Mr. Yvon Charest reports

INDUSTRIAL ALLIANCE REPORTS STRONG Q2

For the second quarter ended June 30, 2014, Industrial Alliance Insurance and Financial Services Inc. had net income attributed to common shareholders of $113.6-million and diluted earnings per common share of $1.13. The annualized return on shareholders' equity was 14.2 per cent and the solvency ratio at quarter-end was 215 per cent. All these results exceed guidance provided by management for the quarter.

Yvon Charest, president and chief executive officer, commented: "The first half of 2014 closed on a strong note. Second quarter earnings reflect both market- and business-related gains. Top-line growth was mixed but over all continues to show good momentum, notably for dealer services, segregated funds, the United States, IA auto, and home and excellence, our adjustable disability business. In addition, the Jovian acquisition is on track, including the integration of their IIROC business into IA securities on April 1."

"Our second quarter profit was strong and had the benefit of a 15-cent tax gain," said Rene Chabot, executive vice-president and appointed actuary. "The two main drivers were our retail insurance and wealth management businesses. In individual insurance, strain on new business and mortality both made a favourable contribution. In addition, the rise in equity markets benefited our retail insurance as well as our wealth management results. Equity markets are an important driver of our fee-earnings assets, up 3 per cent for the quarter and 21 per cent over the last year."

                                                                                                             
                                               HIGHLIGHTS
                               (In millions, unless otherwise indicated)
                                                                                       Year to date
                                                       Second quarter                 as at June 30,
                                                     2014        2013               2014       2013

Net income attributed to shareholders               120.7        81.9              210.7      170.3
Less preferred share dividends                        7.1         8.6               14.2       17.3
Net income attributed to common shareholders        113.6        73.3              196.5      153.0
Earnings per common share (diluted)                 $1.13       $0.74              $1.96      $1.59
Return on common shareholders' equity               14.2%       10.5%              13.0%      12.6%

Second quarter highlights

Profitability

For the second quarter ended June 30, 2014, Industrial Alliance reports net income attributed to common shareholders of $113.6-million. Diluted earnings per share of $1.13 compare with 74 cents a year earlier, an increase of 39 cents per share. The annualized shareholders return on equity of 14.2 per cent compares with 10.5 per cent a year earlier. Earnings in the second quarter of 2014 principally reflect growth in equity markets, a benefit from the company's hedging program, favourable mortality experience and tax gains, offset by a loss in group insurance benefits.

The key elements that explain profitability follow. All figures are after taxes unless otherwise indicated.

Expected profit on in force increased by 17 per cent to $115.7-million pretax over the last year, mainly attributed to growth in assets under management in the wealth management businesses. Beginning in 2014, expected profit on in force for the wealth management businesses is updated on a quarterly basis to reflect market growth and net fund sales.

Individual Insurance reported a net experience gain of four cents per share ($4.0-million). Equity markets contributed two cents per share, while mortality gains offset by adverse lapse and morbidity contributed the remaining two cents per share.

Individual wealth management had an experience gain of eight cents per share ($8.0-million). The dynamic hedging program for the segregated fund guarantee provided six cents per share. Equity markets contributed one cent per share, as did favourable longevity.

Group insurance reported an experience loss of seven cents per share ($7.0-million). Employee plans experienced higher-than-expected disability, dental and health claims resulting in a loss of six cents per share. The remaining one cent per share is attributed to adverse disability in special market solutions.

Strain

In the individual insurance sector, the strain-to-new-business ratio of 23 per cent compared with guidance of 25 per cent for the quarter. Management estimates that the lower strain ratio, attributed to a favourable sales mix, represented a gain of two cents per share.

Income on capital

Total income on capital of $19.9-million pretax compares with $16.1-million in the previous quarter. The variation is due primarily to the results of IA auto and home.

Income taxes

The effective tax rate is 7 per cent compared with the company's guidance of 18 per cent to 22 per cent. The second quarter gain of 15 cents per share, relative to the low end of guidance, is related to adjustments following the completion of tax reviews.

Business growth

Fee-earning assets, an important driver of long-term earnings growth, benefited from strong equity markets in the quarter. Assets under management and administration rose 3 per cent, ending the period at $105.3-billion. Premiums and deposits of $1.7-billion compared with $1.9-billion last year, when a single transfer related to a large mandate was recorded.

Sales growth in the quarter was mixed. In the retail sectors, insurance sales of $55.5-million reflect a decline in excess premiums. Net sales of segregated funds ($35.7-million) were positive for the second quarter in a row, but offset by negative net mutual fund sales (negative $98.0-million). In the group sectors, dealer services reported strong sales of P&C products of $46.5-million (plus-23 per cent), while creditor insurance sales of $105.6-million were comparable to the previous year. Employee plans sales of $8.1-million were in line with the last three quarters. Special markets solutions had sales of $37.6-million, slightly above the previous year. In group savings and retirement, where results can fluctuate significantly because of the size of mandates awarded, sales were $206.5-million versus $340.2-million a year earlier when funds related to a large mandate were transferred.

Capital

At June 30, 2014, the solvency ratio stood at 215 per cent compared with 212 per cent at March 31, 2014. The increase is primarily attributed to the debt issuance during the quarter as well as the strong earnings contribution, offset by the decrease in long-term interest rates.

Dividend

The board of directors today approved a dividend of 26 cents per share on the company's outstanding common shares representing a payout ratio of 23 per cent. This dividend is payable on Sept. 15, 2014, to shareholders of record at Aug. 22, 2014.

Dividend reinvestment and share purchase

Registered shareholders wishing to enroll in the company's dividend reinvestment and share purchase plan so as to be eligible to reinvest the next dividend payable on Sept. 15 must ensure that the duly completed form is delivered to Computershare no later than 4 p.m. on Aug. 15, 2014. Enrolment information is provided on the company's website under investor relations/dividends.

Macroeconomic sensitivity at June 30, 2014

• The company can absorb a sudden decrease of about 30 per cent in the S&P/TSX index before having to strengthen reserves for policyholder liabilities (27 per cent at March 31, 2014).
• The company can absorb a sudden decrease of 43 per cent in the S&P/TSX index before the solvency ratio drops below 175 per cent (40 per cent at March 31, 2014) and a decrease of 55 per cent before the solvency ratio drops below 150 per cent (52 per cent at March 31, 2014).
• The full year impact on net income attributed to common shareholders of a sudden 10-per-cent decrease in the stock markets is $26-million ($25-million at March 31, 2014). This does not take into consideration any potential reserve strengthening.
• The impact on net income attributed to common shareholders of a 10-basis-point decrease in the initial and ultimate reinvestment rates totals $84-million ($80-million at March 31, 2014).

Market guidance for 2014

• Earnings per common share: target range of $3.40 to $3.80;
• Return on common shareholders' equity (ROE): target range of 11.0 per cent to 12.5 per cent;
• Solvency ratio: target range of 175 per cent to 200 per cent;
• Dividend payout ratio: payout range of 25 per cent to 35 per cent with the target being the midpoint;
• Effective tax rate: target range of 18 per cent to 22 per cent;
• Strain on new business: 25 per cent of sales.

Guidance for ROE and earnings per common share excludes any potential reserve strengthening in 2014.

Issuance of subordinated debentures

On May 16, 2014, Industrial Alliance completed an offering of $250-million of subordinated debentures bearing interest of 2.80 per cent due May 16, 2024. The net proceeds were used for general corporate purposes including the redemption of Industrial Alliance's $150-million 5.13-per-cent subordinated debentures due June 30, 2019. The debentures were redeemed effective June 30, 2014, at $1,025.65 per $1,000.

Change in actuarial standard

On May 15, 2014, the Canadian Institute of Actuaries published its revised standard with respect to the economic reinvestment assumptions and assumed investment strategies utilized under the Canadian asset liability method for the valuation of long-tail liability cash flows. The final standard, which takes effect on Oct. 15, 2014, fixes the ultimate reinvestment rate (URR) at 3.3 per cent and introduces a maximum credit spread of 80 basis points over the risk-free rate. At the company's investor day on June 11, 2014, management disclosed its intention to use a combined rate of 4.0 per cent at the end of 2014, an increase of 90 basis points over its current URR of 3.1 per cent. The new standard represents a favourable development that will reduce the overall sensitivity of the company's actuarial reserves to the macroeconomic environment. Industrial Alliance will provide full disclosure of the impact of the revised standard after completion of its year-end assumption review in the fourth quarter of 2014.

Investor day 2014

Industrial Alliance held its biennial investor day on June 11, 2014. A written transcript, webcast and audio recording of management's presentations are available at its website under investor relations/events and presentations.

We seek Safe Harbor.