The Company discloses the impact of the recent federal budget on its earnings
TORONTO, June 20, 2006 – Industrial Alliance Insurance and Financial Services Inc. will be holding an Investor Day for the institutional investment community today, June 20, 2006.
“We want to leave investors with three primary messages today,” stated Yvon Charest, President and Chief Executive Officer. “We believe that Industrial Alliance has the potential to grow EPS organically in the low double-digit range over the mid-term, including in the Individual Insurance line of business, owing primarily to a strict management of the new business strain. The Company’s Wealth Management strategy is bearing fruit and has the potential to transform the Company, from a life company to a financial institution. And Industrial Alliance multi-channel distribution strategy is, and will remain, at the root of the Company’s success.”
Here are a few of the highlights that will be presented during the conference:
Profitability – Industrial Alliance has consistently reached its objective of a low double-digit growth rate for its net income year over year and maintained a return on equity between 13% and 15%. In fact, between 2000 and 2005, recurring(1) shareholder net income increased an average of 14% per year, and the return on equity, adjusted to take into account non-recurring items, has held steady at around 14% in the last five years. Mr. Charest is taking advantage of the conference to reiterate the Company’s objective to grow the net income by some 10% to 13%. For 2006, however, Mr. Charest indicates that the Company believes that it can grow the net income by some 10%, not including the gains that could be realized following the decrease in the corporate tax rates announced in the last federal budget (see “Reduction in Federal Corporate Taxes” below).
Business Growth – With respect to business growth, Mr. Charest is reiterating the Company’s objective to grow business by five percentage points higher than the industry, in all lines of business. Mr. Charest points out that the Company has reached this objective in most lines of business in the last five years. This objective has been reached in Individual Wealth Management, Group Insurance and Group Pensions, for the accumulation products target market. This objective was reached in the first quarter of 2006 in the Individual Insurance sector, as the Company’s sales were 11% higher than the first quarter of last year, compared to 3% for the industry, but was not reached in the last five years, even though the Company’s sales growth was higher than that of the industry during this period.
Value of New Business – Not only does Industrial Alliance continue to stand out through its capacity to grow sales, but through its ability to achieve profitable sales. The value of new business grew from $0.80 per share in 2004 to $1.01 per share in 2005, a 26% increase. More recently, the Company reached a new quarterly high in the first quarter of 2006, as the value of new business reached $0.35 per share, which represents growth of 17% compared to the same quarter last year.
Distribution Strategy – One of Industrial Alliance’s main strengths is its ability to manage multi-channel distribution networks. In addition to doing business through its three traditional networks – the Career network, General Agents network and National Accounts network – in 2001 Industrial Alliance began to develop business relationships with over 14,000 additional brokers distributed among multi-channel networks in the mutual fund and securities sectors, as well as the banking sector.
Growth Strategy in the Wealth Management Sector – The Company’s management is reiterating that Industrial Alliance intends to actively pursue its growth in the Wealth Management sector, a market that has experienced strong growth and where the Company is in a position to leverage both its distribution capabilities and its investment skills. Already recognized as a leader in life and health insurance in Canada, Industrial Alliance resolutely entered the wealth management market at the beginning of the 2000s. While it barely had any operations in this sector in 2000, as at March 31, 2006, the Company was managing $6.0 billion in mutual fund assets through its Industrial Alliance Fund Management Inc. and Clarington Corporation subsidiaries, and was administering $1.5 billion in securities through its Industrial Alliance Securities Inc. subsidiary and $8.2 billion in mutual funds through its Investia Financial Services and FundEX Investments Inc. subsidiaries. Industrial Alliance also manages $8.0 billion in segregated fund assets.
Canada-Wide Diversification – One of the Company’s strategic objectives is to diversify its operations across Canada. In 2005, for the first time in its history, over 50% of the Company’s sales were outside Quebec, in each line of business.
Clarington Acquisition – The Company is reiterating that the Clarington acquisition should increase the Company’s earnings per share by 2 cents in 2006 and 6 cents in 2007. The Clarington integration is progressing as planned. This acquisition has made Industrial Alliance a scale player in the investment fund market. Today, the Company manages over $11.6 billion in mutual fund and segregated fund assets in the retail market, ranking it 15th in Canada and among the top 10 in the independent advisors network.
National Life Integration – The National Life integration is progressing as planned. The integration should increase the Company’s earnings per share by 2.5 cents in 2006 and 8.5 cents in 2007. The restructuring charges should reach $12.5 million (after tax), as expected. Since it announced the integration of National Life (in the fourth quarter of 2004), the Company has posted $10.8 million of the $12.5 million in restructuring charges that it had anticipated. All remaining charges will be recognized on the income statement as they are incurred by the end of 2006.
Reduction in Federal Corporate Taxes – The Company estimates that the decrease in corporate taxes proposed in the last federal budget will increase the Company’s earnings per share by 12 cents per year, starting in 2006 (recurring effect) and an additional 14 cents for 2006 (non-recurring effect). The Company also believes that its effective tax rate, which is currently 32.5%, should decrease to about 29%, starting in 2006. The tax reductions proposed in the last federal budget will only take effect if the legislation giving effect to these measures is adopted by Parliament and receives Royal Assent.
New Accounting Standards in 2007 – The Company believes that the new accounting standards that are scheduled to take effect on January 1, 2007 will have the following impacts on the Company’s 2007 results: 5 cent decrease in the earnings per share; 68 cent increase in the book value per share; 0.4 percentage point reduction in the rate of return on equity; and a decrease of some 4 percentage points in the solvency ratio (MCCSR). The Company believes that the new accounting standards should have a minimal impact on the embedded value.
Share Buy-Back Program – On June 6, 2006, the Company completed the program announced at the end of 2005 to buy back 1,800,000 of its common shares. The purchases were spread out between the months of March and June 2006 and were made at an average price of $32.12 per common share. This buy-back should increase the earnings per share by 4 cents per year. When the Company acquired Clarington at the end of 2005, in order to minimize any dilution for Industrial Alliance common shareholders, it announced its intention to use its normal course issuer bid to buy back some 1,800,000 of its common shares, equivalent to the number issued when it acquired Clarington.
Excess Capital – The Company estimates that it has some $68 million in excess capital (data as at March 31, 2006), taking into account the buy-back of 1,800,000 common shares of the Company. This excess capital should grow during the year, since the Company estimates that it only uses about two thirds of its net income for organic growth purposes and to pay dividends to shareholders. On the other hand, the new accounting standards that are scheduled to take effect on January 1, 2007 should decrease the excess capital that would have otherwise been available to the Company by some $25 million.
Dividend Payout Ratio – Mr. Charest is reiterating that in the short term the Company aims to increase its dividend payout ratio to 25% of the net sustainable earnings. On May 2, 2006, the Company declared a dividend of $0.14 per common share, which corresponds to a payout ratio of about 24% of the Company’s net earnings for the first quarter.
Acquisitions Strategy – Industrial Alliance aims to grow both organically and through acquisitions. The Company is on the lookout for acquisitions in three specific sectors or regions: in the Wealth Management sector (the Company has already made 11 acquisitions in the mutual fund and securities sectors in the last six years); in the life insurance sector, which is its core sector; and in the U.S. market. Industrial Alliance, which is thinking of the Company’s long-term growth, is looking into acquisition opportunities in the U.S., by targeting segments where it can benefit from a good market position and generate competitive advantages.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). It also uses certain non-GAAP financial measures, including adjusted shareholder net income, adjusted diluted earnings per common share and adjusted return common shareholders equity. These non-GAAP financial measures are always clearly indicated, and are always accompanied by and reconciled with GAAP financial measures. The Company believes that these non-GAAP financial measures provide investors and analysts with useful information so that they can better understand the financial results and perform a better analysis of the Company’s growth and profitability potential. These non-GAAP financial measures provide a different way of assessing various aspects of the Company’s operations and may facilitate the comparison of results from one period to another. Since non-GAAP financial measures do not have a standardized definition, they may differ from the non-GAAP financial measures used by other institutions. The Company strongly encourages investors to review its financial statements and other publicly-filed reports in their entirety and not to rely on any single financial measure. The data related to the embedded value and the added value of sales, as well as adjusted data, as indicated above, are not subject to GAAP.
About Industrial Alliance
Founded in 1892, Industrial Alliance Insurance and Financial Services Inc. is a life and health insurance company that offers a wide range of life and health insurance products, savings and retirement plans, RRSPs, mutual and segregated funds, securities, auto and home insurance, mortgage loans and other financial products and services. The fifth largest life and health insurance company in Canada, Industrial Alliance is at the head of a large financial group – the Industrial Alliance Group – which has operations across Canada as well as in the Northwestern United States. Industrial Alliance insures over 2 million Canadians, employs more than 2,700 people and manages and administers over $40 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.
