Current year claims
Current year claims
NEP, before reinstatement premiums
Underlying current year loss ratio
1,937
11
1,948
-
1,948
1,126
(6)
(3)
6
1,123
(2)
75
1,196
1,196
1,948
61.4%
1,819
11
1,830
-
1,830
1,099
(37)
(2)
6
1,066
(10)
78
1,134
2015
7,490
45
7,535
(2)
7,533
4,659
(58)
(11)
25
4,615
(116)
477
4,976
2014
7,164
43
7,207
-
7,207
4,600
(103)
(8)
26
4,515
(243)
364
4,636
1,134
1,830
62.0%
4,976
7,533
66.1%
4,636
7,207
64.3%
Table 30 – Reconciliation of NOIPS and OROE to net income
Net income
Add income tax expense
Deduct net investment gains (losses)
Add negative impact of MYA on underwriting
Add difference between expected return and discount rate on pension assets
Add amortization of intangible assets recognized in business combinations
Add integration, restructuring and other costs
Pre-tax operating income
Tax impact
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
Table 31 – Reconciliation of ROE to net income
Net income
Less preferred share dividends
Adjusted net income attributable to common shareholders
Average common shareholders’ equity
ROE for the last 12 months
Q4-2015
Q4-2014
2015
2014
198
43
72
6
7
11
3
340
(75)
265
(5)
205
60
3
37
6
8
1
320
(73)
247
(5)
260
131.5
1.97
242
131.5
1.84
706
169
64
58
30
46
18
1,091
(231)
860
(21)
839
131.5
6.38
5,041
16.6%
782
175
(174)
103
22
30
9
947
(180)
767
(21)
746
131.5
5.67
4,587
16.3%
Q4-2015
Q4-2014
2015
2014
198
(5)
193
205
(5)
200
706
(21)
685
782
(21)
761
5,103
13.4%
4,716
16.1%
58
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Table 32 – Reconciliation of AEPS and AROE 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
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
Q4-2015
Q4-2014
198
8
2
208
(5)
203
131.5
1.54
205
7
1
213
(5)
208
131.5
1.58
2015
706
37
7
750
(21)
729
131.5
5.54
5,103
14.3%
2014
782
23
7
812
(21)
791
131.5
6.01
4,716
16.8%
Table 33 – Reconciliation of underwriting income to underwriting income, as reported under IFRS
Underwriting income, as reported under IFRS
Add (deduct) share of the results of jointly held insurance operations
Add difference between expected return and discount rate on pension assets
Add impact of MYA on underwriting results
Underwriting income
Q4-2015
Q4-2014
2015
2014
206
2
7
6
221
174
(1)
6
37
216
536
4
30
58
628
393
1
22
103
519
Section 23 – 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 34 – Non-operating results
Net investment gains (losses)
Positive (negative) impact of MYA on underwriting
Difference between expected return and discount
rate on pension assets
Integration, restructuring and other costs
Amortization of intangible assets recognized in
business combinations
Non-operating gains (losses)
Q4-2015
Q4-2014
Change
2015
2014
Change
(72)
(6)
(7)
(3)
(11)
(99)
(3)
(37)
(6)
(1)
(8)
(69)
31
(1)
(2)
(3)
(55)
(44)
(64)
(58)
(30)
(18)
(46)
(216)
174
(103)
(22)
(9)
(30)
10
(238)
45
(8)
(9)
(16)
(226)
Impact of MYA on underwriting
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 is generally offset by gains and losses on FVTPL fixed-income securities with the objective
that these items offset each other with a minimal overall impact to net income.
Difference between expected return and discount rate on pension assets
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 the expected return on plan assets to better reflect our operating
performance. Any difference between the expected return on pension assets and the return based on the discount rate determined
at the beginning of the year is treated as a non-operating item.
INTACT FINANCIAL CORPORATION
59
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 24 – Accounting and disclosure matters
Reference to our Consolidated financial statements
Significant accounting judgments,
estimates and assumptions
Related-party transactions
Standards issued
but not yet effective
Note 3
Note 23
Note 27
24.1 New accounting standards effective January 1, 2015
There were no new accounting standards, applicable to us, effective January 1, 2015. Please refer to Note 2 – Summary of
significant accounting policies in the Consolidated financial statements.
24.2 Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to use judgments, estimates and assumptions
that can have a significant impact on reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as at
the balance sheet date, as well as 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;
measurement of income taxes.
valuation of defined benefit obligation;
business combinations;
impairment;
goodwill and intangible assets;
financial assets; and
24.3 Related-party transactions
We enter into transactions with associates and joint ventures in the normal course of business. Most of these related-party
transactions are with entities associated with our distribution channel. These transactions mostly comprise of 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.
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.
60
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
24.4 Financial instruments
An important portion of our Consolidated balance sheets is composed of financial instruments. For additional information, please
refer our Consolidated financial statements.
Reference to our Consolidated financial statements
Significant accounting policies
Derivative financial instruments
Fair value measurement
Note 2
Note 6
Note 7
24.5 Disclosure controls and procedures
We are committed to providing timely, accurate and balanced disclosure of all material
information about the Company and to
providing fair and equal access to such information. Management is responsible for establishing and maintaining our disclosure
controls and procedures to ensure that information used internally and disclosed externally is complete and reliable. Due to the
inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute assurance, that all
control issues and instances of fraud or error, if any, within the Company have been detected. We continue to evolve and enhance
our system of controls and procedures.
Management, at the direction and under the supervision of the Chief Executive Officer and the Chief Financial Officer of the
Company, has evaluated the effectiveness of our disclosure controls and procedures. The evaluation was conducted in accordance
with the requirements of National Instrument 52-109- Certification of Disclosure in Issuer’s Annual and Interim Filings 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, 2015. 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.
24.6 Internal controls over financial reporting
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.
Following the acquisition of CDI on May 1, 2015, management has limited the scope of design of our disclosure controls and
procedures and ICFR reporting to exclude the controls, policies and procedures of CDI. CDI’s contribution to our Consolidated
financial statements for the quarter ended December 31, 2015 was 2% of DPW. Additionally, as at December 31, 2015, CDI’s
contribution to our consolidated total assets and total liabilities were both approximately 1%. Management is committed to removing
this limitation within the timeframe permitted by regulation.
Management has evaluated the design and operating effectiveness of its ICFR as defined in National Instrument 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, 2015.
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 ICFR during 2015 that have materially affected, or are reasonably likely to
materially affect the Company’s ICFR.
INTACT FINANCIAL CORPORATION
61
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 25 – Off-balance sheet arrangements
25.1 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 $1.9 billion as at December 31, 2015 ($1.6 billion as at December 31, 2014).
Collateral is provided by the counterparty and is held in trust by the custodian for our benefit until the underlying security has been
returned to us. The collateral cannot be sold or re-pledged externally by us, unless the counterparty defaults on its financial
obligations. Additional collateral is obtained or refunded on a daily basis as the market value of the underlying loaned securities
fluctuates. The collateral consists of government securities with an estimated fair value of 105% of the fair value of the loaned
securities and amounts to $2.0 billion as at December 31, 2015 ($1.7 billion as at December 31, 2014).
Section 26 – Share capital and LTIP information
26.1 Authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
26.2 Outstanding share data
The following table presents the outstanding share data.
Table 35 – Outstanding share data (number of shares)
As at February 9, 2016
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.
26.3 Long-term incentive plans
The following table shows the outstanding units and fair value for each of the performance cycles as at December 31, 2015.
Table 36 – Outstanding units and weighted-average fair value at grant date by performance cycle
Performance cycles
2013-2015
2014-2016
2015-2017
Total
Number of
units
236,151
246,094
215,679
697,924
Weighted-average
fair value at grant
date (in $)
Amount
(in millions of $)
62.08
66.25
77.89
68.44
15
16
17
48
Refer to Note 22 – Share-based payments to the accompanying Consolidated financial statements for additional details.
62
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
Section 27 – Selected annual and quarterly information
27.1 Selected annual information
The following table presents selected annual information for the years ended December 31.
Table 37 – Selected annual information
Total revenues
Underwriting income1
Net income attributable to shareholders
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
1 Refer to Section 22 – Non-IFRS financial measures.
The following table presents selected annual information at the dates shown.
Table 38 – Selected annual information
As at December 31,
Investments
Total assets
Debt outstanding
Shareholders' equity
27.2 Selected quarterly information
Table 39 – Selected quarterly information
2015
8,032
628
706
5.20
2.12
1.05
1.05
2015
13,504
21,236
1,143
5,728
2014
7,915
519
782
5.79
1.92
1.05
1.05
2014
13,440
20,580
1,143
5,455
Q4
Q3
Q2
1,897
1,908
1,680
2,027
1,948
2
(75)
221
88.6%
110
265
198
2,092
2,095
2,021
2,003
1,930
81
(107)
131
93.2%
105
199
131
2,346
2,344
2,259
1,975
1,865
22
(106)
158
91.6%
104
210
199
2015
Q1
1,572
1,575
1,459
2,027
1,792
11
(189)
118
93.4%
105
186
178
Q4
Q3
Q2
1,760
1,775
1,595
1,964
1,830
10
(78)
216
88.2%
111
247
205
1,913
1,941
1,881
1,989
1,826
125
(80)
124
93.2%
106
185
202
2,173
2,212
2,142
1,984
1,801
33
(65)
128
92.9%
105
206
215
DPW1
DPW (underlying) 1
Written insured risks (in thousands)
Total revenues
NEP1
Current year catastrophe losses
Favourable PYD
Underwriting income1
Combined ratio
Net investment income
NOI1
Net income
Per share measures, basic and
diluted (in dollars)
NOIPS1
EPS
1.97
1.46
1.47
0.95
1.56
1.47
1.37
1.32
1.84
1.52
1.37
1.49
1.53
1.60
0.94
1.17
1 Refer to Section 22 – Non-IFRS financial measures.
See also the discussion on seasonality of the business hereafter.
INTACT FINANCIAL CORPORATION
63
2013
7,434
142
431
3.10
1.76
1.05
1.05
2013
12,261
19,774
1,143
4,954
2014
Q1
1,503
1,533
1,444
1,978
1,750
75
(141)
51
97.1%
105
129
160
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2015
(in millions of dollars, except as otherwise noted)
27.3 Seasonality of the P&C insurance business
The P&C insurance business is seasonal in nature. While NEP are generally stable from quarter to quarter, underwriting results are
mainly driven by weather conditions which may vary significantly between quarters. The underlying seasonality in our combined
ratio is best illustrated by excluding the impact of CAT losses (see Table 41).
For instance, in 2015 our first and third quarters saw a higher combined ratio including CAT losses than the second and fourth
quarters in 2015, meaning that underwriting results were relatively less profitable in Q1-2015 and Q3-2015. When CAT losses are
excluded, the first quarter of 2015 saw a higher combined ratio than all the other quarters in 2015, meaning that the underwriting
results were relatively less profitable in Q1-2015 than the rest of the year.
Table 40 – Seasonal indicator, including CAT losses
Q1
Q2
Q3
Q4
2015
1.02
1.00
1.02
0.96
2014
1.05
1.00
1.00
0.95
Table 41 – Seasonal indicator, excluding CAT losses
Q1
Q2
Q3
Q4
2015
1.03
1.01
0.98
0.98
2014
1.04
1.02
0.96
0.98
2013
0.97
1.00
1.05
0.98
2013
1.04
0.97
0.97
1.02
2012
0.99
0.99
1.03
0.99
2012
1.02
0.98
0.97
1.03
2011
1.00
1.03
0.99
0.98
2011
1.04
0.96
0.99
1.01
2010
0.98
0.98
1.01
1.03
2010
1.00
0.99
0.98
1.03
2009
1.00
0.97
1.07
0.96
2009
1.02
0.99
1.00
0.99
2008
1.03
0.98
0.97
1.02
2008
1.03
0.97
0.97
1.03
Eight-year
average
1.01
0.99
1.02
0.98
Eight-year
average
1.03
0.99
0.98
1.00
27.4 Expected issuance dates of our financial results
The expected issuance dates of our financial results for the next 12 months are as follows:
Q1-2016
May 4, 2016
Q2-2016
Q3-2016
Q4-2016
July 27, 2016
November 2, 2016
February 8, 2017
64
INTACT FINANCIAL CORPORATION
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2015
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 9, 2016
Charles Brindamour
Chief Executive Officer
Louis Marcotte
Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of
Intact Financial Corporation
We have audited the accompanying consolidated financial statements of
Intact Financial
Corporation, which comprise the consolidated balance sheets as at December 31, 2015 and 2014,
and the consolidated statements of comprehensive income, changes in shareholders’ equity and
cash flows for the years ended December 31, 2015 and 2014, and a summary of significant
accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
involves performing procedures to obtain audit evidence about
An audit
the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditors’ judgment,
including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments,
the auditors consider internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Intact Financial Corporation as at December 31, 2015 and 2014, and its
financial performance and its cash flows for the years ended December 31, 2015 and 2014 in
accordance with International Financial Reporting Standards.
Montréal, Canada
February 9, 2016
1 CPA auditor, CA, public accountancy permit no A114960
A member firm of Ernst & Young Global Limited
INTACT FINANCIAL CORPORATION
Consolidated financial statements
For the year ended December 31, 2015
Table of contents
Consolidated balance sheets…………………………………………………………………………….……...………..3
Consolidated statements of comprehensive income (loss)……..……………………..………………………………4
Consolidated statements of changes in shareholders’ equity…………………………………………………………5
Consolidated statements of cash flows……………………….………………………………………………………....6
Notes to the Consolidated financial statements
Note 1 – Status of the Company..........................................................................................................................7
Note 2 – Summary of significant accounting policies...........................................................................................7
Note 3 – Significant accounting judgments, estimates and assumptions ..........................................................19
Note 4 – Business combination .........................................................................................................................21
Note 5 – Financial instruments ..........................................................................................................................22
Note 6 – Derivative financial instruments...........................................................................................................27
Note 7 – Fair value measurement .....................................................................................................................29
Note 8 – Financial risk .......................................................................................................................................30
Note 9 – Claims liabilities and unearned premiums...........................................................................................39
Note 10 – Insurance risk....................................................................................................................................42
Note 11 – Other assets and other liabilities .......................................................................................................45
Note 12 – Goodwill and intangible assets..........................................................................................................46
Note 13 – Investments in associates and joint ventures....................................................................................47
Note 14 – Property and equipment....................................................................................................................47
Note 15 – Debt outstanding ...............................................................................................................................47
Note 16 – Common shares and preferred shares..............................................................................................48
Note 17 – Capital management .........................................................................................................................49
Note 18 – Revenues..........................................................................................................................................50
Note 19 – Income taxes.....................................................................................................................................51
Note 20 – Earnings per share............................................................................................................................52
Note 21 – Employee future benefits ..................................................................................................................53
Note 22 – Share-based payments .....................................................................................................................58
Note 23 – Related-party transactions ................................................................................................................60
Note 24 – Additional information on the Consolidated statements of cash flows...............................................61
Note 25 – Commitments and contingencies ......................................................................................................61
Note 26 – Disclosures on rate regulation for automobile insurance...................................................................62
Note 27 – Standards issued but not yet effective ..............................................................................................63
2
INTACT FINANCIAL CORPORATION
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 (loss)
Note
2015
2014
5
$
$
$
9
19
11
13
14
12
12
9
9
5
19
11
15
16
16
141 $
8,709
1,235
2,971
448
13,504
67
2,868
274
24
171
720
655
396
104
1,285
1,168
89
8,684
1,268
2,992
407
13,440
65
2,711
335
5
57
669
571
313
110
1,202
1,102
21,236 $
20,580
8,094 $
4,390
378
101
107
1,295
1,143
15,508
2,090
489
119
3,051
(21)
5,728
8,021
4,110
432
105
93
1,221
1,143
15,125
2,090
489
115
2,616
145
5,455
Total liabilities and shareholders’ equity
See accompanying notes to the Consolidated financial statements.
$
21,236 $
20,580
On behalf of the Board:
Charles Brindamour
Director
Eileen Mercier
Director
INTACT FINANCIAL CORPORATION
3
INTACT FINANCIAL CORPORATION
Consolidated statements of comprehensive income (loss)
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
Direct premiums written
Net premiums earned
Other underwriting revenues
Total underwriting revenues
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
Income before income taxes
Income tax expense
Net income attributable to shareholders
Weighted-average number of common shares outstanding (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 losses (gains)
Derivatives designated as cash flow hedges:
Net changes in unrealized gains (losses)
Income tax benefit (expense)
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 (losses) on employee future benefits
Income tax benefit (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.
4
INTACT FINANCIAL CORPORATION
$
$
$
$
$
18
18
18
9
5
5
18
19
20
20
19
21
19
$
$
$
$
$
2015
7,893
7,490
122
7,612
(4,659)
(2,417)
536
423
(64)
26
121
(103)
(64)
875
(169)
706
131.5
5.20
2.12
706
(339)
123
(1)
54
(3)
(166)
48
(13)
35
(131)
2014
7,329
7,164
100
7,264
(4,600)
(2,271)
393
426
173
19
98
(88)
(64)
957
(175)
782
131.5
5.79
1.92
782
170
(125)
1
(12)
(1)
33
(41)
11
(30)
3
785
$
575
$
Total
5,455
706
(131)
575
(279)
(21)
(2)
INTACT FINANCIAL CORPORATION
Consolidated statements of changes in shareholders’ equity
(in millions of Canadian dollars, except as otherwise noted)
Common
shares
Preferred
shares
Contributed
surplus
Retained
earnings
Note
Accumulated
other
comprehensive
income (loss)
Balance as at January 1, 2015
$
2,090 $
489 $
115 $
2,616
$
145 $
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Dividends declared on:
Common shares
Preferred shares
Share-based payments
Balance as at December 31, 2015
Balance as at January 1, 2014
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Dividends declared on:
Common shares
Preferred shares
Share-based payments
16
16
22
16
16
22
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4
706
35
741
(279)
(21)
(6)
-
(166)
(166)
-
-
-
$
$
2,090 $
489 $
119 $
3,051
2,090 $
489 $
116 $
2,147
$
$
(21) $
5,728
112 $
4,954
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
782
(30)
752
(255)
(21)
(7)
-
33
33
-
-
-
782
3
785
(255)
(21)
(8)
Balance as at December 31, 2014
2,090 $
See accompanying notes to the Consolidated financial statements.
$
489 $
115 $
2,616
$
145 $
5,455
INTACT FINANCIAL CORPORATION
5
Note
2015
2014
$
21
5
24
24
9
4
22
16
16
875
(265)
(52)
(7)
64
189
38
47
889
6,499
(6,666)
(187)
(77)
(89)
(520)
(17)
(279)
(21)
(317)
52
89
141
$
$
957
293
(55)
-
(173)
163
48
179
1,412
9,887
(10,722)
(13)
(178)
(97)
(1,123)
(23)
(255)
(21)
(299)
(10)
99
89
INTACT FINANCIAL CORPORATION
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 taxes received (paid), net
Contributions to the pension plans
Share-based payment
Net investment losses (gains)
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
Proceeds from sale of investments
Purchases of investments
Business combinations, net of cash acquired
Purchases of brokerages and books of business, net of sales
Purchases of intangibles and property and equipment, net
Net cash flows used in investing activities
Financing activities
Common shares repurchased for share-based payments
Dividends paid on common shares
Dividends paid on preferred shares
Net cash flows used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the Consolidated financial statements.
24
$
6
INTACT FINANCIAL CORPORATION
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 through its
operating subsidiaries principally underwrites automobile, home, as well as commercial P&C contracts to individuals and
businesses. The Company acquired all of
Insurance Inc. (“CDI”) on
May 1, 2015. Further details of the acquisition are provided in Note 4 – Business Combination.
the issued and outstanding shares of Canadian Direct
These Consolidated financial statements include the accounts of the Company and its subsidiaries. The Company’s significant
operating subsidiaries are: Intact Insurance Company, Belair Insurance Company Inc., The Nordic Insurance Company of Canada,
Novex Insurance Company, Jevco Insurance Company, Canadian Direct Insurance Inc., Trafalgar Insurance Company of Canada,
Intact Farm Insurance Inc., Canada Brokerlink Inc., Equisure Financial Network Inc. and IB Reinsurance Inc.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
Note 2 – Summary of significant accounting policies
Glossary of abbreviations ................................................................................................................................................................. 8
2.1 Basis of presentation................................................................................................................................................................ 8
2.2 Basis of consolidation .............................................................................................................................................................. 8
2.3 Insurance contracts……………………………………….…………………………………………………………………………… .... 9
a) Revenue recognition……………………………………………………………………………………………………………………. 9
b) Claims liabilities……………………………………………………………………………………………………………………….. ... 9
c) Reinsurance assets……………………………………………………………………………………………………………………. .10
d) Deferred acquisition costs……………………………………………………………………………………………………………...10
e) Liability adequacy test…………………………………………………………………………………………………………………..10
f) Industry pools…………………………………………………………………………………………………………………………....10
g) Structured settlements…………………………………………………………………………………………………………………. 10
2.4 Financial instruments …………………………………………………………………………………………................................... 11
a) Classification and measurement of financial assets and financial liabilities………………………………………………….…..11
b) Fair value measurement…………………………………………………………………………………………………………….… 12
c) Revenue and expense recognition…...…………………………………………………………………………………………… ....13
d) Impairment of financial assets.……………………………………………………………………………………………………….. 13
e) Classification as investment grade …………………………………………………………………………………………………...15
f) Recognition and offsetting of financial assets and financial liabilities....................................................................................15
g) Restricted funds ....................................................................................................................................................................15
2.5 Business combinations…………………………………………………………………………………………………………………..15
2.6 Goodwill and intangible assets…………………………………………………………………………………………………..……. 15
a) Goodwill…………………………………………………………………………………………………..……………………………… 15
b) Intangible assets…………………………………………………………………………………………………..……………………. 15
2.7
Investments in associates and joint ventures…………………………………………………………………………………….… 16
2.8 Property and equipment………………………………………………………………………………………………………………… 16
2.9 Leases……………………………………………………………………………………………………………………………………….16
2.10 Income taxes……………………………………………………………………………………………………………………………… .16
2.11 Employee future benefits………………………………………………………………… ...............................................................17
a) Pension and post-retirement benefits…………………………………………………………………………………….………….. 17
b) Post-employment benefits…………………………………………………………………………………….………………………. 17
2.12 Share-based payments………………………………………………………………………………………………………………….. 17
a) Long-term incentive plans………………………………………………………………………………………………………………17
b) Employee share purchase plan…………………………………………………………………………………………………….… .18
c) Deferred share unit plan……………………………………………………………………………………………………………...... 18
2.13 Foreign currency translation…………………………………………………………………………………………………………. ..18
2.14 Current vs non-current………………………………………………………………………………………………………………..… 18
2.15 Operating segments……………………………………………………………………………………………………………………... 18
INTACT FINANCIAL CORPORATION
7
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Glossary of abbreviations
AFS
AMF
AOCI
CGU
CIA
DPW
DSU
EPS
ESPP
FA
Available for sale
Autorité des marchés financiers
Accumulated other comprehensive income
Cash generating unit
Canadian Institute of Actuaries
Direct premiums written
Deferred share unit
Earnings per share to common shareholders
Employee share purchase plan
Facility Association
FVTOCI
Fair value through OCI
FVTPL
Fair value through profit and loss
2.1
Basis of presentation
IASB
IBNR
IFRS
LTIP
MCT
OCI
OSFI
P&C
PfAD
PSU
RSP
RSU
International Accounting Standards Board
Insurance claims incurred but not reported by
policyholders
International Financial Reporting Standards
Long-term incentive plans
Minimum capital test
Other comprehensive income
Office of the Superintendent of Financial Institutions
Property and casualty
Provision for adverse deviations
Performance stock units
Risk sharing pools
Restricted stock units
These Consolidated financial statements are prepared in accordance with IFRS, as issued by the 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 9, 2016.
The key accounting policies applied in the preparation of these Consolidated financial statements are described below. These
policies have been applied consistently to all periods presented. Certain comparative figures have been reclassified to conform to
the presentation adopted in the current year.
Basis of consolidation
2.2
These Consolidated financial statements include the accounts of the Company and its subsidiaries.
Table 2.1 – Basis of consolidation
Investment category
Subsidiaries
Entities over which the Company:
1. has the power over the relevant activities of the investee;
2.
is exposed, or has rights to variable returns from its
involvement with the investee; and
3. has the ability to affect those returns through its power over
the investee.
Associates
Entities over which the Company:
1.
has the power to participate in the decisions over the
relevant activities of the investee, but
2.
does not have control.
Joint ventures
Joint arrangements whereby the parties have:
1.
joint control of the arrangements, requiring unanimous
consent of the parties sharing control for strategic and
operating decision making; and
2.
rights to the net assets of the arrangements.
8
INTACT FINANCIAL CORPORATION
Generally a
shareholding of:
Accounting policies
more than 50% of
voting rights
All subsidiaries are fully consolidated from the
date control is transferred to the Company.
They are deconsolidated from the date control
ceases and any gain or loss is recognized in Net
investment gains (losses).
20% to 50% of
voting rights
Equity method
Refer to Note 2.7 for details
equal percentage of
voting rights from each
party to the joint
arrangement
Equity method
Refer to Note 2.7 for details
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 through 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.
Acquisitions or disposals of equity interests in a subsidiary that do not result in the Company obtaining or losing control are treated
as equity transactions.
All balances, transactions, income and expenses and profits and losses resulting from intercompany transactions and dividends are
eliminated on consolidation.
2.3
Insurance contracts
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is
transferred when the Company agrees to compensate a policyholder on the occurrence of an adverse specified uncertain future
event. As a general guideline, the Company determines whether it has significant insurance risks, by comparing the benefits that
could become payable under various possible scenarios relative to the premium received from the policyholder for insuring the risk.
a)
Revenue recognition and premium receivables
Premiums written are reported 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. Premium receivables consist of the
premiums due for the remaining months of the contracts.
Fees collected from policyholders in accordance with the Company’s billing plans are recognized over the terms of the underlying
policies and are reported in Other underwriting revenues.
Commission revenues received from external insurance providers by consolidated brokers are recognized on an accrual basis and
included in Other revenues.
b)
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. They are 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 IBNR, as required by the 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, 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 at the reporting date. Anticipated payment patterns are revised from time to
time to reflect the most recent trends and claims environment. This ensures getting the most accurate and representative market
yield-based discount rate.
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. 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 PfAD.
INTACT FINANCIAL CORPORATION
9
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, which is included in Reinsurance
assets. Changes in claims liabilities, net of reinsurance, are reported in Net claims incurred. Claims liabilities are considered to be
settled when the contract expires, is discharged or cancelled.
c)
Reinsurance assets
Reinsurance assets include the 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.
d)
Deferred acquisition costs
Policy acquisition costs incurred in acquiring insurance premiums include commissions and premium taxes 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 written off when the corresponding contracts
are settled or cancelled.
e)
Liability adequacy test
At the end of each reporting period, a liability adequacy test is performed 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.
f)
Industry pools
When certain automobile owners are unable to obtain insurance via the voluntary insurance market, they are insured via the FA. In
addition, entities can choose to cede certain risks to the FA administered 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 OSFI guidelines, assumed and ceded RSP premiums are reported in DPW.
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, which are reported in Other underwriting revenues. Policy issuance fees are earned
immediately while claims handling fees are deferred and earned over the servicing life of the claims.
g)
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 sheet. 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 or transferable,
the Company keeps the liability and the corresponding asset on its financial statements.
10
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
2.4
Financial instruments
a)
Classification and measurement of financial assets and financial liabilities
For the purpose of initial and subsequent measurement, the Company has classified or designated its financial assets and financial
liabilities in the following categories:
− AFS;
− Financial assets and financial liabilities at FVTPL;
− Cash and cash equivalents, loans and receivables; or
− Other financial liabilities.
The table below summarizes the classification of the Company’s most significant financial assets and financial liabilities.
Table 2.2 – Classification of financial assets and financial liabilities
Category
AFS
FVTPL
Financial instruments
Description
Debt securities
Intended to be held for an indefinite period of time and which may be sold in
response to liquidity needs or changes in market conditions.
Common shares and
preferred shares
Neither classified nor designated as FVTPL.
Classified as FVTPL
Common shares
Purchased with the intention of generating profits in the near term.
Derivative financial
instruments
Used for economic 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.
Embedded derivatives
Related to the Company’s perpetual preferred shares. Treated as separate
derivative financial instruments when their economic characteristics and risks are
not clearly and closely related to those of the host instrument.
Long and short positions
A market neutral
investment strategy, where the objective is to maximize the
value added from active equity portfolio management while at the same time
using short positions to mitigate overall equity market volatility.
Investments in mutual funds Third party investment funds (mainly in equities). When the Company is deemed
to control such vehicles, they are consolidated and the third party units are
recorded as a liability at fair value and disclosed as Net asset value attributable
to third party unit holders.
Designated as FVTPL
Debt securities backing the
Company’s claims liabilities
and some common shares
A portion of the Company’s investments backing its claims liabilities has been
voluntarily designated as FVTPL to reduce the volatility caused by fluctuations in
fair values of underlying claims liabilities due to changes in discount rates.
To comply with regulatory guidelines, the Company ensures that the weighted-
dollar duration of debt securities designated as FVTPL is approximately equal to
the weighted-dollar duration of claims liabilities.
Cash and cash
equivalents, loans and
receivables
Cash and cash equivalents Consist of 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
Financial assets with fixed or determinable payments not quoted in an active
market.
Other financial liabilities Debt outstanding
The Company’s medium-term notes net of associated issuance costs.
INTACT FINANCIAL CORPORATION
11
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The table below summarizes the Company’s initial and subsequent measurement basis of financial assets and financial liabilities
based on their respective classification. It also indicates when and where their related changes in fair value are recognized in the
Consolidated statements of comprehensive income.
Table 2.3 – Measurement of financial assets and financial liabilities and recognition of related changes in fair value
Category
Financial assets
AFS
Initial measurement
Subsequent measurement
Changes in fair value
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
FVTPL
Fair value using bid
prices at the trade date
Fair value using bid prices at end
of period
Reported in Net investment gains (losses)
Cash and cash equivalents,
loans and receivables
Fair value at the
issuance date
Amortized cost using the effective
interest method
Reported in Net investment gains (losses)
when realized or impaired
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
Fair value measurement
b)
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 table below summarizes the three-level fair value hierarchy and the Company’s financial instruments normally classified in each
category.
Table 2.4 – Three-level fair value hierarchy
Levels
Description
Type of financial instruments normally classified as such
Level 1
Quoted prices in active markets for identical
assets or liabilities
Level 2
Valuation techniques for which all inputs that
have a significant effect on the fair value are
observable (either directly or indirectly)
− Most Government bonds1
− Corporate bonds1
− Common shares and Preferred shares
−
− Short-term notes
− Exchange-traded derivatives
Investments in mutual funds
− Some Government bonds1
− Corporate bonds1
− Unsecured medium-term notes2
− Asset-backed securities
− Over-the-counter derivatives
Level 3
Valuation techniques for which inputs that
have a significant effect on the fair value are
not based on observable market data
− Loans2
− Gross-up component of the Company’s perpetual preferred shares
and related embedded derivatives
1
2
Categorized as Level 1 or Level 2 instruments depending on the market trading statistics of the last month for each reporting period.
Measured at amortized cost with fair value disclosed.
12
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
A financial instrument is regarded as quoted in an active market (Level 1) if quoted prices for that financial instrument are readily
and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices
represent actual and regularly occurring market transactions on an arm’s length basis.
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. Inputs used in
their valuation include:
−
−
−
prevailing market rates for bonds with similar characteristics and risk profiles;
closing prices of the most recent trade date subject to liquidity adjustments; or
average brokers’ quotes when trades are too sparse to constitute an active market.
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.
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. In these cases, judgment is required to establish fair values.
Changes in assumptions about these factors could affect the reported fair value of financial instruments.
c)
Revenue and expense recognition
Dividends are recognized when the shareholders’ right to receive payment is established, which is the ex-dividend date. Interest
income from debt securities and loans are recognized on an accrual basis. Premiums and discounts on debt securities classified as
AFS are amortized using the effective interest method. Premiums earned or discounts incurred for loans and AFS securities are
also amortized using the effective interest method. Dividend income and interest income are reported in Net investment income.
Transaction costs associated with the acquisition of financial instruments classified or designated as FVTPL are recognized in Net
investment gains (losses) as incurred; otherwise, transaction costs are capitalized on initial recognition and amortized using the
effective interest method. Transaction costs incurred at the time of disposition of a financial
instrument are included in Net
investment gains (losses).
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.
d)
Impairment of financial assets
The Company determines, at each balance sheet date, whether there is objective evidence that a financial asset or a group of
financial assets, other than those classified or designated as FVTPL, are impaired. Those financial assets are impaired according to
either a debt, equity, or loans and receivables impairment model. The appropriate impairment model is determined based on the
characteristics of each instrument, the capacity of the issuer to pay dividends or interest and the Company’s intention to either hold
the shares for the long term or sell them. As a result, as at December 31, 2015, the Company’s preferred shares have been
assessed using a debt impairment model, which determines that a security is impaired when it is probable that the future cash flows
will not be recovered based on credit considerations rather than based on the fair value of that security. This impairment model is
better aligned with the Company’s business model of holding these securities for the long term to earn dividend income.
Debt impairment model
A financial asset is impaired if there is objective evidence of impairment, as a result of one or more loss events (a payment default
for example) that occurred after initial recognition and that loss event has an impact on the estimated future cash flows of the
financial asset. The debt model is used to assess impairments for all debt securities, preferred shares that are redeemable at the
option of the holder, and perpetual preferred shares which have been purchased with the intent of holding for the long-term.
INTACT FINANCIAL CORPORATION
13
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Since the business model of the Company is to purchase preferred shares for the purpose of earning dividend income,
with the intent of holding them for the long-term, virtually all perpetual preferred shares are assessed for impairment
using a debt impairment model.
Equity impairment model
For securities impaired according to an equity impairment model, objective evidence of impairment includes a significant, a
prolonged, or a significant and prolonged decline in the fair value of an investment below cost, as well as information about
significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in
which an issuer operates, indicating that the cost of an equity instrument may not be recovered.
The equity model is used to assess impairment for the Company’s common shares, as well as any perpetual preferred shares not
impaired using the debt impairment model.
Table 2.5 – Objective evidence of impairment for equity impairment model
Unrealized loss position Common shares
Perpetual preferred shares which are not
evaluated for impairment under the debt model
Significant
Prolonged
Unrealized loss of 50% or more
Unrealized loss of 50% or more
Unrealized loss for 15 consecutive months or more
Unrealized loss for 18 consecutive months or more
Significant and
prolonged
Unrealized loss for 9 consecutive months or more and
unrealized loss of 25%
Unrealized loss for 12 consecutive months or more
and unrealized loss of 25%
Loans and receivables impairment model
Loans and receivables 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 a financial asset 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 financial asset concerned using the effective interest rate, or the fair value of collateral when applicable.
Loans and receivables which have not been individually impaired are grouped by similar characteristics to be tested for impairment.
Measurement and recognition of impairment losses
The following table summarizes the measurement and recognition of impairment losses for each type of financial asset, other than
those classified or designated as FVTPL.
Table 2.6 – Measurement and recognition of financial asset impairment
Category
Loss measurement
Reported loss
Subsequent fair value increases
Debt
impairment
model
Equity
impairment
model
Loans and
receivables
impairment
model
Difference between amortized cost
and current fair value less any
unrealized loss on that security
previously recognized
Difference between acquisition cost
and current fair value less any
impairment loss on that security
previously recognized
Difference between amortized cost
and the present value of the
estimated future cash flows
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.
Impairment loss removed from
OCI and recognized in Net
investment gains (losses)
Recognized directly in OCI.
Impairment losses are not reversed.
Impairment loss recognized in
Net investment gains (losses)
Provision can be reversed when the event
that gave rise to its recognition
subsequently disappears.
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.
14
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
e)
Classification as investment grade
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 'P3L' are classified as investment grade.
f)
Recognition and offsetting of financial assets and financial liabilities
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 liabilities are no longer
recorded when they have expired or have been cancelled. Financial assets lent by the Company in the course of securities lending
operations remain on the balance sheet because the Company has not substantially transferred the risks and rewards related to the
lent assets.
Financial assets and financial 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.
Restricted funds
g)
The Company has concluded reserve fund agreements with third parties whereby the use and profit sharing are subject to certain
restrictions. These funds are presented as Restricted funds in Other assets.
2.5
Business combinations
Business combinations are accounted for using the acquisition method. The purchase consideration is measured at fair value at
acquisition date. At that date, the identifiable assets acquired and liabilities assumed are estimated at their fair value. Acquisition-
related costs are expensed as incurred. When the Company acquires a business, it assesses financial assets acquired and financial
liabilities assumed for appropriate classification and designation in accordance with the contractual term, economic circumstances
and relevant conditions at the acquisition date.
If a business combination is achieved in stages, any previously held equity interest is remeasured as at its acquisition date fair value
and any resulting gain or loss is recognized in Net investment gains (losses).
2.6
a)
Goodwill and intangible assets
Goodwill
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 in a business combination.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested at least annually
for impairment. Gains and losses calculated on the disposal of a business include the carrying value of goodwill relating to the
business sold.
b)
Intangible assets
The Company’s intangible assets consist of distribution networks, customer relationships and internally developed software.
Intangible assets are initially measured at cost, except for intangible assets acquired in a business combination which 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. For each distribution network acquired, that
assessment depends on the nature of the distribution network. When the related cash flows are expected to continue indefinitely,
the distribution network acquired is assessed as having an indefinite useful life. 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.
INTACT FINANCIAL CORPORATION
15
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The amortization method and terms of intangible assets assessed as having finite useful lives are shown below.
Table 2.7 – Amortization method and terms of intangible assets – finite useful life
Intangible assets
Distribution networks
Customer relationships
Internally developed software
Method
Straight-line
Straight-line
Straight-line
2.7
Investments in associates and joint ventures
Term
25 years
3 to 10 years
3 to 10 years
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 or loss 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. The Company determines at each
reporting date whether there is any objective evidence that investments in associates and joint ventures are impaired.
2.8
Property and equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation terms are established to depreciate the
cost of the assets over their estimated useful lives.
Depreciation method as well as terms are shown below.
Table 2.8 – Depreciation method and terms of property and equipment
Property and equipment
Computer equipment
Furniture and equipment
Leasehold improvements
2.9
Leases
Method
Straight-line
Straight-line
Straight-line
Term
2 to 3 years
5 years
Over the terms of related leases
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.
2.10
Income taxes
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 in 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.
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, entities
concerned have a legally enforceable right to make or receive a single net payment and entities intend to make or receive such net
payment or to recover the asset or settle the liability simultaneously.
16
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
2.11
Employee future benefits
a)
Pension and post-retirement benefits
The defined benefit obligation, net of the fair value of plan assets, is recognized on the balance sheets as an asset, when the plan is
in a surplus position, or as a liability, when the plan is in a deficit position. This classification is determined on a plan-by-plan basis.
The actuarial determination of the defined benefit obligation uses the projected unit credit method and management’s best estimate
assumptions.
Cost recognized in Net income in the current period includes:
−
service costs, which represent benefit costs provided in exchange for employees’ services rendered during the year or prior
years;
− 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 in reference to
market yields on high quality corporate bonds with cash flows that match the timing and amount of expected benefit
payments, determined at the beginning of the year;
−
interest on the asset ceiling, when applicable; and
− administrative expenses paid from the pension assets.
Re-measurements recognized directly in OCI in the period in which they occur include:
−
return on plan assets, which represents the difference between the actual return on plan assets and the return based on
the discount rate determined using high quality corporate bonds;
− actuarial gains and losses arising from plan experience;
−
−
changes in actuarial methods and assumptions, such as discount rate; and
changes in the asset ceiling.
Such re-measurements are also immediately reclassified to Retained earnings as they will not be reclassified to Net income in
subsequent periods.
b)
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 begins.
2.12
Share-based payments
The Company has three types of shared-based payment plans:
a)
Long-term incentive plans
Certain key employees are entitled to a LTIP. Under this program, participants are awarded notional share units referred to as PSUs
and RSUs. The payout for the PSUs is based on a specific target composed of the difference between the three-year average
adjusted return on equity of the Company and that of the Canadian P&C industry. Most RSUs automatically vest three years from
the year of the grant. Vesting for RSUs is not linked to the Company’s performance.
The awards are estimated and 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 to Contributed surplus.
At the time of the payout, with respect to the units to be settled in shares of the Company, the plan administrator purchases in the
market the amount of common shares based upon the performance targets achieved with respect to the vested PSUs and the
amount of common shares equal to the amount of vested RSUs. The difference between the market price of the shares purchased
and the cumulative cost for the Company of these vested units, net of income taxes, is recorded in Retained earnings.
INTACT FINANCIAL CORPORATION
17
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Starting in 2014, participants meeting a defined share ownership threshold (eligible participants) can elect annually to receive cash
in lieu of shares of the Company in respect to the cycle that will come to maturity the following year (first cycle: 2015), subject to the
Company’s Board of Directors’ approval. The amount to be settled in cash, based on confirmed elections by eligible participants, is
reported in Other liabilities and the cumulative cost of units is removed from Contributed surplus. The difference between the market
price of the shares and the cumulative cost for the Company at the date of the Company’s Board of Directors’ approval is recorded
in Retained earnings.
b)
Employee share purchase plan
Employees who are not eligible for the LTIP are entitled to make contributions to a voluntary ESPP. Under the ESPP, eligible
employees can contribute up to 10% of their annual base salary through a payroll deduction. As an incentive to participate in the
plan, the Company contributes to the plan an amount equal to 50% of the employee contribution. The common shares are
purchased in the market by an independent broker at the end of each month and are held by a custodian on behalf of the
employees. The common shares purchased with the Company’s contributions vest upon continued employment for a period of
12 months. The Company’s contributions under the ESPP are cash-settled awards which are accrued and expensed over the
vesting period.
c)
Deferred share unit plan
Non-employee directors of the Company are eligible to participate in the Company’s 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 DSUs and shares vest at the time of the grant. The DSUs are redeemed upon director retirement or termination and are settled
for cash after that time. The DSUs are cash-settled awards which are expensed 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.
2.13
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the reporting date. Revenues
and expenses denominated in foreign currencies are translated at the average exchange rate prevailing during the year. Non-
monetary assets and liabilities are translated at historical exchange rates. Exchange gains and losses are recognized in income with
the exception of AFS equity securities and foreign monetary items that form part of a net investment in a foreign operation and the
results of hedging these positions. These foreign exchange gains and losses are recognized in OCI until such time that the foreign
operation is disposed of, or control or significant influence over it is lost.
2.14
Current vs non-current
In line with industry practice for insurance companies, the Company’s balance sheets are not presented using current and
non-current classifications, but are rather presented broadly in order of liquidity. Most of the Company’s assets and liabilities are
considered current given they are expected to be realized or settled within the Company’s normal operating cycle. 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.
2.15
Operating segments
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.
18
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 3 – Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to use judgments, estimates and assumptions
that can have a significant impact on the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as
at the balance sheet date, as well as 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:
3.1
Valuation of claims liabilities
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. 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 (severity) and number of claims (frequency) based on the observed development of earlier
years and expected loss ratios. Historical claims development is analyzed by accident years, by geographical area, as well as by
significant business line and claim type. Large catastrophic events are separately addressed, either by being reserved at the face
value of loss adjuster estimates in the case of very large losses or separately projected in order to reflect their future development
which might differ from historical data in the case of catastrophic events. In most cases, no explicit assumptions are made regarding
future rates of claims inflation. 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.
Details on key assumptions and sensitivity analysis can be found in Note 10.4.
3.2
Valuation of defined benefit obligation
The cost of the defined benefit plans and the defined benefit obligation are calculated by the Company’s independent actuaries
using assumptions determined by management. The actuarial valuation involves making assumptions about discount rates, future
salary increases, future inflation, the employees’ age upon termination and retirement, mortality rates, future pension increases,
disability incidence and health and dental care cost trends. If actuarial experience differs from the assumptions used, the expected
obligation could increase or decrease in future years.
Due to the complexity of the valuation 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 on key assumptions and sensitivity analysis can be found in Note 21.6.
3.3
Business combinations
Upon initial recognition, 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.
INTACT FINANCIAL CORPORATION
19
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
3.4
Impairment of 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.
The carrying value of these intangibles 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. Impairment testing of these
intangibles requires an estimation of the recoverable amount.
The most recent test was performed as at June 30, 2015. 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 determined
using budgeted margins based on past performance and management expectations for the Company and the industry.
− Cash flows beyond the three-year period are extrapolated using estimated growth rates of 3% as at June 30, 2015 and
2014, which do not exceed the industry long-term average past growth rate in which the Company operates.
− A Company specific risk adjusted discount rate of 10.2% as at June 30, 2015 (June 30, 2014 – 12.5% was used).
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, 2015 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.
3.5
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 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.
Details on objective evidence of impairment can be found in Note 2.4.
3.6
Measurement of income taxes
Management exercises judgment in estimating the provision for income taxes. The Company is subject to federal income tax law
and provincial income tax laws in the various jurisdictions where it operates. Various tax laws are potentially subject to different
interpretations by the taxpayer and the relevant tax authority. To the extent that the Company’s interpretations of tax laws differ from
those of tax authorities or that the timing of realization of deferred tax assets is not as expected, the provision for income taxes may
increase or decrease in future periods to reflect actual experience.
20
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 4 – Business combination
On February 10, 2015, the Company announced that it had entered into a definitive agreement with Canadian Western Bank for the
acquisition of all of the issued and outstanding shares of its subsidiary CDI. The acquisition enhances the Company’s product
offering, thereby extending its direct-to-consumer operations from coast to coast.
The acquisition closed on May 1, 2015 and CDI became a wholly owned subsidiary of the Company. The results of operations are
included in the Consolidated financial statements from that date.
The following table summarizes the consideration paid for CDI, and the amounts recognized for the assets acquired and liabilities
assumed:
Table 4.1 – Business combination – CDI
As at December 31, 2015
Purchase price – cash consideration paid (net of cash acquired of $2 million)
Provisional fair value of assets acquired and liabilities assumed
Investments
Premium receivables
Deferred tax assets
Other assets
Customer relationships (net of deferred tax liabilities $21 million)
Claims liabilities
Unearned premiums
Other liabilities
Total identifiable net assets
Goodwill
187
158
35
6
27
58
(90)
(71)
(6)
117
70
The fair value of the acquired customer relationships is based on a preliminary discounted cash flow analysis. Their useful life has
been assessed between 3 and 10 years and will be amortized on a straight-line basis over that period.
Goodwill reflects the strategic location of CDI activities, the workforce of the acquired business and the synergies expected following
the integration of CDI. The goodwill is not expected to be deductible for tax purposes.
The determination of the fair value of identifiable assets and liabilities acquired is expected to be completed within the one-year
permitted timeframe following the acquisition.
INTACT FINANCIAL CORPORATION
21
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 5 – Financial instruments
5.1
Investments
The following tables summarize the Company’s investments.
Table 5.1 – Investments by classification
As at December 31, 2015
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed1
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Preferred shares
Common shares
Loans
As at December 31, 2014
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed1
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Preferred shares
Common shares
Loans
AFS
-
210
1,868
1,604
211
-
3,893
69
328
838
1,235
1,886
-
7,014
-
124
2,043
1,627
172
7
3,973
90
314
864
1,268
1,867
-
7,108
Classified
as FVTPL
Designated
as FVTPL
-
-
-
-
-
-
-
-
-
-
-
327
-
327
-
-
-
-
-
-
-
-
-
-
-
325
-
325
-
-
3,047
1,730
39
-
4,816
-
-
-
-
758
-
5,574
-
-
2,942
1,725
43
1
4,711
-
-
-
-
800
-
5,511
Cash and cash
equivalents,
loans and
receivables
141
-
-
-
-
-
-
-
-
-
-
-
448
589
89
-
-
-
-
-
-
-
-
-
-
-
407
496
Total
141
210
4,915
3,334
250
-
8,709
69
328
838
1,235
2,971
448
13,504
89
124
4,985
3,352
215
8
8,684
90
314
864
1,268
2,992
407
13,440
1 Asset-backed securities consist of mortgage-backed securities, auto loan receivables and credit card receivables.
22
INTACT FINANCIAL CORPORATION
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
investments
At carrying
value
Amortized
cost
Net unrealized
gains (losses)
Other
investments
At carrying
value
Total
investments
At carrying
value
As at December 31, 2015
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Preferred shares
Common shares
Loans
As at December 31, 2014
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
Preferred shares
Common shares
Loans
-
-
3,047
1,730
39
4,816
-
-
-
-
1,085
-
5,901
-
-
2,942
1,725
43
1
4,711
-
-
-
-
1,125
-
5,836
141
210
1,762
1,591
209
3,772
69
316
961
1,346
1,898
448
7,605
89
124
1,965
1,614
169
7
3,879
88
271
843
1,202
1,813
407
7,390
-
-
106
13
2
121
-
12
(123)
(111)
(12)
-
(2)
-
-
78
13
3
-
94
2
43
21
66
54
-
214
141
210
1,868
1,604
211
3,893
69
328
838
1,235
1,886
448
7,603
89
124
2,043
1,627
172
7
3,973
90
314
864
1,268
1,867
407
7,604
141
210
4,915
3,334
250
8,709
69
328
838
1,235
2,971
448
13,504
89
124
4,985
3,352
215
8
8,684
90
314
864
1,268
2,992
407
13,440
INTACT FINANCIAL CORPORATION
23
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Company uses either a debt, equity or loans and receivables impairment model described in Note 2.4d). The AFS investments
as at December 31, 2015 were subject to the following impairment models.
Table 5.3 – Impairment models (AFS investments)
As at December 31, 2015
Fixed-income securities
Preferred shares
Common shares
Impairment models
Equity
Debt
3,683
1,235
-
4,918
-
-
1,886
1,886
Total
3,683
1,235
1,886
6,804
Refer to Table 5.8 – Net investment gains (losses) for the impairment losses recognized during the years.
The fair value of loans was $449 million as at December 31, 2015 (December 31, 2014 – $413 million). The fair value is determined
using a valuation technique based on the income approach. 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. The Company receives guarantees for loans.
The following table shows the terms to maturity of the Company’s investments.
Table 5.4 – Terms to maturity of investments
As at December 31, 2015
Cash and cash equivalents
Short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
As at December 31, 2014
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
141
210
1,023
39
-
1
1,414
89
124
739
41
-
4
997
-
-
4,286
22
-
51
4,359
-
-
4,224
46
-
79
4,349
-
-
3,190
8
-
396
3,594
-
-
3,597
3
-
319
3,919
-
-
-
1,166
2,971
-
4,137
-
-
-
1,178
2,992
5
4,175
Total
141
210
8,499
1,235
2,971
448
13,504
89
124
8,560
1,268
2,992
407
13,440
24
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
5.2
Equities sold short
Among the Company’s various investment strategies is a market neutral equity investment strategy, which consists of having both
long and short equity positions. The objective of
this strategy is to maximize the value added from active equity portfolio
management while at the same time using short positions to mitigate overall equity market volatility. Long positions are reported in
Common shares and short positions are reported in Financial liabilities related to investments. The Company has secured its short
positions by pledging government debt securities as collateral.
Table 5.5 – Long and short positions
As at December 31,
Long positions
Short positions
5.3
Financial liabilities related to investments
Table 5.6 – Financial liabilities related to investments
As at December 31,
Equities sold short positions (Table 5.5)
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 6.2)
2015
2014
Fair
value
164
(166)
Debt securities
pledged as
collateral
-
172
Fair
value
150
(151)
Debt securities
pledged as
collateral
-
157
2015
2014
166
163
24
22
3
378
151
175
58
45
3
432
Securities lending
5.4
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 loaned securities with a fair value of $1.9 billion as at December 31, 2015
(December 31, 2014 – $1.6 billion) that are reported in Investments.
Collateral, mainly consisting of government securities, is provided by the counterparty and 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 underlying loaned securities fluctuates. The collateral amounted to $2.0 billion as at
December 31, 2015 (December 31, 2014 – $1.7 billion), representing approximately 105% of the securities loaned fair value as at
December 31, 2015 and 2014.
INTACT FINANCIAL CORPORATION
25
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
5.5
Net investment income
The following table provides additional details on items reported in Net investment income.
Table 5.7 – Net investment income
For the years ended December 31,
Interest income from:
Financial instruments as FVTPL
AFS financial instruments
Loans and cash and cash equivalents
Interest income
Dividend income (expense) from:
AFS financial instruments
Financial instruments as FVTPL, net
Equities sold short
Long-term investments, at cost
Dividend income
Expenses
5.6
Net investment gains (losses)
The following table provides additional details on items reported in Net investment gains (losses).
Table 5.8 – Net investment gains (losses)
For the years ended December 31,
Net gains (losses) excluding foreign currency gains (losses) from:
Financial instruments designated as FVTPL
AFS financial instruments
Derivative financial instruments
Financial instruments classified as FVTPL
Embedded derivatives
Net foreign currency gains (losses) from:
Fixed-income securities denominated in U.S. dollars:
designated as FVTPL
classified as AFS
U.S. dollar foreign-currency forward contracts
Common shares denominated in U.S. dollars classified as AFS
Impairment losses from:
Common shares
Preferred shares
Net gains on investments in associates and joint ventures related to a change of control
2015
2014
163
96
21
280
133
50
(5)
1
179
(36)
423
168
92
27
287
124
53
(4)
1
174
(35)
426
2015
2014
(211)
21
183
4
38
35
111
68
(179)
-
19
19
(124)
(38)
(162)
44
(64)
(29)
203
54
4
(3)
229
43
31
(74)
-
-
-
(68)
(9)
(77)
21
173
5.7
Sale and repurchase agreements
The Company may from time to time enter into sale and repurchase agreements consisting of the sale of securities together with an
agreement to repurchase them in the short term, at a set price and date, up to a maximum of 1.5% of invested assets. The
Company did not have any securities sold under repurchase agreements as at December 31, 2015 and 2014.
26
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 6 – Derivative financial instruments
6.1
Types of derivatives used
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 economic hedging purposes and for the purpose of modifying the risk profile of the
Company’s investments, as long as the resulting exposures are within the investment policy guidelines.
Table 6.1 – Types of derivatives used
Derivatives used Description
Objective
Forwards
Currency
Contractual obligations to exchange:
Mitigate risk arising from:
one currency for another on a predetermined future date
Futures
Contractual obligations to buy or sell:
Interest rate
an interest rate sensitive financial instrument on a predetermined
future date at a specified price
foreign currency fluctuations on the U.S.
debt portfolio
Modify exposure to:
interest rate fluctuations
Equity
a specified amount of stocks, a basket of stocks or an equity index at
an agreed price on a specified date
Canadian equity market
Swaps
Over-the-counter contracts:
Swap agreements
in which two counterparties exchange a series of cash flows based
on a basket of stocks, applied to a notional amount
Modify exposure to:
equity market fluctuations
Credit default
that transfer credit risk related to an underlying financial instrument
from one counterparty to another
credit
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):
Reduce exposure to:
Inflation caps
an index at a predetermined price, at or by a specified future date
inflation risk
INTACT FINANCIAL CORPORATION
27
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
6.2
Fair value and notional amount of derivatives
The following table presents the fair value and notional amount of derivatives by term to maturity and nature of risk.
Table 6.2 – Fair value and notional amount of derivatives by term to maturity and nature of risk (held for other than trading purposes)
Fair value
Notional amount
Positive
(Asset)
Negative
(Liability)
Less than
1 year
From 1 to
5 years
Over
5 years
As at December 31, 2015
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Equity contracts
Swap agreements
Futures
Credit contracts
Swap agreements
Inflation contracts
Options
As at December 31, 2014
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Swaps
Equity contracts
Swap agreements
Futures
Options
Inflation contracts
Options
5
-
48
-
1
-
54
-
-
1
40
-
-
-
41
1,069
986
751
142
-
42
1,055
1,020
130
803
149
2
51
-
-
2
-
1
-
3
2
-
-
1
-
-
-
3
-
-
-
-
69
97
-
-
-
-
-
-
122
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
1,069
986
751
142
69
139
1,055
1,020
130
803
149
2
173
Derivative financial assets are presented on the consolidated balance sheets as part of Other assets and derivative financial
liabilities are presented as part of Financial liabilities related to investments.
6.3
Embedded derivatives
An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract. Some
of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes
some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified financial
variable.
The fair value of embedded derivatives amounted to $24 million as at December 31, 2015 (December 31, 2014 – $58 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 $1,062 million as at December 31, 2015 (December 31, 2014
– $1,119 million). Embedded derivatives are reported in Financial liabilities related to investments.
28
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 7 – Fair value measurement
7.1
Categorization of fair values
The Company categorizes its fair value measurements according to a three-level fair value hierarchy. Refer to Note 2.4b) for
details.
The following table presents the distribution of the Company’s financial instruments between levels.
Table 7.1 – Fair value hierarchy of financial assets and financial liabilities
As at December 31, 2015
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Debt securities
Preferred shares
Common shares
Derivative financial assets
Total financial assets measured at fair value
Total financial liabilities measured at fair value
As at December 31, 2014
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Preferred shares
Common shares
Derivative financial assets
Total financial assets measured at fair value
Total financial liabilities measured at fair value
Level 1
Valued
using quoted
(unadjusted)
market prices
Level 2
Valued
using models
(with
observable
inputs)
Level 3
Valued
using models
(without
observable
inputs)
210
-
3,643
1,484
-
5,337
1,211
2,971
-
9,519
329
124
3,467
1,346
-
-
4,937
1,210
2,992
-
9,139
326
1,272
1,850
250
3,372
-
-
54
3,426
3
-
1,518
2,006
215
8
3,747
-
-
41
3,788
3
-
-
-
-
-
24
-
-
24
24
-
-
-
-
-
-
58
-
-
58
58
Total
210
4,915
3,334
250
8,709
1,235
2,971
54
12,969
356
124
4,985
3,352
215
8
8,684
1,268
2,992
41
12,985
387
INTACT FINANCIAL CORPORATION
29
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
7.2
Reclassifications between Level 1 and 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 of debt securities between Level 1 and Level 2
As at December 31, 2015
From Level 1 to Level 2
From Level 2 to Level 1
7.3
Level 3 instruments
320
440
Level 3 instruments include the Company’s 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 and accounted
for as an embedded derivative. To determine the fair value of embedded derivatives, the Company uses a valuation technique
based on the implied volatility of the underlying preferred shares. The implied volatility is an unobservable parameter that is
calculated using an internally developed valuation model, which can be significantly affected by market conditions. Judgment is also
required to determine the time period over which the volatility is measured.
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 and internal auditors.
The Company’s exposure to financial risk arising from its financial
policies and practices used to mitigate it are explained hereafter.
instruments together with the Company’s risk management
The majority of the investment portfolio is invested in well established, active and liquid markets.
Table 8.1 – Financial risk
Market risk
Basis risk
Credit risk
Liquidity risk
Risk
definition
Risk that the fair value or future
cash flows of a financial
instrument will fluctuate because
of changes in equity market
prices, interest rates or spreads,
or foreign exchange rates.
Risk that offsetting investments
in an economic hedging
strategy will not experience
price changes that entirely
offset each other.
Possibility that
counterparties may not be
able to meet payment
obligations when they
become due.
Risk that the Company
will encounter difficulty
in raising funds to meet
obligations associated
with financial liabilities.
Reference
Note 8.1
Note 8.2
Note 8.3
Note 8.5
30
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Market risk
8.1
The Company’s exposure to market risk together with the Company’s risk management policy and practices used to mitigate it are
explained below.
Table 8.2 – Market risk
Equity price risk
Interest rate risk
Currency risk
Risk definition
Risk of losses arising from
changes in equity market prices.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in
interest rates or spreads.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in
foreign exchange rates.
Risk exposure
Significant exposure to price
changes for common shares and
preferred shares.
Significant exposure to changes in
interest rates from debt securities and
preferred shares.
Some exposure to foreign exchange
risks arising from investments
denominated in foreign currency,
mainly U.S. dollars.
Risk management
investment policy
Set forth limits in terms of equity
exposure.
Set forth limits in terms of interest rate
duration.
Set forth limits in terms of currency
exposure.
Risk mitigation
Through asset class and
economic sector diversification
and, in some cases, the use of
derivatives.
Through the use of derivatives.
Changes in the discount rate applied to
the Company’s claims liabilities offers a
partial offset to the interest rate risk on
invested assets.
Foreign currency exposure in the
U.S. debt portfolio is mitigated
through the use of foreign-currency
forward contracts.
The Operational Investment Committee regularly monitors compliance with the Company’s investment policies. The Compliance
Review and Corporate Governance Committee reviews on a quarterly basis reports on the compliance of the Company regarding its
investment policies. 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.
a)
Exposure to equity price risk
Sensitivity analysis
The sensitivity analyses hereafter reflect the impacts on Net income and OCI of a 10% variation applied to the price of all common
shares, net of any equity hedges, including the impact of any impairment, as well as of a 5% variation applied to the price of all
preferred shares and related embedded derivatives.
The analyses were prepared using the following 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 sale.
Impact on the Company’s pension plans is not included.
INTACT FINANCIAL CORPORATION
31
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 8.3 – Sensitivity analysis to equity price risk – Common shares
For the years ended December 31,
10% increase
10% decrease
Table 8.4 – Sensitivity analysis to equity price risk – Preferred shares
For the years ended December 31,
5% increase
5% decrease
2015
Net income
(2)
(5)
2015
OCI
117
(110)
2014
Net income
1
1
2014
Net income
OCI
Net income
(7)
5
52
(50)
(13)
9
OCI
111
(113)
OCI
57
(53)
Decline 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.
b)
Exposure to interest rate risk
The Company’s net exposure to the risk that the future cash flows of a financial instrument will fluctuate because of changes in
market interest rates is detailed hereafter in Table 8.6.
including changes in credit spreads, cause changes in realized and
Movements in short-term and long-term interest rates,
unrealized gains and losses. Interest rate risk exposures are reported based on the earlier of the financial instruments contractual
repricing date or maturity date. The effective rates shown in Table 8.6 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 table below does not
incorporate management’s expectation of future events where expected repricing or maturity dates differ significantly from the
contractual dates.
Sensitivity analysis
The sensitivity analysis reflects the impact of a 100 basis-point variation in interest rates on Net income and OCI. The analysis was
prepared using the following 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 debt securities, the estimated impact on Net income is assumed to be offset by the market-yield
Impact on the Company’s pension plans is not included.
adjustment.
− AFS debt securities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be realized either
through a sale or impairment.
Table 8.5 – Sensitivity analysis to interest rate risk
For the years ended December 31,
100 basis-point increase
100 basis-point decrease
2015
Net income
7
(7)
OCI
(159)
159
2014
Net income
18
(18)
OCI
(172)
172
Gains and losses resulting from changes in interest rates vary depending on the position taken by the Company on the interest rate
risk.
32
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 8.6 – Contractual repricing and maturity schedule
As at December 31, 2015
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, 2014
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
Floating
rates
Less than
1 year
Fixed rates
From 1 to
5 years
Over
5 years
Non-rate
sensitive
98
-
5
52
-
219
-
96
470
-
-
2
-
-
2
468
88
-
3
73
-
95
-
41
300
-
-
7
-
-
7
293
43
0.47%
210
0.45%
1,019
1.25%
39
5.02%
-
1
4.59%
110
1.67%
-
1,422
3,262
1.67%
-
-
-
-
3,262
(1,840)
1
0.88%
124
0.61%
739
1.44%
41
4.77%
-
2
3.30%
134
2.01%
-
1,041
3,209
2.01%
-
3
-
-
3,212
(2,171)
-
-
4,286
1.45%
728
4.92%
-
37
5.57%
109
1.67%
-
5,160
3,221
1.67%
249
5.41%
13
4.92%
-
-
3,483
1,677
-
-
4,222
1.63%
837
4.07%
-
61
5.62%
132
2.01%
-
5,252
3,168
2.01%
249
5.41%
33
4.03%
-
-
3,450
1,802
-
-
3,189
1.82%
336
5.36%
-
191
5.09%
55
1.67%
-
3,771
1,611
1.67%
894
5.47%
12
5.37%
-
-
2,517
1,254
-
-
3,596
2.12%
317
5.05%
-
249
5.26%
69
2.01%
-
4,231
1,644
2.01%
894
5.47%
18
5.06%
-
-
2,556
1,675
-
-
-
80
2,971
-
-
7,362
10,413
-
-
351
5,893
5,728
11,972
(1,559)
-
-
-
-
2,992
-
-
6,764
9,756
-
-
371
5,529
5,455
11,355
(1,599)
Total
141
210
8,499
1,235
2,971
448
274
7,458
21,236
8,094
1,143
378
5,893
5,728
21,236
-
89
124
8,560
1,268
2,992
407
335
6,805
20,580
8,021
1,143
432
5,529
5,455
20,580
-
INTACT FINANCIAL CORPORATION
33
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Exposure to currency risk
c)
The following table presents the net currency exposure on foreign-denominated investments and receivables.
Table 8.7 – Net currency exposure on foreign-denominated investments and receivables
As at December 31,
Investments and receivables denominated in U.S. dollars
Fixed-income securities
Common shares
Other
Investments and receivables denominated in U.S. dollars
Less: U.S. dollar foreign-currency forward contracts, notional amount
Net currency exposure – U.S. dollar
Investment in Brazil denominated in Brazilian Real
Net currency exposure on foreign-denominated investments and receivables
Sensitivity analysis
2015
986
594
30
1,610
1,029
581
11
592
2014
1,012
508
41
1,561
1,055
506
16
522
The sensitivity analysis reflects the impact of a 5% change in the value of the Canadian dollar compared to the U.S. dollar on Net
to forward foreign-exchange contracts. The analysis was prepared using the following
income and OCI after giving effect
assumptions:
− Foreign currency and interest rates move independently.
− Credit, liquidity and basis risks have not been considered.
−
− Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
− AFS debt or equity securities in an unrealized gain or loss position, as reflected in AOCI may, at some point in the future,
Impact on the Company’s pension plans is not included.
be realized through a sale.
Table 8.8 – Sensitivity analysis to currency risk
For the years ended December 31,
5% increase (strengthening of Canadian dollar)
5% decrease (strengthening of U.S. dollar)
8.2
Basis risk
2015
2014
Net income
OCI
Net income
1
(1)
(22)
22
1
(1)
OCI
(19)
19
The Company’s use of derivatives exposes it to a number of risks, including credit and market risks. The hedging of certain risks
with derivatives results in basis risk. The imperfect correlation between the hedging instrument and hedged item 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 economic hedges on a regular basis. Basis risk is controlled by limits prescribed in the investment policy, which are monitored
regularly.
8.3
Credit risk
The Company’s credit risk exposure is concentrated primarily in its debt securities and preferred shares and, to a lesser extent, in its
premium receivables, reinsurance assets, and structured settlement agreements entered into with various life insurance companies.
The Company is also subject to counterparty credit risk arising from reinsurance, over-the-counter derivatives, as well as securities
lending and borrowing transactions. A counterparty is any person or entity from which cash or other forms of consideration are
expected to extinguish a liability or obligation to the Company. These exposures and the Company’s risk management policy and
practices used to mitigate credit risk are explained below.
34
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Maximum exposure to credit risk
The table below presents 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 exposure to credit
risk is defined as the carrying value of the asset.
Table 8.9 – Maximum exposure to credit risk
As at December 31,
Cash
Debt securities (excluding Government debt securities)
Preferred shares
Loans
Premium receivables
Reinsurance assets
Other financial assets1
On-balance sheet credit risk exposure
Structured settlements (Note 8.4)
2015
98
3,794
1,235
448
2,868
274
549
9,266
1,169
2014
87
3,699
1,268
407
2,711
335
485
8,992
1,067
Off-balance sheet credit risk exposure
1,067
1Include industry pools receivable, other receivables and recoverable, accrued investment income, income taxes receivable, restricted funds, and
1,169
financial assets related to investments.
b)
Concentration of credit risk
Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located in the
same geographic area or have comparable economic characteristics. Their ability to meet contractual obligations may be similarly
affected by changing economic, political or other conditions. The Company’s investments could be sensitive to changing conditions
in specific geographic regions or industries.
Table 8.10 – Investment breakdown by country of incorporation and by industry
As at December 31,
By country of incorporation
Canada
U.S.
Other
By industry
Government
Banks, insurance and diversified financial services
Energy
Other
2015
87%
11%
2%
100%
40%
32%
7%
21%
100%
2014
86%
10%
4%
100%
40%
33%
8%
19%
100%
The Company has a significant concentration of its investments in the financial sector and in Canada; this risk concentration is
closely monitored. As a means to provide geographic and sector diversification to its investment portfolio, the Company invests in
high-quality non-financial U.S. corporate bonds and U.S. common shares.
INTACT FINANCIAL CORPORATION
35
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
c)
Investments
The Company’s risk management strategy is to invest in debt securities 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, all debt securities have a minimum credit rating of 'BBB' and of ‘P3’ for
preferred shares. Management monitors subsequent credit rating changes on a regular basis.
For the Company’s federally 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 regardless of the asset class (see Table 8.10). The Company applies limits against that aggregate exposure, which are
more conservative than OSFI’s limits. Investment portfolio diversification helps to mitigate credit risk and is monitored against
established guidelines with respect to exposure to individual issuers.
d)
Counterparty credit risk
Counterparty credit
transactions.
Reinsurance
risk arises from reinsurance, over-the-counter derivatives, as well as security lending and borrowing
The Company relies on reinsurance to manage underwriting risk. Under reinsurance programs, management considers that in order
for a contract to reduce exposure to risk, it must be structured to ensure that the reinsurer assumes the significant insurance risk
related to the underlying reinsured risks and it is reasonably possible that the reinsurer may realize a significant loss from the
reinsurance.
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. There is no certainty that its reinsurers will pay all reinsurance
claims on a timely basis or at all. As a result, the Company bears credit risk with respect to its reinsurers.
The Company may also be subject to credit risk on potential future recoverables arising from catastrophes that could be subject to a
non-payment (default). 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 assesses the financial soundness of the reinsurers before signing any reinsurance treaties and monitors their
situation on a regular basis. The Company also has minimum rating requirements for its reinsurers. Substantially all reinsurers are
required to have a minimum credit rating of 'A-' at inception of the contract. The Company also requires that its contracts include a
special termination and security review clause allowing the Company to replace a reinsurer during the contract period should the
reinsurer’s credit rating fall below the level acceptable to the Company or for other reasons that might jeopardize the Company’s
ability to continue doing business with such reinsurer as intended at the time of entering into the reinsurance arrangement.
The Company has collateral in place to support amounts receivable and recoverable from unregistered reinsurers. The Company is
the assigned beneficiary of collateral consisting of cash, security agreements and letters of credit totalling $133 million as at
December 31, 2015 (December 31, 2014 – $166 million) as guarantees from unregistered reinsurers. This collateral
is held in
support of policy liabilities of $76 million as at December 31, 2015 (December 31, 2014 – $91 million) and could be used should
these reinsurers be unable to meet their obligations.
Management concluded that
reinsurance as at December 31, 2015.
the Company was not exposed to significant
loss from reinsurers for potentially uncollectible
36
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Over-the-counter derivatives, as well as security lending and borrowing transactions
Credit risk from over-the-counter 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.
Credit risk from security lending and borrowing transactions arises when the counterparty is allowed to re-hypothecate or re-pledge
the collateral externally. Credit risk from security borrowing is the potential for the counterparty to default when the value of the
collateral posted is higher than the value of the security borrowed.
The Company subjects its derivative-related, as well as security lending and 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, or has a guarantee from a
company rated ‘A-’ or better.
The Company uses netting clauses in master derivative agreements to reduce derivative-related credit exposure. Netting clauses in
master derivative agreements 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 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 security lending and borrowing transactions. Most of the Company’s legal
agreements allow for daily collateral movement. Consequently, the Company regularly validates 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 derivative positions when the value
exceed a specified threshold amount.
The aggregate credit risk exposure was $133 million as at December 31, 2015 (December 31, 2014 – $123 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.
8.4
Structured settlements
The Company has obligations to pay certain fixed amounts to claimants on a recurring basis and has purchased annuities from life
insurers to provide for those payments. In the event that the life insurers are in default, the Company may have to assume a
financial guarantee obligation. Therefore, the net risk to the Company is any credit risk related to the life insurers. Since the
Company deals with registered life insurers with credit rating of at least ‘A-’ at the inception of the contract, this credit risk is minimal.
INTACT FINANCIAL CORPORATION
37
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
8.5
Liquidity risk
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 the Company’s P&C 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 matching status on a quarterly basis.
To manage its cash flow requirements, a portion of the Company’s investments is maintained in short-term (less than one year)
highly liquid money market securities. A large portion of the investments are 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.
The following table presents the carrying value of financial liabilities by expected maturity. The expected maturity of claims liabilities
is determined by estimating when claims liabilities will be settled. Unearned premiums have been excluded because they do not
constitute actual obligations.
Table 8.11 – Financial liabilities by expected maturity
As at December 31, 2015
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
As at December 31, 2014
Claims liabilities
Financial liabilities related to investments
Income taxes payable
Debt outstanding
Other financial liabilities
Less than
1 year
From 1 to
5 years
Over
5 years
No specific
maturity
3,262
25
101
-
837
4,225
3,209
48
105
-
791
4,153
3,221
-
-
249
96
3,566
3,168
-
-
249
56
3,473
1,611
-
-
894
9
2,514
1,644
-
-
894
6
2,544
-
353
-
-
232
585
-
384
-
-
246
630
Total
8,094
378
101
1,143
1,174
10,890
8,021
432
105
1,143
1,099
10,800
38
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 9 – Claims liabilities and unearned premiums
9.1
Summary of claims liabilities
The following table presents movements in the Company’s claims liabilities.
Table 9.1 – Movements in claims liabilities
Direct
Ceded
Net
As at December 31, 2015
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 4)
Balance, end of year
As at December 31, 2014
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
Balance, end of year
8,021
5,144
(503)
59
4,700
(4,717)
90
8,094
7,996
4,899
(387)
104
4,616
(4,626)
35
8,021
314
64
(24)
1
41
(105)
3
253
484
32
(17)
1
16
(205)
19
314
The following table presents claims liabilities by line of business.
Table 9.2 – Claims liabilities by line of business
Direct
Ceded
As at December 31, 2015
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
As at December 31, 2014
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
4,638
581
5,219
731
2,144
2,875
8,094
4,533
584
5,117
674
2,230
2,904
8,021
64
10
74
8
171
179
253
68
39
107
9
198
207
314
7,707
5,080
(479)
58
4,659
(4,612)
87
7,841
7,512
4,867
(370)
103
4,600
(4,421)
16
7,707
Net
4,574
571
5,145
723
1,973
2,696
7,841
4,465
545
5,010
665
2,032
2,697
7,707
INTACT FINANCIAL CORPORATION
39
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
9.2
Summary of unearned premiums
The following table presents movements in the Company’s unearned premiums.
Table 9.3 – Movements in unearned premiums
As at December 31, 2015
Balance, beginning of year
Business combination (Note 4)
Premiums written
Premiums earned
Balance, end of year
As at December 31, 2014
Balance, beginning of year
Business combination
Premiums written
Premiums earned
Balance, end of year
The following table presents unearned premiums by line of business.
Table 9.4 – Unearned premiums by line of business
As at December 31, 2015
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
As at December 31, 2014
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
40
INTACT FINANCIAL CORPORATION
Direct
Ceded
Net
4,110
71
7,893
(7,684)
4,390
4,125
13
7,329
(7,357)
4,110
21
-
194
(194)
21
21
6
187
(193)
21
Direct
Ceded
2,131
990
3,121
338
931
1,269
4,390
1,983
900
2,883
319
908
1,227
4,110
-
-
-
1
20
21
21
-
-
-
1
20
21
21
4,089
71
7,699
(7,490)
4,369
4,104
7
7,142
(7,164)
4,089
Net
2,131
990
3,121
337
911
1,248
4,369
1,983
900
2,883
318
888
1,206
4,089
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
9.3
Fair value of claims liabilities
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, 2015 and 2014.
Table 9.5 – Carrying value of claims liabilities
As at December 31, 2015
Undiscounted value
Effect of time value of money using a discount rate of 1.67%
Provision for adverse deviations (PfAD)
As at December 31, 2014
Undiscounted value
Effect of time value of money using a discount rate of 2.01%
Provision for adverse deviations (PfAD)
Direct
Ceded
Net
7,754
(303)
643
8,094
7,675
(351)
697
8,021
244
(7)
16
253
303
(9)
20
314
7,510
(296)
627
7,841
7,372
(342)
677
7,707
9.4
Prior-year claims development
The following table presents the estimates of cumulative incurred claims, including IBNR, with subsequent developments during the
periods and together with cumulative payments to date.
Table 9.6 – Prior-year claims development – Net
Total
2015
2014
2013
2012
2011
2010
2009
2008 Earlier
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
Seven years later
Eight years later
Current estimate
Claims paid in subsequent periods
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Claims paid to date
Undiscounted claims liabilities
Discounting and PfAD
Claims liabilities - Net
7,510
331
7,841
2,489
2,456
2,519
2,370
2,305
2,037
1,799
1,626
4,294
-
-
-
-
-
-
-
-
2,489
-
-
-
-
-
-
-
-
-
2,386
-
-
-
-
-
-
-
2,386
(911)
-
-
-
-
-
-
-
2,457
2,422
-
-
-
-
-
-
2,338
2,258
2,215
-
-
-
-
-
2,207
2,136
2,052
2,012
-
-
-
-
1,922
1,895
1,860
1,835
1,791
-
-
-
2,422
2,215
2,012
1,791
(959)
(312)
--
--
--
--
--
--
(885)
(277)
(268)
-
-
-
-
-
(827)
(269)
(219)
(193)
-
-
-
-
(554)
(293)
(239)
(192)
(173)
-
-
-
1,739
1,739
1,715
1,679
1,656
1,628
-
-
1,628
(568)
(176)
(212)
(200)
(167)
(90)
-
-
1,625
1,596
1,586
1,562
1,525
1,511
1,493
-
1,493
(607)
(155)
(144)
(169)
(95)
(89)
(55)
-
4,136
4,069
3,985
3,910
3,821
3,807
3,794
3,753
3,753
(1,137)
(559)
(462)
(334)
(317)
(323)
(162)
(87)
(911)
(1,271)
(1,430)
(1,508)
(1,451)
(1,413)
(1,314)
(3,381)
2,489
1,475
1,151
785
504
340
215
179
372
INTACT FINANCIAL CORPORATION
41
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Company applied the transitional rules of IFRS 4 - Insurance contracts that permit only five years of information to be disclosed
upon adoption of IFRS in 2011. The claims development information disclosed in the preceding table is being increased from five
years to ten years over the period 2012 – 2016.
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.
9.5
Net loss from reinsurance
The following table presents the net loss from reinsurance.
Table 9.7 – Net loss from reinsurance
For the years ended December 31,
Ceded earned premiums
Ceded claims incurred
Commissions earned on ceded reinsurance
2015
(194)
41
19
(134)
2014
(193)
16
23
(154)
Note 10 – Insurance risk
The Company principally underwrites automobile, home, as well as commercial P&C contracts to individuals and businesses. The
majority of the insurance risk to which the Company is exposed is of a short-term nature. Policies generally cover a 12-month
period. The average duration of claims liabilities is approximately 2.4 years as at December 31, 2015 and 2014.
Insurance contract risk is the risk that a loss arises from the following reasons:
−
−
−
−
underwriting and pricing (Note 10.1);
fluctuation in the timing, frequency and severity of claims relative to expectations (Note 10.2);
inadequate reinsurance protection (Note 8.3d); and
large unexpected losses arising from a single event such as a catastrophe (Note 10.3).
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 related to past
insured events. 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 risks, are described hereafter.
Underwriting and pricing risks
10.1
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 insurance contracts may vary in relation to the geographical area of
the risk insured by the Company. The Company’s exposure to concentration 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.
42
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 10.1 – Concentration of insurance contracts on the basis of DPW
For the years ended December 31,
By line of business
Personal Auto
Personal Property
Commercial P&C
Commercial Auto
By province
Ontario
Québec
Alberta
British Columbia
Other
2015
45%
23%
23%
9%
100%
41%
27%
18%
6%
8%
100%
2014
46%
21%
24%
9%
100%
42%
27%
18%
6%
7%
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. Its mandate is to identify, measure and monitor
risks, as well as 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.
10.2
Risk related to the timing, frequency and severity of claims
The occurrence of claims being unforeseeable, the Company is exposed to the risk that the number and the severity of claims would
exceed the estimates.
Strict claim review policies are in place to assess all new and ongoing claims. Regular detailed reviews of claims handling
procedures and frequent investigations of possible fraudulent claims reduce the Company’s risk exposure. Further, the Company
enforces a policy of actively managing and promptly pursuing claims, in order to reduce its exposure to unpredictable future
developments that could negatively impact the business. The Company has established a Large Loss Committee responsible for
analyzing large losses and contentious matters to ensure that appropriate claims liabilities are established and approved.
INTACT FINANCIAL CORPORATION
43
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
10.3
Catastrophe risk
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). Ceded reinsurance complies with regulatory guidelines. Retention limits for the excess-of-loss reinsurance vary by
product line.
Table 10.2 – Company’s reinsurance net retention and coverage limits by nature of risk
As at December 31,
Single risk events
Retentions:
On property policies
On liability policies
Multi-risk events and catastrophes
Retention
Coverage limits
2015
2014
7.5
2 - 10
100
3,450
7.5
2 - 10
100
3,100
Single risk events
For certain special classes of business or types of risks, the retention may be lower through specific treaties or the use of facultative
reinsurance.
Multi-risk events and catastrophes
Following the integration of the CDI exposure in the Company’s reinsurance program, the coverage limit has been increased to
$3,450 million on August 1, 2015. The Company retains participations averaging 5.5% as at December 31, 2015
(December 31, 2014 – 8%) on reinsurance layers between the retention and coverage limits.
Effective January 1, 2015, the Company entered into an aggregate reinsurance treaty to protect for frequency of multi-risk events
and catastrophes of $30 million or more. The above retention and coverage limits exclude this aggregate reinsurance treaty.
Exposure to insurance risk
10.4
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 (severity);
average number of claims by accident year (frequency);
trends in claims severity and frequency;
payment patterns;
other factors such as inflation, expected or in-force government pricing and coverage reforms, and level of insurance fraud;
discount rate; and 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 insurance contracts that the
Company underwrites. There may also 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. Reserving policies are overseen by the Company’s Reserve Review Committee.
The claims liabilities’ sensitivity to certain of these key assumptions is outlined below. It is not possible to quantify the sensitivity to
certain assumptions such as legislative changes or uncertainty in the estimation process. The analysis 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.
44
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 10.3 – Sensitivity analysis (claims liabilities)
Sensitivity factors
As at December 31, 2015
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
As at December 31, 2014
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
Note 11 – Other assets and other liabilities
11.1
Components of other assets
Table 11.1 – Components of other assets
As at December 31,
Industry pools receivable
Other receivables and recoverable
Employee future benefit assets (Table 21.1)
Financial assets related to investments
Restricted funds
Investments, at cost
Prepaids
Other
Change in
assumptions
Impact on
Net income
+5%
+5%
+1%
+5%
+5%
+1%
(271)
(53)
134
(267)
(53)
131
2015
2014
229
123
93
64
42
41
31
32
655
232
127
69
56
-
44
26
17
571
During 2015, there were no events or changes in circumstances that indicated that the carrying values of Investments at cost may
not be recoverable.
11.2
Components of other liabilities
Table 11.2 – Components of other liabilities
As at December 31,
Commissions payable
Industry pools payable
Premium and sale taxes payable
Accrued salaries and other short-term benefits
Employee future benefit liabilities (Table 21.1)
Accrued expenses
Deferred income
Deposits received from reinsurers
Other payables
2015
2014
237
230
192
136
112
56
54
15
263
210
237
158
115
113
52
-
34
302
1,295
1,221
INTACT FINANCIAL CORPORATION
45
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 12 – Goodwill and intangible assets
12.1
Summary of goodwill and intangible assets
Table 12.1 – Reconciliation of the carrying value of goodwill and intangible assets
Cost
Balance as at January 1, 2015
Acquisitions and costs capitalized
Business combination (Note 4)
Disposals
Balance as at December 31, 2015
Accumulated amortization
Balance as at January 1, 2015
Amortization expense
Disposals
Balance as at December 31, 2015
Net carrying value
Cost
Balance as at January 1, 2014
Acquisitions and costs capitalized
Reclassification
Disposals
Balance as at December 31, 2014
Accumulated amortization
Balance as at January 1, 2014
Amortization expense
Disposals
Balance as at December 31, 2014
Net carrying value
Goodwill
Distribution
networks
Customer
relationships
Internally
developed
software
Total
intangible
assets
Intangible assets
1,102
74
70
(78)
1,168
-
-
-
-
1,168
972
138
5
(13)
1,102
-
-
-
-
1,102
909
-
1
-
910
(8)
(3)
-
(11)
899
905
4
-
-
909
(4)
(4)
-
(8)
901
258
89
78
(80)
345
(119)
(33)
9
(143)
202
228
43
(5)
(8)
258
(96)
(26)
3
(119)
139
364
62
-
-
426
(202)
(40)
-
(242)
184
300
64
-
-
364
(169)
(33)
-
(202)
162
1,531
151
79
(80)
1,681
(329)
(76)
9
(396)
1,285
1,433
111
(5)
(8)
1,531
(269)
(63)
3
(329)
1,202
Management has determined that intangible assets with finite useful lives are not impaired.
The distribution network with indefinite useful life amounted to $820 million as at December 31, 2015 and 2014. Intangible assets
under development amounted to $70 million as at December 31, 2015 (December 31, 2014 – $85 million). These intangible assets
are not subject to amortization, but are tested for impairment on an annual basis.
46
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 13 – Investments in associates and joint ventures
The following table presents the Company’s investments in associates and joint ventures, all of which are investments in private
entities.
Table 13.1 – Investments in associates and joint ventures
As at December 31,
Associates
Joint ventures
2015
207
189
396
2014
232
81
313
During 2015, the Company acquired investments in associates and joint ventures accounted for using the equity method for a total
purchase price of $123 million (2014 – $78 million). During 2015, there were no events or changes in circumstances that indicated
that the carrying values of these investments may not be recoverable.
Note 14 – Property and equipment
14.1
Net carrying value of property and equipment
Table 14.1 – Net carrying value of property and equipment
As at December 31,
Computer equipment
Furniture and equipment
Leasehold improvements
Note 15 – Debt outstanding
15.1
Unsecured medium term notes (“term notes”)
Table 15.1 – Term notes outstanding terms
2015
10
44
50
104
2014
11
51
48
110
Series 1
Series 2
Series 3
Series 4
Series 5
Date issued
Date of supplemental issue
Maturity date
Principal amount outstanding
Fixed annual rate
Semi-annual coupon payment
due each year on:
Aug. 31, 2009
Sept. 3, 2019
250
5.41%
March 3
Sept. 3
Nov. 23, 2009
March 23, 2010
Nov. 23, 2039
250
6.40%
May 23
Nov. 23
July 8, 2011
Aug. 18, 2011
July 8, 2061
100
6.20%
Jan. 8
July 8
Aug. 18, 2021
300
4.70%
Feb. 18
Aug. 18
June 15, 2012
Sept. 10, 2012
June 16, 2042
250
5.16%
June 16
Dec. 16
15.2
Summary of debt outstanding
The following table presents the summary of debt outstanding.
Table 15.2 – Fair value and carrying value of debt outstanding
As at December 31,
Series 1
Series 2
Series 3
Series 4
Series 5
2015
2014
Carrying value
Fair value Carrying value
Fair value
249
248
99
298
249
280
319
129
336
279
249
248
99
298
249
283
326
135
336
288
1,143
1,343
1,143
1,368
INTACT FINANCIAL CORPORATION
47
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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. Fair value is established using valuation data from a benchmark firm.
Interest expense on term notes is presented as Finance costs.
15.3
Credit facility
The Company has a $300-million five-year unsecured revolving term credit facility, which matures on December 5, 2020. This credit
facility may be drawn as prime loans or base rate (Canada) advances at the prime or base rate plus a margin, as well as bankers’
acceptances or Libor advances at
the bankers’ acceptance or Libor rate plus a margin. This facility was undrawn as at
December 31, 2015 and 2014.
As part of the covenants of the loans under the credit facility, the Company is required to maintain certain financial ratios, which
were fully met as at December 31, 2015 and 2014.
Note 16 – Common shares and preferred shares
16.1
Authorized
Authorized share capital consists of an unlimited number of common shares and Class A shares.
16.2
Issued and outstanding
Table 16.1 – Issued and outstanding shares, by class
As at December 31, 2015 and 2014
Common
Class A
Series 1 Preferred
Series 3 Preferred
Total Class A
Class A shares
Number of shares
Amount
131,543,134
2,090
10,000,000
10,000,000
20,000,000
244
245
489
Issued and outstanding Class A shares would rank both with regards to dividends and return of capital in priority to common shares.
The holders of Series 1 Preferred shares are entitled to receive fixed non-cumulative preferential cash dividends, as and when
declared by the Board of Directors of
fixed-rate period ending on
the Company, on a quarterly basis for
December 31, 2017, based on an annual rate of 4.20%. The dividend rate will be reset on December 31, 2017 and every five years
thereafter at a rate equal to the five-year Government of Canada bond yield plus 1.72%. Subject to certain conditions, on
December 31, 2017 and on December 31 every five years thereafter, the holders of Series 1 Preferred Shares will have the right to
convert their shares into Non-cumulative Floating Rate Class A Shares Series 2 (the “Series 2 Preferred Shares”). In addition, the
Company has the option to redeem the Series 1 and Series 2 Preferred Shares on the same dates.
the initial
The holders of Series 3 Preferred shares are entitled to receive fixed non-cumulative preferential cash dividends, as and when
declared by the Board of Directors of
fixed-rate period ending on
September 30, 2016, based on an annual rate of 4.20%. The dividend rate will be reset on September 30, 2016 and every five years
thereafter at a rate equal to the five-year Government of Canada bond yield plus 2.66%. Subject to certain conditions, on
September 30, 2016 and on September 30 every five years thereafter, holders of Series 3 Preferred Shares will have the right to
convert their shares into Non-cumulative Floating Rate Class A Shares Series 4 (the “Series 4 Preferred Shares”). In addition, the
Company has the option to redeem the Series 3 Preferred Shares and Series 4 Preferred Shares on the same dates.
the Company, on a quarterly basis,
the initial
for
Dividends declared per share
16.3
During the year ended December 31, 2015,
the Company declared dividends on its Common shares of $2.12 per share
(December 31, 2014 – $1.92 per share) and of $1.05 per share on its Preferred shares Series 1 and Series 3 (December 31, 2014
– $1.05 per share).
48
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 17 – Capital management
Capital management objectives
17.1
The Company’s objectives when managing capital consist of:
− ensuring policyholders are well protected while maintaining strong regulatory capital levels (see Regulatory capital section
below); and
− maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
The Company seeks 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 the Company’s evaluation of risks and their potential impact
on capital.
The Company also keeps higher levels of excess capital when it foresees growth or actionable opportunities in the near term.
Furthermore, the Company intends to return excess capital to shareholders through annual dividend increases and, when excess
capital levels permit, through share buybacks.
Regulatory capital
The Company manages regulatory capital on an aggregate basis, as well as individually for each regulated entity. Its federally
chartered P&C insurance subsidiaries are subject to the regulatory capital requirements defined by OSFI and the Insurance
Companies Act, while its Québec provincially chartered subsidiaries are subject to the requirements of the AMF and the Act
respecting insurance.
Federal and Québec regulated P&C insurers are required, at a minimum, to maintain a MCT ratio of 100%. OSFI and the AMF have
also established an industry-wide supervisory target capital ratio of 150%, which provides a cushion above the minimum
requirement. To ensure that there is minimal risk of breaching the supervisory target, the Company has established a higher internal
threshold in its principal
insurance subsidiaries in excess of which, under normal circumstances, the Company will maintain its
capital.
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, net of related deferred tax liabilities.
Total capital required is calculated by classifying assets and liabilities into categories and applying prescribed risk factors to each
category. It is further increased by an operational risk margin, based on the overall riskiness of a P&C insurer (its capital required)
and its premium volume. Capital required is then reduced by a credit for diversification between investment risk and insurance risk.
MCT Guidelines
In September 2014, OSFI released the final MCT guidelines outlining changes to the MCT framework. The new guidelines came
into effect on January 1, 2015 and their impact on the Company’s regulatory capital ratios will be positive, with the benefits phasing
in over three years. The positive impact
from the 2015 MCT guidelines phase in was approximately eight points as at
December 31, 2015.
On November 30, 2015, OSFI issued a final 2016 MCT Guideline, which amends regulatory capital requirements, beginning
January 1, 2016. The most significant changes are the addition of capital requirements for equity derivatives and equity instruments
sold short, as well as the recognition of equity hedging strategies. These modifications will be phased in over a two-year period.
INTACT FINANCIAL CORPORATION
49
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Capital position
17.2
The following table presents the estimated aggregate capital position of the Company’s P&C insurance subsidiaries.
Table 17.1 – Capital position of the Company’s P&C insurance subsidiaries
As at December 31,
Total capital available
Total capital required
MCT %
Excess capital at 100%
Excess capital at 150%
Excess capital at 170%
1 Comparative figures are presented under the MCT guidelines in effect as at December 31, 2014.
2015
3,840
1,889
203%
1,951
1,007
629
20141
3,933
1,878
209%
2,055
1,116
740
As at December 31, 2015 and 2014, the Company’s P&C insurance subsidiaries remained well capitalized on an individual basis
and were in compliance with regulatory requirements.
Including net
MCT of 170% was $625 million as at December 31, 2015 (December 31, 2014 – $681 million).
the P&C insurance subsidiaries,
liquid assets outside of
the Company’s total estimated excess capital at an
Annually, the Company performs Dynamic Capital Adequacy Testing (DCAT) 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 2015 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.
Note 18 – Revenues
Table 18.1 – Revenues
For the years ended December 31,
Net premiums earned
Other underwriting revenues
Interest income (Table 5.7)
Dividend income (Table 5.7)
Net investment gains (losses) (Table 5.8)
Share of profit from investments in associates and joint ventures
Other revenues
Table 18.2 – Premiums written and net premiums earned
For the years ended December 31,
Premiums written
Direct
Ceded
Net
Changes in unearned premiums
Net premiums earned
50
INTACT FINANCIAL CORPORATION
2015
7,490
122
280
179
(64)
26
121
8,154
2014
7,164
100
287
174
173
19
98
8,015
2015
2014
7,893
(194)
7,699
(209)
7,490
7,329
(187)
7,142
22
7,164
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 19 – Income taxes
19.1
Income tax expense (benefit) recorded in Net income
Table 19.1 – Components of income tax expense (benefit) recorded in Net income
For the years ended December 31,
Current income tax expense
Prior-year adjustment expense
Deferred income tax expense (benefit)
19.2
Income tax expense (benefit) recorded in OCI
Table 19.2 – Components of income tax expense (benefit) recorded in OCI
For the years ended December 31,
Reclassification to income of net losses (gains) on AFS instruments
Net change in unrealized gains (losses) on AFS instruments
Net actuarial gains (losses) on employee future benefits
2015
211
1
(43)
169
2015
31
(85)
13
(41)
2014
158
(19)
36
175
2014
(29)
41
(11)
1
19.3
Effective income tax rate
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 following table presents the reconciliation of the effective income tax rate to the income tax expense calculated at statutory tax
rates.
Table 19.3 – 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
Prior-year adjustments
Resolution of specific tax matters
Non-taxable accounting gains
Non-taxable income
Equity pick-up net of tax
Non-deductible expenses
Other
Effective income tax rate
2015
26.7%
(5.2)%
0.1%
-
(1.1)%
(0.9)%
(0.8)%
0.7%
(0.2)%
19.3%
2014
26.5%
(4.9)%
(1.1)%
(0.8)%
(0.7)%
(0.6)%
(0.5)%
0.5%
(0.1)%
18.3%
INTACT FINANCIAL CORPORATION
51
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
19.4
Components of deferred tax assets and liabilities
Table 19.4 – Components of deferred tax assets and liabilities
As at December 31,
2015
2014
2015
2014
Consolidated
balance sheets
Asset (liability)
Consolidated statements
of comprehensive income
(loss)
Expense (benefit)
Net claims liabilities
Deferred loss for tax purposes
Difference between market value and book value of investments
Deferred expenses for tax purposes
Losses available for carry forward
Defined benefit plans
Other
Deferred tax assets
Intangible assets
Deferred income for tax purposes
Deferred gains and losses on specified debt obligations
Property and equipment
Difference between market value and book value of investments
Deferred tax liabilities
Net deferred tax asset (liability)/ expense (benefit)
Reported in:
Deferred tax assets
Deferred tax liabilities
Net income
OCI
Business combination
Balance sheet
106
64
7
66
7
6
1
257
(158)
-
(14)
(21)
-
(193)
64
171
(107)
(16)
(3)
101
-
-
69
15
12
3
200
(144)
(58)
(16)
(18)
-
(236)
(36)
57
(93)
(5)
(5)
(64)
(7)
4
8
6
2
(56)
(2)
(58)
(2)
(1)
-
(63)
(119)
(60)
(59)
(7)
-
-
(1)
36
(10)
2
20
(13)
19
(2)
5
(2)
7
27
34
(7)
The Company had allowable capital losses of $24 million as at December 31, 2015 and 2014, 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 has recognized a deferred tax asset for unused non-capital losses as at December 31, 2015 and 2014.
Note 20 – Earnings per share
EPS was calculated by dividing the Net income attributable to common shareholders of the Company by the weighted-average
number of common shares outstanding during the year. Dilution is not applicable and, therefore, diluted EPS is the same as basic
EPS.
Table 20.1 – 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
Weighted-average number of common shares outstanding (in millions) during the year
EPS – basic and diluted (in dollars)
2015
706
21
685
131.5
5.20
2014
782
21
761
131.5
5.79
52
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 21 – 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 64% in
respect of active members, 29% in respect of pensioners and beneficiaries and 7% in respect of deferred members. Effective
January 1, 2014, the Company provides active employees a choice between a defined benefit and a defined contribution pension
plan.
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 the
above cost of settling accrued benefit entitlements.
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 upon termination of the plan. 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 life insurance and health care benefit plans 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 for the duration of their leaves. 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, 2014 or 2012 depending on the plan.
21.1
Funded status
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 21.1 – Funded status
As at December 31,
Defined benefit obligation
Fair value of plan assets
Net defined benefit liability
Reported in:
Defined benefit plans
2015
(1,831)
1,812
(19)
2014
(1,772)
1,728
(44)
Other assets
Other liabilities1
69
(113)
1 As at December 31, 2015, the amount reported in Other liabilities is composed of $82 million relating to pension plans (December 31, 2014 –
93
(112)
$83 million) and $30 million relating to post-retirement and post-employment benefit plans (December 31, 2014 – $30 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 following the advice of an actuary.
Under the provisions of the pension plans, members may annually select between three different defined benefit levels and are
required to make contributions to their respective plans based on the benefit level selected. The Company must fund the excess of
the required funding over the members’ contributions.
INTACT FINANCIAL CORPORATION
53
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 $52 million for
the year ended December 31, 2015
(December 31, 2014 – $55 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 $67 million in 2016. The contributions will vary depending on the results of the
December 31, 2015 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 Company’s liquidity risk with regards to pension plans is not significant, as inflows from contributions receivable generally
outweigh 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 defined benefit obligation is based on the current value of expected benefit payment cash flows to plan members over their
expected lifetime.
21.2
Defined benefit obligation
The movement of the defined benefit obligation is as follows:
Table 21.2 – Movement of the 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 arising from actuarial losses (gains) from changes in:
demographic assumptions
financial assumptions
Employee contributions
Benefit payments
Balance, end of year
21.3
Fair value of plan assets
The movement of the fair value of plan assets is as follows:
Table 21.3 – 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
2015
1,772
67
-
73
24
(68)
25
(62)
2014
1,423
49
1
70
24
235
25
(55)
1,831
1,772
Defined benefit plans
2015
1,728
52
25
70
4
(62)
(5)
1,812
2014
1,425
55
25
69
214
(55)
(5)
1,728
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, 2015 was a gain of $74 million (December 31, 2014 – $283 million).
54
INTACT FINANCIAL CORPORATION
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. Plan assets are essentially all
quoted in an active market.
Table 21.4 – 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
2015
2014
Fair value
% of total
Fair value
% of total
45
756
354
8
1,118
611
38
1,812
2%
42%
20%
-
62%
34%
2%
100%
24
1%
755
310
8
1,073
604
27
1,728
44%
18%
-
62%
35%
2%
100%
21.4
Employee future benefit expense recognized in Net income
Table 21.5 – Components of 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
Actuarial gains from changes in demographic assumptions
Other
Defined benefit plans
2015
2014
67
3
-
5
75
49
1
(2)
5
53
There were no material plan amendments, curtailments or settlements during the years that affect the results presented herein.
21.5
Actuarial gains (losses) recognized in OCI
Table 21.6 – Actuarial gains (losses) recognized in OCI
For the years ended December 31,
Balance, beginning of year1
Re-measurements related to:
increase (decrease) in discount rate
return on plan assets
actuarial gains from changes in other financial assumptions
actuarial losses from changes in experience
actuarial losses from changes in life expectancy
decrease in asset reserve
Actuarial gains (losses) recognized in OCI
Balance, end of year1
1
Net actuarial
reclassified subsequently to Net income in future periods.
losses on employee future benefits recognized in OCI are immediately reclassified to Retained earnings as they will not be
Defined benefit plans
2015
(100)
32
4
36
(24)
-
-
48
(52)
2014
(59)
(235)
214
-
(20)
(6)
6
(41)
(100)
INTACT FINANCIAL CORPORATION
55
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
21.6
Assumptions used and sensitivity analysis
The following table summarizes the key weighted-average assumptions used in measuring the Company’s pension plans.
Table 21.7 – Assumptions used
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
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
Pension plans
2015
4.1%
2.75%
1.75%
21.6
24.0
4.0%
3.0%
21.5
24.0
2014
4.0%
3.0%
2.0%
21.5
24.0
4.8%
3.0%
21.3
23.5
Mortality rates as at December 31, 2015 and 2014 have been established in accordance with the final table and improvement scale
published in February 2014 by the Canadian Institute of Actuaries.
The following table presents the sensitivity of the defined benefit pension obligation to key assumptions.
Table 21.8 – 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
One-year increase
Pension plans
2015
(292)
391
79
(75)
68
(65)
45
2014
(266)
351
71
(68)
64
(61)
40
The effect on the defined benefit pension 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 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.
56
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
21.7
Risk management and investment strategy
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 actual 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 based on estimates of market yields of ‘AA’ corporate bonds.
The Management Pension Committee is responsible for the oversight of the pension plans, including the review of the funding policy
and investment performance. The Investment policy of the pension plan assets (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 debt and equity market risks. Any deviation from the Policy is reviewed by the Operational
is
Investment Committee. The Risk Management Committee, which is a committee of
responsible for the approval of the Policy and the review of the pension plans investment performance.
the Company’s Board of Directors,
The pension plans investment portfolio is managed by Intact Investment Management Inc., a subsidiary of the Company, in
accordance with investment policies that focus on asset diversification and asset-liability matching.
The Company regularly monitors compliance with investment policies.
Asset diversification
The goal of asset diversification is to limit the potential to have material capital losses. Debt 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 debt and equity securities, within credit concentration limit. The pension plans’ risk management
strategy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to any
one issuer by imposing limits based upon credit quality. The adopted investment policy generally requires minimum credit ratings of
‘BBB’ for investments in debt securities and limits its concentration in any one investee or related group of investees to 5% of the
cost of its total assets for debt 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 debt and equity
securities, as well as off-balance sheet exposure.
The Company also establishes asset allocation limits to ensure sufficient diversification.
Table 21.9 – Pension plan assets by country of incorporation and industry
As at December 31,
By country of incorporation
Canada
U.S.
Other
By industry
Government
Banks, insurance and diversified financial services
Energy
Other
2015
84%
8%
8%
100%
46%
23%
6%
25%
100%
2014
84%
8%
8%
100%
46%
24%
7%
23%
100%
INTACT FINANCIAL CORPORATION
57
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Asset-liability matching
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 70% as at December 31, 2015 (December 31, 2014 – 68%).
A portion of the pension plan liabilities contain an indexation provision linked to the consumer price index (CPI). During 2015, the
Company invested in inflation sensitive assets to partially mitigate the risk of an unanticipated increase in inflation. As at
December 31, 2015, 10% of pension plan assets were invested in Canada Government Real Return Bonds (December 31, 2014 -
nil).
Note 22 – Share-based payments
22.1
Long-term incentive plans
The following table shows the outstanding units and fair value at grant date for each of the Company’s performance cycles.
Table 22.1 – Outstanding units and weighted-average fair value at grant date by performance cycle
Performance cycles
As at December 31, 2015
2013–2015
2014–2016
2015–2017
As at December 31, 2014
2012–2014
2013–2015
2014–2016
The following table shows the movements in LTIP share units.
Table 22.2 – Movements in LTIP share units
For the years ended December 31,
Outstanding, beginning of year
Awarded
Net change in estimate of units outstanding
Units settled
Outstanding, end of year
58
INTACT FINANCIAL CORPORATION
Weighted-
average fair
value at grant
date (in $)
Number of
units
Amount
(in millions
of $)
236,151
246,094
215,679
697,924
255,080
230,447
240,928
726,455
62.08
66.25
77.89
68.44
57.45
62.08
66.25
61.84
15
16
17
48
15
14
16
45
2015
(in units)
726,455
188,106
46,347
(262,984)
697,924
2014
(in units)
739,789
193,167
105,397
(311,898)
726,455
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The cumulative cost of the units that vested during the year and were settled through the plan administrator purchasing common
shares on the market and remitting them to the participants was removed from Contributed surplus. The difference between the
market price of the shares and the cumulative cost for the Company of these vested units, net of income taxes, was recorded in
Retained earnings on the Consolidated balance sheets.
Table 22.3 – Settlement in shares
As at December 31,
Value of common shares repurchased for share-based payments
Cumulative cost of the units for the Company
Excess of market price over the cumulative cost for the Company
2015
2014
17
11
6
23
15
8
The LTIP expense was $18 million for the year ended December 31, 2015 (December 31, 2014 – $20 million).
22.2
Employee share purchase plan
The following table shows the movements in restricted common shares under the ESPP.
Table 22.4 – Movements in restricted common shares
For the years ended December 31,
Outstanding, beginning of year
Awarded
Vested or forfeited
Outstanding, end of year
2015
(in units)
161,434
146,236
(149,717)
157,953
2014
(in units)
167,883
155,730
(162,179)
161,434
The ESPP expense was $13 million for the year ended December 31, 2015 (December 31, 2014 – $11 million).
22.3
Deferred share unit plan
The DSU provision amounted to $6 million as at December 31, 2015 (December 31, 2014 – $7 million). The DSU expense was
$1 million for the year ended December 31, 2015 (December 31, 2014 – $2 million).
INTACT FINANCIAL CORPORATION
59
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 23 – Related-party transactions
The Company enters into transactions with associates and joint ventures in the normal course of business, as well as with key
management personnel and pension plans. Transactions with related parties are at normal market prices and mostly comprise
commissions for insurance policies and interest and principal payments on loans.
23.1
Transactions with associates and joint ventures
Table 23.1 – Income and expenses with associates and joint ventures
For the years ended December 31,
Reported in:
Net investment income
Underwriting expenses
Table 23.2 – Assets and liabilities with associates and joint ventures
As at December 31,
Reported in:
Loans
Other liabilities
2015
7
190
2015
178
36
2014
5
172
2014
91
32
23.2
Compensation of key management personnel
Key management personnel comprise all members of the Board of Directors and certain members of the Executive Committee. The
compensation of key management personnel comprises salaries, share-based awards, annual incentive plans and pension value.
Total compensation amounted to $15 million for the year ended December 31, 2015 (December 31, 2014 – $13 million).
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.
23.3
Pension plans
in return for investment advisory fees charged to the pension plans,
Intact Investment Management Inc., a subsidiary of the Company, manages the investment portfolio of the pension plans’ Master
for a total of $6 million for the year ended
Trust
December 31, 2015 (December 31, 2014 – $5 million). The Company made contributions to pension plans of $52 million for the
year ended December 31, 2015 (December 31, 2014 – $55 million).
60
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 24 – 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 24.1 – Additional information on the Consolidated statements of cash flows
For the years ended December 31,
2015
2014
Depreciation of property and equipment
Amortization of intangible assets
Net premiums on debt securities classified as AFS
Defined benefit pension expense
Share-based payments expense
Share of profit from investments in associates and joint ventures
Other
Adjustments for non-cash items
Unearned premiums, net
Deferred acquisition costs, net
Premium receivables, net
Other operating assets
Other operating liabilities
Dividends received from investments in associates and joint ventures
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
Note 25 – Commitments and contingencies
25.1
Operating lease commitments
34
76
13
75
18
(26)
(1)
189
209
(44)
(122)
(36)
16
15
38
98
43
141
64
281
191
33
63
17
53
20
(19)
(4)
163
(22)
15
55
32
(51)
19
48
87
2
89
64
284
193
The Company has entered into commercial operating leases on certain property and equipment. These leases have a life ranging
from one to 15 years with renewal options included in the contracts.
The following table presents the future minimum rental payments under non-cancellable operating leases.
Table 25.1 – Operating lease commitments
As at December 31,
Less than 1 year
From 1 to 5 years
Over 5 years
2015
157
426
230
813
INTACT FINANCIAL CORPORATION
61
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
25.2
Contingencies
In the normal course of operations, various insurance claims and legal proceedings are instituted against the Company. Legal
proceedings are often subject to numerous uncertainties and it is not possible to predict the outcome of individual cases. In
management’s opinion, the Company has made adequate provisions 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.
Note 26 – Disclosures on rate regulation for automobile insurance
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:
Table 26.1 – Rate filing categories
Category
File and use
Description
Insurers file their rates with the relevant authorities and wait for a prescribed period of time and
then implement the proposed rates.
File and approve
Insurers must wait for specific approval of filed rates before they may be used.
Use and file
Rates are filed following use.
The following table lists the provincial authorities which regulate automobile insurance rates. For
the years ended
December 31, 2015 and 2014, automobile DPW in these provinces totalled $4 billion, which represent approximately 99% of
automobile DPW.
Table 26.2 – Regulatory authorities and rate filings for automobile insurance
Province and territories
Regulatory authority
Alberta
Ontario
Quebec
Nova Scotia
Alberta Automobile Insurance Rate Board
Financial Services Commission of Ontario
Autorité des marchés financiers
Nova Scotia Utility and Review Board
New Brunswick
New Brunswick Insurance Board
Prince Edward Island
Island Regulatory Appeals Commission
Newfoundland and Labrador
Board of Commissioners of Public Utilities
Rate filing
File and approve
File and approve
Use and file
File and approve
File and approve
File and approve
File and approve
Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory
asset or liability. As at December 31, 2015 and 2014, the Company had no significant regulatory asset or liability.
62
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 27 – Standards issued but not yet effective
27.1
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”). IFRS 9 will be effective for annual periods beginning on or after January 1, 2018. The Company is
currently evaluating the impact that this standard will have on its Consolidated financial statements.
a)
Classification and measurement
The classification of financial instruments is dependent on the business model and the cash flows characteristics.
Table 27.1 – Classification of financial instruments
Amortized cost
FVTOCI
FVTPL
Default classification when the objective of
the business model is uniquely to receive
contractual cash flows of principal and
interest.
Default classification when the objective of the
business model is equally to receive contractual
cash flows of principal and interest and realize
cash flows from the sale.
Default classification for all other financial
assets, or election to measure them as
FVTPL instead of amortized cost or
FVTOCI.
An entity can also elect on initial recognition to present fair value changes on an equity investment that is not held for trading directly
and permanently in OCI, thus gains or losses are not recognized in income when the investment is disposed of.
b)
Hedge accounting
The new model more closely aligns hedge accounting with risk management activities undertaken by companies when hedging their
financial and non-financial risk exposures (under IAS 39, hedging non-financial components is not permitted). It will enable more
entities to:
−
−
apply hedge accounting to reflect their actual risk management activities; and
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.
Expected credit loss
c)
This new impairment model applies only to financial assets classified as amortized cost and those that are classified by default as
FVTOCI. Under the expected credit loss model, a loss allowance will be established for all financial assets impaired based on a
12-month expected credit losses or a life-time expected credit losses if the credit risk increases significantly.
Revenues from contracts with customers
27.2
In May 2014,
the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”). The standard supersedes
IAS 18 – Revenue, IAS 11 – Construction Contracts, and a number of revenue-related interpretations. This new standard specifies
how and when to recognize revenue and additional relevant disclosure requirements. IFRS 15 applies to nearly all contracts with
customers, except for insurance contracts, financial instruments and leases.
IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company does
not expect significant impacts upon adoption of this standard.
INTACT FINANCIAL CORPORATION
63
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FIVE-YEAR FINANCIAL HISTORY
(Excluding MYA. In millions of Canadian dollars, except as noted)
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 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
2015
7,419
7,907
7,535
(477)
628
91.7%
424
(64)
875
19.3%
860
706
6.38
5.20
131.5
16.6%
13.4%
6,453
5,448
5,244
92.3%
405
4,159
3,584
3,508
95.4%
161
2,294
1,864
1,736
85.9%
244
966
2,459
2,291
90.3%
223
523
670
651
99.0%
7
443
1,789
1,640
86.8%
216
625
203%
889
16.6%
39.83
3.55%
13,504
4%
71%
9%
13%
3%
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
143
2014
7,062
7,349
7,207
(364)
519
92.8%
427
174
957
18.3%
767
782
5.67
5.79
131.5
16.3%
16.1%
6,092
4,973
5,004
92.7%
363
3,900
3,376
3,387
94.5%
186
2,192
1,597
1,617
89.0%
177
970
2,376
2,203
92.9%
156
520
632
615
89.6%
64
450
1,744
1,588
94.2%
92
681
209%
1,378
17.3%
37.75
3.65%
13,440
3%
72%
9%
13%
3%
2013
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
3.68%
12,261
2%
73%
10%
12%
3%
2012
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
3.63%
12,959
3%
74%
10%
10%
3%
2011
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
4.01%
11,828
4%
73%
11%
9%
3%
144
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
THREE-YEAR QUARTERLY REVIEW
(Excluding MYA. In millions of Canadian dollars, except as noted)
2015
Q4
Q3
Q2
Q1
Q4
2014
Q3
Q2
Q1
Q4
2013
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 yield
Total investments
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash
equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
1,680
1,897
1,948
(75)
221
88.6%
110
(72)
241
17.8%
265
198
1.97
1.46
131.5
16.6%
13.4%
1,446
1,253
1,362
88.9%
151
899
801
909
96.9%
28
547
452
453
72.7%
123
234
644
586
88.0%
70
125
167
168
107.9%
(13)
109
477
418
80.1%
83
625
203%
240
16.6%
39.83
2,021
2,092
1,930
(107)
131
93.2%
105
(64)
161
18.6%
199
131
1.47
0.95
131.5
16.9%
14.2%
1,786
1,513
1,347
95.4%
62
1,135
986
903
94.4%
51
651
527
444
97.4%
11
235
579
583
88.2%
69
127
161
166
97.0%
5
108
418
417
84.6%
64
389
195%
419
17.3%
37.84
2,259
2,346
1,865
(106)
158
1,459
1,572
1,792
(189)
118
91.6% 93.4%
105
101
219
21.7% 18.7%
186
178
1.37
1.32
210
199
1.56
1.47
104
(29)
254
131.5
131.5
16.8% 17.2%
15.4% 16.1%
1,250
1,971
1,047
1,635
1,296
1,239
91.1% 93.8%
76
116
1,307
1,094
868
818
703
828
90.3% 100.3%
(3)
85
664
541
428
432
344
411
92.7% 80.7%
79
31
288
711
569
209
525
553
92.6% 92.5%
42
42
162
203
162
109
139
155
94.4% 96.4%
6
9
126
508
407
100
386
398
91.8% 90.9%
36
33
564
763
200% 213%
(51)
16.8% 16.9%
38.95
39.23
281
1,595
1,760
1,830
(78)
216
88.2%
111
(3)
265
22.6%
247
205
1.84
1.52
131.5
16.3%
16.1%
1,354
1,129
1,262
87.1%
162
840
739
847
93.7%
53
514
390
415
73.6%
109
241
631
568
90.5%
54
128
163
159
99.5%
1
113
468
409
87.1%
53
681
209%
300
17.3%
37.75
1,881
1,913
1,826
(80)
124
93.2%
106
30
244
17.2%
185
202
1.37
1.49
131.5
14.3%
14.5%
1,645
1,354
1,266
96.4%
46
1,034
909
857
95.8%
36
611
445
409
97.7%
10
236
559
560
86.0%
78
126
148
157
89.4%
16
2,142
2,173
1,801
(65)
128
1,444
1,503
1,750
(141)
51
92.9% 97.1%
105
103
196
14.7% 18.3%
129
160
0.94
1.17
206
215
1.53
1.60
105
44
252
1,589
1,702
1,804
(66)
67
1,899
1,911
1,784
(103)
(50)
96.3% 102.8%
104
(3)
41
17.6% (14.6)%
59
47
0.41
0.32
143
107
1.05
0.77
104
(29)
130
131.5
11.6%
11.1%
131.5
9.9%
8.7%
131.5
11.2%
9.3%
131.6
12.7%
11.2%
1,235
1,858
998
1,492
1,256
1,220
92.2% 95.3%
57
98
1,220
1,031
853
806
697
830
91.5% 97.0%
25
72
1,656
1,354
1,367
1,108
1,255
1,237
94.6% 102.9%
(35)
68
836
734
861
98.4%
14
1,035
911
849
93.0%
60
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
638
461
403
429
301
390
93.5% 91.8%
32
26
284
681
545
209
505
530
94.7% 101.1%
(6)
30
518
374
394
621
456
388
644
479
365
86.4% 124.7% 113.3%
(49)
(95)
54
243
544
547
235
594
549
295
666
527
100.1% 102.5% 102.9%
(15)
(15)
(1)
159
192
151
107
129
148
79.5% 89.3%
15
32
124
150
154
100.4%
(1)
127
144
155
86.0%
21
165
186
149
89.6%
16
125
489
394
110
411
403
102
376
382
84.7% 100.5% 105.6%
(21)
(2)
62
116
400
392
111
444
395
130
480
378
100.0% 109.0% 108.2%
(31)
(36)
–
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
497
203%
647
17.8%
36.44
657
208%
486
670
213%
(21)
17.8% 18.4%
34.80
36.29
550
203%
(27)
18.7%
33.94
515
199%
413
19.0%
33.25
486
197%
275
19.0%
33.15
744
214%
(476)
18.5%
34.15
3.62%
13,504
3.55%
13,339
3.62% 3.41%
13,394 13,443
3.61%
13,440
3.57%
13,199
3.69% 3.76%
12,371
12,913
3.70%
12,261
3.83%
12,285
3.76%
12,283
3.44%
12,532
4%
71%
9%
13%
3%
5%
70%
8%
13%
4%
4%
70%
9%
13%
4%
3%
72%
9%
13%
3%
3%
72%
9%
13%
3%
3%
73%
9%
12%
3%
4%
72%
9%
12%
3%
2%
72%
10%
13%
3%
2%
73%
10%
12%
3%
5%
71%
9%
11%
4%
3%
73%
10%
11%
3%
1%
74%
10%
12%
3%
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
145
Basis risk Basis risk is the risk that
offsetting investments in an economic
hedging strategy will not experience price
changes that entirely offset 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.
Cash flow available for investment
activities A non-IFRS financial measure,
which includes net cash flows from
cash and cash equivalents and the
investment portfolio.
Catastrophe losses Any one claim, or
group of claims, equal to or greater than
$7.5 million related to a single event.
Claims liabilities Technical accounting
provisions comprising 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, using a rate that reflects the
estimated market yield of the underlying
assets backing these claims liabilities at
the reporting date.
Claims ratio Claims incurred, net of
reinsurance, during a specific period and
expressed as a percentage of net premiums
earned for the same period.
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.
Credit risk Possibility that counterparties
may not be able to meet payment
obligations when they become due.
Currency forwards Contractual
obligations to exchange one currency for
another on 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 financial instruments
A financial contract settled at a future date
that requires little or no initial investment,
and whose value is derived from an
underlying interest rate, foreign exchange
rate, equity or commodity instrument
or index. 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 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.
Direct premiums written (“DPW”) The
total amount of premiums for new and
renewal policies billed (written) during a
specific period, as reported under IFRS.
Direct premiums written (underlying)
A non-IFRS financial measure calculated as
the total amount of premiums for new and
renewal policies billed (written) during a
specific period, excluding industry pools
and normalized for the effect of multi-year
policies. This measure matches direct
premiums written to the year in which
coverage is provided, whereas under
IFRS, the full value of multi-year policies is
recognized in the year the policy is written.
GLOSSARY
Actuarial gains (losses) Effect of
changes in actuarial assumptions and
experience adjustments (the effect
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.
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.
Associates 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.
These investments are accounted for using
the equity method.
Average shareholders’ equity Mean of
shareholders’ equity at the beginning and
end of the period, adjusted for significant
capital transactions, if appropriate.
Shareholder’s equity is determined in
accordance with IFRS.
146
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
Earnings per share to common
shareholders (“EPS”), basic 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
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.
Embedded derivatives A component of
a hybrid (combined) instrument that also
includes a non-derivative host contract.
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.
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 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”).
Expense ratio Underwriting expenses,
including commissions, premium taxes and
general expenses related to underwriting
activities for a specific period and
expressed as a percentage of net earned
premiums 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.
Forwards Forward contracts are
effectively tailor-made agreements that are
transacted between counterparties in the
over-the-counter market.
Interest rate risk Risk that the fair value or
future cash flows of a financial instrument
will fluctuate because of changes in interest
rates or spreads.
Frequency (of claims) Total number of
claims reported in a specific period.
Futures Financial contracts obligating the
buyer to purchase an asset (or the seller
to sell an asset) at a predetermined future
date and price. Futures are 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.
Hedge ratio A ratio calculated by the
Company as the dollar-duration of
the pension asset portfolio divided by
the dollar-duration of the funded pension
plan’s obligation. A lower hedge ratio
increases the Company’s exposure to
changes in interest rates.
Incurred but not reported (“IBNR”)
claims reserve Reserves for estimated
claims that have been incurred but not
yet reported by policyholders, including a
reserve for future developments on claims
that 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. Insurers
can choose to cede risks to the RSP. The
risks ceded are aggregated and assumed
by the entities in the Canadian P&C
insurance industry, generally in proportion
to market share and the volume of business
ceded to the RSP. These pools are managed
by the Facility Association, except for the
Québec RSP.
Interest rate futures
contracts Contractual obligations to
buy or sell interest-rate-sensitive financial
instruments on a predetermined future
date at a specified price.
Joint venture Joint arrangements
whereby the parties have joint control of
the arrangements, requiring unanimous
consent of the parties sharing control of
strategic and operating decision-making.
The parties sharing control also have rights
to the net assets of the arrangements.
These investments are accounted for using
the equity method.
Large loss A single claim larger than
$0.25 million but smaller than the
catastrophe threshold of $7.5 million.
Liquidity risk The risk that an entity will
encounter difficulty in raising funds to
meet obligations associated with financial
liabilities.
Market risk Risk that the fair value or
future cash flows of a financial instrument
will fluctuate because of changes in equity
market prices, interest rates or spreads,
or foreign exchange rates.
Market yield adjustment (“MYA”) The
impact of changes in the discount rate used
to discount claims liabilities based on the
change in the market-based yield of the
underlying assets.
Market-based yield Non-IFRS financial
measure defined as the annualized
total pre-tax investment income (before
expenses) divided by the mid-month
average fair value of net equity and fixed-
income securities held during a period
(average net investments).
Master netting agreement An
agreement between a 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, as
defined by the Office of the Superintendent
of Financial Institutions (“OSFI”) and
Autorité des marchés financiers (“AMF”).
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
147
Net earned premiums Net premiums
written recognized for accounting
purposes as revenue during a period.
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 written Direct premiums
written for a given period less premiums
ceded to reinsurers during the same period.
Operating return on equity (“OROE”)
A non-IFRS financial measure calculated
as net operating income for a 12-month
period less preferred share dividends,
divided by the average shareholders’
equity (excluding preferred shares and
accumulated other comprehensive
income) over the same 12-month period.
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.
Over-the-counter derivatives Contracts
that are negotiated directly between two
parties, without going through a formal
exchange or other intermediaries.
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.
Non-catastrophe weather event
A group of claims that is considered
significant but is smaller than the CAT
threshold of $7.5 million, related to a single
weather event.
Provision for adverse deviation
(“PfAD”) An amount added to
undiscounted case reserves and IBNR to
account for adverse deviation from claims
reserve estimates.
Non-operating results A non-IFRS
financial measure, which includes elements
that are not representative of our operating
performance because they relate to special
items, bear significant volatility from one
period to another or are not part of our
normal activities.
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 Contract amount
used as a reference point to calculate cash
payments for derivatives.
Reinstatement premium Premium
payable to restore the original reinsurance
policy limit as a result of a reinsurance
loss payment under catastrophe coverage.
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.
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.
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.
Swap agreements Over-the-counter
contracts in which two counterparties
exchange a series of cash flows based on
a basket of stocks, applied to a contract
notional amount.
Total excess capital Includes excess
capital in the P&C insurance subsidiaries
at 170% MCT plus excess capital outside of
the P&C insurance subsidiaries.
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.
Underlying growth Growth in direct
premiums written normalized for the
effect of multi-year policies. This measure
matches direct premiums written to
accident year, whereas under IFRS, the full
value of multi-year policies is recognized
in the year the policy is written.
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).
148
INTACT FINANCIAL CORPORATION 2015 ANNUAL REPORT
BOARD OF DIRECTORS
EXECUTIVE COMMITTEE MEMBERS
Charles Brindamour
Chief Executive Officer
Charles Brindamour
Chief Executive Officer
Yves Brouillette 1,4
President, Placements Beluca Inc.
Patrick Barbeau
Senior Vice President, Personal Lines
Robert W. Crispin 1,4
Corporate Director
Janet De Silva 2,4
President and Chief Executive Officer,
Toronto Region Board of Trade
Claude Dussault
Chairman of the Board of Intact Financial Corporation
and President of ACVA Investing Corporation
Robert G. Leary 1,4
Chief Executive Officer,
TIAA Global Asset Management
Eileen Mercier 1,4
Corporate Director
Timothy H. Penner 2,3
Corporate Director
Louise Roy 2,3
Chancellor and Chair of the Board,
Université de Montréal and Invited Fellow,
Centre for Interuniversity Research and
Analysis on Organizations
Frederick Singer 1,3
Chief Executive Officer, Echo360
Stephen Snyder 2,3
Corporate Director
Carol Stephenson 2,3
Corporate Director
Byron Hindle *
Senior Vice President, International
Business Development
Karim Hirji
Senior Vice President, International and Ventures
Mathieu Lamy
Senior Vice President, Claims
Martin Beaulieu
Senior Vice President and Chief Operating
Officer, Direct-to-Consumer Distribution
Alan Blair
Senior Vice President, Atlantic Canada
Alain Lessard
Senior Vice President, Commercial Lines
Jean-François Blais
President, Intact Insurance
Louis Marcotte
Senior Vice President and Chief Financial Officer
Sonya Côté
Senior Vice President and Chief Internal Auditor
Frédéric Cotnoir ***
Senior Vice President, Legal Services
Debbie Coull-Cicchini
Senior Vice President, Ontario
Jean-François Desautels
Senior Vice President, Québec
Claude Désilets *
Senior Vice President and Chief Risk Officer
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
Lucie Martel
Senior Vice President and Chief Human
Resources Officer
Benoit Morissette **
Senior Vice President and Chief Risk Officer
Jennie Moushos
Senior Vice President, Western Canada
Werner Muehlemann
Senior Vice President and Managing Director of
Intact Investment Management
Jack Ott
Senior Vice President and Chief Information Officer
Lilia Sham
Senior Vice President, Corporate Development
Mark A. Tullis
Executive Vice President, Governance and
Capital Management
Peter Weightman
President, BrokerLink
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 Risk Management Committee
* Until December 31, 2015
** Chief Risk Officer as of January 1, 2016
*** As of January 18, 2016
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.
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SHAREHOLDER AND CORPORATE INFORMATION
Credit rating
IFC long-term issuer credit ratings
IFC’s principal P&C insurance subsidiaries’
financial strength ratings
A.M. Best
DBRS
Fitch
Moody’s
a-
A+
A
AA (low)
A-
AA-
Baa1
A1
DBRS has assigned a rating of “Pfd-2” with a Stable trend for the Non-cumulative Rate Reset Class A Series 1
and Class A Series 3 preferred shares (the “Series 1 Preferred Shares ” and “Series 3 Preferred Shares”,
respectively) issued on July 12, 2011 and August 18, 2011, respectively. Fitch Ratings has assigned a rating
of “BBB” with a Stable outlook to the Series 1 Preferred Shares and Series 3 Preferred Shares.
Investor inquiries
Samantha Cheung
Vice President, Investor Relations
416 344 8004
samantha.cheung@intact.net
Media inquiries
Stephanie Sorensen
Director, External Communications
416 344 8027
stephanie.sorensen@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.
Toronto Stock Exchange (TSX) listings
Common Shares Ticker Symbol: IFC
Series 1 Preferred Shares Ticker Symbol:
IFC.PR.A
Series 3 Preferred Shares Ticker Symbol:
IFC.PR.C
Annual Meeting of Shareholders
Date: Wednesday, May 4, 2016
Time: 11:30 a.m. ET
Location/Venue: Montréal Museum of Fine Arts
Maxwell-Cummings Auditorium
1379 Sherbrooke Street West
Montréal, Québec H3G 1J5
Version française
Il existe une version française du présent rapport
annuel à la section Relations investisseurs de
notre site Web www.intactcf.com. Les personnes
intéressées 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, 8th Floor, North Tower
Toronto, Ontario M5J 2Y1
1 800 564 6253
Auditors
Ernst & Young LLP
Earnings release dates
Q1 – Wednesday, May 4, 2016
Q2 – Wednesday, July 27, 2016
Q3 – Wednesday, November 2, 2016
Q4 – Wednesday, February 8, 2017
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 dividend history
Record
Payable
Amount
Dec. 15, 2015
Sept. 15, 2015
June 15, 2015
Mar. 16, 2015
Dec. 15, 2014
Sept. 15, 2014
June 16, 2014
Mar. 17, 2014
Dec. 16, 2013
Sept. 16, 2013
June 14, 2013
Mar. 14, 2013
Dec. 31, 2015
Sept. 30, 2015
June 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Sept. 30, 2014
June 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sept. 30, 2013
June 28, 2013
Mar. 28, 2013
$ 0.53
$ 0.53
$ 0.53
$ 0.53
$ 0.48
$ 0.48
$ 0.48
$ 0.48
$0.44
$0.44
$0.44
$0.44
Common share prices and volume
Q1
Q2
Q3
Q4
Year 2015
Q1
Q2
Q3
Q4
Year 2014
Q1
Q2
Q3
Q4
Year 2013
Source: Toronto Stock Exchange
High
Low
$ 95.77
$ 95.36
$ 95.82
$ 96.77
$ 96.77
$ 69.95
$ 74.92
$ 76.32
$ 84.42
$ 84.42
$ 66.82
$ 64.27
$ 63.36
$ 69.74
$ 69.74
$ 81.74
$ 85.42
$ 86.30
$ 85.81
$ 81.74
$ 65.82
$ 67.89
$ 70.52
$ 71.11
$ 65.82
$ 61.65
$ 56.44
$ 56.53
$ 61.48
$ 56.44
Close
$ 95.42
$ 86.79
$ 93.72
$ 88.68
$ 88.68
$ 68.80
$ 73.58
$ 72.51
$ 83.85
$ 83.85
$ 62.25
$ 59.25
$ 61.78
$ 69.37
$ 69.37
Volume
18,432,707
15,894,652
14,672,799
19,056,349
68,056,507
16,814,617
15,294,740
16,428,400
17,726,044
66,263,801
16,033,974
31,134,095
17,048,486
14,762,433
78,978,988
WHY INVEST
WITH INTACT
We are the largest provider of
P&C insurance in Canada with
almost $8 billion in annual direct
premiums written. We have
consistently outperformed the
industry due to our disciplined
approach to underwriting, our
scale advantage and our in-house
claims expertise. Our record of
strong capital generation and
disciplined deployment has
allowed us to pursue our growth
objectives while also returning
capital to shareholders. Our
financial strength is reinforced
by prudent risk management,
resulting in a consistent track
record of favourable reserve
development.
Intact Financial Corporation
700 University Ave.
Toronto, Ontario
M5G 0A1
www.intactfc.com
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OFFER A CUSTOMER
EXPERIENCE
THAT’S SECOND TO NONE
A TOP EMPLOYER
ATTRACTS THE BEST
EMPLOYEES
BE ONE OF THE
MOST RESPECTED
COMPANIES IN CANADA
VIEW OUR ONLINE REPORT
reports.intactfc.com/2015