We are the largest provider of P&C insurance in Canada with close to $10 billion ($8 billion in Canada) in annual direct premiums written1. We have consistently outperformed the Canadian 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. We are a proven industry consolidator with a track record of 16 accretive acquisitions since 1988. In 2017 we expanded our reach by entering the U.S. specialty market, representing a significant milestone in building a world-class P&C insurer. Our financial strength is reinforced by prudent risk management, resulting in a consistent track record of favourable reserve development.Intact Financial CorporationIntact Financial Corporation700 University Ave.700 University Ave.Toronto, Ontario M5G 0A1Toronto, Ontario M5G 0A1www.intactfc.comwww.intactfc.comWhyinvest with IntactSee the full story online atintactfc.com/2017annualreport +1 DPW (pro-forma) for 2017 comprises the DPW of P&C Canada and the DPW (pro-forma) of P&C U.S., using an exchange rate of 1.30INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORTWhat matters mostintactfc.comINTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT Toronto Stock Exchange (TSX) listingsCommon Shares Ticker Symbol: IFCSeries 1 Preferred Shares Ticker Symbol: IFC.PR.ASeries 3 Preferred Shares Ticker Symbol: IFC.PR.CSeries 4 Preferred Shares Ticker Symbol: IFC.PR.DSeries 5 Preferred Shares Ticker Symbol: IFC.PR.ESeries 6 Preferred Shares Ticker Symbol: IFC.PR.FCredit rating A.M. Best DBRS Moody’s FitchIFC long-term issuer credit ratings a– A Baa1 A–OneBeacon long-term issuer credit ratings bbb+ Not rated Baa2 A–IFC’s principal Canadian P&C insurance subsidiaries’ financial strength ratings A+ AA (low) A1 AA–IFC’s principal U.S. P&C insurance subsidiaries’ financial strength ratings A Not rated A2 AA–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, Non-cumulative Floating Rate Class A Series 4 preferred shares, Non-cumulative Class A Series 5 preferred shares and Non-cumulative Class A Series 6 preferred shares (the “Series 1 Preferred Shares”, “Series 3 Preferred Shares”, “Series 4 Preferred Shares”, “Series 5 Preferred Shares” and “Series 6 Preferred Shares” respectively) issued on July 12, 2011, August 18, 2011, September 30, 2016, May 24, 2017 and August 18, 2017, respectively. Fitch Ratings has assigned a rating of “BBB” with a Stable outlook to the Series 1 Preferred Shares, Series 3 Preferred Shares, Series 4 Preferred Shares, Series 5 Preferred Shares and Series 6 Preferred Shares.Common share prices and volume High Low Close Volume Traded2017 Q1 $ 97.56 $ 91.40 $ 94.58 13,471,9162017 Q2 $ 98.29 $ 91.41 $ 97.96 15,096,9102017 Q3 $ 104.33 $ 95.14 $ 103.07 13,125,5392017 Q4 $ 109.33 $ 99.35 $ 104.99 15,359,434Year 2017 $ 109.33 $ 91.40 $ 104.99 57,053,7992016 Q1 $ 91.08 $ 77.49 $ 90.93 16,605,5312016 Q2 $ 94.16 $ 84.88 $ 92.29 13,312,2862016 Q3 $ 97.20 $ 89.75 $ 94.84 10,209,1342016 Q4 $ 97.34 $ 90.00 $ 96.10 13,065,874Year 2016 $ 97.34 $ 77.49 $ 96.10 53,192,8252015 Q1 $ 95.77 $ 81.74 $ 95.42 18,432,7072015 Q2 $ 95.36 $ 85.42 $ 86.79 15,894,6522015 Q3 $ 95.82 $ 86.30 $ 93.72 14,672,7992015 Q4 $ 96.77 $ 85.81 $ 88.68 19,056,349Year 2015 $ 96.77 $ 81.74 $ 88.68 68,056,507Source: Toronto Stock ExchangeSHAREHOLDER AND CORPORATE INFORMATIONEligible dividend designationFor 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 historyRecord Payable AmountDec. 15, 2017 Dec. 29, 2017 $0.64Sept. 15, 2017 Sept. 29, 2017 $0.64June 15, 2017 June 30, 2017 $0.64Mar. 15, 2017 Mar. 31, 2017 $0.64Dec. 15, 2016 Dec. 30, 2016 $0.58Sept. 15, 2016 Sept. 30, 2016 $0.58June 15, 2016 June 30, 2016 $0.58Mar. 15, 2016 Mar. 31, 2016 $0.58Dec. 15, 2015 Dec. 31, 2015 $0.53Sept. 15, 2015 Sept. 30, 2015 $0.53June 15, 2015 June 30, 2015 $0.53Mar. 16, 2015 Mar. 31, 2015 $0.53 Annual meeting of the shareholdersDate: Wednesday, May 9, 2018Time: 11:30 a.m. (Eastern Time)Venue: Art Gallery of Ontario317 Dundas Street WestToronto, OntarioCanada M5T 1G4Version françaiseIl 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 registrarComputershare Investor Services Inc.100 University Avenue, 8th Floor, North TowerToronto, Ontario M5J 2Y11 800 564 6253AuditorsErnst & Young LLPEarnings conference call datesQ1 – May 9, 2018Q2 – August 1, 2018Q3 – November 7, 2018Q4 – February 6, 2019Investor inquiriesKen Anderson Vice President, Investor Relations & Treasurer 855 646-8228, ext. 87383 kenneth.anderson@intact.netMedia inquiriesStephanie SorensenDirector, External Communications416 344 8027stephanie.sorensen@intact.netDividend reinvestmentShareholders 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.11319 IFC AR Typeset FINAL_prepress.indd 1753/23/18 9:01 PMDesign: Craib Design & Communications www.craib.com Printed in Canada1 DPW (pro-forma) for 2017 comprises the DPW of P&C Canada and the DPW (pro-forma) of P&C U.S., using an exchange rate of 1.30®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 license. ®BrokerLink & Design is a registered trademark of Canada Brokerlink Inc. used under license. OneBeacon is a trademark of OneBeacon Insurance Group Holdings, Ltd. ®LinkedIn is a registered trademark of LinkedIn Corporation. LinkedIn is not a sponsor of Intact, nor a participant in any promotions. All other trademarks are properties of their respective owners. ©2018 Intact Financial Corporation. All rights reserved.Certain statements made in this annual report are forward-looking statements. These statements include, without limitation, statements relating to the company’s new products and services, its revenue projections, its use of technology, its funding of projects, its position within the industry and market conditions. All such forward-looking statements are made pursuant to the “safe harbour” provisions of applicable Canadian securities laws. Forward-looking statements, by their very nature, are subject to inherent risks and uncertainties and are based on several assumptions, both general and specific, which give rise to the possibility that actual results or events could differ materially from our expectations expressed in or implied by such forward-looking statements as a result of various factors, including those discussed in the Company’s most recently filed Annual Information Form and annual MD&A. As a result, we cannot guarantee that any forward-looking statement will materialize and we caution you against unduly relying on any of these forward-looking statements. Except as may be required by Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise. Please read the cautionary note at the beginning of the annual MD&A.COMPANY PROFILEWe are the largest provider of property and casualty (P&C) insurance in Canada and a leading provider of specialty insurance in North America, with close to $10 billion in total annual premiums1. We have over 13,000 full- and part-time employees who serve more than five million personal, business, public sector and institutional clients through offices in Canada and the U.S. In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through belairdirect. In the U.S., OneBeacon Insurance Group, a wholly-owned subsidiary, provides specialty insurance products through independent agencies, brokers, wholesalers and managing general agencies.See the full story online: intactfc.com/2017annualreportPlease visit our online annual report to view videos, interactive features and additional information on what matters most to us.Financial highlightsFinancial highlights(in millions of Canadian dollars, except as noted)201720162015 20142013Consolidated performanceDirect premiums written 8,747 8,2937,9227,4617,345Net earned premiums 8,530 7,9467,5357,2077,014Underwriting income486375 628 519 142Net investment income 432414 424 427 406Net distribution income 132111 104 75 75Net operating income 771660 860 767 500Non-operating gains (losses) (31) (152) (216) 10 (95)Net income 792541 706 782 431Combined ratio94.3%95.3% 91.7% 92.8% 98.0%Net operating income per share ($) 5.60 4.88 6.38 5.67 3.62Earnings per share ($) 5.753.97 5.20 5.79 3.10Book value per share ($) 48.0042.72 39.83 37.75 33.94Operating return on equity 12.9%12.0% 16.6% 16.3% 11.2%Return on equity 12.8%9.6% 13.4% 16.1% 9.3%Adjusted return on equity 13.0%11.0% 14.3% 16.8% 10.3% W H AT M AT T E R S M O S T
At Intact, our purpose is to help people, businesses and society prosper in good
times and be resilient in bad times. We believe insurance is not about things.
Insurance is about people.
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F I N A N C I A L H I G H L I G H T S
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.
Direct premiums written (DPW) and investment mix
$8.7B
DPW
BY BUSINESS LINE
(excluding pools, %)
$8.7B
DPW
BY BRAND
(excluding pools, %)
$16.9B
OF INVESTMENTS
(mix, net of hedging
positions, % of fair value)
Personal auto
Personal property
Commercial lines – CAN
Commercial lines – US1
44%
24%
28%
4%
Intact Insurance
BrokerLink
belairdirect
OneBeacon1
72%
9%
15%
4%
Fixed income
Common shares
Preferred shares
Loans
Cash and short-term notes
72%
14%
8%
2%
4%
Total shareholder return
On a total shareholder return
basis (including dividends),
our 13% CAGR over the past
five years compares favourably
versus our peers.
13% CAGR
Intact Financial Corp.
12.1%
35.0%
84.4%
S&P/TSX Composite
9.1%
21.1%
51.2%
S&P/TSX Banks
14.6%
42.6%
98.0%
S&P/TSX Life Insurance
9.7%
28.8%
108.3%
S&P U.S. P&C Insurance
22.4%
55.1%
148.3%
ONE-YEAR
THREE-YEAR
FIVE-YEAR
Dividends per share growth
We are proud of our dividend
growth track record, including
a five-year CAGR of 10%, which
compares favourably versus
our peers.
10% CAGR
Source: Bloomberg
Intact Financial Corp.
10.3%
33.3%
60.0%
S&P/TSX Composite
5.7%
6.1%
20.5%
S&P/TSX Banks
7.0%
23.0%
46.2%
S&P/TSX Life Insurance
8.5%
28.4%
32.8%
S&P U.S. P&C Insurance
4.1%
13.6%
248.9%
ONE-YEAR
THREE-YEAR
FIVE-YEAR
1 Includes the DPW of OneBeacon since its acquisition on September 28, 2017
2
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200
150
100
20
15
10
5
0
C A N A D I A N I N D U S T RY O U T P E R F O R M A N C E
Direct premiums written growth (%) (Base 100 = 2008)
The combination of our organic growth and
accretive acquisitions has led to a significant growth
outperformance versus the industry.
Combined ratio1 (%)
Our sophisticated pricing, underwriting discipline
and in-house claims expertise have enabled us to
outperform the industry’s combined ratio.
120
100
80
2009 2010 2011 2012 2013 2014 2015 2016 2017
2009 2010 2011 2012 2013 2014 2015 2016 2017
IFC
Industry Benchmark (top 20)
IFC
Industry Benchmark (top 20)
Return on equity2 (%)
Our superior underwriting results, investment
performance and capital management have led
to a better ROE than the industry.
Market share by company
With an estimated market share of 17%, we are
approximately 18 times the size of the average
company in the industry.
20
15
10
5
0
2009 2010 2011 2012 2013 2014 2015 2016 2017
IFC
#2
#3
#4
#5
IFC
Canadian P&C Industry
Market share (%)
Direct premiums written ($ billions)
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.
Industry data: IFC estimate based on MSA Research Inc. data, excluding Lloyd’s, ICBC, SGI, SAF, MPI, Genworth, Canada Guarantee and IFC, as at Dec. 31, 2017.
The industry benchmark consists of the 20 largest comparable companies in the Canadian P&C industry.
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
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W H AT M AT T E R S M O S T
What matters to
you matters to us.
We understand if it
happens to you, it
happens to us. Empathy
is everything. That
is why one in five
Canadians trusts us to
protect what matters
most to them.
Being customer driven
Building the best team
Canada is one of the top five most
connected countries in the world.
Today, seven out of 10 Canadians have
a smartphone. Software and data are
transforming the way we live. We are
evolving our products and solutions
to continue to meet customers’
changing needs.
Every day, we challenge ourselves to
be better – design faster, simpler and
offer more empathetic customer and
broker experiences, go beyond their
expectations and always deliver an
experience that is second to none.
We appreciate that customers’
time is valuable. We are leveraging
technology to design relevant
products and provide options for
customers to connect with us. Our
digital innovations save customers
and brokers time and make it easy
for them. In five easy steps, small
business owners in Québec can
get a quote for their commercial
automobiles with Intact Insurance’s
first-in-Canada online quick quote
tool. With our mobile app, customers
can access our self-serve portal Client
Centre on the go, anywhere, anytime.
We are building a workplace where
employees enjoy coming to work
every day.
Our promise to our employees is that
we won’t compromise on our values
of integrity and respect because
they matter as much as results. We’ll
support them in their career and
growth, surround them with inspiring
teams, and offer them a financial
rewards program that recognizes
their success.
For example, our mobile-friendly and
easy-to-navigate career site is a tool
that supports employees in growing
their careers, allowing them and
potential employees to apply for
a position quickly using their
®LinkedIn profile, join the Intact
Talent Community to receive job
alerts, and share jobs with their social
networks. Our monthly employee
webcast provides employees the
chance to be surrounded with
inspiring leaders and teams, through
interaction with our Chief Executive
Officer and other senior leaders.
Employees can post questions via a
crowd sourcing platform and vote
on the top questions that are most
important to them.
4
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
Creating a leading specialty
insurer in North America
In 2017, we acquired OneBeacon
Insurance Group, expanding our
footprint into the U.S. We are
accelerating our goal of becoming
a world-class property and casualty
(P&C) insurer, by combining our
leading commercial lines track record,
deep data, claims and digital expertise
with OneBeacon’s outstanding team
and specialty lines capabilities. Our
goal is to generate $3 billion in annual
direct premiums written for specialty
lines in North America by 2020.
We are creating opportunities for
growth in Canada and diversifying
Intact’s business and geographical
mix. Brokers have begun using our
cross-border services to better serve
customers with businesses in Canada
and the U.S. Our new Canadian cross-
border team has expertise writing
U.S. risks and can make decisions
locally. We have leveraged
OneBeacon’s expertise and
products and introduced solutions
for entertainment and technology
customers in Canada, offering them
targeted coverage that reflects their
specific industries and exposures.
Continuing to excel
Making a social impact
We know that having a strong track
record is not a guarantee of future
success. We are building on our
strengths to continue to lead in the
future. Our goal is to outperform the
P&C insurance industry based on
return on equity (ROE) by at least
500 basis points each year and grow
net operating income per share
(NOIPS) 10% yearly over time.
We were honoured to be ranked
second of 242 companies in The
Globe and Mail’s 2017 Board Games
report card. Intact’s score improved
from 98 to 99 out of 100 points.
Through Intact Ventures Inc., we
deepen our learning by partnering
with and investing in companies with
the potential to redefine the P&C
insurance industry with innovative
business models and new technology.
We recently invested in Hangar and
Humatics. Our relationship with
Hangar will give us greater insights
into using drones for assessing claims.
Humatics’ data will help us price,
segment, underwrite and further
elevate the customer experience
we are known for as micro location
sensors become more prevalent in
our society.
We are making a difference in
the communities where we live
and work. We are working on all
fronts – from research and creating
standards, to developing product
design and exploiting data to tackle
the challenges of climate change. In
addition to the previously announced
$4.25 million in funding to establish
the Intact Centre on Climate
Adaptation (Intact Centre), the Intact
Foundation is investing another
$1 million in partnerships to protect
Canadians from the increasing
impacts of climate change.
Our second area of focus is tackling
child poverty, a significant issue in our
country. We will be funding over
$1.3 million in 25 communities
nationally, activating community
poverty reduction strategies through
our partner, United Way.
We have evolved our employee
programs to provide more choices
and make it easy for employees
to support their communities. For
example, our new Skills for Impact
program empowers employees to
use their skills and knowledge to help
charities during regular work hours.
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
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C E O ’ S M E S S AG E
What
matters
most
At Intact, we believe insurance is not about things.
Insurance is about people. That is why we have made
it our purpose to help people, businesses and society
prosper in good times and be resilient in bad times. It
drives everything we do and gives meaning to our work.
In building a leading North American
property and casualty (P&C) insurer,
our work starts with the customer. Our
teams are working hard to provide
customers with an experience that is
second to none. One where customers
know, what matters to them matters
to us. We believe this is the best way to
have customers as advocates.
Our people know they make a difference
and their work matters. To build on
that, we aim to be one of Canada’s best
employers and a destination for top
talent. We are creating an environment
that people are proud to be a part of and
enjoy coming to work every day.
With satisfied customers and engaged
employees, we aim to be one of the
most respected companies in Canada.
By leading in the marketplace with our
values, consistently outperforming the
industry in terms of profitability and
growing our earnings by more than
10% per year over time, we are well on
our way. Our success allows us to give
back to communities where we operate
and help make a difference to society
at large.
Year in review
2017 was a pivotal year for Intact.
Our entry into the U.S. specialty lines
market was a major step forward.
The OneBeacon acquisition combines
Intact's leading commercial lines track
record and deep data, claims and digital
expertise with OneBeacon's high calibre
team and specialty lines capabilities.
It also bolsters Intact's Canadian
business with new products and
cross-border capabilities, and
better positions us to compete with
international insurers. Beyond strong
growth prospects in Canada, this
transaction creates a significant new
growth pipeline to leverage Intact's
consolidation expertise in a fragmented
specialty lines market. We are working
with our new colleagues in the U.S. and
Mike Miller, an exceptional leader, to
leverage their expertise and bring the
underwriting performance in specialty
lines to the low 90s in the next 24
months. We expect the acquisition to
contribute to earnings growth within
two years.
Our financial performance in 2017
delivered a return on equity (ROE)
of 13%. However we are not satisfied
with that performance which was
tempered by some setbacks in personal
automobile. Despite this, we have made
excellent progress on many fronts. We
have improved customer experience
across all our channels, maintained
strong employee engagement, opened a
massive new pipeline of earnings growth
in the U.S. and made meaningful strides
in artificial intelligence, technology and
claims management.
We delivered a solid combined ratio of
94.3% in 2017, resulting in net operating
income of $771 million while growing
our top line by more than 5%. I am
pleased with the strong performance
and continued momentum in personal
property and commercial lines,
with combined ratios of 89.1% and
86.5% respectively.
Although our performance in personal
auto was challenging and remains
unacceptable at a combined ratio of
101.7%, we have made important strides
in curbing claims inflation, improving
risk selection and increasing rates. With
increased cost of repairs in the past year,
we are executing on our action plan
with discipline and remain committed
to bring personal auto’s combined ratio
back to the mid-90s. We are confident
this is a short to mid-term issue and our
6
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Quarterly dividends per share
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
05 06 07 08 09 10 11 12 13 14 15 16 17Q1-18
actions should bring us back to our
long-term track record of performance.
For seven of the last 10 years, we have
operated personal auto in the mid-90s
and have averaged a combined ratio in
the mid-90s over five and 10 years. We
will keep at it until we achieve our goal.
We ended 2017 in a very strong
financial position with a total capital
margin of over $1.1 billion and debt-
to-total capital at 23%. Our book
value per share grew 12% in 2017
to $48. Coupled with good earnings
momentum, we have increased our
dividend per share by 9% in 2018,
the 13th consecutive annual increase
since our IPO. We believe we are
well positioned to capture growth
opportunities that the market will
offer in the coming years.
Being customer driven
Consumers’ expectations are
changing rapidly. Software and data
are transforming the way we interact,
gather and share information, and how
we live. Ninety per cent of Canadians
use the Internet and 50% do so through
a mobile device. We have focused on
digital transformation for many years.
2017 was no exception.
We’ll continue to invest in products,
tools and training to make the customer
experience simpler, faster and more
convenient. Leveraging data, artificial
intelligence and technology, our Intact
Lab and Data Lab are instrumental
in helping us improve and become
better at what we do, and enhance
the experience we offer customers
and brokers.
Our mobile telematics offer is now
available across the country. We
have transformed how Canadians can
buy home insurance online and
expanded our services to mobile users.
We have also introduced some of these
functionalities to commercial lines.
On the distribution front, we are
making it easier for customers and
brokers to connect with us. Intact
Insurance’s Buy Online strategy
continues to grow and generate new
business for brokers.
Within weeks of closing the OneBeacon
acquisition, we deployed cross-border
capabilities in the U.S. and in Canada.
We also introduced a new product
suite for technology and entertainment
customers in Canada. We are now able
to tailor our offer to the specific needs
of commercial lines customers.
Committed to outperform
To become one of the most respected
companies in Canada, we are
committed to outperform our industry
every year in terms of profitability. In
the last decade, we have outperformed
our competitors by 550 basis points
(bps) in terms of ROE, above our
500 bps objective. We closed 2017
with an outperformance of 690 bps.
We continue to invest in people,
systems and partnerships to expand
that advantage. We are deploying new
technology platforms in claims, as well
as in personal and commercial lines.
We are also building on our actuarial
and data management capabilities,
investing heavily in artificial intelligence
and establishing partnerships with
leading universities in data science.
We remain focused on integrating the
supply chain in claims by insourcing
the delivery of customer experience.
Our four claims service centres across
Canada translate into a better customer
experience, greater satisfaction and
lower cost.
Our quest for outperformance doesn’t
stop at the fundamentals of insurance.
Our investment management team,
considered one of the best in Canada
by its peers, manages a wide range of
asset classes across North America.
Working closely with our insurance,
treasury, tax and capital teams, they
optimize our asset allocation to match
the unique nature of our P&C activities.
With $20 billion of assets under
management, they are focused on
delivering superior after tax returns.
On that front, they have a tremendous
track record delivering nearly 160 bps
of ROE outperformance since 2010.
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
7
C E O ’ S M E S S AG E
In building a leading North American property and casualty (P&C) insurer, our work starts
with the customer. Our teams are working hard to provide customers with an experience that
is second to none. One where customers know, what matters to them matters to us.
+
Favourable market conditions ahead
Making a difference
2018 and beyond
We are entering 2018 in a changing
marketplace across our product lines
in Canada and the U.S.
2017 was a difficult year for the Canadian
industry, with a ROE slightly above 6%,
but we are starting to see meaningful
corrective actions taking shape and as
a result a firmer rate environment.
In personal lines, we expect to see
mid-single digit revenue growth in the
industry. Claims inflation in personal
automobile driven by physical damage
and the escalating cost of automobile
repairs are putting severe strain on
the industry’s performance. In home
insurance, the industry is still adapting
its offer and prices to better reflect the
cost of natural disasters.
In Canada, the commercial lines market
remains very competitive, but we are
starting to see capacity constraints
in certain sectors. As a result, pricing
continues to firm up. We expect low-to-
mid-single digit revenue growth in this
segment for the industry.
We are new to the U.S. market but
a number of segments in which we
operate are showing clear signs of
rate momentum. We like the direction
it is heading.
We expect the industry’s ROE to
remain below its long-term performance
in 2018 but we are maintaining our
500 bps industry outperformance
objective. We are confident that the
growth opportunities will be stronger
in the coming year. Our people, who
have shown great discipline over time,
stand ready to take advantage of
this environment.
Creating an environment where our
people can contribute and make a real
difference is important to our success.
For the past three years, we have been
recognized as one of Canada’s Best
Employers and a Top 100 Employer. We
were also named a Top Employer for
Young People for a second time.
We are fortunate to have loyal people
and a group of best-in-class leaders
that lives our values and leads by
example. Today’s leaders are strong,
engaged and constantly trying to
improve every day. Tomorrow’s leaders
are equally impressive. We have close
to five successors ready within three
years for the top 120 leaders of the
organization. When I see these emerging
leaders in action, I am thrilled about
our long-term prospect.
We are passionate about helping people.
We are empowering Canadians to
protect themselves from the impacts
of severe weather. The Intact Centre
on Climate Adaptation (Intact Centre)
is establishing standards and advising
governments on building homes to help
Canadians adapt to climate change.
We are also investing in a number
of meaningful employee-focused
partnerships including the Roméo
Dallaire Child Soldiers Initiative. The
work being done by the Intact Senior
Fellow LGen Roméo Dallaire and his
team is inspiring. They have formed
strong partnerships and delivered
results. Partnering with the United
Nations (UN) and the Government
of Canada, they have developed the
Vancouver Principles to prioritize the
prevention of recruiting and using child
soldiers in UN peacekeeping missions.
We have started 2018 on a sound
strategic footing: a bold customer
driven transformation, expanding
distribution, massive technology, digital
and artificial intelligence deployments
coupled with robust measures to
improve underwriting fundamentals.
Our employees are engaged and
excited about building our business and
recognize the opportunities. Combined
with favourable marketplace conditions,
we are in a strong position to expand
our leadership and build momentum for
years to come. We’ll continue to build
on our success as a customer driven
organization. By leading with our values,
improving what we do every day and
driving change, we will succeed.
I am very proud to work with such
a strong and talented team. I want
to thank our 13,000 people for their
loyalty, commitment and contributions.
Our board of directors, strong and
dedicated, has been a key to our
success. My team and I are grateful for
their contributions.
I am convinced that our engaged
employees who are committed to our
customer driven mindset will get us to
where we want to be – one of Canada’s
most respected companies.
Thank you for your support.
Charles Brindamour
Chief Executive Officer
8
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INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT C H A I R M A N ’ S M E S S AG E
Expanding
opportunities
for growth
Intact’s 2017 results were solid.
Under the strong leadership of
Charles Brindamour and the
management team, the Company stayed
focused on its strategy and executed
its plans with a disciplined approach.
Intact’s acquisition of OneBeacon
Insurance Group and expansion into
the U.S. was a milestone in the
Company’s history and will create
new growth opportunities.
The Company has again delivered
great value to shareholders and
increased its common share dividend
for the 13th consecutive year. Through
enhanced risk selection, segmentation,
leveraging data analytics, machine
learning and artificial intelligence, Intact
is well poised to continue to outperform.
With a comprehensive integration plan
for OneBeacon already underway, the
Company is on its way to achieve its goal
of creating a leading specialty solutions
insurer in North America.
The Company has been positioned
to succeed in a changing environment.
Intact is accelerating its development in
digital technology, software engineering
and artificial intelligence to design
relevant products and provide options
for our customers to interact with us.
Succession planning and talent
development are important elements
that continue to contribute to Intact’s
success. The Board is confident that
the Company’s new organizational
structure adopted following the
OneBeacon transaction will accelerate
its customer driven transformation,
optimize distribution of services to
Canadians across all channels, build
on outstanding talent and further enable
its North American scope.
Intact’s commitment to help people
and businesses extends beyond
protecting what’s important to them.
Protecting North Americans from the
impacts of extreme weather caused
by climate change has increased in
urgency in recent years. The frequency
of severe weather events in Canada has
increased seven times in the past 20
years. Intact’s leadership in establishing
the Intact Centre on Climate Adaptation
at the University of Waterloo to make
Canada more resilient to climate
change is gaining good momentum.
This partnership plays a key role in
establishing standards and influencing
how homes and communities will be
built, and gives homeowners tools to
make their homes more flood resilient.
Upholding a high standard of
governance, compliance and ethics is
integral to delivering on the Company’s
goal of being one of the most respected
companies in Canada. This effort has
culminated in Intact attaining top marks
for good governance in The Globe
and Mail’s 2017 Board Games report
card. Intact ranked second out of 242
companies. Additionally, Intact was
awarded Best Financial Reporting by
IR Magazine Awards – Canada.
In 2017, we welcomed Sylvie Paquette
to the Board of Directors. Ms. Paquette
brings with her vast experience and
knowledge of Canada’s P&C insurance
industry. Her achievements are well
recognized. Ms. Paquette was one of
Canada’s Top 100 Most Powerful Women
(2009) and received the “Inspiration
– Andrée Corriveau” Award from the
Association of Québec Women in
Finance (2014). Ms. Paquette’s strengths
and expertise contribute positively to
the Company’s strategic objectives
and further strengthen the collective
expertise of the Board.
To the management team and
employees at Intact, on behalf of my
colleagues, I thank you for another
strong and outstanding year. Your
striving for excellence, your dedication
to being customer driven and your
passion to make a difference continue
to differentiate Intact from its
competitors in a rapidly changing
marketplace. I also want to thank
customers, brokers and shareholders
for their continued support and trust.
Claude Dussault
Chairman of the Board
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
9
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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 85;
Financial Statements – pages 1 to 69.
10
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
11319 IFC AR Typeset FINAL_prepress.indd 10
3/23/18 9:00 PM
Intact Financial Corporation
Management’s Discussion and Analysis
For the year ended December 31, 2017
THIS PAGE IS LEFT INTENTIONALLY BLANK
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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, 2017. 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, 2017 compared to the corresponding periods in 2016. It should be read in conjunction with our
Consolidated financial statements for our fiscal year ended December 31, 2017. This MD&A is dated February 6, 2018.
“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 – Our 2017 performance at a glance ............................................................................................................................................................ 7
Section 3 – Consolidated performance ........................................................................................................................................................................ 8
SEGMENT PERFORMANCE .......................................................................................................................................... 10
Section 4 – Canada Insurance ................................................................................................................................................................................... 10
Section 5 – U.S. Insurance ........................................................................................................................................................................................ 16
Section 6 – Corporate and Other ............................................................................................................................................................................... 18
ENVIRONMENT & OUTLOOK ....................................................................................................................................... 22
Section 7 – Insurance industry at a glance ................................................................................................................................................................. 22
Section 8 – Operating environment ............................................................................................................................................................................ 23
Section 9 – Outlook ................................................................................................................................................................................................... 26
STRATEGY ..................................................................................................................................................................... 28
Section 10 – Strategy update ..................................................................................................................................................................................... 28
Section 11 – Unique advantages ............................................................................................................................................................................... 32
Section 12 – Social responsibility ............................................................................................................................................................................... 36
FINANCIAL CONDITION ................................................................................................................................................ 39
Section 13 – Financial position .................................................................................................................................................................................. 39
Section 14 – Investments .......................................................................................................................................................................................... 40
Section 15 – Claims liabilities and reinsurance .......................................................................................................................................................... 43
Section 16 – Employee future benefit programs ......................................................................................................................................................... 47
Section 17 – Treasury management .......................................................................................................................................................................... 48
Section 18 – Capital management ............................................................................................................................................................................. 52
RISK MANAGEMENT ..................................................................................................................................................... 54
Section 19 – Overview ............................................................................................................................................................................................... 54
Section 20 – Risk management structure................................................................................................................................................................... 54
Section 21 – Corporate governance and compliance program ................................................................................................................................... 56
Section 22 – Enterprise Risk Management ................................................................................................................................................................ 57
Section 23 – Off-balance sheet arrangements ........................................................................................................................................................... 72
Section 24 – Sensitivity analyses ............................................................................................................................................................................... 73
ADDITIONAL INFORMATION ........................................................................................................................................ 74
Section 25 – Financial KPIs and definitions ............................................................................................................................................................... 74
Section 26 – Non-operating results ............................................................................................................................................................................ 77
Section 27 – Non-IFRS financial measures ................................................................................................................................................................ 78
Section 28 – Accounting and disclosure matters ........................................................................................................................................................ 81
Section 29 – Shareholder information ........................................................................................................................................................................ 83
Section 30 – Selected annual and quarterly information ............................................................................................................................................ 84
INTACT FINANCIAL CORPORATION 1
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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 27 – Non-
IFRS financial measures for the definition and reconciliation to the most comparable IFRS measures. 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”, “believes”, “estimates”, “predicts”, “likely”,
“potential” or the negative or other variations of these words or other similar or comparable words or phrases, are intended to identify forward-looking
statements. This MD&A contains forward-looking statements with respect to the acquisition (the “Acquisition”) of OneBeacon Insurance Group, Ltd.
(“OneBeacon”) and the integration and future plans relating to the Acquisition.
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 personal auto 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; economic, financial, business
and political conditions, as well as their resulting effect on management's estimates and expectations in relation to accretion, equity IRR, net
operating income per share, MCT, combined and debt-to-total capital ratio and the other metrics used in relation to the Acquisition; the terms and
conditions of the Acquisition; 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 and frequency of catastrophe events,
including a major earthquake; the Company’s ability to maintain its financial strength and issuer credit ratings; the Company’s access to debt and
equity financing; 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 impact of developments in technology on the Company’s products and distribution; the
Company’s dependence on and ability to retain key employees; changes in laws or regulations; the exercise of the over-allotment option in
connection with the Offering; general economic, financial and political conditions; the Company’s dependence on the results of operations of its
subsidiaries and the ability of the Company’s subsidiaries to pay dividends; the volatility of the stock market and other factors affecting the trading
prices of the Company’s securities; the Company’s ability to hedge exposures to fluctuations in foreign exchange rates; future sales of a substantial
number of its common shares; changes in applicable tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof.
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 19-24) 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, 2017
(in millions of Canadian dollars, except as otherwise noted)
Glossary of abbreviations
Description
Adjusted EPS
Available for sale
Autorité des marchés financiers
Accumulated OCI
Adjusted ROE
Book value per share
Canadian Dollar
Description
Moody’s Moody’s Investor Service Inc.
MYA
NAIC
NCIB
NEP
NOI
Market yield adjustment
National Association of Insurance Commissioners
Normal course issuer bid
Net earned premiums
Net operating income
NOIPS
NOI per share
Compound annual growth rate
OCI
Other comprehensive income
AEPS
AFS
AMF
AOCI
AROE
BVPS
CAD
CAGR
CAN
CAT
Canada
Catastrophe
DBRS
Dominion Bond Rating Services
DPW
EPS
Fitch
Direct premiums written
Earnings per share to common shareholders
Fitch Ratings Inc.
FVTPL
Fair value through profit and loss
IFRS
KPI
MCT
International Financial Reporting Standards
Key performance indicator
Minimum capital test
MD&A
Management’s Discussion and Analysis
Important notes
OROE
Operating ROE
OSFI
P&C
PTOI
PYD
RBC
ROE
S&P
U.S.
USD
Office of the Superintendent of Financial Institutions
Property & Casualty
Pre-tax operating income
Prior year claims development
Risk-based capital
Return on equity
Standard & Poor’s
United States
U.S. Dollar
Unless otherwise noted, DPW refer to DPW normalized for the effect of multi-year policies, excluding industry pools, fronting and exited
lines (referred to as “DPW” in this MD&A). See Table 37 for details on exited lines and Table 39 for the reconciliation to DPW, as
reported under IFRS. All underwriting results and related ratios exclude the MYA and the results of our U.S. Commercial exited lines,
unless otherwise noted. The expense and general expense ratios are presented herein net of other underwriting revenues.
DPW (pro forma) for 2017 are comprised of the DPW of P&C Canada and the DPW (pro forma) of P&C U.S.
Catastrophe claims are any one claim, or group of claims, equal to or greater than $7.5 million for P&C Canada (US$5 million for P&C
U.S.) related to a single event (referred to as the “CAT threshold”). A non-catastrophe weather event is a group of claims, which is
considered significant but that is smaller than the CAT threshold, related to a single weather event. A large loss is defined as a single
claim larger than $0.25 million for P&C Canada (US$0.25 million for P&C U.S.) but smaller than the CAT threshold.
Regulatory Capital Ratios refer to MCT (as defined by OSFI and the AMF in Canada) and RBC (as defined by the NAIC in the U.S.). All
references to “total capital margin” in this MD&A include the aggregate of capital in excess of company action levels in regulated
entities (170% MCT, 200% RBC) plus available cash in unregulated entities (see Section 18.2 - Capital position for details).
Unless otherwise noted, market share and market related data for P&C Canada are based on the latest available data (Q3-2017) from
MSA Research Inc. (“MSA”) and excludes LIoyd’s Underwriters Canada, Insurance Corporation of British Columbia, Saskatchewan
Government Insurance, Saskatchewan Auto Fund, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty
Mortgage Insurance Company. MSA data excludes certain Québec regulated entities. Market share and market positioning reflect the
impact of announced or completed acquisitions and are therefore presented on a pro forma basis.
Unless otherwise noted, market share and market related data for P&C U.S. are based on the latest available data from SNL
Insurance.
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, 2017
(in millions of Canadian dollars, except as otherwise noted)
OVERVIEW
Section 1 – About Intact Financial Corporation
1.1 Building a world-class P&C insurer
Largest provider of P&C insurance in Canada and a leading provider of specialty insurance in North America, with close to
$10 billion in annual DPW1.
Over 13,000 full- and part-time employees who serve more than five million personal, business, public sector and institutional
customers through offices in Canada and the U.S.
In Canada, 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. In the U.S., OneBeacon, a wholly-owned
subsidiary, provides specialty insurance products through independent agencies, brokers, wholesalers and managing general
agencies.
We are a proven industry consolidator with a track record of 16 successful P&C acquisitions since 1988.
1.2 What we offer
With our comprehensive range of auto, home and business insurance products, we offer customers protection tailored to meet their
unique needs. Across Intact, we may have different responsibilities 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.
2017 DPW (pro forma)1
by business segment
2017 DPW (pro forma)1
by line of business
2017 DPW (pro forma)1
by distribution channel
1 DPW (pro forma) for 2017 are comprised of the DPW of P&C Canada and the DPW (pro forma) of P&C U.S., using an exchange rate of 1.30.
PA: Personal auto; PP: Personal property: CL: Commercial lines
4 INTACT FINANCIAL CORPORATION
15%85%Canada InsuranceU.S. Insurance21%25%15%39%PAPPCL CANCL U.S.14%86%BrokersDirect
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
1.3 Our business segments
Following the acquisition of OneBeacon on September 28, 2017, we now report our financial results under the following business
segments. The composition of our segments is aligned with our management structure and internal financial reporting based on
geography and the nature of our activities.
Intact Financial Corporation
Comprised of the underwriting (P&C Canada) and distribution activities
in Canada
Underwriting of automobile, home and business insurance contracts to
individual and businesses in Canada. Underwriting results in Canada are
reported under three lines of business:
Personal auto
Personal property
Commercial, which include Commercial auto and Commercial P&C
Distribution operations, including the operating results of our wholly-
owned broker, BrokerLink, as well as our share of results of broker
affiliates.
Canada
Insurance
(CAN)
Comprised of the underwriting activities in the U.S. (P&C U.S.)
U.S.
Insurance
(U.S)
Underwriting of specialty contracts to small and midsize businesses in
the U.S., which are reported under:
Commercial lines, which include the underwriting results of
OneBeacon since September 28, 2017 (see Sections 5 and 10.2).
Comprised of the following activities, which are managed at the Corporate level:
Corporate
and Other
(Corporate)
Investment management
Treasury and capital management
Other corporate activities
Operating results include net investment income, finance costs, as well as other income and expenses
(including corporate expenses and ancillary income).
We measure our consolidated performance mainly based on NOIPS and business segment performance based on pre-tax
operating income (PTOI). Comparative information has been reclassified accordingly.
Table 1 – Operating performance
1
December 31,
DPW
Operating income
Underwriting income
Net investment income
Finance costs
Net distribution income
Other income (expense)
CAN
8,440
478
-
-
132
-
PTOI
NOI
NOIPS (in dollars)
1 Refer to Section 27 – Non-IFRS financial measures.
610
U.S. Corporate
2017
Total
307
-
8,747
8
-
-
-
-
8
-
432
(82)
-
5
355
486
432
(82)
132
5
973
771
5.60
CAN
8,293
375
-
-
111
-
486
U.S. Corporate
2016
Total
-
-
-
-
-
-
-
-
8,293
-
414
(72)
-
10
352
375
414
(72)
111
10
838
660
4.88
INTACT FINANCIAL CORPORATION 5
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
1.4 What we are aiming to achieve
Our objectives for 2017
Selected 2017 achievements
Our customers
are our
advocates
Progress on goal of
two million
advocates by 2020
1.1 million advocates, up 11% from last year.
Maintained #1 and #2 brand consideration nationally for Intact Insurance
and belairdirect.
Launched Client Centre, which gives personal lines customers digital
access to their policy documents, billing statements and real-time claims
status updates.
Launched Canada's first commercial online auto quick quote tool.
Launched a mobile telematics app, allowing good drivers to save on
car insurance without having to install any hardware in their vehicles.
Launched our fourth Service Centre in Canada with Intact Service
Centre in Montreal, a one-stop shop for customers with auto insurance
claims.
Our employees
are engaged
Be one of Canada’s
best employers
Recognized as an Aon Best Employer – Canada 2018, Platinum
level, for a 3rd year in a row.
Exceed Canadian
nine months of 2017.
Outperformed the P&C insurance industry’s ROE by 590 bps in the first
Our company is
one of the most
respected
industry ROE by 500
bps
Grow NOIPS 10%
yearly over time
NOIPS in 2017 was up 15% over 2016 on improved underwriting results
and strong distribution performance.
Acquisition of OneBeacon in 2017 is expected to add mid-single digit
accretion to NOIPS by the end of 2019.
1.5 Consistent outperformance driven by unique advantages
1
10-year outperformance vs the industry
Unique advantages
1.
All market share and outperformance data as at December 31, 2016
See Section 11.3 for more information on industry outperformance.
See Section 11 for discussion on our unique strategic advantages.
6 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 2 – Our 2017 performance at a glance
2017 Highlights
DPW growth
NOIPS growth
OROE
Total capital
margin
+5%
+15%
12.9%
$1.1 billion
BVPS
+12%
Net operating income per share up 3% to $1.63 in Q4-2017 and up 15% to $5.60 in the full year
DPW grew 17% in the quarter, bolstered by OneBeacon
Combined ratio of 92.6% in the quarter reflected strong performance in Canadian property and commercial operations, and
the inclusion of OneBeacon
Earnings per share up 45% to $5.75 in 2017, driving book value per share growth of 12%
Operating ROE of 13%, with over $1.1 billion in total capital margin
Quarterly dividend increased 9% to $0.70 per share
DPW
Combined ratio
NOIPS (in dollars)
EPS (in dollars)
Operating ROE
Total capital margin
INTACT FINANCIAL CORPORATION 7
1,9081,9612,294Q47,9228,7478,293Annual88.6%92.6%94.3%91.7%92.5%95.3%Q4Annual2015201620171.971.631.58Q46.384.885.60Annual1.461.601.27Q45.203.975.75Annual16.6%12.9%12.0%Annual2015201620176251,135970Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 3 – Consolidated performance
On September 28, 2017, we completed the acquisition of OneBeacon. Its results of operations and balance sheet are included in
our consolidated results and financial position from that date.
Table 2 – Consolidated performance
1
DPW
NEP
Operating income
Underwriting income
Net investment income
Net distribution income
Finance costs
Other income (expense)
PTOI
NOI
Non-operating gains (losses)
Effective income tax rate
Net income
Underwriting ratios
Claims ratio
Expense ratio
Combined ratio
Per share measures, basic and diluted
(in dollars)
NOIPS
EPS
AEPS
BVPS
Return on equity for the last 12 months
OROE
ROE
AROE
Total capital margin
Debt-to-total capital ratio
1 Refer to Section 27 – Non-IFRS financial measures.
Table 3 – Performance by business segment
1
Q4-2017 Q4-2016
1,961
2,294
Change
17%
2,400
2,043
17%
2017
8,747
8,530
2016 Change
5%
8,293
7,946
7%
486
432
132
(82)
5
973
771
(31)
15.9%
792
65.4%
28.9%
94.3%
5.60
5.75
5.82
375
414
111
(72)
10
838
660
(152)
111
18
21
(10)
(5)
16%
17%
121
21.1%
(5.2) pts
541
46%
64.9%
30.4%
0.5 pts
(1.5) pts
95.3%
(1.0) pts
4.88
3.97
4.53
15%
45%
28%
178
121
28
(25)
2
304
236
(58)
5.9%
232
63.5%
29.1%
92.6%
1.63
1.60
1.55
48.00
12.9%
12.8%
13.0%
1,135
23.1%
153
104
24
(18)
13
276
212
(52)
25
17
4
(7)
(11)
10%
11%
(6)
23.7%
(17.8) pts
171
36%
62.9%
29.6%
92.5%
0.6 pts
(0.5) pts
0.1 pts
1.58
1.27
1.56
42.72
12.0%
9.6%
11.0%
970
18.6%
3%
26%
(1)%
12%
0.9 pts
3.2 pts
2.0 pts
165
4.5 pts
DPW growth
Canada Insurance
U.S. Insurance
Combined ratio
Canada Insurance
U.S. Insurance
PTOI
Canada Insurance
U.S. Insurance
Corporate and Other
Section
Q4-2017 Q4-2016 Change
2017
2016 Change
4.4
5.3
4.4
5.3
4.4
5.3
6.4
1,987
307
2,294
91.9%
97.4%
92.6%
198
8
98
304
1,961
-
1,961
92.5%
-
92.5%
177
-
99
276
1%
nm
17%
(0.6) pts
nm
0.1 pts
12%
nm
(1)%
10%
8,440
307
8,747
94.2%
97.4%
94.3%
610
8
355
973
8,293
-
8,293
2%
nm
5%
95.3%
-
(1.1) pts
nm
95.3%
(1.0) pts
486
-
352
838
26%
nm
1%
16%
1 Refer to Section 27 – Non-IFRS financial measures.
8 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Q4-2017 vs Q4-2016
2017 vs 2016
DPW growth
Our premium base has grown 17% in the quarter and 5% in the full year, mainly from our U.S.
acquisition of OneBeacon, which closed on September 28, 2017.
Premium growth in Canada of 1% in the quarter and 2% in the full year was tempered by the impact of
robust profitability actions, including rate increases in all lines of business.
Underwriting
income
Combined ratio in Canada was solid at 91.9%,
in
reflecting strong underlying performance
personal property and commercial lines, rigorous
expense management and challenging results in
personal auto where profitability actions continue.
Combined ratio in Canada improved slightly to
94.2% on lower CAT losses and rigorous expense
management.
Net
investment
income
Net
distribution
income
PTOI
NOIPS
Combined ratio in the U.S. (OneBeacon) was 97.4%. In Q4-2017, we exited underperforming lines and
began realizing synergies. We are executing on our profitability action plan and are on track to bring the
U.S. combined ratio to a low 90s level within 24 to 36 months of closing.
Net investment income was up $17 million in the quarter and $18 million in the full year mainly due
to the acquisition of OneBeacon. Excluding the impact of OneBeacon, net investment income was flat
compared to 2016 as the low yield environment continued to impact our investment income in 2017.
Strong performance, up 17% in the quarter and 19% in the full year, driven by continued growth and
improved profitability of our broker network.
PTOI of $304 million was up 10% on improved
performance in Canada and the addition of
OneBeacon.
PTOI of $973 million was up 16%, on improved
performance in Canada.
NOI of $236 million was up 11% on higher
results
the addition of
OneBeacon. This translated to a NOIPS of $1.63
compared to $1.58 in Q4-2016.
in Canada and
NOI of $771 million was up 17% (15% on a per
share basis), on lower CAT losses, strong
distribution
rigorous expense
management.
income and
OROE
OROE of 13%, reflecting higher earnings and the issuance of common shares in connection with the
acquisition of OneBeacon.
Effective
income tax
rate
Effective income tax rate of 5.9% in the quarter and 15.9% in the full year reflected a one-time income
tax recovery of $27 million following the enactment of the U.S. Corporate Tax reform in December 2017.
Excluding this one-time impact, the effective income tax rate was 17.0% in Q4-2017 and 18.8% in 2017.
The decrease versus last year was mainly driven by higher non-taxable gains in 2017.
Net income
Net income of $232 million was up 36% on
improved operating performance in Canada, the
addition of OneBeacon and a one-time positive
impact from the U.S. Corporate Tax reform, partly
offset by integration costs in connection with the
acquisition of OneBeacon.
Net income of $792 million was up 46% on
in Canada,
improved operating performance
strong gains, as well as a one-time positive
impact from the U.S. Corporate Tax reform.
Financial
condition
BVPS increased 12% from a year ago to $48.00.
Our debt-to-total capital ratio as at December 31, 2017 went down since the closing of OneBeacon, but
remained higher than December 31, 2016 driven by the acquisition of OneBeacon.
We ended the year in a strong capital position, with over $1.1 billion of total capital margin as at
December 31, 2017.
INTACT FINANCIAL CORPORATION 9
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
SEGMENT PERFORMANCE
Section 4 – Canada Insurance
4.1 Canada’s largest home, auto and business insurer
Largest P&C insurer in Canada, with over $8 billion in annual DPW and an
approximate market share of 17%.
We distribute insurance in Canada under the Intact Insurance brand through a
wide network of brokers, including our wholly-owned subsidiary BrokerLink, and
directly to consumers through belairdirect.
Largest private sector provider of P&C insurance in B.C., Alberta, Ontario,
Québec, Nova Scotia and Newfoundland & Labrador.
4.2 We offer a comprehensive range of insurance
products
$8.4B
Personal auto
We offer various levels of coverage to our customers for their vehicles including
accident benefits, third party property and physical damage. Our coverage is
recreational vehicles, motorcycles,
also available
snowmobiles, and all terrain vehicles. While the rate approval process and
timing varies by province, insurers must file for rate adjustments in Ontario and
Alberta before they can be effected.
for motor homes,
Personal property
Our customers can get protection for their homes and contents from risks such
as fire, theft, vandalism, water damage and other damages, as well as personal
liability coverage. Property coverage is also available for tenants, condominium
owners, non-owner occupied residences and seasonal residences.
Commercial lines (including specialty lines)
We provide a broad range of coverages tailored to the needs of a diversified
$8.4B
17%
Market share
group of small and medium sized businesses including commercial landlords, manufacturers, contractors, wholesalers,
retailers, transportation businesses, agriculture businesses and service providers.
Commercial property coverages protect the physical assets of the business and include business interruption insurance.
Liability coverages include commercial general liability, product liability, professional liability as well as cyber endorsement.
Commercial vehicle coverages provide protection for commercial auto, fleets, garage operations, light trucks, public vehicles
and the transportation needs of the sharing economy.
4.3 Operating performance
Strong performance on lower CAT losses, continued growth of our broker network and rigorous expense management.
Table 4 – Operating performance
Canada Insurance
P&C Canada
Distribution
PTOI
10 INTACT FINANCIAL CORPORATION
Section
Q4-2017 Q4-2016 Change
2017
2016 Change
4.4
4.8
170
28
198
153
24
177
11%
17%
12%
478
132
610
375
111
486
27%
19%
26%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
4.4 P&C Canada
Table 5 – Underwriting results for P&C Canada1
Section
Q4-2017 Q4-2016 Change
1,987
1,961
DPW
Personal auto
Personal property
Commercial lines
NEP
Current year claims (excluding CAT claims)
Current year CAT claims
Unfavourable (favourable) PYD
Total net claims
Underwriting expenses
Underwriting income
Underwriting ratios
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
Unfavourable (favourable) PYD ratio
Claims ratio
Commissions
General expenses
Premium taxes
Expense ratio
Combined ratio
Personal auto
Personal property
Commercial lines
4.5
4.6
4.7
4.5
4.6
4.7
824
505
658
2,074
1,372
31
(77)
1,326
578
170
66.2%
1.5%
(3.7)%
64.0%
14.5%
9.7%
3.7%
27.9%
91.9%
101.2%
79.7%
87.4%
829
486
646
2,043
1,313
34
(62)
1,285
605
153
1%
(1)%
4%
2%
2%
59
(3)
(15)
41
(27)
17
64.2%
1.8%
(3.1)%
2.0 pts
(0.3) pts
(0.6) pts
62.9%
1.1 pts
15.6%
10.3%
3.7%
(1.1) pts
(0.6) pts
- pts
29.6%
(1.7) pts
92.5%
(0.6) pts
100.9%
75.6%
93.2%
0.3 pts
4.1 pts
(5.8) pts
2017
8,440
3,818
2,135
2,487
8,204
5,321
313
(253)
5,381
2,345
478
64.9%
3.8%
(3.1)%
65.6%
15.2%
9.7%
3.7%
28.6%
94.2%
101.7%
89.1%
86.5%
2016 Change
8,293
3,792
2,030
2,471
7,946
5,165
385
(389)
5,161
2,410
375
2%
1%
5%
1%
3%
156
(72)
136
220
(65)
103
64.8%
5.0%
(4.9)%
0.1 pts
(1.2) pts
1.8 pts
64.9%
0.7 pts
16.3%
10.5%
3.6%
(1.1) pts
(0.8) pts
0.1 pts
30.4%
(1.8) pts
95.3%
(1.1) pts
99.9%
90.9%
91.5%
1.8 pts
(1.8) pts
(5.0) pts
1 Refer to Section 27 – Non-IFRS financial measures.
Q4-2017 vs Q4-2016
2017 vs 2016
DPW growth of 1% in the quarter and 2% in the full year reflected solid growth in personal property and specialty lines,
tempered by the impact of robust profitability actions, including rate increases in all lines of business.
Underlying current year loss ratio of 66.2% reflected a strong
underlying performance in personal property and commercial
lines, and challenging
in personal auto where
improvement initiatives continue.
results
Underlying current year loss ratio remained strong
at 64.9% and reflected the benefits of our profitability
initiatives, and challenging results in personal auto
despite our actions.
CAT losses of $31 milion were in line with last year, while
slightly above expectations.
CAT losses of $313 million were above expectations,
while lower than last year, which included the impact of
the Fort McMurray wildfires and severe weather in Q3-
2016.
Favourable PYD ratio of 3.7% reflected positive prior year
development in all lines of business.
Favourable PYD ratio declined to 3.1%, in line with
long-term averages.
Expense ratio improved in all lines of business from lower variable costs and rigorous expense management.
Combined ratio in Canada was solid at 91.9%, reflecting strong
underlying performance in personal property and commercial
lines, lower expenses and challenging results in personal auto
where profitability actions continue.
Combined ratio improved to 94.2%, reflecting lower
CAT losses and expense management.
INTACT FINANCIAL CORPORATION 11
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
4.5 Personal auto
Table 6 – 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)
Unfavourable (favourable) PYD ratio
Claims ratio
Expense ratio
Combined ratio
Q4-2017 Q4-2016
Change
824
917
952
(11)
81.4%
0.2%
(2.8)%
78.8%
22.4%
829
928
942
(9)
78.5%
0.4%
(1.4)%
77.5%
23.4%
(1)%
(1)%
1%
nm
2.9 pts
(0.2) pts
(1.4) pts
1.3 pts
(1.0) pts
2017
3,818
4,319
3,782
(64)
77.7%
0.7%
0.3%
78.7%
23.0%
2016
Change
3,792
4,358
3,704
5
76.5%
2.0%
(3.1)%
75.4%
24.5%
1%
(1)%
2%
nm
1.2 pts
(1.3) pts
3.4 pts
3.3 pts
(1.5) pts
101.2%
100.9%
0.3 pts
101.7%
99.9%
1.8 pts
Q4-2017 vs Q4-2016
2017 vs 2016
DPW growth was negative 1% in the quarter and positive 1% in the full year, reflecting rate increases taken across the
country ahead of our competitors and the impact of segmentation initiatives.
Underlying current year loss ratio of 81.4% was elevated due to
physical damage costs and weather-related claims.
Favourable PYD ratio of 2.8% improved compared to recent
quarters and was more in line with historical averages.
The combined ratio of 101.2% remained higher than expected
due to increasing physical damage costs and weather-related
claims. While our actions to date have tempered increasing claims
costs, further pricing, claims and segmentation actions are being
implemented to address physical damage cost trends. With
strengthened claims liabilities and additional profitability actions
involving rate, underwriting and claims, we are committed to bring
the combined ratio of this line back to the mid 90’s.
Underlying current year loss ratio of 77.7%
remained elevated, driven by higher
than
expected physical damage costs.
CAT loss ratio of 0.7% was lower than last year
from severe summer storms across Canada in
2016.
PYD ratio deteriorated
last year’s
favourable 3.1% on adverse development on
large losses and the impact from the actuarial
review performed in Q3-2017.
from
Combined ratio deteriorated to 101.7% mainly
on unfavourable PYD.
DPW
Underlying current year loss ratio
Combined ratio
12 INTACT FINANCIAL CORPORATION
808824829Q43,5913,8183,792Annual73.9%81.4%77.7%75.4%78.5%76.5%Q4Annual20152016201796.9%101.2%101.7%95.4%100.9%99.9%Q4Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
4.6 Personal property
Table 7 – 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)
Unfavourable (favourable) PYD ratio
Claims ratio
Expense ratio
Combined ratio
Q4-2017
Q4-2016
Change
505
562
522
106
49.3%
1.9%
(3.2)%
48.0%
31.7%
79.7%
486
562
494
120
39.9%
2.6%
(2.8)%
39.7%
35.9%
4%
-%
6%
(12)%
9.4 pts
(0.7) pts
(0.4) pts
8.3 pts
(4.2) pts
75.6%
4.1 pts
2017
2,135
2,413
2,040
222
49.6%
10.2%
(3.0)%
56.8%
32.3%
89.1%
2016
Change
2,030
2,393
1,880
170
48.9%
11.6%
(4.7)%
55.8%
35.1%
5%
1%
9%
31%
0.7 pts
(1.4) pts
1.7 pts
1.0 pts
(2.8) pts
90.9%
(1.8) pts
Q4-2017 vs Q4-2016
2017 vs 2016
DPW growth of 4% in the quarter and 5% in the full year, driven by rate increases and growth initiatives in favourable
market conditions.
Strong underlying current year loss ratio of
49.3% deteriorated from last year’s outstanding
performance on higher
level of weather-related
claims.
CAT loss ratio of 1.9% included losses from wind
and rain storms.
Favourable PYD ratio remained healthy at 3.2%.
Combined ratio of 79.7% reflected the effectiveness
of our profitability actions and expense management.
Very strong underlying current year loss ratio of 49.6% was
driven by the effectiveness of our profitability actions.
CAT losses were above expectations, driven by severe wind
and water events in Central Canada.
Favourable PYD ratio of 3.0%, remained healthy, though lower
than last year.
Combined ratio of 89.1% reflected a strong performance in an
elevated CAT environment, meeting our target to operate at
95% or better even with adverse weather.
DPW
Underlying current year loss ratio
Combined ratio
INTACT FINANCIAL CORPORATION 13
452505486Q41,8642,1352,030Annual41.6%49.3%49.6%53.5%39.9%48.9%Q4Annual20152016201772.7%79.7%89.1%85.9%75.6%90.9%Q4Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
4.7 Commercial lines
Table 8 – Underwriting results for Commercial lines Canada, including Commercial P&C and Commercial auto
DPW
Commercial P&C
Commercial auto
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio (including reinst. premiums)
Unfavourable (favourable) PYD ratio
Claims ratio
Expense ratio
Combined ratio
Q4-2017 Q4-2016
Change
658
463
195
600
75
56.9%
2.9%
(5.6)%
54.2%
33.2%
646
466
180
607
42
62.0%
2.9%
(5.8)%
59.1%
34.1%
2%
(1)%
8%
(1)%
79%
(5.1) pts
- pts
0.2 pts
(4.9) pts
(0.9) pts
87.4%
93.2%
(5.8) pts
2017
2,487
1,733
754
2,382
320
57.5%
3.1%
(8.4)%
52.2%
34.3%
86.5%
2016
Change
2,471
1,768
703
2,362
200
59.1%
4.6%
(7.9)%
55.8%
35.7%
1%
(2)%
7%
1%
60%
(1.6) pts
(1.5) pts
(0.5) pts
(3.6) pts
(1.4) pts
91.5%
(5.0) pts
Q4-2017 vs Q4-2016
2017 vs 2016
DPW growth of 2% in the quarter reflected improving growth momentum in commercial lines. Strong growth in
specialty lines was tempered by our ongoing pricing and segmentation actions in commercial P&C deployed in competitive
markets. Profitability measures in commercial auto, including segmented rate increases, continued to be deployed in
favourable market conditions.
Very strong underlying current year loss ratio improved to 56.9% in the quarter and 57.5% in the full year driven by
the effectiveness of our profitability actions and lower large losses.
CAT loss ratio remained above expectations in the quarter and the full year.
included
Favourable PYD
unfavourable development on some large losses.
ratio of 5.6%
Favourable PYD ratio of 8.4% was higher than expected, mainly
due to the impact of the Q3-2017 net reserve change. Refer to
Section 15.2 – Q3-2017 net reserve change.
Combined ratio of 87.4% in the quarter and 86.5% in the full year reflected a very strong underlying performance,
exceeding our target of a low 90s combined ratio.
DPW
Underlying current year loss ratio
Combined ratio
14 INTACT FINANCIAL CORPORATION
648658646Q42,4672,4872,471Annual57.4%56.9%57.5%61.3%62.0%59.1%Q4Annual20152016201788.0%87.4%86.5%90.3%93.2%91.5%Q4Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
4.8 Distribution
Net distribution income represents the operating results from our wholly owned broker, BrokerLink, as well as our share of results
from broker affiliates.
In Table 9 below, we have also presented distribution EBITA (earnings before interest, taxes, amortization and integration costs).
Table 9 – Reconciliation of net distribution income to distribution EBITA
Net distribution income, as currently reported
Adjustments to EBITA basis
Add: interest expense
Add: income taxes
Distribution EBITA
Q4-2017 Q4-2016 Change
28
3
3
34
24
3
2
29
17%
-
50%
17%
2017
132
9
17
158
2016
Change
111
13
10
134
19%
(31)%
70%
18%
Strong performance driven by the expansion and improved profitability of our broker network. In 2017, our brokers generated
an operating margin close to 30%. We expect net distribution income to continue to grow in the future.
In addition, our broker loans generated $17 million of interest income, which is included in Net investment income.
2017 vs 2016
Net distribution income
Distribution EBITA
Net distribution investments
Since 2013, net distribution income and distribution EBITA have grown at a CAGR of
15% from continued growth and improved profitability.
Continued growth in our network, thanks
to close to $570 million of net distribution
investments made in the last 5 years.
Refer to Section 11.1 – Canadian distribution strategy for more details.
INTACT FINANCIAL CORPORATION 15
757510411113220132014201520162017918912313415820132014201520162017160771691026120132014201520162017
Leading U.S.
specialty
insurer
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 5 – U.S. Insurance
On September 28, 2017, we completed our US$1.7 billion ($2.3 billion) acquisition of OneBeacon.
5.1 OneBeacon, a pure-play specialty lines insurer
Leading U.S. specialty insurer focused on small to midsized businesses, with
over US$1 billion in annual DPW.
Distributes insurance products and services in the U.S. under the OneBeacon
brand through independent agencies, regional and national brokers, wholesalers
and managing general agencies.
OneBeacon operates through five underwriting companies: Atlantic Specialty
Insurance Company, Homeland Insurance Company of Delaware, Homeland
Insurance Company of New York, OBI America Insurance Company and OBI
National Insurance Company.
5.2 What we offer
Specialty products that solve the unique needs of particular customers or industry
groups including accident and health, technology, ocean and inland marine,
public entities, and entertainment.
Additionally provide distinct products and tailored coverages to a broad customer
base across the U.S. such as healthcare, tuition reimbursement, surety,
management liability, financial services, specialty property, environmental and
financial institutions.
Each OneBeacon business is managed by an experienced team of specialty
insurance professionals focused on a specific customer group or industry
segment. Competitive factors for most of our insurance products are price,
product terms and conditions, agency and broker relationships, claims service,
company scale and financial stability.
Pro forma DPW by business unit
US $1.1B
US $1.1B
US $1.1B
16 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
5.3 P&C U.S.
Results reflect the first full quarter within IFC following the close of the OneBeacon acquisition in Q3-2017. All figures in the table
below are shown in CAD, using an average exchange rate of 1.2709.
The underwriting results for P&C U.S. excluded the results of exited lines (mainly Programs, and Architects & Engineers) in Q4-
2017, which are reported in Non-operating results (see Section 26 – Non-operating results).
At the date of acquisition of OneBeacon, we purchased an adverse development coverage (“ADC”) on claims liabilities for 2016 and
prior accident years to mitigate the risk of adverse development on the acquired book of claims liabilities (see Section 15.2 –
Reinsurance).
Table 10 – Underwriting results for P&C U.S. 1
DPW
NEP
Current year claims
Unfavourable (favourable) PYD
Net claims incurred
Underwriting expenses
Underwriting income
Underwriting ratios
Underlying current year loss ratio
Unfavourable (favourable) PYD ratio
Claims ratio
Commissions
General expenses
Premium taxes
Expense ratio
Q4-2017 Q4-2016 Change
2017
2016 Change
307
326
183
15
198
120
8
55.9%
4.6%
60.5%
16.8%
18.2%
1.9%
36.9%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
307
326
183
15
198
120
8
55.9%
4.6%
60.5%
16.8%
18.2%
1.9%
36.9%
97.4%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
nm
Combined ratio
1 Excluding the results of exited lines (see Section 27 – Non-IFRS financial measures).
97.4%
Commercial lines
Premiums of $307 million, supported by profitability actions, including underwriting and rate actions in selected lines. Actions
are well underway to grow the business through existing broker relationships and new growth pipelines.
On a pro forma basis, Q4-2017 premiums represented a growth of 1.9% compared to Q4-2016.
Underlying current year loss ratio was healthy at 55.9%.
Unfavourable PYD ratio of 4.6% included our net share of prior year losses and the impact of discounting on the amount
recoverable from the ADC.
Expense ratio of 36.9% reflected expense management initiatives and lower variable compensation. As at December 31,
2017, we estimate our synergy run-rate at close to $9 million in annual savings.
Combined ratio was 97.4% from continuing operations. We are executing on our profitability action plan and are on track to
bring the U.S. combined ratio to a low 90s level within 24 to 36 months of closing.
INTACT FINANCIAL CORPORATION 17
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 6 – Corporate and Other
Comprised of the following activities, which are managed at the Corporate level:
Investing related to P&C insurance
Treasury and capital management
Other corporate activities
Results include net investment income, financing costs, corporate expenses, as well
as other income and expenses, as shown in Table 11 below.
6.1
$17 billion of high-quality investments strategically
managed
Following the acquisition of OneBeacon, our investments totalled $16.9 billion as at
December 31, 2017, up $2.5 billion from December 31, 2016. Our approach to
investment management continues to reflect our objective of maximizing after-tax
returns and outperforming our peers’ investment returns over the long-term, while
ensuring policyholder protection and maintaining strong regulatory capital levels.
We continue to manage our investment portfolio to achieve these objectives via
appropriate asset allocation and active management investment strategies, while
minimizing the potential for large investment losses with diversification and limits on
our investment exposures. Such limits are specified in our investment policies and
are designed to be consistent with our overall risk tolerance. Management monitors
and ensures compliance with our investment policies.
6.2 Maximizing long-term shareholder value by
optimizing capital
Our objectives when managing capital consist of:
maintaining strong regulatory capital levels, while ensuring policyholders are
well protected; and
CORPORATE AND OTHER
$16.9B
Total capital
margin
$1.1B
Debt-to-total
capital ratio
23%
maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
Treasury management: evolving in an international context
6.3
We have a centralized best-in-class treasury management approach that ensures access to funds in multiple currencies and control
of global market variable fluctuations on shareholders’ equity.
6.4 Performance
Table 11 – Operating performance1
Operating performance
Net investment income
Finance costs
Other revenues (expenses)
PTOI
Selected non-operating gains (losses)
Currency and other net gains (losses)
Net investment gains (losses)
1
Net gains (losses)
Section Q4-2017 Q4-2016
Change
2017
2016
Change
6.5
6.6
6.7
121
(25)
2
98
18
(24)
(6)
104
(18)
13
99
(6)
(91)
(97)
17
(7)
(11)
(1)
24
67
91
432
(82)
5
355
105
(36)
69
414
(72)
10
352
(1)
(71)
(72)
18
(10)
(5)
3
106
35
141
1 Refer to Section 26 – Non-operating results for more details.
18 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
6.5 Net investment income
Table 12 – Net investment income
Interest income
Dividend income
Investment income, before expenses
Expenses
Q4-2017 Q4-2016 Change
2017
2016 Change
81
50
131
(10)
66
47
113
(9)
15
3
18
(1)
275
194
469
(37)
265
184
449
(35)
414
10
10
20
(2)
18
13,396
9%
3.36%
(16) bps
Net investment income
Average net investments1
Market-based yield2
3.20%
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 27 – Non-IFRS financial measures.
(16) bps
13,819
14,663
16,644
3.11%
3.27%
20%
432
121
104
17
2017 vs 2016
Net investment income increased due to the acquisition of OneBeacon on September 28, 2017. Excluding the impact of
OneBeacon, net investment income was flat compared to 2016.
Average net investments increased, mainly reflecting the acquisition of OneBeacon.
The lower market-based yield reflected the addition of the OneBeacon portfolio (recorded at fair value at closing), as well as
the increase in equity markets throughout the year (see Section 6.8 – Capital markets).
6.6 Currency and other net gains (losses)
Currency and other net gains (losses) are reported in Non-operating results and included the following items.
Table 13 – Currency and other net gains (losses)
Q4-2017 Q4-2016 Change
2017
2016 Change
Foreign currency
Distribution transactions and other
1
1
17
-
(6)
Currency and other net gains (losses)
1 Including net gains on investments in associates and joint ventures related to a change of control.
18
(6)
1
23
24
65
40
105
-
(1)
(1)
65
41
106
Q4-2017 vs Q4-2016
2017 vs 2016
Net gains of $18 million in Q4-2017
were driven by a realized gain on the
sale of a small non-core subsidiary.
Net gains of $105 million in 2017 were mainly driven by:
pre-acquisition gains on book value hedges related to OneBeacon. Prior to
closing, these derivatives, which lower our book value exposure to the USD,
through P&L (see Section 17.4 – Currency
were marked-to-market
management);
net gains on distribution transactions; and
a realized gain on the sale of a small non-core subsidiary.
INTACT FINANCIAL CORPORATION 19
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
6.7 Net investment gains (losses)
Net investment gains (losses) are reported in Non-operating results and included the following items.
Table 14 – Net investment gains (losses)
Fixed-income strategies1
Realized and unrealized gains (losses) on FVTPL bonds
Other gains (losses)
Equity strategies
Realized and unrealized gains (losses):2
equity securities, net of derivatives
embedded derivatives
Net foreign currency gains on investments
Impairment losses on common shares
Net investment gains (losses)
FVTPL bonds
Other strategies
Q4-2017 Q4-2016 Change
2017
2016 Change
(20)
(3)
(23)
25
(15)
1
(12)
(1)
(24)
(20)
(4)
(24)
(118)
(2)
(120)
37
(8)
4
(4)
29
(91)
(118)
27
(91)
98
(1)
97
(12)
(7)
(3)
(8)
(30)
67
98
(31)
67
(127)
5
(122)
123
(50)
33
(20)
86
(36)
(127)
91
(36)
(103)
(1)
(104)
66
(13)
21
(41)
33
(71)
(103)
32
(71)
(24)
6
(18)
57
(37)
12
21
53
35
(24)
59
35
1 Our U.S. fixed-income portfolio held in our Canadian P&C entities is hedged using foreign-currency forward contracts, resulting in minimal currency
gains or losses.
2 Excluding foreign currency impact on equity securities, which are reported in Net foreign currency gains on investments.
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.
Q4-2017 vs Q4-2016
2017 vs 2016
Unrealized losses on our FVTPL bonds in 2017 and 2016 were driven by rising interest rates. Losses on our FVTPL bonds
were partially offset by gains arising from the changes in the discount rate for our claims liabilities (referred to as MYA).
Other net investment losses of $4 million in Q4-2017
reflected:
mark-to-market losses on our embedded derivatives
related to preferred shares, and impairment losses,
mostly offset by:
gains on our common share strategies, reflecting the
continued strength in common share markets (see
Section 6.8 – Capital markets ).
Other net investment gains of $27 million in Q4-2016
were driven by realized gains on our equity strategies,
reflecting the significant appreciation in equity markets.
Other net investment gains of $91 million in 2017 were driven by:
gains on our equity strategies, reflecting the appreciation in
equity markets, mitigated by:
mark-to-market losses on our embedded derivatives related to
the rise in value of preferred shares.
Other net investment gains of $32 million in 2016 were driven by:
realized gains on our equity securities and currency gains arising
on the sale of U.S. equities, partly offset by:
impairment losses of $41 million, principally on energy stocks.
20 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
6.8 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 15 – Selected market indicators
Selected market Indicators
S&P/TSX Composite
S&P/TSX Financials
S&P/TSX Preferred Share Index
5Y Canada Sovereign Index (estimated variance in bps)
5Y AA Corporate spread (estimated variance in bps)
DJ Dividend 100 Composite (U.S.)
5Y U.S. Sovereign Index (estimated variance in bps)
Strengthening (weakening) of CAD vs USD
Q4-2017
Q4-2016
4%
5%
1%
13 bps
(5) bps
9%
27 bps
(1)%
4%
11%
4%
44 bps
(3) bps
5%
78 bps
(2)%
2017
6%
9%
8%
78 bps
(21) bps
17%
28 bps
6%
2016
18%
19%
1%
37 bps
(27) bps
9%
17 bps
3%
Comments on capital markets performance
North American equity markets rose significantly throughout 2017. The S&P/TSX Composite Index increased by 4% in Q4-
2017 (6% in 2017), while our benchmark DJ Dividend 100 Composite (U.S.) Index increased 9% in Q4-2017 (17% in
2017). This resulted in an increase in the fair value of our common share portfolios and gains on our AFS equity strategies.
Our total comprehensive return on common equities was strong in 2017.
The S&P/TSX Preferred Share Index increased by 1% in Q4-2017 (8% in the full year) buoyed up by strong equity markets
and the positive impact of higher interest rates on the prices of rate-reset preferred shares, leading to an increase in the fair
value of our AFS preferred shares (and a loss on the related embedded derivatives).
Five-year Canadian Sovereign yields increased by approximately 13 bps in Q4-2017 (78 bps in 2017), leading to lower
bond valuations and mark-to-market losses during the quarter.
Our net exposure, after reflecting the impact of hedging strategies related to investments and OneBeacon, is outlined below as at
December 31, 2017.
Investment mix
(net exposure)
Sector mix
(net exposure)
Currency
(net exposure)
INTACT FINANCIAL CORPORATION 21
14%8%6%72%Fixed-incomeCommon sharesPreferred sharesCash, short-term notes and loans22%15%16%47%GovernmentFinancialsMBS/ABSOther (4% or less)19%2%79%CADUSDOther
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
ENVIRONMENT & OUTLOOK
Section 7 – Insurance industry at a glance
7.1 P&C insurance in Canada
A $48 billion market representing approximately 3% of gross domestic product (GDP), according to MSA data
Large and
highly
fragmented
for 2016.
The top five insurers represent 49% of the market, and the top 20 have a combined market share of 85%.
Intact is the largest player with approximately 17% market share.
There has been consolidation in recent years and we expect more to come.
Evolving
and
growing
over time
Over the last 30 years, the industry has grown at a 5.1% CAGR and delivered a ROE of approximately 10%.
Brokers distribute approximately 60% of insurance policies, while direct writers distribute 40%.
Emerging technologies and innovations are beginning to transform the insurance landscape as they enable
new ways to measure, control and price risk, engage with customers, reduce cost, improve efficiency, and
expand insurability. This will likely fuel further innovation, transformation and consolidation within the industry.
Regulated
Insurance companies are licensed under insurance legislation in each of the provinces and territories in which
they conduct business.
Home and commercial insurance rates are unregulated, while personal auto rates are regulated in most
provinces.
Capital for federal insurance companies is regulated by OSFI and by provincial authorities in the case of
provincial insurance companies (see Section 18 – Capital management)
7.2 U.S. specialty insurance
Highly
fragmented
with no
clear leader
U.S. commercial P&C insurance is a $288 billion market, with specialty insurance accounting for more than
40% in 2016.
U.S. commercial specialty industry is a fragmented industry. The top 10 players represent just over 40% of the
market, with the largest player capturing roughly 7% in 2016. Outside of the top six players, no single insurer
contributes more than 3% of the total estimated market. The majority of the top 25 players have a market
share between 1% and 2.5%.
Niche
market with
lucrative
potential
The specialty insurance market offers niche and unique products and services that are not written by most
P&C insurance companies. These products generally require specialized underwriting knowledge compared
with more traditional insurance products.
The combined ratio (and in turn the ROE) of many specialty products have outperformed those typically
offered in the standard market due to more pricing and policy form flexibility.
This unique risk and specialty focus can also come with above-average earnings volatility.
Evolving
and
growing
over time
Over the last 20 years, the specialty insurance market has grown at a 4.1% CAGR.
Market has experienced elevated merger and acquisition activity in recent years and this trend is likely to
continue.
The agency channel (independent agencies, brokers, wholesalers and managing general agencies) is the
primary distribution channel for specialty insurance products.
Trends in litigation, regulation, economic maturity, social and workforce issues, and technology will continue to
support growth and drive product innovation.
22 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 8 – Operating environment
8.1 Auto insurance in Canada
In April 2017, the Ontario Government released a report on auto insurance by David Marshall, Ontario’s advisor on auto insurance.
His report contained 35 recommendations to get customers back on track faster and reach maximum medical recovery, all while
moving to a care, not cash, environment.
In August 2017, the Government of Ontario launched public consultations on the Marshall Report on Auto Insurance. Intact took part
in public roundtables and also submitted a formal written submission.
On December 5, 2017, the Government of Ontario released their Fair Auto Insurance Plan (“FAIP”) based on recommendations
made by David Marshall and feedback from public consultations. Implementation dates for the measures remain to be determined,
but are expected to be staggered throughout 2018. Key initiatives include:
Standard
Treatment Plans
Making sure people with the most common collision injuries receive timely, appropriate and
effective treatment by developing and implementing standard treatment plans that focus on
recovery, monitoring health outcomes and increasing awareness of the best treatment practices.
This is expected to reduce costs in the system by changing the emphasis from cash payouts to
ensuring appropriate care for victims.
Independent
Examination Centres
Creating independent examination centres to provide assessments of more serious auto collision
injuries, to help resolve and reduce diagnosis disputes, and to reduce system costs and
inefficiencies stemming from disputes. This will include developing standards for assessors and
ensuring that the opinions of neutral assessments are respected.
Serious Fraud Office
Establishing an integrated and dedicated office that will combat systemic fraud in Ontario and
support activities to address auto insurance fraud
The FAIP represents an opportunity to re-design the entire Ontario auto insurance product, which could lead to more sustainable
consumer costs. We believe that these initiatives, if implemented, should benefit both consumers and the industry over time.
8.2 U.S. Corporate Tax reform
Following enactment of the U.S. Tax Cuts and Jobs Act (“U.S. Corporate Tax reform”) we recorded a net non-operating income tax
recovery of $27 million in Q4-2017, primarily associated with the remeasurement of deferred tax liabilities related to the acquisition
of OneBeacon. This accounting adjustment has no impact on our underlying performance, measured using operating and adjusted
financial measures (see Section 27 – Non-IFRS financial measures).
Overall the tax reform provisions are expected to have a negligible impact on NOIPS and EPS in 2018 and beyond.
INTACT FINANCIAL CORPORATION 23
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
8.3 Weather conditions at a glance
CANADA
2017
2016
in Eastern Canada,
From a Q4 perspective,
precipitations were below average overall. However,
single important snowfall events caused disruption in
transportation and lead to water damages. The end of the
year was also
than average
temperatures. In Western Canada, early winter conditions
combined with strong winds caused property damages.
impacted by
lower
From an annual perspective, the first half of the year
was marked by higher than normal precipitation combined
with late season snow melt leading to the overflowing of
rivers in several regions.
During summer, drier and warmer
in
Western Canada led to the wildfire in Southern British
Columbia. Conversely, Québec and Ontario received
higher
several
and
thunderstorms causing, flooding in many areas.
temperatures
precipitation
normal
than
Q4-2016 was impacted by the remnants of Hurricane
Matthew in the Maritimes. In addition, an early start to
winter brought difficult road conditions which caused an
elevated claims count in most regions.
Our 2016 financial results were impacted, with CAT losses
exceeding our expectations and historical averages (see
Section 8.4 - CAT losses) as severe weather and natural
disasters including the Fort McMurray wildfires, severe hail
and thunderstorms, as well as Hurricane Matthew, caused
record-breaking industry losses.
U.S.
Q4-2017
In October 2017, wildfires started to burn in California causing damage to many properties and spreading rapidly every day.
As numerous fires continued to spread, a second wave of wildfires commenced in December thereby strengthening the
severity of California’s weather conditions in Q4-2017. The fires have forced many people to be evacuated from their homes
and neighbourhoods and have continued to burn in the early weeks of 2018.
We reported no CAT losses in Q4-2017. Given the nature of our operations in the U.S., we are less impacted by CAT losses
from wildfires and severe weather conditions.
See Section 12 – Social responsibility for details on climate change adaptation.
24 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
8.4 CAT losses
CAT losses can be caused by a variety of events, including weather (such as wildfires, hailstorms and floodings) and non-weather
events (such as industrial fires, surety and liability claims). The incidence and severity of CAT losses, while inherently unpredictable,
can have a significant impact on our underwriting performance by quarter and by line of business. We generally seek to manage our
exposure to CAT losses through individual risk selection and the purchase of CAT reinsurance (see Section 15.2 – Reinsurance
hereafter for more details).
Table 16 – Net current year CAT losses
Net CAT losses
By line of business
Personal auto
Personal property
Commercial lines - Canada
Commercial lines - U.S.
By quarter
Q1
Q2
Q3
Q4
5-year average
P&C Canada
2017
313
2016
385
2015
116
2014
243
2013
486
27
210
76
-
88
105
89
31
73
210
102
n/a
21
164
166
34
37
42
37
n/a
11
22
81
2
41
140
62
n/a
75
33
125
10
44
271
171
n/a
18
143
270
55
In $
309
44
175
90
-
43
94
146
26
% NEP
4.1%
0.6%
2.3%
1.2%
-
0.6%
1.2%
1.9%
0.4%
During the 2013-17 period, average net CAT losses of $309 million included net losses from some of the costliest insured natural
disasters in Canadian history: the Fort MacMurray wildfires in 2016, as well as the Alberta and Toronto floods in 2013. During the
2008-17 period, net CAT losses were closer to $230 million on average.
Net CAT losses
5-year average
(by quarter)
Net CAT losses
5-year average
(by line of business)
Given claim cost inflation trends
and the acquisition of
OneBeacon, we have raised our
current CAT expectations (net of
reinsurance) from $250 million to
$275 million per year.
Historically, the third quarter has
experienced roughly half of the CAT
losses for the year
Historically, roughly three-quarters of
CAT losses impacted the personal lines
of business.
INTACT FINANCIAL CORPORATION 25
14%30%9%47%Q1Q2Q3Q429%71%Personal linesCommercial lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 9 – Outlook
P&C insurance industry
12-month outlook
Our response
Personal
auto
Industry profitability remains challenged with
average loss ratios in the mid-to-upper 70s for
the first nine months of the year.
Claims inflation remains a headwind which is
leading to rate increases in all markets.
Continued increases in the volume ceded to risk
sharing pools and non-standard auto markets
together with the rate action we see across the
country support our view of a firming market.
We expect growth at a mid single-digit level for
the industry.
Our actions continue on pricing, underwriting and
claims to tackle trends, which should lead to
meaningful profitability improvements in the coming
year, with some near term pressure on growth.
Our brand
investments and
further digital
enhancements in this line of business will continue
to help selectively grow our market position.
We have been investing in telematics, big data,
and artificial intelligence to maintain our advantage
in data and segmentation.
Personal
property
As companies are adjusting to changing weather
patterns, we expect the current firm market
conditions to continue.
As a result, we expect growth at a mid single-digit
level.
We expect to continue to capitalize on market
conditions with rate increases to ensure our results
are sustainable even in severe weather conditions.
These lines of business remain competitive,
mainly in the larger risks.
We expect growth at a low-to-mid single-digit
rate.
Given the growth trends through 2017, we expect
growth at a mid single-digit rate in 2018.
Overall, we expect the Canadian industry’s ROE
long-term
improve but remain below
to
average of 10% over the next 12 months.
its
Commercial
lines
Canada
Overall
P&C Canada
Distribution
The Canadian P&C broker industry remains
fragmented with continuing opportunities
for
consolidation.
26 INTACT FINANCIAL CORPORATION
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.
Following the acquisition of OneBeacon we have
strengthened our capabilities in specialty lines. We
are now leveraging OneBeacon’s tailored specialty
products and services in Canada with the launch of
products for technology and entertainment sectors.
Growth initiatives are underway with underwriting
desks now serving our cross-border customers.
We continue to invest in brand, digital strategies,
customer experience and distribution networks to
meet our objectives.
We expect that with our pricing and underwriting
discipline, and our claims management capabilities,
we will continue to outperform the industry.
We will continue to support our brokers as they
expand and grow their businesses, while also
actively participating in broker consolidation via
BrokerLink.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
P&C insurance industry
12-month outlook
Our response
U.S.
Commercial
lines
The U.S. Commercial specialty industry is highly
fragmented with the top 10 players capturing just
over 40% of the market share in 2016.
Our objective is to grow the U.S. specialty business
and operate at a combined ratio in the low 90s
within 24-36 months.
While the pricing environment is competitive, there
are early signs of upward trends in certain specialty
lines with low single-digit growth expected in 2018.
Actions have begun on our performance
improvement plan; we have exited underperforming
lines, launched risk selection and claims initiatives
and are moving fast to realize synergies.
While there is upward momentum on interest rates,
low by historical
remain
investment yields
standards.
Investments
Global capital requirements are continuing
to
influence the asset allocation decisions of many
companies.
Financial
strength
The addition of the OneBeacon investment portfolio
will generate growth in our Net investment income
over the next 12 months.
Our investment management team continues to
optimize the mix of our consolidated investment
portfolio, taking into account factors such as risk,
tax
return, capital, regulation and
legislation changes in the United States.
the recent
We expect to continue to maintain our strong
financial position, allowing IFC to capture growth
opportunities as they arise and withstand any
headwinds
from volatile markets or natural
disasters.
INTACT FINANCIAL CORPORATION 27
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
STRATEGY
Section 10 – Strategy update
10.1 What we are aiming to achieve
The pace of change in our industry, and indeed around the world, continues to accelerate. Consumer and customer needs and
expectations are also changing. They expect fast, simple, effortless and empathetic experiences. We have been building our
company to be customer driven and will continue to enhance our efforts to be easy to do business with and go beyond expectations
to deliver second to none experiences as well as provide best-in-class service to our brokers.
We have a company of talented and diverse employees who are very committed to our customer driven value. We are committed to
ensuring they have the tools and training to do their best work.
We will continue to earn the right to be one of the most respected companies, a company where we are true to our values, where
our people are engaged because they know their work matters, and where our customers are our advocates because they know
what matters to them, matters to us.
Objectives by 2020
Our customers are our advocates
3 out of 4 customers are our advocates
3 out of 4 customers actively engage with us digitally
Our strategy
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 core brands to become trusted, household names.
Contribute to the resiliency and prosperity of communities by leading in climate adaptation initiatives.
Leverage best-in-class digital distribution and service platforms for customers and brokers.
Our employees are engaged
Be a best employer
Be a destination for top talent and experts
Our strategy
Build the best team to succeed now and in the future.
Create a workplace where we are engaged and can contribute our best every day by delivering on our promise.
Live our values and leadership success factors.
28 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Our specialty solutions business is a leader in
North America
Achieve combined ratio in the low 90s
Generate $3 billion in annual DPW
Our strategy
Deliver targeted synergies in back office and claims.
Grow cross-border business.
Retain key talent and management.
Introduce new products to Canada and export Canadian lines to U.S.
See Section 10.2 below for additional details on our transition plan.
Our company is one of the most respected
Exceed industry ROE by 5 points in Canada and the U.S.
Grow NOIPS 10% yearly over time
Our strategy
Deepen our strengths in pricing, risk selection, claims and investments.
Simplify processes to become the most efficient operator.
Manage capital opportunistically.
Consolidate Canadian industry in manufacturing and distribution.
Lead in data, artificial intelligence (AI), and behavioural analytics.
Leverage our size in claims through efficiencies in the supply chain.
10.2 Creating a leading provider of specialty insurance in North America
On September 28, 2017, we completed our US$1.7 billion ($2.3 billion) acquisition of OneBeacon. OneBeacon is a specialty P&C
insurance provider that offers a wide range of insurance products in the U.S. primarily through independent agencies, regional and
national brokers, wholesalers and managing general agencies.
With the acquisition of OneBeacon, we have created a leading provider of
specialty insurance in North America, with over $2 billion in combined annual
premiums. It combines Intact's leading commercial lines track record and deep
data, claims and digital expertise with OneBeacon's high calibre team and
specialty lines capabilities.
The acquisition bolsters our Canadian business with new products and cross-
border capabilities, and better positions us to compete with international insurers.
Furthermore, it provides an additional growth pipeline in the U.S. and enables IFC
to leverage our consolidation expertise in a fragmented specialty lines market.
1 DPW (pro forma) for 2017 are comprised of the DPW of P&C Canada and the DPW (pro forma)
of P&C U.S.
2017 DPW (pro forma)1
INTACT FINANCIAL CORPORATION 29
78%22%Specialty linesOther P&C lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Value creation
With the addition of the OneBeacon team we have created a leading North American specialty lines insurer focused on small
to medium sized enterprises.
We expect the acquisition to deliver mid-single digit accretion to NOIPS by the end of 2019.
Profitable growth
Actions are in progress to grow the many profitable OneBeacon specialty lines by harnessing existing broker relationships
and the momentum created by the stability of our ownership.
Additional growth pipelines have been opened with commercial lines underwriting desks on each side of the border to
support customers with businesses in both countries.
In Q4-2017, we started offering OneBeacon's tailored specialty products and services in Canada, beginning with the launch
of tailored products for technology and entertainment risks.
Profitability improvement
The profitability action plan for OneBeacon is on track to achieve a low-90s combined ratio within 24-36 months of closing
and mid-single digit accretion to NOIPS by the end of 2019.
The profitability action plan is composed of:
o Underwriting: We have exited Programs and Architects & Engineers lines of business and are leveraging Intact’s
analytics and segmentation expertise to take underwriting actions in select other lines. Results of exited lines are
reported in Non-operating results (Underwriting results of exited lines) (see Section 26 – Non-operating results for
details).
o Claims: We are increasing internalization of claims handling and implementing further indemnity control procedures.
o Expense synergies: We expect US$25 million in expense synergies over three years. These comprise internalizing
investment management, combining reinsurance programs, de-listing and eliminating U.S. public company reporting,
as well as shared services and technology savings. On a run-rate basis, we have realized approximately one-third of
these expense synergies at the end of 2017.
Risk management
At the date of acquisition of OneBeacon, we purchased an adverse development coverage (ADC) on claims liabilities for
2016 and prior accident years to mitigate the risk of adverse development on the acquired book of claims liabilities. The cost
of this coverage was recorded as a non-operating expense. Refer to Section 15.2 – Reinsurance for more details.
The acquisition also brings important diversification benefits to all our operations, including earnings stability and reduced tail
risk.
30 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
10.3 Other developments at a glanceration
Innovation
In line with our strategy to deliver a customer experience that is second to none and build a best in class digital distribution and
service platform:
in December, Intact lnsurance launched Canada's first commercial auto quick quote tool. The online tool is currently
available in Québec and will be rolled out across Canada over the next year;
in August, Belairdirect launched a mobile app which gives customers digital access to proof of insurance, insurance
documents, belairdirect roadside assistance (Québec only) and billing information;
in April, we launched our Intact Service Centre in Montreal, our fourth Service Centre in Canada, a one-stop shop for
customers with auto insurance claims;
Intact Insurance in Québec launched Client Centre, which gives personal lines customers digital access to their policy
documents, billing statements and real-time claims status updates; and
we improved our telematics offering for Intact Insurance customers in Alberta, Québec and parts of Ontario by launching a
mobile app, allowing good drivers to save on car insurance without having to install any hardware in their vehicles.
In line with our long-term strategy to invest and partner with emerging and innovative businesses (Section 11.2 – Innovation):
we invested in Hangar Technology Inc., the world’s first drone logistics platform, helping firms increase efficiency, showcase
content and integrate more actionable insights into their workflows. Hangar’s clients use its premium aerial data software
products (drones), all without having to handle any of the logistics of owning, acquiring, flying or editing the data from them.
we invested in Humatics Corporation (“Humatics”). Humatics is reinventing the relationships between people, robots, and
infrastructure in the connected world. Humatics’ breakthrough technologies for ultra-low-cost millimeter scale positioning
create a new category “microlocation”; enabling a world of precise, collaborative relationships between people, places and
things.
we announced a $2.5 million commitment to the Vector Institute, a new independent artificial intelligence research facility.
Acquisitions and financing activities
On September 28, 2017, we completed our US$1.7 billion ($2.3 billion) acquisition of OneBeacon. Please refer to Section
10.2 – Creating a leading provider of specialty insurance in North America and Section 17 – Treasury management.
During 2017, BrokerLink acquired brokers in the Greater Toronto, Ottawa and Southern areas of Ontario, Edmonton, Calgary,
Alberta, and in Newfoundland & Labrador. This increased its presence in personal, commercial, and farm insurance.
Awards and recognition
We were recognized:
as an Aon Best Employer – Canada 2018, Platinum level, recognizing IFC for its strong level of employee engagement,
leadership, performance culture and employment brand;
by The Globe and Mail’s Report on Business Board Games corporate governance index in 2017, placing second among
242 companies and trusts in the S&P/TSX Composite Index; and
as an Iconic Canadian Brand by Interbrand Canada Inc. (“Interbrand”) for Canada150, recognizing the 150 companies,
organizations and institutions that are authentically Canadian. Interbrand considered 10 factors that constitute a strong brand,
and focused on clarity, authenticity and engagement as the most differentiating factors.
We were honoured by La Gouvernance au Feminin, a Québec-based not-for-profit organization that supports women in their
leadership development, career enhancement and access to board seats, with the Certification of Parity for our actions towards the
advancement of women in business. Intact was also one of the three companies that achieved platinum level certification in
recognition of our commitment to advancing the cause of women.
INTACT FINANCIAL CORPORATION 31
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 11 – Unique advantages
We have several unique advantages which have enabled us to sustainably outperform other P&C insurers in Canada. These
advantages are described in the table below.
Leading North American P&C Operator
Seamless
distribution
strategy
Digital first
experiences
Engaged &
talented
teams
Our multi-channel distribution strategy includes the most recognized 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 and needs.
We have more than 2,000 relationships across Canada and the U.S. for customers that prefer the highly-
personalized and community-based service that an insurance broker provides.
We provide our brokers with a variety of digital distribution service platforms, alongside sales training and
financing to enable them to continue to grow and develop their businesses.
Our industry leading mobile and digital experiences separate us from our peers. Our ability to design,
deliver and iterate on new experiences for brokers and customers makes us a preferred company to deal
with. Speed, simplicity and transparency are core tenets of our focus.
Our people are the cornerstone to the execution of our strategy. We benefit from attracting, retaining and
engaging some of the best talent both within and outside our industry. How we organize and behave
provides a sustainable and replicable approach to continuous operational improvement.
Scaled &
diversified
core operations
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.
Our business is well diversified across geographic regions and business lines which provides significant
financial flexibility.
Sophisticated
data &
analytics
capabilities
Deep claims
expertise &
network
Proven
consolidator
& integrator
Our superior data expertise and proprietary segmentation and machine learning models are used to price
and manage risk which allows us to identify certain segments of the market that are more profitable than
others and in turn establish a model that will both attract and maintain clients with profitable profiles.
Substantially all of our claims are handled in house with our preferred network, which translates into a
data advantage helping claims settle faster and at a lower cost, with a more consistent service experience
for the customer.
We are a proven industry consolidator with 16 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, risk selection, claims, distribution and digital expertise. 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.
Tailored
investment
management
In-house investment 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.
32 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
11.1 Canadian distribution strategy
Our multi-channel distribution strategy includes broker and direct-to-consumer brands.
We offer our customers
a multitude of
options to contact us:
online, on the phone or
in person.
With our 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, Alberta and
Atlantic Canada.
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
1
¹Affiliated brokers are those in which we
provide equity or debt financing.
Our broker channel
Our scale and financial strength make us a strong supporter of our broker partners
in terms of brand, technology, products and expertise, business opportunities, as
well as financial solutions.
To further develop broker relationships, we continue to invest in our broker
network with equity and debt financing. Through these relationships, we are able
to foster growth in their organizations, participate in the consolidation of the broker
network, and enhance our product distribution.
Our direct 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 double our direct-to-consumer business in
the mid-term by expanding our reach and find innovative solutions to make it easy
for our customers to protect the things they care about.
11.2
Innovation
Shaping our future in the age of big data
Artificial Intelligence (Al) and machine learning have transformational potential for the insurance industry, the economy and
consumers. Our strategic partnerships with academia (such as Montreal’s IVADO, Laval University and the Vector Institute) and the
recent creation of the Data Lab position us to harness the potential of these emerging technologies now and into the future. While
data has always been integral to assessing risk and determining pricing, these technologies can expand our data advantage to
innovate and improve product offerings so we can better serve customers. We are also using them to help increase our
understanding of risk (including climate risk), and help reduce and prevent risk for customers.
Intact ventures continues to help us accelerate
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.
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.
INTACT FINANCIAL CORPORATION 33
15%50%9%26%Belairdirect (direct)BrokerLinkIntact insurance- Affiliated brokers Intact Insurance- Other brokers
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
11.3 Delivering on our key financial objectives
NOIPS performance over time
ROE outperformance over time
Our objective is to grow NOIPS at a yearly rate of 10% over
Our objective is to outperform industry ROE by at least 500
time.
basis points every year.
Our NOIPS in 2017 was up 15% over 2016 on lower CAT
rigorous
losses, strong distribution performance and
expense management.
Since 2008, our NOIPS has grown at a CAGR of 7.3%.
Over
the past 10 years, we have absorbed over
$230 million of current year CAT losses (net of reinsurance)
on average.
CAGR of 7.3% (2008-17)
(in dollars)
Since 2009, we have regularly exceeded our 500 basis
points ROE outperformance target versus the industry.
Our superior underwriting results, investment performance
and capital management have led to ROE outperformance
compared to the industry.
(in points)
2009: Intact became a widely held Canadian company.
2017 latest industry data: YTD Q3-2017
IFC’s industry outperformance over time
Industry data below represents an IFC estimate based on MSA. Industry benchmark consists of the 20 largest comparable
companies in the P&C industry based on industry data. Please refer to Important notes on page 3 of this MD&A for further
details.
Table 17 – Canadian P&C Industry – IFC outperformance (underperformance)
ROE (annualized)1
P&C Industry
DPW growth (including industry pools)
YTD
Q3-2017
Full year
2016
Full year
2015
Full year
2014
Full year
2013
5.9 pts
5.8 pts
5.1 pts
8.2 pts
4.1 pts
Industry benchmark
(2.3) pts
2.4 pts
3.4 pts
(1.5) pts
3.7 pts
Combined ratio (including MYA)
Industry benchmark
6.0 pts
4.7 pts
5.2 pts
6.5 pts
4.5 pts
AMF (Québec) chartered insurance companies are not required to report on Q1 and Q3 results. As such, we have included estimates for non-reporters in our Industry
benchmark group, based on publicly available information. Actual results may vary.
1 IFC’s ROE corresponds to the AROE.
Our ROE outperformance of 5.9 points versus the P&C insurance industry is above our objective of 5 points.
Our growth underperformance against our industry benchmark was 2.3 points, reflecting robust profitability actions, including
rate increases taken across the country ahead of competitors.
Our combined ratio outperformance against our industry benchmark was 6.0 points, mainly attributable to the effectiveness of
our profitability actions.
34 INTACT FINANCIAL CORPORATION
2.962.353.493.915.003.625.676.384.885.60200820092010201120122013201420152016201711.15.98.25.15.85.9(0.7)4.17.2(2.1)2008200920102011201220132014201520162017
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
11.4
Delivering value to our shareholders
2018: our 13th consecutive annual dividend increase
Book value per share increase over time
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 10% increase in 2017.
Our operating performance and financial strength have
translated into close to $1.6 billion in capital returned to
common shareholders
through dividends and share
repurchases over the past five years.
Our decision to increase common share dividends by 9% to
$0.70 in 2018 reflects the strength of our financial position
and confidence in our ongoing operating earnings and
capital generation.
Our BVPS was up 12% to $48.00 in 2017, driven by EPS
increase of 45%.
We remained committed to our financial objectives in terms
of ROE and NOIPS to enhance value to shareholders.
(in dollars)
2004: Initial public offering on TSX (ING Group retained 70%).
BVPS
Table 18 – Evolution of BVPS (in dollars)
As at December 31,
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
Impact from issuance of common shares
BVPS, end of period
Period-over-period increase
1 Reported in AOCI.
Q4-2017
46.56
1.60
(0.64)
0.65
(0.20)
0.03
-
48.00
3%
2017
42.72
5.75
(2.56)
0.22
(0.49)
(0.23)
2.59
48.00
12%
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%
INTACT FINANCIAL CORPORATION 35
0.160.250.270.310.320.340.370.400.440.480.530.580.640.70'05'06'07'08'09'10'11'12'13'14'15'16'17'1821.9624.8826.4729.7333.0333.9437.7539.8342.7248.00'08'09'10'11'12'13'14'15'16'17
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 12 – Social responsibility
We strive to create an environment where our employees live our values every day. Our
values are organized according to five core themes, one being 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 principally donates to organizations that are
committed to climate change adaptation and breaking the cycle of poverty for children in
Canada.
Some of our 2017 programs and initiatives are outlined below.
12.1 Climate change adaptation
Intact Centre on Climate Adaptation
The frequency and intensity of natural disasters has increased in recent years. At IFC, we remain committed to helping
people protect themselves from extreme weather caused by climate change. Our investment in the Intact Centre on Climate
AdaptationTM (“Intact Centre”) continues to foster innovative solutions to help reduce the physical, financial and social
impacts of extreme weather on Canadian communities.
We have committed $4.25 million over five years to establish the Intact Centre at the University of Waterloo, IFC’s most
significant investment in addressing the impacts of climate change. Established in 2015, the Intact Centre is an applied
research and climate resilience incubator with a national focus working with homeowners, communities, governments, and
businesses to identify and reduce the impacts of extreme weather and climate change.
The Intact Centre has worked to establish a leading position on the climate change adaptation file in Canada.
2017 milestones include:
Releasing two significant applied research reports to the Canadian public.
o When big storms hit – the role of wetlands to limit urban and rural flood damage: Developed in
partnership with the Federal Ministry of Natural Resources and Forestry and charitable organization Ducks
Unlimited, this research demonstrates that wetlands can reduce flood damages by up to 40%.
o Preventing disaster before it strikes – developing a Canadian standard for new flood-resilient
residential communities: Developed in partnership with The Standards Council of Canada, this report
identifies 20 best practices for designing new communities in Canada that are more flood-resilient. The
development of a national standard for new flood-resilient residential communities is being developed based
on this research.
Members of the Intact Centre team either chair or are members of seven different domestic and international
standards-setting committees to advance climate change adaptation. Most notably, Intact Centre head Dr. Blair
Feltmate was appointed chair of the Government of Canada expert panel on climate change adaptation and resilience.
The expert panel advises the Government of Canada on progress measurement on national climate adaptation and
resilience initiatives, including supporting climate-smart infrastructure and updating building codes.
In August 2017, the Intact Centre launched the pilot Home Flood Protection Program (“HFPP”) in the Greater Toronto
Area in Ontario. The HFPP is an on-site flood-risk evaluation service for homeowners. A trained assessor and the
homeowner review 50 points of potential water entry into the home.
Read more on the following websites:
http://www.intactcentreclimateadaptation.ca/programs/
http://www.intactcentreclimateadaptation.ca/about/climate-change-adaptation-project-canada/
36 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Managing the impacts of climate change
Climate change in Canada has resulted in a higher frequency of severe weather events and unpredictable weather
patterns. In particular, our property insurance business has been impacted and increased in the cost of claims associated
with severe storms: water damage alone accounts for 40% of total claims. As a result, we have launched several initiatives
in home insurance to adapt the nature of the product offered and its pricing. We are also reinforcing our claims capabilities,
increasing our education awareness efforts towards distribution partners and customers and offering prevention discounts.
There are five areas where managing the impacts of climate change is integrated into IFC’s business:
Underwriting: determine the risk drivers related to our new climate realities.
Pricing: reflects the scope of risks related to climate change impacts.
Claims Management: ensure claims can be managed efficiently and effectively across Canada. For example, IFC has
designated teams in place across the country that deal efficiently with catastrophic events and ensure service reliability
for customers.
Reinsurance: we re-insure certain risks to limit our losses in the event of catastrophic events or other significant
losses. See Section 15.2 – Reinsurance for more details.
Outreach & Education: we believe it is essential that Canadians adapt to climate change. As a result, we have
launched many home insurance initiatives to help customers understand how to adapt. We continue to work with
partners, such as the Intact Centre and the Insurance Bureau of Canada, to promote climate change adaptation
initiatives to governments, including the development of tools for communities to assess the vulnerabilities of their
infrastructure to climate change and prioritize investments in their modernization. By intensifying our education efforts
and creating greater awareness of the risks our country faces and the preventative measures that we can adopt, we
help Canadians adapt to severe weather caused by climate change.
Climate change risk management is part of the mandate of the risk management committee, which includes:
reviewing the reports of the Chief Risk Officer on risk management, reinsurance programs, implementation plans,
actuary and progress reports;
the risk matrix identifying the top 10 enterprise risks (including the occurrence and severity of natural disasters that
may be affected by climate change) and the emerging risks;
reviewing catastrophe programs, exposure management tests and action plans;
reviewing and approving the reinsurance risk management policy; and
remaining informed of climate change adaptation and risk mitigation measures for the Canadian marketplace.
Intact Foundation climate change grants
In 2017, the Intact Foundation introduced a new granting program, focused on funding climate change adaptation projects
in communities across Canada in three arenas: developing community action plans, implementing resiliency projects, and
finding new innovations to advance climate change resilience in Canada. Eight projects were selected for funding, receiving
a collective $1 million investment in climate change adaptation across the country. Selected partners include the University
of Alberta, Ducks Unlimited, and Bluenose Coastal Action Committee.
INTACT FINANCIAL CORPORATION 37
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
12.2 Social responsibility
Making our communities safer, healthier, and happier
IFC and the Intact Foundation contributed over $3.7 million to charitable initiatives across Canada.
Employees across Canada have donated over 6,500 hours through team volunteering initiatives and personal
volunteer hours throughout the year.
The Intact Foundation introduced a new “skills for impact” program, matching employee professional skills to help with
projects of Intact Foundation charitable partners in 2017.
Intact employees generously donated over $1.3 million towards United Way/Centraide organizations nationally,
supporting initiatives which help children living in poverty in our communities across the country.
Supporting women in their leadership development
We were honoured by La Gouvernance au Feminin, a Québec-based not-for-profit organization
that supports women in their leadership development, career enhancement and access to board
seats, with the Certification of Parity for our actions towards the advancement of women in
business. Intact was also one of the three companies that achieved platinum level certification in
recognition of our commitment to advancing the cause of women.
12.3 Good governance
Intact receives top marks for good governance in Canada
Along with being a best employer and having customers as advocates, we also strive to be recognized as one of the most
respected companies in Canada. In the Globe and Mail's 2017 Board Games, we continue to advance this objective with
top marks for corporate governance. Board Games looks at over 50 different corporate governance practices in four broad
subcategories related to board composition, compensation, shareholder rights and disclosure. Out of 242 companies,
Intact ranked second. We improved from the previous year and ranked among top Canadian companies in the annual
Board Games results. This goes a long way in validating that Intact is consistently striving for excellence, one of our core
values. The Board Games report measures the quality of governance practices of all S&P/TSX composite index
companies.
Well-governed companies usually outperform other companies, and are able to attract investors whose support can help
finance further growth.
More ESG information can be found in our 2017 Social Impact Report.
38 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
FINANCIAL CONDITION
Section 13 – Financial position
Investment portfolio
$16.9 billion
BVPS
for the last 12 months
+12%
Debt-to-total capital
ratio
23.1%
Total capital margin1
$1.1 billion
2017 Highlights
13.1 Balance sheets
On September 28, 2017 we acquired all of the outstanding shares of OneBeacon for US$1.7 billion ($2.3 billion). The amounts
recognized for the assets acquired and liabilities assumed at the acquisition date are presented below in Canadian dollars.
OneBeacon
Sept. 28, 2017
(closing date)
Section
Total IFC
Dec. 31, 2017
Total IFC
Dec. 31, 2016
Table 19 – Balance sheets
As at
Assets
Investments
Premium receivables
Reinsurance assets
Deferred acquisition costs
Other assets
Intangible assets and goodwill
Total assets
Liabilities
Claims liabilities
Unearned premiums
Financial liabilities related to investments
Other liabilities
Debt outstanding
Total liabilities
Shareholders’ equity
Common shares
Preferred shares
Contributed surplus
Retained earnings
AOCI
Shareholders’ equity
14
15
15
17
17
3,383
343
358
108
366
1,560
6,118
2,038
813
18
557
364
3,790
16,853
3,351
822
881
1,618
4,403
27,928
10,475
5,365
246
2,138
2,241
20,465
2,816
783
128
3,520
216
7,463
48.00
14,386
3,057
482
747
1,489
2,705
22,866
8,536
4,573
529
1,747
1,393
16,778
2,082
489
129
3,197
191
6,088
42.72
Book value per share (in dollars)
11.4
1 Aggregate of capital in excess of CALs in regulated entities plus available cash in unregulated entities (see Section 18.2 – Capital position).
INTACT FINANCIAL CORPORATION 39
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 14 – Investments
Our investment portfolio is mainly comprised of Canadian and U.S. securities. Our invested assets increased to $16.9 billion as at
December 31, 2017 largely due to the OneBeacon acquisition.
Our Canadian investment portfolio comprises principally Canadian securities and includes a mix of cash and short-term notes,
fixed-income securities, preferred shares, common shares and loans.
Our U.S. investment portfolio is comprised of fixed-income securities (mainly asset-backed securities and corporate bonds) and
U.S. common shares.
Table 20 – Investments by asset class
As at December 31,
Cash, cash equivalents and short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
2017
380
11,012
1,409
3,659
393
16,853
2016
273
8,696
1,377
3,635
405
14,386
The following tables show the economic exposure of our investment portfolio after reflecting the impact of hedging strategies related
to investments.
Net exposure by asset class
As part of our investment strategies, from time to time we take long/short equity positions in order to maximize the value added from
active equity portfolio management, or to mitigate overall common share market volatility. We also use strategies where market risk
from long common share positions is reduced through the use of swap agreements or other hedging instruments.
On a consolidated basis, the acquisition of OneBeacon does not significantly change our net investment mix by asset class,
although OneBeacon’s product mix within asset classes, especially fixed-income, differed from Intact’s (Canada) as at
December 31, 2017. The OneBeacon portfolio is mainly comprised of fixed-income securities (including highly rated asset- and
mortgage-backed securities and BBB Corporate bonds) and U.S. equities.
Table 21 – Investment mix by asset class (net exposure)
As at December 31,
Cash, cash equivalents, and short-term notes
Fixed-income
Preferred shares
Common equities
Loans
Net currency exposure
Table 22 – Investment portfolio – currency (net exposure)
As at December 31,
CAD
USD
Other
40 INTACT FINANCIAL CORPORATION
2017
4%
72%
8%
14%
98%
2%
100%
2017
79%
19%
2%
100%
2016
3%
70%
10%
14%
97%
3%
100%
2016
95%
5%
-%
100%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Our U.S. fixed-income portfolio held in our Canadian P&C entities ($1,284 million) is hedged using foreign-currency forward contracts,
resulting in minimal currency gains or losses on this portfolio.
Net sectoral exposure
Table 23 – Sector mix by asset class, excluding cash, short-term notes and loans (net exposure)
As at December 31,
Government
Financials
ABS and MBS
Energy
Industrials
Consumer staples
Telecommunication
Utilities
Consumer discretionary
Materials
Information technology
Health care
Fixed-income
securities
Preferred
shares
Common
shares
Total
2017
Total
2016
47%
22%
15%
1%
3%
3%
1%
1%
2%
1%
2%
2%
-
77%
-
12%
-
-
-
11%
-
-
-
-
-
29%
-
15%
11%
8%
6%
7%
8%
6%
6%
4%
33%
33%
11%
4%
4%
3%
1%
3%
3%
1%
2%
2%
41%
36%
1%
5%
3%
3%
1%
2%
2%
1%
3%
2%
100%
100%
100%
100%
100%
Our fixed-income portfolio remains concentrated in the government and financial sectors providing liquidity and stability to our
balance sheet.
Our fixed-income portfolio has more structured debt securities, following the OneBeacon acquisition. As at December 31, 2017,
these securities comprised $987 million of asset-backed securities (“ABS”) and $715 million of mortgage-backed securities (“MBS”).
Residential MBS (“RMBS”) and Commercial MBS (“CMBS”) make up respectively 53% and 47% of our MBS portfolio.
Approximately 95% of these securities are rated A or better.
We continue to have no exposure to leveraged securities.
High-quality investment portfolio
Fixed income
Our fixed-income portfolio includes high quality government and corporate bonds. Approximately 90% of our fixed-income portfolio
was rated ‘A-’ or better as at December 31, 2017 (98% as at December 31, 2016).
On a consolidated basis, the weighted-average rating of our fixed-income portfolio was ‘AA’, (‘AA+’ at December 31, 2016). The
decrease in the rating of the fixed-income securities reflected the impact of the OneBeacon investment portfolio. The average
duration of our fixed-income portfolio was 3.53 years (4.02 years as at December 31, 2016), reflecting the acquisition of
OneBeacon.
Table 24 – Credit quality of fixed-income securities
1
As at December 31,
Fixed-income securities
AAA
AA
A
BBB
BB and not rated
1 Source: S&P, DBRS and Moody’s.
2017
41%
28%
21%
8%
2%
100%
2016
46%
36%
16%
2%
-
100%
INTACT FINANCIAL CORPORATION 41
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Preferred shares
Table 25 – Credit quality of preferred shares
1
As at December 31,
P1
P2
P3
1 Source: S&P, DBRS and Moody’s.
2017
-
79%
21%
100%
2016
-
79%
21%
100%
Our preferred share portfolio is made up of high-quality Canadian issuers. The weighted-average rating of our preferred share
portfolio was ‘P2’ as at December 31, 2017 and 2016.
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 26 – Net pre-tax unrealized gain (loss) on AFS securities
As at
Fixed-income securities
Preferred shares
Common shares
Net pre-tax unrealized gain position
December 31,
2017
Sept. 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
22
79
212
313
25
40
124
189
69
33
114
216
93
26
194
313
83
(67)
253
269
Dec. 31, 2017 vs Sept. 30, 2017
Dec. 31, 2017 vs 2016
Our pre-tax unrealized gain position
increased by $124 million due to:
mark-to-market gains on common
shares and preferred shares, reflecting
strong North American equity markets.
See Section 6.8 – Capital markets
for more details.
Our pre-tax unrealized gain position rose by $44 million due to:
an increase in preferred share prices, reflecting strong equity markets and the
impact of higher interest rates on the price of rate-reset preferred shares;
lower bond prices, reflecting higher interest rates; and
realized gains on our AFS common share portfolio. Realized and unrealized
gains (total comprehensive return) on AFS equities in 2017 reflected strong
equity markets.
Gains and losses in the common share portfolio are generally realized on an ongoing basis under normal capital market conditions.
Impairment recognition on AFS common shares
Table 27 – 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,
2017
Sept 30,
2017
June 30,
2017
March 31,
2017
Dec 31,
2016
34
4
13
51
48
2
24
74
41
27
7
75
23
6
4
33
14
2
4
20
Impairment losses on AFS common shares amounted to $20 million in 2017, compared to $41 million in 2016. Assuming no change
in equity markets from December 31, 2017, impairment losses of $17 million would be recognized in 2018. Since common shares
are measured at fair value on the Company’s balance sheet, impairment losses would have no impact on our BVPS. 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.
42 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 15 – Claims liabilities and reinsurance
15.1 Claims liabilities
Assumptions
Claims liabilities increased to $10.5 billion as at December 31, 2017, mainly due to the impact of the acquisition of OneBeacon.
The main 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:
trends in claims severity and frequency;
average claims cost, 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
risk margin.
The total claims reserve is made up of two main elements:
1) reported claims case reserves, and
2)
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 risk margin 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 26 – Non-operating results for more details on the impact of MYA on underwriting.
INTACT FINANCIAL CORPORATION 43
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Q3-2017 net reserve change
As a result of the acquisition of OneBeacon on September 28, 2017, we harmonized our accounting and actuarial practices as
required under IFRS. With operations in Canada and the U.S., we reviewed our approach to determine the risk margin at the
consolidated level to align the methodology applied to both countries using results from our economic capital model. The model
reflects the benefit of risk diversification between lines of business and geographies. Diversification reduces the uncertainty
associated with the unfavourable development of claims liabilities for both our Canadian and U.S. operations. This refinement in
estimate recognized in Q3-2017 resulted in a decrease in net claims of $196 million for our Canadian operations. See Note 3 and
Note 10 to the accompanying Consolidated Financial Statements for details.
During Q3-2017, following an extensive file-by-file and actuarial reviews at the portfolio level, we took a more cautious reserve
position reflecting uncertainty, mainly in personal auto, leading to an increase in claims liabilities.
Overall, the above-mentioned reserve changes (referred to as “Q3-2017 net reserve change”) had a favourable impact of
0.7 points on the combined ratio for YTD Q3-2017. The net estimated impact on the combined ratio by line of business was as
follows:
Table 28 – Net estimated impact by line of business
P&C Canada
Personal auto
Personal property
Commercial lines
Total unfavourable (favourable) impact
YTD Q3-2017
0.8 pts
(0.7) pts
(2.8) pts
(0.7) pts
OneBeacon claims liabilities have been recorded at fair value at closing and reflected the impact of the conversion to IFRS,
including discounting and risk margin. Risks associated with these claims liabilities have been mitigated by the purchase of an
adverse development coverage (ADC) from a major reinsurer. The determination of the risk margin also takes into account the
reduced volatility resulting from this coverage (see Section 15.4 – Reinsurance).
Net claims liabilities
by business segment
Net claims liabilities
by line of business
Diversification reduces the
uncertainty associated with the
unfavourable development of
claims liabilities for both our
Canadian and U.S. operations.
PA: Personal auto; PP: Personal property: CL: Commercial lines
44 INTACT FINANCIAL CORPORATION
17%83%P&C CanadaP&C U.S.7%28%17%48%PAPPCL CANCL U.S.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Annualized rate of favourable PYD – P&C Canada
(as a % of opening reserves)
Prior year developments
PYD can fluctuate from quarter to quarter and year to year
and, therefore, should be evaluated over longer periods of
time.
In the past five years, favourable PYD as a percentage of
opening reserves ranged between 3% to 6% per year for our
Canadian operations, higher than our long-term historical
averages.
We expect the average favourable PYD as a percentage of
opening reserves to be in the 2%-4% range over the long
term. Higher interest rates will trend PYD around the lower
end of this range, with an offset in the CAY loss ratio.
Table 29 – Unfavourable (favourable) PYD
PYD
P&C Canada
By line of business
Personal auto
Personal property
Commercial lines – Canada
Commercial lines – U.S.
By quarter
Q1
Q2
Q3
Q4
Table 30 – PYD by line of business
By line of business
Personal auto
Personal property
Commercial lines – Canada
Commercial lines – U.S.
2017
(238)
(253)
10
(62)
(201)
15
(82)
(41)
(53)
(62)
2016
(389)
(389)
(115)
(88)
(186)
n/a
(163)
(93)
(71)
(62)
2015
(477)
(477)
(212)
(70)
(195)
n/a
(189)
(106)
(107)
(75)
2014
(364)
(364)
(141)
(71)
(152)
n/a
(141)
(65)
(80)
(78)
2013
(374)
(374)
(188)
(65)
(121)
n/a
(110)
(95)
(103)
(66)
5-year average
P&C Canada
In $
% NEP
(371)
(4.9)%
(129)
(71)
(171)
n/a
(137)
(80)
(83)
(71)
(1.7)%
(0.9)%
(2.3)%
n/a
(1.8)%
(1.1)%
(1.1)%
(0.9)%
Q4-2017 Q4-2016
Change
2017
2016 Change
(27)
(17)
(33)
15
(62)
(13)
(13)
(36)
-
(62)
(14)
(4)
3
15
-
10
(62)
(201)
15
(238)
(115)
(88)
(186)
-
(389)
125
26
(15)
15
151
Total unfavourable (favourable) development
Unfavourable (favourable) annualized rate of PYD1
P&C Canada
P&C U.S.
Consolidated
(3.8)%
3.0%
(2.5)%
(3.2)%
-
(3.2)%
(0.6) pts
nm
0.7 pts
(3.2)%
3.0%
(1.9)%
(5.0)%
-
1.8 pts
nm
(5.0)%
3.1 pts
1 As a % of opening reserves for P&C Canada and as at the closing date for P&C U.S. (OneBeacon).
Q4-2017 vs Q4-2016
2017 vs 2016
Favourable PYD of $62 million reflected positive development in all
lines of business in Canada and unfavourable development in the U.S.
Favourable PYD of $238 million was below last year,
mainly on unfavourable development in personal auto.
Unfavourable PYD in the U.S. included our share of prior year losses and the impact of discounting on the amount recoverable from
the ADC.
INTACT FINANCIAL CORPORATION 45
4.0%3.2%4.8%4.9%5.7%5.1%4.9%5.0%3.2%6.2%2008200920102011201220132014201520162017
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
15.2 Reinsurance
In the ordinary course of business, we reinsure certain risks with other reinsurers to limit our maximum loss in the event of
catastrophic events or other significant losses. Our objectives related to ceded reinsurance are capital protection, reduction in the
volatility of results, increase in underwriting capacity and access to the expertise of reinsurers. The placement of ceded reinsurance
is done almost exclusively on an excess-of-loss basis (per event or per risk). 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.
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.
Canadian operations
Table 31 – 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
2017
2016
7.5
3 - 10
100
3,600
7.5
3 - 10
100
3,575
For certain special classes of business or types of risks, the retention for single risk events may be lower through specific treaties or
the use of facultative reinsurance. For multi-risk events and catastrophes, we retain participations averaging 5.1% as at
December 31, 2017 (December 31, 2016 – 5.3%) on reinsurance layers between the retention and coverage limit. The coverage
limit prudently exceeds our risk assessment of an earthquake in Western Canada at a 1-in-500 year return period.
In line with industry practice, our reinsurance recoverables with licensed Canadian reinsurers ($227 million as at December 31,
2017, $388 million as at December 31, 2016) 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.
U.S. operations
As at December 31, 2017, our newly acquired U.S. operations are covered by its own reinsurance program for single risk events but
also for multi-risk events and catastrophes. Under the property catastrophe reinsurance program, the first US$20 million of losses
resulting from any single catastrophe are retained, with the coverage limit for the next US$110 million of losses being entirely
reinsured. In addition to the corporate catastrophe reinsurance protection, we also have dedicated reinsurance protection for certain
lines of business. Among these, the retention for single risk events is US$3 million on property policies and main liability policies.
In connection with the acquisition of OneBeacon, we entered into a reinsurance contract pursuant to which a major reinsurer will
assume 80% of negative reserve development with respect to OneBeacon's claims liabilities for accident years 2016 and prior. The
purchase of this adverse development coverage (“ADC”) has reduced the potential volatility in our prior years claims liabilities and
resulted in a release of risk margin in 2017. The maximum amount recoverable under the ADC is US$200 million and is subject to
some exclusions and limitations.
46 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 16 – Employee future benefit programs
We sponsor a number of funded and unfunded defined benefit pension plans in
Canada 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. We provide active employees in Canada a choice between a
defined benefit and a defined contribution pension plan. We offer employees in the
U.S. a 401(k) plan.
Defined benefit obligation
(as at the date of the latest actuarial valuation)
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 the past few
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.
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.
Refer to Note 26 – Employee future benefits of the accompanying Consolidated financial statements for details on
actuarial gains and losses recognized in OCI, assumptions used and sensitivity analysis, as well as risk management and
investment strategy.
Funding ratio
Interest rate hedge ratio
2017 pension plan asset mix
Our pension plans remained well funded
as at December 31, 2017. The lower
funding ratio was driven by a decrease in
discount rates.
Hedge ratio down to 68%, driven by the
increase in long-term interest rates.
Pension plan asset mix is essentially
unchanged from 2016.
Funding ratio: Plan assets as a percentage of funded plans’ obligations.
Interest rate hedge ratio: The duration of the pension asset portfolio divided by the duration of the registered 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%.
INTACT FINANCIAL CORPORATION 47
105%103%99%20152016201770%74%68%20152016201735%3%62%Debt securitiesCommon sharesOther29%7%64%Active membersPensioners and beneficiariesDeferred members
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 17 – Treasury management
17.1 Financing structure
2017 Financing structure
Debt-to-total capital ratio
Weighted-average
debt maturity
Weighted-average
debt coupon
Weighted-average
preferred share coupon
23.1%
12 years
3.39% (after tax)
4.07% (after tax)
Evolving in an international context, we ensure that we are able to access funds in multiple currencies. With respect to financing, we
believe that our optimal financing structure is one where the debt-to-total capital ratio is generally at or below 20%, all currency
combined. The debt-to-total capital ratio may on occasion exceed 20% with a firm plan to revert back to 20% within a short period of
time. Our debt-to-total capital ratio increased to 24.7% following the acquisition of OneBeacon at the end of September 2017, and
decreased to 23.1% as at December 31, 2017 (18.6% as at December 31, 2016). Our debt-to-total capital ratio is expected to return
to 20% within 24 months following the closing of the acquisition.
We have a diversified maturity profile with reasonable levels of debt and preferred shares, which improves our overall cost of
capital:
The notes carry a weighted average coupon of 4.61% (3.39% after tax).
We currently have seven series of medium-term notes outstanding with maturities ranging between 2 and 44 years.
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 about 30% of our total capital structure.
Our notes and preferred shares are presented in the table below.
Finance structure – Notes and preferred shares
48 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Credit facility
At closing of the acquisition, to maintain financial flexibility, we increased the size of our credit facility from $300 million to
$750 million. We also extended the access to our unsecured revolving term credit facility to OneBeacon and cancelled the credit
facility they had in place. Our five-year credit facility matures on August 28, 2022 and may be drawn as follows:
Type:
Prime loans
Base rate (Canada) advances
Bankers’ acceptances
Libor advances
At a rate of:
Prime rate plus a margin
Base rate plus a margin
Bankers’ acceptance rate plus a margin
Libor rate plus a margin
The outstanding balance under our credit facility amounted to $60 million as at December 31, 2017 at an interest rate of 2.62% (nil
as at December 31, 2016).
As part of the covenants under the credit facility, we are required to maintain certain financial ratios, which were fully met as at
December 31, 2017 and 2016.
Base shelf prospectus
On November 15, 2017, we filed a final short form base shelf prospectus with the securities regulatory authorities in each of the
provinces and territories of Canada that will allow us to offer up to $7.0 billion in any combination of debt, preferred shares or
common share securities, subscription receipts, warrants, share purchase contracts and units over the following 25 months. We
also filed a supplement to our base shelf prospectus to establish a medium-term note program that would allow us to issue up to
$1.7 billion in unsecured medium-term notes. As at December 31, 2017, the amounts available under the respective prospectuses
were $7.0 billion and $1.7 billion, respectively.
Preferred shares rate reset
On December 1, 2017, we announced that we did not intend to exercise our right to redeem our Non-cumulative Rate Reset Class
A Series 1 Preferred Shares (“Series 1 Preferred Shares”) on December 31, 2017. On December 18, 2017, we also announced
that, after having taken into account all elections received before the conversion deadline with respect to the Series 1 Preferred
Shares tendered for conversion on December 31, 2017 into non-cumulative Floating rate Class A Series 2 Preferred Shares
(“Series 2 Preferred Shares”), the holders of Series 1 Preferred Shares were not entitled to convert their shares as the amount of
shares elected for conversion did not meet the minimum threshold requirement. Subject to certain conditions on December 31, 2022
and on December 31 every five years thereafter, the holders of Series 1 Preferred Shares will have the right to convert their shares
into Series 2 Preferred Shares. In addition, we have the option to redeem the Series 1 and Series 2 Preferred Shares on the same
dates.
17.2 Ratings
Independent third party rating agencies assess our insurance subsidiaries’ ability to meet their ongoing policyholder obligations
(“financial strength rating”) and our ability to honour our financial obligations (“senior unsecured debt 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.
Shortly after the closing of the OneBeacon acquisition, Moody’s and Fitch upgraded the financial strength rating and the senior
unsecured debt rating of OneBeacon and OneBeacon’s U.S. regulated entities (consolidated under Atlantic Specialty Insurance
Company) respectively. A.M. Best upgraded the senior unsecured debt rating of OneBeacon and reaffirmed the financial strength
rating its of U.S. regulated entities. Ratings of IFC and its principal Canadian P&C insurance subsidiaries were reaffirmed by A.M.
Best, DBRS, Moody’s and Fitch in the context of the acquisition of OneBeacon.
Table 32 – Ratings
Financial strength ratings
IFC’s principal Canadian P&C insurance subsidiaries
OneBeacon U.S. regulated entities
Senior unsecured debt ratings
IFC
OneBeacon
A. M. Best
DBRS Moody’s
Fitch
A
a-
bbb+
A+ AA(low)
A1
A2
AA-
AA-
A
Baa1
Baa2
A-
A-
INTACT FINANCIAL CORPORATION 49
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
17.3 OneBeacon acquisition financing
The acquisition of OneBeacon closed on September 28, 2017 and was financed using a
combination of:
Financing of the
acquisition of OneBeacon
Net proceeds from:
common equity financing ($754 million);
medium-term notes ($425 million);
preferred shares ($300 million); and
credit facility and excess capital.
Refer to Note 18 – Debt outstanding and Note 19 – Common shares and Preferred
shares to the accompanying Consolidated financial statements for more details.
17.4 Currency management
We manage our cash flow and book value exposure to U.S. dollar currency volatility.
OneBeacon purchase price hedge
US$
1.7B
As at May 2, 2017 (date of the announcement), we hedged the purchase price exposure to fluctuations of the CAD/USD exchange
rate by entering into currency derivatives to effectively lock the CAD equivalent purchase price at $2.3 billion. These derivatives
qualified as cash flow hedges and were marked-to-market through OCI until closing. At closing, currency losses accumulated in
AOCI amounting to $200 million were included in the purchase price of OneBeacon.
Book value exposure
Our objective is to benefit from currency diversification, while managing the impact of USD volatility on our book value. Foreign
currency derivative contracts, such as currency swaps and forwards, are used as risk management tools.
On May 2, 2017, we entered into foreign currency forward contracts for a notional amount of US$600 million to reduce the book
value exposure of our USD denominated assets relative to the CAD, including OneBeacon. These derivatives represented
economic hedges and were marked-to-market through net income up to closing of the OneBeacon acquisition.
At closing, we designated these forward contracts as a net investment hedge of our foreign operation, OneBeacon. On
December 20, 2017, we terminated half of the US$600 million hedging relationship so that US$300 million foreign currency
forward contracts would be marked-to-market through net income partially offsetting the currency impact of USD denominated
investments also going through net income. This left US$300 million contracts as net investment hedge of our foreign
operations as at December 31, 2017.
Since closing, gains or losses on this hedge, together with foreign exchange translation gains or losses on the net investment in
OneBeacon are recognized in OCI.
Our net currency exposure to the USD (net of derivatives) was US$1,452 million as at December 31, 2017 (US$415 million as at
December 31, 2016). Refer to Note 9.1 b) – Exposure to currency risk of the accompanying Consolidated financial
statements for more details.
Cash flow exposure
USD inflows from OneBeacon will be used to pay U.S. dollar denominated claims and expenses in connection with our Canadian
operations. Any remaining exposure is managed using foreign currency derivative contracts such as currency swaps and forwards.
50 INTACT FINANCIAL CORPORATION
39%30%31%Common sharesMTN, preferred shares and credit facilityExcess capital
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
17.5 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 33 – Cash flows
Cash flows from operating activities
23
153
(130)
Q4-2017 Q4-2016
Change
2017
781
2016
Change
925
(144)
Cash flows deployed on:
Business combinations
Equity investments in brokerages and other, net
Purchases of intangibles and P&E, net
Dividends
Share-based payments in shares
NCIB (see Section 29.3)
Cash flows generated from: (see Section 17.3)
Issuance of common shares
Issuance of medium-term notes
Issuance of Class A Preferred shares
Amount drawn (repaid) under our credit facility
Cash flow available for investment activities1
Excess capital deployed on OneBeacon acquisition
Other net investment sales (purchases)
Net increase (decrease) in cash and cash equivalents
-
(25)
(24)
(99)
(4)
-
-
-
-
(150)
(279)
-
(76)
(355)
(19)
(38)
(30)
(80)
-
(7)
-
-
-
-
(21)
-
52
31
19
13
6
(19)
(4)
7
-
-
-
(150)
(258)
-
(128)
(386)
(2,139)
(108)
(98)
(378)
(37)
(7)
731
422
292
60
(481)
660
(184)
(5)
(19)
(275)
(120)
(324)
(19)
(44)
-
248
-
-
372
-
(345)
27
(2,120)
167
22
(54)
(18)
37
731
174
292
60
(853)
660
161
(32)
1 A non-IFRS financial measure which includes net cash flows from cash and cash equivalents and the investment portfolio.
Liquidity generated by the issuance of common shares, medium-term notes, Class A Preferred shares, drawdown on our credit
facility, together with a portion of the net investment sales, was used to finance the OneBeacon acquisition.
17.6 Contractual obligations
The table below presents the expected timing of contractual liquidity requirements as at December 31, 2017.
Table 34 – Contractual obligations
Total Less than 1 year
1 - 3 years
3 - 5 years
Thereafter
Payments due by period
Principal repayment on notes outstanding
Interest payments on notes outstanding
Claims liabilities1
Operating leases on premises and
equipment
Pension obligations2
Total contractual obligations
2,181
1,283
10,410
810
48
14,732
-
101
4,139
168
8
4,416
250
185
2,857
245
16
3,553
664
153
1,606
167
7
1,267
844
1,808
230
17
2,597
4,166
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 51
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 18 – Capital management
2017 Highlights
Total capital margin
MCT (Canada)
Over $1.1 billion
205%
RBC (U.S.)
459%
18.1 Capital management objectives
Our objectives when managing capital consist of:
maintaining strong regulatory capital levels (see Regulatory capital section below), while 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 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.
Refer to Section 29 – Shareholder information for more details.
Regulatory capital
The amount of capital deployed in any particular company or country depends upon local regulatory requirements, as well as the
Company’s internal assessment of capital requirements in the context of its risk profiles, requirements and strategic plans. The
Company’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant
minimum regulatory capital requirements in the jurisdictions in which they operate (referred to as regulator supervisory minimum
levels).
Our federally chartered Canadian 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.
Canada
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 a regulator supervisory target capital ratio of 150%, which provides
a cushion above the minimum requirement.
Our U.S. insurance operations are subject to regulation and supervision in each of the states where they are
domiciled and licensed to conduct business.
State insurance departments have established the insurer solvency laws and regulatory infrastructure to
maintain accredited status with the National Association of Insurance Commissioners ("NAIC").
U.S.
A key solvency-driven NAIC accreditation requirement is a state's adoption of RBC requirements.
Dividends from our major U.S. insurance subsidiary are subject to the New York Regulator’s prior approval for
a two year period ending September 30, 2019.
Regulatory capital guidelines change from time to time and may impact our capital levels. We carefully monitor all changes, actual
or proposed.
52 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
18.2 Capital position
All our regulated P&C insurance subsidiaries were well capitalized on an individual basis with capital levels well in excess of
regulator supervisory minimum levels, as well as Company action levels (CALs). CALs represent the thresholds below which
regulator notification is required together with a company action plan to restore capital levels.
Table 35 – Estimated aggregated capital position
Regulatory capital ratios (RCRs)
Industry-wide supervisory minimum levels
CALs
Capital above CALs (capital margin)
Other regulated/unregulated entities1
Total capital margin
December 31, 2017
September 30, 2017 December 31, 2016
Canada
(MCT)
U.S.
(RBC)
205%
150%
170%
618
459%
150%
200%
438
Canada
(MCT)
U.S.
(RBC)
201%
150%
170%
558
413%
150%
200%
315
IFC
capital
margin
-
-
-
1,056
79
1,135
IFC
capital
margin
Canada
(MCT)
IFC
capital
margin
218%
150%
170%
947
-
-
-
873
282
1,155
-
-
-
947
23
970
1 Other regulated entities include Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados).
U.S. capital levels comprise the RBC levels of OneBeacon’s U.S. regulated entities, consolidated in Atlantic Specialty Insurance
Company (ASIC). As at December 31, 2017, ASIC’s risk based capital (RBC) level stood at 459% up 46 points from September 30,
2017, as capital was reallocated to ASIC from our U.S. operations.
In Canada, our estimated aggregate MCT level was strong at 205% as at December 31, 2017, up 4 points from September 30, 2017
and down 13 points from December 31, 2016.
Improvement in Q4-2017 was driven by strong operating results and the benefit of the phase-in.
Decline from December 31, 2016 reflected the use of $660 million of capital to finance the acquisition of OneBeacon.
IFC’s total capital margin stood at $1,135 million as at December 31, 2017. This represents the aggregate of capital in excess of
CALs in regulated entities plus available cash in unregulated entities.
For details on our Own Risk and Solvency Assessment, please refer to Section 22.8 - Own Risk and Solvency Assessment.
MCT (Canada)
Total capital margin
Total capital margin includes the
aggregate of capital in excess of
company action levels in regulated
entities (170% MCT, 200% RBC)
plus available cash in unregulated
entities.
INTACT FINANCIAL CORPORATION 53
203%218%205%2015201620176259701,135201520162017
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
RISK MANAGEMENT
Section 19 – 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 20 – Risk management structure
54 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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 2016.
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
Assists 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 policy into all of our business activities,
strategic planning and our subsidiaries and operations, including our pension funds.
Compliance Review
and Corporate
Governance (CRCG)
Committee
Ensures a high standard of governance, compliance and ethics in our company, including our pension funds and that
we meet our legal requirements and engage in best practices as determined by the Board of Directors. In this regard,
the CRCG Committee oversees our governance framework and that of our pension funds, our compliance framework,
our compliance programs which includes related party transactions (“RPT”), our market conduct programs and
policies, as well as the implementation of corporate compliance initiatives.
Human Resources
and Compensation
Committee
Assists the Board of Directors in fulfilling its governance 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 consistent with our overall business objectives.
Audit Committee
Assists the Board of Directors with its oversight of the integrity of our financial statements and financial information,
the accounting and financial reporting process, the qualifications, performance and independence of the external
auditors, the performance of the internal audit function and the quality and integrity of internal controls.
Enterprise Risk
Committee
This committee is composed of senior officers and is chaired by the Chief Risk Officer designated by the Board of
Directors. It meets regularly and oversees our risk management priorities, assesses the effectiveness of risk
management programs, policies and actions of each key function of our business and reports on a quarterly basis to the
Risk Management Committee. The Enterprise Risk Committee evaluates our overall risk profile, aiming for a balance
between risk, return, and capital, and approves risk policies. The Enterprise Risk Committee is mandated to: (I) identify
risks that could materially affect our business; (ii) measure risks 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 55
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 21 – 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 states,
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:
21.1 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.
56 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 22 – Enterprise Risk Management
22.1 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 risks are separated into four main categories: Strategic Risk, Insurance Risk, Financial Risk and Operational Risk.
22.2 Objectives
identifying, as completely as possible, the most important risks and issues that may affect us;
overseeing and objectively challenging the execution of risk management activities;
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.
22.3 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.
INTACT FINANCIAL CORPORATION 57
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
22.4 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.
22.5 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.
58 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
22.6 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 ...................................................................................................................................................................................... 60
Catastrophe events risk ............................................................................................................................................................................................. 61
Increased competition and disruption ......................................................................................................................................................................... 62
Turbulence in financial markets ................................................................................................................................................................................. 63
Reserve and pricing inadequacy ................................................................................................................................................................................ 64
Governmental and/or regulatory intervention ............................................................................................................................................................. 65
Failure of an acquisition ............................................................................................................................................................................................. 67
Failure of a major technology initiative ....................................................................................................................................................................... 67
Information technology and cyber security risk........................................................................................................................................................... 68
Inability to contain fraud and/or abuse ....................................................................................................................................................................... 69
Customer satisfaction risk .......................................................................................................................................................................................... 69
The emergence of autonomous vehicles and crash avoidance technology ................................................................................................................ 70
The legalization of cannabis (marijuana) .................................................................................................................................................................... 70
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 has increased slightly in 2017 versus
the prior year taking into consideration potential exposure in the Pacific
Northwest of the United States related to our U.S. specialty insurance
operations.
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 15.4 – Reinsurance for more details on our
reinsurance program.
In 2017, 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, including the U.S. Pacific Northwest, at a 1-in-500
year return period.
INTACT FINANCIAL CORPORATION 59
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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
financial results and could materially reduce our
profitability or harm our financial condition.
Over the last few years, we have witnessed a
continued increase in the number and severity of
weather events. Changing weather patterns may have
an impact on the likelihood and severity of natural
catastophes, such as wildfires in the West and heavy
precipitation in the East. The trend in climate change
continues to pose a meaningful risk to our ability to
meet our business objectives.
insurance
We began offering cyber risk
to our
commercial customers in 2015 and have expanded
our offerings in this space over time. The acquisition
of OneBeacon expands further our exposure to this
risk. We may be adversely affected by a large scale
cyber-attack that simultaneously compromises the
systems of many of our insureds.
In addition, we have exposure to terrorism risk in the
U.S. through our U.S. specialty business. Terrorism
can take many forms and both our property and
workers’ compensation policies may be affected by an
event.
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. In 2017, we improved segmentation in our
property insurance business with additional focus on wildfire risk.
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 15.2 – 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.
In addition to private reinsurance, we also participate in the U.S. federal government
terrorism insurance backstop (TRIPRA) that mitigates our exposure under certain
circumstances as outlined in federal legislation.
60 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Increased competition and disruption
Strategic risk
Risk we are facing
The P&C insurance industry is highly competitive and we believe that it will remain so for the foreseeable future.
We believe that competition in our business lines is based on price, service, commission structure, product features, financial strength and scale,
ability to pay claims, ratings, reputation and name or brand recognition. We compete with a large number of domestic and foreign insurers as well
as with several Canadian banks that are selling insurance products. These firms may use business models different than ours and sell products
through various distribution channels, including aggregators, brokers and agents who sell products exclusively for one insurer and directly to the
consumer. We compete not only for business and individual customers, employers and other group customers but also for brokers and other
distributors of investment and insurance products.
We distribute our products primarily through a network of brokers and a great part of our success depends on the capacity of this network to be
competitive against other distributors, including direct insurers and web aggregators, as well as our ability to maintain our business relationships
with them. These brokers sell our competitors’ insurance products and may stop selling our insurance products altogether. Strong competition
exists among insurers for brokers with demonstrated ability to sell insurance products.
Potential impact
How we manage this risk
Intense competition for our insurance products could harm our ability to
maintain or increase our profitability, premium levels and written insured
risk volume.
The entrance of a new player in the market or a shift in methods to
purchase insurance could challenge our distribution model. The use of
information technology in the distribution and pricing of insurance
products (e.g. telematics, the use of Big Data, etc.) has increased over
the last several years and this trend is expected to continue in the near
future. Artificial intelligence is another area that is gaining much
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.
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;
Promoting our own usage-based insurance (UBI) product to better
meet customer needs;
Increased digitalization of the customer experience;
Opening innovative service centres in major Canadian cities to
provide an unmatched customer experience; and
Creating Intact Ventures (see Section 11.2) 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.
INTACT FINANCIAL CORPORATION 61
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Turbulence in financial markets
Risk we are facing
Financial risk
Movements in interest rates, credit spreads, foreign exchange rates, inflation 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 2016 and 2017, 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
above could adversely affect our investment
income and/or
the market value of our
securities.
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. We
closely monitor concentration across and within asset classes and ensure that exposures
remain within the risk tolerance stated in our investment policy.
In addition to the risk related to investments
discussed previously, an economic downturn
and/or increase in the inflation rate have a
significant impact on the funded status of our
defined benefit pension plans. Consequently,
this could impact our financial condition.
economic
conditions,
General
political
conditions and many other factors can also
the equity markets and,
adversely affect
the equity
consequently,
securities we own and ultimately affect the
timing and level of realized gains or losses.
fair value of
the
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 our regulatory capital ratios 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 depreciate in value
as a result of negative developments in interest
rate and/or credit markets.
fixed
Our
income portfolio may experience
defaults resulting in impairments and lower
income prospectively.
Market risk
Notes 9.1 and 9.2
Basis risk
Note 9.3
Credit risk
Note 9.4
Liquidity risk
Note 9.5
62 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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 impact on our future actual
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.
To the extent that actual losses and LAE exceed our expectations and the
reserves reflected in our Consolidated financial statements, we will be
required to reflect those changes by increasing our reserves. In addition,
government regulators could require that we increase our reserves if they
determine that our reserves were understated in the past. When we
increase reserves, our income before income taxes for the period will
increasing or
decrease by a corresponding amount.
insurance
strengthening reserves causes a reduction in our P&C
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 15.3 – 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.
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 and assumed risk-
sharing pools in several automobile insurance markets including
Ontario, Québec, Alberta, and the Maritimes.
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.
Following the acquisition of OneBeacon, we purchased reinsurance
to protect against adverse development for OneBeacon’s reserves
from 2016 and prior years. This risk mitigation strategy offers partial
protection in case of a deterioration in our U.S. dollar claims reserves.
INTACT FINANCIAL CORPORATION 63
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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.
64 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Governmental and/or regulatory intervention (cont’d)
Strategic risk
Potential impact
How we manage this risk
We believe that our insurance subsidiaries are in material compliance with all applicable
regulatory requirements. However, it is not possible to predict the future impact of
changing federal, provincial and territorial regulations on our operations. Laws and
regulations enacted in the future may be more restrictive than current laws. Overall, our
business is heavily regulated and changes in regulation may reduce our profitability and
limit our growth prospects.
We are supported by an in-house team of lawyers and
staff, and by outside counsel when deemed necessary
or appropriate, in handling general regulation and
litigation issues and are an active member of the major
industry associations.
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.
Our government relations team ensures contact with
the governments of the various jurisdictions in which we
operate, and can be proactive in situations that could
affect our business.
We regularly monitor trends and make adjustments to
our strategy and products, when deemed appropriate,
to ensure the sustainability of insurance products and
to avoid the potential for additional regulation that may
negatively
impact our reputation, profitability, and
financial condition.
To reduce the risk of breaching the regulatory capital
requirements, we have established an internal target
capital ratio in excess of the supervisory target of 150%
in our principal Canadian insurance subsidiaries and
above 200% for our U.S. insurance subsidiaries. We
operate above our
target under normal
internal
circumstances to reduce the likelihood of regulatory
intervention. Our Enterprise Risk Committee regularly
review risks related to solvency and conducts stress
testing to identify vulnerabilities and possibly areas for
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.
In addition, we conducted a full internal solvency
assessment as described hereafter in Section 22.8 –
Own Risk and Solvency Assessment (ORSA).
INTACT FINANCIAL CORPORATION 65
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Failure of an acquisition
Risk we are facing
Strategic risk
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.
On September 28, 2017, we completed the US$1.7 billion ($2.3 billion) acquisition of OneBeacon, a specialty P&C insurance provider that offers a
wide range of specialty insurance products in the United States. Failure on our part to manage this U.S. acquisition could have a material adverse
effect on our business, results of operations and financial condition. In addition to specific country risks, we cannot be sure that we will be able to
identify appropriate profitability targets or successfully integrate this acquired business into our operations.
Potential impact
How we manage this risk
With respect to the acquisition of OneBeacon, we are faced with a number of integration
risks including but not limited to:
—
—
—
—
the inability to derive the expected returns from the acquisition, which would lead to a
lower future return on equity for shareholders;
the inability to realize growth and profitability action plans, such as cross-border
targets. Under certain adverse
opportunities and underwriting profitability
circumstances, this may lead to a write down of goodwill;
challenges in harmonizing processes; and
a departure of key employees during the integration phase.
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.
team
We are a proven industry consolidator with 16
successful P&C acquisitions since 1988. We have
a dedicated corporate development
that
follows a rigorous selection process. Our approach
to conducting due diligence to assess all the risks
and opportunities
is
consistently executed. We also assign dedicated
and experienced task forces to ensure a swift and
effective integration with seamless impact to our
customers. There is also strong oversight by the
Board of Directors regarding acquisitions.
is well developed and
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
How we manage this risk
that proper
funding and
Senior management provides careful oversight and
ensures
resources are
allocated to our key projects. Risk assessments are
conducted to identify potential areas for remediation or
the necessity for additional controls. A dedicated
committee was created to ensure proper focus is
devoted to major technology projects.
Our technology strategy may take too long to execute or may not be adequate to
maintain a competitive advantage. The complexity and interdependence of our
infrastructure and applications may
to higher costs and more errors.
lead
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.
66 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Information technology and cyber security risk
Operational risk
Risk we are facing
Information technology and cyber security risks continue to be key risks for many industries in Canada and around the globe. Criminal
organizations, hackers, and other external actors have become more active and better equipped to attack even robust systems and networks. Our
dependency on technology, network, telephony and critical applications makes our ability to operate and our profitability vulnerable to business
interruptions, service disruptions, theft of intellectual property and confidential information, litigation and reputational damage.
The volume and sophistication of cyber-attacks continue to increase. These attacks may include targeted attacks on systems and applications,
introduction of malicious software, denial of service attacks, and phishing attacks which could result in the fraudulent use or theft of data, and may
involve attempts to fraudulently induce employees, customers or third party service providers to disclose sensitive information in order to gain
access to the Company’s data. Distributed Denial of Service (DDos) and Ransomeware attacks continue to increase in frequency and severity.
These activities are designed to disrupt the operations of an organization and/or to benefit the attacker financially.
We may be unable to prevent cyber-attacks that result in system disruption or a breach of confidential information, whether personal or corporate in
nature. Third party service providers and other suppliers may also be the subject of successful cyber-attacks leading to a material impact on our
systems or the theft of confidential information.
Potential impact
How we manage this risk
Despite our commitment to information and cyber security, we
may not be able to fully mitigate all risks associated with the
increased sophistication and volume in the threat landscape.
As such, we may be the subject to 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
safeguard personal and confidential information from public
disclosure. Other potential consequences include our inability
to provide customers with real-time access to information on
their insurance policies, provide quotes for new insurance
products or enable customers to report claims electronically.
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 external trends in cyber security to ensure we
are able to rapidly mitigate known vulnerabilities.
lead
to wide ranging
We benchmark our information security practices to assess areas of our cyber
security program that require additional effort and to learn from industry leading
practices.
These events and attacks may
consequences including:
financial loss, which also includes lost productivity,
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.
Our Information Technology Security Committee oversees information security
initiatives and ensures effective collaboration across teams. As part of our overall
security program, we provide 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 67
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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
customers may result in increased regulation
and legislative scrutiny of practices in the P&C
insurance
increased
industry as well as
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
reputational issue. It could result in further
damage to our reputation and impair our future
growth prospects.
68 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 is 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, 2017
(in millions of Canadian dollars, except as otherwise noted)
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.
The legalization of cannabis (marijuana)
Emerging risk
Risk we are facing
Under proposed legislation by Canada’s federal government, marijuana would become legal under certain circumstances in July 2018. In addition,
several states in the U.S. such as California have also proposed the legalization of marijuana. Cannabis for medical use is already permitted in
many states and the trend to allow its use for recreational purpose may accelerate in the coming years.
Potential impact
How we manage this risk
Marijuana legalization could have an impact our results in various
ways, including:
higher frequency and severity of auto insured losses as a result
of impaired driving; and
an increase in claims related to liability insurance or workers
compensation.
This could cause a decline in our underwriting income.
In 2017, we have taken actions to better understand how this risk may
impact our business. Consequently, we have conducted a stress test
inspired by other jurisdictions (e.g. Colorado) that have legalized
marijuana for recreational purposes.
Our personal lines and commercial lines teams have reviewed our
product wordings and underwriting guidelines to ensure we have a clear
risk appetite around exposures related to marijuana producers and
distributors. We will continue to monitor this risk and make adjustments to
product pricing or features as more information becomes available.
INTACT FINANCIAL CORPORATION 69
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
22.7 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 res ults of
operations and financial condition. Unfavourable claim rulings may render fair settlements more difficult to reach. We cannot
determine with any certainty what new theories of recovery may evolve or what their impact may be on our businesses.
Reinsurance risk
We use reinsurance to help manage our exposure to insurance risk, including major catastrophe events. The availability and cost of
reinsurance is subject to prevailing market conditions, both in terms of price and available capacity, which can affect our premium
volume, profitability and regulatory capital position. Both worldwide and Canadian catastrophe losses have an impact on the
reinsurance market in Canada. In recent years, the availability of alternative capital in the reinsurance market has helped maintain
the supply of capital and added downward pressure on rates. However, reinsurance companies may exclude some coverage from
the policies that we purchase from them or may alter the terms of such policies from time to time. These gaps in reinsurance
protection expose us to greater risks and greater potential losses and could adversely affect our ability to write future business. We
may not be able to successfully mitigate risks through reinsurance arrangements, which could cause us to reduce our premiums
written in certain lines or could result in losses. In addition, the cost of reinsurance could increase significantly year over year,
impacting our profitability if we are unable to pass on these costs to consumers. Furthermore, a significant decline in the availability
of reinsurance could impact our premium volume, our profitability and our regulatory capital position.
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
additional qualified personnel in the future. In addition, a significant decline in employee morale could materially affect our
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.
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.
70 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Credit downgrade risk
Independent third party rating agencies assess our ability to honour our financial obligations (the “senior unsecured debt rating”) and
our insurance subsidiaries’ ability to meet their ongoing policyholder obligations (the “financial strength rating”). See Section 17.2 –
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.
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,
notice to OSFI 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.
Deferred tax assets
We have a deferred tax asset related to net operating loss carryforwards and tax credit carryforwards as at December 31, 2017, that
are subject to carryforward limitations in the U.S. Utilization of these assets and other assets included in our net deferred tax asset
is dependent on generating sufficient future taxable income of the appropriate type (i.e. ordinary income or capital gains) in the
appropriate jurisdiction. If it is determined that it is more likely that sufficient future taxable income will not be generated, we would
be required to increase the valuation allowance (an offset to our deferred tax asset) in future periods, which could have an adverse
effect on our results of operations.
Distribution risk
Distribution risk is the risk related to the distribution of our P&C insurance products. It includes the inherent risk of dealing with
independent distributors, the risk related to new market entrants and the risk associated with our multiple distribution channel
strategy. We may also face the risk that one of our channels or business models would not be sustainable in a specific market or
context. From time to time we issue loans or take equity participation in certain brokers and consequently, we expose ourselves to
other risks including financial risk and regulatory risk. For various reasons, the broker channel has been in a consolidation mode for
the last few years and we believe that this situation will continue. The acquisition of brokers by others or even by other insurers may
impact our relationship with some of them and harm our ability to grow our business. In order to maintain strong relationships with
brokers, each relationship is managed by officers in each of the main regions in which we operate. To mitigate the financial risk
arising from loans to brokers we generally receive guarantees and use standard agreements which contain general security and
oversight clauses. The Board of Directors participates in this oversight process by reviewing these activities periodically.
INTACT FINANCIAL CORPORATION 71
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
22.8 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 2017 assessment of capital required decreased slightly compared to that of 2016. 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.
Section 23 – Off-balance sheet arrangements
23.1 Securities lending
We participate in a securities lending program to generate fee income. This program is managed by our custodian, a major
Canadian financial institution, whereby we lend securities we own to other financial institutions to allow them to meet their delivery
commitments. We loaned securities, which are reported as investments in the accompanying Consolidated financial statements,
with a fair value of $1,087 million as at December 31, 2017 ($720 million as at December 31, 2016).
Collateral is provided by the counterparty and is held in trust by the custodian for our benefit until the underlying security has been
returned to us. The collateral cannot be sold or re-pledged externally by us, unless the counterparty defaults on its financial
obligations. Additional collateral is obtained or refunded on a daily basis as the market value of the underlying loaned securities
fluctuates. The collateral consists of government securities with an estimated fair value of 105% of the fair value of the loaned
securities and amounts to $1,144 million as at December 31, 2017 ($758 million as at December 31, 2016).
72 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 24 – Sensitivity analyses
Sensitivity analyses are one risk management technique that assists 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 our 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 36 - Sensitivity analysis (after tax)
For the years ended December 31,
Equity price risk
Common share prices (10% decrease)1
Preferred share prices (5% decrease)2
Interest rate risk (100 basis point increase)
Currency risk (strengthening of the CAD by 10% vs
all currencies)3
USD investments supporting P&C Canada
International equities supporting P&C Canada
Consolidated net assets of a U.S. subsidiary
1 Net of any equity hedges, including the impact of any impairment.
2 Including the impact on related embedded derivatives.
3 After giving effect to forward-exchange contracts.
Net income
2017
OCI
BVPS Net income
(1)
13
9
(201)
(62)
(64)
6
-
-
(1)
(19)
(176)
(1.45)
(0.35)
(0.40)
0.04
(0.14)
(1.26)
9
8
4
2
-
-
2016
OCI
(193)
(57)
(75)
(47)
-
-
BVPS
(1.40)
(0.37)
(0.54)
(0.34)
-
-
The above 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 our pension plans has been considered; and
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 be realized through sale in the future.
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.
INTACT FINANCIAL CORPORATION 73
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
ADDITIONAL INFORMATION
Section 25 – Financial KPIs and definitions
25.1 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 27 – Non-IFRS financial measures for
the reconciliation to the most comparable IFRS measures.
2017
2016
2015
2014
2013
Growth
DPW growth
5.5%
4.7%
6.2%
1.6%
7.2%
Underlying current year loss ratio
64.5%
64.8%
66.1%
64.3%
64.9%
Underwriting
performance
Claims ratio
Expense ratio
Combined ratio
65.4%
64.9%
61.3%
62.6%
66.9%
28.9%
30.4%
30.4%
30.2%
31.1%
94.3%
95.3%
91.7%
92.8%
98.0%
Net underwriting income
Net investment income
Net distribution income
NOI
NOIPS (in dollars)
OROE
ROE
AROE
EPS (in dollars)
AEPS (in dollars)
BVPS (in dollars)
MCT (Canada)
RBC (U.S.)
Total capital margin
Consolidated
performance
Financial
strength
486
432
132
771
5.60
12.9%
12.8%
13.0%
5.75
5.82
375
414
111
660
4.88
12.0%
9.6%
11.0%
3.97
4.53
628
424
104
860
6.38
16.6%
13.4%
14.3%
5.20
5.54
519
427
75
767
5.67
16.3%
16.1%
16.8%
5.79
6.01
142
406
75
500
3.62
11.2%
9.3%
10.3%
3.10
3.44
48.00
42.72
39.83
37.75
33.94
205%
218%
203%
209%
203%
459%
1,135
n/a
970
n/a
625
n/a
681
n/a
550
Debt-to-total capital ratio
23.1%
18.6%
16.6%
17.3%
18.7%
74 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
25.2 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 27 - Non-IFRS financial measures for the
reconciliation to the most comparable IFRS measures.
AEPS and AROE are adjusted measures, meaning that they exclude the after-tax impact of acquisition-related items, such as
amortization of intangible assets recognized in business combinations, as well as integration and restructuring costs.
NOI, NOIPS and OROE are operating measures, meaning that they exclude non-operating items detailed in Section 26 –
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 11.3 –Delivering on our key financial
objectives for more details on our performance versus the industry.
Growth
DPW growth
for a specific period
DPW for a specified period
–
DPW for the previous year
Written insured
risks growth
for a specific period
# of vehicles and premises in
personal insurance
-
Total # for the previous year
DPW for the previous year
Total # for the previous year
Underlying current
year loss ratio
for a specific period
Current year claims ratio
excluding CAT losses and
PYD
Expense ratio
for a specific period
Underwriting expenses (including
commissions, premium taxes and
general expenses related to
underwriting activities)
Underwriting
results
NEP before the impact of
reinstatement premiums
Claims ratio
for a specific period
Claims incurred
(net of reinsurance)
Combined ratio
for a specific period
NEP
NEP
Claims ratio
+
Expense ratio
A combined ratio under 100% indicates a profitable underwriting result.
A combined ratio over 100% indicates an unprofitable underwriting result.
INTACT FINANCIAL CORPORATION 75
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian 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 12 –
Net investment income
Consolidated
performance
NOI
for a specific
period
As detailed in Table 2 –
Consolidated performance
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
NOIPS
for a specific
period
NOI attributable to common
shareholders
WANSO3
EPS
for a specific
period
As reported in the accompanying
Consolidated statements of
income
OROE
for a 12-month
period
NOI attributable to common
shareholders
Average common shareholders’
equity2 (excluding AOCI)
AEPS
for a specific
period
Adjusted net income attributable
to common shareholders
WANSO3
BVPS
as at the end of a
specific period
Common shareholders’ equity4
Number of common shares
outstanding at the same date
Total capital margin
as at the end of a
specific period
Aggregate of capital in excess of
company action levels in
regulated entities (170% MCT,
200% RBC) plus available cash
in unregulated entities.
Financial
strength
Regulatory
capital ratio
as at the end of a
specific period
Minimum capital test (as defined by
OSFI and the AMF in Canada) and
Risk-based capital (as defined by the
NAIC in the U.S.)
Debt-to-total capital
Total debt outstanding
ratio
as at the end of a
specific period
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.
76 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 26 – 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 37 – Non-operating results
Net investment gains (losses)
Currency and other gains (losses)1
Total investment, currency and other gains
(losses)
Positive (negative) impact of MYA on underwriting
Difference between expected return and discount
rate on pension assets
Integration and restructuring costs2
Amortization of intangible assets recognized in
business combinations
Underwriting results of exited lines
Other
Non-operating gains (losses)
Income tax expense on the above items
U.S. Corporate Tax reform
Q4-2017 Q4-2016
Change
2017
2016
Change
(24)
18
(6)
11
(12)
(12)
(25)
(10)
(4)
(58)
27
27
(91)
(6)
(97)
87
(6)
(19)
(12)
-
(5)
(52)
11
-
67
24
91
(76)
(6)
7
(13)
(10)
1
(6)
16
27
(36)
105
69
92
(45)
(57)
(62)
(10)
(18)
(31)
25
27
21
(71)
(1)
(72)
34
(26)
(23)
(53)
-
(12)
35
106
141
58
(19)
(34)
(9)
(10)
(6)
(152)
121
33
-
(8)
27
(119)
140
37
After-tax non-operating gains (losses)
1 Including a currency derivative gain related to book value hedge of OneBeacon of $65 million in 2017.
2 Including $10 million in Q4-2017 and $40 million in 2017 in connection with the acquisition of OneBeacon.
(41)
(4)
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.
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.
Integration and restructuring costs include items such as retention bonuses, the initial net impact of a reinsurance coverage
which provides protection against certain negative reserve developments, pre-acquisition finance costs and acquisition-related
expenses.
The difference between the expected return and discount rate on pension assets is treated as non-operating results, as we
believe the gap in these measures is not reflective of our internal investment management expertise and management of our
pension asset portfolio.
Underwriting results of exited lines included the results of the U.S. Commercial’s business units Programs, and Architects and
Engineers.
INTACT FINANCIAL CORPORATION 77
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 27 – 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.
NOI, NOIPS and OROE
Exclude non-operating results (see Section 26 for details)
Table 38 – Reconciliation of NOI, NOIPS and OROE to net income
Net income
Add (less) income tax expense (recovery)
Add non-operating losses
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
Q4-2017
Q4-2016
2017
2016
232
14
58
304
(68)
236
(10)
171
53
52
276
(64)
212
(4)
226
139.2
1.63
208
131.1
1.58
792
150
31
973
(202)
771
(27)
744
133.1
5.60
744
5,758
12.9%
541
145
152
838
(178)
660
(20)
640
131.2
4.88
640
5,332
12.0%
All underwriting results and related ratios excluded the MYA and results of our U.S. Commercial exited lines, unless otherwise
noted.
DPW
Represents the total amount of premiums for new and renewal policies billed (written) during the reporting period, normalized
for the effect of multi-year policies, excluding industry pools, fronting and exited lines.
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.
Table 39 – Reconciliation of DPW and DPW growth to DPW, as reported under IFRS
DPW, as reported under IFRS
Less impact of industry pools and fronting
Less results of exited lines
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
Q4-2017
Q4-2016
2,301
(2)
(18)
-
2,281
13
2,294
17%
1,937
10
-
7
1,954
7
1,961
3%
2017
8,748
(2)
(18)
-
8,728
19
8,747
5%
2016
8,197
32
-
47
8,276
17
8,293
5%
78 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
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.
Table 40 – Reconciliation of NEP before reinstatement premiums to NEP and of current year claims to net claims incurred, as reported under IFRS
NEP, as reported under IFRS
Add share of the results of jointly held insurance operations
Less NEP of exited lines
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
Less net claims of exited lines
Total net claims
Less current year CAT claims
Add favourable (unfavourable) PYD
Current year claims
NEP, before reinstatement premiums
Underlying current year loss ratio
Underwriting expenses
Q4-2017
Q4-2016
2,428
-
(28)
2,400
(2)
2,398
1,552
11
(6)
-
(33)
1,524
(31)
62
1,555
2,398
2,035
8
-
2,043
2
2,045
1,196
87
(3)
5
-
1,285
(34)
62
1,313
2,045
2017
8,558
-
(28)
8,530
(2)
8,528
5,538
92
(18)
-
(33)
5,579
(313)
238
5,504
8,528
2016
7,902
44
-
7,946
29
7,975
5,108
34
(10)
29
-
5,161
(385)
389
5,165
7,975
64.8%
64.2%
64.5%
64.8%
Table 41 – Reconciliation of underwriting expenses to underwriting expenses, as reported under IFRS
Underwriting expenses, as reported under IFRS
Less difference between expected return and discount rate on pension
assets
Less other underwriting revenues
Less underwriting expenses of exited lines
Add profit (loss) from jointly held insurance operations
Underwriting expenses
ROE
Excludes the dividends declared on preferred shares.
Table 42 – 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
Q4-2017
Q4-2016
735
(6)
(26)
(5)
-
698
635
(4)
(30)
-
4
605
2017
2,605
(27)
(108)
(5)
-
2016
2,533
(16)
(123)
-
16
2,465
2,410
Q4-2017
Q4-2016
2017
2016
232
(10)
222
171
(4)
167
792
(27)
765
765
5,961
12.8%
541
(20)
521
521
5,417
9.6%
INTACT FINANCIAL CORPORATION 79
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
AEPS and AROE
Exclude the after-tax impact of amortization of intangible assets recognized in business combinations, as well as integration
and restructuring costs.
We believe that these items are not appropriate in assessing our underlying performance.
Table 43 – Reconciliation of AEPS and AROE to net income
Net income
Adjustments, net of tax
Remove currency derivative gain related to the acquisition of OneBeacon
Remove positive impact from U.S. Corporate Tax reform
Add amortization of intangibles recognized in business combinations
Add integration and restructuring costs
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)
Adjusted net income attributable to common shareholders - LTM
Average common shareholders’ equity
AROE for the last 12 months
Q4-2017
Q4-2016
232
(7)
(27)
20
7
225
(10)
215
139.2
1.55
171
-
-
23
14
208
(4)
204
131.1
1.56
2017
792
(62)
(27)
50
49
802
(27)
775
133.1
5.82
775
5,961
13.0%
2016
541
-
-
56
17
614
(20)
594
131.2
4.53
594
5,417
11.0%
Cash flow available for investment activities
Includes net cash flows from cash and cash equivalents and the investment portfolio.
See Section 17.5 – 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.
80 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 28 – 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
None
Note 29
Note 32
28.1 New accounting standards effective January 1, 2017
There were no new accounting standards, which have a significant impact on our Consolidated financial statements, effective
January 1, 2017. Please refer to Note 2 – Summary of significant accounting policies in the Consolidated financial statements.
28.2 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:
Reference to our Consolidated financial statements
Description
Business combinations
Note
Description
Note 4.3
Impairment of financial assets
Valuation of claims liabilities
Note 10.3
Measurement of income taxes
Impairment of goodwill and intangible assets
Note 14.2
Valuation of DB obligation
Note
Note 22.2
Note 23.3
Note 26.6
28.3 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
comprise 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 81
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
28.4 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
28.5 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”)
of the Canadian Securities Administrators. This evaluation confirmed, subject to the inherent limitations noted above, the
effectiveness of the design and operation of disclosure controls and procedures as at December 31, 2017. Management can
therefore provide reasonable assurance that material information relating to the Company and its subsidiaries is reported to it on a
timely basis so that it may provide investors with complete and reliable information.
Internal controls over financial reporting
28.6
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 limited the scope of design of its disclosure controls and procedures and its ICFR to exclude the controls, policies
and procedures of OneBeacon, which was acquired by IFC on September 28, 2017. OneBeacon’s total assets and total liabilities
represented approximately 21% and 18% of total consolidated assets and total consolidated liabilities, respectively, as at
December 31, 2017. The impact of the acquisition on the total consolidated net income for the year ended December 31, 2017
amounted to a net loss of $2 million. Management is committed to removing this limitation within the timeframe permitted by
regulation.
Management has evaluated the design and operating effectiveness of its ICFR as defined in NI 52-109, excluding OneBeacon’s
ICFR as explained above. 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, 2017.
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 2017 that have materially affected, or are reasonably likely to
materially affect, the Company’s ICFR.
82 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 29 – Shareholder information
29.1 Authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
29.2 Outstanding share data
Table 44 – Outstanding share data (number of shares)
As at February 2, 2018
Common shares
Class A
Series 1 preferred shares
Series 3 preferred shares
Series 4 preferred shares
Series 5 preferred shares1
Series 6 preferred shares2
¹ Series 5 preferred shares were issued on May 24, 2017.
2 Series 6 preferred shares were issued on August 18, 2017.
139,188,634
10,000,000
8,405,004
1,594,996
6,000,000
6,000,000
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.
29.3 Dividends declared on common shares and preferred shares
Table 45 – Dividends declared per share
Common shares
Class A
Series 1 preferred shares
Series 3 preferred shares
Series 4 preferred shares
Series 5 preferred shares
Series 6 preferred shares
Q1-2018
0.70
0.21225
0.20825
0.217725
0.325
0.33125
Q4-2017
0.64
0.2625
0.20825
0.2143725
0.325
0.49007
FY 2017
2.56
1.0500
0.83305
0.8067975
0.7845
0.49007
Please also see Section 11.4 – Delivering value to our shareholders.
29.4 NCIB
On February 13, 2017, we renewed our NCIB program which permits us 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 February 1,
2017.
From January 1 to February 10, 2017, 20,400 common shares had been repurchased for cancellation under the 2016 NCIB
program at an average price of $93.70 for total consideration of $1.9 million.
From February 13 to September 30, 2017, 51,100 common shares had been repurchased for cancellation under the 2017 NCIB
program at an average price of $94.19 per share for a total consideration of $4.8 million.
Following the announcement of the acquisition of OneBeacon on May 2, 2017, we suspended our purchases under the NCIB to
maintain excess capital prior to the closing date of the transaction. We used excess capital for deleveraging, in line with our
conservative transaction financing plan. This 2017 NCIB program will expire on February 12, 2018.
INTACT FINANCIAL CORPORATION 83
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
Section 30 – Selected annual and quarterly information
30.1 Selected annual information
Table 46 – Selected annual information
1
Total revenues
Underwriting income
Net income
EPS, basic and diluted (in dollars)
2
Cash dividends declared per share (in dollars)
Common shares
Class A
2017
9,157
486
792
5.75
2.56
2016
8,538
375
541
3.97
2.32
2015
8,070
628
706
5.20
2.12
Series 1 Preferred Shares
Series 3 Preferred Shares
Series 4 Preferred Shares
Series 5 Preferred Shares
Series 6 Preferred Shares
1.05
1.05
n/a
n/a
n/a
1 Total revenues exclude other underwriting revenues and NEP of exited lines. Refer to Note 27 – Segment information to the accompanying
1.05
1.00
0.20
n/a
n/a
1.05
0.83
0.81
0.78
0.49
Consolidated financial statements for details.
2 Refer to Section 27 – Non-IFRS financial measures.
Table 47 – Selected annual information
As at December 31,
Investments
Total assets
Debt outstanding
Shareholders' equity
30.2 Selected quarterly information
Table 48 – Selected quarterly information1
2017
16,853
27,928
2,241
7,463
2016
14,386
22,866
1,393
6,088
DPW
Total revenues2
NEP
Current year CAT losses
Favourable PYD
Underwriting income
Combined ratio
Net investment income
Net distribution income
NOI
Net income
Per share measures, basic and
diluted (in dollars)
NOIPS
EPS
Q4
2,294
2,576
2,400
31
(62)
178
92.6%
121
28
236
232
Q3
2,209
2,231
2,082
89
(53)
170
91.8%
101
30
219
171
Q2
2,500
2,204
2,051
105
(41)
103
95.0%
105
50
193
243
2017
Q1
1,744
2,146
1,997
88
(82)
35
98.2%
105
24
123
146
Q4
1,961
2,188
2,043
34
(62)
153
92.5%
104
24
212
171
Q3
2,193
2,187
2,036
166
(71)
61
97.0%
102
30
137
125
Q2
2,458
2,090
1,937
164
(93)
16
99.2%
104
43
114
93
0.90
1.08
1.58
1.27
1.01
0.91
0.83
0.67
1.46
1.11
2015
13,504
21,315
1,143
5,724
2016
Q1
1,681
2,073
1,930
21
(163)
145
92.5%
104
14
197
152
1.63
1.60
1 Refer to Section 27 – Non-IFRS financial measures.
2 Total revenues exclude other underwriting revenues and NEP of exited lines.
1.61
1.25
1.44
1.82
See also the discussion on seasonality of the business hereafter.
84 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2017
(in millions of Canadian dollars, except as otherwise noted)
30.3 Seasonality of the P&C Canadian insurance business
The P&C Canadian insurance business is seasonal in nature. While NEP are generally stable from quarter to quarter, underwriting
results are 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 50).
For instance, in 2017 our first and second quarters saw a higher combined ratio including CAT losses than the third and fourth
quarters, meaning that underwriting results were relatively less profitable in Q1-2017 and Q2-2017. When CAT losses are excluded,
the first and fourth quarters of 2017 saw a slightly higher combined ratio than the other quarters in 2017, meaning that the
underwriting results were relatively less profitable in Q1-2017 and Q4-2017 than the rest of the year.
Table 49 – Seasonal indicator, including CAT losses
Q1
Q2
Q3
Q4
2017
1.04
1.01
0.97
0.98
2016
0.97
1.04
1.02
0.97
Table 50 – Seasonal indicator, excluding CAT losses
Q1
Q2
Q3
Q4
2017
1.03
0.99
0.97
1.01
2016
1.01
0.99
0.99
1.01
2015
1.02
1.00
1.02
0.96
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
2010
Eight-year
average
1.00
1.03
0.99
0.98
0.98
0.98
1.01
1.03
1.00
1.01
1.01
0.98
2011
2010
Eight-year
average
1.04
0.96
0.99
1.01
1.00
0.99
0.98
1.03
1.03
0.99
0.98
1.01
INTACT FINANCIAL CORPORATION 85
THIS PAGE IS LEFT INTENTIONALLY BLANK
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2017
Management’s responsibility for financial reporting
Management is responsible for the preparation and presentation of the Consolidated financial statements of Intact Financial
Corporation and its subsidiaries, collectively known as “the Company”. This responsibility includes selecting appropriate accounting
policies and making estimates and informed judgments based on the anticipated impact of current transactions, events and trends,
consistent with International Financial Reporting Standards.
In meeting its responsibility for the reliability of consolidated financial statements, the Company maintains and relies on a
comprehensive system of internal control comprising organizational procedural controls and internal accounting controls. The
Company’s system of internal control includes the communication of policies and of the Company’s Code of Conduct,
comprehensive business planning, proper segregation of duties, delegation of authority for transactions and personal accountability,
selection and training of personnel, safeguarding of assets and maintenance of records. The Company’s internal auditors review
and evaluate the system of internal control.
The Company’s Board of Directors, acting through the Audit Committee, which is composed entirely of Directors, who are neither
officers nor employees of the Company, oversees management’s responsibility for the design and operation of effective financial
reporting and internal control systems, as well as the preparation and presentation of financial information.
The Audit Committee conducts such review and inquiry of management and the internal and external auditors as it deems
necessary to establish that the Company employs an appropriate system of internal control, adheres to legislative and regulatory
requirements and applies the Company’s Code of Conduct. The internal and external auditors, as well as the Actuary, have full and
unrestricted access to the Audit Committee, with and without the presence of management.
Pursuant to the Insurance Companies Act of Canada or to the Insurance Act (Québec) (“the Acts”), the Group Chief Actuary, who is
a member of management, is appointed by the Board of Directors. The Group Chief Actuary is responsible for discharging the
various actuarial responsibilities required by the Acts and conducts a valuation of policy liabilities, in accordance with generally
accepted actuarial standards, reporting his results to management and the Audit Committee.
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 6, 2018
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, 2017 and 2016,
and the consolidated statements of comprehensive income, changes in shareholders’ equity and
cash flows for the years ended December 31, 2017 and 2016, 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, 2017 and 2016, and its
financial performance and its cash flows for the years ended December 31, 2017 and 2016 in
accordance with International Financial Reporting Standards.
Montréal, Canada
February 6, 2018
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, 2017
Table of contents
Consolidated balance sheets………………………………………………………………………….……...…………..3
Consolidated statements of income………………………...……..……………………..……………………………..........4
Consolidated statements of comprehensive income……..……..……………………..……………………………….5
Consolidated statements of changes in shareholders’ equity…………………………………………………………6
Consolidated statements of cash flows……………………….………………………………………………………....7
Notes to the Consolidated financial statements
Note 1 –
Note 2 –
Note 3 –
Note 4 –
Note 5 –
Note 6 –
Note 7 –
Note 8 –
Note 9 –
Note 10 –
Note 11 –
Note 12 –
Note 13 –
Note 14 –
Note 15 –
Note 16 –
Note 17 –
Note 18 –
Note 19 –
Note 20 –
Note 21 –
Note 22 –
Note 23 –
Note 24 –
Note 25 –
Note 26 –
Note 27 –
Note 28 –
Note 29 –
Note 30 –
Note 31 –
Note 32 –
Status of the Company ........................................................................................................................ 8
Summary of significant accounting policies ......................................................................................... 8
Significant accounting judgments, estimates and assumptions ......................................................... 22
Business combinations ...................................................................................................................... 22
Investments ....................................................................................................................................... 24
Financial liabilities related to investments .......................................................................................... 26
Derivative financial instruments ......................................................................................................... 27
Fair value measurement .................................................................................................................... 29
Financial risk ...................................................................................................................................... 30
Claims liabilities ............................................................................................................................... 36
Unearned premiums ........................................................................................................................ 39
Insurance risk .................................................................................................................................. 39
Reinsurance ..................................................................................................................................... 42
Goodwill and intangible assets ........................................................................................................ 44
Investments in associates and joint ventures ................................................................................... 46
Property and equipment ................................................................................................................... 46
Other assets and other liabilities ...................................................................................................... 47
Debt outstanding .............................................................................................................................. 47
Common shares and preferred shares ............................................................................................ 49
Capital management ........................................................................................................................ 51
Net investment income .................................................................................................................... 52
Net gains (losses) ............................................................................................................................ 53
Income taxes ................................................................................................................................... 54
Earnings per share........................................................................................................................... 56
Share-based payments .................................................................................................................... 56
Employee future benefits ................................................................................................................. 58
Segment information ........................................................................................................................ 63
Additional information on the Consolidated statements of cash flows.............................................. 65
Related-party transactions ............................................................................................................... 65
Commitments and contingencies ..................................................................................................... 66
Disclosures on rate regulation ......................................................................................................... 66
Standards issued but not yet effective ............................................................................................. 67
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
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
Total liabilities
Shareholders’ equity
Common shares
Preferred shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Available-for-sale securities
Translation of foreign operations, net of hedges
Other
Note
5
13
23
17
15
16
14
14
10
11
6
23
17
18
19
19
Total liabilities and shareholders’ equity
$
27,928 $
See accompanying notes to the Consolidated financial statements.
On behalf of the Board:
Charles Brindamour
Director
Eileen Mercier
Director
2017
2016
$
163 $
11,229
1,409
3,659
393
16,853
3,351
822
24
112
881
782
550
150
2,161
2,242
168
8,801
1,377
3,635
405
14,386
3,057
482
116
142
747
549
543
139
1,302
1,403
$
$
27,928 $
22,866
10,475 $
5,365
246
262
257
1,619
2,241
8,536
4,573
529
10
404
1,333
1,393
20,465
16,778
2,816
783
128
3,520
224
(2)
(6)
7,463
2,082
489
129
3,197
195
-
(4)
6,088
22,866
INTACT FINANCIAL CORPORATION 3
Note
$
21
10
22
15
23
24
24
19
$
2017
8,748
(221)
8,527
31
8,558
108
275
194
158
9,293
(5,538)
(2,605)
(37)
69
16
(82)
(57)
(117)
942
(150)
$
$
$
792
$
133.1
5.75
2.56
$
$
2016
8,197
(212)
7,985
(83)
7,902
122
265
184
143
8,616
(5,108)
(2,533)
(35)
(70)
16
(72)
(22)
(106)
686
(145)
541
131.2
3.97
2.32
INTACT FINANCIAL CORPORATION
Consolidated statements of income
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Direct premiums written
Premiums ceded
Net premiums written
Changes in unearned premiums
Net earned premiums
Other underwriting revenues
Investment income
Interest income
Dividend income
Other revenues
Total revenues
Net claims incurred
Underwriting expenses
Investment expenses
Net gains (losses)
Share of profit from investments in associates and joint ventures
Finance costs
Integration and restructuring costs
Other expenses
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)
See accompanying notes to the Consolidated financial statements.
4 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Consolidated statements of comprehensive income
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
2017
Net income attributable to shareholders
Other comprehensive income (loss)
Available-for-sale securities:
net changes in unrealized gains (losses)
income tax benefit (expense)
reclassification of net losses (gains)
income tax benefit (expense)
Cash flow hedges:
net changes in unrealized gains (losses)
reclassification of net losses (gains)
Foreign exchange gains (losses) on:
translation of foreign operations, net of tax
net investment hedges
income tax benefit (expense)
Other
Items that may be reclassified subsequently to net income
Net actuarial gains (losses) on employee future benefits
26
income tax benefit (expense)
Items that will not be reclassified subsequently to net income
Other comprehensive income (loss)
$
792
$
295
(81)
(251)
66
29
(200)
200
-
7
(12)
3
(2)
(2)
25
(89)
24
(65)
(40)
Total comprehensive income attributable to shareholders
$
752
$
See accompanying notes to the Consolidated financial statements.
2016
541
378
(94)
(105)
29
208
-
-
-
-
-
-
-
4
212
(35)
9
(26)
186
727
INTACT FINANCIAL CORPORATION 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, 2017
$
2,082 $
489 $
129 $
3,197
$
191 $
Net income attributable to shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Common shares issued
Preferred shares issued
Common shares repurchased for
cancellation
Dividends declared on:
common shares
preferred shares
Share-based payments
Acquisition of non-controlling interests
19
19
19
19
19
25
-
-
-
735
-
(1)
-
-
-
-
-
-
-
-
294
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
-
792
(65)
727
-
-
(6)
(351)
(27)
(6)
(14)
-
25
25
-
-
-
-
-
-
-
Total
6,088
792
(40)
752
735
294
(7)
(351)
(27)
(7)
(14)
Balance as at December 31, 2017
$
2,816 $
783 $
128 $
3,520
Balance as at January 1, 2016
$
2,090 $
489 $
119 $
3,047
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
19
19
19
25
-
-
-
(8)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
541
(26)
515
(36)
(304)
(20)
(5)
$
$
216 $
7,463
(21) $
5,724
-
212
212
-
-
-
-
541
186
727
(44)
(304)
(20)
5
Balance as at December 31, 2016
$
2,082 $
489 $
129 $
3,197
$
191 $
6,088
See accompanying notes to the Consolidated financial statements
6 INTACT FINANCIAL CORPORATION
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 defined benefit pension plans
Share-based payments
Net losses (gains)
Adjustments for non-cash items
Changes in other operating assets and liabilities
Changes in net claims liabilities
Net cash flows provided by operating activities
Investing activities
Business combinations, net of cash acquired
Proceeds from sale of investments
Purchases of investments
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
Amount drawn under a credit facility
Proceeds from issuance of common shares
Proceeds from issuance of preferred shares
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 provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Composition of cash and cash equivalents
Cash
Cash equivalents
Cash and cash equivalents, end of year
Other relevant cash flow disclosures – operating activities
Interest paid
Interest received
Dividends received
See accompanying notes to the Consolidated financial statements.
Note
2017
2016
26
22
28
28
10
4
18
18
19
19
19
25
19
19
$
$
942
32
(60)
(2)
(69)
225
(201)
(86)
781
(2,139)
11,058
(10,582)
(108)
(98)
(1,869)
422
60
731
292
(7)
(37)
(351)
(27)
1,083
(5)
168
$
163
$
114
49
163
84
277
207
686
(158)
(61)
(3)
70
208
(31)
214
925
(19)
8,152
(8,497)
(275)
(120)
(759)
248
-
-
-
(44)
(19)
(304)
(20)
(139)
27
141
168
167
1
168
68
269
204
INTACT FINANCIAL CORPORATION 7
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Status of the Company
Note 1 –
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 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. On
September 28, 2017, the Company acquired all of the issued and outstanding shares of OneBeacon Insurance Group, Ltd.
(“OneBeacon”), a leading U.S. specialty insurer. Further details of the acquisition are provided in Note 4 – Business
combinations.
These Consolidated financial statements include the accounts of the Company and its subsidiaries. The Company’s significant
operating subsidiaries are presented in Note 27 – Segment information.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
Summary of significant accounting policies
Note 2 –
Glossary of abbreviations .................................................................................................................................................................. 9
2.1 Basis of presentation ................................................................................................................................................................ 9
2.2 Basis of consolidation ............................................................................................................................................................... 9
2.3 Insurance contracts……………………………………….…………………………………………………………………………… ... 10
a) Revenue recognition and premium receivables……………………………………………………………………………………. . 10
b) Claims liabilities……………………………………………………………………………………………………………………….. .. 11
c) Reinsurance assets…………………………………………………………………………………………………………………….. 11
d) Deferred acquisition costs…………………………………………………………………………………………………………….. 11
e) Liability adequacy test…………………………………………………………………………………………………………………. 11
2.4 Financial instruments ………………………………………………………………………………………… ................................... 12
a) Classification and measurement of financial assets and financial liabilities………………………………………………….…. 12
b) Fair value measurement…………………………………………………………………………………………………………….… 13
c) Derivative financial instruments and hedging……………………………………………………………………………………… .. 14
d) Recognition and offsetting of financial assets and financial liabilities ................................................................................... 15
e) Offsetting of financial assets and financial liabilities ............................................................................................................. 15
f) Revenue and expense recognition.…………………………………………………………………………………….. ................... 16
g) Impairment of financial assets other than those classified as designated as FVTPL……………………………………………16
2.5 Business combinations…………………………………………………………………………………………………………………. 17
2.6 Goodwill and intangible assets…………………………………………………………………………………………………..……. 17
a) Goodwill…………………………………………………………………………………………………..……………………………… 17
b) Intangible assets…………………………………………………………………………………………………..……………………. 18
2.7 Foreign currency translation…………………………………………………………………………………………………………. .. 18
2.8
Investments in associates and joint ventures…………………………………………………………………………………….… 19
2.9 Property and equipment………………………………………………………………………………………………………………… 19
2.10 Leases……………………………………………………………………………………………………………………………………… .19
2.11 Income taxes……………………………………………………………………………………………………………………………… .19
a) Income tax expense (benefit)………………………………………………………………………………………………………… . 19
b) Recognition and offsetting of current tax assets and liabilities………………………………………………………………….… 20
2.12 Share-based payments………………………………………………………………………………………………………………….. 20
a) Long-term incentive plan (LTIP)…………………………………………………………………………………………………… .... 20
b) Employee share purchase plan (ESPP)………………………………………………………………………………………….… .. 20
c) Deferred share unit plan (DSU)……………………………………………………………………………………………………...... 21
2.13 Employee future benefits – pension………………………………………………………………… ............................................. 21
2.14 Current vs non-current………………………………………………………………………………………………………………..… 21
8 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Glossary of abbreviations
ABS
AFS
AMF
AOCI
CAD
CALs
CGU
DB
DPW
DSU
EPS
Asset-backed securities
Available for sale
Autorité des marchés financiers
Accumulated other comprehensive income
Canadian Dollar
Company action levels
Cash generating unit
Defined benefits
Direct premiums written
Deferred share unit
Earnings per share to common
shareholders
IFRS
International Financial Reporting Standards
JV
LAE
LTIP
Joint ventures
Loss adjustment expenses
Long-term incentive plan
MBS Mortgage-backed securities
MCT Minimum capital test
MYA Market-yield adjustment
NCI
NEP
OCI
Non-controlling interest
Net earned premiums
Other comprehensive income
OSFI Office of the Superintendent of Financial Institutions
ESPP
Employee share purchase plan
FA
Facility Association
FVTPL Fair value through profit and loss
IASB
IBNR
International Accounting Standards Board
Insurance claims incurred but not reported
by policyholders
PSU
RBC
RSP
RSU
USD
Performance stock units
Risk-based capital
Risk sharing pools
Restricted stock units
U.S. Dollar
Basis of presentation
2.1
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 6, 2018.
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 presents the basis of
consolidation.
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 and reported as acquisitions or disposals of NCI in the Consolidated statements of changes in shareholders’
equity.
All balances, transactions, income and expenses and profits and losses resulting from intercompany transactions and dividends are
eliminated on consolidation.
INTACT FINANCIAL CORPORATION 9
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Shareholding
Accounting policies
Generally 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 gains (losses).
Generally between
20% to 50% of
voting rights
Equity method
Note 2.8 for details
Generally an equal
percentage of
voting rights from
each party to the
joint arrangement
Equity method
Note 2.8 for details
Insurance contracts
2.3
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.
Revenue recognition and premium receivables
a)
Premiums written are reported net of cancellations, promotional returns and sales taxes. Premiums written are recognized on the
date coverage begins. Premiums written are deferred as Unearned premiums and recognized as NEP (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.
Other underwriting revenues include:
fees collected from policyholders in connection with the costs incurred for the Company’s yearly billing plans, which are
recognized over the terms of the underlying policies; and
fees received for the administration of a portion of the FA policies.
Other revenues include commission revenues received from external insurance providers by consolidated brokers recognized on an
accrual basis.
10 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Claims liabilities
b)
Claims liabilities are established to reflect the estimate of the full amount of all liabilities associated with the insurance contracts
earned at the balance sheet date, including IBNR, 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 (usually referred to as loss adjustment expenses or LAE).
Claims liabilities are first determined on a case-by-case basis as insurance claims are reported. They are reassessed as additional
information becomes known. Claims liabilities are estimated by the appointed actuaries using generally accepted 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.
The ultimate amount of these liabilities will vary from the best estimate made for a variety of reasons, including additional
information with respect to the facts and circumstances of the insurance claims incurred. To recognize the uncertainty in
establishing this best estimate, 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.
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.
Claims liabilities are considered to be settled when the contract expires, is discharged or cancelled.
Reinsurance assets
c)
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.
Deferred acquisition costs
d)
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.
Liability adequacy test
e)
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.
INTACT FINANCIAL CORPORATION 11
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
Table 2.2 –
Classification of the Company’s most significant financial assets and financial liabilities
Initial and subsequent measurement
Initially measured at fair value using transaction
prices at the trade date.
Subsequently measured at fair value using bid
prices at end of period, with changes in fair
value reported in OCI (when unrealized) or in
Net gains (losses) when realized or impaired.
Initially measured at fair value using bid prices
(for financial assets) or ask prices (for financial
liabilities) at the trade date.
Subsequently measured at fair value using bid
prices (for financial assets) or ask prices (for
financial liabilities) at end of period, with
changes in fair value reported in Net gains
(losses).
The effective portion of cash flow hedges, as
well as net investment hedges in a foreign
operation is recorded in foreign exchange gains
(losses) OCI.
Classification
Financial
instruments Description
AFS
Debt
securities
Investments 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.
Investments neither classified nor designated as FVTPL.
Common
shares and
preferred
shares
Other
instruments
Guaranteed loan as well as investments in mutual and
private funds.
Classified as
FVTPL
Common
shares
Investments purchased with the intention of generating
profits in the near term.
Derivative
financial
instruments
Derivatives 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
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/short
positions
Market neutral investment strategy, where the Company
actively manages both the long and short positions,
while mitigating overall equity market volatility.
Designated
as FVTPL on
initial
recognition
Debt
securities
backing its
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
Highly liquid investments that are readily convertible into
a known amount of cash are subject to an 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.
Initially measured at fair value at the issuance
date.
Subsequently measured at amortized cost using
the effective interest method, with changes in
fair value reported in Net gains (losses) when
realized or impaired.
12 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Classification
Financial
instruments Description
Other
financial
liabilities
Debt
outstanding
The Company’s Senior and medium-term notes.
Amount drawn under a credit facility.
Initial and subsequent measurement
Initially measured at fair value at the issuance
date, at the date of acquisition of OneBeacon
for the U.S. Senior notes or when credit facility
is used.
Subsequently measured at amortized cost using
the effective interest method, with changes in
fair value reported in Net 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.
In 2017, the Company refined its three-level fair value methodology to categorize all Government and Corporate bonds as Level 2,
except for Canadian Federal, Canadian Agency housing trust and U.S. Treasuries, which are categorized as Level 1.
December 31, 2016 figures have been revised accordingly and resulted in a reclassification of $2,447 million of fixed-income
securities from Level 1 to Level 2.
Table 2.3 –
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
Level 3
Valuation techniques for
which all inputs that have a
significant effect on the fair
value are observable (either
directly or indirectly)
Valuation techniques for
which inputs that have a
significant effect on the fair
value are not based on
observable market data
U.S. Treasuries, Canadian Federal and Canadian Agency housing trust debt
securities
Common shares and preferred shares
Exchange-traded derivatives
Investments in mutual funds
All Government and Corporate debt securities, except for U.S. Treasuries,
Canadian Federal and Canadian Agency housing trust
Unsecured medium-term notes and 2012 U.S. Senior Notes
Over-the-counter derivatives
ABS and MBS
Loans1
Perpetual preferred shares gross up and related embedded derivatives
Hedge and private funds
Guaranteed loan
1
Measured at amortized cost with fair value disclosed.
Level 1
A financial instrument is regarded as quoted in an active market if quoted prices for that financial instrument are readily and
regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent
actual and regularly occurring market transactions on an arm’s length basis.
Level 2
Where the fair values of financial assets and financial liabilities 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.
INTACT FINANCIAL CORPORATION 13
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Loans – The fair value of loans 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.
Perpetual preferred shares gross up and related embedded derivatives – The fair value of the Company’s perpetual
preferred shares with call options (which give the issuer the right to redeem the shares at a particular price) has to be measured
separately from preferred shares and accounted for as an embedded derivative. To determine the fair value of embedded
derivatives, the Company uses a valuation technique based on the implied volatility of underlying preferred shares. The implied
volatility is an unobservable parameter that is calculated using an internally developed valuation model, which can be
significantly affected by market conditions. Judgment is also required to determine the time period over which the volatility is
measured.
Hedge funds and private funds – Hedge funds and private funds are measured at fair value of which the net assets value
(‘’NAV’’), is generally the practical expedient and are no longer classified within the fair value hierarchy. The Company employs
a number of procedures to assess the reasonableness of the NAV reported by the fund, including obtaining and reviewing
periodic and audited financial statements and discussing each fund’s pricing with the fund manager throughout the year. In the
event, the Company believes that its estimate of the NAV differs from that reported by the fund due to the illiquidity or other
factors, the Company will adjust the fund’s reported NAV to more appropriately represent the fair value of our interest in the
investment.
Guaranteed loan – The fair value of the guaranteed loan is based on a discounted expected cash flow model using
information as of the measurement date. The estimated fair value is sensitive to changes in public debt credit spreads, as well
as changes in estimates with respect to other variables including a discount to reflect the lack of liquidity due to its private
nature, the credit quality, as well as the timing, amount and likelihood of interest and principal payments on the loan which are
subject to regulatory approval.
Derivative financial instruments and hedging
c)
The Company enters into a variety of derivative financial instruments to manage its exposure arising from financial assets and
financial liabilities. Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate,
foreign exchange rate, equity or commodity instrument or index. The Company uses derivatives 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. In certain circumstances, these hedges also meet the requirements for hedge accounting. Risk
management strategies eligible for hedge accounting have been designated as cash flow hedges or net investment hedges in a
foreign operation.
14 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Derivatives are initially measured at fair value at the trade date and subsequently re-measured at fair value at the end of each
reporting date. Derivative financial instruments with a positive fair value are recorded as assets while derivative financial instruments
with a negative fair value are recorded as liabilities. Changes in fair value are recorded in Net gains (losses) unless the derivative
financial instruments are part of a qualified hedging relationship, as described below.
Cash flow hedges
The Company has used foreign currency derivatives to hedge the OneBeacon purchase price exposure to fluctuations in the
CAD/USD exchange rate. The effective portion of the change in the fair value of the hedging derivative, net of taxes, was
recognized in OCI. The Company has elected to reclassify net losses accumulated in OCI at the time of closing to the
acquisition cost of its investment in OneBeacon.
Net investment hedges in a foreign operation (Book value hedge)
The Company uses foreign currency derivatives to manage its book value exposure to the USD relative to the CAD of its
foreign operation, OneBeacon. The effective portion of gains or losses on hedging derivatives, together with foreign exchange
translation gains or losses on the net investment in OneBeacon, is recorded in Foreign exchange gains (losses) in OCI.
Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception.
Hedge effectiveness is evaluated at inception and throughout the term of the hedge and hedge accounting is only applied when the
Company expects that the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in
cash flows attributable to the risk being hedged.
Hedge accounting is discontinued prospectively when it is determined that the hedging instrument is no longer effective as a hedge,
the hedging instrument is terminated or sold, or upon the sale or early termination of the hedged item.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments, while providing effective economic hedges, are not designated as hedges for accounting purposes.
Changes in the fair value of such derivatives are recognized in Net gains (losses). See Note 7 – Derivative financial instruments
for details.
Recognition of financial assets and financial liabilities
d)
Financial assets are no longer recorded when the rights to receive cash flows from the instruments 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.
Securities lending - 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.
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.
Offsetting of financial assets and financial liabilities
e)
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.
INTACT FINANCIAL CORPORATION 15
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Revenue and expense recognition
f)
Net investment income
Premiums and discounts on debt securities classified as AFS, as well as premiums earned or discounts incurred for loans and
Interest income from debt securities and loans is recognized on an accrual basis.
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 gains (losses)
Gains and losses on the sale of AFS debt and equity securities are generally calculated on a first in, first out basis, except for
certain equity strategies.
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.
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 income.
Impairment of financial assets other than those classified or designated as FVTPL
g)
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. Objective evidence of impairment includes:
Debt impairment model
One or more loss events (a payment default for example) that occurred after initial recognition and that has an impact on
the estimated future cash flows of the financial asset.
Increased probability that the future cash flows will not be recovered based on counterparty credit rating considerations.
Equity impairment model
A significant, a prolonged, or a significant and prolonged decline in the fair value of an investment below cost.
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.
Table 2.4 –
Objective evidence of impairment for equity impairment model
Unrealized loss position
Common shares
Significant
Prolonged
Unrealized loss of 50% or more
Unrealized loss for 15 consecutive months or more
Significant and prolonged
Unrealized loss for 9 consecutive months or more and unrealized loss of 25%
16 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Loans and receivables impairment model
A payment default or when there are objective indications that the counterparty will not honour its obligations.
The following table summarizes the measurement and recognition of impairment losses.
Table 2.5 –
Impairment models
Debt
Debt securities
Equity
Loans and receivables
Common shares
Loans and receivables:
n
o
i
t
a
c
i
l
p
p
A
Preferred shares redeemable
at the option of the holder
Perpetual preferred shares
purchased with the intent of
holding for the long-term1
Perpetual preferred shares
not impaired using the debt
impairment model1
Significant (tested individually)
Otherwise (grouped by similar
characteristics for testing)
s
s
o
L
-
e
r
u
s
a
e
m
t
n
e
m
Difference between amortized cost
and current fair value less any
unrealized loss on that security
previously recognized
Difference between acquisition
cost and current fair value less
any impairment loss on that
security previously recognized
Difference between amortized cost and the present
value of the estimated future cash flows
d
e
t
r
o
p
e
R
r
i
a
f
t
n
e
u
q
e
s
b
u
S
Impairment loss removed from OCI and recognized in Net gains
(losses)
Impairment loss recognized in Net gains (losses)
s
s
o
l
Recognized in Net gains (losses)
s
e
when there is observable positive
s
a
development on the original
e
r
c
impairment loss event. Otherwise,
n
recognized in OCI
i
e
u
l
a
v
Recognized directly in OCI
Impairment losses are not
reversed
Provision can be reversed when the event that gave
rise to its initial recognition subsequently disappears
Recognized in Net 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
1 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 preferred shares are assessed for impairment using a debt impairment model.
Business combinations
2.5
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 gains (losses).
2.6
Goodwill and intangible assets
Goodwill
a)
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 allocated to CGUs, or groups of CGUs, that are expected to benefit from the business combination in which they arose.
Impairment testing is performed at least annually, on June 30, or more frequently if there are objective indicators of impairment, by
comparing the recoverable amount of a CGU with its carrying amount. Impairment testing is undertaken at the lowest level at which
goodwill is monitored for internal management purposes.
INTACT FINANCIAL CORPORATION 17
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the
determination of gains and losses on disposal. The carrying amount is determined based on the relative fair value of the disposed
portion to the total CGU.
Intangible assets
b)
The Company’s intangible assets consist of distribution networks, trade names, customer relationships and internally developed
software.
Distribution networks represent the contractual agreements between the Company and unconsolidated brokers for the
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).
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,
intangible assets are 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 2.6 –
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
Term
20 to 25 years
10 years
3 to 10 years
Amortization of intangible assets is included in Other expenses in the Consolidated statements of income.
Foreign currency translation
2.7
The Consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency. The
functional currency is the currency of the primary economic environment in which an entity operates. The functional currency of
most foreign subsidiaries is their local currency, mainly the USD.
Foreign currency transactions
Transactions denominated in foreign currencies are initially recorded in the functional currency of the related entity using the
exchange rates in effect at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated using the closing exchange rates. Any
resulting exchange difference is recognized in income.
Non-monetary assets and liabilities denominated in foreign currencies and measured at historical cost are translated using
historical exchange rates, and those measured at fair value are translated using the exchange rate in effect at the date the
fair value is determined.
Revenues and expenses are translated using the average exchange rates for the period or the exchange rate at the date
of the transaction for significant items.
Net 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 asset is sold or becomes impaired.
18 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Foreign operations
Assets and liabilities of foreign operations whose functional currency is other than the Canadian dollar are translated into
Canadian dollars using closing exchange rates.
Revenues and expenses, as well as cash flows, are translated using the average exchange rates for the period.
Translation gains or losses are recognized in OCI and are reclassified to income on disposal or partial disposal of the
investment in the related foreign operation.
The exchange rates used in the preparation of the consolidated financial statements were as follows:
Table 2.7 –
Exchange rates used
USD vs CAD
Dec. 31,
2017
1.25730
Sept. 28,
2017
1.25030
As at
Dec. 31,
2016
1.34265
Average rate for the periods
2017
1.29832
Q4-2017
1.27076
2016
1.32495
Investments in associates and joint ventures
2.8
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.
Property and equipment
2.9
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
Method
Straight-line
Straight-line
Straight-line
Term
15 to 40 years
2 to 7 years
Over the terms of related leases
2.10 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.
2.11
Income taxes
Income tax expense (benefit)
a)
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.
INTACT FINANCIAL CORPORATION 19
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Deferred income tax is provided using the liability method on temporary differences between the carrying value of assets and
liabilities and their respective tax values. Deferred tax is calculated using income tax laws and rates enacted or substantively
enacted as at the balance sheet date, which are expected to apply when the related deferred tax asset is realized or the
deferred tax liability is settled. Deferred tax assets are recognized for all deductible temporary differences as well as unused tax
losses and tax credits to the extent that it is probable that taxable profit will be available against which the losses can be
utilized. For each entity for which there is a history of tax losses, deferred tax assets are only recognized in excess of deferred
tax liabilities if there is convincing evidence that future profit will be available.
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.
2.12 Share-based payments
The Company has three types of shared-based payment plans:
LTIP
a)
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.
ESPP
b)
Employees who are not eligible for the LTIP are entitled to make contributions to a voluntary ESPP. 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.
20 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
DSU
c)
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 time. When directors elect to receive shares, the Company makes instalments to the plan
administrator for the purchase of shares of the Company on behalf of the directors.
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.
2.13 Employee future benefits – pension
The actuarial determination of the DB obligation uses the projected unit credit method and management’s best estimate
assumptions.
DB pension expense
Cost recognized in Net income in the current period includes:
service cost: benefits cost provided in exchange for employees’ services rendered during the year (current service cost) or prior
years (past service cost);
net interest expense: change in the DB obligation and the plan assets as a result of the passage of time; and
administrative expenses paid from the pension assets.
The discount rate methodology used to determine the DB expense is determined with reference to the yields on high quality
corporate bonds with durations that match the various components of the DB expense.
Re-measurement of net DB liability (asset)
The rate used to discount the DB obligation is determined by 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 end of each reporting period.
Re-measurements are recognized directly in OCI in the period in which they occur and 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; and
changes in actuarial methods and assumptions, such as discount rate used to discount the DB obligation.
Such re-measurements are also immediately reclassified to Retained earnings as they will not be reclassified to Net income in
subsequent periods.
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.
INTACT FINANCIAL CORPORATION 21
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Significant accounting judgments, estimates and assumptions
Note 3 –
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:
Description
Business combinations
Valuation of claims liabilities
Impairment of goodwill and intangible assets
Reference
Description
Note 4.3
Note 10.3
Note 14.2
Impairment of financial assets
Measurement of income taxes
Valuation of DB obligation
Reference
Note 22.2
Note 23.3
Note 26.6
Note 4 –
Business combinations
OneBeacon
4.1
On September 28, 2017, the Company completed the acquisition of OneBeacon, a leading U.S. specialty insurer, for a cash
consideration of US$1.7 billion ($2.3 billion). OneBeacon became a wholly owned subsidiary of the Company and the results of
operations are included in the Consolidated financial statements from that date. The acquisition will bolster the Company’s
Canadian business with new products and cross-border capabilities, and better position it to compete with international insurers.
Furthermore, it provides an additional growth pipeline in the U.S. and enables IFC to leverage its consolidation expertise in a
fragmented specialty lines market.
The following table summarizes the consideration paid for OneBeacon, and the amounts recognized for the assets acquired and
liabilities assumed (determined in accordance with IFRS) as of acquisition date (September 28, 2017).
Table 4.1 –
Business combination – OneBeacon
As at December 31, 2017
Preliminary purchase price
Cash consideration paid
Purchase price hedge
Total preliminary purchase price
Provisional fair value of assets acquired and liabilities
assumed
Investments1
Premium receivables
Reinsurance assets
Distribution networks and other intangibles
Other assets
Claims liabilities
Unearned premiums
Deferred tax liabilities
Debt outstanding
Other liabilities
Total identifiable net assets
Goodwill
USD/CAD exchange rate as at September 28, 2017
1 Included net cash acquired of US$151 million.
22 INTACT FINANCIAL CORPORATION
USD
CAD
1,702
-
1,702
2,706
275
287
626
379
(1,630)
(650)
(35)
(292)
(426)
1,240
462
2,128
200
2,328
3,383
343
358
782
474
(2,038)
(813)
(43)
(364)
(532)
1,550
778
1.25030
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
As at December 31, 2017, the fair value of the acquired distribution networks, trade names and other intangible assets are based on
a preliminary discounted cash flow analysis. The distribution networks are amortized over a 20 year period. The fair value of the
claims liabilities reflected the impact of discounting and risk margin. Goodwill reflects the quality of the acquired business and the
synergies expected following the integration of OneBeacon. The goodwill is not deductible for tax purposes. The final determination
of the fair value of identifiable assets and liabilities acquired will be completed within the prescribed period of one year following the
acquisition.
For the year ended December 31, 2017, OneBeacon’s contribution to NEP and comprehensive income before income taxes on an
IFRS basis was $354 million and $24 million respectively, using an exchange rate of 1.27076. On a pro-forma basis, the NEP and
income before income taxes would have increased by $998 million and $40 million (excluding acquisition-related costs) respectively
had OneBeacon been consolidated from January 1, 2017, using an exchange rate of 1.30736.
The integration costs in connection with the acquisition of OneBeacon are reported in Integration and restructuring costs in the
Statements of income. These integration costs include items such as the initial net impact of a reinsurance coverage which provides
protection against certain negative reserve developments (see Note 13 – Reinsurance), pre-acquisition finance costs and
acquisition-related expenses.
The Company has hedged the purchase price and book value exposure associated with CAD/USD exchange rate fluctuations (see
Note 7.3 – Currency hedging in relation with the acquisition of OneBeacon).
InnovAssur
4.2
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. The contingent consideration is payable over a 15-year period based on annual DPW of
InnovAssur. With this transaction, InnovAssur became a wholly owned subsidiary of the Company.
As at 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. During the year ended December 31, 2017, the Company completed its final
assessment of the fair value of assets acquired and liabilities assumed within the prescribed period of one year. The fair value of
acquired customer relationships and distribution network was assessed at $34 million ($25 million net of deferred tax liabilities) and
Goodwill recorded was at $38 million.
Significant accounting judgments, estimates and assumptions
4.3
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.
INTACT FINANCIAL CORPORATION 23
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, 2017
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed1
Mortgage-backed
Agency2
Non-agency
Below investment grade
Corporate
Mortgage backed – non agency
Non-rated3
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Preferred shares
Common shares
Loans
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
Fair value
Classified
as FVTPL
Designated
as FVTPL
Amortized cost
Cash and cash
equivalents and
loans
Total
carrying
amount
-
97
-
-
-
-
-
-
-
-
97
-
-
-
-
357
-
454
-
-
-
-
-
-
-
-
-
-
-
420
-
420
-
-
3,432
2,368
487
250
218
117
7
32
6,911
-
-
-
-
1,030
-
7,941
-
-
3,329
1,642
33
-
5,004
-
-
-
-
1,031
-
6,035
163
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
393
556
168
-
-
-
-
-
-
-
-
-
-
-
405
573
163
217
5,207
3,873
987
340
327
117
7
154
11,229
24
285
1,100
1,409
3,659
393
16,853
168
105
5,358
3,127
177
34
8,801
46
308
1,023
1,377
3,635
405
14,386
AFS
-
120
1,775
1,505
500
90
109
-
-
122
4,221
24
285
1,100
1,409
2,272
-
7,902
-
105
2,029
1,485
144
34
3,797
46
308
1,023
1,377
2,184
-
7,358
1 Credit card receivables and auto loans.
2 Publicly traded mortgage-backed securities which carry the full faith and credit guarantee of the U.S. government or are guaranteed by a
government sponsored entity.
3 Included $40 million of mortgage-backed securities.
24 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
5.2
Carrying value of investments
Table 5.2 –
Carrying value of investments
As at
December 31, 2017
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
December 31, 2016
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
FVTPL
investments
Carrying
value
Amortized
cost
Unrealized
gains
Unrealized
losses
Other
investments
Carrying
value
Total
investments
Carrying
value
-
7,008
-
1,387
-
8,395
-
5,004
-
1,451
-
6,455
163
4,199
1,330
2,060
393
8,145
168
3,714
1,444
1,931
405
7,662
-
43
95
263
-
401
-
92
56
273
-
421
-
(21)
(16)
(51)
-
(88)
-
(9)
(123)
(20)
-
(152)
163
4,221
1,409
2,272
393
8,458
168
3,797
1,377
2,184
405
7,931
163
11,229
1,409
3,659
393
16,853
168
8,801
1,377
3,635
405
14,386
5.3 Market neutral equity investment strategy
Table 5.3 –
Market neutral equity investment strategy
As at December 31,
Long positions – common shares
Short positions (Table 6.1)
2017
2016
Fair value
Collateral
Fair value
Collateral
121
(122)
-
126
324
(327)
-
338
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 $1,087 million as at December 31, 2017 (December 31, 2016 – $720 million)
that are reported in Investments. The collateral amounted to $1,144 million as at December 31, 2017 (December 31, 2016 –
$758 million), representing approximately 105% of the securities loaned fair value as at December 31, 2017 and 2016.
INTACT FINANCIAL CORPORATION 25
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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)
Embedded derivatives (Note 8.1)
Accounts payable to investment brokers on unsettled trades
Derivative financial liabilities (Table 7.2)
Net asset value attributable to third party unit holders
2017
2016
122
79
24
21
-
246
327
39
29
38
96
529
During the year ended December 31, 2017, the Company sold an investment in a mutual fund, which was previously consolidated.
As a result of this sale, the Company’s investments and related financial liabilities no longer include the net asset value attributable
to third party unit holders and related NCI.
26 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
Table 7.1 –
Types of derivatives used
Derivatives
Description
Objective
Intent to hold instrument
Forwards
Contractual obligations to exchange:
Currency
one currency for another on a predetermined
future date
Mitigate risk arising from foreign
currency fluctuations on foreign
currency cash inflows and
outflows impacting the
Company’s Canadian operations
Mitigate risk arising from foreign
currency fluctuations on the
Company’s net investment in a
U.S. subsidiary
Mitigate risk arising from foreign
currency fluctuations on the U.S.
debt portfolio supporting the
Company’s Canadian operations
Cash flow hedges
Risk management
purposes
Risk management
purposes
Futures
Contractual obligations to buy or sell:
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
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
Mitigate exposure to equity
market fluctuations
Risk management
purposes
Modify exposure to credit
Risk management
purposes
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):
Inflation caps
an index at a predetermined price, at or by a
specified future date
Mitigate exposure to inflation risk Trading purposes
INTACT FINANCIAL CORPORATION 27
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Fair value and notional amount of derivatives
7.2
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 –
Fair value and notional amount of derivatives by nature of risk
As at December 31,
Foreign currency contracts
Forwards1
Interest rate contracts
Futures and forwards
Equity contracts
Swap agreements
Futures
Credit contracts
Swap agreements
Inflation options
Options
Net investment hedges (Note 7.3)
Held for risk management purposes
Held for trading purposes
Term to maturity:
less than one year
from one to five years
over five years
1 Include net investment hedges of OneBeacon.
2017
2016
Notional
amount
Fair value
Asset
Liability
Notional
amount
Fair value
Asset
Liability
13
-
8
-
-
-
21
-
21
-
21
8
-
-
-
-
-
8
6
2
-
8
1,852
1,317
1,022
247
-
63
4,501
383
3,954
164
4,501
4,279
222
-
4,501
6
-
-
-
1
-
7
-
6
1
7
-
-
38
-
-
-
38
-
38
-
38
1,098
949
1,023
167
39
93
3,369
-
2,957
412
3,369
3,266
103
-
3,369
7.3
Currency hedging in relation with the acquisition of OneBeacon
Purchase price hedges – On May 2, 2017, in connection with the acquisition of OneBeacon, the Company entered into foreign
currency forward contracts to hedge the purchase price exposure to fluctuations in the CAD/USD exchange rate. These derivatives
for a notional amount of US$1.7 billion were designated and qualified as cash flow hedges. At closing, losses recognized in AOCI
have been included in the acquisition cost of OneBeacon.
Net investment hedges (Book value hedge) – On May 2, 2017, the Company entered into foreign currency forward contracts for a
notional amount of US$600 million to reduce its book value exposure to the USD. These derivatives were recorded at fair value and
gains and losses were recorded in net income up to closing. At closing, the Company designated these forward contracts as net
investment hedges to cover U.S. operations. On December 20, 2017, the Company terminated the hedging relationship on half of
the US$600 million. The effective portion of gains or losses and the foreign exchange impact were recorded in OCI, while the
ineffective portion was recorded in net gains (losses) in the Consolidated statements of income.
See Note 4 – Business Combinations for more details on the acquisition of OneBeacon.
28 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
Categorization of fair values
8.1
In 2017 the Company refined its methodology to categorize the fair value measurements according to a three-level fair value
hierarchy (see Note 2 – Summary of significant accounting policies).
Table 8.1 –
Fair value hierarchy of financial assets and financial liabilities
As at
December 31, 2017
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Mortgage-backed
Agency
Non-agency
Below investment grade
Corporate
Mortgage backed – non agency
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
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
Level 1
Valued
using
quoted
(unadjusted)
market prices
Level 2
Valued
using models
(with
observable
inputs)
Level 3
Valued
using models
(without
observable
inputs)
217
-
2,902
-
-
-
-
-
-
-
3,119
1,330
3,595
-
8,044
122
105
3,090
-
-
-
3,195
1,338
3,635
-
8,168
423
2,305
3,873
987
340
327
117
7
43
7,999
-
35
8
8,042
21
-
2,268
3,127
177
-
5,572
-
-
7
5,579
38
-
-
-
-
-
-
-
-
111
111
79
29
-
219
79
-
-
-
-
34
34
39
-
-
73
39
Total
217
5,207
3,873
987
340
327
117
7
154
11,229
1,409
3,659
8
16,305
222
105
5,358
3,127
177
34
8,801
1,377
3,635
7
13,820
500
The fair value of loans was $384 million as at December 31, 2017 (December 31, 2016 – $400 million).
INTACT FINANCIAL CORPORATION 29
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Financial risk
Note 9 –
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.
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,
foreign exchange rates or
commodity market.
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
Notes 9.1 and 9.2
Note 9.3
Note 9.4
Note 9.5
9.1 Market risk
Table 9.2 –
Market risk
Equity price risk
Interest rate risk
Currency risk
Risk
definition
Risk of losses arising from
changes in equity market
prices.
Risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
changes in interest rates or spreads.
Risk
exposure
Significant exposure to price
changes for common shares
and preferred shares.
Significant exposure to changes in interest
rates from debt securities and preferred
shares.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in foreign
exchange rates.
A portion of the Company’s net
investment in a foreign subsidiary.
Investments supporting the Company’s
Canadian operations denominated in
foreign currencies, mainly USD.
A portion of foreign currency inflows
and outflows impacting the Company’s
Canadian operations.
Risk
management
investment
policy
Risk
mitigation
Set forth limits in terms of
equity exposure.
Set forth limits in terms of interest rate and
credit spread duration.
Set forth limits in terms of currency
exposure.
Through asset class and
economic sector
diversification and, in some
cases, the use of derivatives.
Through the use of interest-rate 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.
Through the use of foreign-currency
derivatives.
30 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Operational Investment Committee and Compliance Review and Corporate Governance Committee regularly monitor and
review compliance, respectively, with the Company’s investment policies.
Sensitivity analyses to market risk
a)
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 (after tax)
For the years ended December 31,
Equity price risk
Common share prices (10% decrease)1
Preferred share prices (5% decrease)2
Interest rate risk (100 basis point increase)
Currency risk (strengthening of Canadian dollar by 10% vs all currencies)3
U.S investments supporting the Company’s Canadian operations
International equities supporting the Company’s Canadian
operations
Consolidated net assets of a U.S. subsidiary
1 Net of any equity hedges, including the impact of any impairment.
2 Including the impact on related embedded derivatives.
3 After giving effect to foreign exchange derivatives.
Net income
2017
OCI Net income
2016
OCI
(1)
13
9
6
-
-
(201)
(62)
(64)
(1)
(19)
(176)
9
8
4
2
-
-
(193)
(57)
(75)
(47)
-
-
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; and
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 be realized through sale in the future.
b)
Exposure to currency risk
Table 9.4 –
Net currency exposure to the USD
As at December 31,
Fixed-income securities
Common shares
Other net assets (liabilities)
Less: USD foreign-currency derivatives, notional amount
Net U.S. exposure - Canadian operations
Consolidated net assets of U.S. subsidiary
Less: net investment hedges
Net currency exposure – U.S. subsidiary
Total net exposure
USD
2017
1,031
3
(21)
1,013
(1,016)
(3)
1,755
(300)
1,455
1,452
2016
730
476
1
1,207
(792)
415
-
-
-
415
The Company’s investment portfolio is mainly comprised of Canadian securities. As a means to provide geographic and sector
diversification to its portfolio, the Company also invests in high-quality international common shares. The Company’s net exposure
to a particular foreign currency (other than the USD) was not significant as at December 31, 2017 and 2016.
INTACT FINANCIAL CORPORATION 31
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Interest risk
9.2
The following table presents the fair value and respective duration of the Company’s assets and liabilities measured at fair value, as
well as financial instruments that are sensitive to movements in interest rates.
Table 9.5 –
Interest risk
As at December 31,
Investments
Debt securities
Preferred shares
Pension plan debt securities assets (Note 26.3)
Net claims liabilities (Note 10.1)
Pension DB obligation (Note 26.2)
Fair value
11,229
1,409
1,308
9,746
2,263
2017
Duration
(in years)
3.43
2.94
12.0
2.37
17.3
Fair value
8,801
1,377
1,213
8,071
2,014
2016
Duration
(in years)
4.01
3.24
13.1
2.4
18.2
The Company manages the interest rate risk exposure of its investments portfolio in accordance with its investment policies.
Compliance with interest rate risk exposure ranges and targets established in these policies is monitored regularly.
Basis risk
9.3
The Company’s use of derivatives exposes the Company 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.
Credit risk
9.4
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.
Credit exposure
a)
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
2017
163
11,229
1,409
393
3,351
822
613
17,980
1,229
2016
168
8,801
1,377
405
3,057
482
356
14,646
1,170
1,170
Off-balance sheet credit risk exposure
1Include restricted funds, other receivables and recoverables, financial assets related to investments, industry pools receivable, accrued investment
income and guaranteed loan.
1,229
32 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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.
Credit quality
b)
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.
As of December 31, 2017, approximately 90% of the fixed-income securities were rated ‘A-’ or better and 79% of the preferred
shares were highly-rated with at least a ‘P2L’ credit rating (December 31, 2016 – 98% and 79% respectively). The decrease in the
rating of the fixed-income securities reflected the addition of OneBeacon investments.
Credit risk concentration
c)
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. These risk concentrations are
closely monitored. As a means to provide sector diversification, the Company holds investment-grade non-financial U.S. corporate
bonds. The acquisition of OneBeacon, as well as the existing U.S. and international equity portfolio, reduce the concentration risk in
Canada.
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
ABS and MBS
Energy
Other
2017
71%
25%
4%
100%
33%
28%
10%
6%
23%
100%
Investments
2016
Pension assets
2016
2017
87%
11%
2%
100%
39%
33%
1%
8%
19%
100%
84%
8%
8%
100%
44%
23%
-%
6%
27%
100%
85%
7%
8%
100%
45%
23%
-%
6%
26%
100%
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 Note 13.4 – Risk management and counterparty credit risk). 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.
The majority of the investment portfolio is invested in well established, active and liquid markets.
INTACT FINANCIAL CORPORATION 33
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Counterparty credit risk
d)
Counterparty credit risk arises from reinsurance (see Note 13.4 – Risk management and counterparty credit risk), over-the-
counter derivatives, as well as securities lending and borrowing transactions.
Over-the-counter derivatives, as well as securities 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 securities lending and borrowing transactions arises when the counterparty is allowed to re-hypothecate or re-
pledge the collateral externally. Credit risk from securities 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 securities 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 securities 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 $95 million as at December 31, 2017 (December 31, 2016 – $90 million) and is the sum of
the replacement cost net of collateral 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.
Liquidity risk
9.5
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 – Credit facility).
34 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Investments and derivative financial instruments by contractual maturity
Table 9.8 –
Investments and derivative financial instruments by contractual maturity
Less than
1 year
From 1 to
5 years
Over
No specific
maturity
As at December 31, 2017
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Derivative financial instruments
As at December 31, 2016
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Derivative financial instruments
163
1,338
4
-
11
1,516
21
1,537
168
995
22
-
6
1,191
38
1,229
5 years
-
3,999
3
-
340
4,342
-
-
5,781
17
-
42
5,840
-
Total
163
11,229
1,409
3,659
393
16,853
21
-
111
1,385
3,659
-
5,155
-
5,840
4,342
5,155
16,874
-
4,695
16
-
49
4,760
-
-
3,077
8
-
350
3,435
-
-
34
1,331
3,635
-
5,000
-
168
8,801
1,377
3,635
405
14,386
38
4,760
3,435
5,000
14,424
b)
Financial liabilities by contractual maturity
Table 9.9 –
Financial liabilities by contractual maturity
As at December 31, 2017
Claims liabilities – undiscounted value
Debt outstanding
Other financial liabilities
As at December 31, 2016
Claims liabilities – undiscounted value
Debt outstanding
Other financial liabilities
Less than
1 year
From 1 to
5 years
4,139
-
763
4,902
3,295
-
737
4,032
4,463
974
81
5,518
3,328
549
119
3,996
Over
No specific
maturity
5 years
1,808
1,267
35
3,110
1,614
844
30
2,488
Total
10,410
2,241
1,437
14,088
8,237
1,393
1,515
11,145
-
-
558
558
-
-
629
629
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)
Claims liabilities
Note 10 –
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.
10.1 Movements in claims liabilities
As a result of the acquisition of OneBeacon, the Company has refined its estimate when determining the overall risk margin
assumption to recognize the benefit of diversification of insurance risk across lines of businesses and geographic regions. This
refinement in estimate recognized in the third quarter of 2017 resulted in a decrease in Net claims incurred of $196 million (see
Note 2 – Summary of significant accounting policies).
Table 10.1 –
Movements in claims liabilities
For the year ended
December 31, 2017
Balance, beginning of year
Current year claims
Unfavourable (favourable) prior-year claims development
Decrease (increase) due to changes in discount rate
Total claims incurred
Claims paid
Business combinations1 (Note 4)
Exchange rate differences
Balance, end of year
December 31, 2016
Balance, beginning of year
Current year claims
Unfavourable (favourable) prior-year claims development
Decrease (increase) due to changes in discount rate
Total claims incurred
Claims paid
Business combinations (Note 4)
Direct
Ceded
Net
8,536
5,705
(299)
(89)
5,317
(5,478)
2,090
10
10,475
8,094
5,884
(396)
(34)
5,454
(5,028)
16
465
54
(46)
(2)
6
(180)
437
1
729
253
353
(6)
(1)
346
(134)
-
8,071
5,651
(253)
(87)
5,311
(5,298)
1,653
9
9,746
7,841
5,531
(390)
(33)
5,108
(4,894)
16
8,071
Balance, end of year
1 Net of positive impact on claims liabilities resulting from the purchase of adverse development coverage (see Note 13 – Reinsurance).
8,536
465
10.2 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, 2017 and 2016.
Table 10.2 –
Carrying value of claims liabilities
As at
December 31, 2017
Undiscounted value
Effect of time value of money using a discount rate of 2.33%
Risk margin (Note 2.3b)
December 31, 2016
Undiscounted value
Effect of time value of money using a discount rate of 1.84%
Risk margin
36 INTACT FINANCIAL CORPORATION
Direct
Ceded
Net
10,410
(553)
618
10,475
8,237
(344)
643
8,536
656
(33)
106
729
447
(9)
27
465
9,754
(520)
512
9,746
7,790
(335)
616
8,071
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
10.3 Significant accounting judgments, estimates and assumptions
The Company establishes claims liabilities to cover the estimated liability for the payment of all losses, including LAE 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 generally accepted actuarial methods.
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 average 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. Expected claim cost inflation is also taken
into account when estimating claims liabilities.
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 the
uncertainties involved (“best estimate”). To recognize the uncertainty in establishing this best estimate, 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.
The determination of the overall risk margin takes into account:
the level of uncertainty in the best estimate due to estimation error, variability of key inflation assumptions and possible
economic and legislative changes; and
the volatility of each line of business and the diversification between the lines of business and geographic regions (referred
to as diversification benefit).
At a fixed probability of adequacy, the appropriate risk margin for two or more classes of business or for two or more geographic
locations combined is likely to be less than the sum of the risk margins for the individual classes. The level of diversification
assumed between classes takes into account industry analysis, historical experience and the judgement of experienced and
qualified actuaries. With operations in Canada and the U.S., the risk margin assumption used reflects this diversification benefit as
at December 31, 2017.
10.4 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 10.3 –
Sensitivity analysis (claims liabilities) – Impact on Net income
As at December 31,
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
+5%
+5%
+1%
Canada
(279)
(54)
137
2017
U.S.
(20)
(62)
29
2016
Canada
(279)
(53)
137
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.
10.5 Prior-year claims development
The claims development table below demonstrates the extent to which the original claim cost estimates in any one accident year
has subsequently developed favourably (lower than originally estimated) or unfavourably. This table illustrates the variability and
inherent uncertainty in estimating the claims estimate on a yearly basis. The ultimate claims cost for any particular accident year is
not known until all claims payments have been made. For property insurance, payout of claims liabilities generally occurs shortly
after the occurrence of the loss. For casualty (long-tailed) coverages, the loss may not be paid, or even reported, until well after the
loss occurred. The estimated ultimate claims payments at the end of each subsequent accident year demonstrate how the original
estimate has been revised over time.
INTACT FINANCIAL CORPORATION 37
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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
As at December 31, 2017
Total 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 earlier
Undiscounted claims liabilities outstanding at
end of accident year
2,771 2,683 2,493 2,461 2,524 2,375 2,312 2,038 1,799 1,627
4,294
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
Ten years later
Current estimate
Claims paid to date
Undiscounted claims liabilities
Discounting and risk margin
Net claims discounted – Business
combination
Claims liabilities - net
2,720 2,390 2,390 2,463 2,342 2,213 1,923 1,740 1,625
2,425 2,384 2,427 2,262 2,142 1,896 1,739 1,596
2,401 2,418 2,220 2,058 1,860 1,715 1,586
2,414 2,194 2,018 1,836 1,679 1,562
2,171 1,986 1,792 1,656 1,525
1,956 1,768 1,628 1,511
1,745 1,602 1,493
1,589 1,482
1,482
4,136
4,069
3,985
3,910
3,821
3,807
3,794
3,753
3,731
3,728
2,771 2,720 2,425 2,401 2,414 2,171 1,956 1,745 1,589 1,482
3,728
(1,099) (1,253) (1,523) (1824) (1,832) (1,744) (1,602) (1,506) (1,387)
(3,496)
8,136 2,771 1,621 1,172
878
590
339
212
143
83
95
232
(38)
1,648
9,746
659
349
244
172
86
58
30
20
10
9
11
The original reserve estimates are evaluated quarterly for redundancy or deficiency. The evaluation is based on actual payments in
full or partial settlement of claims and current estimates of claims liabilities for claims still open or claims still unreported.
The operations of OneBeacon are integrated into the Company’s operations since September 28, 2017 (closing date). The estimate
of net ultimate claims payments attributable to OneBeacon as at December 31, 2017 was included in the prior year claims
development table on a separate line (Business combination) and allocated to the original accident years in which the underlying
claims were incurred. To eliminate the distortion resulting from changes in foreign currency rates, all amounts denominated in
currencies other than the CAD have been translated into CAD using the exchange rate in effect as at December 31, 2017.
Industry pools
10.6
Canadian operations – When certain automobile owners are unable to obtain insurance via the voluntary insurance market in
Canada, 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.
U.S. operations – As a condition of its license to do business in certain states in the U.S., the Company is required to participate in
various mandatory shared market mechanisms commonly referred to as residual or involuntary markets. Each state dictates the
type of insurance and the level of coverage that must be provided.
38 INTACT FINANCIAL CORPORATION
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
Unearned premiums represent the portion of DPW that the Company has not yet earned as it represents insurance coverage to be
provided by the Company after the balance sheet date.
Table 11.1 –
Movements in unearned premiums
For the years ended
December 31, 2017
Balance, beginning of year
Business combinations (Note 4)
Premiums written
Premiums earned
Exchange rate differences
Balance, end of year
December 31, 2016
Balance, beginning of year
Business combinations (Note 4)
Premiums written
Premiums earned
Balance, end of year
Direct
Ceded
Net
4,573
813
8,748
(8,774)
5
5,365
4,390
104
8,197
(8,118)
4,573
17
71
221
(216)
-
93
21
-
212
(216)
17
4,556
742
8,527
(8,558)
5
5,272
4,369
104
7,985
(7,902)
4,556
Insurance risk
Note 12 –
The Company principally underwrites automobile, home, as well as commercial P&C contracts to individuals and businesses. On
September 28, 2017, the Company completed its acquisition of OneBeacon, a specialty P&C insurance provider that offers a wide
range of insurance products in the U.S.
The majority of the insurance risk to which the Company is exposed is of a short-tail nature. The average duration of claims
liabilities was approximately 2.4 years for Canadian operation and 2.2 years for the U.S. operation as at December 31, 2017
(December 31, 2016 – 2.4 years for Canada). Policies generally cover a 12-month period.
Insurance contract risk is the risk that a loss arises from the following reasons:
underwriting and pricing (Note 12.1);
fluctuation in the timing, frequency and severity of claims relative to expectations (Note 12.2);
inadequate reinsurance protection (Note 13.4); and
large unexpected losses arising from a single event such as a catastrophe (Note 12.3).
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 LAE 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 claim cost 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.
12.1 Underwriting and pricing risks
The insurance business is cyclical in nature whereby the industry generally reduces insurance rates following periods of increased
profitability, while it generally increases rates following periods of sustained loss. The Company’s profitability tends to follow this
cyclical market pattern and can also be affected by demand and competition. In addition, the Company is at risk from changes in
automobile insurance legislation, the economic environment and climate patterns.
INTACT FINANCIAL CORPORATION 39
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
In order to properly monitor the Company’s risk appetite, pricing targets are set by the Insurance Risk Department. Pricing targets
are established using an internal return on equity model and a risk-based capital model.
a)
Concentration by countries and lines of business
Table 12.1 –
Concentration by countries and lines of business
As at December 31,
By countries
Canada
U.S. 1
By lines of business
Personal auto
Personal property
Commercial lines- Canada
Commercial lines- U.S. 1
1 Includes only Q4 results of our U.S. operations.
2017
Net claims
liabilities
83%
17%
100%
48%
7%
28%
17%
DPW
100%
-%
100%
46%
24%
30%
-%
100%
100%
2016
Net claims
liabilities
100%
-%
100%
58%
8%
34%
-%
-
100%
DPW
96%
4%
100%
44%
24%
28%
4%
100%
Risks associated with commercial lines and personal property insurance contracts may vary in relation to the geographical area of
the risk insured by the Company. For automobile insurance, legislation is in place at a provincial level and this creates differences in
the benefits provided among the provinces.
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. Diversification also reduces the uncertainty associated with the unfavourable development
of claims liabilities for both our Canadian and U.S. operations.
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.
12.2 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.
40 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
12.3 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, hail or wind storms, and acts of terrorism. Catastrophes can have a significant impact
on the underwriting income of an insurer. Changing climate conditions may add to the unpredictability and frequency of natural
disasters and create additional uncertainty as to future trends and exposures.
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. See Note 13 – Reinsurance for the Company’s reinsurance net retention and coverage limits by nature of risk.
12.4 Exposure to insurance risk
The principal assumption underlying the claims liability estimates is that the Company’s future claims development will follow a
similar pattern to past claims development experience. Claims liabilities estimates are also based on various quantitative and
qualitative factors, including:
average claim costs, including claim handling costs (severity);
average number of claims by accident year (frequency);
trends in claim 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
risk margin.
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)
Note 13 –
Reinsurance
13.1 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. The following table shows the Company’s reinsurance net retention and coverage
limits by nature of risk.
Canadian operations
Table 13.1 –
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
2017
2016
7.5
3 - 10
100
3,600
7.5
3 - 10
100
3,575
For certain special classes of business or types of risks, the retention for single risk events may be lower through specific treaties or
the use of facultative reinsurance. For multi-risk events and catastrophes, the Company retains participations averaging 5.1% as at
December 31, 2017 (December 31, 2016 – 5.3%) on reinsurance layers between the retention and coverage limit. The coverage
limit prudently exceeds the Company's risk assessment of an earthquake in Western Canada at a 1-in-500 year return period.
U.S. operations
As at December 31, 2017, the newly acquired U.S. operations of the Company are covered by their own reinsurance program for
single risk events but also for multi-risk events and catastrophes. Under the property catastrophe reinsurance program, the first
US$20 million of losses resulting from any single catastrophe are retained, with the coverage limit for the next US$110 million of
losses being entirely reinsured. In addition to the corporate catastrophe reinsurance protection, the Company also purchases
dedicated reinsurance protection for certain lines of business. Among these, the retention for single risk events is US$3 million on
property policies and main liability policies.
In connection with the acquisition of OneBeacon, the Company entered into a reinsurance contract pursuant to which a major
reinsurer will assume 80% of negative reserve development with respect to OneBeacon's claims liabilities for accident years 2016
and prior. The maximum amount recoverable under the reinsurance agreement is US$200 million and is subject to some exclusions
and limitations.
The purchase of this adverse development coverage has reduced the potential volatility in the Company’s claims liabilities as at
December 31, 2017 and resulted in a release of risk margin. The initial net cost of the coverage is reported in integration and
restructuring cost in the statement of income.
13.2 Components of reinsurance assets
Reinsurance assets include the reinsurers’ share of claims liabilities and unearned premiums.
Table 13.2 –
Components of reinsurance assets
As at December 31,
Reinsurers’ share of claims liabilities (Note 10.1)
Reinsurers’ share of unearned premiums (Note 11.1)
2017
729
93
822
2016
465
17
482
42 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
13.3 Net recovery (expense) from reinsurance
Table 13.3 –
Net recovery (expense) from reinsurance
For the years ended December 31,
Ceded earned premiums (Note 11.1)
Ceded claims incurred (Note 10.1)
Commissions earned on ceded reinsurance
2017
(216)
100
25
(91)
2016
(216)
346
20
150
The net recovery from reinsurance for the year ended December 31, 2016 mainly related to the Fort McMurray wildfires.
13.4 Risk management and counterparty credit risk
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 on potential future
recoverables and collectability of balances due from reinsurers is important to the Company’s financial strength.
The Company is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. 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 monitors the financial strength of its reinsurers
on a regular basis. Uncollectible amounts historically have not been significant.
Management concluded that the Company was not exposed to significant loss from reinsurers for potentially uncollectible
reinsurance as at December 31, 2017 and 2016.
Canadian operations
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 $114 million as at
December 31, 2017 (December 31, 2016 – $127 million) as guarantees from unregistered reinsurers. This collateral is held in
support of policy liabilities of $69 million as at December 31, 2017 (December 31, 2016 – $94 million) and could be used should
these reinsurers be unable to meet their obligations.
U.S. operations
The Company has collateral in place to support amounts receivable and recoverable from unauthorized reinsurers. The Company is
the assigned beneficiary of collateral consisting of cash, security agreements and letters of credit totalling $86 million as at
December 31, 2017 as guarantees from unauthorized reinsurers. This collateral is held in support of policy liabilities of $71 million
as at December 31, 2017 and could be used should these reinsurers be unable to meet their obligations.
INTACT FINANCIAL CORPORATION 43
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 14 –
Goodwill and intangible assets
14.1 Summary of goodwill and intangible assets
Table 14.1 –
Reconciliation of the carrying value of goodwill and intangible assets.
Distribution
networks and
trade names
Customer
relationships
Internally
developed
software
Total
intangible
assets
Goodwill
Intangible assets
Cost
Balance as at January 1, 2017
Acquisitions and costs capitalized
Business combinations1 (Note 4)
Disposals and write-off
Exchange rate differences
Balance as at December 31, 2017
Accumulated amortization
Balance as at January 1, 2017
Amortization expense
Disposals
Balance as at December 31, 2017
Net carrying value
Cost
Balance as at January 1, 2016
Acquisitions and costs capitalized
Business combinations (Note 4)
Disposals
Balance as at December 31, 2016
Accumulated amortization
Balance as at January 1, 2016
Amortization expense
Disposals
Balance as at December 31, 2016
1,403
83
753
-
3
2,242
-
-
-
-
910
1
804
-
4
1,719
(15)
(16)
-
(31)
2,242
1,688
1,272
82
63
(14)
1,403
-
-
-
-
910
-
-
-
910
(11)
(4)
-
(15)
895
365
31
12
(1)
-
407
(179)
(32)
-
(211)
196
345
26
-
(6)
365
(143)
(37)
1
(179)
186
495
71
18
(67)
-
517
(274)
(33)
67
(240)
277
426
69
-
-
495
(242)
(32)
-
(274)
221
1,770
103
834
(68)
4
2,643
(468)
(81)
67
(482)
2,161
1,681
95
-
(6)
1,770
(396)
(73)
1
(468)
1,302
1,403
Net carrying value
1 Including business combinations of OneBeacon and InnovAssur.
Intangible assets under development amounted to $103 million as at December 31, 2017 (December 31, 2016 – $63 million). These
intangible assets are not subject to amortization, but are tested for impairment on an annual basis.
44 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
14.2 Significant accounting judgments, estimates and assumptions
Allocation of goodwill and intangible assets with indefinite lives to the group of CGUs
a)
Goodwill and intangible assets with indefinite lives are allocated to CGUs, or groups of CGUs, that are expected to benefit from the
business combination in which they arose.
Prior to the acquisition of OneBeacon on September 28, 2017, the carrying value of the goodwill and intangible assets with indefinite
lives were essentially all allocated to the Canada Insurance CGU, which was the Company’s sole operating segment.
In 2017, with the acquisition of OneBeacon, a U.S. P&C insurer, a new group of CGUs has been defined and the goodwill and
intangible assets with indefinite useful lives acquired were allocated to it (see Note 4 – Business combinations).
Table 14.2 –
Allocation of Goodwill and intangible assets with indefinite lives to the groups of CGUs
As at December 31,
Canada Insurance
U.S. Insurance
Goodwill
Intangible assets
2017
1,461
781
2,242
2016
1,403
n/a
1,403
2017
820
46
866
2016
820
n/a
820
Impairment testing of goodwill and intangible assets with indefinite lives
b)
The Company determines whether goodwill and intangible assets with indefinite useful lives (not subject to amortization) are
impaired at least annually and whenever events or changes in circumstances indicate that the carrying amounts may not be
recoverable at the CGU or group of CGUs level.
The annual impairment test was performed as at June 30, 2017 for the Canada Insurance group of CGUs and as at December 31,
2017 for the U.S. Insurance group of CGUs, following the acquisition of OneBeacon. Each group of CGUs was tested for
impairment by comparing their carrying value to their recoverable amount, which has been determined based on a value in use
calculation using the following key estimates and assumptions.
Cash flow projections for the next three years based on financial budgets approved by management and determined using
budgeted margins based on past performance and management expectations for the group of CGUs and their industry.
Cash flows beyond the three-year period are extrapolated using estimated growth rates, based mainly on the U.S. and
Canadian inflation and demographic growth perspectives.
Pre-tax discount rate, which represents the weighted-average cost of capital for comparable companies whose activities are
similar to the group of CGUs concerned.
Table 14.3 –
Key assumptions used
Canada Insurance
U.S. Insurance
Growth rate
2017
2.5%
3.9%
2016
3.0%
n/a
Pre-tax discount rate
2017
9.1%
10.7%
2016
9.6%
n/a
No impairment loss on goodwill or intangible assets with infinite lives has been recognized for these groups of CGUs for the year
ended December 31, 2017 or prior.
The key assumptions used to determine the recoverable amount of each group of CGUs were tested for sensitivity by applying a
reasonably possible change to those assumptions, with all other assumptions held constant. The results of the sensitivity analysis
would not change the conclusion of the Canada Insurance CGUs. For the U.S. Insurance test, since the Company recently acquired
the U.S. operations, the allocated goodwill is already at fair value.
INTACT FINANCIAL CORPORATION 45
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 15 –
Investments in associates and joint ventures
Table 15.1 –
Movement in investments in associates and joint ventures
As at December 31,
Balance, beginning of year
Acquisitions, net of sales
Business combinations (Note 4)
Dividends received
Share of profit (loss) recorded in:
net income
OCI
Balance, end of year
Of which:
associates
joint ventures
2017
543
11
-
(14)
16
(6)
550
398
152
2016
396
194
(45)
(21)
16
3
543
382
161
During 2017, 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 16 –
Property and equipment
16.1 Net carrying value of property and equipment
Table 16.1 –
Net carrying value of property and equipment
As at December 31,
Land and buildings
Furniture and equipment
Leasehold improvements
2017
37
50
63
150
2016
38
47
54
139
46 INTACT FINANCIAL CORPORATION
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 Other assets
Table 17.1 –
Components of other assets
As at December 31,
Other receivables and recoverables
Restricted funds
Industry pools receivable
Guaranteed loan1
Accrued investment income
Investments, at cost
Prepaids
Financial assets related to investments
Pension plans in a surplus position (Note 26.1)
Other
2017
2016
210
111
100
96
76
54
43
34
5
53
782
148
50
108
-
63
54
23
21
62
20
549
1 Recorded at fair value based on a discounted cash flow model using information as of the measurement date.
During 2017, there were no events or changes in circumstances that indicated that the carrying values of Investments at cost may
not be recoverable.
17.2 Other liabilities
Table 17.2 –
Components of other liabilities
As at December 31,
Premium and sale taxes payable
Commissions payable
Deposits received in connection with insurance contracts1
Accrued salaries and other short-term benefits
Accrued expenses
Pension plans in a deficit position and unfunded plans (Note 26.1)
Industry pools payable
Other post-employment benefits and other post-retirement benefits
Deposits received from reinsurers
Deferred income
Other payables
2017
2016
233
199
197
177
157
140
99
52
25
-
340
215
228
-
162
52
95
105
29
32
72
343
1,619
1,333
1 Unrestricted collateral held by the Company primarily in relation with the surety business.
Debt outstanding
Note 18 –
On June 7, 2017, the Company completed an offering of $425 million principal amount of Series 7 unsecured medium term notes
(‘’Notes’’). The Notes bear interest at a fixed annual rate of 2.85% until maturity on June 7, 2027, payable in semi-annual
instalments commencing on December 7, 2017. The net proceeds from this offering of Notes was used to partially fund the
purchase price for the acquisition of OneBeacon (see Note 4 – Business combinations).
INTACT FINANCIAL CORPORATION 47
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
18.1 Summary of debt outstanding
Table 18.1 –
Carrying value and fair value of debt outstanding
As at December 31,
Maturity
date
Initial
term
(years)
Fixed
rate
Coupon
(payment)
Principal
amount
Carrying value (net of fees)
2017
2016
Term notes
Series 1
Series 2
Series 3
Series 4
Series 5
Series 6
Series 7
2012 U.S. Senior Notes
Credit facility
Sept. 2019
Nov. 2039
July 2061
Aug. 2021
June 2042
Mar. 2026
June 2027
Nov. 2022
10
30
50
10
30
10
10
10
5.41% Mar. & Sept.
6.40% May & Nov.
Jan. & July
6.20%
4.70%
Feb. & Aug.
June & Dec.
5.16%
3.77% Mar. & Sept.
June & Dec.
2.85%
250
250
100
300
250
250
425
4.60% May & Nov. USD275
250
248
99
299
249
249
422
365
60
250
248
99
299
249
248
-
-
-
2,241
1,393
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 the Government of Canada Yield at the date of
redemption plus a margin or their par value.
Fair value of debt outstanding amounted to $2,449 million as at December 31, 2017 (December 31, 2016 – $1,624 million) and was
established using valuation data from a benchmark firm. As at December 31, 2017, the Company was in compliance with all debts
covenants.
18.2 Movement in the Company’s debt outstanding
Table 18.2 –
Movement in the Company’s debt outstanding
For the year ended December 31,
Balance, beginning of year
Cash flows from financing activities
Proceeds from issuance of debt
Amount drawn under a credit facility
Business combinations (Note 4)
Exchange rate differences
Other
Balance, end of year
2017
1,393
422
60
364
2
-
2,241
2016
1,143
248
-
-
-
2
1,393
18.3 Credit facility
During the year ended December 31, 2017, the Company increased the amount available under its unsecured revolving term credit
facility from $300 million to $750 million. This five-year credit facility matures on August 28, 2022 and may be drawn as prime loans
or base rate (Canada) advances at the prime or U.S. base rate plus a margin, as well as bankers’ acceptances or Libor advances at
the bankers’ acceptance or Libor rate plus a margin.
The amount drawn under its credit facility totalled $60 million as at December 31, 2017 (December 31, 2016 – nil). 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, 2017 and 2016.
48 INTACT FINANCIAL CORPORATION
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 New financing in connection with the acquisition of OneBeacon
Common
shares
On September 28, 2017, concurrent to the acquisition of OneBeacon, 8,210,000 subscription receipts
(“receipts”) were converted into 8,210,000 common shares. The Company had completed its offering of the
8,210,000 subscription receipts on May 11, 2017 at $91.85 per receipt for gross proceeds of $754 million.
Share issuance costs of $23 million ($19 million after tax), were accounted for as a reduction in common
shares on the Consolidated balance sheets.
Preferred
shares
On August 18, 2017, the Company completed a Series 6 offering of preferred shares (the “Series 6 Preferred
Shares”) by issuing and selling 6,000,000 Series 6 Preferred Shares, at a price of $25.00 per share, for
aggregate gross proceeds of $150 million. Share issuance costs of $4 million ($3 million after tax), were
accounted for as a reduction in preferred shares on the interim Consolidated balance sheets.
On May 24, 2017, the Company completed a Series 5 offering of preferred shares (the “Series 5 Preferred
Shares”) by issuing and selling 6,000,000 Series 5 Preferred Shares, at a price of $25.00 per share, for
aggregate gross proceeds of $150 million. Share issuance costs of $4 million ($3 million after tax), were
accounted for as a reduction in preferred shares on the interim Consolidated balance sheets.
19.3
Issued and outstanding
Table 19.1 –
Issued and outstanding shares
As at December 31,
Common shares
Preferred shares - Class A Shares
Series 1
Series 3
Series 4
Series 5
Series 6
Total Class A
2017
2016
Number of
shares
Amount
(in millions)
Number of
shares
Amount
(in millions)
139,188,634
2,816
131,050,134
2,082
10,000,000
8,405,004
1,594,996
6,000,000
6,000,000
32,000,000
244
206
39
147
147
783
10,000,000
8,405,004
1,594,996
-
-
20,000,000
244
206
39
-
-
489
Issued and outstanding Class A shares rank in priority to common shares with regards to payment of dividends.
Table 19.2 –
Reconciliation of number of shares outstanding
As at December 31,
Balance, beginning of year
Issued
Repurchased for cancellation (Note 19.5)
Preferred shares
Common shares
2017
131,050,134
8,210,000
(71,500)
(in shares)
2016
131,543,134
-
(493,000)
2017
20,000,000
12,000,000
-
Class A shares
(in shares)
2016
20,000,000
-
-
Balance, end of year
139,188,634
131,050,134
32,000,000
20,000,000
On December 1, 2017, the Company announced that it did not intend to exercise its right to redeem its non-cumulative Rate Reset
Class A Series 1 Preferred Shares (“Series 1 Preferred Shares”). On December 18, 2017, the Company also announced that they
are not entitled to convert their shares. Subject to certain conditions on December 31, 2022 and on December 31 every five years
thereafter, the holders of Series 1 Preferred Shares will have the right to convert their shares into 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.
INTACT FINANCIAL CORPORATION 49
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
19.4 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
Series 5
Series 6
2017
2.56
1.05
0.83
0.81
0.78
0.49
2016
2.32
1.05
1.00
0.20
n/a
n/a
The holders of record of the Company preferred shares are entitled to receive non-cumulative preferential cash dividends on a
quarterly basis, as and when declared by the Board of Directors of the Company.
Series 1 Preferred Shares – The initial fixed-rate period ending on December 31, 2017 was based on an annual rate of
4.20%. The dividend rate that will prevail from and including December 31, 2017 to but excluding December 31, 2022 is
3.396%. Every five years thereafter, the dividend rate will reset at a rate equal to the five-year Government of Canada
bond yield plus 1.72%.
Series 3 Preferred Shares – The annual dividend rate for the five-year period from and including September 30, 2016 to
but excluding September 30, 2021 is 3.332%.
Series 4 Preferred Shares – The dividend rate for the 3-month floating rate period from and including September 30, 2017
to but excluding December 31, 2017 was 0.85749% (3.402% on an annualized basis). The floating quarterly dividend rate
will be reset every quarter.
Series 5 Preferred Shares – The annual dividend rate is 5.20%, and is not subject to a rate reset. The initial dividend paid
on September 30, 2017 amounted to $0.45945 per share.
Series 6 Preferred Shares – The annual dividend rate is 5.30%, and is not subject to a rate reset. The initial dividend paid
on December 29, 2017 amounted to $0.49007 per share.
19.5 Normal course issuer bid (NCIB)
On February 13, 2017, the Company renewed the NCIB to purchase for cancellation during the next 12 months up to 6,551,741
common shares, representing approximately 5% of the issued and outstanding common shares as at February 1, 2017.
Table 19.4 –
Common shares repurchased for cancelation under the NCIB
As at December 31,
Common shares repurchased for cancellation (in shares)
Average price (in dollars)
Total consideration paid
2017
71,500
94.05
7
2016
493,000
88.54
44
50 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 $6 million was charged to Retained earnings as at December 31, 2017
(December 31, 2016 – $36 million).
Following the announcement of the acquisition of OneBeacon on May 2, 2017, the Company suspended its NCIB in order to
maintain excess capital prior to the closing date of the transaction. Following closing, the Company plans to use excess capital for
deleveraging, in line with its conservative transaction financing plan.
Note 20 –
Capital management
20.1 Capital management objectives
The Company’s objectives when managing capital consist of:
maintaining strong regulatory capital levels (see Regulatory capital section below), while 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 amount of capital deployed in any particular company or country is dependent upon local regulatory requirements, as well as
the Company’s internal assessment of capital requirements in the context of its risk profiles, requirements and strategic plans. The
Company’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant
minimum regulatory capital requirements in the jurisdictions in which they operate (referred to as regulator supervisory minimum
levels). Regulatory capital guidelines change from time to time and may impact the Company’s our capital levels. The Company
carefully monitors all changes, actual or proposed.
Canada
The Company’s federally chartered Canadian 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 a
regulator supervisory target capital ratio of 150%, which provides a cushion above the minimum requirement.
U.S.
The Company’s U.S. insurance operations are subject to regulation and supervision in each of the states where they
are domiciled and licensed to conduct business. State insurance departments have established the insurer solvency
laws and regulatory infrastructure to maintain accredited status with the National Association of Insurance
Commissioners ("NAIC"). A key solvency-driven NAIC accreditation requirement is a state's adoption of risk-based
capital (“RBC”) requirements. Dividends from our major U.S. insurance subsidiary are subject to the New York
Regulator’s prior approval for a two year period ending September 30, 2019.
INTACT FINANCIAL CORPORATION 51
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
20.2 Capital position
As at December 31, 2017 and 2016, all the of Company’s regulated P&C insurance subsidiaries were well capitalized on an
individual basis with capital levels well in excess of supervisory minimum levels, as well as CALs. CALs represent the thresholds
below which regulator notification is required together with a company action plan to restore capital levels.
U.S. capital levels comprise the RBC levels of OneBeacon’s U.S. regulated entities consolidated in Atlantic Specialty Insurance
Company (ASIC). As at December 31, 2017, ASIC’s RBC level stood at 459%.
Table 20.1 –
Estimated aggregate capital position
As at December 31,
Regulatory capital ratios
Industry-wide supervisory minimum levels
CALs
Capital above CALs (capital margin)
Other regulated / unregulated entities1
Canada
(MCT)
205%
150%
170%
618
-
U.S.
(RBC)
459%
150%
200%
438
-
2017
IFC
Capital
margin
-
-
-
1,056
79
Canada
(MCT)
218%
150%
170%
947
-
Total capital margin
1 Other regulated entities include Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados).
1,135
2016
IFC
Capital
margin
-
-
-
947
23
970
IFC total capital margin stood at $1,135 million as at December 31, 2017 ($970 million as at December 31, 2016). This represents
the aggregate of capital in excess of CALs in regulated entities plus available cash in unregulated entities.
Annually, the Company performs Capital Adequacy Testing 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 2017 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 –
Net investment income
Table 21.1 –
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
Investment income
Expenses
52 INTACT FINANCIAL CORPORATION
2017
2016
161
90
24
275
62
78
61
(8)
1
194
469
(37)
432
157
85
23
265
54
74
61
(6)
1
184
449
(35)
414
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 22 –
Net gains (losses)
Table 22.1 –
Net gains (losses)
For the years ended December 31,
2017
2016
Portfolios
Net gains (losses) from:
financial instruments:
designated as FVTPL
classified as FVTPL
classified as AFS
derivatives1 :
swap agreements
futures
other
Embedded derivatives
Net foreign currency gains (losses), net
Impairment losses from common shares
Currency derivative gain related to book
value hedge of OneBeacon2
Other gains (losses) 3
Fixed
Income
Equity
Total
Fixed
Income
Equity
Total
(127)
-
2
(125)
-
5
-
5
-
(2)
-
(122)
12
9
167
188
(47)
(19)
1
(65)
(50)
33
(20)
86
(115)
9
169
63
(47)
(14)
1
(60)
(50)
31
(20)
(36)
65
40
(103)
-
2
(101)
-
(2)
-
(2)
-
(1)
-
(104)
205
7
122
334
(239)
(29)
-
(268)
(13)
21
(41)
33
102
7
124
233
(239)
(31)
-
(270)
(13)
20
(41)
(71)
-
1
(70)
69
1 Excluding foreign currency contracts, which are reported in Net foreign currency gains (losses).
2 See Note 7.3 – Currency hedging in relation with the acquisition of OneBeacon.
3 Including net gains on investments in associates and joint ventures related to a change of control.
22.2 Significant accounting judgments, estimates and assumptions
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 Table 2.4 - Objective evidence of impairment for equity
impairment model.
INTACT FINANCIAL CORPORATION 53
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 23 –
Income taxes
23.1
Income tax expense recorded in Net income
Table 23.1 –
Components of income tax expense recorded in Net income
For the years ended December 31,
Current income tax expense
Current year
Adjustments to prior years
Deferred income tax expense (benefit)
Change related to temporary differences
Adjustments related to the U.S. Corporate Tax reform (see below)
Adjustments to prior years
2017
2016
216
4
(40)
(27)
(3)
150
103
(29)
42
-
29
145
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“U.S. Corporate Tax reform”), which reduces the U.S. corporate tax rate
from 35% to 21% effective January 1, 2018, was enacted. This change resulted in a deferred tax benefit of $27 million for the year
ended December 31, 2017.
23.2 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 23.2 –
Effective income tax rate reconciliation
For the years ended December 31,
Income tax expense calculated at statutory tax rate
Increase (decrease) in income tax rates resulting from:
non-taxable dividend income
adjustments related to the U.S. Corporate Tax reform
non-deductible losses (non-taxable gains)
non-taxable income from subsidiaries
non-taxable income
non-deductible expenses
foreign income taxed at different rates
other
Effective income tax rate
2017
26.9%
(3.8)%
(2.9)%
(3.5)%
(0.5)%
(0.7)%
1.0%
(0.7)%
0.1%
15.9%
2016
26.9%
(4.8)%
-%
(0.1)%
(0.7)%
(1.5)%
1.1 %
-%
0.2 %
21.1 %
23.3 Significant accounting judgments, estimates and assumptions
Management exercises judgment in estimating the provision for income taxes. The Company is subject to income tax law in 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.
54 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
23.4 Components of deferred tax assets and liabilities
Table 23.3 –
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
DB 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)
Consolidated
balance sheets
Asset (liability)
Consolidated statements
of comprehensive income
Expense (benefit)
2017
2016
2017
2016
100
-
-
58
140
36
13
347
(437)
-
(11)
(36)
(8)
(492)
(145)
108
-
-
52
3
18
2
183
(262)
(140)
(13)
(28)
(2)
(445)
(262)
(92)
-
-
(5)
(30)
29
11
(87)
119
140
2
(11)
5
255
168
(2)
64
7
13
4
(12)
(1)
73
(1)
140
(1)
7
2
147
220
The Company believes that it is probable that it will generate sufficient taxable income in the future to realize the above deferred tax
assets.
23.5 Movement in the net deferred tax asset (liability)
Table 23.4 –
Movement in the net deferred tax asset (liability)
As at December 31,
Balance, beginning of year
Income tax benefit (expense):
recorded in net income
recorded in OCI
recorded in equity
Business combinations (Note 4)
Exchange rate differences and other
Balance, end of year
Reported in:
deferred tax assets
deferred tax liabilities
23.6 Tax losses
Operating losses – As at December 31, 2017, there were approximately:
2017
(262)
70
98
9
(43)
(17)
(145)
112
(257)
2016
(44)
(71)
(149)
-
3
(1)
(262)
142
(404)
$434 million of net operating losses carry forward balances in our U.S. subsidiaries, with the majority of those losses expiring
between 2031 and 2035; and
$60 million of Canadian net operating losses carry forward balances, which will expire in 2037 (December 31, 2016 – nil).
As at December 31, 2017, a deferred tax asset was recognized in relation to all U.S. net operating losses and on $57 million of Canadian
operating losses.
Tax credits – The Company has $27 million of tax credits in the United States that can be used to offset U.S. tax payable in the future.
Capital losses – The Company had allowable capital losses of $81 million as at December 31, 2017 (December 31, 2016 – $25 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.
Non-capital losses – The Company has recognized a deferred tax asset for unused non-capital losses as at December 31, 2017 and
2016.
INTACT FINANCIAL CORPORATION 55
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Earnings per share
Note 24 –
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 24.1 –
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 25 –
Share-based payments
25.1 Long-term incentive plan
2017
792
27
765
133.1
5.75
2016
541
20
521
131.2
3.97
a)
Outstanding LTIP units and fair value at grant date
Table 25.1 –
Outstanding units and weighted-average fair value at grant date by performance cycle
As at December 31,
Performance cycles
2014 - 2016
2015 - 2017
2016 - 2018
2017 - 2019
2017 - 2022
Number of
units
-
227,572
216,886
210,592
119,733
774,783
2017
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
Number of
units
2016
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
-
77.89
90.36
93.30
103.88
92.06
-
19
20
20
12
71
255,253
229,928
217,065
-
-
702,246
66.25
77.89
90.36
-
-
77.51
17
18
19
-
-
54
b)
Movements in LTIP units
Table 25.2 –
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
56 INTACT FINANCIAL CORPORATION
2017
(in units)
702,246
308,252
20,203
(255,918)
774,783
2016
(in units)
697,924
182,170
62,802
(240,650)
702,246
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
LTIP expense recognized in Net income
c)
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).
Table 25.3 –
LTIP expense recognized in Net income
As at December 31,
Cash-settled plans
Equity-settled plans
d)
LTIP settlement in shares
Table 25.4 –
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
Amount recognized in Retained earnings, net of taxes
2017
2016
6
14
20
4
14
18
2017
2016
37
29
8
6
19
13
6
5
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.
25.2 ESPP
e)
Movements in restricted common shares
Table 25.5 –
Movements in restricted common shares
For the years ended December 31,
Outstanding, beginning of year
Awarded and vested
Forfeited
Accrued during the year
Awarded and vested
Outstanding, end of year
2017
(in units)
145,368
(139,953)
(5,415)
-
134,865
(2,374)
132,491
2016
(in units)
-
-
-
-
145,368
-
145,368
ESPP expense recognized in Net income
f)
The ESPP is accounted for as an equity-settled plan. For the years ended December 31, 2017 and 2016, the ESPP expense was
$14 million. For 2016, the $14 million includes an expense of $6 million recognized upon the change to the ESPP, representing the
value of the unvested shares as at December 31, 2015 that vested on January 1, 2016.
25.3 DSU
The DSU is accounted for as a cash-settled plan. For the years ended December 31, 2017 and 2016, the expense was $2 million.
The DSU provision amounted to $10 million as at December 31, 2017 (December 31, 2016 – $8 million).
INTACT FINANCIAL CORPORATION 57
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Employee future benefits
Note 26 –
The Company has a number of funded and unfunded DB pension plans in Canada
that provide benefits to members in the form of a guaranteed pension payable for life
based on final average earnings and contingent upon certain age and service
requirements. The Company provides active employees in Canada a choice between
a DB and a defined contribution pension plan. The Company offers its employees in
the U.S. a 401(k) plan.
DB pension obligation
(as at the date of the latest actuarial valuation)
Active members
Pensioners and beneficiaries
Deferred members
7%
Subject to applicable pension legislation, the Canadian 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.
29%
64%
Provincial minimum funding regulations in Canada require special payments from the
Company to amortize any shortfall of registered plans’ assets relative to the
corresponding funding targets. Security in the form of letters of credit is permitted in
lieu of those special payments, up to a limit of 15% of the actuarial liability used to
determine the funding target.
Subject to applicable legal requirements in Canada, 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 in certain provinces 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 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.
26.1 Funded status
The DB 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.
Table 26.1 –
Movement in the DB obligation
As at December 31,
DB obligation
Fair value of plan assets
Net DB asset (liability)
Reported in:
other assets – plans in a surplus position
other liabilities – unfunded plans
Funded status – funded plans
Pension plans
2017
(2,263)
2,128
(135)
5
(140)
(135)
99%
2016
(2,014)
1,981
(33)
62
(95)
(33)
103%
The measurement date for the DB pension plans is December 31. The latest actuarial valuations for the DB pension plans were
performed as at December 31, 2016. 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.
58 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
26.2 DB obligation
The DB obligation is based on the current value of expected benefit payment cash flows to plan members over their expected lifetime.
Table 26.2 –
Movement in the DB obligation
As at December 31,
Balance, beginning of year
Current service cost
Past service cost
Interest expense on DB obligation
Actuarial losses (gains) due to changes in:
financial assumptions
plan experience
Employee contributions
Benefit payments
Balance, end of year
Pension plans
2017
2,014
65
1
72
103
52
27
(71)
2,263
2016
1,801
63
-
76
110
8
26
(70)
2,014
26.3 Fair value of plan assets
The Company makes contributions to the DB 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 DB 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.
a)
Movement in the fair value of plan assets
Table 26.3 –
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
b)
Composition of pension plan assets
Table 26.4 –
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.
Pension plans
2017
1,981
60
27
69
66
(71)
(4)
2,128
2016
1,812
61
26
75
82
(70)
(5)
1,981
2017
2016
Fair value
% of total
43
2%
Fair value
45
% of total
2%
867
438
3
1,308
749
28
2,128
41%
21%
-
62%
35%
1%
100%
823
382
8
1,213
685
38
1,981
42%
19%
-
61%
35%
2%
100%
INTACT FINANCIAL CORPORATION 59
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 2018 compared to actual contributions of $60 million in 2017. The contributions will vary depending on
the results of the December 31, 2017 actuarial valuations, the impact of any funding rule changes, the 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.
26.4 Employee future benefit expense recognized in Net income
Table 26.5 –
Employee future benefit expense recognized in Net income
For the years ended December 31,
Current service cost
Past service cost
Net interest expense
Interest expense on DB obligation
Interest income on plan assets
Other
26.5 Actuarial losses (gains) recognized in OCI
Table 26.6 –
Actuarial losses (gains) recognized in OCI
For the years ended December 31,
Re-measurements related to:
change in discount rate used to determine the benefit obligation
actual return on plan assets
change in other financial assumptions
changes in plan experience
Pension plans
2017
2016
65
1
72
(69)
4
73
63
-
76
(75)
5
69
Pension plans
2017
2016
110
(66)
(7)
52
89
106
(82)
4
8
36
Net actuarial losses (gains) on employee future benefits recognized in OCI for the year ended December 31, 2016 also include a
gain of $1 million for other post-retirement benefits.
26.6 Significant accounting judgments, estimates and assumptions
The cost of the DB plans and the DB 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 DB obligation is highly sensitive to changes in the assumptions.
Assumptions are reviewed at each reporting date.
60 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Assumptions used and sensitivity analysis
Table 26.7 –
Key weighted-average assumptions used in measuring the Company’s pension plans
Discount rate:
determination of DB obligation
current service cost
interest expense on the DB obligation
Rate of increase in future compensation:
next 3 years
beyond 3 years
Rate of inflation
Life expectancy for pensioners at the age of 65:
male
female
Obligation
As at December 31,
2017
2016
Expense
For the years ended December 31,
2016
2017
3.5%
n/a
n/a
2.75%
2.68%
1.93%
21.6
24.1
3.8%
n/a
n/a
2.75%
2.75%
2.00%
21.6
24.1
n/a
3.9%
3.3%-3.5%
2.75%
2.75%
2.00%
21.6
24.1
n/a
4.1%
4.1%
2.75%
2.75%
1.75%
21.6
24.0
The rate of compensation increase 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 have been established in accordance with the final table and improvement scale published in 2014 by the Canadian
Institute of Actuaries.
Table 26.8 –
Sensitivity of the DB pension obligation to key assumptions
As at December 31,
Discount rates
Rate of increase in future compensation
Rate of inflation
Life expectancy
Change
1%
1%
1%
One year
increase
2017
decrease
increase
2016
decrease
(369)
108
76
60
503
(107)
(69)
(60)
(318)
79
71
50
419
(76)
(68)
(50)
The effect on the DB 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 approximated by
measuring the impact of members being one year younger than their actual age on the valuation date.
26.7 Risk management and investment strategy
Employee DB 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 DB 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 DB liabilities.
INTACT FINANCIAL CORPORATION 61
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The DB 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.
Pension plan asset mix
(as at December 31, 2017)
Debt securities
Common shares
Other
3%
35%
62%
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.
The Company also establishes asset allocation limits to ensure sufficient diversification (see Note 9.4 – Credit risk).
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 duration of the pension
asset portfolio divided by the duration of the funded registered pension plans’ obligation. A lower hedge ratio increases the
Company’s exposure to changes in interest rates. The hedge ratio was 68% as at December 31, 2017 (December 31, 2016 – 74%).
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, 2017
and 2016, 10% of pension plan assets were invested in Canada Government Real Return Bonds.
62 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 27 –
Segment information
27.1 Reportable segments
In 2017, in connection with the acquisition of OneBeacon, the Company changed the composition of its reportable segments to align
with how senior management assesses its operating performance and allocates resources. The Company now has two reportable
segments, in line with its management structure and internal financial reporting which is based on country, as well as nature of
activities. Prior to the acquisition, the Company’s activities used to be captured within a sole reporting and operating segment, P&C
insurance operations. The comparative segment information has been reclassified accordingly.
Canada Insurance (“Canada”)
Underwriting of automobile, home and business insurance contracts to individuals and businesses in Canada distributed
through a wide network of brokers and directly to consumers.
Distribution operations, including the results from the Company’s wholly-owned subsidiary (BrokerLink) and broker affiliates.
U.S. Insurance (“U.S.”)
Underwriting of specialty contracts to small and midsize businesses in the United States. The Company distributes insurance
through independent agencies, brokers, wholesalers and managing general agencies.
Corporate and Other (“Corporate”)
Consists of centralized investing, treasury and capital management activities, as well as other corporate activities.
27.2 Segment operating performance
Table 27.1 –
Segment operating performance1
For the years ended December 31,
Canada U.S. Corporate
Total Canada U.S. Corporate
Total
2017
2016
Operating income
NEP
Investment income
Other
Segment operating revenues
Net claims incurred (before MYA)
Underwriting expenses2
Investment expenses
Investment gains (losses)
Share of profit from invest. in associates & JV
Finance costs
Other
PTOI3
Comprised of:
underwriting income
net investment income
net distribution income
other income (expense)
finance costs
326
8,204
-
-
-
124
8,328
326
(5,381) (198)
(2,345) (120)
-
-
-
-
-
46
-
-
-
(38)
8
610
478
-
132
-
-
8
-
-
-
-
-
469
34
503
-
-
(37)
-
-
(82)
(29)
355
-
432
-
5
(82)
8,530
469
158
9,157
(5,579)
(2,465)
(37)
-
46
(82)
(67)
973
486
432
132
5
(82)
7,946
-
111
8,057
(5,161)
(2,410)
-
2
40
-
(42)
486
375
-
111
-
-
Investments
Net claims liabilities (Table 10.1)
1 See Table 27.2 for the reconciliation to the Consolidated financial statements of income
2 Other underwriting revenues are netted against underwriting expenses when assessing segment performance.
3 See Section 27 – Non IFRS financial measures of the Company’s MD&A for the definition of related operating measures.
16,853 16,853
9,746
-
-
8,098 1,648
-
8,071
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
449
32
481
-
-
(35)
-
-
(72)
(22)
352
-
414
-
10
(72)
7,946
449
143
8,538
(5,161)
(2,410)
(35)
2
40
(72)
(64)
838
375
414
111
10
(72)
14,386 14,386
8,071
-
INTACT FINANCIAL CORPORATION 63
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
All segment revenues presented in Table 27.1 Segment operating performance before are generated from external customers.
Management measures the profitability of the Company’s segments based on pre-tax operating income (“PTOI”). PTOI exclude
elements that are not representative of the Company’s operating performance because they relate to special items, bear significant
volatility from one period to another, or because they are not part of the Company’s normal activities.
The reconciliation of the segment information to the amounts reported in the Consolidated financial statements is presented in the
table below. Other underwriting revenues are netted against underwriting expenses when assessing segment performance for
MD&A presentation and, as such, are not included in segment operating revenues. Revenues and expenses not allocated to
segments mainly represent non-operating items excluded from PTOI.
Table 27.2 –
Reconciliation of segment information to amounts reported in the Consolidated statements of income
For the years ended December 31,
Segment operating revenues (Table 27.1)
Add: other underwriting revenues
Add: NEP exited lines
Less: NEP attributable to jointly held insurance operations
Revenues, as reported
Segment PTOI (Table 27.1)
Non-operating items:
net gains (losses)
positive (negative) impact on MYA on underwriting
integration and restructuring costs
amortization of intangible assets recognized in business combinations
difference between expected return and discount rate on pension assets
underwriting results from OneBeacon exited lines
other non-operating costs
Pre-tax income, as reported
2017
9,157
108
28
-
9,293
973
69
92
(57)
(62)
(45)
(10)
(18)
942
2016
8,538
122
-
(44)
8,616
838
(72)
34
(23)
(53)
(26)
-
(12)
686
27.3
Information by geographic areas
Table 27.3 –
Geographic areas
As at December 31,
Canada
U.S.1
1 Includes only Q4 results of our U.S. operations.
Revenues
2017
8,939
354
9,293
2016
8,616
-
8,616
Total assets
2017
22,093
5,835
27,928
2016
22,866
-
22,866
Revenues and assets are allocated based on the country where the risks originate. The Company’s significant operating
subsidiaries by geographic areas of operations are presented below.
Table 27.4 –
Significant operating subsidiaries by geographic areas
Operations
Canada
Belair Insurance Company Inc.
Canada Brokerlink Inc.
Equisure Financial Network Inc.
Intact Insurance Company
IB Reinsurance Inc.
Legal entities
Jevco Insurance Company
Novex Insurance Company
The Nordic Insurance Company of Canada
Trafalgar Insurance Company of Canada
U.S.
OneBeacon Insurance Group Holding; Ltd.
Atlantic Specialty Insurance Company
OneBeacon U.S. Financial Services Inc.
Split Rock Insurance, Ltd.
64 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 28 –
Additional information on the Consolidated statements of cash flows
28.1 Adjustments for non-cash items
Table 28.1 –
Adjustments for non-cash items
For the years ended December 31,
Depreciation of property and equipment
Amortization of intangible assets
Net premiums on debt securities classified as AFS
DB pension expense
Share-based payments expense (equity-settled plans)
Share of profit from investments in associates and joint ventures
Other
28.2 Changes in other operating assets and liabilities
Table 28.2 –
Changes in other operating assets and liabilities
For the years ended December 31,
Unearned premiums, net
Premium receivables, net
Deferred acquisition costs, net
Other operating assets
Other operating liabilities
Dividends received from investments in associates and joint ventures
2017
2016
34
81
15
73
34
(16)
4
225
2017
(30)
52
(25)
(26)
(186)
14
(201)
37
73
10
69
32
(16)
3
208
2016
85
(98)
(23)
(27)
11
21
(31)
Related-party transactions
Note 29 –
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.
29.1 Transactions with associates and joint ventures
Table 29.1 –
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
2017
2016
8
260
202
36
8
241
203
39
29.2 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 $42 million for the year ended December 31, 2017 (December 31, 2016 – $17 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 65
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
29.3 Pension plans
Intact Investment Management Inc., a subsidiary of the Company, manages the investment portfolio of the pension plans’ Master
Trust in return for investment advisory fees charged to the pension plans, for a total of $7 million for the year ended
December 31, 2017 (December 31, 2016 – $6 million). The Company made contributions to pension plans of $60 million for the
year ended December 31, 2017 (December 31, 2016 – $61 million).
Note 30 –
Commitments and contingencies
30.1 Operating lease commitments
The Company has entered into commercial operating leases, which have a remaining life ranging from one to 14 years.
Table 30.1 –
Future minimum rental payments under non-cancellable operating leases
As at December 31, 2017
Less than 1 year
From 1 to 5 years
Over 5 years
168
412
230
810
30.2 Contingencies
In the normal course of operations, various insurance claims and legal proceedings are instituted against the Company. Legal
proceedings are often subject to numerous uncertainties and it is not possible to predict the outcome of individual cases. In
management’s opinion, the Company has made adequate provisions for, or has adequate insurance to cover all insurance claims
and legal proceedings. Consequently, any settlements reached should not have a material adverse effect on the Company’s
consolidated future operating results and financial position.
The Company provides indemnification agreements to directors and officers, to the extent permitted by law, against certain claims
made against them as a result of their services to the Company. The Company has insurance coverage for these agreements.
During Q4-2017, as a participant in the Voluntary Reimbursement Program established by the Government of Quebec, the
Company entered into a final settlement with the City of Montreal. The settlement related to allegations against AXA Insurance Inc.
("AXA") and events prior to the acquisition of AXA Canada Inc. by the Company, and related to the provision of surety contracts.
The Company denies any liability but elected to participate in the Voluntary Reimbursement Program to resolve this matter
expeditiously. The amount of the settlement was not material.
Note 31 –
Disclosures on rate regulation
31.1 Canada Insurance
The Company’s Canadian 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 31.1 –
Rate filing categories
Category
Description
File and approve
Insurers must wait for specific approval of filed rates before they may be used.
File and use
Insurers file their rates with the relevant authorities and wait for a prescribed period of time and
then implement the proposed rates.
Use and file
Rates are filed following use.
For Canada, all provinces and territories except Quebec use a rate setting mechanisms file and approve. Quebec uses a rate
setting mechanisms use and file. For the years ended December 31, 2017 and 2016, automobile DPW in Canadian provinces
excluding Québec totalled $4 billion, or 98% of the Canadian Company’s automobile DPW.
66 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
31.2 U.S. Insurance
Nearly all states have insurance laws requiring property and casualty insurance companies to file their rates, rules and policy or
coverage forms with the state's regulatory authority. In most cases, such rates, rules and forms must be approved prior to use.
While pricing laws vary from state to state, their objectives are generally to ensure that rates are not excessive, unfairly
discriminatory or used to engage in unfair price competition. Company’s ability to increase rates and the timing of the process are
dependent upon the regulatory requirements in each state.
Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory
asset or liability. As at December 31, 2017 and 2016, the Company had no significant regulatory asset or liability.
Note 32 –
Standards issued but not yet effective
32.1 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 Company
meets the eligibility criteria of the temporary exemption from IFRS 9 as provided by IFRS 4 – Insurance Contracts (“IFRS 4”) (see
Note 32.2 - Insurance contracts – amendments for the application of IFRS 9 Financial Instruments) and has elected to defer
the application of IFRS 9 until the effective date of the new insurance contracts standards IFRS 17 - Insurance Contracts (“IFRS
17”), on January 1, 2021.The Company is currently evaluating the impact that IFRS 9, in conjunction with IFRS 17, will have on its
Consolidated financial statements.
Classification and measurement
The classification of debt instruments is dependent on the business model and the cash flows characteristics. A debt instrument will
be classified in accordance with the table below if its contractual term gives rise on specific dates to cash flows that are solely
payments of principal and interest. It would otherwise be classified as FVTPL.
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.
Classification when the debt instrument does not
meet the objective of the amortized cost or FVTOCI
business models, or election to measure them as
FVTPL instead of amortized cost or FVTOCI if
doing so eliminates or significantly reduces an
accounting mismatch.
Equity instruments and derivatives are usually measured at FVTPL. 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.
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.
INTACT FINANCIAL CORPORATION 67
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Expected credit loss
This new impairment model applies only to financial assets classified as amortized cost and debt securities classified as FVTOCI.
Under the expected credit loss model, a loss allowance will be established for all financial assets impaired based on a 12-month
expected credit losses or a life-time expected credit losses if the credit risk increases significantly.
Insurance contracts – amendments for the application of IFRS 9 Financial Instruments
32.2
In September 2016, the IASB issued amendments to IFRS 4, to address concerns of insurers about the different effective dates for
IFRS 9 and IFRS 17, the new insurance contracts standard. The amendments allow insurance entities to elect one of the two
following options:
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.
The Company has opted for the deferral approach and performed an assessment as at September 30, 2017 considering
OneBeacon’s acquisition (see Note 4 – Business combinations). The Company concluded that its activities are predominantly
connected with insurance, since the percentage of liabilities connected with insurance contracts over total liabilities is above the
80% threshold.
Therefore, the Company will apply the temporary exemption and will continue to apply IAS 39 to its financial assets until January 1,
2021.
32.3 Revenues from contracts with customers
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 adoption of this
standard will have limited impact for the Company.
32.4 Leases
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 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. The Company expects significant changes to its Balance sheets mainly due to its real estate leases and is currently
evaluating the impact.
32.5 Share-based payments
In June 2016, the IASB issued amendments to IFRS 2 – Share-based Payment (“IFRS 2”), which provides 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 vesting 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 adoption of these
amendments will not have any impact for the Company.
68 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Insurance contracts
32.6
In May 2017, the IASB published IFRS 17 a comprehensive new accounting standard for insurance contracts covering recognition
and measurement, presentation and disclosure, which replaces IFRS 4 and introduces consistent accounting for all insurance
contracts.
IFRS 17 provides a general model for the recognition of insurance contracts, as well as a simplified model (premium allocation
approach) for short-duration contracts, which will be applicable to most property and casualty insurance contracts. The standard
requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows
and any uncertainty relating to insurance contracts. Additionally, IFRS 17 requires a company to recognize profits as it delivers
insurance services.
The main features of the simplified new accounting model for property and casualty insurance contracts are as follows:
the concept of portfolio, which is a group of contracts covering similar risks and managed together as a single pool. As
such, contracts will be grouped for allocation of deferred acquisition costs, the calculation of risk adjustment, the
determination of onerous contracts and the application of the discount rate;
insurance liabilities will be discounted at a rate that reflects the characteristics of the liabilities (as opposed to a rate based
on asset returns) and the duration of each portfolio. Entities will record the effect of changes in discount rates either in Net
income or in OCI, according to their accounting policy choice;
changes in balance sheet presentation where unearned premiums will correspond to premiums received in advance, while
accounts receivable will be constituted of amounts not received when revenue is recognized. In profit or loss, direct
premiums written will no longer be presented (only earned premiums). Also, insurance results will be presented without the
impact of discounting. Amounts relating to financing and changes in discount rates will be shown separately;
disclosure: extensive disclosures to provide information on the recognized amounts from insurance contracts and the
nature and extent of risks arising from these contracts.
The standard applies to annual periods beginning on or after January 1, 2021. Earlier application is permitted if IFRS 9 – Financial
Instruments is also applied. Retrospective application is required. However, if full retrospective application for a group of insurance
contracts is impracticable, then the entity is required to choose either a modified retrospective approach or a fair value approach.
The Company plans to adopt the new standard on the required effective date together with IFRS 9 (see above). The Company
started a project to implement IFRS 17 and has been performing a high-level impact assessment of IFRS 17. The Company expects
that the new standard will result in important changes to accounting policies for insurance contract liabilities, but the impact has not
yet been determined.
32.7 Uncertainty over income tax treatments
In June 2017, the IASB issued IFRIC 23 – Uncertainty over Income Tax Treatments (“IFRIC 23”). This interpretation specifies that if
an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, it shall determine the tax result
consistently with the tax treatment used or planned to be used in its income tax filing. If it is not probable, the entity shall reflect the
effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which one the entity
expects to better predict the resolution of the uncertainty:
most likely amount: single most likely amount in a range of possible outcomes.
expected value: sum of the probability-weighted amounts in a range of possible outcomes.
An entity shall apply IFRIC 23 for annual reporting periods beginning on or after January 1, 2019, with earlier application permitted.
The Company will not early adopt IFRIC 23 and does not expect a significant impact.
Income tax consequences of payments on financial instruments classified as equity
32.8
In December 2017, the IASB issued amendments to IAS 12 – Income Taxes (“IAS 12”) to clarify that an entity should account for
the income tax on dividends in Net income, OCI or equity, according to where the entity originally recognized the past transactions
that allowed for having the cash flows to declare a dividend.
The amendments apply to annual periods beginning on or after January 1, 2019, with earlier application permitted. The Company
will not early adopt the amendments to IAS 12. The Company is currently assessing the impact of these amendments.
INTACT FINANCIAL CORPORATION 69
G L O S S A RY
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 for a specific period less
preferred share dividends, adjusted
for the after-tax impact on net income
of amortization of intangible assets
recognized in business combinations,
integration and restructuring costs,
acquisition-related currency derivative
gains or losses and the positive impact
from the U.S. Corporate Tax reform,
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 for a 12-month period
less preferred share dividends, adjusted
for the after-tax impact on net income
of amortization of intangible assets
recognized in business combinations,
integration and restructuring costs,
acquisition-related currency derivative
gains or losses and the positive impact
from the U.S. Corporate Tax reform,
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.
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 and credit card receivables.
Associates
Entities in which the Company has the
power to participate in the relevant
decision-making activities of the investee,
but does not have control. These
investments are accounted for using the
equity method.
Average shareholders’ equity
Mean of shareholders’ equity at the
beginning and end of the period, adjusted
for significant capital transactions, if
appropriate. Shareholder’s equity is
determined in accordance with IFRS.
Basis risk
Basis risk is the risk that offsetting
investments in an economic hedging
strategy will not experience price changes
that entirely offset each other.
Book value per share
Shareholders’ equity (excluding preferred
shares) divided by the number of common
shares outstanding at the same date.
Shareholders’ equity is determined in
accordance with IFRS.
Case reserves
The liability established to reflect the
estimated cost of unpaid claims that have
been reported and claims expenses that
the insurer will ultimately be required
to pay.
Cash flow available for investment
activities
A non-IFRS financial measure, which
includes net cash flows from cash and cash
equivalents and the investment portfolio.
Catastrophe losses
Any one claim or group of claims, equal
to or greater than $7.5 million for P&C
Canada (US$5 million for P&C U.S.) 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) a risk
margin as required by accepted actuarial
practice. 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 earned premiums 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.
Company action levels (CALs)
Thresholds below which regulator
notification is required together with
a company action plan to restore
capital levels.
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.
Customer relationships
Relationships that exist with the
policyholders, either directly (as a
direct insurer) or indirectly (through
consolidated brokers).
Debt-to-total 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.
Distribution EBITA
Operating results excluding interest
and taxes from our wholly owned broker
(BrokerLink), as well as our share of results
from our broker associates for a
specific period.
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Distribution networks
Contractual agreements between the
Company and unconsolidated brokers for
the distribution of its insurance products.
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, normalized for the effect
of multi-year policies, excluding industry
pools, fronting and U.S. Commercial
exited lines. 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.
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 changes in
equity market prices.
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.
Frequency (of claims)
Average number of claims reported in a
specific period.
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
Canadian operations – When certain
automobile owners are unable to obtain
insurance via the voluntary insurance
market in Canada, they are insured via
the Facility Association (“FA”). In addition,
entities can choose to cede certain risks
to the FA administered Risk Sharing Pool
(“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.
U.S. operations – As a condition of its
license to do business in certain states
in the U.S., the Company is required to
participate in various mandatory shared
market mechanisms commonly referred
to as residual or involuntary markets.
Each state dictates the type of insurance
and the level of coverage that must be
provided.
Interest rate futures contracts
Contractual obligations to buy or
sell interest-rate-sensitive financial
instruments on a predetermined future
date at a specified price.
Interest rate hedge ratio
A ratio calculated by the Company as the
duration of the pension asset portfolio
divided by the duration of the registered
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.
Joint venture
Joint arrangement 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
for P&C Canada (US$0.25 million for P&C
U.S.) but smaller than the catastrophe
threshold of $7.5 million for P&C Canada
(US$5 million for P&C U.S).
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, foreign
exchange rates or commodity market.
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.
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G L O S S A RY
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 for a specific period,
excluding the after-tax impact of
amortization of intangible assets
recognized in business combinations,
integration and restructuring costs,
net gains (losses), difference between
expected return and discount rate on
pension assets, market yield adjustment,
underwriting results of U.S. Commercial
exited lines, the positive impact from
the U.S. Corporate Tax reform, 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
catastrophe threshold of $7.5 million for
P&C Canada (US$5 million for P&C U.S.),
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 because
they 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.
Regulatory capital ratios
Minimum capital test (MCT), as defined
by the Office of the Superintendent of
Financial Institutions (OSFI) and the
Autorité des marchés financiers (AMF)
in Canada and Risk-based capital
requirements (RBC) as defined by
the National Association of Insurance
Commissioners (NAIC) in the U.S.
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 earned
premiums.
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.
Risk-based Capital (“RBC”)
Risk-based capital, as defined by the
National Association of Insurance
Commissioners (NAIC) in the U.S.
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 margin
Total capital margin includes the
aggregate of capital in excess of company
action levels in regulated entities (170%
MCT, 200% RBC) plus available cash in
unregulated entities.
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 earned premiums less net claims
incurred, commissions, premium taxes
and general expenses, excluding market
yield adjustment, the difference between
the expected return and discount rate
on pension assets and the underwriting
results of U.S. Commercial exited lines.
Written insured risks
The number of vehicles in automobile
insurance and the number of premises in
personal property insurance.
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F I V E -Y E A R F I N A N C I A L H I S T O RY
(Excluding MYA. In millions of Canadian dollars, except as noted)
Consolidated performance
Direct premiums written
Net earned premiums
Underwriting income (loss)
Net investment income
Net distribution income
Net operating income
Non-operating gains (losses)
Income before income taxes
Effective tax rate
Net income attributable to shareholders
Claims ratio
Expense ratio
Combined ratio
Favourable prior year claims development
Current year catastrophes claims
Net gains (losses)
Per share measures ($)
Weighted average number of common shares
outstanding (millions)
Net operating income per share
Earnings per share
Adjusted earnings per share
Book value per share
Return on equity
Operating return on equity
Return on equity
Adjusted return on equity
Personal auto
Direct premiums written
Written insured risks (thousands)
Net earned premiums
Underwriting income (loss)
Combined ratio
Personal property
Direct premiums written
Written insured risks (thousands)
Net earned premiums
Underwriting income (loss)
Combined ratio
Commercial lines – CAN
Direct premiums written
Net earned premiums
Underwriting income (loss)
Combined ratio
Commercial lines – U.S.
Direct premiums written
Net earned premiums
Underwriting income (loss)
Combined ratio
Financial condition
Total capital margin
MCT %
RBC %
Debt-to-total capital ratio
Investments
Performance
Market-based investment yield
Total investments
Portfolio mix (net of hedging position)
Cash, cash equivalents and short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
2017
8,747
8,530
486
432
132
771
(31)
942
15.9%
792
65.4%
28.9%
94.3%
(238)
313
69
133.1
5.60
5.75
5.82
48.00
12.9%
12.8%
13.0%
3,818
4,319
3,782
(64)
101.7%
2,135
2,413
2,040
222
89.1%
2,487
2,382
320
86.5%
307
326
8
97.4%
1,135
205%
459%
23.1%
3.20%
16,853
4%
72%
8%
14%
2%
2016
8,293
7,946
375
414
111
660
(152)
686
21.1%
541
64.9%
30.4%
95.3%
(389)
385
(72)
131.2
4.88
3.97
4.53
42.72
12.0%
9.6%
11.0%
3,792
4,358
3,704
5
99.9%
2,030
2,393
1,880
170
90.9%
2,471
2,362
200
91.5%
–
–
–
–
970
218%
–
18.6%
3.36%
14,386
3%
70%
10%
14%
3%
IFRS
2015
7,922
7,535
628
424
104
860
(216)
875
19.3%
706
61.3%
30.4%
91.7%
(477)
116
(64)
131.5
6.38
5.20
5.54
39.83
16.6%
13.4%
14.3%
3,591
4,159
3,508
161
95.4%
1,864
2,294
1,736
244
85.9%
2,467
2,291
223
90.3%
–
–
–
–
625
203%
–
16.6%
3.55%
13,504
4%
71%
9%
13%
3%
2014
7,461
7,207
519
427
75
767
10
957
18.3%
782
62.6%
30.2%
92.8%
(364)
243
174
131.5
5.67
5.79
6.01
37.75
16.3%
16.1%
16.8%
3,374
3,900
3,387
186
94.5%
1,715
2,192
1,617
177
89.0%
2,372
2,203
156
92.9%
–
–
–
–
681
209%
–
17.3%
3.65%
13,440
3%
72%
9%
13%
3%
2013
7,345
7,014
142
406
75
500
(95)
465
7.3%
431
66.9%
31.1%
98.0%
(374)
486
(83)
132.4
3.62
3.10
3.44
33.94
11.2%
9.3%
10.3%
3,383
3,902
3,349
228
93.2%
1,635
2,221
1,519
(66)
104.4%
2,327
2,146
(20)
100.9%
–
–
–
–
550
203%
–
18.7%
3.68%
12,261
2%
73%
10%
12%
3%
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
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T H R E E -Y E A R Q UA R T E R LY R E V I E W
(Excluding MYA. In millions of Canadian dollars, except as noted)
Consolidated performance
Direct premiums written
Net earned premiums
Underwriting income (loss)
Net investment income
Net distribution income
Net operating income
Non-operating gains (losses)
Income before income taxes
Effective tax rate
Net income attributable to shareholders
Claims ratio
Expense ratio
Combined ratio
Favourable prior year claims development
Current year catastrophes claims
Net gains (losses)
Per share measures ($)
Weighted average number of common shares
outstanding (millions)
Net operating income per share
Earnings per share
Adjusted earnings per share
Book value per share
Return on equity
Operating return on equity
Return on equity
Adjusted return on equity
Personal auto
Direct premiums written
Written insured risks (thousands)
Net earned premiums
Underwriting income (loss)
Combined ratio
Personal property
Direct premiums written
Written insured risks (thousands)
Net earned premiums
Underwriting income (loss)
Combined ratio
Commercial lines – CAN
Direct premiums written
Net earned premiums
Underwriting income (loss)
Combined ratio
Commercial lines – U.S.
Direct premiums written
Net earned premiums
Underwriting income (loss)
Combined ratio
Financial condition
Total capital margin
MCT %
RBC %
Debt-to-total capital ratio
Investments
Performance
Market-based investment yield
Total investments
IFRS
2017
IFRS
2016
IFRS
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2,294
2,400
178
121
28
236
(58)
246
5.9%
232
63.5%
29.1%
92.6%
(62)
31
(6)
2,209
2,082
170
101
30
219
(61)
220
22.3%
171
63.8%
28.0%
91.8%
(53)
89
(59)
2,500
2,051
103
105
50
193
57
295
17.6%
243
65.6%
29.4%
95.0%
(41)
105
59
1,744
1,997
35
105
24
123
31
181
19.3%
146
69.2%
29.0%
98.2%
(82)
88
75
1,961
2,043
153
104
24
212
(52)
224
23.7%
171
62.9%
29.6%
92.5%
(62)
34
(97)
2,193
2,036
61
102
30
137
(16)
156
19.9%
125
67.4%
29.6%
97.0%
(71)
166
17
2,458
1,937
16
104
43
114
(26)
112
16.9%
93
67.5%
31.7%
99.2%
(93)
164
28
1,681
1,930
145
104
14
197
(58)
194
21.6%
152
62.0%
30.5%
92.5%
(163)
21
(20)
1,908
1,948
221
110
22
265
(99)
241
17.8%
198
57.6%
31.0%
88.6%
(75)
2
(72)
2,095
1,930
131
105
28
199
(89)
161
18.6%
131
63.4%
29.8%
93.2%
(107)
81
(64)
2,344
1,865
158
104
34
210
(14)
254
21.7%
199
60.9%
30.7%
91.6%
(106)
22
(29)
1,575
1,792
118
105
20
186
(14)
219
18.7%
178
63.2%
30.2%
93.4%
(189)
11
101
139.2
131.2
131.0
131.0
131.1
131.1
131.3
131.5
131.5
131.5
131.5
131.5
1.63
1.60
1.55
48.00
1.61
1.25
1.41
46.56
1.44
1.82
1.68
42.16
0.90
1.08
1.18
43.14
1.58
1.27
1.56
42.72
1.01
0.91
1.01
41.47
0.83
0.67
0.76
40.57
1.46
1.11
1.19
40.06
1.97
1.46
1.54
39.83
1.47
0.95
1.06
37.84
1.56
1.47
1.56
39.23
1.37
1.32
1.38
38.95
12.9%
12.8%
13.0%
13.3%
12.7%
13.6%
12.1%
12.3%
13.1%
10.6%
9.5%
10.8%
12.0%
9.6%
11.0%
13.4%
10.5%
11.4%
14.6%
10.5%
11.4%
16.7%
12.7%
13.6%
16.6%
13.4%
14.3%
16.9%
14.2%
15.0%
16.8%
15.4%
16.1%
17.2%
16.1%
16.7%
824
917
952
(11)
1,028
1,139
962
(50)
101.2% 105.1%
1,163
1,360
949
22
1,032
1,164
944
(41)
97.8% 102.6% 100.9% 104.3%
803
903
919
(25)
829
928
942
(9)
1,154
1,373
918
23
97.6%
591
671
517
78
85.0%
590
603
142
76.5%
–
–
–
–
625
704
506
2
99.5%
712
596
79
86.7%
–
–
–
–
414
476
495
36
92.8%
527
583
24
95.9%
–
–
–
–
486
562
494
120
75.6%
646
607
42
93.2%
–
–
–
–
569
669
483
2
592
701
447
(30)
99.7% 106.7%
592
609
100
83.5%
712
572
23
95.9%
–
–
–
–
–
–
–
–
777
893
900
32
96.4%
383
461
456
78
82.9%
521
574
35
93.9%
–
–
–
–
808
899
909
28
96.9%
452
547
453
123
72.7%
648
586
70
88.0%
–
–
–
–
987
1,135
903
51
94.4%
527
651
444
11
97.4%
581
583
69
88.2%
–
–
–
–
1,090
1,307
868
85
706
818
828
(3)
90.3% 100.3%
542
664
428
31
92.7%
712
569
42
92.6%
–
–
–
–
343
432
411
79
80.7%
526
553
42
92.5%
–
–
–
–
1,155
201%
413%
24.7%
1,014
224%
–
22.8%
1,034
225%
–
18.5%
970
218%
–
18.6%
881
215%
–
19.0%
857
212%
–
19.3%
904
215%
–
19.5%
625
203%
–
16.6%
389
195%
–
17.3%
564
200%
–
16.8%
763
213%
–
16.9%
505
562
522
106
79.7%
658
600
75
87.4%
307
326
8
97.4%
1,135
205%
459%
23.1%
3.11%
16,853
3.10%
17,093
3.30%
14,890
3.32%
14,227
3.27%
14,386
3.27%
14,342
3.43%
13,812
3.47%
13,630
3.62%
13,504
3.55%
13,339
3.62%
13,394
3.41%
13,443
Portfolio mix (net of hedging position)
Cash, cash equivalents and short-term notes
Fixed-income securities
Preferred shares
Common shares
Loans
4%
72%
8%
14%
2%
6%
71%
8%
13%
2%
8%
67%
9%
13%
3%
2%
70%
10%
15%
3%
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%
174
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
11319 IFC AR Typeset FINAL_prepress.indd 172
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B OA 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
Robert W. Crispin 2, 4
Corporate Director
Janet De Silva 2, 3
President & CEO of Toronto Region
Board of Trade
Robert G. Leary 1, 4
CEO, Olayan Group
Eileen Mercier 1, 4
Corporate Director
Sylvie Paquette 1, 4
Corporate Director
Timothy H. Penner 2, 3
Corporate Director
Louise Roy 2, 3
Chancellor and Chair of the Board,
Université de Montréal and Invited Fellow,
Centre for Interuniversity Research and
Analysis on Organizations
Frederick Singer 1, 4
CEO of Echo360
Stephen G. Snyder 1, 3
Corporate Director
Carol Stephenson 2, 3
Corporate Director
Charles Brindamour
Chief Executive Officer
Louis Gagnon
President, Canadian Operations**
T. Michael Miller
President, U.S. and Specialty Solutions
Patrick Barbeau
Senior Vice President, Claims
Martin Beaulieu
Senior Vice President and
Chief Risk Officer**
Alan Blair
Senior Vice President, Atlantic Canada
Jean-François Blais*
President, Intact Insurance
Paul Brehm
Senior Vice President,
Specialty Solutions**
Sonya Côté
Senior Vice President and
Chief Internal Auditor
Frédéric Cotnoir
Senior Vice President, Corporate and
Legal Services and Secretary
Debbie Coull-Cicchini
Executive Vice President,
Intact Insurance**
Dennis Crosby
Senior Vice President,
Specialty Solutions (U.S.)**
Joe D’Annunzio
Senior Vice President, BrokerLink**
Jean-François Desautels
Senior Vice President, Québec and
Digital Distribution, Intact Insurance
Monika Federau
Senior Vice President and
Chief Strategy Officer
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
* Retired since Jan. 1, 2018
** Since Jan. 1, 2018
For complete biographies of the members of the Board of Directors,
please see www.intactfc.com.
Anne Fortin
Senior Vice President,
Direct Distribution**
Don Fox
Executive Vice President
Darren Godfrey
Senior Vice President, Personal Lines
Karim Hirji
Senior Vice President,
International and Ventures
Mathieu Lamy
Executive Vice President and
Chief Operating 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
Benoit Morissette
Senior Vice President and
Group Chief Actuary**
Jennie Moushos
Senior Vice President, Western Canada
Werner Muehlemann
Senior Vice President and
Managing Director,
Intact Investment Management Inc.
Carla Smith
Senior Vice President,
Corporate Development
Richard Taschereau**
Senior Vice President,
Marketing (Canada)
Mark A. Tullis
Vice Chairman
Peter Weightman
Senior Vice President, Specialty Solutions
and Surety (Canada)**
INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT
175
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Toronto Stock Exchange (TSX) listingsCommon Shares Ticker Symbol: IFCSeries 1 Preferred Shares Ticker Symbol: IFC.PR.ASeries 3 Preferred Shares Ticker Symbol: IFC.PR.CSeries 4 Preferred Shares Ticker Symbol: IFC.PR.DSeries 5 Preferred Shares Ticker Symbol: IFC.PR.ESeries 6 Preferred Shares Ticker Symbol: IFC.PR.FCredit rating A.M. Best DBRS Moody’s FitchIFC long-term issuer credit ratings a– A Baa1 A–OneBeacon long-term issuer credit ratings bbb+ Not rated Baa2 A–IFC’s principal Canadian P&C insurance subsidiaries’ financial strength ratings A+ AA (low) A1 AA–IFC’s principal U.S. P&C insurance subsidiaries’ financial strength ratings A Not rated A2 AA–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, Non-cumulative Floating Rate Class A Series 4 preferred shares, Non-cumulative Class A Series 5 preferred shares and Non-cumulative Class A Series 6 preferred shares (the “Series 1 Preferred Shares”, “Series 3 Preferred Shares”, “Series 4 Preferred Shares”, “Series 5 Preferred Shares” and “Series 6 Preferred Shares” respectively) issued on July 12, 2011, August 18, 2011, September 30, 2016, May 24, 2017 and August 18, 2017, respectively. Fitch Ratings has assigned a rating of “BBB” with a Stable outlook to the Series 1 Preferred Shares, Series 3 Preferred Shares, Series 4 Preferred Shares, Series 5 Preferred Shares and Series 6 Preferred Shares.Common share prices and volume High Low Close Volume Traded2017 Q1 $ 97.56 $ 91.40 $ 94.58 13,471,9162017 Q2 $ 98.29 $ 91.41 $ 97.96 15,096,9102017 Q3 $ 104.33 $ 95.14 $ 103.07 13,125,5392017 Q4 $ 109.33 $ 99.35 $ 104.99 15,359,434Year 2017 $ 109.33 $ 91.40 $ 104.99 57,053,7992016 Q1 $ 91.08 $ 77.49 $ 90.93 16,605,5312016 Q2 $ 94.16 $ 84.88 $ 92.29 13,312,2862016 Q3 $ 97.20 $ 89.75 $ 94.84 10,209,1342016 Q4 $ 97.34 $ 90.00 $ 96.10 13,065,874Year 2016 $ 97.34 $ 77.49 $ 96.10 53,192,8252015 Q1 $ 95.77 $ 81.74 $ 95.42 18,432,7072015 Q2 $ 95.36 $ 85.42 $ 86.79 15,894,6522015 Q3 $ 95.82 $ 86.30 $ 93.72 14,672,7992015 Q4 $ 96.77 $ 85.81 $ 88.68 19,056,349Year 2015 $ 96.77 $ 81.74 $ 88.68 68,056,507Source: Toronto Stock ExchangeSHAREHOLDER AND CORPORATE INFORMATIONEligible dividend designationFor 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 historyRecord Payable AmountDec. 15, 2017 Dec. 29, 2017 $0.64Sept. 15, 2017 Sept. 29, 2017 $0.64June 15, 2017 June 30, 2017 $0.64Mar. 15, 2017 Mar. 31, 2017 $0.64Dec. 15, 2016 Dec. 30, 2016 $0.58Sept. 15, 2016 Sept. 30, 2016 $0.58June 15, 2016 June 30, 2016 $0.58Mar. 15, 2016 Mar. 31, 2016 $0.58Dec. 15, 2015 Dec. 31, 2015 $0.53Sept. 15, 2015 Sept. 30, 2015 $0.53June 15, 2015 June 30, 2015 $0.53Mar. 16, 2015 Mar. 31, 2015 $0.53 Annual meeting of the shareholdersDate: Wednesday, May 9, 2018Time: 11:30 a.m. (Eastern Time)Venue: Art Gallery of Ontario317 Dundas Street WestToronto, OntarioCanada M5T 1G4Version françaiseIl 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 registrarComputershare Investor Services Inc.100 University Avenue, 8th Floor, North TowerToronto, Ontario M5J 2Y11 800 564 6253AuditorsErnst & Young LLPEarnings conference call datesQ1 – May 9, 2018Q2 – August 1, 2018Q3 – November 7, 2018Q4 – February 6, 2019Investor inquiriesKen Anderson Vice President, Investor Relations & Treasurer 855 646-8228, ext. 87383 kenneth.anderson@intact.netMedia inquiriesStephanie SorensenDirector, External Communications416 344 8027stephanie.sorensen@intact.netDividend reinvestmentShareholders 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.11319 IFC AR Typeset FINAL_prepress.indd 1753/23/18 9:01 PMDesign: Craib Design & Communications www.craib.com Printed in Canada1 DPW (pro-forma) for 2017 comprises the DPW of P&C Canada and the DPW (pro-forma) of P&C U.S., using an exchange rate of 1.30®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 license. ®BrokerLink & Design is a registered trademark of Canada Brokerlink Inc. used under license. OneBeacon is a trademark of OneBeacon Insurance Group Holdings, Ltd. ®LinkedIn is a registered trademark of LinkedIn Corporation. LinkedIn is not a sponsor of Intact, nor a participant in any promotions. All other trademarks are properties of their respective owners. ©2018 Intact Financial Corporation. All rights reserved.Certain statements made in this annual report are forward-looking statements. These statements include, without limitation, statements relating to the company’s new products and services, its revenue projections, its use of technology, its funding of projects, its position within the industry and market conditions. All such forward-looking statements are made pursuant to the “safe harbour” provisions of applicable Canadian securities laws. Forward-looking statements, by their very nature, are subject to inherent risks and uncertainties and are based on several assumptions, both general and specific, which give rise to the possibility that actual results or events could differ materially from our expectations expressed in or implied by such forward-looking statements as a result of various factors, including those discussed in the Company’s most recently filed Annual Information Form and annual MD&A. As a result, we cannot guarantee that any forward-looking statement will materialize and we caution you against unduly relying on any of these forward-looking statements. Except as may be required by Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise. Please read the cautionary note at the beginning of the annual MD&A.COMPANY PROFILEWe are the largest provider of property and casualty (P&C) insurance in Canada and a leading provider of specialty insurance in North America, with close to $10 billion in total annual premiums1. We have over 13,000 full- and part-time employees who serve more than five million personal, business, public sector and institutional clients through offices in Canada and the U.S. In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through belairdirect. In the U.S., OneBeacon Insurance Group, a wholly-owned subsidiary, provides specialty insurance products through independent agencies, brokers, wholesalers and managing general agencies.See the full story online: intactfc.com/2017annualreportPlease visit our online annual report to view videos, interactive features and additional information on what matters most to us.Financial highlightsFinancial highlights(in millions of Canadian dollars, except as noted)201720162015 20142013Consolidated performanceDirect premiums written 8,747 8,2937,9227,4617,345Net earned premiums 8,530 7,9467,5357,2077,014Underwriting income486375 628 519 142Net investment income 432414 424 427 406Net distribution income 132111 104 75 75Net operating income 771660 860 767 500Non-operating gains (losses) (31) (152) (216) 10 (95)Net income 792541 706 782 431Combined ratio94.3%95.3% 91.7% 92.8% 98.0%Net operating income per share ($) 5.60 4.88 6.38 5.67 3.62Earnings per share ($) 5.753.97 5.20 5.79 3.10Book value per share ($) 48.0042.72 39.83 37.75 33.94Operating return on equity 12.9%12.0% 16.6% 16.3% 11.2%Return on equity 12.8%9.6% 13.4% 16.1% 9.3%Adjusted return on equity 13.0%11.0% 14.3% 16.8% 10.3% We are the largest provider of P&C insurance in Canada with close to $10 billion ($8 billion in Canada) in annual direct premiums written1. We have consistently outperformed the Canadian 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. We are a proven industry consolidator with a track record of 16 accretive acquisitions since 1988. In 2017 we expanded our reach by entering the U.S. specialty market, representing a significant milestone in building a world-class P&C insurer. Our financial strength is reinforced by prudent risk management, resulting in a consistent track record of favourable reserve development.Intact Financial CorporationIntact Financial Corporation700 University Ave.700 University Ave.Toronto, Ontario M5G 0A1Toronto, Ontario M5G 0A1www.intactfc.comwww.intactfc.comWhyinvest with IntactSee the full story online atintactfc.com/2017annualreport +1 DPW (pro-forma) for 2017 comprises the DPW of P&C Canada and the DPW (pro-forma) of P&C U.S., using an exchange rate of 1.30INTACT FINANCIAL CORPORATION 2017 ANNUAL REPORTWhat matters mostintactfc.comINTACT FINANCIAL CORPORATION 2017 ANNUAL REPORT