Liquidity
IGM Financial’s operating liquidity is required for:
- Financing ongoing operations, including the funding of selling commissions.
- Temporarily financing mortgages in its mortgage banking facility.
- Meeting regular interest and dividend obligations related to long-term debt and preferred shares.
- Payment of quarterly dividends on its outstanding common shares.
- Maintaining liquidity requirements for regulated entities.
- Financing common share repurchases related to the Company’s normal course issuer bid.
A key liquidity requirement for the Company is the funding of commissions paid on the sale of mutual funds. Commissions paid continue to be fully funded through management fee revenue earned on mutual fund assets under management and through additional sales charges levied in connection with the early redemption of mutual funds.
The Company also maintains sufficient liquidity to fund and temporarily hold mortgages. Through its mortgage banking operations, most of the mortgages are sold to Investors Mortgage Fund or third parties on a fully serviced basis. In order to effectively manage its overall liquidity, the Company is active in both the whole loan sale and securitization markets. During 2005, whole loan sales to third parties totalled $372.4 million and proceeds from securitizations were $251.0 million, compared with $712.1 million and $207.1 million respectively in 2004.
 IGM Financial continues to generate significant cash flows from its operations. Earnings before interest, taxes, depreciation and amortization (EBITDA) totalled $1,365.5 million for 2005 compared to $1,253.1 million in 2004, and represents an increase of 9.0%.
In addition to IGM Financial’s current balance of cash and cash equivalents in excess of the operating liquidity requirements described above, other potential sources of liquidity include the Company’s portfolio of securities and lines of credit. The Company maintains operating lines of credit totalling $210 million with various Schedule A Canadian chartered banks, of which $50 million represented committed lines of credit.
IGM Financial’s demonstrated ability to raise funds in domestic debt and equity markets is also a source of liquidity.
Cash flows
Table 11 – Cash Flows is a summary of the Consolidated Statements of Cash Flows which form part of the Consolidated Financial Statements for the year ended December 31, 2005.
Operating activities, before payment of commissions, generated $941.5 million during the year ended December 31, 2005, as compared to $769.7 million in 2004. Cash commissions paid were $337.4 million in 2005 compared with $305.8 million in 2004 and reflect the increase in mutual fund sales over 2004 levels.
Financing activities during the year ended December 31, 2005 compared to the same period in 2004 related primarily to:
- A net decrease of $18.2 million in deposits and certificates in 2005 compared to $39.1 million in 2004 related to decreases in the term deposit levels offset by an increase in demand deposits.
- The payment of regular common share dividends which increased to $341.3 million in 2005 from $292.1 million in 2004 as a result of increases in the Company’s common share dividends.
- The purchase of 584,700 common shares in 2005 under IGM Financial’s normal course issuer bid at a cost of $23.3 million. In 2004, 756,100 shares were purchased at a cost of $26.9 million.
Other activity in 2004 related to the repayment of the remaining $175 million of Floating Bankers’ Acceptance in the fourth quarter of 2004 as well as the repayment of long-term debt assumed on the acquisition of Investment Planning Counsel in May 2004.
Table 11: Cash flows
Investing activities during the year ended December 31, 2005 compared to the same period in 2004 related primarily to:
- Securities purchases of $102.2 million and securities sales with proceeds of $95.9 million in 2005 compared with $61.7 million and $78.5 million respectively in 2004.
- Increases in residential mortgages related to the Company’s mortgage banking operations and personal loans related to the Company’s intermediary operations of $258.0 million compared to an increase of $167.0 million in 2004 offset by securitizations of $251.0 million in 2005 and $207.1 million in 2004.
Other activity in 2004 related to the acquisition in May 2004 of Investment Planning Counsel, net of cash and cash equivalents assumed, which totalled $62.6 million.
Interest rate risk
The objective of the Company’s asset liability management is to control interest rate risk by actively managing its interest rate exposure within limits established by the Investment Committee of the Board of Directors.
The Company manages the re-pricing characteristics of its consolidated assets and liabilities, and as required by regulation, manages interest rate risk on the assets and liabilities of the deposit operations of M.R.S. Trust and Investors Group Trust Co. Ltd. As at December 31, 2005, the total gap between one-year deposit assets and liabilities was well within the Company’s stated guidelines.
Contractual obligations
Table 12: Contractual obligations
Liquidity requirements
Liquidity requirements for M.R.S. Trust and Investors Group Trust Co. Ltd., which engage in financial intermediary activities, are based on investment policies approved by the investment committees of their respective Boards of Directors. As at December 31, 2005, liquidity for both companies was in compliance with these policies.
Capital resources
 Shareholders’ equity increased to $3.45 billion as at December 31, 2005 from $3.15 billion at December 31, 2004. Long-term debt was $1.23 billion at December 31, 2005, unchanged from 2004 levels and is detailed in Note 12 to the Consolidated Financial Statements.
To achieve its strategic objectives, the Company requires a strong capital base. The Company’s capital management objective is to preserve the quality of its financial position by establishing and maintaining a solid capital base and a strong balance sheet.
Independent reviews confirm the continuing quality of IGM Financial’s balance sheet and the strength of its operations. During 2005, both Standard & Poors (S&P) and the Dominion Bond Rating Service (DBRS) reviewed their ratings of the Company’s senior debt and liabilities. The senior debt and liabilities were rated “A” with a stable outlook by both S&P and DBRS.
Management is confident that the Company’s current capital resources are adequate and can support its activities during 2006.
Off-Balance sheet arrangements
- Securitizations – The Company’s liquidity management practices include the periodic transfers of mortgages and personal loans to commercial paper conduits that in turn issue securities to investors. The Company retains servicing responsibilities and certain elements of recourse with respect to credit losses on transferred loans. The Company also transfers NHA-insured loans through the issuance of mortgage-backed securities. During 2005, the Company entered into securitization transactions through its mortgage banking operation with proceeds of $251.0 million compared with $207.1 million in 2004. Securitized loans serviced at December 31, 2005 totalled $558.8 million compared with $593.2 million in 2004. The fair-value of the Company’s retained interest was $15.5 million at December 31, 2005 and $19.7 million in 2004. Additional information related to the Company’s securitization activities can be found in Notes 1 and 4 of the Consolidated Financial Statements.
- Derivative Contracts – The Company utilizes derivative financial instruments in the management of interest rate and equity market exposures. The Company does not utilize derivative instruments for speculative purposes. The Company enters into interest rate swap arrangements in order to reduce the impact of fluctuating interest rates on its mortgage banking activities and asset liability management. The Company also manages its exposure to market risk on its corporate securities portfolio by using a variety of derivative instruments including options and forward contracts. All derivative contracts are negotiated in the over-the-counter market with Schedule I and Schedule II bank counterparties on a diversified basis. Additional information related to the Company’s utilization of derivative contracts can be found in Notes 1 and 15 of the Consolidated Financial Statements.
Financial instruments and other instruments
Table 13 presents the carrying value and the fair value of on and off-balance sheet financial instruments.
Fair value is determined using the following methods and assumptions:
- The fair value of short-term financial instruments approximate carrying value. These include cash and cash equivalents, accounts and other receivables, and other financial liabilities.
- Securities are valued at quoted market prices, when available. When a quoted market price is not readily available, alternative valuation methods may be used.
- Loans are valued by discounting the expected future cash flows at market interest rates for loans with similar credit risk.
- Deposits and certificates are determined by discounting the contractual cash flows using market interest rates currently offered for deposits with similar terms and credit risks.
- Long-term debt is determined by reference to current market prices for debentures and notes payable with similar terms and risks.
- Derivative financial instruments’ fair values are based on quoted market prices, where available, prevailing market rates for instruments with similar characteristics and maturities, or net present value analysis.
Details of each component of the financial instruments are contained in the various related notes to the Consolidated Financial Statements.
A description of the material risks and management of the risks associated with the various financial instruments are contained in the Consolidated Financial Position, Consolidated Liquidity and Capital Resources, and Off-balance Sheet Arrangements sections in the MD&A.
Table 13: Financial instruments
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