Mr. Yvon Charest reports
INDUSTRIAL ALLIANCE DELIVERS EXCELLENT FOURTH QUARTER AND 2016 RESULTS - QUARTERLY DIVIDEND TO COMMON SHAREHOLDERS INCREASED BY 9%
For the fourth quarter ended Dec. 31, 2016, Industrial Alliance Insurance and Financial Services Inc. had net income attributed to common shareholders of $155.0-million and diluted earnings per common share of $1.48. These results compare with net income of $4.2-million and diluted earnings per common share of four cents in the same quarter of 2015 that included a reserve strengthening of $1.05 per share. A discussion of the 12-month 2016 results is provided in the management discussion and analysis filed on SEDAR.
2016 fourth quarter highlights
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Diluted earnings per common share of $1.48 exceed fourth quarter guidance (earnings per common share of $1.10 to $1.20);
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Favourable impact of year-end assumption review (plus 22 cents for earnings per common share);
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Continued favourable policyholder experience (plus five cents for earnings per common share);
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New business strain ratio at all-time low of 5 per cent (plus one cent for earnings per common share);
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Retail insurance continues to deliver strong growth (plus 27 per cent year over year);
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Net mutual fund flows become positive in the fourth quarter;
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Solvency ratio of 225 per cent (211 per cent after HollisWealth acquisition);
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Book value per share up 6 per cent (11 per cent year over year);
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Quarterly dividend increased by three cents to 35 cents per common share.
"[Two thousand sixteen] was clearly an excellent year for Industrial Alliance and for our shareholders," commented Yvon Charest, president and chief executive officer of Industrial Alliance. "I want to highlight the outstanding results of our retail insurance operations both in Canada and the United States, the industry-leading growth of our segregated fund business, and the successful turnaround in gross and net sales by our mutual fund business. Aside from organic growth, we are also excited by the expansion of our wealth management platform through the acquisition of HollisWealth in early December. The combination of the two groups propels us to the top of non-bank mutual fund distribution in Canada in terms of geographic footprint and assets under administration.
"As for shareholder value creation, I am pleased to report that book value per share grew by 11 per cent in 2016 and that we are announcing an increase in our dividend on common shares. As we celebrate our 125th anniversary this year, we are extremely enthusiastic about the opportunities for continued growth and development as a leading financial services organization."
"Our earnings in 2016 reflect another year of strong policyholder experience, a significant turnaround in profit from employee plans and, like the last four years, lower strain on new business in our retail insurance operations in both Canada and the United States," commented Rene Chabot, executive vice-president, chief financial officer and chief actuary. "As part of our year-end assumption review, we have strengthened our URR [ultimate reinvestment rate] assumption by 20 basis points and maintained significant protection against potential declines in equity markets and long-term interest rates.
"It is is our custom at this time to introduce our earnings guidance for the next year. In 2017, we are expecting to deliver [earnings per common share] in the range of $4.65 to $5.05. Along with the usual organic growth, we are anticipating strain of 6 per cent for the full year, continued improvement from employee plans, profit growth from mutual funds and a better performance in dealer services, especially for car loans. At year-end, our solvency ratio was 225 per cent and our balance sheet retains ample flexibility to support our growth."
HIGHLIGHTS
(in millions of dollars, unless otherwise indicated)
Fourth quarter Year to date at Dec. 31,
2016 2015 (2) 2016 2015 (2)
Net income attributed to shareholders $159.2 $ 8.3 $553.7 $386.4
Less dividends attributed to preferred shares 4.2 4.1 16.5 18.0
Less redemption premium on preferred shares - - - 4.0
Net income attributed to common shareholders 155.0 4.2 537.2 364.4
Earnings per common share (diluted) $ 1.48 $ 0.04 $ 5.19 $ 3.57
Return on common shareholder equity (1) 14.9% 0.4% 13.2% 10.2%
(1) Annualized for the quarter; trailing 12 months for the year to date.
(2) Results for 2015 reflect a reserve strengthening of $1.05 per share.
Dec. 31, 2016 Sept. 30, 2016 Dec. 31, 2015
Solvency ratio 225% (1) 218% 213%
Book value per share $40.97 $38.63 $36.76
Assets under management
and administration $126.2B $126.2B $115.8B
Net impaired investments as a
percentage of investment portfolio 0.08% 0.04% 0.05%
(1) After giving effect to the announced acquisition of HollisWealth
in the third quarter of 2017, the solvency ratio would be 211 per cent.Fourth quarter highlights
Profitability
For the fourth quarter ended Dec. 31, 2016, Industrial Alliance Insurance and Financial Services reports net income attributed to common shareholders of $155.0-million, diluted earnings per common share of $1.48, and annualized return on shareholder equity of 14.9 per cent, all of which exceed management's guidance for the quarter. This compares with net income attributed to common shareholders of $4.2-million, diluted earnings per common share of four cents and annualized return on shareholder equity of 0.4 per cent in the same quarter a year ago. The 2015 results include a reserve strengthening of $1.05.
The key elements that explain profitability follow. All figures are after taxes unless otherwise indicated.
Expected profit on in-force
increased by 13 per cent to $145.8-million pretax over the same quarter last year and is attributed mainly to the retail and group insurance sectors. In addition, the company reported gains of 36 cents per share, of which 22 cents is related to its year-end assumption review, five cents to favourable policyholder experience, two cents to market-related items, one cent to lower strain and six cents to income taxes. A detailed analysis of gains and losses follows.
Year-end assumption review
The company released a net amount of $23.2-million, or 22 cents per share, from its actuarial reserves. Favourable results from the annual mortality update and actions taken during the year to improve investment yields and asset-liability matching were used primarily to strengthen interest rate reinvestment assumptions. The initial reinvestment rate, based on the long-term rate at Dec. 31, 2016, is set at 2.35 per cent, to which a protection of 75 basis points is added. The ultimate reinvestment rate was strengthened by 20 basis points and is set at 3.10 per cent. The ultimate reinvestment rate currently prescribed by the Canadian Institute of Actuaries is 3.30 per cent.
Individual insurance
reported a total experience gain of 19 cents per share ($19.0-million), explained by favourable mortality and morbidity (earnings per share of eight cents), higher excess-premium deposits (earnings per share of six cents) and market appreciation (earnings per share of three cents) related to universal life policies, and miscellaneous items (earnings per share of two cents).
Individual wealth management
had an experience loss of one cent per share ($1.2-million) related to the dynamic hedging program for segregated fund guarantees.
Group insurance
reported an experience loss of nine cents per share ($9.0-million). Employee plans experienced a higher incidence of long-term disability and dental claims (earnings per share of six cents). Dealer services had higher claims for creditor insurance (earnings per share of one cent), as well as lower interest income on car loan originations, together with losses on older car loans, in the portfolio (earnings per share of two cents).
Group savings and retirement
reported a loss of
two cents per share ($2.0-million) related to unfavourable longevity and higher expenses.
Strain
In the individual insurance sector, strain on new business amounted to $5.1-million before tax, or 5 per cent of sales for the quarter, compared with annual guidance of 15 per cent. Management estimates that the lower strain ratio, which is attributed mainly to the higher sales volume in the quarter, represented a gain of one cent per share. Strain can vary on a quarterly basis because of seasonality, as well as sales mix and volume.
Income on capital
Total income on capital of $12.2-million before tax represents a decrease of six cents per share. The decrease is explained by higher financing expenses related to the debt issue in September and lower results at Industrial Alliance's auto and home business (iA Auto and Home).
Income taxes
The company realized a gain of six cents per share related principally to tax-exempt investment income. The effective tax rate was 17 per cent, compared with the company's guidance of 18 per cent to 20 per cent.
Business growth
Premiums and deposits reached an all-time high of $2.3-billion (plus 12 per cent) as a result of strong inflows in both the individual insurance and wealth management sectors. Assets under management and administration of $126.2-billion were comparable with the previous quarter-end, reflecting the increase in long-term interest rates during the quarter and their negative impact principally on assets in the general fund. Year over year, assets were up 9 per cent.
Sales continue to be robust in the retail insurance sector. Total sales of $93.4-million (plus 27 per cent) represent an increase of 37 per cent in Canada and 2 per cent in the United States. The company's adjustable disability business in Canada continues to show strong momentum with growth of 18 per cent in the quarter. Total sales in Canada amounted to $71.4-million (including $5.0-million for adjustable disability) and the United States accounted for $22.0-million.
In retail wealth management, the company reports a second quarter of positive net fund sales attributed to the year-over-year improvement in its mutual fund business. Gross sales of mutual funds increased by 81 per cent to $535.4-million in the fourth quarter, with net inflows of $77.2-million in 2016, compared with net outflows of $247.5-million in 2015. The company's segregated funds continue to perform well with gross sales of $383.2-million (plus 4 per cent) in the quarter and net sales of $74.1-million, compared with $82.3-million in 2015. The company continues to hold first position for net segregated fund sales in Canada and third position for assets.
The group insurance sector reported total sales of $212.2-million. Employee plans had a strong quarter with sales of $23.1-million (plus 59 per cent). Special markets solutions reported sales of $59.8-million (plus 1 per cent). In dealer services, car loan originations increased to $93.9-million (plus 61 per cent), with the majority of this growth in prime loans. Sales of creditor insurance ($85.5-million) and property and casualty products ($43.8-million) were down by 4 per cent and 11 per cent, respectively, reflecting the continuation of soft market conditions in the Western Canadian provinces, partially offset by more favourable markets in Quebec. During the fourth quarter, the company completed the acquisition of Groupe PPP Ltee., which expands the dealer services distribution network in Quebec.
In the group wealth sector, total sales amounted to $367.2-million in the fourth quarter, capping a very strong year, particularly in Western Canada and Quebec.
At iA Auto and Home, written premiums in the fourth quarter grew by 14 per cent to $59.4-million. Almost three-quarters of the new growth in the quarter was driven by the company's car dealer distribution network and strategic partnerships.
Capital issuances and redemptions
On Dec. 5, 2016, the company completed an offering of 2.75 million common shares for gross proceeds of $153-million. The net proceeds were added to the company's general fund and will be used to financed in part the acquisition of HollisWealth, which is expected to close in the third quarter of 2017.
On Dec. 14, 2016, the company redeemed its outstanding $250-million of 4.75 per cent subordinated debentures, as previously announced on Sept. 13, 2016, when it completed an offering of $400-million of 3.30 per cent fixed/floating subordinated debentures.
Capital
At Dec. 31, 2016, the solvency ratio was 225 per cent, compared with 218 per cent at the end of the third quarter. The increase is related to the rise in long-term interest rates during the quarter, the net impact of capital issuances and redemptions, and the contribution from earnings. The completion of the HollisWealth acquisition is expected to reduce the ratio by 14 percentage points.
Dividend
The board of directors approved a dividend of 35 cents per share on the company's outstanding common shares. This represents an increase of three cents per share, or 9 per cent, over the dividend paid in the preceding quarter. This dividend is payable on March 15, 2017, to shareholders of record at Feb. 28, 2017.
Dividend reinvestment
and share purchase plan
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 March 15, 2017, must ensure that the duly completed form is delivered to Computershare no later than 4 p.m. on Feb. 21, 2017. Enrolment information is provided on the company's website under "About iA," in the investor relations/dividends section. Common shares issued under the company's dividend reinvestment and share purchase plan will be purchased on the secondary market, and no discount will be applicable.
Macroeconomic protection at Dec. 31, 2016
The company continues to maintain significant protection against declines in equity markets and long-term interest rates.
It can absorb a sudden decrease of about 25 per cent in the S&P/TSX index before having to strengthen reserves for future policyholder benefits.
It can absorb a sudden decrease of 52 per cent in the S&P/TSX index before the solvency ratio drops below 175 per cent and a decrease of 63 per cent before the solvency ratio drops below 150 per cent.
The full-year impact on net income attributed to common shareholders of a sudden 10-per-cent decrease in the stock markets would be $28-million. 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 reinvestment rate would be $24-million; the impact of a similar decrease in the ultimate reinvestment rate would be $62-million. This does not take into consideration the protection of 75 basis points for the initial reinvestment rate and 20 basis points for the ultimate reinvestment rate in the actuarial reserves.
Market guidance for 2017
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Earnings per common share -- new target range of $4.65 to $5.05 ($4.20 to $4.60 in 2016);
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Return on common shareholder equity -- target range remains at 11.0 per cent to 12.5 per cent;
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Solvency ratio -- target range remains at 175 per cent to 200 per cent;
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Dividend payout ratio -- payout range remains at 25 per cent to 35 per cent, with the target being the midpoint;
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Effective tax rate -- target range increased to 20 per cent to 22 per cent (18 per cent to 20 per cent in 2016);
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Strain on new business -- annual target of 6 per cent of individual insurance sales with quarterly range of 0 per cent to 15 per cent (15 per cent plus or minus 5 per cent in 2016).
Guidance for return on shareholder equity and earnings per common share excludes any potential reserve strengthening in 2017.
Documents related to the financial results
For a detailed discussion of the company's fourth quarter and year-end results, investors are invited to consult the management discussion and analysis for the year ended Dec. 31, 2016, the related consolidated financial statements and accompanying notes, and the company's supplemental information package, all of which are available on the company's website in the investor relations/financial reports section and on SEDAR.
Conference call
Management will hold a conference call to present the company's results on Thursday, Feb. 16, 2017, at 12 p.m. ET. The toll-free dial-in number is 1-800-668-4115. A replay of the conference call will be available for a one-week period, starting at 2:30 p.m. ET on Feb. 16, 2017. To access the conference call replay, dial 1-800-558-5253 (toll-free) and enter access code 21836698. A webcast of the conference call (listen-only mode) will also be available on the company's website.
CONSOLIDATED INCOME STATEMENTS
(in millions of dollars, unless otherwise indicated)
Quarter ended 12 months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2016 2015 2016 2015
Revenues
Premiums
Gross premiums $ 1,824 $ 1,812 $ 7,107 $ 6,564
Premiums ceded (150) (142) (559) (523)
-------- -------- -------- --------
Net premiums 1,674 1,670 6,548 6,041
-------- -------- -------- --------
Investment income
Interest and other investment income 305 297 1,115 1,097
Change in fair value of investments (1,604) 116 478 (61)
-------- -------- -------- --------
(1,299) 413 1,593 1,036
Other revenues 309 290 1,206 1,158
-------- -------- -------- --------
684 2,373 9,347 8,235
-------- -------- -------- --------
Policy benefits and expenses
Gross benefits and claims on contracts 1,226 1,036 4,557 4,270
Ceded benefits and claims on contracts (95) (88) (370) (336)
Net transfer to segregated funds 89 274 744 741
Increase (decrease) in
insurance contract liabilities (1,620) 273 1,099 514
Increase (decrease) in
investment contract liabilities (11) 7 12 21
Decrease (increase) in
reinsurance assets 240 253 122 266
-------- -------- -------- --------
(171) 1,755 6,164 5,476
Commissions 351 315 1,282 1,197
General expenses 272 266 1,018 973
Premium and other taxes 29 28 112 106
Financing charges 20 17 77 62
-------- -------- -------- --------
501 2,381 8,653 7,814
-------- -------- -------- --------
Income before income taxes 183 (8) 694 421
Income taxes 30 (11) 146 39
-------- -------- -------- --------
Net income 153 3 548 382
Net income attributed to
participating policyholders (7) (5) (6) (4)
-------- -------- -------- --------
Net income attributed
to shareholders 160 8 554 386
-------- -------- -------- --------
Dividends attributed
to preferred shares 5 4 17 18
Redemption premium
on preferred shares - - - 4
-------- -------- -------- --------
Net income attributed
to common shareholders $ 155 $ 4 $ 537 $ 364
-------- -------- -------- --------
Earnings per common share (in dollars)
Basic $ 1.50 $ 0.04 $ 5.22 $ 3.59
Diluted $ 1.48 $ 0.04 $ 5.19 $ 3.57
Dividends per common share (in dollars) $ 0.32 $ 0.30 $ 1.26 $ 1.16
About Industrial Alliance Insurance and Financial Services Inc.
Industrial Alliance offers life and health insurance products, mutual and segregated funds, savings and retirement plans, securities, auto and home insurance, mortgages and car loans, and other financial products and services for both individuals and groups. It is one of the four largest life and health insurance companies in Canada and among the largest publicly traded companies in the country.
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