Earnings on nearly 20-year upswing

By Alain Thériault | June 21 2012 03:07PM

UL Mutual’s net earnings have grown constantly since 1992. Low long-term interest rates, however, may curtail this winning streak.

Quebec-based UL Mutual’s net earnings reached $15.8 million in 2011. This is a 4% rise over the $15.2 million in net earnings reported in 2010.

However, low interest rates slowed this growth compared with recent years. “Considering the current interest rates, it is an outstanding achievement,” UL Mutual CEO Jacques Desbiens wrote in the 2011 annual report.

His concern was apparent a year earlier. “If the interest rates situation does not improve and no acquisition opportunities arise, it will be practi­cally impossible to support the same net income growth rates as the last 19 years,” Mr. Desbiens cautioned in the 2010 annual report.

Union of Canada Life

An acquisition opportunity did arise for the insurer in the first quarter of 2012. In early May, UL Mutual took over the policies of the bankrupt Union of Canada Life. The mutual gained a portfolio of 30,000 accident policies in the school niche and 22,500 traditional whole life policies. All for slightly under $6.9 million, including $900,000 in accident insurance.

Most of the policies acquired were issued in Quebec. Despite its modest premiums compared with whole life, the mutual had been angling for student accident insurance.

“School insurance is a jewel and a new niche for us, in which we want to position ourselves as solidly as possible,” Mr. Desbiens told The Insurance and Investment Journal in an interview. About $30 million in premiums are underwritten in this niche each year in Quebec, he adds. The niche is occupied by four or five companies, including Industrial Alliance, Mr. Desbiens says.

School insurance opportunity

This product is profitable and not capital intensive, because it has a one-year term, Mr. Desbiens explains. UL Mutual hopes to boost the income from the school portfolio in an upcoming campaign that aims to at least match the bankrupt insurer’s pace. “We will enrich the offering and derive additional income from this niche by extending it to our advisor network,” Mr. Desbiens says.

Protected by Assuris

Union of Canada declared bankruptcy in early February. The agreement had to be approved by the Ontario Superior Court of Justice at the end of May, its liquidator, accounting firm Grant Thornton confirms. When the policies are transferred, 99% of insured will be protected by Assuris, says Gordon Dunning, president and CEO of the policyholder protection fund.

Insured whose benefits exceed the full protection limit will retain at least 85% of their contractual benefits. In insurance, this protection covers death benefits, reimbursement of medical expenses, cash value and monthly annuity income. Accumulation annuities whose amount exceeds Assuris’ protection limit will retain at least $100,000 of their accumulated value.

Despite the bankruptcy, Union of Canada held onto much of its assets. “Insured will keep 80 cents on the dollar just with the asset value alone,” Mr. Desbiens points out. “Assuris is chipping in five cents so that insured can keep at least 85% of their benefits.”

Prudence and P&C in 2012

In 2011, UL Mutual racked up $79 million in net premiums, versus $71.0 million in 2010, for growth of 11.3%. During this comparison period, investment income soared from $92.3 million to $139 million, equal to 50.6% growth. The insurer’s solvency ratio topped 300% at December 31, 2011.

Jacques Desbiens is stressing prudence and flexibility in 2012. To be prudent, the UL Mutual CEO will control production. “If we set the objective of selling X amount, we don’t want to sell double that. It would be too demanding vis-a-vis the technical provisions (reserves). With the interest rates we have to use today, we sell one dollar in premiums and it costs us $1.50 to $2,” he says.

As for flexibility, Mr. Desbiens might revise his 2012 business plan as rates change. The insurer created a committee that recommends modifying current products to dampen the unfavorable impact of rates and seek higher returns in its investment policy.

Another major recommendation: accelerating the marketing of P&C insurance products. UL Mutual had envisioned entering this market in 2015.

Mr. Desbiens is concerned about the new accounting standards for presentation of insurers’ financial statements (IFRS 4 – Phase 2). Deferred repeatedly for two years, the International Accounting Standards Board now plans to publish its discussion document on insurance contracts in the fall. “IFRS 4 will not take effect before 2015, instead of 2013.”

Mr. Desbiens is also wary of the new capital rules issued by the Office of the Superintendent of Financial Institutions (OSFI). OSFI announced in its reports on plans and priorities for 2012-2013 that it intends to continue to work on reform of the capital framework for insurance companies.