Industrial Alliance Insurance and Financial Services Updates on 1Q Income [Manufacturing Close – Up]

For the quarter ended March 31, Industrial Alliance Insurance and Financial Services Inc. reports net income attributed to common shareholders of $79.7 million versus $62.2 million a year earlier.

In a release dated May 9, the Company said that Diluted earnings per share, adjusted for the dilutive impact of the Company's Tier 1 debt instruments and reflecting the equity issue completed on Feb. 27, amounted to $0.85 compared with $0.69 a year earlier. Premiums and deposits exceeded the $2 billion mark, the highest in the Company's history.

"Our first quarter performance was solid on all metrics," said Yvon Charest, President and Chief Executive Officer. "Industrial Alliance set another record for both premiums and deposits as well as net earnings from continuing operations. In terms of financial flexibility, our solvency ratio remains extremely strong and our leverage ratio shows meaningful improvement as a result of our recent capital strategy."

"All our lines of business delivered experience gains in the quarter together with higher sales," said Rene Chabot, Senior Vice- President and Appointed Actuary. "In Individual Insurance, our strain-to-new business ratio was above our target level but with the new price increase introduced at the end of March, we are in line to achieve our average of 25 percent for the full year."

First Quarter Highlights

Profitability - Industrial Alliance reports net income attributed to common shareholders of $79.7 million, an increase of 28 percent from one year ago. Diluted and adjusted earnings per share amounted to $0.85 ($0.69 in 2012), and the annualized return on common shareholders' equity was 12.0 percent (11.0 percent in 2012). The 2012 figures have been restated for comparability following the amendment to IAS-19 for employee benefits effective Jan. 1.

Individual Insurance had a net experience gain of $0.02 per share ($2.0 million). Equity market growth provided a benefit of $0.04 per share ($4.3 million) on Universal Life policies. Unfavourable mortality represented $0.02 per share ($1.9 million).

Individual Wealth Management had a net experience gain of $0.11 per share ($9.8 million). The dynamic hedging program for the segregated funds guarantee provided a benefit of $0.11 per share ($10.3 million), and equity market growth had a positive impact on fund management fees of $0.02 per share ($1.4 million). Higher commissions and expenses related to higher fund sales accounted for an experience loss of $0.02 per share ($1.9 million).

Group Insurance reported a net experience gain of $0.01 per share ($1.4 million). Dealer Services provided $0.02 per share ($2.7 million) and Special Markets Solutions added $0.01 per share ($0.6 million). This was offset by a loss of $0.02 per share ($1.7 million) by Employee Plans for dental and health claims. Disability was in line with expectations.

Group Savings and Retirement contributed $0.01 per share ($0.8 million) related to investment income gains and favourable annuitant behavior.

Strain - In the Individual Insurance sector, the strain-to-new business ratio was 30 percent in the first quarter, which is above the expectation for the full year. The first quarter ratio is explained by the 2012 year-end assumption changes together with seasonally higher expenses. Management estimates that the higher percentage reduced first quarter earnings by $0.03 per share ($2.8 million).

Management reiterates that strain should represent approximately 25 percent of Individual Insurance sales in 2013 as new pricing implemented at the end of March becomes reflected in sales.

Income on capital - Total income on capital was $18.6 million pre- tax in the first quarter versus $23.2 million a year earlier. The year-over-year decrease is mainly due to the seasonally in-line contribution from IA Auto and Home (loss of $3.1 million pre-tax) compared with the first quarter of 2012 (gain of $1.7 million pre- tax).

Income taxes - The Company reported a tax gain of $0.02 per share ($2.2 million) in the first quarter. The benefit is mostly attributed to a tax recovery in the US, resulting in an effective tax rate of 19 percent.

Business Growth - Assets under management and administration reached a new high of $87.5 billion at March 31st, up 5 percent over the last quarter and 15 percent year over year. Premiums and deposits grew by 12 percent, also reaching a new quarterly high of $2.1 billion. An outstanding contribution was made by the wealth management and individual insurance lines of business.

Sales of Individual Insurance products grew by 23 percent, reaching $65.8 million in the first quarter, driven by a very strong performance from the Canadian operations.

Individual Wealth Management gross sales gathered momentum in the first quarter, reflecting strong demand for mutual funds. Gross sales of all funds totalled $1.1 billion, up 9 percent over the previous year. Net sales of mutual funds more than doubled to $318.6 million. Segregated funds had net sales of $36.9 million.

In Group Insurance, sales of creditor insurance and P&C products (Dealer Services) continued to grow with a year over year increase of 5 percent to $94.8 million. Special Market Solutions gained momentum, with sales increasing 23 percent to $48.3 million. Employee Plans had an exceptionally strong quarter, with sales improving by 49 percent to $29.3 million.

Group Savings and Retirement reported sales of $251.6 million, an increase of 54 percent over the previous year.

Capital - At March 31, the solvency ratio was 237 percent compared with 217 percent at Dec. 31, 2012. The key elements contributing to the increase include regulatory capital relief for lapse effective Jan. 1st and the equity issue of $237 million in February. On April 1, the Company redeemed all its 8.25 percent subordinated debt with a nominal value of $100 million and will redeem on or about June 30, all the 5.714 percent Industrial Alliance Trust Securities - Series A (IATS) with a nominal value of $150 million. Following these buybacks, the solvency ratio stands at 221 percent and the Company's leverage ratio improves to 29 percent from 36 percent at Dec. 31, 2012.

Quality of Investments - At March 31, both net impaired investments (0.04 percent of total investments) and the real estate occupancy rate (95 percent) remained unchanged from the last two quarters. The proportion of bonds rated BB and lower increased slightly to 0.11 percent.

Dividend - The Board of Directors declared a quarterly dividend of $0.245 per common share, which corresponds to a payout of 29 percent of net income attributed to common shareholders. This dividend is payable on June 17, to shareholders of record as at May 24.

Macroeconomic sensitivity - Following the update of its sensitivity analysis at March 31,:

-The Company can absorb a decrease of about 16 percent (14 percent at Dec. 31, 2012) in the S&P/TSX index before having to strengthen reserves for policyholder liabilities.

-The Company can absorb a decrease of 40 percent (35 percent at Dec. 31, 2012) in the S&P/TSX index before the solvency ratio drops below 175 percent and a decrease of 51 percent (46 percent at Dec. 31, 2012) before the solvency ratio drops below 150 percent.

-The full-year impact on net income attributed to common shareholders of a sudden 10 percent decrease in the stock markets is $24 million ($23 million at Dec. 31, 2012).

-The impact on net income attributed to common shareholders of a 10 basis point decrease in the initial and ultimate re-investment rates totals $80 million versus $89 million a year ago, attributed to ongoing improvement in the matching of asset-liability cash flows.

Market Guidance for 2013

-Earnings per common share: target range of $3.00 to $3.40.

-Return on common shareholders' equity (ROE): target range of 10.5 percent to 12.0 percent

-Solvency ratio: target range of 175 percent to 200 percent

-Dividend payout ratio: medium-term payout range of 25 percent to 35 percent

-Effective tax rate: target range of 21 percent to 24 percent

Guidance for ROE and earnings per common share excludes any potential reserve strengthening in 2013.

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