Q3 2019 Earnings Call
After the speakers speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. If you acquire any further assistance. Please press star zero. Please be advised that today's conference is being recorded I would now like to hand the call.
Over to your speaker today can Anderson Deputy Senior Vice President Investor Relations and group Treasury. Thank you. Please go ahead.
Thank you Charles Good morning, everyone. Thank you for joining the call today, a link to our like webcast and published information for this call.
On our website intact Si dot com wonder be investors.
Before we start please refer to slide two for cautionary language regarding the use of forward looking statements, which form part of this morning's remarks.
Treat for a note on the use of non <unk> financial measures unimportant note on the drugs.
The nation used in this presentation.
Joining me here in Toronto today, our children the more seat.
Let me markets CFO , Darren Godfrey SVP of personal line Alain Lazard SVP of commercial line.
Rick Barbel SVP of claim we will begin with prepared remarks, followed by Q1 night with that I will turn the Cold War CEO called Brendan.
Good morning, everyone.
Thanks, Ken Thank you for joining us today.
Last night, we announced strong third quarter results with net operating income per share increasing 18% to $1.91.
Our underwriting performance improved in both personal and commercial lines to deliver strong combined ratio at 92.3%.
Favorable market conditions continued in the third quarter with significant great momentum across all our lines of business.
Topline growth accelerated to 11%.
With double digit growth on both sides of the border.
In Canada.
The hard market is not a surprise on the back of estimated industry.
Are we running below 4% in the 12 months to June 2019.
We continue to outperform the industry or are we by over 800 basis points.
We're exceeding our 500 basis points outperformance target, but our focus is firmly on returning operating <unk> are we to the mid teens.
So let's look in more detail at our results by line of business starting here in Canada.
Personal auto premiums grew 12% is significant step up from the 6% were recorded in Q2 and 1% into one.
Growth was again fueled by rate increases in was bolstered by a 2% increase in units in the quarter as our competitive position continued to evolve favorably.
The combined ratio improved 5.6 points from Q3 last year to 93.4% our best third quarter performance in auto for six years.
The underlying performance was excellent on the back of lower frequency and substantial rate increases.
Our actions in auto or working quite well.
Market conditions remain hard the industry grew north of 8% into first half of 19.
We saw further rate increases across the country in the third quarter.
Our focus remains on portfolio quality.
We're well positioned to capitalize on market conditions and continued to grow personal auto at a mid ninetys combined ratio moving forward.
Personal property premium growth also accelerated to 8% what rate increases and improving unit growth.
Combined ritual 89.1 included lower than expected cap losses, but close to four points of above average non cat weather losses.
The actions we've taken over time in property I've been successful.
While we can anticipate some quarterly fluctuations.
The fundamentals are strong and property is positioned for low ninetys performance moving forward.
Since then what our five year track record.
The industry in this segment grew in excess of 6% in the first half of 19, and we expect growth to continue in this range in the coming year.
Looking at commercial lines in Canada, all segments contributed to the topline growth of 13% in the quarter.
We saw double digit rate increases and continued strong your business and renewal.
The combined ratio of 91 eight were solid despite lower than expected prior year development.
The fundamentals in commercial lines are very good and rate increases are continuing to flow through the system.
The industry outlook for Canadian commercial continues to improve and we expect the current hard market conditions to sustain upper single digit too low double digit industry growth over the next 12 months.
We're positioned for growth and expect to run this business that our historical low ninetys combined ratio.
Moving forward.
Turning to U.S. commercial so premium growth in the third quarter with strong 10% on a constant currency basis.
With over 20% growth in the segments not undergoing profitability improvement.
The combined ratio up 95 nine.
Include some increase claims activity, which reflects quarter to close quarter fluctuations, which can be expected the year to date performance at 94.9% that's been drag by weak performance in lines under profit improvement.
After careful review these businesses effective July 1st.
We took the decision to exit the health care segment.
Which represent approximately 5% of our animal premiums in the U.S.
Pro forma the year to date combined ratio in U.S. commercial was 92.8%.
Keeps us on track to achieve our goal of sustainable low Ninetys performance by the end of 2020.
The U.S. market, it's also evolving in our favor with hardening conditions no evident across a number of lines.
We expect the U.S. commercial industry to grow at a mid single digit freight in the coming year, and we expect strong growth to continue into profitable segments.
Our portfolio.
Turning to strategy well, we've been successful in delivering on our financial objectives over the past decade.
And our aim is to deploy strategies to sustain this performance ended the cade.
Good.
During the third quarter, we advanced meaningfully in my view, we deepened our presence in the supply chain.
With the acquisition of onside restoration, which closed on October 1st this is a big move to improve customer experience, while capturing margins in a business, which helps customers gets back on track.
In August we also reached an agreement to acquire boat.
Guarantee company of North America, and Frank Cowen <unk> Company.
With this transaction, we hit a number of strategic objectives, we bolster our Canadian leadership position and add new products catering to high network individuals.
We enlarge our north American specialty platforms on both sides of the border and segment a top six position in the attractive Shirky segment in North America.
Frank Cowen and company, we acquire and EMG platform manufacture and distribute specialty insurance products in Canada.
Which comes with a stable stream of distribution earnings Frank Cowen also expands our presence into the public entity space in Canada Especial T., we already know well in the U.S.
Most approvals I've now been received and closing is on track.
For before yearend.
[noise] transition planning with the guarantee and Frank I wouldn't teams is already well underway.
The financial merits of these transactions are also compelling interview with each delivering and I are in excess of our 15% threshold together, we expect immediate noise accretion.
Increasing to mid single digit within 24 months.
So in conclusions results in the quarter were strong and the fundamentals continue to improve in all lines of business.
We're focused on portfolio quality, while taking advantage of the momentum we see in the current market.
Our competitive position also continues to improve with strong third quarter performance.
We're on the path to return operating or are we to our historical mid teens level.
We're no posting double digit organic growth and improving market conditions at the same time with bolstered our earning power further with measured and strategic capital deployment.
We're maintaining a strong balance sheet and stand ready to deploy capital should further unfortunate these arise.
So we're well positioned to exceed on our financial objectives to beat the industrial or we by over 500 basis points every year and grow net operating income per share by 10% annually overtime as we have in the past decade.
With that I'll turn the call over to our CFO , we must cut.
Thanks, Charles and good morning, everyone.
We delivered strong net operating earnings of $277 million in Q3 up 17% from last year, driven by premium growth higher underwriting margins improved distribution results and benign weather.
Underwriting income was up 30% over last year to 198 million driven by strong performance in Canada, where we delivered a 91.8 combined ratio.
Net investment income grew 7% over last year to $146 million driven by an increase in assets under management and marginal year over year yield improvement, we expect full year net investment income to increase by about 6%.
Distribution EBITDA and other income grew 37% to $56 million as hard market conditions are fueling higher broker commissions and better margins.
In addition, 29 team continues to be a strong year for broker M&A with a 25% increase in transactions completed year to date and they robust deal pipeline.
We expect full year 2019 distribution than other income to grow north of 20% versus 2018 I.
I will provide further guidance on 2020 expectations during our Investor day on November 19th.
Let me provide some additional color on the underwriting results beginning in Canada.
Personal auto growth of 12% was fueled by written rate increases of 8% in hard markets.
This should drive earned rate growth north of 7% well into the second half of 2020.
In addition, our competitive position in auto is improving as evidenced by a return to unit growth for the first quarter in almost three years.
Auto profitability was solid in the third quarter at 93.4%.
Even after adding one point of favorable seasonality.
Prior year development was muted in the quarter and we expect it to remain muted in the near term.
Overall with strong topline momentum and sustainable profitability, we are well positioned to drive profitable growth and auto moving forward.
In personal property written premiums grew by 8% would rates up 5% as expected with auto unit growth accelerating our bundled products are also bringing benefits to personal property.
And this line of business. The combined ratio was strong at 89% as low cat levels were partially offset by non cat weather and fire losses.
The Canadian expense ratio was lower at 27.8% as we continue to manage expenses carefully and benefit from growing peer premiums. We expect a full year expense ratio to be inline with our year to date figures.
Turning to U.S. commercial the underlying loss ratio of 58.1% deteriorated 1.1 points driven by large losses and if you businesses. This is not a concern I specialty lines profitability can fluctuate quarter to quarter.
On the non operating side, we incurred $44 million in pre tax equity impairment charges this quarter.
Such impairments do not impact our book value or capital levels as the assets are already mark to market.
A few words on our financial position and the financing of the guarantee and Frank Cowen.
Our balance sheet is very strong as we ended the quarter with a total capital margin of 1.1 billion and an MCT at 195% after repaying $250 million of medium term notes.
This takes our debt to total capital ratio to 19.3% below or 20% target.
Our Q3 capital position excludes any proceeds from the subscription receipts offering completed in August which raised gross proceeds of $461 million for the financing of the guarantee and Frank Cowen.
The balance of the 1 billion price tag is expected to be finance with a combination of excess capital and bank borrowings our debt to total capital ratio is expected to rise a couple of points above 20% at close and should be back to 20% in 2020, leaving us in good shape to capture future group growth opportunities.
A quick reminder of value creation expected from the acquisition.
We expect to shave 10 points from the guarantees three year average combined ratio of 98% over three years, we see four areas of improvement.
Better underwriting and data driven risk selection.
Claims handling and supply chain practices.
At least 20 million an expense savings and optimization of the reinsurance programs.
The guarantee from Cowen and onside represent highly strategic synergistic and financially attractive transactions for I have seen.
In aggregate the are expected to deliver mid single digit likes accretion by 2021.
Before I conclude there are two points I would like to cover on weather.
Firstly read the point than a year, where we usually reevaluate our view of annual cat losses.
Our annual estimates reflect a longer term view of trends as well as our premium base and acquisitions.
Reflecting these factors, we're raising our annual cat expectations to $300 million per year.
We continue to expect approximately 75%.
To impact personal lines.
And we would expect about one third of the annual estimate in each of Q2 and Q3.
Secondly.
The cost of the heavy when the rainstorm last weekend and Central Canada.
It is expected to slightly Ics that exceed the catastrophe level, we recorded in Q4 2018.
As usual our troops are on the ground and are doing a great job to get our customers back on track fast.
In conclusion topline is clearly showing strong momentum I know I've, yet to see the full impact on earned premiums.
Earnings are solid on both sides of the border with auto showing strong signs of sustainable profitability.
Book value per share increased almost 3% in the quarter and we are on the path to return operating are are we to our historical mid teens level.
A good brute proof point is if we annualize the operating are we in the third quarter, we are north of 15%.
We are well positioned right now both from a top line profitability and balance sheet point of view, we stand ready to deploy capital as opportunities arise sweats further value for our shareholders with that I'll return the call back together. Thank you do it in order to give everyone a chance to participate in the queue in a we would ask you kindly limit yourselves.
Two questions for first time after time at the end you can certainly re queue for a follow up Ocharleys, we're now ready to take questions.
I will ask a question. Please press star one telephone keypad. The first question comes from John Aiken of Barclays. Please go ahead, Sir your line is open.
Good morning, just wanted to get a little more color on the U.S. commercial operations, we've seen some pressure on the contribution last couple of quarters and on a year over year basis was hoping that you.
You could talk about what's happening on the net earned premiums because that's being flattish over the last couple periods and also you talked about higher claims impacting the combined ratio, but my understanding is with the with the health care being pulled out it actually looks like.
The impact on the quarter was a little bit more damaging then just the two points. If you give some color around what was happening on those higher claims and appreciate it.
Yep.
The performance of the U.S. operation nine months in.
Is around.
94 nine.
Percent, that's including healthcare I think if we strip out elder care, we're at 92 eight.
And well I'll wait in my mind towards low Ninetys combined ratio performance by the end of 2020.
There is fluctuation from quarter to quarter.
You know, it's it's a a business that.
It was special TNS, a number of segments, but overall not or not.
Big issues, there as far as I am concerned I think we're on track I think there's a number of lines that are under profitability improvement and there was good progress being made there and I think in healthcare.
We didn't see a ways to low ninetys performance.
In the mid term and we've decided to move away from it all that I need to give a bit of perspective.
On the healthcare decision and the U.S. performance in general.
So maybe just a bit of contacts on health care decision. That's a line of business unit that was already undergoing some forms of correction when we bought onebeacon two years ago. So fundamentally.
Plan was to really exit long term care large facility and everything and when we look at the that at the time, we really felt that we were able to bring the line of business in the low Ninetys I would say 20 months in the plan. It became clear that the action needed would be a lot more than what we're doing right now.
And I would think you know and we were seeing changes in the healthcare environment.
Plan was really to focus on in the off risk classes single physician I'll I'll care outpatient care facilities small one and what we're seeing is a lot of physician are leaving private practice, joining larger Williams organization.
Hospital are pushing acute care treatments into small medical facility for outpatient so all of a sudden those were picking up larger exposure that are normally in Austin at though and we were shrinking the portfolio because of all the action. We were thinking we're not a large player in that field. So looking at all of that you know results that needed more actually.
In portfolio that was getting smaller and the structural changes happening it became probably cure report Ross that the best option. We had was to really sell the renewable right, Okay, and basically exit the business unit and Thats, what we did in September .
Maybe a comment on the net earned premium for the quarter when you compare the quarter 2019 to 2018.
See flat, but that's because in 2019 Theres no health care and in 2018 18 Health care was included so net earned premium is really picking up on the road were seen yeah and the other point it would make about net earned premium is that in specialty lines that all products are yearly products that are.
Even the earn true month, but if you compare quarters.
Two two quarter you see that a Q1 over Q1 was 314 to 353.
Two over Q2 was 340 to 343 and.
Two tree over Q tree is flat and if you go back in 2017, you see a progression as well despite.
I think exited.
Okay, and I would echo Tom's comments about the volatility of the results no like quarter to quarter to can fluctuate for large losses and everything I think the more relevant number is the pro forma number excluding health care of 92.8, I think thats, a better view of where we are in terms of profitability to give you the comparable.
Number for the full year 2000 team. It was 93.3, well I think we're taking the actions that are necessary to bring us into low nineties.
Alright, thanks, Thank you.
Yes. Thanks, just one one further out one follow on question, if I may not going into specifics, but are there any other the lines that are under profitability improvement that may be under review in the future to exit.
So I mean, we have a tree lines under review at the moment and the work that's being done in each of those three lines by the business units leaders running those those three lines is in my view impressive and taking advantage of the market than which we operate and I have.
Great.
That said these lines will be back in the.
Low ninetys performance in the near to midterm. So no. The answer is no great. Thank you I'll re queue.
The next question comes from Jeff coupon of RBC capital markets. Please go ahead. Your line is open.
Morning, Jeff.
Yes, well on your line is open.
Hi can you hear me now.
Yes, Yes, hi, Okay. That's my first question was theres been a little bit more chatter and NBC about potentially looking at.
At some point moving to more of a no fault system like whats in Ontario, and I'm just wondering from your perspective from in tax perspective if.
We didnt have IC BC and existence is there one province is kind of set up that you think.
It's better for you.
So the best solution to be seems to have the private competitive marketplace and whether you have a no fault product.
Or a toward a product in my mind, you would get better outcome for BC drivers, there's absolutely no doubt.
In my mind, there I think that the no fault product for both.
Car repairs and bodily injury.
Can be a very effective product provided that it's not overly.
Rich so us to invite.
Third parties to take advantage of the richness of the product and so I think no fault had very good characteristics provided that the coverage offered to two drivers is one that is commensurate with the actual need of the drivers as opposed to being overly generous as we have.
I mean, historically in Ontario, and I think.
That some of the reforms that are in the pipelines.
Our ones, where you know.
Governments across the line or trying to.
Take abuse out of the system and really rightside or rightsize.
The coverage, that's being provided and increased care for drivers.
So I think boats.
And work in my mind that have proven to work in a number of provinces in Canada I don't think no fault is the kind of set to automobile insurance issues. It's a calibrated one could get the job done but far more important than my view is choice and private competition.
Okay, Thanks for that and to stuff on the on sides acquisition I.
I know, it's obviously a likely recently small acquisition.
But if this is sort of thing that that you might we might see bit more evolution in terms of a little bit more vertical and vertical integration and then also.
To the extent that onside other insurance customers leave I'm, assuming that would get factored in with it kind of the two year pay out that youve stretching for the transaction.
Yes, so I think on the on your vertical integration question.
You look at it from a strategic point of view.
Over 10 years, we've outperformed the industry are we by 650 basis points, a third of that came from.
Leveraging our size in claims a big portion of that strategy is about getting customers back on track ourselves to the greatest extent possible. It means in practice that we're managing ourselves 99% of claims as opposed to using third parties.
We have the preferred provider network.
Were more than two thirds of our repairs both in hone and in cars.
Our done.
Were 70% of the defense work of our customers is done by our legal team of close to 400 people.
We've done a lot few years back the number of service centers and automobile insurance, so and no.
Our perspective is that.
When it comes to home repairs, what's very clear.
Is that.
When we look at what customers are telling us. The restoration process is there a year, where there is the biggest upside from a customer experience point of view.
The other key observation there is that there's a big capacity issue because the level of natural disasters as increased overtime.
So we see a couple of things one big Unfortunately to improve customer experience.
In.
And home restoration and too big of fortunate to build the business.
In a space, we know that's relevant to our core manufacturing business, where there is a big capacity problems.
At the moment and so should one expect to see more.
Of that I'd say, absolutely certainly enroll home restoration and again the more we can get involved in helping customers get back on track with a second to none experience. The more will do well that's Patrick to give additional color I recognize I sort of.
However.
Points, but go ahead, but what per se I think you're right on that point.
Yeah, maybe additional comments you were referring to other clients of on side. So far it's going well, we all the improvements were making by putting the two operations together to design a better process for clients is not only for arland clients as well all the ones like line, there's a lack of get best in the market then.
I think with on side would bring additional capacity. So we don't expect and we're happy to continue to service drawn side all of their customers. Yes, I mean, it's one of our objective to make sure that.
Onsite as the biggest and best restoration company in the country.
And that is to the benefit not not only of.
Impacts customers, but every other customers of inside onsite, that's very important to us.
Okay, great. Thank you.
Your next question from many of Goldman of Cormark Securities. Please go ahead. Your line is open.
Hi, Good morning question on the guidance on Cat losses, and if you could just give more detail in terms of.
What do information went in to a.
Expanding that guidance is there is their new data that you have available.
Is it based on just some more recent history that you're seeing trends increase.
Well that think to give his perspective, because he's the one managing the cats.
Yeah, we don't look at those trends on the in the short term thats can fluctuate WSE from one quarter to the other even on the one year to the next so we'll look at each gas and we estimate to return for kids will look at.
Next then the period of time five to 10 years and we'll make models based on that I would say that the increase from 275 to 300 reflect some of that but mostly.
The organic and the Aquas the organic growth and.
Yes.
That's helpful and then.
Just another question just in terms of the high net worth marketing Canada.
So one of the rationale for the recent.
And acquisition I'm, just wondering how would you define high net worth and.
How does this change your market share in that in that vertical.
So.
We're not really.
In that vertical quite frankly, and we've defined.
Our appetite based on a historic anyway space on the size of your house and how much your house would cost to reconstruct and.
Past $2 million, a $2 million to $3 million, we really think that this is how the out of the expertise and the platform that we've built.
Already and so anything above that this is how we would define that segment. It is a rudimentary.
Finish of the segment, but it certainly appear one and we will build.
When we close the transaction unit.
I will be entirely focused.
On that segment.
With that dedicated appraisal process dedicated claims support.
Yet benefiting from our data our pricing risk selection, our claims expertise and our scale and we're looking forward to tap into what we think is a market that is under served today.
Darren anything you want to add no I think that said I think we're positioning ourselves to be a meaningful player in that space.
And shell says there's not a lot of plays currently in that space and we're ready to to tackle that space and be a leading player.
In the high net worth just as we are in the retail market as well.
Because we chose.
Historically not to clean that space, because we felt we couldn't provide.
A second to none experience no I think we are much closer to be able to do that and we'll put our energy into getting there and the near term.
How big is that market in terms of premiums.
Yes so.
There's a wide range of estimates as to how big that market is.
And.
It is a low single digit billion dollar market.
Thank you.
Your next question comes from Doug Yes.
<unk> capital markets. Please go ahead your line is open.
Good morning, just first question on the prior year Reserve development, 0.4%.
Well below what you've targeted 1% to 3%.
I think it looks like there's been some pressure and the commercial side and just hoping to get a little bit more detail on that.
Yes, it is dug a little bit below 1%, which is that the lower end of the range and I think we've said in the current interest rate environment.
One should expect us to be in near term at the lower end of that range and indeed point for us below that so you're right.
There's a caution on our part and automobile insurance, we've signaled that before.
And you're right that in commercial lines theres been a bit less few why the than there has been historically I'll ask I like to shares perspective on that okay. So so what happened in the quarter is as we took a basically a bit more prudent and stance on some of a commercial auto in trucking accident year, which led.
Just to revise ultimate loss ratio by one point, it's very minor adjustment on some accident year commercial auto in trucking, which in total in the quarter amounted for about four points. When you look at it on a yearly basis, what happened is mostly what's affecting the people.
He is a bit lower catastrophe a bit more large losses in the pure white view, which can be very much fluctuation in lumpy and roughly about a point that's coming from last quarter Reserve review and I would say this is really getting a bit more conservative on some of the accident year being a bit more prudent so nothing.
Andrew there, but that's it.
What caused you to be more conservative I mean, this is long haul truck in I would imagine as this stuff thats going across the border just curious.
I think we were looking at you know a different methodology art you know we were seeing a bit more claim activity on the trucking side on some aspect there and when you look at the ultimate you're always faced with a range. Okay. So all our range we were pretty much in middle of the range I think right now we would be.
In my qualification bidding being a bit higher in the range closer to the.
Higher point.
It's an assessment.
It's an assessment of one segment of of commercial auto done in one quarter.
And I think that theres not an emergence of a trend there I don't think.
No that makes sense and then second just personal property.
It looked like there was elevated buyer lightning your combined ratio was good but it looked like there was elevated fire losses I think there is a similar issue last quarter.
Is there an issue here, just hoping to get a little more detail. Thanks.
Doug I mean, we continue to watch the fire side and you rightly pointed out we've highlighted that in past quarters.
Our position today continues to be like last quarter. It's it's a lot of noise. When I look at fly a sort of problems to province summer upside down and its fluctuating from quarter to quarter. So do I, we don't see an underlying trend we've done an underwriting we view of many of our large losses.
We don't have any concerns right now from a underwriting standards stem viewpoint.
This was not a frequency issue.
In the quarter itself more just some movements on the severity side.
So again, what seem very very closely but no underlying trend that concerns us at this point in time.
I think in the quarter, Doug if just trip.
The cats. This line is running at about 85, and there's we think four points of non cat weather.
In their beyond historical average what gives you a bit of visibility on the level at which just line is priced.
That's helpful. Thank you.
Your next question comes from Michael So lots of Morgan Stanley . Please go ahead. Your line is open.
Thank you and good morning.
Just a follow up on that last question reserves. So.
A quarter. After you took a auto reserve charge anything.
Three months later that makes you think that.
Maybe overshot that last quarter, and then I guess drilling down kind of can you talk about what you're seeing in the personal auto loss trends.
Three months.
In what we've seen is certainly an environment that gives us.
Very good comfort and in terms of where we closed Q2 is what I'll say.
When I look at the trends in and personal automobile.
The main trend in my mind is the fact that.
Frequency is down a fair bit I mean, it's down year to date.
5.3%.
In personal auto.
Down in the quarter, a couple of points and you're seeing on the other side of the ledger rates.
At about 8% clip now there's mixed change and one should not subtract or add those two things to figure out where the combined ratio is going.
But the big trends in my mind as the frequency keeps coming down.
And.
Partly driven if not largely driven by the actions we've taken.
We're in an environment, where in the upper single digit a rate increase Darren I think the only thing I would add to that shell is.
Now paid activity continues to be relatively benign as well.
So thats another another important point that we're watching very closely yes, I think we've highlighted thats a great point, there and we've highlighted that in Q2 the paid us very.
Steady.
It's in the past.
A few years, it's been our caution was driven by the case activity.
And I would see that a tree monson, we're seeing actually better activity on that front as well and the paid remained stable.
Okay. Thank you. That's that's helpful on I guess sticking with personal lines in general.
Anything else.
That would drive the expense ratio improvements from here besides increases in the on premium.
Well, let's we share his perspective on the trajectory of the expense ratio, when and where we stacked against the market maybe sure. Thank you. So.
As you know we managed expenses globally for all lines of business and are benefiting now from the premium growth certainly that's a positive impact when we manage those expenses were careful to hold back as much as we can trying to leverage productivity improvements and then reinvest on the other side in technology.
In AI and other initiatives that we want to pursue actively were when we look at ourselves and compare to where it to our peers in the industry.
We clearly are successful at this we are outperforming on the brokers side of the business by by three points on the expense ratio and when I look at the direct business were actually outperforming the industry.
In the seven to 800 basis points. So we're successful there and then if you add the premium growth to that that's even.
Improving the ratio itself. So it's on both sides its premium growth plus managing the expenses that has driven this.
The low expense ratio in the quarter and we're going to keep pounding on the on managing the expenses in the same way going forward.
Your premium growth will just.
Make it a bit better I think there are there are a number of powerful structural trends that that.
We're focused on and here all the progress we're making in distribution.
As a separate source of distribution earnings we need to recognize that thing it will be above 200.
Million.
Next year or this year.
If you look at our core manufacturing expense ratio.
In the broker channel the expenses we control.
Is less than 8% and we're continually trying to improve that performance, but in fact insurance very efficient operation on the distribution on the direct side of things.
There's a big drive there to drive our expense ratio meaningfully below what it was historically, we've made really good progress on that point.
This should help overall our expense ratio in aggregate and then across all operations both.
Brokers and direct.
We're deploying new platforms, which should help us make make us more efficient overtime.
Okay, great. Thank you for the color appreciate it.
Your next question comes from Paul Bolden of CBC. Please go ahead. Your line is open.
Thank you good morning.
I wanted to ask your question regarding the potential longevity of this.
Rate cycle, and you've commented that you expected to continue for another 12 months center benchmark at sort of 10% ROI. So I guess my questions are where do you think.
Cost inflation is running across the lines of business.
And how much rate would it take for the industry it to roughly 10% or are we.
So that's and across all lines of business. If you can start we yeah.
It's it's so hard one.
What that's a good one we'll think about it come back on it the investors day.
Okay.
Second question would be a number of U.S. commercial line insurers have.
Talked about last pressure from litigation and settlement.
Wondering how you're thinking about.
Chris can if you're seeing similar pressure I guess specifically.
In the U.S. business, but maybe commercial just more broadly as well.
Yes, so I think that many people talk about.
Inflation in liability.
In the recent past and.
Quite frankly, this is a surprising to us because.
We have been focused on inflation in liability.
In Canada for.
For many years, but in particular in the last three to four years, where we've shared with investors that there was a fair bit of pressure coming from the fact that psychological damage.
Concussions.
PTSD and chronic pain was sort of.
Envelope far more often than before and as a result drove.
Liability inflation, we've also talked about the fact that theres been.
Over the past make it three four years greater representation of lawyers.
On on on file so that inflation is not new and one we've been fighting for for many years into us.
Look we have been exposed to the U.S. now for two and half years.
And it was very clear to us that inflation.
In casualty was an issue before we actually make the acquisition. That's why we've taken a number of measures to protect ourselves that's why we have.
Gone out of lines of business.
That we felt from a casualty point of view.
At an exposure that was really difficult to price and that's why a big portion of our our policies are actually claims made which reduce the tail that is exposed to liability and as you know we bought protection also for the past and relationship with inflation. So yes, there's answer.
Question I'm surprised that.
Talked about now at something you because we think it's been percolating in the system for many years and very much reflected in the actions we've been taking overtime. If it if it helps sustain if this sort of recognition that there is inflation and liability.
Lives a harder markets then we're all for it.
Got it okay. Thank you for your answers.
Your next question comes from Jamie slowing of National Bank Financial. Please go ahead. Your line is open.
Yes. Thank you.
First question is just related to the strong premium growth that we're seeing and how that's expected to impact the underwriting leverage in the business do you see room for that to expand into what level do you think that could expand to within the next 12 months.
Listen we at this point I don't see that expanding.
You know significantly we're running at the end underwriting leverage of 1.5, roughly I don't see that expanding meaningfully were careful that we our capital position is strong and able to absorb the growth.
But not necessarily a significant increase increment in the deleverage itself and the way I think about Leverages read a relationship. If you. If you think about how leveraged and evolve overtime naturally the relationship between the speed at which you grow in the earnings you're generating which helped.
Your book value grow when I think that what we're aiming for in terms of of.
Our a week.
You know is above the speed at which were growing.
As an organization of course, we're paying dividends.
The exercise, but we feel like that capital generation.
The organization 10 can sustain.
The growth, we're seeing a and the topline the other thing is a big chunk of it as rate driven.
Okay. Thank you and second question.
It's kind of on the most on the or are we topic.
Charles you've talked previously about starting work on Monday morning, with an 8% or we from non insurance operations essentially.
Given the growth and distribution.
There is there a shift in strategy or is there a.
Sort of unwritten strategy to increase that 8% through distribution and what level do you think.
I would be reasonable to think about.
Yes, that's a good question.
There's not a shift in strategy, but there are side benefits.
Two hours strategy and all that we give his perspective on that.
So thanks for the question as you point out its 8% Monday morning, as we start the weak and.
I think the view here is to get that 15 or mid teens are we more stable.
We'd like to pushed at 8%.
We would be aiming to take it as as high as 10% overall and so there are sources of earnings that we can add to the investments to the distribution.
The increase the.
Monday morning are we I think those are initiatives, we'd like to take and.
So it is you.
You may say unwritten, but it's clearly in our thought process to strengthen the the base of the are we.
I wouldn't call to see a shift.
Strategy I think we.
We've said that we would build.
Very strong distribution platform benefit is that you generate stable earnings growth the reason why.
We're scaling up our distribution has to make sure that we've got scale in distribution to invest in response in technology and put our product in front of Canadians and as many ways as possible and our view is scaling up distribution is the best way to fight.
Fight disruption and when you look at the earning stream we're building.
In home restoration it is counter cyclical.
To.
To the insurance product in property, but our objective there as really to make sure that we raised the bar in terms of the customer experience thats, where providing tap into a market that as the capacity issue and yes add to a stable stream of of earnings but.
It's part of a broader strategy.
Your next question comes from Tom Mackinnon of BMO capital markets. Please go ahead.
Yes, thanks very much good morning, just a couple of questions here.
With respect to distribution income I think losing you said you would expect it be growing north of 20, I assume that's organically because you are adding Frank Cowen to this going forward.
That's the first question just got a couple of follow ups.
So my North of 20 was for full year 2019, just to give a self aware finished a year I have not yet commented on 2020, we're keeping that for Investor day.
Okay and the transaction that's not closed yet as you know we're expecting that that happened in Q4 before the end of the year. So we'll pick it up next year okay. Thanks.
See I think there was some comments about earned rate growth north of 7% in the second half of 2020, we sat with respect to particular line or was that for overall.
Sure I recall, what is with that just with respect to personal auto.
Okay is there any commentary you can give.
On what you're looking for like organically for the entire company then in this regard.
So if we look at all lines of business combined in Canada.
Bear in mind I won't make.
US commercial point, but the best data point I.
I would offer on that is we're writing right now are written rate change.
7.4%.
At the moment.
Across all lines of business.
Into tree.
So.
From that point of view, that's the kind of level, one should expect will be earn.
In in 2000.
Okay. So.
At the personal lines. So I think is north of seven in overall it seems to be north of seven done that and is there any reason why in the you mentioned in the second half would it be lighter than that in the first half.
I think the comment was it would extend all the way to the second half so nothing to say that well okay.
Okay. Thank you.
And then.
With respect.
In corporate Theres, a negative 15.
Are there is an expensive 15, it seems to be at least twice what you kind of run at.
Is there anything funny that happened in the quarter with respect to this other expense that you have in corporate.
I wouldn't call. It's funny I would say two two nonrecurring items, both less than 5 million Bucks. It just happened to.
I've been here, so I wouldn't read too much into that.
Sure.
Nonrecurring items essentially that hits our.
Our results in Q3, but I would I would take it. This this this can be lumpy in the in during the year.
And I would I would look on a year to date basis as a bit of reference.
Okay.
That's it thanks.
Thank you. Your next question comes from Meyer Shields KBW. Please go ahead. Your line is open.
Great. Thank you.
I wanted to go back to healthcare, just because I'm a little confused.
You're talking about the issues that are impeding the improvement to low ninetys those issues like with the.
Sufficient joining bigger practices those sounds like issues in terms of premiums as opposed to losses am I reading that correctly.
I think we have to read it is what we were we were all the plan on the health care to bring it back to the low ninetys was to exit really.
Exposed class going to.
Gross classes, which means outpatient care facility small physician situation and all of that and what's happening in the structural.
Healthcare system in the USA is these tend to a bit does appear there's less and less private practice physician, they're moving into larger organization and also people are spending acute care patient to outpatient facility. So all of a sudden dose facilities that were basically very small class.
Does that really low exposure are now are picking up a hospital type exposure. So we felt that this was a bit the market. We were going after was a bit shrinking disappearing and that made it very difficult for us to get that line of business back to the low ninetys and would have cost a lot of volume. So we were getting smaller and smaller.
In smaller so at some point you have to figure out that it makes more sense to sell the renewal rights and get out of the business competes or view as exposure was changing in the facilities, which we thought were low risk basically and so.
Difficult to think that we could run the business and the low ninetys and.
Liability associated with those facilities is really hard to price for.
Okay. That's helpful. Thank you so much second question and I don't know if its related but there was about 15 million of ceded adverse development was that helped build related and can you. Let us know how much limit remains on the when do you can AIDC.
So I guess, we have never provided.
The exact figures on DTC, we what we're saying as there's there's plenty of room on DTC.
At this point in time, particularly as were further into the transaction.
So there's nothing specific to.
To that I think the he was the there's still quite a bit of room on that.
But so it is fair to say do that.
The bulk of the.
AIDC usage to date is driven by the exit of line.
Absolutely.
Okay that is fantastic. Thank so much.
Thank you.
Your next question comes from Marriott Madonna of TD Securities. Please go ahead. Your line is open.
Let me just a quick clarification, you said that distribution income would be up about 20% full year 19 versus 18 now some of the growth. We've seen this year has been pretty strong.
It's possible that I'm not looking at the restated numbers. So when you offer the 20%.
Over the other I think you're doing this is off of some restatements in 2018.
Oh because of the there was there was a reclassification.
Let me just split the rights number here.
Because we moved from the EBITDA remember we were from from the earnings in the past to the EBITDA right and you are you're right.
Just told you the right number.
And yen.
Just to say.
You have another question Merial I'll pick up again.
It's not a huge number I just.
Clearly you're talking about 2019, and I think if you could just clarify when you can either now or another time that you're talking about on restated numbers and then maybe a more general question.
The.
The performance. This year has always been very good and it is interesting to see that every segment is delivering is exhibiting hard market conditions.
So we're working with US Charles is the last time something like this was true was industry. Our OE above 10% do you recall I don't mean, specifically in personal I mean, just generally.
And and what are the conditions that cost something like this to eventually <unk> upsets such a great market, what sort of conditions will drive a change.
So to find similar conditions merial.
You have to go back.
In 2002.
2003.
Where.
The industry are are we dipped I recall to 2.7% a number that that stuck with me and youre sitting today in a market that is sub four or whatever you look at the first half of 19 or 18.
And your in an environment, where the industry, whose heavily invested in fixed income securities as a duration of treaters is sort of seeing not only underwriting pressure from the past that's being corrected, but it's coming at the same time.
As there is a headwind on the investment side of things for the industry and so in my view you have.
Hi, good 12 to 18 months pretty comfortable saying that of industry trying to get out of what is a pretty tough.
Profitability situation.
And so I think there's.
Theres a lot of digestion, taking place had the industry level, where the momentum is still good it's not dissipating at this stage and the asset side comment that I'm, making is one that gives me a certain amount of comfort that.
That there is more of it or less than the system here.
And so what could upset that because it is tough across all lines of business. The odds of upsetting the momentum were seeing in my mind are fairly small.
But clearly in our OE approaching it sounds like Pine This guy now, but in our we're approaching 10%.
Would be the sort of level where.
Sort of hard market could persist is that fair.
I think it's fair, yes, and we're not there so close yet or maybe just a quick follow up then.
Do you see anything from a from a new entrance perspective, like any chat potential change in competition for new entrants and what do you feel like the regulators view on an issue like that is.
The concept of.
Entrance into this market.
I think the regulators I personally fine are quite constructive when it comes to new entrants they're quite constructive.
When it comes to us coming up with new products.
Stuff like you'd be I products that combine both personal and commercial lines. We have found in most jurisdictions across the land in regulated line so automobile constructive.
Regulators, so I think they'd be open to see even though it's super competitive.
They're open to new forms of distribution, especially when consumers respond.
To it I think it's true of distribution it's true.
The of manufacturing have we seen.
Anything of substance taking place hard to say, yes.
You know part of it might be driven by the fact that it's been an environment that was tough to navigate in the past few years and it makes it harder when you went trend to new entrants to to find a niche what we've seen aereo is is what we think should take place is consolidation of distribution.
And we might not call that disruption.
But consolidation of the distribution level is certainly a powerful trend in the industry, one in which we play and lead and I think will will prepare the industry for disruption because it's because I think the.
Vulnerability the industry level is that you got a bunch of subscale distributers.
We'll have the hard time investing in response and technology.
One final just real detail question that you might be best position for the closing of the guarantee acquisition do you see any risk to discuss spill into the new here are you confident this is by the end of year.
You know Mario we.
We had to get for approval.
We have three approval and.
The competition Bureau, being part of of the approvals we've received to date.
With regards to our Prudential regulator US fee, we've worked with them for many years on acquisition and.
The odds.
Have a of having an issue are very very small as far as I'm concerned. So we're doing everything we can to close this sep and.
I'd be very disappointed if it didnt close before yearend.
Yes, we expect a full year next year, yes back.
Well she was extremely helpful as well.
To get the file and tend to move it rapidly for an approval. This year. So we're thankful there I'm just on your first question.
So all the numbers have been restated you might remember to EBITDA numbers pure EBITDA numbers for distribution. So the 20% I referred to is based on the EBITDA figures.
That weve restated for the prior years. So it's you look at 2018 just to be clear, we reported 175 to which I would that 20% for the 2019 estimates I think I was I may have been looking at numbers.
Got it thank you.
All right.
Your last question comes from Michael fill up of Morgan Stanley . Please go ahead. Your line is open.
Hi, Thanks, just a real quick on my own sorry, my own confusion on one more thing on the healthcare.
You.
Got moved into non operating July 1st you gave that year to date ex exit to about two points, but was it into 95, none of the third quarter.
No.
No nothing.
Yes.
Alright, Thank you very much.
Thank you and maybe before we close the a the conference I want to think this unfortunate t. too. Thanks.
And then I saw our SVP.
Commercial lines, who joined us from acts on 2012.
Alliance gave us a heads up I don't know 18 months ago, probably I mean that you were considering.
Retiring and then that'll take place in the coming weeks sees a.
He has been an exceptional leaders leader.
Recognized for his depth and commercial lines as speed.
As an unwavering drive to improve performance.
But more importantly for being very kind and and I want it to tank and I because he has made a huge difference for us for our platform.
Both product pricing segmentation as well as technology.
He of course will remain involved coaching mentoring.
Our leaders and commercial lines as well as a assist us in our expansion and specialty line.
In what I think as a long tradition of developing our succession internally.
Darren Godfrey.
Who you know very well, we'll move to commercial lines to oversee our Canadian operations and continue to build on on our outperformance there.
Darren tremendous track record in personal lines and claims and distribution.
Led the personal auto improvement plan.
So bringing him and commercial lines is clearly a move that will help us deepen our commercial lines knowledge at the top a biopsy.
And and I want to thank Darren for taking up that challenge.
Darren will be succeeded by is that Benshaw.
Who drove a big portion of the personal automobile improvement plan you've seen in the past few years is that it is many investors actually met is I've been in the last year. This was deliberate on our part.
As one of a good number of exceptional young leaders I FC and she will join the earnings call in 2020 and should have plenty of help because out of five people on the earnings earnings call for people are or have been SVP first line. So she should be.
Fine so I want to thank I length for all this contribution and good luck to Darren and you said on that all that I'll turn the call back to Ken.
Okay. Thanks trials. So thanks, everyone for joining us today. So following the call a telephone replay will be available for one week and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial.
Filings are.
Our fourth quarter 2019, those are scheduled to be relief after market close on Tuesday February four lastly, as already mentioned, we will be hosting our investor day on Tuesday November 19 presentations by senior executives beginning at nine am Eastern the event will also be accessible live via webcast than we invite you to.
Visit our website for more details and we look forward to welcome you welcoming you at that event. So that concludes our call for today.
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