Industrial Alliance Announces a 20% Increase in Earnings for the First Quarter of 2001
Industrial-Alliance Life Insurance Company (Toronto Stock Exchange: IAG) ended the first quarter of 2001 with net income attributable to the shareholders of $24.2 million, or $0.64 per common share, a 20% increase over last year´s $20.2 million net income, or $0.54 per common share. The return on common shareholders´ equity was 14.19% for the twelve months ended March 31, 2001, up from the 13.30% return achieved for the twelve months ended March 31, 2000. With respect to business growth, insurance and annuities premiums reached $657.6 million, up 6% over the first quarter of 2000.
“The first quarter ended on a very positive note in terms of profitability and business growth, in spite of the market downturn,” declared Yvon Charest, President and Chief Executive Officer. “Sales were strong once again, particularly in individual insurance, where they grew 22%, as well as in group insurance, where they increased by 45% for employee plans, and in Group Pensions, where they jumped 76%. Once again, these results show our organization´s depth and vitality and our capacity to deliver solid performances, quarter after quarter.”
Income and return
Explanations for the improved income – The improvement in the net income for the quarter is primarily explained by a reduction in the new business strain in individual insurance (despite higher sales), the rate increases for group insurance contract renewals, and an exchange gain resulting from the sale of a subsidiary over a year ago. These gains offset the impact that the stock market decline had on the net income for the quarter (an estimated impact of $2.4 million) as well as the preventive increase in provisions to cover any eventual losses resulting from asset defaults caused by the deterioration of the economic environment (the provisions were increased by $1.3 million).
Return on common shareholders´ equity – The return on common shareholders´ equity reached 14.19% for the twelve months ended March 31, 2001. This rate has been continually on the rise since Industrial Alliance converted to a stock company. It was 13.30% at the end of the first quarter of 2000 and grew to 14.03% at the end of 2000. For the second consecutive quarter the return exceeded the upper limit of the Company´s 12% to 14% target range.
Profitability by line of business – All lines of business were profitable, including a turnaround to profitability in group insurance, and have achieved a return of over 12.5%. So far, the steps taken over the past year to make the Group Insurance sector profitable again have been successful. In general, the favourable performance of the individual and group insurance sectors offset the reduced income in the Individual Annuities sector, which was most affected by the stock market decline. In spite of the difficult stock market conditions, management fees continued to grow steadily as a result of business growth.
Premiums – Total insurance and annuities premiums, including contributions to segregated funds, reached $657.6 million for the first quarter of 2001, 6% more than the same period last year. The rise in premiums since the beginning of the year is attributable to increased sales in most sectors and the good persistency rate of in-force business. This favourable performance was achieved in spite of a decrease in Individual Annuities premiums. Premiums from savings and retirement products, which are often associated with wealth management, still represent almost 60% of total premiums, excluding the amounts saved by insureds in universal life insurance policies.
Individual insurance – Once again, one of the highlights of the quarter has been the strong growth of sales in the Individual Insurance sector. For the first quarter of 2001, sales reached $35.1 million, up 22% over 2000. All distribution networks contributed to this increase in sales. Universal policies represented 85% of sales in the first quarter. The expected turnaround with respect to the product mix has occurred, since more than half of clients now choose universal life policies containing the yearly renewable term premium option (YRT option). This turnaround primarily results from the new universal policy launched last year, which has been very successful. According to the most recent industry data (for the year 2000), the Industrial Alliance Group was ranked second in Canada in terms of sales, with 13.4% of the market.
Group insurance: employee plans – In Group Insurance, employee plan sales reached $15.7 million for the first quarter, a 45% increase compared to the previous year. This growth is mainly due to a major sale in the Quebec public sector, a timely breakthrough in a new market segment.
Group creditor insurance – Group creditor insurance sales reached $20.8 million for the first quarter of 2001, a 6% increase compared to 2000. This increase in sales is very satisfying in the current economic environment, since a good portion of the growth in this market is attributable to automobile sales, which are sensitive to the economic environment.
Individual annuities – For the first three months of 2001, Individual Annuities premiums reached $208.7 million, 22% lower than the same period last year. The stock market downturn of the last few months has impacted on investor behaviour, which explains a large part of the first quarter performance. In comparison, the Investment Funds Institute of Canada reported a similar decrease in gross mutual fund sales in the first quarter. On the other hand, surrenders were lower in the first quarter at the Company, so that net sales are on the rise. Net sales totalled $73.1 million for the first three months of the year, a 25% increase compared to the same period last year.
Group pensions – This was a very good quarter for the Group Pensions sector. Gross premiums and deposits totalled $218.6 million, a 76% jump compared to the same period in 2000. Insured annuities stole the spotlight during this quarter, with fund entries five times higher than last year. Even taking reinsurance into account, total premiums reached $182.0 million, a 47% increase over last year. Also, MD Life, a new company created jointly by MD Management and National Life, and which will take charge of the Canadian Medical Association contract, should be fully operational around mid-year. National Life will be in charge of administration for the new company.
Investment income – Net investment income reached $100.7 million for the first quarter of the year, compared with $192.9 million for the same period last year. Most of this difference is attributable to the decrease in income from universal life insurance contract index accounts. This decrease in income ($65.1 million) which, for the most part, corresponds to the drop in stock market values, was offset by an equivalent adjustment of the actuarial liabilities and therefore has no impact on earnings. The same applies to an additional block of $20.0 million, which results from the fact that the first quarter data for 2000 contained investment income related to the Canadian Medical Association contract. These investments have since been transferred to the Company´s segregated funds. This leaves a difference of $7.1 million related to the Company´s regular operations and which reflects changes in the markets, particularly interest rates in the last year.
Assets under management
Assets under management remained practically unchanged at $14.1 billion between the end of 2000 and March 31, 2001. New fund entries and investment income were partially neutralized by the drop in stock market values. On the other hand, the performance of the Company´s investment funds remained very satisfactory. As at March 31, 2001, the one-year performance of 28 funds, representing 75% of the net assets in the investment funds, was better than the median.
Quality of investments
The excellent quality of the investments absorbed the impact of the economic slowdown without having a material effect on first quarter results. The portfolio that was most affected by this slowdown was mortgage loans, where the delinquency rate increased from 0.23% of assets at the end of December 2000 to 0.57% at the end of March 2001. This resulted in an increase in the proportion of diminished-return assets, which rose from 0.26% of investments as at December 31, 2000 to 0.30% as at March 31, 2001. As a precautionary measure, an amount of $1.3 million was added to the provisions, which now total $15.6 million or 38.5% of the diminished-return assets. The occupancy rate of the real estate holdings remains high, at 96.3% (96.7% as at December 31, 2000).
Note that most of the stock and equity indices portfolio is composed of stock market indices and segregated funds (63.6%), which are used to match amounts saved in universal policies. Any difference between the market value and the book value of these investments is absorbed by the insureds.
The capitalization ratio (MCCSR), as measured according to the regulatory authorities´ guidelines, was 179% as at March 31, 2001, down 8 percentage points from the rate calculated at the end of 2000. This decrease primarily results from the drop in the stock markets. This market decline affected the solvency ratio in two ways: through the guarantees granted to segregated fund contract holders and through the decrease in the market value of investments matched to the surplus. If it weren´t for these two items, the solvency ratio would have increased by one percentage point in the first quarter to reach 188% as at March 31, 2001. Note that the new capital requirements concerning segregated fund guarantees make the solvency ratio more volatile when the stock markets fluctuate. Nevertheless, the solvency ratio has remained within the 175% to 200% range targeted by the Company.
About Industrial Alliance
The Industrial Alliance Group is among the most solid financial institutions in Canada, where it is an industry leader in insurance and financial services. The Group has operations across Canada through Industrial Alliance (Quebec City) and its subsidiaries, including IA Pacific Life (Vancouver) and National Life of Canada (Toronto). The seventh largest life insurance company in Canada, the Group insures more than 1.5 million Canadians and employs almost 2,000 people. The Group has more than $14 billion in assets and funds under management. Industrial Alliance´s stock is listed on the Toronto Stock Exchange under the ticker symbol IAG, as well as on the TSE 300, where it is among the 100 largest companies. The address of Industrial Alliance’s web site is www.inalco.com.
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