Industrial Alliance Ends the Third Quarter 2003 with a 27% Increase in net Income - The Dividend is Increased by 12%
Industrial Alliance Insurance and Financial Services Inc. ended the third quarter of 2003 on a strong note, with excellent results in terms of profitability and business growth. The Company recorded a 27% increase in net income compared to the third quarter of last year, a $0.17 increase in its diluted earnings per share, which reached $0.92 for the quarter, and an annualized rate of return on equity of 14.8%. These results are primarily attributable to the upturn in equity markets and the continued growth of in-force business. This is the second consecutive quarter in which the Company's annualized return has hovered around 15%, which is the upper end of the Company's 13% to 15% target range.
With respect to business growth, we are seeing a rebound in sales, particularly in Individual Annuities, which benefited from investors new-found optimism for the equity markets, and in Individual Insurance, where sales have once again surpassed the $30 million mark. The recovery in sales and the good in-force business persistency rate resulted in an 11% increase in the Company's premium income compared to the same quarter last year.
"We are very satisfied with these results, which show how successful we have been in balancing growth and profitability requirements, in an extremely competitive market," stated Yvon Charest, President and Chief Executive Officer. "The Company's excellent results over the last two quarters and the very good solvency ratio, which exceeds our target range, allow us to increase the quarterly dividend to $0.19 per common share, an increase of $0.02 or 12%."
The Company ended the third quarter with shareholder net income of $36.3 million, a 27% increase over the same period last year. Note that last year's income, as with all 2002 figures, has been restated, in accordance with accounting principles, to take into account the stock option charge, which the Company began recording in 2003.
The result for the quarter translates into diluted earnings per share of $0.92 compared to $0.75 in 2002 ($0.78 before the stock option charge). The return on equity is 14.8% on an annualized basis and 14.1% for the last twelve months.
The income for the quarter is essentially explained by continuing growth and good profitability of the in-force business block as well as the upswing in the equity markets, which continued for a second consecutive quarter. The market upturn mainly benefited the Individual Annuities sector, particularly through an increase in the proceeds from management fees, and boosted the return on capital, mainly through the growth in value of segregated funds seed money.
The excellent results for the quarter were achieved in spite of new business strain higher than the third quarter of last year.
Since the beginning of the year, shareholder net income has totalled $99.4 million, compared to $67.6 million for the same period in 2002 ($87.0 million if we exclude the provision taken for Teleglobe in the first quarter of last year).
Profitability By Line of Business
All lines of business achieved excellent net income for the quarter – among the highest ever recorded on a quarterly basis – and all lines reported increased earnings compared to the same period last year. Almost all lines recorded experience gains, which reflects the good profitability of in-force business and the Company's conservatism in the establishingment of the value of its commitments.
Below are a few comments on third quarter earnings for each line of business.
- The Individual Insurance sector had another good quarter, with net income of $18.4 million, up 14% over the same period last year. The mortality results are favourable once again. The new business strain is 16% higher than the third quarter of last year. This is primarily explained by the shift in sales to products that offer more "guaranteed" features. The strain is generally recovered in the form of profits in future years as the margins for adverse deviation are released.
- After having been being subjected to poor market conditions over the last few years, Individual Annuities had a second consecutive good quarter, thanks to the ongoing rise in equity markets. Net income is $7.1 million, almost double last year's figure. New business strain was higher, reflecting a greater proportion of sales of single premium insured annuities, as with the last few quarters.
- Group Insurance also did very well for the second straight very good quarter, with income of $6.0 million. The good results for the quarter reflect the continued growth of business over the last few years and the adoption of a disciplined pricing approach. Mortality experience was also favourable for this sector.
- Group Pensions also had another solid quarter, with income of $4.8 million, up 66% over last year. The increase is primarily attributable to experience gains (as compared to experience losses in the third quarter of last year).
We witnessed a rebound in sales in the third quarter, after a pause in the previous quarter, following a good first quarter. The growth in sales and the good persistency rate boosted premium income to $549.8 million, an 11% increase compared to the same quarter last year. All lines of business obtained higher premium income this quarter, as compared to the third quarter of last year, with the greatest growth coming in the Individual Annuities sector.
Below are a few comments on third quarter sales for each line of business.
- The third quarter was particularly encouraging in the Individual Insurance sector, where sales reached the $30 million mark, as has been the case for almost every quarter for the last three years. Sales totalled $30.5 million in the third quarter, up 1% over the same period last year. Term insurance products, in spite of the intense competition on the market, along with critical illness insurance products, garnered consumer favour in the third quarter.
- In terms of sales, Individual Annuities came out on top in the third quarter, with total fund in-flows of $135.4 million, a 28% increase over the third quarter of 2002. Unlike the first two quarters, where the only growth was in sales of guaranteed products, sales were up in the third quarter for guaranteed products (general funds) and variable products (segregated funds). The growth of in sales of variable products is a strong sign that investor confidence is returning, as they seemed ready to enter the stock markets once again. Note that net segregated fund sales remain positive, reaching $83.7 million after nine months, ranking the Company 4th in Canada, with 12.7% of the market.
- The Group Insurance Employee Plans sector had a rather slow third quarter, much like the second and the exact opposite of the first, which was a very strong quarter. Third quarter sales totalled $8.5 million, 14% lower than the same period last year. Sales for the year-to-date are $43.6 million, 18% higher than last year. This good result comes primarily from sales made to several large groups, mainly in the first quarter.
- On October 8, the Company announced a new marketing strategy whereby the Group Insurance products and services of the three Industrial Alliance Group life companies will now be marketed across the country under a single brand name, that of Industrial Alliance. This strategy aims to strengthen the Industrial Alliance brand name and position in the Canadian marketplace.
- Creditor Insurance sales continue to grow steadily, reaching $40.2 million for the third quarter, a 9% increase over last year. The fact that this sector relies on car sales, which are lower in Canada this year, makes this result even more satisfying. The Company is a leader in Canada in the creditor insurance market among automobile dealers, with over one third of the Canadian market.
- After rising for two consecutive quarters, compared to the two corresponding quarters last year, group insurance sales in the Special Markets Group (SMG) sector were slower in the third quarter. Sales were $17.9 million for the quarter, 25% lower than the same period last year, and have totalled $51.9 million since the beginning of the year, 11% higher than last year. The results for the quarter are in line with expectations, however, given the exceptional sales last year.
- Finally, even though the overall market has still not picked up, third quarter sales grew in the Group Pensions sector. Sales totalled $72.8 million for the third quarter, up 5% over last year. Growth occurred in both the insured annuities sector and the accumulation products sector, where we are particularly pleased with the strong growth of recurrent premiums, which is the heart of our group pension operations. However, sales for the quarter were not strong enough to erase the shortfall from the first two quarters, so that sales year-to-date total $429.4 million, which is 10% lower than last year.
Assets Under Management and Under Administration
Assets under management and under administration reached $18.6 billion as at September 30, 2003, an 11% increase since the beginning of the year. This increase comes from the growth of premium income, the stock market upturn and the transfer of the second block of business from National Bank Trust in the first quarter.
The solvency ratio was 214% as at September 30, 2003, up 6% from July 4, 2003, the date on which the Company issued $150 million of innovative tier 1 capital. The increase in the ratio is primarily attributable to the Company's good results during the quarter and the stock market upturn. Note that the solvency ratio still exceeds the Company's 175% to 200% target range.
Quality of Investments
There was no significant change in the quality of investments during the quarter, or even since the beginning of the year. The overall quality of the different portfolios therefore remains excellent. Hence:
- net impaired investments have been more or less stable throughout the year. They totalled $20.4 million as at September 30, which represents 0.21% of total investments. This is one of the lowest rates obtained by the Company in the last few years;
- no bonds defaulted during the quarter. After having risen slightly in the first quarter (to 0.15% of the portfolio), the proportion of bonds rated BB and lower dropped to 0.09% of the portfolio, a level slightly lower than at the beginning of the year (0.11%);
- the delinquency rate of the mortgage loans portfolio remained more or less stable during the quarter, at 0.87% of the portfolio as at September 30, 2003. Over 40% of delinquent loans are insured;
- the occupancy rate of the real estate holdings remained at a high level of 92.7% during the quarter;
- finally, the market upturn increased the market value of the stocks and market indices portfolio to 100.7% of the book value (96.1% as at December 31, 2002).
General expenses, excluding investment expenses, have totalled $173.8 million since the beginning of the year, $5.1 million more than last year. However, these expenses take into account the amounts posted under the government's major investment project assistance program, which we reported in the previous quarter. Before taxes, these amounts have totalled $9.9 million since the beginning of the year, including $1.1 million for the third quarter; after taxes, they have totalled $6.8 million since the beginning of the year, including $800,000 for the third quarter. Without this contribution, expenses would have totalled $183.7 million since the beginning of the year, and would have corresponded to a $15.0 million (or 9%) increase over the same period last year.
The increase in expenses comes from the normal growth of in business, particularly in the Group Insurance sector as well as in auto and home insurance and securities, where the Company has subsidiaries that are currently in the development phase.
Acquisition of Companies
The company pursued its growth strategy in the wealth management sector, with the announcement of two new takeover bids during the quarter and the closing of an acquisition announced earlier this year.
On August 15, 2003, Industrial Alliance announced an agreement under which it will acquire all common shares of Co-Operators Mutual Funds Limited (CMFL). CMFL is a mutual funds manufacturer with almost $90 million in assets. This agreement is an important step in Industrial Alliance's development strategy, since it will allow the Company to manage its own line of mutual funds. This agreement is subject to regulatory approval.
Also, on September 10, 2003, Industrial Alliance and FundEX Investments announced an agreement under which Industrial Alliance will increase its ownership in FundEX from 25% to 75%. The agreement also provides Industrial Alliance with a purchase option and FundEX shareholders with a sale option on all remaining FundEX shares. These options can be exercised gradually over a three-year period after the transaction closes. This agreement is subject to regulatory approval. Industrial Alliance had acquired 25% of FundEX shares in June 2002. FundEX is a mutual funds broker that has almost 400 representatives and administers some $3.5 billion of in assets.
The purchase of Global Allocation Financial Group Inc., which had been announced on March 4, 2003, was concluded on October 16. Global Allocation is a mutual funds broker that distributes its products through some 50 representatives and administers about $300 million in assets.
With these various agreements, the number of acquisitions made by Industrial Alliance in the mutual funds and securities sectors since 2001 is up to seven. These acquisitions will increase the number of representatives in its distribution networks by some 1,200 and will add almost $4 billion to its other assets under administration.
Declaration of Dividend
The board of directors has declared the payment of a quarterly dividend of $0.19 per common share, an increase of $0.02 or 12%. The dividend is payable in cash on December 15, 2003 to the shareholders of record on November 21, 2003.
This press release may contain forward-looking statements about the operations, objectives and strategies of Industrial Alliance, as well as its financial situation and performance. These statements are subject to risks and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological changes, global capital market activity, interest rates, changes in demographic data, and general economic conditions in Canada or elsewhere in the world. This list is not exhaustive of the factors that may affect any of Industrial Alliance's forward-looking statements. These and other factors must be examined carefully and readers should not place undue reliance on Industrial Alliance's forward-looking statements.
About the Industrial Alliance Group
The Industrial Alliance Group is among the most solid financial institutions in the country, where it is a leader in the fields of insurance and financial services. The Group has operations throughout Canada, through Industrial Alliance (Quebec City), National Life (Toronto) and Industrial Alliance Pacific (Vancouver). The sixth largest life and health insurance company in Canada, the Industrial Alliance Group insures over 1.5 million Canadians, employs over 2,100 people and administers $18.6 billion in assets. Industrial Alliance stock is listed on the Toronto Stock Exchange under the ticker symbol IAG. Industrial Alliance is among the 100 largest public companies in Canada.
- 2002 restated, to take into account the stock option charge, which the Company began recording in 2003.
- The data on the rate of return for the last twelve months exclude the $19.4 million after-tax provision for Teleglobe, taken in the first quarter of 2002, and have been adjusted to exclude the goodwill expense in 2001.
- Solvency ratio as at July 4, 2003, on the closing of the issue of $150 million of innovative tier 1 capital. The solvency ratio as at June 30, 2003 was 185%.
- Sales are defined as follows for each line of business:
- Individual Insurance: first-year annualized premiums;
- Group Insurance: first-year annualized premiums for employee plans, single premiums for creditor insurance and net premiums for special markets group (SMG);
- Individual Annuities: accounting premiums;
- Group Pensions: gross premiums for accumulation products and insured annuities as well as deposits paid directly to the trust company.
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Jacques Carrière, Vice-President, Investor Relations
Office: (418) 684-5275; cellular: (418) 576-3624