Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the impact of Financial Corporation Q1, 2020, <unk> results Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask a question during the session you want me.
The press Star one on your telephone if youve require 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, Kenny Anderson Senior Vice President Investor Relations and corporate development. Thank you. Please go ahead.
Thank you Charles Good morning, everyone, I hope you're old safe and well. Thank you for joining the call today, a link to our live webcast and published information for this call is posted on our website intact Si dot com under the investors.
Our usual 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 on slide three for a note from the use of non I abreast financial measures unimportant note on adjustments terms and definitions used in this presentation.
Our executives are joining virtually today from across the country. Firstly in Toronto, we have our CEO Charles Brendan work with me here in Montreal, our new markup CFO Isabel Gerard SVP of personal line and Patrick Bar Bowl SVP of claim on from Calgary, We're joined by Darren Godfrey SVP of.
Commercial line will begin with prepared remarks, followed by the Q1 night with that I'll turn the call to our CEO Charles brand Tomorrow.
Thanks, Dan Good morning, everyone and.
Thank you for joining us today.
Since the last weeks of March the World has changed dramatically.
On a virus and then it goes inflicted immense pain and suffering on communities across the globe.
And it kind of big activity has slowed to levels not seen in our lifetime.
We are grateful for their dedication and commitment of healthcare workers and essential services. They have rallied to societies eight well people in communities that then jure you locked down never before seen.
Across North America societies discipline is paying off.
It's worth thankfully witnessing a slowing of the spread of cobot Nike.
I didn't talk.
Our business is resilient and our number one priority is ensuring which supports society and our customers through this.
Over the past six weeks, we've been helping in fact, its customers by providing famous flexibility and premium adjustments to recognize financial hardship and changing risk profile.
Our measures are aimed at providing the highest amount of benefit to those who need it looks.
So far into Q2, we've provided over 130 million of relief to approximately 390000 customers and we expect the total amount of relief will exceed 200 million body of the locked down.
Our business was built to support people businesses and society in both good times and bad times and that's exactly what we're doing.
Our ability to support our customers and brokers. It's a direct result of our people, which over 99% of them are working effectively from home.
Supporting them as our robust IP infrastructure, which is performing really well.
We're set up to up radar business remotely for an extended period of time if necessary.
And I didn't talk to the trains are running on time.
I do believe it's not important though for businesses and government to work together to have Lucky plan.
For a gradual risk based return to work in the coming weeks.
Now, let me provide better color on our quarterly results.
So with yesterday evening, we announced solid first quarter net operating income other dollarssixty one per share.
Topline growth was 14% in the quarter, including the GCN acquisition.
In Canada premiums grew 15% and into your West Road.
9%.
The combined ratio was 94.3%, Canada posted a solid 93, three with mild winter weather more than offsetting the cold at 19 related losses.
The U.S. commercial lines combined ratio was 100.1%.
Excluding 8.5 points of Cobot 19 claims provisions.
In aggregate, we recorded a provision of $83 million directly related to Corbett 19 claims and commercial lines, both in Canada and in the U.S.
We did the bottom up analysis of where our exposure I couldn't be to determine the direct impact of Kobin 19, and commercial lines and of course will refine it.
In the second quarter as the situation stepped up.
But we're confident with the position we've taken so far.
We're also of course remaining vigilant on the potential in direct effect of the slowing economy.
Over the coming year.
The prevailing hard market conditions in China that we experienced in 2019 and into early 2020 will be temporarily impacted by the crisis as we provide relief to small and midsize businesses that are going through a hard time.
Once the impact of the crisis as fast we do expect corrective measures tourism fully as the industry continues to report are always well below historical averages.
In 2019, industrial or we was 5.6%.
Which put our outperformance at 500, an 80 basis point for the full year.
Again above our 500 basis point objective.
In the U.S. well industry premium growth will be impacted by the economic slowdown, we expect the prevailing hardening market conditions, including rate increases to continue.
Let's now look at our first quarter results by line of business, starting with Canada.
The personal auto premiums grew 11% driven by favorable market conditions.
And including the GC any acquisition.
The combined ratio of 94.6% improved by 7.3 points.
Driven by lower frequency of claims in large part driven by our action plan over the last few years as well as benign weather in the first quarter this year.
The crisis that none of them material impact on Q1 results in automobile insurance.
And overall or emphasis remains on portfolio quality as we focused on maintaining overall profitability levels in 2020.
In personal property premiums grew 12% driven by favorable market conditions, the GC any acquisition.
And unit growth.
The combined ratio at 81.8% was the strongest in over a decade, driven by our actions over time any mild winter.
The crisis did not have an impact during the quarter and it's not expected to have a meaningful impact in 2020.
Personal property remains well positioned to upgrade sub 95, even with severe weather.
In commercial lines premium growth of 22% reflects the GCN acquisition as well as strong market conditions. The combined ratio of 100.7% included 6.6 points or $50 million of direct cobot 19 related losses.
Overall, the underlying fundamentals in commercial are strong and we're maintaining our focus on underwriting quality.
Business.
His position for low Ninetys performance overtime.
Moving to our U.S. commercial segments premiums grew 9%, including the GCN acquisition.
Combined ratio was 100.1% included.
8.5 points of direct Colgate 19 related loss provision.
Well the crisis may add some near term, but identity. The fundamentals of this segment are trending well towards our goal of sustainable low Ninetys performance.
Looking at our I've see underwriting operation for the rest of 2020.
One could expect to see a mid single digit too low double digit in fact topline growth from Covidien 19, depending on the severity and duration of the crisis.
With the prudent provision we recorded in Q1, we expect the overall direct impact of the crisis on underwriting income for the rest of the year to be largely neutral.
Given this are presented crisis is ongoing.
Of course difficult to be definitive on the in direct impact on the economic slowdown in future periods.
And has there's a fair amount of uncertainty as to how the crisis will evolve performance by quarter in line of business maybe uneven.
Despite the market volatility in March we ended the quarter with a strong capital position with MCT above 200% any capital margin at $1.5 billion.
Our balance sheet as both capable of the absorbing.
Third or meaningful headwinds.
And is also flexible to act on unfortunate these.
Well, it's always difficult to determine the timing, it's clear to me that market dislocation tends to surface unfortunate these and we remain watchful.
Turning to strategy, while supporting customers tradition.
Crisis is our number one priority.
We continue to execute on our long term strategy.
First our people are engaged in responding to customer needs when the crisis hit we mobilized lightning speed.
Over a thousand employees were redeployed across the organization to focus on specific initiatives, including the processing of customer relief transaction.
And supporting our digital tools and other activities.
Across the organization productivity and collaboration remain high and we continued to deliver top notch service to our customers and brokers.
Second to our digital platform, we're ensuring our customers and brokers at ease of access in a world where physical contact has disrupted.
Since the crisis began we've seen for instance, electronic payments for claims increase from low teens to north of 35%.
And the proportion of clients, who are submitting claims electronically as more than doubled as well.
The usage of our digital tools is a win win it drives a better customer experience and improved efficiency. We're both I have C and our brokers.
Lastly, the integration of GE CNN, Frank all one is on track as we build a leading north American specialty platform.
Policy conversions are underway, we launched our high network, Brian intact for speech in March.
GC any employees are already integrating with there in fact colleagues and living our values and we're on track to meet our financial objective of mid single.
No EPS accretion, including the on site acquisition by 2021.
In conclusion.
Our discipline in our work over the past three years meant that we answered 2020.
In a very strong position.
And our first quarter performance is a good proof point.
Our teams have mobilize fast to deal with the Colgate 19 crisis, and we've provided significant relief to our customers.
Our focus is on continuing to provide real help to customers, while advancing our strategies and achieving our financial objectives. Our business is tremendously resilient and we're well positioned to demonstrate demonstrate that again in the months and years ahead and with that.
I'll turn the call over to our CFO and we might go.
Thanks, Charles and good morning, everyone net operating income per share was $1.61 up from 73 cents last year, driven by strong underwriting performance and distribution results.
As good as these results are let me first summarize the impact of the Cobot 19 crisis on our Q1 results.
In fact on top line was very limited as the crisis really began at the end of the quarter. The relieve measure relief measures have also started after four different.
We took a provision of $83 million related to covert 19 losses, which we have reported as cats. This represents a three point impact on our I have see combined ratio.
Of the 83 million 50 million resides in Canada, and 33 million in the U.S. both in our commercial lines.
These provisions relate to direct losses from events cancellations tuition reimbursement.
Liability and specifically endorsed business interruption in some of our specialized programs.
They represent our best estimate of ultimate losses based on the bottom up assessment of where cobot 19 could trigger reliability as few claims have been reported to date.
Although the crisis is still unfolding, we recognize these direct losses early and prudently.
Consequently for the rest of the year and based on our knowledge today, we believe our underwriting performance will be largely on track.
As we progress through the year, we will continue to monitor the economic impacts of the crisis and the potential for indirect losses.
In Canada, excluding 2.1 points of Cobot 90 losses, the combined ratio of 91.2% with solid improving 11.7 points year over year, thanks to benign weather favorable market conditions, and our ongoing profitability actions.
India, Wes excluding eight and a half points of cobot 19 losses, we achieved a 91.6% combined ratio, which reflects solid or improving performances across all lines of business.
Net investment income of $150 million was up 7% compared to last year, mainly driven by the impact of higher invested assets following the acquisition of GCB.
We now expect investment income in 2020 to grow between one and 3% compared to 2019 as we reflect the impact of lower interest rates and visiting yields.
Distribution EBITDA and other income grew 20%, 22% to $44 million in the quarter driven by the acquisitions of Franco and onside.
Our growth expectations for distribution earnings for the year are tempered by the uncertainty resulting from the crisis.
Depending on the length and severity of the crisis. We believe the growth of these earnings for the full year, we'll be in the upper single digit to low double digit range.
I am pleased to see how our business performed in the first quarter delivering strong operating results. Despite absorbing the impacts of course with 19.
In particular I should underlying the operating our we a 14% on the last 12 months basis.
Now let me provide some additional color on the underwriting results beginning with Canada.
In personal auto we saw premium growth of 11% with minimal impact from covert 19 as relief measures have been rolled out after quarter end.
As I mentioned earlier, we expect that the premium reductions offered to customers will largely impact topline in Q2 and Q3.
Personal auto profitability was strong in the first quarter at 94.6% Woody six points improvement in the underlying current year loss ratio driven mainly by our profitability actions as well as better weather conditions.
The impact of Cobot 19 was minimal in the quarter as the frequency the frequency declined observed throughout the quarter accelerated at the very end, making making it difficult to distinguish between the impact of action plans, whether and covert 19.
Prior year development was slightly favorable in the quarter sharp reversal from last year, but in line with our expectations.
In commercial lines, excluding 6.6 points of Cobot 19 losses, the combined ratio of my 94.1%.
Improved 12.6 points on the combination of better weather and profitability actions.
The Canadian expense ratio of 29.3% for the quarter increased 1.2 points from last year, mainly driven by a business mix and the impact of GC any.
Turning to US commercial did you see any acquisition added nine points, where top line in Q1 on a pure organic basis, excluding the impact of exiting health care last year and the acquisition of GC any growth was 10% thanks to favorable market conditions and new business.
The underlying loss ratio of 51.6% than a quarter improved 3.9 points, which was largely driven by the impact of our profitability actions.
Favorable prior year reserve development of 2.2% was better than expected with strength across all ongoing businesses. We continue to expect little impact from few I'd in the near term.
The U.S. expense ratio of 39% was one and a half points higher than Q1 last year, mainly due to the addition of GC anyways surety business.
The combined ratio in the U.S. of 91.6% X Cobot 19 related losses was driven by a strong performance and most lines of business.
Although the crisis adds a bit of Volatilities, where results we continue to make steady progress on our profitability improvement plans and target a sustainable combined ratio in the low nineties.
Moving to our non operating results, we recorded an impairment charge of $96 million on our common share portfolio. Despite the short time period over which we could observe the price movements.
The impairment does not impact book value per share as investments, our mark to market, but it does affect the are are we.
The effective income tax rate of 27.9% was above expectations and reflects a onetime retroactive change and use tax legislation.
Moving forward, we continue to expect our tax rate to be 21 to be between 21 and 22%.
Now a few words on our balance sheet.
Our unrealized gains position, which stood at 360 million.
Dollars at the end of 2019 moved due to an unrealized loss position of 554 million at the end of Q1, mainly from common and preferred shares equity preferred equities.
This was partially offset by an improvement in the funding ratio of our pension plans driven by weather spreads as well as the strengthening of the U.S. dollar overall this led to our book value per share declining by 4% sequentially to $51.71 a good outcome in the circumstances.
In the face of highly volatile markets, we acted quickly and prudently to strengthen our capital position, including the issuance of a $300 million mid medium term note and unwinding some capital intensive strategies, such as our market neutral strategies as a result of our actions we ended the quarter in a strong financial.
Position with 1.5 billion of total capital margin.
In Canada, our MCT was 202% ending in the U.S. the RBC regulatory capital stood at an estimated 393% both well above minimum required levels.
We have 343 million of cash at the holding company and over 600 million of our credit facility is undrawn.
Debt to total capital ratio was 24.1% at March 30, Onest. However, we're confident we will return to our target of 20% over the next 18 to 24 months.
With our resilience operations and strong capital position, we are in a good position to support our customers throughout the could this crisis. We are also in a strong position to pay our dividends absorb future shocks from capital markets and capture opportunities as they arise.
Before concluding let me update you on the unrealized loss position in Q2 I.
Im happy to report that the unlike unrealized loss in AOCI I as decreased by approximately $400 million on the back of strong equity markets.
But keep in mind that stress spreads have tightened and this will impact our pension plan funding and could offset some of these gains.
In closing with a talented team robust operating platforms and solid fundamentals were well positioned to deliver shareholder value. During these unprecedented times.
With that ill give the call back to Ken.
Thank you lose in order to give everyone a chance to participate in the queue. In a we would ask that you kindly limit yourselves to two questions per person of course, if there is time at the end you can certainly re queue for follow up.
So Cheryl we're now ready to take questions.
Certainly to ask a question. Please press star one on your telephone keypad. So first question from Jeff Kwan of RBC capital markets. Please go ahead. Your line is open.
Hi, good morning.
I guess, how you rent each of your business lines, you try to target.
Certain profit levels, but I'll give you these aren't normal times and you've got.
Hello.
From low frequency and commercial or maybe there's potentially higher claims exposure. So when you talk about the premium or lease efforts. Since you guys are doing are you still talking about kind of a silo approach to profitability or given.
Circumstances, where and is it maybe taking a little bit more from a consolidated approach, albeit on a temporary basis.
Taking those decisions on.
The premium.
Yeah.
Jeff That's that's a really good question and I would see that.
You know.
We we entered 2020 in a position of strength.
And that's why we were able to put those measures in place very quickly.
And just to recap.
There is financing relief here that is provided across the board.
And then you add that premium relief that is provided based on change in risk profile, a change in behavior, and where a and were.
Real need exist.
We've tempered some of the increases again in the areas where business is our most impacted.
By shut down lets you know Jeff. This program is very much risk base, its flexible and it's based on individual people circumstances and our approach to running the business has to look at each line as they stand and do the right thing for our customers within those lines of business.
Taking into account.
The performance of that line. So I would say in aggregate subsidization between line of business is not something that is that is part of how we're thinking here about this this relief effort. It is really based on need.
Yes on risk profile and based on what we can do as an organization and sitting here today.
Im quite pleased that we've held 390000 Canadian and we're probably past 400000, as we speak because there's a fair bit of.
Volume and a.
Well, we feel that this has the right thing to do in this environment, but theres no subsidies between lines of business.
That are explicit or even implicit.
Okay. Thanks, and just my other question.
How did that we've seen.
Some some data points from progressive in geico on whether or not just claims ratio frequencies.
Started.
Can you quantify what the impact so far has been in Q2, two whether or not it to claims ratio.
Even if it's just frequency severity.
Commercial.
Jeff at high level.
The impact of the locked down was most acute towards the end of March I'd see last week of March into the first few weeks.
In in April.
And we have seen from telematics data.
As well as from frequency data for a few weeks there we've seen ballpark.
Dropped and frequency close to 50% it's been.
In the past couple of weeks still we've seen driving started to pick up in the 10% to 20% range.
From the bottom of the.
The.
Down and with good weather, we expect that to gradually increase.
I think the other thing that's one needs to take into account when you think about that as a couple of things I think that you can you want should not assume that severity doesn't change when frequency drugs.
There are some secondary impacts related to.
The crisis itself and we remain prudent in particularly in lines of business like accident benefit in Ontario.
The severity impact.
I'll not only the lugged down, but you kind of make environment. So all in all I'd say at the debt.
Dillard down we saw a drop in driving I'll go about 50% we've seen that.
We've seen the driving increase in the past two weeks.
Any I would say meaningful way three not back to normal no doubt about that.
And then we're keeping an eye on on severity in that process. So that's going on.
I think on it I don't know if she is that data want to add anything to that or Patrick who is sitting.
In the a in the claims operation also on the front line of this so maybe is that then a bit of color and then Patrick.
Yes, sure. Thanks Sharon.
Say that.
In addition of what Charles mentioned doing that kind of in prices. I think it's also important does that create covidien frequency was on maybe decreasing in our portfolio and given our strong action plan that was in place for a few and that those months already as well as favorable.
Whether in the first quarter of 2020, so frequency was already in decreased by about that 15%.
Very similar to prior year average I think that's also something that is important to note and as Sean mentioned during the peak of dialog down and frequency glut decline was but we are we seeing there last week that driving picked up and we expect this to continue as.
I've in mens starting to remove a restrictions and starting to share a level that.
Hi level plans to reopen it kind of.
Thank you very much.
How about you Patrick.
Not much to had a from a claims perspective.
There's no real that lag between the.
Also driving that we measure from you'd be I and the intake that we see in the claims operation So I would see that.
The increase in driving from the past two weeks or.
The 50% of our so that's we've seen for a few weeks at the peak.
Mirrors very much the intake we've seen claims so theres no real lag between the two.
Yes, Thank you can't predict and I think Jeff you know, we have been working hard to push our telematics program in the past three years.
You know it is close to 40% of new business. This gives us tremendous insight and driving but it also means that embedded in the product and embedded in a portion of the portfolio the amount of driving that people do is actually.
In part reflected.
With how we price in particular, which telematic and I would add that on top of the unique measures that.
Taking place.
Thanks, Jeff Okay, great. Thank you.
Your next question is from Michael Phillips of Morgan Stanley. Please go ahead. Your line is open.
Hey, Thanks, good morning, everybody.
I think Louis mentioned part of the three for globally. I think you said really specific endorsements for B I.
And if I heard you correctly I hope that's what he said.
And so I guess does that mean that excluding those acts in specific endorsements that you probably wouldn't have had any exposure to business interruption.
And I guess, if so does that mean then that.
I guess I'm trying to get you to maybe quantify any.
Any kind of exclusions you might have in your policies or kilowatt to talk about that down here in the us about specific endorsements and versus exclusions for viruses.
So I just don't know percent maybe your policies that have these exclusions and how that might differ for your Canadian business versus the 1 billion business.
Yeah. So thanks, Mike.
Key question and I would say 99.5%.
Our policies.
Would not provide coverage for pandemic.
And I'll, let Darren maybe give a bit of perspective on the 83 million per se, which has not really driven by business interruption. At this one of the elements that make up the 83 million and may be Darren you want to provide a perspective on on that business interruption in particular.
In the U.S. portfolio to Mikes question.
Sure absolutely thanks Charles.
So my guess is as we mentioned them and consistent with our past practices. Our reserving major events quickly and clearly this is a around the major event I mean, we took a very prudent approach.
Two recognizing at the end of Q1, the ultimate you all of our direct coated losses.
As you mentioned, obviously, our best estimate this point is $83 million.
Should point out though that this is really not being that estimate is not being driven by claims activity to date.
We've only seen less than $10 million of incurred activity.
But we undertook a very extensive bottom up filed by file.
Exercise.
To get a really good understanding of where exposure is understood to exit so when we look at the $83 million.
$50 million relates to Canada.
$33 million relates to the U.S.
And I'll get into the to the FBI component here in a moment.
If we look at some of the key categories, although clearly the 19 exposure.
And as really I would say four major components.
First of all liability exposure, we understand we noted that certain businesses in the commercial space has been impacted by coated 19, now can remember that full liability for see gel negligence has to be proven.
So therefore judy to defend.
It's clearly an exposure that exists for us.
Both in the U.S. and in Canada.
Entertainment line of business has some exposure.
Mostly related to production shutdowns, but also event cancellations.
And then in the U.S. tuition reimbursement, we can see some exposure there as well and then lastly, as you referenced we do have some specialized programs where pandemic related business interruption coverage.
These extended but as a show indicated that's less than half a point.
In our portfolio.
If I look at.
So now you ask portfolio and all the C business interruption.
Comes with the property a form property coverage.
And when we look at out various different lines of business in the U.S.
Roughly 15%, although U.S. portfolio actually has property forms.
Of which a good two thirds of that is actually excess property. So when we back out the excess property, we're really looking at.
Less than 5% all of our portfolio has property, which ultimately then has an extension of business interruption.
If I compare that to Canada, which is always see more main street.
Roughly 40% of the portfolio.
As property coverage with.
Corresponding business interruption coverage as well.
So when we look at how our coverage forms.
Oh the coverage that we have in the U.S. is very consistent with industry practice in industry language, which is surrounding the requirements of physical damage.
By uninsured peril to trigger business interruption.
Together with a virus exclusion, which was introduced well over a decade ago and as I say consistent.
With with U.S. practices.
On the Canadian side.
Our coverage, we're very very comfortable without a language, it's very clear.
And the courts really have determined that loss abuse absent physical damage adrs not trigger business interruption coverage.
Beyond this first line of defense, we have exclusions in our policy language that make it very clear that the inability to use our access a property.
Even in times such like this in a lock down does not qualify for coverage that is very unique.
Similarly, I should say two hour U.S. position as well so we're very very comfortable with where we sit from a coverage position today, it's well understood by governments by brokers by customers that in the vast majority of cases, which as we indicated 99.5% of our policies.
Business the business interruption coverage would not be triggered.
By the pandemic.
One last point that I would Mike Hi, Mike is that again business interruption is a covered peril under our property cat reinsurance treaty.
So assuming we do end up.
More than our retention on multiple claims and we're not all that view.
At this time today.
We believe that there is a reasonable scenario that we would present this.
As a reinsured event so.
What a lot of information that but that's sort of a breakdown in terms of where we sit from a coverage position both in Canada and in the U.S.
We think the position is quite solid and I think barron's point is that there are many layers of protection.
Here and were specific coverage was provided we've largely reserve that for a in Q1 already which would be able to less than 0.5%.
All of our portfolio.
Okay, great. Thanks, guys, that's a pretty to appreciate it that's the one question I had for now thank you.
Thank you.
Your next question from many Kronman Cormack Securities. Please go ahead your line is open.
Hi, Good morning, just wondering if theres any political pressure to increase our.
Premium support or make a broader to all policyholders personal auto side the business and then just more broadly if you could just talk about the regulatory landscape.
Because of koby coming out of cobot in how you see that is there any changes you see on the horizon because that's been done.
So.
We are.
I'm talking with regulators and elected official on a weekly or biweekly basis across the board to share with than what we're seeing.
In the field.
I think that.
There's a lot of relief that is provided by the industry.
Across.
North America, and certainly in personal lines, which I am more familiar with across Canada.
And I think that regulators in general recognize that this is going into right direction I.
I think that it is early in the process and people want to make sure that Canadians have access to this release in personal automobile in particular.
In personal property.
Well I want to go pressure I think as a strong warrant here, but I think we all share the view that relief needs to be provided there's a lot of traction and I think the regulators want to make sure in my mind that indeed.
Canadians take advantage of these are these measures that's the first point.
But very cooperative relationships at this stage and the second point.
On the regulatory landscape.
Oh no major changes at this stage I would say that where reforms we're in the pipeline because the key issues in automobile insurance.
Today in my mind, if you take Ontario, which you take Alberta, if you take the Maritimes to a certain extent is rooted in the fact that they.
Product that is designed by the government's had been a big source of inflation in the net in the last few years as you know I mean, we've talked about that a fair bit they are.
Proposals on the table across most jurisdictions and.
It is likely.
That said, we will see some change in the coming year or two and in my mind imported to put in place to further.
Worldwide.
You know.
Access to the product at a reasonable price there's no change at this stage. Some jurisdictions are saying no. We're going ahead with the reforms.
Other jurisdictions are focused on other things at the moment and it's completely understandable, but no major change from a regulatory point of view as far as a as far as I can tell I don't know you said that.
If you will see a different perspective here or.
Our other members of the team.
No I would say Charlie I agree with your comment that we've had that all the regulator is we're open for a discussion on relief measures as soon as the crisis. Sorry said then that's the two for how the your reduction in Canada. So were really in regular contact with them.
To ensure that they understand our relief and fourth and we keep them advised of our actions on in that regard.
Yes, exactly there's been no in the US a number of stateside issued a moratorium.
On that primarily underwriting measures and so one and quite frankly, many of those measures make make sense I don't know darrin, it's yet to be a different perspective or any color you want to add there but.
That is cobot driven and.
Nothing in there is not things that's we're doing already.
No I would agree Charles I think we're seeing a number of moratoriums in different states the U.S.
Very much consistent with a processes and practices that we had in place.
In the U.S. I think the only other thing I would add from a U.S. standpoint is this notion of a prospective pandemic coverage than seven discussions around that at the federal level.
To look to create a federally funded programs.
To provide prospective pandemic coverage.
Similar to other programs that have been established in the past obviously.
Industry bodies are very much.
In communication with the federal government working through that so that's probably just another new wants that I would add from a U.S. standpoint.
Thank you that or is this just in terms of a follow up on that they use the question as to what extent you see the risk of.
Your your clear that market should continue to harden after maybe a brief pause, but could you be in some situation where because of a deep recession because of political will.
It's just not the political side of this will not allow for those on the personal auto assigned in particular.
Well I think that.
You are saying on the personal auto side in particular I think the answer.
In my mind as the reforms I've just talked about I think that said the industry as suggested over the past few years.
Across the land.
Very specific concrete measures.
That would bring relief in the system and I think the answer.
Now, let me answer it coming out of this is to put those reform measures in place as the best possible way.
To reflect.
You know the environment in which we operate so.
I think the better answer here in my mind is is reforms and keep in mind automobile insurance is regulated today and.
You know the pricing process and automobile insurance is.
A back and forth and I think that.
That will keep happening in the coming period, I think if if if people push.
In ways that become.
Uneconomical too right.
Automobile insurance, you'll see a severe capacity shortage in the marketplace and I think nobody wins in that environment and keep in mind automobile insurance coming in this crisis.
You know maybe not as much for intact, but for the industry in aggregate the industry was operating automobile insurance, where they combined ratio above 100%.
In 2019, the industry is combined ratio.
You know what was probably in the 100 tree, 104% range in automobile insurance and so I think.
Applying pressure in ways that would create a deeper issue there for the industry in my mind is see recipe for a big capacity shortage and I don't think you want that in this environment. That's why we encourage cooperation on relief and we encourage people to think about.
The reforms coming out of this.
Thank you.
Your next question Don Kim of Barclays. Please go ahead your line is open.
Good morning, Charles in terms of the current environment I know, there's a little bit of unwillingness to try to look out in terms of what.
The environment Dean's, but.
Does this change your outlook for M&A in terms of whether or not who's going to be greater dislocation from the up from the rest of participants in the industry.
Yeah, I think that John you know a you know us well we that this thesis of consolidation for many years.
We have.
Said, you know that we felt that in the mid term, we'd see a good 15 20 points of consolidation and I think this environment.
Isn't meaningful source of dislocation in my mind, not only here bought abroad.
And globally.
And I think that.
This only exacerbates or.
Solidify our thesis when it comes to consolidation and I think that we can and team have done a fantastic job with the investment.
Hi, guys in our capital management guys to make sure that we can absorb.
A real bad.
Crisis.
But also.
We'll be able to be on the offensive at the same time and that's really how I feel we're positioned now and I think that the thesis we've laid out the number of years ago is certainly stronger today than it was three months ago.
Understood and chose this week for that dislocation are there any are there any particular areas, where you are deploying capital where you think you can gain market share organically infusion time.
Yeah, So I think that and by the way.
Can I just want to point out that as we wait for consolidation.
We closed our last transaction.
Five months ago, and so we're [laughter].
As we wait we're deeply integration process at this stage and I want to point out this integration is going quite.
Quite well actually we're quite pleased with where we are.
Even though the environment has changed.
You know capital priorities, John I mean.
Clearly.
We've laid out the roadmap.
In the fall.
About the next decade of intact and one of the things we said is.
Priority number one is capital deployment to strengthen our position here in Canada.
And that's true in manufacturing and it's true in distribution.
Prior to the number two and its becoming.
Increasingly relevant is to solidify our position as one of the leading and best specialty lines writer in North America.
We're now hitting 3 billion dollar of revenue.
The underlying performance of that business is low ninetys and I feel really good that after all the heavy lifting that Mike Miller and team I've done in the past two years that we are very much in that zone, and an outperformance zone and I think that we're quite open and interested.
Deployed capital in the U.S. provided.
Good.
Options present themselves to us and and our view us not really changed from that point of view.
Great. Thanks tells I appreciate the color.
All right.
Your next question from James.
National Bank financial. Please go ahead your line is open.
Yes, thanks, good morning.
First question is related to the bottom up assessments.
Direct losses were called it could create some claims appreciate the color around that.
One spot is how far did you look out in terms of developing I bought them up assessment was that related to events and and production shut down for the next three months or is it something further out beyond 2020 for example.
Well the lens we've taken.
Is one of saying if we look at this crisis.
The shutdown the implications of the shutdown, which parts of our portfolio will be subjected.
To a directs us as a result.
Colgate 19 per se not so much as a result of any kind of make so down which is what we call in direct losses and this is the lens that we have used to come true our portfolio.
In Canada and into us to come up with this bottom up exposure as opposed to.
Extrapolating claims reported to date, which is a big difference.
And so all as Darren to give a bit hubs.
Of color on that.
Yes, so James when we look at the indirect.
Next I mean, clearly we can see that these are possible throughout the recovery, but clearly from where we sit today.
Much harder to predict now.
While we've seen economic contraction before.
Our business has proven to be quite resilient.
In Pos economic downturn, so when we look at potential contraction of the recovery and we look out of by line of business I would say in personal lines.
First of all we may see some limited.
Severity pressure and that's mostly around.
Social distancing requirements.
Iris prevention measures in the claims fulfillment process, but we don't see this is being material, but its but it's one that we continue to watch.
The area that will obviously be very vigilant is in commercial lines.
But within the U.S. and and Encana. So let me give you.
A few examples here.
If we can think about property.
No.
Potentially we'll see an increasing vacant properties.
And with that comes the potential for moral hazard.
When you look at C.G. Allen liability.
We potentially see an increase.
In the litigious environment.
In areas, such as employment practices liability and financial services surrounding market volatility just as a couple of examples.
And then I would I would bring another example around contact contract surety.
Which is clearly linked to the health of the construction industry.
While we do expect to see heavy government stimulus.
And infrastructure spending in construction.
Contract surety can be impacted by an economic slowdown so I.
I think at this point was simply highlighting the risk.
On potential indirect losses at this time and to be clear, we have not seen anything to date.
But clearly we remain very very vigilant in particular in commercial lines.
And obviously as the recovery progresses, we will continue to keep you up to date on on what we see but but as I said at this point in time, we don't see anything but the risk is there.
We any color you want to provide.
Well just a bit on the the entertainment and the event cancellation I'm trying to figure out how far ahead, we're estimating here.
In fact, the notion of a bottom up is actually having reviewed every single insured policy that we have in our book and some of them have cancelled or the revenge, they're fully provided for if they have not to reschedule because if they do skin reschedule the the liability goes away, but it was a.
A file by file.
Work that was done for every single ensure that we have entered into attainment, where events have not yet been canceled because they are further out into future. We took an estimate of how much payouts, we could have applied the probability of cancellation there.
But it was not.
Based on time it was more based on what are the insured or the policies that we haven't place and then the likelihood of cancellation because they are extended in the future, but it was really.
Policy by policy from the event cancellation.
Coverage.
So I think what you want to take out of this in my mind as we looked at the portfolio when you said.
The direct impact that we expect here, let's try to.
Account for that now as much as we can.
We're flying that in a slow low economic environment, even though our business is very resilient, we need to keep an eye on in direct losses.
I'd be really hard to.
I mean, you can't reserve for that you just need to keep an eye on it as the situation evolve and we want it to be very transparent with you guys said. These are the sort of things, we'll keep an eye on as.
As this crisis evolves on the direct losses per se, we put our best foot forward tried to be as rigorous as possible.
You should expect fine tuning.
On that point, you know in Q2, and probably in Q tree, but at this stage.
We've put our best foot forward and tried to be as rigorous as we could and doing that and we all knew all recognize that.
This is.
New environment than which most people are operating and that'll come with thumps here and there, but we tried to go as fast as we can.
To develop a perspective on it.
And reserve Accordingly.
Okay. Thank you very much alright.
Your next question is from Brian Meredith.
Please go ahead your line is open.
Yes. Thank you Charles I, just wanted to clarify in Canada, I guess your policies for business interruption does not have a virus exclusion and I guess, it's that's what I think I heard in it. So I guess my question is is it protection purely based upon having a physical kind of Dan.
So the building accident, there's a lot of discussion down here in the U.S. that that's a potential risk area here the courts could potentially.
Side that the virus is in fact a physical.
Damage to a building.
Yeah.
Yes, thanks, Brian the the.
Our primary defense is indeed, a direct physical loss and as we've mentioned the common law is very strong in Canada on that front then the product. That's a second layer of exclusions, not specifically focused on the virus per se, but focused on the fact that if you can.
Can't use your your property if you don't have access to your property pretty much whatever the reason.
There's no there's no coverage for B I interruption as a second there of defense then you have other elements of exclusion as well, which I won't get into when the product and so while we don't think.
The odds.
We think that it's extremely remotes that we need to invoke the second and third layer of the sense. If we had two in an extreme scenario. There are there are solid arguments.
To defend that position.
As well.
Great very very helpful and then I'm just curious.
Yeah, I know you you Dare you talked a little bit about the surety potential indirect exposure here economic downturn.
Do you have any kind of numbers or anything you can give us with respect to the guaranteed book and how that performed during the financial crisis surety business.
Yeah, there and do you want to take this one.
Yeah sure Hi, Brian we're looking at surety business in North America.
Roughly half a billion dollars he's the portfolio.
In Canada us.
Oh I see the contract.
Surety pieces the the portion of the portfolio that is the most sensitive as you as you all know.
And that's just under $300 million that particular portfolio.
That portfolio today isn't I'm very strong position.
And I was very well positioned going into.
The crisis so.
We could see some pressure.
Both in the near term and over the period of economic contraction.
Both in terms of costs, but also in terms of the economic slowdown.
Now the flip side, obviously, we do expect to see strong government stimulus and infrastructure.
To support the construction industry.
But youre your reference back to our white or nine is a really good one if we look back over that period of time.
Well.
We would say that there was less government support.
At the time provided the construction industry in which we look at.
Industry results during that time.
Combined ratios sort of pushed into the mid nineties.
So again strong underlying performance, yes felt some pressure.
Right or nine, but I would say still within manageable levels.
Obviously in addition to that we do have reinsurance protection in place on the surety book.
To provide protection on large losses, that's another layer of protection that we have so I think when I look in the longer term horizon.
Surety portfolio is shown to be very resilient in economic cycles.
And if things get worse, we have reinsurance protection in place so from where we sit today. We don't see this is a key issue for IC during this crisis.
Right, but certainly it's on thing, Brian something where we are watching of course with.
Great intensity, and we'll give you guys an update that upcoming quarters as the economy changes but.
The thing to keep in mind with construction is that before the crisis. This sector was red Hot.
And so as lot of lot of demand and we think government response will compensate to a certain extent the pressure that might come from the economic slowdown, but clearly in area to keep an eye on.
Great. Thank you.
Your next question from Tom Mackinnon of BMO capital markets. Please go ahead. Your line is open.
Yes.
First a question on a on on tax probably for ILUVIEN. Then a question on premium volume maybe for Tom.
With respect to tax the operating tax rate with 22.6, and I think it included an expense of 9 million or about three point.
Related to some U.S. tax legislative changes.
Is that.
Consider to be a one time onetimers. So if we take that out we would have had operating tax rate of 19.6.
Is that correct and is that which should we be thinking about operating taxes going forward given.
And then then we'll get into premium bond question.
So on the tax front, you're right. It's a for us it's a it's a onetime events with a retroactive change.
To some of the distillation, where the U.S. government us as made their use more precise and we had to adjust for that.
Roughly $9 million overall it was.
Affecting.
Operating and non operating the tax rates.
Roughly three points as you said in the.
The operating tax I would say here our expectation generally speaking is to be somewhere between 20 and 22 on the tax rate.
Fluctuate on a quarterly basis as you know depending on the nature of the results how their combined but.
Our view here that doesn't change at this is onetime item and were we would adjust trends and continue estimating between 20 and 22.
Okay, that's great and then second with respect to premium volumes.
There's a 130 million I think of premium relief measures kind of in place.
And they're going to expire at the end of June.
Maybe the first question on that has what's your thinking behind the 200 million or more.
And how much longer how did you come to that and home and.
And how much work do you have that extending too.
And then.
In addition, as a follow up on that in addition to.
The premium at least measures what other headwinds you see that would impact the premium volumes going forward.
Yes, Tom this is a.
This is a question that is multifaceted so we have provided.
Over 130 million so far.
To close to 400000.
People and businesses.
We when we say June 30 at what we're saying is that given where we are given our assessment of the situation we will grant relief.
Until June Thirtyth, then, we'll reassess depending on where the world is.
And that's relief will impact.
Not that performance until June Thirtyth. It will in fact, probably Q2 in Q3 quite frankly, because if you come to us and you need help.
In late May or early June will give you help and provide.
Probably give you three months worth of US help as we do that so.
The 200 million that's been put out there you know as an assessment at today.
How much premium relief I will be provided and on top of that theres a bit of financing relief as well and we think that the bulk of that will in fact, the direct written premium in Q2, and then it you tree to a certain extent and will be.
Earned shortly thereafter, our program this risk based.
Its flexible.
So it depends on how many customers come to us and so far it's been very very successful.
I think we've put our best foot forward and I think as the weeks advanced Tom will look at the environment, we'll look at People's behavior, and we'll decide if.
We take a different stance in the marketplace, but we're not we're not there at this stage, where clearly eating on this relief process and we'll reassess in the coming weeks, but you know I would say you ought to think about that in terms of impacting Q2 in Q3 direct written for.
Yes.
And I would say three quarters of which you should think about in personal lines.
And a quarter of which in commercial lines. That's the first point I would make.
Headwinds from the topline point of view I would say you know you ought to think about a couple of things beyond relief. One is the fact that the slowing economy will have on the units.
And I would say that the impact that it will have on the units ordered a number of customers is expected to be fell to a greater extent and commercial lines.
So.
So on one hand, you've got a more relief in relative terms in personal lines on yet around I think you have more pressure from a unit growth point of view in commercial lines.
Then the third thing that you ought to anticipate.
In in primary in commercial lines I would say is the pressure.
That comes from how much you insured yourself, meaning the amount of insurance, which has driven by your business activity, which is driven by.
The size of your fleet than things of that nature, and I think that.
This will play out in the coming year.
We're not sure exactly what that will be but we know it is a pressure point. So when I came out than in April and I said.
Correct that the.
In fact on the topline.
We'll be between low single digit.
To low double digit.
This really anticipated those three components.
We're sitting here today.
And in the in a moderate scenario.
Which we think is the scenario we're in.
We think that the hit to the topline.
Will likely be.
Mid single digit.
Maybe a bit above mid single digit but at that point in the range and I can help you think true that our perspective is that it's likely to be mid single digit across personal lines and commercial lines in personal lines it'll be more driven by relief.
Hit that is in commercial lines, it's likely to be more driven by units. This is an informed judgment we've done a fair bit of modeling under a number of scenarios, but I would be.
The best way for me to help you would think true what that means and track this from a topline point of view.
Great. That's very helpful. Thank you okay.
Your next question is from Paul Holden.
Please go ahead your line is open.
Hi, Thank you. Good afternoon. So the question is actually going to ask us sort of on.
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See business.
Pretty much just answered it maybe you can give us a little more specifics in terms of.
As we think about that premium relief how much has been provided between personal.
Oh.
And then sort of any details you can provide on premium collection from some commercial.
Yes.
Yes.
So.
It's about three quarters first lines one quarter.
Commercial line.
And.
In terms of.
Collections I guess is the point, that's a that's you're making.
We have provided in in commercial lines.
In terms of.
Financing relief.
In commercial lines.
You know what I don't have that number in front of me.
Right now and maybe it's something we can come back to I don't have a specific perspective on commercial on the.
Convincing relief.
In commercial lines.
Okay. So those kinds of those kind of data.
Together to come up their mid single digit.
Gone on commercial unit conclusion.
Yes, yes, maybe Paul it's down you I can just add a little bit around sort of the some of the forms of relief that we are providing commercial lines. So there's really a few three different elements that when we look at mid terms so middle of.
We're enabling customers to come back to us and say Hey, My revenues are down my payrolls are down.
Hi, just my coverage accordingly.
Just my premium base accordingly.
So we're making those those changes mid term.
Similarly on the auto side with fleets pocketing vehicles that on a use.
Traditional things that we would tend to do more at the end of the time, but what we're making adjustments at the middle of the time.
We are tempering rate increases in commercial lines and in fact, we've identified about stood about portfolio.
That's a small to medium businesses that are most impacted by the current crisis.
And on renewals for those customers.
We're going six months as is in other words.
No change in terms conditions pricing.
So that's another form of relief that we're providing on the commercial line standpoint, and that will feed into some of that topline pressure that the Charles was referring to.
And any sense of how long that commercial lines.
Sure Mike last for that seems like it could be something with.
A little bit more legs to it.
Just a few quarters, but maybe some fat loss.
2021 as well.
Yes, I think.
You know, it's very much dependent on your perspective.
All alone will be.
In a meaningful economic contraction and when the recovery will take hold so.
It depends on the scenario quite frankly in the moderate scenario I think.
You know the pressure less than 2021 will still be pressure in a moderate scenario, we wouldn't qualify it as a significant from a topline point of view in commercial lines at this stage.
Got it because of the question. Thank you.
Thanks, Paul and Ken I think.
You know we have an ATM to go and do a speech too so.
Well, let you know.
And if the Q here, but I want to make sure on Netflix to the GM.
Your next question comes from Mario Mendonca of TD Securities. Please go ahead. Your line is open.
I'll be quick trials the.
Thinking longer term here do you see any meaningful impact on.
Auto miles driven and now that people have become really accustomed to.
Working and now in the more formal settings do you see any long term applications and how's the company position.
So Mario that's a big one right because it talks about behaviors of people and we've done a bit of we've done a bit of work on what the permanent impact of Cove, it could be and we're in the process of thinking too.
True.
You know mid term talking three years here, how our strategic positioning should or or or could change and I think that on one hand.
The unfortunate team to work from home.
As something that obviously will have greater.
Importance.
In in the future FIP side of this Mario is is the fact that.
You could argue that the usage of public transport station.
Might come down.
At the same client.
And so.
There are C.
See a return to normalcy, FX, which might class within a year and I think wouldn't want to will pine on that at this stage still what surprised to see the driving pick up so quickly towards the end of the period, but if I think about it mid to longer term.
You know I think that.
It is a matter of looking at how people will move.
In relationship with coming to work for those who come to work.
Versus how many more people will work from home I think an aggregate, it's probably fair to assume that there will be a fair bit less.
Driving in the long run however.
Again, I think if people.
Don't feel the pressure to live close to the city and if people don't use the public transportation as much I.
I think thats, an upset here and I think that whipped you'll be I.
With some the work that we've done on the data front what are broad distribution platform.
With the fact that were leading and commercial automobile as well.
And on the fleet side of things, we feel very over that.
From a transportations point of view.
We have a fair bit of Optionality.
We have fair bit of Optionality, because a few years back we started two of this discussion about where the world what's going in in relationship with transportation and clearly this has a new vector, but we have optionality shouldn't miles driven.
Some fresh on a permanent fashion.
I clearly the growth profile of Transportations changes, but this is where.
The move we've made.
A few years back to really bolster our presence in commercial and specialty lines.
And the growth that might come from there in my mind is a cure long term macro upset to anything that can happen on the transportation side of things.
Thank you.
Thanks Mario.
We've completed the allotted time for questions.
Turn the call over to Kenny Anderson for closing remarks.
Thank you and thanks, everyone for joining us today following the call. The 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 reports and filings archive also we will be hosting our for virtual annual and special meeting of.
Shareholders. Shortly after this call. It 12 30 PM today and you can join that meeting the a live webcast from our websites lastly, our second quarter 2020 results are scheduled to be released after the market close on Tuesday July 28. Thank you again this conclude the call for today.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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