June 7, 2000

Industrial-Alliance completed its first successful quarter as a publicly traded company since its demutualization this past February. Financial results were quite positive and profitability and growth were better than general expectations. Earnings increased significantly from the corresponding quarter in 1999; they rose from $0.29 to $0.54 per share. The implied return on common equity was 13.23%, compared to 8.04% for the similar period last year. More importantly, Individual Insurance, Individual Annuities and Group Pensions all contributed to profitability. Group Insurance was the notable exception and this segment recorded its first losses after several years of profitable operations. Management is making a concerted effort to adjust contract renewal rates in order to return the division to profitability as quickly as possible.

The Industrial-Alliance sales force generated solid revenue growth across all business lines. Insurance and annuities premiums grew 18.3% from the first quarter of 1999, life and health insurance premiums increased 13.9%, and revenue from savings and retirement plans was up 25.2%. Individual insurance sales were up 9.3% to $27 million and Industrial-Alliance ranked second in terms of new policy sales in Canada. Individual annuity sales were particularly strong during the RRSP season; several new products were offered and premiums totaled $265.9 million, up 53.0% from 1999. Finally, assets under management reached $13.4 billion by the end of the quarter, an increase of 9.1%. With impressive growth figures such as these, it will be difficult for Industrial-Alliance to remain relatively under-followed by the investment community and undervalued by the capital markets.

Industrial-Alliance’s share price has shown good appreciation since the initial public offering but the company is still cheap when compared to its peers. The company has one of the best disclosure policies in the industry and management seems to have recognized the importance of building shareholder value. Finally, Industrial-Alliance is still quite attractive as a takeover candidate. The company has solid fundamentals, an excellent distribution network and an established presence in Quebec. Industrial-Alliance remains one of our top value favourites and we expect the discount to its peers to shrink as profitability and growth continues.

We purchased Industrial-Alliance as a fundamentally undervalued, small capitalization life insurance company when it demutualized in February of this year. We believed in the company and continued to purchase the publicly traded shares for an average cost of approximately $16. At this price Industrial-Alliance was deeply discounted and, along with other recently demutualized life insurance companies, it performed quite well. As Industrial-Alliance increased in price, we reviewed the company's solid quarterly financial results and raised our target price three times.

While we continued to favour the company, as it broke through $30 we believed that Industrial-Alliance was becoming fairly valued. Unfortunately, liquidity was limited, which hampered our ability to divest our holdings without significantly weakening the share price. Fortunately, an opportunity to realize our gains suddenly presented itself. There was increasing speculation that Industrial-Alliance was to be included in the TSE 300, TSE 200 and S&P/TSE Canadian MidCap indices and in fact, on Tuesday September 19, this was finally confirmed. The stock rose substantially due to index buying and we were able to liquidate our entire position at over $33 per share.

We do not wish to imply that the solid financial performance and share price appreciation will not continue. However, we had made a substantial gain from our holding of Industrial-Alliance and we seized the opportunity to raise capital. Our investment mandate ensures that we have the discipline to reallocate our capital from fully valued investments to other opportunities with greater upside potential.