Q4 2005 ING Canada Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen and welcome to the ING Canada fourth quarter and full-year 2005 earnings conference call. My name is Ann Marie and I'll be your coordinator for today.

[Operator Instructions]

I would now like to turn the call over to Mr. Brian Lynch, Director of Investor Relations. Please proceed.

BRIAN LYNCH, DIRECTOR OF INVESTOR RELATIONS, ING CANADA: Thank you Ann Marie, and good morning everyone. Slides supporting today's call and internet broadcast can be found at ingcanada.com. Slide number two contains the forward-looking statement disclaimer and we would like to remind listeners that, as detailed on the slide, there are many reasons why you should not rely too heavily on any forward-looking statements that we might make.

Claude Dussault, CEO, will have some opening remarks and Mike Cunningham, our CFO, will then make his final report on our financial results. Mike begins a well deserved retirement at the end of March. We'll proceed to take questions in French or English, from financial analysts and investors. And Charles Brindamour, EVP, is also with us and available to take your questions. I will now turn things over to Claude.

CLAUDE DUSSAULT, PRESIDENT, CEO, ING CANADA INC: Thank you, Brian. Good morning everyone. I'm very pleased to report that our fourth quarter has produced another strong performance in line with our performance of the previous three quarters of 2005. As you've seen by now, our earnings per share of $1.47 compared to earnings per adjusted share $1.29 for the same quarter last year. And for the full year our earnings per share was $5.85. Our net income for 2005 was $781.8 million, which represents an increase of 25.2% over 2004.

The key drivers to our performance in 2005 were strong underwriting results, the positive contribution of the Allianz earnings, as well as a solid investment performance. So each of the key drivers were really working well in 2005. Our direct written premiums were up by $329 million in 2005, so we've achieved some very attractive growth of 9.2%.

Now if we look at the pieces that have produced this growth, there was obviously the strong contribution of the Allianz addition, which contributed $423 million to the growth. However, there were a few factors that had a negative impact on our growth, one of which was the reduction of the residual market pool, where our volume coming from this pool as a result of the depopulation that took place was $104 million less than in 2004.

And we were also affected by the general decrease that we've applied in personal automobile insurance. Our rates went down by 7.5% on average for the full year of 2005. Overall, we increased the number of risks insured and this is a measure that we are tracking, which is an indicator of our long term organic growth and the growth in units for the year, excluding Allianz, was 3.4%.

Now if we turn to our underwriting performance, I can say that it remained strong in spite of some negative trends. And those trends were higher frequency and personal property insurance from weather related losses, higher claims severity in non-auto commercial lines, and lower average earned premium in automobile insurance from significant rate decreases that we took in the past two years.

However, these negative trends were offset by continued low frequency in automobile and commercial insurance, as well as low inflation on automobile claims severity. We are pleased that we could increase the earnings per share for our shareholders, reduce the rates for our clients, while successfully integrating Allianz.

We believe that we have used effectively our scale advantage, underwriting discipline, pricing sophistication, and multi-channel distribution to continue to outperform the industry in a changing phase of the cycle. I am also pleased to announce that we have increased our quarterly dividend by 54% from $0.1625 to $0.25.

Now if we turn to 2006, we expect that in 2006 industry returns in automobile insurance will exceed average historical levels, assuming that the effect of the reforms that were introduced in the past two and a half years will continue to contain cost inflation. In commercial insurance, prices are softening but are still yielding returns above historical levels. The continued inflation of non-residential construction costs and price competition will continue to put pressure on underwriting margins. But as I mentioned, we still expect returns above historical levels. We expect that pricing and underwriting discipline remains a key success factor in this environment.

Top line growth for the next 12 months should continue to be below historical levels. Our objectives during this coming period is to continue to outperform the industry on both return on equity and growth. Now I would like to turn it to our CFO, Michael Cunningham, to give you a little bit more specific details on the financials.

MICHAEL CUNNINGHAM, CFO, ING CANADA INC: Thanks Claude. There was another good year for both underwriting and investment results. Our combined ratio was flat at 86% with '04 reflecting a 0.3 point decrease in the claims ratio and 0.3 point increase in the expense ratio. The expense ratio reflects a drop in our commission expense ratio of 0.7 due to lower profit sharing commission expenses primarily resulting from property losses from storms in the second and third quarters.

General expense ratio was up by a point from 7.7 to 8.7 due to some increase in expenses, primarily expenses related to the strong profits we had, and also including transition expenses that are related to the Allianz acquisition. The depopulation of the Facility that you mentioned also had an impact on our expenses. Investment results were strong, the addition of Allianz assets plus the retention of profits provided growth in investment assets helping mitigate the downward pressure of rates.

Invested assets including cash and cash equivalents reached over $7 billion at December 31st, 2005. Realized gains on both fixed income and equities were up significantly as a result of beginning to reposition the fixed income portfolio. Plus the sales investments of our seed capital and our mutual funds operation, approximately $19 million of the seed capital. In spite of these gains, net unrealized gains increased to $302 million up from $242 at December 31st, '04. The repositioning of our fixed income portfolio continued in January '06 with the duration of our fixed income portfolio decreasing from 6.3 years to 4.3 to move closer to the duration of our claims liabilities, which are approximately two and a half.

We do not intend to move to a complete match but, believe the environment was conducive to shorten our portfolio with a relatively flat year curve. Shareholders equity increased by $833 million or 40.4% to $2,892 million in 2005, compared to just over $2 billion at December 31st, '04. As a result our debt to total capital ratio continued to decline and is at 4.2% at year end. The debt of $127 million will mature and be repaid in August.

Finally, we raised the dividend to $0.25 for the quarter as we continue to balance our dividend level with our growth and acquisition strategy. We are comfortable that we can maintain this new level and still execute our growth strategy. With that, I think we're ready to take questions.

OPERATOR: Thank you, sir.

[Operator Instructions]

Your first question comes from Jamie Keating with RBC Capital …