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N O W A N D I N T H E F U T U R E
2 FINANCIAL HIGHLIGHTS 4 HERE FOR YOU
6 CEO’S LETTER 9 CHAIRMAN’S LETTER
10 MD&A AND FINANCIAL STATEMENTS
2 0 1 6 A N N U A L R E P O R T R E P O R T S . I N T A C T F C . C O M / 2 0 1 6
We are the largest provider of
property and casualty (“P&C”)
insurance in Canada with over
$8 billion in annual direct premiums
written (“DPW”) and an estimated
market share of 17%. We insure
more than five million individuals
and businesses through our
insurance subsidiaries and are the
largest private sector provider of
P&C insurance in British Columbia,
Alberta, Ontario, Québec,
Nova Scotia and Newfoundland &
Labrador. 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, which total
$14.4 billion.
SEE THE FULL
STORY ONLINE
R E P O R T S . I N TA C T F C .C O M / 2 0 1 6
Please visit our online annual report
to view videos, interactive features
and additional information on how
we are preparing for the future.
We are customer driven. We listen
to customers, understand their
needs, offer the best solutions and
deliver on our promises.
FINANCIAL HIGHLIGHTS
(EXCLUDING MYA, IN MILLIONS OF CANADIAN DOLLARS, EXCEPT AS NOTED)
2016
2015
2014
2013
2012
Consolidated performance
Written insured risks (thousands)
7,697
7,419
7,062
7,115
6,729
Direct premiums written
8,293
7,922
7,461
7,345
6,854
Net premiums earned
7,946
7,535
7,207
7,014
6,571
Combined ratio
95.3% 91.7%
92.8%
98.0%
93.1%
Underwriting income
Net investment income
Net distribution income
Net operating income
375
414
111
660
628
424
104
860
Net investment gains (losses)
(72)
(64)
Net income
Net operating income per share ($)
Earnings per share ($)
541
4.88
3.97
706
6.38
5.20
519
427
75
767
174
782
5.67
5.79
142
406
75
500
(83)
431
3.62
3.10
451
389
83
675
37
571
5.00
4.20
Book value per share ($)
42.72
39.83
37.75
33.94
33.03
Operating return on equity
12.0% 16.6%
16.3%
11.2%
16.8%
Adjusted return on equity
11.0% 14.3%
16.8%
10.3%
16.1%
HERE
FOR YOU
N O W A N D I N T H E F U T U R E
The world is changing fast, as are the
needs of customers. At Intact, we continue
to improve, invest and innovate. Building
on our track record, we will work to deliver
a customer experience that is second to
none, be a best employer and make
Intact Financial Corporation one of the
most respected companies in Canada.
The investments we are making will
ensure that we’ll be here for customers,
employees, brokers and communities
in the future, as we are today.
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.
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 1
FINANCIAL
HIGHLIGHTS
Our superior operating
performance and financial
strength have translated into
12% compound annual growth
in dividends per share, and 13%
compound annual total return
since our IPO in 2004.
2016 DIRECT
PREMIUMS WRITTEN
BY BUSINESS LINE
(excluding pools, %)
2016 DIRECT
PREMIUMS WRITTEN
BY BRAND
(excluding pools, %)
2016 INVESTMENT MIX
(net of hedging positions and
financial liabilities related
to investments)
•Personal auto
•Personal property
•Commercial P&C
•Commercial auto
46%
25%
21%
8%
•Intact Insurance
•BrokerLink
•belairdirect
76%
9%
15%
•Fixed income
•Common shares
•Preferred shares
•Loans
•Cash and short-term notes
70%
14%
10%
3%
3%
TOTAL SHAREHOLDER
RETURN
On a total shareholder return
basis (including dividends),
our 13% CAGR over the past
five years compares favourably
versus our peers.
Source: Bloomberg
ONE-YEAR
THREE-YEAR
FIVE-YEAR
Intact Financial Corp.
11.2%
49.3%
86.8%
S&P/TSX Composite
ONE-YEAR
21.1%
THREE-YEAR
22.7%
FIVE-YEAR
48.6%
S&P/TSX Banks
Intact Financial Corp.
11.2%
30.1%
41.1%
49.3%
86.8%
100.6%
S&P/TSX Insurance
S&P/TSX Composite
15.2%
21.1%
22.7%
31.7%
48.6%
127.1%
S&P U.S. P&C Insurance
S&P/TSX Banks
15.7%
30.1%
S&P/TSX Insurance
S&P U.S. P&C Insurance
15.2%
15.7%
46.7%
41.1%
31.7%
46.7%
100.6%
143.6%
127.1%
143.6%
DIVIDENDS PER SHARE
GROWTH
We are proud of our dividend
growth track record, including
a five-year CAGR of 9%, which
compares favourably versus
our peers.
Intact Financial Corp.
9.4%
S&P/TSX Composite
-2.7%
ONE-YEAR
S&P/TSX Banks
Intact Financial Corp.
6.5%
9.4%
S&P/TSX Insurance
S&P/TSX Composite
9.1%
-2.7%
Source: Bloomberg
S&P U.S. P&C Insurance
S&P/TSX Banks
13.0%
6.5%
S&P/TSX Insurance
9.1%
S&P U.S. P&C Insurance
13.0%
2 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
ONE-YEAR
THREE-YEAR
FIVE-YEAR
31.8%
5.5%
THREE-YEAR
26.1%
31.8%
5.5%
24.0%
26.1%
52.3%
24.0%
52.3%
56.8%
FIVE-YEAR
24.9%
46.7%
56.8%
25.4%
24.9%
46.7%
330.1%
25.4%
330.1%
DIRECT PREMIUMS WRITTEN GROWTH
(%) (base 100 = 2006)
•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
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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
0
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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
19 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, Genworth, Canada Guaranty Mortgage Insurance Company and IFC, as at December 31, 2016
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.
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 3
HERE
FOR YOU
N O W A N D I N T H E F U T U R E
Transforming the
Customer Experience
We were honoured to be recognized a
second time as an Aon Best Employer at
the platinum level, as one of Canada’s
Top 100 Employers, and as a Greater
Toronto Top Employer by Mediacorp
Canada Inc. Intact was also named one of
Canada’s Top Employers for Young People
for 2017, by Mediacorp Canada Inc.,
for the first time.
Our strategic partnerships, combined
with the investments we are making in
data and software, will help us improve
how we serve customers and deliver a
second-to-none experience.
SUPPORTING BUSINESSES
As Canada’s largest commercial P&C
insurer, Intact Insurance continues
to improve its commercial offerings
to protect businesses and design
new products to meet customers’
changing needs. Some of these new
products include:
Fleet telematics: offers fleet managers
access to personalized metrics based
on driving habits to help them better
manage their insurance risk
Building the
Best Team
TRANSFORMING THE
CUSTOMER EXPERIENCE
Customers are at the heart of our
business. From coast to coast, one in
five Canadians count on us to protect
what matters – their homes, cars and
businesses. Not only do we design
products to meet their changing
lifestyles and needs – we also continue
to simplify insurance and offer better
solutions. Our Intact Service CentresTM
make things easier for customers after
an automobile accident. With our
quick quote tool, Intact Insurance and
belairdirect customers can get a quote in
minutes. And we are working with Intact
Insurance brokers across the country to
play an increasingly important role in
digital distribution.
LEADING THROUGH INNOVATION
Software and big data are changing the
way we live. Through data and technology,
we pursue innovation at our Intact Lab –
transforming the digital experience for
customers, businesses and brokers.
To deepen our strength and expertise in
data, we created the Intact Data Lab – to
explore new sources of data and further
leverage artificial intelligence. We are
also investing in partnerships with
institutions to combine our expertise
with academic research.
In addition, we are accelerating our
learning by working with disruptors.
Through Intact Ventures Inc., we partner
with companies that have the potential
to redefine the P&C insurance landscape
with innovative business models and
new technology.
4 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
We are reaching more Canadians
now than ever. belairdirect is
now a visible brand from coast to
coast, and BrokerLink continues
to expand its footprint in Ontario,
Alberta and Atlantic Canada.
Reaching More
Canadians
We are helping Canadians
protect themselves from
increases in severe weather
events by offering them
solutions to adapt to climate
change, and providing them
with information on ways to
protect their homes.
Supporting
Businesses
Leading through
Innovation
Adapting to
Climate Change
Usage-based insurance: enables
businesses with individual commercial
automobiles to save up to 25% on their
insurance premiums through better
driving behaviours
Cyber protection: covers businesses in
the event of data and security breaches
Intact Insurance is also strengthening
its capabilities in specialty lines. Our
new national specialty solutions team,
combined with our comprehensive suite
of solutions, will provide brokers with the
expertise and support they need to help
customers with unique business needs.
With the growing popularity of the sharing
economy, Intact Financial Corporation
worked with Uber to develop tailored
insurance products for ridesharing. These
products were launched in 2016 in Alberta,
Ontario and Québec (pilot project).
In providing commercial insurance to
Turo™, we protect Canadians who wish
to participate in peer-to-peer car sharing
in Canada.
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 5
C E O ’ S L E T T E R
As Canada celebrates its 150th birthday and its rich
history, we are reflecting on our own journey.
HERE FOR
CANADIANS
NO W AN D I N TH E FU TURE
Our business has grown significantly over the years, but we
have never lost sight of our purpose – to help people, businesses
and society prosper in good times and be resilient in bad times.
We’ll continue to invest in our people, transform the customer
experience, enhance our core capabilities, and strengthen
our network from coast to coast to meet the changing needs
of customers.
Building on our track record, we will work to make Intact
Financial Corporation one of the most respected companies in
Canada. We’ll be here for customers, employees, brokers and
communities in the future, as we are today.
YEAR IN REVIEW
Last year, severe weather events and unprecedented wildfires
in Fort McMurray impacted communities across the country.
These catastrophes are a stark reminder of the impacts of
climate change. They reinforce the urgency to adapt to increases
in severe weather events and help Canadians better protect
their homes. I am proud of how our employees rallied to help
customers get back on track. In adversity we found strength,
witnessed compassion and saw communities, government and
businesses come together.
In spite of record-breaking industry catastrophe losses, Intact
delivered a solid combined ratio of 95.3% in 2016, resulting in
net operating income of $660 million. Looking ahead, we remain
confident in the action plans we have put in place, and in the
underlying strength of our operations.
Direct premiums written grew by a robust 5% to reach $8.3 billion.
Overall, we delivered a healthy operating return on equity of
12% despite $385 million in pre-tax catastrophe losses.
From a capital perspective, we ended the year with a strong
balance sheet and $970 million in total excess capital. We also
announced a 10% dividend increase, our 12th consecutive
annual increase since we became a public company.
Charles Brindamour
Chief Executive Officer
6 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
BUILDING ON OUR STRENGTHS
The world we live in is changing fast. Having a strong track
record is not a guarantee of success. We are building on
our strengths to improve what we do to meet changing
customer expectations.
Innovation is at the heart of our approach. We encourage
employees to challenge themselves, see things from the
customer’s perspective and provide an experience that is second
to none. That is why one in five Canadians trust us to protect
what matters most to them.
To harness growth opportunities, and better support brokers
and businesses with unique needs, Intact Insurance created
a new national team for specialty solutions that leverages our
expertise across the country. We will use the strength of our
broker network to reach our growth target of $1 billion by 2020.
We are also working hard to provide Canadians more options to
access our services. BrokerLink continues to expand its footprint
in Ontario, Alberta and Atlantic Canada. On the direct distribution
front, with Canadian Direct Insurance fully integrated into our
business, belairdirect is now available coast-to-coast. We are also
closer to reaching our growth objective of $2 billion in premiums
for direct distribution with the acquisition of InnovAssur. As we
capitalize on opportunities across our distribution channels, we
are reaching more Canadians now than ever.
WINNING IN A CHANGING WORLD
Software and data are transforming the way we live. Canada
is one of the top five most connected countries in the world.
Seven in 10 Canadians have a smartphone. Ninety per cent of
our population uses the Internet. These changes are having a
profound impact on how people interact, share and live. We
need to continue to challenge the status quo and innovate to
stay ahead of our customers’ expectations.
We are using technology to design relevant products and
provide options for customers to connect with us. Our Intact
Service Centres™ offer Intact Insurance and belairdirect
customers a simpler and more convenient process when they
have an auto claim. Our quick quote and home quick quote
tools provide customers quotes in minutes. In parallel, Intact
Insurance’s Buy Online strategy continues to grow and generate
new business for brokers.
We are centralizing our experts and data, and adding talent,
to help us improve our margin, grow our book of business and
improve the customer experience. The Intact Data Lab explores
new sources of data and uses it to expand our competencies in
artificial intelligence.
We have had good success from our telematics product. The
data is 30% more powerful than what had previously been
our most predictive variable. More than 350,000 drivers have
participated in the program so far.
To strengthen our systems, we invest more than $100 million
annually in software development. At the same time, we
are investing in and developing relationships with research
institutions and universities to stay on the cutting edge of
advancements in technology.
At Intact, we are accelerating our learning by working with
disruptors. Through Intact Ventures Inc., we partner with
companies that have the potential to redefine the P&C insurance
landscape with innovative business models and new technology.
Our plan is to invest about $300 million over the next few years.
In Brazil, for example, we have invested in one of the country’s
leading digital insurance brokerages. In the U.S., we are invested
in Metromile – a pay-per-mile insurance company that is
changing the way people insure themselves.
Our strategic partnerships, combined with the investments we
are making in data and software, will help us improve how we
serve customers and deliver a second-to-none experience.
“ Innovation is at the heart of
our approach. We encourage
employees to challenge
themselves, see things from
the customer’s perspective and
provide an experience that is
second to none. That is why one in
five Canadians trust us to protect
what matters most to them.”
We remain committed to addressing climate change, one of
the most significant issues facing Canadians in the coming
decade. We have expanded our offer to help Canadians protect
themselves from natural disasters and are seeing solid growth
as a result. Our investment in the Intact Centre on Climate
Adaptation™ continues to foster innovative solutions to help
reduce the physical, financial and social impacts of extreme
weather on Canadian communities.
INDUSTRY OUTLOOK
Overall, we believe the P&C insurance environment remains
favourable. We expect premiums to grow at a low to mid-single-
digit rate over the next 12 months.
In personal auto, claims cost inflation should lead to rate
increases in all markets. In personal property, we expect the
current firm market conditions to continue, as companies adjust
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 7
8,000
6,400
4,800
3,200
1,600
0
100
80
60
40
20
0
40
32
24
16
8
0
2009 2010 2011 2012 2013 2014
2009 2010 2011 2012 2013 2014
2009 2010 2011 2012 2013 2014
QUARTERLY DIVIDENDS PER SHARE
$0.65
$0.52
$0.39
$0.26
$0.13
$0
05 06 07 08 09 10 11
12
13
14
15
16 Q1-17
C E O ’ S L E T T E R
to changing weather patterns. In commercial lines, business
remains competitive and the economy in Western Canada
continues to pressure industry growth.
40
We expect the industry’s ROE to improve but remain slightly
below its long-term average of 10% over the next 12 months.
We outperformed the industry’s ROE by 6 points in 2016, and
feel strongly about outperforming the industry’s ROE by 5 points
going forward.
32
24
2017 AND BEYOND
It is an exciting time for the P&C insurance industry. It is
important that we prepare today for what is needed for tomorrow.
We see many opportunities to drive change and to continue
to outperform the industry – by putting customers first and
leveraging our strengths.
16
8
We have accomplished much and delivered a solid performance
in a year that saw unprecedented catastrophes. Our people’s
hard work, engagement, and commitment to our values are
key to our success. We will continue to experience headwinds
but I am more confident than ever in our ability to adapt and
respond to changing needs.
0
2009 2010 2011 2012 2013 2014
I want to thank customers, shareholders and brokers for their
continued support. I also extend my appreciation to our Board
of Directors for their continued insight and counsel. We will
continue to stay true to our values, and strive to maintain your
confidence and reward it in the years ahead.
Charles Brindamour
Chief Executive Officer
8 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
C H A I R M A N ’ S L E T T E R
DELIVERING
SUSTAINABLE
GROWTH
Claude Dussault
Chairman of the Board
In 2016, Intact delivered strong results and
demonstrated resiliency in the face of
unprecedented catastrophe losses in Canada –
remaining focused on its strategy and executing
plans with a disciplined approach.
Canada is experiencing change at a record pace, giving rise to
the need to adapt faster and respond to disruption. While this
is not unique to the insurance industry, Intact is focused on
leading through industry disruption and building long-term
growth through the stewardship of the Board.
Maintaining diligence in a competitive marketplace will be
fundamental to delivering sustainable long-term growth.
Through enhanced risk selection, segmentation and leveraging
data analytics, the Board is confident that Intact is well
positioned to deliver products and services that meet the needs
of customers today and in the future.
In addition to providing guidance on the overall strategy, the
Board participated in discussions regarding the Company’s
diversity and people strategy. Through the leadership of
Charles Brindamour and the management team, Intact became
a member of the 30% Club, a membership that reinforces a
commitment to gender diversity at the senior-most levels of
the organization and on the Board. Today 33.9% of the roles
in the management team (Vice President and higher) are held
by women, and 33.3% at the Board level (with an expectation
to reach 41.6% in 2017). It should also be noted that beyond
gender diversity, 14.8% of employees at Intact self-identify as
belonging to a visible minority. Employees and management
should be proud of their commitment to diversity and the
tremendous value it brings to the organization.
During the year, the Board continued its review and renewal of
governance best practices. This effort and Intact’s continued
drive to be one of the most respected companies in Canada are
paying off. The Globe and Mail’s 2016 Board Games awarded
Intact with top marks for good governance, ranking Intact
second (tied) out of 231 companies, up from fifth position in 2015.
Additionally, for the first time, Intact was presented with the
prestigious Award of Excellence in electronic disclosure, and
also received an honourable mention in the financial reporting
category at the CPA Canada’s corporate reporting awards, a
national program that showcases the best corporate reporting
models in the country.
On behalf of my colleagues, I would like to thank Intact’s
employees for their continued dedication and hard work. Their
unwavering commitment to deliver a customer experience that
is second to none is what sets Intact apart. I would also like to
thank the management team for their leadership, and customers
and shareholders for their continued support.
Claude Dussault
Chairman of the Board
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 9
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 68;
Financial Statements – pages 1 to 64.
10 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
Intact Financial Corporation
Management’s Discussion and Analysis
For the year ended December 31, 2016
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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, 2016. 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, 2016 compared to the corresponding periods
in 2015. It should be read in conjunction with our Consolidated financial statements for our fiscal year ended December 31, 2016.
All amounts herein are expressed in Canadian dollars. This MD&A is dated February 7, 2017.
“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 ...................................................................................................................................................................... 16
STRATEGY AND OUTLOOK ......................................................................................................................................... 17
Section 8 – What we are aiming to achieve ....................................................................................................................................... 17
Section 9 – Recent developments...................................................................................................................................................... 18
Section 10 – Intact Ventures .............................................................................................................................................................. 19
Section 11 – Operating environment .................................................................................................................................................. 20
Section 12 – Canadian P&C insurance industry................................................................................................................................. 23
Section 13 – Outlook and strategy ..................................................................................................................................................... 24
FINANCIAL CONDITION ................................................................................................................................................ 25
Section 14 – Financial position........................................................................................................................................................... 25
Section 15 – Liquidity and capital resources ...................................................................................................................................... 33
Section 16 – Capital management ..................................................................................................................................................... 36
RISK MANAGEMENT ..................................................................................................................................................... 38
Section 17 – Overview ....................................................................................................................................................................... 38
Section 18 – Risk management structure........................................................................................................................................... 38
Section 19 – Corporate governance and compliance program .......................................................................................................... 40
Section 20 – Enterprise Risk Management ........................................................................................................................................ 42
Section 21 – Sensitivity analyses ....................................................................................................................................................... 56
ADDITIONAL INFORMATION ........................................................................................................................................ 57
Section 22 – Financial KPIs and definitions ....................................................................................................................................... 57
Section 23 – Non-IFRS financial measures........................................................................................................................................ 60
Section 24 – Non-operating results .................................................................................................................................................... 62
Section 25 – Accounting and disclosure matters................................................................................................................................ 63
Section 26 – Off-balance sheet arrangements ................................................................................................................................... 65
Section 27 – Shareholder information ................................................................................................................................................ 65
Section 28 – Selected annual and quarterly information .................................................................................................................... 67
INTACT FINANCIAL CORPORATION
1
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 23 – 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 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 “Investors” 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
believes are appropriate in the circumstances. Many factors could cause the Company’s actual
results, performance or
achievements or future events or developments to differ materially from those expressed or implied by the forward-looking
statements, including, without limitation, the following factors: the Company’s ability to implement its strategy or operate its business
as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the Company
writes; unfavourable capital market developments or other factors which may affect the Company’s investments, floating rate
securities 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 and severity, including in the Ontario line of business, as well as the evaluation of
losses relating to the Fort McMurray wildfires, catastrophe losses caused by severe weather and other weather-related losses;
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 and provide services to the Company; 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, 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, including a major earthquake; 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 ability to contain fraud and/or abuse; the Company’s reliance on information
technology and telecommunications systems and potential failure of or 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 17-21) 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, 2016
(in millions of dollars, except as otherwise noted)
Glossary of abbreviations
AEPS
AFS
AMF
AOCI
AROE
BVPS
CAD
CAGR
CAT
CSR
DBRS
DPW
EPS
ESG
Fitch
Description
Adjusted EPS
Available for sale
Autorité des marchés financiers
Accumulated OCI
Adjusted ROE
Book value per share
Canadian Dollar
Compound annual growth rate
Catastrophe
Corporate Social Responsibility
Dominion Bond Rating Services
Direct premiums written
Earnings per share to common shareholders
Environmental, social and corporate governance
Fitch Ratings Inc.
FVTPL
Fair value through profit and loss
IFRS
KPI
International Financial Reporting Standards
Key performance indicator
Important notes
LoB
LTIP
MCT
Description
Line of business
Long-term incentive plan
Minimum capital test
MD&A
Management’s Discussion and Analysis
Moody’s Moody’s Investor Service Inc.
MYA
NCIB
NEP
NOI
Market yield adjustment
Normal course issuer bid
Net earned premiums
Net operating income
NOIPS
NOI per share
OCI
OROE
OSFI
PYD
ROE
S&P
U.S.
USD
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
Unless otherwise noted, DPW refers to DPW normalized for the effect of multi-year policies, excluding industry pools (referred to as “DPW” in
this MD&A). This normalized measure is not significantly different from the comparable IFRS-based measure given that the impact of multi-year
policies is no longer material to our results. See Table 30 for the reconciliation.
All underwriting results and related ratios exclude the MYA, but include our share of the underwriting results of jointly held insurance operations,
unless otherwise noted.
The expense and general expense ratios are presented herein net of other underwriting revenues.
Net investment income includes our share of the net investment 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 (“non-CAT weather event”) is a group of claims which is considered significant but that is smaller than the
CAT threshold of $7.5 million, related to a single weather event.
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 data (Q3-2016) from MSA Research Inc.
Insurance,
(“MSA”) and excludes LIoyd’s Underwriters Canada,
Saskatchewan Auto Fund, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.
MSA data excludes certain Quebec regulated entities. Market share and market positioning reflect the impact of announced or completed
acquisitions and are therefore presented on a pro forma basis.
Insurance Corporation of British Columbia, Saskatchewan Government
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, 2016
(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 over $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, Nova Scotia and
Newfoundland & Labrador.
Canada’s largest provider of commercial insurance, with an approximate market share of 13% and a leading provider of
specialized coverages such as Surety, Long Haul Trucking, Farm and sharing economy solutions.
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.
2016 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, the sharing economy, garage risks,
fleets of private passenger vehicles and light trucks.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 2 – Critical capabilities
We have several critical capabilities which have enabled us to sustainably outperform 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
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, with 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
and 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 while being
more responsive to consumer trends.
Proven
acquisition strategy
Tailored
investment management
We are a proven industry consolidator with 15 successful acquisitions since 1988.
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, 2016
(in millions of dollars, except as otherwise noted)
PERFORMANCE
Section 3 – Our performance at a glance
2016 Highlights
Growth
Combined ratio
OROE
+5%
95.3%
12.0%
MCT
218%
BVPS
+7%
Net operating income per share of $1.58 for Q4-2016 and $4.88 for the full year
Q4-2016 combined ratio of 92.5% from strong property lines performance, offset by weaker results in personal auto from
weather-related frequency and industry pools
Premiums grew 3% in the quarter and a robust 5% for the full year
Operating ROE of 12.0% despite $385 million in pre-tax catastrophe losses and total excess capital of $970 million at year end
Book value per share grew 7% year-over-year
Quarterly dividend increase of 10% to $0.64 per share
DPW
Combined ratio
NOIPS (in dollars)
8
0
9
,
1
1
6
9
,
1
5
7
7
,
1
3
9
2
8
,
2
2
9
,
7
1
6
4
,
7
2014
2015
2016
%
3
.
5
9
%
5
.
2
9
%
8
.
2
9
%
7
.
1
9
%
2
.
8
8
%
6
.
8
8
7
9
.
1
4
8
.
1
8
5
.
1
8
3
7 6
6
.
.
5
8
8
.
4
Q4
Annual
Q4
Annual
Q4
Annual
AEPS (in dollars)
8
5
.
1
4
5
.
1
6
5
.
1
1
0
.
6
4
5
.
5
3
5
.
4
Operating ROE
2014
2015
2016
%
3
.
6
1
%
6
.
6
1
%
0
.
2
1
MCT ratio
%
8
1
2
%
9
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, 2016
(in millions of dollars, except as otherwise noted)
Section 4 – Consolidated performance
4.1
Consolidated performance
Table 1 – Consolidated performance1
DPW
Personal auto
Personal property
Commercial P&C
Commercial auto
NEP
Operating income
Underwriting income
Net investment income
Finance costs
Distribution income, net
Other income (expense)2
Pre-tax operating income
NOI
Effective income tax rate
Net income
Combined ratio
Per share measures, basic and diluted (in dollars)
NOIPS
EPS
Return on equity for the last 12 months
OROE
ROE
BVPS (in dollars) (see Section 27.5)
Total excess capital
MCT
Debt-to-capital ratio
1 Refer to Section 23 – Non-IFRS financial measures.
2 Tends to fluctuate from quarter to quarter.
Table 2 – Combined ratio by line of business
Personal lines
Personal auto
Personal property
Commercial lines
Commercial P&C
Commercial auto
2016
8,293
3,792
2,030
1,768
703
7,946
375
414
(72)
111
10
838
660
21.1%
541
95.3%
4.88
3.97
2015
Change
7,922
3,591
1,864
1,796
671
7,535
628
424
(64)
104
(1)
1,091
860
19.3%
706
91.7%
5%
6%
9%
(2)%
5%
5%
(253)
(10)
(8)
7
11
(253)
(200)
1.8 pts
(165)
3.6 pts
6.38
5.20
(24)%
(24)%
Q4-2016
Q4-2015
Change
1,961
829
486
466
180
2,043
153
104
(18)
24
13
276
212
23.7%
171
92.5%
1.58
1.27
12.0%
9.6%
42.72
970
218%
18.6%
1,908
808
452
480
168
1,948
221
110
(16)
22
3
340
265
3%
3%
7%
(3)%
8%
5%
(68)
(6)
(2)
2
10
(64)
(53)
17.8%
198
5.9 pts
(27)
88.6%
3.9 pts
1.97
1.46
(20)%
(13)%
16.6% (4.6) pts
13.4% (3.8) pts
39.83
625
203%
16.6%
7%
345
15.0 pts
2.0 pts
Q4-2016
Q4-2015
Change
92.2%
100.9%
75.6%
93.2%
89.4%
101.9%
88.9%
96.9%
72.7%
88.0%
80.1%
107.9%
3.3 pts
4.0 pts
2.9 pts
5.2 pts
9.3 pts
(6.0) pts
2016
96.9%
99.9%
90.9%
91.5%
90.2%
94.6%
2015
Change
92.3%
95.4%
85.9%
90.3%
86.8%
99.0%
4.6 pts
4.5 pts
5.0 pts
1.2 pts
3.4 pts
(4.4) pts
INTACT FINANCIAL CORPORATION
7
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Q4-2016 vs Q4-2015
2016 vs 2015
DPW growth
Premiums grew by 3%, despite recently
lines of
implemented profitability actions in all
business. Rate increases impacted growth in
personal auto, while commercial P&C was
impacted by profitability actions and continued
difficult conditions in Western Canada. Personal
property and commercial auto saw strong
growth in the quarter.
On an annual basis, solid premium growth of 5%,
mainly organic, as customers responded positively to new
products,
improved digital experiences, as well as
distribution and branding initiatives. Growth was particularly
strong
lines
commercial
encountered difficult conditions in Western Canada.
lines, while
personal
in
Underwriting
performance
We delivered a combined ratio of 92.5% with
strong results in property lines and weaker
results in auto lines.
Net
Investment
income
Distribution
income, net
NOIPS
Net income
Personal auto’s combined ratio of 100.9% was
mainly impacted by weather-driven claims
frequency, losses from industry pools and lower
PYD. We are continuing to improve results
through rate increases and tighter underwriting
rules.
Personal property delivered another very
strong performance with a combined ratio of
75.6% thanks to ongoing profitability measures.
Commercial P&C also delivered a solid
combined ratio of 89.4% due to our profitability
initiatives. The 9.3 points deterioration over last
year’s very strong results was due to higher
CATs and large losses.
Commercial auto had a challenging quarter,
with a combined ratio of 101.9%. The 6.0 point
improvement was driven by a better underlying
performance and lower variable commissions,
offset by unfavourable PYD.
We delivered a solid combined ratio of 95.3% in 2016,
after absorbing losses from the costliest natural disaster in
Canadian history and facing challenges in auto lines. Our
discipline, over time, has led to strong performances in
property lines, despite the impact of elevated CAT losses.
Personal auto’s combined ratio deteriorated by 4.5 points
to 99.9%, mainly due to lower favourable PYD and claims
cost inflation, while rate increases were not yet fully earned.
Personal property’s combined ratio was very strong at
90.9%, after absorbing 11.6 points of CAT losses. More
importantly, on an annual basis, we outperformed our target
to operate at a combined ratio of 95% or better even with
elevated CATs, a strong proof point that profitability actions
have been effective over time.
Commercial P&C also had a very strong underlying
performance for the year with a combined ratio of 90.2%,
despite absorbing higher CAT losses including the Fort
McMurray wildfires.
Commercial auto’s annual combined ratio of 94.6%
improved substantially from last year as we rolled out our
profitability actions. We continue to implement our action
plan to drive a combined ratio sustainably in the low 90s.
On a quarterly and annual basis,
environment outweighed the positive impact of higher invested assets.
investment income decreased slightly, as expected, as the low rate
Up $2 million to $24 million, due to growth in
in part by lower
our broker network, offset
variable commissions.
NOIPS down 20% to $1.58,
reflecting
challenges in personal auto, as well as higher
large losses and higher CATs.
Down 14% to $171 million, substantially due
to the decrease in underwriting income.
Up $7 million to $111 million, due to growth in our broker
network and improved profitability.
NOIPS down $1.50 to $4.88 on higher CAT losses,
including the Fort McMurray wildfires and severe summer
storms.
Down $165 million to $541 million, mainly due to the
impact of elevated CAT losses, with Fort McMurray wildfires
accounting for $128 million, as well as mark-to-market
losses on FVTPL bonds.
OROE was at 12.0%, after absorbing elevated CAT losses including severe storms and the Fort McMurray wildfires. BVPS increased 7%
from a year ago to $42.72. Debt-to-capital ratio at December 31, 2016 was 18.6%. MCT was at 218% with total excess capital of
$970 million.
8
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 5 – Underwriting performance
Table 3 – Consolidated underwriting results1
NEP, before reinstatement premiums
Reinstatement premiums recovery (ceded)
NEP, as reported
Net claims:
Current year claims (excluding CAT claims)
Current year CAT claims
PYD (favourable)
Total net claims
Commissions, premium taxes and general expenses
Underwriting income
Underwriting ratios
Underlying current year loss ratio
CAT loss ratio2
PYD ratio (favourable)
Claims ratio
Expense ratio
Q4-2016
Q4-2015
Change
2,045
(2)
2,043
1,313
34
(62)
1,285
605
153
64.2%
1.8%
(3.1)%
62.9%
29.6%
1,948
-
1,948
1,196
2
(75)
1,123
604
221
97
(2)
5%
117
32
13
162
1
(68)
61.4%
2.8 pts
-
1.8 pts
(3.8)%
0.7 pts
5.3 pts
57.6%
31.0% (1.4) pts
2016
7,975
(29)
7,946
5,165
385
(389)
5,161
2,410
375
64.8%
5.0%
(4.9)%
64.9%
30.4%
2015 Change
7,533
2
7,535
4,976
116
(477)
4,615
2,292
628
442
(31)
5%
189
269
88
546
118
(253)
66.1% (1.3) pts
3.5 pts
1.4 pts
3.6 pts
-
1.5%
(6.3)%
61.3%
30.4%
Combined ratio
1 Refer to Section 23 – Non-IFRS financial measures. Underlying current year loss ratio is calculated using NEP before reinstatement premiums.
2 CAT loss ratio includes current year CAT claims and the impact of reinstatement premiums.
3.9 pts
91.7%
88.6%
92.5%
95.3%
3.6 pts
Table 4 – Components of expense ratio
Commissions
General expenses
Premium taxes
Expense ratio
Q4-2016
Q4-2015
Change
15.6%
10.3%
3.7%
29.6%
16.3% (0.7) pts
11.2% (0.9) pts
0.2 pts
3.5%
31.0% (1.4) pts
2016
16.3%
10.5%
3.6%
30.4%
2015 Change
-
16.3%
10.6% (0.1) pts
0.1 pts
3.5%
30.4%
-
Q4-2016 vs Q4-2015
2016 vs 2015
Underlying current year loss ratio increased by 2.8 points from higher weather-
related claims frequency and the negative impact of industry pools in personal auto,
as well as fire-related losses in Commercial P&C. The benefits of profitability
actions partly mitigated this deterioration.
CAT losses of $34 million mainly attributable to rain storms including the
remnants of hurricane Matthew in the Atlantic. Last year was exceptionally low in
terms of CAT losses.
Favourable PYD ratio of 3.1%, comparable to prior year and in line with long-term
expectations.
Expense ratio improved by 1.4 points due to lower general expenses and
variable commissions. General expenses were lower as a result of cost saving
initiatives introduced in Q4-2016, with further benefits expected in 2017.
Strong performances in property lines led to a combined ratio of 92.5%,
despite early winter conditions and challenges in personal auto.
Underlying current year loss ratio improved
1.3 points overall, owing to successful results of
profitability actions in property lines.
Elevated CAT loss ratio of 5.0% largely
attributable to the Fort McMurray wildfires and
severe
across Canada,
storms
compared to unusually low CAT losses last year.
summer
Favourable PYD ratio of 4.9% was lower than
last year’s elevated level but remained consistent
with long-term historical levels.
Solid combined ratio of 95.3%, after absorbing
losses from the Fort McMurray wildfires and
severe storms across Canada, demonstrating
the resilience of our operations.
INTACT FINANCIAL CORPORATION
9
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
5.1
Personal auto
Table 5 – Underwriting results for personal auto
DPW
Written insured risks (in thousands)
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
PYD ratio (favourable)
Claims ratio
Expense ratio
Combined ratio
Q4-2016
Q4-2015
Change
829
928
942
(9)
78.5%
0.4%
(1.4)%
77.5%
23.4%
100.9%
808
899
909
28
73.9%
0.4%
(3.3)%
71.0%
25.9%
96.9%
3%
3%
4%
(132)%
4.6 pts
-
1.9 pts
6.5 pts
(2.5) pts
4.0 pts
2016
3,792
4,358
3,704
5
76.5%
2.0%
(3.1)%
75.4%
24.5%
99.9%
2015
Change
3,591
4,159
3,508
161
75.4%
1.1%
(6.1)%
70.4%
25.0%
95.4%
6%
5%
6%
(97)%
1.1 pts
0.9 pts
3.0 pts
5.0 pts
(0.5) pts
4.5 pts
Q4-2016 vs Q4-2015
2016 vs 2015
DPW growth of 3% reflects a combination of recently
implemented rate actions and our growth initiatives.
Underlying current year
loss ratio of 78.5%
deteriorated 4.6 points, due to higher weather-related
claims frequency and industry pool losses. Rate actions
have been implemented but were not yet fully earned.
Favourable PYD ratio of 1.4% deteriorated from last
year’s 3.3%, driven in part by losses from industry
pools.
Industry pools were impacted by deteriorating trends
across the country, affecting both current year and prior
year results.
Expense ratio improved by 2.5 points to 23.4% due
to lower variable commissions and general expenses.
telematics offer,
Solid growth of 6% due to initiatives such as our
improved digital experiences, and distribution and branding initiatives.
Growth included one point
from the acquisition of Canadian Direct
Insurance (“CDI”).
Underlying current year loss ratio deteriorated slightly to 76.5% due to
cost inflation in a flat rate environment, offset in part by the benefits of our
claims actions.
CAT loss ratio of 2.0% was mainly attributable to the severe summer
storms across Canada.
Favourable PYD ratio at 3.1% reflected less favourable development from
industry pools and declined from last year’s unusually high level.
While industry pools had minimal
impact on underlying underwriting
results from a full year perspective, they led to a slight deterioration in PYD
as last year’s results were more favourable than usual.
The combined ratio was 100.9% in the quarter and 99.9% in the full year. The underperformance in this line has led to corrective
measures. Given the current rate momentum, claims actions, tighter risk selection and additional benefits from recently implemented
reforms, we expect a meaningful improvement within the next 12 months.
Also see Section 11.4 – Industry pools for more details.
DPW
Underlying current year loss ratio
Combined ratio
2
9
7
,
3
1
9
5
,
3
4
7
3
,
3
8
0
8
9
2
8
9
3
7
2014
2015
2016
%
5
.
8
7
%
5
.
3
7
%
9
.
3
7
%
5
.
6
7
%
4
.
5
7
%
7
.
2
7
Q4
Annual
Q4
Annual
10
INTACT FINANCIAL CORPORATION
%
9
.
0
0
1
%
9
.
9
9
%
4
.
5
9
%
5
.
4
9
Annual
%
7
.
3
9
%
9
.
6
9
Q4
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
5.2
Personal property
Table 6 – Underwriting results for personal property
DPW
Written insured risks (in thousands)
NEP
Underwriting income
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
PYD ratio (favourable)
Claims ratio
Expense ratio
Combined ratio
Q4-2016
Q4-2015
Change
486
562
494
120
39.9%
2.6%
(2.8)%
39.7%
35.9%
75.6%
452
547
453
123
41.6%
-
(2.8)%
38.8%
33.9%
72.7%
7%
3%
9%
(2)%
(1.7) pts
2.6 pts
-
0.9 pts
2.0 pts
2.9 pts
2016
2,030
2,393
1,880
170
48.9%
11.6%
(4.7)%
55.8%
35.1%
90.9%
2015
Change
1,864
2,294
1,736
244
53.5%
2.3%
(4.0)%
51.8%
34.1%
85.9%
9%
4%
8%
(30)%
(4.6) pts
9.3 pts
(0.7) pts
4.0 pts
1.0 pts
5.0 pts
Q4-2016 vs Q4-2015
2016 vs 2015
DPW grew at a solid 7% in continued favourable market
conditions, driven by new product offerings, distribution and
branding initiatives, as well as rate increases.
Underlying current year loss ratio was very strong at
39.9%, an improvement of 1.7 points, mainly driven by the
effectiveness of profitability actions.
CAT loss ratio of 2.6% is in line with expectations and
included losses from rain storms and the remnants of
hurricane Matthew. Last year’s CAT losses were unusually
low.
Favourable PYD ratio at 2.8% remained healthy and in
line with last year and expectations.
Expense ratio deteriorated 2.0 points, mainly due to a
reallocation of variable commissions to this line of business
in Q4-2016.
Strong growth of 9% for the year, as growth initiatives and
rate increases were deployed in favourable market conditions.
Growth included one point from the acquisition of CDI.
Underlying current year loss ratio was very strong at
48.9%, having improved meaningfully on the effectiveness of
profitability actions and our efforts to adapt our products to
changing weather patterns.
Industry record-breaking CAT losses,
including the Fort
McMurray wildfires and severe storms across Canada drove a
CAT loss ratio of 11.6%.
Favourable PYD ratio contributed 4.7 points, slightly better
than last year but in line with historical levels.
Expense ratio deteriorated 1.0 point mainly due to higher
variable commissions.
The combined ratio was very strong at 75.6% in the quarter, a testament to the continued effectiveness of profitability actions.
For the full year, the combined ratio was very strong at 90.9%, after absorbing losses from the Fort McMurray wildfires and
severe storms across Canada, meeting our target to operate at 95% or better even with elevated CAT losses.
DPW
Underlying current year loss ratio
Combined ratio
6
8
4
2
5
4
7
0
4
0
3
0
2
,
4
6
8
,
1
5
1
7
,
1
Q4
Annual
2014
2015
2016
%
5
3
5
.
%
0
1
5
.
%
9
8
4
.
Annual
%
9
9
3
.
%
3
0
4
.
%
6
1
4
.
Q4
%
9
.
0
9
%
0
.
9
8
%
9
.
5
8
Annual
%
6
.
5
7
%
6
3
7
.
%
7
2
7
.
Q4
INTACT FINANCIAL CORPORATION
11
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
5.3
Commercial P&C
Table 7 – Underwriting results for commercial P&C
DPW
Written insured risks (in thousands)
NEP
Underwriting income
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
PYD ratio (favourable)
Claims ratio
Expense ratio
Combined ratio
Q4-2016 Q4-2015
Change
466
107
419
45
57.5%
4.0%
(10.1)%
51.4%
38.0%
89.4%
480
109
418
83
49.5%
(0.7)%
(8.1)%
40.7%
39.4%
80.1%
(3)%
(2)%
-
(46)%
8.0 pts
4.7 pts
(2.0) pts
10.7 pts
(1.4) pts
9.3 pts
2016
1,768
445
1,657
162
56.0%
6.1%
(11.0)%
51.1%
39.1%
90.2%
2015
Change
1,796
443
1,640
216
58.1%
2.0%
(12.2)%
47.9%
38.9%
86.8%
(2)%
-
1%
(25)%
(2.1) pts
4.1 pts
1.2 pts
3.2 pts
0.2 pts
3.4 pts
Q4-2016 vs Q4-2015
2016 vs 2015
Decrease in DPW of 3% reflecting difficult economic conditions in
Western Canada and segmented rate increases deployed in
competitive markets.
Underlying current year loss ratio was very strong at 57.5%,
despite a deterioration of 8.0 points mainly due to fire-related
losses.
CAT loss ratio of 4.0% mainly due to a large fire, compared to
none last year.
PYD ratio was 2.0 points better mainly due to favourable PYD on
large losses.
Expense ratio improved by 1.4 points, mainly on lower general
expenses.
DPW declined 2% mainly due to difficult
conditions in Western Canada and the impact
of profitability initiatives.
Very strong underlying current year loss
ratio of 56.0%, improved 2.1 points, driven by
our profitability actions.
CAT loss ratio of 6.1%, a deterioration of
4.1 points mainly attributable to the Fort
McMurray wildfires.
Favourable PYD ratio at 11.0% was strong,
but consistent with historical average.
We delivered another solid performance with combined ratios of 89.4% in the quarter and 90.2% in the full year,
despite elevated CAT losses, thanks to the effectiveness of profitability actions. We continue our actions to ensure these
results are sustainable over the long term.
DPW
Underlying current year loss ratio
Combined ratio
2014
2015
2016
%
5
.
7
5
%
2
.
0
6
%
1
.
8
5
%
0
.
6
5
Annual
%
7
.
2
5
%
5
9
4
.
Q4
%
4
.
9
8
%
2
.
4
9
%
2
.
0
9
%
8
.
6
8
Annual
%
1
.
7
8
%
1
.
0
8
Q4
6
6
4
0
8
4
6
6
4
0
4
7
,
1
6
9
7
,
1
8
6
7
,
1
Q4
Annual
12
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
5.4
Commercial auto
Table 8 – Underwriting results for commercial auto
DPW
Written insured risks (in thousands)
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
PYD ratio unfavourable (favourable)
Claims ratio
Expense ratio
Combined ratio
Q4-2016 Q4-2015
Change
2016
2015
Change
180
121
188
(3)
72.2%
0.5%
3.6%
76.3%
25.6%
168
125
168
(13)
77.4%
0.1%
1.1%
78.6%
29.3%
8%
(3)%
12%
77%
(5.2) pts
0.4 pts
2.5 pts
(2.3) pts
(3.7) pts
101.9%
107.9%
(6.0) pts
703
501
705
38
66.4%
1.1%
(0.4)%
67.1%
27.5%
94.6%
671
523
651
7
69.5%
0.6%
0.7%
70.8%
28.2%
5%
(4)%
8%
443%
(3.1) pts
0.5 pts
(1.1) pts
(3.7) pts
(0.7) pts
99.0%
(4.4) pts
Q4-2016 vs Q4-2015
2016 vs 2015
DPW grew 8%, driven by the introduction of innovative
in part by
products for the sharing economy, offset
profitability measures.
Underlying current year loss ratio of 72.2% improved
by 5.2 points, mainly driven by lower large losses and
the impact of profitability actions.
Unfavourable PYD ratio was 2.5 points worse largely
on the adverse development of large losses.
Expense ratio improved 3.7 points, mainly due to a
reallocation of variable commissions by line of business
in Q4-2016.
DPW grew 5%, driven by the launch of
innovative
products, offset by profitability actions and difficult
conditions in Western Canada.
Underlying current year loss ratio improved 3.1 points
to 66.4%, mainly due to profitability actions and lower
large losses.
CAT losses of 1.1% caused mainly by severe summer
storms.
Favourable PYD ratio of 0.4% improved 1.1 points from
last year’s unfavourable level.
While performance was unsatisfactory in the quarter at a combined ratio of 101.9%, our full year results improved
by 4.4 points to 94.6%, as we continued to implement our remediation plan. The improvement in the underlying current
year loss ratio suggests that our measures, including higher rates, improved risk selection and tighter underwriting rules,
are generating results.
DPW
Underlying current year loss ratio
Combined ratio
3
0
7
1
7
6
2
3
6
3
6
1
8
6
1
0
8
1
2014
2015
2016
%
9
.
0
8
%
4
.
7
7
%
2
.
2
7
%
5
.
9
6
%
4
.
6
6
%
1
.
4
6
%
9
.
7
0
1
%
9
.
1
0
1
%
5
.
9
9
%
0
.
9
9
%
6
.
4
9
%
6
.
9
8
Q4
Annual
Q4
Annual
Q4
Annual
INTACT FINANCIAL CORPORATION
13
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 6 – Investment performance
Investment policy
6.1
Our investment policy and long-term asset mix reflect our objectives to maximize after-tax returns and outperform the P&C industry
investment returns over the long-term while ensuring policyholder protection and maintaining strong regulatory capital levels. We
manage our investment portfolio and seek to achieve these objectives via appropriate asset allocation and active management of
investment strategies. Our objective is to minimize the potential for large investment losses by maintaining diversification through
limits on our investment exposures. Such limits are specified in our investment policy and are designed to be consistent with our
overall risk tolerance. Management monitors and ensures 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
Q4-2016
Q4-2015
Change
2016
2015
Change
66
47
113
(9)
104
70
48
118
(8)
110
(4)
(1)
(5)
(1)
(6)
265
184
449
(35)
414
281
179
460
(36)
424
13,819
13,067
6%
13,396
12,974
(16)
5
(11)
1
(10)
3%
Market-based yield2
3.36%
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 23 – Non-IFRS financial measures.
3.27%
3.62%
3.55%
Q4-2016 vs Q4-2015
2016 vs 2015
investment
Net
income of $104 million was
down $6 million, mainly driven by the impact of
lower bond yields, partly compensated by higher
invested assets.
net
investments
Average
billion
increased by 6%, due to cash flows provided by
operating activities and higher equity markets.
$13.8
of
investment
Net
income of $414 million was lower by
$10 million. The $16 million decline in interest income reflects the
low yield environment, and was partly mitigated by a $5 million
increase in dividend income resulting from more preferred shares.
Average net investments of $13.4 billion increased by 3%, mainly
due to cash flows provided by operating and financing activities.
Net investment income
Average net investments1
Market-based yield2
1
1
1
0
1
1
4
0
1
7
2
4
4
2
4
4
1
4
2014
2015
2016
9
1
8
,
3
1
7
6
0
,
3
1
2
8
8
,
2
1
6
9
3
,
3
1
4
7
9
,
2
1
0
7
2
,
2
1
%
1
6
.
3
%
2
6
.
3
%
7
2
.
3
%
5
6
.
3
%
5
5
.
3
%
6
3
.
3
Q4
Annual
Q4
Annual
Q4
Annual
14
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Net investment losses
6.3
Net investment gains (losses) are reported in non-operating results and include the following items.
Table 10 – Net investment losses
Fixed-income strategies
Realized and unrealized gains (losses)
Equity strategies
Realized and unrealized gains (losses) on:1
Equity securities, net of derivatives
Embedded derivatives
Net foreign currency gains (losses)
Impairment losses on:
Common shares
Preferred shares
Other gains (losses) 2
Q4-2016
Q4-2015
Change
2016
2015
Change
(120)
(17)
(103)
(104)
(7)
(97)
37
(8)
4
(4)
-
29
(6)
(8)
(7)
4
(44)
-
(55)
-
45
(1)
-
40
-
84
(6)
(25)
66
(13)
21
(41)
-
33
(1)
(72)
4
38
19
(124)
(38)
(101)
44
(64)
62
(51)
2
83
38
134
(45)
(8)
Net investment losses
1 Excluding foreign currency impact.
2 Including net gains on investments in associates and joint ventures related to a change of control.
(72)
(97)
Refer to Note 23 – Net investment losses to the accompanying Consolidated financial statements for more details on the components of
investment gains and losses. Realized and unrealized gains (losses) on fixed-income strategies include mark-to-market gains (losses) on
our FVTPL bonds which are generally offset by gains (losses) arising from the changes in the discount rate for our claims liabilities (referred
to as MYA). See further details in Section 24 - Non-operating results.
We own perpetual preferred shares with embedded call option derivatives which give the issuer the right to redeem the shares at a
particular price. These embedded derivatives are marked-to-market through net income, while changes in value of our AFS preferred
shares flow through OCI. When preferred share prices increase, the value of these written options also increases, generating a mark-to-
market loss. Conversely, when preferred prices decline, the value of these derivatives also falls, resulting in a mark-to-market gain.
Our U.S. fixed-income portfolio is hedged using foreign-currency forward contracts, resulting in minimal currency gains or losses on the U.S.
fixed-income portfolio.
The mark-to-market of investments is fully reflected in BVPS. As a result, impairment losses have no impact on BVPS. 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 21 – Net pre-tax unrealized gain (loss) on AFS securities).
Q4-2016 vs Q4-2015
sovereign rates
led to mark-to-market
Net investment losses amounted to $97 million in Q4-2016.
Higher
losses of
$118 million on our FVTPL bond portfolio, which were mostly
offset by a positive impact from MYA of $87 million (see Section
24- Non-operating results). Additionally,
these losses were
mitigated by gains realized from ordinary trading activities on our
AFS equity portfolios, reflecting the rebound in equity markets in
2016.
As a comparison, net investment losses of $72 million in Q4-
2015 were mainly due to high impairment losses resulting from
the significant decline in equity markets, particularly the energy
and materials sectors.
2016 vs 2015
Net investment losses totalled $72 million in 2016. These losses
were mainly driven by mark-to-market losses on our FVTPL bond
portfolio resulting from higher sovereign interest rates, as well as
impairment charges incurred in the first half of the year principally
on energy stocks. These losses were partly offset by gains on our
reflecting higher equity markets and realized
equity securities,
currency gains of $21 million arising on the sale of U.S. equities.
As a comparison, net investment losses of $64 million in 2015
were driven by impairment losses on our equities, reflecting the
weakness in energy and materials sectors. These were offset by
gains on broker transactions and mark-to-market gains on our
embedded derivatives.
INTACT FINANCIAL CORPORATION
15
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 7 – Distribution
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. Our strategy at a glance:
We offer our customers
a multitude of
options to contact us:
online, on the phone or
in person.
With two strong brands, our
customers have coverage
options: via our broker network
with Intact Insurance, or with
us directly via belairdirect.
We have a large network
of brokerages, including our
wholly-owned subsidiary,
Brokerlink, which operates
in Ontario and Alberta.
We’re joining our
expertise with other
strong brands (National
Bank of Canada and Sun
Life Financial) to connect
with new customers.
DPW by distribution channel
Belairdirect (Direct-to-consumer)
Brokerlink
Intact insurance- Affiliated brokers
Intact Insurance- Other brokers
1
28%
48%
9%
15%
¹Affiliated brokers are either those in which we
hold an equity investment or provide financing.
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 direct-to consumer channel
Our direct-to-consumer strategy is to be the digital leader with a national cost-efficient
platform which provides 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.
7.2
Net distribution income
In 2016, net distribution income increased by 7% to $111 million, despite challenges from
industry-wide elevated CATs and challenges in personal auto, due to:
Continued growth in our network, thanks to over half a billion dollars of net
investments in brokerages made in the last 5 years.
Improved overall profitability combined with synergies, as our brokers generated
an operating margin close to 30%.
Net distribution income
3-year CAGR of
14% since 2013
5
7
5
7
4
0
1
1
1
1
As we continue investing in our network and improving profitability, we expect distribution
income to grow in the future.
2013
2014
2015
2016
In Table 11 below, we have presented distribution EBITA (earnings before interest, taxes, amortization and integration costs). This
presentation enhances the comparability of our broker channel performance with the industry.
Table 11 – Distribution EBITA, reconciliation to Net distribution income
Net distribution income, as currently reported
Adjustments to report broker associates on an operating basis
Add: Income taxes
Add: Interest expense
Distribution EBITA
16
INTACT FINANCIAL CORPORATION
Q4-2016
Q4-2015
Change
24
3
2
29
22
3
2
27
2
-
-
2
2016
111
13
10
134
2015
Change
104
12
7
123
7
1
3
11
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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
One million advocates
r
u
O
s
e
v
i
t
c
e
j
b
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
972,000 advocates, up 11% from last
year
Belairdirect received the highest
numerical score in the Quebec and
Atlantic/Ontario regions in the J.D Power
2016 Canadian Home Insurance
Customer Satisfaction Study¹
y
g
e
t
a
r
t
s
r
u
O
s
t
n
e
m
e
v
e
i
h
c
a
6
1
0
2
r
u
O
Be one of Canada’s best
employers
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
For the second year in a row:
Recognized as an Aon Best
Employer- Canada 2017,
Platinum Level
Recognized as one of Canada’s
Top 100 Employers by Mediacorp
Canada Inc.
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
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
Outperformed industry’s ROE by
670 basis points in the first nine months
of 2016.
Our overall track record remains solid,
and we continue to outperform the
industry (See Section 12- Canadian
P&C insurance industry).
Despite the fact that the P&C insurance
industry absorbed record-breaking
losses from elevated CATs in 2016, our
NOIPS of $4.88 represents a three-year
CAGR of 10% since 2013 and a five-
year CAGR of 5% since 2011.
¹ Based on 7,738 total responses measuring experiences and perceptions of customers, surveyed March- April 2016. Your experiences may vary. Visit jdpower.com.
NOIPS performance (in dollars)
3.49
3.91
5.00
3.62
2.35
5.67
6.38
4.88
2009
2010
2011
2012
2013
2014
2015
INTACT FINANCIAL CORPORATION
2016
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INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 9 – Recent developments
At a glance
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We acquired all of the outstanding shares of InnovAssur assurances générales inc., (“InnovAssur”) that we did
not already own. InnovAssur was part of a joint venture previously held with National Bank of Canada.
In October 2016, the Quebec government put in place a pilot project for ride sharing services provided by Uber.
Intact is providing commercial insurance for the pilot project.
On July 5 2016, our wholly-owned subsidiary, BrokerLink, announced that it had acquired Cornerstone
Insurance Brokers Ltd., a multi-line, full service brokerage. Through the acquisition, BrokerLink welcomed 90-
plus employees and increased its footprint to more than 75 locations in Ontario.
In May 2016, we announced the creation of a new national team dedicated to growing our specialty solutions
business. We believe this will help accelerate our plan to become the Canadian leader in specialty lines and
surety.
In 2016, we invested in Metromile Inc. (“Metromile”), a pay-per-mile insurance provider in the U.S. This venture
is in line with our long-term strategy to invest and partner with emerging and innovative businesses.
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Our NCIB program, which commenced on February 12, 2016, will expire on February 11, 2017. Our Board of
Directors has authorized the renewal of the NCIB for a subsequent year, subject to TSX approval. Please see
further details regarding our NCIB in Section 27.4 – NCIB.
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On September 30, 2016, the outstanding Non-cumulative Rate Reset Class A Shares Series 3 Preferred Shares
reset to an annual dividend rate of 3.332% for a five year period. Holders of 1,594,006 of these shares (out of the
total of 10,000,000 shares) elected to convert their Series 3 shares into Non-Cumulative Floating Rate Class A
Shares Series 4 Preferred Shares on a one-for-one basis and will instead receive a floating dividend rate. This
floating dividend rate will reset every quarter.
On February 25, 2016, we announced an offering of $250 million of Series 6 unsecured medium term notes,
which was completed on March 1, 2016. Please see further details in Section 15.1 – Financing and capital
structure.
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We recently launched our Intact Service Centre in Toronto, the third of our four Intact Service Centres slated to
open. Earlier this year, we opened our Ottawa and Calgary Service Centres, and our Montreal location is set to
open in 2017.
We recently launched our Quick Quote for homeowners tool for belairdirect in Ontario and Quebec. Within
minutes, customers can receive a home quote. The streamlined and simplified 15 question process represents a
66% reduction in the number of questions.
In September 2016, we reached an important milestone – 1,000,000 quick quotes! Consumers are looking for
speed and convenience, and quick quote delivers this with a five-fold reduction in questions needed to generate
their auto insurance quote, from 60 questions down to just 12.
In 2016, we launched several new products, including our Enhanced Water Damage Package in our personal
property line, as well as our new commercial solution for Unmanned Air Vehicles (UAVs), typically referred to as
drones.
18
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
At a glance At a glance
At a glance
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We were recognized as an Aon Best Employer – Canada 2017, Platinum level, recognizing IFC for its strong
level of employee engagement, leadership, performance culture and employment brand.
We were recognized as one of Canada’s Top Employers for Young People by Mediacorp Canada Inc. for
2017, recognizing employers that offer the nation’s best workplaces and programs for young people starting their
careers.
In December 2016, we were awarded the CPA Canada Award of Excellence in electronic disclosure, as well
as an Honourable Mention in financial reporting.
In November 2016, we were recognized by The Globe and Mail’s Report on Business Board Games corporate
governance index in 2016, placing second among 231 companies and trusts in the S&P/TSX Composite Index.
Board Games assesses the quality of governance practices based on factors related to board composition,
compensation, shareholder rights and disclosure.
Section 10 – Intact Ventures
10.1 Mission
Launched in 2016, Intact Ventures Inc. (“Intact Ventures”),
is focused on investing and/or partnering with companies that are
redefining the P&C insurance landscape with innovative business models and new technology. Building relationships with ground-
breaking companies will enable us to accelerate our learning, design smarter products and leverage unique technology.
In return, we will support the growth of these companies by providing them with access to our expertise and talent. We want to
ensure that we continue to be a leader in a fast paced industry to serve the best interests of our customers, as well as our portfolio
of companies and partners.
10.2 Our goal
Our goal is to connect with companies that are defining:
The future of transportation;
How we leverage big data;
How people interact with their homes, cars and their surroundings;
Collaborative consumption within the sharing economy; and
Insurance technology, digital tools and alternative distribution models.
As an organization we’re not standing
still- we’re evolving to meet our current
and future customer needs
Our total planned investment
envelope is between $200M-$300M
INTACT FINANCIAL CORPORATION
19
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 11 – Operating environment
11.1 Weather conditions
At a glance
6
1
0
2
From a Q4 perspective, while overall precipitation amounts in the East were relatively low compared to normal, there
was significant monthly variability. The remnants of hurricane Matthew hit the Eastern Maritimes in October 2016,
causing wind gusts over 100 km/h and record levels of rain in certain regions. Western Ontario and Northern Quebec
received more snow than usual in December. In addition, an early start to winter brought difficult road conditions to
unprepared drivers, which caused an increase in claims counts in personal auto. In most regions, the number of days
with significantly elevated claims counts was at the upper end of the normal range.
From an annual perspective, according to Catastrophe Indices and Quantification (CatIQ), severe weather and
natural disasters including the Fort McMurray wildfires, severe hail and thunderstorms, as well as Hurricane Matthew,
caused record-breaking industry losses.
Our 2016 financial results were impacted, with CAT losses exceeding our expectations and historical averages (see
Section 11.3 - Catastrophe losses).
In part because of El Niño, winter had a late start throughout the country, resulting in better Q4-2015 results than
2014, which also experienced benign weather.
Q4-2015 experienced a significantly lower incidence of weather-related claims.
5
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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 in Atlantic Canada, snow accumulated
until April, and then quickly melted when spring brought warmer weather and rain. 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.
Our CAT losses were low for all of 2015, and overall were at their lowest level since 2010.
11.2 Fort McMurray wildfires
On May 3, 2016, wildfires in northern Alberta threatened the town of Fort McMurray, requiring the mandatory evacuation of more
than 80,000 occupants. At its height, the fire spanned over 500,000 hectares, resulting in the costliest insured natural disaster in
Canadian history according to the July 7, 2016 press release from the Insurance Bureau of Canada (“IBC”), who estimated that total
industry insured property damage could reach more than $3.6 billion.
Within hours of the evacuation, we mobilized our claims and catastrophe response teams to many of the evacuation centres
throughout Alberta. We provided customers with support and emergency financial assistance as needed, including temporary
relocation. Approximately 90% of our customers are now back in their homes; the balance having experienced total
losses or
significant partial losses to their homes.
While the cost of this CAT before reinsurance was approximately $400 million, the impact on our financial results net of reinsurance
was $175 million, before tax, or $128 million, after tax, in line with the estimate provided in Q2-2016. This translates to $0.97 per
share, net of reinsurance and taxes.
20
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
11.3 Catastrophe losses
The table below presents the historical seasonality of net current year CAT claims. See Section 28.3 – Seasonality of the P&C
insurance business for more details.
Table 12 – Seasonal historical average of net current year CAT losses by LoB
Personal auto
Personal property
Commercial P&C
Commercial auto
Total
Total % of NEP¹
2016
73
210
95
7
385
4.8%
2015
37
42
33
4
116
1.5%
2014
41
140
58
4
243
3.4%
2013
2012
Five-year
average (in $)
Five-year average
(% NEP)
44
271
167
4
486
6.9%
41
151
50
3
245
3.7%
47
163
81
4
295
0.7%
2.2%
1.1%
0.1%
4.1%
Table 13 - Seasonal historical average of net current year CAT losses by quarter
Q1
Q2
Q3
Q4
Total
Total % of NEP¹
2016
21
164
166
34
385
4.8%
2015
11
22
81
2
116
1.5%
2014
75
33
125
10
243
3.4%
2013
2012
Five-year
average (in $)
Five-year average
(% NEP)
18
143
270
55
486
6.9%
17
62
150
16
245
3.7%
28
85
159
23
295
0.4%
1.2%
2.2%
0.3%
4.1%
¹ Excluding the impact of reinstatement premiums.
Breakdown by Quarter
(average 2012-2016)
Q1
Q2
Q3
Q4
8% 9%
29%
54%
Historically, the third quarter has
experienced roughly half of the
CAT losses for the year, and
roughly three-quarters of CAT
losses impacted the personal lines
of business.
We raised our CAT expectations
from $200M to $250M per year.
Breakdown by LoB
(average 2012-2016)
Personal auto
Personal property
Commercial P&C
Commercial auto
2%
16%
27%
55%
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. Results for industry pools
tend to fluctuate between periods. The impact of assumed industry pools on personal auto underwriting income was a loss of
$24 million in Q4-2016, compared to a loss of $6 million in Q4-2015. On a full year basis, the impact was a loss of $48 million in
2016, compared to a loss of $6 million in 2015. The deterioration was mainly explained by unfavourable trends in Ontario, claims
cost inflation across the country and an overall increase in claims frequency.
INTACT FINANCIAL CORPORATION
21
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
11.5 Capital markets
While the correlation between the performance of capital markets and the performance of our investment portfolio is not perfect, the
following market indicators may be useful in understanding the overall performance of our investments.
Table 14 – Selected market indicators
Market Indicators
S&P/TSX Composite
S&P/TSX Financials
S&P/TSX Energy
S&P/TSX Preferred Share Index
5Y Canada Sovereign Index (estimated variance in bps)
5Y AA Corporate spread (estimated variance in bps)
Strengthening (weakening) of USD vs CAD
Q4-2016
4%
11%
6%
4%
44 bps
(3) bps
2%
Q4-2015
(2)%
1%
(3)%
5%
(5) bps
(2) bps
4%
2016
18%
19%
31%
1%
37 bps
(27) bps
(3)%
2015
(11)%
(6)%
(26)%
(19)%
(55) bps
29 bps
19%
Comments on capital markets performance
Q4-2016
FY 2016
The S&P/TSX Composite Index rose by 4% in Q4-
led by the financial and energy sectors. This
2016,
translated into an increase in the fair value of our
equities,
leading to higher gains and favourable OCI
development.
Five-year Canadian sovereign yields increased by
approximately 40 bps, resulting in lower bond prices,
which were reflected in the mark-to-market losses on our
FVTPL bonds. This increase in yields also continued to
rate-reset preferred shares,
support demand for
resulting
favourable OCI
in
development on our preferred shares portfolio.
higher
prices
and
The S&P/TSX Composite Index rose by 18% in 2016.
increased by 31% and 19%
Energy and financials
respectively. The impact of higher equity markets is reflected
in net investment gains (losses) and in the increase of our net
pre-tax unrealized gains on AFS equities. Higher equity
markets also led to significantly lower impairment charges
than in 2015.
Five-year Canadian sovereign yields
increased by
approximately 40 bps, resulting in lower bond prices which
were reflected in the mark-to-market losses on our FVTPL
bonds.
Our net exposure, after reflecting the impact of hedging strategies and financial liabilities related to investments, is outlined below.
Sector mix – Bonds
(as at December 31, 2016)
Sector mix – Common shares
(as at December 31, 2016)
Currency net exposure
(as at December 31, 2016)
Government
Financials
Other
10%
28%
Financials
Energy
Industrials
Other
16%
USD
CAD
5%
62%
51%
20%
13%
95%
22
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 12 – Canadian P&C insurance industry
The P&C insurance market in Canada is relatively mature and highly competitive. It is:
Large and
highly
fragmented
A $47 billion market representing approximately 3% of GDP, according to MSA Research Inc. data for 2015.
The top five insurers represent 49% of the market, and the top 20 have a combined market share of 84%.
Intact is the largest player with approximately 17% market share.
Evolving
and
growing
over time
Regulated
Over the last 30 years, the industry has grown at a 6% CAGR and delivered a ROE of approximately 10%.
Brokers continue to control commercial lines and a large share of personal lines in Canada. However, the
direct-to-consumer channel is growing. Distribution in the industry is currently about 64% through brokers and
36% 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
provinces.
Capital for federal
provincial insurance companies.
insurance companies is regulated by OSFI and by provincial authorities in the case of
insurance rates are unregulated, while personal auto rates are regulated in many
Table 15 – Most recent Canadian P&C insurance results (estimated)
YTD Q3 2016
IFC
P&C
industry
Out
performance
Industry
Benchmark1
Out
performance
DPW growth (including industry pools)
Combined ratio (including MYA)
ROE (annualized)2
Industry data: IFC estimate based on MSA Research Inc. Please refer to Important notes on page 3 of this MD&A for further information.
1 Consists of the 20 largest comparable companies in the P&C industry based on industry data, as defined above.
2 IFC’s ROE corresponds to the AROE.
1.4%
103.2%
4.7%
2.0%
103.4%
4.7%
2.4 pts
5.9 pts
6.7 pts
4.4%
97.5%
11.4%
3.0 pts
5.7 pts
6.7 pts
YTD Q3-2016
Our growth outperformance against our industry benchmark reached 3.0 points, largely driven by our growth
initiatives and the acquisition of CDI.
Our combined ratio outperformance against our industry benchmark was 5.7 points, an improvement of 0.5 points
over FY 2015’s gap, mainly due to the impact of our profitability actions and exposure to the Fort McMurray wildfires which
was lower than our relative market share.
Our ROE outperformance of 6.7 points versus the P&C insurance industry is above our objective of 5 points and
increased from the FY 2015 gap of 5.1 points, mainly on better underwriting results.
DPW Growth
Combined ratio (including MYA)
ROE 2
IFC's outperformance
%
4
.
3
%
0
.
3
%
5
.
6
%
2
.
5
%
7
.
5
%
2
.
8
%
7
.
6
%
1
.
5
2015
YTD Q3 2016
2014
2015
YTD Q3 2016
2014
2015
YTD Q3 2016
%
5
.
1
-
2014
2014
INTACT FINANCIAL CORPORATION
23
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 13 – 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
Industry profitability has been challenged with an
average loss ratio of about 80% for the first nine
months of 2016.
In Ontario, we continue to expect additional cost
benefits from reforms given the lag between prior rate
reductions and the implementation of government cost
measures.
Overall, we believe that claims cost inflation is leading
to rate increases in all markets.
We therefore expect growth at a low to mid single-digit
rate for the industry.
As companies are adjusting to changing weather
patterns, we expect the current firm market conditions
to continue.
We therefore expect growth rate should remain at the
mid to upper single-digit level.
These lines of business remain competitive.
The economy in Western Canada continues to
pressure industry growth.
We therefore expect growth at a low single-digit rate.
In the current interest rate environment, we estimate
that the industry’s pre-tax investment yield will continue
to decline slightly, given its asset mix and duration.
levels could be negatively impacted if
Industry capital
volatility resulting from global events puts downward
pressure on market values.
Global capital requirements are continuing to influence
the asset allocation decisions of many companies.
We expect growth at a low to mid single-digit rate.
Overall, we expect the industry’s ROE to improve but
remain slightly below its long-term average of 10% over
the next 12 months.
Personal
auto
Personal
property
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Commercial
lines
s Investments
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a
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O
Financial
strength
Overall
Our Strategy
We have robust pricing and claims action plans to
tackle observed emerging trends, which should lead to
meaningful improvements in 2017.
We expect that our branding and digital actions in this
line of business will continue to help selectively grow
our market position.
We are enhancing our home improvement plan to
ensure the results are sustainable even in severe
weather conditions.
To support growth, we continue to focus on addressing
customer needs (e.g. Quick Quote home, Lifestyle
AdvantageTM and an expanded Enhanced Water
Damage Package).
We continue to develop innovative products to address
customer needs (e.g. cyber risk coverage and sharing
economy). At the same time, our focus on training and
service excellence remains.
We are strengthening capabilities in specialty lines.
We are taking corrective measures in Commercial
auto.
We are targeting a combined ratio sustainably in the
low 90s through better segmentation, rate increases
and product changes.
investment
We expect a mild reduction in our net
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 and withstand
headwinds from volatile capital markets or natural
disasters.
We continue to invest
in brand, digital strategies,
customer experience and distribution networks to
generate premium growth.
We expect that our pricing and underwriting discipline,
as well as our claims management capabilities will
continue to help us outperform the industry.
24
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
FINANCIAL CONDITION
Section 14 – Financial position
2016 Highlights
BVPS
for the last 12 months
Debt-to-capital ratio
Total excess capital
7%
18.6%
$970 million
MCT
218%
14.1 Balance sheets
Table 16 – 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)
2016
2015
273
8,696
1,377
3,635
405
351
8,499
1,235
2,971
448
14,386
13,504
3,057
482
747
1,614
2,705
2,868
274
720
1,392
2,557
22,991
21,315
8,536
4,573
529
1,872
1,393
8,094
4,390
378
1,586
1,143
16,903
15,591
2,082
489
129
3,197
191
6,088
42.72
2,090
489
119
3,047
(21)
5,724
39.83
INTACT FINANCIAL CORPORATION
25
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
14.2 Investments
Our investments totalled $14.4 billion as at December 31, 2016, up $882 million from December 31, 2015. The increase is due to
the receipt of investment income and to favourable mark-to-market development driven by higher equity markets. Our investment
portfolio is mainly composed of Canadian securities and includes a mix of cash and short-term notes, fixed-income securities,
preferred shares, common shares and loans. As a means to provide geographic and sector diversification to our portfolio, we invest
in high quality U.S. corporate bonds and U.S. equities.
High-quality investment portfolio
Our investment portfolio includes high quality government and corporate bonds, as well as equity securities of large, publicly-traded,
dividend-paying companies.
Nearly 98% of our fixed-income portfolio is rated ‘A-’ or better as at December 31, 2016.
We have no exposure to leveraged securities.
Our asset-backed securities, all rated ‘AAA’, totalled $177 million as at December 31, 2016 ($250 million as at December 31,
2015) and included Canadian credit card receivables ($152 million as at December 31, 2016, $230 million as at December 31,
2015) and mortgage-backed securities.
Our preferred shares portfolio is mainly comprised of Canadian issuers with 79% 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 $616 million in
dividend-paying U.S. equities ($584 million as at December 31, 2015). We actively manage our portfolio to enhance dividend
income throughout the year.
Table 17 – Credit quality of 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.
2016
46%
36%
16%
2%
100%
-
79%
21%
100%
2015
50%
31%
18%
1%
100%
1%
81%
18%
100%
As at December 31, 2016,
fixed-income portfolio was ‘AA+’, unchanged since
December 31, 2015, and the average duration of our fixed-income portfolio was 4.02 years (4.04 years, net of interest rate
derivatives), similar to the duration of 4.03 years as at December 31, 2015 (4.00 years, net of interest rate derivatives). The
weighted-average rating of our preferred share portfolio was ‘P2’ as at December 31, 2016 and 2015.
the weighted-average rating of our
26
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Net exposure
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 tables show our economic exposure after reflecting the impact of hedging strategies and financial liabilities related to
investments.
Table 18 – 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
2016
3%
70%
10%
14%
97%
3%
100%
2015
4%
71%
9%
13%
97%
3%
100%
The investment mix as at December 31, 2016 is comparable to last year.
Approximately 11% of our fixed-income and 18% of our common share asset portfolios were comprised of USD securities as at
December 31, 2016. Foreign currency exposure in USD denominated fixed-income securities is hedged using foreign-currency
forward contracts.
Table 19 – Investment portfolio – currency (net exposure)
As at December 31,
CAD
USD
2016
95%
5%
100%
2015
95%
5%
100%
Table 20 – Sector mix by asset class, excluding cash, short-term notes and loans (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
62%
28%
1%
2%
2%
-
-
1%
-
2%
2%
-
76%
13%
-
-
-
11%
-
-
-
-
Common shares
IFC Total
IFC
-
16%
20%
13%
9%
7%
6%
9%
7%
9%
4%
S&P/TSX
Weighting
2016
2015
-
38%
21%
9%
4%
5%
3%
5%
12%
2%
1%
41%
37%
5%
3%
3%
1%
2%
2%
1%
3%
2%
40%
37%
5%
3%
3%
1%
3%
2%
1%
3%
2%
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.
100%
100%
100%
100%
100%
100%
INTACT FINANCIAL CORPORATION
27
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 21 – 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,
2016
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015
83
(67)
253
269
165
(117)
210
258
166
(158)
142
150
140
(184)
79
35
121
(111)
(12)
(2)
Dec. 31, 2016 vs Sept. 30, 2016
Dec. 31, 2016 vs 2015
Our pre-tax unrealized gain position stood at $269 million
as at December 31 2016, up $11 million for the quarter. This
increase was driven by common shares and preferred shares,
mostly offset by the impact of higher rates on bond prices.
See Section 11.5 - Capital markets for more details.
The favourable development of $271 million was
driven by higher common share prices as equity markets
rose significantly in 2016. See Section 11.5 - 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
The table below presents the aging of unrealized losses on our AFS common shares.
Table 22 – 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,
2016
Sept 30,
2016
June 30,
2016
Mar 31,
2016
Dec 31,
2015
14
2
4
20
19
3
-
22
39
3
1
43
46
3
24
73
96
31
44
171
The current valuation of preferred shares, particularly those with reset features, reflects, to a large extent, the impact of low interest
rates. Our investment strategy is to purchase preferred shares for the purpose of earning dividend income, with the intent of holding
them for the long-term. Accordingly, our impairment model for preferred shares is based on credit considerations, not interest rate
levels. This is consistent with the treatment of debt securities. Almost all of our preferred shares are now assessed for impairment
using a debt impairment model.
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 or 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 $4 million in Q4-2016 and
$41 million for
the year ended
the year ended December 31, 2016 ($44 million in Q4-2015 and $124 million for
December 31, 2015). Refer to Table 10 – Net investment losses for additional details on our impairment losses. Also refer to Note
2 – Summary of significant accounting policies of the accompanying Consolidated financial statements for additional details on our
accounting policy regarding the impairment of financial assets.
28
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
14.3 Claims liabilities and PYD
Claims liabilities amounted to $8.5 billion as at December 31, 2016, having increased
slightly from December 31, 2015 due to the impact of the Fort McMurray wildfires and
severe storms across Canada.
Direct claims liabilities
(as at December 31, 2016)
Personal lines
Commercial lines
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.
36%
The principal assumption underlying the claims liability estimates is that our future
claims development will
follow a similar pattern to past claims development
experience. Claims liability estimates are also based on various quantitative and
qualitative factors, including:
64%
Trends in claims severity and frequency;
Average claim costs, including claim handling costs (severity);
Average number of claims by accident year (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 24 – 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, 2016
(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%
5.0%
4.0%
3.2%
2008
2009
2010
2011
2012
2013
2014
2015
2016
The following table shows the PYD by line of business and the annualized rate of favourable PYD (as a % of opening reserves).
Table 23 – Favourable PYD by line of business
By line of business
Personal auto
Personal property
Commercial P&C
Commercial auto
Total favourable (unfavourable) development
Annualized rate of favourable PYD1
1 As a % of opening reserves.
Q4-2016
Q4-2015
Change
2016
2015 Change
13
13
43
(7)
62
29
13
34
(1)
75
(16)
-
9
(6)
(13)
115
88
183
3
389
212
70
199
(4)
477
(97)
18
(16)
7
(88)
3.2%
3.9%
(0.7) pts
5.0%
6.2% (1.2) pts
Q4-2016 vs Q4-2015
2016 vs 2015
Favourable PYD of $62 million, or 3.2% of
opening reserves on an annualized basis, was
slightly lower than last year on the unfavourable
development of
large losses, as well as a
negative impact from industry pools.
Favourable PYD of $389 million, or 5.0% of opening reserves, was
in line with the historical
below the 6.2% recorded in 2015 but
average.
Last year experienced an elevated level of favourable PYD, reflecting
a favourable impact from industry pools and prior year CAT losses,
as well as an increasing comfort around the effectiveness of certain
auto reforms.
30
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
14.4 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 recoverables with licensed Canadian reinsurers ($388 million as at December 31,
2016, $198 million as at December 31, 2015) 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 9.3 c)
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 24 – 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, 2017
December 31, 2016
7.5
3 - 10
100
3,500
7.5
3 - 10
100
3,575
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
We retain participations averaging 5.1% as at January 1, 2017 (December 31, 2016 – 5.3%) on reinsurance layers between the
retention and coverage limits. The 2017 coverage limit will gradually increase from $3.5 billion to $3.6 billion during the year.
The net after-tax impact of a catastrophe that would exhaust our coverage limits as at January 1, 2017 is estimated at 3.5% of our
NEP for 2016 (January 1, 2016 – 3.6% of our NEP for 2015).
INTACT FINANCIAL CORPORATION
31
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
14.5 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 reduced 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%
31%
62%
We realized a positive return on plan assets in 2016. As at December 31, 2016, we have a net surplus of $62 million, or 103%, for
funded pension plans, compared to a net surplus of $93 million, or 105%, as at December 31, 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 27.5
Note 27.6
Note 27.7
Funding ratio
(as at December 31)
Interest rate hedge ratio
(as at December 31)
Pension plan asset mix
(as at December 31, 2016)
%
4
0
1
%
5
0
1
%
3
0
1
%
4
7
%
0
7
%
8
6
Debt securities
Common shares
Other
4%
35%
61%
2014
2015
2016
2014
2015
2016
Funding ratio: Plan assets as a percentage of funded plans’ obligations.
Interest rate hedge ratio: The 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 pension fund investment policy target of 70%, assuming the funding ratio is 100%.
32
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 15 – Liquidity and capital resources
15.1 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.
2016 Capital structure
Debt-to-capital ratio
Weighted-average
debt maturity
Weighted-average
debt coupon
Weighted-average
preferred share coupon
18.6%
15 years
3.79% (after tax)
3.75% (after tax)
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 18.6% as at December 31, 2016 (16.6% as at December 31,
2015). The increase reflects the issuance in March 2016 of $250 million of Series 6 medium term unsecured notes, which mature in
March 2026. We issued the Series 6 debt for general investment purposes at an attractive all-in cost.
We have a diversified maturity profile with reasonable levels of debt and preferred shares, which improves our overall cost of
capital:
We currently have six series of notes outstanding with maturities ranging between 3 and 45 years.
The notes carry a weighted average coupon of 5.15% (3.79% after tax).
All debt tranches are prudent in size with no large peaks, reducing financing risk.
Preferred shares provide flexibility in our capital structure at a reasonable cost.
Debt and preferred shares represent less than 30% of our total capital structure.
Our debt and preferred shares are presented in the table below.
Capital structure – debt and preferred shares
INTACT FINANCIAL CORPORATION
33
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Series 6 unsecured medium term notes
On March 1, 2016, we completed an offering of $250 million of Series 6 unsecured medium term notes. These notes bear
interest at a fixed annual rate of 3.77% until maturity on March 2, 2026, payable in semi-annual instalments commencing on
September 2, 2016. Further to the issuance of the notes, DBRS, Moody’s and Fitch have maintained their respective credit
ratings.
As at December 31, 2016, the amounts available under the base shelf prospectus and medium-term note supplement
filed in September 2015 were $4.75 billion and $950 million, respectively.
Preferred Shares rate reset
On August 31, 2016, we announced that we did not intend to exercise our right to redeem our Non-cumulative Rate Reset
Class A Series 3 Preferred Shares on September 30, 2016. See more information regarding our Preferred Shares in Section
27.2 – Outstanding share data.
On December 31, 2017, subject to certain conditions, the holders of the Non-cumulative Rate Reset Class A Series 1
Preferred Shares (“Series 1”) 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.
Credit facility
We have a $300-million 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, 2016 and 2015.
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, 2016 and 2015.
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 sale and repurchase agreements as at December 31, 2016 and 2015.
15.2 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 25 – 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-
On October 5, 2016, 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 remained positive.
On November 10, 2016, A.M. Best reaffirmed the financial strength ratings and issuer credit ratings of Intact Financial
Corporation and its principal P&C subsidiaries. The outlook remained stable.
DBRS and Fitch have maintained their ratings for long-term issuer and insurance financial strength.
34
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
15.3 Understanding our cash flows
Cash inflows from operating activities mainly consist of insurance premiums and investment income. Cash inflows in excess of
required outflows are deployed in our investment portfolio to generate additional investment income in the future.
Table 26 – Cash flows
Q4-2016
Q4-2015
Change
Cash flows from operating activities
153
240
Cash flows deployed on:
Business combinations, net of cash acquired
Equity investments in brokerages and other, net
Purchases of intangibles and P&E, net
Dividends
Share-based payments in shares
NCIB (see Section 27.4)
Cash flows generated from:
Issuance of Series 6 medium term notes
Cash flow available for investment activities1
Net investment sales (purchases)
Net increase (decrease) in cash and cash equivalents
(19)
(38)
(30)
(80)
-
(7)
-
(21)
52
31
-
(7)
(32)
(75)
-
-
-
126
(170)
(44)
(87)
(19)
(31)
2
(5)
-
(7)
-
(147)
222
75
2016
925
(19)
(275)
(120)
(324)
(19)
(44)
248
372
(345)
27
2015
Change
889
36
(187)
(77)
(89)
(300)
(17)
-
-
219
(167)
52
168
(198)
(31)
(24)
(2)
(44)
248
153
(178)
(25)
1 A non-IFRS financial measure which includes net cash flows from cash and cash equivalents and the investment portfolio.
We continued to invest in our broker network to develop broker relationships. Investing in brokers generates distribution income and
supports our long-term growth objective.
15.4 Contractual obligations
The table below presents the expected timing of contractual liquidity requirements as at December 31, 2016.
Table 27 – 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
Claims liabilities1
Operating leases on premises and
equipment
Pension obligations2
Total contractual obligations
1,393
1,143
8,237
786
52
11,611
-
72
3,295
157
8
3,532
250
144
2,043
236
16
2,689
299
113
1,285
156
11
1,864
844
814
1,614
237
17
3,526
1 Represents the undiscounted value and includes incurred but not reported reserves.
2 These amounts represent the annual mandatory funding required by regulators, based on the latest actuarial valuations and expected benefit
payments for unfunded plans.
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.
INTACT FINANCIAL CORPORATION
35
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 16 – Capital management
16.1 Capital management objectives
Our objectives when managing capital consist of:
maintaining strong regulatory capital
levels (see Regulatory capital section below) and ensuring policyholders are well
protected; and
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 that the probability of breaching the regulatory minimum requirements
is very low. Such levels may vary over time depending on our evaluation of risks and 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 an 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. 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. The new guidelines came into effect on January 1, 2016 and the impact on our MCT ratios
is positive, with the benefit phasing in over a two-year period.
36
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
16.2 Capital position
The following table presents the estimated aggregate capital position of our P&C insurance subsidiaries.
Table 28 – 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,
2016
September 30,
2016
December 31,
2015¹
4,300
1,972
218%
2,328
1,342
947
4,175
1,939
215%
2,236
1,267
879
3,840
1,889
203%
1,951
1,007
629
1 Comparative figures are presented under the MCT guidelines in effect as at December 31, 2015.
Our estimated aggregate MCT level as at December 31, 2016 was strong at 218%, up by 3 points from September 30, 2016,
reflecting our operating profit. The 15-point improvement from December 31, 2015 was mainly due to our operating profit despite the
impact of the Fort McMurray wildfires during Q2-2016, to the phase-in benefit of the 2015-2016 MCT guidelines and to our debt
issuance in Q1-2016.
Total excess capital includes excess capital, over a 170% MCT, in our P&C insurance subsidiaries and excess capital outside of the
P&C insurance subsidiaries. As at December 31, 2016, total excess capital stood at $970 million, up by $89 million from September
30, 2016, which is consistent with the MCT movement mentioned above. The increase of $345 million from December 31, 2015 is
also consistent with the improvement in MCT outlined above.
As at December 31, 2016, our P&C insurance subsidiaries remained well capitalized on an individual basis and were in compliance
with regulatory requirements, as well as above internal thresholds.
For details on MCT sensitivity, please refer to Section 21- Sensitivity Analyses.
For details on our Own Risk and Solvency Assessment, please refer to Section 20.8- Own Risk and Solvency Assessment.
16.3 Capital returned to common shareholders
Our operating performance and financial strength have translated into $1.4 billion in capital returned to common shareholders
through dividends and share repurchases since 2012.
We strive to maintain our dividend track record through sustainable annual dividend increases. We have increased our common
share dividends each year since going public, with a 9% increase in 2016.
Over the last five years, our dividend payout ratio has been about 40%, both in terms of NOIPS and EPS, and our annualized
dividend yield of 2.4% has remained relatively stable reflecting our growth objectives and use of buybacks as a flexible means
to return additional capital to shareholders.
Our decision to increase common share dividends by 10% for 2017 reflects the strength of our financial position and confidence
in our ongoing operating earnings and capital generation.
Capital returned to common shareholders
(in millions of dollars)
Quarterly dividend per share for common shares
(in dollars)
NCIB
Dividends paid on common shares
13% CAGR since 2012
106
233
210
255
279
44
304
0.48
0.53
0.44
0.40
0.64
0.58
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Q1-2017
INTACT FINANCIAL CORPORATION
37
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
RISK MANAGEMENT
Section 17 – 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 18 – Risk management structure
38
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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, applicable laws and regulatory
guidelines on corporate governance. The following structure is in place and remains largely unchanged from 2015.
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 of our
business activities, 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 monitoring
of 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.
INTACT FINANCIAL CORPORATION
39
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 19 – 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:
19.1 Corporate governance and compliance program
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 in
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 SVP, Corporate
and Legal services that remain
independent of operations.
The SVP, Corporate and Legal
services 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.
40
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
19.2 Living our values
We strive to create an environment where our employees live our values every day. It is a
framework for who we are, how we behave and how we maintain our excellent reputation.
Our values are organized according to five core themes, defined as follows:
Integrity
We demonstrate the highest ethical standards of personal conduct. We behave with honesty, integrity, openness and fairness when working
with each other, customers, partners and governments.
Respect
We value the diversity of our people and their dreams. We foster an environment conducive to personal growth and development and to
new opportunities. We recognize and value the contribution that each of us and our teams are making to our success.
Customer Driven
We listen to customers, understand their needs, offer the best solutions and deliver on our promises. We make it easy for customers to deal
with us. We go beyond expectations and always deliver an outstanding experience.
Excellence
We are disciplined in our approaches and our actions, which is why we excel
in all of our businesses. We embrace change and the
opportunities it creates, encourage innovative thinking and always seek to improve. We value and reward high performance and success.
We provide value to our stakeholders.
Social Responsibility
We respect the environment and its finite resources. We believe in making the communities where we live and work safer, healthier and
happier. We encourage the involvement and citizenship of all our employees. Our commitment to social responsibility also serves as the
mandate of the Intact Foundation, which donates to organizations that are committed to climate-change adaptation and the improvement of
the lives of at-risk youth. A few of 2016 our achievements are highlighted below.
s
t
n
e
m
e
v
e
i
h
c
a
6
1
0
2
r
u
O
The Intact Foundation contributed $3.5 million to over 130 organizations across Canada, working to support challenged
youth get the critical support they need and to help Canadians protect themselves from the impacts of climate change.
One of our key investments was a $525,000 commitment to the Egale Centre, a LGBTIQ2S (lesbian, gay, bisexual,
trans, intersex, queer, two spirit) emergency and transitional housing facility.
Our employee generosity achieved new heights in 2016, with over $1.3 million raised for United Way/Centraide
organizations nationally, an 11% increase from 2015. The Intact Foundation has begun a pilot project to integrate skill
based volunteering projects for Intact employees to leverage our wide range of competencies to build the capacity of our
charitable partners.
The Intact Centre on Climate Adaptation completed its inaugural year in 2016, with significant accomplishments:
delivering over 40 presentations to key government stakeholders and influencers on the economic impacts of
climate change adaptation, signing the City of Burlington to deploy the Home Adaptation Assessment Program to 4,000
homes to assess flooding exposure.
Environmental, Social and Governance activities
The following publications on our website provide further details on our ESG activities:
Online Annual Report
Annual Information Form
Management Proxy Circular
Public Accountability Statement
INTACT FINANCIAL CORPORATION
41
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 20 – Enterprise Risk Management
20.1 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.
20.2 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.
20.3 A shared responsibility
Managing risk is a shared responsibility at Intact. The three lines of defence model is employed to clearly identify the roles and
responsibilities of those involved in the risk management process.
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INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
20.4 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 of our Risk Appetite under the Corporate Governance section.
20.5 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
43
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
20.6 Top and emerging risks that may affect future results
Each year the Enterprise Risk Management Committee 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.
TOP AND EMERGING RISKS
Major earthquake in Canada .......................................................................................................................................................... 44
Catastrophe events risk .................................................................................................................................................................. 45
Increased competition and disruption ............................................................................................................................................. 46
Turbulence in financial markets ...................................................................................................................................................... 47
Reserve and pricing inadequacy .................................................................................................................................................... 48
Governmental and/or regulatory intervention.................................................................................................................................. 49
Failure of a major technology initiative ........................................................................................................................................... 51
Information technology security failure ........................................................................................................................................... 51
Inability to contain fraud and/or abuse............................................................................................................................................ 52
Customer satisfaction risk............................................................................................................................................................... 52
Failure of an acquisition.................................................................................................................................................................. 53
The emergence of autonomous vehicles and crash avoidance technology.................................................................................... 53
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. Based on our assessment, our exposure to a major
earthquake in Western Canada was stable in 2016 versus the prior
year.
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 14.4 – Reinsurance for more details on our
reinsurance program.
In 2016, we completed a comprehensive review of the models we use
to evaluate our earthquake exposure. We concluded that the models
we use to help us assess our risk are sound. Given the nature of
earthquake risk, different models provide different assessments of the
same exposure. We continue to maintain a prudent amount of
reinsurance that exceeds our risk assessment of an earthquake in
Western Canada at a 1-in-500 year return period.
44
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 including but 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. As mentioned in Section 11.2, the
events in Fort McMurray were the costliest natural
catastrophe in Canadian history and highlight the risk
of wildfire in Canada. Changing weather patterns may
have an impact on the likelihood and severity of
natural catastophes, such as wildfires. The trend in
climate change continues to pose a meaningful risk to
our ability to meet our business objectives.
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. 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 is focused on key
areas that will reduce climate change and extreme weather risk for home owners,
governments and businesses. This is one of several initiatives to promote awareness on
the potential impact of climate change to provide practical solutions for society as a whole
to implement.
In addition, our reinsurance program offers protection against multi-risk events and
catastrophes. See Section 14.4 – 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 triggers a high volume of claims.
INTACT FINANCIAL CORPORATION
45
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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
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;
Opening innovative service centres in major Canadian cities to
provide an unmatched customer experience; and
Creating Intact Ventures (see Section 10) to be at the forefront of
technological change as it applies to the P&C insurance industry.
We also constantly seek to develop innovative and competitive
products. We launched the Intact Lab, our centre for digital excellence,
in 2015 to accelerate innovation and explore advanced technology
solutions.
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. Artificial
is gaining much
intelligence is another area that
attention and could have a material
impact on the insurance industry.
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
or alternate business models (e.g. peer-to-peer insurance) 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.
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INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 significant amount of
securities issued by companies in the energy sector. In both 2015 and 2016, our preferred share portfolio experienced significant fluctuations 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 9.1
Basis risk
Note 9.2
Credit risk
Note 9.3
Liquidity risk
Note 9.4
INTACT FINANCIAL CORPORATION
47
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 14.3 – Claims liabilities and PYD 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.
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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, 2016
(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
49
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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
or appropriate,
regulation and
in handling general
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
reputation, profitability, and
negatively impact our
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
internal solvency
In addition, we conducted a full
assessment as described below in Section 20.8 – Own
Risk and Solvency Assessment (ORSA).
We believe that our insurance subsidiaries are in material compliance with all applicable
it is not possible to predict the future impact of
regulatory requirements. However,
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.
50
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Failure of a major technology initiative
Risk we are facing
Operational risk
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
Our technology strategy may take too long to execute or may not be adequate to maintain a
infrastructure and
competitive advantage. The complexity and interdependence of our
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.
How we manage this risk
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
technology
projects.
focus is devoted to major
Information technology security failure
Risk we are facing
Operational risk
The use of information technology enables us to increase our productivity, to offer attractive products and interfaces to existing and potential customers, and
to distinguish ourselves from the competition by benefiting from a competitive advantage. However, our dependency on technology, network, telephony and
critical applications makes our ability to operate and our profitability vulnerable to service interruption, third party agreement failure and information security
breaches.
Information security risks for all types of organizations continue to increase. 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. In 2016, there was a significant increase in the
number and sophistication of ransomware attacks globally.
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 resulting in system unavailability, data corruption or
deletion, or the disclosure of confidential or personal information.
Massive denial of service attacks and system intrusion attempts
could compromise our ability to operate or we may be unable to
information from public
safeguard personal and confidential
disclosure. Other types of potential attacks we may face include
ransomware, data theft or manipulation, and cyber-espionage.
These events may lead to wide ranging consequences including:
loss, which also includes lost productivity,
financial
remediation costs, and costs associated with potential
legal action;
regulatory action, which may include regulatory fines
and/or increased scrutiny by government; and
reputational damage such as lost consumer confidence
and lower customer retention
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.
Our Information Technology Security Committee oversees our security initiatives and
ensures effective collaboration across teams. In 2016, we have increased our focus on
employee information security awareness and training to enhance our ability to resist
cyber-attacks.
In addition, our Enterprise Risk Committee oversees the establishment of our cyber
security strategy and monitors the progress of our mitigation action plans.
INTACT FINANCIAL CORPORATION
51
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(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 - Fighting Fraud and Reducing Automobile
Insurance Rates Act is one example of government action that aims to reduce auto insurance
fraud.
Customer satisfaction risk
Risk we are facing
Strategic risk
Our insurance products and services are ultimately distributed to individual consumers and businesses. From time to time, unsatisfied customers,
consumer advocacy groups or the media may generate negative publicity related to our claims handling or underwriting practices. Untimely or poor
handling of such negative publicity may increase the impact of a situation and materially affect our reputation and growth prospects.
In addition, a lack of appropriate focus on customers’ needs and wants may threaten our ability to meet customer expectations, resulting in poor
customer retention.
Potential impact
How we manage this risk
Negative publicity resulting from unsatisfied
in increased regulation
customers may result
and legislative scrutiny of practices in the P&C
insurance industry as well as
increased
litigation. Such events 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.
52
INTACT FINANCIAL CORPORATION
To mitigate these risks, we have established escalation procedures to help ensure that our
customers have multiple channels to express any dissatisfaction. This includes a Customer
Experience Team and an Ombudsman’s Office which both offer the opportunity for customer
dissatisfaction to be resolved.
In addition, management proactively identifies potential issues
and performs an additional review to help ensure that our customers are treated fairly.
The wording of our insurance policies 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.
The Enterprise Risk Committee regularly monitors our operations to identify situations that can
negatively affect customer satisfaction.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Failure of an acquisition
Risk we are facing
Strategic risk
An important part of our growth strategy involves consolidating the Canadian market and expanding beyond our existing markets. Acquiring other
companies has historically been a key element in executing our growth strategy. In this context, there is a risk that we engage in an acquisition that
improperly values and prices a target, lacks sufficient due diligence and/or poorly integrates the target company following the close. This is
applicable for both domestic transactions and international expansion.
Potential impact
How we manage this risk
If we acquire a company at a price that far exceeds its true
value, we may be unable to derive the expected returns
from the transaction. This would lead to a lower future return
on equity for shareholders. Depending on the nature of the
transaction and the subsequent events, it may be necessary
to take a writedown of goodwill. In addition to the potential
financial impact, our reputation may be adversely affected if
such an event were to occur. Consequently, it may impact
the cost or availability of capital for future acquisitions.
We have a dedicated corporate development team that follows a rigorous selection
process. Our approach to conducting due diligence is well developed and is
consistently executed. There is also strong oversight by the Board of Directors
regarding acquisitions.
In 2016, we conducted a stress testing exercise on this topic that was presented to
the Enterprise Risk Committee and the Risk Management Committee. As part of
the exercise, we estimated the potential impact on the Company of a significantly
underperforming acquisition and identified remedial actions that could be taken.
The emergence of autonomous vehicles and crash avoidance technology
Emerging risk
Risk we are facing
Commercialisation of fully- or semi-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 and crash avoidance
technology is realized, a number of changes may occur including a
significant reduction in accident 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.
20.7 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.
INTACT FINANCIAL CORPORATION
53
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
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.
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 employee engagement surveys continue to reveal 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 15.2 –
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.
54
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
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.
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.
20.8 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 20 – 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.
We also compared our assessment of our own capital requirements with that of regulatory bodies on the same basis. Our overall
assessment continues to be materially lower than current regulatory requirements given the same confidence level and time
horizon. Our 2016 assessment of capital required decreased slightly compared to that of 2015. Our capital sufficiency remains very
strong when comparing both available financial resources and tangible equity to our assessment of capital required.
The revisions to the MCT Guidelines in 2015 and again in 2016 have resulted in lower capital requirements for IFC and continue to
converge 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.
INTACT FINANCIAL CORPORATION
55
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 21 – Sensitivity analyses
Sensitivity analyses are one risk management technique that assist management in ensuring that risks assumed remain within our
risk tolerance level. Sensitivity analyses involve varying a single factor to assess the impact that this would have on the Company’s
results and financial condition. No management action is considered.
Actual results can differ materially from these estimates for a variety of reasons and therefore, these sensitivities should be
considered as directional estimates.
Table 29 - Sensitivity analysis
For the quarters ended
Equity price risk
Common share prices (10% decrease)2
Preferred share prices (5% decrease)3
Interest rate risk4 (100 basis point increase)
Investments (net asset position, when referring
to MCT)
Currency risk (strengthening of Can. dollar by 10%)5
Investments (net asset position, when referring
to MCT)
Underwriting profitability
Combined ratio (3 points increase) 6
December 31, 2016
Net income
OCI
MCT1
December 31, 2015
Net income
OCI
MCT1
9
8
4
2
(193)
(57)
(1) pts
(2) pts
(75)
(3) pts
(47)
- pts
(5)
5
7
2
(156)
(50)
(1) pts
(2) pts
(89)
(3) pts
(45)
(1) pts
(10) pts
(10) pts
¹ MCT sensitivity is based on movements in the net asset position caused by the relevant risk.
2 Net of any equity hedges, including the impact of any impairment.
3 Including the impact on related embedded derivatives.
4 The yield curve experiences an instantaneous parallel shift.
5 After giving effect to forward-exchange contracts.
6 Combined ratio deteriorates across all lines of business. All resulting claims are outstanding (no payments) and no reinsurance is triggered.
A 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.
Gains and losses resulting from changes in interest rates vary depending on our position on the interest rate risk.
Interest rates, equity prices and foreign currency move independently.
The above analyses were prepared using the following assumptions:
− 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.
−
− AFS debt or equity securities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be realized
For FVTPL debt securities, the estimated impact on net income is assumed to be offset by the market yield adjustment.
Impact on the Company’s pension plans has been considered.
through sale.
See Section 14.3 – Claims liabilities and PYD for a sensitivity analysis of the discount rate on our claims liabilities.
56
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
ADDITIONAL INFORMATION
Section 22 – Financial KPIs and definitions
22.1 Our financial KPIs
Our most relevant key performance indicators are outlined in the table below. DPW, Underlying current year loss ratio, NOI, NOIPS,
OROE, ROE, AROE and AEPS are considered non-IFRS financial measures. See Section 23 – Non-IFRS financial measures for
the reconciliation to the most comparable IFRS measures.
Growth
DPW growth
Written insured risks growth
2016
4.7%
3.8%
6.2%
5.1%
2015
2014
2013
2012
Underlying current year loss ratio
64.8%
66.1%
64.9%
61.3%
30.4%
30.4%
Underwriting
performance
Claims ratio
Expense ratio
Combined ratio
Net investment income
Net distribution income
NOI
NOIPS (in dollars)
OROE
ROE
AROE
EPS (in dollars)
AEPS (in dollars)
BVPS (in dollars)
MCT
Total excess capital
Consolidated
performance
Financial
strength
1.6%
(0.7)%
64.3%
62.6%
30.2%
7.2%
5.7%
64.9%
66.9%
31.1%
34.3%
32.3%
63.5%
61.6%
31.5%
95.3%
91.7%
92.8%
98.0%
93.1%
414
111
660
4.88
12.0%
9.6%
11.0%
3.97
4.53
42.72
218%
970
424
104
860
6.38
16.6%
13.4%
14.3%
5.20
5.54
39.83
203%
625
427
75
767
5.67
16.3%
16.1%
16.8%
5.79
6.01
37.75
209%
681
406
75
500
3.62
11.2%
9.3%
10.3%
3.10
3.44
33.94
203%
550
389
83
675
5.00
16.8%
13.5%
16.1%
4.20
5.02
33.03
205%
599
Debt-to-capital ratio
18.6%
16.6%
17.3%
18.7%
18.9%
INTACT FINANCIAL CORPORATION
57
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
22.2 Definitions of our financial KPIs
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 23 - 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 and restructuring-
related items, such as amortization of intangible assets recognized in business combinations, as well as integration and
restructuring costs.
NOI, NOIPS and OROE are operating measures, meaning that they exclude non-operating items detailed in Section 24 –
Non-operating results.
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 12 – 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.
58
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Net distribution
income
for a specific
period
Net investment
income
for a specific
period
Operating income excluding interest
and taxes from our wholly-owned
broker (BrokerLink)
+
Operating income including interest
and taxes from our broker associates
As detailed in Table 9 –
Net investment income
Consolidated
performance
NOI
for a specific
period
As detailed in Table 1 –
Consolidated performance
NOIPS
for a specific
period
OROE
for a 12-month
period
NOI attributable to common
shareholders
WANSO3
NOI attributable to common
shareholders
Average common shareholders’
equity2 (excluding AOCI)
Distribution EBITA
for a specific
period
Operating income excluding
interest and taxes from our
wholly-owned broker (BrokerLink)
and our broker associates
ROE
for a 12-month
period
AROE
for a 12-month
period
Net income attributable to
common shareholders1
Average common shareholders'
equity2
Adjusted net income attributable
to common shareholders
Average common shareholders'
equity2
EPS
for a specific
period
As reported in the accompanying
Consolidated statements of
comprehensive income
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.
INTACT FINANCIAL CORPORATION
59
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 23 – 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 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 not predictable, 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, integration and restructuring costs, as well as other costs that we do not believe to be
reflective of our operating performance. 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, 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 15.3 – 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 30 – Reconciliation of DPW and DPW growth to DPW, as reported under IFRS
DPW, as reported under IFRS
Exclude impact of industry pools
Add share of the results of jointly held insurance operations
DPW (full term)
Add impact of the normalization for multi-year policies
DPW
DPW growth
Q4-2016
Q4-2015
1,937
10
7
1,954
7
1,961
3%
1,890
(3)
10
1,897
11
1,908
7.5%
2016
8,197
32
47
8,276
17
8,293
5%
2015
7,893
(34)
48
7,907
15
7,922
6.2%
60
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Table 31 – Reconciliation of NEP before reinstatement premiums to NEP and of current year claims to net claims incurred, as reported under IFRS
Q4-2016
Q4-2015
NEP, as reported under IFRS
Add share of the results of jointly held insurance operations
NEP
Add (deduct) reinstatement premiums ceded (recovered)
NEP, before reinstatement premiums
Net claims incurred, as reported under IFRS
Less positive (negative) 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 CAT claims
Add favourable (unfavourable) PYD
Current year claims
NEP, before reinstatement premiums
Underlying current year loss ratio
2,035
8
2,043
2
2,045
1,196
87
(3)
5
1,285
(34)
62
1,313
2,045
64.2%
1,937
11
1,948
-
1,948
1,126
(6)
(3)
6
1,123
(2)
75
1,196
1,948
2016
7,902
44
7,946
29
7,975
5,108
34
(10)
29
5,161
(385)
389
5,165
7,975
2015
7,490
45
7,535
(2)
7,533
4,659
(58)
(11)
25
4,615
(116)
477
4,976
7,533
61.4%
64.8%
66.1%
Table 32 – Reconciliation of NOIPS and OROE to net income
Net income
Add income tax expense
Add net investment losses (gains)
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 and restructuring costs
Add loss (gain) from other non-operating items
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)
NOI to common shareholders – last 12 months
Average common shareholders’ equity, excluding AOCI
OROE for the last 12 months
Table 33 – Reconciliation of ROE to net income
Net income
Less preferred share dividends
Net income attributable to common shareholders
Net income attributable to common shareholders – last 12 months
Average common shareholders’ equity
ROE for the last 12 months
Q4-2016
Q4-2015
2016
2015
171
53
97
(87)
6
12
19
5
276
(64)
212
(4)
198
43
72
6
7
11
3
-
340
(75)
265
(5)
208
131.1
1.58
260
131.5
1.97
541
145
72
(34)
26
53
23
12
838
(178)
660
(20)
640
131.2
4.88
640
5,332
12.0%
706
169
64
58
30
46
10
8
1,091
(231)
860
(21)
839
131.5
6.38
839
5,041
16.6%
Q4-2016
Q4-2015
2016
2015
171
(4)
167
198
(5)
193
541
(20)
521
521
5,417
9.6%
706
(21)
685
685
5,103
13.4%
INTACT FINANCIAL CORPORATION
61
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Table 34 – Reconciliation of AEPS and AROE to net income
Net income
Add amortization and write-off of intangibles recognized in business combinations, net
of tax¹
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)
Q4-2016
Q4-2015
171
23
14
208
(4)
204
131.1
1.56
198
8
2
208
(5)
203
131.5
1.54
Adjusted net income attributable to common shareholders - LTM
Average common shareholders’ equity
AROE for the last 12 months
¹ Write-off of intangibles recognized in business combinations are recorded in net investment gains (losses).
Table 35 – Reconciliation of underwriting income to underwriting income, as reported under IFRS
2016
541
56
17
614
(20)
594
131.2
4.53
594
5,417
11.0%
2015
706
37
7
750
(21)
729
131.5
5.54
729
5,103
14.3%
Underwriting income, as reported under IFRS
Add profit (loss) from jointly held insurance operations
Add difference between expected return and discount rate on pension assets
Add impact of MYA on underwriting results
Underwriting income
Q4-2016
Q4-2015
2016
2015
233
1
6
(87)
153
206
2
7
6
221
383
-
26
(34)
375
536
4
30
58
628
Section 24 – 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.
Table 36 – 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 and restructuring costs
Amortization of intangible assets recognized in business
combinations
Other
Non-operating gains (losses)
Impact of MYA on underwriting
Q4-2016
Q4-2015
Change
2016
2015
Change
(97)
87
(6)
(19)
(12)
(5)
(52)
(72)
(6)
(7)
(3)
(11)
-
(99)
(25)
93
1
(16)
(1)
(5)
47
(72)
34
(26)
(23)
(53)
(12)
(152)
(64)
(58)
(30)
(10)
(46)
(8)
(216)
(8)
92
4
(13)
(7)
(4)
64
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, which are included in net investment
gains (losses) in the table above, 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 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.
62
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 25 – Accounting and disclosure matters
Reference to our Consolidated financial statements
Significant accounting
judgments, estimates and
assumptions
Change in accounting
policy
Related-party
transactions
Standards issued
but not yet effective
Note 3
Note 4
Note 28
Note 33
25.1 New accounting standards effective January 1, 2016
There were no new accounting standards, which have a significant impact on our Consolidated financial statements, effective
January 1, 2016. Please refer to Note 2 – Summary of significant accounting policies in the Consolidated financial statements.
25.2 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
Valuation of defined benefit obligation
Business combinations
Impairment
Goodwill and intangible assets
Measurement of income taxes
Financial assets
25.3 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.
INTACT FINANCIAL CORPORATION
63
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
25.4 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 7
Note 8
25.5 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 (“NI 52-109”)
the
of
effectiveness of the design and operation of disclosure controls and procedures as at December 31, 2016. 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.
the Canadian Securities Administrators. This evaluation confirmed, subject
limitations noted above,
to the inherent
25.6 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.
Management has evaluated the design and operating effectiveness of its ICFR as defined in NI 52-109. 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, 2016.
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 2016 that have materially affected, or are reasonably likely to
materially affect the Company’s ICFR.
64
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 26 – Off-balance sheet arrangements
26.1 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 $0.7 billion as at December 31, 2016 ($1.9 billion as at December 31, 2015).
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 $0.8 billion as at December 31, 2016 ($2.0 billion as at December 31, 2015).
Section 27 – Shareholder information
27.1 Authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
27.2 Outstanding share data
The following table presents the outstanding share data.
Table 37 – Outstanding share data (number of shares)
As at February 3, 2017
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
Series 4 Preferred Shares
131,034,834
10,000,000
8,405,004
1,594,996
Refer to our Annual Information Form for more detailed information on the rights of shareholders and to Note 19 – Common shares
and preferred shares to the accompanying Consolidated financial statements for additional information. Please also see Section
16.3 - Capital returned to common shareholders.
27.3 Dividends paid on common shares
On February 7, 2017, we declared a quarterly dividend of 64 cents per common share on our outstanding common shares. We also
declared a quarterly dividend of 26.25 cents per share on our Class A Series 1, a quarterly dividend of 20.825 cents per share on our
Class A Series 3 preferred shares and a quarterly dividend of 19.535 cents per share on our Class A Series 4 preferred shares.
Table 38 – Dividends declared per share
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
Series 4 Preferred Shares¹
¹Series 4 Preferred Shares were issued on September 30, 2016.
Q1-2017
0.64
0.2625
0.20825
0.19535
Q4-2016
0.58
0.2625
0.20825
0.1993325
FY 2016
2.32
1.05
0.99575
0.1993325
INTACT FINANCIAL CORPORATION
65
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
27.4 NCIB
On February 12, 2016, we commenced a NCIB to purchase for cancellation during the next 12 months up to 6,577,156 common
shares,
issued and outstanding common shares as at February 1, 2016. As at
December 31, 2016, 493,000 common shares had been repurchased and cancelled under the NCIB at an average price of $88.54
per share for a total consideration of $44 million. This NCIB program will expire on February 11, 2017.
representing approximately 5% of our
Our Board of Directors has approved the renewal of the NCIB for a subsequent year, to purchase for cancellation during the next
12 months up to 6,551,741 common shares, representing approximately 5% of our issued and outstanding common shares as at
January 31, 2017. This renewal is subject to TSX approval.
27.5 Book value per share
Table 39 – Components of BVPS
As at
BVPS, beginning of period
EPS
Dividends on common shares
Impact of market movements on AFS securities1
Net actuarial gains (losses) on employee future
benefits1
NCIB and other
BVPS, end of period
Period-over-period increase
1 Reported in AOCI.
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 $14 billion of investments, we are exposed to
market volatility. In 2015, our BVPS was impacted by
capital markets,
from weaker
unrealized
amounting to $1.62 per share.
losses
We remained committed to our financial objectives in
terms of ROE and NOIPS to enhance value to
shareholders.
Q4-2016
41.47
1.27
(0.58)
0.08
0.49
(0.01)
42.72
3%
2016
39.83
3.97
(2.32)
1.62
(0.20)
(0.18)
42.72
7%
2015
37.75
5.20
(2.12)
(1.26)
0.27
(0.01)
39.83
6%
Book value per share
(in dollars)
2014
33.94
5.79
(1.92)
0.25
(0.23)
(0.08)
37.75
11%
42.72
39.83
37.75
33.03
33.94
2012
2013
2014
2015
2016
27.6 Long-term incentive plan
The following table shows the outstanding units and fair value for each of the performance cycles as at December 31, 2016.
Table 40 – Outstanding units and weighted-average fair value at grant date by performance cycle
Performance cycles
2014-2016
2015-2017
2016-2018
Total
Number of
units
255,253
229,928
217,065
702,246
Weighted-average
fair value at grant
date (in $)
Amount
(in millions of $)
66.25
77.89
90.36
77.51
17
18
19
54
Refer to Note 26 – Share-based payments to the accompanying Consolidated financial statements for additional details.
66
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
Section 28 – Selected annual and quarterly information
28.1 Selected annual information
The following table presents selected annual information for the years ended December 31.
Table 41 – 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
Series 4 Preferred Shares
1 Refer to Section 23 – Non-IFRS financial measures.
2016
8,440
375
541
3.97
2.32
1.05
1.00
0.20
2015
8,032
628
706
5.20
2.12
1.05
1.05
n/a
2014
7,915
519
782
5.79
1.92
1.05
1.05
n/a
The following table presents selected annual information at the dates shown.
Table 42 – Selected annual information
As at December 31,
2016
2015¹
2014¹
Investments
Total assets
Debt outstanding
Shareholders' equity
13,440
20,501
1,143
5,451
¹ Comparative information was restated for a change in accouting policy. Refer to Note 4 – Change in accounting policy to the accompanying
Consolidated financial statements
13,504
21,315
1,143
5,724
14,386
22,991
1,393
6,088
28.2 Selected quarterly information
Table 43 - Selected quarterly information
DPW
Written insured risks (in thousands)
Total revenues1
NEP2
Current year CAT losses
Unfavourable (favourable) PYD
Underwriting income2
Combined ratio
Net investment income
NOI2
Net income
Per share measures, basic and
diluted (in dollars)
NOIPS2
EPS
Q4
Q3
Q2
1,961
1,718
2,085
2,043
34
(62)
153
92.5%
104
212
171
2,193
2,064
2,197
2,036
166
(71)
61
97.0%
102
137
125
2,458
2,357
2,117
1,937
164
(93)
16
99.2%
104
114
93
2016
Q1
1,681
1,558
2,041
1,930
21
(163)
145
92.5%
104
197
152
Q4
Q3
Q2
1,908
1,680
2,027
1,948
2
(75)
221
88.6%
110
265
198
2,095
2,021
2,003
1,930
81
(107)
131
93.2%
105
199
131
2,344
2,259
1,975
1,865
22
(106)
158
91.6%
104
210
199
2015
Q1
1,575
1,459
2,027
1,792
11
(189)
118
93.4%
105
186
178
1.58
1.27
1.01
0.91
0.83
0.67
1.46
1.11
1.97
1.46
1.47
0.95
1.56
1.47
1.37
1.32
1 Total revenues exclude other underwriting revenues.
2 Refer to Section 23 – Non-IFRS financial measures.
See also the discussion on seasonality of the business hereafter.
INTACT FINANCIAL CORPORATION
67
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2016
(in millions of dollars, except as otherwise noted)
28.3 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 45).
For instance, in 2016 our second and third quarters saw a higher combined ratio including CAT losses than the first and fourth
quarters, meaning that underwriting results were relatively less profitable in Q2-2016 and Q3-2016. When CAT losses are excluded,
the first and fourth quarters of 2016 saw a slightly higher combined ratio than the other quarters in 2016, meaning that the
underwriting results were relatively less profitable in Q1-2016 and Q4-2016 than the rest of the year.
Table 44 – Seasonal indicator, including CAT losses
Q1
Q2
Q3
Q4
2016
0.97
1.04
1.02
0.97
2015
1.02
1.00
1.02
0.96
Table 45 – Seasonal indicator, excluding CAT losses
Q1
Q2
Q3
Q4
2016
1.01
0.99
0.99
1.01
2015
1.03
1.01
0.98
0.98
2014
1.05
1.00
1.00
0.95
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
Eight-year
average
1.00
1.00
1.02
0.98
Eight-year
average
1.02
0.99
0.98
1.01
68
INTACT FINANCIAL CORPORATION
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2016
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
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.
includes the communication of policies and 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 Superintendent of Financial
The Office of
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 7, 2017
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, 2016 and 2015,
and the consolidated statements of comprehensive income, changes in shareholders’ equity and
cash flows for the years ended December 31, 2016 and 2015, and a summary of significant
accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditors’ judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments,
the auditors consider internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Intact Financial Corporation as at December 31, 2016 and 2015, and its
financial performance and its cash flows for the years ended December 31, 2016 and 2015 in
accordance with International Financial Reporting Standards.
Montréal, Canada
February 7, 2017
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, 2016
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 ......................................................... 20
Note 4 – Change in accounting policy .............................................................................................................. 21
Note 5 – Investments ....................................................................................................................................... 22
Note 6 – Financial liabilities related to investments .......................................................................................... 24
Note 7 – Derivative financial instruments ......................................................................................................... 25
Note 8 – Fair value measurement .................................................................................................................... 27
Note 9 – Financial risk...................................................................................................................................... 28
Note 10 – Claims liabilities ............................................................................................................................... 36
Note 11 – Unearned premiums ........................................................................................................................ 38
Note 12 – Reinsurance..................................................................................................................................... 39
Note 13 – Insurance risk .................................................................................................................................. 40
Note 14 – Investments in associates and joint ventures................................................................................... 42
Note 15 – Property and equipment................................................................................................................... 42
Note 16 – Goodwill and intangible assets ........................................................................................................ 43
Note 17 – Other assets and other liabilities...................................................................................................... 44
Note 18 – Debt outstanding.............................................................................................................................. 45
Note 19 – Common shares and preferred shares ............................................................................................ 46
Note 20 – Capital management........................................................................................................................ 47
Note 21 – Revenues......................................................................................................................................... 48
Note 22 – Net investment income .................................................................................................................... 49
Note 23 – Net investment losses...................................................................................................................... 49
Note 24 – Income taxes ................................................................................................................................... 50
Note 25 – Earnings per share........................................................................................................................... 52
Note 26 – Share-based payments.................................................................................................................... 52
Note 27 – Employee future benefits ................................................................................................................. 54
Note 28 – Related-party transactions ............................................................................................................... 59
Note 29 – Business combinations .................................................................................................................... 60
Note 30 – Additional information on the Consolidated statements of cash flows.............................................. 61
Note 31 – Commitments and contingencies..................................................................................................... 61
Note 32 – Disclosures on rate regulation for automobile insurance ................................................................. 62
Note 33 – 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
5
12
24
17
14
15
16
16
10
11
6
24
17
18
19
19
Restated
(see Note 4)
2015
2016
$
168 $
8,801
1,377
3,635
405
14,386
63
3,057
482
116
142
747
611
543
139
1,302
1,403
141
8,709
1,235
2,971
448
13,504
67
2,868
274
24
146
720
655
396
104
1,285
1,272
$
$
22,991 $
21,315
8,536 $
4,573
529
10
404
1,458
1,393
16,903
2,082
489
129
3,197
191
6,088
8,094
4,390
378
101
190
1,295
1,143
15,591
2,090
489
119
3,047
(21)
5,724
Total liabilities and shareholders’ equity
See accompanying notes to the Consolidated financial statements.
$
22,991 $
21,315
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,
Direct premiums written
Net premiums earned
Other underwriting revenues
Total underwriting revenues
Net claims incurred
Underwriting expenses
Underwriting results
Net investment income
Net investment 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 income (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
Note
$
21
10
22
23
24
25
25
19
24
27
24
$
$
$
$
$
2016
8,197
7,902
122
8,024
(5,108)
(2,533)
383
414
(70)
16
143
(128)
(72)
686
(145)
541
131.2
3.97
2.32
541
378
(105)
1
(65)
3
212
(35)
9
(26)
186
727
$
$
$
$
$
$
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)
575
Total
5,724
541
186
727
(44)
(304)
(20)
5
INTACT FINANCIAL CORPORATION
Consolidated statements of changes in shareholders’ equity
(in millions of Canadian dollars, except as otherwise noted)
Note
Common
shares
Preferred
shares
Contributed
surplus
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Balance as at January 1, 2016
$
2,090 $
489 $
119 $
3,047
$
(21) $
19
19
19
26
$
$
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Common shares repurchased for
cancellation
Dividends declared on:
Common shares
Preferred shares
Share-based payments
Balance as at December 31, 2016
Balance as at January 1, 2015
Impact of change in accounting
policy
Balance as at January 1, 2015 -
restated
Net income attributable to
shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Dividends declared on:
Common shares
Preferred shares
Share-based payments
19
19
26
-
-
-
(8)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
541
(26)
515
(36)
(304)
(20)
(5)
-
212
212
-
-
-
-
2,082 $
489 $
129 $
3,197
2,090 $
489 $
115 $
2,616
$
$
191 $
6,088
145 $
5,455
4
-
-
-
(4)
-
(4)
$
2,090
$
489
$
115 $
2,612
$
145 $
5,451
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4
706
35
741
(279)
(21)
(6)
-
(166)
(166)
-
-
-
706
(131)
575
(279)
(21)
(2)
Balance as at December 31, 2015
2,090 $
See accompanying notes to the Consolidated financial statements.
$
489 $
119 $
3,047
$
(21) $
5,724
INTACT FINANCIAL CORPORATION
5
Note
2016
27
23
30
30
10
29
18
19
26
19
19
$
$
$
$
686
(158)
(61)
(3)
70
208
(31)
214
925
8,152
(8,497)
(19)
(275)
(120)
(759)
248
(44)
(19)
(304)
(20)
(139)
27
141
168
167
1
168
2015
875
(265)
(50)
(7)
64
187
38
47
889
6,499
(6,666)
(187)
(77)
(89)
(520)
-
-
(17)
(279)
(21)
(317)
52
89
141
98
43
141
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
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 other equity investments, net
Purchases of intangibles and property and equipment, net
Net cash flows used in investing activities
Financing activities
Proceeds from issuance of debt
Common shares repurchased for cancellation
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 in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Composition of cash and cash equivalents
Cash
Cash equivalents
Cash and cash equivalents, end of year
See accompanying notes to the Consolidated financial statements.
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.
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. (“CDI”), Trafalgar Insurance Company of
Canada, Equisure Financial Network Inc., Canada Brokerlink Inc., Intact Farm Insurance 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 and premium receivables……………………………………………………………………………………. .. 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) Classification as investment grade…...…………………………………………………………………………………………… ....13
d) Revenue and expense recognition.…………………………………………………………………………………….. ..................13
e) Impairment of financial assets …………………………………………………………………………………………………..........14
f) Recognition and offsetting of financial assets and financial liabilities ....................................................................................15
2.5 Business combinations…………………………………………………………………………………………………………………..15
2.6 Goodwill and intangible assets…………………………………………………………………………………………………..……. 16
a) Goodwill…………………………………………………………………………………………………..……………………………… 16
b) Intangible assets…………………………………………………………………………………………………..……………………. 16
2.7
Investments in associates and joint ventures…………………………………………………………………………………….… 16
2.8 Property and equipment………………………………………………………………………………………………………………… 17
2.9 Leases……………………………………………………………………………………………………………………………………….17
2.10 Income taxes……………………………………………………………………………………………………………………………… .17
a) Income tax expense (benefit)…………………………………………………………………………………………………………..17
b) Recognition and offsetting of current tax assets and liabilities………………………………………………………………….… .17
2.11 Share-based payments………………………………………………………………………………………………………………….. 18
a) Long-term incentive plan (LTIP)…………………………………………………………………………………………………….....18
b) Employee share purchase plan (ESPP)………………………………………………………………………………………….…...18
c) Deferred share unit plan (DSU)……………………………………………………………………………………………………...... 18
2.12 Employee future benefits – pension………………………………………………………………… .............................................19
2.13 Foreign currency translation…………………………………………………………………………………………………………. ..19
2.14 Current vs non-current………………………………………………………………………………………………………………..… 19
2.15 Operating segments……………………………………………………………………………………………………………………... 19
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 plan
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 7, 2017.
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 connection with the costs incurred for the Company’s yearly 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.
Table 2.2 – Classification of the Company’s most significant financial assets and financial liabilities
Category
AFS
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.
Financial assets and financial liabilities
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.
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)
Level 3
Valuation techniques for which inputs that
have a significant effect on the fair value are
not based on observable market data
Most Government bonds1
Some Corporate bonds1
Common shares and Preferred shares
Investments in mutual funds
Short-term notes
Exchange-traded derivatives
Some Government bonds1
Some Corporate bonds1
Unsecured medium-term notes2
Asset-backed securities
Over-the-counter derivatives
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)
Level 1
instrument are readily and
A financial
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.
instrument is regarded as quoted in an active market if quoted prices for that financial
Level 2
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.
For discounted cash flow models, 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 condition of counterparties.
Discount rates are influenced by risk free interest rates and credit risk.
The inputs to these models are derived from observable market data where possible. Inputs used in valuations 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.
Level 3
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)
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.
Revenue and expense recognition
d)
Net investment income
Interest income from debt securities and loans are recognized on an accrual basis.
Premiums and discounts on debt securities classified as AFS, as well as premiums earned or discounts incurred for loans and
AFS securities are amortized using the effective interest method.
Dividends are recognized when the shareholders’ right to receive payment is established, which is the ex-dividend date.
Net investment gains (losses)
Gains and losses on the sale of AFS debt and equity securities are generally calculated on a first in, first out basis and on a
specific lot basis, respectively.
Transaction costs associated with the acquisition of financial instruments classified or designated as FVTPL are expensed 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 expensed as incurred.
Foreign exchange gains and losses are recognized in income with the exception of AFS equity securities where unrealized
foreign exchange gains and losses are recognized in OCI until the security is sold or becomes impaired.
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 income.
INTACT FINANCIAL CORPORATION
13
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
e)
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.
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. Under the debt impairment model, 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.
The debt model is used to assess impairments for 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. 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
Objective evidence of impairment includes a significant, a prolonged, or a significant and prolonged decline in the fair value of an
investment below cost. It also includes 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. Loans and receivables which have not been individually
impaired are grouped by similar characteristics to be tested for impairment.
14
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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
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.
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 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.
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
an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
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 re-measured as at its acquisition date fair
value and any resulting gain or loss is recognized in Net investment gains (losses).
INTACT FINANCIAL CORPORATION
15
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Distribution networks represent
distribution of its insurance products.
Customer relationships represent the relationships that exist with the policyholders, either directly (as a direct insurer) or
indirectly (through consolidated brokers).
the contractual agreements between the Company and unconsolidated brokers for the
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.
The amortization method and terms of intangible assets assessed as having finite useful lives are shown below.
Table 2.7 – Amortization methods 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
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.
16
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 methods and terms are shown below.
Table 2.8 – Depreciation methods and terms of property and equipment
Property and equipment
Buildings
Furniture and equipment
Leasehold improvements
2.9
Leases
Method
Straight-line
Straight-line
Straight-line
Term
15 to 40 years
2 to 7 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
a)
Income tax expense (benefit)
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. Income tax expense (benefit) comprises current and deferred tax.
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.
Recognition and offsetting of current tax assets and liabilities
b)
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.
INTACT FINANCIAL CORPORATION
17
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
2.11
Share-based payments
The Company has three types of shared-based payment plans:
a)
Long-term incentive plan (LTIP)
Certain key employees are eligible to participate in the LTIP. 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.
Certain participants meeting a defined share ownership threshold (“eligible participants”) can elect annually to receive cash in lieu of
shares of the Company, subject to the Company’s Board of Directors’ approval. At the time of the payout, the plan administrator
purchases in the market the amount of common shares based upon the vested PSUs and RSUs, and elections of eligible
participants.
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 LTIP is accounted for as an equity-settled plan, except for the participants that are eligible to receive cash in lieu of shares of
the Company (accounted for as a cash-settled plan).
Equity-settled plan
The cost of the awards is recognized as an expense over the vesting period, with a corresponding entry to Contributed surplus. 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 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.
Cash-settled plan
The cost of the awards is recognized as an expense over the vesting period, with a corresponding entry to Other liabilities. The
liability is re-measured at each reporting period based on the number of awards that are expected to vest and the current share
price, with any fluctuations in the liability also recorded as an expense until it is settled.
b)
Employee share purchase plan (ESPP)
Employees who are not eligible for the LTIP are entitled to make contributions to a voluntary ESPP. Effective January 1, 2016, the
Company amended its ESPP to help encourage employee ownership. Under the new plan, eligible employees can contribute up to
10% of their annual base salary through a payroll deduction to purchase IFC common shares in the market. As an incentive to
participate in the plan the Company matches, at the end of each year, a number of shares equal to 50% of the common shares
purchased by the employees during the year (subject to certain conditions). During the following year, the common shares
contributed by the Company are purchased by an independent broker at each pay period and deposited in the employee account
evenly each pay. The common shares contributed by the Company are awarded and vested at the time they are deposited in the
employee account.
Equity-settled plan
The ESPP is accounted for as an equity-settled plan. The fair value of awards is estimated at the grant date and 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
awards is recognized as an expense over the vesting period, with a corresponding entry to Contributed surplus. The difference
between the market price of the common shares purchased and the cumulative cost for the Company of these vested awards, net of
income taxes, is recorded in Retained earnings.
c)
Deferred share unit plan (DSU)
Non-employee directors of the Company are eligible to participate in the Company’s DSU. A portion of the remuneration of non-
employee directors of the Company must be received in DSUs or common shares of the Company. For the remainder of their
compensation, the directors are given the choice of cash, common shares of the Company, DSUs or a combination of the three.
Both DSUs and common shares vest at the time of the grant. The DSUs are redeemed upon director retirement or termination and
are settled for cash after that
the Company makes instalments to the plan
to receive shares,
administrator for the purchase of shares of the Company on behalf of the directors.
time. When directors elect
18
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Cash-settled plan
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.
2.12
Employee future benefits – pension
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 cost, which represent the benefits cost 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.
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 where unrealized foreign exchange gains and losses are recognized in OCI until the asset is
sold or becomes impaired.
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.
INTACT FINANCIAL CORPORATION
19
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 the 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. See Note 13.4 for key assumptions and sensitivity analysis.
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. See Note 27.6 for key assumptions and sensitivity analysis.
3.3
Business combinations
Upon initial recognition, the acquiree’s assets and liabilities have been included in the Consolidated balance sheets at fair value.
Management estimated the fair values using estimates on future cash flows and discount rates. However, actual results can be
different from those estimates. The changes in the estimates that relate to new information obtained about facts and circumstances
that existed as of the acquisition date, made at initial recognition with regard to items for which the valuation was incomplete, would
have an impact on the amount of goodwill recognized. Any other changes in the estimates made at initial recognition would be
recognized in income.
3.4
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. See Note 2.4 for objective evidence of impairment.
20
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
3.5
Impairment of goodwill and intangible assets
The Company determines whether goodwill, intangible assets with indefinite useful lives and those under development (not subject
to amortization) are impaired at least on an annual basis. Impairment testing of these intangibles requires an estimation of the
recoverable amount at the CGU level. A CGU is the lowest level at which there are separately identifiable cash flows. The carrying
value of these intangibles is essentially all allocated to the P&C insurance operations CGU, which is the Company’s sole operating
the year ended
segment. No impairment
December 31, 2016 or prior.
intangible assets has been recognized for
loss for goodwill or
this CGU for
a)
Company’s P&C insurance operations
The most recent test was performed as at June 30, 2016. 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, 2016 and 2015,
which do not exceed the industry long-term average past growth rate in which the Company operates.
A Company specific risk adjusted pre-tax discount rate of 9.6% as at June 30, 2016 (June 30, 2015 – 10.2%).
The test results indicate that the recoverable amount of the P&C insurance operations CGU exceeds its carrying value. 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.
3.6
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.
Note 4 – Change in accounting policy
In November 2016, the IFRS Interpretations Committee (“IFRIC”) published a summary of its discussions following a request to
clarify how an entity determines the expected manner of recovery of an intangible asset with an indefinite useful life for the purpose
of measuring deferred taxes in accordance with IAS 12 – Income Taxes. The IFRIC noted that the fact that an entity does not
amortize an intangible asset with an indefinite useful life does not mean that it has an infinite life and that the entity will recover the
carrying amount of that asset only through sale and not through use.
The benefits of the distribution network with an indefinite useful life will flow to the Company on an annual basis; therefore, the
carrying amount will be recovered through use with a higher tax rate. In response to this clarification, the Company retrospectively
changed its accounting policy for the deferred tax liabilities recorded in relation to its distribution network.
The following table summarizes the impact of this change in accounting policy on the Consolidated balance sheets. This change did
not have an impact on the 2015 comparative figures reported in the Consolidated statements of comprehensive income (loss) and
Consolidated statements of cash flows.
Table 4.1 – Impact of change in accounting policy
As at December 31,
Increase (decrease) of previously reported balances
Goodwill
Deferred tax assets
Deferred tax liabilities
Retained earnings
2015
104
(25)
83
(4)
INTACT FINANCIAL CORPORATION
21
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 5 – Investments
5.1
Classification of investments
Table 5.1 – Classification of investments
As at December 31, 2016
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, 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
AFS
-
105
2,029
1,485
144
34
3,797
46
308
1,023
1,377
2,184
-
7,358
-
210
1,868
1,604
211
-
3,893
69
328
838
1,235
1,886
-
7,014
Classified
as FVTPL
Designated
as FVTPL
-
-
-
-
-
-
-
-
-
-
-
4202
-
420
-
-
-
-
-
-
-
-
-
-
-
3272
-
327
-
-
3,329
1,642
33
-
5,004
-
-
-
-
1,031
-
6,035
-
-
3,047
1,730
39
-
4,816
-
-
-
-
758
-
5,574
Cash and cash
equivalents,
loans and
receivables
168
-
-
-
-
-
-
-
-
-
-
-
405
573
141
-
-
-
-
-
-
-
-
-
-
-
448
589
Total
168
105
5,358
3,127
177
34
8,801
46
308
1,023
1,377
3,635
405
14,386
141
210
4,915
3,334
250
-
8,709
69
328
838
1,235
2,971
448
13,504
1 Asset-backed securities consist of mortgage-backed securities and credit card receivables.
2 Comprised of Long positions (Note 5.4) and Net asset value attributable to third party unit holders (Note 6).
22
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
5.2
Carrying value of investments
Table 5.2 – Carrying value of investments
As at December 31, 2016
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
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
FVTPL
investments
At carrying
value
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
At carrying
value
Total
investments
At carrying
value
-
-
3,329
1,642
33
-
5,004
-
-
-
-
1,451
-
6,455
-
-
3,047
1,730
39
4,816
-
-
-
-
1,085
-
5,901
168
105
1,958
1,475
142
34
3,714
45
291
1,108
1,444
1,931
405
7,662
141
210
1,762
1,591
209
3,772
69
316
961
1,346
1,898
448
7,605
-
-
76
14
2
-
92
1
24
31
56
273
-
421
-
-
106
16
2
124
-
21
9
30
159
-
313
-
-
(5)
(4)
-
-
(9)
-
(7)
(116)
(123)
(20)
-
(152)
-
-
-
(3)
-
(3)
-
(9)
(132)
(141)
(171)
-
(315)
168
105
2,029
1,485
144
34
3,797
46
308
1,023
1,377
2,1841
405
7,931
141
210
1,868
1,604
211
3,893
69
328
838
1,235
1,8861
448
7,603
168
105
5,358
3,127
177
34
8,801
46
308
1,023
1,377
3,635
405
14,386
141
210
4,915
3,334
250
8,709
69
328
838
1,235
2,971
448
13,504
1 Includes net foreign currency gains of $52 million as at December 31, 2016 ($90 million as at December 31, 2015).
The Company invests in high-quality non-financial U.S. corporate bonds and U.S. common shares as a means to provide
geographic and sector diversification to its investment portfolio, which is mainly comprised of Canadian securities. As at
December 31, 2016, the Company held $980 million in U.S. fixed-income securities (December 31, 2015: $986 million) and
$638 million in U.S. common shares (December 31, 2015: $594 million). Foreign currency exposure in the U.S. fixed-income
portfolio is mitigated through the use of foreign-currency forward contracts.
INTACT FINANCIAL CORPORATION
23
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
5.3
Market neutral equity investment strategy
The market neutral equity investment strategy 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. The Company has secured its short positions by pledging government debt securities as collateral.
Table 5.3 – Market neutral equity investment strategy
As at December 31,
Long positions
Common shares
Short positions
Financial liabilities related to investments
2016
Fair
value
Debt securities
pledged as
collateral
2015
Fair
value
Debt securities
pledged as
collateral
324
(327)
-
338
164
(166)
-
172
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. 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 Company loaned securities with a fair value of $0.7 billion as at December 31, 2016 (December 31, 2015 – $1.9 billion) that are
reported in Investments. The collateral amounted to $0.8 billion as at December 31, 2016 (December 31, 2015 – $2.0 billion),
representing approximately 105% of the securities loaned fair value as at December 31, 2016 and 2015.
Note 6 – Financial liabilities related to investments
Table 6.1 – Financial liabilities related to investments
As at December 31,
Equities sold short positions (Table 5.3)
Net asset value attributable to third party unit holders
Embedded derivatives (Note 7.3)
Accounts payable to investment brokers on unsettled trades
Derivative financial liabilities (Table 7.2)
2016
327
96
39
29
38
529
2015
166
163
24
22
3
378
24
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 7 – Derivative financial instruments
7.1
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 7.1 – Types of derivatives used
Derivatives
used
Description
Forwards
Contractual obligations to exchange:
Currency
one currency for another on a predetermined future
date
Futures
Contractual obligations to buy or sell:
Objective
Intent to hold
instrument
Mitigate risk arising from foreign
currency fluctuations on the U.S. debt
portfolio
Risk management
purposes
Interest rate
an interest rate sensitive financial instrument on a
predetermined future date at a specified price
Modify or mitigate exposure to interest
rate fluctuations
Mostly for risk
management purposes
Equity
a specified amount of stocks, a basket of stocks or
an equity index at an agreed price on a specified
date
Mitigate exposure to Canadian equity
market
Risk management
purposes
Swaps
Over-the-counter contracts:
Swap
agreements
Credit default
Options
in which two counterparties exchange a series of
cash flows based on a basket of stocks, applied to
a notional amount
that transfer credit risk related to an underlying
financial instrument from one counterparty to
another
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):
Mitigate exposure to equity market
fluctuations
Trading purposes
Modify exposure to credit
Trading purposes
Inflation caps
an index at a predetermined price, at or by a
specified future date
Mitigate exposure to inflation risk
Trading purposes
Refer to Table 7.2 hereafter for the net gain (loss), fair value and notional amount of derivatives
INTACT FINANCIAL CORPORATION
25
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
7.2
Fair value and notional amount of derivatives
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.
Table 7.2 – Net gain (loss), fair value and notional amount of derivatives by term to maturity and nature of risk
For the years
ended
Net gain (loss) on
derivatives
As at
As at
Fair value
Notional amount: term to maturity
Positive
(Asset)
Negative
(Liability)
Less than
1 year
From 1 to
5 years
Over
5 years
December 31, 2016
Foreign currency contracts
Forwards
Interest rate contracts
Futures and forwards
Equity contracts
Swap agreements
Futures
Credit contracts
Swap agreements
Inflation contracts
Options
Foreign currency contracts
Other contracts (Table 23.1)
December 31, 2015
Foreign currency contracts
Forwards
Interest rate contracts
Futures
Equity contracts
Swap agreements
Futures
Credit Contracts
Swap Agreements
Inflation contracts
Options
Foreign currency contracts
Other contracts (Table 23.1)
7.3
Embedded derivatives
23
(2)
(239)
(29)
-
-
(247)
23
(270)
(180)
(6)
177
12
-
-
3
(180)
183
6
-
-
-
1
-
7
5
-
48
-
1
-
54
-
-
38
-
-
-
38
-
-
2
-
1
-
3
1,098
949
1,023
167
-
29
1,069
986
751
142
-
42
-
-
-
-
39
64
-
-
-
-
69
97
-
-
-
-
-
-
-
-
-
-
-
-
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 $39 million as at December 31, 2016 (December 31, 2015 – $24 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 $1,185 million as at December 31, 2016 (December 31, 2015 – $1,062 million). Embedded derivatives are
reported in Financial liabilities related to investments.
26
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 8 – Fair value measurement
8.1
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.
Table 8.1 – Fair value hierarchy of financial assets and financial liabilities
As at December 31, 2016
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Non-rated
Debt securities
Preferred shares
Common shares
Derivative financial assets (Table 7.2)
Total financial assets measured at fair value
Total financial liabilities measured at fair value
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 (Table 7.2)
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)
105
-
4,134
1,403
-
-
5,642
1,338
3,635
-
10,615
423
210
3,643
1,484
-
5,337
1,211
2,971
-
9,519
329
1,224
1,724
177
-
3,125
-
-
7
3,132
38
-
1,272
1,850
250
3,372
-
-
54
3,426
3
-
-
-
-
34
34
39
-
-
73
39
-
-
-
-
-
24
-
-
24
24
Total
105
5,358
3,127
177
34
8,801
1,377
3,635
7
13,820
500
210
4,915
3,334
250
8,709
1,235
2,971
54
12,969
356
The fair value of loans was $400 million as at December 31, 2016 (December 31, 2015 – $449 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.
INTACT FINANCIAL CORPORATION
27
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
8.2
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 8.2 – Reclassifications of debt securities between Level 1 and Level 2
As at December 31, 2016
From Level 1 to Level 2
From Level 2 to Level 1
Note 9 – Financial risk
389
409
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 9.1 – 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 9.1
Note 9.2
Note 9.3
Note 9.4
28
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Market risk
9.1
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 9.2 – Market risk
Equity price risk
Currency risk
Interest rate 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 foreign
exchange rates.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in
interest rates or spreads.
Risk exposure
Significant exposure to price
changes for common shares and
preferred shares.
Some exposure to foreign exchange
risks arising from investments
denominated in foreign currency,
mainly U.S. dollars.
Significant exposure to changes in
interest rates from debt securities and
preferred shares.
Risk management
investment policy
Set forth limits in terms of equity
exposure.
Set forth limits in terms of currency
exposure.
Set forth limits in terms of interest rate
and credit spread duration.
Risk mitigation
Through asset class and
economic sector diversification
and, in some cases, the use of
derivatives.
Foreign currency exposure in the U.S.
debt portfolio is mitigated through the
use of foreign-currency forward
contracts.
Through the use of derivatives.
Changes in the discount rate applied to
the Company’s claims liabilities offers a
partial offset to the change in price of
interest sensitive assets.
The Operational Investment Committee and Compliance Review and Corporate Governance Committee regularly monitor and
review compliance, respectively, with the Company’s investment policies.
a)
Sensitivity analyses to market risk
Sensitivity analyses are one risk management technique that assists management in ensuring that risks assumed remain within the
Company’s risk tolerance level. Sensitivity analyses involve varying a single factor to assess the impact that this would have on the
Company’s results and financial condition, excluding any management action. Actual results can differ materially from these
estimates for a variety of reasons and therefore, these sensitivities should be considered as directional estimates.
Table 9.3 – Sensitivity analyses
For the years ended December 31,
Equity price risk
Common share prices (10% decrease)1
Preferred share prices (5% decrease)2
Interest rate risk3 (100 basis point increase)
Investments
Currency risk (strengthening of Canadian dollar by 10%)4
Investments
1 Net of any equity hedges, including the impact of any impairment.
2 Including the impact on related embedded derivatives.
3 The yield curve experiences an instantaneous parallel shift.
4 After giving effect to forward-exchange contracts.
2016
Net income
OCI
2015
Net income
9
8
4
2
(193)
(57)
(75)
(47)
(5)
5
7
2
OCI
(156)
(50)
(89)
(45)
INTACT FINANCIAL CORPORATION
29
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
These sensitivity analyses were prepared using the following assumptions:
Shifts in the yield curve are parallel.
Interest rates, equity prices and foreign currency move independently.
Credit, liquidity and basis risks have not been considered.
Impact on the Company’s pension plans has been considered.
Risk reduction measures perform as expected, with no material basis risk and no counterparty defaults.
For FVTPL debt securities, the estimated impact on Net income is assumed to be offset by the market-yield adjustment.
AFS debt or equity securities in an unrealized loss position, as reflected in AOCI may, at some point in the future, be realized
through sale.
A 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.
Gains and losses resulting from changes in interest rates vary depending on the Company’s position on the interest rate risk.
Exposure to currency risk
b)
The following table presents the net currency exposure on foreign-denominated investments.
Table 9.4 – Net currency exposure on foreign-denominated investments
As at December 31,
Investments denominated in U.S. dollars
Fixed-income securities
Common shares
Other
Investments denominated in U.S. dollars
Less: U.S. dollar foreign-currency forward contracts, notional amount
Net currency exposure – U.S. dollar
2016
980
638
131
1,749
1,027
722
2015
986
594
44
1,624
1,029
595
The Company’s net exposure to other currencies was not significant as at December 31, 2016 and 2015.
c)
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 9.5.
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 9.5 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.
30
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 9.5 – Contractual repricing and maturity schedule
As at December 31, 2016
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
Other liabilities
Effective interest rate
Shareholders’ equity
Net long (short) exposure
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
Other liabilities
Effective interest rate
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
167
-
1
54
-
204
-
50
476
-
-
2
-
2
474
98
-
5
58
-
219
-
96
476
-
-
2
-
2
474
1
0.48%
105
0.66%
890
1.09%
24
4.80%
-
5
4.41%
193
1.84%
6
1,224
3,414
1.84%
-
38
-
3,452
(2,228)
43
0.47%
210
0.45%
1,019
1.25%
43
4.85%
-
1
4.59%
110
1.67%
-
1,426
3,262
1.67%
-
-
-
3,262
(1,836)
-
-
4,729
1.55%
952
4.76%
-
36
5.34%
195
1.84%
1
5,913
3,449
1.84%
250
5.41%
25
4.75%
-
3,724
2,189
-
-
4,286
1.45%
769
4.97%
-
37
5.57%
109
1.67%
-
5,201
3,221
1.67%
249
5.41%
13
4.92%
-
3,483
1,718
-
-
3,076
2.06%
347
5.32%
-
160
4.88%
94
1.84%
-
3,677
1,673
1.84%
1,143
5.10%
12
5.33%
-
2,828
849
-
-
3,189
1.82%
365
5.37%
-
191
5.09%
55
1.67%
-
3,800
1,611
1.67%
894
5.47%
12
5.37%
-
2,517
1,283
-
-
-
-
3,635
-
-
8,066
11,701
-
-
6,897
6,088
12,985
(1,284)
-
-
-
-
2,971
-
-
7,441
10,412
-
-
6,327
5,724
12,051
(1,639)
Total
168
105
8,696
1,377
3,635
405
482
8,123
22,991
8,536
1,393
6,974
6,088
22,991
-
141
210
8,499
1,235
2,971
448
274
7,537
21,315
8,094
1,143
6,354
5,724
21,315
-
INTACT FINANCIAL CORPORATION
31
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
9.2
Basis risk
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.
9.3
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.
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 9.6 – Maximum exposure to credit risk
As at December 31,
Cash and cash equivalents
Debt securities
Preferred shares
Loans
Premium receivables
Reinsurance assets
Other financial assets1
On-balance sheet credit risk exposure
Structured settlements
2016
168
8,801
1,377
405
3,057
482
481
14,771
1,183
2015
141
8,709
1,235
448
2,868
274
493
14,168
1,116
Off-balance sheet credit risk exposure
1,116
1Include industry pools receivable, other receivables and recoverables, accrued investment income, restricted funds, and financial assets related to
1,183
investments.
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.
32
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Investments
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.
Table 9.7 – 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
2016
87%
11%
2%
100%
39%
33%
8%
20%
100%
2015
87%
11%
2%
100%
39%
34%
7%
20%
100%
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. This credit quality restriction excludes indirect investments through debt funds. In the case of funds, specific policy
limits apply to manage the overall exposure to these investments. 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 9.7). 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.
c)
Counterparty credit risk
Counterparty credit
transactions.
risk arises from reinsurance, over-the-counter derivatives, as well as security lending and borrowing
Reinsurance
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.
INTACT FINANCIAL CORPORATION
33
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 $127 million as at
December 31, 2016 (December 31, 2015 – $133 million) as guarantees from unregistered reinsurers. This collateral
is held in
support of policy liabilities of $94 million as at December 31, 2016 (December 31, 2015 – $76 million) and could be used should
these reinsurers be unable to meet their obligations.
Management concluded that
reinsurance as at December 31, 2016 and 2015.
the Company was not exposed to significant
loss from reinsurers for potentially uncollectible
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
exceeds a specified threshold amount.
The aggregate credit risk exposure was $90 million as at December 31, 2016 (December 31, 2015 – $133 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.
34
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
9.4
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 18.3.
a)
Investments by contractual maturity
Table 9.8 – Investments by contractual maturity
As at December 31, 2016
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
As at December 31, 2015
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
b)
Financial liabilities by contractual maturity
Table 9.9 – Financial liabilities by contractual maturity
As at December 31, 2016
Claims liabilities – undiscounted value
Debt outstanding
Other financial liabilities
As at December 31, 2015
Claims liabilities – undiscounted value
Debt outstanding
Other financial liabilities
Less than
1 year
From 1 to
5 years
Over
5 years
No specific
maturity
168
995
22
-
6
1,191
141
1,233
39
-
1
1,414
-
4,695
16
-
49
4,760
-
4,286
22
-
51
4,359
-
3,077
8
-
350
3,435
-
3,190
8
-
396
3,594
-
34
1,331
3,635
-
5,000
-
-
1,166
2,971
-
4,137
Less than
1 year
From 1 to
5 years
Over
5 years
No specific
maturity
3,295
-
736
4,031
3,125
-
670
3,795
3,328
250
115
3,693
3,086
249
96
3,431
1,614
1,143
18
2,775
1,543
894
9
2,446
-
-
754
754
-
-
585
585
Total
168
8,801
1,377
3,635
405
14,386
141
8,709
1,235
2,971
448
13,504
Total
8,237
1,393
1,623
11,253
7,754
1,143
1,360
10,257
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.
INTACT FINANCIAL CORPORATION
35
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 10 – Claims liabilities
10.1
Movements in claims liabilities
Table 10.1 – Movements in claims liabilities
For the year ended December 31, 2016
Balance, beginning of year
Current year claims
Favourable prior-year claims development
Decrease due to changes in discount rate
Total claims incurred
Claims paid
Business combinations (Note 29)
Balance, end of year
For the year ended 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 combinations (Note 29)
Balance, end of year
10.2
Claims liabilities by line of business
Table 10.2 – Claims liabilities by line of business
As at December 31, 2016
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
As at December 31, 2015
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
36
INTACT FINANCIAL CORPORATION
Direct
Ceded
Net
8,094
5,884
(396)
(34)
5,454
(5,028)
16
8,536
8,021
5,144
(503)
59
4,700
(4,717)
90
8,094
253
353
(6)
(1)
346
(134)
-
465
314
64
(24)
1
41
(105)
3
253
Direct
Ceded
4,752
750
5,502
795
2,239
3,034
8,536
4,638
581
5,219
731
2,144
2,875
8,094
79
131
210
11
244
255
465
64
10
74
8
171
179
253
7,841
5,531
(390)
(33)
5,108
(4,894)
16
8,071
7,707
5,080
(479)
58
4,659
(4,612)
87
7,841
Net
4,673
619
5,292
784
1,995
2,779
8,071
4,574
571
5,145
723
1,973
2,696
7,841
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
10.3
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, 2016 and 2015.
Table 10.3 – Carrying value of claims liabilities
As at December 31, 2016
Undiscounted value
Effect of time value of money using a discount rate of 1.84%
Provision for adverse deviations (PfAD)
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)
Direct
Ceded
Net
8,237
(344)
643
8,536
7,754
(303)
643
8,094
447
(9)
27
465
244
(7)
16
253
7,790
(335)
616
8,071
7,510
(296)
627
7,841
10.4
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 10.4 – Prior-year claims development – net
Total
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007 &
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
Nine years later
Current estimate
Claims paid to date
Undiscounted claims liabilities
Discounting and PfAD
Claims liabilities - net
7,790
281
8,071
2,683
2,493
2,461
2,524
2,375
2,312
2,038
1,799
1,627
4,294
-
-
-
-
-
-
-
-
-
2,390
-
-
-
-
-
-
-
-
2,390
2,384
-
-
-
-
-
-
-
2,463
2,427
2,418
-
-
-
-
-
-
2,342
2,262
2,220
2,194
-
-
-
-
-
2,213
2,142
2,058
2,018
1,986
-
-
-
-
1,923
1,896
1,860
1,836
1,792
1,768
-
-
-
1,740
1,739
1,715
1,679
1,656
1,628
1,602
-
-
1,625
1,596
1,586
1,562
1,525
1,511
1,493
1,482
-
2,683
2,390
2,384
2,418
2,194
1,986
1,768
1,602
1,482
4,136
3,985
3,985
3,910
3,821
3,807
3,794
3,753
3,731
3,731
-
(917)
(1,232)
(1,552)
(1,662)
(1,669)
(1,544)
(1,470)
(1,356)
(3,446)
2,683
1,473
1,152
866
532
317
224
132
126
285
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.
INTACT FINANCIAL CORPORATION
37
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 11 – Unearned premiums
11.1
Movements in unearned premiums
Table 11.1 – Movements in unearned premiums
For the year ended December 31, 2016
Balance, beginning of year
Business combinations (Note 29)
Premiums written
Premiums earned
Balance, end of year
For the year ended December 31, 2015
Balance, beginning of year
Business combinations (Note 29)
Premiums written
Premiums earned
Balance, end of year
11.2
Unearned premiums by line of business
Table 11.2 – Unearned premiums by line of business
As at December 31, 2016
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
As at December 31, 2015
Personal Auto
Personal Property
Personal lines
Commercial Auto
Commercial P&C
Commercial lines
38
INTACT FINANCIAL CORPORATION
Direct
Ceded
Net
4,390
104
8,197
(8,118)
4,573
4,110
71
7,893
(7,684)
4,390
21
-
212
(216)
17
21
-
194
(194)
21
Direct
Ceded
2,250
1,111
3,361
337
875
1,212
4,573
2,131
990
3,121
338
931
1,269
4,390
-
-
-
1
16
17
17
-
-
-
1
20
21
21
4,369
104
7,985
(7,902)
4,556
4,089
71
7,699
(7,490)
4,369
Net
2,250
1,111
3,361
336
859
1,195
4,556
2,131
990
3,121
337
911
1,248
4,369
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 12 – Reinsurance
12.1
Company’s reinsurance net retention and coverage limits by nature of risk
In the ordinary course of business, the Company reinsures certain risks with other reinsurers to limit its maximum loss in the event
of catastrophic events or other significant losses.
Table 12.1 – 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
2016
2015
7.5
3 - 10
100
3,575
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
The Company retains participations averaging 5.3% as at December 31, 2016 (December 31, 2015 – 5.5%) on reinsurance layers
between the retention and coverage limits.
In 2015 and 2016, the Company entered into an aggregate reinsurance treaty, renewable on an annual basis, 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.
12.2
Components of reinsurance assets
Table 12.2 – Components of reinsurance assets
As at December 31,
Reinsurers’ share of claims liabilities (Note 10.1)
Reinsurers’ share of unearned premiums (Note 11.1)
12.3
Net recovery (expense) from reinsurance
Table 12.3 – Net recovery (expense) from reinsurance
For the years ended December 31,
Ceded earned premiums (Note 10.1)
Ceded claims incurred (Note 11.1)
Commissions earned on ceded reinsurance
2016
465
17
482
2016
(216)
346
20
150
2015
253
21
274
2015
(194)
41
19
(134)
The estimated gross loss related to the Fort McMurray wildfires amounted to $400 million, impacting ceded earned premiums by
$27 million and ceded claims incurred by $252 million for a net recovery from reinsurance of $225 million for the year ended
December 31, 2016.
INTACT FINANCIAL CORPORATION
39
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 13 – 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, 2016 and 2015.
Insurance contract risk is the risk that a loss arises from the following reasons:
underwriting and pricing (Note 13.1);
fluctuation in the timing, frequency and severity of claims relative to expectations (Note 13.2);
inadequate reinsurance protection (Note 9.3c); and
large unexpected losses arising from a single event such as a catastrophe (Note 13.3).
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
13.1
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.
Table 13.1 – 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
40
INTACT FINANCIAL CORPORATION
2016
46%
24%
21%
9%
100%
41%
27%
18%
7%
7%
100%
2015
45%
23%
23%
9%
100%
41%
27%
18%
6%
8%
100%
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
13.2
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 could
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.
13.3
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.
Refer to Note 12 – Reinsurance for the Company’s reinsurance net retention and coverage limits by nature of risk.
Exposure to insurance risk
13.4
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.
INTACT FINANCIAL CORPORATION
41
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Key assumptions and sensitivity analysis
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.
Table 13.2 – Sensitivity analysis (claims liabilities)
Sensitivity factors
As at December 31, 2016
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
As at December 31, 2015
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
Note 14 – Investments in associates and joint ventures
Table 14.1 – Movement in investments in associates and joint ventures
As at December 31,
Balance, beginning of year
Acquisitions, net of sales
Business combinations (Note 29)
Dividends received
Share of profit (loss) :
recorded in net income
recorded in OCI
Balance, end of year
Of which:
Associates
Joint ventures
Change in
assumptions
Impact on
Net income
+5%
+5%
+1%
+5%
+5%
+1%
(279)
(53)
137
(271)
(53)
134
2016
2015
396
194
(45)
(21)
16
3
543
382
161
313
75
-
(15)
26
(3)
396
207
189
During 2016, there were no events or changes in circumstances that indicated that the carrying values of Company’s investments in
associates and joint ventures, all of which are investments in private entities, may not be recoverable.
Note 15 – Property and equipment
15.1
Net carrying value of property and equipment
Table 15.1 – Net carrying value of property and equipment
As at December 31,
Land and buildings
Furniture and equipment
Leasehold improvements
42
INTACT FINANCIAL CORPORATION
2016
38
47
54
139
2015
10
44
50
104
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 16 – Goodwill and intangible assets
16.1
Summary of goodwill and intangible assets
Table 16.1 – Reconciliation of the carrying value of goodwill and intangible assets
Cost
Balance as at January 1, 2016
Acquisitions and costs capitalized
Business combinations (Note 29)
Disposals and write-off
Balance as at December 31, 2016
Accumulated amortization
Balance as at January 1, 2016
Amortization expense
Disposals
Balance as at December 31, 2016
Net carrying value
Cost
Balance as at January 1, 2015 (Note 4)
Acquisitions and costs capitalized
Business combinations (Note 29)
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
Goodwill
Distribution
networks
Customer
relationships
Internally
developed
software
Total
intangible
assets
Intangible assets
1,272
82
63
(14)
1,403
-
-
-
-
1,403
1,206
74
70
(78)
1,272
-
-
-
-
1,272
910
-
-
-
910
(11)
(4)
-
(15)
895
909
-
1
-
910
(8)
(3)
-
(11)
899
345
26
-
(6)
365
(143)
(37)
1
(179)
186
258
89
78
(80)
345
(119)
(33)
9
(143)
202
426
69
-
-
495
(242)
(32)
-
(274)
221
364
62
-
-
426
(202)
(40)
-
(242)
184
1,681
95
-
(6)
1,770
(396)
(73)
1
(468)
1,302
1,531
151
79
(80)
1,681
(329)
(76)
9
(396)
1,285
The distribution network with indefinite useful life amounted to $820 million as at December 31, 2016 and 2015. Intangible assets
under development amounted to $63 million as at December 31, 2016 (December 31, 2015 – $70 million). These intangible assets
are not subject to amortization, but are tested for impairment on an annual basis.
INTACT FINANCIAL CORPORATION
43
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 17 – Other assets and other liabilities
17.1
Components of other assets
Table 17.1 – Components of other assets
As at December 31,
Industry pools receivable
Other receivables and recoverables
Pension plans in a surplus position (Note 27.1)
Investments, at cost
Restricted funds
Prepaids
Financial assets related to investments
Other
2016
2015
233
148
62
54
50
23
21
20
611
229
123
93
54
42
31
64
19
655
During 2016, there were no events or changes in circumstances that indicated that the carrying values of Investments at cost may
not be recoverable.
17.2
Components of other liabilities
Table 17.2 – Components of other liabilities
As at December 31,
Industry pools payable
Commissions payable
Premium and sale taxes payable
Accrued salaries and other short-term benefits
Pension plans in a deficit position and unfunded plans (Note 27.1)
Deferred income
Accrued expenses
Deposits received from unregistered reinsurers
Unfunded other post-employment benefits and other post-retirement benefits
Other payables
2016
2015
230
228
215
162
95
72
52
32
29
343
230
237
192
136
82
54
56
15
30
263
1,458
1,295
44
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 18 – Debt outstanding
18.1
Summary of debt outstanding
On March 1, 2016, the Company completed an offering of $250 million of Series 6 unsecured medium term notes. These notes bear
interest at a fixed annual rate of 3.77% until maturity on March 2, 2026, payable in semi-annual
instalments commencing on
September 2, 2016.
Table 18.1 – Fair value and carrying value of debt outstanding
As at December 31,
Carrying value
Fair value Carrying value
Fair value
2016
2015
Series 1
Series 2
Series 3
Series 4
Series 5
Series 6
250
248
99
299
249
248
275
329
134
335
286
265
249
248
99
298
249
-
280
319
129
336
279
-
1,393
1,624
1,143
1,343
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.
18.2
Unsecured medium term notes (“term notes”)
Table 18.2 – Term notes outstanding terms
Series 1
Series 2
Series 3
Series 4
Series 5
Series 6
Date issued
Aug. 31, 2009
Nov. 23, 2009
July 8, 2011
Aug. 18, 2011
June 15, 2012
March 1, 2016
Date of supplemental issue
March 23, 2010
Sept. 10, 2012
Maturity date
Sept. 3, 2019
Nov. 23, 2039
July 8, 2061
Aug. 18, 2021
June 16, 2042
March 2, 2026
Principal amount outstanding
Fixed annual rate
Semi-annual coupon payment
due each year on:
18.3
Credit facility
250
5.41%
March 3
Sept. 3
250
6.40%
May 23
Nov. 23
100
6.20%
Jan. 8
July 8
300
4.70%
Feb. 18
Aug. 18
250
5.16%
June 16
Dec. 16
250
3.77%
March 2
Sept. 2
The Company has a $300-million 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, 2016 and 2015.
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, 2016 and 2015.
INTACT FINANCIAL CORPORATION
45
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 19 – Common shares and preferred shares
19.1
Authorized
Authorized share capital consists of an unlimited number of common shares and Class A Shares.
19.2
Issued and outstanding
On August 31, 2016, the Company announced that it did not intend to exercise its right to redeem the Company’s non-cumulative
Rate Reset Class A Series 3 Preferred Shares (the “Series 3 Preferred Shares”) on September 30, 2016. Holders of 1,594,996 of
these shares elected to convert their shares into non-cumulative Floating Rate Class A Series 4 Preferred Shares (the “Series 4
Preferred Shares”).
Table 19.1 – Issued and outstanding shares
As at December 31,
Common shares
Class A Shares
Series 1
Series 3
Series 4
Total Class A
Common shares
2016
2015
Number of
shares
Amount
(in millions)
Number of
shares
Amount
(in millions)
131,050,134
2,082
131,543,134
2,090
10,000,000
8,405,004
1,594,996
20,000,000
244
206
39
489
10,000,000
10,000,000
-
20,000,000
244
245
-
489
Table 19.2 – Reconciliation of number of common shares outstanding
As at December 31,
Balance, beginning of year
Common shares repurchased and cancelled (Note 19.4)
Balance, end of year
2016
(in shares)
2015
(in shares)
131,543,134
(493,000)
131,543,134
-
131,050,134
131,543,134
Class A shares
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 IFC, on a quarterly basis. The annual dividend rate for the Series 3 Preferred Shares for the
five-year period from and including September 30, 2016 to but excluding September 30, 2021 will be 3.332%, as determined in
accordance with the terms of the Series 3 Preferred Shares.
46
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The holders of Series 4 Preferred Shares are entitled to receive floating rate non-cumulative preferential cash dividends on a
quarterly basis, as and when declared by the Board of Directors of IFC. The dividend rate for the Series 4 Preferred Shares for the
3-month floating rate period from and including September 30, 2016 to but excluding December 31, 2016 was 0.79733% (3.172%
on an annualized basis), as determined in accordance with the terms of the Series 4 Preferred Shares (the "Floating Quarterly
Dividend Rate"). The Floating Quarterly Dividend Rate will be reset every quarter.
19.3
Dividends declared and paid per share
Table 19.3 – Dividends declared and paid per share (in dollars)
For the years ended December 31,
Common shares
Preferred Shares
Series 1
Series 3
Series 4
2016
2.32
1.05
1.00
0.20
2015
2.12
1.05
1.05
n/a
19.4 Normal course issuer bid (NCIB)
On February 12, 2016, the Company commenced a NCIB to purchase for cancellation during the next twelve months up to
6,577,156 common shares, representing approximately 5% of its issued and outstanding common shares as at February 1, 2016.
As at December 31, 2016, 493,000 common shares had been repurchased and cancelled under the NCIB at an average price of
$88.54 per share for a total consideration of approximately $44 million. The cost paid, including fees, was first charged to Share
capital to the extent of the average carrying value of the common shares purchased for cancellation and the excess of $36 million
was charged to Retained earnings.
Note 20 – Capital management
Capital management objectives
20.1
The Company’s objectives when managing capital consist of:
maintaining strong regulatory capital
levels (see Regulatory capital section below) and ensuring policyholders are well
protected; 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, it 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.
INTACT FINANCIAL CORPORATION
47
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
2016 MCT Guidelines
On November 30, 2015, OSFI issued a final 2016 MCT Guideline, which amends regulatory capital requirements. 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. The new guidelines came into effect on January 1, 2016 and the impact on our MCT ratios
is positive, with the benefit phasing in over a two-year period.
20.2
Capital position
Table 20.1 – Estimated aggregate 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, 2015.
2016
4,300
1,972
218%
2,328
1,342
947
20151
3,840
1,889
203%
1,951
1,007
629
As at December 31, 2016 and 2015, the Company’s P&C insurance subsidiaries remained well capitalized on an individual basis
and were in compliance with regulatory requirements. Including net liquid assets outside of the P&C insurance subsidiaries, the
Company’s total estimated excess capital at an MCT of 170% was $970 million as at December 31, 2016 (December 31, 2015 –
$625 million).
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 2016 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 21 – Revenues
Table 21.1 – Revenues
For the years ended December 31,
Net premiums earned
Other underwriting revenues
Interest income (Table 22.1)
Dividend income (Table 22.1)
Net investment losses (Table 23.1)
Share of profit from investments in associates and joint ventures
Other revenues
Table 21.2 – Premiums written and net premiums earned
For the years ended December 31,
Premiums written
Direct
Ceded
Net
Changes in unearned premiums
Net premiums earned
48
INTACT FINANCIAL CORPORATION
2016
7,902
122
265
184
(70)
16
143
8,562
2015
7,490
122
280
179
(64)
26
121
8,154
2016
2015
8,197
(212)
7,985
(83)
7,902
7,893
(194)
7,699
(209)
7,490
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 22 – Net investment income
Table 22.1 – Net investment income
For the years ended December 31,
Interest income from:
Debt securities
designated or classified as FVTPL
classified as AFS
Loans and cash and cash equivalents
Interest income
Dividend income (expense) from:
Common shares, net
designated or classified as FVTPL
classified as AFS
Preferred shares
classified as AFS
Equities sold short
Long-term investments, at cost
Dividend income
Expenses
Note 23 – Net investment losses
Table 23.1 – Net investment gains (losses)
2016
2015
157
85
23
265
54
74
61
(6)
1
184
(35)
414
163
92
25
280
50
79
54
(5)
1
179
(36)
423
For the years ended December 31,
2016
2015
Strategies
Net gains (losses) from:
Financial instruments1:
designated as FVTPL
classified as FVTPL
classified as AFS
Derivatives2 (Table 7.2)
Embedded derivatives
Net foreign currency gains (losses)
Impairment losses from:
Common shares
Preferred shares
Other gains (losses) 3
Fixed
Income
Equity
Total
Fixed
Income
Equity
Total
(103)
-
2
(2)
-
(103)
(1)
-
-
-
(104)
205
7
122
(268)
(13)
53
21
(41)
-
(41)
33
102
7
124
(270)
(13)
(50)
20
(41)
-
(41)
(71)
1
(70)
(16)
-
15
(6)
-
(7)
-
-
-
-
(7)
(195)
4
6
189
38
42
19
(124)
(38)
(162)
(101)
(211)
4
21
183
38
35
19
(124)
(38)
(162)
(108)
44
(64)
1 Refer to Note 2.4a) for details on the classification of financial instruments.
2 Excluding foreign currency contracts, which are reported in Net foreign currency gains (losses).
3 Including net gains on investments in associates and joint ventures related to a change of control and losses arising from the write-off of goodwill
and intangible assets recognized in business combinations.
INTACT FINANCIAL CORPORATION
49
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 24 – Income taxes
24.1
Income tax expense recorded in Net income
Table 24.1 – Components of income tax expense recorded in Net income
For the years ended December 31,
Current income tax expense
Prior-year adjustment expense
Deferred income tax expense (benefit)
24.2
Income tax expense (benefit) recorded in OCI
Table 24.2 – Components of income tax expense (benefit) recorded in OCI
For the years ended December 31,
Income tax expense (benefit) related to:
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
2016
103
-
42
145
2015
211
1
(43)
169
2016
2015
(29)
94
(9)
56
31
(85)
13
(41)
24.3
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 24.3 – 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
Non-taxable income
Non-deductible expenses
Non-taxable income from subsidiaries
Non-deductible losses (non-taxable gains)
Prior-year adjustments
Other
Effective income tax rate
2016
26.9 %
(4.8)%
(1.5)%
1.1 %
(0.7)%
(0.1)%
-
0.2 %
21.1 %
2015
26.7 %
(5.2)%
(0.9)%
0.7 %
(0.8)%
(1.1)%
0.1 %
(0.2)%
19.3 %
50
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
24.4
Components of deferred tax assets and liabilities
Table 24.4 – Components of deferred tax assets and liabilities
As at December 31,
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 (Note 4)
Deferred tax liabilities (Note 4)
Net income
OCI
Consolidated
balance sheets
Asset (liability)
Consolidated statements
of comprehensive income
Expense (benefit)
2016
2015
2016
2015
108
-
-
52
3
18
2
183
(262)
(140)
(13)
(28)
(2)
(445)
(262)
142
(404)
106
64
7
66
7
6
1
257
(266)
-
(14)
(21)
-
(301)
(44)
146
(190)
(2)
64
7
13
4
(12)
(1)
73
(1)
140
(1)
7
2
147
220
71
149
(5)
(64)
(7)
4
8
6
2
(56)
(2)
(58)
(2)
(1)
-
(63)
(119)
(60)
(59)
The Company believes that it is probable that it will generate sufficient taxable income in the future to realize the above deferred tax
assets.
24.5
Movement in the net deferred tax asset (liability)
Table 24.5 – Movement in the net deferred tax asset (liability)
As at December 31,
Balance, beginning of year (Note 4)
Income tax benefit (expense):
recorded in net income
recorded in OCI
Business combinations (Note 29)
Reclassifications
Balance, end of year
2016
(44)
(71)
(149)
3
(1)
(262)
2015
(144)
60
59
(16)
(3)
(44)
The Company had allowable capital losses of $25 million as at December 31, 2016 (December 31, 2015 – $24 million), which had
not been recognized when computing the deferred tax asset. These losses, which have no expiry date, can be used to reduce future
taxable capital gains.
The Company has recognized a deferred tax asset for unused non-capital losses as at December 31, 2016 and 2015.
INTACT FINANCIAL CORPORATION
51
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 25 – 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 25.1 – 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)
EPS – basic and diluted (in dollars)
Note 26 – Share-based payments
26.1
Long-term incentive plan
a)
Outstanding LTIP units and fair value at grant date
Table 26.1 – Outstanding units and weighted-average fair value at grant date by performance cycle
2016
541
20
521
131.2
3.97
2015
706
21
685
131.5
5.20
Performance cycles
As at December 31, 2016
2014–2016
2015–2017
2016–2018
As at December 31, 2015
2013–2015
2014–2016
2015–2017
b)
Movements in LTIP units
Table 26.2 – 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
52
INTACT FINANCIAL CORPORATION
Weighted-
average fair
value at grant
date (in $)
Number of
units
Amount
(in millions
of $)
255,253
229,928
217,065
702,246
236,151
246,094
215,679
697,924
66.25
77.89
90.36
77.51
62.08
66.25
77.89
68.44
17
18
19
54
15
16
17
48
2016
(in units)
697,924
182,170
62,802
(240,650)
702,246
2015
(in units)
726,455
188,106
46,347
(262,984)
697,924
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
c)
LTIP expense recognized in Net income
The LTIP expense was $18 million for the years ended December 31, 2016 and 2015.
d)
LTIP settlement in shares
Table 26.3 – Settlement in shares
As at December 31,
Value of common shares repurchased for share-based payments
Less: cumulative cost of the units for the Company
Excess of market price over the cumulative cost for the Company
2016
2015
19
13
6
17
11
6
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.
26.2
Employee share purchase plan (ESPP)
a)
Movements in restricted common shares
Table 26.4 – Movements in restricted common shares
For the years ended December 31,
Outstanding, beginning of year
Awarded
Estimated shares to be awarded
Vested or forfeited
Outstanding, end of year
New plan
2016
(in units)
-
-
145,368
-
145,368
Old plan
2016
(in units)
157,953
-
-
(157,953)
-
2015
(in units)
161,434
146,236
-
(149,717)
157,953
As at December 31, 2016, the Company estimated that 145,368 restricted common shares were to be awarded in accordance with
the terms of the new employee share purchase plan effective January 1, 2016. Refer to Note 2.11b) for details.
ESPP expense recognized in Net income
b)
The ESPP expense was $14 million for the year ended December 31, 2016 (December 31, 2015 – $13 million). The ESPP expense
for the year ended December 31, 2016 includes an amount of $6 million recognized upon the change to the new ESPP,
representing the value of the unvested shares as at December 31, 2015 that vested on January 1, 2016.
26.3
Deferred share unit plan
The DSU provision amounted to $8 million as at December 31, 2016 (December 31, 2015 – $6 million). The DSU expense was
$2 million for the year ended December 31, 2016 (December 31, 2015 – $1 million).
INTACT FINANCIAL CORPORATION
53
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 27 – 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. 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.
Defined benefit pension obligation
(as at the date of the latest actuarial valuation)
Active members
Pensioners and beneficiaries
Deferred members
7%
31%
62%
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.
27.1
Funded status
Table 27.1 – Funded status
As at December 31,
Defined benefit obligation
Fair value of plan assets
Net defined benefit asset (liability)
Reported in:
Other assets – plans in a surplus position
Other liabilities – unfunded plans
Funded status – funded plans
Pension plans
2016
(2,014)
1,981
(33)
62
(95)
(33)
103%
2015
(1,801)
1,812
11
93
(82)
11
105%
The measurement date for the defined benefit (“DB”) pension plans is December 31. The latest actuarial valuations for the DB
pension plans were performed as at December 31, 2015.
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.
54
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
27.2
Defined benefit obligation
The defined benefit obligation is based on the current value of expected benefit payment cash flows to plan members over their
expected lifetime.
Table 27.2 – Movement in the defined benefit obligation
As at December 31,
Balance, beginning of year
Current service cost
Interest expense on defined benefit obligation
Actuarial losses (gains) due to changes in:
financial assumptions
plan experience
Employee contributions
Benefit payments
Balance, end of year
27.3
Fair value of plan assets
a)
Movement in the fair value of plan assets
Table 27.3 – Movement in the fair value of plan assets
As at December 31,
Balance, beginning of year
Employer contributions
Employee contributions
Actual return on plan assets
Interest income on plan assets (recognized in Net income)
Actuarial gains (recognized in OCI)
Benefit payments
Other
Balance, end of year
Pension plans
2016
1,801
63
76
110
8
26
(70)
2015
1,742
66
72
(68)
24
25
(60)
2,014
1,801
Pension plans
2016
1,812
61
26
75
82
(70)
(5)
2015
1,728
50
25
70
4
(60)
(5)
1,981
1,812
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.
Based on the latest projections of the financial position of all its plans, total cash contributions by the Company are expected to be
approximately $62 million in 2017 compared to actual contributions of $61 million in 2016. The contributions will vary depending on
the results of the December 31, 2016 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.
INTACT FINANCIAL CORPORATION
55
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
b)
Composition of pension plan assets
Table 27.4 – 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
Plan assets are essentially all quoted in an active market.
27.4
Employee future benefit expense recognized in Net income
Table 27.5 – Employee future benefit expense recognized in Net income
For the years ended December 31,
Current service cost
Net interest expense
Interest expense on defined benefit obligation
Interest income on plan assets
Other
27.5
Actuarial losses (gains) recognized in OCI
Table 27.6 – Actuarial losses (gains) recognized in OCI
For the years ended December 31,
Balance, beginning of year
Actuarial losses (gains) on the defined benefit obligation due to changes in:
discount rate
other financial assumptions1
plan experience
Actuarial losses (gains) related to actual return on plan assets
Actuarial losses (gains) recognized in OCI2
2016
2015
Fair value
% of total
Fair value
% of total
45
823
382
8
1,213
685
38
1,981
2%
42%
19%
-
61%
35%
2%
100%
45
2%
756
354
8
1,118
611
38
1,812
Pension plans
2016
63
76
(75)
5
69
Pension plans
2016
55
106
4
8
(82)
36
42%
20%
-
62%
34%
2%
100%
2015
66
72
(70)
5
73
2015
103
(32)
(36)
24
(4)
(48)
Balance, end of year
1 Including rate of increase in future compensation and inflation.
2 Net actuarial losses (gains) on employee future benefits recognized in OCI also include a gain of $1 million for other post-retirement benefits for
91
55
the year ended December 31, 2016 (nil for the year ended December 31, 2015).
56
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
27.6
Assumptions used and sensitivity analysis
The following table summarizes the key weighted-average assumptions used in measuring the Company’s pension plans.
Table 27.7 – Assumptions used
As at December 31,
To determine the benefit obligation at end of year
Discount rate
Rate of increase in future compensation – next 3 years1
Rate of increase in future compensation – beyond 3 years1
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 the benefit expense for the year
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
1 Excludes the impact of a merit and promotion table as at December 31, 2015.
Pension plans
2016
2015
3.8%
2.75%
2.75%
2.00%
21.6
24.1
4.1%
2.75%
1.75%
21.6
24.0
4.1%
2.75%
2.75%
1.75%
21.6
24.0
4.0%
3.0%
2.00%
21.5
24.0
Rate of compensation increase as at December 31, 2016 was based on financial plans approved by management for the next
3 years, and on inflation and long-term expectations of wage salary increase beyond 3 years.
Mortality rates as at December 31, 2016 and 2015 have been established in accordance with the final table and improvement scale
published in February 2014 by the CIA.
The following table presents the sensitivity of the defined benefit pension obligation to key assumptions.
Table 27.8 – Impact of changes in key assumptions
As at December 31,
Discount rate
1% increase
1% decrease
Rate of increase in future compensation
1% increase
1% decrease
Rate of inflation
1% increase
1% decrease
Life expectancy
One-year increase
Pension plans
2016
2015
(318)
419
79
(76)
71
(68)
50
(292)
391
79
(75)
68
(65)
45
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.
INTACT FINANCIAL CORPORATION
57
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
27.7
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 expectancy. It is based on estimates of market yields of highly rated 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 Statement of Investment Policies and Procedures of the pension plan (the “SIP&P”) 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 SIP&P is reviewed
by the Operational Investment Committee. The Risk Management Committee, which is a committee of the Company’s Board of
Directors, is responsible for the approval of the SIP&P and the review of the pension plans investment performance.
The pension plans investment portfolio is managed by Intact Investment Management Inc., a subsidiary of the Company, in
accordance with the SIP&P that focuses on asset diversification and asset-liability matching.
The Company regularly monitors compliance with the SIP&P.
Asset diversification
The goal of asset diversification is to limit the potential to have significant 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 SIP&P 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.
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.
.
Pension plan asset mix
(as at December 31, 2016)
Debt securities
Common shares
Other
4%
35%
61%
58
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Company also establishes asset allocation limits to ensure sufficient diversification.
Table 27.9 – 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
2016
85%
7%
8%
100%
45%
23%
6%
26%
100%
2015
84%
8%
8%
100%
46%
23%
6%
25%
100%
Asset-liability matching
One objective established in the SIP&P 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 74% as at December 31, 2016 (December 31, 2015 – 70%).
A portion of the pension plan liabilities contain an indexation provision linked to the consumer price index (CPI). The Company
invests in inflation sensitive assets to partially mitigate the risk of an unanticipated increase in inflation. As at
December 31, 2016 and 2015, 10% of pension plan assets were invested in Canada Government Real Return Bonds.
Note 28 – 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.
28.1
Transactions with associates and joint ventures
Table 28.1 – Transactions with associates and joint ventures
For the years ended December 31,
Income and expenses reported in:
Net investment income
Underwriting expenses
Assets and liabilities reported in:
Loans and other receivables
Commissions payable
2016
2015
8
232
203
35
7
197
190
29
28.2
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 $17 million for the year ended December 31, 2016 (December 31, 2015 – $15 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.
INTACT FINANCIAL CORPORATION
59
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
28.3
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 years ended
Trust
December 31, 2016 and 2015. The Company made contributions to pension plans of $61 million for
the year ended
December 31, 2016 (December 31, 2015 – $50 million).
Note 29 – Business combinations
29.1
InnovAssur
On November 30, 2016, the Company acquired all of the remaining outstanding shares of InnovAssur, assurances générales inc.
(“InnovAssur”), a joint venture previously held with National Bank of Canada, for a cash consideration of $30 million and a
contingent consideration of $21 million. With this transaction, InnovAssur became a wholly owned subsidiary of the Company and a
gain of $7 million was recognized following the revaluation of its original participation held in the joint venture.
The contingent consideration is payable over a 15-year period based on annual DPW of InnovAssur. Total consideration paid (net of
cash acquired) amounted to $19 million for the year ended December 31, 2016.
The excess of the purchase price over the provisional fair value of assets acquired and liabilities assumed was preliminarily
recorded to Goodwill for $63 million. The determination of the fair value of the identifiable assets and liabilities acquired is expected
to be completed within the one-year permitted timeframe following the acquisition.
This agreement is in line with the Company’s objective to grow its direct-to-consumer distribution.
CDI
29.2
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.
Table 29.1 – Business combination – CDI
As at December 31, 2016
Purchase price – cash consideration paid (net of cash acquired of $2 million)
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 and will be amortized
on a straight-line basis over 10 years. Goodwill reflects the strategic location of CDI activities, the workforce of the acquired
is not expected to be deductible for tax
business and the synergies expected following the integration of CDI. The goodwill
purposes.
The determination of the fair value of identifiable assets and liabilities acquired was finalized with no significant changes since
acquisition.
60
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 30 – Additional information on the Consolidated statements of cash flows
Table 30.1 – Additional details on the items included in net cash flows provided by (used in) operating activities
For the years ended December 31,
2016
2015
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 (equity-settled plans)
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
Other relevant cash flow disclosures
Interest paid
Interest received
Dividends received
Note 31 – Commitments and contingencies
31.1
Operating lease commitments
37
73
10
69
32
(16)
3
208
85
(23)
(98)
(27)
11
21
(31)
68
269
204
34
76
13
73
18
(26)
(1)
187
209
(44)
(122)
(36)
16
15
38
64
281
191
The Company has entered into commercial operating leases on certain property and equipment. These leases have a remaining 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 31.1 – Operating lease commitments
As at December 31,
Less than 1 year
From 1 to 5 years
Over 5 years
31.2
Contingencies
2016
157
392
237
786
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.
INTACT FINANCIAL CORPORATION
61
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 32 – 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. Personal and commercial 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 32.1 – 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, 2016 and 2015, automobile DPW in these provinces totalled $4 billion, which represent approximately 98% as at
December 31, 2016 of automobile DPW (December 31, 2015 – 99%).
Table 32.2 – Regulatory authorities and rate filings for automobile insurance
Province and territories
Regulatory authority
Alberta
Ontario
Quebec
Nova Scotia
New Brunswick
Alberta Automobile Insurance Rate Board
Financial Services Commission of Ontario
Autorité des marchés financiers
Nova Scotia Utility and Review Board
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, 2016 and 2015, 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 33 – Standards issued but not yet effective
33.1
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. However, the effective
date for the Company will depend on the option elected under IFRS 4 (see Note 33.2). 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 33.1 – 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 debt securities classified as FVTOCI.
Under the expected credit
financial assets impaired based on a
12-month expected credit losses or a life-time expected credit losses if the credit risk increases significantly.
loss model, a loss allowance will be established for all
Insurance contracts
33.2
In September 2016, the IASB issued amendments to IFRS 4 Insurance Contracts (“IFRS 4”), to address concerns of insurers about
the different effective dates for IFRS 9 and the upcoming new Standard on insurance contracts. The amendments allow insurance
entities to elect one of two option approach:
The deferral approach provides entities whose predominant activities are to issue contracts within the scope of IFRS 4, a
temporary exemption to continue using IAS 39, instead of IFRS 9 until January 1, 2021 (the “deferral approach”).
The overlay approach can be applied to eligible financial assets and provides an option for all issuers of insurance contracts to
reclassify from profit or loss to OCI any additional accounting volatility that may arise from applying IFRS 9 before the new
insurance contracts standard.
This amendment will be effective for annual periods beginning on or after January 1, 2018. The Company is currently assessing the
impact of these amendments.
INTACT FINANCIAL CORPORATION
63
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Revenues from contracts with customers
33.3
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.
Leases
33.4
In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”). IFRS 16 will replace IAS 17 – Leases and IFRIC 4 – Determining
Whether an Arrangement Contains a Lease. It requires lessees to recognize most leases on their Balance sheets as lease liabilities,
with the corresponding right-of-use assets. Lessees will have the option not to recognise leases with duration of less than one year
and those of low-value assets. Generally, the recognition pattern for recognized leases will be similar to today’s finance lease
accounting, with interest and depreciation expense recognized separately in the Consolidated statements of comprehensive
income.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early application permitted. Lessees must adopt
IFRS 16 using either a full retrospective or a modified retrospective approach. The Company does not anticipate early adoption of
IFRS 16 and is currently evaluating its impact.
Share-based payments
33.5
In June 2016, the IASB issued amendments to IFRS 2 – Share-based Payment (“IFRS 2”), which provide additional guidance on the
classification and measurement of share-based payment transactions. The amendments clarify the accounting for cash-settled
share-based payment transactions that include a performance condition, the classification of share-based payment transactions with
net settlement features for withholding tax obligations, and the accounting for modifications of share-based payment transactions
from cash-settled to equity-settled.
The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, with early application permitted.
It should be applied prospectively; however, retrospective application is permitted in certain instances. The Company is currently
assessing the impact of these amendments.
64
INTACT FINANCIAL CORPORATION
F I V E - Y E A R F I N A N C I A L H I S T O R Y
(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 investment yield
Total investments
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
2016
7,697
8,293
7,946
(389)
375
95.3%
414
(72)
686
21.1%
660
541
4.88
3.97
131.2
12.0%
9.6%
6,751
5,822
5,584
96.9%
175
4,358
3,792
3,704
99.9%
5
2,393
2,030
1,880
90.9%
170
946
2,471
2,362
91.5%
200
501
703
705
94.6%
38
445
1,768
1,657
90.2%
162
970
218%
925
18.6%
42.72
3.36%
14,386
3%
70%
10%
14%
3%
2015
7,419
7,922
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
5,455
5,244
92.3%
405
4,159
3,591
3,508
95.4%
161
2,294
1,864
1,736
85.9%
244
966
2,467
2,291
90.3%
223
523
671
651
99.0%
7
443
1,796
1,640
86.8%
216
625
203%
889
16.6%
39.83
3.55%
13,504
4%
71%
9%
13%
3%
2014
7,062
7,461
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
5,089
5,004
92.7%
363
3,900
3,374
3,387
94.5%
186
2,192
1,715
1,617
89.0%
177
970
2,372
2,203
92.9%
156
520
632
615
89.6%
64
450
1,740
1,588
94.2%
92
681
209%
1,412
17.3%
37.75
3.65%
13,440
3%
72%
9%
13%
3%
2013
7,115
7,345
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
5,018
4,868
96.7%
162
3,902
3,383
3,349
93.2%
228
2,221
1,635
1,519
104.4%
(66)
992
2,327
2,146
100.9%
(20)
526
612
603
93.3%
40
466
1,715
1,543
103.9%
(60)
550
203%
185
18.7%
33.94
3.68%
12,261
2%
73%
10%
12%
3%
2012
6,729
6,854
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
4,642
4,539
95.0%
226
3,584
3,092
3,077
95.7%
132
2,225
1,550
1,462
93.5%
94
920
2,212
2,032
88.9%
225
477
563
536
81.5%
99
443
1,649
1,496
91.6%
126
599
205%
723
18.9%
33.03
3.63%
12,959
3%
74%
10%
10%
3%
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 147
T H R E E - Y E A R Q U A R T E R LY R E V I E W
(Excluding MYA. In millions of Canadian dollars, except as noted)
2016
Q4
Q3
Q2
Q1
Q4
2015
Q3
Q2
Q1
Q4
2014
Q3
Q2
Q1
Consolidated performance
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Favourable prior year claims development
Underwriting income (loss)
Combined ratio
Net investment income
Net investment gains (losses)
Income before income taxes
Effective tax rate
Net operating income
Net income attributable to shareholders
Net operating income per share ($)
Earnings per share ($)
Weighted-average number of common shares
outstanding (millions)
Operating return on equity
Return on equity
Personal lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Personal property
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial lines – total
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial auto
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Commercial P&C
Written insured risks (thousands)
Direct premiums written
Net premiums earned
Combined ratio
Underwriting income (loss)
Financial condition
Total excess capital (over 170% MCT)
MCT %
Cash provided by (used in) operating activities
Debt-to-capital ratio
Book value per share ($)
Investments
Performance
Market-based investment yield
Total investments
Portfolio mix (net of hedging positions)
Short-term notes, including cash and cash
equivalents
Fixed-income securities
Preferred shares
Common shares
Loans
1,718
1,961
2,043
(62)
153
92.5%
104
(97)
224
23.7%
212
171
1.58
1.27
131.1
12.0%
9.6%
2,064
2,193
2,036
(71)
61
97.0%
102
17
156
19.9%
137
125
1.01
0.91
131.1
13.4%
10.5%
2,357
2,458
1,937
(93)
16
1,558
1,681
1,930
(163)
145
99.2% 92.5%
104
(20)
194
16.9% 21.6%
197
152
1.46
1.11
114
93
0.83
0.67
104
28
112
131.5
131.3
14.6% 16.7%
10.5% 12.7%
1,833
1,601
1,427
1,490
1,354
1,315
1,160
1,356
1,436
92.2% 102.7% 100.5% 91.9%
110
2,074
1,746
1,365
(39)
111
(7)
928
829
942
1,164
1,032
944
100.9% 104.3%
(41)
(9)
1,373
1,154
918
893
777
900
97.6% 96.4%
32
23
562
486
494
75.6%
120
228
646
607
93.2%
42
121
180
188
101.9%
(3)
107
466
419
89.4%
45
970
218%
153
18.6%
42.72
701
592
447
669
569
483
461
383
456
99.7% 106.7% 82.9%
78
(30)
2
231
592
609
83.5%
100
118
172
186
88.6%
21
113
420
423
81.3%
79
881
215%
507
19.0%
41.47
283
712
572
204
521
574
95.9% 93.9%
35
23
157
207
166
105
144
165
90.3% 97.5%
4
16
126
505
406
99
377
409
98.2% 92.4%
31
7
857
904
212% 215%
(20)
19.3% 19.5%
40.06
40.57
285
1,680
1,908
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
1,260
1,362
88.9%
151
899
808
909
96.9%
28
547
452
453
72.7%
123
234
648
586
88.0%
70
125
168
168
107.9%
(13)
109
480
418
80.1%
83
625
203%
240
16.6%
39.83
2,021
2,095
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
1,514
1,347
95.4%
62
1,135
987
903
94.4%
51
651
527
444
97.4%
11
235
581
583
88.2%
69
127
160
166
97.0%
5
108
421
417
84.6%
64
389
195%
419
17.3%
37.84
2,259
2,344
1,865
(106)
158
1,459
1,575
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%
1,971
1,250
1,632
1,049
1,239
1,296
91.1% 93.8%
76
116
1,307
1,090
868
818
706
828
90.3% 100.3%
(3)
85
664
542
428
432
343
411
92.7% 80.7%
79
31
288
712
569
209
526
553
92.6% 92.5%
42
42
162
204
162
109
139
155
94.4% 96.4%
6
9
126
508
407
100
387
398
91.8% 90.9%
36
33
564
200%
281
763
213%
(51)
16.8% 16.9%
38.95
39.23
1,595
1,775
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
1,146
1,262
87.1%
162
840
739
847
93.7%
53
514
407
415
73.6%
109
241
629
568
90.5%
54
128
163
159
99.5%
1
113
466
409
87.1%
53
681
209%
300
17.3%
37.75
1,881
1,941
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
1,383
1,266
96.4%
46
1,034
905
857
95.8%
36
611
478
409
97.7%
10
236
558
560
86.0%
78
126
148
157
89.4%
16
2,142
2,212
1,801
(65)
128
92.9%
105
44
252
14.7%
206
215
1.53
1.60
131.5
11.6%
11.1%
1,858
1,532
1,256
92.2%
98
1,220
1,029
853
91.5%
72
638
503
403
93.5%
26
1,444
1,533
1,750
(141)
51
97.1%
105
103
196
18.3%
129
160
0.94
1.17
131.5
9.9%
8.7%
1,235
1,028
1,220
95.3%
57
806
700
830
97.0%
25
429
328
390
91.8%
32
284
680
545
209
505
530
94.7% 101.1%
(6)
30
159
192
151
79.5%
32
107
129
148
89.3%
15
110
410
403
102
125
376
488
382
394
84.7% 100.5% 105.6%
(21)
(2)
62
497
203%
647
17.8%
36.44
657
208%
486
17.8%
36.29
670
213%
(21)
18.4%
34.80
3.27%
14,386
3.27%
14,342
3.43% 3.47%
13,812 13,630
3.62%
13,504
3.55%
13,339
3.62% 3.41%
13,443
13,394
3.61%
13,440
3.57%
13,199
3.69%
12,913
3.76%
12,371
3%
70%
10%
14%
3%
5%
69%
9%
14%
3%
4%
70%
9%
14%
3%
4%
70%
9%
14%
3%
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%
148 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
G L O S S A R Y
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.
Affiliated brokers Brokers in which we hold
an equity investment or provide financing.
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.
Shareholders’ equity is determined in
accordance with IFRS.
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.
Customer relationships Relationships
that exist with the policyholders, either
directly (as a direct insurer) or indirectly
(through consolidated brokers).
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.
DPW (MD&A basis) 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.
DPW growth (MD&A basis) Growth
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.
Distribution EBITA Operating income
excluding interest and taxes from our
wholly owned broker (BrokerLink) and our
broker associates for a specific period.
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 149
Distribution networks Contractual
agreements between the Company and
unconsolidated brokers for the distribution
of its insurance products.
Forwards Forward contracts are effectively
tailor-made agreements that are transacted
between counterparties in the over-the-
counter market.
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 & Labrador,
Northwest Territories, Nova Scotia,
Nunavut, Ontario, Prince Edward Island
and Yukon.
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.
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 which have been reported.
Industry pools Industry pools consist of
the “residual market” as well as risk-sharing
pools (“RSP”) in Alberta, Ontario, Québec,
New Brunswick and Nova Scotia. 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. 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
at a predetermined future date at a
specified price.
Interest rate 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 plans’ obligation. A lower hedge
ratio increases the Company’s exposure to
changes in interest rates.
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.
150 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
Joint venture Joint arrangements
whereby the parties have joint control of
the arrangements, requiring unanimous
consent of the parties sharing control for
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 Liquidity risk is the risk that
an entity will encounter difficulty in raising
funds to meet obligations associated with
financial liabilities.
Market-based yield Non-IFRS financial
measure defined as the annualized
total pre-tax investment income (before
expenses) divided by the mid-month
average fair value of net equity and fixed-
income securities held during a period
(average net investments).
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.
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 total capital available to total capital
required, as defined by the Office of the
Superintendent of Financial Institutions
(“OSFI”) and Autorité des marchés
financiers (“AMF”).
Net distribution income Operating
income excluding interest and taxes from
our wholly owned broker (BrokerLink)
and operating income including interest
and taxes from our broker associates for a
specific period.
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, MYA, as well as other
costs that we do not believe to be reflective
of our operating performance.
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.
Non-catastrophe weather event
A group of claims which is considered
significant but that is smaller than the CAT
threshold of $7.5 million, related to a single
weather event.
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.
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.
Provision for adverse deviation
(“PfAD”) An amount added to
undiscounted case reserves and IBNR to
account for adverse deviation from claims
reserve estimates.
Reinstatement premium Premium
payable to restore the original reinsurance
policy limit as a result of a reinsurance loss
payment under 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 capital available 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. These
amounts are applicable to our P&C
insurance subsidiaries and are determined
in accordance with prescribed OSFI and
AMF rules.
Total capital required 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. These amounts are applicable to
our P&C insurance subsidiaries and are
determined in accordance with prescribed
OSFI and AMF rules.
Total excess capital 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.
Underwriting income Net premiums
earned less net claims incurred,
commissions, premium taxes and
general expenses (excluding MYA).
Written insured risks The number of
vehicles in automobile insurance, the
number of premises in personal property
insurance and the number of policies
in commercial insurance (excluding
commercial auto insurance).
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 151
B O A R D O F D I R E C T O R S
E X E C U T I V E C O M M I T T E E M E M B E R S
Claude Dussault
Chairman of the Board of Intact Financial
Corporation and President of ACVA
Investing Corporation
Charles Brindamour
Chief Executive Officer
Yves Brouillette 1,4
President, Placements Beluca Inc.
Robert W. Crispin 1,4
Corporate Director
Janet De Silva 2,4
President and Chief Executive Officer,
Toronto Region Board of Trade
Robert G. Leary 1,4
Chief Executive Officer, Nuveen
Eileen Mercier 1,4
Corporate Director and Chair, Payments Canada
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 G. Snyder 2,3
Corporate Director
Carol Stephenson 2,3
Corporate Director
Charles Brindamour
Chief Executive Officer
Louis Gagnon
President, Service and Distribution
Jean-François Blais
President, Intact Insurance Company
Patrick Barbeau
Senior Vice President, Claims
Martin Beaulieu
Senior Vice President and Chief Operating
Officer, Direct-to-Consumer Distribution
Alan Blair
Senior Vice President, Atlantic Canada
Darren Godfrey
Senior Vice President, Personal Lines
Karim Hirji
Senior Vice President, International and Ventures
Mathieu Lamy
Senior Vice President and Chief Information Officer
Alain Lessard
Senior Vice President, Commercial Lines
Louis Marcotte
Senior Vice President and Chief Financial Officer
Lucie Martel
Senior Vice President and Chief Human Resources
Officer
Sonya Côté
Senior Vice President and Chief Internal Auditor
Benoit Morissette
Senior Vice President and Chief Risk Officer
Frédéric Cotnoir
Senior Vice President, Corporate and Legal Services,
and Secretary
Debbie Coull-Cicchini
Senior Vice President, Ontario
Jennie Moushos
Senior Vice President, Western Canada
Werner Muehlemann
Senior Vice President and Managing Director,
Intact Investment Management Inc.
Joe D’Annunzio
Senior Vice President, Specialty Solutions and Surety
Lilia Sham
Senior Vice President, Corporate Development
Jean-François Desautels
Senior Vice President, Québec
Mark A. Tullis*
Vice Chairman
Monika Federau
Senior Vice President and Chief Strategy Officer
Don Fox**
Executive Vice President
Anne Fortin
Senior Vice President, Sales & Marketing,
Direct-to-Consumer Distribution
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
* Since March 1, 2017
** Since January 1, 2017
For complete biographies of the members of the Board of Directors, please see www.intactfc.com.
152 INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT
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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, 2016
Sept. 15, 2016
June 15, 2016
Mar. 15, 2016
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. 30, 2016
Sept. 30, 2016
June 30, 2016
Mar. 31, 2016
Dec. 31, 2015
Sept. 30, 2015
June 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Sept. 30, 2014
June 30, 2014
Mar. 31, 2014
$0.58
$0.58
$0.58
$0.58
$0.53
$0.53
$0.53
$0.53
$0.48
$0.48
$0.48
$0.48
S H A R E H O L D E R A N D C O R P O R A T E I N F O R M A T I O N
Credit rating
IFC long-term issuer credit ratings
a-
A
A-
Baa1
IFC’s principal P&C insurance subsidiaries’ financial
strength ratings
A+
AA (low)
AA-
A1
A.M. Best
DBRS
Fitch
Moody’s
DBRS has assigned a rating of “Pfd-2” with a Stable trend for the Non-cumulative Rate Reset Class A Series 1
preferred shares, Non-cumulative Rate Reset Class A Series 3 preferred shares and Non-cumulative Floating
Rate Class A Series 4 preferred shares (the “Series 1 Preferred Shares”, “Series 3 Preferred Shares” and
“Series 4 Preferred Shares”, respectively) issued on July 12, 2011, August 18, 2011 and September 30, 2016,
respectively. Fitch Ratings has assigned a rating of “BBB” with a Stable outlook to the Series 1 Preferred
Shares, Series 3 Preferred Shares and Series 4 Preferred Shares.
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
Series 4 Preferred Shares Ticker Symbol: IFC.PR.D
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 Investors section of the Company’s
website at www.intactfc.com.
Annual Meeting of Shareholders
Date: Wednesday, May 3, 2017
Time: 11:30 a.m. (Atlantic Time)
Venue: Lord Nelson Hotel
1515 South Park Street
Halifax, Nova Scotia
Canada B3J 2L2
Version française
Il existe une version française du présent rapport
annuel à la section Investisseurs de notre site Web
www.intactfc.com/French/accueil/default.aspx.
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 conference call dates
Q1 – May 3, 2017
Q2 – August 2, 2017
Q3 – November 8, 2017
Q4 – February 7, 2018
FPO
(cid:20)(cid:19)(cid:19)(cid:8)
(cid:41)(cid:85)(cid:82)(cid:80)(cid:98)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3236)
(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:71)(cid:98)(cid:73)(cid:82)(cid:85)(cid:72)(cid:86)(cid:87)(cid:86)
(cid:38)(cid:19)(cid:19)(cid:19)(cid:19)(cid:19)(cid:19)
Common share prices and volume
Q1
Q2
Q3
Q4
Year 2016
Q1
Q2
Q3
Q4
Year 2015
Q1
Q2
Q3
Q4
Year 2014
Source: Toronto Stock Exchange
High
Low
Close
Volume traded
$ 91.08
$ 94.16
$ 97.20
$ 97.34
$ 97.34
$ 95.77
$ 95.36
$ 95.82
$ 96.77
$ 96.77
$ 69.95
$ 74.92
$ 76.32
$ 84.42
$ 84.42
$ 77.49
$ 84.88
$ 89.75
$ 90.00
$ 77.49
$ 81.74
$ 85.42
$ 86.30
$ 85.81
$ 81.74
$ 65.82
$ 67.89
$ 70.52
$ 71.11
$ 65.82
$ 90.93
$ 92.29
$ 94.84
$ 96.10
$ 96.10
$ 95.42
$ 86.79
$ 93.72
$ 88.68
$ 88.68
$ 68.80
$ 73.58
$ 72.51
$ 83.85
$ 83.85
16,605,531
13,312,286
10,209,134
13,065,874
53,192,825
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
®Intact Design and Intact Insurance Design are registered trademarks of Intact Financial Corporation. TMIntact Service Centre and Intact Centre on Climate Adaptation are trademarks of Intact Financial Corporation.
®belairdirect. & Design is a registered trademark of Belair Insurance Company Inc. used under licence. ®BrokerLink & Design is a registered trademark of Canada Brokerlink Inc. used under licence. All other trademarks
are properties of their respective owners. ©2017 Intact Financial Corporation. All rights reserved.
INTACT FINANCIAL CORPORATION | 2016 ANNUAL REPORT 153
Intact Financial Corporation
700 University Ave.
Toronto, Ontario
M5G 0A1
www.intactfc.com
WHY INVEST
WITH INTACT
We are the largest provider of P&C insurance in Canada
with over $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
capital 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.
I
N
T
A
C
T
F
I
N
A
N
C
I
A
L
C
O
R
P
O
R
A
T
I
O
N
2
0
1
6
A
N
N
U
A
L
R
E
P
O
R
T
SEE THE FULL STORY ONLINE
REPORTS.INTACTFC.COM/2016