Our Values
Our People
Our Future
Intact Financial Corporation
2018 Annual Report
Intact Financial Corporation 2018 Annual Report
Company Profile
Intact Financial Corporation is the largest provider of property and casualty insurance in Canada and a leading provider of specialty
insurance in North America, with over $10 billion in total annual premiums. We serve more than five million personal, business and
public sector clients through oces in Canada and the U.S. In Canada, Intact distributes insurance under the Intact Insurance brand
through a wide network of brokers, including its wholly owned subsidiary BrokerLink, and directly to consumers through belairdirect.
In the U.S., OneBeacon Insurance Group, a wholly owned subsidiary, provides specialty insurance products through independent
agencies, brokers, wholesalers and managing general agencies.
Table of contents
1 Our Values | Our People | Our Future
2 Financial highlights
4 CEO’s message
10 Chairman’s message
12 Board of Directors and Executive
Committee members
13 MD&A and financial statements
170 Glossary
172 Five-year financial history
173 Three-year quarterly financial history
174 Shareholder and corporate information
175 Social responsibility
DPW BY BUSINESS LINE
1
Personal auto _______________37%
Personal property ____________22%
Commercial lines – CAN _______26%
Commercial lines – US ________15%
Approximately14,000
EMPLOYEES
$10.1B
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,
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 eciencies, as well as the sharing economy, climate change and market conditions. All such forward-looking statements are made pursuant to the “safe harbour” provisions of applicable
Canadian securities laws.
Forward-looking statements, by their very nature, are subject to inherent risks and uncertainties and are based on several assumptions, both general and specific, which give rise to the possibility that actual results or events
could dier materially from our expectations expressed in or implied by such forward-looking statements as a result of various factors, including those discussed in the Company’s most recently filed Annual Information Form
and annual MD&A. As a result, we cannot guarantee that any forward-looking statement will materialize and we caution you against unduly relying on any of these forward-looking statements. Except as may be required by
Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise. Please read
the cautionary note at the beginning of the annual MD&A.
Disclaimer:
®Intact Design and Intact Insurance Design are registered trademarks of Intact Financial Corporation.
TM
Intact Service Centre and Intact Centre on Climate Adaptation are trademarks of Intact Financial Corporation.
®belairdirect. & Design is a registered trademark of Belair Insurance Company Inc. used under license. ®BrokerLink & Design is a registered trademark of Canada Brokerlink Inc. used under license. OneBeacon is a trademark of
OneBeacon Insurance Group Holdings, Ltd. All other trademarks are properties of their respective owners. ©2019 Intact Financial Corporation. All rights reserved.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$3
$2
$1
$0
Annual dividend per common share
We are proud of our dividend growth track record,
including a CAGR of 9% since 2009.
350%
250%
150%
50%
-50%
Total shareholder return vs peers
On a total shareholder return basis (including dividends), our 15.3% CAGR over the past 10 years compares very favourably versus peers.
15%
9%
10-YEAR
CAGR
CAGR
YE2008 YE2009 YE2010 YE2011 YE2012 YE2013 YE2014 YE2015 YE2016 YE2017 YE2018
Intact Financial Corp. S&P/TSX Composite
S&P/TSX Banks
S&P/TSX Life Insurance
S&P/U.S. P&C Insurance
DPW BY BRAND
1
$10.1B
Intact Insurance _____________63%
belairdirect _________________14%
OneBeacon _________________15%
BrokerLink _________________ 8%
1 This is a non-IFRS financial measure. See glossary on page 170 for definition.
-50
50
150
250
350
Intact Financial Corporation 2018 Annual Report
1
Intact Financial Corporation 2018 Annual Report
1
OUR COMPANY IS ONE OF THE MOST RESPECTED
OUR VALUES | OUR PEOPLE | OUR FUTURE
Our Strategy
GROW
NOIPS
1
10% yearly
over time
EXCEED
industry ROE
by 5 points
LEAD
in data, AI, and
behavioural analytics
What we believe
Insurance is not about things. Insurance is about people.
OUR CUSTOMERS ARE
OUR ADVOCATES
•
Stay ahead of changing customer
expectations
•
Deliver experiences that are
second-to-none
•
Engage with our customers digitally
OUR PEOPLE
ARE ENGAGED
•
Be a best employer
•
Be a destination for top talent
and experts
•
Create an inspiring and
inclusive workplace
OUR SPECIALTY SOLUTIONS
BUSINESS IS A LEADER IN
NORTH AMERICA
•
Achieve a combined ratio
in the low 90s
•
Attract and retain the best expertise
•
Create $3 B in annual premiums
Our Values
Integrity | Respect | Customer driven | Excellence | Social responsibility
Why we are here
We are here to help people, businesses and society prosper
in good times and be resilient in bad times.
1 This is a non-IFRS financial measure. See glossary on page 170 for the definition.
Intact Financial Corporation 2018 Annual Report
2
Investment Portfolio
Financial Strength
FINANCIAL HIGHLIGHTS
2018 Financial Highlights
TOTAL INVESTMENTS
$16.9B
DPW
1
Underwriting income
1
Net investment income
NOIPS
1
OROE
1
Net distribution income
1
16%
$10.1B
2%
$474M
22%
$529M
11%
$146M
$5.74
3%
12.1%
0.8 pts
Fixed income ____________ 75%
Common shares __________ 13%
Preferred shares __________ 7%
Cash, cash equivalents,
short-term notes and loans __ 5%
Investment
mix
(net exposure)
Book value per share
$ 48.73
Debt-to-total capital ratio
22.0%
Total capital margin
$1.3B
95.2%
94.8%
Personal
auto
2018 2017
Personal
property
Commercial lines
Canada
Commercial lines
U.S.
99.5% 101.7% 89.1%88.3% 94.6% 86.5% 94.8%
Combined ratio by line of business
1
Underwriting Performance
Combined ratio by segment
1
95.1%
IFC
1 These are non-IFRS financial measures. See glossary on page 170 for definitions.
Intact Financial Corporation 2018 Annual Report
3
0
5
10
15
20
IFC #2 #3 #4 #5
20
15
10
5
0
Canadian Industry Outperformance
FINANCIAL HIGHLIGHTS
10
8
6
4
2
0
12
10
8
6
4
2
0
-2
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Market share by company (%)
1
With a market share of 16%,
we are 17 times the size of the
average P&C insurer in Canada.
Canadian combined ratio
outperformance (in pts)
1
Our sophisticated pricing,
underwriting discipline and
in-house claims expertise have
enabled us to outperform the
industry benchmark’s (top 20)
combined ratio.
Return on equity
outperformance (in pts)
1
Our superior underwriting results,
investment performance and
capital management have led to
a better ROE than the industry.
Target
outperformance
5 pts
16%
MARKET
SHARE
5.7 pts
10-YEAR AVG
outperformance
6.5 pts
10-YEAR AVG
outperformance
1 IFC’s ROE is the consolidated adjusted return on equity
(“AROE”), a non-IFRS financial measure. See glossary on
page170 for the definition.
1 Including MYA. Combined ratio is a non-IFRS financial
measure. See glossary on page 170 for the definition.
1 Market share data is based on the latest available data
from MSA Research Inc. (FY 2018).
Intact Financial Corporation 2018 Annual Report
4
CEO’S MESSAGE
Our values guide our decision making and are the foundation of our
success. They’re embraced by our people as they work to build a safe and
vibrant future for our customers, shareholders and communities.
In 2018, Intact Financial Corporation
(IFC) continued to grow, adapt and
innovate to define the future of
insurance, deliver second-to-none
experiences for our customers, and
help to build resilient communities.
Our success in 2018, and over the last
10 years, has been possible because
of the foundation it is built on and the
people who work here. As I write this
letter, we are celebrating our 10th
anniversary. I want to share with you
what has transpired in that time and
why it matters.
Ten years ago, with the support of
employees, brokers and the financial
markets, we raised $2.4 billion and
parted ways with our majority
shareholder ING. We brought the
leadership of property and casualty
(P&C) insurance industry back to
Canada – establishing IFC as an
independent, widely held company.
The financial crisis was at its peak – the
status quo was not an option and
we had to move with lightning speed.
The excitement was palpable, and it
worked – because we created a company
based on values and a belief that
insurance is about people, not things.
People needed to know who we were
and what we stood for. Within days of
the transaction we announced our name,
our colours and our values, and we used
those to transform the organization and
make it what it is today.
Our brands are now among the
most recognized insurance brands
in Canada – a testament to our focus
on getting customers back on track. We
have doubled the number of employees
to 14,000, become a best employer and
attracted a diverse and talented group
of people. Our strategy – to deliver
exceptional customer service, engage
our employees and earn the right to
be one of the most respected
companies – has delivered strong
returns for our shareholders.
Over the last decade, organic growth
and six major acquisitions have driven
a 10% CAGR in Direct Premiums
Written (DPW)
1
. With the acquisition of
OneBeacon, we have launched a new
growth pipeline in the U.S. We have
outperformed the P&C industry on
Return on Equity (ROE) by an average
of 650 basis points (bps). Our market
capitalization has quadrupled to
$14 billion, and we have delivered
an average annual total shareholder
return of over 15%, almost double
that of the TSX60.
Over the next 10 years, we will build
an unparalleled advantage in Canada by
transforming the customer experience
and extending our presence and
expertise in the U.S. As we focus on
excelling at the fundamentals, we will
continue to challenge ourselves to
stay ahead of changing consumer
expectations. We will lead in artificial
intelligence as the explosion of data and
technology advancements continue
rapidly. These big trends combined with
the impacts of climate change will have
Dear
shareholders,
1 This is a non-IFRS financial measure. See glossary on page 170 for the definition.
Intact Financial Corporation 2018 Annual Report
5
CEO’S MESSAGE
a profound eect on the kinds of
products we oer and the way we work.
Our values, purpose and strategy will
guide us as we tackle these trends,
serve our customers and communities,
and build a world-class P&C insurer.
2018 year in review
2018 was our first full year operating
in both Canada and the U.S.
DPW grew by 16%, driven by the
acquisition of OneBeacon and strong
growth in both commercial and specialty
lines in Canada. We saw improving
market conditions as the year progressed
and expect personal lines to be a greater
contributor to growth in 2019.
Net Operating Income Per Share
(NOIPS)
1
grew 3% to $5.74, with solid
underwriting performance in both
Canada and the U.S., and improved net
investment and distribution income.
Net investment income was up a strong
22% due to the growth resulting from
the integration of our Canadian and
U.S. investment portfolio, as well as
investment optimization initiatives
and higher yields.
The combined ratio
1
for Canada
was 95.2%, with continued strong
performance from personal property
and significant improvement in
personal auto. We are pleased with
the profitability trajectory in auto and
are focused on sustaining a mid-90s
combined ratio in 2019. Canadian
commercial lines experienced higher
large losses and higher CAT losses in
2018, but the underlying fundamentals
of the business remain strong.
OneBeacon, in its first full year,
produced a combined ratio of 94.8%.
We realized synergies in excess of
US $25 million in 2018, ahead of schedule.
OneBeacon business segments under
profit improvement plans are responding
positively and claims initiatives are
being rolled out and are gaining traction.
NOIPS accretion from OneBeacon was
roughly 6% in 2018 and we remain on
track for a sustainable low 90s combined
ratio by the end of 2020.
The Operating ROE (OROE)
1
was
12.1% in 2018, below our mid-teen
expectations and historical track record.
That being said, we outperformed the
industry on ROE by close to 900 bps,
a significant margin. We expect our
OROE to improve in 2019 given the
success of our profitability actions
and the improving market outlook.
Our balance sheet is strong, with
$1.3 billion of total capital margin
and debt-to-total capital of 22%.
This strength fuels the execution of
our strategy and gives us the flexibility
to take advantage of consolidation
opportunities in Canada moving
forward. Our balance sheet, combined
with good earnings momentum and
a favourable growth outlook, led us to
once again raise our quarterly dividend
this year by 9% to $0.76.
Favourable industry outlook
supportive of growth and
profitability initiatives
2018 was a challenging year for the
Canadian P&C industry with a combined
ratio of 102.1% and ROE of 2.8%.
Industry-wide actions including rate
increases have led to the firm conditions
we now see across all lines. We expect to
see at least mid single-digit premium
growth for the Canadian industry in 2019.
In personal auto and commercial lines,
profitability challenges are putting
upward pressure on rates, while in
personal property, companies continue
to adjust to changing weather patterns.
As industry rate increases catch up and
our competitive position improves, we
expect our growth in personal lines to
improve in 2019.
Direct premiums written Quarterly dividend per common share Total shareholder return
1
2009 2018
$4.3B
$10.1B
2009 2018
$2.35
$5.74
10.4
%
CAGR
10
%
CAGR
2009 2018
$0.32
$0.70
9
%
CAGR
0
5
10
15
20
S&P/TSX
Composite
IFC
15.3%
7.9%
2009 2018
$4.3B
$10.1B
2009 2018
$2.35
$5.74
10.4
%
CAGR
10
%
CAGR
2009 2018
$0.32
$0.70
9
%
CAGR
0
5
10
15
20
S&P/TSX
Composite
IFC
15.3%
7.9%
2009 2018
$4.3B
$10.1B
2009 2018
$2.35
$5.74
10.4
%
CAGR
10
%
CAGR
2009 2018
$0.32
$0.70
9
%
CAGR
0
5
10
15
20
S&P/TSX
Composite
IFC
15.3%
7.9%
1 Annualized, since December 31, 2008.
1 These are non-IFRS financial measures. See glossary on page 170 for definitions.
Intact Financial Corporation 2018 Annual Report
6
CEO’S MESSAGE
In U.S. Commercial, the pricing
environment is competitive but stable,
with modest upward pricing trends. We
expect low to mid single-digit industry
growth in the coming year, while our
strategies in U.S. Specialty position
us to do better than that.
Overall, we expect the industry’s ROE to
improve but remain below its long-term
average of 10% over the next 12 months.
While we maintain our 500 bps industry
outperformance objective, our strategies,
strong distribution networks and depth
of talent across the organization should
help us exceed this target and capture
improving growth opportunities in 2019.
Our strategy shapes
our success
In the medium term, we will continue
to excel at the fundamentals and
execute on our four strategic pillars
to solidify our position as Canada’s
number one P&C insurer and a leading
North American specialty insurer.
By 2020, we aim to have three out
of four customers as advocates by
delivering second-to-none experiences.
Through awareness and digital
adoption, we aim to have three out of
four people actively digitally engaged.
Our people are engaged
Our people are central to the success
of our customer driven transformation.
They are the ones who help customers
get back on track, develop new products,
and make it easier to do business with
us. We are a growing destination for
top talent as a company that invests in
the skills and tools of our employees,
provides an inspiring environment and
wants to be a force for good in society.
We are actively recruiting people with
a wide range of expertise, from those
focused on the front-line customer
service; to industry experts; to software
engineers, designers and data scientists.
We all share a common goal of wanting
to shape the future of insurance
and provide second-to-none
customer experiences.
Our customers are our advocates
This year, substantial investments
in technology, digital tools, design
expertise and artificial intelligence (AI)
helped us deliver industry-leading
platforms and provide more convenience
for customers. Our new Client Centre
self-service app makes it easier for
customers and brokers to do business
with us. And our recently launched mobile
Usage Based Insurance (UBI) 2.0 can
now detect distracted driving and
improve safety.
We are making things simpler for
small and mid-sized business customers
to get quotes through our new Quick
Quote tool for commercial lines – pre-
filling more than half the questions using
geomatics and external data sources.
Our claims service is a key dierentiator
and is at the heart of what we promise.
We continue to increase satisfaction by
providing customers with options to
tailor their experience – oering both
online self-service options as well as
face-to-face, full-service centres.
Our people are central to the success of our customer driven
transformation. They are the ones who help customers get back on track,
develop new products, and make it easier to do business with us.
Intact Financial Corporation 2018 Annual Report
7
CEO’S MESSAGE
A team that is engaged and inspired is
central to that future. As our company
grows and evolves, we continue to
have strong engagement. In 2018,
employees recognized our company
as being customer driven, for living our
values and for having leaders who care
for people, are open and honest, take
accountability and drive change. For
the 4th year in a row, we were named
one of Canada’s Top 100 Employers and
an Aon Best Employer –Canada 2019,
Platinum level. And for the first time, we
were named one of the 25 Best Places
to Work in Canada by Glassdoor, as
determined by those who know a
company best – employees.
Our specialty solutions business
is a leader in North America
Our Canadian specialty lines platform
has grown close to 50% over the past
five years. In 2017, we boosted our
ambitions in specialty lines with the
acquisition of OneBeacon. The
transition has gone very well – our
culture and values have been aligned
from the beginning. It feels like we've
been working together for a long time
and we are seeing positive results.
We continue to drive change, increase
broker satisfaction, and take customer
experience to the next level across
our personal and commercial
businesses while deepening our
strengths in pricing, risk selection,
claims and investments.
We have laid out clear performance
targets to earn respect including
exceeding industry ROE by 500 bps
in Canada and the U.S. and growing
NOIPS 10% yearly over time. We have
continued to perform well against those
targets. In 2018, we exceeded industry
ROE by close to 900 bps, taking average
annual outperformance on this metric
to 650 bps over the past decade. Since
becoming Intact Financial in 2009,
we’ve grown NOIPS at a compound
annual growth rate just north of 10%.
This outperformance allows us to invest
in transformation – including leveraging
AI to design relevant products and
services for customers. We aspire to
be the best insurance AI shop in the
world and we are building unique
partnerships with leading universities
in Canada to build a top talent pipeline
of actuaries and data scientists, and
to develop cutting-edge products.
Combined specialty lines premiums
grew to $2.3 billion in 2018, nearly a
quarter of IFC’s book of business.
We are on track to reach our goal of
$3 billion and achieve a sustainable
combined ratio in the low 90s in the
medium term.
Having the right people with the right
expertise is critical to the success of the
specialty business. We are now better
positioned to leverage the significant
opportunities we see in specialty lines
across North America including growing
our Canadian cross-border business,
expanding the most attractive
OneBeacon product oerings in both
the U.S. and Canada, and leveraging
our sharing economy expertise.
Our company is one of
the most respected
To be one of the most respected
companies we must, above all, live
our values in the marketplace every
day. That includes putting in place
strong governance and abiding by
the highest ethical standards. As our
Chairman notes in his letter, we have
consistently performed well in external
governance reviews.
Net operating income per share
2009 2018
$4.3B
$10.1B
2009 2018
$2.35
$5.74
10.4
%
CAGR
10
%
CAGR
2009 2018
$0.32
$0.70
9
%
CAGR
0
5
10
15
20
S&P/TSX
Composite
IFC
15.3%
7.9%
650 bps
10YEAR
AVERAGE ROE
OUTPERFORMANCE
Intact Financial Corporation 2018 Annual Report
8
CEO’S MESSAGE
Our team of data scientists and
actuaries at the Data Lab are rolling out
our latest rating algorithms. We see
strong evidence that our investments
in AI will drive eciencies, growth and
margin expansion in the years ahead
through more accurate pricing to better
reflect risk and a more personalized
product for customers.
Making a dierence
Making a dierence is in our DNA, and
it is reflected in our purpose and how
we live our values. Those values help
us make the right decisions whether we
are talking about financial performance
or supporting our communities.
Employees and customers are
increasingly looking to businesses to
take the lead on important societal
issues. We must challenge ourselves
over the next 10 years to have a greater
presence in our communities, and to
be more generous of our time, our
knowhow and our financial resources.
So how do we begin to raise the bar?
Over the last 10 years, we have donated
more than $37 million to charitable
causes, including more than $6 million in
2018 alone. Climate change adaptation,
addressing the root causes of child
poverty, and supporting employee
account for them. We also co-hosted
the Geneva Association Global Forum
on Pathways to Climate-Resilient Critical
Infrastructure in Toronto last September.
We will continue to use our knowledge,
experience and expertise in 2019 to
work with our partners to find solutions.
Child poverty is another serious issue
that needs immediate attention right
here in our own backyard. Today one
in five children in Canada lives in
poverty. This year, Intact’s donation
to the United Way was designated to
agencies that specifically address child
poverty issues. And we will continue
to build on our commitment in this
area of focus.
In 2018, we also supported the Roméo
Dallaire Child Soldiers Initiative to
establish a regional centre of training and
learning in Rwanda. These funds will help
the Dallaire Initiative establish a
permanent presence in Africa. This is a
cause that has been widely embraced
by our employees and I spent time in
Rwanda last spring with the Dallaire
Initiative and saw first-hand the
importance of their work. While the
problem of using children in wars is far
from resolved, the General's team is
moving the needle and making progress.
citizenship through our community
impact program are at the heart of
our giving.
Supporting climate change adaptation
initiatives has been, and will continue
to be, at the top of our list. We saw the
canary in the coal mine 10 years ago
and we’ve been helping our customers
manage the direct eects of increased
flooding, fire and other extreme weather
events ever since. We continue to see the
benefits in our investment in the Intact
Centre for Climate Adaptation at the
University of Waterloo. Dr. Blair Feltmate
and the team had outstanding success
this year working with government
partners to strengthen building codes
and flood standards and to give
homeowners practical tools and tips
to protect their homes from flooding.
We are working with other global
insurers, governments and non-
government organizations on climate
change. This year, we joined the United
Nations Environment Programme
Finance Initiative (UNEP FI) Task Force
on Climate-related Financial Disclosures
(TCFD) pilot, bringing together 16 of
the world's largest insurers to better
understand the impacts of climate
change on their business and how to
Climate change adaptation, addressing the root
causes of child poverty, and supporting employee
citizenship through our community impact program
are at the heart of our giving.
Over the last 10 years we
have donated more than
$37 million
to charitable causes
Intact Financial Corporation 2018 Annual Report
9
CEO’S MESSAGE
We will challenge ourselves to do better
in supporting climate change adaptation
and addressing the root causes of child
poverty in 2019 and beyond.
As beneficiaries of the power of AI,
we will also turn more of our attention
to the uncertainty this creates around
the future of work. People are
increasingly concerned about the
impact of technology on jobs and
whether they can continue to get
ahead. It is up to companies like Intact
to help our employees navigate this
uncertainty and gain new skills, and
for us to continue to grow and provide
good jobs in the future.
I would like to thank our shareholders
and brokers for their support over the
last 10 years and our world-class team
of employees across North America
for their dedication to our customers
and communities.
Conclusion
Our values, our people and our
strategy have been foundational to
our success over the last 10 years
and they will continue to underpin
our work over the next 10.
Our customer driven culture and our
care for our people during a period of
transformational change are what will
dierentiate us. We are confident that
this will fuel profitable growth and
another decade of outperformance on
our financial objectives as we establish
ourselves as a world-class P&C
insurance company.
Charles Brindamour
Chief Executive Ocer
•
Combined ratio of 93.0% in 2018
•
$2.3B of DPW in 2018
•
Steady improvement in
OneBeacon performance
•
NOIPS CAGR >10% since 2009
•
Track record of exceeding 500 bps
of ROE outperformance vs industry
•
Ranked #2 in Corporate Governance
out of all TSX listed companies
•
Invested in machine learning
and artificial intelligence
Our
Specialty
Solutions
business is
a leader
in N.A.
Our
company
is one of the
most
respected
•
Launched self-service app
•
Launched mobile UBI 2.0
•
Maintained #1 and #2 brand
consideration nationally for
Intact Insurance and belairdirect
•
Aon Best Employer
•
Canada’s Top 100 Employers
•
Canada’s Top Employers
for Young People
•
25 Best Places to Work (Glassdoor)
Our
customers
are our
advocates
Our
people
are
engaged
Our strategy
Intact Financial Corporation 2018 Annual Report
10
CHAIRMAN’S MESSAGE
Intact continues to accelerate its digital oerings, investing
in software engineering, machine learning and artificial
intelligence to design relevant products and provide options
for customers.
Intact is celebrating its 10-year
anniversary in 2019. It became an
independent and widely held company
in 2009 against the backdrop of the
global financial crisis. It was a bold move
that has consistently delivered strong
growth for you over the last 10 years.
In 2018, Intact delivered solid results
across underwriting, investments and
distribution, in both Canada and the
U.S. Net Operating Income Per Share
(NOIPS)
1
of $5.74 drove Operating
Return on Equity (OROE)
1
of 12.1%,
with over $1.3 billion of total capital
margin. In addition, the Company
announced a 9% increase in the
quarterly dividend for shareholders
to $0.76 per common share – the 14th
consecutive annual increase.
Under the leadership of Charles Brindamour
and his management team, the Company
continues to excel, outperform and deliver
value to you while staying grounded in its
founding values – integrity, respect,
customer driven, strive for excellence
and socially responsible.
Despite continued challenges with
extreme weather across North America,
personal auto in Canada and recent
market volatility, the Company is
well-positioned to outperform in a
changing environment, through
enhanced risk selection, better
segmentation and leveraging data
analytics.
Intact continues to accelerate its digital
oerings, investing in software
engineering, machine learning and
artificial intelligence to design relevant
products and provide options for
customers. With the successful
integration of OneBeacon in the U.S.
and close to $2.3 billion in combined
direct premiums written in 2018, Intact
is making good strides towards
achieving its goal of creating a leading
specialty insurer in North America.
10 years of
outperformance
Recognizing the significance of climate
change and the Company's expertise as
a risk manager, Intact is participating in
the United Nations Environment
Programme Finance Initiative (UNEP FI)
Task Force on Climate-related Financial
Disclosures (TCFD) pilot to help better
assess the intensifying impacts of
climate change on the business.
Built on strong governance principles,
and a high standard of compliance and
ethics, Intact is today one of the most
respected companies in Canada. The
Company was ranked first (tie) by the
Clarkson Centre for Board Eectiveness
in its Board Shareholder Confidence
Index 2018, for the third year running.
This index examines the quality of
corporate governance practices among
Canadian public companies. As well,
Intact maintained its second position
in The Globe and Mail’s 2018 Board
Games report card.
1 These are non-IFRS financial measures. See glossary on page 170 for definitions.
Intact Financial Corporation 2018 Annual Report
11
CHAIRMAN’S MESSAGE
The Company was one of three companies awarded with
Platinum Parity Certification by Women in Governance,
recognized for its ongoing focus and progress in developing
women in the workplace.
Claude Dussault
Chairman of the Board
Intact was also recognized by Brendan
Wood International (BWI) as one of
five 2018 Global TopGun insurance
companies for transparency and
financial reporting. Louis Marcotte
was also named a Global TopGun CFO
by BWI.
Having engaged employees is integral
to Intact’s success. Besides retaining
past awards – an Aon Best Employer in
Canada at the platinum level, one of
Canada's Top 100 Employers and
Greater Toronto’s Top Employers, and
one of Canada's Top Employers for
Young People, the Board is pleased
to note that Intact was voted for the
first time as one of the 25 Top-Rated
Workplaces in Canada by Indeed,
Canada's top job search site, as well
as one of the 25 best places to work
in Canada, by Glassdoor. Also,
the Company was one of three
companies awarded with Platinum
Parity Certification by Women in
Governance, recognized for its ongoing
focus and progress in developing
women in the workplace. These
accolades speak to the Company’s
commitment to talent development,
employee engagement and diversity.
I want to thank Louise Roy who retired
from the Board in 2018. Louise served
on the Board of the Company since
its IPO in 2004 and brought her
expertise to the Board’s Human
Resources and Corporate Governance
committees during her tenure.
Following Louise’s retirement, we
welcomed William L. Young, a director
with extensive public company board
and board leadership experience
gained at several U.S., Canadian and
European-based companies.
As Intact marks a decade of delivering
for customers and outperforming, l
want to pay tribute to the management
team and employees at Intact, who
deliver on the Company’s purpose
every day – helping people, businesses
and society prosper in good times
and be resilient in bad times. Your
dedication, passion and commitment
are most admirable and are what sets
the Company apart in the marketplace.
To shareholders, customers and
brokers, thank you for your trust and
support over the last decade. It is
with your continued trust that Intact
will continue to grow, outperform
and succeed in 2019, and for many
years to come.
Intact Financial Corporation 2018 Annual Report
12
GOVERNANCE
Claude Dussault
Chairman of the Board of Intact Financial
Corporation and President of ACVA Investing
Corporation
Charles Brindamour
Chief Executive Ocer
Robert W. Crispin
2,4
Corporate Director
Janet De Silva
2,3
President & CEO of Toronto Region Board of Trade
Robert G. Leary
1,4
CEO, Olayan Group
Eileen Mercier
1,4
Corporate Director
Sylvie Paquette
1,4
Corporate Director
Timothy H. Penner
2,3
Corporate Director
Frederick Singer
2,4
CEO of Echo360
Stephen G. Snyder
1,3
Corporate Director
Carol Stephenson
2,3
Corporate Director
William L. Young
1,3
Corporate Director
Charles Brindamour
Chief Executive Ocer
Louis Gagnon
President, Canadian Operations
T. Michael Miller
President, U.S. and Specialty Solutions
Patrick Barbeau
Senior Vice President, Claims
Martin Beaulieu
Senior Vice President and Chief Risk Ocer
Paul Brehm
Senior Vice President, Specialty Solutions
Sonya Côté
Senior Vice President and Chief Internal Auditor
Frédéric Cotnoir
Senior Vice President, Corporate and Legal Services
and Secretary
Debbie Coull-Cicchini
Executive Vice President, Intact Insurance
Dennis Crosby
Senior Vice President, Specialty Solutions (U.S.)*
Luisa Currie
Senior Vice President, Western Canada**
Joe D’Annunzio
Senior Vice President, BrokerLink
Jean-François Desautels
Senior Vice President, Québec and Digital
Distribution, Intact Insurance
Monika Federau
Senior Vice President and Chief Strategy Ocer
Anne Fortin
Senior Vice President, Direct Distribution and
Chief Marketing Ocer
Don Fox
Executive Vice President
Darren Godfrey
Senior Vice President, Personal Lines
Natalie Higgins
Senior Vice President, Atlantic Canada***
Karim Hirji
Senior Vice President, International and Ventures
Mathieu Lamy
Executive Vice President and Chief Operating Ocer
Alain Lessard
Senior Vice President, Commercial Lines
Louis Marcotte
Senior Vice President and Chief Financial Ocer
Lucie Martel
Senior Vice President and Chief Human Resources
Ocer
Benoit Morissette
Senior Vice President and Group Chief Actuary
Werner Muehlemann
Senior Vice President and Managing Director,
Intact Investment Management Inc.
Carla Smith
Senior Vice President, Corporate Development
Mark A. Tullis
Vice Chairman
Peter Weightman
Senior Vice President, Specialty Solutions and
Surety (Canada)
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
Complete biographies of the members of the Board of Directors available on www.intactfc.com.
* As of January 1, 2019, transition to part-time status.
** Since June 1, 2018
*** Since April 2018
Board of Directors
Executive Committee Members
Intact Financial Corporation 2018 Annual Report
13
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 80;
Financial Statements –
pages 1 to 71.
MD&A AND FINANCIAL STATEMENTS
This page is
intentionally
left blank.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 1
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, 2018. 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, 2018, compared to the corresponding periods in 2017. It should be read in conjunction with our
Consolidated financial statements for our fiscal year ended December 31, 2018. This MD&A is dated February 5, 2019.
“Intact”, the “Company”, “IFC”, “we” and “our” are terms used throughout the document to refer to Intact Financial Corporation and its subsidiaries.
Further information about Intact Financial Corporation, including the Annual Information Form, may be found online on SEDAR at www.sedar.com.
Table of contents
OVERVIEW ....................................................................................................................................................................... 5
Section 1 – About Intact Financial Corporation ............................................................................................................................................................ 5
Section 2 – Our performance at a glance..................................................................................................................................................................... 7
Section 3 – Consolidated performance ........................................................................................................................................................................ 8
SEGMENT PERFORMANCE .......................................................................................................................................... 10
Section 4 – Canada ................................................................................................................................................................................................... 10
Section 5 – U.S. ........................................................................................................................................................................................................ 16
Section 6 – Corporate and Other ............................................................................................................................................................................... 19
ENVIRONMENT & OUTLOOK ....................................................................................................................................... 22
Section 7 – Insurance industry at a glance ................................................................................................................................................................ 22
Section 8 – Operating environment ........................................................................................................................................................................... 23
Section 9 – Outlook ................................................................................................................................................................................................... 24
STRATEGY ..................................................................................................................................................................... 26
Section 10 – Strategy update .................................................................................................................................................................................... 26
Section 11 – Unique advantages ............................................................................................................................................................................... 31
Section 12 – Social responsibility .............................................................................................................................................................................. 33
FINANCIAL CONDITION ................................................................................................................................................ 36
Section 13 – Financial position .................................................................................................................................................................................. 36
Section 14 – Investments .......................................................................................................................................................................................... 37
Section 15 – Claims liabilities and reinsurance .......................................................................................................................................................... 40
Section 16 – Employee future benefit programs ........................................................................................................................................................ 43
Section 17 – Treasury management .......................................................................................................................................................................... 44
Section 18 – Capital management ............................................................................................................................................................................. 47
RISK MANAGEMENT ..................................................................................................................................................... 49
Section 19 – Overview ............................................................................................................................................................................................... 49
Section 20 – Risk management structure .................................................................................................................................................................. 49
Section 21 – Corporate governance and compliance program ................................................................................................................................... 51
Section 22 – Enterprise Risk Management ................................................................................................................................................................ 52
Section 23 – Off-balance sheet arrangements ........................................................................................................................................................... 67
Section 24 – Sensitivity analyses ............................................................................................................................................................................... 68
ADDITIONAL INFORMATION ........................................................................................................................................ 69
Section 25 – Financial KPIs and definitions ............................................................................................................................................................... 69
Section 26 – Non-operating results ............................................................................................................................................................................ 72
Section 27 – Non-IFRS financial measures ............................................................................................................................................................... 73
Section 28 – Accounting and disclosure matters........................................................................................................................................................ 76
Section 29 – Shareholder information ........................................................................................................................................................................ 78
Section 30 – Selected annual and quarterly information ............................................................................................................................................ 79
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
2 INTACT FINANCIAL CORPORATION
Non-IFRS financial measures
We use both IFRS and non-IFRS financial measures to assess our performance. Non-IFRS financial measures do not have any
standardized meaning prescribed by IFRS and are unlikely to be comparable to any similar measures presented by other
companies. The non-IFRS measures included in this MD&A are: direct premiums written (DPW), change or growth in constant
currency, net earned premiums (NEP), total net claims, underlying current year loss ratio, underwriting expenses, underwriting
income (loss), combined ratio, net distribution income, net operating income (NOI), net operating income per share (NOIPS),
operating return on equity (OROE), adjusted net income, adjusted net income per share (AEPS), adjusted return on equity (AROE)
and market based yield. See Section 27 – Non-IFRS financial measures for the definition and reconciliation to the most
comparable IFRS measures. These measures and other insurance-related terms used in this MD&A are defined in the glossary
available in the “Investors” section of our web site at www.intactfc.com.
Important notes
• 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). DPW for 2017 were adjusted to exclude fronting from P&C Canada, to
enhance comparability with our current reporting. See Table 29 for details on exited lines and Table 31 for the
reconciliation to DPW, as reported under IFRS. All underwriting results and related ratios exclude the MYA and the results
of our U.S. Commercial exited lines, unless otherwise noted. The expense and general expense ratios are presented herein
net of other underwriting revenues.
• Catastrophe claims are any one claim, or group of claims, equal to or greater than $7.5 million for P&C Canada (US$5 million
for P&C U.S.) related to a single event (referred to as the “CAT threshold”), 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.
• When relevant, we present changes in constant currency, which exclude the impact of fluctuations in foreign exchange rates
from one period to the other, to enhance the analysis of our results with comparative periods. See Section 27 – Non-IFRS
financial measures.
• Regulatory Capital Ratios refer to MCT (as defined by OSFI and the AMF in Canada) and RBC (as defined by the NAIC in the
U.S.). All references to “total capital margin” in this MD&A include the aggregate of capital in excess of company action levels
in regulated entities (170% MCT, 200% RBC and other CALs in other jurisdictions) plus available cash in unregulated entities.
• Unless otherwise noted, market share and market related data for P&C Canada are based on the latest available data (YTD
Q3-2018) from MSA Research Inc. (“MSA”) and excludes LIoyd’s Underwriters Canada, Insurance Corporation of British
Columbia, Saskatchewan Government Insurance, Saskatchewan Auto Fund, Genworth Financial Mortgage Insurance
Company Canada and Canada Guaranty Mortgage Insurance Company. MSA data excludes certain Québec regulated
entities. Market share and market positioning reflect the impact of announced or completed acquisitions and are therefore
presented on a pro forma basis.
• 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, 2018 and are subject to change after that date.
Forward-looking statements are based on estimates and assumptions made by management based on management’s experience
and perception of historical trends, current conditions and expected future developments, as well as other factors that management
believes are appropriate in the circumstances. Many factors could cause the Company’s actual results, performance or
achievements or future events or developments to differ materially from those expressed or implied by the forward-looking
statements, including, without limitation, the following factors:
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 3
• the Company’s ability to implement its strategy or operate
its business as management currently expects;
• its ability to accurately assess the risks associated with the
insurance policies that the Company writes;
• unfavourable capital market developments or other factors
which may affect the Company’s investments, floating rate
securities and funding obligations under its pension plans;
• the cyclical nature of the P&C insurance industry;
• management’s ability to accurately predict future claims
frequency and severity, including in the personal auto line of
business;
• government regulations designed to protect policyholders
and creditors rather than investors;
• litigation and regulatory actions; periodic negative publicity
regarding the insurance industry;
• intense competition;
• the Company’s reliance on brokers and third parties to sell
its products to clients and provide services to the Company;
• the Company’s ability to successfully pursue its acquisition
strategy; the Company’s ability to execute its business
strategy; the Company’s ability to 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 Company’s profitability following the acquisition (the
“Acquisition”) of OneBeacon Insurance Group, Ltd.
(“OneBeacon”);
• the Company’s ability to improve its Combined Ratio in the
United States in relation to the Acquisition;
• the Company’s ability to retain business and key employees
in the United States in relation to the Acquisition;
• undisclosed liabilities in relation to the Acquisition;
• the Company’s participation in the Facility Association (a
mandatory pooling arrangement among all industry
participants) and similar mandated risk-sharing pools;
• terrorist attacks and ensuing events;
• the occurrence and frequency of catastrophe events,
including a major earthquake;
• catastrophe losses caused by severe weather and other
weather-related losses, as well as the impact of climate
change;
• the Company’s ability to maintain its financial strength and
issuer credit ratings; the Company’s access to debt and
equity financing;
• the Company's ability to compete for large commercial
business;
• the Company’s ability to alleviate risk through reinsurance;
• the Company’s ability to successfully manage credit risk
(including credit risk related to the financial health of
reinsurers);
• the Company’s ability to contain fraud and/or abuse; the
Company’s reliance on information technology and
telecommunications systems and potential failure of or
disruption to those systems, including 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;
• general economic, financial and political conditions;
• the Company’s dependence on the results of operations of
its subsidiaries and the ability of the Company’s subsidiaries
to pay dividends;
• the volatility of the stock market and other factors affecting
the trading prices of the Company’s securities;
• the Company’s ability to hedge exposures to fluctuations in
foreign exchange rates;
• future sales of a substantial number of its common shares;
• changes in applicable tax laws, tax treaties or tax
regulations or the interpretation or enforcement thereof.
All of the forward-looking statements included in this MD&A and the quarterly earnings press release dated February 5, 2019, are
qualified by these cautionary statements and those made in the section entitled Risk management (Sections 19-24) of our MD&A
for the year ended December 31, 2018. 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
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
4 INTACT FINANCIAL CORPORATION
Glossary of abbreviations
Description
Description
AEPS
Adjusted EPS
MD&A
Management’s Discussion and Analysis
AFS
Available for sale
Moody’s
Moody’s Investor Service Inc.
AMF
Autorité des marchés financiers
MYA
Market yield adjustment
AOCI
Accumulated OCI
NAIC
National Association of Insurance Commissioners
AROE
Adjusted ROE
NCIB
Normal course issuer bid
BVPS
Book value per share
NEP
Net earned premiums
CAD
Canadian Dollar
NOI
Net operating income
CAGR
Compound annual growth rate
NOIPS
NOI per share
CAL
Company action level
OCI
Other comprehensive income
CAN
Canada
OROE
Operating ROE
CAT
Catastrophe
OSFI
Office of the Superintendent of Financial Institutions
DBRS
Dominion Bond Rating Services
P&C
Property & Casualty
DPW
Direct premiums written
PTOI
Pre-tax operating income
EPS
Earnings per share to common shareholders
PYD
Prior year claims development
Fitch
Fitch Ratings Inc.
RBC
Risk-based capital
FVTPL
Fair value through profit and loss
ROE
Return on equity
IFRS
International Financial Reporting Standards
S&P
Standard & Poor’s
KPI
Key performance indicator
U.S.
United States
MCT
Minimum capital test
USD
U.S. Dollar
This icon represents data relevant to environmental, social and governance (ESG) disclosure including its impact
on our results where applicable.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 5
OVERVIEW
Section 1 – About Intact Financial Corporation
1.1 Who we are
• Largest provider of P&C insurance in Canada and a leading provider of specialty insurance in North America, with over
$10 billion in annual DPW.
• Approximately 14,000 full- and part-time 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. In the U.S., OneBeacon, a wholly-owned
subsidiary, provides specialty insurance products through independent agencies, brokers, wholesalers and managing general
agencies.
• We are a proven industry consolidator with a track record of 16 successful P&C acquisitions since 1988.
1.2 What we offer
With our comprehensive range of auto, home and business insurance products, we offer customers protection tailored to meet their
unique needs. Across Intact, we share the same goal: We are here to help people, businesses and society prosper in good times
and be resilient in bad times. Making a difference is important to us; it is our purpose.
2018 DPW
by business segment
2018 DPW
by line of business
2018 DPW
by brand
15%
85%
Canada Insurance
U.S. Insurance
22%
26%
15%
37%
Personal auto
Personal property
Commercial lines- Canada
Commercial lines- U.S.
8%
14%
15%
63%
Intact insurance BrokerLink
belairdirect OneBeacon
$8.6B
$1.5B
1
1
Represents Intact insurance premiums sold
through BrokerLink
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
6 INTACT FINANCIAL CORPORATION
1.3 Our business segments
We report our financial results under the business segments set out below. The composition of our segments is aligned with our
management structure and internal financial reporting based on geography and the nature of our activities.
Intact Financial Corporation
Canada
(CAN)
Comprised of underwriting (P&C Canada) and distribution activities in Canada
• Underwriting of automobile, home and business insurance contracts to individual and businesses in
Canada. Underwriting results in Canada are reported under three lines of business (see Section 4):
• Personal auto
• Personal property
• Commercial, which include Commercial auto and Commercial P&C
• Distribution operations, including the operating results of our wholly-owned broker, BrokerLink, as
well as our share of results of broker affiliates.
U.S.
Comprised of underwriting activities in the U.S. (P&C U.S.)
• Underwriting of specialty contracts mainly to small and midsize businesses in the U.S., which are
reported under:
• Commercial lines, which include the underwriting results of OneBeacon since September 28,
2017 (see Section 5).
Corporate
and Other
(Corporate)
Comprised of the following activities, which are managed at the Corporate level
• Investment management
• Treasury and capital management
• Other corporate activities, including internal reinsurance
Operating results include net investment income, finance costs, as well as other income and expenses
(including corporate expenses and ancillary income) (see Section 6).
We measure our consolidated performance mainly based on NOIPS and business segment performance based on pre-tax
operating income (PTOI).
Table 1 – Operating performance by segment
1
For the years ended Dec. 31,
2018
2017
CAN
U.S.
Corporate
Total
CAN
U.S.
Corporate
Total
DPW
8,601
1,489
-
10,090
8,423
307
-
8,730
NEP
8,332
1,380
3
9,715
8,204
326
-
8,530
Operating income
Underwriting income
400
71
3
474
478
8
-
486
Net investment income
-
-
529
529
-
-
432
432
Net distribution income
146
-
-
146
132
-
-
132
Finance costs
-
-
(103)
(103)
-
-
(82)
(82)
Other income (expense)
-
-
(18)
(18)
-
-
5
5
Pre-tax operating income (PTOI)
546
71
411
1,028
610
8
355
973
Net operating income (NOI)
839
771
NOIPS (in dollars)
5.74
5.60
1
Refer to Section 27 – Non-IFRS financial measures.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 7
Section 2 – Our performance at a glance
Full year 2018 Highlights
DPW growth
NOIPS growth
OROE
Total capital
margin
BVPS
+16%
+3%
12.1%
$1.3 billion
+2%
• Net operating income per share up 19% to $1.93 in Q4-2018 driven by solid operating results
• Premiums grew 4% in the quarter and 16% for the full year fuelled by commercial lines across North America
• Combined ratio of 91.7% in Q4-2018 with significant improvement in personal auto
• Full year NOIPS of $5.74 drove Operating ROE of 12.1%, with over $1.3 billion of total capital margin
• Quarterly dividend increased by 9% to $0.76 per common share
DPW
Combined ratio
NOIPS (in dollars)
1,959
2,293
2,392
Q4
8,277
10,090
8,730
Annual
92.5%
91.7%
95.1%
95.3%
92.6%
94.3%
Q4 Annual
2016 2017 2018
1.58
1.93
1.63
Q4
4.88
5.60
5.74
Annual
EPS (in dollars)
Operating ROE
Total capital margin
1.27
1.67
1.60
Q4
3.97
5.75
4.79
Annual
12.0%
12.1%
12.9%
Annual
2016 2017 2018
970
1,333
1,135
Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
8 INTACT FINANCIAL CORPORATION
Section 3 – Consolidated performance
Table 2 – Consolidated performance
1
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW
2,392
2,293
4%
10,090
8,730
16%
NEP
2,509
2,400
5%
9,715
8,530
14%
Operating income
Underwriting income
210
178
32
474
486
(12)
Net investment income
140
121
19
529
432
97
Net distribution income
36
28
8
146
132
14
Finance costs
(27)
(25)
(2)
(103)
(82)
(21)
Other income (expense)
(6)
2
(8)
(18)
5
(23)
PTOI
353
304
49
1,028
973
55
NOI
281
236
19%
839
771
9%
Non-operating gains (losses)
(42)
(58)
16
(142)
(31)
(111)
Effective income tax rate
21.5%
5.9%
15.6 pts
20.2%
15.9%
4.3 pts
Net income
244
232
5 %
707
792
(11)%
Underwriting ratios
Claims ratio
62.7%
63.5%
(0.8) pts
65.3%
65.4%
(0.1) pts
Expense ratio
29.0%
29.1%
(0.1) pts
29.8%
28.9%
0.9 pts
Combined ratio
91.7%
92.6%
(0.9) pts
95.1%
94.3%
0.8 pts
Per share measures, basic and diluted
(in dollars)
NOIPS
1.93
1.63
19%
5.74
5.60
3%
EPS
1.67
1.60
4%
4.79
5.75
(17)%
BVPS
48.73
48.00
2%
Return on equity for the last 12 months
OROE
12.1%
12.9%
(0.8) pts
ROE
9.9%
12.8%
(2.9) pts
Total capital margin
1,333
1,135
198
Debt-to-total capital ratio
22.0%
23.1%
(1.1) pts
1
Refer to Section 27 – Non-IFRS financial measures.
Table 3 – Performance by business segment
1
Section
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW growth in constant currency
Canada
4.4
2,067
1,986
4%
8,601
8,423
2%
U.S.
5.3
325
307
2%
1,489
307
nm
2,392
2,293
4%
10,090
8,730
16%
Combined ratio
Canada
4.4
90.8%
91.9%
(1.1) pts
95.2%
94.2%
1.0 pts
U.S.
5.3
96.7%
97.4%
(0.7) pts
94.8%
97.4%
nm
91.7%
92.6%
(0.9) pts
95.1%
94.3%
0.8 pts
PTOI
Canada
4.3
232
198
17%
546
610
(10)%
U.S.
5.3
13
8
63%
71
8
nm
Corporate and Other
6.4
108
98
10%
411
355
16%
353
304
16%
1,028
973
6%
1
Refer to Section 27 – Non-IFRS financial measures.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 9
Constant currency
With the acquisition of OneBeacon, approximately 15% of our premiums are written in USD. The impact of fluctuations in foreign exchange
rates was not material to our consolidated performance for the year ended December 31, 2018. See Section 5 – U.S. for the impact on our
U.S. results.
▪
Q4-2018 vs Q4-2017
2018 vs 2017
DPW growth
• Our premiums grew 4% in the quarter with strong
growth in commercial and specialty lines across
North America.
• Our premiums grew 16% for the full year, mainly
from the acquisition of OneBeacon which contributed
14% to our topline, and strong growth in both
commercial and speciality lines in Canada.
Underwriting
performance
• Overall combined ratio was solid at 91.7%, with
improved underlying performances in both Canada
and the U.S.
• Combined ratio for Canada was strong at 90.8%,
1.1 points better than last year, reflecting significant
improvement in personal auto, tempered by a
deterioration in commercial lines.
• Overall combined ratio of 95.1% with solid
underlying performances in both Canada and the
U.S.
• Combined ratio for Canada deteriorated by
one point to 95.2%, as the improvement in personal
auto was more than offset by higher large losses and
catastrophe losses in commercial lines.
• Combined ratio in the U.S. was 96.7%, as a
healthy underlying performance was offset by
5.9 points of CAT losses.
• Solid combined ratio in the U.S. of 94.8%, in line
with expectations for 2018, reflecting good progress
towards our goal of achieving a sustainable
combined ratio in the low-90s within 18-24 months.
Net investment
income
• Net investment income was up 16% from
investment optimization initiatives and higher yields.
• Net investment income was up 22%, due to the
growth in our investment portfolio following the
acquisition of OneBeacon, as well as investment
optimization initiatives and higher yields.
Net distribution
income
• Net distribution income was up 29% to
$36 million due to organic growth, improved
margins and broker acquisitions.
• Net distribution income was up 11% to
$146 million, reflecting the continued growth of our
broker network and improved profitability.
NOIPS
• NOIPS of $1.93 up 19%, due to improved
underwriting performance and strong growth in both
net investment income and net distribution income.
• NOIPS of $5.74 improved by 3%, largely driven by
the acquisition of OneBeacon, which delivered solid
underwriting results and drove the strong growth in
net investment income.
Effective
income tax rate
• Effective income tax rate of 21.5% for the quarter and 20.2% for the full year was largely in line with
expectations. In 2017, the effective income tax rate was unusually low as it included a one-time income tax
recovery related to the enactment of the U.S. Corporate tax reform as well as higher non-taxable gains.
Net income
• Net income of $244 million was up 5%, driven by
solid operating earnings.
• Net income of $707 million was down 11%,
despite higher operating earnings. In 2017, we had
benefited from one-time non-operating gains relating
to the acquisition of OneBeacon.
OROE
• Operating ROE for the 12 months ended December 31, 2018 was 12.1%, due to weak personal auto results
in the earlier part of 2018, as well as elevated large losses in commercial lines. Our OROE remains well above
the industry, though below our historical track record.
Financial
condition
• BVPS of $48.73 increased 2% from a year ago as our earnings, net of common share dividends, were offset
in part by the impact of unfavourable capital markets on our investment portfolio.
• Our debt-to-total capital ratio of 22.0% as at December 31, 2018 increased by 0.3 points in the quarter mainly
due to the weaker capital markets, which resulted in a lower equity base. For the full year, it decreased by
1.1 points as we continue to track towards our goal of 20% in 2019.
• We ended the year in a strong financial position, with over $1.3 billion of total capital margin.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
10 INTACT FINANCIAL CORPORATION
SEGMENT PERFORMANCE
Section 4 – Canada
4.1 Canada’s largest home, auto and business insurer
• Largest P&C insurer in Canada, with $8.6 billion in annual DPW and an
approximate market share of 17%.
• We distribute insurance in Canada under the Intact Insurance brand through a
wide network of brokers, including our wholly-owned subsidiary BrokerLink,
and directly to consumers through belairdirect.
• Largest private sector provider of P&C insurance in most provinces.
4.2 We offer a comprehensive range of insurance
products
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 (including specialty lines)
• We provide a broad range of coverages tailored to the needs of a diversified
group of small and medium sized businesses including commercial landlords,
manufacturers, contractors, wholesalers, retailers, transportation businesses,
agriculture businesses and service providers.
• Commercial property coverages protect the physical assets of the business and include business interruption insurance.
Liability coverages include commercial general liability, product liability, professional liability as well as cyber endorsement.
• Commercial vehicle coverages provide protection for commercial auto, fleets, garage operations, light trucks, public vehicles
and the specific needs of the sharing economy.
4.3 Operating performance
Table 4 – Operating performance
Section
Q4-2018
Q4-2017
Change
2018
2017
Change
Canada
P&C Canada
4.4
196
170
15%
400
478
(16)%
Distribution
36
28
29%
146
132
11%
PTOI
232
198
17%
546
610
(10)%
17%
Market share
$8.6B
$8.6B
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 11
4.4 P&C Canada
Table 5 – Underwriting results for P&C Canada
1
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW
2,067
1,986
4%
8,601
8,423
2%
NEP
2,129
2,074
3%
8,332
8,204
2%
Current year claims (excluding CAT claims)
1,356
1,372
(16)
5,411
5,321
90
Current year CAT claims
33
31
2
308
313
(5)
(Favourable) unfavourable PYD
(56)
(77)
21
(181)
(253)
72
Total net claims
1,333
1,326
7
5,538
5,381
157
Underwriting expenses
600
578
22
2,394
2,345
49
Underwriting income
196
170
26
400
478
(78)
Underwriting ratios
Underlying current year loss ratio
63.7%
66.2%
(2.5) pts
65.0%
64.9%
0.1 pts
CAT loss ratio
1.6%
1.5%
0.1 pts
3.7%
3.8%
(0.1) pts
(Favourable) unfavourable PYD ratio
(2.7)%
(3.7)%
1.0 pts
(2.2)%
(3.1)%
0.9 pts
Claims ratio
62.6%
64.0%
(1.4) pts
66.5%
65.6%
0.9 pts
Commissions
14.9%
14.5%
0.4 pts
15.3%
15.2%
0.1 pts
General expenses
9.6%
9.7%
(0.1) pts
9.6%
9.7%
(0.1) pts
Premium taxes
3.7%
3.7%
- pts
3.8%
3.7%
0.1 pts
Expense ratio
28.2%
27.9%
0.3 pts
28.7%
28.6%
0.1 pts
Combined ratio
90.8%
91.9%
(1.1) pts
95.2%
94.2%
1.0 pts
1
Refer to Section 27 – Non-IFRS financial measures.
Table 6 – Performance by line of business – Canada
Section
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW growth
Personal auto
4.5
818
824
(1)%
3,750
3,818
(2)%
Personal property
4.6
517
505
2%
2,186
2,135
2%
Commercial lines
4.7
732
657
11%
2,665
2,470
8%
2,067
1,986
4%
8,601
8,423
2%
Combined ratio
Personal auto
4.5
97.3%
101.2%
(3.9) pts
99.5%
101.7%
(2.2) pts
Personal property
4.6
78.5%
79.7%
(1.2) pts
88.3%
89.1%
(0.8) pts
Commercial lines
4.7
91.6%
87.4%
4.2 pts
94.6%
86.5%
8.1 pts
90.8%
91.9%
(1.1) pts
95.2%
94.2%
1.0 pts
DPW
Underlying current year loss ratio
Combined ratio
1,959
2,067
1,986
Q4
8,277
8,601
8,423
Annual
64.2%
63.7%
65.0%
64.8%
66.2%
64.9%
Q4 Annual
2016 2017 2018
92.5%
90.8%
95.2%
95.3%
91.9%
94.2%
Q4 Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
12 INTACT FINANCIAL CORPORATION
Q4-2018 vs Q4-2017
2018 vs 2017
• DPW growth of 4% reflected very strong growth in
commercial lines, including specialty lines. Growth in
personal lines remained tempered by our profitability
actions in personal auto.
• DPW growth of 2% reflected strong growth in commercial
lines, while growth in personal lines was tempered by the
impact of our profitability actions in personal auto.
• Underlying current year loss ratio improved by
2.5 points to 63.7%, reflecting 7 points of
improvement in personal auto, offset in part by
deterioration in commercial lines.
• Underlying current year loss ratio of 65.0% is essentially
unchanged, as continued improvement in personal auto was
offset by higher large losses and severe weather in
commercial lines and personal property.
• CAT loss ratio of 1.6% was in line with last year and
expectations.
• CAT loss ratio of 3.7% was mostly weather-related and
comparable to last year, though it remains above
expectations.
• Lower favourable PYD ratios of 2.7% for the quarter and 2.2% for the full year, though they were in line with
expectations.
• Expense ratio of 28.2% in the quarter and 28.7% for the full year remained lower than historical levels thanks to our
expense initiatives and to lower variable commissions. The increase in commissions in the quarter was due to improved
profitability.
• We delivered a very strong combined ratio of
90.8%, 1.1 points better than last year, with
outstanding results in personal property and
significant improvement in personal auto. This was
tempered by a deterioration in commercial lines.
• We completed the year with a combined ratio of 95.2%,
up one point compared to last year, as strong results in
personal lines including improvement in personal auto, were
more than offset by higher large losses in commercial lines.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 13
4.5 Personal auto
Table 7 – Underwriting results for personal auto
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW
818
824
(1)%
3,750
3,818
(2)%
Written insured risks (in thousands)
866
917
(6)%
4,159
4,319
(4)%
NEP
934
952
(2)%
3,727
3,782
(1)%
Underwriting income (loss)
26
(11)
nm
19
(64)
nm
Underlying current year loss ratio
74.4%
81.4%
(7.0) pts
74.7%
77.7%
(3.0) pts
CAT loss ratio
- %
0.2%
(0.2) pts
0.6%
0.7%
(0.1) pts
(Favourable) unfavourable PYD ratio
0.3%
(2.8)%
3.1 pts
1.3%
0.3%
1.0 pts
Claims ratio
74.7%
78.8%
(4.1) pts
76.6%
78.7%
(2.1) pts
Expense ratio
22.6%
22.4%
0.2 pts
22.9%
23.0%
(0.1) pts
Combined ratio
97.3%
101.2%
(3.9) pts
99.5%
101.7%
(2.2) pts
Q4-2018 vs Q4-2017
2018 vs 2017
• DPW declined by 1%, as we remain ahead of the market in
terms of rate increases. There is growing evidence of
improving market conditions based on recent rate filings
and growth in the risk sharing pools.
• DPW declined by 2%, reflecting continued profitability actions
including rate increases taken ahead of our competitors. Our
segmentation initiatives, including changes to our regional and
new business mix, have improved the portfolio quality while
impacting unit growth.
• Underlying current year loss ratio of 74.4% improved by
7.0 points, mostly attributable to our profitability actions. Our
rate increases and other profitability actions have delivered
another quarter of lower claims frequency and severity,
strengthening our view that our actions are effective.
• Underlying current year loss ratio of 74.7% improved by
3.0 points due to the continued benefits of our action plan
including rate increases across the country. Weather-related
losses were essentially in line with 2017.
• Unfavourable PYD ratio was minimal at 0.3%.
• Unfavourable PYD ratio of 1.3%, mostly driven by
unfavourable development on Ontario Accident Benefit (AB)
files dating prior to the 2016 reform.
• Combined ratio of 97.3% improved by 3.9 points,
reflecting a significant improvement in underlying
performance offset in part by a deterioration in PYD.
• Combined ratio of 99.5% improved by 2.2 points, as an
improved underlying performance driven by the benefits of our
profitability actions was offset in part by higher unfavourable
PYD.
• Our profitability actions have yielded results. We have reached a mid-90s combined ratio run-rate and are now focused on
sustaining that performance. We remain well positioned to capture potential growth opportunities as market conditions continue
to improve.
DPW
Underlying current year loss ratio
Combined ratio
829
818
824
Q4
3,792
3,750
3,818
Annual
78.5%
74.4%
74.7%
76.5%
81.4%
77.7%
Q4 Annual
2016 2017 2018
100.9%
97.3%
99.5%
99.9%
101.2%
101.7%
Q4 Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
14 INTACT FINANCIAL CORPORATION
4.6 Personal property
Table 8 – Underwriting results for personal property
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW
517
505
2%
2,186
2,135
2%
Written insured risks (in thousands)
547
556
(2)%
2,364
2,395
(1)%
NEP
534
522
2%
2,098
2,040
3%
Underwriting income
115
106
8%
246
222
11%
Underlying current year loss ratio
47.1%
49.3%
(2.2) pts
52.0%
49.6%
2.4 pts
CAT loss ratio
2.1%
1.9%
0.2 pts
7.6%
10.2%
(2.6) pts
(Favourable) unfavourable PYD ratio
(2.9)%
(3.2)%
0.3 pts
(3.7)%
(3.0)%
(0.7) pts
Claims ratio
46.3%
48.0%
(1.7) pts
55.9%
56.8%
(0.9) pts
Expense ratio
32.2%
31.7%
0.5 pts
32.4%
32.3%
0.1 pts
Combined ratio
78.5%
79.7%
(1.2) pts
88.3%
89.1%
(0.8) pts
Q4-2018 vs Q4-2017
2018 vs 2017
• DPW growth of 2% in the quarter and the full year reflected continuing rate increases in firm market conditions,
tempered by the impact of profitability actions in personal auto.
• Underlying current year loss ratio was very
strong at 47.1% and improved by 2.2 points, despite
an increase in weather-related losses of roughly
2 points.
• Underlying current year loss ratio for the year remains
solid at 52.0%, though it deteriorated by 2.4 points from last
year, due to an increase in weather-related claims and large
losses.
• CAT loss ratio of 2.1% was essentially in line with
last year.
• CAT loss ratio of 7.6% was lower than last year, though in
line with expectations.
• Favourable PYD ratio of 2.9% in the quarter and 3.7% in the full year remained healthy.
• This line continues to perform very well with combined ratios of 78.5% in the quarter and 88.3% for the full year,
including the impact of severe weather. With market conditions remaining firm, this line is well positioned for the future.
DPW
Underlying current year loss ratio
Combined ratio
486
517
505
Q4
2,030
2,186
2,135
Annual
39.9%
47.1%
52.0%
48.9%
49.3%
49.6%
Q4 Annual
2016 2017 2018
75.6%
78.5%
88.3%
90.9%
79.7%
89.1%
Q4 Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 15
4.7 Commercial lines
Table 9 – Underwriting results for Commercial lines Canada, including Commercial P&C and Commercial auto
Q4-2018
Q4-2017
Change
2018
2017
Change
DPW
732
657
11%
2,665
2,470
8%
Commercial P&C
502
462
9%
1,822
1,716
6%
Commercial auto
230
195
18%
843
754
12%
NEP
661
600
10%
2,507
2,382
5%
Underwriting income (loss)
55
75
(27)%
135
320
(58)%
Underlying current year loss ratio
62.0%
56.9%
5.1 pts
61.3%
57.5%
3.8 pts
CAT loss ratio
3.4%
2.9%
0.5 pts
4.9%
3.1%
1.8 pts
(Favourable) unfavourable PYD ratio
(6.7)%
(5.6)%
(1.1) pts
(6.0)%
(8.4)%
2.4 pts
Claims ratio
58.7%
54.2%
4.5 pts
60.2%
52.2%
8.0 pts
Expense ratio
32.9%
33.2%
(0.3) pts
34.4%
34.3%
0.1 pts
Combined ratio
91.6%
87.4%
4.2 pts
94.6%
86.5%
8.1 pts
Q4-2018 vs Q4-2017
2018 vs 2017
• Very strong DPW growth of 11%, as we continue to
benefit from rate momentum in firm market conditions
and robust growth in specialty lines.
• Strong DPW growth of 8%, as both segments are
benefiting from rate momentum in firm market conditions
and strong growth in specialty lines.
• Underlying current year loss ratio of 62.0% was
healthy, though it deteriorated by 5.1 points from last
year’s strong performance.
• Underlying current year loss ratio of 61.3% deteriorated
by 3.8 points, mainly due to elevated large losses.
• CAT loss ratio was 3.4%, roughly twice our
expectations.
• CAT loss ratio of 4.9% was roughly twice the expected
amount, and mostly driven by severe weather.
• Favourable PYD of 6.7% remained healthy.
• Favourable PYD of 6.0% remained healthy, though lower
than last year’s elevated level.
• Combined ratio of 91.6% deteriorated by 4.2 points
from last year’s very strong performance, which had a
lower level of large losses.
• Combined ratio of 94.6% deteriorated by 8.1 points
compared to last year’s exceptionally strong performance,
driven by elevated large losses and higher CAT losses.
• The underlying fundamentals of this business remain strong, supported by firm market conditions and a high-quality
portfolio.
DPW
Underlying current year loss ratio
Combined ratio
644
732
657
Q4
2,455
2,665
2,470
Annual
62.0%
62.0%
61.3%
59.1%
56.9%
57.5%
Q4 Annual
2016 2017 2018
93.2%
91.6%
94.6%
91.5%
87.4%
86.5%
Q4 Annual
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
16 INTACT FINANCIAL CORPORATION
Section 5 – U.S.
The acquisition of OneBeacon was completed on September 28, 2017.
5.1 A pure-play specialty lines insurer
• Leading U.S. specialty insurer focused on small to midsized businesses, with
US$1.1 billion (CAD$1.5 billion) in annual DPW.
• Distributes insurance products and services in the U.S. under the OneBeacon
brand through independent agencies, regional and national brokers,
wholesalers and managing general agencies.
• OneBeacon operates through five underwriting companies: Atlantic Specialty
Insurance Company, Homeland Insurance Company of Delaware, Homeland
Insurance Company of New York, OBI America Insurance Company and OBI
National Insurance Company.
5.2 What we offer
• Specialty insurance to solve the unique needs of particular customers or
industry groups including accident and health, technology, ocean and inland
marine, public entities, and entertainment.
• Distinct specialty products and tailored coverages to a broad customer base
across the U.S. in areas such as healthcare, tuition reimbursement, surety,
management liability, financial services, specialty property, environmental and
financial institutions.
• Each OneBeacon business unit is managed by an experienced team of
specialty insurance professionals focused on a specific customer group or
industry segment. Competitive factors for most of our insurance products are
price, product terms and conditions, agency and broker relationships, claims service, company scale and financial stability.
DPW by business unit
Leading U.S.
specialty insurer
$1.5B
$1.5B
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 17
5.3 P&C U.S.
All figures in the table below are shown in CAD, using an average exchange rate of 1.32 for Q4-2018 and 1.30 for full year 2018
(Q4-2017 results were converted at 1.27). Percentage changes reported in constant currency exclude the impact of currency
fluctuations. See Section 27 – Non-IFRS financial measures.
Table 10 – Underwriting results for P&C U.S.
1
Q4-2018
Q4-2017
Change
FY 2018
Q4-2017
Change
2
DPW
325
307
6%
1,489
307
nm
Growth in constant currency
2%
nm
NEP
379
326
16%
1,380
326
nm
Growth in constant currency
12%
nm
Current year claims
211
183
28
786
183
nm
Current year CAT claims
22
-
22
22
-
nm
(Favourable) unfavourable PYD
6
15
(9)
(4)
15
nm
Net claims incurred
239
198
41
804
198
nm
Underwriting expenses
127
120
7
505
120
nm
Underwriting income
13
8
5
71
8
nm
Underwriting ratios
3
Underlying current year loss ratio
55.6%
55.9%
(0.3) pts
56.9%
55.9%
nm
CAT loss ratio
5.9%
-
5.9 pts
1.6%
-
nm
(Favourable) unfavourable PYD ratio
1.5%
4.6%
(3.1) pts
(0.3)%
4.6%
nm
Claims ratio
63.0%
60.5%
2.5 pts
58.2%
60.5%
nm
Commissions
14.9%
16.8%
(1.9) pts
15.5%
16.8%
nm
General expenses
17.8%
18.2%
(0.4) pts
19.0%
18.2%
nm
Premium taxes
1.0%
1.9%
(0.9) pts
2.1%
1.9%
nm
Expense ratio
33.7%
36.9%
(3.2) pts
36.6%
36.9%
nm
Combined ratio
96.7%
97.4%
(0.7) pts
94.8%
97.4%
nm
1
Excluding the results of exited lines (see Section 27 – Non-IFRS financial measures).
2
Change for FY 2018 vs Q4-2017 is not meaningful, as 2017 includes only three months of results given the acquisition date of September 28, 2017.
3
The impact of currency fluctuations on underwriting ratios is minimal and is not considered significant.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
18 INTACT FINANCIAL CORPORATION
Q4-2018 vs Q4-2017
2018
1
• DPW growth of 2% on a constant currency basis with solid
progress in our growth focus lines, tempered by the impact
of our profitability improvement actions in other lines.
• DPW growth of 2% for the full year on a constant
currency basis reflected strong new business, tempered by
the impact of our profitability improvement actions.
• Underlying current year loss ratio was healthy at 55.6% in the quarter and 56.9% in the full year.
• CAT loss ratio of 5.9% in the quarter, mainly reflected the impact of hurricane Michael and large commercial fires. From a full
year perspective, CAT loss ratio of 1.6% in 2018 was slightly above our expectations.
• Though PYD was unfavourable 1.5% in the quarter, it was slightly favourable for the full year. Refer to Section 15.2 –
Reinsurance for more details on the Adverse Development Coverage (ADC).
• Expense ratio of 33.7% reflected the seasonality of our
operations, though it was slightly better than our
expectations for the fourth quarter mainly due to business
mix and a one-time favourable adjustment to premium
taxes.
• Expense ratio of 36.6% reflected our continued focus on
cost saving initiatives including realized synergies, and was
slightly better than expectations.
• We have realized another US$7 million of synergies in the quarter. On a run-rate basis, we have exceeded our target of
US$25 million of annual synergies, ahead of schedule.
• Combined ratio of 96.7% improved marginally, after
absorbing 5.9 points of CAT losses, thanks to a better
expense ratio and lower unfavourable PYD.
• Combined ratio of 94.8% was in line with our expectations
for 2018. Though further progress remains, we are on track
towards achieving our goal of a sustainable combined ratio
in the low-90s within 18-24 months.
• We continue to realize the benefits of our underwriting profitability actions, the internalization of claims and our
expense synergies.
1
2018 full year performance is not comparable to 2017 performance, which only includes one quarter of results.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 19
Section 6 – Corporate and Other
Comprised of the following activities, which are managed at the Corporate level:
• Investing related to P&C insurance
• Treasury and capital management
• Other corporate activities, including internal reinsurance
Operating results include net investment income, finance costs, as well as other
income and expenses, as shown in Table 11 below.
6.1 $17 billion of high-quality investments
strategically managed
Our investments totalled $16.9 billion as at December 31, 2018, up $123 million
from December 31, 2017 despite the decline in capital markets in Q4-2018 (see
Section 6.5 – Capital markets). Our approach to investment management
continues to reflect our objective of maximizing after-tax returns and
outperforming our peers’ investment returns over the long-term, while ensuring
policyholder protection and maintaining strong regulatory capital levels.
We continue to manage our investment portfolio to achieve these objectives via
appropriate asset allocation and active management investment strategies,
while minimizing the potential for large investment losses with diversification and
limits on our investment exposures. Such limits are specified in our investment
policies and are designed to be consistent with our overall risk tolerance.
Management monitors and ensures compliance with our investment policies.
6.2 Maximizing long-term shareholder value by optimizing capital
Our objectives when managing capital consist of:
• maintaining strong regulatory capital levels, while ensuring policyholders are well protected; and
• maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
6.3 Treasury management: evolving in an international context
We have a centralized best-in-class treasury management approach that ensures access to funds in multiple currencies and
mitigates the impact of volatility in capital markets on our shareholder’s equity.
6.4 Operating performance
Table 11 – Corporate and other (operating performance)
Section
Q4-2018
Q4-2017
Change
2018
2017
Change
Underwriting income
1
1
-
1
3
-
3
Net investment income
6.6
140
121
19
529
432
97
Finance costs
(27)
(25)
(2)
(103)
(82)
(21)
Other income (expense)
2
(6)
2
(8)
(18)
5
(23)
Corporate and other
108
98
10
411
355
56
1
Reflected the impact of our internal reinsurance treaty.
2
Includes general corporate expenses, consolidation adjustments, regulatory fees related to our public company status, special projects and other
operating items. These can fluctuate from quarter to quarter.
2018 vs 2017
• Finance costs increased in 2018 due to the issuance of the Series 7 medium term notes in Q2-2017.
• Other expense increased in the quarter and the full year mainly due to the impact of the unfavourable capital markets on restricted fund
assets, and a one-time favourable adjustment in 2017.
Total capital
margin
Debt-to-total
capital ratio
22.0%
CORPORATE
AND OTHER
$1.3B
$16.9B
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
20 INTACT FINANCIAL CORPORATION
6.5 Capital markets
While the correlation between the performance of capital markets and the performance of our investment portfolio is not perfect, the
following market indicators may be useful in understanding the overall performance of our investments. Refer to Section 6.6 – Net
investment income, Section 6.7 – Net gains (losses) and Section 14 – Investments for further details.
Table 12 – Selected market indicators
Selected market Indicators
Q4-2018
Q4-2017
2018
2017
S&P/TSX Composite
(11)%
4%
(12)%
6%
S&P/TSX Financials
(12)%
5%
(13)%
9%
S&P/TSX Preferred Share Index
(11)%
1%
(12)%
8%
5Y Canada Sovereign Index (estimated variance in bps)
(41) bps
13 bps
8 bps
78 bps
5Y AA Corporate spread (estimated variance in bps)
26 bps
(5) bps
32 bps
(21) bps
DJ Dividend 100 Composite (U.S.)
(11)%
9%
(8)%
17%
5Y U.S. Sovereign Index (estimated variance in bps)
(44) bps
27 bps
31 bps
28 bps
Strengthening (weakening) of USD vs CAD
6%
1%
8%
(6)%
6.6 Net investment income
Table 13 – Net investment income
Q4-2018
Q4-2017
Change
2018
2017
Change
Interest income
94
81
13
351
275
76
Dividend income
55
50
5
213
194
19
Investment income, before expenses
149
131
18
564
469
95
Expenses
(9)
(10)
1
(35)
(37)
2
Net investment income
140
121
19
529
432
97
Average net investments
1
16,623
16,644
-%
16,442
14,663
12%
Market-based yield
2
3.58%
3.11%
47 bps
3.44%
3.20%
24 bps
1
Defined as the mid-month average fair value of net equity and fixed-income securities held during the reporting period.
2
Refer to Section 27 – Non-IFRS financial measures.
Q4-2018 vs Q4-2017
2018 vs 2017
• Net investment income increased by $19 million, mainly
due to our optimization initiatives, as well as higher yields.
• Net investment income increased by $97 million, due
to the growth of our investment portfolio following the
acquisition of OneBeacon, our optimization initiatives, as
well as higher yields.
• Average net investments were flat at $16.6 billion, as
the increase from operations was impacted by the market
decline in late 2018.
• Average net investments were up 12%, mainly
reflecting the addition of the OneBeacon portfolio.
• The higher market-based yields in Q4-2018 and for the full year mainly reflected the benefit of higher bond rates
captured through the optimization of our portfolio. See Section 6.5 – Capital markets.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 21
6.7 Net gains (losses)
Net investment gains (losses) are reported in Non-operating results and included the following items.
Table 14 – Net gains (losses)
Q4-2018
Q4-2017
Change
2018
2017
Change
Realized and unrealized gains (losses) on:
AFS bonds, net of derivatives
(6)
(3)
(3)
(26)
5
(31)
Equity securities, net of derivatives
(3)
25
(28)
127
123
4
Embedded derivatives
38
(15)
53
25
(50)
75
Net foreign currency gains on investments
-
1
(1)
-
33
(33)
Impairment losses on common shares
(21)
(12)
(9)
(47)
(20)
(27)
Currency derivative gain related to book value hedge of
OneBeacon
-
1
(1)
-
65
(65)
Other gains (losses)
1
3
17
(14)
19
40
(21)
Gains (losses) excluding FVTPL bonds
11
14
(3)
98
196
(98)
Realized and unrealized gains (losses) on FVTPL
bonds
48
(20)
68
(85)
(127)
42
Net gains (losses)
59
(6)
65
13
69
(56)
1
Including net gains (losses) on investments in associates and joint ventures.
Q4-2018
2018
• Net gains excluding FVTPL bonds of $11 million
reflected mark-to-market gains on our embedded
derivatives related to our perpetual preferred shares,
offset in part by impairment losses on common shares,
both linked to weaker equity markets. See Section 6.5 –
Capital markets.
• Net gains excluding FVTPL bonds of $98 million
reflected gains realized from our portfolio optimization
initiatives and from ordinary trading activities on AFS
common shares, offset by impairment losses of $47 million
relating mainly to energy stocks.
• One-time gains in 2017 were mainly related to the
OneBeacon acquisition.
• Realized and unrealized gains on our FVTPL bonds of
$48 million were driven by declining interest rates in both
Canada and the U.S. These gains were offset by the
unfavourable impact of lower rates used to discount our
claims liabilities (MYA). See Section 26 – Non-operating
results.
• Realized and unrealized losses on our FVTPL bonds of
$85 million were driven by increasing rates throughout
most of the year. These losses were offset by the positive
impact of higher rates used to discount our claims liabilities
(MYA). See Section 26 – Non-operating results.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
22 INTACT FINANCIAL CORPORATION
ENVIRONMENT & OUTLOOK
Section 7 – Insurance industry at a glance
7.1 P&C insurance in Canada
Large and
highly
fragmented
• In 2017, it was a $51 billion market representing approximately 3% of gross domestic product (GDP), according to
MSA data.
• The top five insurers represent 48% of the market, and the top 20 have a combined market share of 84%. Intact is
the largest player with approximately 17% market share.
• There has been consolidation in recent years and we expect more to come.
Evolving
and growing
over time
• Over the last 30 years, the industry has grown at about a 5% CAGR and delivered ROE of approximately 10%.
• While we distribute about 85% of our premiums through brokers, the P&C industry as a whole distributes about 64%
of their premiums through this channel. In 2017, the broker channel represented about $33 billion in premiums.
• Emerging technologies and innovations continue to transform the insurance landscape as they enable new ways to
measure, control and price risk, engage with customers, reduce cost, improve efficiency, and expand insurability.
This will fuel further innovation, transformation and consolidation within the industry.
Regulated
• Insurance companies are licensed under insurance legislation in each of the provinces and territories in which they
conduct business.
• Home and commercial insurance rates are unregulated, while personal auto is regulated in most provinces. While
the rate approval process and timing for personal auto vary by province, insurers must file for rate adjustments in
Ontario and Alberta before they can be effected.
• Capital for federal insurance companies is regulated by OSFI and by provincial authorities in the case of provincial
insurance companies (see Section 18 – Capital management).
7.2 U.S. specialty insurance
Highly
fragmented
with no
clear leader
• In 2017, the U.S. commercial P&C insurance was a $290 billion market, up 2.8% from 2016, with specialty insurance
accounting for approximately 43%.
• U.S. commercial specialty industry is a fragmented industry. The top 10 players represent more than 45% of the
market, with the largest player capturing roughly 7% in 2017. Outside of the top eight players, no single insurer
contributes more than 3% of the total estimated market. The majority of the top 25 players have a market share
between 1% and 2.5%.
Niche
market with
lucrative
potential
• The specialty insurance market offers niche and unique products and services that are not written by most P&C
insurance companies. These products generally require specialized underwriting knowledge compared with more
traditional insurance products.
• The combined ratio (and in turn the ROE) of many specialty products have outperformed those typically offered in
the standard market due to more pricing and policy form flexibility.
• This unique risk and specialty focus can also come with above-average earnings volatility.
Evolving
and growing
over time
• Over the last 20 years, the specialty insurance market has grown at a 4.4% CAGR.
• 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 managing general agencies) is the primary
distribution channel for specialty insurance products.
• Trends in litigation, regulation, economic maturity, social and workforce issues, and technology will continue to
support growth and drive product innovation.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 23
Section 8 – Operating environment
8.1 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 industrial fires, surety and liability claims). The incidence and severity of CAT losses, while inherently
unpredictable, can have a significant impact on our underwriting performance by quarter and by line of business. We generally
seek to manage our exposure to CAT losses through individual risk selection and the purchase of CAT reinsurance (see
Section 15.2 – Reinsurance hereafter for more details).
Table 15 – Net current year CAT losses
2018
2017
2016
2015
2014
Net CAT losses
330
313
385
116
243
By loss type
Weather
275
297
350
101
229
Non-weather
1
55
16
35
15
14
By line of business
Personal auto
26
27
73
37
41
Personal property
159
210
210
42
140
Commercial lines - Canada
123
76
102
37
62
Commercial lines - U.S.
22
-
n/a
n/a
n/a
By quarter
Q1
36
88
21
11
75
Q2
142
105
164
22
33
Q3
97
89
166
81
125
Q4
55
31
34
2
10
1
Mostly large commercial losses, including non-weather-related fires, surety and liability losses.
During the 2014-2018 period, average net current year CAT losses were $277 million, and included net losses from the Fort
MacMurray wildfires in 2016, the costliest insured natural disaster in Canadian history. During the 2009-2018 period, net current
year CAT losses were closer to $250 million on average.
8.2 CAT guidance
Over time, our expectation for total CAT losses (net of reinsurance) remains at $275 million per year, including both our
Canadian and U.S. operations. We continue to expect close to half to occur in the third quarter and approximately 75% to impact
personal lines.
Net CAT losses 5-year average
By loss type
By line of business
By quarter
10%
90%
Weather Other than weather
30%
70%
Personal lines
Commercial lines
17%
33%
10%
40%
Q1 Q2 Q3 Q4
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
24 INTACT FINANCIAL CORPORATION
Section 9 – Outlook
P&C insurance industry
12-month outlook
Our response
Personal
auto
• Industry growth exceeded 5% for the first three quarters
of 2018.
• Industry profitability continues to be challenged with
average direct loss ratios in the mid 70s for the first
nine months of 2018.
• The market is firm with rate actions continuing,
increases in residual market volumes and further
tightening of capacity.
• We expect growth at a mid-single-digit level in 2019.
• Our actions continue on pricing, underwriting and claims
to tackle trends.
• We are focused on sustaining a mid-90’s combined ratio
in 2019, after reflecting seasonal variations.
• Rate actions ahead of the market are bringing some near-
term pressure on growth but position us well as our
competitive position is improving.
• Our brand investments and focus on customer driven
digital leadership will continue to help selectively grow our
market share. We are also investing in telematics, big
data, and artificial intelligence to maintain our advantage
in data and segmentation.
Personal
property
• Industry growth exceeded 5% in the first three quarters
of 2018 with loss ratios close to 70%.
• We expect that the current firm market conditions will
continue as companies are adjusting to changing
weather patterns, leading to growth at a mid-single-digit
level over the next 12 months.
• Product enhancements and pricing actions taken over
time have positioned this business very well for the future.
• We expect to continue to capitalize on market conditions
with rate increases to ensure our results remain
sustainable even in severe weather conditions.
Commercial
lines
Canada
• Industry growth exceeded 7% in the first nine months of
2018 with a loss ratio of approximately 70%. Market
conditions are firm.
• We expect growth at a mid-single-digit rate in 2019.
• In such an environment we remain disciplined on pricing
and underwriting of each risk, while we continue to
capture opportunities where we see market inefficiencies.
At the same time, our focus on loss prevention and
service excellence remains.
• We have strengthened our capabilities and product suite
in specialty lines following the OneBeacon acquisition
while we continue to develop innovative products to
address customer needs (e.g. cyber risk coverage and
sharing economy).
Distribution
• The broker channel represents approximately 64% of
the total P&C industry and had higher growth than the
direct channel in 2017. The broker industry remains
fragmented with continuing opportunities for
consolidation.
• Our multi-channel strategy means we are well positioned
to capture opportunities as consumer and technology
trends continue to evolve the distribution of insurance.
• We will continue to grow distribution income by
supporting our brokers as they expand and grow their
businesses, while actively participating in broker
consolidation via BrokerLink and partners.
• Our brand and technology investments aim to bolster
growth in our belairdirect business.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 25
P&C insurance industry
12-month outlook
Our response
U.S.
Commercial
lines
• The pricing environment remains competitive but stable,
with modest upward trends continuing.
• Coupled with the current favourable economic
environment, we expect low-to-mid single-digit industry
growth in the coming year.
• Our objective is to grow the U.S. specialty business, and
opportunities are being successfully pursued in the
segments of the portfolio performing at or above
expectations.
• Profitability actions on underperforming lines and claims
improvement initiatives are well underway and gaining
traction towards our goal to operate at a combined ratio in
the low-90’s on a sustainable basis within 18 to 24
months.
Investments
• Investment yields remain low by historical standards, but
there has been upward momentum on interest rates in
2018.
• Volatility in capital markets may put some pressure on
investment market values and capital levels.
• We are continuously seeking to optimize the composition
of our investment portfolio, taking into account factors
including risk, return, capital, regulation and tax legislation
changes.
• Our investment management team seeks to maximize
after-tax returns while preserving capital and limiting
volatility.
Overall
• Overall, we expect the industry’s ROE to improve but
remain below its long-term average of 10% over the next
12 months.
• With our action plans and strategies, we expect to
outperform the industry’s ROE by more than 500 basis
points in the coming year.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
26 INTACT FINANCIAL CORPORATION
STRATEGY
Section 10 – Strategy update
10.1 What we are aiming to achieve
Our objectives by 2020
Our customers are our advocates
• 3 out of 4 customers are our advocates
• 3 out of 4 customers actively engage with us digitally
Our strategy
• Be easy to deal with and go beyond expectations to deliver a customer experience that is second to none.
• Be the recognized leader in small and mid-sized businesses and specialty lines through service, expertise and product.
• Build core brands to become trusted, household names.
• Leverage best-in-class digital distribution and service platforms for customers and brokers.
• Contribute to the resiliency and prosperity of communities by leading in climate adaptation initiatives.
Our people are engaged
• Be a best employer
• Be a destination for top talent and experts
Our strategy
• Be a destination for top talent and experts.
• Build an unrivalled team of insurance experts and leaders.
• Create a workplace where we are engaged and can contribute our best every day by delivering on our employee promise.
• Live our values and leadership success factors.
Our specialty solutions business is a leader in North
America
• Achieve combined ratio in the low 90s
• Generate $3 billion in annual DPW
Our strategy
• Deliver targeted synergies in back office and claims.
• Introduce new products to Canada and export Canadian lines to the U.S.
• Grow cross-border business.
• Retain key talent and management.
Our company is one of the most respected
• Grow NOIPS 10% yearly over time
• Exceed industry ROE by 5 points in Canada and the U.S.
Our strategy
• Deepen our strengths in pricing, risk selection, claims and investments.
• Simplify processes to become the most efficient operator.
• Lead in data, artificial intelligence (AI), and behavioural analytics.
• Leverage our size in claims through efficiencies in the supply chain.
• Manage capital opportunistically.
• Consolidate Canadian industry in manufacturing and distribution.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 27
10.2 Progress on our 2020 objectives
Our customers are
our advocates
• 1.1 million advocates in 2018, up 1% from last year.
• Maintained #1 and #2 brand consideration nationally for Intact Insurance and belairdirect in
2018.
• In May 2018, we launched the Intact Insurance App, providing customers with a mobile-friendly
way of accessing their insurance documents, accessing the status of their claims in real-time,
and contacting their broker or adjuster.
• In Q3-2018 we launched our UBI 2.0 product, using our mobile app, which improves the way
that customers track their my Driving Discount. Almost half of our UBI customers log in daily to
check in.
• Net promoter score improved in 2018, for personal line customers who filed a claim during the
year.
Our people are
engaged
In 2018, we were recognized:
• as an Aon Best Employer – Canada 2019, Platinum level, for the 4
th
year in a row.
• as one of Canada’s top 100 employers by Mediacorp Canada Inc., for the 4
th
year in a row.
• by Glassdoor as one of the ‘25 best places to work’ in Canada for the first time this year.
Our specialty
solutions business is
a leader in North
America
• On track to achieve these objectives across North America:
• Delivered a combined ratio of 93.0% in 2018.
• Generated close to $2.3 billion in DPW in 2018.
Our company is one
of the most respected
• Over the past 5 years, our NOIPS has grown at a CAGR of 10%.
• NOIPS in 2018 was up 3% over 2017, with a solid underwriting performance, strong growth in
net investment income and solid net distribution income.
• Outperformed the P&C insurance industry’s ROE by 750 bps in the first nine months of 2018.
• Since 2009, we have regularly exceeded our 500 basis points ROE outperformance target
versus the industry, due to our superior underwriting results, investment performance and capital
management.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
28 INTACT FINANCIAL CORPORATION
10.3 IFC’s OROE performance over time
10.4 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. Refer to Important notes on page 2 of this MD&A for further details.
Table 16 – Canadian P&C Industry – IFC outperformance (underperformance)
YTD
Q3-2018
Full year
2017
Full year
2016
Full year
2015
Full year
2014
ROE (annualized)
1
P&C Industry
7.5 pts
6.9 pts
5.8 pts
5.1 pts
8.2 pts
DPW growth (including industry pools)
Industry benchmark
(4.3) pts
(2.4) pts
2.4 pts
3.4 pts
(1.5) pts
Combined ratio (including MYA)
Industry benchmark
8.6 pts
6.2 pts
4.7 pts
5.2 pts
6.5 pts
AMF (Québec) chartered insurance companies are not required to report on Q1 and Q3 results. As such, we have included estimates for non-
reporters in our Industry benchmark group, based on publicly available information. Actual results may vary.
1
IFC’s ROE corresponds to the AROE.
• Our ROE outperformance of 7.5 points versus the P&C insurance industry is above our objective of 5 points and improved
slightly from H1-2018, mainly due to our strong underwriting performance.
• Our growth underperformance against our industry benchmark was 4.3 points, reflecting robust profitability actions in
personal auto, taken ahead of the industry.
• Our combined ratio outperformance against our industry benchmark was 8.6 points, an increase of 0.6 points from H1-2018.
This solid outperformance is the result of the effectiveness of our disciplined profitability actions.
ROE outperformance over time
6.2
4.1
5.1
5.8
6.9
7.5
(2.1)
8.2
11.1
10.7
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2018 latest industry data: YTD Q3-2018.
OROE performance over time
16.8%
11.2%
16.6%
12.0%
12.9%
12.1%
9.2%
16.3%
15.3%
15.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Our historical track record shows an OROE performance in the mid-teens, though in recent years we have been affected by
weak personal auto results and elevated CAT losses.
(in points)
(for the last 12 months)
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 29
10.5 Delivering value to our shareholders
2019: our 14
th
consecutive annual dividend increase
• We strive to maintain our dividend track record through sustainable annual dividend increases. We have increased our common
share dividends each year since going public, with a 9% increase in 2018.
• Our decision to increase common share dividends by 9% to $0.76 per quarter in 2019 reflects the strength of our financial
position and confidence in our ongoing operating earnings and capital generation.
0.65
1.00
1.08
1.24
1.28
1.36
1.48
1.60
1.76
1.92
2.12
2.32
2.56
2.80
3.04
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2004: Initial public offering on TSX (ING Group retained 70%).
Book value per share increase over time
• Our operating performance and financial strength have translated into more than $1.6 billion in capital returned to common
shareholders through dividends and share repurchases over the past five years.
• Our BVPS was up 2% to $48.73 in 2018 driven mainly by our earnings, net of common share dividends, offset in part by the
impact of unfavourable capital markets on our investment portfolio.
• We remained committed to our financial objectives in terms of ROE and NOIPS to enhance value to shareholders.
21.96
24.88
26.47
29.73
33.03
33.94
37.75
39.83
42.72
48.00
48.73
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(in dollars)
(in dollars)
1
Annual dividend for 2019 is projected
CAGR of 8% (2008-2018)
CAGR of 12% (2005-2018)
CAGR of 8% (2008-2018)
1
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
30 INTACT FINANCIAL CORPORATION
10.6 Other developments at a glance
Innovation
In line with our strategy to deliver a customer experience that is second to none and build a best in class digital distribution and
service platform:
• In Q4-2018, we launched the first car and home quick quote for belairdirect Ontario, a tool that allows customers to get a
bundled home and auto quote in 20 questions.
• Leveraging our leadership position in data and data science, we continue to roll-out our new Machine Learning Algorithms
in Rating. These new algorithms will help us improve our accuracy in segmentation and accelerate profitable growth.
• OneBeacon introduced new management liability products that deliver a more comprehensive coverage to a broad range
of private and not-for-profit organizations. The modular policy approach is designed to help minimize gaps in coverage, while
providing flexibility to tailor solutions based on each client’s unique exposures.
Acquisition and financing activities
• In May, we completed a $250 million offering of Rate Reset Class A Series 7 Preferred Shares. Refer to Section 17.1 –
Financing structure for further details.
• BrokerLink acquired several brokerages this year, adding many new locations. BrokerLink’s scale and reputation, local
experts, emphasis on customer service and community involvement were the deciding factors for the brokerages to join the
team.
• Subsequent to quarter-end, BrokerLink acquired two new brokers, Alberta-based Challenge Insurance Group, and
Ontario-based Insurance & Financial Group.
Awards and recognition
We were recognized:
• for the fourth year in a row, as an Aon Best Employer – Canada 2019, Platinum level, recognizing IFC for its strong level of
employee engagement, leadership, performance culture and employment brand.
• for the fourth year in a row, by Mediacorp Canada Inc. as one of Canada’s Top 100 Employers.
• by the Globe and Mail, who awarded us top marks for governance, placing Intact second out of 242 publicly traded companies
in their annual “Board Games” ranking.
• for a third year in a row, as one of Canada’s Top Employers for Young People, an award given to employers who offer the
best workplaces and employee programs to young professionals starting their careers.
• for the first time, by Glassdoor as one of the ‘25 best places to work’ in Canada. Winners are determined based on
feedback from former and current employees who voluntarily and anonymously share insights and opinions about the
companies they work for.
• our Intact Investment Management (IIM) team was selected as one of ten TopGun Investments Teams of the Year, which
honours the most enlightened and disciplined professionals in the investment industry.
• by IR Magazine for ‘Best Financial Reporting’ (co-winner) at the annual IR Magazine Awards Gala, the largest gathering in
Canada to recognize excellence in various aspects of investor relations.
• in the Risk Manager Choice Award, administered by the Flashpohler | NMG Research Group, which recognized OneBeacon
for 3 of the 12 key factors studied; claims management (OneBeacon ranked #1), ease of doing business and relationship
management.
See Section 12 – Social responsibility to see our actions and other developments regarding climate adaptation and social
responsibility.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 31
Section 11 – Unique advantages
We have several unique advantages which have enabled us to sustainably outperform other P&C insurers in Canada. These
advantages are described in the table below.
Leading North American P&C Operator
Seamless
distribution
strategy
• Our multi-channel distribution strategy includes the most recognized broker and direct-to-consumer
brands. This strategy maximizes growth in the market and enables us to appeal to different customer
preferences while being more responsive to consumer trends and needs.
• We have close to 2,000 broker relationships across Canada and the U.S. for customers that prefer the
highly-personalized and community-based service that an insurance broker provides.
• We provide our brokers with a variety of digital distribution service platforms, alongside sales training and
financing to enable them to continue to grow and develop their businesses.
Digital first
experiences
• Our industry leading mobile and digital experiences separate us from our peers. Our ability to design,
deliver and iterate on new experiences for brokers and customers makes us a preferred company to deal
with. Speed, simplicity and transparency are core tenets of our focus.
Engaged &
talented
teams
• Our people are the cornerstone to the execution of our strategy. We benefit from attracting, retaining and
engaging some of the best talent both within and outside our industry. How we organize and behave
provides a sustainable and replicable approach to continuous operational improvement.
Scaled &
diversified
core operations
• Our large database of customer and claims information enables us to identify trends in claims and more
accurately model the risk of each policy.
• We can negotiate preferred terms with suppliers, including service and quality guarantees for repairs and
workmanship, and lower material costs.
• Our business is well diversified across geographic regions and business lines which provides significant
financial flexibility.
Sophisticated
data &
analytics
capabilities
• Our superior data expertise and proprietary segmentation and machine learning models are used to price
and manage risk which allows us to identify certain segments of the market that are more profitable than
others and in turn establish a model that will both attract and maintain clients with profitable profiles.
Deep claims
expertise &
network
• Substantially all of our claims are handled in house with our preferred network, which translates into a
data advantage helping claims settle faster and at a lower cost, with a more consistent service experience
for the customer.
Proven
consolidator
& integrator
• We are a proven industry consolidator with 16 successful acquisitions since 1988.
• Our primary strategy is to pursue consolidation in the Canadian market and expansion in foreign markets
where we can deploy our expertise in pricing, risk selection, claims, distribution and digital expertise. With
these acquisitions, we look to expand our product offering and improve customer experience.
• Our outperformance is driven by three key factors: thorough due diligence to assess all the risks and
opportunities; swift and effective integration with seamless impact to our customers; and financial benefit
from significant synergies due to our scale.
Tailored
investment
management
• In-house investment management provides greater flexibility in support of our insurance operations at
competitive costs. In establishing our asset allocation, we consider a variety of factors including
prospective risk and return of various asset classes, the duration of claim obligations, the risk of
underwriting activities and the capital supporting our business.
• Our primary investment objective is to maximize after-tax total return via appropriate asset allocation and
active management of investment strategies.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
32 INTACT FINANCIAL CORPORATION
11.1 Canadian distribution strategy
Our multi-channel distribution strategy includes our broker and direct-to-consumer channels.
We offer our customers a multitude
of options to reach us: online, by
phone or in person.
With our strong brands, our customers
have coverage options: via our broker
network with Intact Insurance, or
with us directly via belairdirect.
We have a large network of
brokerages, including our wholly-owned
subsidiary, BrokerLink, which operates
in Ontario, Alberta and Atlantic Canada.
2018 DPW by distribution channel
Our broker channel
• Our scale and financial strength position us as a strong supporter of our broker
partners in terms of brand, technology, products and expertise, business
opportunities, as well as financial solutions.
• We invest in our broker network with equity and debt financing. Through these
relationships, we are able to foster growth in their organizations, participate in
the consolidation of the broker network, and enhance our product distribution.
Our direct channel
• We strive for digital leadership with a simplified, easy to use customer
experience and a cost efficient platform.
• We continue to seek opportunities to double our direct-to-consumer business
in the mid-term by expanding our reach and find innovative solutions to make it
easy for our customers to protect the things they care about.
16%
47%
27%
10%
Direct (belairdirect)
BrokerLink
Affiliated brokers - Intact insurance
Non-affiliated brokers - Intact insurance
11.2 Innovation
Shaping our future in the age of big data
Artificial Intelligence (Al) and machine learning have transformational potential for the insurance industry, the economy and
consumers. Our strategic partnerships with academia (such as Montreal’s IVADO, Laval University and the Vector Institute) and the
Intact Data Lab position us to harness the potential of these emerging technologies now and into the future. While data has always
been integral to assessing risk and determining pricing, these technologies can expand our data advantage to innovate and
improve product offerings, so we can better serve customers. We are also using them to help increase our understanding of risk
(including climate risk), and help reduce and prevent risk for customers.
Intact Ventures continues to help us accelerate
Launched in 2016, Intact Ventures Inc. (Intact Ventures), is focused on investing and/or partnering with companies that are
redefining the P&C insurance landscape with innovative business models and new technology. Building relationships with ground-
breaking companies will enable us to accelerate our learning, design smarter products and leverage unique technology.
In return, we will support the growth of these companies by providing them with access to our expertise and talent. We want to
ensure that we continue to be a leader in a fast-paced industry to serve the best interests of our customers, as well as our portfolio
of companies and partners.
Our goal is to connect with companies that are defining:
• the future of transportation;
• how we leverage big data and utilize artificial intelligence;
• how consumers and businesses will choose to purchase insurance in the future; and
• the sharing of risks, assets and expertise.
1
Affiliated brokers are those to which we provide equity
or debt financing.
1
$8.6B
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 33
Section 12 – Social responsibility
We strive to create an environment where our employees live our values every day. Our
values are organized according to five core themes, one being Social responsibility.
We respect the environment and its finite resources. We believe in making the
communities where we live and work safer, healthier and happier. We encourage the
involvement and citizenship of all our employees. Our commitment to social
responsibility also serves as the mandate of the Intact Foundation, which principally
donates to organizations that are committed to climate change adaptation and
addressing the root causes of child poverty in Canada.
Some of our 2018 developments and initiatives are outlined below.
12.1 2018 developments and initiatives
• Intact Centre on Climate Adaptation
At IFC, we remain committed to helping people protect themselves from extreme weather caused by climate change. Our
investment in the Intact Centre on Climate Adaptation
TM
(“Intact Centre”) continues to foster innovative solutions to help
reduce the physical, financial and social impacts of extreme weather on Canadian communities.
The Intact Centre has worked to establish a leading position on the climate change adaptation file in Canada.
2018 milestones include:
• The Intact Centre presented to the Government of Canada standing Senate committee on energy, environment and
natural resources in February, discussing the financial and social need, and means, to mitigate flood risk across
Canada.
• Chaired the Expert Panel on Climate Change Adaptation and Resilience Results, releasing recommendations to the
Canadian federal government in June.
• Supported the development of the national guidelines on basement flood protection and risk reduction for Canada,
published in July.
• Released two significant applied research reports to the Canadian public.
o After the flood: a report profiling the impact of climate change on mental health and lost time from work,
which found that more than half of flooded households took an average of seven days away from work,
10 times the Ontario average for non-flooded households.
o Combatting Canada’s rising flood costs: Natural infrastructure is an underutilized option: a joint
research report with the Insurance Bureau of Canada (‘IBC’), which encourages communities to consider
natural infrastructure to limit their flood risk and realize cost efficiencies. For example, naturally occurring
ponds in Gibbons, B.C., provide up to $4 million in stormwater storage services annually.
• Launched a home flood risk assessment training course with Seneca and Fleming Colleges in Ontario, to build a home
flood risk assessment as a component of home inspector training.
• Entrenched our role as trusted advisors to the Canadian public by participating in over 100 media interviews to help
educate Canadians on the importance of adapting to climate change.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
34 INTACT FINANCIAL CORPORATION
• Other climate - related developments
• We co-hosted the global forum on climate-resilient critical infrastructure organized by the Geneva
Association, the leading international think tank of the insurance industry. Participants engaged in discussions on
critical infrastructure, prioritizing climate change migration and adaptation, challenges and opportunities for scaling up
private investments in climate-resilience, and the insurance industry's role as underwriters, risk managers and
investors.
• Our CEO, Charles Brindamour, addressed global political leaders and experts at the G7 Environment, Oceans
and Energy Ministers meeting in Halifax on September 19, 2018. On an Adaptation and Conserving Nature panel,
he spoke about the role of the insurance industry and public-private partnerships to address the critical need of
building climate resilient infrastructure.
• We signed to the United Nations Environment Programme (UNEP) Finance Initiative Principles for Sustainable
Insurance (“PSI”). The PSI are a global framework for the insurance industry to address environmental, social and
governance risks.
• We joined the United Nations Environment Programme Finance Initiative (UNEP FI) Task force on Climate-
related financial disclosures (TCFD) insurance pilot, which brings together 18 of the world’s largest insurers to better
understand the impacts of climate change on their business.
• Intact Foundation climate change grants
• Beyond our funding to the Intact Centre, the Intact Foundation has provided over $1 million in funding to eight
projects nationally to further Canada’s ability to be resilient to the impacts of climate change. Projects funded
included FireSmart Canada, which provides detailed and customized wildfire risk assessments for homeowners and
ALUS Canada, which encourages climate resiliency for inefficient farmlands.
• Making our communities safer, healthier, and happier
• Employees across Canada have donated over 4,000 hours through team volunteering initiatives and personal
volunteer hours throughout the year.
• Intact reaffirmed its commitment to the Romeo Dallaire Child Soldiers Initiative with a $1 million commitment to
establish a regional centre of training and learning in Rwanda. The regional hub will serve as a meeting place for
countries to exchange and learn how to prevent the recruitment and use of child soldiers.
• The Intact Foundation announced a $500,000 partnership with UNICEF Canada to support two initiatives: “One
Youth”, a program with youth led initiatives to help make Canada the best country in the world to grow up and
"UNdaunted", a program focused on improving the lives of girls and women in sub-Saharan Africa through education.
• Intact receives top marks for good governance in Canada
• The Globe and Mail awarded Intact with top marks for governance, placing Intact second out of 242 publicly traded
companies in their annual “Board Games” ranking.
• The Clarkson Centre for Board Effectiveness ranked Intact first (tie) in its Board Shareholder Confidence Index 2018,
an annual examination of governance practices among Canadian public companies, for the quality of its corporate
governance practices.
• Intact was awarded a Certification of Parity, Platinum level by La Gouvernance au Féminin for its actions regarding the
advancement of women in business.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 35
12.2 Climate-related governance and risk management
• Governance
Climate change risk management is part of the mandate of the risk management committee, which includes:
• reviewing the reports on risk management, reinsurance programs, implementation programs and progress reports;
• reviewing the risk matrix identifying the top and emerging enterprise risks (including the occurrence and severity of
natural disasters that may be affected by climate change);
• reviewing catastrophe programs, exposure management tests and action plans;
• reviewing and approving the reinsurance risk management policy; and
• remaining informed of climate change adaptation and risk mitigation measures for the Canadian marketplace.
• Risk management
Climate change in Canada continues to create unpredictable weather patterns. In particular, our property insurance
business has been impacted and increased the cost of claims associated with severe storms: water damage accounts for
40% of total claims on average. To address this, we have built initiatives in home insurance to adapt the nature of the
product offered and its pricing. We are also reinforcing our claims capabilities, increasing our education and awareness
efforts towards distribution partners and customers, and offering prevention discounts.
There are numerous areas where managing the impacts of climate change is integrated into IFC’s business:
• Corporate development: as we pursue our growth strategy, we evaluate the strategic fit of potential acquisitions
including the impact on our business mix. For example, the acquisition of OneBeacon last year resulted in further
diversification of our insurance portfolio by increasing the contribution of specialty solutions and decreasing our
exposure to weather events relative to our capital base.
• Underwriting: determines the risk drivers related to our new climate realities. For example, we use detailed flood
maps to manage exposure related to our enhanced water damage endorsement.
• Pricing: reflects the scope of risks related to climate change impacts. We have implemented rate changes in our
property insurance products to reflect recent trends in catastrophes and severe weather.
• Claims management: ensure claims can be managed efficiently and effectively across Canada. For example, we
have designated teams in place across the country that deal efficiently with catastrophic events and ensure service
reliability for customers.
• Reinsurance: we reinsure certain risks to limit our losses in the event of catastrophic events or other significant
losses. See Section 15.2 – Reinsurance for more details.
• Outreach and education: we believe it is essential that Canadians adapt to climate change. As a result, we have
launched many home insurance initiatives to help customers understand how to adapt. We continue to work with
partners, such as the Intact Centre and the IBC, to promote climate change adaptation initiatives to governments.
These initiatives include the development of tools for communities to assess the vulnerabilities of their infrastructure to
climate change and prioritize investments in their modernization. By intensifying our education efforts and creating
greater awareness of the risks our country faces and the preventative measures that we can adopt, we help
Canadians adapt to severe weather caused by climate change.
More ESG information will be available in our 2018 Social Impact Report, our 2018 Annual Information Form and our 2019
Management Proxy Circular for the year ended December 31, 2018.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
36 INTACT FINANCIAL CORPORATION
FINANCIAL CONDITION
Section 13 – Financial position
2018 Highlights
Investment portfolio
Claims liabilities
BVPS
for the last 12 months
Debt-to-total capital
ratio
$16.9 billion
$10.6 billion
+2%
22.0%
13.1 Balance sheets
Table 17 – Balance sheets
As at
Section
December 31,
2018
December 31,
2017
Assets
Cash, cash equivalents and short-term notes
461
380
Fixed-income securities
11,682
11,012
Preferred shares
1,165
1,330
Common shares
3,295
3,659
Loans
294
393
Investments
14
16,897
16,774
Premium receivables
3,358
3,351
Reinsurance assets
15.2
864
822
Deferred acquisition costs
903
881
Other assets
1,840
1,565
Intangible assets and goodwill
4,599
4,445
Total assets
28,461
27,838
Liabilities
Claims liabilities
15.1
10,623
10,475
Unearned premiums
5,412
5,365
Financial liabilities related to investments
289
167
Other liabilities
2,118
2,127
Debt outstanding
17
2,209
2,241
Total liabilities
20,651
20,375
Shareholders’ equity
Common shares
2,816
2,816
Preferred shares
1,028
783
Contributed surplus
149
128
Retained earnings
3,776
3,520
AOCI
41
216
Shareholders’ equity
7,810
7,463
Book value per share (in dollars)
29.4
48.73
48.00
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 37
Section 14 – Investments
Our investment portfolio is mainly comprised of Canadian and U.S. securities. Our invested assets were $16.9 billion as at
December 31, 2018, essentially in line with December 31, 2017. The benefits from our optimization initiatives and higher yields
were tempered by the decline in capital markets in Q4-2018.
• 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.
High-quality investment portfolio
Fixed income
Our fixed-income portfolio includes high quality government and corporate bonds. Approximately 91% of our fixed-income portfolio
was rated ‘A-’ or better as at December 31, 2018 (90% as at December 31, 2017). On a consolidated basis, the weighted-average
rating of our fixed-income portfolio was ‘AA’ at December 31, 2018 and 2017. The average duration of our fixed-income portfolio
was 3.70 years (3.53 years as at December 31, 2017), reflecting the integration of the OneBeacon portfolio.
Preferred shares
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, 2018 and 2017.
Net exposure by asset class
As part of our investment strategies, from time to time we take long/short equity positions in order to maximize the value added
from active equity portfolio management, or to mitigate overall common share market volatility. We also use strategies where
market risk from long common share positions is reduced through the use of swap agreements or other hedging instruments.
Table 18 – Investment mix by asset class (net exposure)
As at December 31,
2018
2017
Cash, cash equivalents, and short-term notes
3%
4%
Fixed-income
75%
72%
Preferred shares
7%
8%
Common equities
13%
14%
98%
98%
Loans
2%
2%
100%
100%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
38 INTACT FINANCIAL CORPORATION
Net currency exposure
We hedge the currency exposure of all USD-denominated investments in our Canadian entities using foreign currency contracts,
resulting in minimal currency gains or losses. As at December 31, 2018, on a net exposure basis, 81% of our portfolio is
denominated in CAD, 17% in USD and 2% in other currencies (79% in CAD, 19% in USD and 2% in other currencies as at
December 31, 2017).
Net sectoral exposure
Table 19 – Sector mix by asset class, excluding cash, short-term notes and loans (net exposure)
As at December 31,
Fixed-income
securities
Preferred
shares
Common shares
Total
2018
Total
2017
Government
44%
-
-
32%
33%
Financials
22%
77%
24%
31%
33%
ABS and MBS
17%
-
-
12%
11%
Energy
1%
13%
13%
3%
4%
Industrials
3%
-
10%
4%
4%
Consumer staples
2%
-
10%
3%
3%
Communication Services
1%
-
8%
2%
1%
Utilities
2%
10%
11%
4%
3%
Consumer discretionary
1%
-
6%
2%
3%
Materials
1%
-
5%
1%
1%
Information technology
3%
-
5%
3%
2%
Health care
3%
-
8%
3%
2%
100%
100%
100%
100%
100%
Our fixed-income portfolio remains concentrated in the government and financial sectors providing liquidity and stability to our
balance sheet.
Following the OneBeacon acquisition, our portfolio is comprised of more structured debt securities. As at December 31, 2018,
these securities comprised $689 million of asset-backed securities (“ABS”) and $1,256 million of mortgage-backed securities
(“MBS”). Residential MBS (“RMBS”) and Commercial MBS (“CMBS”) make up respectively 50% and 50% of our MBS portfolio.
Approximately 99% of these structured debt securities are rated ‘A’ or better.
We continue to have no exposure to leveraged securities.
Our net exposure as at December 31, 2018, after reflecting the impact of hedging strategies related to investments and foreign
subsidiaries, is outlined below.
Total portfolio
Net exposure
Investment mix
Fixed income strategies
Net exposure
Sector mix
Total portfolio
Net exposure
Currency
13%
7%
5%
75%
Fixed-income
Common shares
Preferred shares
Cash, short-term notes and loans
22%
17%
17%
44%
Government
Financials
MBS/ABS
Other (4% or less)
17%
2%
81%
CAD USD Other
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 39
Net pre-tax unrealized gain (loss) on AFS securities
In determining the fair value of investments, we rely on quoted market prices. In cases where an active market does not exist, the
estimated fair values are based on recent transactions or current market prices for similar securities.
Table 20 – Net pre-tax unrealized gain (loss) on AFS securities
As at
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
Dec. 31,
2017
Fixed-income securities
17
(38)
(11)
2
22
Preferred shares
(83)
62
53
64
43
Common shares
(85)
148
117
54
212
Net pre-tax unrealized gain (loss) position
(151)
172
159
120
277
Gains and losses in the common share portfolio are generally realized on an ongoing basis under normal capital market conditions.
Impairment recognition on AFS common shares
Table 21 – Aging of unrealized losses on AFS common shares
As at
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
Mar. 31,
2018
Dec. 31,
2017
Less than 25% below book value
148
70
73
78
34
More than 25% below book value for less than 6 consecutive months
55
2
1
3
4
More than 25% below book value for 6 consecutive months or more,
but less than 9 consecutive months
18
10
1
1
13
Unrealized losses on AFS common shares
221
82
75
82
51
Impairment losses on AFS common shares amounted to $47 million in 2018, compared to $20 million in 2017. Since common
shares are measured at fair value on our balance sheet, impairment losses have no impact on our BVPS. Refer to Note 2 –
Summary of significant accounting policies of the Consolidated financial statements for the year ended December 31,
2018, for additional details on our accounting policy regarding the impairment of financial assets.
Quarter
Full year
Our pre-tax unrealized loss position of $151 million increased
by $323 million in the quarter mainly due to:
• mark-to-market losses on our common shares and preferred
shares, reflecting the decline in capital markets, partly offset
by:
• mark-to-market gains on fixed-income securities, reflecting
lower interest rates.
See Section 6.5 – Capital markets for more details.
Our pre-tax unrealized loss position of $151 million
increased by $428 million in 2018 mainly due to:
• mark-to-market losses on our common shares and
preferred shares, reflecting the decline in capital
markets in Q4-2018, and:
• gains realized from ordinary trading activities in our
common share portfolio.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
40 INTACT FINANCIAL CORPORATION
Section 15 – Claims liabilities and reinsurance
15.1 Claims liabilities
Assumptions
Claims liabilities were $10.6 billion as at December 31, 2018, largely in line with those as at December 31, 2017.
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) reported claims case reserves, and
2) incurred but not reported (“IBNR”) reserves.
IBNR reserves supplement the case reserves by taking into account:
• possible claims that have been incurred but not yet reported to us by policyholders;
• expected over/under estimation in case reserves based on historical patterns; and
• other claims adjustment expenses or subrogation amounts not included in the initial case reserve.
Case reserves and IBNR should be sufficient to cover all expected claims liabilities for events that have already occurred, whether
reported or not, taking into account the time value of money, using a rate that reflects the estimated market yield of the underlying
assets backing these claims liabilities. IBNR and risk margin are reviewed and adjusted at least quarterly.
The discount is applied to the total claims reserve and adjusted on a regular basis for changes in market yields. If market yields
rise, the discount would increase and reduce total claims liabilities and, therefore, positively impact underwriting income in that
period, all else being equal. If market yields decline, it would have the opposite effect. See Section 26 – Non-operating results
for more details on the impact of MYA on underwriting.
Net claims liabilities
by business segment
Net claims liabilities
by line of business
18%
82%
P&C Canada P&C U.S.
6%
29%
18%
47%
PA PP CL CAN CL U.S.
Diversification reduces the
uncertainty associated with the
unfavourable development of
claims liabilities for both our
Canadian and U.S. operations.
PA: Personal auto; PP: Personal property: CL: Commercial lines
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 41
Prior year development
PYD can fluctuate from quarter to quarter and year
to year and, therefore, should be evaluated over
longer periods of time.
As yields have been increasing, we would expect
average favourable PYD as a percentage of
opening reserves to be in the 1%-3% range over
the long term. We expect that the current accident
year (CAY) loss ratio will be favourably impacted by
these higher yields.
Table 22 – Unfavourable (favourable) PYD
5-year average
P&C Canada
2018
2017
2016
2015
2014
In $
% NEP
1
PYD
(185)
(238)
(389)
(477)
(364)
P&C Canada
(181)
(253)
(389)
(477)
(364)
(333)
(4.3)%
P&C U.S.
(4)
15
-
-
-
n/a
n/a
By line of business
Personal auto
49
10
(115)
(212)
(141)
(82)
(1.0)%
Personal property
(78)
(62)
(88)
(70)
(71)
(74)
(1.0)%
Commercial lines – Canada
(152)
(201)
(186)
(195)
(152)
(177)
(2.3)%
Commercial lines – U.S.
(4)
15
n/a
n/a
n/a
n/a
n/a
By quarter
Q1
(75)
(82)
(163)
(189)
(141)
(130)
(1.7)%
Q2
(32)
(41)
(93)
(106)
(65)
(67)
(0.8)%
Q3
(28)
(53)
(71)
(107)
(80)
(68)
(0.9)%
Q4
(50)
(62)
(62)
(75)
(78)
(70)
(0.9)%
1
Expressed as a % of total annual NEP for P&C Canada.
Table 23 – PYD by line of business
Q4-2018
Q4-2017
Change
2018
2017
Change
By line of business
Personal auto
3
(27)
30
49
10
39
Personal property
(15)
(17)
2
(78)
(62)
(16)
Commercial lines – Canada
(44)
(33)
(11)
(152)
(201)
49
Commercial lines – U.S.
6
15
(9)
(4)
15
(19)
Total unfavourable (favourable) development
(50)
(62)
12
(185)
(238)
53
Unfavourable (favourable) annualized rate of PYD
1
P&C Canada
(2.8)%
(3.8)%
1.0 pts
(2.3)%
(3.2)%
0.9 pts
P&C U.S.
1.5%
3.0%
(1.5) pts
(0.2)%
3.0%
(3.2) pts
Consolidated
(2.1)%
(2.5)%
0.4 pts
(1.9)%
(1.9)%
- pts
1
As a % of opening reserves.
Annualized rate of favourable PYD – P&C Canada
(as a % of opening reserves)
4.5%
4.3%
3.5%
3.2%
2.3%
10-year average 5-year average 3-year average 2017 2018
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
42 INTACT FINANCIAL CORPORATION
15.2 Reinsurance
In the ordinary course of business, we reinsure certain risks with other reinsurers to limit our maximum loss in the event of
catastrophic events or other significant losses. Our objectives related to ceded reinsurance are capital protection, reduction in the
volatility of results, increase in underwriting capacity and access to the expertise of reinsurers. The placement of ceded reinsurance
is done almost exclusively on an excess-of-loss basis (per event or per risk). Ceded reinsurance complies with regulatory
guidelines. Furthermore, the reinsurance treaties call for timely reimbursement of ceded losses.
Because of the importance of the catastrophe program in place, a certain level of concentration exists with high-quality reinsurers,
but diversification of reinsurers remains a key element and is analyzed and implemented to avoid excessive concentration in a
specific reinsurance group. A single catastrophe event such as an earthquake could financially weaken a reinsurer, so distribution
of risk is an important reinsurance strategy for us.
Annually, we review and adjust our reinsurance coverage as well as our net retention of risks in order to reflect our current
exposures and our capital base. For multi-risk events and catastrophes, the coverage limits are well in excess of the regulatory
requirements with respect to the earthquake risk as per our conservative approach.
In line with industry practice, our reinsurance recoverables with licensed Canadian reinsurers ($169 million as at
December 31, 2018, $227 million as at December 31, 2017) 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.
Since January 1, 2018, the Company’s U.S. operations are covered by the multi-risk events and catastrophes reinsurance
program. Until April 30, 2018, the losses resulting from any single catastrophe above US$20 million and up to US$130 million were
being reinsured externally.
In connection with the acquisition of OneBeacon, we entered into a reinsurance contract pursuant to which a major reinsurer will
assume 80% of negative reserve development with respect to OneBeacon's claims liabilities for accident years 2016 and prior. The
maximum amount recoverable under the ADC is US$200 million and is subject to some exclusions and limitations. As at
December 31, 2018, significant capacity remains under this coverage.
For further details, see Note 14 – Reinsurance of the Consolidated Financial statements.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 43
Section 16 – Employee future benefit programs
We sponsor a number of funded and unfunded defined benefit pension plans
in Canada that provide benefits to members in the form of a guaranteed level
of pension payable for life based on final average earnings and contingent
upon certain age and service requirements. We provide active employees in
Canada a choice between a defined benefit and a defined contribution
pension plan. We offer employees in the U.S. a 401(k) plan.
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. The sharp decline in equity
markets in late 2018 drove pre-tax OCI losses of $127 million in Q4-2018,
offsetting OCI gains recognized earlier in 2018.
We have taken a multi-faceted approach to ensure the sustainability of our pension plans and gradually reduced the risk and
volatility that stems from our pension liabilities and assets, including:
• increasing the target allocation of fixed-income securities to reduce our exposure to market volatility;
• improving our pension asset-liability matching to reduce our interest-rate exposure;
• adding inflation sensitive assets;
• making voluntary contributions to improve the funding status of our pension plans; and
• amending pension plan benefits and conditions.
We regularly monitor the risks inherent in our defined benefit pension plans on an asset-liability basis. We continue to evaluate
various alternatives to better manage the risk related to these plans.
Refer to Note 27 – Employee future benefits of the accompanying Consolidated financial statements for details on
actuarial gains and losses recognized in OCI, assumptions used and sensitivity analysis, as well as risk management and
investment strategy.
Funding ratio
Interest rate hedge ratio
2018 pension plan asset mix
103%
99%
96%
2016 2017 2018
74%
68%
67%
2016 2017 2018
34%
4%
62%
Debt securities
Common shares
Other
The lower funding ratio was mainly
driven by the market decline in Q4-2018.
The hedge ratio was essentially in line
with last year.
Pension plan asset mix is essentially
unchanged from 2017.
Funding ratio: Plan assets as a percentage of funded plans’ obligations.
Interest rate hedge ratio: The duration of the pension asset portfolio divided by the duration of the registered pension plans’ obligation. Our
objective is to remain in a modest range around our pension fund investment policy target of 70%, assuming the funding ratio is 100%. A lower
hedge ratio increases our exposure to changes in interest rates.
Defined benefit obligation
(as at the date of the latest actuarial valuation)
32%
7%
61%
Active members
Pensioners and beneficiaries
Deferred members
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
44 INTACT FINANCIAL CORPORATION
Section 17 – Treasury management
17.1 Financing structure
2018 Financing structure
Debt-to-total capital ratio
Weighted-average
debt maturity
Weighted-average
debt coupon
Weighted-average
preferred share coupon
22.0%
11 years
3.37% (after tax)
4.30% (after tax)
We believe that our optimal financing structure is one where the debt-to-total capital ratio is generally at 20%. We also expect to
have approximately 10% of our total capital comprised of preferred shares. The debt-to-total capital ratio may occasionally exceed
20% with a firm plan to revert back to 20% within a short period of time; in the case of the OneBeacon acquisition, within 24 months
following closing. Our debt-to-total capital ratio following this acquisition at the end of September 2017 was 24.7% and has
decreased to 22.0% as at December 31, 2018 (23.1% as at December 31, 2017).
We have a diversified maturity profile with reasonable levels of debt and preferred shares, which improves our overall cost of
capital:
• We currently have seven series of medium-term notes outstanding with maturities ranging between less than 1 year and
43 years.
• The notes carry a weighted average coupon of 4.61% (3.37% after tax).
• All debt tranches are prudent in size with no large peaks, reducing financing risk.
• Preferred shares provide flexibility in our capital structure at a reasonable cost.
• Debt and preferred shares represent about 30% of our total capital structure.
Our notes and preferred shares are presented in the table below.
Finance structure – Notes and preferred shares
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 45
Credit facility
Our $750 million credit facility matures on August 28, 2023. There were no outstanding amounts under our credit facility as at
December 31, 2018 ($60 million as at December 31, 2017). As part of the covenants under the credit facility, we are required to
maintain certain financial ratios, which were fully met as at December 31, 2018 and 2017.
Our credit facility may be drawn as follows:
Type:
At a rate of:
Prime loans
Prime rate plus a margin
Base rate (Canada) advances
Base rate plus a margin
Bankers’ acceptances
Bankers’ acceptance rate plus a margin
Libor advances
Libor rate plus a margin
Series 7 preferred shares
In May, we completed a $250 million offering of Rate-Reset Class A Series 7 Preferred Shares. The holders of these shares will be
entitled to receive fixed non-cumulative cash dividends on a quarterly basis, subject to Board approval, based on an annual rate of
4.90% until June 30, 2023. The dividend rate will be reset at this time and every five years thereafter. Further details, including
conversion rights, can be found in the Prospectus Supplement dated May 22, 2018 filed by the Company and available on SEDAR
at www.sedar.com.
17.2 Ratings
Independent third-party rating agencies assess our insurance subsidiaries’ ability to meet their ongoing policyholder obligations
(“financial strength rating”) and our ability to honour our financial obligations (“senior unsecured debt rating”). Ratings are an
important factor in establishing our competitive position in the insurance market, mainly in commercial insurance, and accessing
capital markets at competitive pricing levels.
Table 24 – Ratings
A. M. Best
DBRS
Moody’s
Fitch
Financial strength ratings
IFC’s principal Canadian P&C insurance subsidiaries
A+
AA(low)
A1
AA-
OneBeacon U.S. regulated entities
A
A2
AA-
Senior unsecured debt ratings
IFC
a-
A
Baa1
A-
OneBeacon
bbb+
Baa2
A-
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
46 INTACT FINANCIAL CORPORATION
17.3 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 25 – Cash flows
Q4-2018
Q4-2017
Change
2018
2017
Change
Net cash flows provided by operating activities
211
23
188
833
781
52
Cash flows generated from (deployed on):
Acquisition of OneBeacon
-
-
-
-
(2,139)
2,139
Equity investments in brokerages and other, net
(13)
(25)
12
(78)
(108)
30
Purchases of intangibles and P&E, net
(36)
(24)
(12)
(117)
(98)
(19)
Dividends
(109)
(99)
(10)
(430)
(378)
(52)
Share-based payments in shares
(4)
(4)
-
(36)
(37)
1
NCIB
-
-
-
-
(7)
7
Issuance of common shares
-
-
-
-
731
(731)
Issuance of medium-term notes
-
-
-
-
422
(422)
Issuance of Class A Preferred shares
-
-
-
243
292
(49)
Amount drawn (repaid) under our credit facility
-
(150)
150
(60)
60
(120)
Net cash inflows (outflows) before investment
portfolio sales/purchases
49
(279)
328
355
(481)
836
Excess capital deployed on OneBeacon acquisition
-
-
-
-
660
(660)
Proceeds from investment sales (investment purchases)
(43)
(76)
33
(90)
(184)
94
Net increase (decrease) in cash and cash equivalents
6
(355)
361
265
(5)
270
We have sufficient capital resources, cash flows from operating activities and borrowing capacity to support our current and
anticipated activities, scheduled principal and interest payments on our outstanding debt, the payment of dividends and other
expected financial requirements in the near term.
17.4 Contractual obligations
The table below presents the expected timing of contractual liquidity requirements as at December 31, 2018.
Table 26 – Contractual obligations
Payments due by period
Total
Less than 1 year
1 - 3 years
3 - 5 years
Thereafter
Principal repayment on notes outstanding
2,209
250
299
393
1,267
Interest payments on notes outstanding
1,184
97
171
128
788
Claims liabilities
1
10,734
4,182
2,913
1,787
1,852
Operating leases and other commitments
1,191
214
261
189
527
Pension obligations
2
37
4
7
7
19
Total contractual obligations
15,355
4,747
3,651
2,504
4,453
1
Represents the undiscounted value and includes incurred but not reported reserves.
2
These amounts represent the annual mandatory funding required by regulators, based on the latest actuarial valuations and expected benefit
payments for unfunded plans.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 47
Section 18 – Capital management
18.1 Capital management objectives
Our objectives when managing capital consist of:
• maintaining strong regulatory capital levels (see Regulatory capital section below), while ensuring policyholders are well
protected; and
• maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
We seek to maintain adequate capital levels to ensure that the probability of breaching the regulatory minimum requirements is
very low. Such levels may vary over time depending on our evaluation of risks and their potential impact on capital. We also keep
higher levels of capital when we foresee growth or actionable opportunities in the near term. Furthermore, we may return excess
capital to shareholders through annual dividend increases and, when appropriate, through share buybacks.
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.
U.S.
• Our U.S. insurance operations are subject to regulation and supervision in each of the states where they are
domiciled and licensed to conduct business.
• State insurance departments have established the insurer solvency laws and regulatory infrastructure to
maintain accredited status with the National Association of Insurance Commissioners ("NAIC").
• A key solvency-driven NAIC accreditation requirement is a state's adoption of RBC requirements.
• Dividends from our major U.S. insurance subsidiary are subject to the New York State Department of
Financial Services’ prior approval for a two-year period ending September 30, 2019.
Regulatory capital guidelines change from time to time and may impact our capital levels. We carefully monitor all changes, actual
or proposed.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
48 INTACT FINANCIAL CORPORATION
18.2 Capital position
All our regulated P&C insurance subsidiaries were well capitalized on an individual basis with capital levels well in excess of
regulator supervisory minimum levels, as well as Company action levels (CALs). CALs represent the thresholds below which
regulator notification is required together with a company action plan to restore capital levels.
Table 27 – Estimated aggregated capital position
December 31, 2018
September 30, 2018
December 31, 2017
Canada
(MCT)
U.S.
(RBC)
IFC
capital
margin
Canada
(MCT)
U.S.
(RBC)
IFC
capital
margin
Canada
(MCT)
U.S.
(RBC)
IFC
capital
margin
Regulatory capital ratios (RCRs)
201%
377%
-
196%
384%
-
205%
459%
-
Industry-wide supervisory minimum
levels
150%
150%
-
150%
150%
-
150%
150%
-
--
CALs
170%
200%
-
170%
200%
-
170%
200%
-
Capital above CALs (capital margin)
530
396
926
469
381
850
618
438
1,056
Other regulated/unregulated entities
1
-
-
407
-
-
327
-
-
79
Total capital margin
2
1,333
1,177
1,135
1
Other regulated entities include Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados).
2
Total capital margin includes the aggregate of capital in excess of company action levels in regulated entities (170% MCT, 200% RBC and other
CALs on other jurisdictions) plus available cash in unregulated entities.
Total capital margin increased by $156 million in Q4-2018 to $1,333 million. Strong Canadian underwriting results and seasonal
improvements in capital factors were tempered by a decline in equity markets.
On a full year basis, total capital margin increased by $198 million, reflecting the proceeds of the preferred share issuance in
Q2-2018, partly offset by the full repayment of the credit facility.
For details on our Own Risk and Solvency Assessment, refer to Section 22.8 – Own Risk and Solvency Assessment.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 49
RISK MANAGEMENT
Section 19 – Overview
We have a comprehensive risk management framework and internal control procedures designed to manage and monitor various
risks in order to protect our business, clients, employees, shareholders, 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.
Section 20 – Risk management structure
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
50 INTACT FINANCIAL CORPORATION
The Board of Directors is responsible for the oversight of risk management to ensure that risks are properly measured, monitored
and reported. In this regard, the Board is supported by its Risk Management Committee that covers enterprise wide risks. In
addition, we have an internal Enterprise Risk Committee composed of senior executives.
The Board and Committee structures are reviewed periodically to be aligned with best practices, applicable laws and regulatory
guidelines on corporate governance. The following structure is in place and remains largely unchanged from 2017.
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 and business continuity. Further details follow on
how these committees operate, ensure compliance with laws and regulations and report to the Enterprise Risk
Committee.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 51
Section 21 – Corporate governance and compliance program
We believe that sound corporate governance and compliance monitoring related to legal and regulatory requirements are
paramount for maintaining the confidence of different stakeholders including our investors. Legal and regulatory compliance risk
arises from non-compliance with the laws, regulations or guidelines applicable to us as well as the risk of loss resulting from
non-fulfilment of a contract. We are subject to strict regulatory requirements and detailed monitoring of our operations in all states,
provinces and territories where we conduct business, either directly or through our subsidiaries. Our corporate governance and
compliance program is built on the following foundations:
21.1 Corporate governance and compliance program
Corporate governance ensuring compliance with laws and regulatory requirements
Sound corporate
governance standards
Effective disclosure
controls and
processes
Sound corporate
compliance structures
and processes
Specialized resources
independent from
operations
The Board of Directors and its
committees are structured in
accordance with sound
corporate governance
standards.
Directors are presented with
relevant information in all areas
of our operations to enable
them to effectively oversee our
management, business
objectives and risks. The Board
of Directors and the Audit
Committee periodically receive
reports on all important
litigation, whether in the
ordinary course of business
where such litigation may have
a material adverse effect, or
outside the ordinary course of
business.
Disclosure controls and
processes have been put in
place so that relevant
information is obtained and
communicated to senior
management and the Board of
Directors to ensure that we
meet our disclosure obligations,
while protecting the
confidentiality of information.
A decision-making process
through the Disclosure
Committee is also in place to
facilitate timely and accurate
public disclosure.
Effective corporate governance
depends on sound corporate
compliance structures and
processes.
We have established an
enterprise-wide Compliance
Policy and framework including
procedures and policies
necessary to ensure adherence
to laws, regulations and related
obligations. Compliance
activities include identification,
mitigation and monitoring of
compliance/reputation risks, as
well as communication,
education, and activities to
promote a culture of compliance
and ethical business conduct.
To manage the risks associated
with compliance, regulatory,
legal and litigation issues, we
have specialized resources
reporting to the SVP, Corporate
and Legal services that remain
independent of operations.
The SVP, Corporate and Legal
services reports to the Board of
Directors and its committees on
such matters, including with
respect to privacy and
Ombudsman complaints.
We also use third party legal
experts and take provisions
when deemed necessary or
appropriate.
While senior management has ultimate responsibility for compliance, it is a responsibility that each individual employee shares.
This is clearly set out in our core Business Values and Code of Conduct and employees sign a confirmation that they have
reviewed and complied with them annually.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
52 INTACT FINANCIAL CORPORATION
Section 22 – Enterprise Risk Management
22.1 Mandate
The Enterprise Risk Management strategy is designed to provide an overview of our risks and ensure that appropriate actions are
taken to protect our clients, employees, shareholders, 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.
22.2 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.
22.3 A shared responsibility
Managing risk is a shared responsibility at Intact. The three lines of defence model is employed to clearly identify the roles and
responsibilities of those involved in the risk management process.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 53
22.4 Risk Appetite
How do we manage corporate risk?
From a risk management perspective, our objective is to protect the sustainability of our activities, while delivering on our promises
to our stakeholders. To do so, we strive to maintain our financial strength, even in unpredictable environments or under extreme
stress. We take a prudent approach to managing risk, and the following principles help us establish the nature and scope of risks
we are willing to assume:
• we focus on our core competencies;
• we keep our overall risk profile in check;
• we protect ourselves against extreme events;
• we promote a strong risk management culture; and
• we maintain our ability to access capital markets at reasonable costs.
Consult our website for a more detailed discussion of our Risk Appetite under the Corporate Governance section.
22.5 Main risk factors and mitigating actions
Our practice is to regularly identify our top risks, assess the likelihood of occurrence and evaluate the potential impacts should they
materialize both in terms of financial resources and reputation. We also consider potential emerging risks that are newly developing
or changing risks which are inherently more difficult to quantify.
We then determine mitigation plans and assign accountability for each risk if deemed appropriate given our overall assessment, our
risk appetite, and our business objectives.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
54 INTACT FINANCIAL CORPORATION
22.6 Top and emerging risks that may affect future results
Each year the Enterprise Risk Management Committee identifies the top risks that the Company faces. The following section
presents the top and emerging risks identified with the most severe potential impact. In assessing the potential impact for each of
the top risks, the presence and effectiveness of risk mitigation activities are taken into consideration. Our main risk factors together
with our practices used to mitigate these risks are explained below.
TOP AND EMERGING RISKS
Major earthquake ...................................................................................................................................................................................................... 54
Catastrophe events risk............................................................................................................................................................................................. 55
Increased competition and disruption ........................................................................................................................................................................ 56
Turbulence in financial markets ................................................................................................................................................................................. 57
Reserve and pricing inadequacy ............................................................................................................................................................................... 58
Governmental and/or regulatory intervention ............................................................................................................................................................. 59
Failure of an acquisition ............................................................................................................................................................................................ 61
Failure of a major technology initiative ...................................................................................................................................................................... 61
Information technology and cyber security risk .......................................................................................................................................................... 62
Inability to contain fraud and/or abuse ....................................................................................................................................................................... 63
Customer satisfaction risk ......................................................................................................................................................................................... 63
The emergence of autonomous vehicles and crash avoidance technology ................................................................................................................ 64
Major earthquake
Insurance risk
Risk we are facing
The occurrence of a major earthquake may produce significant damage in large, heavily populated areas.
Potential impact
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 increased assessments from the P&C Insurance
Compensation Corporation (PACICC) leading to further costs if other
insurers are unable to meet their contractual obligations with their
clients. Based on our assessment, our exposure to a major earthquake
in Western Canada has continued to increase slightly in 2018 versus
the prior year.
How we manage this risk
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 15.2 – Reinsurance for more details on our
reinsurance program.
In 2017, we completed a comprehensive review of the models we use
to evaluate our earthquake exposure. We concluded that the models
we use to help us assess our risk are sound. Given the nature of
earthquake risk, different models provide different assessments of the
same exposure. We continue to maintain a prudent amount of
reinsurance that exceeds our risk assessment of an earthquake in
Western Canada, including the U.S. Pacific Northwest, at a 1-in-500
year return period.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 55
Catastrophe events risk
Insurance risk
Risk we are facing
Climate change is a challenge faced by the entire P&C insurance industry. In particular, our property insurance business has been affected
due to changing climate patterns and an increase in the number and cost of claims associated with severe storms and other natural disasters.
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.
Catastrophe events include natural disasters and unnatural events.
• There are a wide variety of natural disasters including but not limited to hurricanes, wind storms, hailstorms, rainstorms, ice storms, floods,
severe winter weather and forest fires.
• Unnatural catastrophe events including but not limited to hostilities, terrorist acts, riots, explosions, crashes and derailments, and wide scale
cyber-attacks.
Despite the use of sophisticated models, the incidence and severity of catastrophe events are inherently unpredictable. The extent of losses from a
catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most
catastrophe events are restricted to small geographic areas; however, hurricanes and other storms may produce significant damage in large,
heavily populated areas. Catastrophe events can cause losses in a variety of P&C insurance lines.
Potential impact
Claims resulting from natural or unnatural catastrophe
events could cause substantial volatility in our
financial results and could materially reduce our
profitability or harm our financial condition.
Over the last few years, we have witnessed a
continued increase in the number and severity of
weather events. Changing weather patterns may have
an impact on the likelihood and severity of natural
catastrophes, such as wildfires in the West and heavy
precipitation in the East. The trend in climate change
continues to pose a meaningful risk to our ability to
meet our business objectives.
We began offering cyber risk insurance to our
commercial customers in 2015 and have expanded
our offerings in this space over time. The acquisition
of OneBeacon expands further our exposure to this
risk. We may be adversely affected by a large scale
cyber-attack that simultaneously compromises the
systems of many of our insureds.
In addition, we have exposure to terrorism risk in the
U.S. through our U.S. specialty business. Terrorism
can take many forms and both our property and
workers’ compensation policies may be affected by an
event.
How we manage this 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, and the
introduction of depreciation schedules in personal property insurance across Canada.
These initiatives should help mitigate, to some extent, P&C insurance losses resulting
from water damage and harsh weather. As climate risk continues to evolve, we are
continuously developing or acquiring new modelling tools to help better assess
catastrophe risk. See Section 12.2 – Climate-related governance and risk
management for more details on our initiatives and ongoing management of the
risks related to climate change.
In addition, our reinsurance program offers protection against multi-risk events and
catastrophes. See Section 15.2 – Reinsurance for more details on our reinsurance
program.
To help mitigate the risks associated with our cyber risk insurance product, we focus on
small to medium size companies with relatively modest policy limits. In addition, we
purchase reinsurance specifically to transfer some of the risk in the event a large scale
cyber-attack triggers a high volume of claims.
In addition to private reinsurance, we also participate in the U.S. federal government
terrorism insurance backstop (TRIPRA) that mitigates our exposure under certain
circumstances as outlined in U.S. federal legislation.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
56 INTACT FINANCIAL CORPORATION
Increased competition and disruption
Strategic risk
Risk we are facing
The P&C insurance industry is highly competitive and we believe that it will remain so for the foreseeable future.
We believe that competition in our business lines is based on price, service, commission structure, product features, financial strength and scale,
ability to pay claims, ratings, reputation and name or brand recognition. We compete with a large number of domestic and foreign insurers as well
as with Canadian banks that are selling insurance products. These firms may use business models different than ours and sell products through
various distribution channels, including aggregators, brokers and agents who sell products exclusively for one insurer and directly to the consumer.
We compete not only for business and individual customers, employers and other group customers but also for brokers and other distributors of
investment and insurance products.
We distribute our products primarily through a network of brokers and a great part of our success depends on the capacity of this network to be
competitive against other distributors, including direct insurers and web aggregators, as well as our ability to maintain our business relationships
with them. These brokers sell our competitors’ insurance products and may stop selling our insurance products altogether. Strong competition
exists among insurers for brokers with demonstrated ability to sell insurance products.
Potential impact
Intense competition for our insurance products could harm our ability to
maintain or increase our profitability, premium levels and written insured
risk volume.
The entrance of a new player in the market or a shift in methods to
purchase insurance could challenge our distribution model. The use of
information technology in the distribution and pricing of insurance
products (e.g. telematics, the use of Big Data, etc.) has increased over
the last several years and this trend is expected to continue in the near
future. Artificial intelligence is another area that is gaining much
attention and could have a material impact on the insurance industry.
Competitors may use these technologies more effectively than us or
there may be negative reputational consequences arising from our
initiatives.
Demutualization and further consolidation in the Canadian P&C industry
remains likely which may result in an erosion of our competitive
advantage.
The 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.
How we manage this risk
Our multi-channel distribution strategy including the broker channel,
direct-to-consumer brands and web platforms, enhances our ability to
adapt to evolving conditions in the insurance market. We have
established close relationships with our independent distributors by
providing them with advanced technology, as well as training to help
strengthen their market position. We closely monitor pricing gaps
between our various channels and manage the different channels under
different brand names including BrokerLink, our wholly-owned broker
network.
We also have a number of initiatives that we are pursuing to help
mitigate the risk of competition and disruption including:
• Investing significantly in promoting our brands with an increasing
focus on using web and mobile technology to reach consumers;
• Promoting our own usage-based insurance (UBI) product to better
meet customer needs;
• Increased digitalization of the customer experience;
• Opening innovative service centres in major Canadian cities to
provide an unmatched customer experience; and
• Creating Intact Ventures (see Section 11.2) to be at the forefront
of technological change as it applies to the P&C insurance
industry.
We are continuously monitoring and analyzing competitor offerings in
the marketplace to help ensure that we remain at the forefront of
innovation in the P&C insurance marketplace.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 57
Turbulence in financial markets
Financial risk
Risk we are facing
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 2018, there was renewed financial market volatility that we had not experienced for several years. See Section 6.5 – Capital
markets for more details.
Potential impact
Changes in the market variables mentioned
above could adversely affect our investment
income and/or the market value of our
securities.
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.
General economic conditions, political
conditions and many other factors can also
adversely affect the equity markets and,
consequently, the fair value of the equity
securities we own and ultimately affect the
timing and level of realized gains or losses.
Our preferred share portfolio depreciates in
value as a result of negative developments in
interest rate and/or credit markets.
Our fixed income portfolio may experience
defaults resulting in impairments and lower
income prospectively.
How we manage this risk
While our strategy is long-term in nature, it is regularly reviewed to adapt to the investment
environment when necessary, especially in times of turbulence and increased volatility. We
closely monitor concentration across and within asset classes and ensure that exposures
remain within the risk tolerance stated in our investment policy.
Periodically, we employ several risk mitigation measures such as changes to our strategic asset
mix, hedging of interest rate, foreign exchange, or equity risk and increased holdings in cash.
These actions serve to reduce exposures in the investment portfolio and decrease the
sensitivity of our regulatory capital ratios to financial market volatility.
Regular stress testing of our investment risk exposures assists management in assessing the
overall level of financial risk and helps to ensure that exposures remain within established risk
tolerances. In 2018, we conducted comprehensive stress testing that considered exposures
holistically across all geographies in which we invest and the potential impact on our capital
position, both in local jurisdictions and on an aggregate basis for IFC.
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
Credit risk
Notes 10.1 and 10.2
Note 10.4
Basis risk
Liquidity risk
Note 10.3
Note 10.5
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
58 INTACT FINANCIAL CORPORATION
Reserve and pricing inadequacy
Insurance risk
Risk we are facing
Our success depends upon our ability to accurately assess the risks associated with the insurance policies that we write. We establish reserves to
cover our estimated liability for the payment of all losses and loss adjustment expenses (“LAE”) incurred with respect to premiums collected or due
on the insurance policies that we write. Reserves do not represent an exact calculation of a liability. Rather, reserves are our estimates of what we
expect to be the ultimate cost of resolution and administration of claims. These estimates are based upon various factors, including:
• actuarial projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
• estimates of trends in claims severity and frequency;
• judicial theories of liability;
• variables in claims handling procedures;
• economic factors (such as inflation);
• judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverage or policy exclusions; and
• the level of insurance fraud.
Product design and pricing risk is the risk that the established price is or becomes insufficient to ensure an adequate return for shareholders as
compared to our profitability objectives. This risk may be due to an inadequate assessment of market needs, new business context, a poor estimate
of the future experience of several factors, or the introduction of new products that could adversely impact the future behaviour of policyholders.
Potential impact
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.
To the extent that actual losses and LAE exceed our expectations and the
reserves reflected in our Consolidated financial statements, we will be
required to reflect those changes by increasing our reserves. In addition,
government regulators could require that we increase our reserves if they
determine that our reserves were understated in the past. When we
increase reserves, our income before income taxes for the period will
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 15.1 – Claims liabilities for more details on the claims reserve
and prior year claims development.
Inadequate pricing may lead to material declines in underwriting income
and/or deficient reserves.
How we manage this risk
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.
We have adopted policies which specify our retention limits and risk
tolerance and our application depends on training and the discipline
of our underwriting teams. Once the retention limits have been
reached, we use reinsurance to cover the excess risk. Moreover,
our profitability and ability to grow may also be adversely affected
by our mandatory participation in the Facility Association and
assumed risk-sharing pools in several automobile insurance
markets including Ontario, Québec, Alberta, and the Maritimes.
In addition, on an annual basis, our external auditor provides an
independent review of our reserves in the context of the audit of the
Consolidated financial statements. This review includes
establishing their own view of a reasonable range for the estimate.
Following the acquisition of OneBeacon, we purchased reinsurance
to protect against adverse development for OneBeacon’s reserves
from 2016 and prior years. During 2018, this risk mitigation strategy
resulted in lower volatility in our U.S. dollar claims reserves.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 59
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.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
60 INTACT FINANCIAL CORPORATION
Governmental and/or regulatory intervention (cont’d)
Strategic risk
Potential impact
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.
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;
• modification of tax laws or a change in interpretation to existing tax laws, either
retroactively or prospectively; and
• nationalization of one or more of our business lines.
Furthermore, a significant increase in solvency requirements would increase the possibility
of regulatory intervention and may reduce our ability to generate attractive returns for
shareholders. This may also negatively impact our ability to execute our growth strategy
and attain our financial objectives.
How we manage this risk
We are supported by an in-house team of lawyers and
staff, and by outside counsel when deemed necessary
or appropriate, 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 regularly monitor trends and make adjustments to
our strategy and products, when deemed appropriate,
to ensure the sustainability of insurance products and
to avoid the potential for additional regulation that may
negatively impact our reputation, profitability, and
financial condition.
To reduce the risk of breaching the regulatory capital
requirements, we have 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.
In addition, we conducted a full internal solvency
assessment as described hereafter in Section 22.8 –
Own Risk and Solvency Assessment (ORSA).
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 61
Failure of an acquisition
Strategic risk
Risk we are facing
Our primary strategy is to pursue consolidation in the Canadian market and expansion in foreign markets where we can deploy our expertise in
pricing, underwriting, claims management and multi-channel management.
On September 28, 2017, we completed the US$1.7 billion ($2.3 billion) acquisition of OneBeacon, a specialty P&C insurance provider that offers a
wide range of specialty insurance products in the United States. Failure on our part to manage this U.S. acquisition could have a material adverse
effect on our business, results of operations and financial condition. In addition to specific country risks, we cannot be sure that we will be able to
identify appropriate profitability targets or successfully integrate this acquired business into our operations.
Potential impact
With respect to the acquisition of OneBeacon, we are faced with a number of integration
risks including but not limited to:
• the inability to derive the expected returns from the acquisition, which would lead to a
lower future return on equity for shareholders;
• the inability to realize growth and profitability action plans, such as cross-border
opportunities and underwriting profitability targets. Under certain adverse
circumstances, this may lead to a write down of goodwill;
• challenges in harmonizing processes; and
• a departure of key employees during the integration phase.
In addition to the potential financial impact, our reputation may be adversely affected if such
an event were to occur. Consequently, it may impact the cost or availability of capital for
future acquisitions.
How we manage this risk
We are a proven industry consolidator with 16
successful P&C acquisitions since 1988. 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.
Failure of a major technology initiative
Operational risk
Risk we are facing
To maintain our performance levels, we are required to regularly modernize our systems. Often significant time and investment is required
for accomplishing these projects. Any unplanned delays, unforeseen costs, or unsuccessful execution of such projects could lead to a significant
decline in service levels, impact employee morale negatively and reduce our competitiveness. There is no assurance that we will succeed in
meeting our objectives for these projects.
Potential impact
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
internal audits are regularly conducted to identify
potential areas for remediation or the necessity for
additional controls. A dedicated committee was created
to ensure proper focus is devoted to major technology
projects.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
62 INTACT FINANCIAL CORPORATION
Information technology and cyber security risk
Operational risk
Risk we are facing
Information technology and cyber security risks continue to be key risks for many 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 continue to increase. These attacks may include targeted attacks on systems and applications,
introduction of malicious software, denial of service attacks, and phishing attacks which could result in the fraudulent use or theft of data, and may
involve attempts to fraudulently induce employees, customers or third-party service providers to disclose sensitive information in order to gain
access to the Company’s data. Distributed Denial of Service (DDos) and Ransomeware attacks continue to increase in frequency and severity.
These activities are designed to disrupt the operations of an organization and/or to benefit the attacker financially.
We may be unable to prevent cyber-attacks that result in system disruption or a breach of confidential information, whether personal or corporate in
nature. Third party service providers and other suppliers may also be the subject of successful cyber-attacks leading to a material impact on our
systems or the theft of confidential information.
Potential impact
Despite our commitment to information and cyber security, we
may not be able to fully mitigate all risks associated with the
increased sophistication and volume in the threat landscape.
As such, we may be the subject to a cyber-attack resulting in
system unavailability, data corruption or deletion, or the
disclosure of confidential or personal information. Massive
denial of service attacks and system intrusion attempts could
compromise our ability to operate or we may be unable to
safeguard personal and confidential information from public
disclosure. Other potential consequences include our inability
to provide customers with real-time access to information on
their insurance policies, provide quotes for new insurance
products or enable customers to report claims electronically.
These events and attacks may lead to wide ranging
consequences including:
• financial loss, which also includes lost productivity,
remediation costs, and costs associated with potential
legal action;
• regulatory action, which may include regulatory fines
and/or increased scrutiny by government; and
• reputational damage such as lost consumer confidence
and lower customer retention.
How we manage this risk
To ensure the security and resilience of our systems, the safeguard of our
confidential information and the integrity of our information and databases,
dedicated teams plan, test and execute our continuity and security plans. This
includes threat and vulnerability assessments and the implementation of
appropriate mitigation actions. Our security teams constantly monitor our systems
and are ready to intervene if an incident occurs. To ensure the expected levels of
service are delivered by our critical third-party service providers, service level
agreements are signed and added to relevant contracts.
We continuously upgrade our applications to better protect our systems and
information. We regularly monitor external trends in cyber security to ensure we
are able to rapidly mitigate known vulnerabilities.
We benchmark our information security practices to assess areas of our cyber
security program that require additional effort and to learn from industry leading
practices.
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.
In 2018, we conducted a cyber-security exercise to test our ability to respond to a
major security incident and identify opportunities to further strengthen our
resilience.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 63
Inability to contain fraud and/or abuse
Operational risk
Risk we are facing
As a property and casualty insurer, we may be subject to internal or external fraud. Our insureds may exaggerate claims for personal gain. Despite
our efforts to control fraud and abuse, our staff, systems, and processes may be unable to accurately detect and prevent internal or external fraud.
Potential impact
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.
How we manage this risk
We have strong internal controls in place to prevent and detect potential internal fraud. Internal
and external audits are performed to verify that the controls are followed.
Fraud detection software is used by our claims teams to detect potential external fraud and flag
cases for further investigation. 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.
Customer satisfaction risk
Strategic risk
Risk we are facing
Our insurance products and services are ultimately distributed to individual consumers and businesses. From time to time, unsatisfied customers,
consumer advocacy groups or the media may generate negative publicity related to our claims handling or underwriting practices. Untimely or poor
handling of such negative publicity may increase the impact of a situation and materially affect our reputation and growth prospects.
In addition, a lack of appropriate focus on customers’ needs and wants may threaten our ability to meet customer expectations, resulting in poor
customer retention.
Potential impact
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.
How we manage this risk
To mitigate these risks, we have established escalation procedures to help ensure that our
customers have multiple channels to express any dissatisfaction. This includes a Customer
Experience Team and an Ombudsman’s Office which both offer the opportunity for customer
dissatisfaction to be resolved. In addition, management proactively identifies potential issues
and performs an additional review to help ensure that our customers are treated fairly.
The wording of our insurance policies is reviewed periodically by management to detect and
remediate potential issues before they arise.
New products and significant changes in existing products undergo a rigorous product
development life-cycle including an independent review by the risk management function prior
to launch. Potential reputational issues can be identified in the early stages of product
development and, if required, changes are implemented prior to launch.
The Enterprise Risk Committee regularly monitors our operations to identify situations that can
negatively affect customer satisfaction.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
64 INTACT FINANCIAL CORPORATION
The emergence of autonomous vehicles and crash avoidance technology
Emerging risk
Risk we are facing
Commercialisation of fully- or semi-autonomous vehicles could profoundly change the transportation and auto insurance industries. The
speed at which autonomous vehicles are adopted will depend on a number of factors including, but not limited to, the success of the new
technology, the legal and regulatory environment, and customer preferences. These vehicles may have a dramatically different risk profile than
current modes of transportation.
Potential impact
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.
How we manage this risk
We recognize the potential impact of this emerging technology and have been closely monitoring
developments on this topic for some time. We devote part of our research agenda to include items such as
the future of mobility insurance and autonomous vehicles. We believe it is crucial to understand this emerging
technology and the possible implications to be able to adjust our corporate strategy accordingly.
In 2018, Intact ventures invested in a self-driving start-up, Voyage, 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.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 65
22.7 Other risk factors that may affect future results
Legal risk
In addition to the occasional employment-related litigation, we are a defendant in a number of claims relating to our insurance and
other related business operations. We may from time to time be subject to a variety of legal actions, 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. In recent years, the availability of alternative capital in the reinsurance market
has helped maintain the supply of capital and added downward pressure on rates. However, reinsurance companies may exclude
some coverage from the policies that we purchase from them or may alter the terms of such policies from time to time. These gaps
in reinsurance protection expose us to greater risks and greater potential losses and could adversely affect our ability to write future
business. We may not be able to successfully mitigate risks through reinsurance arrangements, which could cause us to reduce
our premiums written in certain lines or could result in losses. In addition, the cost of reinsurance could increase significantly year
over year, impacting our profitability if we are unable to pass on these costs to consumers. Furthermore, a significant decline in the
availability of reinsurance could impact our premium volume, our profitability and our regulatory capital position.
People risk
Our success has been, and will continue to be, dependent on our ability to retain the services of key employees and to
attract additional qualified personnel in the future. In addition, a significant decline in employee morale could materially
affect our operations including an increase in the risk of human error or deliberate acts that harm the company. The loss of the
services of any of our key employees, or the inability to identify, hire and retain other highly qualified personnel in the future, could
adversely affect the quality and profitability of our business operations.
We have developed a focused recruiting strategy to aggressively market careers and opportunities at Intact. The strategy includes
an updated web site, focused external recruiting, campaigns, rebranding, and targeted advertising. It also includes partnering with
four universities on graduate recruiting as well as commercial and personal lines trainee program recruiting. Talent identification
and development programs have been implemented to retain and grow existing talent. We also have a comprehensive succession
planning program at various levels within the organization to ensure we are prepared for unplanned departures and retirements.
Furthermore, our employee engagement surveys continue to reveal a high level of engagement among employees. IFC was
recognized by multiple organizations as one of Canada’s best employers. We believe that a high level of employee engagement
helps mitigate some of the operational risks associated with people. However, there is no assurance that the Company will be
successful in retaining and motivating our key talent across the organization.
Business interruption risk
We may experience an abrupt interruption of activities caused by unforeseeable and/or catastrophe events, an example of
which being a global pandemic (e.g. the Ebola virus) or a large scale cyber-attack. Our service levels may decline
materially resulting in negative financial and reputational consequences. Losses can relate to property, financial assets, trading
positions and also to key personnel. If our business continuity plans cannot be put into action or do not take such events into
account, losses may increase further.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
66 INTACT FINANCIAL CORPORATION
We continuously monitor world events, such as the Ebola virus outbreak in 2014, to enable us to pro-actively adapt our response
plan. In order to maintain the integrity and continuity of our operations in the event of a crisis, we have developed personalized alert
and mobilization procedures as well as communication protocols. For example, emergency action plans, business continuity plans,
business recovery plans, major health crisis plans, building evacuation plans and crisis communication plans have all been defined
and are tested on an ongoing basis. This process is supported by a crisis management structure adapted to our organization and to
the type of events we may have to manage.
Credit downgrade risk
Independent third-party rating agencies assess our ability to honour our financial obligations (the “senior unsecured debt rating”)
and our insurance subsidiaries’ ability to meet their ongoing policyholder obligations (the “financial strength rating”). See Section
17.2 – Ratings for more details.
The rating agencies periodically evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us.
We may not be in a position to maintain either the issuer credit ratings or the financial strength ratings we have received from the
rating agencies. An issuer credit rating downgrade could result in materially higher borrowing costs. A financial strength rating
downgrade could result in a reduction in the number of insurance contracts we write and in a significant loss of business; as such
business could move to other competitors with higher ratings, thus causing premiums and earnings to decrease.
This is more applicable to our commercial insurance where clients place a higher emphasis on such ratings. Credit downgrades
may affect our ability to raise capital or may result in an increase in the cost of raising capital with negative implications for
shareholders and other stakeholders.
Limit on dividend and capital distribution risk
As a holding company, IFC is a legal entity and is separate and distinct from its operating subsidiaries, most of which are regulated
insurance companies. While no regulatory approval is required for dividend payments from the regulated insurance companies,
notice to OSFI is required together with pro forma capital calculations showing internal target capital levels are maintained both
before and after such dividends are paid out. In addition, for competitive reasons, our insurance subsidiaries maintain financial
strength ratings which require us to maintain minimum capital levels in our insurance subsidiaries. These regulations and ratings
targets limit the ability of our insurance subsidiaries to pay unlimited dividends or invest all of their capital in other ways. In certain
stress scenarios limitations on our subsidiaries’ ability to pay dividends to IFC could have a material adverse effect on our ability to
pay shareholder dividends and may result in a material decline in the price of securities we have issued.
Deferred tax assets
We have a deferred tax asset related to net operating loss carryforwards and tax credit carryforwards as at December 31, 2018,
that are subject to carryforward limitations in the U.S. Utilization of these assets and other assets included in our net deferred tax
asset is dependent on generating sufficient future taxable income of the appropriate type (i.e. ordinary income or capital gains) in
the appropriate jurisdiction. If it is determined that it is more likely that sufficient future taxable income will not be generated, we
would be required to increase the valuation allowance (an offset to our deferred tax asset) in future periods, which could have an
adverse effect on our results of operations.
Distribution risk
Distribution risk is the risk related to the distribution of our P&C insurance products. It includes the inherent risk of dealing with
independent distributors, the risk related to new market entrants and the risk associated with our multiple distribution channel
strategy. We may also face the risk that one of our channels or business models would not be sustainable in a specific market or
context. From time to time we issue loans or take equity participation in certain brokers and consequently, we expose ourselves to
other risks including financial risk and regulatory risk. For various reasons, the broker channel has been in a consolidation mode for
the last few years and we believe that this situation will continue. The acquisition of brokers by others or even by other insurers
may impact our relationship with some of them and harm our ability to grow our business. In order to maintain strong relationships
with brokers, each relationship is managed by officers in each of the main regions in which we operate. To mitigate the financial
risk arising from loans to brokers we generally receive guarantees and use standard agreements which contain general security
and oversight clauses. The Board of Directors participates in this oversight process by reviewing these activities periodically.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 67
22.8 Own Risk and Solvency Assessment
Since 2014, we have conducted our Own Risk and Solvency Assessments (“ORSA”) at least annually. ORSA encompasses
processes to identify, assess, monitor, and manage the risks we take in conducting our business. ORSA also covers the
determination of our capital needs and solvency position. ORSA is an integral part of the implementation of our Enterprise Risk
Management strategy. This exercise was conducted over and above the Dynamic Capital Adequacy Testing (DCAT) performed
annually by the Appointed Actuary (refer to Note 21 – Capital management to the accompanying Consolidated financial
statements for details).
Our ORSA revealed that the financial resources of our insurance subsidiaries are sufficient to meet policyholder obligations after
adverse situations at a confidence level of 99.5 % 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.
Our 2018 assessment of capital required increased slightly compared to that of 2017, primarily driven by the acquisition of
OneBeacon Insurance. Our capital sufficiency remains within the Board approved operating range as measured by the ratio of
adjusted tangible equity to internal capital required.
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.
Section 23 – Off-balance sheet arrangements
23.1 Securities lending
We participate in a securities lending program to generate fee income. This program is managed by our custodian, a major
Canadian financial institution, whereby we lend securities we own to other financial institutions to allow them to meet their delivery
commitments. We loaned securities, which are reported as investments in the accompanying Consolidated financial statements,
with a fair value of $1,155 million as at December 31, 2018 ($1,087 million as at December 31, 2017).
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 $1,215 million as at December 31, 2018 ($1,144 million as at December 31, 2017).
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
68 INTACT FINANCIAL CORPORATION
Section 24 – Sensitivity analyses
Sensitivity analyses are one risk management technique that assists management in ensuring that risks assumed remain within our
risk tolerance level. Sensitivity analyses involve varying a single factor to assess the impact that this would have on our results and
financial condition. No management action is considered. Actual results can differ materially from these estimates for a variety of
reasons and therefore, these sensitivities should be considered as directional estimates.
Table 28 – Sensitivity analysis (after tax)
For the years ended December 31,
2018
2017
Split by geography
(total equity impact, estimated)
Net
income
OCI
BVPS
Canada
U.S.
Inter-
national
Net
income
OCI
BVPS
Equity price risk
Common share prices
(10% decrease)
1
(11)
(202)
(1.53)
61%
31%
8%
(1)
(201)
(1.45)
Preferred share prices (5%
decrease)
2, 3
8
(51)
(0.31)
100%
-
-
13
(62)
(0.35)
Interest rate risk
(100 basis point increase)
Debt securities
4
(188)
(174)
(2.60)
62%
38%
-
(167)
(116)
(2.03)
Preferred shares
6
(37)
(0.22)
100%
-
-
8
(37)
(0.21)
Net claims liabilities
168
-
1.21
84%
16%
-
168
-
1.20
Defined benefit pension
plan obligation, net of
related debt securities
-
87
0.63
100%
-
-
-
89
0.64
Currency risk
(strengthening of the CAD by
10% vs all currencies)
5
U.S. Investments
supporting P&C Canada
-
-
-
-
-
-
6
(1)
0.04
International securities
-
(19)
(0.14)
-
-
100%
-
(19)
(0.14)
Book value of foreign
operations
-
(196)
(1.41)
-
99%
1%
-
(176)
(1.26)
1
Net of any equity hedges, including the impact of any impairment.
2
Including the impact on related embedded derivatives.
3
The preferred share equity price risk sensitivity analysis includes the impact of interest rate movements.
4
Excludes the impact of debt securities related to the defined benefit pension plan.
5
After giving effect to forward-exchange contracts.
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.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 69
ADDITIONAL INFORMATION
Section 25 – Financial KPIs and definitions
25.1 Our financial KPIs
Our most relevant key performance indicators are outlined in the table below. DPW, Underlying current year loss ratio, NOI,
NOIPS, OROE, ROE, AROE and AEPS are considered non-IFRS financial measures. See Section 27 – Non-IFRS financial
measures for the reconciliation to the most comparable IFRS measures.
2018
2017
2016
2015
2014
Growth
DPW growth
15.6%
5.5%
4.8%
6.2%
1.6%
DPW growth in constant currency
15.4%
n/a
n/a
n/a
n/a
Underwriting
performance
Underlying current year loss ratio
63.8%
64.5%
64.8%
66.1%
64.3%
Claims ratio
65.3%
65.4%
64.9%
61.3%
62.6%
Expense ratio
29.8%
28.9%
30.4%
30.4%
30.2%
Combined ratio
95.1%
94.3%
95.3%
91.7%
92.8%
Consolidated
performance
Net underwriting income
474
486
375
628
519
Net investment income
529
432
414
424
427
Net distribution income
146
132
111
104
75
NOI
839
771
660
860
767
NOIPS (in dollars)
5.74
5.60
4.88
6.38
5.67
OROE
12.1%
12.9%
12.0%
16.6%
16.3%
ROE
9.9%
12.8%
9.6%
13.4%
16.1%
AROE
11.8%
13.0%
11.0%
14.3%
16.8%
EPS (in dollars)
4.79
5.75
3.97
5.20
5.79
AEPS (in dollars)
5.70
5.82
4.53
5.54
6.01
Financial
strength
BVPS (in dollars)
48.73
48.00
42.72
39.83
37.75
MCT (Canada)
201%
205%
218%
203%
209%
RBC (U.S.)
377%
459%
n/a
n/a
n/a
Total capital margin
1,333
1,135
970
625
681
Debt-to-total capital ratio
22.0%
23.1%
18.6%
16.6%
17.3%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
70 INTACT FINANCIAL CORPORATION
25.2 Definitions of our financial KPIs
Our most relevant key performance indicators are defined below. See Section 27 – Non-IFRS financial measures for the
reconciliation to the most comparable IFRS measures.
• AEPS and AROE are adjusted measures, meaning that they exclude the after-tax impact of acquisition-related items, such
as amortization of intangible assets recognized in business combinations, as well as integration and restructuring costs.
• NOI, NOIPS and OROE are operating measures, meaning that they exclude non-operating items detailed in Section 26 –
Non-operating results.
• EPS and ROE are IFRS measures, meaning that their definition is determined in accordance with IFRS.
Incentive compensation is based on the comparison of results for DPW growth, combined ratio, NOIPS and AROE as defined
above, against those of our Canadian P&C insurance industry benchmark, specific targets, or a combination of both. See Section
10.4 – IFC’s industry outperformance over time for more details on our performance versus the industry.
Growth
DPW growth
for a specific period
DPW for a specified period
–
DPW for the previous year
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
results
Underlying current
year loss ratio
for a specific period
Current year claims ratio
excluding CAT losses and
PYD
NEP before the impact of
reinstatement premiums
Expense ratio
for a specific period
Underwriting expenses (including
commissions, premium taxes and
general expenses related to
underwriting activities)
NEP
Claims ratio
for a specific period
Claims incurred
(net of reinsurance)
NEP
Combined ratio
for a specific period
Claims ratio
+
Expense ratio
A combined ratio under 100% indicates a profitable underwriting result.
A combined ratio over 100% indicates an unprofitable underwriting result.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 71
1
Net income is determined in accordance with IFRS.
2
The average shareholders’ equity is the mean of shareholders’ equity at the beginning and the end of the period, adjusted for significant capital
transactions, if appropriate. Shareholder’s equity is determined in accordance with IFRS.
3
Weighted-average number of common shares outstanding during the same period.
4
Shareholder’s equity is determined in accordance with IFRS.
Consolidated
performance
Net distribution
income
for a specific
period
Operating income excluding interest
and taxes from our wholly-owned
broker (BrokerLink)
+
Operating income including interest
and taxes from our broker associates
Net investment
income
for a specific period
As detailed in Table 13 –
Net investment income
PTOI
for a specific
period
As detailed in Table 2 –
Consolidated performance
ROE
for a 12-month
period
Net income attributable to
common shareholders
1
Average common shareholders'
equity
2
NOI
for a specific
period
As detailed in Table 30 –
Reconciliation of NOI, NOIPS and
OROE to net income
AROE
for a 12-month
period
Adjusted net income attributable
to common shareholders
Average common shareholders'
equity
2
NOIPS
for a specific
period
NOI attributable to common
shareholders
WANSO
3
EPS
for a specific
period
As reported in the accompanying
Consolidated statements of
income
OROE
for a 12-month
period
NOI attributable to common
shareholders
Average common shareholders’
equity
2
(excluding AOCI)
AEPS
for a specific
period
Adjusted net income attributable
to common shareholders
WANSO
3
Financial
strength
BVPS
as at the end of a
specific period
Common shareholders’ equity
4
Number of common shares
outstanding at the same date
Total capital margin
as at the end of a
specific period
Aggregate of capital in excess of
company action levels in
regulated entities (170% MCT,
200% RBC) plus available cash
in unregulated entities.
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
Total debt outstanding
Sum of the total shareholders’
equity
4
and total debt
outstanding as at the same date
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
72 INTACT FINANCIAL CORPORATION
Section 26 – Non-operating results
Non-operating results, a non-IFRS financial measure, include elements that are not representative of our operating performance
because they relate to special items, bear significant volatility from one period to another, or because they are not part of our
normal activities. As a result, these elements are excluded from the calculation of NOI and related non-IFRS financial measures.
Table 29 – Non-operating results
Q4-2018
Q4-2017
Change
2018
2017
Change
Net gains (losses) (Table 14)
59
(6)
65
13
69
(56)
Positive (negative) impact of MYA on underwriting
(36)
11
(47)
97
92
5
Amortization of intangible assets recognized in
business combinations
1
(24)
(25)
1
(89)
(62)
(27)
Integration and restructuring costs
2
(14)
(12)
(2)
(63)
(57)
(6)
Difference between expected return and discount
rate on pension assets
(12)
(12)
-
(49)
(45)
(4)
Underwriting results of exited lines
(7)
(10)
3
(29)
(10)
(19)
Other
(8)
(4)
(4)
(22)
(18)
(4)
Non-operating gains (losses)
(42)
(58)
16
(142)
(31)
(111)
Income tax recovery (expense) on the above items
5
27
(22)
19
25
(6)
U.S. Corporate Tax reform
-
27
(27)
(9)
27
(36)
After-tax non-operating gains (losses)
(37)
(4)
(33)
(132)
21
(153)
1
Includes $10 million in Q4-2018 ($36 million for 2018) in connection with the acquisition of OneBeacon.
2
Includes $10 million in Q4-2018 ($51 million for 2018) in connection with the acquisition of OneBeacon.
• 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.
• Integration and restructuring costs include items such as retention bonuses, the initial net impact of a reinsurance coverage
which provides protection against certain negative reserve developments, pre-acquisition finance costs and acquisition-related
expenses.
• The difference between the expected return and discount rate on pension assets is treated as non-operating results, as
the gap in these measures is not reflective of our internal investment management expertise and management of our pension
asset portfolio.
• Underwriting results of exited lines included the results of the U.S. Commercial’s business units Programs, and Architects
and Engineers. In our consolidated statements of income, underwriting results of exited lines are presented in several
captions, namely Direct premiums written, Net earned premiums, Net claims incurred and Underwriting expenses.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 73
Section 27 – Non-IFRS financial measures
The non-IFRS measures included in this MD&A are: DPW, change or growth in constant currency, NEP, total net claims,
underlying current year loss ratio, underwriting expenses, underwriting income, combined ratio, net distribution income, NOI, net
NOIPS, OROE, adjusted net income, AEPS, AROE and market-based yield.
These 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.
NOI, NOIPS and OROE
• Exclude non-operating results (see Section 26 for details).
Table 30 – Reconciliation of NOI, NOIPS and OROE to net income
Q4-2018
Q4-2017
2018
2017
Net income
244
232
707
792
Add (less) income tax expense (recovery)
67
14
179
150
Add non-operating losses
42
58
142
31
Pre-tax operating income
353
304
1,028
973
Tax impact
(72)
(68)
(189)
(202)
NOI
281
236
839
771
Less preferred share dividends
(11)
(10)
(40)
(27)
NOI to common shareholders
270
226
799
744
Divided by weighted-average number of common shares (in millions)
139.2
139.2
139.2
133.1
NOIPS, basic and diluted (in dollars)
1.93
1.63
5.74
5.60
NOI to common shareholders – last 12 months
799
744
Average common shareholders’ equity, excluding AOCI
6,603
5,758
OROE for the last 12 months
12.1%
12.9%
All underwriting results and related ratios exclude the MYA and results of our U.S. Commercial exited lines, unless otherwise noted.
DPW
• Represents the total amount of premiums for new and renewal policies billed (written) during the reporting period, normalized
for the effect of multi-year policies, excluding industry pools, fronting and exited lines. 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 DPW to the year in which coverage is provided, whereas under IFRS, the full value of multi-year
policies is recognized in the year the policy is written.
Table 31 – Reconciliation of DPW and DPW growth to DPW, as reported under IFRS
Q4-2018
Q4-2017
2018
2017
DPW, as reported under IFRS
2,377
2,301
10,125
8,748
Add (less) impact of industry pools and fronting
(31)
(3)
(105)
(19)
Less DPW of exited lines
(2)
(18)
(17)
(18)
DPW (full term)
2,344
2,280
10,003
8,711
Add impact of the normalization for multi-year policies
48
13
87
19
DPW
2,392
2,293
10,090
8,730
DPW growth
4%
17%
16%
5%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
74 INTACT FINANCIAL CORPORATION
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 32 – Reconciliation of NEP before reinstatement premiums to NEP and of current year claims to net claims incurred, as reported under IFRS
Q4-2018
Q4-2017
2018
2017
NEP, as reported under IFRS
2,516
2,428
9,765
8,558
Less NEP of exited lines
(7)
(28)
(50)
(28)
NEP
2,509
2,400
9,715
8,530
Add (deduct) reinstatement premiums ceded (recovered)
1
(2)
-
(2)
NEP, before reinstatement premiums
2,510
2,398
9,715
8,528
Net claims incurred, as reported under IFRS
1,624
1,552
6,340
5,538
Add positive (negative) impact of MYA on underwriting results
(36)
11
97
92
Less difference between expected return and discount rate on pension
assets allocated to net claims incurred
(3)
(6)
(20)
(18)
Less net claims of exited lines
(13)
(33)
(75)
(33)
Total net claims
1,572
1,524
6,342
5,579
Less current year CAT claims
(55)
(31)
(330)
(313)
Add favourable (unfavourable) PYD
50
62
185
238
Current year claims (excluding CATs and PYD)
1,567
1,555
6,197
5,504
NEP, before reinstatement premiums
2,510
2,398
9,715
8,528
Underlying current year loss ratio
62.5%
64.8%
63.8%
64.5%
CAT loss ratio (including reinstatement premiums)
2.2%
1.3%
3.4%
3.7%
Unfavourable (favourable) PYD ratio
(2.0)%
(2.6)%
(1.9)%
(2.8)%
Claims ratio
62.7%
63.5%
65.3%
65.4%
Underwriting income (loss)
Table 33 – Reconciliation of underwriting expenses to underwriting expenses, as reported under IFRS
Q4-2018
Q4-2017
2018
2017
Underwriting income, as reported under IFRS
1
155
167
493
523
Less impact of MYA on underwriting results
36
(11)
(97)
(92)
Add difference between expected return and discount rate on pension assets
12
12
49
45
Add underwriting results of exited lines
7
10
29
10
Underwriting income
210
178
474
486
Combined ratio
91.7%
92.6%
95.1%
94.3%
1
Includes the following captions in the Consolidated statements of income: Net earned premiums, Other underwriting revenues, Net claims incurred
and Underwriting expenses.
Underwriting expenses
Table 34 – Reconciliation of underwriting expenses to underwriting expenses, as reported under IFRS
Q4-2018
Q4-2017
2018
2017
Underwriting expenses, as reported under IFRS
765
735
3,042
2,605
Less difference between expected return and discount rate on pension
assets
(9)
(6)
(29)
(27)
Less other underwriting revenues
(28)
(26)
(110)
(108)
Less underwriting expenses of exited lines
(1)
(5)
(4)
(5)
Underwriting expenses
727
698
2,899
2,465
Expense ratio
29.0%
29.1%
29.8%
28.9%
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 75
ROE
• 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 35 – Reconciliation of ROE to net income
Q4-2018
Q4-2017
2018
2017
Net income
244
232
707
792
Less preferred share dividends
(11)
(10)
(40)
(27)
Net income attributable to common shareholders
233
222
667
765
Net income attributable to common shareholders – last 12 months
667
765
Average common shareholders’ equity
6,731
5,961
ROE for the last 12 months
9.9%
12.8%
AEPS and AROE
• Exclude the after-tax impact of amortization of intangible assets recognized in business combinations, as well as integration
and other acquisition-related costs.
• We believe that these acquisition-related items are not appropriate in assessing our underlying performance.
Table 36 – Reconciliation of AEPS and AROE to net income
Q4-2018
Q4-2017
2018
2017
Net income
244
232
707
792
Adjustments, net of tax
Remove currency derivative gain related to the acquisition of OneBeacon
-
(7)
-
(62)
Add negative (positive) impact from U.S. Corporate Tax reform
-
(27)
9
(27)
Add amortization of intangibles recognized in business combinations
19
20
71
50
Add integration and other costs
10
7
47
49
Adjusted net income
273
225
834
802
Less preferred share dividends
(11)
(10)
(40)
(27)
Adjusted net income attributable to common shareholders
262
215
794
775
Divided by weighted-average number of common shares (in millions)
139.2
139.2
139.2
133.1
AEPS, basic and diluted (in dollars)
1.88
1.55
5.70
5.82
Adjusted net income attributable to common shareholders - LTM
794
775
Average common shareholders’ equity
6,731
5,961
AROE for the last 12 months
11.8%
13.0%
Market-based yield
• Represents the annualized total pre-tax investment income (before expenses), divided by the mid-month average fair value of
net equity and fixed-income securities held during the reporting period (average net investments).
• This calculation provides users with a consistent measure of our relative investment performance.
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, particularly with respect to the KPI of our U.S. segment
(namely, DPW and NEP growth, as the impact of currency fluctuations on underwriting ratios is minimal and not considered
significant).
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
76 INTACT FINANCIAL CORPORATION
Section 28 – 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
28.1 New accounting standards effective January 1, 2018
On January 1, 2018, we adopted following new standards and amendments to existing standards:
• Amendments to IFRS 4 - Insurance Contracts for the application of IFRS 9 - Financial Instruments
• IFRS 15 - Revenue from contracts with customers
• Income tax consequences of payments on financial instruments classified as equity
For further details on these new standards, refer to Note 4 of our Consolidated financial statements.
28.2 Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to use judgments, estimates and
assumptions that can have a significant impact on reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities as at the balance sheet date, as well as reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from these estimates.
The key estimates and assumptions that have a risk of causing a material adjustment to the carrying value of certain assets and
liabilities within the next financial year are as follows:
Reference to our Consolidated financial statements
Description
Note
Description
Note
Business combinations
Note 5.2
Impairment of financial assets
Note 23.2
Valuation of claims liabilities
Note 11.3
Measurement of income taxes
Note 24.3
Impairment of goodwill and intangible assets
Note 15.2
Valuation of DB obligation
Note 27.6
28.3 Related-party transactions
We enter into transactions with associates and joint ventures in the normal course of business. Most of these related-party
transactions are with entities associated with our distribution channel. These transactions mostly comprise of commissions for
insurance policies, as well as interest and principal payments on loans. These transactions are measured at the amount of the
consideration paid or received, as established and agreed by the related parties. Management believes that such exchange
amounts approximate fair value.
We also enter into transactions with key management personnel and post-employment plans. Our key management personnel
comprise all members of the Board of Directors and certain members of the Executive Committee. Key management personnel can
purchase our insurance products offered in the normal course of business. The terms and conditions of such transactions are
essentially the same as those available to our clients and employees. Transactions with post-employment plans comprise the
contributions paid to these plans.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 77
28.4 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
28.5 Disclosure controls and procedures
We are committed to providing timely, accurate and balanced disclosure of all material information about the Company and to
providing fair and equal access to such information. Management is responsible for establishing and maintaining our disclosure
controls and procedures to ensure that information used internally and disclosed externally is complete and reliable. Due to the
inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute assurance, that all
control issues and instances of fraud or error, if any, within the Company have been detected. We continue to evolve and enhance
our system of controls and procedures.
Management, at the direction and under the supervision of the Chief Executive Officer and the Chief Financial Officer of the
Company, has evaluated the effectiveness of our disclosure controls and procedures. The evaluation was conducted in accordance
with the requirements of National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings (“NI 52-109”)
of the Canadian Securities Administrators. This evaluation confirmed, subject to the inherent limitations noted above, the
effectiveness of the design and operation of disclosure controls and procedures as at December 31, 2018. 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.
28.6 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, 2018.
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 2018 that have materially affected, or are reasonably likely to
materially affect, the Company’s ICFR.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
78 INTACT FINANCIAL CORPORATION
Section 29 – Shareholder information
29.1 Authorized share capital
Our authorized share capital consists of an unlimited number of common shares and Class A shares.
29.2 Outstanding share data
Table 37 – Outstanding share data (number of shares)
As at February 2, 2019
Common shares
139,188,634
Class A
Series 1 preferred shares
10,000,000
Series 3 preferred shares
8,405,004
Series 4 preferred shares
1,594,996
Series 5 preferred shares
6,000,000
Series 6 preferred shares
6,000,000
Series 7 preferred shares
1
10,000,000
¹ Series 7 preferred shares were issued on May 29, 2018.
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 accompanying Consolidated financial statements for additional information.
29.3 Dividends declared on common shares and preferred shares
Table 38 – Dividends declared per share
Q1-2019
Q4-2018
FY 2018
Common shares
0.76
0.70
2.80
Class A
Series 1 preferred shares
0.21225
0.21225
0.84900
Series 3 preferred shares
0.20825
0.20825
0.83300
Series 4 preferred shares
0.2695675
0.2627050
0.9687500
Series 5 preferred shares
0.325
0.325
1.300
Series 6 preferred shares
0.33125
0.33125
1.32500
Series 7 preferred shares
0.30625
0.30625
0.72245
29.4 BVPS
Table 39 – Evolution of BVPS (in dollars)
As at December 31,
Q4-2018
2018
2017
2016
BVPS, beginning of period
49.27
48.00
42.72
39.83
EPS
1.67
4.79
5.75
3.97
Dividends on common shares
(0.70)
(2.80)
(2.56)
(2.32)
Impact of market movements on AFS securities
1
(1.72)
(2.49)
0.22
1.62
Net actuarial gains (losses) on employee future benefits
1
(0.67)
(0.13)
(0.49)
(0.20)
Foreign exchange impact
1
0.86
1.26
-
-
NCIB and other
0.02
0.10
(0.23)
(0.18)
Impact from issuance of common shares
-
-
2.59
-
BVPS, end of period
48.73
48.73
48.00
42.72
Period-over-period increase
(1)%
2%
12%
7%
1
Reported in AOCI.
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 79
Section 30 – Selected annual and quarterly information
30.1 Selected annual information
Table 40 – Selected annual information
2018
2017
2016
Total revenues
1
10,426
9,157
8,538
Underwriting income
2
474
486
375
Net income
707
792
541
EPS, basic and diluted (in dollars)
4.79
5.75
3.97
Cash dividends declared per share (in dollars)
Common shares
2.80
2.56
2.32
Class A
Series 1 Preferred Shares
0.85
1.05
1.05
Series 3 Preferred Shares
0.83
0.83
1.00
Series 4 Preferred Shares
0.97
0.81
0.20
Series 5 Preferred Shares
1.30
0.78
n/a
Series 6 Preferred Shares
1.33
0.49
n/a
Series 7 Preferred Shares
0.72
n/a
n/a
1
Total revenues exclude other underwriting revenues and NEP of exited lines. Refer to Note 28 – Segment information to the accompanying
Consolidated financial statements for details.
2
Refer to Section 27 – Non-IFRS financial measures.
Table 41 – Selected annual information
30.2 Selected quarterly information
Table 42 – Selected quarterly information
1
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
DPW
2,392
2,708
2,908
2,082
2,293
2,203
2,497
1,737
Total revenues
2
2,697
2,644
2,589
2,496
2,576
2,231
2,204
2,146
NEP
2,509
2,462
2,410
2,334
2,400
2,082
2,051
1,997
Current year CAT losses
55
97
142
36
31
89
105
88
Favourable PYD
(50)
(28)
(32)
(75)
(62)
(53)
(41)
(82)
Underwriting income
210
152
93
19
178
170
103
35
Combined ratio
91.7%
93.8%
96.1%
99.2%
92.6%
91.8%
95.0%
98.2%
Net investment income
140
133
134
122
121
101
105
105
Net distribution income
36
34
52
24
28
30
50
24
NOI
281
237
201
120
236
219
193
123
Net income
244
199
161
103
232
171
243
146
Per share measures, basic and
diluted (in dollars)
NOIPS
1.93
1.62
1.38
0.81
1.63
1.61
1.44
0.90
EPS
1.67
1.34
1.10
0.68
1.60
1.25
1.82
1.08
1
Refer to Section 27 – Non-IFRS financial measures.
2
Total revenues exclude other underwriting revenues and NEP of exited lines.
See also the discussion on seasonality of the business hereafter.
As at December 31,
2018
2017
2016
Investments
16,897
16,774
14,386
Total assets
28,461
27,838
22,866
Debt outstanding
2,209
2,241
1,393
Shareholders' equity
7,810
7,463
6,088
INTACT FINANCIAL CORPORATION
Management’s Discussion and Analysis for the year ended December 31, 2018
(in millions of Canadian dollars, except as otherwise noted)
80 INTACT FINANCIAL CORPORATION
30.3 Seasonality of the P&C Canadian insurance business
The P&C Canadian insurance business is seasonal in nature. While NEP are generally stable from quarter to quarter, underwriting
results are driven by weather conditions which may vary significantly between quarters.
The tables below present the unfavourable (favourable) seasonality indicators, in points of combined ratio. For instance, in 2018,
Q1 and Q2 saw a higher combined ratio including CAT losses than Q3 and Q4, meaning that underwriting results were relatively
less profitable in Q1-2018 and Q2-2018. When CAT losses are excluded, Q1-2018 saw a higher combined ratio than the other
quarters in 2018, meaning that the underwriting results were relatively less profitable in Q1-2018 than the rest of the year.
Table 43 – Seasonal indicator, including CAT losses
2018
2017
2016
2015
2014
3-year
average
5-year
average
10-year
average
Q1
4.7 pts
4.1 pts
(2.9) pts
1.8 pts
4.5 pts
1.9 pts
2.4 pts
0.6 pts
Q2
1.3 pts
0.8 pts
4.1 pts
(0.1) pts
0.1 pts
2.1 pts
1.2 pts
0.3 pts
Q3
(1.3) pts
(2.5) pts
1.7 pts
1.6 pts
0.4 pts
(0.7) pts
- pts
1.5 pts
Q4
(4.7) pts
(2.4) pts
(2.9) pts
(3.3) pts
(5.0) pts
(3.3) pts
(3.6) pts
(2.4) pts
Table 44 – Seasonal indicator, excluding CAT losses
2018
2017
2016
2015
2014
3-year
average
5-year
average
10-year
average
Q1
7.0 pts
3.7 pts
1.2 pts
2.8 pts
3.7 pts
4.0 pts
3.7 pts
2.9 pts
Q2
(2.0) pts
(0.5) pts
(0.4) pts
0.2 pts
1.7 pts
(1.0) pts
(0.2) pts
(1.1) pts
Q3
(2.4) pts
(3.2) pts
(1.4) pts
(1.2) pts
(3.5) pts
(2.3) pts
(2.4) pts
(1.9) pts
Q4
(2.6) pts
- pts
0.6 pts
(1.8) pts
(1.9) pts
(0.7) pts
(1.1) pts
0.1 pts
30.4 Expected release dates of our financial results
Q1-2019
Q2-2019
Q3-2019
Q4-2019
May 7, 2019
July 30, 2019
November 5, 2019
February 4, 2020
Intact Financial Corporation
Consolidated financial statements
For the year ended December 31, 2018
Management’s responsibility for financial reporting
Management is responsible for the preparation and presentation of the Consolidated financial statements of Intact Financial
Corporation and its subsidiaries, collectively known as “the Company”. This responsibility includes selecting appropriate accounting
policies and making estimates and informed judgments based on the anticipated impact of current transactions, events and trends,
consistent with International Financial Reporting Standards.
In meeting its responsibility for the reliability of consolidated financial statements, the Company maintains and relies on a
comprehensive system of internal control comprising organizational procedural controls and internal accounting controls. The
Company’s system of internal control includes the communication of policies and of the Company’s Code of Conduct,
comprehensive business planning, proper segregation of duties, delegation of authority for transactions and personal accountability,
selection and training of personnel, safeguarding of assets and maintenance of records. The Company’s internal auditors review
and evaluate the system of internal control.
The Company’s Board of Directors, acting through the Audit Committee, which is composed entirely of 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 Actuary
and the Group Chief Actuary, have full and unrestricted access to the Audit Committee, with and without the presence of
management.
Pursuant to the Insurance Companies Act of Canada or to the Insurance Act (Québec) (“the Acts”), the Appointed Actuary, who is a
member of management, is appointed by the Board of Directors. The Appointed Actuary is responsible for discharging the various
actuarial responsibilities required by the Acts and conducts a valuation of policy liabilities, in accordance with generally accepted
actuarial standards, reporting his results to management and the Audit Committee.
The Company’s external auditors, Ernst & Young LLP, are appointed by the shareholders to conduct an independent audit of the
Consolidated financial statements of the Company and meet separately with both management and the Audit Committee to discuss
the results of their audit, financial reporting and related matters. The Independent Auditor’s Report to shareholders appears on the
following page.
February 5, 2019
Charles Brindamour
Chief Executive Officer
Louis Marcotte
Senior Vice President and
Chief Financial Officer
A member rm of Ernst & Young Global Limited
Independent auditor’s report
To the shareholders of
Intact Financial Corporation
Opinion
We have audited the consolidated financial statements of Intact Financial Corporation and its subsidiaries (the
Group), which comprise the consolidated balance sheets as at December 31, 2018 and 2017, and the consolidated
statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then
ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Group as at December 31, 2018 and 2017, and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International Financial
Reporting Standards (IFRSs).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our opinion.
Other information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
• The information, other than the consolidated financial statements and our auditor’s report thereon, in the
Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express
any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information, and in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work
we have performed, we conclude that there is a material misstatement of this other information, we are required
to report that fact. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the
work we will perform on this other information, we conclude there is a material misstatement of other information,
we are required to report that fact to those charged with governance.
A member rm of Ernst & Young Global Limited
– 2 –
Responsibilities of management and those charged with Governance for the consolidated financial
statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRSs, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or
has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Group to cease to continue as a going concern.
A member rm of Ernst & Young Global Limited
1
CPA a
uditor, CA, public accountancy permit no. A112431
– 3 –
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are responsible
for the direction, supervision and performance of the group audit. We remain solely responsible for our audit
opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Ted Di Giorgio.
Montréal, Canada
February 5, 2019
INTACT FINANCIAL CORPORATION
2 INTACT FINANCIAL CORPORATION
Consolidated financial statements
For the year ended December 31, 2018
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
Status of the Company ........................................................................................................................ 8
Summary of significant accounting policies ......................................................................................... 8
Significant accounting judgments, estimates and assumptions ......................................................... 22
Adoption of new accounting standards .............................................................................................. 23
Business combinations ...................................................................................................................... 24
Investments ....................................................................................................................................... 25
Derivative financial instruments ......................................................................................................... 27
Financial liabilities related to investments .......................................................................................... 28
Fair value measurement .................................................................................................................... 29
Financial risk .................................................................................................................................... 30
Claims liabilities ............................................................................................................................... 37
Unearned premiums ........................................................................................................................ 40
Insurance risk .................................................................................................................................. 40
Reinsurance ..................................................................................................................................... 43
Goodwill and intangible assets ........................................................................................................ 45
Investments in associates and joint ventures ................................................................................... 47
Property and equipment ................................................................................................................... 47
Other assets and other liabilities ...................................................................................................... 48
Debt outstanding .............................................................................................................................. 49
Common shares and preferred shares ............................................................................................ 50
Capital management ........................................................................................................................ 52
Net investment income .................................................................................................................... 53
Net gains (losses) ............................................................................................................................ 54
Income taxes ................................................................................................................................... 55
Earnings per share........................................................................................................................... 57
Share-based payments .................................................................................................................... 58
Employee future benefits ................................................................................................................. 60
Segment information ........................................................................................................................ 65
Additional information on the Consolidated statements of cash flows.............................................. 67
Related-party transactions ............................................................................................................... 67
Commitments and contingencies ..................................................................................................... 68
Disclosures on rate regulation ......................................................................................................... 68
Standards issued but not yet effective ............................................................................................. 69
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION 3
Consolidated balance sheets
(in millions of Canadian dollars, except as otherwise noted)
Restated
(see Note 5)
As at December 31,
Note
2018
2017
Assets
Investments
6
Cash and cash equivalents
$
442
$
163
Debt securities
11,701
11,229
Preferred shares
1,165
1,330
Common shares
3,295
3,659
Loans
294
393
Investments
16,897
16,774
Premium receivables
3,358
3,351
Reinsurance assets
14
864
822
Income taxes receivable
88
24
Deferred tax assets
24
141
124
Deferred acquisition costs
903
881
Other assets
18
841
703
Investments in associates and joint ventures
16
600
550
Property and equipment
17
170
164
Intangible assets
15
2,200
2,161
Goodwill
15
2,399
2,284
Total assets
$
28,461
$
27,838
Liabilities
Claims liabilities
11
$
10,623
$
10,475
Unearned premiums
12
5,412
5,365
Financial liabilities related to investments
8
289
167
Income taxes payable
15
262
Deferred tax liabilities
24
239
246
Other liabilities
18
1,864
1,619
Debt outstanding
19
2,209
2,241
Total liabilities
20,651
20,375
Shareholders’ equity
Common shares
20
2,816
2,816
Preferred shares
20
1,028
783
Contributed surplus
149
128
Retained earnings
3,776
3,520
Accumulated other comprehensive income
Available-for-sale securities
(122)
224
Translation of foreign operations, net of hedges
166
(10)
Other
(3)
2
7,810
7,463
Total liabilities and shareholders’ equity
$
28,461
$
27,838
See accompanying notes to the Consolidated financial statements.
On behalf of the Board:
Charles Brindamour
Director
Eileen Mercier
Director
INTACT FINANCIAL CORPORATION
4 INTACT FINANCIAL CORPORATION
Consolidated statements of income
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
2018
2017
Direct premiums written
$
10,125
$
8,748
Premiums ceded
(393)
(221)
Net premiums written
9,732
8,527
Changes in unearned premiums
33
31
Net earned premiums
9,765
8,558
Other underwriting revenues
110
108
Investment income
22
Interest income
351
275
Dividend income
213
194
Other revenues
147
158
Total revenues
10,586
9,293
Net claims incurred
11
(6,340)
(5,538)
Underwriting expenses
(3,042)
(2,605)
Investment expenses
(35)
(37)
Net gains (losses)
23
13
69
Share of profit from investments in associates and joint ventures
16
25
16
Finance costs
(103)
(82)
Integration and restructuring costs
(63)
(57)
Other expenses
(155)
(117)
Income before income taxes
886
942
Income tax expense
24
(179)
(150)
Net income attributable to shareholders
$
707
$
792
Weighted-average number of common shares outstanding (in millions)
25
139.2
133.1
Earnings per common share, basic and diluted (in dollars)
25
$
4.79
$
5.75
Dividends paid per common share (in dollars)
20
$
2.80
$
2.56
See accompanying notes to the Consolidated financial statements.
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION 5
Consolidated statements of comprehensive income
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
2018
2017
Net income attributable to shareholders
$
707
$
792
Other comprehensive income (loss)
Available-for-sale securities:
net changes in unrealized gains (losses)
(408)
295
income tax benefit (expense)
104
(81)
reclassification of net losses (gains)
(60)
(251)
income tax benefit (expense)
18
66
(346)
29
Cash flow hedges:
net changes in unrealized gains (losses)
-
(200)
reclassification of net losses (gains)
-
200
-
-
Foreign exchange gains (losses) on:
translation of foreign operations
352
-
net investment hedges
(176)
(12)
income tax benefit (expense)
-
3
176
(9)
Other, net of tax
(5)
5
Items that may be reclassified subsequently to net income
(175)
25
Net actuarial gains (losses) on employee future benefits
27
(25)
(89)
income tax benefit (expense)
7
24
Items that will not be reclassified subsequently to net income
(18)
(65)
Other comprehensive income (loss)
(193)
(40)
Total comprehensive income attributable to shareholders
$
514
$
752
See accompanying notes to the Consolidated financial statements.
INTACT FINANCIAL CORPORATION
6 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, 2018
$
2,816
$
783
$
128
$
3,520
$
216
$
7,463
Net income attributable to shareholders
-
-
-
707
-
707
Other comprehensive income (loss)
-
-
-
(18)
(175)
(193)
Total comprehensive income (loss)
-
-
-
689
(175)
514
Preferred shares issued
20
-
245
-
-
-
245
Dividends declared on:
common shares
20
-
-
-
(390)
-
(390)
preferred shares
20
-
-
-
(40)
-
(40)
Share-based payments
26
-
-
21
(3)
-
18
Balance as at December 31, 2018
$
2,816
$
1,028
$
149
$
3,776
$
41
$
7,810
Balance as at January 1, 2017
$
2,082
$
489
$
129
$
3,197
$
191
$
6,088
Net income attributable to shareholders
-
-
-
792
-
792
Other comprehensive income (loss)
-
-
-
(65)
25
(40)
Total comprehensive income (loss)
-
-
-
727
25
752
Common shares issued
20
735
-
-
-
-
735
Preferred shares issued
20
-
294
-
-
-
294
Common shares repurchased for
cancellation
20
(1)
-
-
(6)
-
(7)
Dividends declared on:
common shares
20
-
-
-
(351)
-
(351)
preferred shares
20
-
-
-
(27)
-
(27)
Share-based payments
26
-
-
(1)
(6)
-
(7)
Acquisition of non-controlling interests
-
-
-
(14)
-
(14)
Balance as at December 31, 2017
$
2,816
$
783
$
128
$
3,520
$
216
$
7,463
See accompanying notes to the Consolidated financial statements.
INTACT FINANCIAL CORPORATION
INTACT FINANCIAL CORPORATION 7
Consolidated statements of cash flows
(in millions of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
2018
2017
Operating activities
Income before income taxes
$
886
$
942
Income taxes received (paid), net
(382)
32
Contributions to the defined benefit pension plans
27
(55)
(60)
Share-based payments
(4)
(2)
Net losses (gains)
23
(13)
(69)
Adjustments for non-cash items
29
294
225
Changes in other operating assets and liabilities
29
112
(201)
Changes in net claims liabilities
11
(5)
(86)
Net cash flows provided by operating activities
833
781
Investing activities
Business combinations, net of cash acquired
5
-
(2,139)
Proceeds from sale of investments
14,471
11,058
Purchases of investments
(14,561)
(10,582)
Purchases of brokerages and other equity investments, net
(78)
(108)
Purchases of intangibles and property and equipment, net
(117)
(98)
Net cash flows used in investing activities
(285)
(1,869)
Financing activities
Proceeds from issuance of debt, net of issuance costs
19
-
422
Amount borrowed (repaid) on the credit facility, net
19
(60)
60
Proceeds from issuance of common shares, net of issuance costs
20
-
731
Proceeds from issuance of preferred shares, net of issuance costs
20
243
292
Common shares repurchased for cancellation
20
-
(7)
Common shares repurchased for share-based payments
26
(36)
(37)
Dividends paid on common shares
20
(390)
(351)
Dividends paid on preferred shares
20
(40)
(27)
Net cash flows provided by (used in) financing activities
(283)
1,083
Net increase (decrease) in cash and cash equivalents
265
(5)
Cash and cash equivalents, beginning of year
163
168
Exchange rate differences on cash and cash equivalents
14
-
Cash and cash equivalents, end of year
$
442
$
163
Composition of cash and cash equivalents
Cash
205
114
Cash equivalents
237
49
Cash and cash equivalents, end of year
442
163
Other relevant cash flow disclosures – operating activities
Interest paid
105
84
Interest received
347
277
Dividends received
228
207
See accompanying notes to the Consolidated financial statements.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
8 INTACT FINANCIAL CORPORATION
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 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. On September 28, 2017, the Company
acquired all of the issued and outstanding shares of OneBeacon Insurance Group, Ltd. (“OneBeacon”), a leading U.S. specialty
insurer. Further details of the acquisition are provided in Note 5 – Business combinations.
These Consolidated financial statements include the accounts of the Company and its subsidiaries. The Company’s significant
operating subsidiaries are presented in Note 28 – Segment information.
The registered office of the Company is 700 University Avenue, Toronto, Canada.
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 premium receivables……………………………………………………………………………………. . 10
b) Claims liabilities……………………………………………………………………………………………………………………….. .. 11
c) Reinsurance assets…………………………………………………………………………………………………………………….. 11
d) Deferred acquisition costs…………………………………………………………………………………………………………….. 11
e) Liability adequacy test…………………………………………………………………………………………………………………. 11
2.4 Financial instruments ………………………………………………………………………………………… ................................... 12
a) Classification and measurement of financial assets and financial liabilities………………………………………………….…. 12
b) Fair value measurement…………………………………………………………………………………………………………….… 13
c) Derivative financial instruments and hedging……………………………………………………………………………………… .. 14
d) Recognition of financial assets and financial liabilities .......................................................................................................... 15
e) Offsetting of financial assets and financial liabilities ............................................................................................................. 15
f) Revenue and expense recognition.…………………………………………………………………………………….. ................... 16
g) Impairment of financial assets other than those classified as designated as FVTPL……………………………………………16
2.5 Business combinations…………………………………………………………………………………………………………………. 17
2.6 Goodwill and intangible assets…………………………………………………………………………………………………..……. 17
a) Goodwill…………………………………………………………………………………………………..……………………………… 17
b) Intangible assets…………………………………………………………………………………………………..……………………. 18
2.7 Foreign currency translation…………………………………………………………………………………………………………. .. 18
2.8 Investments in associates and joint ventures…………………………………………………………………………………….… 19
2.9 Property and equipment………………………………………………………………………………………………………………… 19
2.10 Leases……………………………………………………………………………………………………………………………………… .19
2.11 Income taxes……………………………………………………………………………………………………………………………… .19
a) Income tax expense (benefit)………………………………………………………………………………………………………… . 19
b) Recognition and offsetting of current tax assets and liabilities………………………………………………………………….… 20
2.12 Share-based payments………………………………………………………………………………………………………………….. 20
a) Long-term incentive plan…………………………………………………………………………………………………… ............... 20
b) Employee share purchase plan………………………………………………………………………………………….… ............... 21
c) Deferred share unit plan ……………………………………………………………………………………………………...... ......... 21
2.13 Employee future benefits – pension………………………………………………………………… ............................................. 21
2.14 Current vs non-current………………………………………………………………………………………………………………..… 22
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 9
Glossary of abbreviations
ABS
Asset-backed securities
IFRS
International Financial Reporting Standards
AFS
Available for sale
JV
Joint ventures
AMF
Autorité des marchés financiers
LAE
Loss adjustment expenses
AOCI
Accumulated other comprehensive income
LTIP
Long-term incentive plan
CAD
Canadian Dollar
MBS
Mortgage-backed securities
CALs
Company action levels
MCT
Minimum capital test
CGU
Cash generating unit
MYA
Market-yield adjustment
DB
Defined benefits
NCI
Non-controlling interest
DPW
Direct premiums written
NEP
Net earned premiums
DSU
Deferred share unit
OCI
Other comprehensive income
EPS
Earnings per share to common shareholders
OSFI
Office of the Superintendent of Financial
Institutions
ESPP
Employee share purchase plan
PSU
Performance stock units
FA
Facility Association
RBC
Risk-based capital
FVTOCI
Fair value through other comprehensive income
ROE
Return on equity
FVTPL
Fair value through profit and loss
RSP
Risk sharing pools
IASB
International Accounting Standards Board
RSU
Restricted stock units
IBNR
Insurance claims incurred but not reported by
policyholders
USD
U.S. Dollar
2.1 Basis of presentation
These Consolidated financial statements are prepared in accordance with IFRS, as issued by the IASB. These Consolidated financial
statements and the accompanying notes were authorized for issue in accordance with a resolution of the Board of Directors on
February 5, 2019.
The key accounting policies applied in the preparation of these Consolidated financial statements are described below. These policies
have been applied consistently to all periods presented. Certain comparative figures have been reclassified to conform to the
presentation adopted in the current year (see Note 5 – Business combinations for details).
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
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
10 INTACT FINANCIAL CORPORATION
Basis of consolidation
Investment category
Shareholding
Accounting policies
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.
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).
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.
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.
a) Revenue recognition and premium receivables
Premiums written are reported net of cancellations, promotional returns and sales taxes. Premiums written are recognized on the date
coverage begins. Premiums written are deferred as Unearned premiums and recognized as NEP (net of reinsurance), on a pro rata
basis over the terms of the underlying policies, usually 12 months.
Premium receivables consist of the premiums due for the remaining months of the contracts.
Other underwriting revenues include:
• fees collected from policyholders in connection with the costs incurred for the Company’s yearly billing plans, which are
recognized over the terms of the underlying policies; and
• fees received for the administration of a portion of the FA policies.
Other revenues include commission revenues received from external insurance providers by consolidated brokers recognized on an
accrual basis.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 11
b) Claims liabilities
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.
c) Reinsurance assets
The Company reports third party reinsurance balances on the Consolidated balance sheets on a gross basis to indicate the extent of
credit risk related to third party reinsurance. The estimates for the reinsurers’ share of claims liabilities are presented as an asset and
are determined on a basis consistent with the related claims liabilities. Reinsurance assets are reviewed for impairment at each
reporting date or more frequently when an indication of impairment arises during the reporting period.
d) Deferred acquisition costs
Policy acquisition costs incurred in acquiring insurance premiums include commissions and premium taxes directly related to the
writing or renewal of insurance policies. These acquisition costs are deferred and amortized on the same basis as the unearned
premiums and are reported in Underwriting expenses. Deferred acquisition costs are written off when the corresponding contracts are
settled or cancelled.
e) Liability adequacy test
At the end of each reporting period, a liability adequacy test is performed to validate the adequacy of unearned premiums and deferred
acquisition costs. A premium deficiency would exist if unearned premiums were deemed insufficient to cover the estimated future
costs associated with the unexpired portion of written insurance policies. A premium deficiency would be recognized immediately as
a reduction of deferred acquisition costs to the extent that unearned premiums plus anticipated investment income are not considered
adequate to cover for all deferred acquisition costs and related insurance claims and expenses. If the premium deficiency is greater
than the unamortized deferred acquisition costs, a liability is accrued for the excess deficiency.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
12 INTACT FINANCIAL CORPORATION
2.4 Financial instruments
a) Classification and measurement of financial assets and financial liabilities
Classification of the Company’s most significant financial assets and financial liabilities
Classification
Financial
instruments
Description
Initial and subsequent measurement
AFS
Debt
securities
Investments intended to be held for an indefinite period
and which may be sold in response to liquidity needs or
changes in market conditions.
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.
Common
shares and
preferred
shares
Investments neither classified nor designated as FVTPL.
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.
Classified as
FVTPL
Common
shares
Investments purchased with the intention of generating
profits in the near term.
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 cash flow hedges, as well
as net investment hedges in foreign operations is
recorded in foreign exchange gains (losses) in
OCI.
Derivative
financial
instruments
Derivatives used for economic hedging purposes and for
the purpose of modifying the risk profile of the Company’s
investment portfolio as long as the resulting exposures
are within the investment policy guidelines.
Embedded
derivatives
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.
Designated
as FVTPL on
initial
recognition
Debt
securities
backing its
claims
liabilities and
some
common
shares
A portion of the Company’s investments backing its claims
liabilities has been voluntarily designated as FVTPL to
reduce the volatility caused by fluctuations in fair values
of underlying claims liabilities due to changes in discount
rates. To comply with regulatory guidelines, the Company
ensures that the weighted-dollar duration of debt
securities designated as FVTPL is approximately equal to
the weighted-dollar duration of claims liabilities.
Cash and
cash
equivalents,
loans and
receivables
Cash and
cash
equivalents
Highly liquid investments that are readily convertible into
a known amount of cash are subject to an insignificant risk
of changes in value and have an original maturity of three
months or less.
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.
Loans and
receivables
Financial assets with fixed or determinable payments not
quoted in an active market.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 13
Classification
Financial
instruments
Description
Initial and subsequent measurement
Other
financial
liabilities
Debt
outstanding
The Company’s Senior and medium-term notes.
Amount drawn under a credit facility.
Initially measured at fair value at the issuance
date.
Subsequently measured at amortized cost using
the effective interest method, with changes in
fair value reported in Net gains (losses) when
the liability is extinguished.
b) Fair value measurement
The fair value of financial instruments on initial recognition is normally the transaction price, being the fair value of the consideration
given or received. 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.
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
• U.S. Treasuries, Canadian Federal and Canadian Agency housing trust debt
securities
• Common shares and preferred shares
• Investments in mutual funds
• Exchange-traded derivatives
Level 2
Valuation techniques for
which all inputs that have a
significant effect on the fair
value are observable (either
directly or indirectly)
• All Government and Corporate debt securities, except for U.S. Treasuries,
Canadian Federal and Canadian Agency housing trust
• Unsecured medium-term notes and 2012 U.S. Senior Notes
• ABS and MBS
• Over-the-counter derivatives
Level 3
Valuation techniques for
which inputs that have a
significant effect on the fair
value are not based on
observable market data
• Loans
1
• Embedded derivatives related to perpetual preferred shares with call option
• Hedge and private funds
• Surplus notes
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
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
14 INTACT FINANCIAL CORPORATION
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 the 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.
c) Derivative financial instruments and hedging
The Company enters a variety of derivative financial instruments to manage its exposure arising from financial assets and financial
liabilities. Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign
exchange rate, equity or commodity instrument or index. The Company uses derivatives for economic hedging purposes and for the
purpose of modifying the risk profile of the Company’s investment portfolio as long as the resulting exposures are within the investment
policy guidelines. In certain circumstances, these hedges also meet the requirements for hedge accounting. Risk management
strategies eligible for hedge accounting have been designated as cash flow hedges or net investment hedges in a foreign operation.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 15
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.
• Net investment hedges
The Company uses foreign currency derivatives to manage its book value exposure to the USD relative to the CAD. 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.
• Cash flow hedges
The Company has used foreign currency derivatives to hedge the OneBeacon purchase price exposure to fluctuations in the
CAD/USD exchange rate. The effective portion of the change in the fair value of the hedging derivative, net of taxes, was
recognized in OCI. The Company has elected to reclassify net losses accumulated in OCI at the time of closing to the acquisition
cost of its investment in OneBeacon.
Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception.
Hedge effectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the
Company expects that the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in cash
flows attributable to the risk being hedged.
Hedge accounting is discontinued prospectively when it is determined that the hedging instrument is no longer effective as a hedge,
the hedging instrument is terminated or sold, or upon the sale or early termination of the hedged item.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments, while providing effective economic hedges, are not designated as hedges for accounting purposes.
Changes in the fair value of such derivatives are recognized in Net gains (losses). See Note 7 – Derivative financial instruments
for details.
d) Recognition of financial assets and financial liabilities
Refer to Table 2.2 for the initial 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.
Securities lending - Financial assets lent by the Company in the course of securities lending operations remain on the Consolidated
balance sheet because the Company has not substantially transferred the risks and rewards related to the lent assets.
Structured settlements - The Company enters into annuity agreements with various Canadian life insurance companies to provide
for fixed and recurring payments to claimants.
• When the annuity agreements are non-commutable, non-assignable and non-transferable, the Company is released by the
claimant for the settlement of the claim amount. As a result, the liability to its claimants is substantially discharged and the
Company removes that liability from its Consolidated balance sheet. However, the Company remains exposed to the credit risk
that life insurers may fail to fulfill their obligations.
• When the annuity agreements are commutable, assignable or transferable, the Company keeps the liability and the corresponding
asset on its financial statements.
e) Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are offset, and the net amount is reported on the Consolidated balance sheets only when there
is:
• a legally enforceable right to offset the recognized amounts; and
• an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
16 INTACT FINANCIAL CORPORATION
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 a business combination is achieved in stages, any previously held equity interest is remeasured as at its acquisition date fair
value and any resulting gain or loss is recognized in income.
g) Impairment of financial assets other than those classified or designated as FVTPL
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.
Objective evidence of impairment for equity impairment model
Unrealized loss position
Common shares
Significant
Unrealized loss of 50% or more
Prolonged
Unrealized loss for 15 consecutive months or more
Significant and prolonged
Unrealized loss for 9 consecutive months or more and unrealized loss of 25%
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 17
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.
Impairment models
Debt
Equity
Loans and receivables
Application
• Debt securities
• Preferred shares redeemable
at the option of the holder
• Perpetual preferred shares
purchased with the intent of
holding for the long-term
1
• Common shares
• Perpetual preferred shares
not impaired using the debt
impairment model
1
• Loans and receivables:
- Significant (tested individually)
- Otherwise (grouped by similar
characteristics for testing)
Loss
measure
-
ment
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
Reported
loss
Impairment loss removed from OCI and recognized in Net gains
(losses)
Impairment loss recognized in Net gains (losses)
Subsequent fair
value increases
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
a) Goodwill
Goodwill is initially measured at cost, being the excess of the fair value of the consideration transferred over the Company’s share in
the net identifiable assets acquired and liabilities assumed in a business combination. After initial recognition, goodwill is measured
at cost less any accumulated impairment losses.
Goodwill is 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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
18 INTACT FINANCIAL CORPORATION
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.
b) Intangible assets
The Company’s intangible assets consist of distribution networks, trade names, customer relationships and internally developed
software.
• Distribution networks represent the contractual agreements between the Company and unconsolidated brokers for the distribution
of its insurance products.
• Customer relationships represent the relationships that exist with the policyholders, either directly (as a direct insurer) or indirectly
(through consolidated brokers).
Intangible assets are initially measured at cost, except for intangible assets acquired in a business combination which are recorded
at fair value as at the date of acquisition.
The useful lives of intangible assets are assessed to be either finite or indefinite. For each distribution network acquired, that
assessment depends on the nature of the distribution network. When the related cash flows are expected to continue indefinitely,
intangible assets are assessed as having an indefinite useful life.
Intangible assets with finite lives are amortized over their useful lives and assessed for impairment whenever there is an indication
that the intangible asset may be impaired. Intangible assets with indefinite lives, as well as those intangible assets that are under
development, are not subject to amortization, but are tested for impairment on an annual basis.
The amortization method and terms of intangible assets assessed as having finite useful lives are shown below.
Amortization methods and terms of intangible assets – finite useful life
Intangible assets
Method
Term
Distribution networks
Straight-line
20 to 25 years
Customer relationships
Straight-line
10 years
Internally developed software
Straight-line
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 presentation currency. The
functional currency is the currency of the primary economic environment in which an entity operates. The functional currency of most
foreign subsidiaries is their local currency, mainly the USD.
Foreign currency transactions
Transactions denominated in foreign currencies are initially recorded in the functional currency of the related entity using the exchange
rates in effect at the date of the transaction.
• Monetary assets and liabilities denominated in foreign currencies are translated using the closing exchange rates. Any
resulting exchange difference is recognized in income.
• Non-monetary assets and liabilities denominated in foreign currencies and measured at historical cost are translated using
historical exchange rates, and those measured at fair value are translated using the exchange rate in effect at the date the
fair value is determined.
• Revenues and expenses are translated using the average exchange rates for the period or the exchange rate at the date of
the transaction for significant items.
• Net foreign exchange gains and losses are recognized in income except for AFS equity securities where unrealized foreign
exchange gains and losses are recognized in OCI until the asset is sold or becomes impaired.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 19
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:
Exchange rates used
As at December 31,
Average rate for the years
2018
2017
2018
2017
USD vs CAD
1.36490
1.25730
1.29618
1.29832
2.8 Investments in associates and joint ventures
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.
Depreciation methods and terms of property and equipment
Property and equipment
Method
Term
Buildings
Straight-line
15 to 40 years
Furniture and equipment
Straight-line
2 to 7 years
Leasehold improvements
Straight-line
Over the terms of related leases
Finance leases
Straight-line
Over the terms of related leases
2.10 Leases
Leases which do not transfer to the Company substantially all the risks and benefits incidental to ownership of the leased items are
operating leases. Payments made under operating leases are recognized on a straight-line basis over the lease term and reported in
underwriting expenses. Refer to Note 33.2 – Leases for more details on the IFRS 16 – Leases standard effective January 1, 2019.
2.11 Income taxes
a) Income tax expense (benefit)
Income tax is recognized in Net income, except to the extent that it relates to items recognized in OCI, or directly in equity where it is
recognized in OCI or equity. Income tax expense (benefit) comprises current and deferred tax.
• Current income tax is based on current year’s results of operations, adjusted for items that are not taxable or not deductible.
Current income tax is calculated based on income tax laws and rates enacted or substantively enacted as at the balance sheet
date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulations are subject to interpretation and provisions are established where appropriate based on amounts expected to be paid
to the tax authorities.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
20 INTACT FINANCIAL CORPORATION
• 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.
b) Recognition and offsetting of current tax assets and liabilities
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, 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.
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 21
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.
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
22 INTACT FINANCIAL CORPORATION
2.14 Current vs non-current
In line with industry practice for insurance companies, the Company’s balance sheets are not presented using current and
non-current classifications but are rather presented broadly in order of liquidity. Most of the Company’s assets and liabilities are
considered current given they are expected to be realized or settled within the Company’s normal operating cycle. All other assets
and liabilities are considered as non-current and generally include: Investments in associates and joint ventures, Deferred tax assets,
Property and equipment, Intangible assets, Goodwill, Deferred tax liabilities and Debt outstanding.
Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to use judgments, estimates and assumptions
that can have a significant impact on the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as
at the balance sheet date, as well as reported amounts of revenues and expenses during the reporting period. Actual results could
differ significantly from these estimates.
The key estimates and assumptions that have a risk of causing a material adjustment to the carrying value of certain assets and
liabilities are as follows:
Description
Reference
Description
Reference
Business combinations
Note 5.2
Impairment of financial assets
Note 23.2
Valuation of claims liabilities
Note 11.3
Measurement of income taxes
Note 24.3
Impairment of goodwill and intangible assets
Note 15.2
Valuation of DB obligation
Note 27.6
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 23
Adoption of new accounting standards
On January 1, 2018, the Company adopted the following new standards and amendments to existing standards:
4.1 Amendments to IFRS 4 – Insurance Contracts for the application of IFRS 9 – Financial Instruments
The Company has adopted the amendments to IFRS 4 – Insurance Contracts (“IFRS 4”) that address concerns of insurers about the
different effective dates for IFRS 9 – Financial Instruments (“IFRS 9”) and IFRS 17 – Insurance Contracts (“IFRS 17”), the new
insurance contracts standard. The amendments allow insurance entities to elect one of the two following approaches.
• The deferral approach provides entities whose predominant activities are to issue contracts within the scope of IFRS 4, a
temporary exemption to continue using IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”), instead of
IFRS 9 until January 1, 2021.
• The overlay approach can be applied to eligible financial assets and provides an option for all issuers of insurance contracts
to reclassify from profit or loss to OCI any additional accounting volatility that may arise from applying IFRS 9 before the new
insurance contracts standard.
The Company has opted for the deferral approach and performed an assessment as at September 30, 2017, considering
OneBeacon’s acquisition (see Note 5 – Business combinations). The Company concluded that its activities are predominantly
connected with insurance, since the percentage of liabilities connected with insurance contracts over total liabilities is above the 80%
threshold. This assessment is only updated if significant changes to activities of an entity occur.
Therefore, the Company will continue to apply IAS 39 to its financial instruments until January 1, 2021. In November 2018, the IASB
tentatively decided that the mandatory effective date of IFRS 17 should be deferred by one year (see Note 33.3 – Insurance
contracts) and consequently, the fixed expiry date for the temporary exemption in IFRS 4 should be amended to annual periods
beginning on or after January 1, 2022, subject to public consultation.
Nevertheless, in the interim, the Company is required to present additional disclosure related to the classification and fair value of
financial assets as well as their credit rating.
Disclosure
Reference
Classification and fair value of financial assets
Note 6.2 – Carrying value of investments
Credit rating of financial assets
Note 10.4 b) – Credit risk (credit quality)
Refer to Note 33.1 – Standards issued but not yet effective (Financial instruments) for more details on IFRS 9 – Financial
instruments.
4.2 IFRS 15 – Revenue from contracts with customers
The Company has adopted the new IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”). The standard supersedes IAS 18
– Revenue, IAS 11 – Construction Contracts, and a number of revenue-related interpretations. This new standard specifies how and
when to recognize revenue and additional relevant disclosure requirements. IFRS 15 applies to nearly all contracts with customers,
except for insurance contracts, financial instruments and leases.
IFRS 15 only applies to the Company’s Other revenues and its adoption had no impact on the Consolidated financial statements.
4.3 Income tax consequences of payments on financial instruments classified as equity
In December 2017, the IASB issued amendments to IAS 12 – Income Taxes (“IAS 12”) to clarify that an entity should account for the
income tax on dividends in Net income, OCI or equity, according to where the entity originally recognized the past transactions that
allowed for having the cash flows to declare a dividend.
The amendments apply to annual periods beginning on or after January 1, 2019, with earlier application permitted. The Company
early adopted the amendments to IAS 12 and there was no significant impact.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
24 INTACT FINANCIAL CORPORATION
Business combinations
5.1 OneBeacon
On September 28, 2017, the Company completed the acquisition of OneBeacon, a leading U.S. specialty insurer, for a cash
consideration of US$1.7 billion ($2.3 billion). OneBeacon became a wholly-owned subsidiary of the Company and the results of
operations are included in the Consolidated financial statements from that date.
The following table summarizes the consideration paid for OneBeacon, and the amounts recognized for the assets acquired and
liabilities assumed (determined in accordance with IFRS) as at the acquisition date. As required by IFRS 3 – Business Combinations,
the provisional fair values have been reassessed considering new information obtained during the measurement period following the
acquisition and the purchase price allocation is now final.
Business combination – OneBeacon
As at acquisition date
Final assessment of fair value
USD
CAD
Purchase price
Cash consideration paid
1,702
2,128
Purchase price hedge
-
200
Total purchase price
1,702
2,328
Fair value of assets acquired, and liabilities assumed
Investments
1
2,706
3,383
Premium receivables
275
343
Reinsurance assets
287
358
Distribution networks and other intangibles
626
782
Other assets
328
410
Claims liabilities
(1,628)
(2,036)
Unearned premiums
(650)
(813)
Deferred tax liabilities
(18)
(21)
Debt outstanding
(292)
(364)
Other liabilities
(431)
(538)
Total identifiable net assets
1,203
1,504
Goodwill
499
824
Exchange rate (CAD/USD) as at the acquisition date
1.25030
1
Included net cash acquired of US$151 million.
During the third quarter of 2018, a measurement period adjustment was made which resulted in a decrease to the Surplus notes
reported in Other assets of US$51 million ($64 million), a decrease to Deferred tax liabilities of US$18 million ($22 million) and a
resulting increase to Goodwill of US$33 million ($42 million). The 2017 comparative balance sheet was restated to reflect these
adjustments to the provisional amounts.
The fair value of the acquired distribution networks, trade names and other intangible assets are based on a discounted cash flow
analysis. The distribution networks are amortized over a 20-year period. The fair value of the claims liabilities reflected the impact of
discounting and risk margin. Goodwill reflects the quality of the acquired business and the synergies expected following the integration
of OneBeacon. The goodwill is not deductible for tax purposes.
The integration costs in connection with the acquisition of OneBeacon are reported in Integration and restructuring costs in the
Consolidated statements of income.
The Company has hedged the purchase price and book value exposure associated with CAD/USD exchange rate fluctuations.
5.2 Significant accounting judgments, estimates and assumptions
Upon initial recognition, the acquiree’s assets and liabilities have been included in the Consolidated balance sheets at fair value.
Management estimated the fair values using estimates on future cash flows and discount rates. However, actual results can be
different from those estimates. The changes in the estimates that relate to new information obtained about facts and circumstances
that existed as of the acquisition date, made at initial recognition 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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 25
Investments
6.1 Classification of investments
Classification of investments
Fair value
Amortized cost
As at
AFS
Classified
as FVTPL
Designated
as FVTPL
Cash and cash
equivalents and
loans
Total
carrying
amount
December 31, 2018
Cash and cash equivalents
-
-
-
442
442
Short-term notes
19
-
-
-
19
Fixed income
Investment grade
Government
2,248
-
2,899
-
5,147
Corporate
2,180
-
2,240
-
4,420
Asset-backed
1
505
-
184
-
689
Mortgage-backed
Agency
2
182
-
387
-
569
Non-agency
373
-
314
-
687
Non-rated
170
-
-
-
170
Debt securities
5,677
-
6,024
-
11,701
Investment grade
Retractable
31
-
-
-
31
Fixed-rate perpetual
256
-
-
-
256
Other perpetual
878
-
-
-
878
Preferred shares
1,165
-
-
-
1,165
Common shares
2,316
123
856
-
3,295
Loans
-
-
-
294
294
9,158
123
6,880
736
16,897
December 31, 2017
Cash and cash equivalents
-
-
-
163
163
Short-term notes
120
97
-
-
217
Fixed income
Investment grade
Government
1,775
-
3,432
-
5,207
Corporate
1,505
-
2,368
-
3,873
Asset-backed
1
500
-
487
-
987
Mortgage-backed
Agency
2
90
-
250
-
340
Non-agency
109
-
218
-
327
Below investment grade
Corporate
-
99
18
-
117
Mortgage backed – non-agency
-
-
7
-
7
Non-rated
3
122
-
32
-
154
Debt securities
4,221
196
6,812
-
11,229
Investment grade
Retractable
24
-
-
-
24
Fixed-rate perpetual
271
-
-
-
271
Other perpetual
1,035
-
-
-
1,035
Preferred shares
1,330
-
-
-
1,330
Common shares
2,272
357
1,030
-
3,659
Loans
-
-
-
393
393
7,823
553
7,842
556
16,774
1
Credit card receivables and auto loans.
2
Publicly traded MBS which carry the full faith and credit guarantee of the U.S. Government or are guaranteed by a government sponsored entity.
3
Included $40 million of MBS as at December 31, 2017 (nil as at December 31, 2018).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
26 INTACT FINANCIAL CORPORATION
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.
6.2 Carrying value of investments
Carrying value of investments
FVTPL
investments
Other
investments
Total
investments
As at
Carrying
value
Amortized
cost
Unrealized
gains
Unrealized
losses
Carrying
value
Carrying
value
December 31, 2018
Cash and cash equivalents
-
442
-
-
442
442
Debt securities
6,024
5,660
44
(27)
5,677
11,701
Preferred shares
-
1,248
23
(106)
1,165
1,165
Common shares
979
2,401
136
(221)
2,316
3,295
Loans
-
294
-
-
294
294
7,003
10,045
203
(354)
9,894
16,897
December 31, 2017
Cash and cash equivalents
-
163
-
-
163
163
Debt securities
7,008
4,199
43
(21)
4,221
11,229
Preferred shares
-
1,287
71
(28)
1,330
1,330
Common shares
1,387
2,060
263
(51)
2,272
3,659
Loans
-
393
-
-
393
393
8,395
8,102
377
(100)
8,379
16,774
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 is adopted, which is expected to be on January 1, 2022.
6.3 Market neutral equity investment strategy
Market neutral equity investment strategy
2018
2017
As at December 31,
Fair value
Collateral
Fair value
Collateral
Long positions – reported in Common shares
104
-
121
-
Short positions – reported in Financial liabilities related to
investments (Table 8.1)
(105)
(105)
(122)
126
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.
Securities lending
2018
2017
As at December 31,
Fair value
Collateral
1
Fair value
Collateral
1
Loaned securities – reported in Investments
1,155
1,215
1,087
1,144
1
Representing approximately 105% of the fair value of the securities loaned as at December 31, 2018 and 2017.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 27
Derivative financial instruments
7.1 Types of derivatives used
Types of derivatives used
Derivatives
Description
Objective
Intent to hold
instrument
Forwards
Contractual obligations to exchange:
Mitigate risk arising from foreign currency
fluctuations on:
Currency
one currency for another at a predetermined
future date
• foreign currency cash inflows and
outflows impacting the Company’s
operations
Risk management
purposes
• on the Company’s net investment in
foreign operations
Book value hedge
Futures
Contractual obligations to buy or sell:
Interest rate
an interest rate sensitive financial instrument
at a specified price and a predetermined
future date
Modify or mitigate exposure to interest rate
fluctuations
Mostly for risk
management
purposes
Equity
a specified amount of stocks, a basket of
stocks or an equity index at an agreed price
and a specified date
Mitigate exposure to equity market
Risk management
purposes
Swaps
Over-the-counter contracts:
Swap
agreements
in which two counterparties exchange a series
of cash flows based on a basket of stocks,
applied to a notional amount
Mitigate exposure to equity market
fluctuations
Risk management
purposes
Credit default
that transfer credit risk related to an
underlying financial instrument from one
counterparty to another
Modify exposure to credit
Risk management
purposes
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
Book value hedge
Options
Contractual agreements under which the seller grants to the buyer the right, but not the obligation either to
buy (call option) or sell (put option):
Inflation caps
an index at a predetermined price, at or by a
specified future date
Mitigate exposure to inflation risk
Trading purposes
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
28 INTACT FINANCIAL CORPORATION
7.2 Fair value and notional amount of derivatives
Derivative financial assets are presented on the Consolidated balance sheets as part of Other assets and derivative financial liabilities
are presented as part of Financial liabilities related to investments.
Fair value and notional amount of derivatives by nature of risk
2018
2017
Notional
amount
Fair value
Notional
amount
Fair value
As at December 31,
Asset
Liability
Asset
Liability
Foreign currency contracts
Forwards
1,636
-
69
1,852
8
13
Cross currency swaps
392
-
16
-
-
-
Interest rate contracts
Futures
505
-
-
1,317
-
-
Equity contracts
Swap agreements
847
58
-
1,022
-
8
Futures
160
-
-
247
-
-
Credit contracts
Swap agreements
-
-
-
-
-
-
Inflation options
Options
28
-
-
63
-
-
3,568
58
85
4,501
8
21
Held for risk management purposes
1
3,492
58
85
4,337
8
21
Held for trading purposes
76
-
-
164
-
-
3,568
58
85
4,501
8
21
Term to maturity:
less than one year
3,568
4,279
from one to five years
-
222
over five years
-
-
3,568
4,501
1
Includes net investment hedges and cash flow hedges, using forwards and cross currency swaps.
Financial liabilities related to investments
Financial liabilities related to investments
As at December 31,
2018
2017
Equities sold short positions (Table 6.3)
105
122
Accounts payable to investment brokers on unsettled trades
99
24
Derivative financial liabilities (Table 7.2)
85
21
289
167
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 29
Fair value measurement
9.1 Categorization of fair values
Fair value hierarchy of financial assets and financial liabilities
Level 1
Level 2
Level 3
Total
As at
Valued
using
quoted
(unadjusted)
market prices
Valued
using models
(with
observable
inputs)
Valued
using models
(without
observable
inputs)
December 31, 2018
Short-term notes
19
-
-
19
Fixed income
Investment grade
Government
2,667
2,480
-
5,147
Corporate
-
4,420
-
4,420
Asset-backed
-
689
-
689
Mortgage-backed
Agency
-
569
-
569
Non-agency
-
687
-
687
Non-rated
-
-
170
170
Debt securities
2,686
8,845
170
11,701
Preferred shares
1
1,165
-
-
1,165
Common shares
3,262
-
33
3,295
Derivative financial assets (Table 7.2)
-
58
-
58
Total financial assets measured at fair value
7,113
8,903
203
16,219
Total financial liabilities measured at fair value
105
85
-
190
December 31, 2017
Short-term notes
217
-
-
217
Fixed income
Investment grade
Government
2,902
2,305
-
5,207
Corporate
-
3,873
-
3,873
Asset-backed
-
987
-
987
Mortgage-backed
Agency
-
340
-
340
Non-agency
-
327
-
327
Below investment grade
Corporate
-
117
-
117
Mortgage backed – non-agency
-
7
-
7
Non-rated
-
43
111
154
Debt securities
3,119
7,999
111
11,229
Preferred shares
1
1,330
-
-
1,330
Common shares
3,595
35
29
3,659
Derivative financial assets (Table 7.2)
-
8
-
8
Total financial assets measured at fair value
8,044
8,042
140
16,226
Total financial liabilities measured at fair value
122
21
-
143
1
Include perpetual preferred shares with call options amounting to $1,017 million as at December 31, 2018 ($1,182 million as at December 31, 2017).
The fair value of the embedded derivatives component amounting to $39 million as at December 31, 2018 ($79 million as at December 31, 2017)
was determined using a Level 3 methodology.
The fair value of loans was $289 million as at December 31, 2018 ($384 million as at December 31, 2017).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
30 INTACT FINANCIAL CORPORATION
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 in identifying, understanding and communicating 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.
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
Market risk
Equity price risk
Interest rate risk
Currency risk
Risk
definition
Risk of losses arising from
changes in equity market
prices.
Risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
changes in interest rates or spreads.
Risk that the fair value or future cash
flows of a financial instrument will
fluctuate because of changes in foreign
exchange rates.
Risk
exposure
Significant exposure to price
changes for common shares
and preferred shares,
including pension plan
equities.
Significant exposure to changes in interest
rates from:
• debt securities and preferred shares;
• defined benefit pension plan
obligations, net of related debt
securities; and
• net claims liabilities.
A portion of the Company’s net
investment in foreign operations.
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
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.
Risk
mitigation
Through asset class and
economic sector
diversification and, in some
cases, the use of derivatives.
Using interest-rate derivatives.
Changes in the discount rate applied to the
Company’s claims liabilities offers a partial
offset to the change in price of interest
sensitive assets.
Using foreign currency derivatives.
The Operational Investment Committee and Compliance Review and Corporate Governance Committee regularly monitor and review
compliance, respectively, with the Company’s investment policies.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 31
a) Sensitivity analyses to market risk
Sensitivity analyses are one risk management technique that assists management in ensuring that risks assumed remain within the
Company’s risk tolerance level. Sensitivity analyses involve varying a single factor to assess the impact that this would have on the
Company’s results and financial condition. 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.
Sensitivity analyses (after tax)
2018
2017
For the years ended December 31,
Net income
OCI
Net income
OCI
Equity price risk
Common share prices (10% decrease)
1
(11)
(202)
(1)
(201)
Preferred share prices (5% decrease)
2,3
8
(51)
13
(62)
Interest rate risk (100 basis point increase)
Debt securities
4
(188)
(174)
(167)
(116)
Preferred shares
6
(37)
8
(37)
Net claims liabilities
168
-
168
-
Defined benefit pension plan obligation, net of related debt securities
-
87
-
89
Currency risk (strengthening of Canadian dollar by 10% vs all currencies)
5
U.S investments supporting the Company’s Canadian operations
-
-
6
(1)
International securities
-
(19)
-
(19)
Net assets of foreign operations
-
(196)
-
(176)
1
Net of any equity hedges, including the impact of any impairment.
2
Including the impact on related embedded derivatives.
3
The preferred share equity price risk sensitivity analysis includes the impact of interest rate movements.
4
Excludes the impact of debt securities related to the defined benefits pension plan.
5
After giving effect to foreign-exchange contracts.
These sensitivity analyses were prepared using the following assumptions:
• shifts in the yield curve are parallel;
• interest rates, equity prices and foreign currency move independently;
• credit, liquidity, 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.
b) Exposure to currency risk
Net foreign currency and translation exposure to the USD
USD
As at December 31,
2018
2017
U.S. investments supporting the Company’s Canadian operations
1,255
1,048
Less: foreign-currency derivatives, notional amount
(1,236)
(1,045)
19
3
Consolidated net assets of OneBeacon
1,769
1,755
Less: foreign-currency derivatives, notional amount
(300)
(300)
1,469
1,455
Other net assets denominated in USD
12
13
Total net currency exposure to the USD
1,500
1,471
In addition, the Company holds international securities amounting to $254 million as at December 31, 2018 ($344 million as at
December 31, 2017).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
32 INTACT FINANCIAL CORPORATION
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.
Interest risk
2018
2017
As at December 31,
Fair value
Duration
(in years)
Fair value
Duration
(in years)
Investments:
Debt securities
11,701
3.69
11,229
3.43
Preferred shares
1,165
3.59
1,330
2.94
Net claims liabilities (Note 11.1)
9,877
2.29
9,746
2.37
Defined benefit pension plans
Debt securities (Note 27.3)
1,285
12.3
1,308
12.0
Obligation (Note 27.2)
2,271
17.7
2,263
17.3
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 a number of risks, including credit and market risks. The hedging of certain risks with
derivatives results in basis risk. The imperfect correlation between the hedging instrument and hedged item creates the potential for
excess gains or losses in a hedging strategy, thus adding risk to the position. The Company monitors the effectiveness of its economic
hedges on a regular basis. Basis risk is controlled by limits prescribed in the investment policy, which are monitored regularly.
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
premium receivables, 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.
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.
Maximum exposure to credit risk
As at December 31,
2018
2017
Cash and cash equivalents
442
163
Debt securities
11,701
11,229
Preferred shares
1,165
1,330
Loans
294
393
Premium receivables
3,358
3,351
Reinsurance assets
864
822
Other financial assets
1
676
553
On-balance sheet credit risk exposure
18,500
17,841
Structured settlements
1,264
1,229
Off-balance sheet credit risk exposure
1,264
1,229
1
Include restricted funds, other receivables and recoverables, financial assets related to investments, industry pools receivable, accrued investment income
and Surplus notes.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 33
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 credit rating of at least ‘A-’ at the inception of the contract.
b) Credit quality
The Company’s risk management strategy is to invest in debt securities and preferred shares of high credit quality issuers and to limit
the amount of credit exposure with respect to any one issuer by imposing limits based upon credit quality. The Company’s investment
policy requires that, at the time of the investment, all debt securities have a minimum credit rating of 'BBB' and of ‘P3’ for preferred
shares. This credit quality restriction excludes indirect investments through debt funds. In the case of funds, specific policy limits apply
to manage the overall exposure to these investments. Management monitors subsequent credit rating changes on a regular basis.
The following tables present the credit quality of the Company’s debt securities and preferred shares.
Credit quality of debt securities
As at December 31,
2018
2017
Debt securities
AAA
43%
41%
AA
31%
28%
A
17%
21%
BBB
7%
8%
BB and not rated
2%
2%
100%
100%
Credit quality of preferred shares
As at December 31,
2018
2017
P2
84%
79%
P3
16%
21%
100%
100%
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
34 INTACT FINANCIAL CORPORATION
c) Credit risk concentration
Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located in the
same geographic area or have comparable economic characteristics. Their ability to meet contractual obligations may be similarly
affected by changing economic, political or other conditions. The Company’s investments could be sensitive to changing conditions
in specific geographic regions or industries.
Investments
The Company has a significant concentration of its investments in the financial sector and in Canada. These risk concentrations are
closely monitored. To provide sector diversification, the Company holds investment-grade non-financial U.S. corporate bonds. The
acquisition of OneBeacon, as well as the existing U.S. and international securities, reduce the concentration risk in Canada.
Investment breakdown by country of incorporation and by industry
Investments
Pension assets
As at December 31,
2018
2017
2018
2017
By country of incorporation
Canada
69%
71%
85%
84%
U.S.
29%
25%
7%
8%
Other
2%
4%
8%
8%
100%
100%
100%
100%
By industry
Government
32%
33%
43%
44%
Financials
27%
28%
24%
23%
ABS and MBS
12%
10%
-%
-%
Energy
5%
6%
5%
6%
Other
24%
23%
28%
27%
100%
100%
100%
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 35
d) Counterparty credit risk
Counterparty credit risk arises from reinsurance (see Note 14.4 – Risk management and counterparty credit risk), over-the-counter
derivatives, as well as securities lending and borrowing transactions.
Over-the-counter derivatives, as well as securities lending and borrowing transactions
Credit risk from over-the-counter derivative transactions reflects the potential for the counterparty to default on its contractual
obligations when one or more transactions have a positive market value to the Company. Therefore, derivative-related credit risk is
represented by the positive fair value of an over-the-counter instrument and is normally a small fraction of the contract’s notional
amount. In addition, the Company may be subject to wrong-way risk arising from certain derivative transactions. Wrong-way risk
occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty.
Credit risk from securities lending and borrowing transactions arises when the counterparty 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.
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 $135 million as at December 31, 2018 ($95 million as at December 31, 2017) 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 highly volatile and unpredictable.
The Company’s liquidity needs are rigorously managed by matching asset and liability cash flows and by establishing forecasts for
cash inflows and outflows. The Company invests in various types of assets 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 19.3 – Credit facility).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
36 INTACT FINANCIAL CORPORATION
a) Investments and derivative financial assets by contractual maturity
Investments and derivative financial assets by contractual maturity
Less than
1 year
From 1 to
5 years
Over
5 years
No specific
maturity
Total
As at December 31, 2018
Cash and cash equivalents
442
-
-
-
442
Debt securities
1,078
5,559
4,894
170
11,701
Preferred shares
11
12
8
1,134
1,165
Common shares
-
-
-
3,295
3,295
Loans
2
40
252
-
294
1,533
5,611
5,154
4,599
16,897
Derivative financial assets
58
-
-
-
58
1,591
5,611
5,154
4,599
16,955
As at December 31, 2017
Cash and cash equivalents
163
-
-
-
163
Debt securities
1,338
5,781
3,999
111
11,229
Preferred shares
4
17
3
1,306
1,330
Common shares
-
-
-
3,659
3,659
Loans
11
42
340
-
393
1,516
5,840
4,342
5,076
16,774
Derivative financial assets
8
-
-
-
8
1,524
5,840
4,342
5,076
16,782
b) Financial liabilities by contractual maturity
Financial liabilities by contractual maturity
Less than
1 year
From 1 to
5 years
Over
5 years
No specific
maturity
Total
As at December 31, 2018
Claims liabilities – undiscounted value
4,182
4,700
1,852
-
10,734
Debt outstanding
250
692
1,267
-
2,209
Other financial liabilities
950
77
31
599
1,657
5,382
5,469
3,150
599
14,600
As at December 31, 2017
Claims liabilities – undiscounted value
4,139
4,463
1,808
-
10,410
Debt outstanding
-
974
1,267
-
2,241
Other financial liabilities
753
81
35
568
1,437
4,892
5,518
3,110
568
14,088
The expected maturity of claims liabilities is determined by estimating when claims liabilities will be settled. Unearned premiums have
been excluded because they do not constitute actual obligations.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 37
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
Movements in claims liabilities
For the years ended
Direct
Ceded
Net
December 31, 2018
Balance, beginning of year
10,475
729
9,746
Current year claims
6,783
180
6,603
Unfavourable (favourable) prior-year claims development
(115)
51
(166)
Increase (decrease) due to changes in discount rate (see Note 11.2)
(111)
(14)
(97)
Total claims incurred
6,557
217
6,340
Claims paid
(6,586)
(241)
(6,345)
Business combinations
(2)
-
(2)
Exchange rate differences
179
41
138
Balance, end of year
10,623
746
9,877
December 31, 2017
Balance, beginning of year
8,536
465
8,071
Current year claims
5,705
54
5,651
Unfavourable (favourable) prior-year claims development
(299)
(46)
(253)
Increase (decrease) due to changes in discount rate (see Note 11.2)
(89)
(2)
(87)
Total claims incurred
5,317
6
5,311
Claims paid
(5,478)
(180)
(5,298)
Business combinations (see Note 5)
2,090
437
1,653
Exchange rate differences
10
1
9
Balance, end of year
10,475
729
9,746
11.2 Fair value of claims liabilities
The Company estimates that the fair value of its net claims liabilities approximates their carrying values.
Carrying value of claims liabilities
As at
Direct
Ceded
Net
December 31, 208
Undiscounted value
10,734
731
10,003
Effect of time value of money
1
(693)
(64)
(629)
Risk margin
582
79
503
10,623
746
9,877
December 31, 2017
Undiscounted value
10,410
656
9,754
Effect of time value of money
1
(553)
(33)
(520)
Risk margin
618
106
512
10,475
729
9,746
1
Using a discount rate of 2.73% for Canada and 3.25% for the U.S. as at December 31, 2018 (2.33% and 2.34% respectively as at
December 31, 2017).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
38 INTACT FINANCIAL CORPORATION
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 years, 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”). 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, 2018 and
2017.
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.
Sensitivity analysis (claims liabilities net of reinsurance) – Impact on Net income
2018
2017
As at December 31,
Canada
U.S.
Canada
U.S.
Average claim costs (severity)
+5%
(282)
(19)
(279)
(20)
Average number of claims (frequency)
+5%
(52)
(61)
(54)
(62)
Discount rate
+1%
138
24
137
29
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 39
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 acquisition 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.
Prior-year claims development – net
Accident year
As at December 31, 2018
Total
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Earlier
Undiscounted claims liabilities outstanding at
end of accident year
3,344
3,447
3,067
2,759
2,648
2,618
2,435
2,346
2,060
1,810
Revised estimates
One year later
3,298
3,104
2,656
2,577
2,557
2,402
2,247
1,945
1,751
Two years later
3,110
2,691
2,571
2,521
2,322
2,176
1,918
1,750
Three years later
2,712
2,588
2,512
2,280
2,092
1,882
1,726
Four years later
2,599
2,508
2,254
2,052
1,858
1,690
Five years later
2,518
2,231
2,020
1,814
1,667
Six years later
2,227
1,990
1,790
1,639
Seven years later
1,968
1,767
1,613
Eight years later
1,752
1,600
Nine years later
1,593
Current estimate
3,344
3,298
3,110
2,712
2,599
2,518
2,227
1,968
1,752
1,593
Claims paid to date
(1,268)
(1,594)
(1,657)
(1,882)
(2,049)
(1,955)
(1,812)
(1,646)
(1,523)
Net undiscounted claims liabilities
10,003
3,344
2,030
1,516
1,055
717
469
272
156
106
70
268
Discounting and risk margin
(126)
Net claims liabilities
9,877
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, 2018.
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
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
40 INTACT FINANCIAL CORPORATION
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, 2018 and 2017.
Movements in unearned premiums
For the years ended
Direct
Ceded
Net
December 31, 2018
Balance, beginning of year
5,365
93
5,272
Premiums written
10,125
393
9,732
Premiums earned
(10,139)
(374)
(9,765)
Exchange rate differences
61
6
55
Balance, end of year
5,412
118
5,294
December 31, 2017
Balance, beginning of year
4,573
17
4,556
Business combinations (Note 5)
813
71
742
Premiums written
8,748
221
8,527
Premiums earned
(8,774)
(216)
(8,558)
Exchange rate differences
5
-
5
Balance, end of year
5,365
93
5,272
Insurance risk
The Company principally underwrites automobile, home, as well as commercial P&C contracts to individuals and businesses in
Canada. The Company also offers a wide range of insurance products in the U.S. through OneBeacon, a specialty P&C insurance
provider.
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 2.4 years for Canadian operations and 2 years for the U.S. operations as at December 31, 2018 (2.4 years for Canada
and 2.2 years for the U.S. as at December 31, 2017). 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);
• inadequate reinsurance protection (Note 14.4); and
• large unexpected losses arising from a single event such as a catastrophe (Note 13.3).
Insured events can occur at any time during the coverage period and can generate losses of variable amounts. An objective of the
Company is to ensure that sufficient claims liabilities are established to cover future insurance claim payments related to past insured
events. The Company’s success depends upon its ability to accurately assess the risk associated with the insurance contracts
underwritten by the Company. The Company establishes claims liabilities to cover the estimated liability for the payment of all losses,
including LAE incurred with respect to insurance contracts underwritten by the Company.
Claims liabilities do not represent an exact calculation of the liability. Rather, claims liabilities are the Company’s best estimates of its
expected ultimate cost of resolution and administration of claims. Expected claim cost inflation is 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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 41
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
automobile insurance legislation, the economic environment and climate patterns.
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
Concentration by countries and lines of business
2018
2017
As at December 31,
DPW
Net claims
liabilities
DPW
Net claims
liabilities
By countries
Canada
84%
82%
96%
83%
U.S.
1
16%
18%
4%
17%
100%
100%
100%
100%
By lines of business
Personal auto
36%
47%
44%
48%
Personal property
21%
6%
24%
7%
Commercial lines - Canada
27%
29%
28%
28%
Commercial lines - U.S.
1
16%
18%
4%
17%
100%
100%
100%
100%
1
2017 includes only Q4 results of our U.S. operations.
Risks associated with commercial lines and personal property insurance contracts may vary in relation to the geographical area of
the risk insured by the Company. For automobile insurance, legislation is in place at a provincial level and this creates differences in
the benefits provided among the provinces.
The Company’s exposure to concentration of insurance risk, in terms of type of risk and level of insured benefits, is mitigated by
careful selection and implementation of underwriting strategies, which is in turn largely achieved through diversification across industry
sectors and geographical areas. Diversification also reduces the uncertainty associated with the unfavourable development of claims
liabilities for both our Canadian and U.S. operations.
The Enterprise Risk Committee monitors the Company’s overall risk profile, aiming for a balance between risk, return and capital and
determines policies concerning the Company’s risk management framework. Its mandate is to identify, measure and monitor risks, as
well as avoid risks that are outside of the Company’s risk tolerance level. Further, 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.
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
42 INTACT FINANCIAL CORPORATION
13.3 Catastrophe risk
Catastrophe risk is the risk of occurrence of a catastrophe defined as any one claim, or group of claims related to a single event such
as large fires, hurricanes, earthquakes, hail or wind storms, and acts of terrorism. Catastrophes can have a significant impact on the
underwriting income of an insurer. Changing climate conditions may add to the unpredictability and frequency of natural disasters and
create additional uncertainty as to future trends and exposures.
The Company manages its exposure to catastrophe risk by imposing maximum claim amounts on certain contracts, as well as by
using reinsurance arrangements. The placement of ceded reinsurance is almost exclusively on an excess-of-loss basis (per event or
per risk). Ceded reinsurance complies with regulatory guidelines. Retention limits for the excess-of-loss reinsurance vary by product
line. See Note 14.1 – Company’s reinsurance net retention and coverage limits by nature of risk.
13.4 Exposure to insurance risk
The principal assumption underlying the claims liability estimates is that the Company’s future claims development will follow a similar
pattern to past claims development experience. Claims liabilities estimates are also based on various quantitative and qualitative
factors, including:
• average claim costs, including claim handling costs (severity);
• average number of claims by accident year (frequency);
• trends in claim severity and frequency;
• payment patterns;
• other factors such as inflation, expected or in-force government pricing and coverage reforms, and level of insurance fraud;
• discount rate; and
• risk margin (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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 43
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.
Company’s reinsurance net retention and coverage limits by nature of risk
As at December 31
2018
2017
Single risk events
Retentions in Canada:
on property policies
7.5
7.5
on liability policies
5 - 10
3 - 10
Retentions in the U.S. (in USD):
on property and liability policies
3
3
Multi-risk events and catastrophes
Retention
100
100
Coverage limits
3,800
3,600
For certain special classes of business or types of risks, the retention for single risk events may be lower through specific treaties or
the use of facultative reinsurance. For multi-risk events and catastrophes, the Company retains participations averaging 5.6% as at
December 31, 2018 (5.1% as at December 31, 2017) 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.
Since January 1, 2018, the Company’s U.S. operations are covered by the multi-risk events and catastrophes reinsurance program.
Until April 30, 2018, the losses resulting from any single catastrophe above US$20 million and up to US$130 million were being
reinsured externally.
In connection with the acquisition of OneBeacon, the Company entered into a reinsurance contract pursuant to which a major reinsurer
will assume 80% of negative reserve development with respect to OneBeacon's claims liabilities for accident years 2016 and prior.
The maximum amount recoverable under the reinsurance agreement is US$200 million and is subject to some exclusions and
limitations.
14.2 Components of reinsurance assets
Reinsurance assets include the reinsurers’ share of claims liabilities and unearned premiums.
Components of reinsurance assets
As at December 31,
2018
2017
Reinsurers’ share of claims liabilities (Note 11.1)
746
729
Reinsurers’ share of unearned premiums (Note 12.1)
118
93
864
822
14.3 Net recovery (expense) from reinsurance
Net recovery (expense) from reinsurance
For the years ended December 31,
2018
2017
Ceded earned premiums (Note 12.1)
(374)
(216)
Ceded claims incurred (Note 11.1)
217
100
Commissions earned on ceded reinsurance
42
25
(115)
(91)
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
44 INTACT FINANCIAL CORPORATION
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 the significant insurance risk related to
the underlying reinsured risks and it is reasonably possible that the reinsurer may realize a significant loss from the reinsurance.
Although reinsurance makes the assuming reinsurer liable to the Company to the extent of the risk ceded, the Company is not relieved
of its primary liability to its policyholders as the direct insurer. There is no certainty that its reinsurers will pay all reinsurance claims
on a timely basis or at all. As a result, the Company bears credit risk with respect to its reinsurers on potential future recoverables and
collectability of balances due from reinsurers is important to the Company’s financial strength.
The Company is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. The
Company’s placement of reinsurance is diversified such that it is not dependent on a single reinsurer and the Company’s operations
are not substantially dependent upon any single reinsurance contract. The Company monitors the financial strength of its reinsurers
on a regular basis. Uncollectible amounts historically have not been significant.
Management concluded that the Company was not exposed to significant loss from reinsurers for potentially uncollectible reinsurance
as at December 31, 2018 and 2017.
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.
Canadian operations
The Company has collateral in place to support amounts receivable and recoverable from unregistered reinsurers. The Company is
the assigned beneficiary of collateral consisting of cash, security agreements and letters of credit totalling $95 million as at
December 31, 2018 ($114 million as at December 31, 2017) as guarantees from unregistered reinsurers. This collateral is held in
support of policy liabilities of $58 million as at December 31, 2018 ($69 million as at December 31, 2017) and could be used should
these reinsurers be unable to meet their obligations.
U.S. operations
The Company has collateral in place to support amounts receivable and recoverable mainly from unauthorized reinsurers. The
Company is the assigned beneficiary of collateral consisting of cash, security agreements and letters of credit totalling $154 million
as at December 31, 2018 ($96 million as at December 31, 2017) as guarantees from unauthorized reinsurers. This collateral is held
in support of policy liabilities of $136 million as at December 31, 2018 ($87 million as at December 31, 2017) and could be used
should these reinsurers be unable to meet their obligations.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 45
Goodwill and intangible assets
15.1 Summary of goodwill and intangible assets
Reconciliation of the carrying value of goodwill and intangible assets.
Intangible assets
Goodwill
Distribution
networks and
trade names
Customer
relationships
Internally
developed
software
Total
intangible
assets
Cost
Balance as at January 1, 2018
2,284
1,719
407
517
2,643
Acquisitions and costs capitalized
39
-
22
75
97
Business combinations
4
-
-
-
-
Disposals and write-off
-
-
(1)
(55)
(56)
Exchange rate differences
72
67
-
6
73
Balance as at December 31, 2018
2,399
1,786
428
543
2,757
Accumulated amortization
Balance as at January 1, 2018
-
(31)
(211)
(240)
(482)
Amortization expense
-
(41)
(34)
(45)
(120)
Disposals and write-off
-
-
1
52
53
Exchange rate differences
-
(3)
-
(5)
(8)
Balance as at December 31, 2018
-
(75)
(244)
(238)
(557)
Net carrying value
2,399
1,711
184
305
2,200
Cost
Balance as at January 1, 2017
1,403
910
365
495
1,770
Acquisitions and costs capitalized
83
1
31
71
103
Business combinations
1
795
804
12
18
834
Disposals and write-off
-
-
(1)
(67)
(68)
Exchange rate differences
3
4
-
-
4
Balance as at December 31, 2017
2,284
1,719
407
517
2,643
Accumulated amortization
Balance as at January 1, 2017
-
(15)
(179)
(274)
(468)
Amortization expense
-
(16)
(32)
(33)
(81)
Disposals and write-off
-
-
-
67
67
Balance as at December 31, 2017
-
(31)
(211)
(240)
(482)
Net carrying value
2,284
1,688
196
277
2,161
1
Including business combinations of OneBeacon as restated (see Note 5 – Business combinations) and InnovAssur, assurances générales inc.
Intangible assets under development amounted to $53 million as at December 31, 2018 ($103 million as at December 31, 2017).
These intangible assets are not subject to amortization but are tested for impairment on an annual basis.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
46 INTACT FINANCIAL CORPORATION
15.2 Significant accounting judgments, estimates and assumptions
a) Allocation of goodwill and intangible assets with indefinite lives to the group of CGUs
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.
In 2017, following the acquisition of OneBeacon a new group of CGUs has been defined and the goodwill and intangible assets with
indefinite useful lives acquired were allocated to it (see Note 5 – Business combinations).
Allocation of goodwill and intangible assets with indefinite lives to the groups of CGUs
Goodwill
Intangible assets
As at December 31,
2018
2017
2018
2017
Canada
1,499
1,461
820
820
U.S.
900
823
50
46
2,399
2,284
870
866
b) Impairment testing of goodwill and intangible assets with indefinite lives
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 at the following dates:
• Canada – as at June 30, 2018 and 2017; and
• U.S. – as at June 30, 2018 and as at December 31, 2017, following the acquisition of OneBeacon.
The Canada and U.S. CGUs 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. 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. CGUs.
Key assumptions used (groups of CGUs)
Growth rate
Pre-tax discount rate
2018
2017
2018
2017
Canada
2.5%
2.5%
9.0%
9.1%
U.S.
3.9%
3.9%
11.6%
10.7%
No impairment loss on goodwill or intangible assets with infinite lives has been recognized for these CGUs for the years ended
December 31, 2018 and 2017.
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. CGUs.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 47
Investments in associates and joint ventures
Movement in investments in associates and joint ventures
As at December 31,
2018
2017
Balance, beginning of year
550
543
Acquisitions, net of sales
36
11
Dividends received
(15)
(14)
Share of profit (loss) recorded in:
net income
25
16
OCI
4
(6)
Balance, end of year
600
550
Of which:
associates
436
398
joint ventures
164
152
During 2018, there were no events or changes in circumstances that indicated that the carrying values of Company’s investments in
associates and joint ventures, all of which are investments in private entities, may not be recoverable.
Property and equipment
Net carrying value of property and equipment
As at December 31,
2018
2017
Land and buildings
35
37
Furniture and equipment
59
50
Leasehold improvements
61
63
Finance leases
15
14
170
164
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
48 INTACT FINANCIAL CORPORATION
Other assets and other liabilities
18.1 Other assets
Components of other assets
As at December 31,
2018
2017
Financial assets related to investments
139
34
Industry pools receivable
104
100
Restricted funds
103
111
Reinsurance receivable
96
60
Other receivables and recoverables
92
112
Accrued investment income
80
76
Investments, at cost
66
54
Prepaids
48
43
Premium and sale taxes receivable
41
38
Surplus notes
1
28
31
Pension plans in a surplus position (Note 27.1)
-
5
Other
44
39
841
703
1
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 (see Note 5 – Business combinations).
During 2018, there were no events or changes in circumstances that indicated that the carrying values of Investments at cost may not
be recoverable.
18.2 Other liabilities
Components of other liabilities
As at December 31,
2018
2017
Deposits received in connection with insurance contracts
1
366
197
Premium and sale taxes payable
251
233
Accrued salaries and related compensation
244
244
Commissions payable
196
199
Pension plans in a deficit position and unfunded plans (Note 27.1)
191
140
Account payables and accrued expenses
107
108
Industry pools payable
101
99
Other post-employment benefits and other post-retirement benefits
51
52
Deposits received from reinsurers
14
25
Other payables and other liabilities
343
322
1,864
1,619
1
Unrestricted collateral held by the Company primarily in relation with the surety business.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 49
Debt outstanding
19.1 Summary of debt outstanding
Carrying value of debt outstanding
Maturity
date
Initial
term
(years)
Fixed
rate
Coupon
(payment)
Principal
amount
Carrying value (net of fees)
As at December 31,
2018
2017
Term notes
Series 1
Sept. 2019
10
5.41%
Mar. & Sept.
250
250
250
Series 2
Nov. 2039
30
6.40%
May & Nov.
250
248
248
Series 3
July 2061
50
6.20%
Jan. & July
100
99
99
Series 4
Aug. 2021
10
4.70%
Feb. & Aug.
300
299
299
Series 5
June 2042
30
5.16%
June & Dec.
250
249
249
Series 6
Mar. 2026
10
3.77%
Mar. & Sept.
250
249
249
Series 7
June 2027
10
2.85%
June & Dec.
425
422
422
2012 U.S. Senior Notes
Nov. 2022
10
4.60%
May & Nov.
USD275
393
365
Credit facility (Note 19.3)
-
60
2,209
2,241
The term notes are accounted for at amortized cost which equals their carrying value. They may be redeemed at the option of the
issuer, in whole or in part at any time, at a redemption price equal to the greater of the Government of Canada Yield at the date of
redemption plus a margin or their par value.
Fair value of debt outstanding amounted to $2,365 million as at December 31, 2018 (December 31, 2017 – $2,449 million) and was
established using valuation data from a benchmark firm. As at December 31, 2018 and 2017, the Company was in compliance with
all debts covenants.
19.2 Movement in the Company’s debt outstanding
Movement in the Company’s debt outstanding
For the year ended December 31,
2018
2017
Balance, beginning of year
2,241
1,393
Cash flows from financing activities
Proceeds from issuance of debt
-
422
Amount drawn (repaid) under a credit facility
(60)
60
Business combinations (Note 5)
-
364
Exchange rate differences
31
2
Other
(3)
-
Balance, end of year
2,209
2,241
19.3 Credit facility
In 2017, the Company increased the amount available under its unsecured revolving term credit facility from $300 million to
$750 million. This five-year credit facility matures on August 28, 2023 and may be drawn as follows:
Type:
At a rate of:
Prime loans
Prime rate plus a margin
Base rate (Canada) advances
Base rate plus a margin
Bankers’ acceptances
Bankers’ acceptance rate plus a margin
Libor advances
Libor rate plus a margin
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, 2018 and 2017.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
50 INTACT FINANCIAL CORPORATION
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
Series 7
Preferred
Shares
• On May 29, 2018, the Company completed a Class A Series 7 offering of preferred shares (the “Series 7
Preferred Shares”) by issuing and selling 10,000,000 Series 7 Preferred Shares, at a price of $25.00 per share,
for aggregate gross proceeds of $250 million. Share issuance costs of $7 million ($5 million after tax), were
accounted for as a reduction in preferred shares on the Consolidated financial statements.
• The holders of the Series 7 Preferred Shares will have the right, at their option, to convert their Series 7 Preferred
Shares into Non-cumulative Floating Rate Class A Shares, Series 8 (the "Series 8 Preferred Shares"), subject
to certain conditions, on June 30, 2023, and on June 30 every five years thereafter. The holders of Series 8
Preferred Shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends,
as and when declared by the Board of Directors of the Company, on the last day of March, June, September
and December in each year at an annualized rate equal to the 90-day Canadian Treasury Bill rate plus 2.55%.
20.3 Issued and outstanding
Issued and outstanding shares
2018
2017
As at December 31,
Number of
shares
Amount
(in millions)
Number of
shares
Amount
(in millions)
Common shares
139,188,634
2,816
139,188,634
2,816
Preferred shares - Class A Shares
Series 1
10,000,000
244
10,000,000
244
Series 3
8,405,004
206
8,405,004
206
Series 4
1,594,996
39
1,594,996
39
Series 5
6,000,000
147
6,000,000
147
Series 6
6,000,000
147
6,000,000
147
Series 7
10,000,000
245
-
-
Total Class A
42,000,000
1,028
32,000,000
783
Issued and outstanding Class A shares rank in priority to common shares with regards to payment of dividends.
Reconciliation of number of shares outstanding
Common shares
(in shares)
Preferred shares
Class A shares (in shares)
As at December 31,
2018
2017
2018
2017
Balance, beginning of year
139,188,634
131,050,134
32,000,000
20,000,000
Issued
-
8,210,000
10,000,000
12,000,000
Repurchased for cancellation (Note 20.5)
-
(71,500)
-
-
Balance, end of year
139,188,634
139,188,634
42,000,000
32,000,000
On September 28, 2017, concurrent to the acquisition of OneBeacon, 8,210,000 subscription receipts (“receipts”) were converted into
8,210,000 common shares. The Company had completed its offering of the 8,210,000 subscription receipts on May 11, 2017 at $91.85
per receipt for gross proceeds of $754 million. Share issuance costs of $23 million ($19 million after tax), were accounted for as a
reduction in common shares on the Consolidated balance sheets.
On May 24, 2017, the Company completed a Series 5 offering of preferred shares (the “Series 5 Preferred Shares”) by issuing and
selling 6,000,000 Series 5 Preferred Shares, at a price of $25.00 per share, for aggregate gross proceeds of $150 million. Share
issuance costs of $4 million ($3 million after tax), were accounted for as a reduction in preferred shares on the Consolidated balance
sheets.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 51
On August 18, 2017, the Company completed a Series 6 offering of preferred shares (the “Series 6 Preferred Shares”) by issuing and
selling 6,000,000 Series 6 Preferred Shares, at a price of $25.00 per share, for aggregate gross proceeds of $150 million. Share
issuance costs of $4 million ($3 million after tax), were accounted for as a reduction in preferred shares on the Consolidated balance
sheets.
20.4 Dividends declared and paid per share
Dividends declared and paid per share (in dollars)
For the years ended December 31,
2018
2017
Common shares
2.80
2.56
Preferred shares
Series 1
0.85
1.05
Series 3
0.83
0.83
Series 4
0.97
0.81
Series 5
1.30
0.78
Series 6
1.33
0.49
Series 7
0.72
n/a
The holders of record of the Company preferred shares are entitled to receive non-cumulative preferential cash dividends on a
quarterly basis, as and when declared by the Board of Directors of the Company.
• Series 1 Preferred Shares – The initial fixed-rate period ending on December 31, 2017 was based on an annual rate of
4.20%. The dividend rate that will prevail from and including December 31, 2017 to but excluding December 31, 2022 is
3.396%. Every five years thereafter, the dividend rate will reset at a rate equal to the five-year Government of Canada bond
yield plus 1.72%.
• Series 3 Preferred Shares – The annual dividend rate for the five-year period from and including September 30, 2016 to
but excluding September 30, 2021 is 3.332%.
• Series 4 Preferred Shares – The dividend rate for the 3-month floating rate period from and including September 30, 2018
to but excluding December 31, 2018 was 1.05082% (4.169% 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. The initial dividend paid on September 28, 2018 amounted to $0.4162 per share.
20.5 Normal course issuer bid (NCIB)
Following the announcement of the acquisition of OneBeacon on May 2, 2017, the Company suspended its NCIB in order to maintain
excess capital prior to the closing date of the transaction. The NCIB program expired on February 12, 2018 and was not renewed.
Common shares repurchased for cancelation under the NCIB
As at December 31,
2018
2017
Common shares repurchased for cancellation (in shares)
-
71,500
Average price (in dollars)
-
94.05
Total consideration paid
-
7
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
52 INTACT FINANCIAL CORPORATION
Capital management
21.1 Capital management objectives
The Company’s objectives when managing capital consist of:
• maintaining strong regulatory capital levels (see Regulatory capital section below), while ensuring policyholders are well
protected; and
• maximizing long-term shareholder value by optimizing capital used to operate and grow the Company.
The Company seeks to maintain adequate capital margin 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.
Regulatory capital
The amount of capital deployed in any company or country is dependent upon local regulatory requirements, as well as the Company’s
internal assessment of capital requirements in the context of its risk profiles, requirements and strategic plans. The Company’s practice
is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory
capital requirements in the jurisdictions in which they operate (referred to as regulator supervisory minimum levels). Regulatory capital
guidelines change from time to time and may impact the Company’s capital levels. The Company carefully monitors all changes,
actual or proposed.
Canada
The Company’s federally chartered Canadian P&C insurance subsidiaries are subject to the regulatory capital
requirements defined by OSFI and the Insurance Companies Act, while its Québec provincially chartered subsidiaries
are subject to the requirements of the AMF and the Act Respecting Insurance. Federal and Québec regulated P&C
insurers are required, at a minimum, to maintain a MCT ratio of 100%. OSFI and the AMF have also established a
regulator supervisory target capital ratio of 150%, which provides a cushion above the minimum requirement.
U.S.
The Company’s U.S. insurance operations are subject to regulation and supervision in each of the states where they
are domiciled and licensed to conduct business. State insurance departments have established the insurer solvency
laws and regulatory infrastructure to maintain accredited status with the National Association of Insurance
Commissioners ("NAIC"). A key solvency-driven NAIC accreditation requirement is a state's adoption of RBC
requirements. Dividends from our major U.S. insurance subsidiary are subject to the New York State Department of
Financial Services’ prior approval for a two-year period ending September 30, 2019.
21.2 Capital position
As at December 31, 2018 and 2017, all 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.
Estimated aggregate capital position
As at December 31,
2018
2017
Canada
(MCT)
U.S.
(RBC)
IFC
Capital
margin
Canada
(MCT)
U.S.
(RBC)
IFC
Capital
margin
Regulatory capital ratios
201%
377%
-
205%
459%
-
Industry-wide supervisory minimum levels
150%
150%
-
150%
150%
-
CALs
170%
200%
-
170%
200%
-
Capital above CALs (capital margin)
530
396
926
618
438
1,056
Other regulated / unregulated entities
1
-
-
407
-
-
79
Total capital margin
1,333
1,135
1
Other regulated entities include Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 53
• CALs represent the thresholds below which regulator notification is required together with a company action plan to restore
capital levels.
• U.S. capital levels comprise the RBC levels of OneBeacon’s U.S. regulated entities consolidated in Atlantic Specialty Insurance
Company.
• IFC’s total capital margin represents the aggregate of capital in excess of CALs in regulated entities, as well as unrestricted
cash and invested assets in unregulated entities.
Annually, the Company performs Capital Adequacy Testing to ensure that the Company has sufficient capital to withstand significant
adverse event scenarios. These scenarios are reviewed each year to ensure appropriate risks are included in the testing process.
The 2018 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.
Net investment income
Net investment income
For the years ended December 31,
2018
2017
Interest income from:
debt securities
designated or classified as FVTPL
190
161
classified as AFS
134
90
loans and cash and cash equivalents
27
24
Interest income
351
275
Dividend income (expense) from:
common shares, net
designated or classified as FVTPL
63
62
classified as AFS
94
78
preferred shares classified as AFS
60
61
equities sold short positions
(4)
(8)
investments, at cost
-
1
Dividend income
213
194
Expenses
(35)
(37)
529
432
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
54 INTACT FINANCIAL CORPORATION
Net gains (losses)
23.1 Net gains (losses)
Net gains (losses)
For the years ended December 31,
2018
2017
Portfolios
Fixed
Income
Equity
Total
Fixed
Income
Equity
Total
Net gains (losses) from:
financial instruments:
designated as FVTPL
(82)
(179)
(261)
(127)
12
(115)
classified as FVTPL
(3)
4
1
-
9
9
classified as AFS
(20)
127
107
2
167
169
(105)
(48)
(153)
(125)
188
63
derivatives
1
:
swap agreements
-
155
155
-
(47)
(47)
forwards and futures
(5)
22
17
5
(19)
(14)
other
-
(2)
(2)
-
1
1
(5)
175
170
5
(65)
(60)
Embedded derivatives
-
25
25
-
(50)
(50)
Net foreign currency gains (losses)
(1)
-
(1)
(2)
33
31
Impairment losses on common shares
-
(47)
(47)
-
(20)
(20)
(111)
105
(6)
(122)
86
(36)
Currency derivative gain related to book
value hedge of OneBeacon
-
65
Other gains (losses)
2
19
40
13
69
1
Excluding foreign currency contracts, which are reported in the line Net foreign currency gains (losses).
2
Including net gains (losses) on investments in associates and joint ventures.
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 55
Income taxes
24.1 Income tax expense recorded in Net income
Components of income tax expense recorded in Net income
For the years ended December 31,
2018
2017
Current income tax expense
Current year
168
216
Adjustments to prior years
(2)
4
Deferred income tax expense (benefit)
Change related to temporary differences
2
(40)
Adjustments related to the U.S. Corporate Tax reform (see below)
9
(27)
Adjustments to prior years
2
(3)
179
150
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“U.S. Corporate Tax reform”), which reduces the U.S. corporate tax rate
from 35% to 21% effective January 1, 2018, was enacted. This change resulted in the initial recognition of a deferred tax benefit of
$27 million in 2017. In 2018, the deferred tax expense of $9 million related to the finalization of the OneBeacon purchase price
equation (see Note 5 – Business combinations for details).
24.2 Effective income tax rate
The effective income tax rates are different from the combined Canadian federal and provincial income tax rates. The Consolidated
statements of comprehensive income contain items that are non-taxable or non-deductible for income tax purposes, which cause the
income tax expense to differ from what it would have been if based on statutory tax rates.
The following table presents the reconciliation of the effective income tax rate to the income tax expense calculated at statutory tax
rates.
Effective income tax rate reconciliation
For the years ended December 31,
2018
2017
Income tax expense calculated at statutory tax rate
26.9%
26.9%
Increase (decrease) in income tax rates resulting from:
non-taxable investment income
(4.7)%
(3.8)%
foreign income taxed at different rates
(1.7)%
(0.7)%
adjustments related to the U.S. Corporate Tax reform
1
1.1%
(2.9)%
non-taxable income
(1.0)%
(0.7)%
non-deductible losses (non-taxable income) from subsidiaries
(0.8)%
(0.5)%
non-deductible losses (non-taxable gains)
(0.3)%
(3.5)%
non-deductible expenses
0.3%
1.0%
other
0.4%
0.1%
Effective income tax rate
20.2%
15.9%
1
See Note 24.1 above for details.
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
56 INTACT FINANCIAL CORPORATION
24.4 Components of deferred tax assets and liabilities
Components of deferred tax assets and liabilities
Consolidated
balance sheets
Asset (liability)
Consolidated statements
of comprehensive income
Expense (benefit)
As at December 31,
2018
2017
2018
2017
Net claims liabilities
96
100
4
(92)
Difference between market value and book value of investments
32
15
(17)
-
Deferred expenses for tax purposes
55
58
3
(5)
Losses available for carry forward
155
140
(15)
(30)
DB plans
50
36
(14)
29
Other
6
13
7
11
Deferred tax assets
394
362
(32)
(87)
Intangible assets
(439)
(437)
2
119
Deferred income for tax purposes
-
-
-
140
Deferred gains and losses on specified debt obligations
(9)
(11)
(2)
2
Property and equipment
(44)
(36)
8
(11)
Difference between market value and book value of investments
-
-
-
5
Deferred tax liabilities
(492)
(484)
8
255
Net deferred tax asset (liability) / expense (benefit)
(98)
(122)
(24)
168
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, 2018 and 2017, no deferred tax liability has been recognized on the temporary
differences associated with investments in subsidiaries and associates.
24.5 Movement in the net deferred tax asset (liability)
Movement in the net deferred tax asset (liability)
As at December 31,
2018
2017
Balance, beginning of year
(122)
(262)
Income tax benefit (expense):
recorded in net income
(13)
70
recorded in OCI
37
98
recorded in equity
5
9
Business combinations (Note 5)
(4)
(20)
Exchange rate differences and other
(1)
(17)
Balance, end of year
(98)
(122)
Reported in:
deferred tax assets
141
124
deferred tax liabilities
(239)
(246)
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 57
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, 2018 and 2017.
Unused tax losses and credits
2018
2017
As at December 31,
Total
Recognized
Expiry date
Total
Recognized
Expiry date
Unused net operating losses:
U.S subsidiaries
426
426
2031 - 2037
434
434
2031 - 2035
Canada
117
111
2037 - 2038
60
57
2037
Unused tax credits:
U.S subsidiaries
33
33
2030 - 2038
27
27
2030 - 2037
Unused allowable capital losses:
Canada
93
-
No expiry date
81
-
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.
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.
Earnings per share
For the years ended December 31,
2018
2017
Net income attributable to shareholders
707
792
Less: dividends declared on preferred shares, net of tax
40
27
Net income attributable to common shareholders
667
765
Weighted-average number of common shares outstanding (in millions)
139.2
133.1
EPS – basic and diluted (in dollars)
4.79
5.75
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
58 INTACT FINANCIAL CORPORATION
Share-based payments
26.1 Long-term incentive plan
a) Outstanding LTIP units and fair value at grant date
Outstanding units and weighted-average fair value at grant date by performance cycle
As at December 31,
2018
2017
Performance cycles
Number of
units
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
Number of
units
Weighted-average
fair value at
grant date (in $)
Amount
(in millions
of $)
2015 - 2017
-
-
-
227,572
77.89
19
2016 - 2018
248,005
90.36
22
216,886
90.36
20
2017 - 2019
246,137
93.30
23
210,592
93.30
20
2017 - 2022
119,733
103.88
12
119,733
103.88
12
2018 - 2020
473,736
105.14
50
-
-
-
1,087,611
99.01
107
774,783
92.06
71
b) Movements in LTIP units
Movements in LTIP share units
For the years ended December 31,
2018
(in units)
2017
(in units)
Outstanding, beginning of year
774,783
702,246
Awarded
434,583
308,252
Net change in estimate of units outstanding
132,079
20,203
Units settled
(253,834)
(255,918)
Outstanding, end of year
1,087,611
774,783
c) LTIP expense recognized in Net income
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).
LTIP expense recognized in Net income
For the years ended December 31,
2018
2017
Cash-settled plans
4
6
Equity-settled plans
42
14
46
20
26.2 Employee share purchase plan
a) Movements in restricted common shares
Movements in restricted common shares
For the years ended December 31,
2018
(in units)
2017
(in units)
Outstanding, beginning of year
132,491
145,368
Accrued
133,871
134,865
Awarded and vested
(129,416)
(142,327)
Forfeited
(5,265)
(5,415)
Outstanding, end of year
131,681
132,491
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 59
b) ESPP expense recognized in Net income
The ESPP is accounted for as an equity-settled plan. For the years ended December 31, 2018, the ESPP expense was $13 million
(December 31, 2017 – $14 million).
26.3 Deferred share unit
The DSU is accounted for as a cash-settled plan. For the years ended December 31, 2018, the expense was $1 million (December 31,
2017 - $2 million). The DSU provision amounted to $10 million as at December 31, 2018 and 2017.
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 Settlement in shares (LTIP and ESPP plans)
For the years ended December 31,
2018
2017
Value of common shares repurchased for share-based payments
36
37
Less: cumulative cost of the units for the Company
32
29
Excess of market price over the cumulative cost for the Company
4
8
Amount recognized in Retained earnings, net of taxes
3
6
The cumulative cost of the units that vested during the year and were settled through the plan administrator purchasing common
shares on the market and remitting them to the participants was removed from Contributed surplus.
The difference between the market price of the shares and the cumulative cost for the Company of these vested units, net of income
taxes, was recorded in Retained earnings.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
60 INTACT FINANCIAL CORPORATION
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.
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.
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.
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.
Movement in the DB obligation
Pension plans
As at December 31,
2018
2017
DB obligation
(2,271)
(2,263)
Fair value of plan assets
2,080
2,128
Net DB asset (liability)
(191)
(135)
Reported in:
other assets – plans in a surplus position
-
5
other liabilities – plans in a deficit position and unfunded plans
(191)
(140)
(191)
(135)
Funded status – funded plans
96%
99%
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, 2017. The Company’s liquidity risk with regards to pension plans is not significant, as inflows from
contributions receivable generally outweigh outflows for benefit payments. A large portion of the investments are held in short-term
notes and highly liquid federal and provincial government debt to protect against any unanticipated large cash requirements.
DB pension obligation
(as at the date of the latest actuarial valuation)
61%
32%
7%
Active members
Pensioners and beneficiaries
Deferred members
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 61
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.
Movement in the DB obligation
Pension plans
As at December 31,
2018
2017
Balance, beginning of year
2,263
2,014
Current service cost
76
65
Past service cost
-
1
Interest expense on DB obligation
77
72
Actuarial losses (gains) due to changes in:
financial assumptions
(170)
103
plan experience
55
52
life expectancy
23
-
Employee contributions
27
27
Benefit payments
(80)
(71)
Balance, end of year
2,271
2,263
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.
a) Movement in the fair value of plan assets
Movement in the fair value of plan assets
Pension plans
As at December 31,
2018
2017
Balance, beginning of year
2,128
1,981
Employer contributions
55
60
Employee contributions
27
27
Actual return on plan assets
Interest income on plan assets recognized in Net income
71
69
Actuarial gains (losses) recognized in OCI
(117)
66
Benefit payments
(80)
(71)
Other
(4)
(4)
Balance, end of year
2,080
2,128
b) Composition of pension plan assets
Composition of pension plan assets
2018
2017
As at December 31,
Fair value
% of total
Fair value
% of total
Cash and short-term notes
62
3%
43
2%
Fixed income
Investment grade
Government
823
40%
867
41%
Corporate
460
22%
438
21%
Asset-backed
2
-
3
-
Debt securities
1,285
62%
1,308
62%
Common shares
710
34%
749
35%
Derivative financial instruments
23
1%
28
1%
2,080
100%
2,128
100%
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
62 INTACT FINANCIAL CORPORATION
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 $51 million in 2019 compared to actual contributions of $55 million in 2018. 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.
27.4 Employee future benefit expense recognized in Net income
Employee future benefit expense recognized in Net income
Pension plans
For the years ended December 31,
2018
2017
Current service cost
76
65
Past service cost
-
1
Net interest expense
Interest expense on DB obligation
77
72
Interest income on plan assets
(71)
(69)
Other
4
4
86
73
27.5 Actuarial gains (losses) recognized in OCI
Actuarial gains (losses) recognized in OCI
Pension plans
For the years ended December 31,
2018
2017
Remeasurements related to:
change in discount rate used to determine the benefit obligation
131
(110)
actual return on plan assets
(117)
66
changes in life expectancy (Note 27.6)
(23)
-
change in other financial assumptions
39
7
changes in plan experience
(55)
(52)
(25)
(89)
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.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 63
a) Assumptions used and sensitivity analysis
Key weighted-average assumptions used in measuring the Company’s pension plans
Obligation
Expense
As at December 31,
For the years ended December 31,
2018
2017
2018
2017
Discount rate:
determination of DB obligation
3.86%
3.53%
n/a
n/a
current service cost
n/a
n/a
3.58%
3.90%
interest expense on the DB obligation
n/a
n/a
3.30%
3.45%
Rate of increase in future compensation:
next 3 years
2.75%
2.75%
2.75%
2.75%
beyond 3 years
2.39%
2.68%
2.68%
2.75%
Rate of inflation
1.64%
1.93%
1.93%
2.00%
Life expectancy for pensioners at the age of 65:
male
22.2
21.7
21.7
21.6
female
24.6
24.1
24.1
24.1
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 as at December 31, 2018 also reflected the
Company’s recent mortality experience study conducted in 2018.
Sensitivity of the DB pension obligation to key assumptions
As at December 31,
Change
2018
2017
increase
decrease
increase
decrease
Discount rates
1%
(360)
482
(369)
503
Rate of increase in future compensation
1%
97
(85)
108
(107)
Rate of inflation
1%
74
(67)
76
(69)
Life expectancy
One year
53
(53)
60
(60)
The effect on the DB pension obligation at the end of the year has been calculated by changing one assumption for the sensitivity but
without changing any other assumptions. The impact of a one-year increase in life expectancy has been approximated by measuring
the impact of members being one year younger than their actual age on the valuation date.
27.7 Risk management and investment strategy
Employee DB provisions expose the Company to actuarial risks (such as longevity risk, interest rate risk, inflation risk and market
investment risk). The ultimate cost of the DB provisions to the Company will depend upon future events rather than on the assumptions
made. In general, the risk to the Company is that the assumptions underlying the disclosures, or the calculation of contribution
requirements are not borne out in practice and the cost to the Company is higher than expected. This could result in higher
contributions required from the Company and a higher deficit disclosed.
Assumptions which may vary significantly include:
• the actual return on plan assets;
• decrease in asset values not being matched by a similar decrease in the value of liabilities; and
• unanticipated future changes in mortality patterns leading to an increase in the DB liabilities.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
64 INTACT FINANCIAL CORPORATION
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
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.
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 a 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 hedge ratio increases the Company’s
exposure to changes in interest rates. The hedge ratio was 67% as at December 31, 2018 (December 31, 2017 – 68%).
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, 2018 and 2017,
10% of pension plan assets were invested in Canada Government Real Return Bonds.
Pension plan asset mix
(as at December 31, 2018)
62%
34%
4%
Debt securities
Common shares
Other
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 65
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.
• Distribution operations, including the results from the Company’s wholly-owned subsidiary (BrokerLink) and broker affiliates.
U.S.
• Underwriting of specialty contracts mainly to small and midsize businesses in the United States. The Company distributes
insurance through independent agencies, brokers, wholesalers and managing general agencies.
Corporate and Other (“Corporate”) consists of centralized investing, treasury and capital management activities, as well as other
corporate activities.
28.2 Segment operating performance
Segment operating performance
1
2018
2017
For the years ended December 31,
Canada
U.S.
Corporate
Total
Canada
U.S.
Corporate
Total
Operating income
NEP
8,332
1,380
3
9,715
8,204
326
-
8,530
Investment income
-
-
564
564
-
-
469
469
Other
136
-
11
147
124
-
34
158
Segment operating revenues
8,468
1,380
578
10,426
8,328
326
503
9,157
Net claims incurred (before MYA)
(5,538)
(804)
-
(6,342)
(5,381)
(198)
-
(5,579)
Underwriting expenses
2
(2,394)
(505)
-
(2,899)
(2,345)
(120)
-
(2,465)
Investment expenses
-
-
(35)
(35)
-
-
(37)
(37)
Share of profit from invest. in associates & JV
53
-
-
53
46
-
-
46
Finance costs
-
-
(103)
(103)
-
-
(82)
(82)
Other
(43)
-
(29)
(72)
(38)
-
(29)
(67)
PTOI
3
546
71
411
1,028
610
8
355
973
Comprised of:
underwriting income
4
400
71
3
474
478
8
-
486
net investment income
-
-
529
529
-
-
432
432
net distribution income
146
-
-
146
132
-
-
132
finance costs
-
-
(103)
(103)
-
-
(82)
(82)
other income (expense)
-
-
(18)
(18)
-
-
5
5
Investments
-
-
16,897
16,897
-
-
16,774
16,774
Net claims liabilities (Table 11.1)
8,151
1,726
-
9,877
8,098
1,648
-
9,746
1
See Table 28.2 for the reconciliation to the Consolidated statements of income.
2
Other underwriting revenues are netted against underwriting expenses when assessing segment performance.
3
See Section 27 – Non IFRS financial measures of the Company’s MD&A for the definition of related operating measures.
4
2017 includes only Q4 results of the Company’s U.S. operations.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
66 INTACT FINANCIAL CORPORATION
All segment 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 pre-tax operating income (“PTOI”). PTOI 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.
The reconciliation of the segment information to the amounts reported in the Consolidated statements of income is presented in the
table below. Other underwriting revenues are netted against underwriting expenses when assessing segment performance for MD&A
presentation and, as such, are not included in segment operating revenues. Revenues and expenses not allocated to segments
mainly represent non-operating items excluded from PTOI.
Reconciliation of segment information to amounts reported in the Consolidated statements of income
For the years ended December 31,
2018
2017
Segment operating revenues (Table 28.1)
10,426
9,157
Add: other underwriting revenues
110
108
Add: NEP exited lines
50
28
Revenues, as reported
10,586
9,293
Segment PTOI (Table 28.1)
1,028
973
Non-operating items:
net gains (losses)
13
69
positive (negative) impact of MYA on underwriting
97
92
amortization of intangible assets recognized in business combinations
(89)
(62)
integration and restructuring costs
(63)
(57)
difference between expected return and discount rate on pension assets
(49)
(45)
underwriting results from OneBeacon exited lines
(29)
(10)
other non-operating costs
(22)
(18)
Pre-tax income, as reported
886
942
28.3 Information by geographic areas
Geographic areas
Revenues
Total assets
As at December 31,
2018
2017
2018
2017
Canada
9,060
8,923
22,023
21,814
U.S.
1
1,526
370
6,438
6,024
10,586
9,293
28,461
27,838
1
2017 includes only Q4 results of the Company’s U.S. operations.
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.
Significant operating subsidiaries by geographic areas
Operations
Legal entities
Canada
• Belair Insurance Company Inc.
• Canada Brokerlink Inc.
• Equisure Financial Network Inc.
• Intact Insurance Company
• IB Reinsurance Inc.
• Jevco Insurance Company
• Novex Insurance Company
• The Nordic Insurance Company of Canada
• Trafalgar Insurance Company of Canada
U.S.
• OneBeacon Insurance Group Holdings; Ltd.
• Atlantic Specialty Insurance Company
• OneBeacon U.S. Financial Services Inc.
• Split Rock Insurance, Ltd.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 67
Additional information on the Consolidated statements of cash flows
29.1 Adjustments for non-cash items
Adjustments for non-cash items
For the years ended December 31,
2018
2017
Depreciation of property and equipment
38
34
Amortization of intangible assets
120
81
Net premiums on debt securities classified as AFS
20
15
DB pension expense
86
73
Share-based payments expense
59
34
Share of profit from investments in associates and joint ventures
(25)
(16)
Other
(4)
4
294
225
29.2 Changes in other operating assets and liabilities
Changes in other operating assets and liabilities
For the years ended December 31,
2018
2017
Unearned premiums, net
(33)
(30)
Premium receivables, net
19
52
Deferred acquisition costs, net
(13)
(25)
Other operating assets
(13)
(26)
Other operating liabilities
137
(186)
Dividends received from investments in associates and joint ventures
15
14
112
(201)
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
Transactions with associates and joint ventures
As at December 31,
2018
2017
Income and expenses reported in:
net investment income
7
8
underwriting expenses
266
260
Assets and liabilities reported in:
loans and other receivables
129
202
commissions payable
35
36
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, 2018 ($43 million for the year ended December 31,
2017).
Key management personnel can purchase insurance products offered by the Company in the normal course of business. The terms
and conditions of such transactions are essentially the same as those available to clients and employees of the Company.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
68 INTACT FINANCIAL CORPORATION
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 $6 million for the year ended December 31, 2018
($7 million for the year ended December 31, 2017). The Company made contributions to pension plans of $55 million for the year
ended December 31, 2018 ($60 million for the year ended December 31, 2017).
Commitments and contingencies
31.1 Commitments
The Company has entered into commercial operating leases and other commitments, with a remaining life ranging from one to 19
years.
Future minimum payments under non-cancellable operating leases and other commitments
As at December 31, 2018
Operating
leases
Other
Total
Less than 1 year
118
96
214
From 1 to 5 years
375
75
450
Over 5 years
512
15
527
1,005
186
1,191
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.
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.
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:
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 $3.3 billion, or 74% of
the Canadian Company’s automobile DPW for the year ended December 31, 2018 ($3.4 billion, or 75%, for the year ended
December 31, 2017).
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 69
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.
Standards issued but not yet effective
33.1 Financial instruments
IFRS 9 is a three-part standard that will replace IAS 39 and will be effective for annual periods beginning on or after January 1, 2018.
However, the Company meets the eligibility criteria of the temporary exemption from IFRS 9 as provided by IFRS 4 and has elected
to defer the application of IFRS 9 until the effective date of the new insurance contracts standards IFRS 17, on January 1, 2021 (see
Note 4.1 - Amendments to IFRS 4 – Insurance Contracts for the application of IFRS 9 – Financial Instruments). The Company
is currently evaluating the impact that IFRS 9, in conjunction with IFRS 17, will have on its Consolidated financial statements.
Nevertheless, in the interim, the Company is required to present additional disclosures as described in Note 4.1.
Classification and measurement
The classification of debt instruments is dependent on the business model and the cash flows characteristics. A debt instrument will
be classified in accordance with the table below if its contractual term gives rise on specific dates to cash flows that are solely payments
of principal and interest. It would otherwise be classified as FVTPL.
Amortized cost
FVTOCI
FVTPL
Default classification when the
objective of the business model is
uniquely to receive contractual cash
flows of principal and interest.
Default classification when the
objective of the business model is
equally to receive contractual cash
flows of principal and interest and
realize cash flows from the sale.
Classification when the debt instrument does not
meet the objective of the amortized cost or
FVTOCI business models, or election to measure
them as FVTPL instead of amortized cost or
FVTOCI if doing so eliminates or significantly
reduces an accounting mismatch.
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.
Hedge accounting
The new model more closely aligns hedge accounting with risk management activities undertaken by companies when hedging their
financial and non-financial risk exposures (under IAS 39, hedging non-financial components is not permitted). It will enable more
entities to:
• apply hedge accounting to reflect their actual risk management activities; and
• use information produced internally for risk management purposes as a basis for hedge accounting, compared to IAS 39
which imposes eligibility and compliance based on metrics that are designed solely for accounting purposes.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
70 INTACT FINANCIAL CORPORATION
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 recognising lifetime expected credit losses
is not met if the credit risk on the financial instrument is low (“investment grade”) at the reporting date.
33.2 Leases
In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”). IFRS 16 will replace IAS 17 – Leases and related interpretations. It
requires lessees to recognize most leases on their balance sheets as right-of-use assets (representing the right to use the underlying
assets), with the corresponding lease liabilities (representing the obligation to make lease payments). Generally, the recognition
pattern for capitalized leases will be similar to today’s finance lease accounting, with interest and depreciation expense recognized in
Finance costs and Other expenses respectively in the Consolidated statements of income.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Lessees must adopt IFRS 16 using either a full
retrospective or a modified retrospective approach. The Company will apply the modified retrospective approach, under which the
cumulative effect of adoption will be recognized in opening Retained earnings as at January 1, 2019, with no restatement to the
comparative figures.
The adoption of IFRS 16 will lead to the recognition of operating leases, mainly real estate leases. As a result, the Company expects
to account for right-of-use assets of $358 million, lease liabilities of $441 million, write-off of net liabilities recognized under IAS 17 of
$29 million, and a reduction of shareholders’ equity of $40 million, net of income taxes.
33.3 Insurance contracts
In May 2017, the IASB published IFRS 17 a comprehensive new accounting standard for insurance contracts covering recognition
and measurement, presentation and disclosure, which replaces IFRS 4 and introduces consistent accounting for all insurance
contracts.
IFRS 17 provides a general model for the recognition of insurance contracts, as well as a simplified model (premium allocation
approach) for short-duration contracts, which will be applicable to most property and casualty insurance contracts. The standard
requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows
and any uncertainty relating to insurance contracts. Additionally, IFRS 17 requires a company to recognize profits as it delivers
insurance services.
The main features of the simplified new accounting model for property and casualty insurance contracts are as follows:
• the concept of portfolio, which is a group of contracts covering similar risks and managed together as a single pool. As such,
contracts will be grouped for allocation of deferred acquisition costs, the calculation of risk adjustment, the determination of
onerous contracts and the application of the discount rate;
• insurance liabilities will be discounted at a rate that reflects the characteristics of the liabilities (as opposed to a rate based
on asset returns) and the duration of each portfolio. Entities will record the effect of changes in discount rates either in Net
income or in OCI, according to their accounting policy choice;
• changes in balance sheet presentation where the deferred acquisition costs, premium receivables, unearned premiums and
claims liabilities will be presented together on a single line called insurance liabilities;
• direct premiums written will no longer be presented in profit or loss. The new insurance revenue will reflect services that have
been provided during the period (similar to the current earned premiums). Also, insurance results will be presented without
the impact of discounting. Amounts relating to financing and changes in discount rates will be shown separately;
• disclosure: extensive disclosures to provide information on the recognized amounts from insurance contracts and the nature
and extent of risks arising from these contracts.
INTACT FINANCIAL CORPORATION
Notes to the Consolidated financial statements
(in millions of Canadian dollars, except as otherwise noted)
INTACT FINANCIAL CORPORATION 71
The standard applies to annual periods beginning on or after January 1, 2021. Earlier application is permitted if IFRS 9 is also applied.
In November 2018, the IASB tentatively decided to defer by one year the mandatory effective date of IFRS 17, subject to public
consultation to address concerns and implementation challenges raised by stakeholders. Retrospective application is required.
However, if full retrospective application for a group of insurance contracts is impracticable, then the entity is required to choose either
a modified retrospective approach or a fair value approach. The Company plans to adopt the new standard on the required effective
date together with IFRS 9 (see above). The Company started a project to implement IFRS 17 and has been performing a high-level
impact assessment. The Company expects that the new standard will result in important changes to accounting policies for insurance
contract liabilities, but the impact has not yet been determined.
33.4 Uncertainty over income tax treatments
In June 2017, the IASB issued IFRIC 23 – Uncertainty over Income Tax Treatments (“IFRIC 23”). This interpretation specifies that if
an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, it shall determine the tax result
consistently with the tax treatment used or planned to be used in its income tax filing. If it is not probable, the entity shall reflect the
effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which one the entity
expects to better predict the resolution of the uncertainty:
• most likely amount: single most likely amount in a range of possible outcomes;
• expected value: sum of the probability-weighted amounts in a range of possible outcomes.
An entity shall apply IFRIC 23 for annual reporting periods beginning on or after January 1, 2019, with earlier application permitted.
The Company will not early adopt IFRIC 23 and does not expect a significant impact.
33.5 Plan amendment, curtailment or settlement (amendments to IAS 19 – Employee Benefits)
In February 2018, the IASB issued amendments to IAS 19 – Employee Benefits (“IAS 19”) to specify how companies determine
pension expense when changes to a defined benefit pension plan occur. A company now uses updated assumptions from the
remeasurement of the net defined benefit asset (liability) to determine the current service cost and net interest for the period.
Previously, it would not have updated its calculation of these costs until year-end.
The amendments are to be applied prospectively, effective for annual periods beginning on or after January 1, 2019, with earlier
application permitted. The Company will not early adopt the amendments to IAS 19.
33.6 Definition of a business
In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 – Business Combinations. 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. The amendments apply prospectively to acquisitions that occur in annual periods beginning on or after January 1, 2020,
with earlier application permitted. The Company is currently assessing the impact of these amendments.
33.7 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 this amendment 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
apply prospectively to annual periods beginning on or after January 1, 2020, with earlier application permitted. The Company is
currently assessing the impact of these amendments.
33.8 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’s effective date is January 1, 2020, with earlier application permitted. The Company does not
expect any impact upon its adoption.
GLOSSARY
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, 2018
for further details.
Actuarial gains (losses)
Eect of changes in actuarial assumptions and
experience adjustments (eect of dierences
between the previous actuarial assumptions and
what has occurred).
Adjusted earnings per share (AEPS)
1
Calculated as net income for a specific period less
preferred share dividends, adjusted for the after-tax
impact on net income of amortization of intangible
assets recognized in business combinations,
integration costs, acquisition-related currency
derivative gains or losses and the impact from
the U.S. Corporate Tax reform, divided by the
weighted-average number of common shares
outstanding during the same period.
Adjusted return on equity (AROE)
1
Calculated as net income for a 12-month period less
preferred share dividends, adjusted for the after-tax
impact on net income of amortization of intangible
assets recognized in business combinations,
integration costs, acquisition-related currency
derivative gains or losses and the impact from the
U.S. Corporate Tax reform, divided by the average
shareholders’ equity (excluding preferred shares)
over the same 12-month period. Net income and
shareholders’ equity are determined in accordance
with IFRS.
Aliated brokers
Brokers in which we hold an equity investment or
provide financing.
Average shareholders’ equity
Mean of shareholders’ equity at the beginning and
end of the period, adjusted for significant capital
transactions, if appropriate. Shareholders’ equity is
determined in accordance with IFRS.
Book value per share
Shareholders’ equity (excluding preferred
shares) divided by the number of common shares
outstanding at the same date. Shareholders’ equity
is determined in accordance with IFRS.
Case reserves
The liability established to reflect the estimated
cost of unpaid claims that have been reported and
claims expenses that the insurer will ultimately be
required to pay.
Cash flow available for investment activities
1
Includes net cash flows from cash and cash
equivalents and the investment portfolio.
CAT loss ratio
1
Current accident year catastrophe losses, including
net reinstatement premiums, expressed as a
percentage of Net earned premiums (MD&A basis)
before reinstatement premiums.
Catastrophe losses
Any one claim or group of claims, equal to or greater
than $7.5 million for P&C Canada (US$5 million for
P&C U.S.) related to a single event.
Change in constant currency
1
The growth or change between two figures,
excluding the impact of foreign currency
fluctuations, calculated by applying the exchange
rate in eect for the current period results to the
results of the previous period.
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 take into account the time value
of money, using a rate that reflects the estimated
market yield of the underlying assets backing these
claims liabilities at the reporting date.
Claims ratio
1
Claims incurred, net of reinsurance (as determined
in accordance with IFRS), excluding the market yield
adjustment, the dierence between expected return
and discount rate on pension assets and claims
incurred from U.S. Commercial exited lines, during a
specific period and expressed as a percentage of Net
earned premiums (MD&A basis) for the same period.
Combined ratio
1
The sum of the Claims ratio and the Expense ratio.
A combined ratio below 100% indicates a profitable
underwriting result. A combined ratio over 100%
indicates an unprofitable underwriting result.
Company action levels (CALs)
Thresholds below which regulator notification is
required together with a company action plan to
restore capital levels.
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 eect of multi-year
policies, excluding industry pools, fronting and U.S.
Commercial exited lines. This measure matches
direct premiums written to the year in which
coverage is provided, whereas under IFRS, the full
value of multi-year policies is recognized in the year
the policy is written.
Distribution EBITA
1
Operating results excluding interest and taxes from
our consolidated brokers (including our wholly
owned broker, BrokerLink), as well as our share of
operating results excluding interest and taxes from
our broker associates for a specific period.
Earnings per share to common shareholders
(“EPS”)
Net income attributable to common shareholders
divided by the weighted-average number of common
shares outstanding during the same period.
Expense ratio
1
Underwriting expenses, net of other underwriting
revenues, including commissions, premium taxes
and general expenses related to underwriting
activities for a specific period and expressed as a
percentage of Net earned premiums (MD&A basis)
for the same period.
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.
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 duration of
the pension asset portfolio divided by the duration
of the registered pension plans’ obligation. A lower
hedge ratio increases the Company’s exposure to
changes in interest rates.
Intact Financial Corporation 2018 Annual Report
170
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.
GLOSSARY
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
1
The annualized total pre-tax investment income
(before expenses) divided by the mid-month
average fair value of net equity and fixed-income
securities held during a period (average net
investments).
Market yield adjustment (MYA)
The impact of changes in the discount rate used to
discount claims liabilities based on the change in the
market-based yield of the underlying assets.
Minimum capital test (“MCT”)
Ratio of total capital available to total capital
required, as defined by the Oce of the
Superintendent of Financial Institutions (OSFI) and
Autorité des marchés financiers (AMF).
Net distribution income
1
Operating income excluding interest and taxes
from our consolidated brokers (including our
wholly owned broker, BrokerLink) and our share of
operating income including interest and taxes from
our broker associates for a specific period.
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
U.S.Commercial exited lines.
Net operating income (“NOI”)
1
Calculated as net income for a specific period,
excluding the after-tax impact Non-operating
results.
Net operating income per share (“NOIPS”)
1
Calculated as net operating income for a specific
period less preferred share dividends, divided by
the weighted-average number of common shares
outstanding during the same period.
Net premiums written
Direct premiums written for a specific period less
premiums ceded to reinsurers during the same
period.
Non-catastrophe weather event
A group of claims, which is considered significant
but that is smaller than the catastrophe threshold of
$7.5 million for P&C Canada (US$5 million for P&C
U.S.), related to a single weather event.
Non-operating results
1
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,
integration and restructuring costs, net gains (losses),
dierence between expected return and discount
rate on pension assets, market yield adjustment,
underwriting results of U.S. Commercial exited lines,
the impact from the U.S. Corporate Tax reform, 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.
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.
Operating return on equity (“OROE”)
1
Calculated as net operating income for a 12-month
period less preferred share dividends, divided by the
average shareholders’ equity (excluding preferred
shares and accumulated other comprehensive
income) over the same 12-month period.
Policies in force
The number of insurance policies in eect at a specific
date. If two or more separate risks are covered under
the same insurance policy, this counts as one policy
in force.
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.
Prior year claims development (PYD) (MD&A
basis)
1
PYD (IFRS basis), adjusted to exclude the PYD related
to U.S. Commercial exited lines.
PYD ratio
1
PYD (MD&A basis) expressed as a percentage of Net
earned premiums (MD&A basis).
Regulatory capital ratios
Minimum capital test (MCT), as defined by the Oce
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).
Reinsurer
An insurance company that agrees to indemnify
another insurance or reinsurance company, the
ceding company, against all or a portion of the
insurance or reinsurance risks underwritten by the
ceding company, under one or more policies.
Return on equity (“ROE”)
Net income for a 12-month period less preferred
share dividends, divided by the average
shareholders’ equity (excluding preferred shares)
over the same 12-month period. Net income and
shareholders’ equity are determined in accordance
with IFRS.
Risk-based capital (“RBC”)
Risk-based capital as defined by the National
Association of Insurance Commissioners (NAIC) in
the U.S.
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 in regulated
entities (170% MCT, 200% RBC) plus available cash
in unregulated entities.
Underlying current year loss ratio
1
Current year claims excluding catastrophe losses
and prior year claims development, expressed as a
percentage of Net earned premiums (MD&A basis)
before reinstatement premiums.
Underwriting income (MD&A basis)
1
Net earned premiums less net claims incurred,
commissions, premium taxes and general expenses,
excluding market yield adjustment, the dierence
between the expected return and discount rate on
pension assets and the underwriting results of U.S.
Commercial exited lines.
Written insured risks
The number of vehicles in personal automobile
insurance and the number of premises in personal
property insurance written during a specific period.
Intact Financial Corporation 2018 Annual Report
171
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.
FIVEYEAR FINANCIAL HISTORY
Intact Financial Corporation 2018 Annual Report
172
2018 2017 2016 2015 2014
3-year
average
5-year
average
10-year
average
Consolidated performance
Direct premiums written
1
10,090 8,730 8,277 7,901 7,441 9,032 8,488 7,044
Net earned premiums
1
9,715 8,530 7,946 7,535 7,207 8,730 8,187 6,768
Underwriting income (loss)
1
474 486 375 628 519 445 496 360
Net investment income 529 432 414 424 427 458 445 394
Net distribution income
1
146 132 111 104 75 130 114 n/a
Net operating income
1
839 771 660 860 767 757 779 622
Non-operating gains (losses)
1
(142) (31) (152) (216) 10 (108) (106) (85)
Eective tax rate 20.2% 15.9% 21.1% 19.3% 18.3% 19.1% 19.0% 18.7%
Net income attributable to shareholders 707 792 541 706 782 680 706 562
Combined ratio
1
95.1% 94.3% 95.3% 91.7% 92.8% 94.9% 93.8% 94.9%
Per share measures ($)
Net operating income per share
1
5.74 5.60 4.88 6.38 5.67 5.41 5.65 4.66
Earnings per share 4.79 5.75 3.97 5.20 5.79 4.84 5.10 4.21
Book value per share 48.73 48.00 42.72 39.83 37.75 46.48 43.41 36.51
Dividend per common share 2.80 2.56 2.32 2.12 1.92 2.56 2.34 1.92
Return on equity
Operating return on equity
1
12.1% 12.9% 12.0% 16.6% 16.3% 12.3% 14.0% 13.7%
Return on equity 9.9% 12.8% 9.6% 13.4% 16.1% 10.8% 12.4% 12.0%
Underwriting performance by line of business
Personal auto
Direct premiums written
1
3,750 3,818 3,792 3,591 3,374 3,787 3,665 3,159
Net earned premiums 3,727 3,782 3,704 3,508 3,387 3,738 3,622 3,116
Combined ratio
1
99.5% 101.7% 99.9% 95.4% 94.5% 100.4% 98.2% 96.4%
Personal property
Direct premiums written
1
2,186 2,135 2,030 1,864 1,715 2,117 1,986 1,637
Net earned premiums 2,098 2,040 1,880 1,736 1,617 2,006 1,874 1,539
Combined ratio
1
88.3% 89.1% 90.9% 85.9% 89.0% 89.4% 88.6% 95.0%
Commercial lines – CAN
Direct premiums written
1
2,665 2,470 2,455 2,446 2,352 2,530 2,478 2,069
Net earned premiums 2,507 2,382 2,362 2,291 2,203 2,417 2,349 1,942
Combined ratio
1
94.6% 86.5% 91.5% 90.3% 92.9% 90.9% 91.2% 92.5%
Commercial lines – U.S. (in CAD)
Direct premiums written
1
1,489 307 – – – n/a n/a n/a
Net earned premiums
1
1,380 326 – – – n/a n/a n/a
Combined ratio
1
94.8% 97.4% – – – n/a n/a n/a
Financial condition
Total capital margin 1,333 1,135 970 625 681 1,146 949 800
Debt-to-total capital ratio 22.0% 23.1% 18.6% 16.6% 17.3% 21.2% 19.5% 18.4%
Investments
Total investments 16,897 16,774 14,386 13,504 13,440 16,019 15,000 12,876
Market-based investment yield
1
3.44% 3.20% 3.36% 3.55% 3.65% 3.33% 3.44% 3.72%
This table contains non-IFRS financial measures. Refer to Section 27 – Non-IFRS financial measures of the MD&A for the year ended December 31, 2018 for details.
(In millions of Canadian dollars, except as noted)
1 These are non-IFRS financial measures. See glossary on page 170 for definitions.
THREEYEAR QUARTERLY FINANCIAL HISTORY
Intact Financial Corporation 2018 Annual Report
173
This table contains non-IFRS financial measures. Refer to Section 27 – Non-IFRS financial measures of the MD&A for the year ended December 31, 2018 for details.
(In millions of Canadian dollars, except as noted)
2018 2017 2016
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Consolidated performance
Direct premiums written
1
2,392 2,708 2,908 2,082 2,293 2,203 2,497 1,737 1,959 2,188 2,455 1,675
Net earned premiums
1
2,509 2,462 2,410 2,334 2,400 2,082 2,051 1,997 2,043 2,036 1,937 1,930
Underwriting income (loss)
1
210 152 93 19 178 170 103 35 153 61 16 145
Net investment income 140 133 134 122 121 101 105 105 104 102 104 104
Net distribution income
1
36 34 52 24 28 30 50 24 24 30 43 14
Net operating income
1
281 237 201 120 236 219 193 123 212 137 114 197
Non-operating gains (losses)
1
(42) (36) (45) (19) (58) (61) 57 31 (52) (16) (26) (58)
Eective tax rate 21.5% 22.3% 19.1% 14.2% 5.9% 22.3% 17.6% 19.3% 23.7% 19.9% 16.9% 21.6%
Net income attributable to shareholders 244 199 161 103 232 171 243 146 171 125 93 152
Combined ratio
1
91.7% 93.8% 96.1% 99.2% 92.6% 91.8% 95.0% 98.2% 92.5% 97.0% 99.2% 92.5%
Per share measures ($)
Net operating income per share
1
1.93 1.62 1.38 0.81 1.63 1.61 1.44 0.90 1.58 1.01 0.83 1.46
Earnings per share 1.67 1.34 1.10 0.68 1.60 1.25 1.82 1.08 1.27 0.91 0.67 1.11
Book value per share 48.73 49.27 48.64 47.32 48.00 46.56 42.16 43.14 42.72 41.47 40.57 40.06
Dividend per common share 0.70 0.70 0.70 0.70 0.64 0.64 0.64 0.64 0.58 0.58 0.58 0.58
Return on equity
Operating return on equity
1
12.1% 11.6% 11.9% 12.4% 12.9% 13.3% 12.1% 10.6% 12.0% 13.4% 14.6% 16.7%
Return on equity 9.9% 9.8% 10.0% 11.7% 12.8% 12.7% 12.3% 9.5% 9.6% 10.5% 10.5% 12.7%
Underwriting performance by line of business
Personal auto
Direct premiums written
1
818 1,003 1,137 792 824 1,028 1,163 803 829 1,032 1,154 777
Net earned premiums 934 939 935 919 952 962 949 919 942 944 918 900
Combined ratio
1
97.3% 99.9% 95.6% 106.4% 101.2% 105.1% 97.8% 102.6% 100.9% 104.3% 97.6% 96.4%
Personal property
Direct premiums written
1
517 606 640 423 505 591 625 414 486 569 592 383
Net earned premiums 534 531 521 512 522 517 506 495 494 483 447 456
Combined ratio
1
78.5% 83.8% 102.7% 88.3% 79.7% 85.0% 99.5% 92.8% 75.6% 99.7% 106.7% 82.9%
Commercial lines – CAN
Direct premiums written
1
732 630 757 546 657 584 709 520 644 587 709 515
Net earned premiums 661 644 613 589 600 603 596 583 607 609 572 574
Combined ratio
1
91.6% 94.9% 92.9% 99.5% 87.4% 76.5% 86.7% 95.9% 93.2% 83.5% 95.9% 93.9%
Commercial lines – U.S. (in CAD)
Direct premiums written
1
325 469 374 321 307 – – – – – – –
Net earned premiums
1
379 347 340 314 326 – – – – – – –
Combined ratio
1
96.7% 93.5% 93.8% 95.3% 97.4% – – – – – – –
Financial condition
Total capital margin 1,333 1,177 1,243 1,067 1,135 1,155 1,014 1,034 970 881 857 904
Debt-to-total capital ratio 22.0% 21.7% 22.5% 23.4% 23.1% 24.7% 22.8% 18.5% 18.6% 19.0% 19.3% 19.5%
Investments
Total investments 16,897 16,999 16,946 16,424 16,774 17,093 14,890 14,227 14,386 14,342 13,812 13,630
Market-based investment yield
1
3.58% 3.44% 3.51% 3.22% 3.11% 3.10% 3.30% 3.32% 3.27% 3.27% 3.43% 3.47%
1 These are non-IFRS financial measures. See glossary on page 170 for definitions.
Credit rating
A.M. Best DBRS Fitch Moody’s
IFC senior unsecured debt ratings a- A A- Baa1
OneBeacon senior unsecured debt ratings a- Not rated A- Baa2
IFC’s principal Canadian P&C insurance
subsidiaries’ financial strength ratings
A+
AA(low)
AA-
A1
IFC’s principal U.S. P&C insurance
subsidiaries’ financial strength ratings
A+
Not rated
AA-
A2
SHAREHOLDER AND CORPORATE INFORMATION
On March 8, 2019, A.M. Best upgraded IFC’s principal U.S. P&C insurance subsidiaries’ financial strength rating
(FSR) to A+ (Superior) from A (Excellent) and the OneBeacon senior unsecured debt rating to “a-” from “bbb+”.
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 and Non-cumulative Class A Series 7 preferred shares (the
“Series 1 Preferred Shares”, “Series 3 Preferred Shares”, “Series 4 Preferred Shares”, “Series 5 Preferred
Shares”, “Series 6 Preferred Shares” and “Series 7 Preferred Shares”, respectively) issued on July 12, 2011,
August 18, 2011, September 30, 2016, May 24, 2017, August 18, 2017 and May 29, 2018, 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 and Series 7 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
Annual meeting of the shareholders
Date: Wednesday, May 8, 2019
Time: 11:30 a.m. (Eastern Time)
Venue: Art Gallery of Ontario
317 Dundas Street West
Toronto, Ontario
Canada M5T 1G4
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 [email protected].
Common share dividend history
Record Payable Amount
Dec. 14, 2018 Dec. 31, 2018 $0.70
Sept. 14, 2018 Sept. 28, 2018 $0.70
June 15, 2018 June 29, 2018 $0.70
Mar. 15, 2018 Mar. 29, 2018 $0.70
Dec. 15, 2017 Dec. 29, 2017 $0.64
Sept. 15, 2017 Sept. 29, 2017 $0.64
June 15, 2017 June 30, 2017 $0.64
Mar. 15, 2017 Mar. 31, 2017 $0.64
Dec. 15, 2016 Dec. 30, 2016 $0.58
Sept. 15, 2016 Sept. 30, 2016 $0.58
June 15, 2016 June 30, 2016 $0.58
Mar. 15, 2016 Mar. 31, 2016 $0.58
Common share prices and volume
High Low Close Volume traded
2018 Q1 $105.00 $94.57 $96.81 14,148,701
2018 Q2 $98.85 $92.53 $93.25 12,649,563
2018 Q3 $109.17 $91.65 $107.40 14,146,639
2018 Q4 $107.69 $95.75 $99.19 16,274,245
2018 YE $109.17 $91.65 $99.19 57,219,148
2017 Q1 $97.56 $91.40 $94.58 13,471,916
2017 Q2 $98.29 $91.41 $97.96 15,096,910
2017 Q3 $104.33 $95.14 $103.07 13,125,539
2017 Q4 $109.33 $99.35 $104.99 15,359,434
2017 YE $109.33 $91.40 $104.99 57,053,799
2016 Q1 $91.08 $77.49 $90.93 16,605,531
2016 Q2 $94.16 $84.88 $92.29 13,312,286
2016 Q3 $97.20 $89.75 $94.84 10,209,134
2016 Q4 $97.34 $90.00 $96.10 13,065,874
2016 YE $97.34 $77.49 $96.10 53,192,825
Source: Toronto Stock Exchange Data items are not adjusted for stock splits and consolidations. This data is provided "AS IS". TSX, its
aliates, 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.
Concept and Design: THE WORKS DESIGN COMMUNICATIONS worksdesign.com
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 8, 2019
Q2 – July 31, 2019
Q3 – November 6, 2019
Q4 – February 5, 2020
Investor inquiries
Ken Anderson
Vice President, Investor Relations & Treasurer
855 646 8228, ext. 87383
[email protected]
Media inquiries
Stephanie Sorensen
Director, External Communications
416 344 8027
[email protected]
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.
Intact Financial Corporation 2018 Annual Report
174
SOCIAL RESPONSIBILITY
In 2018:
We donated over
$6.1 million
to over 400 organizations
across North America
Our employees
volunteered over
4,000 hours
and donated
over $1.4 million
3 new standards
and guidelines
were developed to address
flooding in Canada
$1.3 million
was invested in
25 communities
to address root causes
of child poverty
Social Impact
Intact Financial Corporation 2018 Annual Report
175
Intact Financial Corporation 2018 Annual Report
Why Invest with Intact
LARGEST
PROVIDER
of P&C insurance in Canada
and a leading provider of specialty
insurance in North America
PROVEN
industry consolidator
Consistently
OUTPERFORMS
INDUSTRY
due to disciplined underwriting, scale
advantage and in-house claims expertise
FINANCIAL
STRENGTH
reinforced by
prudent risk management
TRACK RECORD
of strong capital generation
and annual dividend increases
Attracts and retains
TOP TALENT
as one of
Canada’s Top Employers
See the full suite of our reports here:
intactfc.com
Intact Financial Corporation
700 University Avenue
Toronto, Ontario M5G 0A1