Q4 2019 Earnings Call
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if you've acquired any further assistance. Please press star zero. Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today can Anderson senior Vice President Investor Relations and corporate development. Thank you. Please go ahead.
Thank you Charles Good morning, everyone. Thank you for joining the call contain.
Linked to our live webcast and published information for this call is posted on our website at intact, that's the dot com under the investors.
Before we start please refer to slide two for cautionary language regarding the use of forward looking statements, which part of this morning's remarks on slide three for a note from the use of non <unk> financial measures and important note on adjustments terms and definitions used in this presentation.
Joining me here in Toronto today of Charles Brenda more CEO.
<unk> CFO, Darren Godfrey SVP of commercial lines, Isabel Gerard SVP of personal lines and Patrick Barbel SVP of claims will begin with prepared remarks, followed by Q1 night with that I'll turn the call to Charles.
Good morning, everyone and thanks for joining us today.
Last night, we don't strong fourth quarter results with net operating income per share.
$2, an eight cents.
It's an increase of 8% driven by strong underwriting result, and growth and distribution earnings.
For the full year net operating income per share was up 7% to $6 in 16 cents.
And brought upbringing <unk> are we to 12.5% with an 11% increase in book value per share.
[music] topline growth was 12% in the quarter, driven by 13% growth in Canada, and the solid 5% in the U.S. after exiting healthcare.
The fourth quarter combined ratio was 91 five with solid performance on both sides of the border U.S. commercial post the 88.8% good indicator of our progress toward sustainable low Ninetys performance.
The combined ratio in Canada was 92% what strong underlying performance.
In Canada, we continued to see hard market conditions. This comes as no surprise.
Weak profitability across all lines remain an industry challenge.
True Q3 2019.
The industry posted a 12 month, our we have 4%.
As we started to take action over three years ago.
Our our we outperformance is running at 790 basis points I'd be a few tree.
Well above our 500 basis points objective.
Our focus is on returning operating <unk> are we to the mid teens.
Let's now look at our results by leather business.
Starting here in Canada.
So it was a good quarter for personal auto premiums were up 15% driven by rate mix and customer growth.
Combined ratio of 96, five was our best fourth quarter performance in five years.
Driven by earned rate increases and the success of our claims and segmentation actions.
Our auto business is well positioned moving forward were growing at double digit.
With a strong focus on quality.
And sustaining mid Ninetys performance.
[noise] personal brought premiums were up 9% driven by rate increases as well as customer growth.
The combined ratio was solid at 82% spiked up losses above historical fourth quarter averages.
For the year that combined ratio was 92 five so as we've mentioned before this segment should be operating sub 95.
Even in bad years, and 2019, we think it was a good example.
Meeting that objective and commercial lines continued momentum from rate increases in hard market conditions drilled 12% premium growth in the quarter combined ratio of 93 five.
Included approximately seven a point of losses from catastrophes.
Looking at the full year 96 combined ratio is not good.
Both cats and large losses were elevated the 19, however, the fundamentals and commercial are strong and we're maintaining our focus on underwriting quality in favorable market conditions.
Well there maybe some bumps along the road. This business is very well positioned for loan on his performance.
Let's turn to the industry outlook for Canada, It's really an auto we expect to see upper single digit industry growth.
In the coming year as weak industry profitability continues and capacity remains tight.
In personal property, we expect the challenging weather will continue to drive mid to upper single digit growth.
In Canadian commercial lines growth into double digits range can be expected as the industry continues to struggle with underwriting profitability.
Overall, we expect the hard market conditions in all segments and kind of up to continue until the industry's profitability has evolved closer to its historical 10% or are we level.
We moved to eat or U.S. commercial segment.
Despite the exit from the health care business premiums grew a solid 5%.
Our action plans to improve the profitability are showing progress.
Combined ratio was quite strong at 88.8%, even with favorable seasonality in the quarter.
We're executing well in the U.S., we're on track for sustainable low Ninetys performance by the end.
20.
The market continues to harden, we expect mid to upper single digit premium growth for the U.S. commercial industry over the next 12 months.
If we turn to strategy so as we outlined at our Investor day, we've been very successful in delivering on our strategies and exceeding our financial objectives over the last 10 years.
And 19 was another strong year with progress on many fronts.
We've advanced our customer driven digital transformation, adding many new features and functionalities to our digital and mobile platforms. We continued to bolster our data and risks that extra and capabilities for meaningful investments in AI. We see strong evidence that these investments will support the achievement of our funnel.
Actual objectives in the next decade.
And with the recent acquisitions.
We've advanced many pillars of our strategy the guarantee and Frank Cowen added to our scale in Canada bolstered our North American specialty platform and opened up and you pipeline of distribution earnings.
On slide restoration, we began a push to go deeper in the supply chain.
The improved customer experience capture margins and expand capacity in that space.
For all Canadians.
Oh this progress would not be possible, what our greatest asset our people for the fifth year in a rule. We were named as one of Concentrix best employers and were again recognized as a top employer for young people.
Our employees are the funds for forefront of everything we do I don't want to thank them for another outstanding year, they're really make a big difference.
Well its solid year behind us the strong balance sheet and the favorable outlook for capital generation, We're pleased to increase our quarterly dividend by 9% to 83 cents per share.
Continuing our 15 year track record of annual increases moving forward, we're firmly focused on delivering on our strategies and financial objectives ended the Kid ahead.
That begins with for near term priorities first we aim to capitalize on the current favorable market conditions.
Both sides of the border.
Second we'll work to deliver on the unfortunate these brought by the acquisition of guarantee and Frank Cowens platforms.
Sure well continue to advance our customer driven digital transformation.
The Denver best in class experience to our customers and lastly, with the underwriting improvements we brought to our North American specialty platform. We can now look to better leverage our distribution capabilities through both organic and inorganic unfortunate. These.
But looking more broadly.
Climate change continues to shape our industry.
Extreme weather events in Canada that increased fivefold or the past 30 years.
And evidence both at home and abroad or clearly demonstrating the need.
Or climate change adaptation building resilience as a collective effort.
I didn't I will continue to remain very active on this front working with brokers government and communities to help Canadians adapt to severe weather.
Thank the environment around us and make our communities more resilient so in conclusion.
<unk> team was a solid year, we head into 2020.
But the best theme sustainable competitive advantages any sharp focus on positioning the business for the long term.
While making the most in the shorter.
There's no doubt in our mind that we're well positioned to beat our objectives of outperformance and operating earnings growth for years to come.
On that I'll turn the call over to our CFO will not go thanks, Charles and good morning, everyone.
In the quarter net operating income was up 8% to $303 million. This was driven by a strong 9% growth in underwriting income driven by topline growth and margin improvement strong distribution results also contributed to our earnings growth.
In Canada, the combined ratio of 92% with solid despite 4.8 points of cat losses.
Both weather and non weather related events drove 111 million in cats on a pre tax basis, well above expectations, leading to our press release on January eight.
In the U.S., we delivered a solid combined ratio of 88.8%, partly reflecting the seasonality of our operations, but also good progress on profitability improvements.
Net investment income of $142 million was down 1% compared to last year as the impact of higher invested assets was offset by lower reinvestment yields.
We estimate net investment income in 2020 will grow by approximately 4% compared to 2090.
Distribution EBITDA and other income grew 7% to $45 million into quarter, including the results of both on side and Frank out one.
For the full year 2019 distribution EBITDA was up 19% driven by a strong year for broker revenues as well as M&A activity.
We continue to expect 20% growth and distribution income in 2020.
There was no doubt our businesses have delivered solid operating results in the second half of the year.
Although we measure our are we on the last 12 months basis.
They are we for the second half of 2019 gives us confidence in our near term mid teens are we objective.
Now let me provide some additional color on the underwriting results beginning with Canada.
Personal auto written premium growth of 15% was fueled by rate increases of 7% unit growth of 2% and the remainder remainder to mix.
Well such levels of growth, we continue to focus on the quality of the portfolio.
Written rate changes in the system will drive earned rate growth north of 7% into the second half of Twentytwenty.
[noise] auto profitability was solid in the fourth quarter at 96.5%, what a 1.4 point improvement in the underlying current year loss ratio.
Although Q4 is generally impacted by unfavorable seasonality.
2019, Q4 performance was driven by our continued profitability actions.
Prior year development was muted in the quarter as expected.
And we expected to remain muted in the near term.
In commercial lines premium written growth was robust at 12% would contributions from all segments led by rate increases.
The combined ratio of 93.5% included 36 million on of non weather catastrophes.
The Canadian expense ratio of 27.8% for the quarter improved across all lines, mainly driven by rigorous expense management and the benefits of growing.
Turning to U.S. commercial topline growth of 5% was largely impacted by the exit of health care business.
However, excluding exited lines. This segment, that's all the growth of 13%.
The underlying loss ratio of 53.4% in the quarter improved 2.2 points, which was driven by the exit of health care and a positive impact from business mix.
Favorable prior year reserve development of 1.6% was better than expected, which strengthens across all ongoing businesses.
We continue to expect little impact from prior year development in the near term.
The U.S. expense ratio of 36% was 2.3 points higher than Q4 last year, largely driven by variable compensation and mix.
For the full year the expense ratio 37.6 was in line with our expectation.
Well, we delivered a solid quarterly performance in the U.S. at 88.8% results in this segment can be volatile quarter to quarter and one should not extrapolate our Q4 results to all future quarters.
We remain committed to delivering a sustainable low ninetys combined ratio from are you as business on an annual basis and I think we are well underway.
Focus is now in sustainability and will lead a few more quarters before declaring victory.
Exiting healthcare was one key steps we took early this year to improve our future results at year end, we took a further step to protect our results by Reinsuring the run off health care business.
In short we transferred most of our current than under and exposure to a third party for a fee. The net result of the transaction is included in the result from exited lines.
Now a few words on our balance sheet. We ended the year any strong financial position with total capital margin in excess of 1.2 billion in.
In Canada, our MCC was 198% and into us the RBC regulatory capital stood at an estimated 457%.
Well above minimum required levels, our debt to total capital ratio was 21.3% slightly above our 20% target level. Following the acquisition of the guarantee and Franco.
The strike this strong position provides us flexibility to capture a future growth opportunities.
During the quarter, we grew book value per share by 5% sequentially to 53 97.
This was mainly driven by earnings in the share issuance to partly financed the acquisitions the guarantee and from Cowen.
What is strong balance sheet and confidence in our outlook for growth and profitability. We are pleased to raise our quarterly dividends by 9% to 83 cents per share. This represents an 11% annual dividend growth rate since our IPO in 2004.
In closing would a talented team robust operating platforms and solid fundamentals were well positioned to execute on our financial objectives. You outperformed the industry are we by 500 basis points and grow net operating income for sure, but 10% overtime.
With that I'll turn the call back to Ken. Thank you Louie in order to give everyone a chance to participate in the queue and they would you kindly limit yourselves to two questions per person. If there's time at the end you can certainly re queue for follow up.
Cheryl we're ready to take questions.
You asked a question. Please press star one on your telephone keypad. So first question comes from Tom Mackinnon.
<unk> capital markets. Please go ahead, Sir your line is open.
Yes, thanks, very much good morning as questions about the.
Exerted lines, the 34 million charge you took in the exit at lines, it's sorta it doubled quarter over quarter I'm, just kind of curious as to what the outlook of this should we should be modeling this to be.
Going forward.
See that you bought some new coverage for the health and maybe you can talk about what prompted that was that covered in the old 200 coverage you had and how much of that 200 coverage is left thanks.
Yes to your question I mean, the the.
Double in fact is very much driven by the protection that we bought a and charged in the quarter Oh, let can we give a bit of color on that we.
So at the very end of the year, we decided to acquire a reinsurance to protect ourselves against any development in health care going forward. This basically covers us from 20 set for the years accident years 2017 to 2019.
And the cost the net cost of the coverage.
Our gene is included in the exited lines result, so thats really the jump I would say that.
That you've seen in the quarter compared to previous quarters going forward through your question. Tom you know our expectation is that.
This should be in material to our to the overall economics of the business because I think were reserved unprotected properly for these things. The other thing as you said at lines are becoming more mature no I mean, we've exited two of the tree lines.
Pretty much at closing and so healthcare's latest one and we think we've got good protection anyways.
So the 34 in the quarter.
Should we look at that kind of as a run rate for 2020 or running at a something less than that.
Thank you should think about that as as less much less than that because a big chunk of the 34 is driven by the exit of health care and the protection we bought into premium we've paid for the protection isn't that number and that's a one time, obviously, okay and how much of the coverage of the 200 coverages left.
I think at this stage.
I would say three years, then we views a good chunk of it but given the maturity of the exposure we feel that we're in good shape.
Okay, and just if I can just squeeze another one with respect to integration and restructuring costs.
I mean, they jumped in the quarter, yes. It should these come back down again and.
Yeah same thing about the.
Amortization of intangibles.
So on the integration costs, obviously, they fluctuate with acquisition so should not come as a surprise right. After an acquisition that the numbers jump as we take actions to integrate so that will fluctuate with our transactions and as the integration process goes on you will we had in the past the onebeacon.
Integration that drove some of those numbers now what's the GCA transaction. So there is some drag driven by these elements.
In terms of the amortization of goodwill.
That number depends effectively on the transaction so new transaction.
I had a bit of will will drive some increase in the amortization for the portion that is amortized and that's what you've seen in Q4 essentially okay. Thanks very much.
Your next question comes from many Feldman of Cormark Securities. Please go ahead. Your line is open.
Hi, good morning, just going back to the exit lines and specifically the reinsurance coverage on the heels Im just wondering.
What's what surprised you in the healthcare business that the push you to take on this a reinsurance coverage.
Well I think that.
There's two issues when it comes to the healthcare business.
As you might recall, we have put it under a profitability improvement plan.
Closing basically and I think that.
Theres two dynamics in that space that that.
We felt were problematic one was inflation.
But the other one is the fact that because of healthcare reforms.
Thank you Wes.
Services being provided in various types of healthcare facilities have shifted and as such exposure that one takes in writing those.
Facilities as changed in the past few years, and we felt that pricing for that business was too complex four hour.
Capability and decided to exit to exit.
So was the reinsurance coverage sort of the plan all along or is it more of a recent doberman reinsurance coverage comes from the fact that we've decided to exit that segments and we wanted to make sure that the a year 17 to 19 would not be a drag on the results going forward wanted to close the door and move on.
Two running our continuing businesses as best we could.
Thank you and then just a broader question definitely a lot of has been discussed in written about just the the rise of social inflation a in the U.S.. It's come up a lots of trials Im just wondering your views on on the risk on this phenomenon and.
Especially in just in terms of the frequency in magnitude of a verdicts, especially in the United States, but if you could touch on Canada as well.
I mean, we've been focused on this for many years, we have talked about sources of inflation.
In liability for.
Many years and therefore, we're not really surprised the number of the moves we have made.
In terms of exiting lines in the U.S., we're very much driven by the fact that we felt that pricing.
For the sort of liability exposure that we took in areas like.
Architects and engineers and healthcare and programs really hard to do so I'll, let Patrick who runs our claims operation as you know share his perspective.
On that but I think it's these are awards, we use that are being used in the industry more frequently but certainly not a new phenomenon as far as we're concerned.
Right. The we can define broadly speaking social inflation as tendency of court decisions to become more favorable duplantis overtime.
Either because of new types of liability just an increase the amount of litigation in our products over time or a few adverse decisions that sometimes can open door for.
More similar cases, we brought in front of the courts going forward you might recall.
A few years back when we're talking about Western Canada, they were reasons around chronic pain.
That created cost inflation that line of business and we reacted with some response from the claims perspective.
As well as reflecting proactively in our pricing and reserving assumptions those trends. So clearly a not new as Charles mentioned, even before the acquisition in the fast with Onebeacon because of volatility caused such trends, we exited some lines of business. So we will be proactive and.
Managing our risk appetite to reflect where discussed pressure is more significant than the states hearing candidates really around personal lines, mostly the discussing and with good kept our as they were close to it one last point I would mention is.
Our strategy to internalize the claims legal work is probably an asset that helps us understand more even before.
Many others. How this is developing we have more than 400 volumes internally in the Eagle professionals, and we internalized, 70% of our defense costs that allows us to be one proactive, but also understand well those trends in our lines of business.
Exactly and I think the fact that we bought protection for the past when we entered the U.S. as a first step in the U.S. as a reflection that there's inherent volatility in liability in the U.S. that is not new over the last six months, that's very much been a core part of doing business in the U.S. and social.
Inflation is something I think Warren Buffett was talking about in the eighties.
And so I don't think people should be overly surprised by the trends there.
Thank you.
Your next question from Brian Meredith a few B.S. Please go ahead your line is open.
Yes, Thanks, two questions I, just the first one of them.
Looking at the improvement that you saw on your Canadian commercial lines underlying loss ratios. You described it is kind of the earn rate coming through tempered by higher losses that was a pretty meaningful improvement is that something that we can kind of expect going forward that magnitude of proven.
Oh, that's a Darren who's been one month of the job on the job comment.
On that.
Thanks, Brian Yeah, I mean, as you say I mean, you only five points of underlying improvement.
Supported slightly by more favorable weather a year over year in Q4, but as you highlight some rate increases continued to to flow through the through the portfolio Oh, we definitely have good momentum there.
So we're encouraged in terms of the improvement that we are seeing obviously as you could sell in our results a little bit of large loss activity as well too. So that's a little bit of accounted to some of the underlying improvement that we're keeping a very close eye on but with the fundamentals remain strong in the commercial loan portfolio.
Obviously, the 96 combined for the full year is disappointing.
But as I said, the fundamentals remain strong and we still believe that the portfolio is well positioned for from low Ninetys performance.
And so if you think a year over year approach you should see we expect underlying improvement.
To take us and his own that's cool closer to the low nineties.
A little Ninetys, Great and then second question just looking at the personal auto business. It looks like we're about to see some year over year policies horse growth do you think that's going to happen next year or should we see it kind of a good acceleration there given your competitive positioning right now in the marketplace.
The market is quite hard.
In personal automobile you know that.
We have started to take action three years ago, and I think now there's momentum in that space it's been.
I shouldn't say surprising.
But the speedup change is certainly impressive.
I will let you said that give her perspective on.
On top line and how she feels about quality of the growth.
Go ahead seven thanks, sorry.
Yes, we're seeing grow 10%, though in the second half of 29 team and we feel that were well positioned in the market.
And and given that now competitors are catching up on rates to improve that perhaps debbie.
So our focus now is we need to make sure that the qualities. There. So that's something we monitor closely on her regular basis and to make sure that we can sort of all with what we see.
And of course, that's behind that we're keeping a close eye on and will continue to take rates when needed.
That's that's our forecast for the coming month, I think has that been it would be helpful. If you unpack the 15% for for Brian.
Yes, let's break down the 15% in the quarter.
So main driver of growth in the quarter is coming from rates at about 7%.
We also added.
On coming from the within units that are increasing north of 2% in the quarter and the remainder of the growth is driven.
Driven by what we call mix.
So we're attracting more new businesses as I said the than last year, because our competitive positioning is it has improved and new businesses as an average premium that is higher than our current but that's creating positive mix and that's contributing to the growth that we see.
In personal auto so Brian when we step back and look at the business I would see today were very focused on the quality of the new business that's coming in.
Because it is you know any hard environment, we're comfortable with the adequacy of pricing.
But the mix is changing that's a function of.
The fact that we're growing in provinces that have higher average premiums, maybe a little faster than the average and that the mix itself. As is embedded was talking about you know rates in the seven ish percent range is what we expect to see throughout the year I think that's good.
And then you look at the units per se.
And the units are still in the low single digit range. So on one hand, there's big focus on quality, which would say you know we're trying to temper some.
Areas to the extent, we cannot the other hand that we think there's still room for upside on the units and so we feel good about where we are from pricing point of view, we feel good about the actions we've taken.
In relative terms much sooner than the market and we want to make sure that we'd run the right places a but its good environment given what we've done.
Very helpful. Thank you.
Your next question comes from Jeff coupon of RBC capital markets. Please go ahead, Sir your line is open.
Hi, a first question is on personal auto and you bought just talking about the improvements that we're seeing on the DPW side.
And you've generally talked about the mid Ninetys combined ratio I'm, just wondering in terms of how to look at that.
Based on the Crystal ball right now obviously, a lot can happen over the course of 2020, but.
Would you say the bias.
If you're not going to be in that mid ninetys is that given the price increases that you're seeing that it would potentially being better than 95 or is there something that you're seeing going on.
Kind of percolating underneath that Tim.
Could resulted in potentially going the other way.
Well this is a better share her perspective on where she thinks we we are and then all that a bit of color on what is percolating, one way or another so he said.
So and yeah. That's really we have seen strong improvement in performance of Bersani. During the last 24 and 32 turnkey six months following our action plan.
But I think there's still valid that portfolio given it's a long tail line of business. So so far we've done a successful job at at reducing inflation with our action plans, but we know inflation still exists in that portfolio. So that's why we continue to push for Ray.
Into 2020, so we're taking a cautious approach and we think we're under his own we're shooting for meaning the mid Ninetys combined ratio and I think that's what we can expect future and work on fundable going in that that environment, Yes, Oh, that's exactly right.
We think we're in the zone, where we said we'd be.
And there's good momentum there's no doubt about it the action plans.
We put in place are gaining traction there is inflation and assist them. Therefore, we remain prudent from an underwriting for the pricing from a reserving point of view and there's a meaningful tailwind of new business coming in and you know as you know you got to be cautious with new business, we feel really good about where are we.
We are in personal automobile.
But given where we're coming from we're taking a cautious stance here.
And looking forward to grow in that segment.
Okay. Thanks, and then just my other question on the industry pools, we've seen elevated activity over the past couple of years, but the industry as a whole just wanted to get your sense on the outlook in terms of the trend do you see this as a bit of the new normal or do you see this is more of a cyclical aspect and then.
On the net net.
Just the experience spin beneficial or or as had been more negative with respect to the combined ratio.
Do you want to share your perspective on pools.
So yeah increase in the volume of schools is clearly linked to our emerging markets. So so people cabot's these tightened so.
Difficult for us on some risk to get insurance or some interest to be comfortable with some risk so anything more to that pool I think it's it's as you said, it's reading nine with their cycle, where a him and I think on current in terms of impact on our combined ratio. It's it's the polls impacts I really volatile from quarter to quarter.
So from an annualized basis, its limited and pack and it's really volatile from quarter to today.
Maybe we can I ask that take to share his perspective, he saw or a representative with the phase. So my point to share your perspective on on pricing and.
So maybe a couple of comments I could have had a when we talk about the pool Theres really two main parts there's.
The facility Association rates, which is really for clients, who don't find a room within that private sector.
The get a written in what we called the farm residual market and then there's the pools, which is more each companys.
Sending to the pools on risk, where we feel we might be on the price.
If I take the first portion we filed rate phase on the experience that for all this is not a drag on the industry, usually we filed for the rates and it's very close to adequacy of course, the other pools that is shared the weather results our shared with the full industry.
It is usually on their price, it's the risk that we feel we on the price all the players going up but because of our size.
And some of our models, we feel that in general do slightly better jump than than the average at identifying those risks so if anything.
Long term, it's slightly positive on our financial Yeah, and the third point I would add is that with regards to the facility Association, which in itself as an insurance company.
Where one of the.
Companies managing that and we're getting paid for that so when you stack.
Our ability to seed well in the reassuring pool. The fact that the facility Association itself, we think is well priced and.
The service fee that we're collecting as an organization in aggregate.
Pooled shouldn't be a meaningful drag if anything on our performance.
Okay, great. Thank you.
Your next question comes from Paul Holden I see IVC. Please go ahead. Your line is open.
Thank you good morning.
Question I want to ask is related to in tax capacity to grow premiums relative to regulatory capital.
Is there an opportunity here to increase underwriting leverage or will you have to kind of grow in line with fee.
You have your capital.
So I I I would say here I don't see an opportunity this necessarily to increase our leverage I think the capital required to absorb the growth accumulates over time. So there's a transition period between the you write the business and the data capital is required for it.
And at this point, we're going to be able to absorb within our current capital projections, we don't see any a challenge there does it become an opportunity to leverage higher I'm not clear to me at this point.
I think there's there's.
Very good earnings generation and relationship with the organic growth we can capture.
And the market and.
And we feel like others, there's no need to really increase the underwriting leverage or or gearing.
Got it.
The debt told cap is 21, four and our objective is to get that back to 20, so that we're in a position to.
The strike if there were inorganic unfortunate these in the marketplace.
Got it.
The second question, Hi, asking something I'm, just struggling a bit about has your outlook for the industry are are we.
And the relative outperformance on the part of intact, which you say clearly is gonna be something you expected to be something higher than 500 basis points.
Departed got some struggling about is why why why is a intact analysts or investors should I care about the industry are are we like is there still some kind of interconnection between your capacity to generate an a or b and where the industry sets.
Well I think that.
So when we think about creating value and here I talk and economic terms.
It is about finding.
The right balance between growth.
And our are we.
And the best way to create value in our space.
As to maximize our or we wouldn't be industries performance is weak.
And then make sure that we're comfortably above our cost of capital when the industry stronger to grab as much as much growth as possible.
And this so that's the first point I think an economic terms driving the business to outperform.
Is the best way to have the leavers to maximize the economy proposition of the business first 0.2nd.
How are we outperformed equals moat as far as where concern and mode equal ability to invest and ability to invest equals ability to outperform some more and to outgrow the industry I mean, that's very much been.
Our our our practice.
Overtime, So I think yes, one should absolutely.
Look at and think about VR, we outperformance in assessing an unfortunate because it is a sense of.
How you can take advantage of the market.
At different points of the cycle. So I don't do we if there's anything you want to Oh, well you know the way we structure. The strategy is all aimed at outperforming and we break it down into our claims operations into our underwriting and capital management and at the other day, we compare ourselves to the industry knows.
Segments, and really strive to keep it to keep our competitive advantage in those four segments. So yes for us is fundamental to outperform the industry.
In an environment, where the industry is running at four first hard market conditions, which is critical market behavior that were that we work with and then when they return to historical levels, which were historically closer to 10, which we thought was close to cost of capital.
Performance was a fairly good indicator of how much economic value we were creating.
So.
The other thing Paul is that you know when you invest in PMC, you got to be ready to live with the fact that a their cyclicality in the business. There are natural disasters and so on certainly true by quarter and still to come at this thinking that would be one flat our OE year.
After year in my mind means that you're missing unfortunate these and if you go back.
20 years, and you look at the patterns of the industry's performance, it's ranged between two and 17%.
And I would say if the industry hits the top of the bracket.
You want to make sure that you outperform and grow in that environment not clear to me that's running the business flat in a cyclical industries the best way to a two to create value, but I think you got to be ready to modulate our point is.
It's got to be at least 500 basis points every year.
Given the nature of the business, we've built our strategy to do that and if you look at the last 10 years, we've rented at 700 basis points.
Sorry, I think.
Yeah, but just just to complete that then can can you open kind of where you think the industry will be in 2020, where that opportunity is between maximizing our OE differential and grabbing additional share because it's it's big blurred a bit right. We're transitioning where we are in the cycle. Yeah. I think that's that's the key question.
In my mind and and.
And so we don't think the industry's going back to 10.
In 2020.
We think the industry should be somewhere in between four entity.
Okay.
No you look at where we are in the cycle a growing at about let's say, 10% and now we're talking about.
Canada, and I think you know the U.S., probably not that far off if you remove the noise of exit lines.
Quite frankly, our objective.
Is to get back to mid teens are we getting and once we feel we're there.
This is where I think you you you you capture growth and tried to maximize margins, where you can depending on the market.
We feel like from a pricing point of view, we're very much in that zone as we've talked about this morning, and given where in that zone. We're open to grow and if the market is hard to a point, where we can exceed.
Being in that zone from an R&D point of view was certainly we'll do it but we feel like we're in the zone where units of growth.
Our very accretive from an economic point of view and we remain focused on those as you do that than the units of Groats are plentiful you got to keep your eyes on quality and I would say you know just people the people of intact in the field.
Qualities. The first word they will talk about.
And if they don't give me a color because [laughter] it didn't understand.
All right that's helpful. Thank you.
Good.
There are no further questions at this time I will turn the call back over to Kenya, Anderson, Oh, we did get one more question. So.
Your next question from James Coin National Bank Financial. Please go ahead. Your line is open.
Yeah. Thanks, just real quick one on the investment income and were invested or the yield on invested assets might be I might be headed this year, a little bit of a drawdown in in Q4 can you just sort of talk about the.
Dilution of yields earned on that portfolio as we enter a little bit of a lower rate environment here and the the progression over the course of 2020.
Sure.
So.
We guided to almost 4% growth in the investment income easier for us to provide clear guidance on the dollar amount rather than the yield because the yield takes into account the market fluctuations of the asset base.
And sometimes gives a unusual results what we know.
Clearly the fixed income portfolio will gets reinvested at lower yields right now.
That's very clear, but it turns over at a pace of about <unk> percent of the portfolio per year. So it takes a couple of years for the entire portfolio to switch over and our guidance for next year encompasses the fact that there's growth in assets on one hand, and the declining yields so they sort of offset each.
Other and then you add the impact of GCN, a which drives essentially the 4%. So that's how we sort of guided rather than trying to give a yield which might fluctuate because of asset movements, yeah, and I think that you know when one thinks about how we're running the business we're not reach.
King for yield.
Thats sort of environment I mean, we're you know pricing to achieve certain levels of or are we depending on the line of business.
And when interest rates change the underwriting margin is meant to to compensate and so this means that in practice we're not.
Expanding the risk envelope to reach for yield.
Tretter, making sure that are prices are adequate equus across the board to achieve our objective.
Good.
I'll now turn the call over the Kenny Anderson for closing remarks.
So thanks, everyone for joining us today following the call a telephone replay will be available for one week and the webcast will be archived on our website for one year transcript will be available on our website.
Thanks.
Filings archive, our first quarter 2020 results are scheduled to be released after market close on Tuesday may fit. So this concludes our call. Thank you and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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