Make itIntact
Intact Financial Corporation
Annual Report 2020
Our purpose, Values and core belief
We believe that insurance is about people, not
things. Our purpose is clear – to help people,
businesses and society prosper in good
times and be resilient in bad times.
Our purpose extends beyond simply getting customers
back on track after a crisis. We combine our financial strength
and deep industry expertise to help build a resilient society.
Our strength is based on living our Values, caring for
people, being open and honest, taking accountability,
and driving change.
Our Values Guide Us
We won’t compromise on our
Values because they matter as
much as results.
Integrity
Being honest, open and fair, setting high
standards, and standing up for what is right.
Respect
Being kind, seeing diversity as a strength,
and being inclusive and collaborative.
Customer-driven
Listening to our customers, making it
easy, finding solutions, and delivering
second-to-none experiences.
Excellence
Acting with discipline, driving to outperform,
embracing change, improving every day, and
celebrating success, yet remaining humble.
Generosity
Helping others, protecting the environment,
and making our communities more resilient.
We envision a future where we will
continue to play an impactful role
in helping customers and society to
be more resilient.
What we
aim to
achieve
Our customers are
our advocates:
3 out of 4 customers are
our advocates, and 3 out
of 4 customers actively
engage with us digitally.
Our people are
engaged:
Be recognized as a
best employer and be
a destination for top
talent and experts.
Our Specialty Solutions
business is a leader in
North America:
Achieve combined ratio
in the low 90s, and
generate $6 billion in
annual DPW by 2025.
Our company is one of
the most respected:
Exceed industry ROE by
five points and grow NOIPS
10% yearly over time.
1
Intact Financial Corporation Annual Report 2020 Company Profile
DPW1 $12B total
By line of
business
By
brand
36%
Personal auto
28%
Commercial lines –
Canada
21%
Personal property
15%
Commercial lines –
U.S.
63%
Intact Insurance
13%
belairdirect
9%
BrokerLink
15%
Intact Insurance
Specialty Solutions
(U.S.)
Total shareholder return 14% CAGR over the past ten years
400%
350
300
250
200
150
100
50
0
-50
2010
2015
2020
Intact Financial Corporation
S&P/TSX Banks
S&P U.S. P&C Insurance
S&P/TSX Composite
S&P/TSX Life Insurance
Table of contents
Our Values and Our Objectives
Company Profile
Financial Highlights
Canadian Industry Outperformance
CEO’s Letter
Chairman’s Letter
1
2
3
4
5
11
Board of Directors
Executive Committee Members
MD&A and Financial Statements
Glossary
Five-Year Financial History
Three-Year Quarterly Financial
History
13
13
14
196
200
201
ESG Content Map
Shareholder and Corporate
Information
202
203
Why Invest with Intact
Back cover
Certain statements made in this annual report are forward-looking statements. These statements include, without limitation, statements relating to the company’s strategy, new products and services, lines
of business, revenue, underwriting and investment performance, profitability and growth projections, use of technology, data and artificial intelligence, funding of projects, position within the industry and
markets where it operates, return on equity, net operating income per share and improved cross-border efficiencies, as well as the sharing economy, climate change, diversity and inclusion, market conditions
and the impact on the Company of the occurrence of and response to the COVID-19 pandemic and ensuing events, the proposed acquisition (the “RSA Acquisition”) of RSA Insurance Group Plc. (“RSA”) and the
completion and timing for completion of the RSA Acquisition. 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. Estimates and assumptions have been made regarding, among other things, the timely receipt of all requisite approvals relating to the RSA Acquisition and on
terms acceptable to the Company, the realization of the expected strategic, financial and other benefits of the RSA Acquisition, and economic and political environments and industry conditions. There can be
no assurance that the RSA Acquisition will be completed, or if completed, that the strategic and financial benefits expected to result from the RSA Acquisition will be realized. 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.
Disclaimer: ®Intact Small Straight Lines Design, Intact Design, Intact Insurance Design, Intact Centre on Climate Adaptation, Intact Ventures, are registered 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 Brokerlink Inc. used under license. ™OneBeacon is a
trademark of Intact Insurance Group USA Holdings Inc. used under license. ®On Side Restoration & Design is a registered trademark of On Side Restoration Services Ltd. used under license. ®The Guarantee & G
Design is a registered trademark of The Guarantee Company of North America used under license. ®Frank Cowan Company is a registered trademark of Princeton Holdings Limited used under license. All other
trademarks are properties of their respective owners. ©2021 Intact Financial Corporation. All rights reserved.
1 These are non-IFRS financial measures. See Glossary on page 196 for definitions.
2
Intact Financial Corporation (TSX: IFC) is the largest provider of property and casualty (P&C) insurance in Canada and a leading provider of specialty insurance in North America, with over $12 billion in total annual premiums. The Company has over 16,000 employees who serve more than five million personal, business and public sector customers 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. Frank Cowan Company, a leading managing general agent, distributes public entity insurance programs including risk and claims management services in Canada.In the U.S., Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, wholesalers and managing general agencies. Products are underwritten by the insurance company subsidiaries of Intact Insurance Group USA, LLC. Intact Financial Corporation Annual Report 2020
2020 Financial Highlights
Table of contents
DPW1
$12B
9%
NOIPS1
$9.92
61%
OROE1
18.4%
5.9 points
Combined ratio1
89.1%
6.3 points
Net investment income
Stable
$577M
Distribution EBITA and Other1
$275M
32%
Combined ratio by line of business1
Combined ratio by segment1
2019
2020
86.6%
81.7%
95.1%
94.9%
97.7%
92.5%
96.0%
93.2%
Personal auto
Personal property
Commercial lines –
Canada
Commercial lines –
U.S.
Canada
88.0%
U.S.
94.9%
IFC
89.1%
Investment portfolio
Investment mix (net exposure)
Distribution EBITA and Other1
(in $ millions)
$20.6B
Total
Investments
72% Fixed income
10% Common shares
7% Preferred shares
11% Cash, cash equivalents,
short-term notes and loans
275
209
158
175
134
2016
2017
2018
2019
2020
Financial strength
Book value per share
$58.79
Debt-to-total capital ratio
24.1%
Total capital margin
$2.7B
1 These are non-IFRS financial measures. See Glossary on page 196 for definitions.
3
Intact Financial Corporation Annual Report 2020
Canadian Industry Outperformance
Table of contents
Market share by company (%)1
1 Market share data is based on the latest available data from MSA Research Inc. (FY 2020).
16%
Market share
With a market share of
16%, we are 16 times the
size of the average P&C
insurer in Canada.
Canadian combined ratio outperformance (in pts)1
1 For comparison purposes, IFC combined ratio is based on financial statements presentation.
5.4pts
10-yr average
outperformance
Our sophisticated
pricing and underwriting
discipline and in-house
claims expertise have
enabled us to outperform
the industry benchmark’s
combined ratio.
20
15
10
5
0
12
10
8
6
4
2
0
IFC
#2
#3
#4
#5
Return on equity outperformance (in pts)1
1
IFC’s ROE is the consolidated adjusted return on equity (“AROE”), a non-IFRS financial measure. See glossary on page 196 for the definition.
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
6.8pts
10-yr average
outperformance
Our superior underwriting
results, investment
performance and capital
management have led
to a better ROE than the
industry.
12
10
8
6
4
2
0
4
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Target outperformance 5pts
Intact Financial Corporation Annual Report 2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
12
10
8
6
4
2
0
12
10
8
6
4
2
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Chief Executive Officer
Charles Brindamour
CEO’s Letter
Table of contents
Introduction
Just over a year ago the world changed with the onset
of COVID-19. While I’m optimistic for the future, the
pandemic continues to have a profound impact on
people, the global economy and society.
Our strong financial position helped us pivot our business to support
employees, brokers and customers through this extraordinarily
difficult period, while we made meaningful progress on our strategic
objectives and continued to outperform in 2020.
That outperformance and financial strength underpinned our ability
to provide significant relief to customers who needed our help. And to
take on our biggest acquisition to date – RSA Insurance Group PLC –
a company that we have admired for more than a decade.
The CAD$12.5 billion offer, made in partnership with Scandinavian
insurer Tryg A/S, was done entirely virtually, and is on track to close
in Q2 of 2021. It will be transformational – accelerating our leadership
in Canada, expanding our specialty lines platform with international
expertise and giving us entry into the UK and Ireland with scale.
Above all, it will allow us to invest more heavily in our core capabilities
to deliver second-to-none customer services, and to strengthen our
outperformance.
We couldn’t have achieved these milestones without the commitment
and dedication of our employees across Intact – they adapted at an
incredible pace last year and with the highest levels of engagement
we’ve seen yet.
Our ability to deliver strong results, accelerate our strategy and
provide relief to customers this past year also comes from being
grounded in our Values and purpose. Our purpose – to help people,
businesses and society prosper in good times and be resilient in
bad times – mattered more than ever.
The pandemic has driven home the importance of good risk
management practices and the need to prepare for large tail-risk
events. While we collectively continue to fight COVID-19, we cannot
forget about the existential threat of climate change. Governments,
businesses and communities must work together to build a climate-
resilient society.
We are committed to elevating our role in helping customers and
society Make it Intact – building back stronger and being better
prepared for the future.
5
Intact Financial Corporation Annual Report 2020
CEO’s Letter
Table of contents
Our response to COVID-19
Leadership in a crisis is grounded in experience and a strong sense
of purpose. We were able to leverage our leaders’ can-do attitude,
our employees’ willingness to step up, and our strong financial
position to offer help for people in need while continuing to execute
on our strategy.
Right from the start we took a problem-solving approach and moved
quickly to provide relief to both our personal and small business
customers. In fact, we were ahead of the industry in our risk-based
and needs-based relief efforts. We’ve helped more than 1.2 million
personal and commercial customers, amounting to $530 million in
relief. This took the form of policy adjustments, premium reductions,
and flexible payment options. Our Intact Small Business Relief
Program offered $50 million in financial support for about 100,000
small business customers most impacted by the pandemic.
We will continue to provide further support through customer-
driven rate strategies, product enhancements and the accelerated
deployment of Usage Based Insurance (UBI). Customers who drive
less, and safely, can see meaningful reductions in auto premiums
though UBI. Late last year we also began offering increased liability
and property coverage to new and existing personal lines customers
who work from home. As well, we included free access to online
mental health and well-being programs for a year.
The first part of 2021 will continue to be difficult for many – especially
those affected by the deepening impacts of extended lockdowns. But
as large-scale vaccination picks up speed, I’m more optimistic about
the remainder of the year. It’s important that businesses continue
to protect and support their employees and communities. We will
continue to do our part – our capital position remains strong and
we’ve shown that our business is tremendously resilient.
2020 performance in review
The fundamentals across all our businesses have remained robust.
We saw solid premium growth of 9% in 2020, driven by market
conditions, new business and the Guarantee Company of North
America acquisition. Our combined ratio of 89.1% was strong and
driven by our action plans, the impact of reduced driving and
benign weather conditions.
In our distribution business, we saw EBITA increase by 32% on strong
organic growth, good expense management and broker acquisitions.
Our accretive acquisitions of On Side and Frank Cowan Company
also contributed to this strong growth. Investment income was flat
year-over-year as we continue to face lower reinvestment yields.
This performance led to net operating income per share (NOIPS)
increasing 61% to $9.92 in 2020, a strong Operational ROE of 18.4%,
and a 9% increase in book value to $58.79. Included in these results
are $106 million in losses directly related to the COVID-19 pandemic.
DPW1
(in $ millions)
11%
Ten Year
CAGR
10,090
11,049
12,039
2018
2019
2020
NOIPS1
11%
Ten Year
CAGR
$5.74
$6.16
$9.92
2018
2019
2020
Quarterly dividend
per common share
9%
Ten Year
CAGR
$0.70
$0.76
$0.83
2018
2019
2020
1
These are non-IFRS financial measures.
See Glossary on page 196 for definitions.
6
Intact Financial Corporation Annual Report 2020
CEO’s Letter
Table of contents
At Intact, we’ve had a simple capital management philosophy since
our inception: to have significant capital available in good and in
bad times. Our strong balance sheet position at year-end is the
result of this disciplined approach. We ended 2020 with $2.7 billion
in total capital margin, which includes funds to acquire RSA, and
strong regulatory capital levels in Canada and the U.S.
Our financial objectives are to increase NOIPS 10% annually over time
and outperform the industry ROE by 500 bps every year. We continue
to meet and exceed this objective, with NOIPS well over 10% this year,
and our ROE outperformance sitting at 570 bps. Our track record over
the last decade is strong with NOIPS compounding at 11% annually
and our ROE outperformance averaging 680 bps.
“The pandemic has driven home
the importance of good risk
management practices and the need
to prepare for large tail-risk events.
While we collectively continue to
fight COVID-19, we cannot forget
about the existential threat of
climate change. Governments,
businesses and communities must
work together to build a climate-
resilient society.”
Charles Brindamour, Chief Executive Officer
Outlook
We are expecting an extended period of economic disruption in
Canada and the U.S. While Canada is widely accepted to be in the
midst of a rebound, the speed of recovery will be tightly tied to the
vaccine rollout and how quickly the pandemic can be controlled.
Economic recovery in the U.S. will depend upon how efficiently the
Biden administration is able to deliver on the promised raft of health
and economic measures to manage the pandemic.
The pandemic has had an extraordinary impact on our collective
physical and mental well-being, and on healthcare systems in Canada
and the U.S. While immunity in the general population is still some
time away, the vaccination data we are seeing related to vulnerable
populations, including those in long-term care and seniors, is
promising. As society continues to grapple with the introduction
of COVID-19 variants, the importance of mass testing and contact
tracing remains critical.
Over the past year, we have seen governments around the world take
quick and decisive action. However, the pandemic has also highlighted
the vital importance of preparedness and the need to have policy
mechanisms in place to be able to act quickly. As we brace for a third
wave of COVID-19, it is critical that governments adopt a risk-based
approach to protecting the health and safety of individuals and
society while also focusing on re-opening the economy and getting
back on track.
The effects of the pandemic are highly uneven across society. We are
likely to see permanent changes in consumer behaviour, the economy
and society more broadly. Customers are increasingly adopting digital
solutions and are more anchored to value for money. The business
landscape will likely see more consolidation of smaller and mid-sized
businesses. As well, the gaps in racial and economic equality are rising,
as is the resulting political polarization. Business has an important role
to play in coming to the table with solutions and narrowing these gaps.
At the Canadian insurance industry level, with the 3-year average ROE
in the mid-single digit range and the average combined ratio close to
100%, we expect corrective measures to continue. In commercial lines,
we expect hard market conditions, and in personal property we see
firm market conditions. Personal auto was the most impacted segment
of the industry, given the reduction in driving and claims activity. We
expect personal auto conditions to be temporarily soft, until driving
activity returns to normal. In the U.S. commercial lines segment, we
expect hard market conditions to continue in 2021.
The Canadian P&C industry remains highly fragmented and
competitive, which is conducive to further consolidation. We
anticipate that 10-15 points of market share will change hands
in the coming years, and we are keen to continue to lead.
7
Intact Financial Corporation Annual Report 2020
CEO’s Letter
Table of contents
Our strategy – delivering strong,
sustainable performance
Our teams across North America didn’t miss a beat on delivering on
our objectives and meaningfully advancing our ten-year strategic
roadmap in 2020. We did so while navigating volatile markets and
global uncertainty. Our acquisition of RSA will significantly accelerate
our strategy and add a fifth pillar to our strategic roadmap.
Here is an update on our roadmap:
1. Expanding our leadership position in Canada
Our objective is to have 3 out of 4 customers as advocates and 3 out
of 4 customers actively digitally engaged with us, and we’ve made
significant progress this year.
We met increased customer demand for digital options through our
market-leading insurance apps and telematics capabilities, and our
user-friendly digital tools to file claims. Our mobile app more than
doubled the number of monthly users. One out of three claims are now
being reported digitally – twice the pre-crisis levels. And, we achieved
a major milestone at belairdirect with 3 out of 4 customers now
digitally engaged with us.
We also made product enhancements in personal lines to respond
to the needs of our customers by accelerating our UBI program and
increasing coverage and protection in personal property.
Strengthening distribution continues to be a key focus. BrokerLink
reached an important milestone last year achieving more than
$2 billion in DPW, and we have set a new $3 billion target. We will
continue to deploy insurance simplified at belairdirect. By simplifying
our products and enhancing the claims process and digital
experience, we will make it easier to buy online and engage with
us. Value for money will be an increasingly important aspect
coming out of the pandemic and belairdirect is well positioned to
capture this shift.
We have neared completion of the integration of the Guarantee
Company of North America and Frank Cowan Company, and we
announced the RSA acquisition in November.
Acquiring RSA’s business will expand our leadership by 30% at home,
while bringing complementary offerings in commercial lines and a
well-known affinity business with Johnson Insurance. Canada is where
we see the most meaningful value-creation opportunities to drive our
outperformance, provide a wider offering to our brokers and deliver
second-to-none customer service.
2. Building a specialty solutions leader
Specialty Solutions premiums grew to $3 billion in 2020, meeting our
original objective and setting us on a course to achieve $6 billion in
DPW by 2025. Achieving a combined ratio in the low 90s is within sight
but progress was slowed somewhat this year with the pandemic.
We expanded our distribution capabilities with the acquisition
of IB&M, a privately held brokerage specializing in international
trade markets. IB&M and Frank Cowan Company are meaningful
investments in the MGA channel, where we see the opportunity
to build an attractive stream of distribution earnings and put our
underwriting capacity to work. We’ve got the appetite to do more
in this channel.
We also announced a new cyber solutions product delivered in
partnership with Resilience Insurance. We now focus on 20 specialty
lines, nine of which serve both Canada and the U.S. And lastly, we
brought together our North American specialty capabilities under a
single brand – Intact Insurance Specialty Solutions.
With the acquisition of RSA, we will expand and broaden our
distribution footprint by adding international capabilities and
expertise in Europe, creating a $4 billion+ leading specialty solutions
platform. Our specialty lines teams also see a compelling opportunity
to build international leadership in Marine, Specialty Property and
E&O/D&O. As well, RSA has a strong global network, which we look
forward to capitalizing on to accelerate our outperformance.
3. Strengthening a leading position in the UK and Ireland
We will enter the large UK and Ireland markets at scale. RSA has a
300-year heritage and strong presence in the UK and will play an
important role as a hub for our new combined organization to create
second-to-none customer experiences and drive future success.
While these markets are new to us, the products and competitors
are not. RSA has leading positions in commercial lines and personal
property – we have built outperformance in Canada in the same
business lines against many of the same players.
We look forward to working with RSA to build on their strengths and
share our core expertise in data, risk selection, claims and supply chain
management to further drive sustainable outperformance.
Scott Egan will continue to run the UK and International business once
the transaction closes. This sends a strong message to RSA’s people,
brokers and customers – that we believe in the business. Scott is an
impressive leader, there is great chemistry, and I look forward to him
joining Intact’s Executive Committee.
8
Intact Financial Corporation Annual Report 2020
CEO’s Letter
Table of contents
“Leadership in a crisis is grounded
in experience and a strong sense of
purpose. We were able to leverage
our leaders’ can-do attitude, our
employees’ willingness to step up,
and our strong financial position
to offer help for people in need
while continuing to execute on
our strategy.”
Charles Brindamour, Chief Executive Officer
4. Transforming our competitive advantages
Transforming our competitive advantages is key to our
outperformance mindset. We are delivering on our objective to exceed
industry ROE by five points and grow NOIPS 10% yearly over time.
That mindset helps us deliver value to our customers and create
capabilities that are hard to replicate. Our industry-leading capabilities
were built over decades and will be particularly important as we
integrate RSA.
These core capabilities, our unparalleled access to data and an
astounding rate of digital acceleration by customers led to improved
experiences and increased operational efficiencies in 2020.
Our team of AI experts has grown by over 40% this year and we’ve
doubled our models in production. We’ve developed next-generation
algorithms to improve segmentation and risk selection and launched
our first Sales and Claims chatbots.
Our customers’ claims experience continues to improve. Through
our mobile app, customers can now file a claim and have it appraised
digitally by uploading photos – close to 40% of all eligible claims are
now being handled in this manner.
We acquired On Side Restoration – a leader in home restoration in
Canada – over a year ago. We have grown its top line by over 20%,
expanded operations in seven provinces and improved margins by a
third. And we have significantly increased customer satisfaction with
job cycle times cut by 15%. The On Side team is executing well and
there is lots of momentum in this business.
Through the RSA acquisition we will grow the top line by two-thirds.
This will give us an unmatched ability to further invest data, risk
selection, claims and supply chain management.
And finally, our strong capital management and investment teams
navigated a turbulent year with incredible rigour. When the crisis hit
in early March last year, they moved quickly to protect our balance
sheet and improve liquidity. These early moves, as well as discipline
throughout the year, awarded us the flexibility to provide real relief
to our customers, protect our employees, and provided the ideal
conditions for RSA.
5.
Investing in our people
Our people are at the heart of our strategy – it’s why being a best
employer with a highly engaged team is a key strategic objective.
We are committed to providing employees with the opportunity to
shape the future, win as a team, and grow with us.
The importance of investing in our people has never been clearer.
Within a two-week period in March 2020 nearly every employee
began working from home. We invested quickly in the necessary
IT infrastructure and tools to work virtually. And we doubled down
on communication across the organization and enhanced mental
health support.
We’ve continued to improve the experience throughout the last year.
We invested in the rollout of digital collaboration tools and a new
e-learning platform to help our employees adapt and succeed and as
we prepare for the workplace of the future.
The COVID-19 crisis also brought many social justice issues – including
systemic racism – to the forefront. It was a wake-up call for society.
My leadership team and the Board have committed to accelerating
our Diversity and Inclusion strategy by taking concrete actions to
address gaps in our organization.
These actions include adding a new strategic objective to ensure
our leaders and employees are representative of the communities
we serve, with new targets to increase the diversity at all levels
of management – including at the Board of Directors and the
Executive Committee.
Despite the challenges, we’ve had record-high levels of engagement
in 2020 and our people have not missed a beat. They have been there
day in and day out for our customers, brokers and communities.
I commend their can-do attitude, flexibility and empathy over the
past year.
One of the rewarding aspects of building through acquisitions is the
ability to bring new talent into our Intact family quickly. It provides
an opportunity to build the best team with a shared outperformance
mindset. To our RSA colleagues: I’m looking forward to welcoming
you and seeing what we can achieve together.
Social impact and climate resilience
The pandemic created a level of societal upheaval not seen since the
Great Depression. While we can’t eliminate deep-rooted societal
problems overnight, businesses can mobilize quickly to take concrete
actions and be a part of the solution.
With that in mind, we’ve challenged ourselves to redefine and build
a stronger social impact mandate at Intact in the areas of climate
resiliency, and in creating opportunity for children and families living
in poverty. We are working on a framework to measure our success
in building resilient communities as part of our strategic objective to
be recognized as one of the most respected companies.
9
Intact Financial Corporation Annual Report 2020
CEO’s Letter
Table of contents
Helping people through the pandemic
While our social impact action framework lays out a longer-term plan,
we were also focused on immediate action in 2020. Within days of
pandemic lockdowns, we committed an initial $2 million to help the
most vulnerable members of our society. This doubled to $4 million as
the impact of the pandemic worsened. From food security, to support
for the elderly, to financial support to help accelerate COVID-19
treatments, it was a chance for us to live our purpose.
Through our Generosity in Action campaign we doubled our
employee donations match in 2020. Together, we raised over
$5.2 million nationally for the United Way and other community
level organizations – an exemplary demonstration of our value of
Generosity, and how our employees continue to help people in need.
Building a climate resilient society
While the pandemic has been top of mind, the ongoing threat and
impacts of climate change didn’t slow down, with 2020 tied for the
warmest year on record. Climate change is a multi-faceted issue, with
a critical call to action for society to adapt to a world where disruptive
severe weather events are becoming more common.
For Intact, climate change is not simply an Environmental Social and
Governance (ESG) issue – it’s embedded in our strategy. Climate risk
management has been built into our strategy for more than 10 years
and we continue to adapt. Over the years, we have implemented
several actions to manage the impacts of changing weather patterns
including improved risk selection, pricing, product changes, supply
chain enhancements and a greater emphasis on and investment in
prevention. You can read more about this in our Social Impact Report.
A critical aspect of our approach to prevention is partnerships. In
the midst of the pandemic, we committed more than $1.3 million
to five new climate adaptation partners to accelerate solutions at
the community level. In addition, we renewed our long-standing
partnership with the Intact Centre on Climate Adaptation at the
University of Waterloo for another five years. We are working with
the Intact Centre to establish best practices to limit the impacts of
floods, wildfires and extreme heat. We’re focused on helping build the
capacity of these partnerships to create, validate and scale solutions
to withstand the impacts of climate change.
Simply put – economic resilience requires climate resilience. In
order to prosper and grow Canada’s economic competitiveness,
adaptation and resilience must be integrated into economic policy.
We have a collective responsibility to ensure that our most vulnerable
and climate-affected communities are climate resilient and we will
continue to use our strengths to protect them.
Conclusion
While the social and economic upheaval caused by COVID-19 will likely
continue for some time, our focus has always been on the long term.
Returning to the ‘new normal’ will be a shared responsibility to be
coordinated across governments, businesses and society.
We delivered outstanding results throughout a challenging year,
and I want to thank our people across North America – you really
stepped up.
Our acquisition of RSA will help us to further accelerate our strategy
and strengthen our ability to outperform – and we especially look
forward to welcoming RSA employees into the Intact family.
As we embark upon 2021, I know that we have the best teams, a
business that is tremendously resilient, and strong momentum to
surpass our financial objectives.
We’re ready to continue delivering strong results and to play a role in
rebuilding our communities and the economy. We are energized by
the possibilities ahead.
Charles Brindamour
Chief Executive Officer
10
Intact Financial Corporation Annual Report 2020
Chairman’s Letter
Table of contents
When reflecting on the past year, it was certainly
a time of unprecedented challenges. Responding
to and withstanding these obstacles required
extraordinary agility from the company and that
need continues as this report is issued. The Board
is working closely with the management team to
soundly manage risks and ensure the resiliency of our
business to deliver value for our customers, brokers
and shareholders.
Intact’s Values of integrity, respect, being customer-driven, excellence
and generosity allowed the company to enter the COVID-19 crisis in
a position of strength, both financially and operationally, and with
exceptional leadership of the management team. Strong governance
and high ethical standards are a critical component of the company’s
success, enabling not only enhanced value for shareholders and
long-term viability, but also delivering on Intact’s purpose to help
people, businesses and society prosper in good times and be resilient
in bad times.
Intact ended the year with very strong results, a testament to the
bench strength of the leadership team and the enormous resilience of
employees, brokers and their support of customers. Direct premiums
written grew by 9% and net operating income per share was up
61%, with strong underlying results in Canada and the U.S., strong
distribution results and stable net investment income.
Strong results came from disciplined execution of Intact’s sound
strategy while continuing to strengthen its competitive advantages
in 2020. As well, Intact carefully deployed capital to accelerate its
outperformance. Our acquisition of RSA Insurance Group PLC,
the largest acquisition to date, will significantly accelerate Intact’s
strategy, leadership and capabilities.
In 2020, Intact also provided both immediate COVID-19 relief to
affected customers and instituted longer-term measures to help them
cope with the ongoing fallout of the pandemic. Intact provided more
than $530 million of relief to over 1.2 million customers in 2020.
The COVID-19 crisis has exacerbated many underlying societal
challenges from poverty to racism. Many changes need to occur for
our society to be inclusive. It is clear that businesses in Canada have
work to do in addressing the diversity of Boards. Intact has made a
commitment to move beyond words and take action. One of those
actions is approving an update to our Board and Senior Management
Diversity Policy to include additional diversity targets.
Intact’s approach to building the best team is to provide a workplace
that attracts, retains and develops current and future high-performing
employees from the broadest talent pool. Building the best team
means having different experiences, perspectives, abilities and
backgrounds around the table.
11
Chairman of the Board
Claude Dussault
Intact Financial Corporation Annual Report 2020
Chairman’s Letter
Table of contents
Against the backdrop of a global pandemic, society continues to
grapple with difficult and complex challenges that continue to
accelerate. Being a purpose-driven business provides a clear focus
to help people, businesses and society prosper in good times and be
resilient in bad times. For Intact, addressing broader societal issues
such as climate change is both an ESG position and business strategy.
You have heard from Charles Brindamour that economic resilience
requires climate resilience. To this point, Intact’s response to
managing risks related to climate change has been embedded in the
company’s strategy. We invite you to read more about how Intact
manages climate change and works to build a resilient society in the
Social Impact Report, Management Proxy Circular and MD&A.
Among Intact’s objectives is to be recognized as one of the most
respected companies, and the Board and management have taken
another step in the right direction. Intact attained the top position in
The Globe & Mail Board Games 2020 rankings. Board Games evaluates
the quality of governance practices and disclosure for Canadian
publicly traded companies. This recognition reinforces the importance
of Intact’s clear purpose, Values and strong governance.
An important aspect of strong governance, and in line with Intact’s
value of integrity, are transparent discussions between shareholders,
the Board and Management. With my colleagues on the Board, I met
virtually with shareholders representing 33% of our investor base in
2020. Shareholders interested in discussions can contact the Board of
Directors any time through the office of the Corporate Secretary.
Last year, we bid farewell to long-standing Board member Stephen
Snyder. Later this year, Carol Stephenson – after a tenure of more
than 20 years – is retiring from our Board. Both Stephen and Carol
were among those who oversaw Intact establishing itself as a fully
independent company in 2009, and have since contributed greatly to
its growth and evolution. I am thankful to Stephen and Carol for their
much-valued leadership and service over the years.
I am pleased to welcome two new members of the Board in 2021.
Carolyn Wilkins joins the Board of Directors after a distinguished
twenty-year career at the Bank of Canada. Carolyn served as
Senior Deputy Governor for the last six and a half years of her
tenure, and we welcome her strategic leadership and economic
and financial expertise. I am delighted to also share the nomination
of Dr. Indira Samarasekera. She is internationally recognized as a
leading metallurgical engineer, including for her work on steel
process engineering for which she was appointed an Officer of the
Order of Canada. With her nomination, Indira brings expertise and
leadership in technology, ESG, governance, and public affairs to
the Board of Directors.
The financial results, support for customers and strategic progress of
the past year are due in great measure to the customer-driven focus
and engagement of employees across Intact. They are essential to
the success of the organization and I want to thank them for living the
Intact Values every day.
I would like to thank Charles Brindamour and his leadership team
as they continue to realize opportunities and face challenges with
calm, confidence and a steadfast stewardship of the interests of
all stakeholders.
Also, thank you to our customers, brokers and shareholders for your
trust and dedication this year. Intact’s strength and resilience were
showcased again this year and I look forward to seeing the company
outperform in the years ahead.
Claude Dussault
Chairman of the Board
Recognized as a
best employer
12
Intact Financial Corporation Annual Report 2020
Board of Directors
Claude Dussault
Chairman of the Board of Intact
Financial Corporation and President
of ACVA Investing Corporation
Charles Brindamour
Chief Executive Officer
Janet De Silva (3), (4)
President and CEO,
Toronto Region Board of Trade
Jane E. Kinney (1), (4)
Corporate Director
Robert G. Leary (1), (4)
Corporate Director
Sylvie Paquette (3), (4)
Corporate Director
Timothy H. Penner (2), (3)
Corporate Director
Stuart J. Russell (3), (4)
Professor of Electrical Engineering
and Computer Sciences at University
of California at Berkeley
Frederick Singer (1), (2)
Chief Executive Officer, Echo360
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
Executive Committee Members*
Table of contents
Table of contents
Carol Stephenson (2), (3)
Corporate Director
Carolyn A. Wilkins (1), (4)
Corporate Director
William L. Young (1), (2)
Corporate Director,
Chair of Magna International Inc. and
Chair of SNC-Lavalin Group Inc.
Complete biographies of the members
of the Board of Directors available on
www.intactfc.com.
Charles Brindamour
Chief Executive Officer
Ken Anderson
Senior Vice President, Investor Relations
& Corporate Development
Patrick Barbeau
Senior Vice President, Claims
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
Luisa Currie
Senior Vice President, Western Canada
Danny Da Costa
Senior Vice President, Ontario
Joe D’Annunzio
Senior Vice President, BrokerLink
Jean-François Desautels
Senior Vice President, Quebec and Digital
Distribution Intact Insurance
Lucie Martel
Senior Vice President and Chief Human
Resources Officer
Anne Fortin
Senior Vice President, Direct Distribution
and Chief Marketing Officer
Christian Menkens
Senior Vice President and Chief Technology
Officer
Louis Gagnon
President, Canadian Operations
T. Michael Miller
President, U.S. and Specialty Solutions
Isabelle Girard
Senior Vice President, Personal Lines
Darren Godfrey
Senior Vice President, Commercial Lines
Natalie Higgins
Senior Vice President, Atlantic Canada
Karim Hirji
Senior Vice President & Managing Director,
Intact Ventures
Mathieu Lamy
Executive Vice President & Chief
Operating Officer
Tracy Laughlin
Senior Vice President, Intact Prestige
Louis Marcotte
Senior Vice President and Chief
Financial Officer
Benoit Morissette
Senior Vice President and Chief Risk and
Actuarial Officer
Werner Muehlemann
Senior Vice President and Managing Director,
Intact Investment Management Inc.
Lynn O’Leary
Chief Operations Officer, Specialty Solutions
Carla Smith
Senior Vice President, Specialty Solutions,
Canada
Mark A. Tullis
Vice Chair
Peter Weightman
Senior Vice President and Chief Underwriting
Officer, Specialty Solutions, North America
*As at December 31, 2020. No changes have occured as of March 1, 2021.
13
Intact Financial Corporation Annual Report 2020
Table of contents
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 100;
Financial Statements – pages 1 to 75.
14
Intact Financial Corporation Annual Report 2020
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
OVERVIEW ................................................................................................................................................................................................................. 4
PERFORMANCE ........................................................................................................................................................................................................ 8
ENVIRONMENT & OUTLOOK .................................................................................................................................................................................. 25
STRATEGY ............................................................................................................................................................................................................... 35
FINANCIAL CONDITION .......................................................................................................................................................................................... 43
RISK MANAGEMENT ............................................................................................................................................................................................... 61
ADDITIONAL INFORMATION .................................................................................................................................................................................. 85
INTACT FINANCIAL CORPORATION 1
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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, 2020. 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, 2020, compared to the corresponding periods in 2019. It should
be read in conjunction with our Consolidated financial statements for our fiscal year ended December 31, 2020. This MD&A is dated
February 9, 2021. “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.
Non-IFRS financial measures
We use both IFRS and non-IFRS financial measures to assess our performance. 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.
The non-IFRS measures included in this MD&A are: direct premiums written (DPW), DPW growth in constant currency, underwriting
income (loss), combined ratio, net earned premiums (NEP), total net claims, underlying current year loss ratio, PYD and PYD ratio,
underwriting expenses and expense ratio, distribution EBITA and Other, finance costs, other income (expense), total income taxes,
income before income taxes, net operating income (NOI), net operating income per share (NOIPS), operating return on equity (OROE),
adjusted net income, adjusted earnings per share (AEPS) and adjusted return on equity (AROE). See Section 36 – Non-IFRS financial
measures for the definition and reconciliation to the most comparable IFRS measures.
Important notes
• Non-IFRS financial 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.
• Abbreviations and definitions of selected key terms used in this MD&A are defined in Section 40 – Glossary and definitions.
• When relevant, to enhance the analysis of our results with comparative periods, we present changes in constant currency, which
exclude the impact of fluctuations in foreign exchange rates from one period to the other. Approximately 15% of our DPW is
denominated in USD.
• On November 18, 2020, we announced that, together with the Scandinavian P&C leader Tryg A/S, we have reached an agreement
to acquire RSA Insurance Group plc (RSA). A significant portion of the financing for the RSA Acquisition was raised in Q4-2020.
See Section 2 – Acquisition of RSA’s Canadian, UK and International operations.
• 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%.
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.
Unless otherwise indicated, all forward-looking statements in this MD&A are made as at December 31, 2020, and are subject to change after that
date. This MD&A contains forward-looking statements with respect to the proposed acquisition (the “RSA Acquisition”) of RSA Insurance Group PLC
(“RSA”) and the completion of and timing for completion of the RSA Acquisition, as well as with respect to the acquisition of The Guarantee and
Frank Cowan Company Limited (“FCC”) and with respect to the impact of COVID-19 and related economic conditions on the Company’s operations
and financial performance.
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. In addition to other estimates and assumptions which may be identified herein, estimates and assumptions have been made
regarding, among other things, the receipt of all requisite approvals relating to the RSA Acquisition in a timely manner and on terms acceptable to
the Company, the realization of the expected strategic, financial and other benefits of the RSA Acquisition, and economic and political environments
and industry conditions. However, the completion of the RSA Acquisition is subject to customary closing conditions, termination rights and other
risks and uncertainties, including, without limitation, regulatory approvals, and there can be no assurance that the RSA Acquisition will be completed.
There can also be no assurance that if the RSA Acquisition is completed, the strategic and financial benefits expected to result from the RSA
Acquisition will be realized. 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:
2 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
•
•
•
•
•
•
•
•
•
expected regulatory processes and outcomes in connection with its
business;
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, including
the impact of the COVID-19 pandemic and related economic conditions,
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 high net worth and personal auto lines of
business;
government regulations designed to protect policyholders and creditors
rather than investors;
litigation and regulatory actions, including with respect to the COVID-19
pandemic;
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 and the impact of
COVID-19 and related economic conditions on such brokers and third
parties;
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;
the uncertainty of obtaining in a timely manner, or at all, the regulatory
approvals required to complete the RSA Acquisition;
unfavourable capital markets developments or other factors that may
adversely affect the Company’s ability to refinance the bridge for the
RSA Acquisition;
the Company’s ability to improve its combined ratio, retain existing and
attract new business, retain key employees and achieve synergies and
maintain market position arising from successful integration plans
relating to the RSA Acquisition, as well as management's estimates and
expectations in relation to future economic and business conditions and
other factors in relation to the RSA Acquisition and resulting impact on
growth and accretion in various financial metrics;
the Company’s ability to otherwise complete the integration of the
business acquired within anticipated time periods and at expected cost
levels, as well as its ability to operate in new jurisdictions relating to the
RSA Acquisition;
the Company’s profitability and ability to improve its combined ratio in
the United States;
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;
catastrophe losses caused by severe weather and other weather-
related losses, as well as the impact of climate change;
the occurrence of and response to public health crises including
epidemics, pandemics or outbreaks of new infectious diseases,
including, most recently, the COVID-19 pandemic and ensuing
events;
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
technology and
reliance on
telecommunications systems and potential failure of or disruption
to those systems, including in the context of the impact on the
ability of our workforce to perform necessary business functions
remotely, as well as in the context of evolving cybersecurity risk;
the impact of developments in technology and use of data on the
Company’s products and distribution;
the Company’s dependence on and ability to retain key
employees;
changes in laws or regulations, including those adopted in
response to COVID-19 that would, for example, require insurers
to cover business interruption claims irrespective of terms after
policies have been issued, and could result in an unexpected
increase in the number of claims and have a material adverse
impact on the Company's results;
information
•
•
•
• COVID-19 related coverage issues and claims, including certain
class actions and related defence costs, could negatively impact
our claims reserves;
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, including in the
context of the COVID-19 crisis;
the Company’s ability to hedge exposures to fluctuations in
foreign exchange rates, including those related to purchase price
and book value related to the RSA Acquisition;
future sales of a substantial number of its common shares; and
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 and the quarterly earnings press release dated February 9, 2021 are qualified by these
cautionary statements and those made in the section entitled Risk management (Sections 28-33) of this MD&A for the year ended December 31,
2020. 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.
INTACT FINANCIAL CORPORATION 3
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
OVERVIEW
About Intact Financial Corporation
1.1 Our purpose, values and core belief
1.2 Who we are
•
Largest provider of P&C insurance in Canada and a leading provider of specialty insurance in North America, with over $12 billion
in annual DPW.
• A recognized best employer in Canada and the U.S, with over 16,000 employees who serve more than five million personal,
business and public sector 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. Frank Cowan Company, a leading MGA, distributes public
entity insurance programs including risk and claims management services in Canada.
In the U.S., Intact Insurance Specialty Solutions provides a range of specialty insurance products and services sold through
independent agencies, regional and national brokers, wholesalers and managing general agencies. Products are underwritten by
the insurance company subsidiaries of Intact Insurance Group USA, LLC.
• Our North American specialty operations are now under a single brand – Intact Insurance Specialty Solutions.
• Proven industry consolidator with a track record of 17 successful P&C acquisitions since 1988.
2020 DPW
by business segment
Canada
U.S.
2020 DPW
by line of business
2020 DPW
by distribution channel
PA
PP
CL - Canada
CL - U.S.
Brokers
Direct to consumers
15%
85%
4 INTACT FINANCIAL CORPORATION
36%
21%
28%
13%
15%
87%
PA: Personal auto; PP: Personal property: CL: Commercial lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Acquisition of RSA’s Canadian, UK and International
operations
2.1 Highly strategic, with significant shareholder value creation
On November 18, 2020, we announced that, together with the Scandinavian P&C leader Tryg A/S, we have reached an agreement to
acquire RSA Insurance Group Plc. (RSA). RSA is a multinational insurance group with strong positions in the P&C insurance market
in the UK, Scandinavia and Canada along with supporting international business in Ireland, Continental Europe and the Middle East.
Pursuant to the Transaction, we will retain RSA's Canadian, UK and International operations, Tryg will retain RSA’s Swedish and
Norwegian businesses, and Intact and Tryg will co-own RSA's Danish business.
The acquisition was approved by the Boards of Directors of all three companies on announcement and was approved by RSA’s
shareholders on January 18, 2021. The Transaction is expected to close during Q2-2021, subject to receipt of the relevant approvals
or clearances from the relevant regulatory and antitrust authorities and the satisfaction of the other conditions.
With the RSA Acquisition, we are taking a significant step to accelerate our strategy. The acquisition will expand our leadership position
in Canada, create a leading specialty lines platform with international expertise, and provide entry into the UK and Ireland market at
scale. The acquisition will also strengthen our ability to outperform with increased investments in our core capabilities of data, risk
selection, claims and supply chain management. The RSA Acquisition will create significant value for our shareholders.
Expands our
leadership
position in
Canada
Creates a
leading
specialty lines
platform
Entry into the
UK & Ireland at
scale
• Bolsters our Canadian business, unlocking synergies and opportunities for growth
• Enhances commercial lines, and both direct and broker channels simultaneously
• Builds on our strengths in data, claims, pricing and segmentation
• Expands North American specialty lines and broadens distribution footprint
• Adds international capabilities and expertise in Europe
• Creates a $4 billion+ specialty solutions leader
• Opportunity to apply risk selection and claims management expertise to improve underwriting performance
• Attractive commercial and SME portfolio to share our successful operating model
• Opportunity to apply our customer driven and digital advantages in personal lines
• Net assets to be acquired at 0.9x book value with expected internal rate of return (IRR) in excess of our
15% threshold
Financially
compelling
• Expected high-single-digit NOIPS accretion in the first year, increasing to upper teens within 36 months
• Expected to maintain mid-teens OROE; BVPS expected to increase in excess of 25% at closing
• Over $1.7 billion total capital margin estimated at closing; debt-to-total-capital ratio expected to return to
20% within 36 months
See Section 18 – Our evolved strategic roadmap for the next decade.
INTACT FINANCIAL CORPORATION 5
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
The acquisition of the Canadian, UK and International operations (UK&Intl.) of RSA is expected to increase our annual premiums from
approximately $12 billion to $20 billion, with premiums in Canada and Specialty Lines each increasing by approximately 30%.
We expect to generate significant value through DPW growth, loss ratio and expense ratio improvements across the operations. The
acquisition of RSA's Canadian operations is expected to drive approximately 75% of the value creation, with UK and International
operations accounting for approximately 20% and Specialty Lines accounting for approximately 5%. Over $250 million of pre-tax annual
run-rate synergies are expected within 36 months, before risk selection improvements.
Integration and transition planning is on track. Strategic planning is taking place across all lines, including the Denmark business.
2.2 Financing and hedging
RSA shareholders will receive 685 pence per ordinary share in cash, representing a total
consideration of approximately £7.2 billion ($12.5 billion).
• We will pay £3.0 billion ($5.2 billion) for the acquisition of RSA’s Canadian, UK and
•
International operations, and our co-share of RSA’s Danish business.
Tryg will pay £4.2 billion ($7.3 billion) for the acquisition of RSA’s Swedish and
Norwegian businesses and its co-share of RSA’s Danish business.
Financing for the purchase price of approximately $5.2 billion (£3.0 billion) and expected
related transaction costs of approximately $0.7 billion has been raised with $4.45 billion of
private placement subscription receipts, €392 million ($600 million) bank term loan facility
to be drawn on closing and $600 million of medium-term notes. The remaining balance of
approximately $200 million will be raised in 2021 with the issuance of preferred shares or
other financing.
Total financing: $5.9 billion
Common equity
Debt
Other
$0.2
$1.2
$4.45
Our purchase price is set in GBP, with the CAD equivalent fluctuating with foreign exchange
rates. In November 2020, in connection with the RSA Acquisition, we have hedged the purchase price and other items to foreign
currency fluctuations.
See Section 25.5 – Managing leverage for details on the new financing in connection with the acquisition of RSA.
See Section 27.1 – Currency hedging in relation with the RSA Acquisition.
2.3 Estimated capital position upon closing
We expect to maintain a strong capital position at close, with an estimated capital margin above $1.7 billion and an MCT ratio above
194% in Canada, a Solvency II coverage ratio above 160% in the UK and an RBC ratio above 400% in the U.S.
Our debt-to-total-capital ratio at close of the Transaction is expected to be approximately 26%, and is expected to return to 20% within
36 months. Our credit ratings have been affirmed following the RSA Acquisition announcement.
Further information related to our RSA Acquisition can be found on the Intact website at www.intactfc.com.
6 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Building sustainable competitive advantages
We have many unique advantages which have enabled us to consistently outperform P&C insurers in North America. These competitive
advantages, which we will continue to strengthen and share across the RSA operations, are described below.
Building a leading P&C Insurer
• Our multi-channel distribution strategy includes the most recognized broker and direct-to-consumer brands
in Canada. Full advice-based support is provided through our broker channels and simplified, online
convenience is available through belairdirect.
Scale in
distribution
• We have close to 3,000 broker relationships across Canada and the U.S. for customers who value advice,
and the specialized and community-based services that only an insurance broker can provide.
• 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.
Digital
engagement
• Our industry leading mobile and fully integrated digital solutions distinguish 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 customer driven digital focus.
Investing in
our people
• Our people are the cornerstone to execution of our strategy. As a best employer, we benefit from attracting,
retaining and engaging some of the best talent both within and outside our industry. We have highly
engaged employees and our strong set of values and leadership success factors guide decision making
and provide a strong moral compass.
Diversified
business
mix
• Our underwriting business is well diversified across segments (with presence in Canada, the U.S. and,
following RSA closing, the UK and Europe) and lines of business (personal, commercial and specialty).
• Our growing distribution stream of earnings, as well as our investment income, provides earnings
diversification and reduces volatility.
Global leader
in leveraging
data and AI for
pricing and
risk selection
Deep claims
expertise &
strong supply
chain network
Strong capital
and
investment
management expertise
Proven
consolidator
& integrator
• Our AI and machine learning expertise combined with our data advantage allows us to create sophisticated
•
•
•
•
algorithms that price for risk more accurately than the market.
In turn this establishes a model that will both attract and retain customers with profitable profiles.
The majority of our claims are handled in house with the support of our preferred network of suppliers. As
well, we have invested directly in the supply chain to strengthen our network.
This provides an opportunity for simpler, faster and superior experience for the customer and translates into
a competitive advantage, as we can settle claims at a lower cost.
In-house investment management provides greater flexibility in support of our insurance operations at a
competitive cost. 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 returns, while preserving capital and limiting
volatility. We achieve this through an appropriate asset allocation and active management of investment
strategies.
•
Acquisitions play an important role in accelerating execution on the strategy.
• We are a proven industry consolidator with 17 successful acquisitions since 1988. RSA will mark our 18th
acquisition and will expand our leadership position in Canada and advance our objective to build a specialty
solutions leader.
• Our successful track record on acquisitions is driven by three key factors: thorough due diligence to assess
all the risks and opportunities; swift and effective integration that is seamless to our customers; and financial
benefit from significant synergies due to our scale and core expertise in data, pricing and segmentation,
and claims and supply chain management.
INTACT FINANCIAL CORPORATION 7
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
PERFORMANCE
Consolidated performance
4.1 Consolidated performance
Table 1 - Consolidated performance1
DPW (growth in constant currency)
Canada
U.S.
NEP
Operating income
Underwriting income
Net investment income
Distribution EBITA and Other
Finance costs
Other income (expense)
Pre-tax operating income (PTOI)
Net operating income (NOI)
Pre-tax non-operating gains (losses)
Net income
Effective income tax rates
Operating
Total
6.1
7.1
Q4-2020 Q4-2019
Change
2,872
2,471
401
2,879
415
143
72
(32)
2
600
467
(125)
378
2,670
2,328
342
2,692
229
142
45
(28)
(2)
386
303
(109)
240
8%
6%
19%
7%
186
1
27
(4)
4
214
164
(16)
138
2020
12,039
10,216
1,823
11,220
1,227
577
275
(126)
(37)
1,916
1,471
(535)
1,082
2019 Change
11,049
9,399
1,650
10,211
465
576
209
(120)
(23)
1,107
905
(257)
754
9%
9%
9%
10%
762
1
66
(6)
(14)
809
566
(278)
328
22.1%
20.4%
21.5%
13.4%
0.6 pts
7.0 pts
23.2%
21.7%
18.3%
11.3%
4.9 pts
10.4 pts
Per share measures, basic and diluted (in dollars)
NOIPS
EPS
BVPS
Return on equity for the last 12 months
OROE
AROE
ROE
Total capital margin
Debt-to-total capital ratio
1 See Section 36 – Non-IFRS financial measures.
Table 2 – Underwriting ratios
3.18
2.55
58.79
18.4%
15.0%
12.8%
2,729
24.1%
2.08
1.63
53.97
12.5%
11.4%
10.0%
1,222
21.3%
53%
56%
9%
5.9 pts
3.6 pts
2.8 pts
1,507
2.8 pts
9.92
7.20
6.16
5.08
61%
42%
Claims ratio
Expense ratio
Combined ratio
Canada
U.S.
8 INTACT FINANCIAL CORPORATION
Section
Q4-2020
Q4-2019
Change
55.1%
30.5%
85.6%
84.0%
92.0%
62.6%
28.9%
91.5%
92.0%
88.8%
(7.5) pts
1.6 pts
(5.9) pts
(8.0) pts
3.2 pts
6.1
7.1
2020
57.8%
31.3%
89.1%
88.0%
94.9%
2019
Change
66.0%
29.4%
95.4%
95.9%
93.2%
(8.2) pts
1.9 pts
(6.3) pts
(7.9) pts
1.7 pts
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Highlights
Q4-2020 and full year 2020
• Net operating income per share of $3.18 in Q4-2020 and OROE of 18.4%, driven by strong underwriting
performance and distribution results
• Premiums grew 8% in the quarter and 9% for the full year with solid growth in all lines and The
Guarantee acquisition
• Combined ratio of 85.6% in Q4-2020 included $74 million of CAT losses, with $23 million related to the
COVID-19 crisis
• Our COVID-19 related relief has helped more than 1.2 million customers, with $530 million of support
provided in 2020
• Full year EPS of $7.20 and BVPS up 9% in 2020 to $58.79
• RSA Acquisition is progressing well and on track for Q2-2021 closing
COVID-19 crisis
•
In 2020, we have provided $530 million of relief, including premium reductions of $439 million, as well as payment flexibility,
to more than 1.2 million customers to recognize hardship, changing driving behaviours and lower business activity resulting
from the COVID-19 crisis. Included in the $530 million of relief is a $50 million targeted relief program, which provided an
additional support to approximately 100,000 vulnerable small business customers in Q4-2020.
• Premium reductions lowered DPW by $419 million (4 points) in 2020 and NEP by $236 million (2 points).
•
In 2020, we recorded $106 million for COVID-19 CAT losses for commercial line and specialty line exposure in Canada and
the U.S. and $34 million of bad debt expense.
See Section 13 – COVID-19 crisis update.
Premiums
growth
in constant
currency
▪
Q4-2020 vs Q4-2019
• Premiums growth was solid at 8%, after
reflecting an estimated 5 points of customer
premium relief measures. The acquisition of
The Guarantee contributed 4 points of growth.
2020 vs 2019
• Premiums grew 9%, reflecting strong growth on
both sides of
tempered by an
the border,
estimated 4 points of customer premium relief
measures. The acquisition of The Guarantee
contributed 5 points of growth.
•
•
In Canada, premium growth was solid at 6%,
after reflecting $135 million (6 points) of customer
premium relief measures, driven by market
conditions and unit growth. The acquisition of
The Guarantee contributed 3 points of growth.
In the U.S., premium growth of 19% on a
constant currency basis, including 6 points from
the acquisition of The Guarantee, was driven by
hard market conditions, strong new business
growth and solid retention.
•
•
In Canada, premium growth was strong at 9%,
after reflecting $419 million (4 points) of customer
premium relief measures, driven by market
conditions and unit growth. The acquisition of
The Guarantee contributed 5 points of growth.
In the U.S., premium growth of 9% on a
constant currency basis, including 6 points from
the acquisition of The Guarantee, was driven by
hard market conditions, increased new business
and strong renewals.
Underwriting
performance
• Overall combined ratio of 85.6%, driven by
strong underlying performance in Canada. During
Q4-2020, we also increased COVID-19 CAT
losses by $23 million and provided $50 million of
targeted relief to our small business customers.
• Overall combined ratio improved by 6.3 points
to a strong at 89.1%, driven by strong underlying
performance
the U.S. The
combined ratio of 89.1% for 2020 also reflected
$106 million (0.9 points) of COVID-19 CAT losses.
in Canada and
•
•
In Canada, combined ratio improved to a strong 84.0% in Q4-2020 and 88.0% in 2020, mainly driven by
lower claims frequency, which includes the benefits of our profitability actions and better weather conditions,
partially offset by the impact of relief measures. The combined ratio of 88.0% for 2020 also reflected
$64 million of COVID-19 CAT losses, and $32 million of bad debt expense recorded in Q2-2020.
In the U.S., combined ratio of 92.0% increased
by 3.2 points, mainly due to adverse PYD and
higher weather-related
lines of
business are performing very well.
losses. Most
•
In the U.S, combined ratio of 94.9%, reflecting
1.8 points of COVID-19 CAT losses and elevated
CAT and non-CAT weather-related losses, partly
offset by favourable PYD.
INTACT FINANCIAL CORPORATION 9
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Net
investment
income
Distribution
EBITA and
Other
NOIPS
▪
Q4-2020 vs Q4-2019
2020 vs 2019
• As expected, net investment income of $143 million for Q4-2020 and $577 million for full year 2020
were essentially in line with last year, as the benefit of higher invested assets was offset by lower
reinvestment yields.
• Distribution EBITA and Other grew 60% to
a very strong $72 million, driven by strong
organic growth, accretive acquisitions and
expense management.
• Distribution EBITA and Other grew 32%
to
$275 million, reflecting strong organic growth, accretive
acquisitions, expense management, as well as the
acquisitions of Frank Cowan and On Side.
• NOIPS increased to $3.18 in Q4-2020 and $9.92 in 2020, driven by strong underwriting performance and
distribution results.
Non-
operating
results (see
Section 35 for
details)
• Non-operating
increased by
losses
$16 million to $125 million, mainly driven by
acquisition-related expenses of $42 million
relating to the RSA Acquisition, partially offset
by realized gains from favourable equity
markets.
• Non-operating losses increased by $278 million to
$535 million, mainly due to impairment losses of
$151 million and RSA acquisition-related expenses of
$42 million. Impairment losses included $96 million of
equity impairment in Q1-2020, mostly related to the
energy sector.
Effective
income tax
rates1
• Operating effective income tax rate of 22.1% for Q4-2020 and 23.2% for 2020, mainly reflected strong
Canadian underwriting results leading to a higher proportion of Canadian underwriting income over pre-tax
operating income, and the unfavourable impact of the change in U.S. tax legislation.
EPS
Return on
equity
BVPS (see
Section 25.4)
Debt-to-total
capital ratio
(leverage
ratio)
Financial
condition
• Operating and effective income tax rate for Q4-2020 and 2020 were in line with expectations.
• EPS increased to $2.55 in Q4-2020 and $7.20 in 2020, driven by strong growth in net operating income.
• Operating ROE for the last 12 months improved by 5.9 points to 18.4%, driven by strong underwriting
performance and distribution results.
• BVPS increased by 5% to $58.79, driven by
strong operating performance and mark-to-
market investments gains.
• BVPS increased by 9% to $58.79, driven by strong
operating performance, net of common share dividends.
• Leverage ratio increased to 24.1% after issuing $600 million of medium-term notes in December 2020 to
partially fund the RSA Acquisition, representing an impact of 3.8 points on the leverage ratio, and another
$300 million earlier in 2020.
• We expect the leverage ratio to be 26% at closing of the RSA Acquisition and return to 20% within 36 months
following closing.
• We ended the year in a strong financial position, with $2.7 billion of total capital margin, including the
net proceeds from the medium-term note issuances in December 2020 to partly finance the RSA Acquisition.
See Section 25 – Capital management.
1 See Note 24.2 – Effective income tax rate to the Consolidated financial statements for further details.
10 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Segment performance
The composition of our segments is aligned with our management structure and internal financial reporting based on geography and
nature of our activities. We report our financial results under the business segments set out below.
Canada (CAN)
U.S.
Intact Financial Corporation
Underwriting and distribution activities in Canada
Underwriting activities in the U.S.
Section 6 – Canada
Section 7 – U.S.
Corporate and Other consists of activities managed at the Corporate level, including investing related to P&C insurance, treasury and
capital management, as well as other corporate activities. See Section 8 – Corporate and Other.
Table 3 – Operating performance by segment1
For the quarters ended Dec. 31,
DPW
Growth in constant currency
NEP
Operating income
Underwriting income2
Including COVID-19 CAT losses2
Net investment income
Distribution EBITA and Other
Finance costs
Other income (expense)
PTOI
NOI
NOIPS (in dollars)
For the years ended Dec. 31,
DPW
Growth in constant currency
NEP
Operating income
Underwriting income2
Including COVID-19 CAT losses2
Net investment income
Distribution EBITA and Other
Finance costs
Other income (expense)
PTOI
NOI
NOIPS (in dollars)
CAN
2,471
6%
2,446
392
14
-
72
(3)
-
461
2020
U.S. Corporate
401
19%
432
35
(4)
-
-
-
-
35
-
-
1
(12)
13
143
-
(29)
2
104
2019
CAN
2,328
13%
2,302
184
-
-
45
(2)
-
227
Total
2,872
8%
2,879
415
23
143
72
(32)
2
600
467
3.18
U.S. Corporate
Total
342
5%
389
44
-
-
-
-
-
44
-
-
1
2,670
12%
2,692
1
-
142
-
(26)
(2)
115
229
-
142
45
(28)
(2)
386
303
2.08
2020
2019
CAN
U.S. Corporate
Total
10,216
9%
9,633
1,823
9%
1,582
-
-
5
12,039
9%
11,220
1,154
64
-
275
(11)
-
1,418
81
29
-
-
-
-
81
(8)
13
577
-
(115)
(37)
417
1,227
106
577
275
(126)
(37)
1,916
1,471
9.92
CAN
9,399
9%
8,775
363
-
-
209
(10)
-
562
U.S. Corporate
Total
1,650
8%
1,431
97
-
-
-
-
-
97
-
-
5
11,049
9%
10,211
5
-
576
-
(110)
(23)
448
465
-
576
209
(120)
(23)
1,107
905
6.16
1 See Section 36 – Non-IFRS financial measures.
2 In Q4-2020, $13 million of U.S. COVID-19 CAT losses were ceded under the internal CAT reinsurance treaty. See Section 8 – Corporate and Other.
INTACT FINANCIAL CORPORATION 11
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Canada
Canada segment
Underwriting and distribution activities in Canada
INSURANCE: P&C Canada (see Section 6.1 – P&C Canada)
•
Largest P&C insurer in Canada, with more than $10 billion in annual DPW and an approximate market share of 17%
(22% proforma for the RSA Acquisition).
• We underwrite automobile, home and business insurance contracts to individuals and businesses in Canada, which are
reported under three lines of business: personal auto, personal property and commercial lines (including specialty lines).
•
The RSA Acquisition will bolster our leadership position by adding approximately $3 billion in annual premiums in Canada.
• 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. With the acquisition of Frank Cowan, we now have
a new MGA platform to distribute public entity insurance products in Canada.
•
Largest private sector provider of P&C insurance in most provinces.
DISTRIBUTION AND OTHER (see Section 6.2 – Distribution and other activities)
• 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.
• BrokerLink is a leading distributor of P&C products in Canada, with over $2 billion of written premiums in 2020.
• Distribution and Other is reported on a pre-tax and pre-interest basis and includes the operating results of our wholly-owned
broker, BrokerLink; as well as our share of operating results of broker affiliates, Frank Cowan, a specialty MGA in Canada; and
On Side, a Canadian restoration firm.
2020 DPW
by line of business
2020 DPW
by region
2020 DPW
by distribution channel
PA
PP
CL
Ontario Québec
Alberta Other
Brokers
Direct
42%
25%
33%
12 INTACT FINANCIAL CORPORATION
40%
30%
84%
14%
16%
16%
PA: Personal auto; PP: Personal property: CL: Commercial lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
6.1 P&C Canada
Underwriting results exclude the impact of the BC exit effective in Q4-2020, with no restatement of comparatives.
Table 4 – Underwriting results for P&C Canada1
DPW
Personal auto
Personal property
Commercial lines
NEP
9.1
9.2
9.3
Current year claims (excluding CAT claims)
Current year CAT claims
(Favourable) unfavourable PYD
Total net claims
Underwriting expenses
Underwriting income
Underwriting ratios
Underlying current year loss ratio
CAT loss ratio
(Favourable) unfavourable PYD ratio
Claims ratio
Commissions
General expenses
Premium taxes
Expense ratio
Combined ratio
Personal auto
Personal property
Commercial lines
Q4-2020 Q4-2019 Change
2,471
984
623
864
2,446
1,300
65
(33)
1,332
722
392
53.2%
2.7%
(1.4)%
54.5%
16.0%
10.2%
3.3%
2,328
941
566
821
2,302
1,399
111
(32)
1,478
640
184
6%
5%
10%
5%
6%
(99)
(46)
(1)
(146)
82
208
60.8%
4.8%
(1.4)%
(7.6) pts
(2.1) pts
-
64.2%
(9.7) pts
14.9%
9.4%
3.5%
1.1 pts
0.8 pts
(0.2) pts
29.5%
27.8%
1.7 pts
84.0%
82.6%
73.2%
95.3%
92.0%
(8.0) pts
96.5%
82.0%
93.5%
(13.9) pts
(8.8) pts
1.8 pts
2020
10,216
4,322
2,586
3,308
9,633
5,357
299
(85)
5,571
2,908
1,154
55.6%
3.1%
(0.9)%
57.8%
16.5%
10.1%
3.6%
30.2%
88.0%
86.6%
81.7%
95.1%
2019
Change
9,399
4,067
2,337
2,995
8,775
5,577
362
11
5,950
2,462
363
9%
6%
11%
10%
10%
(220)
(63)
(96)
(379)
446
791
63.6%
4.1%
0.1%
(8.0) pts
(1.0) pts
(1.0) pts
67.8%
(10.0) pts
15.3%
9.2%
3.6%
28.1%
1.2 pts
0.9 pts
- pts
2.1 pts
95.9%
(7.9) pts
97.7%
92.5%
96.0%
(11.1) pts
(10.8) pts
(0.9) pts
1 See Section 36 – Non-IFRS financial measures.
DPW
Underlying current year loss ratio
Combined ratio
6
1
2
,
0
1
9
9
3
,
9
1
0
6
,
8
2018
2019
2020
%
7
.
3
6
%
8
.
0
6
%
2
.
3
5
%
0
.
5
6
%
6
.
3
6
%
6
.
5
5
%
8
.
0
9
%
0
.
2
9
%
0
.
4
8
%
2
.
5
9
%
9
.
5
9
%
0
.
8
8
Annual
Q4
Annual
Q4
Annual
1
7
4
2
7
6
0
,
2
8
2
3
,
2
Q4
INTACT FINANCIAL CORPORATION 13
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Q4-2020 vs Q4-2019
2020 vs 2019
• Premium growth was solid at 6%, including 3 points
from the acquisition of The Guarantee, but also reflecting
an estimated 6 points of customer premium relief
measures.
• Premium growth was strong at 9%, including 5 points from
the acquisition of The Guarantee, but also reflecting an
estimated 4 points of customer premium relief measures.
• Excluding these items, DPW growth was driven by market conditions and unit growth.
• Underlying current year loss ratio improved to a strong at 53.2% in Q4-2020 and 55.6% in 2020, reflecting lower claims
frequency across the business, the impact of our profitability actions and better weather conditions, all of which were partially
offset by the impact of relief measures.
• CAT losses of $65 million in Q4-2020 reflected the
impact of wind and water events in Central Canada, as
well as non- weather-related losses, including $14 million
of COVID-19 related losses (see Section 14 – Weather).
• CAT losses of $299 million in 2020 were mostly weather-
driven but also included $64 million of COVID-19 related
losses in commercial lines.
• PYD ratio was favourable at 1.4% and in line with last
• PYD ratio was favourable at 0.9%, with all lines showing
year.
favourable development.
• Expense ratio increased to 29.5% across all lines of
business, mainly due to the impact of relief measures on
NEP, higher variable commissions and accelerated spent
in technology.
• Expense ratio increased to 30.2% across all lines of
business, mainly due to higher variable commissions, the
impact of relief measures on NEP and accelerated spent in
technology. The expense ratio for 2020 also reflected a
$32 million bad debt expense recorded in Q2-2020.
• Combined ratio was strong at 84% in Q4-2020 and 88% in 2020, reflecting strong underlying performance across all lines.
• Underwriting income was up $208 million in Q4-2020 and $791 million for the full year, reflecting NEP growth and strong
improvement in underwriting performance.
6.2 Distribution and other activities
We aim to continue to:
Our strategy: increase scale in distribution
•
•
•
support our brokers as they expand and grow their businesses, while actively participating in broker consolidation through
BrokerLink and partners;
expand our distribution footprint in specialty lines through the acquisition of MGAs, such as Frank Cowan; and
strengthen our supply chains, including strengthening our repair and restoration services with the acquisition of On Side.
Our performance over time
7-year CAGR (2013-20): 17%
91
89
123
134
158
175
275
209
2013
2014
2015
2016
2017
2018
2019
2020
Our 2020 performance
Distribution EBITA and
Other grew 32% to
$275 million, reflecting strong
organic growth, accretive
acquisitions, expense
management, as well as the
acquisitions of Frank Cowan
and On Side.
14 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
U.S.
U.S. segment
Underwriting activities in the U.S.
INSURANCE: P&C U.S.
•
Focused on small-to-medium sized businesses, with over US$1.3 billion ($1.8 billion) in annual DPW.
• Distributes insurance products and services in the U.S. under the Intact Insurance Specialty Solutions brand through
independent agencies, regional and national brokers, wholesalers and managing general agencies.
• We offer specialty insurance to solve the unique needs of particular customers or industry groups, as well as distinct specialty
products and tailored coverages to a broad customer base across the U.S.
• Each business unit is managed by an experienced team of specialty insurance professionals focused on a specific customer
group or industry segment.
• We hold a top 6 position in the surety segment in North America.
• 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.
2020 DPW by business unit
Accident & Health 16%
Surety 14%
Technology 12%
Ocean Marine 11%
Specialty Property 8%
Management Liability 7%
Tuition Reimbursement 7%
Inland Marine 6%
Public Entities 5%
Fin. Services 4%
Entertainment 4%
Environmental 3%
Fin. Institutions 3%
INTACT FINANCIAL CORPORATION 15
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
2020
1,823
2019
Change
1,650
11%
9%
11%
58
43
(4)
97
70
(16)
(1.7) pts
2.7 pts
(0.1) pts
0.9 pts
0.8 pts
(0.3) pts
0.3 pts
0.8 pts
1.7 pts
1,582
1,431
861
47
(15)
893
608
81
54.4%
3.0%
(0.9)%
56.5%
16.5%
19.7%
2.2%
38.4%
94.9%
803
4
(11)
796
538
97
56.1%
0.3%
(0.8)%
55.6%
15.7%
20.0%
1.9%
37.6%
93.2%
Combined ratio
%
7
.
6
9
%
8
.
8
8
Q4
%
8
.
4
9
%
2
.
3
9
%
9
.
4
9
%
0
.
2
9
Annual
7.1 P&C U.S.
Table 5 – Underwriting results for P&C U.S.1
DPW
Growth in constant currency
NEP
Current year claims
Current year CAT claims
(Favourable) unfavourable PYD
Net claims incurred
Underwriting expenses
Underwriting income
Underwriting ratios
Underlying current year loss ratio
CAT loss ratio
(Favourable) unfavourable PYD ratio
Claims ratio
Commissions
General expenses
Premium taxes
Expense ratio
Combined ratio
1 See Section 36 – Non-IFRS financial measures.
DPW
3
2
8
,
1
0
5
6
,
1
9
8
4
,
1
Q4-2020
Q4-2019
Change
401
342
432
239
(4)
5
240
157
35
55.2%
(0.9)%
1.3%
55.6%
16.2%
18.5%
1.7%
36.4%
92.0%
389
208
4
(7)
205
140
44
53.4%
1.0%
(1.6)%
52.8%
15.0%
19.2%
1.8%
36.0%
88.8%
17%
19%
11%
31
(8)
12
35
17
(9)
1.8 pts
(1.9) pts
2.9 pts
2.8 pts
1.2 pts
(0.7) pts
(0.1) pts
0.4 pts
3.2 pts
Underlying current year loss ratio
2019
2020
2018
%
6
.
5
5
%
2
.
5
5
%
4
.
3
5
%
9
.
6
5
%
1
.
6
5
%
4
.
4
5
1
0
4
5
2
3
2
4
3
Q4
Annual
Q4
Annual
16 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Q4-2020 vs Q4-2019
2020 vs 2019
• On a constant currency basis, very strong DPW
growth of 19%, including 6 points from the acquisition
of The Guarantee, driven by hard market conditions,
strong new business growth and solid retention.
• On a constant currency basis, solid DPW growth of 9%,
including 6 points from the acquisition of The Guarantee, driven
by hard market conditions, increased new business and strong
renewals.
• Underlying current year loss ratio increased
1.8 points from a solid 53.4% in Q4-2019, mainly due
to higher non-CAT weather-related losses.
• CAT loss ratio was negative 0.9% in Q4-2020,
reflecting additional COVID-19 related losses of
$9 million in Q4-2020, more than offset by the cession
of $13 million of losses under an internal reinsurance
treaty (see Section 8 – Corporate and Other).
• PYD ratio was unfavourable at 1.3%, mainly driven
by adverse development on prior year claims, net of
ADC cover.
• Underlying current year loss ratio improved to a strong
54.4%, driven by the impact of our profitability actions, including
rate increases, claims actions and the exit of the Healthcare
business.
• CAT loss ratio of 3.0% in 2020 was driven by 1.8 points
($29 million) of COVID-19 related losses in 2020 and severe
weather events in Q1-2020.
•
Favourable PYD ratio of 0.9% was tempered by adverse
development on prior year claims, net of ADC cover.
• Expense ratio was slightly up in Q4-2020 and 2020, reflecting the addition of The Guarantee’s surety business.
• Combined ratio increased by 3.2 points to 92.0%,
mainly due to unfavourable PYD and higher non-CAT
weather-related losses. Most lines of business are
performing very well.
• Combined ratio of 94.9% was higher than expected,
reflecting 1.8 points of COVID-19 CAT losses and elevated CAT
and non-CAT weather-related losses. Given all the actions we
have taken so far, we remain confident in the fundamentals of
our U.S. business and our ability to deliver a low 90's combined
ratio on a sustainable basis.
7.2 Performance vs objectives
At the time of the acquisition, we set two critical objectives for success, both targeting the end of 2020 for completion.
1. Reach $3 billion DPW across our North American Specialty platform. Our DPW reached $3 billion in 2020, in line with
our objective (see Section 16 – Progress on our strategic roadmap); and
2. Achieve a sustainable low-90s combined ratio in the U.S. We have taken several tangible actions to achieve our combined
ratio target, including:
•
•
•
implementing profit improvement plans on certain underperforming lines and targeted exits from business units such as
healthcare;
the realization of synergies, including $30 million of expense synergies on an annual basis; and
investments in our strong core of industry leading business units, both organic and via acquisitions such as The Guarantee
and International Bond & Marine Brokerage Ltd. (IB&M).
We believe our U.S. business will deliver sustainable low 90s performance going forward, given the actions we have taken so far and
continued discipline on underwriting performance.
7.3 Other performance matters
Exited lines reported a loss of $57 million in 2020 ($66 million in 2019), net of reinsurance, mainly driven by adverse PYD in the
Healthcare business, which we exited effective July 1, 2019. These results support our decision to exit the business.
INTACT FINANCIAL CORPORATION 17
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Corporate and Other
CORPORATE AND OTHER
Consists of income and expenses related to activities managed at the Corporate level, including:
Investment management activities
Treasury and capital management
•
•
• Risk management, including internal CAT reinsurance
• Other corporate activities
Internal CAT reinsurance treaty
As part of our global risk management optimization strategy, an internal CAT reinsurance treaty has been in place since 2018 to
cover for P&C U.S. CAT losses in excess of US$20 million. The impact of the internal reinsurance treaty is reflected as follows, in
line with how we measure our performance:
• P&C U.S. performance is presented net of reinsurance.
• Corporate and Other performance reflects P&C U.S. ceded premiums and ceded losses, which are included in the
consolidated underwriting performance.
See Section 23.2 – Reinsurance for details on reinsurance net retention and coverage limits.
8.1 Corporate and Other (operating performance)
Table 6 – Corporate and other (operating performance)
Section Q4-2020 Q4-2019
Change
2020
2019
Change
10.2
Underwriting income (loss)
Net investment income
Finance costs1
Other income (expense)2
Corporate and other
Underwriting income (loss)
NEP (ceded premiums from P&C U.S.)
CAT losses
Underwriting income (loss)
(12)
143
(29)
2
104
1
13
(12)
1
142
(26)
(2)
115
1
-
1
(13)
1
(3)
4
(11)
-
13
(13)
(8)
577
(115)
(37)
417
5
13
(8)
5
576
(110)
(23)
448
5
-
5
(13)
1
(5)
(14)
(31)
-
13
(13)
1 Finance costs (other than those related to our Canadian broker associates).
2 Other income (expense) can fluctuate from quarter to quarter and includes general corporate expenses and income, consolidation adjustments,
regulatory fees related to our public company status, special projects and other operating items. Included underwriting results of The Guarantee from
December 2, 2019 (closing date) of $7 million in 2019.
Underwriting performance highlights
• Underwriting loss of $12 million in Q4-2020 and $8 million in 2020, reflected $13 million (US$10 million) of P&C U.S.
COVID-19 CAT losses ceded to the internal CAT reinsurance treaty, net of reinsurance premiums of $5 million in 2020.
• CAT losses ceded of US$10 million represented losses in excess of P&C U.S. segment retention of US$20 million. It is the
first time that P&C U.S. CAT losses exceed that retention since inception in 2018. See Section 7.1 – P&C U.S.
• On a consolidated basis, COVID-19 CAT losses totaled $23 million in Q4-2020 and $106 million in 2020, all of which
are reflected in the consolidated combined ratio.
See Section 5 – Segment performance.
18 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Line of business performance
The composition of our lines of business is aligned with our management structure and internal financial reporting. We report our
financial results under the lines of business set out below.
Intact Financial Corporation
• 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 also available for motor
homes, recreational vehicles, motorcycles, snowmobiles, and all terrain vehicles.
• 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 - CANADA – We provide a broad range of coverages tailored to the needs of a
diversified group of small and medium sized businesses,
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 specific
needs of the sharing economy.
including commercial
• Commercial lines U.S. (P&C U.S.) – Through our 13 business units, we provide a broad range of
specialty insurance solutions tailored to meet the unique needs of specific industry segments or
product/customer groups. Businesses serving targeted industry segments include accident and health
(transportation, specialty health, and sharing economy), technology, ocean marine, inland marine
(construction, transportation, and fine arts), government risks (public entities), entertainment, financial
services, and financial institutions. Businesses offering distinct specialty products to broad customer
groups
liability, and
environmental.
tuition reimbursement, management
include specialty property, surety,
Section
9.1
9.2
9.3
7.1
INTACT FINANCIAL CORPORATION 19
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
9.1 Personal auto
Underwriting results exclude the impact of the BC exit effective in Q4-2020, with no restatement of comparatives.
Table 7 – Underwriting results for personal auto1
DPW
Written insured risks (in thousands)
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio
(Favourable) unfavourable PYD ratio
Claims ratio
Expense ratio
Combined ratio
1 See Section 36 – Non-IFRS financial measures.
Q4-2020 Q4-2019
Change
2020
2019
Change
984
908
1,087
189
58.8%
0.6%
(1.0)%
58.4%
24.2%
941
886
1,007
35
73.0%
0.8%
-%
73.8%
22.7%
5%
2%
8%
nm
(14.2) pts
(0.2) pts
(1.0) pts
(15.4) pts
1.5 pts
4,322
4,246
4,187
560
61.0%
1.1%
(0.1)%
62.0%
24.6%
4,067
4,150
3,818
86
6%
2%
10%
nm
71.7%
0.7%
2.9%
(10.7) pts
0.4 pts
(3.0) pts
75.3%
22.4%
(13.3) pts
2.2 pts
82.6%
96.5%
(13.9) pts
86.6%
97.7%
(11.1) pts
Q4-2020 vs Q4-2019
• Solid DPW growth of 5%, after reflecting an estimated
6 points of customer premium relief measures and
2 points due to the BC exit, driven by unit growth.
2020 vs 2019
• Solid DPW growth of 6%, after reflecting an estimated
6 points of customer premiums relief measures. DPW
growth was driven by favourable market conditions entering
into 2020, the acquisition of The Guarantee (2 points), as
well as unit growth.
• Underlying current year loss ratio improved to a
strong 58.8%, reflecting lower claims frequency due to
reduced driving, the benefit of our profitability actions and
lower non-CAT weather-related losses, partly offset by
increased claims severity and customer relief measures.
• Underlying current year loss ratio improved to a strong
61.0% in 2020, reflecting lower claims frequency due to the
benefit of our profitability actions, reduced driving and lower
non-CAT weather-related losses, partly offset by increased
claims severity and customer relief measures.
• CAT loss ratio of 0.6% in Q4-2020, essentially in line
• CAT loss ratio of 1.1% in 2020, in line with expectations.
with last year.
•
Favourable PYD was minimal in Q4-2020 in 2020, in line with expectations.
• Combined ratio was strong at 82.6% in Q4-2020 and 86.6% in 2020, driven by improvement in underlying performance.
DPW
Underlying current year loss ratio
Combined ratio
2018
2019
2020
2
2
3
,
4
7
6
0
,
4
0
5
7
,
3
1
4
9
4
8
9
8
1
8
%
4
.
4
7
%
0
.
3
7
%
8
.
8
5
%
7
.
4
7
%
7
.
1
7
%
0
.
1
6
%
3
.
7
9
%
5
.
6
9
%
6
.
2
8
%
5
.
9
9
%
7
.
7
9
%
6
.
6
8
Q4
Annual
Q4
Annual
Q4
Annual
20 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
9.2 Personal property
Table 8 – Underwriting results for Personal property1
DPW
Written insured risks (in thousands)
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio
(Favourable) unfavourable PYD ratio
Claims ratio
Expense ratio
Combined ratio
1 See Section 36 – Non-IFRS financial measures.
Q4-2020 Q4-2019
Change
623
579
630
169
40.3%
2.4%
(2.4)%
40.3%
32.9%
566
562
566
102
43.5%
8.5%
(1.8)%
50.2%
31.8%
10%
3%
11%
66%
(3.2) pts
(6.1) pts
(0.6) pts
(9.9) pts
1.1 pts
2020
2,586
2,480
2,444
446
46.5%
3.8%
(1.9)%
48.4%
33.3%
2019
Change
2,337
2,404
2,184
165
53.7%
9.0%
(1.7)%
61.0%
31.5%
11%
3%
12%
nm
(7.2) pts
(5.2) pts
(0.2) pts
(12.6) pts
1.8 pts
73.2%
82.0%
(8.8) pts
81.7%
92.5%
(10.8) pts
Q4-2020 vs Q4-2019
2020 vs 2019
• Strong premium growth of 10%, after reflecting an
estimated 3 points of customer premium relief measures,
driven by solid unit growth and firm market conditions.
• Strong premium growth of 11%, after reflecting an
estimated 2 points of customer premium relief measures,
driven by solid unit growth and firm market conditions.
• Underlying current year loss ratio improved to a strong 40.3% in Q4-2020 and 46.5% in 2020, driven by strong
fundamentals, market conditions and lower non-CAT weather-related losses.
• CAT loss ratio of 2.4%, in line with expectations, while
lower than last year’s elevated level, which was impacted
by a severe storm in Central Canada in 2019.
• CAT loss ratio of 3.8% was driven by Q2-2020 severe
weather events in Alberta, but remained below expectations
and last year’s elevated level.
•
Favourable PYD ratio of 2.4% in Q4-2020 and 1.9% in 2020, in line with expectations.
• Personal property continued to deliver solid results, with a combined ratio of 73.2% in Q4-2020 and 81.7% in 2020 and
limited COVID-19 impacts.
DPW
6
8
5
,
2
7
3
3
,
2
6
8
1
,
2
7
1
5
6
6
5
3
2
6
Q4
Annual
Underlying current year loss ratio
2019
2018
2020
Combined ratio
%
1
.
7
4
%
3
.
0
4
%
5
.
3
4
Q4
%
7
.
3
5
%
0
.
2
5
%
5
.
6
4
Annual
%
5
.
8
7
%
0
.
2
8
Q4
%
2
.
3
7
%
5
.
2
9
%
3
.
8
8
%
7
.
1
8
Annual
INTACT FINANCIAL CORPORATION 21
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
9.3 Commercial lines
Table 9 – Underwriting results for Commercial lines Canada, including Commercial P&C and Commercial auto1
DPW
Commercial P&C
Commercial auto
NEP
Underwriting income (loss)
Underlying current year loss ratio
CAT loss ratio
(Favourable) unfavourable PYD ratio
Claims ratio
Expense ratio
Combined ratio
Q4-2020 Q4-2019
Change
864
646
218
729
34
55.8%
6.0%
(1.0)%
60.8%
34.5%
821
574
247
729
47
57.2%
7.5%
(2.9)%
61.8%
31.7%
5%
13%
(12)%
-
(28)%
(1.4) pts
(1.5) pts
1.9 pts
(1.0) pts
2.8 pts
95.3%
93.5%
1.8 pts
2020
3,308
2,382
926
3,002
148
55.3%
5.5%
(1.1)%
59.7%
35.4%
95.1%
2019
Change
2,995
2,046
949
2,773
112
60.0%
5.1%
(2.3)%
62.8%
33.2%
10%
16%
(2)%
8%
32%
(4.7) pts
0.4 pts
1.2 pts
(3.1) pts
2.2 pts
96.0%
(0.9) pts
1 See Section 36 – Non-IFRS financial measures.
Q4-2020 vs Q4-2019
• Solid DPW growth of 5%, driven by the acquisition of The
Guarantee, but also reflecting an estimated 6 points for the
$50-million
for small business
customers.
targeted relief program
2020 vs 2019
• Solid DPW growth of 10%, driven by the acquisition of
The Guarantee, but also reflecting an estimated 4 points
of customer premium relief measures.
• Excluding these items, premiums reflected hard market conditions, tempered by relief measures and the economic slowdown
in Commercial P&C, as well as lower volumes from the sharing economy products in Commercial auto.
• Underlying current year loss ratio improved to a strong
55.8%, driven by lower claims frequency, in part due to our
profitability actions, partly offset by customer relief measures.
• CAT loss ratio of 6.0% was elevated and driven by non-
weather related losses, including $14 million (2 points) of
COVID-19 related losses.
• Underlying current year loss ratio improved to a
strong 55.3%, driven by lower claims frequency, in part
due to better weather conditions and our profitability
actions, partly offset by customer relief measures.
• CAT loss ratio was elevated at 5.5% and reflected non-
weather related losses, including $64 million (2 points) of
COVID-19 related losses, and the impact of severe
weather in Alberta in Q2-2020.
•
Favourable PYD ratio of 1.0% in Q4-2020 and 1.1% in 2020 was lower than last year, reflecting lower favourable PYD in
Commercial P&C and improvement in Commercial auto.
• Combined ratio was solid at 95.3%, as strong underlying
performance was offset by the impact of our $50-million
targeted customer relief program (6 points), COVID-19 CAT
losses and higher expenses.
• Combined ratio was solid at 95.1%, as strong
underlying performance was offset by the impact of
customer relief measures, COVID-19 CAT losses and
higher expenses.
DPW
8
0
3
,
3
5
9
9
,
2
5
6
6
,
2
2
3
7
1
2
8
4
6
8
Underlying current year loss ratio
2019
2018
2020
Combined ratio
%
0
.
2
6
%
2
.
7
5
%
8
.
5
5
%
3
.
1
6
%
0
.
0
6
%
3
.
5
5
%
3
.
5
9
%
5
.
3
9
%
6
.
1
9
%
0
.
6
9
%
1
.
5
9
%
6
.
4
9
Q4
Annual
Q4
Annual
Q4
Annual
22 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Investment performance
10.1 $21 billion of strategically managed high-quality investments
Our approach to investment management continues to reflect our objective of:
• maximizing after-tax returns, while preserving capital and limiting volatility, based on our risk profile, 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.
10.2 Net investment income
Table 10 – Net investment income
Interest income
Dividend income
Investment income, before expenses
Expenses
Net investment income
Average net investments1
Q4-2020 Q4-2019 Change
2020
2019 Change
88
62
150
(7)
143
93
55
148
(6)
142
(5)
7
2
(1)
1
358
242
600
(23)
577
374
225
599
(23)
576
(16)
17
1
-
1
19,167
17,616
9%
18,637
17,207
8%
Market-based yield2
3.24%
1 Defined as the mid-month average fair value of net equity and fixed-income securities held during the reporting period.
2 Represents the annualized total pre-tax investment income (before expenses), divided by the average net investments.
(24) bps
3.15%
3.39%
3.50%
(26) bps
Q4-2020 vs Q4-2019
2020 vs 2019
• Net investment income of $143 million for Q4-2020 and $577 million for full year 2020 were essentially in line with
last year, as the benefit of higher invested assets was offset by lower reinvestment yields.
• Average net investments increased by 9% in the quarter and 8% for the full year, reflecting the acquisition of The
Guarantee, as well as cash inflows from operations (see Section 22 – Investments and capital markets).
• Market based yield decreased to 3.15% in the quarter and 3.24% for the full year, mainly due to the impact of higher
average net investments and lower reinvestment yields.
10.3 Realized and unrealized gains (losses) on FVTPL bonds
Realized and unrealized gains and losses on our FVTPL bonds are expected to offset by the change in rates used to discount our
claims liabilities (MYA) (see Section 35 – Non-operating results).
Q4-2020 vs Q4-2019
2020 vs 2019
• Net losses of $7 million in Q4-2020 driven by a slight
increase of interest rates in both Canada and the U.S.
(see Section 22.1 – Capital markets update).
• Net gains of $237 million in 2020, mainly driven by the
significant decline in interest rates in both Canada and the
U.S. (see Section 22.1 – Capital markets update).
• REMINDER: Net losses of $47 million in Q4-2019
were driven by increasing interest rates in both Canada
and the U.S.
• REMINDER: Net gains of $115 million in 2019 were driven
by declining interest rates in 2019 in both Canada (mainly in
H1-2019) and the U.S.
INTACT FINANCIAL CORPORATION 23
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
10.4 Net gains (losses) excluding FVTPL bonds
Net investment gains (losses) are reported in Non-operating results and included the following items. See Section 22.1 – Capital
market update for more details on market performance.
Table 11 – Net gains (losses) excluding FVTPL bonds1
Q4-2020 Q4-2019 Change
2020
2019 Change
Realized and unrealized gains (losses)2 on:
AFS bonds, net of derivatives
Equity securities, net of derivatives
Embedded derivatives related to our perpetual
preferred shares
Net foreign currency gains (losses) on investments
Impairment losses on AFS common shares
Other gains (losses) (see below)
Gains (losses) excluding FVTPL bonds
Other gains (losses) can be broken down as follows:
Currency derivative economic hedges related to the
RSA Acquisition
Purchase price
Book value
Broker gains related to a change of control
Impairment loss on Intact U.S. Surplus notes
Other
-
62
(12)
(1)
(22)
26
53
41
(22)
14
-
(7)
4
23
(8)
-
(14)
11
16
-
-
-
-
11
(4)
39
(4)
(1)
(8)
15
37
41
(22)
14
-
(18)
33
8
(14)
10
(121)
29
(55)
41
(22)
35
(30)
5
14
26
(5)
-
(76)
91
50
-
-
72
-
19
19
(18)
(9)
10
(45)
(62)
(105)
41
(22)
(37)
(30)
(14)
1 See Note 23 – Net gains (losses) to the Consolidated financial statements for further details.
2 Excluding foreign currency impact, which is reported in Net foreign currency gains (losses) on investments.
Q4-2020 vs Q4-2019
2020 vs 2019
Net gains of $53 million in Q4-2020 reflected:
Net losses of $55 million in 2020, mainly reflected:
•
•
•
•
realized gains from favourable equity markets; and
other net gains of $26 million.
Partly offset by:
losses on embedded derivatives; and
impairment losses of $22 million.
•
•
•
•
impairment losses on AFS common shares of $121 million; and
losses on embedded derivatives.
Partly offset by:
realized gains on bonds and equity securities; and
other net gains of $29 million.
Net gains of $16 million in Q4-2019 included realized
gains from favourable equity markets, partly offset by
impairment losses, mostly stock specific.
Net gains of $50 million in 2019 included a broker gain of
$72 million in Q1-2019 and realized gains on our AFS bonds and
common shares, partly offset by impairment losses of $76 million.
24 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
ENVIRONMENT & OUTLOOK
P&C insurance industry outlook
•
•
•
•
Given that the Canadian industry combined ratio was approximately 100% for the first three quarters of 2020 and the industry
ROE was slightly above 7% for the last twelve months to September 30, 2020, we believe continued industry corrective measures
are required and are likely to resume as the impact of the COVID-19 crisis eases.
In commercial lines on both sides of the border, hard market conditions are expected to continue. In personal lines, firm market
conditions are expected in personal property, while personal auto market conditions are temporarily softening.
During the COVID-19 crisis, we have tempered rate increases and provided relief to customers by allowing for payment deferrals
and waiving late payment fees. In addition, specific relief measures by line of business are outlined below. In 2020, we have
provided $530 million of relief to more than 1.2 million customers.
Our on-going relief measures include customer-driven rate strategies, accelerated deployment of UBI, product enhancements in
personal property and continued support to the most vulnerable small businesses.
P&C insurance industry
12-month outlook
Our response
•
•
is
relief measures
temporarily
The COVID-19 crisis
softening market conditions in personal
auto as claims frequency remains below
historical levels. As well, companies have
to
provided various
customers.
In the first three quarters of 2020, industry
growth was approximately 6%, as the rate
trend tempered and may continue while
claims frequency remains below historical
levels. We expect corrective measures to
resume once the impact of the crisis eases.
• Despite improved underwriting results in
Q3-2020, industry profitability continued to
be challenged, with a combined ratio
estimated at approximately 100% in the
first nine months of 2020.
Personal
auto
Personal
Property
•
•
The COVID-19 crisis has not materially
impacted personal property as consumers
continue to need protection against theft,
fire, water and other climate-related
damages.
Industry growth was above 8% in the first
three quarters of 2020.
• We expect firm market conditions since this
line of business is subject to challenging
weather over time.
• We expect growth at a mid single-digit level
over the next 12 months.
•
In addition to the customer relief measures outlined above,
we have adjusted auto premiums and provided flexibility for
changed customer risk profiles. Our relief measures are
evolving
rate strategies and accelerated UBI
deployment.
into
• Our UBI offering is well positioned in an environment where
drivers want insurance to reflect their own behaviours and
where value for money is becoming more important.
• We are leveraging our robust data and analytic tools,
including UBI, to dynamically monitor driving activity and
customer behaviour. Our relief measures are risk- and
needs-based, enabling us to adapt while maintaining
margins.
• We are investing in telematics, big data, and artificial
in data and
to maintain our advantage
intelligence
segmentation.
• Our brand investments and focus on customer driven digital
leadership will continue to help grow our business.
• We are maintaining the emphasis on our portfolio quality
and are focused on maintaining overall profitability levels.
• We have provided relief to customers impacted by the
COVID-19 crisis by offering flexibility for those who have
used their homes during the crisis for different purposes.
• Our relief is evolving through product enhancements, and
profitability actions over time have positioned this business
very well.
• We continue to ensure our results remain sustainable even
with severe weather.
• On Side deepens our supply chain to improve customer
experience, while capturing margins and expanding
capacity.
INTACT FINANCIAL CORPORATION 25
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
P&C insurance industry
12-month outlook
•
•
In commercial P&C, hard market conditions are
continuing, with industry rate increases back to
pre-crisis
industry
levels, driven by
profitability and tight capacity.
In commercial auto, the industry, on average,
continues to pursue rate increases, albeit at a
slightly tempered pace due to the COVID-19
crisis.
low
• Overall, we expect
to see hard market
conditions as the impact of the crisis eases.
• Premiums will continue to be impacted by the
lower units and
economic downturn, with
adjustments to risk profiles.
In the first three quarters of 2020, the industry
reported growth of 12%, and weak profitability
with an estimated industry combined ratio over
100%.
•
Our response
• We have provided risk- and needs-based relief to
customers impacted by the COVID-19 crisis through
premium adjustments to reflect changed commercial
automobile usage; and provided mid-term premium
adjustments and rate relief for small- and medium-
sized businesses that have been impacted from a
declining
receipts and payroll
perspective.
revenues, sales
• Our relief is on-going and evolving. In Q4-2020 we
provided $50 million relief program to support the most
vulnerable small businesses. The impact was fully
reflected in Q4-2020, which reduced DPW growth by
6 points and increased the combined ratio by 6 points.
The majority of our businesses had low exposure to
COVID-19 related claims. There were some exposures
for specifically covered business interruption and
specialized programs. We increased our provision for
COVID-19 losses by $14 million in Q4-2020.
•
• We are maintaining an emphasis on portfolio quality
while our focus on loss prevention and service
excellence remains.
• We continue to develop innovative products to address
customer needs, and pursue acquisitions to strengthen
our capabilities and product suite.
•
lines,
• A mix of hard and hardening market conditions
sustained price
across
including
increases and tightening terms and conditions,
are expected to continue. Rising reinsurance
costs, lower-for-longer interest rates, and an
active CAT season will further support recent
trends.
The economic impact of the COVID-19 crisis
has affected some insurance lines more than
others. Exposures in the short term will be
reduced in certain lines such as commercial
auto and some segments of workers
compensation. Other lines such as D&O, E&O,
and excess property, which are economically
impacted and
sensitive, have been more
continue to see upward pricing trends.
The U.S. Commercial P&C industry top line
decelerated to approximately 4% in the first nine
months of 2020 as strong rate increases were
partially offset by reduced exposures and the
impact of a slower economy. The combined
ratio is estimated in the upper 90’s to low 100’s.
•
•
• Despite the COVID-19 crisis, our underwriting appetite
largely
for new and renewal business remains
unchanged.
The majority of our businesses have low exposure to
COVID-19 related claims. Losses are expected and
have been provided for in certain segments – primarily
event cancellation and production shutdowns in the
Entertainment business, and to a much lesser extent,
specifically endorsed business interruption in select
specialized programs. We
increased our gross
provision by $9 million in Q4-2020.
• Our objective remains to expand the U.S. specialty
business. Growth opportunities,
the
acquisitions of The Guarantee and IB&M, are being
successfully pursued in the segments of the portfolio
that are performing at or above expectations.
including
• While the impact of the COVID-19 crisis may add some
near-term volatility, we believe the fundamentals of our
U.S. commercial business are well positioned to
maintain a low 90’s combined ratio in line with our
objective.
Commercial
lines
Canada
U.S.
Commercial
lines
26 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
P&C insurance industry
12-month outlook
Our response
Investments
•
regarding
uncertainty
Increased
global
economic activity resulted in volatile capital
markets in Q1. The significant response from
governments
to support businesses and
economies, as well as the earlier than expected
release of multiple COVID-19 vaccines, led to
a significant market rebound in the subsequent
quarters. Nevertheless, the capital markets will
remain volatile until the COVID-19 crisis has
passed and economies fully reopen.
Investment yields are
standards.
In the current interest rate environment, we
expect the industry’s pre-tax investment yield
to decline over time as portfolios roll over.
• Continued volatility in capital markets may put
investment market
low by historical
•
•
additional pressure on
values and capital levels.
Overall
• While the COVID-19 crisis has resulted in
dislocation in the Canadian P&C market, a mid-
to-high single-digit industry ROE over the past
year supports a continuation of the hard market
environment once the crisis has passed.
• We expect the industry ROE to modestly
improve in 2021 but remain below its long-term
average of close to 10%.
• Our investment portfolio is managed like the rest of
our business, for the long-term. Our investment
management team seeks to maximize after-tax
returns while preserving capital and
limiting
volatility.
• We are well positioned for a low interest rate
environment. Our insurance products are short-
term in nature and priced to generate mid-teens
ROEs, taking into account our investment portfolio
yields.
• We continuously seek to optimize the composition
of our investment portfolio, considering factors
including risk, return, capital, regulation and tax
legislation changes.
•
The RSA Acquisition will expand our leadership
position in Canada, create a leading specialty lines
platform with international expertise, and provide
entry into the UK and Ireland market at scale.
• With our action plans and strategies, we expect to
industry ROE
exceed our 500 basis point
outperformance target.
• We are focused on maintaining a mid-teens OROE
level.
INTACT FINANCIAL CORPORATION 27
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Insurance industry at a glance
12.1 P&C insurance in Canada
Large and
highly
fragmented
Evolving
and
growing
over time
Broad
distribution
channel
•
•
•
•
In 2019, the P&C market grew by 11%, driven by rate increases, to $60 billion in annual premiums,
representing approximately 3% of gross domestic product (GDP).
The top five insurers represent 47% of the market, and the top 20 have a combined market share of 84%.
Intact remains the largest player with an estimated market share of 17%. Intact holds an estimated market
share of 19% in personal auto, 18% in personal property and 14% in commercial lines.
There has been consolidation over the past decade in which IFC has participated. We still expect 10 to
15 points of market share will change hands in the next three to five years.
• Over the last 30 years, the industry has grown at about a 5% CAGR and delivered a ROE close to 10%.
• Emerging technologies and innovations continue to transform the insurance landscape, which will fuel further
innovation, transformation and consolidation within the industry.
•
The P&C industry distributes close to two-thirds of its premiums through brokers.
• We distribute our products mainly through a wide network of affiliated and non-affiliated brokers, as well as
directly to our customers. Frank Cowan provides us with an opportunity to diversify distribution with one of
Canada’s leading MGAs. Through our broad distribution channel, we offer customers many options to reach
us: online, by phone or in person.
•
Insurance companies are licensed under insurance legislation in each of the provinces and territories in which
they conduct business.
Regulated
market
• Home and commercial insurance products and rates are unregulated, while personal auto is regulated in
provinces where the product is provided by private sector insurance companies. While the rate approval
process for personal auto vary by province, insurers must file and receive approval for rate adjustments before
they can be effective.
• Capital for federal insurance companies is regulated by OSFI and by provincial authorities in the case of
provincially incorporated insurance companies (see Section 25 – Capital management).
2019 Industry DPW
by line of business
PA
PP
CL
23%
37%
40%
2019 Industry DPW
by region
2019 Industry DPW
by distribution channel
Ontario
Alberta
46%
19%
Québec
Other
18%
17%
Brokers
Direct
60%
40%
PA: Personal auto; PP: Personal property: CL: Commercial lines
28 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
12.2
IFC’s Canadian 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.
Table 12 – Canadian P&C Industry – IFC outperformance (underperformance)
YTD
Q3-2020
H1-2020
Full year
2019
Full year
2018
Full year
2017
ROE (for the last 12 months)1
IFC
Outperformance (underperformance) vs P&C Industry
13.4%
6.0 pts
12.0%
6.9 pts
11.4%
5.8 pts
11.8%
8.9 pts
13.0%
6.9 pts
DPW growth
IFC: P&C Canada2
Outperformance (underperformance) vs Industry benchmark
10.1%
2.8 pts
10.1%
3.1 pts
9.7%
- pts
2.3%
(4.4) pts
2.1%
(2.4) pts
Combined ratio
IFC: P&C Canada2
Outperformance (underperformance) vs Industry benchmark
93.6%
6.4 pts
96.7%
6.6 pts
97.5%
3.6 pts
95.0%
8.3 pts
94.1%
6.2 pts
1 IFC’s ROE for comparison purposes corresponds to the AROE, which is the most comparable to the industry.
2 For comparison purposes, IFC DPW growth and combined ratio are based on financial statements presentation. See Section 35 – Non-operating
results.
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.
• Compared to the P&C insurance industry, our ROE outperformance of 6 points was above our objective
of 5 points, largely driven by our combined ratio outperformance, as well as strong distribution results.
YTD Q3-2020
performance
• Compared to the industry benchmark, our growth outperformance of 2.8 points represented a
meaningful improvement compared to full year 2019, mainly driven by the acquisition of The Guarantee.
• Compared to the industry benchmark, our combined ratio outperformance was 6.4 points, mainly
reflecting a significant underlying outperformance in all lines, except commercial auto.
ROE outperformance versus the industry over time (in points)
10.7
11.1
6.2
4.1
8.2
5.1
5.8
8.9
6.9
5.8
6.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2020 latest industry data: YTD Q3-2020
INTACT FINANCIAL CORPORATION 29
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
12.3 U.S. specialty market
Highly
fragmented
with no
clear leader
•
The U.S. commercial P&C insurance market grew roughly 5% in 2019 to over US$320 billion in annual
premiums, with specialty insurance accounting for approximately 45%, or US$140 billion.
• U.S. commercial specialty insurance industry is fragmented, with the largest player capturing around 7%
market share in 2019.
• Outside of the top eight players, no single insurer contributes more than 3% to 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.
• Over the last 20 years, the specialty insurance market has remained attractive, and has grown at an
approximate 4.6% CAGR.
Evolving
and
growing
over time
•
•
•
The 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 MGAs) is the primary distribution
channel for specialty insurance products.
Trends in litigation, regulation, social and workforce issues, and technology will continue to support growth
and drive product innovation.
12.4 Performance against U.S. P&C industry
The industry benchmark consists of the 11 most relevant competitors in the P&C industry, for which reliable and comparable information
is publicly available. The data below is compiled from company and segment data from SEC filings.
Table 13 – U.S. P&C Industry – IFC outperformance (underperformance) vs industry benchmark
DPW growth (in local currency)
IFC: U.S. Commercial
Outperformance (underperformance)
Combined ratio1
IFC: U.S. Commercial
Outperformance (underperformance)
1 Excluding the risk margin and discount impact for comparability purposes.
YTD
Q3-2020
H1-2020
Full year
2019
Full year
2018
6.8%
(0.3) pts
9.6%
1.6 pts
8.0%
(1.2) pts
2.2%
(6.7) pts
94.9%
4.9 pts
95.7%
4.1 pts
92.8%
2.3 pts
93.6%
1.3 pts
YTD Q3-2020
performance
• Compared to the industry benchmark, our DPW growth has largely been in line as, much like our
peers, we have experienced a combination of hard market conditions, partially offset by lower volumes in
lines impacted by the COVID-19 crisis.
• Compared to the industry benchmark, our combined ratio outperformance of 4.9 points reflected
both robust underlying outperformance, including strong results in most lines, as well as a comparatively
smaller adverse impact from the COVID-19 crisis and weather-related losses, which while elevated, were
lower than peers.
30 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
COVID-19 crisis update
13.1 We remain well positioned to deal with this crisis
We continue to focus on the safety and well-being of all our employees, while being there for individual customers, small and medium-
sized enterprises and brokers when they need us most.
•
The COVID-19 pandemic has had a significant impact on society, and it is important for business to support their communities
through this difficult time. We have provided significant relief to our customers, evolved our product offerings and ramped up
our digital efforts to deliver excellent customer service.
• We entered the crisis in a position of strength, which has enabled us to protect our employees, deliver high levels of service,
and provide relief to our customers. Our operations and financial position are strong, and we are well positioned to manage
through this crisis.
• We have provided $530 million of relief in 2020, including premium reductions, as well as payment flexibility, to more than
1.2 million customers to recognize hardship, changing driving behaviours and lower business activity resulting from the
COVID-19 crisis. Included in the $530 million of relief is a $50 million targeted relief program, which provided an additional
support to approximately 100,000 vulnerable small business customers.
• Our on-going relief measures include customer-driven rate strategies, accelerated deployment of UBI, product enhancements
in personal property and continued support to the most vulnerable small businesses.
• We have donated more than $4 million in 2020 to charities targeting the immediate needs of individuals and families who are
most vulnerable to the effects of the pandemic.
• Our robust technology infrastructure is performing very well. Services levels to our brokers and customers remain high, while
digital engagement continues to ramp-up. The number of monthly users on our branded app more than doubled and the
number of monthly UBI logged-in users has increased by 118% since the beginning of the year.
• We have not requested or received any financial aid from governments during the COVID-19 crisis.
• We are well positioned to continue to support our customers, invest in our people and create value for all stakeholders as the
crisis continues.
• Our balance sheet is strong with $2.7 billion of total capital margin and our business is well positioned to sustain mid-teens
operating ROE performance.
13.2
Impact on our financial results
Out of the $530 million of relief, $439 million of premium reductions have been provided to customers on policies issued to date, with
the following estimated impact on DPW and NEP in Q4-2020 and 2020. The unearned portion of premium reductions amounting to
$203 million will lower NEP in 2021.
Table 14 – Estimated impact of customer relief measures
Customer relief measures
(in millions of Canadian dollars)
Personal auto
Personal property
Commercial lines2
Premium reductions3
Payment flexibility4
Relief provided
on policies
issued1
260
51
128
439
91
530
Premium reductions
Written (DPW)
Earned (NEP)
Unearned
Q4-2020
2020
Q4-2020
2020
61
14
60
135
240
51
128
419
38
11
69
118
123
17
96
236
137
34
32
203
Total
1 There is generally a two-month lag between the policy issue date and effective date (written) upon renewal.
2 Includes the $50-million targeted relief program.
3 Consists of premium reductions to reflect changes in driving habits (such as change in kilometres driven in a year, change of use or safety storage of
personal and commercial vehicles), premium adjustments tempering rate increase at renewal, premium adjustments for commercial customers that
are now closed or have been severely impacted from a sales receipts and payroll perspective, as well as rate reductions on renewals and new
business.
4 Includes flexible payment options such as payment deferrals.
INTACT FINANCIAL CORPORATION 31
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Estimated impact of premium reductions written
Table 15 – Estimated impact of premium reductions written on DPW and DPW growth in constant currency
DPW
DPW
reported
Q4-2020
Premium
reductions
DPW
reported
Full year 2020
Premium
reductions
2020 premium reductions
Total DPW
2,872
(135)
12,039
DPW growth
PA
PP
CL - Canada
P&C Canada
P&C U.S.
Consolidated
5%
10%
5%
6%
19%
8%
(6) pts
(3) pts
(7) pts
(6) pts
-
(5) pts
6%
11%
10%
9%
9%
9%
(419) • Premium reductions lowered DPW by $419 million
(4 points) in 2020, including the $50-million targeted
relief program in Commercial lines in Q4-2020.
•
In personal auto, where the majority of the premium
relief applies, the estimated impact on DPW growth
was 6 points in Q4-2020 and 2020.
(6) pts
(2) pts
(4) pts
(4) pts
-
(4) pts
Estimated impact of COVID-19 CAT losses and bad debt expense
Table 16 – Estimated impact of COVID-19 CAT losses
(in $M)
COVID-19 CAT losses
P&C Canada
P&C U.S.
Corporate
Consolidated
14
(4)
13
23
Q4-2020
pts of
combined
ratio
Full year 2020
pts of
combined
ratio
(in $M)
0.5 pts
(0.9) pts
nm
0.8 pts
64
29
13
106
•
0.6 pts
1.8 pts
nm
0.9 pts
2.1 pts
CL - Canada
See Section 8 – Corporate and Other for details on the internal reinsurance
CAT treaty.
1.9 pts
14
64
2020 COVID-19 CAT losses
In Q4-2020, we increased our COVID-19 CAT
provision by $23 million. COVID-19 CAT losses in
excess of
retention
threshold of US$20 million were ceded to the
Corporate treaty, lowering the P&C U.S. CAT losses
by the same amount in Q4-2020.
reinsurance
internal
the
•
In 2020, we recorded $106 million for COVID-19
related losses for commercial line and specialty line
exposure in Canada and the U.S.
In Q2-2020, we recorded $34 million of bad debt expense, including $13 million in personal auto, $9 million in personal property,
$10 million in commercial lines – Canada and $2 million in commercial lines – U.S.
As the COVID-19 crisis continues to evolve, we continue to manage the impact on our business. Our operations and financial position
remain strong and we are well positioned to protect our employees, support our customers and advance our strategic objectives.
See Note 3.2 – COVID-19 pandemic to the Consolidated financial statements for more details.
32 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Weather conditions
14.1 Weather conditions in Canada
Weather conditions in 2020
Weather conditions in 2019
•
•
•
•
In Q4-2020, despite an unusually cold October,
temperatures were above average
for most
regions. Eastern Canada experienced early freeze,
which was
record breaking high
temperatures for that time of year. Precipitation in
most regions were below average.
followed by
In Q3-2020, weather conditions were generally
benign. Western Canada saw dry conditions, leading
to a relatively quiet thunderstorm season in Alberta
except for a hailstorm that hit the Calgary area in
July 2020. Precipitations in Central Canada were
above average.
In Q2-2020, weather conditions were generally
cold and dry for most regions. Alberta was impacted
by severe weather,
in Fort
McMurray in April and severe thunderstorms causing
widespread damage in Calgary in June 2020. These
events drove CAT losses of $116 million in Q2-2020.
including
flooding
In Q1-2020, the winter in Canada was particularly
mild, with
temperatures well above seasonal
averages in eastern Canada. Western Canada had a
bit more variability, with colder temperatures in
January and March, and warmer temperatures in
February 2020. As a result, weather-related CAT
losses were minimal in Q1-2020.
• Q4-2019 saw rainier conditions in Eastern Canada in
October due to many fall depressions sweeping over the region.
The late October storm in Central Canada drove higher than
expected CAT losses, mainly in personal property.
• Q3-2019 saw rainier conditions in Western Canada, and the
Atlantic was impacted by the remnants of Hurricane Dorian.
While we had higher non-CAT weather-related losses, CAT
losses of $53 million were lower than expected for a third
quarter. We saw less extreme weather this summer, especially
hail and water events, which have historically driven CAT losses
in the third quarter.
•
•
In Q2-2019, a rapid snow melt and extreme wind and rain led
to elevated property damage from water infiltration and flooding,
mostly in Central Canada. These events drove CAT losses of
$70 million, in line with our expectations for a second quarter.
In Q1-2019 the winter was particularly difficult with heavy
snowfall, freezing rain, and rain while snow and ice were on the
ground, which led to elevated property damage from water
infiltration and a record number of roof collapses, mostly in
eastern Canada. Freezing rain and intense cold also led to
higher-than-expected frequency of auto collisions. These events
lead to CAT losses of $128 million and 3 points of higher-than-
expected non-CAT weather-related losses in Q1-2019.
14.2 Weather conditions in the U.S.
Weather conditions in 2020
•
In 2020, weather-related losses were elevated, driven by a broad array of weather events, including:
o
the most active Atlantic hurricane season on record with 30 named storms, 12 of which were hurricanes that made
landfall in the U.S. Intact Specialty was particularly impacted by a few of those hurricanes, primarily in the Ocean
Marine business.
o There were inland weather events, including a Tornado in Tennessee and a derecho windstorm that crossed multiple
states, including Iowa and Illinois, and which caused more industry damage than all but one of the hurricanes.
o There were also several millions of acres in wildfires in the Western U.S., including in Q4-2020.
• Weather-related losses in the U.S. have historically been volatile on a quarterly basis, with the third quarter typically seeing
higher losses than other quarters.
INTACT FINANCIAL CORPORATION 33
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
14.3 Net current year CAT losses
CAT losses can be caused by a variety of events, including weather (such as wildfires, hailstorms and floods) and non-weather events
(such as large commercial fires, surety and liability losses, as well as direct losses related to the COVID-19 crisis). In 2020, CAT losses
included provisions totalling $106 million for COVID-19 commercial line and specialty line exposure in Canada and the U.S.
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 at the company level, through individual
risk selection and the purchase of reinsurance contracts.
Table 17 – Net current year CAT losses
Net CAT losses
By loss type
Weather
Non-weather
Other
By line of business
Personal auto
Personal property
Commercial lines - Canada
Commercial lines - U.S.
Corporate and Other
By quarter
Q1
Q2
Q3
Q4
2020
359
2019
366
205
154
43
92
164
47
13
137
124
24
74
326
40
26
196
140
4
-
128
70
53
115
2018
2017
2016
3Y avg.
5Y avg.
10Y avg.
330
313
385
275
297
350
55
16
35
26
159
123
22
-
36
142
97
55
27
210
76
-
-
88
105
89
31
73
210
102
n/a
-
21
164
166
34
352
269
83
32
149
142
24
n/a
100
112
58
81
351
291
60
39
173
121
n/a
n/a
82
121
86
62
305
262
43
37
163
97
n/a
n/a
55
97
111
43
Weather Other than weather
Personal lines Commercial lines
Q1
Q2
Q3
Q4
5-year average net current year CAT losses
17%
83%
40%
23%
60%
18%
34%
25%
14.4 CAT guidance
Our current expectation for CAT losses (net of reinsurance) remains unchanged at $300 million on a calendar year basis, including
both our Canadian and U.S. operations. Our annual estimate reflects our view of longer-term trends, our growing premium base, as
well as product changes. We continue to expect approximately 75% to impact personal lines, and we expect about one third of the
annual estimate in each of the second and third quarters.
34 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
STRATEGY
What we are aiming to achieve
Progress on our strategic roadmap
Strengthening our leadership position in Canada
In 2020, we continued to heavily invest on our strategic priorities to provide a second-to-none customer experience, particularly
in digital engagement as customer expectations continue to evolve.
3 out of 4 customers are our advocates, and engage with us digitally
• Digital engagement continued to ramp in 2020, with the addition of several self-service features to our mobile offering.
Customers can now make payments, submit policy changes, access their proof of car insurance (pink slip), as well as report
and track claims through our app. New app features are being added every quarter.
•
•
The IFC mobile app offers a leading mobile experience to our customers in Canada. We run the top 3 favourite insurance
apps, namely belairdirect, Intact Insurance and National Bank Insurance. Our mobile app’s monthly users more than doubled
this year.
To better serve the needs of customers now working from home, we enhanced our homeowners offering with increased
liability and property coverage; provided optional identity theft coverage and cyber protection at a discount; and gave free
access to mental health and well-being programs.
Scale in distribution
• On August 31, 2020, BrokerLink reached a significant milestone, surpassing $2 billion in DPW. The growth story remains
robust, and we have set a new premiums target of $3 billion for BrokerLink by 2025. We continue to be active on the
acquisition front with 18 transactions closed this year.
•
belairdirect continues to progress well on its Insurance.Simplified initiatives. By simplifying our products and enhancing our
digital experience, we make it easier than ever to buy online and engage digitally with us.
INTACT FINANCIAL CORPORATION 35
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Integration of The Guarantee and Frank Cowan
• December 2, 2020 marked the one-year anniversary of our acquisition of The Guarantee and Frank Cowan.
•
•
Integration is progressing well and we remain on track to meet our financial objectives of low-single digit NOIPS accretion
by the end of 2021.
Intact Prestige, our high-net-worth (HNW) offering, was successfully launched in British Columbia, Alberta, Ontario, and
Québec. Our objective is to become a key player in the HNW segment and quadruple our penetration by 2025.
Build a North American Specialty Leader
Our differentiated offering and specialized customer value proposition provide the ideal platform to deliver solutions for
businesses across North America. We have made significant progress across our strategic objectives in 2020 and we are well
on our way to solidify our position as a leading specialty solutions provider.
Providing a specialized customer value proposition, under a unified brand
•
This year, we brought together our Canadian and U.S. specialty capabilities under a single brand, Intact Insurance Specialty
Solutions. We offer over 20 specialty focus areas, 9 of which serve both sides of the border.
Optimizing distribution
•
•
Intact Insurance Specialty Solutions acquired IB&M, a privately held brokerage specializing in international trade markets.
IB&M broadened our portfolio of owned-brokerage assets, and expanded and reshaped our customs bonds market offerings
though an end-to-end risk management platform.
In November, Intact Insurance Specialty Solutions announced its new cyber insurance solutions, delivered in partnership
with Resilience Insurance, to address the pervasiveness of cybercrime. By combining Resilience's cyber analytics
technology with Intact's risk transfer capabilities, the companies are enhancing the breadth of risk mitigation available to the
cyber insurance market.
Low 90’s combined ratio and DPW objective
• At the time of the acquisition of OneBeacon, we set two critical objectives, both targeting the end of 2020 for completion.
•
•
The first objective was to achieve a low 90’s combined ratio. See Section 7.2 – U.S. performance vs objectives.
The second objective was to reach $3 billion DPW across our North American Specialty platform. We achieved our objective
with $3 billion of premiums in 2020, including the benefit of The Guarantee acquisition. We continue to successfully pursue
growth strategies by capitalizing on organic opportunities in the favourable hard market. Moving forward, our new objective
is to grow our specialty lines premiums to $6 billion by 2025.
36 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Transform our competitive advantages
Our outperformance mindset is what sets us apart from our competitors. It drives us to deliver our promise to customers, transform
our competitive advantages, and build a leading insurer. In 2020, we’ve continued to invest in our competitive advantages.
RSA Acquisition
• On November 18, 2020, together with our partner, Tryg, we announced our intention to acquire RSA. See Section 2 –
Acquisition of RSA’s Canadian, UK and International operations.
Becoming the best insurance AI shop in the world
• Our team of AI experts has grown by over 40% this year, allowing us to more than double our models in production. Key
deliveries this year included our next-generation rating algorithms to improve segmentation and risk selection, as well as our
first Sales and Claims chatbots to improve customer experience and operational efficiencies.
• We have grown our Hong Kong Data Lab from 9 to 20 employees since its launch in February 2020, with further expansion
to come. The Hong Kong Data Lab delivered its first project to Intact Investment Management to support investment
decisions in the small capitalization market.
Deepening our claims expertise and supply chain network
• Our customers’ claims experience is more convenient and digitalized than ever before. Through our mobile app, customers
can now file first notice of loss and have their claims appraised digitally using photos they have taken.
o Close to 40% of eligible auto claims are being digitally appraised through photos submitted on our app.
• October 1, 2020 marked the one-year anniversary of the acquisition of On Side. This acquisition has contributed to our
objective of building a strong supply chain network and providing a leading claims experience to our customers. Based on
its success, we continue to grow our restoration supply chain with the recent acquisition of Quebec-based Groupe Dijon inc.
Invest in our people
Our people’s health and safety remained a top priority this year. We ramped up training and awareness around mental health
issues, enhanced our Diversity and Inclusion (“D&I”) strategy, and invested more in learning and development.
Being a best employer
• Our employee engagement score reached a new all-time high in 2020.
•
•
For the sixth consecutive year, IFC has been named a Kincentric Best Employer in Canada, the U.S. and for North America.
The COVID-19 crisis accelerated our approach to a hybrid workplace, including the rollout of digital collaboration tools across
the organization, the launch of a new e-learning platform accessible to all employees and the digitalization of many training
programs. These tools will empower our employees to adapt, collaborate, and succeed in the workplace of the future.
• Beyond keeping our people physically safe, we focused on our employees’ health and well-being. We introduced a
partnership with Lifespeak, an online platform, offering employees real time access to expert mental health support,
alongside our internal resource hub dedicated to help employees adjust to life and work at home.
Accelerating our Diversity and Inclusion Strategy
•
This year, we accelerated our existing D&I plans and committed to support underrepresented communities, as well as identify
and address gaps within our organization.
• We took a data-driven approach to better support the advancement of a diverse workforce. This included a number of actions:
o Establishing a task force of Black and other Visible Minority employees to provide recommendations to our D&I
Council.
Introducing mandatory inclusivity training for our people leaders.
o
o Hosting 42 Inclusion Circles to hear from Black, Indigenous and People of Colour employees and incorporating
their insights into our D&I priorities; and Becoming a founding signatory of The BlackNorth Initiative, a pledge from
private and public companies in Canada committing to end systemic anti-Black racism, as part of our promise to
support D&I.
INTACT FINANCIAL CORPORATION 37
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Progress on our two financial objectives
• During the past decade, we grew our NOIPS at a CAGR of 11%, in line with our target.
• Over the past 3 years, our NOIPS grew at a CAGR of 21%, benefiting from strong underwriting and
distribution results. We maintain our objective to grow NOIPS by 10% annually, over time.
•
The RSA Acquisition is highly strategic and financially compelling for all stakeholders. We expect the
acquisition to generate high-single digit NOIPS accretion in the first year, increasing to upper-teens within
36 months following closing.
• We have an outperformance mindset. Over the past ten years, we exceeded the industry ROE by a yearly
average of 680 basis points.
•
In the past three years, we outperformed the P&C insurance industry’s ROE by 690 basis points on average,
as our profitability actions in all lines of business were taken ahead of the industry.
• We continue to target 500 bps of ROE outperformance every year driven by our underwriting, claims, as
well as capital and investment management activities.
Our evolved strategic roadmap for the next decade
Following the RSA Acquisition, we have evolved our ten-year strategic roadmap to reflect five big ideas:
1. Expand our leadership position in Canada through leading customer experience, digital engagement and scale in distribution.
2. Build a specialty solutions leader with a growing and profitable mix of verticals, a specialised customer valuation proposition
and expanded distribution.
3. Strengthen our acquired leading position in the UK and Ireland through focusing the footprint for outperformance, optimising
underwriting performance and delivering leading customer experience.
4. Transform our competitive advantages in data, pricing, risk selection, claims and supply chain management, and strong capital
and investment management expertise.
5.
Invest in our people, by continuing to be a best employer, a destination for top talent and experts, and to future-proof our
people to succeed in a changing world.
This Transaction accelerates our strategy, which is expected to fuel future profitability growth and outperformance.
38 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Climate change
Alongside our customers, we have been on the front lines of climate change for more than a decade. For us, climate change is
not solely an ESG issue – it’s strategy. We have a unique understanding of the impacts of climate change and as a consequence,
we’ve embedded our response directly into our strategy.
There is a clear trend of increasing frequency and severity of extreme weather events. Insurance industry losses from natural
catastrophes and man-made disasters amounted to US$83 billion globally in 2020, making it the fifth-costliest year for the industry
since 19701. In Canada, insured damage for severe weather events reached $2.4 billion, ranking 2020 as the fourth highest in insured
losses since 1983 in Canada2.
We have a proven track record of protecting North Americans while building sustainable performance and as such, we are well placed
to address this growing risk pool. However, this is not solely a business issue, but a societal issue. We see significant opportunities to
create a climate resilient economy and society.
19.1 Governance and strategy
The Enterprise Risk Management Committee identified climate change as one of the top ten risks for our company. Climate risk is
incorporated into Enterprise Risk Management Strategy, which is integrated into all business activities and strategic planning, including
subsidiaries and operations. See Section 31.6 – Top and emerging risks that may affect future results.
Within our Board of Directors, climate change is an integral accountability of the Board’s Risk Management Committee. This Committee
oversees the assessment and monitoring of the risks related to climate change, including the potential impact of insured losses resulting
from damage to property and assets arising from climate related natural catastrophe events, and the development of strategies to
manage these risks. The Risk Management Committee also oversees additional initiatives to promote awareness of the potential impact
of climate change and provide practical solutions for our communities.
Our Senior Management team, including our CEO, Charles Brindamour, provides direct leadership on our climate change initiatives
and advocates publicly for climate adaptation with business associations, government officials, regulators and globally in his role as the
Board Chair of The Geneva Association.
19.2 Managing physical risks
Physical risks have an impact on a majority of our P&C business We continue to adapt our business to the impacts of climate change.
Over the years, we have implemented several actions to manage the potential impact of changing weather patterns including improved
risk selection, pricing, product changes, supply chain enhancements and a greater emphasis and investment on prevention.
Risk selection &
pricing
•
•
•
•
•
Enhance segmentation to understand evolving risks. We input weather, climate and topographic data into
machine learning models to develop risk maps to assess risk to weather perils such as flood and wildfire.
Corporate teams review current personal and commercial line products, underwriting and pricing practices related
to severe weather.
Continuously redefine how we select, choose and price risk with data and predictive analysis, leveraging the
expertise of 200 AI experts. We set risk tolerances based on catastrophe model output and use it to determine
pricing.
Implement rate changes in our property business to reflect recent trends in catastrophes and severe weather.
Reinsure certain risks to limit our losses in the event of a catastrophe or other significant weather-related losses.
Below our catastrophe cover, we purchase specific treaties for business that are more exposed to major events
and use facultative and per risk reinsurance to limit exposure on any one risk. More information can be found
in Section 31.6 - Top and emerging risks that may affect future results.
1 Insurance Journal. Global Natural and Manmade Disasters Cost Insurers US$83B in 2020: Swiss Re
2 Insurance Bureau of Canada. Severe Weather Caused $2.4 Billion in Insured Damage in 2020
INTACT FINANCIAL CORPORATION 39
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Product
Claims
operations and
supply chain
enhancements
•
•
•
•
•
•
Advance our products to account for new climate realities and increase the flexibility of protection for our
customers. In 2020, we addressed hail events in the West by introducing a mandatory age-adjusted roof
endorsement.
Transform our business to adapt to new climate realities. For example, we redesigned our personal property
business to account for an increased risk of flood and unbundled our enhanced water damage product to make
protection more accessible.
Invest in addressing supply chain shortages during extreme weather events and enhancing our excellent
customer service through the acquiring of On Side Restoration, one of the largest players in restoration in Canada.
On Side has the capacity to mobilize employees quickly between regions and to add capacity in impacted areas.
Employ over 4,000 claims professionals dedicated helping customers get back on track – we manage 99% of
customers’ claims in house.
Have designated catastrophe response teams across the country to deal efficiently with catastrophic events. We
have connected our claims teams from coast-to-coast to ensure service reliability for our customers.
Use actuarial tools and have actuaries in claims support operations to quickly assessing CATs (including the
number of claims, nature of claims, geo-coded maps & supply-chain requirements).
Prevention
• Our Loss Prevention team is the largest in Canada with 70 members nationally with vast backgrounds including
engineers, fire protection experts, sprinkler designers, brokers, claims adjusters and underwriters.
•
•
•
•
Include weather alerts in our apps to proactively inform clients on preventive tips they can take to protect their
homes and avoid potential automobile accidents caused by bad weather conditions.
Continue to increase our customer and distribution partner education and awareness efforts, including providing
climate-related tips featured in our BrokerLobby.
Facilitate a pilot project to communicate specific tips on climate resilience to customers in high risk geographies.
Use data to help prevent losses from occurring. For example, we have developed a forecast system that
automatically detects which customers are at risk of roof collapse after a significant snowfall. We provide subsidies
to our customers to remove snow and prevent damage.
• We work with partners, such as the University of Waterloo, our industry association the Insurance Bureau of
Canada and the global insurance industry think tank The Geneva Association, to promote climate change
adaptation initiatives at all levels of government.
In 2020, we renewed our investment in the Intact Centre on Climate Adaptation at the University of Waterloo, an applied research
centre establishing best practices to help homeowners, communities, governments and businesses identify and reduce the impacts of
extreme weather and climate change – including flood, fire, and extreme heat. Their research is used to help society adapt effectively,
including informing flood resilient building standards as well as developing a climate resilience curriculum for home inspector training.
More information will be available in our 2020 Social Impact Report, released on March 30, 2021.
Intact Investment Management
Intact Investment Management (IIM), believes that appropriately managing Environmental, Social and Governance (ESG) risks,
including climate change, can enhance the sustainability of a company’s business. Climate change is integrated into IIM’s investment
policies and procedures and is part of its investment management process for all its investment portfolios.
In 2020, IIM developed and released a Coal Policy and engaged portfolio companies on climate change. As our economy continues to
transition, there will be investment opportunities that offer climate change solutions and greener assets that contribute to climate change
mitigation and extreme weather adaptation. More information on IIM’s integration and progress on ESG issues, including climate
change will be available in our 2020 Social Impact Report, released on March 30, 2021.
It is critical that society adapts to climate change. While we have adopted an all-of-company approach to managing climate risks,
addressing climate change requires an all-of-society approach to protect our communities and our economy.
More information related to our initiatives on climate change, including information related to the Task Force on Climate-
related Financial Disclosure (TCFD) will be available in our 2020 Social Impact Report, released on March 30, 2021.
40 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Social impact
As a purpose driven business, we are focused on helping people, businesses and society prosper in good
times and be resilient in bad times. Our purpose is supported by our Values, including Our Value of generosity,
which guides our efforts to help others and to use our strengths to help make a more resilient society.
The COVID-19 crisis has exacerbated many existing societal challenges, from poverty to racism, to the care of
our most vulnerable people. Businesses and their employees have an important role to play in solving these problems. This year, we
focused our attention towards helping those most vulnerable and impacted by the COVID-19 crisis in addition to our continued mandate
in climate change. We challenged ourselves to raise the bar on Generosity - to help build the resiliency of our communities to continued
shocks of unexpected events.
Climate Adaptation
Our support of initiatives in climate adaptation continued to accelerate in 2020, with increased investments in applied research and
community level projects to demonstrate the concrete benefits of resilience. We renewed our partnership with the Intact Centre on
Climate Adaptation, an applied research centre at the University of Waterloo, for an additional 5 year mandate.
o
In 2020, the Intact Centre continued to enhance Canada’s ability to adapt to the impacts of climate change, releasing
four reports. Two reports focused on the financial sector: Factoring Climate Risk into Financial Valuation and
Institutional Investors Find Alpha In Climate Risk Matrices: Global Survey Finds provide guidance to asset managers
on how to account for physical risks in decision making.
o Their report Climate Change and the Preparedness of Canadian Provinces and Territories to Limit Flood Risk
examined the preparedness of provincial and territorial governments to minimize the negative consequences of
current and future floods.
o Under One Umbrella: Practical Approaches for Reducing Flood Risk in Canada provides practical approaches to limit
flood risk in Canada, summarizing best practices from national guidelines and standards.
•
In December 2020, we announced a commitment of $1.3 million to 5 Canadian charitable partners from coast-to-coast focused
on protecting Canadians from the impacts of climate change. More information on these partnerships is available in our
2020 Social Impact Report.
• Since 2017, we have invested more than $3.6 million in 21 charitable partners who are exploring concrete solutions to help
Canadians adapt to climate change and strengthen our communities, our people and our economy.
•
In May, the spring floods in Fort McMurray, Alberta caused nearly 13,000 people to evacuate their homes. We donated
$100,000 to Wood Buffalo Community Foundation Rapid Response Fund, supporting the community during these
challenges times.
Pandemic Response
Within days of the pandemic, we responded and continue to adapt to the needs of our communities focusing on the immediate needs
of individuals and families most vulnerable to the social, health and economic effects of the COVID-19 pandemic. Since the end of
March 2020, we have invested more than $4 million across Canada and the United States.
• During our 2020 Generosity In Action Campaign – Intact’s annual employee giving campaign in partnership with the United
Way, employees donated $1.7M to the United Way Campaign. To amplify our employee’s outstanding generosity, doubled
our corporate match – making a combined contribution of over $5.2 million nationally to help families living in poverty and
other worthy organizations to help communities manage the impacts of the pandemic.
• Allocated $1.4 million from our 2019 Generosity In Action Campaign match to 25 United Way organizations nationally to
COVID-19 relief and recovery efforts to help address basic needs, such as food and shelter and help for seniors.
•
To help families struggling with food insecurity in every province and territory during the pandemic, we donated $1.2 million to
Breakfast Club of Canada, including $500,000 to their COVID-19 Emergency Club Fund.
INTACT FINANCIAL CORPORATION 41
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
• Donated $500,000 to a national research project being led by CHU Sainte-Justine Hospital to help develop and test a treatment
using the antibodies of people who have recovered from the virus.
•
Intact Insurance Specialty Solutions donated US$200,000 to Feeding America, the nation’s largest hunger-relief
organization that supports food banks throughout the U.S.. An additional US$300,000 was contributed to local efforts within
those communities where our employees live and work.
• Partnered with 10 Meals on Wheels organizations nationally to help elderly members of our communities. We donated
$225,000 to support their important work and our employees contacted over 14,000 of our elderly customers to purchase
meals for those who experienced a need.
Diversity & Inclusion
Intact’s values drive our approach to Diversity and Inclustion (D&I). Our value of Integrity means standing up for what is right and our
value of Respect is founded on seeing diversity as a strength, being inclusive and fostering collaboration
•
In 2020, we accelerated our D&I plans including: mandatory inclusivity training for our people leaders, employee inclusion
webinars, 42 Inclusion Circles with employees who identify as a Visible minority/Person of Color and establishing a task force
of Black and other Visible Minority employees to provide recommendations to our D&I Council.
• As part of our promise to support D&I, we pledged our commitment to end systemic anti-Black racism by joining the BlackNorth
Initiative.
• Donated $500,000 to Pathways to Education in Canada and the Northside Achievement Zone in the U.S. to support families
and youth to close the achievement gap and end generational poverty – both of which disproportionately affect Black,
Indigenous and People of Colour.
• Our first-annual Count Me In! campaign encouraged employees to voluntarily and confidentially share their diversity
information. More than 7,500 of them shared your diversity information, representing 63.3% of our total workforce.
More details on our D&I initiatives in 2020 will be in our 2020 Social Impact Report and 2021 Management Proxy Circular,
released on March 30, 2021.
Governance
To be one of the most respected companies we must live Our Values, including having strong governance practices and abiding by
high ethical standards.Our governance practices enable us to not only enhance value for shareholders and ensure our long-term
viability, but also to achieve our purpose. Intact has been consistently recognized for our governance and disclosure practices.
• Named the top-ranking company in this year’s Globe & Mail Board Games rankings, scoring 98 points out of a possible 100.
Board Games evaluates the quality of governance practices and disclosure for Canadian publicly traded companies.
• Continued to strive for greater gender diversity in management, in line with our commitments to the 30% Club and the Catalyst
Accord, with over 35% of our VP and higher positions being comprised of women. Our Board of Directors had 36% female
representation in 2020.
• Received over 95% approval on the advisory resolution on executive compensation (say-on-pay) at the 2020 annual and
special meeting of shareholders.
42 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
FINANCIAL CONDITION
Financial position
2020 Highlights
Investment portfolio
Claims liabilities
$20.6 billion
$12.8 billion
BVPS
for the last 12 months
+9%
Debt-to-total capital
ratio
24.1%
Section
December 31,
2020
September 31,
2020
December 31,
2019
21.1 Balance sheets
Table 18 – 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
22
23
23
25
Book value per share (in dollars)
25.4
20,630
3,822
1,533
1,089
2,718
5,327
35,119
12,780
6,256
89
3,370
3,041
25,536
3,265
1,175
187
4,547
409
9,583
58.79
19,607
3,842
1,522
1,095
2,685
5,359
34,110
12,750
6,398
157
3,114
2,476
24,895
3,265
1,175
177
4,294
304
9,215
56.22
18,608
3,588
1,511
1,026
2,410
5,149
32,292
11,846
5,960
295
3,082
2,362
23,545
3,265
1,028
170
3,959
325
8,747
53.97
INTACT FINANCIAL CORPORATION 43
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Investments and capital markets
22.1 Capital market update
On March 11, 2020, COVID-19 was declared a pandemic by the World Health Organization. Increased uncertainty regarding
global economic activity resulted in volatile capital markets in Q1-2020. The significant response from governments to support
businesses and economies, as well as the early release of multiple COVID-19 vaccines towards the end of the year have led to
important rebound in common shares since Q1-2020.
While restrictions have eased for parts of the economy, the second wave of COVID-19 has increased uncertainty and has led to
renewed lockdowns measures. Until the crisis has passed and economies fully reopen, the Company expects financial markets to
remain volatile.
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
Q1-2020
Q1-2020
Q2-2020
Q2-2020
Q3-2020
Q3-2020
Q4-2020
Q4-2020
IFC
S&P/TSX Composite
S&P/TSX Preferred Share index
S&P/TSX Energy
DJ Dividend 100 Composite (U.S.)
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 investment portfolio. See Section 10.3 – Net
investment income and Section 10.2 – Net gains (losses) excluding FVTPL bonds.
Table 19 – Selected market indicators
Selected market Indicators
Common shares
S&P/TSX Composite
S&P/TSX Financials
S&P/TSX Energy
DJ Dividend 100 Composite (U.S.)
Preferred shares
S&P/TSX Preferred Share Index
Fixed-income securities
Q4-2020
Q4-2019
2020
2019
8%
15%
13%
16%
6%
2%
-%
6%
6%
2%
2%
(3)%
(31)%
11%
19%
17%
16%
23%
-
(2)%
5Y Canada Sovereign Index (estimated variance in bps)
5Y U.S. Sovereign Index (estimated variance in bps)
5Y AA Corporate spread (estimated variance in bps)
Strengthening (weakening) of USD vs CAD
3 bps
8 bps
(14) bps
(4)%
22 bps
15 bps
(17) bps
(2)%
(136) bps
(133) bps
(12) bps
(2)%
(20) bps
(82) bps
(43) bps
(5)%
44 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
22.2
Investment portfolio
Our investment portfolio is mainly comprised of Canadian and U.S. securities. The Canadian securities mainly comprise a mix of cash
and short-term notes, fixed-income securities, preferred shares, common shares and loans. The U.S. securities mainly comprise fixed-
income securities (including asset-backed securities and corporate bonds) and common shares.
Table 20 – Investment portfolio
As at
Cash, cash equivalents, and short-term notes
Fixed-income
Preferred shares
Common equities
Loans
December 31, 2020
September 30, 2020 December 31, 2019
1,601
13,414
1,552
3,779
284
20,630
901
13,568
1,472
3,380
286
19,607
997
11,765
1,465
4,063
318
18,608
Our investments increased by $1.0 billion, driven by:
Our investments increased by $2.0 billion, driven by:
Quarter
Full year
•
the proceeds from the issuance of $600 million of
medium-term notes in connection with the RSA
Acquisition; and
•
•
the proceeds from the issuance of $600 million of medium-
term notes in connection with the RSA Acquisition;
cash inflows from operations and investments; and
• mark-to-market gains on equity securities, driven
• mark-to-market gains on fixed-income securities, due to the
by favourable equity markets in Q4-2020.
decline in interest rates since 2019 year-end.
22.3 High quality portfolio
Our fixed-income portfolio includes high quality Government and corporate bonds. Approximately 89% of our fixed-income
portfolio was rated ‘A-’ or better as at December 31, 2020 (90% as at December 31, 2019). On a consolidated basis, the weighted-
average rating of our fixed-income portfolio was ‘AA’ as at December 31, 2020 and 2019. The average duration of our fixed-income
portfolio was 3.74 years as at December 31, 2020 (3.75 years as at December 31, 2019).
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, 2020 and 2019.
22.4 Net pre-tax unrealized gain (loss) on AFS securities
Table 21 – Net pre-tax unrealized gain (loss) on AFS securities
As at
Fixed-income securities
Preferred shares
Common shares
Net pre-tax unrealized gain (loss) position
Quarter
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
March 31,
2020
Dec. 31,
2019
297
(8)
224
513
310
(97)
44
257
165
(376)
(294)
(505)
107
(64)
314
357
300
(218)
(31)
51
Full year
Unrealized gain position improved by $256 million,
mainly driven by mark-to-market gains on equity securities
due to favourable equity markets in Q4-2020.
Unrealized gain position increased by $156 million, mainly driven
by mark-to-market gains on fixed-income securities, due to the
decline in interest rates, partly offset by mark-to-market losses on
common shares.
INTACT FINANCIAL CORPORATION 45
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
22.5 Aging of unrealized losses on AFS common shares
Table 22 – Aging of unrealized losses on AFS common shares
As at
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Mar. 31,
2020
Dec. 31,
2019
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
66
-
-
66
97
1
96
194
106
99
3
208
102
270
15
387
36
-
11
47
Highlights
•
In Q4-2020, we recorded $22 million of impairment on AFS common shares, which was lower than the $96 million expected
as at the end of Q3-2020, due to favourable equity markets in Q4-2020. This compares to $14 million in Q4-2019. In 2020, we
recorded impairment losses on AFS common shares of $121 million, of which $96 million in Q1-2020, mostly related to the
energy sector (see Table 11 – Net gains (losses) on FVTPL bonds).
• Since common shares are measured at fair value on our balance sheet, impairment losses have no impact on our BVPS and
capital position.
See Note 2 – Summary of significant accounting policies to the Consolidated financial statements for additional details on
our accounting policy regarding the impairment of financial assets.
22.6 Net exposure
As part of our investment strategies, from time to time we take long/short equity positions in order to maximize the value added from
active equity portfolio management, or to mitigate overall 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.
Our net exposure as at December 31, 2020 (after reflecting the impact of hedging strategies related to investments and foreign
subsidiaries) is outlined below.
Total portfolio
Investment mix
Fixed-income
Common shares
Preferred shares
Cash, short-term notes and loans
Fixed-income strategies
Sector mix
Government
Financials
MBS/ABS
Other (4% or less)
11%
7%
10%
72%
20%
15%
22%
43%
We had highly liquid assets at the
Corporate level and in our insurance
subsidiaries to provide additional
financial flexibility and to support our
customers through the COVID-19 crisis.
Our fixed-income portfolio remains
concentrated in highly liquid instruments,
such as securities in the government and
financial sectors.
46 INTACT FINANCIAL CORPORATION
Total portfolio
Currency
CAD
USD
15%
85%
We have no exposure to other
currencies.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Net exposure by asset class
Table 23 – Investment mix by asset class (net exposure)
As at
Cash, cash equivalents, and short-term notes
Fixed-income
Preferred shares
Common equities
Loans
December 31,
2020
September 30,
2020
December 31,
2019
10%
72%
7%
10%
1%
100%
7%
75%
8%
9%
1%
100%
6%
70%
8%
14%
2%
100%
As at December 31, 2020, equity securities had a lower weight in our investment portfolio given our strategic reduction in common
equities exposure. The fixed-income portfolio weight increased accordingly since December 31, 2019.
Net sectoral exposure
Table 24 – Sector mix by asset class, excluding cash, short-term notes and loans (net exposure)
As at
Fixed-income
securities
Preferred
shares
Common
shares
Total
Dec. 31,
2020
Total
Sept. 30,
2020
Total
Dec. 31,
2019
Government
Financials
ABS and MBS1
Energy
Industrials
Consumer staples
Communication Services
Utilities
Consumer discretionary
Materials
Information technology
Health care
43%
22%
15%
1%
2%
2%
2%
3%
1%
1%
4%
4%
-
77%
-
12%
-
-
1%
10%
-
-
-
-
-
23%
-
12%
10%
10%
8%
14%
5%
7%
4%
7%
32%
32%
11%
3%
3%
3%
3%
5%
1%
1%
3%
3%
33%
31%
11%
3%
3%
3%
2%
5%
1%
1%
3%
4%
31%
31%
11%
4%
3%
3%
3%
5%
2%
1%
3%
3%
1 Our structured debt securities comprised $450 million of ABS and $1,533 million of MBS as at December 31, 2020. Residential MBS and Commercial
MBS make up respectively 49% and 51% of our MBS portfolio. Approximately 98% of these structured debt securities are rated ‘A’ or better. We
continue to have no exposure to leveraged securities.
100%
100%
100%
100%
100%
100%
Net currency exposure
Table 25 – Net currency exposure
As at
CAD
USD
Other currencies
December 31,
2020
September 30,
2020
December 31,
2019
85%
15%
-
100%
84%
16%
-
100%
81%
17%
2%
100%
In Q1-2020, we strategically reduced our exposure to common equities, including our international portfolio, to enhance our capital
position (see Section 25 – Capital management).
INTACT FINANCIAL CORPORATION 47
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Claims liabilities and reinsurance
23.1 Claims liabilities
Assumptions
Claims liabilities stood at $12.8 billion as at December 31, 2020.
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:
•
•
•
•
•
•
•
average claims cost, including claim handling costs (severity);
average number of claims by accident year (frequency);
trends in claims severity and frequency;
payment patterns;
other factors such as inflation, expected or in-force government pricing and coverage reforms, and level of insurance fraud;
discount rate; and
risk margin.
The total claims reserve is made up of two main elements:
1)
2)
reported claims case reserves, and
incurred but not reported (“IBNR”) reserves.
IBNR reserves supplement the case reserves by taking into account:
•
•
•
possible claims that have been incurred but not yet reported to us by policyholders;
expected over/under estimation in case reserves based on historical patterns; and
other claims adjustment expenses or subrogation amounts not included in the initial case reserve.
Case reserves and IBNR should be sufficient to cover all expected claims liabilities for events that have already occurred, whether
reported or not, taking into account the time value of money, using a rate that reflects the estimated market yield of the underlying
assets backing these claims liabilities. IBNR and 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 35 – Non-operating results
for more details on the impact of MYA on underwriting.
Net claims liabilities
by business segment
P&C Canada
P&C U.S.
14%
86%
December 31, 2020
Diversification reduces the
uncertainty associated with the
unfavourable development of
claims liabilities for both our
Canadian and U.S. operations.
Net claims liabilities
by line of business
PA
PP
CL CAN
CL U.S.
6%
45%
35%
14%
48 INTACT FINANCIAL CORPORATION
PA: Personal auto; PP: Personal property: CL: Commercial lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Prior year claims development
• PYD can fluctuate from quarter to quarter and year to year and, therefore, should be evaluated over longer periods of time.
• We expect average favourable PYD as a percentage of opening reserves to be in the 1-3% range over the long-term. In the
near-term, we expect to be at the lower end of the range.
Favourable (unfavourable) PYD (as a % of opening reserves) – P&C Canada
%
9
7
.
%
9
4
.
%
0
% 4
.
2
3
.
%
7
% 5
.
9
4
.
%
1
5
.
%
8
4
.
%
2
3
.
.
%
2
% 6
9
4
.
%
0
5
.
%
2
3
.
%
3
2
.
%
1
0
-
.
%
9
0
.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
%
9
3
.
%
8
3
.
%
3
2
.
15Y
avg.
10Y
avg.
5Y
avg.
Table 26 – PYD by line of business
By line of business
Personal auto
Personal property
Commercial lines – Canada
Commercial lines – U.S.
Total (favourable) unfavourable development
(Favourable) unfavourable annualized rate of PYD1
P&C Canada
P&C U.S.
Consolidated
1 As a % of opening reserves.
Q4-2020 Q4-2019
Change
2020
2019 Change
(11)
(15)
(7)
5
(28)
(1)
(10)
(21)
(7)
(39)
(10)
(5)
14
12
11
(6)
(46)
(33)
(15)
(100)
111
(36)
(64)
(11)
-
(117)
(10)
31
(4)
(100)
(1.5)%
1.4%
(1.6)%
(1.6)%
(1.1)%
(1.6)%
0.1 pts
3.0 pts
0.5 pts
(0.9)%
(1.0)%
(0.9)%
0.1%
(0.6)%
(1.0) pts
(0.4) pts
-
(0.9) pts
INTACT FINANCIAL CORPORATION 49
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
23.2 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) but some proportional cessions are performed on specific portfolios.
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. The coverage limits are well in excess of the regulatory requirements with respect to the earthquake risk. As at
December 31, 2020, we retain participations averaging 10.2% on reinsurance layers between the retention and coverage limit. Effective
January 1, 2021, we maintained our coverage limit of $5.3 billion for multi-risk events and catastrophes but increased the retention from
$100 million to $150 million. For 2021, we retain participations averaging 9.2% on reinsurance layers between the retention and
coverage limit.
In line with industry practice, our reinsurance recoverables with licensed Canadian reinsurers ($580 million as at December 31, 2020,
$548 million as at December 31, 2019) 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.
See Note 14 – Reinsurance to the Consolidated Financial statements for further details on our reinsurance net retention and
coverage limits by nature of risk.
At the time of acquisition of Intact U.S. (OneBeacon) in September 2017, we purchased from a major reinsurer an adverse development
cover (ADC) subject to an aggregate limit of US$200 million to cover for any losses with respect to Intact U.S.’s claims liabilities for
accident years 2016 and prior. As at December 31, 2020, the maximum amount recoverable of US$200 million has been recorded,
with approximately two thirds related to exited lines.
Subsequent to the exit of the U.S. Healthcare business on July 1, 2019, Intact U.S. (OneBeacon) entered into a loss portfolio transfer
and a prospective quota share reinsurance contract with a reinsurer as at December 31, 2019 (collectively known as the “loss portfolio
transfer”). Subject to an aggregate limit, the reinsurer assumed the liabilities and future reserve development for accident years 2017
and subsequent, net of reinsurance, with the exception of a few files. The ceded Healthcare portfolio consisted of Claims liabilities of
$158 million and Unearned premiums of $27 million. The net cost of the reinsurance transaction of $13 million was recognized in Non-
operating results (Underwriting results of U.S. exited lines) in Q4-2019.
50 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Employee future benefit programs
In Canada, we sponsor a number of funded and unfunded defined benefit pension plans
that provide benefits to members in the form of a guaranteed level of pension payable for
life based on final average earnings and contingent upon certain age and service
requirements. We provide active employees a choice between a defined benefit and a
defined contribution pension plan. In the U.S., we offer employees a 401(k) plan.
Benefit obligations arising from our defined benefit plans are dependent on assumptions,
such as the discount rate, life expectancy of pensioners, inflation and rate of compensation
increase. Because of the long-term nature of our pension obligations, movements in
discount rates and investment returns could bring volatility in our balance sheet.
DB pension obligation
(as at the date of the latest actuarial valuation)
Active members
Pensioners and beneficiaries
Deferred members
8%
33%
59%
In 2020, we continued to strengthen our 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:
•
increasing the target allocation of fixed-income securities (partly funded in the repo
market) by investing in inflation sensitive assets to partially mitigate the risk of an unanticipated increase in inflation; and
improving our pension asset-liability matching to better align our credit and interest rate exposures.
•
We will continue the regular monitoring of 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.
Table 27 – Selected pension indicators
As at December 31,
Defined benefit pension obligation
Funding ratio (funded pension plans)
Interest rate hedge ratio
Pension asset mix
Debt securities
Common shares
Derivatives
Repos
2020
3,151
97%
72%
71%
36%
2%
(9%)
2019
2,756
94%
70%
70%
36%
1%
(7%)
Highlights
• Our funding ratio increased to 97% as at December 31, 2020, mainly due to the positive return on pension plan assets.
•
Interest rate hedge ratio increased to 72% as at December 31, 2020, in line with the increase in the funding ratio. Our objective
is to remain in a modest range around our pension fund investment policy target of 75%, assuming the funding ratio is 100%.
An interest rate hedge ratio below 100% indicates that funded status of the pension plans would increase if government bond
yields rise, all else equal.
See Note 27 – Employee future benefits to the Consolidated financial statements for more details, including actuarial gains
and losses recognized in OCI, assumptions used and sensitivity analysis, as well as risk management and investment
strategy.
INTACT FINANCIAL CORPORATION 51
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Capital management
25.1 Our capital management framework
Capital management objectives
Our objectives when managing capital consist of:
• maximizing long-term shareholder value by optimizing capital used to operate and grow the
Company; and
• maintaining strong regulatory capital levels, to ensure policyholders are well protected.
Despite the COVID-19 crisis, our capital priorities have not changed. We are focused on maintaining a resilient balance sheet,
providing flexibility in good times and in bad times. We want to make sure that we have capital ready to be deployed for growth
opportunities, both organic and through acquisitions, and that we return capital to shareholders over time.
Capital deployment strategy
Any deployment of capital is executed within the context of the stated capital management objectives and only after careful
consideration of the impact on the Company’s risk metrics.
Capital deployment will be considered in the context of the following capital management priorities:
Manage
leverage
Increase
common
shareholder
dividends
• Prudent debt leverage is an important component of our capital structure. We target a 20% debt-to-total
•
capital ratio.
Leverage may increase temporarily to support value creation from M&A opportunities, with the goal to return
to the target within a two to three year time horizon.
• Common shareholder dividend payments are reviewed annually. The Company seeks to maintain a
sustainable dividend payout level, with the intention of annually increasing common shareholder dividends.
Manage
volatility
Invest in
growth
•
•
The Company will maintain an adequate capital margin to ensure that it is sufficiently capitalized to withstand
an acceptable level of insurance and/or market shocks.
Investing in growth opportunities continues to be a key pillar of the Company`s strategy. The Company may
use a portion of the capital margin for acquisitions or other growth opportunities.
Share
buybacks
• Where there is excess capital and no actionable growth opportunities on the near-to-medium term horizon,
we may consider share buybacks as a capital management tool.
• Key considerations in any share buybacks include our estimate of intrinsic value and impacts on NOIPS,
ROE and BVPS.
52 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
25.2 Managing volatility
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.
Regulatory capital
The amount of capital in any particular company or country depends upon the Company’s internal assessment of capital adequacy in
the context of its risk profile and strategic plans, as well as local regulatory requirements. The Company’s objective is to maintain the
capitalization of its regulated operating subsidiaries above the relevant minimum regulatory capital requirements in the jurisdictions in
which they operate (referred to as regulator supervisory minimum levels).
Canada
• 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.
•
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.
U.S.
• 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 RBC requirements.
Regulatory capital guidelines change from time to time and may impact our capital levels. We carefully monitor all changes, actual or
proposed.
25.3 Maintaining a strong capital position
Capital position
All our regulated P&C insurance subsidiaries are well capitalized on an individual basis with capital levels well in excess of regulator
supervisory minimum levels and CALs. CALs represent the thresholds below which regulator notification is required together with a
company action plan to restore capital levels.
Table 28 – Estimated aggregated capital position
As at
Canadian regulated entities
Regulatory capital ratio (MCT)
Capital above CALs (capital margin)
Other regulated entities
Capital above CALs (capital margin)1
Unregulated entities
Total capital margin2
Debt-to-total capital
December 31,
2020
September. 30,
2020
December 31,
2019
224%
1,101
640
988
2,729
24.1%
205%
735
633
503
1,871
21.2%
198%
554
630
38
1,222
21.3%
1 Includes Atlantic Specialty Insurance (U.S.) (“ASIC”), Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados). The Guarantee
Company of North America USA was included in Other regulated entities as at December 31, 2020 and in Canadian regulated entities as at
December 31, 2019.
2 Consists of the aggregate of capital in excess of CALs in regulated entities plus available cash and investments in unregulated entities, including the
$600 million from the medium-term notes issued on December 16, 2020.
INTACT FINANCIAL CORPORATION 53
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
The following table summarizes the movement in our key capital indicators for the quarter and full year.
Table 29 – Key capital indicators
As at
Sept. 30, 2020 / Dec. 31, 2019
Insurance operations and investments1
Capital injection in P&C subsidiaries
Dividends paid
Financing raised (RSA Acquisition)2
Issue of $150 million of Series 9
Preferred Shares2
Use of $150 million of credit facility and
issue of $300 million MTN Series 82
Deleveraging
Other
December 31, 2020
MCT
RBC
205%
28%
-
(9)%
-
-
451%
18%
-
-
-
-
-
-
-
-
-
-
224%
469%
Quarter
Full year
Debt-to-total
capital ratio
Capital
margin
MCT
RBC
Debt-to-total
capital ratio
Capital
margin
21.2%
(0.9)%
-
0.2%
3.8%
-
-
(0.2)%
-
24.1%
1,871
498
-
(132)
596
-
198%
75%
8%
(45)%
-
-
457%
12%
-
-
-
-
-
-
(104)
-
(12)%
-
-
-
-
2,729
224%
469%
21.3%
(1.9)%
-
0.7%
3.8%
(0.3)%
3.1%
(2.6)%
-
24.1%
1,222
1,356
-
(641)
596
146
449
(338)
(61)
2,729
1 Net of tax. U.S. figures are based on statutory accounting, which differs from IFRS.
2 Refer to Section 25.5 – Managing leverage.
Highlights
• As at December 31, 2020, our Canadian insurance companies have a MCT of 224% and our U.S. subsidiary has a RBC of 469%,
both solid levels.
• Our total capital margin stood at a strong $2.7 billion as at December 31, 2020, including the net proceeds from the medium-term
note issuances in December 2020 to partly finance the RSA Acquisition. By maintaining a strong balance sheet and capital
position, we can withstand the shocks driven by volatility in financial markets and capture growth opportunities.
• Our debt-to-total capital ratio of 24.1% as at December 31, 2020 has increased by 2.9 points, mainly due to the medium-term
note issuances to partly finance the RSA transaction.
Refer to Section 31.8 – Own Risk and Solvency Assessment for details on our Own Risk and Solvency Assessment.
54 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
25.4 Book value per share
Book value per share increase over time
• Our operating performance and financial strength have translated into close to $2.2 billion in capital returned to common
shareholders through dividends and share repurchases over the past five years.
• Our BVPS was up 9% to $58.79 in 2020, mainly driven by our earnings, net of common share dividends.
• We remained committed to our financial objectives in terms of ROE outperformance and NOIPS growth to enhance value to
shareholders.
10-year CAGR (2010-20) of 8.3%
33.03
33.94
29.73
24.88
26.47
21.96
58.79
53.97
48.00
48.73
37.75
39.83
42.72
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Table 30 – Evolution of BVPS (in dollars)
As at December 31,
BVPS, beginning of period
EPS
Dividends on common shares
Net impact from issuance of common shares
Impact of market movements on AFS securities1
Net actuarial gains (losses) on employee future benefits1
Foreign exchange impact1
Impact of the adoption of IFRS 16 (Leases)
Other2
BVPS, end of period
Period-over-period increase
1 Reported in AOCI.
2 Includes share-based payments.
Q4-2020
56.22
2.55
(0.83)
0.06
1.44
0.06
(0.71)
-
-
58.79
5%
2020
53.97
7.20
(3.32)
0.04
0.96
0.31
(0.34)
-
(0.03)
58.79
9%
2019
48.73
5.08
(3.04)
1.71
2.85
(0.38)
(0.86)
(0.28)
0.16
53.97
11%
2018
48.00
4.79
(2.80)
-
(2.49)
(0.13)
1.26
-
0.10
48.73
2%
INTACT FINANCIAL CORPORATION 55
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
25.5 Managing leverage
2020 Financing structure
Debt-to-total capital ratio
Weighted-average
debt maturity
Weighted-average
debt coupon
Weighted-average
preferred share coupon
24.1%
11 years
2.94% (after tax)
4.39% (after tax)
We believe that our optimal financing structure is one where:
the debt-to-total capital ratio is generally at 20%; and
•
approximately 10% of our total capital is comprised of preferred shares.
•
The debt-to-total capital ratio may occasionally exceed 20% with a firm plan to revert back
to 20% within 2 to 3 years.
We have a diversified maturity with reasonable levels of debt and preferred shares, which
improves our overall cost of capital:
• We currently have nine series of medium-term notes outstanding with maturities
ranging between 1 and 41 years.
The notes carry a weighted average coupon of 3.98% (2.94% after tax).
•
• All debt tranches are prudent in size with no large peaks, reducing refinancing 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
Capital structure
December 31, 2020
Debt
Preferred shares
Equity
24%
9%
67%
See next page for more details on the new financing.
56 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
New financing in connection with the RSA Acquisition
On November 18, 2020, we announced that, together with the Scandinavian P&C leader Tryg
A/S, we have reached an agreement to acquire RSA for a total consideration of approximately
£7.2 billion ($12.5 billion). We will pay £3.0 billion ($5.2 billion) of the total consideration
payable and Tryg will pay £4.2 billion ($7.3 billion). See Section 2 – Acquisition of RSA’s
Canadian, UK and International operations.
Financing for the purchase price of approximately $5.2 billion (£3.0 billion) and expected
related transaction costs of approximately $0.7 billion has been raised with $4.45 billion of
private placement subscription receipts, €392 million ($600 million) bank term loan facility to
be drawn on closing and $600 million of medium-term notes (see details below). The
remaining balance of approximately $200 million will be raised in 2021 with the issuance of
preferred shares or other financing.
Acquisition of RSA
Total financing: $5.9 billion
Common equity Debt Other
5%
20%
75%
As part of the acquisition, we also intend to assume the full amount of RSA’s outstanding issued debt and hybrid securities, which totals
approximately £0.8 billion ($1.4 billion) and £0.4 billion ($0.7 billion), respectively as at December 31, 2020. We will also retain and
guarantee the obligations of the closed RSA’s UK pension schemes. See Note 5 – Business Combinations to the Consolidated
financial statements for further details.
Our purchase price is set in GBP, with the CAD equivalent fluctuating with foreign exchange rates. We have hedged the purchase price
against the exposure associated with GBP/CAD exchange rate fluctuations. See Section 27.1 - Currency hedging in relation with
the RSA Acquisition.
• On November 25, 2020, we completed the private placement of subscription receipts to three Canadian
institutional investors of an aggregate of 23.8 million Subscription Receipts for gross proceeds of
approximately $3.2 billion.
• On December 3, 2020, we completed the private placement of subscription receipts with a group of
underwriters of an aggregate of 9,272,000 subscription receipts for gross proceeds of approximately
$1.25 billion.
Private
placement
subscription
receipts
• Each Subscription Receipt will entitle the holder to receive one common share of Intact as well as a dividend
equivalent payment upon closing of the Acquisition.
Bank term
loan facility
• On November 18, 2020, we entered into a $0.6 billion 24 months bank term loan facility agreement which
we plan to draw in EUR a rate of Libor plus 100 bps and which will be drawn upon closing.
On December 16, 2020, we completed the private placements of:
•
•
Medium-term
notes
$300 million principal amount of Series 9 unsecured medium-term notes, which bear interest at a fixed
annual rate of 1.928% until maturity on December 16, 2030, payable in semi-annual instalments commencing
on June 16, 2021.
$300 million principal amount of Series 10 unsecured medium-term notes, which bear interest at a fixed
annual rate of 2.954% until maturity on December 16, 2050, payable in semi-annual instalments commencing
on June 16, 2021.
The net proceeds from the private placements will be used to fund a portion of the purchase price for the RSA
Acquisition.
Q1-2020 financing
• On February 18, 2020, we completed a Class A Series 9 offering of preferred shares (the “Series 9 Preferred Shares”) by
issuing and selling 6,000,000 Series 9 Preferred Shares, at a price of $25.00 per share, for aggregate gross proceeds of
$150 million. The net proceeds have been used for general corporate purposes. The Series 9 Preferred Shares will yield 5.40%
per annum and are not subject to a rate reset.
• On March 24, 2020, we completed an offering of $300 million principal amount of Series 8 unsecured medium-term notes
(“the Notes’’). The Notes bear interest at a fixed annual rate of 3.691% until maturity on March 24, 2025, payable in semi-annual
instalments commencing on September 24, 2020. The net proceeds have been used for general corporate purposes.
INTACT FINANCIAL CORPORATION 57
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Credit facility
Our $750 million credit facility matures on November 26, 2024 and can be drawn as follows.
Type
Prime loans
Base rate (Canada) advances
Bankers’ acceptances
Libor advances
Rate
Prime rate plus a margin
Base rate (Canada) plus a margin
Bankers’ acceptance rate plus a margin
Libor rate plus a margin
Amendment in connection with the RSA Acquisition
On December 18, 2020, the credit facility was amended to comply with all covenants upon closing. Furthermore, the credit facility will
be increased to $1.5 billion in order to provide incremental liquidity, contingent upon the closing of the acquisition.
As at December 31, 2020, no balance was drawn under our credit facility ($138 million or US$106 million as at December 31, 2019).
All covenants were fully met as at December 31, 2020 and 2019.
Strong 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 (surety business for example),
and accessing capital markets at competitive pricing levels.
Table 31 – Ratings
Financial strength ratings
IFC’s principal Canadian P&C insurance subsidiaries
Intact U.S. (OneBeacon) U.S. regulated entities
Senior unsecured debt ratings
IFC
Intact U.S. (OneBeacon)
A. M. Best
DBRS
Moody’s
Fitch
A+
A+
a-
a-
AA(low)
AA(low)
A
A
A1
A2
Baa1
Baa2
AA-
AA-
A-
A-
We do not anticipate the Transaction and its planned financing structure to lead to a change in our current credit ratings. See Section 2
– Acquisition of RSA’s Canadian, UK and International operations.
25.6
Increase common shareholder dividends
With a strong financial position and confidence in earnings growth, we will continue to protect our people, support our customers and
advance our strategic objectives. We intend to increase our dividend this year as we have in the past 15 years. However, given the
current regulatory environment, we are postponing our dividend increase to a later quarter in 2021.
25.7
Invest in growth
See Section 2 – Acquisition of RSA’s Canadian, UK and International operations.
25.8 Share buybacks
There was no share buyback during 2020 and 2019. Since 2009, $627 million has been returned to shareholders, with an average
buyback share price of $50.91.
58 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Treasury management
26.1 Understanding our cash flows
Cash flows used in operating activities mainly consist of insurance premiums less claims and expense payments, plus investment
income. Cash is used to pay dividends on common and preferred shares. Cash may also be deployed for strategic purposes like
business acquisitions, investments in brokerage firms and share buybacks, or to repay outstanding financing. Cash inflows in excess
of these outflows are moved to our investment portfolio to generate additional investment income in the future.
Table 32 – Cash flows
Net cash flows provided by operating activities
680
187
493
2,352
1,290
1,062
Q4-2020 Q4-2019 Change
2020
2019 Change
Cash flows generated from (deployed on):
Proceeds from issuance of debt, net of issuance costs1
Repayment of debt
Borrowing (repayment) on the credit facility, net
Proceeds from issuance of common shares
Proceeds from issuance of Class A Preferred Shares
Dividends on common shares and preferred shares
Business combinations, net of cash acquired
Equity investments in brokerages and other, net
Purchases of intangibles and P&E, net
Payments of lease liabilities
Payment of contingent consideration related to a business
combination2
Proceeds from (repayment of) securities sold under repos
Repurchase of common shares for share-based payments
Net cash inflows (outflows) before the following:
Excess capital deployed on the acquisition of The Guarantee
Proceeds from investment sales (purchases), net
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Exchange rate difference on cash and cash equivalents
Cash and cash equivalents at end of the period
596
-
(2)
-
-
(132)
-
(59)
(55)
(15)
(94)
-
(4)
915
-
(818)
97
837
(17)
917
266
-
145
444
-
(120)
(731)
(18)
(27)
(14)
-
(55)
(4)
73
172
355
600
343
(7)
936
330
-
(147)
(444)
-
(12)
731
(41)
(28)
(1)
(94)
55
-
894
(47)
(165)
-
146
(527)
-
(187)
(163)
(59)
(94)
(20)
(49)
842
(172)
(1,173)
2,081
-
(2,092)
(503)
494
(10)
(19)
(11)
936
(8)
917
266
(250)
145
444
-
(474)
(731)
(104)
(117)
(51)
-
20
(43)
395
172
(62)
505
442
(11)
936
628
203
(310)
(444)
146
(53)
731
(83)
(46)
(8)
(94)
40
(6)
1,686
(172)
(2,030)
(516)
494
3
(19)
1 See Section 25 – Capital management.
2 See Note 5.1 – Business combinations to the Consolidated financial Statements for details.
We have ample liquidity at the holding company level and within our investment portfolio to protect against market volatility,
support our customers through the crisis, and quickly respond to market opportunities that may arise.
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 commitments in the near term.
INTACT FINANCIAL CORPORATION 59
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
26.2 Contractual obligations
Table 33 – Contractual obligations
As at December 31, 2020
Principal repayment on notes outstanding
Interest payments on notes outstanding
Claims liabilities1
Leases and other commitments2
Pension obligations3
Total contractual obligations
Payments due by period
Total Less than 1 year
1 - 5 years Thereafter
3,041
1,366
12,370
1,177
42
18,406
510
107
4,363
200
4
5,333
656
335
6,242
549
17
8,257
1,875
924
1,765
428
21
4,816
1 Undiscounted value, including incurred but not reported reserves.
2 Refer to Note 10.5b) – Financial liabilities by contractual maturity and Note 31 – Commitments and Contingencies to the Consolidated
financial Statements for details.
3 Represent the expected benefit payments for unfunded plans. There is no significant annual mandatory funding required by regulators, based on the
latest actuarial valuations.
Foreign currency management
27.1 Currency hedging in relation with the RSA Acquisition
Purchase price hedges
In November 2020, we entered into foreign currency forward contracts in order to hedge the £3.0 billion ($5.2 billion) purchase price to
exposures from fluctuations in the CAD/GBP and EUR/GBP currency pairs. These derivatives have a notional of £2.7 billion
($4.7 billion) GBP/CAD and £0.3 billion ($0.5 billion) GBP/EUR, of which £2.4 billion ($4.2 billion) are contingent on the closing of the
acquisition.
As at December 31, 2020, these derivatives did not qualify as cash flow hedges and are marked-to-market through net income. We
recognized an unrealized gain of $41 million in 2020. See Table 11 – Gains (losses) excluding FVTPL bonds.
Book value hedges
In November 2020, we entered into foreign currency forward contracts for a notional of £700 million ($1.2 billion), whereby we sell GBP
for CAD in order to reduce our book value exposure to the GBP. These derivatives represent economic hedges and the changes in the
fair value are recognized through net income until closing of the transaction. We recognized an unrealized loss of $22 million in 2020.
See Table 11 – Gains (losses) excluding FVTPL bonds.
We also intend to hedge our book value exposure to the DKK after closing with our €392 million ($600 million) bank term loan facility.
We also entered into other foreign currency forward contracts for a net notional of £100 million ($174 million) CAD/GBP for risk
management purposes related to the RSA Acquisition.
See Note 7 – Derivative financial instruments to the Consolidated financial Statements for more details.
60 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
RISK MANAGEMENT
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, regulators 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.
Risk management structure
INTACT FINANCIAL CORPORATION 61
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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.
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 designated by the Board of Directors and is chaired by the Chief Risk Officer.
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, capital allocation and business continuity. Further
details follow on how these committees operate, ensure compliance with laws and regulations and report to the
Enterprise Risk Committee.
62 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
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:
30.1 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.
INTACT FINANCIAL CORPORATION 63
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Enterprise Risk Management
31.1 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, regulators, 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.
31.2 Objectives
overseeing and objectively challenging the execution of risk management activities;
identifying, as completely as possible, the most important risks and issues that may affect us;
•
•
• monitoring identified risks, major incidents and control weaknesses and reviewing adopted strategies;
•
•
•
•
•
•
allocating risk ownership and responsibilities;
gathering early warning information;
escalating risk management issues and vetoing high risk business activities;
enforcing compliance with the risk policies;
disclosing key risks completely and transparently; and
supporting management in raising risk awareness and insight.
31.3 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 and ensure accountability. On-going collaboration and clear
communication across the lines of defence is paramount to foster alignment and optimal risk management.
64 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
31.4 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.
Consult our website for a more detailed discussion of our Risk Appetite under the Corporate Governance section.
31.5 Main risk factors and mitigating actions
Our practice is to regularly identify our top risks, assess the likelihood of occurrence and evaluate the potential impacts should they
materialize both in terms of financial resources and reputation. We also consider potential emerging risks that are newly developing
or changing risks which are inherently more difficult to quantify.
We then determine mitigation plans and assign accountability for each risk if deemed appropriate given our overall assessment, our
risk appetite, and our business objectives.
INTACT FINANCIAL CORPORATION 65
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
31.6 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
Risk we are facing
The occurrence of a major earthquake may produce significant damage in large, heavily populated areas.
Potential impact
How we manage this risk
Insurance risk
The occurrence of a major earthquake 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
Insurance
Compensation Corporation (PACICC) leading to further costs if
other insurers are unable to meet their contractual obligations
with their clients.
increased assessments
the P&C
from
Our risk management strategy consists of regular monitoring of insured value
accumulation and concentration of risks. We use earthquake risk models to
help assess our possible losses at various return periods and use reinsurance
to transfer a substantial amount of risk. Consequently, the diversification of
risk among an appropriate number of reinsurers is vital for us. See Section
23.2 – Reinsurance for more details on our reinsurance program.
Since the beginning of 2020, we’ve implemented a robust action plan resulting
in a material reduction in our exposure to Western Canada earthquake
exposure. Both our personal and commercial lines are applying a series of
pricing and product measures.
We increased our reinsurance coverage in 2020 to beyond an estimated 1-in-
700 year return period of an earthquake in Western Canada, including the
U.S. Pacific Northwest.
66 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Climate change risk
Risk we are facing
Insurance risk
Climate change is a challenge that has been faced by the Canadian P&C insurance industry for over 10 years and the risk is evolving and becoming
heavily faced across industries as we shift to a low-carbon economy.
Physical risk has been affecting our property insurance business due to changing climate patterns and an increase in the number and cost of
claims associated with severe storms and other natural disasters. Changing weather patterns has resulted in hotter, drier weather in some areas
and more humid, wetter weather in other areas. The result has been more unpredictable weather and increasingly severe storms. These changes
could negatively affect our property and automobile insurance results, which collectively contribute to a majority of our total annual premiums.
There are a wide variety of natural disasters that may be affected by climate change to some degree including but not limited to hurricanes,
windstorms, hailstorms, rainstorms, ice storms, floods, severe winter weather and forest fires.
Transition risk is the risk of transitioning to low-carbon and more climate resilient economy. Awareness of the potential risk has been increasing
this year with several large institutional investors shifting away from carbon-intensive sectors. Some sectors or companies may be perceived as
too carbon-intensive or may have unsatisfactory transition plan towards greener sources of revenue. This could impact asset prices and economic-
sensitive lines of business. Furthermore, the exposure to carbon-intensive sectors or companies could result in the perception of disregard towards
greener economy and increase reputational risk for insurers who underwrite these risks.
INTACT FINANCIAL CORPORATION 67
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Potential impact
How we manage this risk
Physical risk
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 catastrophes, such as wildfires in the
West and heavy precipitation and Hurricanes in
the East. The impact of climate change may result
in increased earnings volatility.
Transition risk
Over 2020, we have meaningfully reduced our
investments in carbon-intensity companies that
have no or unsatisfactory plan of reducing their
footprint.
Physical risk
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, segmentation refinement, and the
introduction of depreciation schedules in personal property insurance across Canada. These
initiatives help mitigate, to some extent, P&C insurance losses resulting from water damage
and harsh weather. As climate risk continues to evolve, we are continuously developing or
acquiring new modelling tools to help better assess catastrophe risk. For example, we
regularly update Canadian flood maps used in underwriting coverage for this peril. See
Section 19 – climate change for more details on our initiatives and ongoing
management related to the risks of climate change.
In addition, our reinsurance program offers protection against multi-risk events and
catastrophes. See Section 23.2 – Reinsurance for details on our reinsurance program.
We are participating to the Pilot of Bank of
Canada and OSFI’s Climate Scenario Analysis.
the
The
understanding of our exposure to transition risks
during 2021.
further enhance
initiative should
Investing in Climate Adaptation and Awareness
We continue to promote climate adaptation and awareness through a number of initiatives,
including but not limited to:
•
•
Renewed our commitment to the Intact Center on Climate Adaptation, an applied
research centre providing practical solutions to help society adapt to the impacts of
climate change;
Participated in the United Nations Environment Programme’s Financial Initiative
(UNEP FI)’s Global Insurers Pilot on the Task Force on Climate-related Financial
Disclosures (TCFD);
• Member of the Geneva Association, an international think tank for the insurance
industry providing research and expertise on key industry topics, such as climate
change; and
Committed 1.3-million in five new Intact Climate Adaptation Grantees. These
projects are focused on building communities’ climate resiliency.
•
Transition risk
In 2020, Intact Investment Management developed a Coal Policy and engaged portfolio
companies on climate change. Existing holdings that exceed thresholds stated in our Coal
Policy are evaluated based on their energy transition plan. We will divest from companies that
do not have a satisfactory plan. We will continue to evaluate and adapt our thresholds over
time.
We are also participating in the Bank of Canada and Office of the Superintendent of Financial
Institutions (OSFI) pilot project to use climate-change scenarios to better understand the risks
to our financial condition related to a transition to a low-carbon economy.
68 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Catastrophe risk (excluding earthquake risk)
Insurance risk
Risk we are facing
Catastrophe events include natural disasters and unnatural events.
•
There are a wide variety of natural disasters that are mainly weather-related including but not limited to hurricanes, windstorms, hailstorms,
rainstorms, ice storms, floods, severe winter weather and forest fires.
• Unnatural catastrophe events include but are not limited to hostilities, terrorist acts, riots, explosions, crashes and derailments, and wide scale
cyber-attacks.
Despite the use of sophisticated models, the incidence and severity of catastrophe events are inherently unpredictable. The extent of losses from
a catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most
catastrophe events are restricted to small geographic areas; however, hurricanes and other storms may produce significant damage in large,
heavily populated areas. Catastrophe events can cause losses in a variety of P&C insurance lines.
Potential impact
How we manage this risk
Claims resulting from natural or unnatural catastrophe
events could cause substantial volatility in our financial
results and could materially reduce our profitability or harm
our financial condition.
Natural catastrophe risk
Some the risk mitigations referred to in the section above on Climate Change risk
also mitigate the catastrophe risk. For example, deductibles and sub-limits help
reduce the impact of natural catastrophe risk.
Unnatural catastrophe risk
We offer cyber risk insurance to our commercial customers
across North America. We may be adversely affected by
large scale cyber-attacks that simultaneously compromises
the systems of many of our insureds.
Unnatural catastrophe risk
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, 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.
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 U.S. federal legislation.
INTACT FINANCIAL CORPORATION 69
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Increased competition and disruption
Risk we are facing
Strategic risk
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 Canadian banks that are selling insurance products. Disruptors with lower costs and/or better technology could enter our markets and
quickly accumulate market share. 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 sophisticated player in the market or a
disruptor could shift methods to purchase insurance and
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
these
technologies more effectively than us or there may be negative
reputational consequences arising from our initiatives.
industry. Potential disruptors may use
Demutualization and further consolidation in the Canadian P&C
industry remains likely which may result in an erosion of our
competitive advantage.
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.
There is a number of initiatives that we have presented to our customers to
mitigate the risk of competition and disruption including, but not limited to:
• Our multi-channel distribution strategy including the broker channel, direct
distribution 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 are promoting our brands with a focus on using web and mobile
technology to reach consumers. U.S. activities now operate under the
North American Intact Insurance Specialty Solution;
• We are constantly streamlining and simplifying the experience in our direct
distribution channel. As a result, we have seen a drop in our expense ratio
ensuring that we can compete on affordability;
• We are insourcing part of our claim supply chain process to differentiate
ourselves from a cost perspective and customer experience. With the
acquisition of On Side, we have now vertically integrated an important
supply chain vendor. We established innovative service centres in major
Canadian cities to provide an unmatched customer experience in Auto
repair. We have also deployed digital tools to accelerate claims settlement
and enhancing communication with our customers;
• We are investing in our Data Lab and in our large team of experts. We use
artificial intelligence and machine learning in a variety of business
applications to acquire and retain more profitable clients (e.g. Usage-
based insurance).
70 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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.
Severe deflation or unexpected inflation could materially impact both our assets and liabilities, including our employee defined benefit pension plans.
In 2020, we experience increased turbulence in financial markets due to COVID-19 crisis, while interest rates in North American have declined to
historical low levels. See Section 22.1 – Capital markets update.
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, such as
the COVID-19 crisis. 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, social unrest and many other factors
can also adversely affect the equity markets and,
consequently,
the equity
securities we own and ultimately affect the timing
and level of realized gains or losses.
fair value of
the
Our preferred share portfolio depreciates in value
as a result of negative developments in interest
rate, credit or liquidity market.
Our fixed income portfolio may experience
defaults resulting in impairments and lower
income prospectively.
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. During the first half of 2020, a series
of actions were taken to solidify our capital and liquidity positions. Our investment portfolio
remains defensive as we maintain an underweight position in equity exposure versus our target
investment policy allocation.
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. These stress tests help assessing whether our financial risk exposure requires any
adjustments. When turbulence was at his peak this year for example, we stress tested further
severe downside scenarios and the results demonstrated that our liquidity position in the
operating subsidiaries remained strong and able to withstand extreme liquidity shocks.
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
Market risk
Notes 10.1 and 10.2
Basis risk
Note 10.3
Credit risk
Note 10.4
Liquidity risk
Note 10.5
INTACT FINANCIAL CORPORATION 71
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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.
The COVID-19 crisis brings an additional level of uncertainty to these factors when estimating reserve level.
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, or 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.
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.
in our Consolidated
the reserves reflected
To the extent that actual losses and LAE exceed our expectations
and
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
decrease by a corresponding amount. In addition, increasing or
strengthening reserves causes a reduction in our P&C insurance
subsidiaries’ regulatory capital. For example, there remains
uncertainty related to the ultimate impact of the 2016 Ontario Auto
Insurance reforms. As claims incurred after the reforms were
enacted are settled, the uncertainty related to these specific
changes in legislation declines. See Section 23.1 – Claims
liabilities for more details on the claims reserve and prior
year claims development.
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.
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. These committees also review
our portfolio quality and the evolution of our pricing versus internal rate
indication to ensure ongoing rate adequacy.
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.
Estimated direct losses associated to COVID-19 remains low at an estimated
$106 million. There are several class-action lawsuits over our business
interruption coverage. Most commercial policies, except in very limited
instances, do not provide for business interruption coverage in the context of
a closure due to COVID-19 crisis since direct physical damage is required to
trigger this coverage. We remain confident with our policy language that limits
the coverage to losses arising from physical damages.
In 2020, we maintained our focus on pricing adequacy and reserve
sufficiency. The loss of a large sharing economy account in Canada is an
example of our commitment to maintain strong pricing discipline.
72 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Inadequate pricing may lead to material declines in underwriting
income and/or deficient reserves.
The effects of the COVID-19 crisis related to emerging coverage
issues and claims, including certain class actions relating to
business interruption coverage and related defence costs, as well
as other indirect claims could negatively impact our claims
reserves. The COVID-19 crisis also brings uncertainty related to
potential exposure to the ultimate level of direct losses in lines
such as business interruption and indirect losses in specialty lines.
Surety losses may increase as a result of the potential weakening
economy that may result in client bankruptcies.
Governmental and/or regulatory intervention
Strategic Risk
Risk we are facing
Our subsidiaries and affiliates are subject to regulation and supervision by 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.
Governments and regulators around the world have been on crisis response mode due COVID-19. Auto premium relief and refunds were strongly
encouraged or mandated in some jurisdictions.
INTACT FINANCIAL CORPORATION 73
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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 subsidiaries are in material compliance with all
applicable regulatory requirements. However, it is not possible to predict
the future impact of changing federal, states, provincial and territorial
regulations on our operations. Laws and regulations enacted in the
future may be more restrictive than current laws. Overall, our business
is heavily regulated and changes in regulation may reduce our
profitability and limit our growth prospects.
We could be subject to regulatory actions, sanctions and fines if a
regulatory authority believed we had failed to comply with any applicable
law or regulation. Any such failure to comply with applicable laws could
result in the imposition of significant restrictions on our ability to do
business or significant penalties, which could adversely affect our
reputation, results of operations and financial condition. In addition, any
changes in laws and regulations could materially adversely affect our
business, results of operations and financial condition.
We may be subject to governmental or administrative investigations and
proceedings in the context of our highly regulated sectors of activity. We
cannot predict the outcome of these investigations, proceedings and
reviews, and cannot be sure that such investigations, proceedings or
reviews or related litigation or changes in operating policies and
practices would not materially adversely affect our results of operations
and financial condition. In addition, if we were to experience difficulties
with our relationship with a regulatory body in a given jurisdiction, it could
have a material adverse effect on our ability to do business in that
jurisdiction and the price of our common shares.
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.
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 have been an active
partner to governments throughout the COVID-19 crisis, offering our
expertise around risk management, data and tracing.
We have also been supporting Finance Canada by providing data to
help in their decision making when it comes to people and businesses
who are facing financial hardship during the pandemic.
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.
We provided significant premium relief measures to our customers
during the pandemic (see Customer satisfaction risk for more details).
Several sectors are facing challenges with commercial hard market,
including long-term care, hospitality, condominium and entertainment.
We are coordinating our effort with IBC and the Minister of Finance in
Ontario to ensure affordable coverage is available to small and mid size
companies.
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 or in the interpretation of existing
laws including with respect to restrictions on the ownership of brokers
by insurers and/or the compensation arrangements between
insurers and brokers, limitations on the conduct of brokers, or claims
handling procedures;
the adoption of consumer initiatives regarding rates charged for
automobile or other insurance coverage or forced reductions in
premiums or additional costs imposed by governments that limit our
ability to properly price our insurance products;
•
To reduce the risk of breaching the regulatory capital requirements, we
have Board approved thresholds for the regulatory capital ratios in all
jurisdictions in which we operated. We operate above these thresholds
under normal circumstances to reduce the likelihood of regulatory
intervention. Our Enterprise Risk Committee regularly review risks
related to solvency and uses 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.
• 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.
•
In addition, we conducted a full internal solvency assessment as
described hereafter in Section 31.8 – Own Risk and Solvency
Assessment (ORSA).
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.
74 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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
data analytic, pricing, underwriting, claims management and multi-channel management. Specialty lines is another key avenue of growth where
we can leverage our expertise and leading edge customer experience.
On November 18, we announced that Intact together with Tryg has reached an agreement to acquire RSA. Following the transaction, Intact will
retain RSA's Canadian, UK and International operations, Tryg will retain RSA's Swedish and Norwegian businesses, and Intact and Tryg will co-
own RSA's Danish business. See Section 2 – Acquisition of RSA’s Canadian, UK and International operations.
The acquisition opens up a series of opportunities such as expanding our leadership position in Canada and bolsters our North American specialty
lines with international expertise. On the other hand, the large scale of this acquisition and the entry into new international markets brings a set of
risks. Failure on our part to manage the acquisitions could have a significant adverse effect on our business, results of operations and financial
condition. 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 RSA Acquisition, we are faced with a number of risks including,
but not limited to:
•
•
inability to achieve expected synergies;
changes in laws or regulations, including those adopted in response to the COVID-
19 crisis that would, for example, require insurers to cover business interruption
claims irrespective of terms after policies have been issued, and could result in an
unexpected increase in the number of claims and have a material adverse impact
on our results;
COVID-19 related coverage issues and claims, including certain class actions and
related defense costs could negatively impact our claims reserves;
unfavourable capital market developments or other factors, including the impact of
the COVID-19 pandemic and related economic conditions, which may affect the
Company's investments, floating rate securities and funding obligations under its
pension plans; and
the additional challenge of integrating new colleagues and systems during a
pandemic.
•
•
•
In addition to the potential financial impact, our reputation may be adversely affected
if such an event were to occur. Consequently, it may impact the cost or availability of
capital for future acquisitions.
We are a proven industry consolidator with 17 successful
P&C acquisitions since 1988, including the cross-border
acquisition of Intact U.S. (One Beacon) in 2017. We have
a dedicated corporate development team that follows a
rigorous selection process. Our approach to conducting
due diligence to assess all the risks and opportunities is
well developed and 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. In addition, we
have a proven process of operational integration that will
be deployed for the RSA Acquisition.
INTACT FINANCIAL CORPORATION 75
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Cyber security failure
Risk we are facing
Operational risk
Information technology and cyber security risks continue to be key risks for many companies. 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 have significantly accelerated in the context of the COVID-19 crisis. Cyber criminals often exploit
fear and uncertainty from the pandemic and with people working almost entirely remotely this brings a new vector of potential attacks.
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. Ransomware attacks have particularly
accelerated 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.
Working-from-home environment from the pandemic
also increases the level of some risks. 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
to
their insurance policies, provide
information on
quotes
insurance products or enable
customers to report claims electronically.
real-time access
for new
These events and attacks may lead to wide ranging
consequences including:
•
loss, which also
includes
lost
remediation costs, and costs
financial
productivity,
associated with potential legal action;
regulatory action, which may include regulatory
fines and/or increased scrutiny by government;
and
reputational damage such as lost consumer
confidence and lower customer retention.
•
•
To ensure the security and resilience of our systems, the safeguard of our confidential
information and the integrity of our information and databases, dedicated teams plan, test
and execute our continuity and security plans. This includes threat and vulnerability
assessments and the implementation of appropriate mitigation actions. Our security teams
constantly monitor our systems and are ready to intervene if an incident occurs. To ensure
the expected levels of service are delivered by our critical third-party service providers,
service level agreements are signed and added to relevant contracts. In the context of
work-from-home, there was also an acceleration of investment and initiatives related to
data loss protection.
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.
We periodically benchmark our information security practices to assess areas of our cyber
security program that may require additional effort and to ensure we learn from industry
leading practices. In 2020, we conducted a benchmarking exercise that confirmed
progress on our cyber security plan and continued improvement in the maturity of our
cyber defense.
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. During 2020, cyber security awareness was continually provided to our
employees, with reminders around information security and privacy best practices in a
work-from-home context.
In 2020, we renewed our cyber insurance to continue to mitigate a portion of the financial
impact in the event of a major cyber security incident affecting our operations.
76 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Failure of a major technology initiative
Risk we are facing
Operational risk
To maintain our performance levels in a world of digitalization, we are required to regularly modernize and enhance our systems. Often significant
time and investment is required for accomplishing these projects. Any unplanned delays, unforeseen costs, or unsuccessful execution of such projects
could lead to a significant decline in service levels, impact employee morale negatively and reduce our competitiveness. There is no assurance that
we will succeed in meeting our objectives for these projects.
Potential impact
Our technology strategy may take too long to execute or may not be adequate to maintain
a competitive advantage. The complexity and interdependence of our infrastructure and
applications may lead to higher costs and more errors. Implementation of new technology
may introduce more complexity in the interim prior to simplification after decommissioning
older systems.
We could decide to abandon one or more of our technology initiatives resulting in a
material write down.
How we manage this risk
Senior management provides careful oversight and
ensures that proper funding and resources are allocated
to our key projects. Risk assessments and real-time
internal audits are regularly conducted to identify
potential areas for remediation or the necessity for
additional controls. A dedicated committee ensuring
proper focus is devoted to major technology projects.
Inability to contain fraud and abuse
Risk we are facing
Operational risk
As a P&C 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. An economic
downturn, like the one brought on by the pandemic, could increase pressure on individuals and result in increased fraud and abuse. The work-from-
home context brings new challenges to mitigating this risk.
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. Assessments
were performed during 2020 to ensure that our control environment remains effective in a work-
from-home context.
We are enhancing our fraud detection analytics which are used by our claims teams to detect
potential fraud and flag cases for further investigation. In Canada, we also have national
investigative services and a number of investigative tools to help detect and root out fictitious
losses or injuries, staged accidents and material misrepresentation or exaggeration of loss
amounts or personal injury.
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.
INTACT FINANCIAL CORPORATION 77
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
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.
In the current context, there is an increased risk of negative publicity related to the perception of not providing sufficient relief in Personal automobile
or not providing affordable insurance.
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 industry as well as increased
litigation. Such events may further increase
our costs of doing business and adversely
affect our profitability by impeding our ability
to market our products and services,
requiring us to change our products or
services or increasing the regulatory burdens
under which we operate. The periodic
negative publicity of insurance and related
businesses may negatively
impact our
financial results and financial condition.
Social media could amplify the impact of a
reputational issue. It could result in further
damage to our reputation and impair our
future growth prospects.
Despite the challenging environment in 2020,
there was a low level of unfavourable publicity
for Intact.
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 and Operational Risk Committee regularly monitors our operations
to identify situations that can negatively affect customer satisfaction.
We also invest in digital tools to enhance the customer experience and reduce the possibility of
negative publicity arising from interactions with our customers.
Early in the pandemic, a series of strong relief measures have been implemented and clearly
communicated to provide maximum relief to our customers. We have helped more than 1.2 million
customers through our flexible payment options and premium adjustment measures, resulting in
$530 million in relief, including $50 million of targeted relief to approximately 100,000 small
business customers.
78 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Social unrest risk
Risk we are facing
Insurance risk
Social unrest was on the rise this year sparking movements to address police brutality and systemic racism both in North America and around the
world. The list of potential catalysts for social unrest has also been increasing: COVID-19 pandemic, movements for social justice, U.S. elections,
the economic downturn and income inequality, and climate change inaction could all spark further unrest and violence.
Potential impact
How we manage this risk
Social unrest events in high-density areas could
result in material losses on our automobile and
property business.
We stress tested the company against a severe social unrest scenario. We concluded that Intact
has sufficient capital to absorb losses despite a material decline in underwriting income and lower
regulatory capital levels prior to management actions. A series of actions were identified to help
mitigate the impact of this risk including, but not limited to:
Social unrest could also disrupt our operations
and affect the security of our employees.
•
•
preparing to ensure operations remain resilient; and
developing a framework to monitor the evolution of this risk.
Third party risk
Risk we are facing
Operational risk
The acceleration of digitalization has increased the reliance on third parties and increases the risk of disruption to our operations. Work-from-home
context has increased our reliance on critical utilities/communications infrastructures. Moreover, the economic downturn increases supplier failure
risk, adds pressure on supply chain quality of service and capacity.
Potential impact
How we manage this risk
Our third parties may face internal and external
incidents
the
confidentiality of our information and/or limit the
service level.
compromise
could
that
Widespread power grid, internet or phone failure
could limit our operations, impact our customer
support and lead to substantial reputational
damages. Depending on the length of the failure,
important opportunity costs could also be
incurred.
We manage third party risk along the life cycle of our arrangements, i.e. from planning, due
diligence, contractual commitment, ongoing management and termination. We have deployed
tools to help assessing how third parties manage our information and what controls they have in
place. Levels of monitoring and mitigation are directly proportional to the level of criticality of each
third party.
In the context of the pandemic, we have increased the level of monitoring of our most critical third
parties and our supply chain providers. We are currently reviewing our operational resilience
against potential outages of critical infrastructure.
Our cyber insurance could also mitigate a portion of the financial impact in the event of a third-
party incident affecting our operations.
INTACT FINANCIAL CORPORATION 79
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
The emergence of autonomous vehicles
Risk we are facing
Emerging risk
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. We devote an important 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.
Intact ventures continue to invest in a self-driving start-ups such as Voyage Auto and Gatik AI, to
better position the Company as transportation evolves and insurance needs change.
We participate in the development of recommendations by the Insurance Bureau of Canada related
to the regulation of automated vehicles.
31.7 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, including lawsuits, regulatory
examinations, investigations, audits and reassessments by various parties including customers, suppliers, and government regulatory
agencies and authorities, relating to our current and past business operations. Plaintiffs may also continue to bring new types of legal
claims against us. Current and future court decisions and legislative activity may increase our exposure to these types of claims.
Multiparty or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards.
The loss of even one of these claims, if it resulted in a significant damage award or a judicial ruling that was otherwise detrimental,
could have a material adverse effect on our results of operations and financial condition. Unfavourable claim rulings may render fair
settlements more difficult to reach. We cannot determine with any certainty what new theories of recovery may evolve or what their
impact may be on our businesses.
Reinsurance risk
We use reinsurance to help manage our exposure to insurance risk, including major catastrophe events. The availability and
cost of reinsurance is subject to prevailing market conditions, both in terms of price and available capacity, which can affect
our premium volume, profitability and regulatory capital position. Both worldwide and Canadian catastrophe losses have an impact on
the reinsurance market in North America. 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. Communicable disease exclusions is an
example of protection that has recently been added by most of our reinsurers. 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.
80 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
People risk
Our success has been, and will continue to be, dependent on our ability to retain the services of key employees and to attract
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.
As the COVID-19 crisis continues to evolve, the extent to which it may impact our employees will depend on future developments
including the effectiveness of measures to contain the spread of the virus, such as the retightening of lockdown measures, and the
effective roll out of vaccinations.
Employee development, onboarding or knowledge transfer can prove challenging in the work-from-home environment. A stretch in
resources and increased pace of some projects could lead to further employee fatigue, mental health issues, as well as loss of staff
through disability, extended leaves, early retirement and turnover. High levels of employee engagement and robust human resource
programs to support our employees helps mitigate this risk.
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. COVID-19) 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 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 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.
Our operational resilience has increased during the COVID-19 pandemic and a series of lessons learned were integrated. Further
efforts in this regard will be taken in 2021.
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 25.2 –
Managing leverage for more details on ratings.
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.
INTACT FINANCIAL CORPORATION 81
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Limit on dividend and capital distribution risk
As a holding company, IFC is a legal entity and is separate and distinct from its operating subsidiaries, most of which are regulated
insurance companies. While no regulatory approval is required for dividend payments from the regulated insurance companies, 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. Our regulated subsidiaries in the U.S. are also subject to limitations on capital distributions as set out
in applicable regulations. 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.
As a result of the COVID-19 pandemic and financial market turbulence, many regulators (including Canada) have increased scrutiny
on upstream dividend payments. In early 2020, we stress tested our ability to maintain dividend payments at the holding company level
even if upstream dividends were severely restricted. The outcome of these stress tests was satisfactory.
Deferred tax assets
We have a deferred tax asset related to net operating loss carry forwards and tax credit carry forwards, that are subject to carry forward
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.
31.8 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 Financial Condition Testing (formerly Dynamic Capital Adequacy Testing) performed
annually by the Appointed Actuary (see Section 25 – Capital management for details).
Our 2020 ORSA revealed that the financial resources of our insurance subsidiaries are sufficient to meet policyholder obligations after
adverse situations at a confidence level of 99.5% Value-at-Risk (VaR) 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.
The ORSA process is well integrated into our operations and influences the definition of our corporate risk tolerance, the target levels
of capital by jurisdiction and in aggregate, and underwriting profit targets by line of business.
82 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Off-balance sheet arrangements
32.1 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 Consolidated financial statements, with a fair value of $1,054 million as
at December 31, 2020 ($1,286 million as at December 31, 2019).
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 $1,108 million as at December 31, 2020 ($1,353 million as at December 31, 2019).
INTACT FINANCIAL CORPORATION 83
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
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 34 – 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)
Debt securities3,4
Net claims liabilities
Defined benefit pension plan obligation, net of
related debt securities
Currency risk5
Strengthening of CAD by 10% vs all currencies
International securities
Book value of foreign operations
Currency derivatives related to RSA Acquisition6
Strengthening of GBP by 10% vs EUR
2020
2019
Estimated split
OCI
BVPS Canada
U.S.
Net
income
OCI BVPS
(221)
(1.47)
73%
27%
3
(241)
(1.66)
(68)
(0.39)
100%
-
11
(64)
(0.37)
Net
income
11
12
(198)
(197)
(2.76)
200
-
1.40
66%
87%
34%
13%
(182)
(170)
(2.46)
184
-
1.29
-
130
0.91
100%
-
6
-
-
(196)
(283)
-
(1.33)
(1.98)
-
100%
-
-
-
111
0.78
-
(20)
(0.14)
- 100%
32
(236)
(1.43)
-
-
-
-
-
-
-
-
Currency derivatives related to RSA Acquisition
(52)
-
(0.36)
100%
1 Including the impact of common shares related to the defined benefit pension plan. Net of any equity hedges, including the impact of any impairment.
2 Including the impact on related embedded derivatives.
3 Excludes the impact of debt securities related to the defined benefit pension plan.
4 Interest rate sensitivity is based on the fixed-income portfolio, which comprises approximately 50% of both government-related and corporate-related
securities.
5 After giving effect to forward-exchange contracts.
6 Effective January 18, 2021 the change in fair value of £2.1 billion ($3.6 billion) derivatives will be recognized in OCI, therefore the above table excludes
losses of $22 million incurred in 2021 before that date. Refer to Note 8.3 – Currency hedging in relation with the RSA Acquisition of our
Consolidated financial statements for more details.
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, spread 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 sales 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.
84 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
ADDITIONAL INFORMATION
Financial KPIs and definitions
34.1 Our financial KPIs
Our most relevant key performance indicators are outlined in the table below. See Section 36 – Non-IFRS financial measures for
the reconciliation to the most comparable IFRS measures.
Growth
DPW growth
DPW growth in constant currency
2020
9.1%
8.7%
2019
2018
2017
2016
9.5%
9.1%
15.6%
15.4%
5.5%
5.5%
4.8%
4.8%
Underlying current year loss ratio
55.5%
62.4%
63.8%
64.5%
64.8%
Underwriting
performance
Claims ratio
Expense ratio
Combined ratio
57.8%
66.0%
65.3%
65.4%
64.9%
31.3%
29.4%
29.8%
28.9%
30.4%
89.1%
95.4%
95.1%
94.3%
95.3%
Underwriting income
Net investment income
Distribution EBITA and Other
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
1,227
577
275
1,471
9.92
18.4%
12.8%
15.0%
7.20
8.48
58.79
224%
469%
2,729
465
576
209
905
6.16
12.5%
10.0%
11.4%
5.08
5.75
53.97
198%
457%
1,222
474
541
175
839
5.74
12.1%
9.9%
11.8%
4.79
5.70
48.73
201%
377%
1,333
486
448
158
771
5.60
12.9%
12.8%
13.0%
5.75
5.82
48.00
205%
459%
1,135
375
429
134
660
4.88
12.0%
9.6%
11.0%
3.97
4.53
42.72
218%
n/a
970
Debt-to-total capital ratio
24.1%
21.3%
22.0%
23.1%
18.6%
INTACT FINANCIAL CORPORATION 85
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
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 35 – Non-operating results
Q4-2020
Q4-2019
Change
2020
2019
Change
Net gains (losses)
Gains (losses) excluding FVTPL bonds
(Table 11)
Realized and unrealized gains (losses) on
FVTPL bonds
Positive (negative) impact of MYA on underwriting
Amortization of intangible assets recognized in
business combinations
Acquisition, integration and restructuring costs
Non-operating pension expense
Underwriting results of exited lines1
Other
53
(7)
(23)
(40)
(53)
(13)
(39)
(3)
16
(47)
35
(34)
(31)
(12)
(34)
(2)
Non-operating gains (losses)
(125)
(109)
Income tax recovery (expense) on the above items
Deferred income tax benefit recognized2
After-tax non-operating gains (losses)
34
2
(89)
24
22
(63)
37
40
(58)
(6)
(22)
(1)
(5)
(1)
(16)
10
(20)
(26)
(55)
50
(105)
237
(315)
(154)
(115)
(53)
(62)
(18)
(535)
144
2
115
(125)
(107)
(57)
(48)
(66)
(19)
(257)
84
22
122
(190)
(47)
(58)
(5)
4
1
(278)
60
(20)
(389)
(151)
(238)
1 Included an underwriting loss of $5 million in Q4-2020 and 2020 relating to the BC exit, effective in Q4-2020.
2 See Note 24 – Income taxes of the Consolidated financial statements for details.
• Net 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. MYA is included in Net claims incurred in our consolidated statements of income.
• Acquisition, integration and restructuring costs include items such as acquisition-related expenses, severances, retention
bonuses, system integration costs, changes in the fair value of the contingent considerations, as well as expenses related to the
implementation of significant new accounting standards.
•
The non-operating pension expense represents the difference between the asset return (interest income on plan assets)
calculated using the expected return on plan assets versus the IFRS discount rate. The expected return better reflects our operating
performance given our internal investment management expertise and the composition of our pension asset portfolio.
• Underwriting results of exited lines included the results of the U.S. Commercial’s business Programs, Architects and Engineers,
Healthcare (effective July 1, 2019), as well as BC auto exit (effective in Q4-2020).
86 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
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. They 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.
The non-IFRS financial measures used in this MD&A include measures related to:
• Our underwriting performance (see Section 36.1): Change or growth in constant currency, DPW, underwriting income (loss),
combined ratio, NEP, total net claims, underlying current year loss ratio, PYD and underwriting expenses.
• Our consolidated performance (see Section 36.2): Distribution EBITA and Other, finance costs, other income (expense), total
income taxes, income before income taxes, NOI, NOIPS, OROE, adjusted net income, AEPS and AROE.
36.1 Underwriting performance
Growth or change in constant currency
• Represents the growth or change between two figures, excluding the impact of foreign currency fluctuations. This is calculated by
applying the exchange rate in effect for the current year to the results of the previous year. We believe that this measure enhances
the analysis of our results with comparative periods with respect to the KPI of our U.S. segment.
DPW
• Represents the total amount of premiums for new and renewal policies written during the reporting period, normalized for the effect
of multi-year policies, excluding industry pools, fronting and exited lines. We consider that this measure better reflects the operating
performance of our core operations, and that it is the most useful measure in terms of measuring growth, volume of business and
market share. This measure matches 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.
Table 36 – Reconciliation of DPW and DPW growth to DPW, as reported under IFRS
DPW, as reported under IFRS
Remove: impact of industry pools and fronting
Remove: DPW of exited lines
DPW (full term)
Add impact of the normalization for multi-year policies
DPW, as reported in the MD&A
DPW growth
DPW growth (in constant currency)
Underwriting income (loss)
Q4-2020
Q4-2019
2020
2019
2,930
(41)
(17)
2,872
-
2,872
8%
8%
2,696
(39)
(10)
2,647
23
12,143
(119)
(21)
12,003
36
2,670
12,039
12%
12%
9%
9%
11,019
(141)
(29)
10,849
200
11,049
9%
9%
Table 37 – Reconciliation of underwriting expenses to underwriting expenses, as reported under IFRS
Underwriting income, as reported under IFRS1 (Table 41)
Remove: underwriting results of The Guarantee reported in Other income
Sub total (Table 41)
Remove: impact of MYA on underwriting results
Remove: non-operating pension expense
Remove: underwriting loss of exited lines
Underwriting income (loss), as reported in the MD&A
NEP, as reported in the MD&A (Table 38)
Combined ratio
Q4-2020
Q4-2019
2020
2019
340
-
340
23
13
39
415
225
(7)
218
(35)
12
34
229
797
-
797
315
53
62
1,227
233
(7)
226
125
48
66
465
2,879
85.6%
2,692
11,220
91.5%
89.1%
10,211
95.4%
1 Comprised of the following captions in the Consolidated statements of income: Net earned premiums, Other underwriting revenues, Net claims incurred
and Underwriting expenses.
INTACT FINANCIAL CORPORATION 87
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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 subject to volatility, and as such, excluding them provides clearer insight into our
analysis of current year performance.
Table 38 – Reconciliation of NEP before reinstatement premiums to NEP and of current year claims to net claims incurred, as reported under IFRS
Q4-2020
Q4-2019
2020
2019
NEP, as reported under IFRS
Remove: NEP of The Guarantee included in Other income
Remove: NEP of exited lines1
NEP, as reported in the MD&A
Remove: reinstatement premiums ceded (recovered)
NEP, before reinstatement premiums
Net claims incurred, as reported under IFRS
Remove: impact of MYA on underwriting results
Remove: adjustment for non-operating pension expense
Remove: net claims of exited lines
Remove: net claims of The Guarantee
Total net claims, as reported in the MD&A
Remove: current year CAT claims
Remove: PYD
Current year claims (excluding CATs and PYD)
NEP, before reinstatement premiums
2,899
-
(20)
2,879
-
2,879
1,664
(23)
(5)
(51)
-
1,585
(74)
28
1,539
2,879
2,730
(32)
(6)
2,692
-
2,692
1,700
35
(5)
(37)
(10)
1,683
(115)
39
1,607
2,692
11,241
-
(21)
11,220
1
11,221
6,883
(315)
(20)
(71)
-
6,477
(359)
100
10,275
(32)
(32)
10,211
-
10,211
6,989
(125)
(20)
(88)
(10)
6,746
(366)
-
6,218
11,221
6,380
10,211
Underlying current year loss ratio
CAT loss ratio (including reinstatement premiums)
(Favourable) unfavourable PYD ratio (see Table 39 below) 2
Claims ratio
62.4%
3.6%
-%
66.0%
1 Included the impact of the loss portfolio transfer and prospective quota share reinsurance contract in Q4-2019 (see Section 23.2 – Reinsurance for
59.7%
4.3%
(1.4)%
62.6%
55.5%
3.2%
(0.9)%
57.8%
53.5%
2.6%
(1.0)%
55.1%
details).
2 Calculated using NEP, as reported in the MD&A.
Prior year claims development (PYD)
Table 39 – Reconciliation of PYD to prior year claims development, as reported under IFRS
(Favourable) unfavourable PYD, as reported under IFRS
Remove: unfavourable PYD of exited lines
(Favourable) unfavourable PYD, as reported in the MD&A
NEP, as reported in the MD&A
(Favourable) unfavourable PYD ratio
Underwriting expenses
Q4-2020
Q4-2019
2020
11
(39)
(28)
2,879
(1.0)%
(29)
(10)
(39)
2,692
(41)
(59)
(100)
11,220
(1.4)%
(0.9)%
Table 40 – Reconciliation of underwriting expenses to underwriting expenses, as reported under IFRS
Underwriting expenses, as reported under IFRS
Net with: other underwriting revenues
Remove: adjustment for non-operating pension expense
Remove: underwriting expenses of exited lines
Remove: underwriting expenses of The Guarantee
Underwriting expenses, MD&A basis
NEP, as reported in the MD&A
Expense ratio
88 INTACT FINANCIAL CORPORATION
Q4-2020
Q4-2019
932
(36)
(8)
(9)
-
879
2,879
30.5%
837
(32)
(7)
(3)
(15)
780
2,692
28.9%
2020
3,696
(135)
(33)
(12)
-
3,516
11,220
31.3%
2019
36
(36)
-
10,211
-
2019
3,172
(119)
(28)
(10)
(15)
3,000
10,211
29.4%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
36.2 Consolidated performance
Distribution EBITA and Other, finance costs, other income (expense) and total income taxes
• Distribution EBITA and Other is the measure used to report the performance of our distribution channel, which includes operating
income before interest and taxes from our consolidated brokers (including BrokerLink) and our broker associates, Frank Cowan (a
specialty MGA in Canada) and On Side (a Canadian restoration firm).
• Other income (expense) include general corporate expenses and income, consolidation adjustments, regulatory fees related to our
public company status, special projects and other operating items.
• Finance costs (MD&A) and income taxes (MD&A) include finance costs and income taxes (in their respective captions) from our
broker associates, which are accounted for using the equity method under IFRS.
Table 41 – Reconciliation of Distribution EBITA and Other, Finance costs and other income (expense) with the Consolidated financial statements
As presented in the Financial statements
For the quarter ended December 31, 2020
Other revenues
Share of profits from invest. in ass. & JV
Other expenses
Finance costs
Underwriting income
Income tax recovery (expense)
Total, as reported in MD&A
For the quarter ended December 31, 2019
Other revenues
Share of profits from invest. in ass. & JV
Other expenses
Finance costs
Underwriting income1 (Table 37)
Income tax recovery (expense)
Total, as reported in MD&A
For the years ended December 31, 2020
Other revenues
Share of profits from invest. in ass. & JV
Other expenses
Finance costs
Underwriting income
Income tax recovery (expense)
Total, as reported in MD&A
For the years ended December 31, 2019
Other revenues
Share of profits from invest. in ass. & JV
Other expenses
Finance costs
Underwriting income1 (Table 37)
Income tax recovery (expense)
Total, as reported in MD&A
MD&A Captions
Pre-tax
Distribution
EBITA and
Other
Finance
costs
Other
income
(expense)1
Total
income
taxes
Non-
operating
losses2
Operating
income
Total F/S
caption
82
32
(42)
-
-
-
72
80
19
(54)
-
-
-
45
309
121
(155)
-
-
-
275
196
97
(84)
-
-
-
209
-
(3)
-
(29)
-
-
(32)
-
(2)
-
(26)
-
-
(28)
-
(11)
-
(115)
-
-
(126)
-
(10)
-
(110)
-
-
(120)
9
-
(7)
-
-
-
2
5
-
(14)
-
7
-
(2)
18
-
(55)
-
-
-
(37)
18
-
(48)
-
7
-
(23)
-
(5)
-
-
-
(92)
(97)
-
(3)
-
-
-
(34)
(37)
-
(22)
-
-
-
(277)
(299)
-
(17)
-
-
-
(79)
(96)
-
(7)
(36)
-
-
-
-
(9)
(27)
-
-
-
-
(36)
(136)
-
-
-
-
(39)
(87)
-
-
-
-
-
-
-
340
-
-
-
-
-
218
-
797
-
-
-
-
226
-
91
17
(85)
(29)
340
(92)
85
5
(95)
(26)
225
(34)
327
52
(346)
(115)
797
(277)
214
31
(219)
(110)
233
(79)
1 Other income included underwriting results of the Guarantee from December 2, 2019 (closing date) in 2019.
2 Comprised of $40 million relating to amortization of intangible assets recognized in business combinations and $3 million to other non-operating results
for Q4-2020 ($34 million and $2 million respectively for Q4-2019) and $154 million and $18 million respectively for the full year 2020 ($107 million and
$19 million respectively for the full year 2019).
INTACT FINANCIAL CORPORATION 89
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Income before income taxes
•
Includes income taxes related to broker associates, which are accounted for net of tax under IFRS. This measure is better aligned
with how management analyzes the operating performance of our broker associates (recorded in distribution EBITA and Other),
which is on a pre-tax basis.
Table 42 – Reconciliation of income before income taxes under IFRS to income before income taxes (MD&A)
Income before income taxes, as reported under IFRS
Add: share of income tax expense of broker associates
Income before income taxes, as reported in the MD&A
Income tax benefit (expense), as reported in the MD&A (table 34)
Net income
Effective income tax rate, as reported in the MD&A
ROE
Q4-2020 Q4-2019
470
5
475
(97)
274
3
277
(37)
378
20.4%
240
13.4%
2020
1,359
22
1,381
(299)
1,082
21.7%
2019
833
17
850
(96)
754
11.3%
• Excludes the dividends declared on preferred shares. Average common shareholder’s equity is the mean of the shareholder’s
equity at the beginning and the end of the period, adjusted for significant capital transactions, if appropriate.
Table 43 – Reconciliation of ROE to net income
Net income
Remove: preferred share dividends
Net income attributable to common shareholders
Net income attributable to common shareholders for the last 12 months
Average common shareholders’ equity
ROE for the last 12 months
Q4-2020
Q4-2019
378
(13)
365
1,030
8,064
12.8%
240
(11)
229
709
7,057
10.0%
2020
1,082
(52)
1,030
2019
754
(45)
709
NOI, NOIPS and OROE
• Exclude non-operating results (see Section 35 – Non-operating results for details).
Table 44 – Reconciliation of NOI, NOIPS and OROE to net income
Net income
Remove: income tax expense (benefit), as reported in the MD&A (table 35)
Remove: non-operating losses (gains)
Pre-tax operating income
Operating income tax benefit (expense)
NOI
Remove: 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 for the last 12 months
Average common shareholders’ equity, excluding AOCI
OROE for the last 12 months
Q4-2020
Q4-2019
378
97
125
600
(133)
467
(13)
454
143.0
3.18
1,419
7,697
18.4%
240
37
109
386
(83)
303
(11)
292
140.4
2.08
860
6,874
12.5%
2020
1,082
299
535
1,916
(445)
1,471
(52)
1,419
143.0
9.92
2019
754
96
257
1,107
(202)
905
(45)
860
139.5
6.16
90 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(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 acquisition and
integration costs. We believe that these acquisition-related items are not appropriate in assessing our performance compared to
our peers.
Table 45 – Reconciliation of AEPS and AROE to net income
Q4-2020
Q4-2019
Net income
Adjustments, net of tax
Remove: amortization of intangibles recognized in business combinations
Remove: acquisition and integration costs
Remove: impact of deferred income tax benefit recognized
Remove: net gain on currency derivative economic hedges related to the
RSA Acquisition
Remove: foreign currency gain on an intercompany loan
Remove: impact of tax adjustments on prior-year acquisition-related items
Adjusted net income
Remove: 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 for the last
12 months
Average common shareholders’ equity
AROE for the last 12 months
378
30
41
(2)
(16)
-
2
433
(13)
420
143.0
2.94
1,213
8,064
15.0%
240
26
22
(22)
-
(6)
-
260
(11)
249
140.4
1.77
802
7,057
11.4%
2020
1,082
117
79
(2)
(16)
-
5
1,265
(52)
1,213
143.0
8.48
2019
754
81
40
(22)
-
(6)
-
847
(45)
802
139.5
5.75
INTACT FINANCIAL CORPORATION 91
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Accounting and disclosure matters
Reference to our Consolidated financial statements
Significant accounting
judgments, estimates and
assumptions
Adoption of new
accounting standards
Related-party
transactions
Standards issued
but not yet effective
Note 3
Note 4
Note 30
Note 33
37.1 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
COVID-19 pandemic
Business combinations
Valuation of claims liabilities
Impairment of goodwill and intangible assets
37.2 Related-party transactions
Note
Description
Note 3.2
Note 5.2
Note 11.3
Note 15.2
Impairment of financial assets
Measurement of income taxes
Valuation of DB obligation
Note
Note 23.2
Note 24.3
Note 27.6
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 pension 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 pension plans comprise the contributions paid to these plans.
See Note 30 – Related-party transactions to the Consolidated financial statements for additional information.
92 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
37.4 Financial instruments
An important portion of our Consolidated balance sheets is composed of financial instruments. For additional information, refer to
our Consolidated financial statements.
Reference to our Consolidated financial statements
Significant accounting policies
Derivative financial instruments
Fair value measurement
Note 2
Note 7
Note 9
37.5 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, 2020. 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.
37.6
Internal controls over financial reporting
Management has designed and is responsible for maintaining adequate internal control over financial reporting (“ICFR”) to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with IFRS.
Management has evaluated the design and operating effectiveness of its ICFR as defined in NI 52-109. The evaluation was based on
the criteria established in the “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). This evaluation was performed by the Chief Executive Officer and the Chief Financial Officer of the
Company with the assistance of other Company Management and staff to the extent deemed necessary. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the ICFR were appropriately designed and operating effectively,
as at December 31, 2020.
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 2020 that have materially affected, or are reasonably likely to materially
affect, the Company’s ICFR.
INTACT FINANCIAL CORPORATION 93
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Shareholder information
38.1 Authorized share capital and outstanding share data
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
Table 46 – Outstanding share data (number of shares)
As at February 8, 2020
Common shares1
Class A
Series 1 preferred shares
Series 3 preferred shares
Series 4 preferred shares
Series 5 preferred shares
Series 6 preferred shares
Series 7 preferred shares
Series 9 preferred shares¹
143,018,134
10,000,000
8,405,004
1,594,996
6,000,000
6,000,000
10,000,000
6,000,000
¹ Series 9 preferred shares were issued on February 18, 2020 (See Section 25 – Capital management).
Refer to our Annual Information Form for more detailed information on the rights of shareholders and to Note 20 – Common
shares and preferred shares to the Consolidated financial statements for additional information.
38.2 Quarterly dividends declared on common shares and preferred shares
Table 47 – Dividends declared per share
Common shares
Class A
Series 1 preferred shares
Series 3 preferred shares
Series 4 preferred shares (floating rate)
Series 5 preferred shares
Series 6 preferred shares
Series 7 preferred shares
Series 9 preferred shares
Q1-2021
0.83
0.21225
0.20825
0.1706925
0.325
0.33125
0.30625
0.3375
Q4-2020
0.83
0.21225
0.20825
0.1765225
0.325
0.33125
0.30625
0.3375
¹ On February 9, 2021, the Board of Directors approved the quarterly dividend for Q1-2021. See Section 25.6 - Increase common shareholder
dividends for more information.
94 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Selected annual and quarterly information
39.1 Selected annual information
Table 48 – Selected annual information
DPW
Total revenue1
Underwriting income2
Net income
EPS, basic and diluted (in dollars)
Cash dividends declared per share (in dollars)
Common shares
Class A
Series 1 Preferred Shares
Series 3 Preferred Shares
Series 4 Preferred Shares (floating rate)
Series 5 Preferred Shares
Series 6 Preferred Shares
Series 7 preferred shares
Series 9 preferred shares
1 Total revenue exclude other underwriting revenues and NEP of exited lines.
2 See Section 36 – Non-IFRS financial measures.
Table 49 – Selected annual information
As at December 31,
Investments
Total assets
Debt outstanding
Shareholders' equity
39.2 Selected quarterly information
Table 50 – Selected quarterly information1
2020
12,039
12,147
1,227
1,082
7.20
3.32
0.85
0.83
0.89
1.30
1.33
1.23
1.17
2020
20,630
35,119
3,041
9,583
2019
11,049
11,056
465
754
5.08
3.04
0.85
0.83
1.08
1.30
1.33
1.23
-
2019
18,608
32,292
2,362
8,747
2018
10,090
10,426
474
707
4.79
2.80
0.85
0.83
0.97
1.30
1.33
0.72
-
2018
16,897
28,461
2,209
7,810
DPW
Total revenue2
NEP
Current year CAT losses
Favourable PYD
Underwriting income
Combined ratio
Net investment income
Distribution EBITA and Other
NOI
Net income
Per share measures, basic and
diluted (in dollars)
NOIPS
EPS
Q4
2,872
3,120
2,879
74
(28)
415
85.6%
143
72
467
378
Q3
3,264
3,092
2,863
24
(17)
369
87.1%
143
81
411
334
Q2
3,382
2,939
2,712
124
(3)
284
89.5%
141
78
350
263
2020
Q1
2,521
2,996
2,766
137
(52)
159
94.3%
150
44
243
107
Q4
2,670
2,957
2,692
115
(39)
229
91.5%
142
45
303
240
Q3
3,012
2,775
2,581
53
(11)
198
92.3%
146
56
277
187
Q2
3,152
2,699
2,500
70
64
75
97.0%
148
72
212
168
2019
Q1
2,215
2,625
2,438
128
(14)
(37)
101.5%
140
36
113
159
3.18
2.55
2.78
2.25
2.35
1.74
1.61
0.66
2.08
1.63
1.91
1.26
1.44
1.13
0.73
1.06
1 See Section 36 – Non-IFRS financial measures.
2 Total revenue exclude other underwriting revenues and NEP of exited lines.
INTACT FINANCIAL CORPORATION 95
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
39.3 Seasonality of the P&C insurance business
The P&C insurance business is seasonal in nature. While NEP are generally stable from quarter to quarter, underwriting results are
driven by weather conditions which may vary significantly between quarters. In 2020, our underwriting performance was impacted by
the COVID-19 crisis, resulting overall in lower claims frequency despite $106 million of COVID-19 CAT losses in Canada and the U.S.,
of which $83 million was recorded in Q1-2020 and $23 million in Q4-2020.
The tables below present the unfavourable (favourable) seasonality indicators, in points of combined ratio, of the P&C Canadian
insurance business. For instance, Q1-2020 saw a higher combined ratio (including and excluding CAT losses) than the other quarters,
meaning that underwriting results were relatively less profitable in Q1-2020.
Table 51 – Seasonal indicator, including CAT losses
Q1
Q2
Q3
Q4
2020
2019
2018
2017
2016
5.9 pts
1.0 pts
(2.3) pts
(4.6) pts
7.1 pts
1.4 pts
(4.4) pts
(4.1) pts
4.7 pts
1.3 pts
(1.3) pts
(4.7) pts
4.1 pts
0.8 pts
(2.5) pts
(2.4) pts
(2.9) pts
4.1 pts
1.7 pts
(2.9) pts
Table 52 – Seasonal indicator, excluding CAT losses
Q1
Q2
Q3
Q4
2020
2019
2018
2017
2016
5.2 pts
(1.0) pts
0.1 pts
(4.3) pts
5.2 pts
2.5 pts
(2.6) pts
(5.1) pts
7.0 pts
(2.0) pts
(2.4) pts
(2.6) pts
3.7 pts
(0.5) pts
(3.2) pts
- pts
1.2 pts
(0.4) pts
(1.4) pts
0.6 pts
39.4 Expected release dates of our financial results
3-year
average
5-year
average
5.9 pts
1.2 pts
(2.7) pts
(4.4) pts
3.8 pts
1.7 pts
(1.8) pts
(3.7) pts
3-year
average
5-year
average
5.8 pts
(0.2) pts
(1.6) pts
(4.0) pts
4.5 pts
(0.3) pts
(1.9) pts
(2.3) pts
10-year
average
2.1 pts
1.0 pts
0.1 pts
(3.2) pts
10-year
average
3.8 pts
(0.7 pts)
(2.2) pts
(0.9) pts
Q1-2021
May 11, 2021
Q2-2021
July 27, 2021
Q3-2021
Q4-2021
November 9, 2021
February 8, 2022
96 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
Glossary and definitions
This icon represents data relevant to environmental, social and governance (ESG) disclosure, and its impact on our results where
applicable.
40.1 Glossary of abbreviations
AEPS
AFS
AMF
Description
Adjusted EPS
Available for sale
Autorité des marchés financiers
KPI
M&A
MCT
Description
Key performance indicator
Mergers and acquisitions
Minimum capital test (Canada)
AOCI
Accumulated OCI
MD&A
Management’s Discussion and Analysis
AROE
Adjusted ROE
BC
British Columbia
BVPS
Book value per share
Moody’s Moody’s Investor Service Inc.
MGA
MYA
Managing general agent
Market yield adjustment
CAD
Canadian Dollar
NAIC
National Association of Insurance Commissioners
CAGR
Compound annual growth rate
CAL
CAN
CAT
Company action level
Canada
Catastrophe
NEP
NOI
Net earned premiums
Net operating income
NOIPS
NOI per share
OCI
Other comprehensive income
DBRS
Dominion Bond Rating Services
OROE
Operating ROE
DKK (kr.)
Danish krone, Denmark’s official currency
OSFI
Office of the Superintendent of Financial Institutions
DPW
D&I
D&O
EPS
Direct premiums written
Diversity and Inclusion
Directors and Officers
P&C
P&E
Property & Casualty
Property and equipment
PTOI
Pre-tax operating income
Earnings per share to common shareholders PYD
Prior year claims development
Euro (€)
Currency of the European Union
RBC
Risk-based capital
E&O
F/S
Fitch
Errors and Omissions
Financial Statements
Fitch Ratings Inc.
FVTPL
Fair value through profit and loss
Repos
Repurchase agreements
ROE
S&P
UK
Return on equity
Standard & Poor’s
United Kingdom
GBP (£)
British pound sterling, UK’s official currency
U.S.
United States
IFRS
International Financial Reporting Standards
INTACT FINANCIAL CORPORATION 97
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
40.2 Definitions of our financial KPIs
Our most relevant key performance indicators are defined below. See Section 36 – Non-IFRS financial measures for the
reconciliation to the most comparable IFRS measures.
• AEPS and AROE are adjusted measures, as they exclude the after-tax impact of acquisition-related items, such as amortization
of intangible assets recognized in business combinations, as well as acquisition and integration costs.
• NOI, NOIPS and OROE are operating measures, as they exclude non-operating items detailed in Section 35 – Non-operating
results.
• EPS and ROE are IFRS measures, as their definition is determined in accordance with IFRS.
DPW growth
Growth
for a specific period
DPW for a specified period
–
DPW for the previous year
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
Total # for the previous year
Underwriting
income
for a specific period
Underlying current
year loss ratio
for a specific period
Underwriting
results
NEP 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 exited lines.
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)
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.
98 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
As detailed in Table 10 –
Net investment income
Distribution EBITA
and Other
for a specific period
Operating income excluding
interest and taxes related to our
distribution and supply chain
strategies.
Net investment
income
for a specific
period
PTOI
for a specific
period
As detailed in Table 1 –
Consolidated performance
Consolidated
performance
NOI
for a specific
period
As detailed in Table 44 –
Reconciliation of NOI, NOIPS and
OROE to net income
NOIPS
for a specific
period
NOI attributable to common
shareholders
WANSO5
OROE
for a 12-month
period
NOI attributable to common
shareholders
Average common shareholders’
equity2 (excluding AOCI)
ROE
for a 12-month
period
AROE
for a 12-month
period
Net income attributable to
common shareholders3
Average common shareholders'
equity4
Adjusted net income attributable
to common shareholders
Average common shareholders'
equity2
EPS
for a specific
period
As reported in the accompanying
Consolidated statements of
income
AEPS
for a specific
period
Adjusted net income attributable
to common shareholders
WANSO3
BVPS
as at the end of a
specific period
Common shareholders’ equity6
Number of common shares
outstanding at the same date
Total capital margin
as at the end of a
specific period
Financial
strength
Aggregate of capital in excess of
company action levels in
regulated entities (165% MCT,
200% RBC) plus available cash
and investments in unregulated
entities.
Total debt outstanding
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
ratio
as at the end of a
specific period
Sum of the total shareholders’
equity4 and total debt
outstanding as at the same date
3 Net income is determined in accordance with IFRS.
4 Average shareholders’ equity is the mean of shareholders’ equity at the beginning and the end of the period, adjusted on a prorata basis (number of
days) for significant capital transactions, if appropriate. Shareholder’s equity is determined in accordance with IFRS.
5 Weighted-average number of common shares outstanding on a daily basis during the same period.
4 Shareholder’s equity is determined in accordance with IFRS.
INTACT FINANCIAL CORPORATION 99
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2020
(in millions of Canadian dollars, except as otherwise noted)
40.3 Definitions of selected key terms used in our MD&A
• 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 Section 35 – Non-operating results for details on exited lines and
Table 36 for the reconciliation to DPW, as reported under IFRS.
• Unless otherwise noted, all underwriting results and related ratios exclude the MYA, as well as the results of exited lines, including
those of our BC Auto effective in Q4-2020, with no restatement of comparatives. The expense and general expense ratios are
presented herein net of other underwriting revenues.
• 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.) before reinsurance related to a single event (referred to as the “CAT threshold”), and can either be weather-related or
not weather-related (‘other than weather-related’).
• 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.
• Non-CAT weather-related losses represent claims which we attribute to weather conditions. We estimate the impact of weather on
our results by matching increases in claims frequency with specific weather events, and also by considering the underlying cause
of claims.
• 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
(CALs) in regulated entities plus available cash and investments in unregulated entities. The CAL is 165% MCT for most Canadian
insurance subsidiaries effective April 1, 2020 and going forward (previously 170% MCT) and 200% RBC and other CALs in other
jurisdictions.
100 INTACT FINANCIAL CORPORATION
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2020
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, management 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 system of internal controls are
reviewed and evaluated on an ongoing basis by management and the Company’s internal auditors.
The Company’s Board of Directors, acting through the Audit Committee, which is composed entirely of independent 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 Appointed Actuaries
and the Chief Actuarial Officer, have full and unrestricted access to the Audit Committee, with and without the presence of
management.
The Appointed Actuaries, who are members of management, are appointed by the Board of the Company. The Appointed Actuaries
are responsible for discharging the various actuarial responsibilities and conduct a valuation of policy liabilities, in accordance with
generally accepted actuarial standards, reporting 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 Auditor’s Report to shareholders appears on the
following page.
February 9, 2021
Charles Brindamour
Chief Executive Officer
Louis Marcotte
Senior Vice President and
Chief Financial Officer
This page intentionally left blank
INTACT FINANCIAL CORPORATION
Consolidated financial statements
For the year ended December 31, 2020
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 – Status of the Company ........................................................................................................................ 8
Note 2 – Summary of significant accounting policies ......................................................................................... 8
Note 3 – Significant accounting judgments, estimates and assumptions ......................................................... 22
Note 4 – Adoption of new accounting standards .............................................................................................. 24
Note 5 – Business combinations ...................................................................................................................... 25
Note 6 – Investments ....................................................................................................................................... 27
Note 7 – Financial liabilities related to investments .......................................................................................... 29
Note 8 – Derivative financial instruments ......................................................................................................... 29
Note 9 – Fair value measurement .................................................................................................................... 31
Note 10 – Financial risk .................................................................................................................................... 32
Note 11 – Claims liabilities ............................................................................................................................... 39
Note 12 – Unearned premiums ........................................................................................................................ 42
Note 13 – Insurance risk .................................................................................................................................. 42
Note 14 – Reinsurance ..................................................................................................................................... 45
Note 15 – Goodwill and intangible assets ........................................................................................................ 47
Note 16 – Investments in associates and joint ventures ................................................................................... 49
Note 17 – Property and equipment ................................................................................................................... 49
Note 18 – Other assets and other liabilities ...................................................................................................... 50
Note 19 – Debt outstanding .............................................................................................................................. 51
Note 20 – Common shares and preferred shares ............................................................................................ 52
Note 21 – Capital management ........................................................................................................................ 55
Note 22 – Net investment income .................................................................................................................... 56
Note 23 – Net gains (losses) ............................................................................................................................ 57
Note 24 – Income taxes ................................................................................................................................... 58
Note 25 – Earnings per share........................................................................................................................... 60
Note 26 – Share-based payments .................................................................................................................... 61
Note 27 – Employee future benefits ................................................................................................................. 62
Note 28 – Segment information ........................................................................................................................ 68
Note 29 – Additional information on the Consolidated statements of cash flows.............................................. 70
Note 30 – Related-party transactions ............................................................................................................... 71
Note 31 – Commitments and contingencies ..................................................................................................... 71
Note 32 – Disclosures on rate regulation ......................................................................................................... 72
Note 33 – Standards issued but not yet effective ............................................................................................. 73
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
Premiums receivable
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
6
2020
2019
$
917 $
$
$
14
24
18
16
17
15
15
11
12
7
24
18
19
20
20
35,119 $
32,292
14,098
1,552
3,779
284
20,630
3,822
1,533
7
179
1,089
1,201
811
520
2,514
2,813
12,780 $
6,256
89
149
279
2,942
3,041
25,536
3,265
1,175
187
4,547
412
(2)
(1)
9,583
936
11,826
1,465
4,063
318
18,608
3,588
1,511
14
175
1,026
968
715
538
2,523
2,626
11,846
5,960
295
150
286
2,646
2,362
23,545
3,265
1,028
170
3,959
275
46
4
8,747
32,292
Total liabilities and shareholders’ equity
$
35,119 $
See accompanying notes to the Consolidated financial statements.
On behalf of the Board:
Charles Brindamour
Director
Jane E. Kinney
Director
INTACT FINANCIAL CORPORATION 3
Note
$
22
11
23
16
24
25
25
20
$
2020
12,143
(527)
11,616
(375)
11,241
135
358
242
327
12,303
(6,883)
(3,696)
(23)
182
52
(115)
(115)
(346)
1,359
(277)
$
1,082
$
$
$
143.0
7.20
3.32
$
$
2019
11,019
(443)
10,576
(301)
10,275
119
374
225
214
11,207
(6,989)
(3,172)
(23)
165
31
(110)
(57)
(219)
833
(79)
754
139.5
5.08
3.04
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
Acquisition, 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
2020
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
Foreign exchange gains (losses) on:
translation of foreign operations
net investment hedges
income tax benefit (expense)
Other, net of tax
Items that may be reclassified subsequently to net income
Net actuarial gains (losses) on employee future benefits
27
income tax benefit (expense)
Items that will not be reclassified subsequently to net income
Other comprehensive income (loss)
$
1,082
$
204
(41)
(27)
1
137
(105)
55
2
(48)
(5)
84
59
(15)
44
128
Total comprehensive income attributable to shareholders
$
1,210
$
See accompanying notes to the Consolidated financial statements.
2019
754
550
(127)
(34)
8
397
(217)
97
-
(120)
7
284
(71)
18
(53)
231
985
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)
Total
Balance as at January 1, 2020
$
3,265 $
1,028 $
170 $
3,959
$
325 $
8,747
Net income attributable to shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Preferred shares issued
Dividends declared on:
common shares
preferred shares
Share-based payments
20
20
20
26
-
-
-
-
-
-
-
-
-
-
-
147
-
-
-
-
-
-
-
-
-
17
1,082
44
1,126
-
(475)
(52)
(11)
-
84
84
-
-
-
-
1,082
128
1,210
147
(475)
(52)
6
Balance as at December 31, 2020
$
3,265 $
1,175 $
187 $
4,547 $
409 $
9,583
Balance as at January 1, 2019
Impact of the adoption of IFRS 16
$
2,816 $
-
1,028 $
-
149 $
-
Adjusted balance as at January 1, 2019
Net income attributable to shareholders
Other comprehensive income (loss)
Total comprehensive income (loss)
Common shares issued
Dividends declared on:
common shares
preferred shares
Share-based payments
20
20
20
26
2,816
-
-
-
449
-
-
-
1,028
-
-
-
-
-
-
-
149
-
-
-
-
-
-
21
3,776
(39)
3,737
754
(53)
701
-
(429)
(45)
(5)
$
41 $
-
41
-
284
284
-
-
-
-
7,810
(39)
7,771
754
231
985
449
(429)
(45)
16
Balance as at December 31, 2019
$
3,265 $
1,028 $
170 $
3,959
$
325 $
8,747
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 (used in) 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 provided by (used in) investing activities
Financing activities
Payment of lease liabilities
Payment of contingent consideration related to a business combination
Proceeds from (repurchase of) securities sold under repurchase agreements
Proceeds from issuance of debt, net of issuance costs
Repayment of debt
Borrowing (repayment) on the credit facility, net
Proceeds from issuance of common shares, net of issuance costs
Proceeds from issuance of preferred shares, net of issuance costs
Repurchase of common shares for share-based payments
Payment of dividends on common shares
Payment of dividends 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
Exchange rate differences on cash and cash equivalents
Note
2020
$
27
23
29
29
11
5
5
7
19
19
19
20
20
26
20
20
$
1,359
(348)
(51)
(7)
(182)
437
257
887
2,352
-
11,170
(13,262)
(187)
(163)
(2,442)
(59)
(94)
(20)
894
(47)
(165)
-
146
(49)
(475)
(52)
79
(11)
936
(8)
Cash and cash equivalents, end of year
$
917
$
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.
844
73
917
115
353
268
2019
833
(3)
(47)
(7)
(165)
363
125
191
1,290
(731)
10,432
(10,322)
(104)
(117)
(842)
(51)
-
20
266
(250)
145
444
-
(43)
(429)
(45)
57
505
442
(11)
936
269
667
936
117
384
246
INTACT FINANCIAL CORPORATION 7
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 1 – Status of the Company
Intact Financial Corporation (the “Company”), incorporated under the Canada Business Corporations Act, is domiciled in Canada and
its shares are publicly traded on the Toronto Stock Exchange (TSX: IFC). The Company has investments in wholly owned subsidiaries
which operate principally in the Canadian property and casualty (“P&C”) insurance market and offers specialty insurance products
mainly to small and midsize businesses in the United States. The Company, through its operating subsidiaries, principally underwrites
automobile, home, as well as commercial P&C contracts to individuals and businesses. Effective February 18, 2020, OneBeacon
Insurance Group Holdings, Ltd. was renamed Intact Insurance Group USA Holdings Inc. (referred to as “Intact U.S. (OneBeacon)”).
On November 18, 2020, the Company announced the proposed acquisition of RSA Insurance Group plc (“RSA”), referred to as the
"RSA acquisition". See Note 5.1 – Business combinations for more details.
These Consolidated financial statements include the accounts of the Company and its subsidiaries. The Company’s significant
operating subsidiaries are presented in Note 28 – Segment information.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
Note 2 – Summary of significant accounting policies
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 premiums receivable……………………………………………………………………………………. . 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……………………………………………………………………………………… .. 15
d) Recognition of financial assets and financial liabilities .......................................................................................................... 15
e) Offsetting of financial assets and financial liabilities ............................................................................................................. 16
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…………………………………………………………………………………………………… ............... 20
b) Employee share purchase plan………………………………………………………………………………………….… ............... 21
c) Deferred share unit plan ……………………………………………………………………………………………………...... ......... 21
2.13 Employee future benefits – pension………………………………………………………………… ............................................. 21
2.14 Acquisition, integration and restructuring costs………………………………………………………………… ........................ 22
2.15 Current vs non-current………………………………………………………………………………………………………………..… 22
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
Asset-backed securities
Available-for-sale
Autorité des marchés financiers
Accumulated other comprehensive income
Canadian Dollar
Company action levels
Cash generating unit
Defined benefits
DKK (kr.) Danish krone, Denmark’s official currency
DPW
DSU
Direct premiums written
Deferred share unit
EBITA
Earnings before interest, taxes and amortization
EPS
ESPP
Earnings per share to common shareholders
Employee share purchase plan
EUR (€)
Currency of the European Union
FA
Facility Association
FVTOCI
Fair value through other comprehensive income
FVTPL
Fair value through profit and loss
GBP (£)
British pound sterling, UK’s official currency
IASB
IBNR
International Accounting Standards Board
Insurance claims incurred but not reported by
policyholders
JV
LAE
LTIP
MBS
MCT
Joint ventures
Loss adjustment expenses
Long-term incentive plan
Mortgage-backed securities
Minimum capital test (Canada)
MD&A
Management’s Discussion and Analysis
MYA
NCI
NEP
NOI
OCI
OSFI
P&C
PSU
PTOI
RBC
ROE
RSP
RSU
UK
U.S.
Market-yield adjustment
Non-controlling interest
Net earned premiums
Net operating income
Other comprehensive income
Office of the Superintendent of Financial Institutions
Property and casualty
Performance stock units
Pre-tax operating income
Risk-based capital (U.S.)
Return on equity
Risk sharing pools
Restricted stock units
United Kingdom
United States
IFRS
International Financial Reporting Standards
USD
U.S. Dollar
2.1 Basis of presentation
These Consolidated financial statements and the accompanying notes are prepared in accordance with IFRS, as issued by the IASB.
They were authorized for issue in accordance with a resolution of the Board of Directors on February 9, 2021.
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, except for the amendments to existing standards and revised Conceptual
Framework adopted on January 1, 2020 as described in Note 4 – Adoption of new accounting standards. Certain comparative
figures have been reclassified to conform to the presentation adopted in the current year.
2.2 Basis of consolidation
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.
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
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.
Generally, an
equal percentage
of voting rights
from each party to
the joint
arrangement
Equity method
Note 2.8 for details
2.3
Insurance contracts
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is
transferred when the Company agrees to compensate a policyholder on the occurrence of an adverse specified uncertain future event.
As a general guideline, the Company determines whether it has significant insurance risks, by comparing the benefits that could
become payable under various possible scenarios relative to the premium received from the policyholder for insuring the risk.
Revenue recognition and premiums receivable
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, which is usually 12 months.
Premium modifications are reported against premiums written with a corresponding change in Premiums receivable and are
recognized on the contract modification date. Premium modifications are deferred as part of Unearned premiums and are recognized
against NEP on a pro rata basis over the remaining term of the underlying policy or immediately if they clearly relate to past services
to match the change in insurance risk.
Premiums receivable 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 are recognized on an accrual basis and include commission revenues received from external insurance providers by
consolidated brokers and revenues related to supply chain operations.
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, as well as changes in the
legal and regulatory environment, 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. Actuaries are required to include margins in some
assumptions 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.
Claims liabilities are discounted to consider 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 deemed 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 and unearned premiums are
presented as assets and are determined on a basis consistent with the related claims liabilities and unearned premiums respectively.
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.
e)
Liability adequacy test
At the end of each reporting period, a liability adequacy test is performed to validate the adequacy of unearned premiums and deferred
acquisition costs. A premium deficiency would exist if unearned premiums were deemed insufficient to cover the estimated future
costs associated with the unexpired portion of written insurance policies. A premium deficiency would be recognized immediately as
a reduction of deferred acquisition costs to the extent that unearned premiums plus anticipated investment income are not considered
adequate to cover for all deferred acquisition costs and related insurance claims and expenses. If the premium deficiency is greater
than the unamortized deferred acquisition costs, a liability is accrued for the excess deficiency.
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
Classification
Financial
instruments Description
AFS
Debt securities
Common
shares and
preferred
shares
Investments intended to be held for an indefinite period and
which may be sold in response to liquidity needs or changes
in market conditions.
Investments neither classified nor designated as FVTPL.
Initial and subsequent measurement
Initially measured at fair value using transaction
prices at the trade date.
Subsequently measured at fair value using bid
prices (except as noted below for Level 3
instruments) at end of period, with changes in fair
value reported in OCI (when unrealized) or in Net
gains (losses) when realized or impaired.
Other
instruments
Surplus notes, as well as investments in mutual and private
funds.
Refer to Note 2.4 b) (Level 3) hereafter for
more details on the fair value measurement.
Initially measured at fair value using transaction
prices 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 designated cash flow
hedges and net investment hedges in foreign
operations is recorded in foreign exchange gains
(losses) in OCI.
Designated as
FVTPL on
initial
recognition
Debt securities
backing 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
the weighted-dollar duration of debt securities
that
designated as FVTPL
the
weighted-dollar duration of claims liabilities.
is approximately equal
to
Classified as
FVTPL
Common
shares
Investments purchased with the intention of generating
profits in the near term.
Derivative
financial
instruments
Embedded
derivatives
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 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. These embedded derivatives are presented in
Investments, with the related perpetual preferred shares, on
the Consolidated balance sheets.
Contingent
considerations
Financial liability arising from a business combination to be
remeasured at fair value based on future performance.
Initially measured at fair value based on the
estimate on the date of the transaction.
Subsequently measured at fair value based on
revised estimates, with changes in fair value
integration and
reported
restructuring costs. Refer to Note 2.4 b) (Level
3) hereafter for more details on the fair value
measurement.
in Acquisition,
Initially measured at fair value using transaction
prices at the trade 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.
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 (including securities purchased
under reverse repurchase agreements).
12 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Financial
instruments
Debt outstanding
Classification
Other
financial
liabilities
Description
Initial and subsequent measurement
The Company’s Senior and medium-term notes and
term loan.
Initially measured at fair value at the
issuance date.
Amount drawn under a credit facility.
Securities sold
under repurchase
agreements
The sale of securities together with an agreement to
repurchase them in the short-term, at a set price and
date.
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.
Initially measured at fair value at the
amount owing.
Subsequently measured at amortized cost
using the effective interest method.
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. After initial recognition, the fair value of financial instruments is determined based on available information and
categorized according to a three-level fair value hierarchy.
Table 2.3 – 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
•
•
Investments in mutual funds
Exchange-traded derivatives
•
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 Notes1
•
ABS and MBS
• Over-the-counter derivatives
•
•
Loans1
Embedded derivatives related to perpetual preferred shares with call option
• Hedge and private funds
•
Surplus notes
• Contingent considerations
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.
• Embedded derivatives related to perpetual preferred shares call options – The fair value of the Company’s perpetual
preferred shares 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 for which the net assets value
(‘’NAV’’) is generally the practical expedient. The Company employs several 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 illiquidity or other factors, the Company will adjust the fund’s reported NAV to more appropriately
represent the fair value of its interest in the investment.
• Surplus notes – The fair value of the surplus notes 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. These variables include 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 notes which are subject
to regulatory approval.
• Contingent considerations – The fair value of the contingent considerations is based on future revenues or profitability metrics
discounted using a rate adjusted for specific risks related to the transaction using information as at the measurement date.
14 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Derivative financial instruments and hedging
c)
The Company enters a variety of derivative financial instruments to manage its exposure arising from financial assets, financial
liabilities and the RSA acquisition (refer to Note 8.3 for more details). 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 when eligible for hedge accounting have been designated as cash
flow hedges or net investment hedges in a foreign operation.
Net investment hedges – The Company uses foreign currency derivatives to manage its book value exposure to foreign operations
with a functional currency other than CAD.
Cash flow hedges – The Company uses foreign currency derivatives to hedge the purchase price exposure to fluctuations in foreign
exchange rates.
Derivatives are initially measured at fair value at the trade date and subsequently remeasured 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.
Derivatives that qualify for hedge accounting
Where the Company has elected to apply hedge accounting, the effective portion of gains or losses on hedging derivatives, together
with foreign exchange translation gains or losses on foreign operations, is recorded in Foreign exchange gains (losses) in OCI.
A hedging relationship is designated and documented at inception. Hedge effectiveness is evaluated at inception and throughout the
term of the hedge. 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 8 – Derivative financial instruments for details.
d)
Recognition of financial assets and financial liabilities
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. Refer to Table 2.2 for the initial recognition of financial assets and
financial liabilities.
Securities lending – Financial assets lent by the Company in the course of securities lending operations remain on the Consolidated
balance sheets because the Company has not substantially transferred the risks and rewards related to the lent assets.
Securities purchased under reverse repurchase agreements and sold under repurchase agreements – The Company
purchases securities from major Canadian financial institutions with an agreement to resell them to the original seller in the short-term
(reverse repurchase agreements), at a set price and date. It also sells securities to major Canadian financial institutions together with
an agreement to repurchase them in the short-term (repurchase agreements), at a set price and date.
Securities purchased in the course of reverse repurchase agreements are not recognized on the Consolidated balance sheets
because the seller substantially retained the risks and rewards related to the assets sold. The commitment to resell the assets
purchased is presented in Financial assets related to investments in Other assets in the Consolidated balance sheets.
Securities sold in the course of repurchase agreements remain on the Consolidated balance sheets because the Company has not
substantially transferred the risks and rewards related to the assets sold. The obligation to repurchase the assets sold is presented in
Financial liabilities related to investments in the Consolidated balance sheets.
INTACT FINANCIAL CORPORATION 15
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Structured settlements – The Company enters into annuity agreements with various Canadian life insurance companies to provide
for fixed and recurring payments to claimants.
• When the annuity agreements are non-commutable, non-assignable and non-transferable, the Company is released by the
claimant for the settlement of the claim amount. As a result, the liability to its claimants is substantially discharged and the
Company removes that liability from its Consolidated balance sheets. However, the Company remains exposed to the credit
risk that life insurers may fail to fulfill their obligations.
• When the annuity agreements are commutable, assignable or transferable, the Company keeps the liability and the
corresponding asset on its Consolidated balance sheets.
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.
f)
Revenue and expense recognition
Net investment income
Interest income from debt securities and loans is recognized on an accrual basis.
•
• Premiums and discounts on debt securities classified as AFS, as well as premiums earned, or discounts incurred for loans
and AFS securities are amortized using the effective interest method.
• Dividends are recognized when the shareholders’ right to receive payment is established, which is the ex-dividend date.
Net 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 there is a change of control, any retained equity instrument is remeasured at fair value as at the acquisition or disposal
date 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 preferred 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% or more
16 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Considering the COVID-19 crisis, the Company evaluated additional factors before concluding there was evidence of impairment
(refer to Note 23.2 – Significant accounting judgments, estimates and assumptions).
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
s
s
o
l
r
i
a
f
t
n
e
u
q
e
s
b
u
S
s
e
s
a
e
r
c
n
i
e
u
a
v
l
Impairment loss removed from OCI and recognized in Net gains
(losses)
Impairment loss recognized in Net gains (losses)
Recognized in Net gains (losses)
when there is observable positive
development on the original
impairment loss event. Otherwise,
recognized in OCI
Recognized directly in OCI
Impairment losses are not
reversed
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.
2.5 Business combinations
Business combinations are accounted for using the acquisition method. The purchase consideration is measured at fair value at
acquisition date. At that date, the identifiable assets acquired and liabilities assumed are estimated at their fair value. Acquisition-
related costs are expensed as incurred. When the Company acquires a business, it assesses financial assets acquired and financial
liabilities assumed for appropriate classification and designation in accordance with the contractual term, economic circumstances
and relevant conditions at the acquisition date.
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, which corresponds to the Company’s operating segments (refer to
Note 28 – Segment information).
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, customer relationships, trade names 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 to 15 years
3 to 10 years
Amortization of intangible assets is included in Other expenses in the Consolidated statements of income.
2.7 Foreign currency translation
The Consolidated financial statements are presented in Canadian dollars, which is the Company’s functional 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 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 except for 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
As at December 31,
Average rate for the years
USD vs CAD
GBP vs CAD1
EUR vs CAD1
1 Average rate period from November 18 to December 31, 2020 in relation to the RSA acquisition.
1.27210
1.73972
1.55412
2.8
Investments in associates and joint ventures
2020
2019
1.29835
n/a
n/a
2020
1.34104
1.72588
1.55619
2019
1.32685
n/a
n/a
The Company’s investments in associates and joint ventures are initially recorded at the amount of consideration paid, which includes
the fair value of tangible assets, intangible assets and goodwill identified on acquisition, plus post-acquisition changes in the
Company’s share of their net assets. They are subsequently measured using the equity method.
The Company’s profit or loss from such investments is shown in Share of profit from investments in associates and joint ventures and
reflects the after-tax share of the results of operations of the associates and joint ventures. The Company determines at each reporting
date whether there is any objective evidence that investments in associates and joint ventures are impaired.
2.9 Property and equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation terms are established to depreciate the cost
of the assets over their estimated useful lives. Depreciation methods and terms are shown below.
Table 2.8 – Depreciation methods and terms of property and equipment
Property and equipment
Buildings
Furniture and equipment
Leasehold improvements
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
On the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset is initially measured
at cost, which corresponds to the value of the lease liability adjusted for any lease payment made at or before the commencement
date, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method over the
lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted using the Company’s incremental borrowing rate for a similar asset. Lease payments included in the measurement of the
lease liability comprise fixed payments, reduced by any incentives receivable, and exclude operational costs and variable lease
payments. The lease liability is subsequently measured at amortized cost using the effective interest method.
The Company presents right-of-use assets in Property and equipment and lease liabilities in Other liabilities in the Consolidated
balance sheets. The interest and depreciation expense are presented in Finance costs and Underwriting expenses respectively in the
Consolidated statements of income.
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.
INTACT FINANCIAL CORPORATION 19
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
• 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 based on amounts expected to be paid
to the tax authorities.
• Deferred income tax is provided using the liability method on temporary differences between the carrying value of assets and
liabilities and their respective tax values. Deferred tax is calculated using income tax laws and rates enacted or substantively
enacted as at the balance sheet date, which are expected to apply when the related deferred tax asset is realized, or the deferred
tax liability is settled. Deferred tax assets are recognized for all deductible temporary differences as well as unused tax losses
and tax credits to the extent that it is probable that taxable profit will be available against which the losses can be utilized. For
each 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:
a)
Long-term incentive plan
Certain key employees are eligible to participate in the LTIP. Participants are awarded notional share units referred to as PSUs and
RSUs. The PSU payout is subject to the achievement of specific targets with regards to:
•
The Company’s estimated ROE outperformance versus the Canadian P&C industry or the North American P&C industry
benchmark (for the three-year cycle ending in 2021 and 2022), based on a three-year average; or
The three-year average combined ratio of the U.S. operations compared to a specific target; or
•
• A combination of both.
Most RSUs automatically vest three years from the year of the grant. Vesting for RSUs is not linked to the Company’s performance.
RSUs and PSUs – Subject to the Company’s Board of Directors’ approval, certain participants can receive cash in lieu of shares of
the Company:
• Based on the plan structure; or
•
If they meet a defined share ownership threshold (“eligible participants”) and elect to receive cash.
At the time of the payout, the plan administrator purchases in the market the number 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.
20 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Cash-settled plan
The cost of the awards is recognized as an expense over the vesting period, with a corresponding entry to Other liabilities. The liability
is remeasured at each reporting period based on the number of awards that are expected to vest and the current share price, with
any fluctuations in the liability also recorded as an expense until it is settled.
b)
Employee share purchase plan
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.
Equity-settled plan
The fair value of awards is estimated at the grant date and is not revalued subsequently, but the Company re-estimates the number
of awards that are expected to vest at each reporting period. The cost of awards is recognized as an expense over the vesting period,
with a corresponding entry to Contributed surplus. The difference between the market price of the common shares purchased and the
cumulative cost for the Company of these vested awards, net of income taxes, is recorded in Retained earnings.
c)
Deferred share unit plan
Non-employee directors of the Company are eligible to participate in the Company’s DSU plan. A portion of the remuneration of non-
employee directors of the Company must be received in DSUs or 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 afterwards. 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 remeasured 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 resulting from 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.
Remeasurement 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.
INTACT FINANCIAL CORPORATION 21
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Remeasurements 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 remeasurements are also immediately reclassified to Retained earnings as they will not be reclassified to Net income in
subsequent periods.
2.14 Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs include items such as acquisition-related expenses, severances, retention bonuses,
system integration, changes in the fair value of the contingent considerations as well as expenses related to the implementation of
significant new accounting standards.
2.15 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.
Note 3 – Significant accounting judgments, estimates and assumptions
3.1 Use of judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to use judgments, estimates and assumptions
that can have a significant impact on the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as
at the balance sheet date, as well as reported amounts of revenues and expenses during the reporting period. Actual results could
differ significantly from these estimates.
The key estimates and assumptions that have a risk of causing a material adjustment to the carrying value of certain assets and
liabilities are as follows:
Description
COVID-19 pandemic
Business combinations
Reference
Description
Note 3.2
Impairment of financial assets
Note 5.2
Measurement of income taxes
Valuation of claims liabilities
Note 11.3
Valuation of DB obligation
Impairment of goodwill and intangible assets
Note 15.2
Reference
Note 23.2
Note 24.3
Note 27.6
22 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
3.2 COVID-19 pandemic
On March 11, 2020, COVID-19 was declared a pandemic by the World Health Organization. The magnitude of the impact of the
COVID-19 crisis on the economy and financial markets continues to evolve while also contributing to increased market volatility and
changes to the macroeconomic environment. The significant response from governments to support businesses and economies, as
well as the earlier than expected release of multiple COVID-19 vaccines, led to a rebound in financial markets since the first quarter.
While restrictions have eased for parts of the economy, the second wave of COVID-19 has increased uncertainty and has led to
renewed lockdown measures. Until the crisis has passed and economies fully reopen, the Company expects financial markets to
remain volatile.
The Company continues to manage the impact on its business and believes that its operations and financial position remain strong
and that it is well positioned to deal with this crisis. Various scenarios and the potential impacts to the underwriting results were
assessed. In addition, the effects of the COVID-19 crisis related to emerging coverage issues and claims, including certain class
actions relating to business interruption coverage and related defence costs, as well as other indirect claims could negatively impact
the Company’s claims reserves. Regarding the class actions relating to business interruption coverage, most commercial policies,
except in very limited instances, do not provide for business interruption coverage in the context of a closure due to COVID-19 since
direct physical loss or damage is required to trigger this coverage. The Company plans to contest these class actions vigorously. In
the event that these cases result in a significant judgment against the Company, the resulting liability could be material. Based on
information currently known, the Company does not believe that the outcome of these cases will have a material impact on its
consolidated financial condition, cash flows, or results of operations.
As the COVID-19 crisis continues to evolve, the extent to which it may impact the Company’s operations will depend on future
developments including the effectiveness of measures to contain the spread of the virus, such as the retightening of lockdown
measures, the effective roll out of vaccinations and actions that will be taken by the governments and central banks to stabilize
economic conditions. Consequently, the Company’s financial results will be subject to volatility. The increased uncertainty required
management to use judgements, estimates and assumptions related to the COVID-19 crisis. As a result, the Company has provided
additional disclosures on the following areas impacted by COVID-19:
•
•
•
•
•
The valuation of the Company’s investments (refer to Note 23 – Net gains (losses));
The valuation of the DB obligation and the related plan assets (refer to Note 27 – Employee future benefits);
The increase in provisions in Claims liabilities to reflect the potential risks for certain lines of business (refer to Note 11 –
Claims liabilities);
The actions taken to maintain solid capital levels despite the COVID-19 crisis (refer to Note 21 – Capital management);
The customer relief measures announced (see below).
Customer relief measures
Since April 2020, the Company has provided customer relief measures, including premium reductions and flexible payment options.
Premium reductions include those to reflect changes in driving habits, adjustments for commercial clients severely impacted from a
sales receipts and payroll perspective as well as cap and reduction in rates on renewals and new business. In October, the Company
announced additional immediate relief measures of $50 million for small business customers through cash reimbursement of an
amount equivalent to 20% of their annual premium in 2020.
For the year ended December 31, 2020, these premium reductions including the above small business customer relief measures,
were estimated to have negatively impacted DPW by $419 million along with NEP by $236 million. The Company has provided
$439 million of premium reductions on issued policies to date. Refer to Note 2.3 a) Revenue recognition and premiums receivable
for the accounting policy on premium reductions.
The COVID-19 crisis also impacted significantly the level of bad debt expense and allowance for doubtful accounts on Premiums
receivable and other customer receivables. The Company applied judgment in its evaluation of the provision to consider flexible
payment options provided, as well as experience during the crisis and in past economic downturns. As a result, for the year ended
December 31, 2020, the Company recognized a bad debt expense of $35 million, mainly as a part of Underwriting expenses.
INTACT FINANCIAL CORPORATION 23
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 4 – Adoption of new accounting standards
The following amendments to existing standards and revised Conceptual Framework are effective for annual periods beginning on or
after January 1, 2020:
4.1 Definition of a business
In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 – Business Combinations (“IFRS 3”). The
objective of the amendments is to assist entities in determining whether a transaction should be accounted for as a business
combination or as an asset transfer.
The amendments were adopted prospectively with no impact on the Consolidated financial statements.
4.2 Definition of material
In October 2018, the IASB issued amendments to IAS 1 – Presentation of Financial Statements and IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors to align the definition of “material” across the standards and to clarify certain aspects of
the definition. The objective of these amendments is to improve disclosure effectiveness in the financial statements by improving the
understanding of the existing requirements rather than to significantly impact an entity’s materiality judgements.
The amendments were adopted prospectively with no impact on the Consolidated financial statements.
4.3 Conceptual Framework for financial reporting
In March 2018, the IASB issued a comprehensive set of concepts for financial reporting: the revised Conceptual Framework for
Financial Reporting (“Conceptual Framework”), which replaces its previous version. It assists companies in developing accounting
policies when no IFRS standard applies to a particular transaction and it helps stakeholders more broadly to better understand the
standards.
The revised Conceptual Framework was adopted prospectively with no impact on the Consolidated financial statements.
Interest rate benchmark reform
4.4
In September 2019, the IASB issued amendments to IFRS 9 – Financial Instruments (“IFRS 9”), IAS 39 – Financial Instruments:
Recognition and Measurement (“IAS 39”) and IFRS 7 – Financial Instruments: Disclosures (“IFRS 7”). The objective of these
amendments is to support the provision of useful financial information during the period of uncertainty arising from the phasing out of
interest rate benchmarks such as interbank offered rates. The amendments enable entities to apply hedge accounting despite the
uncertainties surrounding the use of interbank offered rates and require entities to provide additional information about their hedging
relationships which are directly affected by these uncertainties.
Hedging relationships extending beyond December 31, 2021 are impacted by the reform and require additional disclosures. As at
December 31, 2020, the Company’s derivatives indexed to rates impacted by the reform and designated as hedging relations mature
before December 31, 2021 and therefore no additional disclosure is required.
The amendments were adopted retrospectively with no impact on the Consolidated financial statements.
24 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 5 – Business combinations
5.1 Business combinations
a)
Business acquisition proposed in 2020
RSA Insurance Group plc
On November 18, 2020, the Company announced that together with the Scandinavian P&C leader Tryg A/S (“Tryg”), it had reached
an agreement on the terms of a recommended all-cash acquisition for the entire issued and to be issued share capital of RSA, a
multinational insurance group with strong positions in the P&C insurance market in the UK, Scandinavia and Canada along with
supporting international business in Ireland, Continental Europe and the Middle East.
RSA shareholders will receive 685 pence per ordinary share which represents an aggregate cash consideration of approximately £7.2
billion ($12.5 billion), with:
•
•
The Company paying approximately £3.0 billion ($5.2 billion) for the acquisition of RSA’s Canadian, UK and International
operations and its co-share of RSA’s Danish business; and
Tryg paying approximately £4.2 billion ($7.3 billion) for the acquisition of RSA’s Sweden and Norway businesses and its co-
share of RSA’s Danish business.
In November 2020, the Company economically hedged the purchase price and other items to foreign currency fluctuations. Refer to
Note 8.3 – Currency hedging in relation with the RSA acquisition.
Financing for the purchase price of approximately $5.2 billion (£3.0 billion) and expected related transaction costs of approximately
$0.7 billion has been raised with $4.45 billion of private placement subscription receipts, €392 million ($600 million) bank term loan
facility to be drawn on closing and $600 million of medium-term notes. The remaining balance of approximately $200 million will be
raised in 2021 with the issuance of preferred shares or other financing. Refer to Note 19 – Debt outstanding and Note 20 – Common
shares and preferred shares for more details.
As part of the acquisition, the Company will assume the full amount of RSA’s outstanding issued debt and hybrid securities which
totals approximately £0.8 billion ($1.4 billion) and £0.4 billion ($0.7 billion), respectively. The Company will also retain and guarantee
the obligations of the closed RSA UK pension schemes. On November 18, 2020, an agreement was reached with the pension trustees
requiring the following funding commitments:
• An additional contribution of approximately £75 million ($130 million) at closing; and
• Continuation of current funding arrangements of approximately £75 million ($130 million) per year until the schemes are fully
funded, which is estimated to be reached within 10 years.
The acquisition will expand the Company's leadership position in Canada, create a leading specialty lines platform with international
expertise and provide an opportunity to enter the UK and Ireland markets at scale.
The acquisition was approved by the Boards of Directors of all three companies on announcement and was approved by RSA’s
shareholders on January 18, 2021. The transaction is expected to close in the second quarter of 2021, subject to relevant approvals
or clearances from regulatory and antitrust authorities and the satisfaction of the other conditions.
The acquisition-related costs of $42 million have been reported in Acquisition, integration and restructuring costs.
Business acquisitions completed in 2019
b)
The Company completed the following acquisitions during the year ended December 31, 2019:
On Side Restoration
• On October 1, 2019, the Company acquired control (33% of the participating shares and 51% of the voting shares) of On
Side Developments Ltd., the parent company of On Side Restoration (collectively known as “On Side"), a leading Canadian
restoration firm based in Vancouver.
• On December 1, 2020, the Company purchased all of the remaining shares in one single tranche instead of two equal
tranches by the end of 2021, for an estimated cash consideration of $119 million (including interest of $10 million paid in
2020 and a holdback of $15 million payable in 2021). As a result, the Company derecognized most of the remaining
contingent consideration and recognized a gain of $3 million in Acquisition, integration and restructuring costs.
INTACT FINANCIAL CORPORATION 25
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
The Guarantee Company of North America and Frank Cowan Company Limited
• On December 2, 2019, the Company acquired all outstanding shares of The Guarantee Company of North America ("The
Guarantee"), a specialty lines insurer in Canada and the U.S. and Frank Cowan Company Limited ("Frank Cowan"), a
managing general agent focused on specialty insurance.
The following table summarizes the consideration and the final determination of the fair value of assets acquired and liabilities
assumed for the above acquisitions as at the acquisition date. There were no significant adjustments to the preliminary fair values.
Table 5.1 – Business combinations
As at the acquisition date
Purchase price
Cash consideration1
Contingent consideration (Note 18.2)
Total purchase price
Fair value of the identifiable assets acquired and liabilities assumed
Assets
Investments2
Premiums receivable
Reinsurance assets
Deferred acquisition costs
Intangible assets
Other
Liabilities
Claims liabilities
Unearned premiums
Deferred tax liabilities
Debt outstanding
Other
Total identifiable net assets acquired
Goodwill
1 On Side’s cash consideration includes a 10% holdback.
2 Includes cash and cash equivalents acquired of $311 million.
The Guarantee
and Frank
Cowan
On Side
1,021
-
1,021
1,178
115
401
62
337
99
(887)
(289)
(36)
-
(135)
845
176
24
110
134
-
-
-
-
50
149
-
-
(12)
(23)
(78)
86
48
Total
1,045
110
1,155
1,178
115
401
62
387
248
(887)
(289)
(48)
(23)
(213)
931
224
The fair value of the acquired distribution networks, customer relationships and other intangible assets are mainly based on a
discounted cash flow analysis. The distribution networks are amortized over a 25-year period and the customer relationships are
amortized over a 10-year period. Goodwill reflects the quality of the acquired businesses and the synergies expected following the
integration of the acquired businesses. Goodwill is not deductible for tax purposes.
The acquisition-related and integration costs in connection with the acquisitions are reported in Acquisition, integration and
restructuring costs.
5.2 Significant accounting judgments, estimates and assumptions
Upon initial recognition, the acquiree’s assets and liabilities and the contingent consideration have been included in the Consolidated
balance sheets at fair value. Management determined the fair values using estimates of 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 regarding 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.
26 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 6 – Investments
6.1 Classification of investments
Table 6.1 – Classification of investments
As at
December 31, 2020
Cash and cash equivalents
Short-term notes1
Fixed income
Investment grade
Government
Corporate
Asset-backed2
Mortgage-backed
Agency3
Non-agency
Below investment grade Corporate
Non-rated
Debt securities
Investment grade
Retractable
Fixed-rate perpetual
Other perpetual
Preferred shares
Common shares
Loans
December 31, 2019
Cash and cash equivalents
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed2
Mortgage-backed
Agency3
Non-agency
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17
-
17
-
-
-
-
-
-
-
-
-
-
-
-
-
202
-
202
-
-
3,134
2,968
76
281
329
4
-
6,792
-
-
-
-
1,357
-
8,149
-
-
2,715
2,443
101
329
266
-
5,854
-
-
-
-
1,149
-
7,003
917
-
-
-
-
-
-
-
-
-
-
-
-
-
-
284
1,201
936
-
-
-
-
-
-
-
-
-
-
-
-
-
318
1,254
917
684
5,842
5,238
442
697
836
24
335
14,098
21
303
1,228
1,552
3,779
284
20,630
936
61
5,230
4,346
641
586
716
246
11,826
24
266
1,175
1,465
4,063
318
18,608
AFS
-
684
2,708
2,270
366
416
507
20
335
7,306
21
303
1,228
1,552
2,405
-
11,263
-
61
2,515
1,903
540
257
450
246
5,972
24
266
1,175
1,465
2,712
-
10,149
1 Includes the invested proceeds of $600 million from the Series 9 and 10 medium-term notes issued on December 16, 2020 (refer to Note 19.1 –
New financing). This amount is held in a segregated account with restricted use until the closing date of the RSA acquisition.
2 Credit card receivables and auto loans.
3 Publicly traded MBS which carry the full faith and credit guarantee of the U.S. Government or are guaranteed by a government sponsored entity.
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.
INTACT FINANCIAL CORPORATION 27
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
6.2 Carrying value of investments
Table 6.2 – Carrying value of investments
As at
December 31, 2020
Cash and cash equivalents
Debt securities
Preferred shares1
Common shares
Loans
December 31, 2019
Cash and cash equivalents
Debt securities
Preferred shares1
Common shares
Loans
FVTPL
investments
Carrying
value
Amortized
cost
Unrealized
gains2
Unrealized
losses2
Other
investments
Carrying
value
Total
investments
Carrying
value
-
6,792
-
1,374
-
8,166
-
5,854
-
1,351
-
7,205
917
7,009
1,560
2,181
284
11,951
936
5,865
1,529
2,398
318
11,046
-
304
70
292
-
666
-
118
39
361
-
518
-
(7)
(78)
(68)
-
917
7,306
1,552
2,405
284
(153)
12,464
-
(11)
(103)
(47)
-
(161)
936
5,972
1,465
2,712
318
11,403
917
14,098
1,552
3,779
284
20,630
936
11,826
1,465
4,063
318
18,608
1 Includes unrealized gains (losses) on embedded derivatives of $(12) million as at December 31, 2020 (nil as at December 31, 2019). These derivatives
were presented in Investments, with the related perpetual preferred shares, on the Consolidated balance sheets but their change in fair value was
reported in Net gains (losses) in Net income.
2 Foreign amounts are translated using the period-end exchange rate.
The Company is currently assessing the cash flow characteristics test (solely payments of principal and interest or “SPPI” test). Based
on its preliminary assessment, most of the debt securities would pass the SPPI test. The composition of debt securities may change
significantly by the time IFRS 9 – Financial Instruments (“IFRS 9”) is adopted, which is expected to be on January 1, 2023.
6.3 Market neutral equity investment strategy
Table 6.3 – Market neutral equity investment strategy
As at December 31,
2020
2019
Fair value
Collateral
Fair value
Collateral
Long positions – reported in Common shares
Short positions – reported in Financial liabilities related to
investments (Table 7.1)
8
(8)
-
8
195
(197)
-
202
During 2020, the Company reduced certain common equity strategies in order to de-risk and unwind capital-intensive strategies.
6.4 Securities lending
The Company participates in a securities lending program to generate fee income. This program is managed by the Company’s
custodian, a major Canadian financial institution. The Company lends securities it owns to other financial institutions to allow them to
meet their delivery commitments. 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 daily as the market value of underlying loaned securities fluctuates.
Table 6.4 – Securities lending
As at December 31,
2020
2019
Fair value
Collateral1
Fair value
Collateral1
Loaned securities – reported in Investments
1,054
1,108
1,286
1,353
1 Representing approximately 105% of the fair value of the securities loaned as at December 31, 2020 and 2019.
28 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 7 – Financial liabilities related to investments
Table 7.1 – Financial liabilities related to investments
As at December 31,
Accounts payable to investment brokers on unsettled trades
Derivative financial liabilities (Table 8.2)
Equities sold short positions (Table 6.3)
Securities sold under repurchase agreements
Note 8 – Derivative financial instruments
8.1 Types of derivatives used
Table 8.1 – Types of derivatives used
2020
43
38
8
-
89
2019
33
45
197
20
295
Derivatives Description
Objective
Forwards
Contractual obligations to exchange:
Currency
one currency for another at a predetermined
future date
Mitigate risk arising from foreign currency
fluctuations on:
•
foreign currency cash inflows and
outflows impacting the Company’s
operations
Intent to hold
instrument
Risk management
purposes
• on the Company’s net investment in
Book value hedge
foreign operations
•
foreign currency cash flows related to the
purchase price and the Company’s net
investment in foreign operations as a
result of the RSA acquisition
Risk management
purposes
Modify or mitigate exposure to interest rate
fluctuations
Mitigate exposure to equity market
Mostly for risk
management
purposes
Risk management
purposes
Mitigate exposure to equity market
fluctuations
Risk management
purposes
Futures
Contractual obligations to buy or sell:
Interest rate
an interest rate sensitive financial instrument
at a specified price and a predetermined
future date
Equity
Swaps
Equity
a specified amount of stocks, a basket of
stocks or an equity index at an agreed price
and a specified date
Over-the-counter contracts:
in which two counterparties exchange a series
of cash flows based on a basket of stocks,
applied to a notional amount
Credit default
that transfer credit risk related to an
underlying financial instrument from one
counterparty to another
Modify exposure to credit
Cross
currency
in which two counterparties exchange interest
and principal payments in two different
currencies
Mitigate risk arising from foreign currency
fluctuations on the Company’s net investment
in foreign operations
Risk management
purposes
Book value hedge
INTACT FINANCIAL CORPORATION 29
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
8.2 Fair value and notional amount of derivatives
Derivative financial assets are presented on the Consolidated balance sheets as part of Other assets and derivative financial liabilities
are presented as part of Financial liabilities related to investments.
Table 8.2 – Fair value and notional amount of derivatives
As at December 31,
Foreign currency contracts
Forwards
Cross currency swaps
Interest rate contracts
Futures
Equity contracts
Swaps
Futures
Held for risk management purposes1
Held for trading purposes
Term to maturity:
less than one year
from one to five years
over five years
2020
2019
Notional
amount
Fair value
Asset
Liability
Notional
amount
Fair value
Asset
Liability
10,328
266
1,841
1,348
427
14,210
14,075
135
14,210
12,312
1,898
-
14,210
154
12
-
-
-
166
166
-
166
23
-
-
15
-
38
38
-
38
2,063
266
516
1,139
155
4,139
4,026
113
4,139
3,873
266
-
4,139
23
6
-
-
-
29
29
-
29
1
-
-
44
-
45
45
-
45
1 Includes net investment hedges using forwards and cross currency swaps.
8.3 Currency hedging in relation with the RSA acquisition
Purchase price hedges
In November 2020, in connection with the RSA acquisition, the Company entered into foreign currency forward contracts in order to
hedge the £3.0 billion ($5.2 billion) purchase price to exposures from fluctuations in the CAD/GBP and EUR/GBP currency pairs.
These derivatives have a notional of £2.7 billion ($4.7 billion) GBP/CAD and £0.3 billion ($0.5 billion) GBP/EUR, of which £2.4 billion
($4.2 billion) are contingent on the closing of the acquisition.
As at December 31, 2020, these derivatives did not qualify as cash flow hedges. As a result, the changes in the fair value were
recognized in Net gains (losses) in Net income.
On January 18, 2021 (RSA’s shareholders approval date), the RSA acquisition was considered highly probable and the purchase
price hedge was designated as a cash flow hedge. From this date, the effective portion of changes in the fair value of GBP/CAD
derivatives with a notional value of £2.1 billion ($3.6 billion) was recognized in OCI.
Book value hedges
In November 2020, the Company also entered into foreign currency forward contracts for a notional of £700 million ($1.2 billion),
whereby it sells GBP for CAD , in order to reduce its book value exposure to the GBP. These derivatives represent economic hedges
and the changes in the fair value are recognized through Net income until closing of the transaction. In addition, the Company intends
to hedge its book value exposure to the DKK after closing with its €392 million ($600 million) bank term loan facility. After closing of
the acquisition, these derivatives and financial liability will be designated as hedges of net investments in foreign operations, with
changes in fair value recognized in OCI.
The Company also entered into other foreign currency forward contracts for a net notional of £100 million ($174 million) CAD/GBP for
risk management purposes related to the RSA acquisition. Refer to Note 5.1 – Business combinations for more details.
30 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 9 – Fair value measurement
9.1 Categorization of fair values
Table 9.1 – Fair value hierarchy of financial assets and financial liabilities measured at fair value
As at
December 31, 2020
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Mortgage-backed
Agency
Non-agency
Below investment grade corporate
Non-rated
Debt securities
Preferred shares1
Common shares
Derivative financial assets (Table 8.2)
Total financial assets measured at fair value
Total financial liabilities measured at fair value (Table 7.1)
December 31, 2019
Short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Mortgage-backed
Agency
Non-agency
Non-rated
Debt securities
Preferred shares1
Common shares
Derivative financial assets (Table 8.2)
Total financial assets measured at fair value
Total financial liabilities measured at fair value (Table 7.1)
Level 1
Valued
using
quoted
(unadjusted)
market prices
Level 2
Valued
using models
(with
observable
inputs)
Level 3
Valued
using models
(without
observable
inputs)
459
225
2,541
-
-
-
-
-
-
3,000
1,552
3,751
-
8,303
8
36
2,367
-
-
-
-
-
2,403
1,465
4,039
-
7,907
197
3,301
5,238
442
697
836
24
-
10,763
-
-
166
10,929
38
25
2,863
4,346
641
586
716
-
9,177
-
-
29
9,206
45
-
-
-
-
-
-
-
335
335
-
28
-
363
-
-
-
-
-
-
-
246
246
-
24
-
270
-
Total
684
5,842
5,238
442
697
836
24
335
14,098
1,552
3,779
166
19,595
46
61
5,230
4,346
641
586
716
246
11,826
1,465
4,063
29
17,383
242
1 Includes perpetual preferred shares with call options amounting to $1,373 million as at December 31, 2020 ($1,296 million as at December 31, 2019).
The fair value of the embedded derivatives component amounting to $63 million as at December 31, 2020 ($49 million as at December 31, 2019)
was determined using a Level 3 methodology.
The fair value of loans was $290 million as at December 31, 2020 ($314 million as at December 31, 2019).
The carrying value of certain short-term financial instruments not measured at fair value is a reasonable approximation of their fair
value.
INTACT FINANCIAL CORPORATION 31
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 10 – Financial risk
The Company has a comprehensive risk management framework and internal control procedures designed to manage and monitor
various risks 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 of identifying, assessing, responding, monitoring, and reporting on all material risks that the
Company is exposed to in the course of its operations. 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 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 10.1 – 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.
Risk 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 10.1 and 10.2
Note 10.3
Note 10.4
Note 10.5
10.1 Market risk
Table 10.2 – Market risk
Equity price risk
Interest rate and credit spread 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 credit spreads.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in foreign
exchange rates.
Risk
exposure
Significant exposure to price
changes for common shares
and preferred shares,
including pension plan
equities.
Significant exposure to changes in interest
rates from:
A portion of the Company’s net
investment in foreign operations.
•
•
debt securities and preferred shares;
defined benefit pension plan
obligations, net of related debt
securities; and
•
net claims liabilities.
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
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.
Using interest-rate derivatives.
Using foreign currency derivatives.
Changes in the discount rate applied to the
Company’s claims liabilities offers a partial
offset to the change in price of interest
sensitive assets.
The Operational Investment Committee and Compliance Review and Corporate Governance Committee regularly monitor and review
compliance, respectively, with the Company’s investment policies.
32 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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. 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 10.3 – Sensitivity analyses (after tax)
For the years ended December 31,
Net income
OCI
Net income
OCI
2020
2019
Equity price risk
Common share prices (10% decrease)1
Preferred share prices (5% decrease) 2
Interest rate risk (100 basis point increase)
Debt securities3,4
Net claims liabilities
Defined benefit pension plan obligation, net of related
debt securities
Currency risk5
Strengthening of CAD by 10% vs all currencies
International securities
Net assets of foreign operations
Currency derivatives related to RSA
acquisition 6
Strengthening of GBP by 10% vs EUR
Currency derivatives related to RSA
acquisition
11
12
(198)
200
-
-
6
-
(221)
(68)
3
11
(197)
-
130
-
(196)
(283)
(182)
184
-
-
32
-
-
(241)
(64)
(170)
-
111
(20)
(236)
-
-
(52)
-
1 Including the impact of common shares related to the defined benefit pension plan. Net of any equity hedges, including the impact of any impairment.
2 Including the impact on related embedded derivatives.
3 Excludes the impact of debt securities related to the defined benefit pension plan.
4 Interest rate sensitivity is based on the fixed-income portfolio, which comprises approximately 50% of both government-related and corporate-related
securities.
5 After giving effect to forward-exchange contracts.
6 Effective January 18, 2021, the change in fair value of £2.1 billion ($3.6 billion) derivatives will be recognized in OCI, therefore the above table
excludes losses of $22 million incurred in 2021 before that date. Refer to Note 8.3 - Currency hedging in relation with the RSA acquisition.
These sensitivity analyses were prepared using the following assumptions:
Interest rates, equity prices and foreign currency move independently;
• Shifts in the yield curve are parallel;
•
• Credit, liquidity, spread 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.
INTACT FINANCIAL CORPORATION 33
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
b)
Exposure to currency risk
Table 10.4 – Net foreign currency and translation exposure
As at December 31,
U.S. investments supporting the Company’s Canadian operations
Less: foreign-currency derivatives, notional amount
Consolidated net assets of U.S. subsidiaries
U.S. debt related to the acquisition of The Guarantee and Frank Cowan
Less: foreign-currency derivatives, notional amount
Other net assets denominated in USD
Total net currency exposure to the USD
USD
2020
1,728
(1,713)
15
1,811
-
(200)
1,611
38
1,664
2019
1,370
(1,363)
7
2,176
(306)
(300)
1,570
51
1,628
In addition, the Company held international securities amounting to $272 million as at December 31, 2019, which were sold in 2020.
10.2 Interest risk
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 10.5 – Interest risk
As at December 31,
Investments:
Debt securities
Preferred shares
Net claims liabilities
Defined benefit pension plans
Debt securities
Obligation
2020
2019
Fair value
Duration
(in years)
Fair value
Duration
(in years)
14,098
1,552
11,399
2,054
3,151
3.57
2.45
2.46
18.4
18.8
11,826
1,465
10,546
1,730
2,756
3.73
2.76
2.38
18.2
18.8
The Company manages the interest rate risk exposure of its investment portfolio in accordance with its investment policies.
Compliance with interest rate risk exposure ranges and targets established in these policies is monitored regularly.
10.3 Basis risk
The use of derivatives exposes the Company to several 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.
10.4 Credit risk
The Company’s credit risk exposure is concentrated primarily in its debt securities and preferred shares and, to a lesser extent, in its
premiums receivable, reinsurance assets, and structured settlement agreements entered with various life insurance companies. The
Company is also subject to counterparty credit risk arising from reinsurance, over-the-counter derivatives, as well as securities lending
and borrowing transactions. A counterparty is any person or entity from which cash or other forms of consideration are expected to
extinguish a liability or obligation to the Company. These exposures and the Company’s risk management policy and practices used
to mitigate credit risk are explained below.
34 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Credit exposure
The table below presents the Company’s maximum exposure to credit risk without considering 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 10.6 – Maximum exposure to credit risk
As at December 31,
Cash and cash equivalents
Debt securities
Preferred shares
Loans
Premiums receivable
Reinsurance assets
Other financial assets1
On-balance sheet credit risk exposure
Structured settlements
Off-balance sheet credit risk exposure
2020
917
14,098
1,552
284
3,822
1,533
909
23,115
1,552
1,552
2019
936
11,826
1,465
318
3,588
1,511
773
20,417
1,454
1,454
1 Mainly includes other receivables and recoverables, industry pools receivable, financial assets related to investments, restricted funds, reinsurance
receivable, accrued investment income, surplus notes and contract assets.
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. If 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. This credit risk is minimal since the
Company deals with registered life insurers with a credit rating of at least ‘A-’ at the inception of the contract.
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 at least 97% of the public fixed income investments portfolio to be rated investment grade and at least 68% of preferred
shares portfolio to be rated P2 (low) or better. 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.
The following tables present the credit quality of the Company’s debt securities and preferred shares.
Table 10.7 – Credit quality of debt securities
As at December 31,
Debt securities
AAA
AA
A
BBB
Not rated
Table 10.8 – Credit quality of preferred shares
As at December 31,
P2
P3
2020
38%
30%
21%
9%
2%
100%
2020
80%
20%
100%
2019
41%
30%
19%
8%
2%
100%
2019
77%
23%
100%
INTACT FINANCIAL CORPORATION 35
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Credit risk concentration
Concentration of credit risk exists where several 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. To provide sector diversification, the Company holds investment-grade non-financial U.S. corporate bonds. The
U.S. and international securities reduce the concentration risk in Canada.
Table 10.9 – Investment breakdown by country of incorporation and by industry
As at December 31,
By country of incorporation
Canada
U.S.
Other
By industry
Government
Financials
ABS and MBS
Energy
Other
Investments
2020
72%
27%
1%
100%
34%
27%
10%
5%
24%
100%
2019
71%
27%
2%
100%
30%
26%
11%
6%
27%
100%
Pension assets
2020
85%
8%
7%
100%
45%
20%
-
3%
32%
100%
2019
85%
8%
7%
100%
46%
21%
-
5%
28%
100%
For the Company’s regulated subsidiaries, the assets invested in any entity or group of related entities are limited by OSFI and AMF
to 5% of the subsidiaries’ assets. In the U.S. similar limitations exist and vary depending on the state. The Company also monitors
aggregate concentrations of credit risk by country of issuer and by industry regardless of the asset class (see Note 14.4 – 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.
Most of the investment portfolio is invested in well established, active and liquid markets.
c)
Counterparty credit risk
Counterparty credit risk arises from reinsurance (see Note 14.4 – Risk management and counterparty credit risk), over-the-counter
derivatives, reverse repurchase agreements, 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 can 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.
36 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 $311 million as at December 31, 2020 ($130 million as at December 31, 2019) 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.
10.5 Liquidity risk
The Company’s liquidity management is governed by establishing a prudent policy that identifies oversight responsibilities as well as
by setting limits and implementing effective techniques to monitor, measure and control exposure to liquidity risk. Given the nature of
the Company’s P&C insurance activities, cash flows may be volatile and unpredictable. The company uses internal liquidity metrics
to monitor and control liquidity risk within its insurance subsidiaries.
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 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 19.5 – Credit facility).
INTACT FINANCIAL CORPORATION 37
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Investments and derivative financial assets by contractual maturity
Table 10.10 – Investments and derivative financial assets by contractual maturity
Less than 1
year
From 1 to
5 years
Over
5 years
No specific
maturity
As at December 31, 2020
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Derivative financial assets
As at December 31, 2019
Cash and cash equivalents
Debt securities
Preferred shares
Common shares
Loans
Derivative financial assets
917
2,005
-
-
12
2,934
166
3,100
936
993
3
-
12
1,944
29
1,973
Total
917
14,098
1,552
3,779
284
20,630
166
-
6,344
13
-
50
6,407
-
-
5,414
8
-
222
5,644
-
-
335
1,531
3,779
-
5,645
-
6,407
5,644
5,645
20,796
-
5,668
13
-
43
5,724
-
-
4,919
8
-
263
5,190
-
-
246
1,441
4,063
-
5,750
-
936
11,826
1,465
4,063
318
18,608
29
5,724
5,190
5,750
18,637
b)
Financial liabilities by contractual maturity
Table 10.11 – Financial liabilities by contractual maturity
As at December 31, 2020
Claims liabilities – undiscounted value
Debt outstanding
Lease liabilities – undiscounted value1
Other financial liabilities
As at December 31, 2019
Claims liabilities – undiscounted value
Debt outstanding
Lease liabilities – undiscounted value1
Other financial liabilities
Less than
1 year
From 1 to
5 years
4,363
510
83
1,095
6,051
3,772
-
69
962
4,803
6,242
656
231
57
7,186
6,200
1,068
220
112
7,600
5 years
1,765
1,875
211
27
3,878
1,834
1,267
243
29
3,373
Over
No specific
maturity
Total
12,370
3,041
525
1,981
17,917
11,806
2,362
532
1,848
16,548
-
-
-
802
802
-
27
-
745
772
1 Lease liabilities in Other Liabilities includes discounting of $78 million as at December 31, 2020 ($71 million as at December 31, 2019) (refer to Note
18.2 – Other liabilities).
The contractual 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.
The contractual maturity of lease liabilities excludes operational costs and variable lease payments. The Company has extension
options for its real estate leases. Such extensions were excluded from the measurement of lease liabilities as management concluded
that it is not reasonably certain that they will be exercised.
38 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 11 – Claims liabilities
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.
11.1 Movements in claims liabilities
Table 11.1 – Movements in claims liabilities
For the years ended
December 31, 2020
Balance, beginning of year
Current year claims
Unfavourable (favourable) prior-year claims development
Increase (decrease) due to changes in discount rate (Note 11.2)
Total claims incurred
Claims paid
Business combinations (Note 5)
Exchange rate differences
Balance, end of year
December 31, 2019
Balance, beginning of year
Current year claims
Unfavourable (favourable) prior-year claims development
Increase (decrease) due to changes in discount rate (Note 11.2)
Total claims incurred
Claims paid
Loss portfolio transfer (Note 14)
Business combinations (Note 5)
Exchange rate differences
Balance, end of year
Direct
Ceded
Net
11,846
6,888
86
356
7,330
(6,345)
-
(51)
12,780
10,623
7,016
163
143
7,322
(6,872)
-
887
(114)
11,846
1,300
279
127
41
447
(349)
-
(17)
1,381
746
188
127
18
333
(232)
158
327
(32)
1,300
10,546
6,609
(41)
315
6,883
(5,996)
-
(34)
11,399
9,877
6,828
36
125
6,989
(6,640)
(158)
560
(82)
10,546
In relation to COVID-19, the Company incurred claims of $106 million for certain lines of business for the year ended
December 31, 2020.
11.2 Fair value of claims liabilities
The Company estimates that the fair value of its net claims liabilities approximates their carrying values.
Table 11.2 – Carrying value of claims liabilities
As at December 31,
Direct
Ceded
Net
Direct
Ceded
Net
2020
2019
Undiscounted value
Effect of time value of money1
Risk margin
12,370
(264)
674
12,780
1,313
(31)
99
1,381
11,057
(233)
575
11,806
(605)
645
11,399
11,846
1,261
(74)
113
1,300
10,545
(531)
532
10,546
1 Using a discount rate of 0.85% for Canada and 1.13% for the U.S. as at December 31, 2020 (2.17% and 2.32% respectively as at
December 31, 2019).
INTACT FINANCIAL CORPORATION 39
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
11.3 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 year, by geographical area, as well as by
significant business line and claim type. 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 to reflect their future development which might differ
from historical data in the case of catastrophic events. Expected claim cost inflation is also considered when estimating claims
liabilities.
Additional qualitative judgment is used to assess the extent to which past trends may not apply in the future to arrive at the estimated
ultimate cost of claims that present the likely outcome from the range of possible outcomes, considering the uncertainties involved
(“best estimate”). In relation to COVID-19, the Company applied actuarial standards to determine its Claims liabilities reserve as well
as judgment given the lack of historical data, using different scenarios and assumptions based on the information currently available.
As a result of the COVID-19 crisis, the claims liabilities may be subject to volatility from potential distortion in claims development
pattern and claim severity for certain lines of business. Actuaries are required to include margins in some assumptions 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.
The determination of the overall risk margin considers:
•
•
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 considers 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, 2020 and
2019.
11.4 Sensitivity analysis
The claims liabilities’ sensitivity to certain 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 11.3 – Sensitivity analysis (claims liabilities net of reinsurance) – Impact on Net income
As at December 31,
Average claim costs (severity)
Average number of claims (frequency)
Discount rate
2020
Canada
(344)
(80)
179
U.S.
(71)
(10)
26
2019
Canada
(317)
(65)
161
+5%
+5%
+1%
U.S.
(54)
(7)
21
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 the value of underlying claims liabilities due to changes in discount rates.
40 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
11.5 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 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.
The outstanding claims liabilities assumed and revised estimates resulting from a business combination are included in the claims
development table from the date of acquisition. Prior years are adjusted to ensure comparability while avoiding the presentation of
development in pre-acquisition accident years.
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 11.4 – Prior-year claims development – net
As at December 31, 2020
Total
2020
2019
2018
2017
Undiscounted claims liabilities
Accident year
2015
2016
2014
2013
2012
2011 Earlier
outstanding at end of accident year
3,703
3,583
3,395
3,462
3,086
2,777
2,660
2,637
2,446
2,356
Revised estimates
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate
Claims paid to date
Net undiscounted claims liabilities
Discounting and risk margin
Net claims liabilities
11,057
342
11,399
3,476
3,304
3,315
3,314
3,285
3,285
3,123
3,129
3,190
3,236
2,674
2,708
2,730
2,750
2,764
2,589
2,582
2,600
2,611
2,599
2,592
2,576
2,540
2,531
2,527
2,536
2,507
2,496
2,413
2,334
2,291
2,265
2,243
2,237
2,222
2,210
2,258
2,187
2,102
2,062
2,031
2,000
1,978
1,965
1,961
3,703
3,476
3,315
3,285
3,236
2,764
2,592
2,496
2,210
1,961
(1,328) (1,719) (2,102) (2,389) (2,285) (2,305) (2,301) (2,087) (1,871)
3,703
2,148
1,596
1,183
847
479
287
195
123
90
406
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.
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, 2020.
11.6 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 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.
INTACT FINANCIAL CORPORATION 41
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 12 – Unearned premiums
12.1 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. There was no premium deficiency as at December 31, 2020 and 2019.
Table 12.1 – Movements in unearned premiums
For the years ended
December 31, 2020
Balance, beginning of year
Premiums written
Premiums earned
Exchange rate differences
Balance, end of year
December 31, 2019
Balance, beginning of year
Premiums written
Premiums earned1
Loss portfolio transfer (Note 14)
Business combinations (Note 5)
Exchange rate differences
Balance, end of year
Direct
Ceded
Net
5,960
12,143
(11,828)
(19)
6,256
5,412
11,019
(10,720)
-
289
(40)
5,960
211
527
(587)
1
152
118
443
(445)
27
74
(6)
211
5,749
11,616
(11,241)
(20)
6,104
5,294
10,576
(10,275)
(27)
215
(34)
5,749
1 Premiums earned ceded includes the net cost of $13 million from the loss portfolio transfer (see Note 14 - Reinsurance).
Note 13 – Insurance risk
The Company principally underwrites automobile, home and commercial P&C contracts to individuals and businesses in Canada. The
Company also offers a wide range of specialty insurance products to small and midsize businesses in Canada and the U.S.
Most of the insurance risk to which the Company is exposed is of a short-tail nature. The average duration of claims liabilities was
approximately 2.5 years for Canadian operations and 2.1 years for the U.S. operations as at December 31, 2020 (2.5 years for Canada
and 1.9 years for the U.S. as at December 31, 2019). 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 13.1);
fluctuation in the timing, frequency and severity of claims relative to expectations (Note 13.2);
large unexpected losses arising from a single event such as a catastrophe (Note 13.3);
claims liability risk (Note 13.4); and
inadequate reinsurance protection (Note 14.4).
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 are the Company’s best estimates of its expected ultimate cost of resolution and administration of claims. Expected
claim cost inflation is considered 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.
42 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
13.1 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
insurance legislation, economic environment and climate patterns. The Company also manages emerging risks that may arise.
In order to properly monitor the Company’s risk appetite, guidance on pricing targets is provided by the Risk Management Department.
Pricing targets are established using a return on equity model and an internal risk-based capital model.
a)
Concentration by countries and lines of business
Table 13.1 – Concentration by countries and lines of business
As at December 31,
By countries
Canada
U.S.
By lines of business
Personal auto
Personal property
Commercial lines - Canada
Commercial lines - U.S.
2020
2019
DPW
85%
15%
100%
36%
21%
28%
15%
100%
Net claims
liabilities
86%
14%
100%
45%
6%
35%
14%
100%
DPW
84%
16%
100%
35%
21%
28%
16%
100%
Net claims
liabilities
86%
14%
100%
47%
7%
32%
14%
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 instance, legislation for automobile insurance is in place at a provincial level in Canada 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 the Company’s Canadian and U.S. operations. The Company maintains Growth and Profitability Committees
responsible for balancing growth and profitability of its insurance business and ensuring it remains adequately compensated for the
risks that it underwrites.
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, 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 to lower its risk.
INTACT FINANCIAL CORPORATION 43
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
13.2 Risk related to the timing, frequency and severity of claims
The occurrence of claims being unforeseeable, the Company is exposed to the risk that the number and the severity of claims could
exceed the estimates.
Strict claim review policies are in place to assess all new and ongoing claims. Regular detailed reviews of claims handling procedures
and frequent investigations of possible fraudulent claims reduce the Company’s risk exposure. Further, the Company enforces a
policy of actively managing and promptly pursuing claims, to reduce its exposure to unpredictable future developments that could
negatively impact the business. The Company has established a Large Loss Committee responsible for analyzing large losses and
contentious matters to ensure that appropriate claims liabilities are established and approved.
13.3 Catastrophe risk
Catastrophe risk is the risk of occurrence of a catastrophe defined as any one claim, or group of claims related to a single event such
as a natural disaster or any climatic, environmental, technological, political, or geopolitical risk. 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.
Catastrophic events include natural disasters and unnatural events:
•
There are a wide variety of natural disasters including but not limited to hurricanes, windstorms, hailstorms, rainstorms, ice storms,
floods, severe winter weather and forest fires.
• Unnatural catastrophe events include but are not limited to hostilities, terrorist acts, riots, explosions, crashes and derailments,
and wide scale cyber-attacks.
Despite the use of sophisticated models, the incidence and severity of catastrophic events are inherently unpredictable. The extent of
losses from a catastrophic 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.
The Company manages its exposure to catastrophe risk by imposing limits of insurance, deductibles, exclusions and strong
underwriting guidelines on 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), but some proportional cessions are performed on specific portfolios.
Ceded reinsurance complies with regulatory guidelines. Retention limits for the excess-of-loss reinsurance vary by product line. See
Note 14.1 – Company’s reinsurance net retention and coverage limits by nature of risk.
13.4 Claims liability 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 (see Note 11.3 for more details).
See Note 11.4 for the sensitivity analysis of claims liabilities to certain key assumptions.
Most or all 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 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.
44 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 14 – Reinsurance
14.1 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.
Table 14.1 – Company’s reinsurance net retention and coverage limits by nature of risk
For the years ended December 31,
2020
2019
Single risk events
Retentions in Canada:
on property policies
on liability policies
Retentions in the U.S. (in USD):
on property and liability policies
Multi-risk events and catastrophes
Retention
Coverage limits
7.5
5 - 10
3
100
5,300
7.5
5 - 10
3
100
4,050
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 10.2% as at December 31, 2020 (5.5% as at
December 31, 2019) 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. Effective January 1, 2021, the
Company maintained its coverage limits but increased the retention to $150 million and retains participations averaging 9.2% on
reinsurance layers between the retention and coverage limit.
With respect to the Intact U.S. (OneBeacon) claims liabilities for accident years 2016 and prior, the Company purchased from a major
reinsurer in 2017 an adverse development cover subject to an aggregate limit of US$200 million. As at December 31, 2020, the
maximum amount recoverable of US$200 million has been fully utilized.
The Guarantee
Since January 1, 2020, The Guarantee is covered by the corporate multi-risk events and catastrophes reinsurance program and the
corporate single risk events property program. The operations of The Guarantee are covered by their own reinsurance program for
liability single risk events. The Guarantee also purchased dedicated reinsurance protection for certain lines of business.
As at December 31, 2019, the operations of The Guarantee were covered by their own reinsurance program for single risk events,
multi-risk events and catastrophes. Under the property catastrophe reinsurance program, the first $7 million of losses resulting from
any multi-risk event are retained, with the coverage limit for the next $168 million of losses being entirely reinsured. The Guarantee
also purchased dedicated reinsurance protection for certain lines of business.
Loss portfolio transfer
Subsequent to the exit of the U.S Healthcare business in July 2019, Intact U.S. (OneBeacon) entered into a loss portfolio transfer and
a prospective quota share reinsurance contract with a reinsurer effective December 31, 2019 (collectively known as the “loss portfolio
transfer”). Subject to an aggregate limit, the reinsurer assumed the liabilities and future reserve development for accident years 2017
and subsequent, net of reinsurance. The ceded Healthcare portfolio consisted of Claims liabilities of $158 million and Unearned
premiums of $27 million as at December 31, 2019. The net cost of the reinsurance transaction of $13 million was recognized in
Premiums ceded in the Consolidated statements of income at inception of the contract for the year ended December 31, 2019.
INTACT FINANCIAL CORPORATION 45
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
14.2 Components of reinsurance assets
Reinsurance assets include the reinsurers’ share of claims liabilities and unearned premiums.
Table 14.2 – Components of reinsurance assets
As at December 31,
Reinsurers’ share of claims liabilities (Note 11.1)
Reinsurers’ share of unearned premiums (Note 12.1)
14.3 Net recovery (expense) from reinsurance
Table 14.3 – Net recovery (expense) from reinsurance
For the years ended December 31,
Ceded earned premiums (Note 12.1)
Ceded claims incurred (Note 11.1)
Commissions earned on ceded reinsurance
2020
1,381
152
1,533
2020
(587)
447
90
(50)
2019
1,300
211
1,511
2019
(445)
333
45
(67)
14.4 Risk management and counterparty credit risk
The Company relies on reinsurance to manage underwriting risk. Under reinsurance programs, management considers that for a
contract to reduce exposure to risk, it must be structured to ensure that the reinsurer assumes significant insurance risk related to the
underlying reinsured 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, 2020 and 2019.
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 following table shows the collateral in place to support amounts receivable and recoverable from unregistered reinsurers in
Canada and mainly from unauthorized reinsurers in the U.S. This collateral is held in support of policy liabilities and could be used
should these reinsurers be unable to meet their obligations.
Table 14.4 – Collateral in place to support amounts receivable and recoverable from unregistered and unauthorized reinsurers
For the years ended December 31,
Collateral consisting of cash, security agreements and
letters of credit
Policy liabilities supported by the above collateral
2020
2019
Canadian
operations
U.S.
operations
Canadian
operations
U.S.
operations
91
65
136
110
97
61
147
135
46 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 15 – Goodwill and intangible assets
15.1 Summary of goodwill and intangible assets
Table 15.1 – 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, 2020
Acquisitions and costs capitalized
Business combinations
Disposals and write-off
Exchange rate differences
Balance as at December 31, 2020
Accumulated amortization
Balance as at January 1, 2020
Amortization expense
Disposals and write-off
Exchange rate differences
Balance as at December 31, 2020
Net carrying value
Cost
Balance as at January 1, 2019
Acquisitions and costs capitalized
Business combinations (Note 5)
Disposals and write-off
Exchange rate differences
Balance as at December 31, 2019
Accumulated amortization
Balance as at January 1, 2019
Amortization expense
Disposals and write-off
Exchange rate differences
Balance as at December 31, 2019
2,626
205
4
(2)
(20)
2,813
-
-
-
-
-
2,072
-
-
-
(21)
2,051
(124)
(91)
-
6
(209)
2,813
1,842
2,399
59
220
(8)
(44)
2,626
-
-
-
-
-
1,786
-
327
-
(41)
2,072
(75)
(52)
-
3
(124)
1,948
483
109
-
(32)
-
560
(258)
(42)
19
-
(281)
279
428
53
41
(39)
-
483
(244)
(36)
22
-
(258)
225
633
108
-
-
(1)
740
(283)
(65)
-
1
(347)
393
543
78
19
(4)
(3)
633
(238)
(52)
4
3
(283)
350
3,188
217
-
(32)
(22)
3,351
(665)
(198)
19
7
(837)
2,514
2,757
131
387
(43)
(44)
3,188
(557)
(140)
26
6
(665)
2,523
Net carrying value
2,626
Intangible assets under development amounted to $88 million as at December 31, 2020 ($77 million as at December 31, 2019). These
intangible assets are not subject to amortization but are tested for impairment on an annual basis.
INTACT FINANCIAL CORPORATION 47
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
15.2 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.
Table 15.2 – Allocation of goodwill and intangible assets with indefinite lives to the groups of CGUs
As at December 31,
Canada
U.S.
Goodwill
Intangible assets
2020
1,910
903
2,813
2019
1,737
889
2,626
2020
829
8
837
2019
829
8
837
In connection with the business combinations completed in 2019, Goodwill in the amounts of $186 million and $34 million were
allocated to the Canada and U.S. groups of CGUs respectively (refer to Note 5 – Business combinations).
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 tests for the groups of CGUs were performed as at June 30, 2020 and 2019.
The Canada and U.S. groups of CGUs, which correspond to the Company’s operating segments, were 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 are based on financial budgets approved by the Board of Directors and determined
using budgeted margins based on past performance and management expectations for the Canada and U.S. groups of CGUs
and their industry.
• Cash flow projections beyond the three-year period are extrapolated using estimated growth rates, based mainly on the Canadian
and U.S. inflation, as well as demographic or gross domestic product growth perspectives.
• Pre-tax discount rate is based on the weighted-average cost of capital for comparable companies whose activities are similar to
the Canada and U.S. groups of CGUs.
Table 15.3 – Key assumptions used (groups of CGUs)
Canada
U.S.
Terminal growth rate
Pre-tax discount rate
2020
2.5%
3.9%
2019
2.5%
3.9%
2020
11.1%
11.1%
2019
9.5%
10.6%
No impairment loss on goodwill or intangible assets with indefinite lives has been recognized for these CGUs for the years ended
December 31, 2020 and 2019.
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 have resulted in an impairment of the Canada and U.S. groups of CGUs.
48 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 16 – Investments in associates and joint ventures
Table 16.1 – Movement in investments in associates and joint ventures
As at December 31,
Balance, beginning of year
Acquisitions, net of sales
Dividends received
Share of profit (loss) recorded in:
net income
OCI
Balance, end of year
Of which:
associates
joint ventures
2020
2019
715
75
(27)
52
(4)
811
446
365
600
109
(20)
31
(5)
715
431
284
During 2020, there were no events or changes in circumstances that indicated that the carrying values of the Company’s investments
in associates and joint ventures, all of which are investments in private entities, may not be recoverable.
Note 17 – Property and equipment
17.1 Net carrying value of property and equipment
Table 17.1 – Net carrying value of property and equipment
As at December 31,
Right-of-use assets1
Furniture and equipment
Leasehold improvements
Land and buildings
2020
349
82
57
32
520
2019
373
74
58
33
538
1 Right-of-use assets mainly related to real estate for which additions for the year ended December 31, 2020 amounted to $45 million ($61 million -
December 31, 2019). Total additions to right-of-use assets related to business combinations was $37 million for the year ended December 31, 2019.
INTACT FINANCIAL CORPORATION 49
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 18 – Other assets and other liabilities
18.1 Other assets
Table 18.1 – Components of other assets
As at December 31,
Financial assets related to investments
Industry pools receivable
Other receivables and recoverables
Reinsurance receivable
Investments, at cost
Prepaids
Restricted funds
Accrued investment income
Premium and sale taxes receivable
Contract assets1
Surplus notes2
Other
2020
2019
230
168
165
137
121
114
86
83
44
16
-
37
1,201
106
137
178
77
90
59
95
77
40
34
36
39
968
1 Unbilled revenues related to supply chain operations.
2 Surplus notes were written-off in 2020 (refer to Note 23 – Net gains (losses)). Previously, they were recorded at fair value based on a discounted
cash flow model using information as of the measurement date and classified in Level 3 of the fair value hierarchy.
Considering the COVID-19 crisis and based on the information currently available, the Company believes that the carrying value of
investments at cost is not impaired as at December 31, 2020.
18.2 Other liabilities
Table 18.2 – Components of other liabilities
As at December 31,
Deposits received in connection with insurance contracts1
Lease liabilities
Commissions payable
Accrued salaries and related compensation
Premium and sale taxes payable
Pension plans in a deficit position and unfunded plans (Note 27.1)
Account payables and accrued expenses
Industry pools payable
Other post-employment benefits and other post-retirement benefits
Reinsurance payable
Contingent considerations2
Deposits received from reinsurers
Other payables and other liabilities3
2020
2019
475
447
297
269
263
260
233
151
55
53
37
26
376
363
461
189
252
266
284
158
131
54
55
143
16
274
1 Unrestricted collateral held by the Company primarily in relation with the surety business.
2 Recorded at fair value based on future profitability metrics, discounted using information as of the measurement date and classified in Level 3 of
the fair value hierarchy (refer to Note 5 – Business combinations).
3 Includes an amount of $107M recorded in 2020 payable to a broker classified as an investment in joint venture (see Note 23 – Net gains (losses)).
2,942
2,646
50 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 19 – Debt outstanding
19.1 New financing
On March 24, 2020, the Company completed an offering of $300 million principal amount of Series 8 unsecured medium-term notes
(the ‘’Notes’’). The Notes bear interest at a fixed annual rate of 3.691% until maturity on March 24, 2025, payable in semi-annual
instalments commencing on September 24, 2020. The net proceeds from this offering of Notes have been used for general corporate
purposes.
Term Loan and Medium-term notes in relation with the RSA acquisition
On November 18, 2020, the Company entered into a €392 million ($600 million) 24-month bank term loan facility agreement which it
plans to draw in EUR at a rate of Libor plus 100bps and which will be drawn upon closing of the acquisition.
On December 16, 2020, the Company completed an offering of $300 million principal amount of Series 9 unsecured medium-term
notes which bear interest at a fixed annual rate of 1.928% until maturity on December 16, 2030, payable in semi-annual instalments
commencing on June 16, 2021. On the same day, the Company completed an offering of $300 million principal amount of Series 10
unsecured medium-term notes which bear interest at a fixed annual rate of 2.954% until maturity on December 16, 2050, payable in
semi-annual instalments commencing on June 16, 2021.
The proceeds of these medium-term notes are held in a segregated account with IFC’s custodian (refer to Note 6.1 - Classification
of investments) and are subject to a special mandatory redemption of the principal amount plus accrued and unpaid interest, if the
closing of the acquisition does not occur prior to December 31, 2021.
19.2 Bridge facility in relation with the RSA acquisition
On November 18, 2020, the Company secured a bridge financing facility (“bridge facility”) if alternative financing is not available by
closing of the acquisition. The bridge facility is subject to a mandatory cancellation if the closing of the acquisition does not occur prior
to November 18, 2021. As at December 31, 2020, the amounts available under the bridge facility included a £341 million ($593 million)
non-revolving equity bridge and a £47 million ($82 million) non-revolving bond bridge.
Refer to Note 5.1 – Business combinations for more details.
19.3 Summary of debt outstanding
Table 19.1 – Carrying value of debt outstanding
As at December 31,
Medium-term notes
Series 2
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8
Series 9
Series 10
2012 U.S. Senior Notes
Term loan (see below)
Other debt1
Credit facility (Note 19.5)
Maturity
date
Initial
term
(years)
Fixed
rate
Coupon
(payment)
Principal
amount
Carrying value (net of
fees)
2019
2020
Nov. 2039
July 2061
Aug. 2021
June 2042
Mar. 2026
June 2027
Mar. 2025
Dec. 2030
Dec. 2050
Nov. 2022
May 2021
Oct 2028
30
50
10
30
10
10
5
10
30
10
1.5
6.40% May & Nov.
Jan. & July
6.20%
Feb. & Aug.
4.70%
5.16%
June & Dec.
3.77% Mar. & Sept.
June & Dec.
2.85%
3.69% Mar. & Sept.
June & Dec.
1.93%
June & Dec.
2.95%
4.60% May & Nov.
250
100
300
250
250
425
300
300
300
USD275
USD165
248
99
300
249
249
423
298
298
298
358
210
11
-
248
99
300
249
249
422
-
-
-
370
260
-
165
3,041
2,362
1 Related to the acquisition of control of a portion of an investment in joint venture (see Note 23 – Net gains (losses)).
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.
INTACT FINANCIAL CORPORATION 51
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
On November 29, 2019, the Company entered into a US$200 million ($266 million) 18-month term loan agreement at a rate of Libor
plus 0.50% and borrowed US$106 million ($141 million) on its credit facility to finance the acquisition of The Guarantee and Frank
Cowan. The credit facility was repaid in full in 2020. On September 30, 2020, Company repaid US$35 million ($47 million) of its term
loan.
Fair value of debt outstanding amounted to $3,482 million as at December 31, 2020 ($2,650 million as at December 31, 2019) and
was established using valuation data from a benchmark firm. As at December 31, 2020 and 2019, the Company was in compliance
with all debt covenants.
19.4 Movement in the Company’s debt outstanding
Table 19.2 – 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
Borrowing (repayment) on the credit facility, net
Repayment of term loan
Repayment of term notes on maturity
Business combinations (Note 5)
Exchange rate differences
Other1
2020
2,362
894
(165)
(47)
-
-
(10)
7
Balance, end of year
1 Includes debt from the acquisition of control of a portion of an investment in joint venture (see Note 23 – Net gains (losses)).
3,041
2019
2,209
266
145
-
(250)
23
(27)
(4)
2,362
19.5 Credit facility
The Company has an unsecured revolving term credit facility available for an amount of $750 million which matures on November 26,
2024. As at December 31, 2020, no balance was drawn under this credit facility as it was repaid in full in 2020 ($138 million or US$106
million as at December 31, 2019) 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 (Canada) plus a margin
Bankers’ acceptance rate plus a margin
Libor rate plus a margin
On December 18, 2020, the credit facility was amended to comply with all covenants upon closing of the RSA acquisition. Furthermore,
the credit facility will be increased from $750 million to $1.5 billion in order to provide incremental liquidity, contingent upon the closing
of the acquisition of RSA.
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, 2020 and 2019.
Note 20 – Common shares and preferred shares
20.1 Authorized
Authorized share capital consists of an unlimited number of common shares and Class A Shares.
20.2 New financing
On February 18, 2020, the Company completed a Class A Series 9 offering of preferred shares (the “Series 9 Preferred Shares”) by
issuing and selling 6,000,000 Series 9 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 Consolidated
balance sheets.
On or after March 31, 2025, the Company may redeem, in whole or in part, at its option, the Series 9 Preferred Shares, subject to
certain conditions.
52 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Private placements of subscription receipts in relation with the RSA acquisition
On November 25, 2020, the Company completed a private placement of subscription receipts (“receipts”) with three Canadian
institutional investors for an aggregate of 23.8 million receipts at a price of $134.50 per receipt for gross proceeds of approximately
$3.2 billion. The related issuance costs of $128 million are contingent on the closing of the acquisition, as a result, they were not
accrued as at December 31, 2020. These fees will be accounted for as a reduction in common shares and will result in net proceeds
of approximately $3.1 billion.
On December 3, 2020, the Company completed a private placement of subscription receipts with a group of underwriters for an
aggregate of 9,272,000 receipts at a price of $134.50 per receipt for gross proceeds of approximately $1.25 billion. Out of the related
issuance costs of $47 million, $23 million was payable on issuance of the receipts using funds in escrow, as a result the Company
recorded a payable and other asset related to the deferred equity issuance costs as at December 31, 2020. The remaining amount is
contingent on the closing of the acquisition, therefore it was not accrued as at December 31, 2020. These fees will be accounted for
as a reduction in common shares and will result in net proceeds of approximately $1.2 billion.
Each receipt entitles the holder to receive one common share of the Company upon closing of the acquisition. The cash proceeds of
these private placements are held in escrow and are not under the control of the Company. As a result, the cash and receipts are not
included in the Consolidated balance sheets as at December 31, 2020.
The receipt holders are entitled to a dividend equivalent payment equal to any common share dividends declared by the Company
from the date of their issuance to the closing of the acquisition. On November 3, 2020, the Company declared dividends of $0.83 per
common share, payable on December 31, 2020 to shareholders on record as of December 15, 2020. The related dividend equivalent
payment of $27 million was not accrued as at December 31, 2020 since such payment is contingent provided the acquisition closes
prior to December 31, 2021.
Refer to Note 5.1 – Business combinations for more details.
20.3 Issued and outstanding
Table 20.1 – 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
Series 7
Series 9
Total Class A
2020
2019
Number of
shares
Amount
(in millions)
Number of
shares
Amount
(in millions)
143,018,134
3,265
143,018,134
3,265
10,000,000
8,405,004
1,594,996
6,000,000
6,000,000
10,000,000
6,000,000
48,000,000
244
206
39
147
147
245
147
10,000,000
8,405,004
1,594,996
6,000,000
6,000,000
10,000,000
-
244
206
39
147
147
245
-
1,175
42,000,000
1,028
Issued and outstanding Class A shares rank in priority to common shares with regards to payment of dividends.
Table 20.2 – Reconciliation of number of shares outstanding
As at December 31,
Balance, beginning of year
Issued
Balance, end of year
Common shares
Preferred shares
(in shares)
2020
Class A shares (in shares)
2019
2020
2019
143,018,134
-
139,188,634
3,829,500
42,000,000
6,000,000
42,000,000
-
143,018,134
143,018,134
48,000,000
42,000,000
On December 2, 2019, concurrent to the acquisition of The Guarantee and Frank Cowan, 3,829,500 subscription receipts (“receipts”)
were converted into 3,829,500 common shares. The Company completed its offering of receipts on August 26, 2019 at a price of
$120.45 per receipt, for aggregate gross proceeds of $461 million. Share issuance costs of $17 million ($12 million after tax), were
accounted for as a reduction in common shares on the Consolidated balance sheets.
INTACT FINANCIAL CORPORATION 53
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
20.4 Dividends declared and paid per share
Table 20.3 – 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
Series 7
Series 9
2020
3.32
0.85
0.83
0.89
1.30
1.33
1.23
1.17
2019
3.04
0.85
0.83
1.08
1.30
1.33
1.23
-
The holders of record of the Company’s 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, 2020
to but excluding December 31, 2020 was 0.70609% (2.809% 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.
• Series 6 Preferred Shares – The annual dividend rate is 5.30% and is not subject to a rate reset.
• Series 7 Preferred Shares – The annual dividend rate until June 30, 2023 is 4.90%, the dividend rate will be reset at this
time and every five years thereafter.
• Series 9 Preferred Shares – The annual dividend rate is 5.40% and is not subject to a rate reset. The initial dividend paid
on June 30, 2020 amounted to $0.4906 per share.
54 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 21 – Capital management
21.1 Capital management objectives
The Company’s objectives when managing capital consist of:
• maximizing long-term shareholder value by optimizing capital used to operate and grow the Company; and
• maintaining strong regulatory capital levels, to ensure policyholders are well protected.
The Company seeks to maintain adequate 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 capital margin when it foresees growth or actionable opportunities in the near term. Furthermore,
the Company may return capital to shareholders through annual dividend increases and, when appropriate, through share buybacks.
Any deployment of capital is executed within the context of the stated capital management objectives and only after careful
consideration of the impact on the Company’s risk metrics.
Regulatory capital
The amount of capital in any particular company or country depends upon the Company’s internal assessment of capital adequacy in
the context of its risk profile and strategic plans, as well as local regulatory requirements. The Company’s objective is to maintain the
capitalization of its regulated operating subsidiaries above 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 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.
•
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.
U.S.
• 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 RBC requirements.
21.2 Capital position
As at December 31, 2020 and 2019, all of the Company’s 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 CALs. CALs represent the
thresholds below which regulator notification is required together with a company action plan to restore capital levels.
Table 21.1 – Estimated aggregate capital position
As at December 31,
Canadian regulated entities
Regulatory capital ratio (MCT)
Industry-wide supervisory minimum levels
Capital above CAL (capital margin)
Other regulated entities
Capital above CAL (capital margin)¹
Unregulated entities
Total capital margin2
2020
2019
224%
150%
1,101
640
988
2,729
198%
150%
554
630
38
1,222
1 Includes Atlantic Specialty Insurance Company (U.S.) (“ASIC”), Split Rock Insurance, Ltd. (Bermuda), IB Reinsurance Inc. (Barbados). The
Guarantee Company of North America USA was included in Other regulated entities as at December 31, 2020 and in Canadian regulated entities
as at December 31, 2019. ASIC’s RBC was 469% as at December 31, 2020 (457% as at December 31, 2019).
2 Consists of the aggregate of capital in excess of CALs in regulated entities plus available cash and investments in unregulated entities, including
the $600 million from the medium-term notes issued on December 16, 2020. The CAL is 165% MCT for most Canadian insurance subsidiaries
effective April 1, 2020 (previously CAL of 170% MCT) and 200% RBC for U.S. insurance subsidiaries.
INTACT FINANCIAL CORPORATION 55
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
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 2020 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.
The Company took actions to maintain solid capital levels despite the COVID-19 crisis, including reducing its common equity portfolio,
issuing medium-term notes (refer to Note 19 – Debt outstanding) and injecting funds into its insurance subsidiaries (refer to Section
25.3 – Maintaining a strong capital position of the Company’s MD&A).
2020
2019
177
158
23
358
70
96
76
(1)
1
242
(23)
577
182
166
26
374
66
102
62
(6)
1
225
(23)
576
Note 22 – Net investment income
Table 22.1 – Net investment income
For the years ended December 31,
Interest income from:
debt securities
designated or classified as FVTPL
classified as AFS
loans and cash and cash equivalents
Interest income
Dividend income (expense) from:
common shares, net
designated or classified as FVTPL
classified as AFS
preferred shares classified as AFS
equities sold short positions
investments, at cost
Dividend income
Expenses
56 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 23 – Net gains (losses)
23.1 Net gains (losses)
Table 23.1 – Net gains (losses)
For the years ended December 31,
2020
2019
Portfolios
Net gains (losses) from:
financial instruments:
designated as FVTPL
classified as FVTPL
classified as AFS
derivatives1:
swap agreements
forwards and futures
other
Embedded derivatives
Net foreign currency gains (losses)
Impairment losses on common shares
Currency derivative hedges related to the
RSA acquisition (see Note 8.3):
Purchase price2
Book value
Other gains (losses) 3,4,5
Fixed
Income
Equity
Total
Fixed
Income
Equity
Total
237
-
35
272
-
(2)
-
(2)
-
(1)
-
269
(140)
(5)
102
(43)
85
(34)
-
51
(14)
11
(121)
(116)
97
(5)
137
229
85
(36)
-
49
(14)
10
(121)
153
41
(22)
10
182
115
-
25
140
-
(11)
-
(11)
-
-
-
129
173
1
85
259
(201)
(34)
2
(233)
(5)
-
(76)
(55)
288
1
110
399
(201)
(45)
2
(244)
(5)
-
(76)
74
-
-
91
165
1 Excluding foreign currency contracts, which are reported in the line net foreign currency gains (losses).
2 Includes a hedging premium associated with deal contingent forwards.
3 Includes a gain of $21 million recorded in 2020 related to the acquisition of control of a portion of an investment in joint venture’s business.
4 Includes an impairment loss of $30 million recorded in 2020 for the write-off of Surplus notes net of an unrealized gain of $6 million previously
recognized in OCI and reclassified to Net income.
5 Includes a gain of $14 million recorded in 2020 and of $72M recorded in 2019 related to changes of control which were accounted for as disposals
of the subsidiaries’ net assets, including the related goodwill, in exchange for joint venture investments retained by the Company in the former
subsidiaries.
23.2 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.
For common shares in an unrealized loss position of 50% or more (“significant”) as at March 31, 2020, the Company considered
additional factors before concluding to an evidence of impairment, given the unprecedented volatility and uncertainty in the worldwide
financial markets in March 2020 as a result of the COVID-19 pandemic. Additional factors reviewed included publicly announced
dividend reductions and average stock performance in March as well as the review of sector and specific securities. Since the second
quarter, financial markets and volatility have stabilized. As a result, the Company applied its usual quantitative impairment model
policy.
INTACT FINANCIAL CORPORATION 57
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 24 – Income taxes
24.1 Income tax expense recorded in Net income
Table 24.1 – Components of income tax expense recorded in Net income
For the years ended December 31,
Current income tax expense
Current year1
Adjustments to prior years
Deferred income tax expense (benefit)
Change related to temporary differences2
Adjustments related to changes in tax legislation3
Adjustments related to the U.S. Corporate Tax reform4
Adjustments to prior years
2020
2019
322
1
(58)
-
14
(2)
277
121
-
(19)
(18)
-
(5)
79
1 Includes non-taxable gains of $21 million recorded in 2020 related to the acquisition of control of a portion of an investment in joint venture’s business
and $14 million recorded in 2020 and $72 million recorded in 2019 related to a change of control of a subsidiary (refer to Note 23 – Net gains
(losses)).
2 Includes a deferred income tax benefit of $22 million recorded in 2019 related to the recognition of a capital loss carry forward of $193 million net of
unrealized capital gains of $28 million.
3 Includes a deferred income tax benefit of $17 million recorded in 2019 related to changes in the taxable status of a Canadian subsidiary.
4 Includes a current tax expense of $14 million recorded in 2020 related to U.S. corporate tax changes which limit tax deductions for interest payable
on certain debt in a U.S. subsidiary. The rules are applicable retroactive to January 1, 2019.
24.2 Effective income tax rate
The effective income tax rates are different from the combined Canadian federal and provincial statutory income tax rates. The
Consolidated statements of comprehensive income contain items that are non-taxable or non-deductible for income tax purposes,
which cause the income tax expense to differ from what it would have been if based on statutory tax rates.
The following table presents the reconciliation of the effective income tax rate to the income tax expense calculated at statutory tax
rates.
Table 24.2 – 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 investment income
non-deductible losses (non-taxable gains)1
non-deductible losses (non-taxable income) from subsidiaries
foreign income taxed at different rates
recognition of previously unrecognized capital losses1
adjustments related to changes in tax legislation1
non-deductible expenses
adjustments related to the U.S. Corporate Tax reform1
other
Effective income tax rate
1 See Note 24.1 above for details.
2020
26.2%
(4.5)%
(1.3)%
(1.0)%
(0.2)%
(0.2)%
-
0.6%
1.1%
(0.3)%
20.4%
2019
26.7%
(7.5)%
(3.0)%
(1.0)%
(1.3)%
(2.6)%
(2.2)%
0.9%
-
(0.5)%
9.5%
24.3 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.
58 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
24.4 Components of deferred tax assets and liabilities
Table 24.3 – Components of deferred tax assets and liabilities
As at December 31,
Net claims liabilities
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 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)
2020
2019
2020
2019
140
-
65
148
71
2
426
(449)
(6)
(59)
(12)
(526)
(100)
117
-
64
186
76
4
447
(494)
(7)
(51)
(6)
(558)
(111)
(25)
-
(1)
39
4
2
19
(61)
(2)
7
6
(50)
(31)
5
32
(2)
(11)
(24)
7
7
(54)
(2)
21
6
(29)
(22)
The Company believes that it is probable that it will generate sufficient taxable income in the future to realize the above deferred tax
assets.
The Company recognizes a deferred tax liability on all temporary differences associated with investments in subsidiaries and
associates unless it can control the timing of the reversal of these differences and it is probable that these differences will not reverse
in the foreseeable future. As at December 31, 2020 and 2019, no deferred tax liability has been recognized on the temporary
differences of $318 million (2019 – $120 million) associated with investments in subsidiaries and associates.
24.5 Movement in the net deferred tax asset (liability)
Table 24.4 – Movement in the net deferred tax asset (liability)
As at December 31,
Balance, beginning of year
Impact of the adoption of IFRS 16
Adjusted balance, beginning of year
Income tax benefit (expense):
recorded in net income
recorded in OCI
recorded in equity
Business combinations and other acquisitions
Exchange rate differences and other
Balance, end of year
Reported in:
deferred tax assets
deferred tax liabilities
2020
(111)
-
(111)
46
(15)
1
(24)
3
(100)
179
(279)
2019
(98)
14
(84)
42
(20)
6
(58)
3
(111)
175
(286)
INTACT FINANCIAL CORPORATION 59
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
24.6 Unused tax losses and credits
The following table presents a summary of unused tax losses and credits, as well as the amount for which a deferred tax asset was
recognized on the Consolidated Balance sheets as at December 31, 2020 and 2019.
Table 24.5 – Unused tax losses and credits
As at December 31,
Unused net operating losses:
U.S. subsidiaries
Canada
Unused tax credits:
U.S. subsidiaries
Unused allowable capital losses:
Canada
219
256
29
5
2020
Total Recognized
Expiry date
2019
Total Recognized
219
254
29
2033-2036
2037-2040
2030-2040
297
252
32
297
246
32
Expiry date
2033-2037
2037-2039
2030-2039
1
No expiry date
100
100
No expiry date
Unused tax credits can be used to offset U.S. tax payable in the future. Unused allowable capital losses can be used to reduce future
taxable capital gains in Canada.
24.7 Dividend received deduction
In 2020, the Canada Revenue Agency and Alberta Tax and Revenue Administration reassessed the Company for additional income
tax and interest in respect to the 2013 taxation year. Also, the Company expects to receive a reassessment from Revenu Québec in
respect of the 2013 taxation year. These tax authorities are denying certain dividend deductions on the basis that they were part of
a “dividend rental arrangement”. The total amount of additional income taxes and interests owed for the 2013 taxation year is
approximately $11 million. The Company also expects to be reassessed for subsequent years up to 2016 on the same basis. The
Company is confident that its tax filing position was appropriate and intends to defend itself vigorously. As a result, no amounts have
been accrued in the Consolidated financial statements.
Note 25 – Earnings per share
EPS was calculated by dividing the Net income attributable to common shareholders of the Company by the weighted-average number
of common shares outstanding during the year. Dilution is not applicable and, therefore, diluted EPS is the same as basic EPS.
Table 25.1 – Earnings per share
For the years ended December 31,
Net income attributable to shareholders
Less: dividends declared on preferred shares, net of tax
Net income attributable to common shareholders
Weighted-average number of common shares outstanding (in millions)
EPS – basic and diluted (in dollars)
2020
1,082
52
1,030
143.0
7.20
2019
754
45
709
139.5
5.08
60 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 26 – Share-based payments
26.1 Long-term incentive plan
a)
Outstanding LTIP units and fair value at grant date
Table 26.1 – Outstanding units and weighted-average fair value at grant date by performance cycle
As at December 31,
Performance cycles
2017 - 2019
2017 - 2022
2018 - 2020
2019 - 2021
2020 - 2022
Number of
units
-
105,515
458,165
451,640
404,755
1,420,075
2020
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
Number of
units
2019
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
-
103.88
105.14
102.36
136.06
112.64
-
11
48
46
55
277,572
115,991
494,575
469,658
-
160
1,357,796
93.30
103.88
105.14
102.36
-
101.70
26
12
52
48
-
138
b)
Movements in LTIP units
Table 26.2 – Movements in LTIP share units
For the years ended December 31,
Outstanding, beginning of year
Awarded
Net change in estimate of units outstanding
Units settled
Outstanding, end of year
2020
(in units)
1,357,796
370,510
(25,549)
(282,682)
1,420,075
2019
(in units)
1,087,611
411,500
130,264
(271,579)
1,357,796
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 26.3 – LTIP expense recognized in Net income
For the years ended December 31,
Cash-settled plans
Equity-settled plans
26.2 Employee share purchase plan
a)
Movements in restricted common shares
Table 26.4 – Movements in restricted common shares
For the years ended December 31,
Outstanding, beginning of year
Accrued
Awarded and vested
Forfeited
Outstanding, end of year
2020
13
38
51
2019
15
43
58
2020
(in units)
116,036
124,076
(115,299)
(1,699)
123,114
2019
(in units)
131,681
118,508
(129,021)
(5,132)
116,036
INTACT FINANCIAL CORPORATION 61
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
ESPP expense recognized in Net income
b)
The ESPP is accounted for as an equity-settled plan. For the years ended December 31, 2020 and 2019, the ESPP expense was $14
million.
26.3 Deferred share unit
The DSU is accounted for as a cash-settled plan. For the years ended December 31, 2020, the expense was $3 million ($5 million –
December 31, 2019). The DSU provision amounted to $18 million as at December 31, 2020 ($15 million as at December 31, 2019).
26.4 Common shares repurchased for share-based payments
The settlement in shares with regards to the Company’s LTIP and ESPP plans is presented below.
Table 26.5 – Settlement in shares (LTIP and ESPP plans)
For the years ended 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
2020
2019
49
35
14
11
43
36
7
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.
Note 27 – Employee future benefits
The Company has 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. In
Canada, the Company provides active employees a choice between a DB and a
defined contribution pension plan. In the U.S., the Company offers a 401(k) plan to its
employees.
DB pension obligation
(as at the date of the latest actuarial valuation)
Active members
Pensioners and beneficiaries
Deferred members
8%
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.
33%
59%
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.
62 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
27.1 Funded status
The DB obligation, net of the fair value of plan assets, is recognized on the Consolidated 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 27.1 – 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 – plans in a deficit position and unfunded plans
Funded status – funded plans
Pension plans
2020
(3,151)
2,891
(260)
-
(260)
(260)
97%
2019
(2,756)
2,472
(284)
-
(284)
(284)
94%
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, 2018. The Company’s liquidity risk with regards to pension plans is not significant, as inflows from
contributions receivable mostly offset 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.
27.2 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 27.2 – Movement in the DB obligation
As at December 31,
Balance, beginning of year
Current service cost
Interest expense on DB obligation
Actuarial losses (gains) due to changes in:
financial assumptions
plan experience
Employee contributions
Benefit payments
Business combinations
Balance, end of year
Pension plans
2020
2,756
72
84
263
34
36
(94)
-
2019
2,271
53
84
340
30
34
(85)
29
3,151
2,756
27.3 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.
INTACT FINANCIAL CORPORATION 63
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
a)
Movement in the fair value of plan assets
Table 27.3 – Movement in the fair value of plan assets
As at December 31,
Balance, beginning of year
Employer contributions
Employee contributions
Actual return on plan assets
Interest income on plan assets recognized in Net income
Actuarial gains (losses) recognized in OCI
Benefit payments
Business combinations
Other
Balance, end of year
b)
Composition of pension plan assets
Table 27.4 – Composition of pension plan assets
As at December 31,
Cash and short-term notes
Fixed income
Investment grade
Government
Corporate
Asset-backed
Debt securities
Common shares
Derivative financial instruments
Securities sold under repurchase agreements
Pension plans
2020
2,472
51
36
74
356
(94)
-
(4)
2,891
2019
2,080
47
34
75
299
(85)
26
(4)
2,472
2020
2019
Fair value
% of total
Fair value
% of total
(7)
-
4
-
1,391
661
2
2,054
1,043
59
(258)
2,891
48%
23%
-
71%
36%
2%
(9)%
1,198
530
2
1,730
891
28
(181)
49%
21%
-
70%
36%
1%
(7)%
100%
2,472
100%
Plan assets are essentially all quoted in an active market.
Based on the latest projections of the financial position of all its plans, total cash contributions by the Company are expected to be
approximately $59 million in 2021 compared to actual contributions of $51 million in 2020. The contributions will vary depending on
the number of active members accruing benefits and their level of pensionable earnings, the results of any new 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.
64 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
27.4 Employee future benefit expense recognized in Net income
Table 27.5 – Employee future benefit expense recognized in Net income
For the years ended December 31,
Current service cost
Net interest expense
Interest expense on DB obligation
Interest income on plan assets
Other
27.5 Actuarial gains (losses) recognized in OCI
Table 27.6 – Actuarial gains (losses) recognized in OCI
For the years ended December 31,
Remeasurements related to:
change in discount rate used to determine the DB obligation
actual return on plan assets
change in other financial assumptions
changes in plan experience
Pension plans
2020
72
84
(74)
4
86
2019
53
84
(75)
4
66
Pension plans
2020
2019
(229)
356
(34)
(34)
59
(340)
299
-
(30)
(71)
Remeasurements of the DB obligation and pension plan assets were impacted by the market volatility resulting from the COVID-19
crisis (refer to Note 27.6 a) – Assumptions used and sensitivity analysis).
27.6 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 actual 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. The COVID-19 crisis impacted the long-term yields of high-quality corporate bonds,
which resulted in significant volatility in the discount rate in the first half of the year.
INTACT FINANCIAL CORPORATION 65
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 27.7 – 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,
Expense
For the years ended December 31,
2020
2019
2020
2019
2.71%
n/a
n/a
2.75%
2.49%
1.74%
22.2
24.6
3.15%
n/a
n/a
2.75%
2.34%
1.59%
22.2
24.6
n/a
3.18%
2.97%
2.75%
2.34%
1.59%
22.2
24.6
n/a
3.91%
3.62%
2.75%
2.39%
1.64%
22.2
24.6
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. Assumptions regarding life expectancy for pensioners are based on
the standard Canadian private sector mortality table published in 2014 by the Canadian Institute of Actuaries (“CPM2014Priv table”).
The assumptions also reflect the results of a mortality experience study conducted in 2018.
The following table presents the sensitivity analysis of the DB pension obligation to key assumptions.
Table 27.8 – Sensitivity of the DB pension obligation to key assumptions
As at December 31,
Change
2020
2019
increase
decrease
increase
decrease
Discount rates
Rate of increase in future compensation
Rate of inflation
Life expectancy
1%
1%
1%
One year
(541)
144
98
83
729
(125)
(89)
(83)
(461)
121
88
69
618
(106)
(80)
(69)
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 (decrease) in life expectancy has been approximated by
measuring the impact of members being one year younger (older) than their actual age on the valuation date.
27.7 Risk management and investment strategy
Employee DB provisions expose the Company to balance sheet volatility resulting from changes in actuarial assumptions (such as
longevity, interest rates, credit spreads and inflation). 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.
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 on 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
66 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. 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 of sustaining 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, 2020)
Debt securities
Common shares
Other
2%
36%
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 10.4 – 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 plans’ invested
assets and the duration of its contractual liabilities. The Company calculates an interest rate hedge ratio as the interest rate duration
of the pension asset portfolio divided by the duration of the funded registered pension plans’ obligation. A lower interest rate hedge
ratio increases the Company’s exposure to changes in interest rates. The interest rate hedge ratio was 72% as at December 31, 2020
(70% as at December 31, 2019).
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, 2020 21% of
pension plan assets were invested in Canada Government Real Return Bonds (21% as at December 31, 2019).
The Company used repurchase agreements to partly fund the increase of fixed income securities in the pension plan asset mix with
the objective to improve its asset-liability matching.
INTACT FINANCIAL CORPORATION 67
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 28 – Segment information
28.1 Reportable segments
The Company has two reportable segments, in line with its management structure and internal financial reporting which is based on
country, and the nature of its activities.
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, including the results of the Canadian operations of The Guarantee in 2020.
• Distribution and other include the results from the Company’s wholly owned subsidiaries (Brokerlink Inc. and Frank Cowan
Company Limited) and broker affiliates as well as supply chain operations from On Side.
U.S.
• Underwriting of specialty contracts mainly to small and midsize businesses in the United States, including the results of the U.S.
operations of The Guarantee in 2020. The Company distributes insurance through independent agencies, brokers, wholesalers
and managing general agencies.
Corporate and Other (“Corporate”) consists of investment management, treasury and capital management activities, as well as other
corporate activities, including internal reinsurance. In 2019, the results of The Guarantee were included in Corporate and its
underwriting results were included in other income (expense) from the acquisition date.
28.2 Segment operating performance
All segment operating revenues presented in Table 28.1 – Segment operating performance are generated from external
customers.
Management measures the profitability of the Company’s segments based on PTOI which excludes 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. In addition, the Company presents:
• Other underwriting revenues against Underwriting expenses, as a result, they are not included in segment operating revenues;
• Share of profit from investments in associates & JV before interest and taxes from affiliated brokers (“broker associates”);
•
Finance costs including finance costs from broker associates.
The reconciliation of the segment information to the amounts reported in the Consolidated statements of income is presented in Table
28.2 – Reconciliation of segment information to amounts reported in the Consolidated statements of income.
68 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Table 28.1 – Segment operating performance1
For the years ended December 31,
Canada
U.S. Corporate
Total Canada
U.S. Corporate
Total
2020
2019
Operating income
NEP
Investment income
Other
Segment operating revenues
Net claims incurred (before MYA)
Underwriting expenses
Investment expenses
Share of profit from invest. in associates & JV
Finance costs
Other
PTOI
Operating income taxes
NOI
PTOI is comprised of:
underwriting income
net investment income
distribution EBITA and other
finance costs
other income (expense)
Investments (Note 6)
Net claims liabilities (Table 11.1)
9,633
-
309
9,942
(5,571)
(2,908)
-
121
(11)
(155)
1,418
1,154
-
275
(11)
-
-
9,869
1,582
-
-
1,582
(893)
(608)
-
-
-
-
81
8,775
-
196
8,971
(5,950)
(2,462)
-
97
(10)
(84)
562
1,431
-
-
1,431
(796)
(538)
-
-
-
-
97
5
600
18
623
(13)
-
(23)
-
(115)
(55)
417
11,220
600
327
12,147
(6,477)
(3,516)
(23)
121
(126)
(210)
1,916
(445)
1,471
81
-
-
-
-
(8)
577
-
(115)
(37)
1,227
577
275
(126)
(37)
363
-
209
(10)
-
97
-
-
-
-
5
576
-
(110)
(23)
-
1,530
20,630
-
20,630
11,399
-
8,568
-
1,422
18,608 18,608
556 10,546
599
50
5 10,211
599
246
654 11,056
(6,746)
(3,000)
(23)
97
(120)
(157)
1,107
(202)
-
-
(23)
-
(110)
(73)
448
905
465
576
209
(120)
(23)
1 See Section 36 – Non IFRS financial measures of the Company’s MD&A for the definition and reconciliation of related operating measures.
Table 28.2 – Reconciliation of segment information to amounts reported in the Consolidated statements of income
For the years ended December 31,
Segment operating revenues (Table 28.1)
Add: other underwriting revenues
Add: NEP from exited lines
Revenues, as reported
Segment PTOI (Table 28.1)
Non-operating items1:
net gains (losses)
positive (negative) impact of MYA on underwriting
amortization of intangible assets recognized in business combinations
acquisition, integration and restructuring costs
non-operating pension expense
underwriting results from exited lines
other non-operating costs
Pre-tax income, as reported in the MD&A
Less: income taxes from broker associates
Pre-tax income, as reported
2020
12,147
135
21
12,303
1,916
182
(315)
(154)
(115)
(53)
(62)
(18)
1,381
(22)
1,359
2019
11,056
119
32
11,207
1,107
165
(125)
(107)
(57)
(48)
(66)
(19)
850
(17)
833
1 See Section 35 – Non-operating results of the Company’s MD&A for the definition of related non-operating measures.
INTACT FINANCIAL CORPORATION 69
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
28.3 Information by geographic areas
Table 28.3 – Geographic areas
As at December 31,
Canada
U.S.
Revenues
2020
10,630
1,673
12,303
2019
9,627
1,580
11,207
Total assets
2020
28,235
6,884
35,119
2019
24,907
7,385
32,292
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 28.4 – Significant operating subsidiaries by geographic areas
Operations
Canada
• Belair Insurance Company Inc.
• Brokerlink Inc.
• Equisure Financial Network Inc.
Frank Cowan Company Limited
•
Intact Insurance Company
•
IB Reinsurance Inc.
•
U.S.
• Atlantic Specialty Insurance Company
•
Intact Insurance Group USA Holdings Inc.
Legal entities
Jevco Insurance Company
•
• Novex Insurance Company
• On Side Developments Ltd.
•
•
•
The Guarantee Company of North America
The Nordic Insurance Company of Canada
Trafalgar Insurance Company of Canada
Intact U.S. Financial Services Inc.
•
• Split Rock Insurance, Ltd.
•
The Guarantee Company of North America USA
Note 29 – Additional information on the Consolidated statements of cash flows
29.1 Adjustments for non-cash items
Table 29.1 – Adjustments for non-cash items
For the years ended December 31,
Depreciation of property and equipment1
Amortization of intangible assets
Net premiums on debt securities classified as AFS
DB pension expense
Share-based payments expense
Share of profit from investments in associates and joint ventures
Other
1 Includes depreciation of right-of-use assets of leases.
29.2 Changes in other operating assets and liabilities
Table 29.2 – Changes in other operating assets and liabilities
For the years ended December 31,
Unearned premiums, net
Premiums receivable, net
Deferred acquisition costs, net
Other operating assets
Other operating liabilities
Dividends received from investments in associates and joint ventures
70 INTACT FINANCIAL CORPORATION
2020
2019
116
198
31
86
65
(52)
(7)
437
2020
375
(246)
(70)
(124)
295
27
257
95
140
15
66
72
(31)
6
363
2019
274
(136)
(63)
(5)
35
20
125
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 30 – Related-party transactions
The Company enters into transactions with associates and joint ventures in the normal course of business, as well as with key
management personnel and pension plans. Transactions with related parties are at normal market prices and mostly comprise
commissions for insurance policies and interest and principal payments on loans.
30.1 Transactions with associates and joint ventures
Table 30.1 – Transactions with associates and joint ventures
As at December 31,
Income and expenses reported in:
net investment income
underwriting expenses
Assets and liabilities reported in:
loans and other receivables
other payables and other liabilities
commissions payable
2020
2019
5
349
279
107
60
6
302
294
-
33
30.2 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 $28 million for the year ended December 31, 2020 ($27 million – December 31, 2019).
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.
30.3 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 $8 million for the year ended December 31,
2020 ($7 million – December 31, 2019). The Company made contributions to pension plans of $51 million for the year ended December
31, 2020 ($47 million – December 31, 2019).
Note 31 – Commitments and contingencies
31.1 Commitments
The Company has entered into commercial leases mainly related to real estate right-of-use assets, as well as other commitments.
The remaining life of these commitments ranges from one to 15 years. Refer to Note 10.5 b) – Financial liabilities by contractual
maturity and Note 18.2 – Other liabilities for details on lease liabilities.
Other non-cancellable commitments
a)
The following table presents other non-cancellable commitments including operational costs and variable lease payments.
Table 31.1 – Other non-cancellable commitments
As at December 31, 2020
Less than 1 year
From 1 to 5 years
Over 5 years
1 Includes variable lease payments not based on an index or rate, such as property taxes.
Leases1
Other
Total
56
179
196
431
61
139
21
221
117
318
217
652
INTACT FINANCIAL CORPORATION 71
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
b)
Amounts recognized in the Consolidated statements of income
Table 31.2 – Amounts recognized in the Consolidated statements of income
For the year ended December 31,
Interest expense on lease liabilities
Operational costs and variable lease payment expenses
2020
13
65
2019
13
58
31.2 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. For details on class actions relating to business interruption coverage refer to
Note 3.2 – COVID-19 pandemic.
The Company provides indemnification agreements to directors and officers, to the extent permitted by law, against certain claims
made against them as a result of their services to the Company. The Company has insurance coverage for these agreements.
Note 32 – Disclosures on rate regulation
32.1 Canada
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 32.1 – 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 and then
implement the proposed rates.
Use and file
Rates are filed following use.
In Canada, essentially all provinces and territories use a “file and approve” rate setting mechanism except for Quebec, which uses a
“use and file” mechanism. Automobile DPW covered by a “file and approve” rate setting mechanism totalled $3.8 billion, or 72% of
the Canadian Company’s automobile DPW for the year ended December 31, 2020 ($3.6 billion, or 75% – December 31, 2019).
32.2 U.S.
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. The Company’s ability to increase rates and the timing of the process are dependent upon
the regulatory requirements in each state.
72 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
Note 33 – Standards issued but not yet effective
33.1 Insurance contracts
In May 2017, the IASB published IFRS 17 – Insurance Contracts (“IFRS 17”) a comprehensive new accounting standard for insurance
contracts covering recognition, measurement, presentation and disclosure, which replaces IFRS 4 – Insurance Contracts (“IFRS 4”)
and introduces consistent accounting for all insurance contracts.
The original effective date was for annual periods beginning on or after January 1, 2021, however, in June 2019, the IASB issued an
exposure draft which proposed amendments to IFRS 17, including the deferral of the effective date by one year to January 1, 2022.
In March 2020, the IASB tentatively decided to further extend the deferral of the effective date to January 1, 2023 as well as extend
the temporary exemption from applying IFRS 9 as provided by IFRS 4 until the effective date of IFRS 17. In June 2020, amendments
to the final standard were issued and the IASB officially extended the deferral of the effective date to January 1, 2023. The Company
plans to adopt the new standard on the required effective date together with IFRS 9.
In addition to the deferred effective date, the main amendments that would be applicable to the Company are the following: the
recognition of a loss recovery on reinsurance contracts held when an underlying insurance contract is onerous, the transitional reliefs
related to contracts acquired in their settlement period and the treatment of accounting estimates in the interim financial statements.
IFRS 17 provides a general measurement model for the recognition of insurance contracts, which requires measuring insurance
contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance
contracts. In addition, entities have the option to use a simplified measurement model (premium allocation approach) for short-duration
contracts, which is similar to the current approach; this model will be applicable to most property and casualty insurance contracts
issued by the Company.
The main features of the standard that would be applicable to property and casualty insurance contracts are as follows:
•
•
•
•
The concept of portfolio, which is composed of groups of contracts covering similar risks and managed together as a single
pool. The presentation of insurance and reinsurance contracts on the balance sheet is determined at the portfolio level;
The concept of group, which is composed of sets of contracts with similar profitability issued within the same year. The
following are determined at the group level: the measurement model, the revenue pattern, the allocation of deferred
acquisition costs, the calculation of risk adjustment, onerous contracts and the application of the discount rate;
The loss component of onerous contracts measured based on projected profitability will be recognized in Net income as
soon as insurance contracts are issued;
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. The effect of changes in discount rates will be recorded either in Net
income or in OCI, according to the accounting policy choice;
• Changes in balance sheet presentation where the premiums receivable, deferred acquisition costs, claims liabilities,
unearned premiums and other related assets and liabilities will be presented together by portfolio on a single line called
insurance contract liabilities or assets. Reinsurance assets, reinsurance receivables, deferred acquisition costs ceded, and
other related assets and liabilities will be presented together by portfolio on a single line called reinsurance contract assets
or liabilities;
• Direct premiums written will no longer be presented in statements of income. The new insurance revenue will reflect services
•
that have been provided during the period (similar to the current earned premiums);
Insurance results will be presented without the impact of discounting. Amounts relating to financing and changes in discount
rates will be shown separately;
• Extensive disclosures to provide information on the recognized amounts from insurance contracts and the nature and extent
of risks arising from these contracts.
The Company has devoted considerable resources and efforts to the implementation of IFRS 17 since its issuance in May 2017. A
program structure was put in place, comprised of a dedicated multi-disciplinary team representing Finance, Actuarial and Information
Technology. Strong governance was established to assist program sponsors who report regularly to the Executive Steering
Committee.
In 2020, the Company progressed in its efforts towards formulating accounting policies, documenting detailed requirements and
designing new processes. As well, the Company has made progress with regards to the development and the testing of the
technological solutions required for the compliance with IFRS 17 requirements. The Company also continued to have regular
discussions with industry groups and other stakeholders regarding adoption and interpretation of the standard. In 2021, the Company
is aiming to finalize its accounting policies, monitor regulatory changes, evaluate the impact on processes and continue the
development and testing of the technological solutions started in 2020.
The Company is currently evaluating the impact that IFRS 17, in conjunction with IFRS 9, will have on its Consolidated financial
statements but has not yet determined the impact.
INTACT FINANCIAL CORPORATION 73
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
33.2 Financial instruments
IFRS 9 is a three-part standard that replaced IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”) and is 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 and has elected to defer the application of IFRS 9 until the effective date of the new
insurance contracts standards IFRS 17 (see Note 33.1 – Insurance contracts). The Company is currently evaluating the impact that
IFRS 9, in conjunction with IFRS 17, will have on its Consolidated financial statements but has not yet determined the impact.
Classification and measurement
The classification of debt instruments is dependent on the business model and the cash flow 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.
Cash and cash equivalents, deposits with financial institutions, and receivables pass the SPPI test and are held at amortized cost,
whereby the amortized cost is assumed to approximate fair value due to the short-term nature of the assets.
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.
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 life-time expected credit losses if the credit risk increases significantly.
As an exception from the general requirements, an entity may assume that the criterion for recognizing lifetime expected credit losses
is not met if the credit risk on the financial instrument is low (“investment grade”) at the reporting date.
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.
74 INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
33.3 Reference to the Conceptual Framework (amendments to IFRS 3)
In May 2020, the IASB issued amendments to IFRS 3 to update references to the revised Conceptual Framework without significantly
changing its requirements (see Note 4.3 - Conceptual Framework for financial reporting). It also added an exception to the
recognition principle of IFRS 3 to avoid the issue of potential day 2 gains or losses for some types of liabilities and contingent liabilities.
Finally, it clarified existing guidance by explicitly prohibiting the recognition of contingent assets in a business combination.
The amendments apply prospectively to annual periods beginning on or after January 1, 2022, with earlier application permitted. The
Company does not expect any significant impact from the adoption of these amendments.
33.4 Interest rate benchmark reform ‒ Phase 2
In August 2020, the IASB issued amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Leases (“IFRS 16”). The amendments
complement those issued in 2019 (see Note 4.4 – Interest rate benchmark reform) and focus on the effects on financial statements
when an entity replaces an old interest rate benchmark with an alternative benchmark rate as part of the reform.
The amendments clarify that, if the contractual cash flows of a financial instrument are modified as a result of the reform, an entity
updates the effective interest rate to reflect the change instead of derecognizing it or adjusting its carrying amount. In addition, hedge
accounting relationships shall not be discontinued if changes are required by the reform, as long as the hedge meets other hedge
accounting criteria. Finally, additional disclosures about new risks arising from the reform and how the entity manages the transition
to alternative benchmark rates are required.
The amendments apply retrospectively to annual periods beginning on or after January 1, 2021, with earlier application permitted.
Companies are not required to restate prior periods. The Company is currently assessing the impact of these amendments.
INTACT FINANCIAL CORPORATION 75
Glossary
Table of contents
This glossary includes IFRS and Non-IFRS financial measures, as well as other insurance-related terms used in our financial reports. See
our MD&A for the year ended December 31, 2020 for further details.
Acquisition, integration and restructuring costs
Include items such as acquisition-related expenses, severances,
retention bonuses, system integration costs, changes in the fair value
of the contingent considerations, as well as expenses related to the
implementation of significant new accounting standards.
Adjusted earnings per share (AEPS)1
Adjusted net income attributable to common shareholders, divided by
the WANSO.
Adjusted net income1
Net income, as reported under IFRS, adjusted for the after-tax impact
of acquisition-related items, such as amortization of intangible assets
recognized in business combinations, as well as acquisition and
integration costs.
Adjusted net income attributable to common shareholders1
Adjusted net income less preferred share dividends.
Adjusted return on equity (AROE)1
Adjusted net income attributable to common shareholders for a
12-month period, divided by the Average common shareholders’
equity over the same 12-month period.
Affiliated brokers
Brokers in which we hold an equity investment or provide financing.
Average common shareholders’ equity
Mean of Common shareholders’ equity at the beginning and end of the
period, adjusted on a prorata basis (number of days) for significant
capital transactions, if appropriate.
Book value per share
Common shareholders’ equity divided by the number of common
shares outstanding at the same date.
Case reserves
The liability established to reflect the estimated cost of unpaid claims
that have been reported and claims expenses that the insurer will
ultimately be required to pay.
Catastrophe losses (CAT 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.) before reinsurance, related
to a single event.
CAT loss ratio
Current year CAT claims plus net reinstatement premiums, expressed
as a percentage of NEP (MD&A basis) before reinstatement premiums.
Claims liabilities
Technical accounting provisions comprising case reserves, claims
incurred but not reported by policyholders (IBNR), and a risk margin
as required by accepted actuarial practice. Claims liabilities are
discounted to consider 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 ratio1
Total net claims expressed as a percentage of NEP (MD&A basis).
Combined ratio1
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.
Common shareholders’ equity
Shareholders’ equity (excluding preferred shares) determined in
accordance with IFRS at the end of a specific period.
Company action levels (CALs)
Thresholds below which regulator notification is required together
with a company action plan to restore capital levels. The CAL is 165%
MCT for most Canadian insurance subsidiaries effective April 1, 2020
and going forward (previously 170% MCT) and 200% RBC and other
CALs in other jurisdictions.
Current year CAT claims
Current accident year Catastrophe losses, net of reinsurance, excluding
those of exited lines.
Debt-to-total capital ratio
Total debt outstanding divided by the sum of total shareholders’
equity and total debt outstanding, at the same date.
Direct premiums written (DPW) (IFRS)
The total amount of premiums for new and renewal policies written
during a specific period, as determined in accordance with IFRS.
Direct premiums written (DPW) (MD&A basis)1
DPW (IFRS) normalized for the effect of multi-year policies, excluding
the impact of industry pools, fronting and 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.
1 These are non-IFRS financial measures, which do not have any standardized meaning prescribed by IFRS and are unlikely to be comparable to similar measures presented by other companies.
196
Intact Financial Corporation Annual Report 2020
Glossary
Table of contents
Distribution EBITA and Other1
Operating income excluding interest and taxes related to our
distribution and supply chain strategies for a specific period.
Distribution EBITA and Other includes the operating results of
our consolidated brokers (including our wholly-owned broker,
BrokerLink), our share of operating results of our broker associates,
as well as the operating results of Frank Cowan Company Limited
(a specialty managing general agent in Canada) and On Side
Developments Ltd. (a Canadian restoration firm).
DPW growth in constant currency1
DPW growth, excluding the impact of foreign currency fluctuations,
calculated by applying the exchange rate in effect for the current
period results to the results of the previous year.
Earnings per share (EPS)
Net income attributable to common shareholders divided by the
WANSO, as reported in the Consolidated financial statements.
Expense ratio1
Underwriting expenses (MD&A basis), expressed as a percentage of
NEP (MD&A basis).
Finance costs (MD&A)1
Finance costs, as reported under IFRS, adjusted to include finance
costs from our broker associates, which are accounted for using the
equity method under IFRS.
Frequency (of claims)
Average number of claims reported in a specific period.
Full-time equivalent number of employees
A unit of measurement equivalent to an employee with a full-time
workload. If two employees each have a 50% workload, they would
represent one full-time equivalent employee.
Funding ratio
Pension plan’s assets expressed as a percentage of funded plans’
obligations.
Income before income taxes (MD&A basis)1
Income before income taxes, as reported under IFRS, excluding
income taxes from our broker associates, which are accounted for
using the equity method under IFRS. In the MD&A, income taxes
from our broker associates are included in Total income taxes (MD&A).
In the Financial statements, the share of profit (loss) from investments
in associates and joint ventures is presented net of taxes.
Incurred but not reported (“IBNR”) claims reserve
Reserves for estimated claims that have been incurred but
not 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 hedge ratio
A ratio calculated by the Company as the sum of the dollar duration
of the pension asset portfolio divided by the dollar duration of the
registered pension plans’ obligation. An interest rate hedge ratio
below 100% indicates that funded status of the pension plans would
increase if government bonds yield rise, all else equal.
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).
Market-based yield
The annualized total pre-tax investment income (before expenses)
divided by the average net investments. Average net investments are
defined as the mid-month average fair value of net equity and fixed-
income securities held during the reporting period.
Market yield adjustment (MYA)
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.
MYA is included in Net claims incurred in our consolidated statements
of income.
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 earned premiums (NEP) (IFRS)
Net premiums written recognized for accounting purposes as revenue
during a specific period including net reinstatement premiums, as
determined in accordance with IFRS.
Net earned premiums (NEP) (MD&A basis)1
NEP (IFRS), excluding net earned premiums of exited lines.
1 These are non-IFRS financial measures, which do not have any standardized meaning prescribed by IFRS and are unlikely to be comparable to similar measures presented by other companies.
197
Intact Financial Corporation Annual Report 2020
Glossary
Net income attributable to common shareholders
Net income, as reported under IFRS, less preferred share dividends.
Net operating income (NOI)1
Net income, as reported under IFRS, excluding the after-tax impact of
Non-operating results.
Net operating income attributable to common shareholders1
Net operating income, less preferred share dividends.
Net operating income per share (NOIPS)1
Net operating income attributable to common shareholders, divided
by the WANSO.
Net premiums written (MD&A basis)1
Direct premiums written (MD&A basis) plus assumed premiums
(external and industry pools) less ceded premiums (reinsurers and
industry pools).
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 pension expense
Difference between the asset return (interest income on plan assets)
calculated using the expected return on plan assets versus the IFRS
discount rate. The expected return better reflects our operating
performance given our internal investment management expertise
and the composition of our pension asset portfolio.
Non-operating results1
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. These include the Amortization of intangible
assets recognized in business combinations, Acquisition, integration
and restructuring costs, Net gains (losses), Non-operating pension
expense, Market yield adjustment on underwriting, Underwriting
results of exited lines, as well as other costs or revenues that are not
representative of our operating performance.
Non-weather catastrophe losses
Catastrophe losses mostly related to large commercial losses
(including non-weather-related fires), surety and liability losses, as
well as direct losses related to the COVID-19 crisis.
Operating return on equity (OROE)1
Net operating income attributable to common shareholders for a
12-month period, divided by the Average common shareholders’ equity
(excluding accumulated other comprehensive income) over the same
12-month period.
Other income (expense)1
Include general corporate expenses and income, consolidation
adjustments, regulatory fees related to our public company status,
special projects and other operating items.
Policies in force
The number of insurance policies in effect at a specific date. If two or
more separate risks are covered under the same insurance policy, this
counts as one policy in force.
Pre-tax operating income (PTOI)1
Comprises of the following items (MD&A basis): Underwriting income,
Net investment income, Distribution EBITA and Other, Finance costs and
Other income (expense).
Prior year claims development (PYD) (IFRS)
Change in total prior year claims liabilities during a specific period.
A decrease to claims liabilities is referred to as favourable prior year
claims development. An increase in claims liabilities is referred to as
unfavourable prior year claims development.
PYD (MD&A basis)1
Prior year claims development (IFRS), net of reinsurance, excluding
the PYD related to exited lines.
PYD ratio1
PYD (MD&A basis), expressed as a percentage of NEP (MD&A basis).
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 a catastrophe coverage.
Reinstatement premiums are reported in Net earned premiums (IFRS).
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.
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.
1 These are non-IFRS financial measures, which do not have any standardized meaning prescribed by IFRS and are unlikely to be comparable to similar measures presented by other companies.
198
Intact Financial Corporation Annual Report 2020 Glossary
Return on equity (ROE)
Net income attributable to common shareholders for a 12-month period,
divided by the Average common shareholders’ equity over the same
12-month period.
Underwriting results of exited lines
Included the results of the U.S. Commercial’s business Programs,
Architects and Engineers, Healthcare (effective July 1, 2019), as well as
BC auto exit (effective in Q4-2020).
Risk-based Capital (RBC)
Risk-based capital, as defined by the National Association of Insurance
Commissioners (NAIC) in the U.S.
WANSO
Weighted-average number of common shares outstanding on a daily
basis during a specific period.
Written insured risks
The number of vehicles in personal automobile insurance and the
number of premises in personal property insurance written for a
specific period.
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.
Total capital margin
Total capital margin includes the aggregate of capital in excess of
company action levels (CALs) in regulated entities plus available cash
and investments in unregulated entities.
Total income taxes (MD&A)1
Income tax expense, as reported under IFRS, adjusted to include
income taxes from our broker associates, which are accounted for
using the equity method under IFRS.
Total net claims1
Claims incurred, net of reinsurance (as determined in accordance with
IFRS), excluding the Impact of MYA on underwriting results, adjustment
for Non-operating pension expense and net claims of exited lines.
Underlying current year loss ratio1
Total net claims, excluding Current year CAT claims and prior year claims
development, expressed as a percentage of NEP (MD&A basis) before
reinstatement premiums.
Underwriting expenses (MD&A basis)1
Underwriting expenses, net of reinsurance and other underwriting
revenues, including commissions, premium taxes and general
expenses related to underwriting activities but excluding the
adjustment for non-operating pension expense and underwriting
expenses of exited lines.
Underwriting income (MD&A basis)1
NEP (MD&A basis) less Total net claims and Underwriting expenses
(MD&A basis) for a specific period.
1 These are non-IFRS financial measures, which do not have any standardized meaning prescribed by IFRS and are unlikely to be comparable to similar measures presented by other companies.
199
Intact Financial Corporation Annual Report 2020 Five-Year Financial History
Table of contents
This table contains non-IFRS financial measures. Refer to Section 36 – Non-IFRS financial measures of the MD&A for the year-ended
December 31, 2020 for further details.
Consolidated performance
Direct premiums written1
Net earned premiums1
Underwriting income1
Net investment income
Distribution EBITA and Other1
Net operating income1
Non-operating gains (losses)1
Effective income tax rate1
Net income attributable to shareholders
2020
2019
2018
2017
2016
3-year
average
5-year
average
10-year
average
12,039
11,220
1,227
577
275
1,471
(535)
21.7%
1,082
11,049
10,211
465
576
209
905
(257)
11.3%
754
10,090
9,715
474
541
175
839
(147)
21.4%
707
8,730
8,530
486
448
158
771
(36)
17.0%
792
8,277
7,946
375
429
134
660
(156)
22.2%
541
11,059
10,382
722
565
220
1,072
(313)
18.1%
848
10,037
9,524
605
514
190
929
(226)
18.7%
775
8,478
8,083
504
461
139
791
(158)
18.5%
683
Combined ratio1
89.1%
95.4%
95.1%
94.3%
95.3%
93.2%
93.8%
93.9%
Per share measures ($)
Net operating income per share1
Earnings per share
Book value per share
Dividend per common share
Return on equity
Operating return on equity1
Adjusted return on equity1
Return on equity
Underwriting performance
P&C Canada
Direct premiums written1
Net earned premiums1
Combined ratio1
Personal auto
Direct premiums written1
Net earned premiums1
Combined ratio1
Personal property
Direct premiums written1
Net earned premiums1
Combined ratio1
Commercial lines – Canada
Direct premiums written1
Net earned premiums1
Combined ratio1
P&C U.S. (in canadian dollars)2
Direct premiums written1
Net earned premiums1
Combined ratio1
Financial condition
Total assets
Total capital margin
Debt-to-total capital ratio
9.92
7.20
58.79
3.32
18.4%
15.0%
12.8%
10,216
9,633
88.0%
4,322
4,187
86.6%
2,586
2,444
81.7%
3,308
3,002
95.1%
1,823
1,582
94.9%
6.16
5.08
53.97
3.04
12.5%
11.4%
10.0%
9,399
8,775
95.9%
4,067
3,818
97.7%
2,337
2,184
92.5%
2,995
2,773
96.0%
1,650
1,431
93.2%
5.74
4.79
48.73
2.80
12.1%
11.8%
9.9%
8,601
8,332
95.2%
3,750
3,727
99.5%
2,186
2,098
88.3%
2,665
2,507
94.6%
1,489
1,380
94.8%
5.60
5.75
48.00
2.56
12.9%
13.0%
12.8%
8,423
8,204
94.2%
3,818
3,782
101.7%
2,135
2,040
89.1%
2,470
2,382
86.5%
307
326
97.4%
4.88
3.97
42.72
2.32
12.0%
11.0%
9.6%
8,277
7,946
95.3%
3,792
3,704
99.9%
2,030
1,880
90.9%
2,455
2,362
91.5%
-
-
-
7.27
5.69
53.83
3.05
14.3%
12.7%
10.9%
9,405
8,913
93.0%
4,046
3,911
94.6%
2,370
2,242
87.5%
2,989
2,761
95.2%
1,654
1,464
94.3%
6.46
5.36
50.44
2.81
13.6%
12.4%
11.0%
8,983
8,578
93.7%
3,950
3,844
97.1%
2,255
2,129
88.5%
2,779
2,605
92.7%
n/a
n/a
n/a
5.69
4.90
42.65
2.29
14.4%
13.7%
12.2%
7,946
7,610
93.9%
3,562
3,495
95.5%
1,924
1,811
91.9%
2,465
2,304
93.0%
n/a
n/a
n/a
35,119
2,729
24.1%
32,292
1,222
21.3%
28,461
1,333
22.0%
27,838
1,135
23.1%
22,866
970
18.6%
31,957
1,761
22.5%
29,315
1,478
21.8%
24,827
1,028
20.4%
1 These are non-IFRS financial measures. See glossary on page 196 for definitions.
2 2017 only includes Q4 results.
200
Intact Financial Corporation Annual Report 2020
Three-Year Quarterly Financial History
Table of contents
This table contains non-IFRS financial measures. Refer to Section 36 – Non-IFRS financial measures of the MD&A for the year-ended
December 31, 2020 for further details.
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
2020
2019
Consolidated performance
Direct premiums written1
Net earned premiums1
Underwriting income (loss)1
Net investment income
Distribution EBITA and Other1
Net operating income1
Non-operating gains (losses)1
Effective income tax rate1
Net income attributable
to shareholders
Combined ratio1
Per share measures ($)
Net operating income per share1
Earnings per share
Book value per share
Dividend per common share
Return on equity
Operating return on equity1
Adjusted return on equity1
Return on equity
Underwriting performance
P&C Canada
Direct premiums written1
Net earned premiums1
Combined ratio1
Personal auto
Direct premiums written1
Net earned premiums1
Combined ratio1
Personal property
Direct premiums written1
Net earned premiums1
Combined ratio1
Commercial lines – Canada
Direct premiums written1
Net earned premiums1
Combined ratio1
P&C U.S. (in canadian dollars)
Direct premiums written1
Net earned premiums1
Combined ratio1
Financial condition
Total assets
Total capital margin
Debt-to-total capital ratio
2018
Q1
2,082
2,334
19
125
30
120
(20)
15.6%
2,872
2,879
415
143
72
467
(125)
2,670
2,692
229
142
45
303
(109)
20.4% 22.9% 19.1% 27.9% 13.4%
2,521
2,766
159
150
44
243
(166)
3,264
2,863
369
143
81
411
(114)
3,382
2,712
284
141
78
350
(130)
3,012
2,581
198
146
56
277
(119)
20.8%
3,152
2,500
75
148
72
212
(62)
2,215
2,438
(37)
140
36
113
33
15.0% (14.0)%
2,392
2,509
210
143
42
281
(44)
21.8%
2,708
2,462
152
136
41
237
(37)
23.5%
2,908
2,410
93
137
62
201
(46)
21.5%
378
334
263
107
240
187
168
159
244
199
161
103
85.6% 87.1% 89.5% 94.3% 91.5%
92.3%
97.0% 101.5%
91.7%
93.8%
96.1%
99.2%
3.18
2.55
58.79
0.83
2.78
2.25
56.22
0.83
2.35
1.74
53.95
0.83
1.61
0.66
51.71
0.83
2.08
1.63
53.97
0.76
1.91
1.26
51.20
0.76
1.44
1.13
49.90
0.76
0.73
1.06
50.21
0.76
1.93
1.67
48.73
0.70
1.62
1.34
49.27
0.70
1.38
1.10
48.64
0.70
0.81
0.68
47.32
0.70
18.4% 16.9% 15.6% 14.0% 12.5%
15.0% 13.4% 12.0% 11.0% 11.4%
9.2% 10.0%
12.8% 11.5% 10.1%
12.4%
11.6%
10.2%
12.0%
12.1%
10.6%
11.9%
12.3%
10.6%
12.1%
11.8%
9.9%
11.6%
11.2%
9.8%
11.9%
11.3%
10.0%
12.4%
12.3%
11.7%
2,328
2,896
2,471
2,302
2,446
2,330
84.0% 86.0% 89.0% 93.3% 92.0%
2,125
2,378
2,724
2,479
941
984
1,007
1,087
82.6% 84.9% 84.7% 94.6% 96.5%
1,214
1,081
1,242
990
882
1,029
623
630
566
566
73.2% 83.7% 88.6% 81.8% 82.0%
491
593
719
620
753
601
864
729
821
729
95.3% 89.4% 95.1% 100.7% 93.5%
901
739
791
778
752
756
401
432
342
389
92.0% 94.5% 93.2% 100.1% 88.8%
396
386
540
383
486
381
32,292
33,184
35,119
1,222
2,729
1,707
24.1% 21.2% 22.1% 24.1% 21.3%
32,229
1,485
34,110
1,871
2,491
2,234
91.8%
1,853
2,727
2,155
2,084
97.4% 102.9%
2,067
2,129
90.8%
2,239
2,114
93.9%
2,534
2,069
96.6%
1,761
2,020
99.8%
1,126
962
93.4%
1,204
939
796
910
99.5% 101.9%
818
934
97.3%
1,003
939
99.9%
1,137
935
792
919
95.6% 106.4%
653
555
89.1%
679
537
99.6%
439
526
99.8%
517
534
78.5%
606
531
640
521
83.8% 102.7%
423
512
88.3%
712
717
91.8%
844
679
618
648
92.8% 106.7%
732
661
91.6%
630
644
94.9%
757
613
92.9%
546
589
99.5%
521
346
95.9%
425
343
94.8%
362
353
94.0%
325
379
96.7%
469
347
93.5%
374
340
93.8%
321
314
95.3%
30,103
1,116
19.3%
29,580
1,269
21.6%
28,806
1,367
21.5%
28,461
1,333
22.0%
28,540
1,177
21.7%
28,410
1,243
22.5%
27,330
1,067
23.4%
201
1 These are non-IFRS financial measures. See glossary on page 196 for definitions.
Intact Financial Corporation Annual Report 2020
ESG content map
Table of contents
The Company’s disclosure with respect to environmental, social and governance factors is included across our annual disclosure documentation:
❚❚ 2020 Annual Report (which includes the Company’s consolidated financial statements
and Management’s Discussion and Analysis for the fiscal year ended December 31, 2020)
❚❚ 2020 Annual Information Form
❚❚ 2021 Management Proxy Circular
❚❚ 2020 Social Impact Report
You will find below a quick and easy guide to where you can find our ESG content:
Environmental
Carbon emissions
Climate adaptation and resiliency
Social
Community engagement
Customer-driven approach and complaints handling
Diversity and inclusion
Employee compensation and benefits
Human capital management
Talent attraction and retention
Workplace culture
Workforce demographics
Governance
Board of Directors
Director independence
Director nomination and renewal process
Risk management
Shareholder engagement
Structure and oversight functions (including ESG oversight)
Compliance and ethics
Data privacy and security
Executive compensation
Intact Investment Management
Shareholder rights plan
Frameworks
Public Accountability Statement
Principles for Sustainable Insurance Report
Disclosure for the Sustainability Accounting Standards Board (SASB)
standards for the insurance industry
Task Force on Climate-related Financial Disclosures (TCFD)
Pages
2020
Annual
Report
2020
Social Impact
Report
2021
Management
Proxy Circular
2020 Annual
Information
Form
53 to 55, 81 to 82
58
28 to 33
55 to 56
56
75 to 80
54, 82
34 to 42
10 to 15, 59
23 to 26
22, 59
19 to 27
22
19 to 27
26, 55, 60 to 61
44 to 47
63 to 68
69 to 73
69 to 73
69 to 73
44 to 47, 69 to 73
47 to 62
54 to 56
56 to 59
50 to 52
73 to 75
47 to 51
44 to 47
91 to 134
19, 34 to 36
43 to 45
43
43 to 45
45
17 to 18
44
46 to 47
55 to 57
53 to 54
51 to 52
49 to 50
202
Intact Financial Corporation Annual Report 2020
Shareholder and Corporate Information
Credit rating
IFC senior unsecured debt ratings
Intact U.S. (OneBeacon) senior unsecured debt ratings
IFC’s principal Canadian P&C insurance subsidiaries’ financial strength ratings
IFC’s principal U.S. P&C insurance subsidiaries’ financial strength ratings
A.M. Best
a-
a-
A+
A+
DBRS
A
A
AA (low)
AA(low)
Fitch
A-
A-
AA-
AA-
Moody’s
Baa1
Baa2
A1
A2
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, Non-cumulative
Class A Series 6 preferred shares, Non-cumulative Rate Reset Class A Series 7 preferred shares and Non-cumulative Class A Series 9 preferred shares (the “Series 1
Preferred Shares”, “Series 3 Preferred Shares”, “Series 4 Preferred Shares”, “Series 5 Preferred Shares”, “Series 6 Preferred Shares”, “Series 7 Preferred Shares”,
and “Series 9 Preferred Shares” respectively) issued on July 12, 2011, August 18, 2011, September 30, 2016, May 24, 2017, August 18, 2017, May 29, 2018 and
February 18, 2020, 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, Series 6 Preferred Shares, Series 7 Preferred Shares and Series 9 Preferred Shares.
Toronto Stock Exchange (TSX) listings
Common Shares Ticker Symbol: IFC
Series 1 Preferred Shares Ticker Symbol: IFC.PR.A
Series 3 Preferred Shares Ticker Symbol: IFC.PR.C
Series 4 Preferred Shares Ticker Symbol: IFC.PR.D
Series 5 Preferred Shares Ticker Symbol: IFC.PR.E
Series 6 Preferred Shares Ticker Symbol: IFC.PR.F
Series 7 Preferred Shares Ticker Symbol: IFC.PR.G
Series 9 Preferred Shares Ticker Symbol: IFC.PR.I
Annual and special meeting of the shareholders
Date: Wednesday, May 12, 2021
Time: 1:00 p.m. (Eastern Time)
Place: Virtual-only meeting via live
webcast. The webcast will be available at
https://web.lumiagm.com/439189203.
Detailed information on how to participate in
the Meeting is included in our Management
Proxy Circular.
Version française
Il existe une version française du présent rapport
annuel à la section Investisseurs de notre site Web
www.intactfc.com/French/accueil/default.aspx.
Les personnes intéressées peuvent obtenir une
version imprimée en appelant au 1 866 778 0774
ou en envoyant un courriel à ir@intact.net.
Transfer agent and registrar
Computershare Investor Services Inc.
100 University Avenue, 8th Floor, North Tower
Toronto, Ontario M5J 2Y1
1 800 564 6253
Auditors
Ernst & Young LLP
Earnings conference call dates
Q1 – May 12, 2021
Q2 – July 28, 2021
Q3 – November 10, 2021
Q4 – February 9, 2022
Investor inquiries
Ryan Penton, Director, Investor Relations
416 341 1464 ext. 45112
ryan.penton@intact.net
Media inquiries
Jennifer Beaudry, Manager, Media Relations
1 514 282 1914, ext. 87375
jennifer.beaudry@intact.net
Dividend reinvestment
Shareholders can reinvest their cash dividends in
common shares of Intact Financial Corporation on
a commission-free basis either through a broker,
subject to eligibility as determined by the broker,
or through Canadian ShareOwner Investments
Inc. Full details can be obtained by visiting the
Investors section of the Company’s website at
www.intactfc.com.
Eligible dividend designation
For purposes of the enhanced dividend tax credit
rules contained in the Income Tax Act (Canada)
and any corresponding provincial and territorial
tax legislation, all dividends (and deemed
dividends) paid by Intact Financial Corporation to
Canadian residents on our common and preferred
shares after December 31, 2005, are designated
as eligible dividends. Unless stated otherwise, all
dividends (and deemed dividends) paid by the
Company hereafter are designated as eligible
dividends for the purposes of such rules.
Information for shareholders outside of Canada
Dividends paid to residents of countries with
which Canada has bilateral tax treaties are
generally subject to the 15% Canadian non-
resident withholding tax. There is no Canadian
tax on gains from the sale of shares (assuming
ownership of less than 25%) or debt instruments
of the Company owned by non-residents not
carrying on business in Canada. No government in
Canada levies estate taxes or succession duties.
Common share dividend history
Common share prices and volume
Record
Payable
Dec. 15, 2020
Dec. 31, 2020
Sept. 15, 2020
Sept. 30, 2020
June 15, 2020
June 30, 2020
Mar. 16, 2020
Mar. 31, 2020
Dec. 16, 2019
Dec. 31, 2019
Sept. 16, 2019
Sept. 30, 2019
June 14, 2019
Mar. 15, 2019
June 28, 2019
Mar. 29, 2019
Dec. 14, 2018
Dec. 31, 2018
Sept. 14, 2018
Sept. 28, 2018
June 15, 2018
Mar. 15, 2018
June 29, 2018
Mar. 29, 2018
Amount
$ 0.83
$ 0.83
$ 0.83
$ 0.83
$ 0.76
$ 0.76
$ 0.76
$ 0.76
$ 0.70
$ 0.70
$ 0.70
$ 0.70
2020 Q1
2020 Q2
2020 Q3
2020 Q4
2020 YE
2019 Q1
2019 Q2
2019 Q3
2019 Q4
2019 YE
2018 Q1
2018 Q2
2018 Q3
2018 Q4
2018 YE
High
$ 157.65
$ 143.10
$ 147.81
$ 157.74
$ 157.74
$ 114.13
$ 124.32
$ 133.97
$ 140.96
$ 140.96
$ 105.00
$ 98.85
$ 109.17
$ 107.69
$ 109.17
Low
$ 104.81
$ 117.54
$ 128.61
$ 131.94
$ 104.81
$ 96.37
$ 107.00
$ 122.68
$ 131.64
$ 96.37
$ 94.57
$ 92.53
$ 91.65
$ 95.75
$ 91.65
Close
$ 121.63
$ 129.21
$ 142.58
$ 150.72
$ 150.72
$ 113.08
$ 121.02
$ 133.34
$ 140.42
$ 140.42
$ 96.81
$ 93.25
$ 107.40
$ 99.19
$ 99.19
Volume
27,168,157
25,805,748
16,552,737
18,551,508
88,078,150
15,928,946
17,278,057
16,017,749
16,380,891
65,605,643
14,148,701
12,649,563
14,146,639
16,274,245
57,219,148
Data items are not adjusted for stock splits and consolidations. This data is provided “AS IS”. TSX, its affiliates, their respective service providers, suppliers and licensors: (i) make no warranties or
representations of any kind, express, implied or otherwise regarding this data or its accuracy, completeness or timeliness, (ii) disclaim the implied warranties of merchantability and fitness for a particular
purpose, and (iii) assume no liability in making this data available.
Intact Financial Corporation Annual Report 2020
203
Why Invest with Intact
Largest provider
of P&C insurance in Canada and a
leading provider of specialty insurance
in North America
Consistently
outperforms industry
leveraging disciplined underwriting, scale
advantage and in-house claims expertise
Track record
of strong capital generation, earnings
growth and annual dividend increases
Proven industry
consolidator
with 17 successful P&C acquisitions since 1988
Financial strength
reinforced by prudent risk management
Attracts and retains
Top talent
as a best employer
See the full suite
of our reports on
intactfc.com
Intact Financial Corporation
700 University Avenue
Toronto, Ontario M5G 0A1